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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
September 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 November 1, 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 September 30, 2000 and
December 31, 1999 1
Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 2
Statements of Cash Flows for the nine months ended
September 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 9
Signatures 10
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
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ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,347,022 $3,844,168
Accounts receivable, less allowance of $50,000 185,856 1,125,994
Inventory (Note 3) 2,714,892 2,861,571
Refundable income taxes - 201,494
Prepaid expenses 16,677 58,056
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Total current assets 5,264,447 8,091,283
PROPERTY AND EQUIPMENT, NET 92,464 125,314
OTHER ASSETS 3,991 4,591
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Total assets $5,360,902 $8,221,188
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $100,501 $102,710
Accrued payroll and related expenses 211,659 252,289
Accrued income taxes 16,868 -
Accrued expenses 499,595 499,692
Customer deposits - 89,146
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Total current liabilities 828,623 943,837
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 -- 3,309,642 shares at September 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 (5,354,677) (2,657,960)
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4,782,279 7,277,351
Less cost of Common Stock held in treasury (314,754
shares at September 30, 2000) (250,000) -
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Total stockholders' equity 4,532,279 7,277,351
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Total liabilities and stockholders' equity $5,360,902 $8,221,188
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</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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C> <C> <C>
NET SALES $340,376 $1,857,386 $1,186,573 $4,348,616
COST OF SALES 294,987 811,614 1,428,623 2,232,907
--------- --------- ----------- ----------
Gross profit (loss) 45,389 1,045,772 (242,050) 2,115,709
OPERATING EXPENSES:
Selling, general and administrative expenses 604,418 659,745 1,902,036 2,194,231
Engineering expenses 200,379 253,557 693,742 792,928
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Total operating expenses 804,797 913,302 2,595,778 2,987,159
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Operating income (loss) (759,408) 132,470 (2,837,828) (871,450)
INTEREST INCOME (NET) 41,288 44,997 144,093 131,345
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Income (loss) before provision for income taxes (718,120) 177,467 (2,693,735) (740,105)
PROVISION FOR INCOME TAXES 2,982 145,500 2,982 15,000
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Net Income (Loss) ($721,102) $31,967 ($2,696,717) ($755,105)
========== ========= ============ ===========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE ($0.24) $0.01 ($0.88) ($0.23)
======= ===== ======= =========
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,994,888 3,242,500 3,051,361 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>
Nine Months Ended
September 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,696,717) ($755,105)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 32,850 67,410
Changes in operating assets and liabilities -
Accounts receivable 940,138 549,373
Inventory 146,679 712,466
Prepaid expenses and other assets 41,979 65,693
Accounts payable (2,209) (7,662)
Accrued expenses and income taxes 177,635 56,019
Customer deposits (89,146) (28,990)
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Total adjustments 1,247,926 1,414,309
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Net cash provided (used) by operating activities (1,448,791) 659,204
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (11,075)
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Net cash used in investing activities 0 (11,075)
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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 (1,497,146) 648,129
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,844,168 3,313,889
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CASH AND CASH EQUIVALENTS, END OF PERIOD $2,347,022 $3,962,018
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (refunded) for -
Interest $6,729 $5,708
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Income taxes ($213,057) ($42,151)
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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 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.
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.
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.
Basic and diluted EPS were equal for the three months and nine months
ended September 30, 2000 and 1999; therefore, no reconciliation between basic
and diluted EPS is required.
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<PAGE>
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,
2000 1999
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Raw materials and finished parts $ 803,832 $1,270,450
Work-in-process 1,553,029 1,002,563
Finished goods 358,031 588,558
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$2,714,892 $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 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 SEPTEMBER 30, 2000 AND 1999
Net sales for the three months ended September 30, 2000 ("Interim
2000") was $340,376 compared to $1,857,386 for the three months ended September
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 fourth quarter 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 $294,987 compared to $811,614 for
Interim 1999. Gross profit on sales for Interim 1999 was $1,045,772 (56% of
sales) compared to $45,389 for Interim 2000. The decrease in gross profit
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 $604,418 for
Interim 2000 from $659,745 for Interim 1999. The decrease of $ 55,327 (8%) was
due primarily to reductions in staffing expenses, travel and field service
expenses, offset by increases in insurance, recruitment costs, professional fees
and promotional expenses.
Engineering expenses for Interim 2000 of $200,379 decreased from
$253,557 for Interim 1999. The decrease was due primarily to reductions in
staffing and related expenses.
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<PAGE>
Interest income (net) was $41,288 for Interim 2000 compared to $44,997
for Interim 1999. This was due to a decrease in average invested funds partially
offset by higher yields earned during Interim 2000 as compared to Interim 1999.
In Interim 1999, the provision for income taxes reflected the reversal
of tax benefits taken in the first quarter of 1999 based on management's
expectation of market conditions and an adjustment of the expected annual
effective income tax rate. The adjustment resulted in a $145,500 tax provision
for Interim 1999. In Interim 2000, the provision for income taxes has been
provided based on the expected effective annual rate for 2000.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales for the nine months ended September 30, 2000 was $1,186,573
compared to $4,348,616 for the nine months ended September 30, 1999. The
decrease resulted from lower system sales during 2000.
Cost of sales for the nine months ended September 30, 2000 was
$1,428,623 compared to $2,232,907 for the nine months ended September 30, 1999.
There was a gross loss on sales for the nine months ended September 30, 2000 of
$242,050 (20% of net sales) compared to a gross profit of $2,115,709 (49% of net
sales) for the nine months ended September 30, 1999. The decrease in gross
profit reflected the decreased sales for the nine months ended September 30,
2000, which was not offset by corresponding decreases in fixed type
manufacturing expenses.
Selling, general and administrative expenses decreased to $1,902,036
for the first nine months of 2000 from $2,194,231 for the first nine months of
1999. The decrease of $292,195 (13%) was due to reductions in personnel levels,
travel, rent and field service expenses, offset by increases in recruitment and
promotional expenses.
Engineering expenses for the first nine months of 2000 of $693,742
decreased from $792,928 for the first nine months of 1999. The decrease of
$99,186 (13%) was due primarily to reductions in staffing and related expenses
and in materials and supplies.
Interest income (net) was $144,093 for the first nine months of 2000
compared to $131,345 for the first nine 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 nine months of 2000, the provision for income taxes has
been provided based on the expected effective annual rate for fiscal 2000. The
tax benefit provided in the first nine months of 1999 reflected the adjusted
effective tax rate expected for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of
$2,347,022, a decrease of $1,497,146 from $3,844,168 at December 31, 1999.
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<PAGE>
Working capital was $4,435,824 at September 30, 2000 as compared to $7,147,446
at December 31, 1999, a decrease of $2,711,622. Cash used by operating
activities was $1,448,791 during the nine months ended September 30, 2000
compared to $659,204 of cash provided by operating activities for the same
period in 1999 due to operating results, the timing of accounts receivable
collections, payments of accounts payable and accrued expenses and receipt of
customer advances.
We recently amended our revolving line of credit with Citizens Bank.
The amended line of credit allows for maximum borrowings of $2,000,000 and
requires monthly payment of interest on the outstanding balance to maturity on
June 30, 2001. 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 (9.5% at September 30, 2000). In the
event that we have borrowings under the line of credit, we will be required to
maintain certain financial ratios and covenants. In addition, the loan agreement
also provides for various negative and affirmative covenants and restricts
certain transactions without the bank's prior written consent. At September 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.
-8-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. Not applicable
ITEM 2. CHANGES IN SECURITIES. Not applicable
ITEM 3. DEFAULTS 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 exhibits are filed herewith:
Exhibit
No. Title
10.1 First Amendment to Amended and Restated Credit
Agreement between the Company and Citizens Bank of
Massachusetts
10.2 Lease Agreement between the Company and Jonspin
Realty Trust
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 10, 2000 By:/s/ Eric T. Chase
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Eric T. Chase
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 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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