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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
June 30, 1999 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 July 31, 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
Item 1. Financial Statements
Balance Sheets at June 30, 1999 and December 31, 1998 1
Statements of Operations for the three and six months
ended June 30, 1999 and 1998 2
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,578,126 $3,313,889
Accounts receivable, less allowance of $50,000 1,505,772 1,897,564
Inventory (Note 3) 3,495,133 3,732,134
Refundable income taxes 148,322 --
Prepaid expenses 43,214 68,001
---------- ----------
Total current assets 8,770,567 9,011,588
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 220,069 217,024
Machinery and equipment 345,787 345,787
Leasehold improvements 84,743 76,714
Motor vehicles 21,574 21,574
---------- ----------
672,173 661,099
Less - Accumulated depreciation and amortization 529,913 484,974
---------- ----------
Property and equipment, net 142,260 176,125
DEFERRED TAX ASSETS 243,500 243,500
OTHER ASSETS 4,939 35,656
---------- ----------
Total assets $9,161,266 $9,466,869
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $185,050 $119,414
Accrued payroll and related expenses 359,023 271,244
Accrued income taxes -- --
Accrued expenses 442,140 465,106
Customer deposits 483,452 132,432
---------- ----------
Total current liabilities 1,469,665 988,196
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 (2,243,710) (1,456,638)
---------- ----------
Total stockholders' equity 7,691,601 8,478,673
---------- ----------
Total liabilities and stockholders' equity $9,161,266 $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 Six Months Ended
------------------ ----------------
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
NET SALES $2,200,092 $3,038,366 $2,491,230 $6,176,790
COST OF SALES 929,444 1,545,710 1,421,293 3,337,865
---------- ---------- ---------- ----------
Gross profit 1,270,648 1,492,656 1,069,937 2,838,925
OPERATING EXPENSES:
Selling, general and administrative expenses 741,641 847,838 1,534,486 1,846,882
Engineering expenses 267,267 361,998 539,371 672,944
---------- ---------- ---------- ----------
Total operating expenses 1,008,908 1,209,836 2,073,857 2,519,826
---------- ---------- ---------- ----------
Operating income (loss) 261,740 282,820 (1,003,920) 319,099
INTEREST INCOME (NET) 47,016 53,034 86,348 115,697
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes 308,756 335,854 (917,572) 434,796
PROVISION (BENEFIT) FOR INCOME TAXES 298,700 121,800 (130,500) 157,500
---------- ---------- ---------- ----------
Net Income (Loss) $10,056 $214,054 ($787,072) $277,296
========== ========== =========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $0.00 $0.07 ($0.24) $0.09
========== ========== =========== ==========
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,242,500 3,247,848 3,242,500 3,256,005
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30,
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($787,072) $277,296
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 44,939 46,740
Changes in operating assets and liabilities -
Accounts receivable 391,792 475,770
Inventory 237,001 (536,548)
Prepaid expenses and other assets 55,504 77,846
Accounts payable 65,636 62,747
Accrued expenses and refundable income taxes (83,509) (278,417)
Customer deposits 351,020 25,049
---------- ----------
Total adjustments 1,062,383 (126,813)
---------- ----------
Net cash provided (used) by operating activities 275,311 150,483
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,074) (31,393)
---------- ----------
Net cash used in investing activities (11,074) (31,393)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES: -- --
Net cash used in financing activities ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 264,237 119,090
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,313,889 3,766,534
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,578,126 $3,885,624
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $3,792 $5,197
======= =======
Income taxes $7,640 $258,663
======= ========
</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-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 June 30, 1999 and 1998, there
were 289,468 and 284,720 options outstanding, respectively. Of these potentially
dilutive securities, 0 and 65,488 qualified for inclusion in the diluted EPS
calculation for the three months ended June 30, 1999 and 1998, respectively.
These options yielded 0 and 5,348 incremental shares for the periods and as a
result, the period-end weighted average shares outstanding were 3,242,500 and
3,247,848 as of June 30, 1999 and 1998, respectively. Basic and diluted EPS were
equal for the three and six months ended June 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:
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<PAGE>
June 30, December 31,
1999 1998
Raw materials and finished parts $1,391,197 $1,815,183
Work-in-process 1,314,989 1,189,882
Finished goods 788,947 727,069
---------- -----------
$3,495,133 $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.
RESULTS OF OPERATIONS
Comparison of Three Month Periods Ended June 30, 1999 and 1998
Net sales for the three months ended June 30, 1999 ("Interim 1999") was
$2,200,092 compared to $3,038,366 for the three months ended June 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 may not achieve
break-even results for the second half of 1999.
Cost of sales for Interim 1999 was $929,444 compared to $1,545,710 for
Interim 1998. Gross profit on sales for Interim 1999 was $1,270,648 (58% of
sales) compared to $1,492,656 (49% of sales) for Interim 1998. The increase in
gross profit percentage reflects improved manufacturing efficiencies.
Selling, general and administrative expenses decreased to $741,641 for
Interim 1999 from $847,838 for Interim 1998. The decrease of $106,197 (13%) was
due primarily to reductions in personnel levels that substantially occurred in
the second half of 1998.
Engineering expenses for Interim 1999 of $267,267 decreased from
$361,998 for Interim 1998. The decrease was due primarily to reductions in
personnel levels that substantially occurred in the second half of 1998.
Interest income (net) was $47,016 for Interim 1999 compared to $53,034
for Interim 1998. This was due to the decrease in average invested funds and
lower interest rates during Interim 1999 as compared to Interim 1998.
In Interim 1999, the provision for income taxes reflected an adjustment
of the expected annual effective income tax rate. The adjustment resulted in a
$298,700 tax provision for Interim 1999. In Interim 1998, the provision for
income taxes amounted to $121,800, an effective tax rate of 36%.
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<PAGE>
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Net sales for the six months ended June 30, 1999 was $2,491,230
compared to $6,176,790 for the six months ended June 30, 1998. The decrease
resulted from lower system sales during 1999.
Cost of sales for the six months ended June 30, 1999 was $1,421,293
compared to $3,337,865 for the six months ended June 30, 1998. Gross profit on
sales for the six months ended June 30, 1999 was $1,069,937 (43% of sales)
compared to $2,838,925 (46% of sales) for the six months ended June 30, 1999.
The decrease resulted from lower system sales during 1999.
Selling, general and administrative expenses decreased to $1,534,486
for the first six months of 1999 from $1,846,882 for the first six months of
1998. The decrease of $312,396 (17%) was due to reductions in personnel levels
that substantially occurred in the second half of 1998.
Engineering expenses for the first six months of 1999 of $539,371
decreased from $672,994 for the first six months of 1998. The decrease was due
to reductions in personnel levels that substantially occurred in the second half
of 1998.
Interest income (net) was $86,348 for the first six months of 1999
compared to $115,697 for the first six months of 1998. The decrease reflected a
decrease in average invested funds and lower interest rates during 1999.
The tax benefit provided for the first six months of 1999 reflects the
adjusted effective tax rate expected for fiscal 1999. The tax provision for the
first six months of 1998 was $157,500, an effective tax rate of 36%.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of
$3,578,126, an increase of $264,237 from $3,313,889 at December 31, 1998.
Working capital was $7,300,902 at June 30, 1999 as compared to $8,023,392 at
December 31, 1998, a decrease of $722,490. Cash provided by operating activities
was $275,311 during the six months ended June 30, 1999 compared to $150,483 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 June 30, 1999). The terms of the loan
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<PAGE>
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 June 30, 1999, the
Company had no borrowings outstanding under the revolving credit agreement and
borrowing availability of approximately $1,177,000.
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 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.
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
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<PAGE>
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; 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 10, 1999,
the Company held its Annual Meeting of Stockholders to vote on the following
proposals:
1. To elect one member to the Board of Directors for a three year term.
The Nominee for Director was Eric T. Chase ("Proposal No. 1"); and
2. To ratify and confirm the selection of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1999
("Proposal No. 2").
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<PAGE>
Of the 3,242,500 shares of the Company's Common Stock of record as of
April 20,1999 able to be voted at the meeting, a total of 2,334,266 shares were
voted, or approximately 71.99% of the Company's issued and outstanding shares of
Common Stock entitled to vote on these matters. Each of the proposals was
adopted, with the vote total as follows:
Proposal No. 1 Votes For Votes Withheld
- -------------- --------- --------------
Eric T. Chase 2,309,147 25,119
Each of Allan Berman and John Tarrh continue to serve as directors of
the Company for terms that expire in 2001 and 2000, respectively, and until
their successors are duly elected.
Proposal Shares Voting For Shares Voting Against Shares Abstaining
- -------- ----------------- --------------------- -----------------
No. 2 2,291,026 21,700 21,540
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibit is filed herewith:
Exhibit
No. Title
------- -----
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were
filed during the quarter for which this report is
filed.
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: August 12, 1999 By: /s/ Eric T. Chase
-------------------------------------
Eric T. Chase
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 12, 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 six month period ended June
30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 3,578,126
<SECURITIES> 0
<RECEIVABLES> 1,555,772
<ALLOWANCES> 50,000
<INVENTORY> 3,495,133
<CURRENT-ASSETS> 8,770,567
<PP&E> 672,173
<DEPRECIATION> 529,913
<TOTAL-ASSETS> 9,161,266
<CURRENT-LIABILITIES> 1,469,665
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 7,659,176
<TOTAL-LIABILITY-AND-EQUITY> 9,161,266
<SALES> 2,491,230
<TOTAL-REVENUES> 2,491,230
<CGS> 1,421,293
<TOTAL-COSTS> 1,421,293
<OTHER-EXPENSES> 2,073,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (86,348)
<INCOME-PRETAX> (917,572)
<INCOME-TAX> (130,500)
<INCOME-CONTINUING> (787,072)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (787,072)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
</TABLE>
