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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
June 30, 2000 1-12337
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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 August 8, 2000, the Company had outstanding 2,994,888 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, 2000 and December 31, 1999 1
Statements of Operations for the three and six months
ended June 30, 2000 and 1999 2
Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 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 9
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,
2000 1999
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,028,264 $3,844,168
Accounts receivable, less allowance of $50,000 153,531 1,125,994
Inventory (Note 3) 2,614,062 2,861,571
Refundable income taxes 201,494 201,494
Prepaid expenses 24,403 58,056
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Total current assets 6,021,754 8,091,283
PROPERTY AND EQUIPMENT, NET 103,413 125,314
OTHER ASSETS 3,991 4,591
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Total assets $6,129,158 $8,221,188
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $64,855 $102,710
Accrued payroll and related expenses 216,289 252,289
Accrued commissions 27,689 21,539
Accrued expenses 528,798 478,153
Customer deposits 38,146 89,146
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Total current liabilities 875,777 943,837
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized -- 1,000,000 shares
Issued and outstanding -- no shares 0 0
Common stock, $.01 par value -
Authorized -- 10,000,000 shares
Issued -- 3,309,642 shares at June 30, 2000 and 3,242,500
shares at December 31, 1999 33,096 32,425
Additional paid-in capital 10,103,860 9,902,886
Accumulated deficit (4,633,575) (2,657,960)
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5,503,381 7,277,351
Less cost of Common Stock held in treasury (314,754
shares at June 30, 2000) (250,000) 0
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Total stockholders' equity 5,253,381 7,277,351
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Total liabilities and stockholders' equity $6,129,158 $8,221,188
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</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NET SALES $380,753 $2,200,092 $846,197 $2,491,230
COST OF SALES 499,475 929,444 1,133,636 1,421,293
---------- ---------- ----------- ----------
Gross profit (loss) (118,722) 1,270,648 (287,439) 1,069,937
OPERATING EXPENSES:
Selling, general and administrative expenses 645,514 741,641 1,297,618 1,534,486
Engineering expenses 250,614 267,267 493,363 539,371
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Total operating expenses 896,128 1,008,908 1,790,981 2,073,857
---------- ---------- ----------- ----------
Operating income (loss) (1,014,850) 261,740 (2,078,420) (1,003,920)
INTEREST INCOME (NET) 48,570 47,016 102,805 86,348
---------- ---------- ----------- ----------
Income (loss) before provision (benefit) for income taxes (966,280) 308,756 (1,975,615) (917,572)
PROVISION (BENEFIT) FOR INCOME TAXES 0 298,700 0 (130,500)
---------- ---------- ----------- ----------
Net Income (Loss) ($966,280) $10,056 ($1,975,615) ($787,072)
========== ========= ============ ==========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE ($0.32) $0.00 ($0.64) ($0.24)
======= ====== ======= =======
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,994,830 3,242,500 3,079,907 3,242,500
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,975,615) ($787,072)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 21,900 44,939
Changes in operating assets and liabilities -
Accounts receivable 972,463 391,792
Inventory 247,509 237,001
Prepaid expenses and other assets 34,254 55,504
Accounts payable (37,855) 65,636
Accrued expenses 20,795 (83,509)
Customer deposits (51,000) 351,020
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Total adjustments 1,208,066 1,062,383
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Net cash provided (used) by operating activities (767,549) 275,311
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (11,074)
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Net cash used in investing activities 0 (11,074)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 201,645 0
Purchase of treasury stock (250,000) 0
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Net cash used in financing activities (48,355) 0
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (815,904) 264,237
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,844,168 3,313,889
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CASH AND CASH EQUIVALENTS, END OF PERIOD $3,028,264 $3,578,126
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $5,417 $3,792
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Income taxes $2,680 $7,640
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</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, 1999 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, 1999, 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 2000 period are not
necessarily indicative of the results to be achieved for any future period or
for the entire year ended December 31, 2000.
The Securities and Exchange Commission released Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), in
December 1999. This SAB provides additional guidance on the accounting for
revenue recognition including both broad conceptual discussion as well as
certain industry-specific guidance. We are in the process of accumulating the
information necessary to quantify the potential impact of this new guidance (if
any) and, accordingly, have made no revenue recognition accounting change.
2. EARNINGS PER SHARE CALCULATION
Basic earnings per common 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. Basic
and diluted EPS were equal for the three and six months ended June 30, 2000 and
1999; therefore, no reconciliation between basic and diluted EPS is required.
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3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market and consists of the following:
June 30, December 31,
2000 1999
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Raw materials and finished parts $ 832,871 $ 1,270,450
Work-in-process 1,395,222 1,002,563
Finished goods 385,969 588,558
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$ 2,614,062 $ 2,861,571
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
QC Optics, Inc. designs, manufactures and markets laser-based defect
detection systems primarily for the computer hard disk and semiconductor
markets. We use our patented and other proprietary technology in lasers and
optical systems that scan a computer hard disk or photomask for defects or
contamination. Our 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, 2000 AND 1999
Net sales for the three months ended June 30, 2000 ("Interim 2000") was
$380,753 compared to $2,200,092 for the three months ended June 30, 1999
("Interim 1999"). The decrease resulted from lower system sales during Interim
2000. Historically, we have experienced significant quarterly fluctuations in
operating results due to the relatively small number of high dollar volume sales
in any quarter. We expect these fluctuations to continue. Primarily, as a result
of the steep declines in capital expenditures in the computer hard disk
industry, we expect that we will not achieve break-even results for the second
half of 2000.
The Securities and Exchange Commission released Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), in
December 1999. This SAB provides additional guidance on the accounting for
revenue recognition including both broad conceptual discussion as well as
certain industry-specific guidance. We are in the process of accumulating the
information necessary to quantify the potential impact of this new guidance (if
any) and, accordingly, have made no revenue recognition accounting change.
Cost of sales for Interim 2000 was $499,475 compared to $929,444 for
Interim 1999. Gross profit on sales for Interim 1999 was $1,270,648 (58% of net
sales) compared to a gross loss $118,722 (31% of net sales) for Interim 2000.
The decrease in gross profits reflected the decreased sales for Interim 2000,
which was not offset by corresponding decreases in fixed type manufacturing
expenses.
Selling, general and administrative expenses decreased to $645,514 for
Interim 2000 from $741,641 for Interim 1999. The decrease of $96,127 (13%) was
due primarily to reductions in staffing expenses, travel and field service
expenses, offset by increases in commissions and promotional expenses.
Engineering expenses for Interim 2000 of $250,614 decreased from
$267,267 for Interim 1999. The decrease was due primarily to reductions in
materials and supplies.
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<PAGE>
Interest income (net) was $48,570 for Interim 2000 compared to $47,016
for Interim 1999. This was due to an decrease in average invested funds offset
by higher interest rates during Interim 2000 as compared to Interim 1999.
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 2000, no benefit for income
taxes has been provided due to the uncertainty regarding the ability to utilize
tax operating losses in future periods.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Net sales for the six months ended June 30, 2000 was $846,197 compared
to $2,491,230 for the six months ended June 30, 1999. The decrease resulted from
lower system sales during 2000.
Cost of sales for the six months ended June 30, 2000 was $1,133,636
compared to $1,421,293 for the six months ended June 30, 1999. There was a gross
loss on sales for the six months ended June 30, 2000 of $287,439 (34% of net
sales) compared to gross profits of $1,069,937 (43% of net sales) for the six
months ended June 30, 1999. The decrease in gross profits reflected the
decreased sales for the six months ended June 30, 2000, which was not offset by
corresponding decreases in fixed type manufacturing expenses.
Selling, general and administrative expenses decreased to $1,297,618
for the first six months of 2000 from $1,534,486 for the first six months of
1999. The decrease of $236,868 (15%) was due to reductions in personnel levels,
travel, rent and field service expenses.
Engineering expenses for the first six months of 2000 of $493,363
decreased from $539,371 for the first six months of 1999. The decrease of
$46,008 (9%) was due to reductions in materials and supplies.
Interest income (net) was $102,805 for the first six months of 2000
compared to $86,348 for the first six months of 1999. The increase reflected a
decrease in average invested funds offset by an increase in average interest
rates during 2000.
In the first six months of 2000, no benefit for income taxes has been
provided due to the uncertainty regarding the ability to utilize tax operating
losses in future periods. The tax benefit provided in the first six months of
1999 reflected the adjusted effective tax rate expected for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash and cash equivalents of
$3,028,264, a decrease of $815,904 from $3,844,168 at December 31, 1999. Working
capital was $5,145,977 at June 30, 2000 as compared to $7,147,446 at December
31, 1999, a decrease of $2,001,469. Cash used by operating activities was
$767,549 during the six months ended June 30, 2000 compared to $275,311 of cash
provided by operating activities for the same period in 1999 due to operating
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<PAGE>
results, the timing of accounts receivable collections, payments of accounts
payable and accrued expenses and receipt of customer advances.
We are currently negotiating an amendment to and extension of our
revolving line of credit with Citizens Bank, which allowed for maximum
borrowings of $2,000,000 and required monthly payment of interest on the
outstanding balance to maturity on June 30, 2000. Borrowings under the revolving
line of credit agreement were limited to 80% of qualifying accounts receivable.
Borrowings under the agreement bear interest at the bank's prime rate (9.5% at
June 30, 2000). The terms of the loan agreement provided 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 restricted certain transactions without the bank's
prior written consent. At June 30, 2000, we had no borrowings outstanding under
the revolving credit agreement and borrowing availability of approximately
$159,000.
Based on our current cash balances and anticipated results of
operations, we believe that we have sufficient funds to meet our working capital
requirements for the next 12 months. Thereafter, we anticipate that we could
need additional financing to meet our current plans for expansion and working
capital needs. No assurance can be given of our ability to obtain financing on
favorable terms, if at all. If we are unable to obtain additional financing, our
ability to meet our current plan for expansion and working capital needs could
be materially adversely affected.
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; an
increase of competition; increased or continued market acceptance of our
products and proposed products; availability of raw materials; the loss of the
services of one or more of our 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 our
filings with the Securities and Exchange Commission.
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<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. On June 9, 2000, we
held our 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 John M. Tarrh ("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, 2000
("Proposal No. 2").
Of the 2,994,888 shares of common stock of record as of April 17, 2000
able to be voted at the meeting, a total of 2,620,971 shares were voted, or
approximately 88% of the 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
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John M. Tarrh 2,613,351 7,620
Each of Allan Berman and Eric Chase continue to serve as directors for
terms that expire in 2001 and 2002, respectively, and until their successors are
duly elected.
Proposal No. 2 Shares Voting For Shares Voting Against Shares Abstaining
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Arthur Andersen, LLP 2,606,629 8,918 5,424
ITEM 5. OTHER INFORMATION. Effective July 10, 2000, John R. Freeman was elected
to serve as our Vice President, Finance, replacing Richard C. Allard.
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<PAGE>
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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<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: August 10, 2000 By:/s/ Eric T. Chase
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Eric T. Chase
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 10, 2000 By:/s/ John R. Freeman
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John R. Freeman
Vice President of Finance
(Principal Financial Officer)
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