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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
March 31, 1999 1-12337
- --------------------- ----------------------
QC OPTICS, INC.
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(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, 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 March 31, 1999 (unaudited) and
December 31, 1998 1
Statements of Operations for the three months ended
March 31, 1999 and 1998 (unaudited) 2
Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (unaudited) 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 8
<PAGE>
PART 1 - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
QC OPTICS, INC.
BALANCE SHEETS
March 31, December 31,
1999 1998
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ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $4,854,796 $3,313,889
Accounts receivable, less allowance of $50,000 229,242 1,897,564
Inventory (Note 3) 3,712,587 3,732,134
Refundable income taxes 443,195 -
Prepaid expenses 49,248 68,001
---------- ----------
Total current assets 9,289,068 9,011,588
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 217,024 217,024
Machinery and equipment 345,787 345,787
Leasehold improvements 76,714 76,714
Motor vehicles 21,574 21,574
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661,099 661,099
Less - Accumulated depreciation 507,444 484,974
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Property and equipment, net 153,655 176,125
DEFERRED TAX ASSETS 243,500 243,500
OTHER ASSETS 4,939 35,656
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Total assets $9,691,162 $9,466,869
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $231,618 $119,414
Accrued payroll and related expenses 284,886 271,244
Accrued income taxes - -
Accrued expenses 464,710 465,106
Customer deposits 1,028,402 132,432
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Total current liabilities 2,009,616 988,196
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 (2,253,765) (1,456,638)
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Total stockholders' equity 7,681,546 8,478,673
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Total liabilities and stockholders' equity $9,691,162 $9,466,869
========== ==========
</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
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March 31, March 31,
1999 1998
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<S> <C> <C>
NET SALES $291,138 $3,138,424
COST OF SALES 491,849 1,792,155
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Gross profit (loss) (200,711) 1,346,269
OPERATING EXPENSES:
Selling, general and administrative expenses 792,845 999,044
Engineering expenses 272,104 310,946
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Total operating expenses 1,064,949 1,309,990
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Operating income (loss) (1,265,660) 36,279
INTEREST INCOME (NET) 39,332 62,663
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Income (loss) before benefit (provision) for income taxes (1,226,328) 98,942
BENEFIT (PROVISION) FOR INCOME TAXES 429,200 (35,700)
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Net Income (Loss) ($797,128) $63,242
========== =======
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE ($0.25) $0.02
======= =====
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,500 3,264,161
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($797,128) $63,242
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 22,470 23,370
Changes in operating assets and liabilities -
Accounts receivable 1,668,322 1,124,700
Inventory 19,547 (245,063)
Refundable income taxes (443,195) -
Prepaid expenses and other assets 49,470 67,274
Accounts payable 112,204 255,265
Accrued expenses 13,247 (394,010)
Customer deposits 895,970 389,060
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Total adjustments 2,338,035 1,220,596
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Net cash provided (used) by operating activities 1,540,907 1,283,838
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (21,168)
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Net cash used in investing activities - (21,168)
CASH FLOWS FROM FINANCING ACTIVITIES: - -
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,540,907 1,262,670
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,313,889 3,766,534
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CASH AND CASH EQUIVALENTS, END OF PERIOD $4,854,796 $5,029,204
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $1,875 $2,628
======= ========
Income taxes $5,000 $243,950
======= ========
</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. As of March 31, 1999 and 1998, there
were 284,676 and 284,720 options outstanding, respectively. Of these potentially
dilutive securities, 0 and 157,992 qualified for inclusion in the diluted EPS
calculation for the three months ended March 31, 1999 and 1998, respectively.
These options yielded 0 and 21,661 incremental shares for the periods and as a
result, the period-end weighted average shares outstanding were 3,242,500 and
3,264,161 as of March 31, 1999 and 1998, respectively. Basic and diluted EPS
were equal for the three months ended March 31, 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:
March 31, December 31,
1999 1998
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Raw materials and finished parts $1,403,819 $1,815,183
Work-in-process 1,647,934 1,189,882
Finished goods 660,834 727,069
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$3,712,587 $3,732,134
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4
<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 THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Net sales for the three months ended March 31, 1999 ("Interim 1999")
were $291,138 compared to $3,138,424 for the three months ended March 31, 1998
("Interim 1998"). The decrease resulted from the lack of 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
semiconductor and computer hard disk industries, the Company expects that it may
not achieve break-even results for the second quarter of 1999.
Cost of sales for Interim 1999 was $491,849, which resulted in a
$200,711 gross loss on sales of spare parts and service for Interim 1999. The
Company operated below its fixed cost breakeven levels for Interim 1999. Cost of
sales of $1,792,155 resulted in a $1,346,269 gross profit (43% of sales) on
sales of systems, service and spare parts in Interim 1998.
Selling, general and administrative expenses decreased to $792,845 for
Interim 1999 from $999,044 for Interim 1998. The decrease of $206,199 (20.6%)
was due primarily to a decrease in field service expenses.
Engineering expenses for Interim 1999 of $272,104 decreased from
$310,946 for Interim 1998. The decrease of $38,842 (12.5%) was due primarily to
a decrease in staffing costs.
Interest income (net) was $39,332 for Interim 1999 compared to $62,663
for Interim 1998. This was due to the decrease in average investable funds
during Interim 1999 as compared to Interim 1998.
In Interim 1999, the benefit provision for income taxes amounted to
$429,200, an effective tax rate of approximately 35%. In Interim 1998 the
provision for income taxes amounted to $35,700, an effective tax rate of 36%.
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of
$4,854,796, an increase of $1,540,907 from $3,313,889 at December 31, 1998.
Working capital was $7,279,452 at March 31, 1999 as compared to $8,023,392 at
December 31, 1998, a decrease of $743,940. Cash provided by operating activities
was $1,540,907 during the three months ended March 31, 1999 compared to
$1,283,838 of cash provided 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 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 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 (7.75% at March 31, 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, and restricts certain
transactions without the bank's prior written consent. At March 31, 1999, the
Company had no borrowings outstanding under the revolving credit agreement and
borrowing availability of approximately $140,000.
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 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 systems are not Year
2000 compliant. The Company
6
<PAGE>
has been and will continue to contact its customers and offer modifications to
make such 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.
At this time, the Company cannot give any assurance that it will be
successful in completing its planned actions to become Year 2000 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; 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 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; 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 semiconductor and
computer hard disk industries, 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, 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.
7
<PAGE>
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. 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.
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 13, 1999 By:/s/ Eric T. Chase
--------------------
Eric T. Chase
Chief Executive Officer and
President
Date: May 13, 1999 By:/s/ Richard C. Allard
------------------------
Richard C. Allard
Vice President of Finance
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 4,854,796
<SECURITIES> 0
<RECEIVABLES> 279,242
<ALLOWANCES> 50,000
<INVENTORY> 3,712,587
<CURRENT-ASSETS> 9,289,068
<PP&E> 661,099
<DEPRECIATION> 507,444
<TOTAL-ASSETS> 9,691,162
<CURRENT-LIABILITIES> 2,009,616
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 7,649,121
<TOTAL-LIABILITY-AND-EQUITY> 9,691,162
<SALES> 291,138
<TOTAL-REVENUES> 291,138
<CGS> 491,849
<TOTAL-COSTS> 491,849
<OTHER-EXPENSES> 1,064,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39,332)
<INCOME-PRETAX> (1,226,328)
<INCOME-TAX> (429,200)
<INCOME-CONTINUING> (797,128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (797,128)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>