AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1996
REGISTRATION NO. 333-07683
================================================================================
SECURITIES AND EXCHANGE COMMISSION
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
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PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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QC OPTICS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
----------
ERIC T. CHASE, PRESIDENT
154 MIDDLESEX TURNPIKE
BURLINGTON, MASSACHUSETTS 01803
(617) 272-4949
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICE AND
NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------
DELAWARE 3550 04-2916548
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
----------
COPIES TO:
NEIL H. ARONSON, ESQUIRE WILLIAM M. PRIFTI, ESQUIRE
ANN C. BONIS, ESQUIRE 220 BROADWAY, SUITE 204
O'CONNOR, BROUDE & ARONSON LYNNFIELD, MASSACHUSETTS 01904
950 WINTER STREET, SUITE 2300 (617) 593-4525
WALTHAM, MASSACHUSETTS 02154
(617) 890-6600
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [x]
Pursuant to Rule 416, there are also being registered such additional
indeterminate number of shares of Common Stock as may become issuable pursuant
to antidilution provisions of the Redeemable Warrants and the Representative's
Warrants, stock splits, stock dividends and similar adjustments.
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
================================================================================
QC OPTICS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-B
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM SB-2 IN PROSPECTUS LOCATION OR CAPTION
-------------------------------------- -------------------
<S> <C> <C>
1. Front of the Registration Statement and Outside Front
CoverPage of Prospectus ........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages; Inside
Front Cover Page; Outside of Prospectus ........... Back Cover Page
3. Summary Information and Risk Factors ................ Prospectus Summary; Risk Factors
4. Use of Proceeds ...................................... Use of Proceeds
5. Determination of Offering Price ..................... Outside Front Cover Page; Risk
Factors -- Absence of Public
Market; Determination of Offering
Price; Underwriting
6. Dilution ............................................ Dilution
7. Selling Security Holders ............................ Not Applicable
8. Plan of Distribution ................................ Outside Front Cover Page;
Underwriting
9. Legal Proceedings ................................... Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons ........................................... Management -- Directors and
11. Security Ownership of Certain Beneficial Owners and Executive Officers
Management ........................................ Principal Stockholders
12. Description of Securities ........................... Outside Front Cover Page; Description
of Securities
13. Interest of Named Experts and Counsel ................ Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities .................... Management -- Limitation on
Officers' and Directors' Liabilities
15. Organization Within Last Five Years ................. The Company
16. Description of Business ............................. Business
17. Management's Discussion and Analysis of Operation .... Management's Discussion and Analysis of
Financial Condition and
Results of Operations
18. Description of Property ............................. Business -- Facilities
19. Certain Relationships and Related Transactions ...... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. Risk Factors -- Absence of Public Market;
Determination of Offering Price;
Dividend Policy; Description of
Securities
21. Executive Compensation .............................. Management -- Executive Officers'
Compensation
22. Financial Statements ................................ Financial Statements
23. Changes in and Disagreements with Accountants on
Accountingand Financial Disclosure ................ Not Applicable
</TABLE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 20, 1996
PROSPECTUS
- ----------
QC OPTICS, INC.
950,000 SHARES OF COMMON STOCK
950,000 REDEEMABLE WARRANTS
QC Optics, Inc. ("QCO" or the "Company") hereby offers (the "Offering")
950,000 shares of Common Stock, $.01 par value per share (the "Common Stock"),
and 950,000 Redeemable Warrants (the "Redeemable Warrants"). The Common Stock
and the Redeemable Warrants offered hereby are sometimes hereinafter
collectively referred to as the "Securities." Each Redeemable Warrant entitles
the holder to purchase one share of Common Stock at a price of $7.80 per share
(130% of the public offering price per share) beginning ______, 1997 (13 months
after the date of this Prospectus) and ending ______, 2001 (five years after the
date of this Prospectus), unless the Redeemable Warrants are redeemed as
provided herein. The Redeemable Warrants are redeemable by the Company at a
redemption rate of $.20 per Redeemable Warrant at any time commencing thirteen
(13) months from the date of this Prospectus upon 30 days' prior written notice,
provided that the average closing bid price of the Company's Common Stock equals
or exceeds $10.80 per share (180% of the public offering price per share) for 20
consecutive trading days ending within ten (10) days prior to the notice of
redemption. See "DESCRIPTION OF SECURITIES."
Prior to this Offering, no public market for the Securities has existed and
no assurance can be given that any such market will develop after the completion
of the Offering or, that if developed, it will be sustained. For the method of
determining the initial public offering price of the Securities, see "RISK
FACTORS -- Arbitrary Determination of Offering Price" and "UNDERWRITING." The
Company has applied for listing of the shares of Common Stock and Redeemable
Warrants on the American Stock Exchange ("AMEX") under the symbols "QCO" and
"QCO.W," respectively, upon official notice of issuance.
-------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
------ ------------ ----------
Per Share $ $ $
Per Redeemable Warrant $ $ $
Total(3) $ $ $
================================================================================
(1) Does not include additional compensation in the form of (a) a 3%
non-accountable expense allowance in the amount of $173,850 and a
consulting fee payable to Schneider Securities, Inc., as the Representative
(the "Representative") of the Underwriters (the "Underwriters") in the
amount of $108,000 and (b) warrants (the "Representative's Warrants") to
purchase up to 95,000 shares of Common Stock and 95,000 Redeemable Warrants
at 160% of the public offering price of the Securities. In addition, the
Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting additional expenses of the Offering payable by the
Company, estimated at $860,000, including the Representative's
non-accountable expense allowance and the consulting fee payable to the
Representative.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 142,500 shares of Common Stock and/or 142,500 Redeemable
Warrants on the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the overallotment option is exercised in full,
the total "Price to Public," "Underwriting Discount" and "Proceeds to
Company" will be $___, $___ and $___ , respectively. See "UNDERWRITING."
The Securities are being offered on a "firm commitment basis" by the
Underwriters, when, as, and if delivered to and accepted by the Underwriters and
subject to prior sale, withdrawal or cancellation of the offer without notice.
It is expected that delivery of certificates representing the Securities will be
made at the clearing offices of Schneider Securities, Inc., New York, New York,
on or about , 1996.
-------------
SCHNEIDER SECURITIES, INC.
-------------
THE DATE OF THIS PROSPECTUS IS_______, 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
[PHOTOGRAPH INSERTED HERE] [PHOTOGRAPH INSERTED HERE]
API-3000/5 with TCLS, Automatic Pelliclized QCO-4000, Advanced Photomask
Photomask Inspection System Inspection System
with cassette load system
[PHOTOGRAPH INSERTED HERE]
Pelliclized Photomask
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PRIOR TO THIS OFFERING, THE COMPANY HAS NOT BEEN A REPORTING COMPANY UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUBSEQUENT
TO THIS OFFERING, THE COMPANY INTENDS TO FURNISH TO ITS STOCKHOLDERS ANNUAL
REPORTS, WHICH WILL INCLUDE FINANCIAL STATEMENTS AUDITED BY INDEPENDENT
ACCOUNTANTS, AND SUCH OTHER PERIODIC REPORTS AS IT MAY DETERMINE TO FURNISH OR
AS MAY BE REQUIRED BY LAW.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information, including "Risk Factors" and the Company's financial
statements (including the Notes thereto), appearing elsewhere in this
Prospectus. Unless otherwise indicated, all per share data and information in
this Prospectus relating to the number of shares of Common Stock have been
adjusted to give effect to an approximate 1.7167040:1 stock split effected on
June 18, 1996.
A glossary of certain terms has been provided on page 53 of this Prospectus.
THE COMPANY
QC Optics, Inc. is a rapidly growing company which designs, manufactures and
markets laser based defect detection systems for the semiconductor, flat panel
display and computer hard disk 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 believes that these
features enable it to maintain a leading market position in the United States in
the semiconductor, flat panel display and computer hard disk drive industries
where high quality inspection capabilities are required. The Company's customers
include many of the world's largest leading semiconductor and computer hard disk
manufacturers. Currently, QCO has over 200 systems installed in 14 countries.
QCO was formed in 1986 to acquire the assets of a division of GCA
Corporation. The Company funded its product development primarily with equity
investments and debt financing from Kobe Steel Ltd. and its subsidiaries
including Kobe Steel USA Holdings, Inc., a Delaware corporation, and Kobe Steel
USA International, Inc., a Delaware corporation (collectively, "Kobe Steel").
From 1986 to 1990, the Company focused its efforts on developing inspection
systems for computer hard disk inspection. Using the Company's patented and
proprietary information, the Company expanded its efforts to use this technology
for inspection of photomasks used to image integrated circuit patterns onto
semiconductor wafers. In early 1996, management of the Company acquired a 62.2%
equity interest in the Company through a management buyout with bank supplied
debt financing personally guaranteed by QCO's senior management. See "CERTAIN
TRANSACTIONS."
The Company introduced its QCO-4000 automatic pelliclized (a protective
cover) photomask laser based inspection systems in March 1996, which has the
sensitivity to detect defects or contamination of 0.3 micrometers (the
equivalent of 0.06 micrometers on the semiconductor wafer), which will be
required to detect defects in the next generation of semiconductors. As
semiconductor devices have become more complex, the semiconductor manufacturing
process has become very sensitive to photomask errors, requiring more complex
photomasks and, as a result, increasingly sophisticated photomask inspection
tools.
The Company's systems, such as its API-3000/5 and DISKAN-6000, are designed
to fit into its customers' production lines, virtually eliminating the need for
special handling or special production procedures while performing 100%
inspection throughout the process. In addition, these systems sort out fatal
defects on disks and pelliclized photomasks before they cause manufacturing
yield or other quality problems. As more manufacturers of computer hard disks
move toward total inspection protocols versus statistical sampling, demand
during the past year for the Company's products which can inspect computer hard
disks has increased significantly. The Company is also working on research and
development for porting the Company's technology in its other systems to the
inspection of flat panel displays.
The Company currently serves three markets with its inspection systems:
semiconductors, computer hard disks and flat panel displays. In addition, the
Company plans to continue to develop additional products, based on the Company's
existing patented and proprietary technologies, to further develop laser based
inspection systems.
3
The Company's goal is to maintain a leadership position in the United States
in photomask inspection systems for soft defects (e.g., particulates and other
contamination) and use its knowledge and contacts to pursue other opportunities
in high performance inspection markets. The Company intends to use a portion of
the proceeds of this Offering to expand its sales and marketing activities;
continue research and development activities in inspection opportunities; and to
continue to work closely with major customers and seek strategic alliances with
other industry participants in order to maintain a leading edge position in the
high performance inspection markets. In addition, the Company may consider
acquisitions in complementary businesses in the inspection and handling markets.
QCO's principal offices and manufacturing facilities are based in
Burlington, Massachusetts. The Company also maintains regional sales or service
personnel in Texas, Florida, New Mexico, Oregon, Arizona and California. The
Company currently has approximately 60 employees and has manufacturer's
representatives in Europe and distributors in Asia.
The Company maintains its principal executive offices at 154 Middlesex
Turnpike, Burlington, Massachusetts 01803, and its telephone number is (617)
272-4949.
THE OFFERING
Securities Offered by the
Company ................ 950,000 shares of Common Stock and 950,000
Redeemable Warrants. See "DESCRIPTION OF
SECURITIES."
Redeemable Warrants....... Each Redeemable Warrant entitles the holder to
purchase one share of Common Stock at a price of
$7.80 per share (130% of the public offering price
per share) beginning , 1997 (13 months after the
date of this Prospectus) and ending , 2001 (five
years after the date of this Prospectus), unless the
Redeemable Warrants are redeemed as provided herein.
The Redeemable Warrants are redeemable by the
Company at a redemption price of $.20 per Redeemable
Warrant at any time commencing thirteen months from
the date of this Prospectus on 30 days' prior
written notice, provided that the average closing
bid price of the Common Stock equals or exceeds
$10.80 per share (180% of the public offering price
per share) for 20 consecutive trading days ending
within 10 days prior to the notice of redemption.
See "DESCRIPTION OF SECURITIES."
Shares of Common Stock
Outstanding Before
Offering................ 2,150,000 shares
Shares of Common Stock to
be Outstanding After
Offering ............... 3,100,000 shares
Use of Proceeds .......... The net proceeds from the Offering will be used for
sales and marketing, research and development
activities, repayment of debt to an affiliate and
general working capital and corporate purposes. See
"USE OF PROCEEDS."
Risk Factors ............. Investment in the Securities involves a high degree
of risk and immediate substantial dilution. See
"RISK FACTORS" and "DILUTION."
4
AMEX Symbols(1):
Common Stock .......... QCO
Redeemable Warrants .. QCO.W
(1) No assurance can be given that an active trading market will develop for the
Securities. See "RISK FACTORS -- Absence of Public Market and Possible
Volatility of Stock Price" and "RISK FACTORS -- Arbitrary Determination of
Offering Price."
Except where otherwise indicated, all share and per share data in this
Prospectus (i) assumes no exercise of 950,000 Redeemable Warrants; (ii) gives no
effect to 285,000 shares issuable upon exercise of the Underwriters'
overallotment option, including 142,500 shares underlying the Redeemable
Warrants subject to such option; (iii) gives no effect to 95,000 shares issuable
upon exercise of the Representative's Warrants; (iv) gives no effect to 95,000
shares issuable upon the exercise of 95,000 Redeemable Warrants underlying the
Representative's Warrants; (v) assumes no exercise of stock options to purchase
up to 360,000 shares which may be issued pursuant to the Company's 1996 Stock
Option Plan (the "1996 Plan"), of which 231,992 options have been granted as of
the date of this Prospectus, including options to purchase up to 107,500 shares
which were granted to certain legal advisors to the Company (the "Advisor
Options") at an exercise price of $6.30 per share; and (vi) assumes no exercise
of stock options to purchase of up to 100,000 shares which may be issued
pursuant to the Company's 1996 Director Formula Stock Option Plan (the "Formula
Plan"), of which 30,000 options have been granted as of the date of this
Prospectus (collectively, the 1996 Plan and the Formula Plan are referred to as
the "Plans"). See "MANAGEMENT -- 1996 Stock Option Plan," "MANAGEMENT --
Director Formula Stock Option Plan," "UNDERWRITING" and "LEGAL MATTERS."
5
SUMMARY FINANCIAL INFORMATION
The following sets forth certain historical financial information of the
Company.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ --------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $10,373,464 $8,394,932 $6,003,843 $ 6,782,522 $ 4,930,277
Cost of sales .................................. 4,798,902 3,911,108 3,269,363 3,062,307 2,455,777
--------- --------- --------- --------- ---------
Gross profit ................................... 5,574,562 4,483,824 2,734,480 3,720,215 2,474,500
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses . 2,843,266 2,465,479 1,986,663 1,922,028 1,544,121
Engineering expenses ......................... 1,586,951 1,347,480 1,334,364 693,442 807,108
Management buyout charge(1) .................. -- -- -- 1,701,000 --
--------- --------- --------- --------- ---------
Total operating expenses ................... 4,430,217 3,812,959 3,321,027 4,316,470 2,351,229
--------- --------- --------- --------- ---------
Operating income (loss) ........................ 1,144,345 670,865 (586,547) (596,255) 123,271
Interest expense, net .......................... 156,345 162,942 117,404 91,117 87,088
------- ------- ------- ------ ------
Income (loss) before provision for income taxes 988,000 507,923 (703,951) (687,372) 36,183
Provision for income taxes(1) .................. 79,781 37,866 11,101 320,994 13,320
-- ------ ------ ------ ------- ------
Net income (loss) .............................. $ 908,219 $ 470,057 $ (715,052) $(1,008,366) $ 22,863
=========== ========== ========== =========== ===========
Net income (loss) per common and common
equivalent share ............................. $ .42 $ .22 $ (.33) $ (.46) $ .01
=========== ========== ========== =========== ===========
Weighted average common and common equivalent
shares outstanding ........................... 2,173,174 2,173,174 2,173,174 2,173,174 2,173,174
========= ========= ========= ========= =========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------
AT
DECEMBER 31,
1995 ACTUAL AS ADJUSTED(2)
---- ------ --------------
<S> <C> <C> <C>
Working capital ..................................................... $2,060,723 $2,504,157 $ 6,854,157
Total assets ........................................................ $7,721,910 $5,874,770 $ 9,474,770
Short-term debt ..................................................... $4,250,000 $ 750,000 $ --
Long-term debt, less current maturities ............................. $ -- $ 500,000 $ 500,000
Stockholders' equity ................................................ $2,203,838 $2,146,472 $ 6,496,472
</TABLE>
- --------
(1) Represents a non-recurring, non-cash charge associated with the acquisition
of a 62.2% equity interest in the Company by management with bank supplied
debt financing personally guaranteed by QCO's senior management. This charge
is not deductible for income tax purposes and as a result of the
transaction, additional paid in capital is increased by a like amount. See
"CERTAIN TRANSACTIONS."
(2) Gives effect to the receipt by the Company of the estimated net proceeds of
approximately $4,350,000 from the sale of the Securities and the use of a
portion of the net proceeds therefrom to repay the term loan from Kobe Steel
USA Holdings, Inc. See "USE OF PROCEEDS" and "CERTAIN TRANSACTIONS."
6
RISK FACTORS
The Securities offered hereby involve a high degree of risk. Prospective
investors should carefully consider, in addition to the other information
contained in this Prospectus, the information presented below.
CYCLICAL NATURE OF THE SEMICONDUCTOR, COMPUTER HARD DISK AND FLAT PANEL
DISPLAY INDUSTRIES
The Company's operating results depend on capital expenditures by
semiconductor, computer hard disk, and flat panel display manufacturers, which
in turn depend on the current and anticipated demand for computers. Although the
semiconductor industry in particular has recently experienced significant
growth, there can be no assurance that such growth will be sustained. Moreover,
the overall computer industry has been and is likely to continue to be cyclical
with periods of oversupply. A downturn in the demand for computers would likely
reduce the demand for the Company's inspection equipment. The Company's ability
to reduce expenses in response to any such downturn is limited by its need for
continued investment in research and development and in customer service and
support. A downturn in demand for semiconductor, computer hard disk and flat
panel display manufacturing equipment would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"BUSINESS -- Markets."
FLUCTUATIONS IN OPERATING RESULTS; ACCUMULATED DEFICIT
The Company derives most of its annual revenues from a relatively small
number of sales of products, systems and upgrades. As a result, any delay in the
recognition of revenue for single products, systems or upgrades would have a
material adverse effect on the Company's results of operations for a given
accounting period. In addition, some of the Company's net sales have been
realized near the end of a quarter. Accordingly, a delay in a shipment scheduled
to occur near the end of a particular quarter could materially adversely affect
the Company's results of operations for that quarter.
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate on a quarterly and annual basis due
to a variety of factors, including but not limited to the cyclical nature of the
industries served by the Company's inspection products, patterns of capital
spending by customers, the timing of significant orders, order cancellations and
shipment rescheduling, market acceptance of the Company's products, fluctuations
in the grant and funding of development contracts, consolidation of customers,
unanticipated delays in design, engineering or production or in customer
acceptance of product shipments, changes in pricing by the Company or its
competitors, the timing of product announcements or introductions by the Company
or its competitors, the mix of systems sold, the relative proportions of product
revenues and service revenues, the timing of payments of sales commissions, the
availability of components and subassemblies, changes in product development
costs, expenses associated with acquisitions and exchange rate fluctuations.
Over the last three years, the Company's gross margin has fluctuated and the
Company anticipates that its gross margin will continue to fluctuate. The
Company cannot predict the impact of these and other factors on its financial
performance in any future period.
As of June 30, 1996, the Company had an accumulated deficit of approximately
$2,715,000 as a result of losses incurred for the year ended December 31, 1993
and prior years. Although the Company had net income of $908,219 and $470,057
for the years ended December 31, 1995 and 1994, respectively, no assurance can
be given that the Company will remain profitable in any future period. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
CONCENTRATION OF CUSTOMERS
Historically, the Company has sold a significant proportion of its systems
to a limited number of customers as the markets that the Company participates in
are primarily dominated by a few major companies. Sales to the Company's ten
largest customers accounted for approximately 96% and 95% of net sales for the
years ended December 31, 1994 and December 31, 1995, respectively. Sales to the
largest customer during those periods accounted for approximately 32% of net
sales. The failure to replace sales with sales to other customers in succeeding
periods would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company expects that sales to
relatively few
7
customers will continue to account for a high percentage of the Company's
revenues in any accounting period in the foreseeable future. A reduction in
orders from any such customer or the cancellation of any significant order could
have a material adverse effect on the Company's business, financial condition
and results of operations. None of the Company's customers has entered into a
long-term agreement requiring it to purchase the Company's products. See
"BUSINESS -- Customers."
IMPORTANCE OF RECENTLY INTRODUCED PRODUCTS
The Company's future success depends upon the market's acceptance of new
generations of its systems. The Company recently commenced shipments of its
QCO-4000, which has the capability to inspect the 0.25 to 0.35 micrometer
generation of semiconductor devices currently in pilot production and under
development. The inability of these systems to achieve widespread customer
acceptance or any technical or manufacturing difficulties with these systems (or
subsequent generations of the Company's systems) would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, there can be no assurance that the market for leading-edge
applications targeted by the QCO-4000 systems will develop as quickly or to the
degree that the Company currently anticipates, or that these systems will
achieve widespread customer acceptance. See "BUSINESS -- Products and Services."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON PRODUCT DEVELOPMENT
The semiconductor, computer hard disk drives and flat panel display
industries, in general, are characterized by rapid technological change and
evolving industry standards. As a result, the Company must continue to enhance
its existing products and develop and manufacture new products and upgrades with
improved capabilities, which has required and will continue to require
substantial investments in research and development by the Company to advance a
number of state-of-the-art technologies. Continuous investments in research and
development will also be required to respond to the emergence of new
technologies. The failure to develop, manufacture and market new products, or to
enhance existing products, would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's competitors can be expected to continue to develop and introduce new
and enhanced products, any of which could cause a decline in market acceptance
of the Company's products or a reduction in the Company's margins as a result of
intensified price competition.
Changes in manufacturing processes could also have a materially adverse
effect on the Company's business, financial condition and results of operations.
The Company anticipates continued changes in semiconductor, computer hard disk
and flat panel display technologies and processes. There can be no assurance
that the Company will be able to develop, manufacture and sell products that
respond adequately to such changes. See "BUSINESS -- Competition."
The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements, introduction of new products on schedule, cost-effective
manufacturing and product performance in the field. The Company's new product
decisions and development commitments must anticipate the equipment needed to
satisfy the requirements for inspection processes one year or more in advance of
sales. Any failure to predict accurately customer requirements and to develop
new generations of products to meet those requirements would have a sustained
material adverse effect on the Company's business, financial condition and
results of operations. New product transitions could adversely affect sales of
existing systems. Product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and orders
for existing products or enhancements of existing products fluctuate. See
"BUSINESS -- Products Under Development" and "BUSINESS -- Engineering and
Product Development."
LIMITATIONS ON THE USE OF NET OPERATING LOSSES
The Company's net income and cash flow will be affected by its ability to
apply its net operating loss carryforwards ("NOLs"), which totaled approximately
$2,163,000 for federal income tax purposes at December 31, 1995, against taxable
income in future periods. Under the Tax Reform Act of 1986, the amount of the
benefit from NOLs may be impaired or limited in certain circumstances, including
a cumulative stock ownership change of more than 50% over a three-year period,
which occurred in connection with the management buyout. As a result of the
management buyout, the Company is limited
8
to approximately $180,000 of loss utilization per year. Given the limitations on
the utilization of the Company's net operating losses as a result of the
management buyout and uncertainty surrounding the ability of the Company to
generate future income in order to realize such deferred tax assets in the
future, primarily due to such factors as dependence on a few customers, rapid
technological change and the cyclical nature of the semiconductor, computer hard
disk and flat panel display industries, management has concluded that the
ability to realize the deferred tax assets as of December 31, 1995 is uncertain
and has, therefore, provided a full valuation allowance against such deferred
tax assets. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "CERTAIN TRANSACTIONS" and Note 3 of Notes to Financial
Statements.
PATENTS AND PROPRIETARY INFORMATION
The Company's patent and trade secret rights are of material importance to
the Company and its future prospects because the Company relies on these rights
to protect proprietary technology. No assurance can be given as to the issuance
of additional patents or, if so issued, as to their scope and validity. Patents
granted may not provide meaningful protection from competitors. Even if a
competitor's products were to infringe patents owned by the Company, it would be
costly for the Company to enforce its rights in an infringement action and would
divert funds and other resources from the Company's operations. Furthermore, no
assurance can be given that the Company' products or processes will not infringe
any patents or other intellectual property rights of third parties. If the
Company's products or processes do infringe the rights of third parties, no
assurance can be given that the Company can obtain a license from the
intellectual property owner on commercially reasonable terms or at all.
The Company relies on trade secrets that it seeks to protect, in part,
through, confidentiality agreements with employees, consultants and its
customers and potential customers. No assurance can be given that these
agreements will not be breached, that the Company will have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. As the Company intends to
enforce its patents, trademarks and copyrights and protect its trade secrets, it
may be involved from time to time in litigation to determine the enforceability,
scope and validity of these rights. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel. See "BUSINESS -- Patents and Proprietary
Information."
DEPENDENCE ON SUPPLIERS
The Company does not maintain any long-term supply agreements with any of
its suppliers, and the majority of the critical components and subassemblies
included in the Company's products are obtained from a limited group of
suppliers. The manufacture of certain components and subassemblies is very
complex and requires long lead times and the Company's systems cannot be
produced without certain critical components. Additionally, alternative
suppliers for many of these components may not be readily available, and no
substantial increase in the number of alternative suppliers is anticipated. The
Company intends to continue to rely on outside suppliers because of their
specialized expertise in component fabrication and subsystem assembly. The
Company's reliance on a limited group of suppliers involves several risks,
including the potential inability to obtain an adequate supply of components and
reduced control over pricing and delivery time. To date, the Company has
generally been able to obtain adequate and timely delivery of critical
subassemblies and components, although it has experienced occasional delays.
There can be no assurance that delays or shortages caused by suppliers will not
occur in the future. Any inability to obtain adequate, timely deliveries of
subassemblies and components could prevent the Company from meeting scheduled
shipment dates, which would damage relationships with current and prospective
customers and materially adversely affect the Company's business, financial
condition and results of operations. See "BUSINESS -- Manufacturing."
LENGTHENED LEAD TIMES; LIMITED MANUFACTURING CAPACITY
The Company's systems have a large number of components and are highly
complex. The Company has experienced limited delays in manufacturing and
delivering its systems and upgrades and may experience similar or more extended
delays in the future. Any inability to manufacture and ship
9
systems or upgrades on schedule could adversely affect the Company's
relationships with its customers and thereby materially adversely affect the
Company's business, financial condition and results of operations. Due to recent
increases in demand, the average time between order and shipment of the
Company's systems has increased over the last fiscal year. The Company's ability
to increase its manufacturing capacity in response to an increase in demand is
limited given the complexity of the manufacturing process, the lengthy lead
times necessary to obtain critical components and the need for highly skilled
personnel. The failure of the Company to keep pace with customer demand would
lead to further extensions of delivery times, which could deter customers from
placing additional orders, and could adversely affect product quality. There can
be no assurance that the Company will be successful in increasing its
manufacturing capacity. See "BUSINESS -- Manufacturing."
RISKS OF ACQUISITIONS
The Company's business strategy includes expanding its product lines and
markets through internal product development or acquisitions. Although no
acquisitions are currently contemplated by the Company, any acquisition may
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities, and amortization expense related to intangible
assets acquired, any of which could materially adversely affect the Company's
financial condition and results of operations. In addition, acquired businesses
may be experiencing operating losses. Any acquisition will involve numerous
risks, including difficulties in the assimilation of the acquired Company's
operations and products, uncertainties associated with operating in new markets
and working with new customers, and the potential loss of the acquired company's
key employees. To date, the Company has had no experience in acquisitions. See
"USE OF PROCEEDS -- Working Capital and General Corporate Purposes" and
"BUSINESS -- Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted for
42.5%, 17.9% and 35.5% of net sales in Fiscal 1994, Fiscal 1995 and the first
six months of Fiscal 1996, respectively. The Company anticipates that
international shipments, principally to Japan, Taiwan, Ireland and Scotland,
will continue to account for a significant portion of net sales of the
foreseeable future. Sales and operations outside of the United States are
subject to certain inherent risks, including fluctuations in the value of the
U.S. dollar relative to foreign currencies, tariffs, quotas, taxes and other
market barriers, political and economic instability, restrictions on the export
or import of technology, potentially limited intellectual property protection,
difficulties in staffing and managing international operations and potentially
adverse tax consequences. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's business, financial
condition or results of operations. In particular, although the Company's
international sales are primarily denominated in U.S. dollars, currency exchange
fluctuations in countries where the Company does business could materially
adversely affect the Company's business, financial condition and results of
operations by rendering the Company less price-competitive than foreign
manufacturers. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," "BUSINESS -- Customers" and "BUSINESS -- Sales and
Marketing."
LENGTHY SALES CYCLE
Installing and integrating inspection equipment requires a substantial
investment by a customer. In addition, customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with the Company's senior management, before reaching a sufficient
level of confidence in the system's performance characteristics and
compatibility with the customer's target applications. Accordingly, the
Company's systems typically have a lengthy sales cycle during which the Company
may expend substantial funds and management time and effort with no assurance
that a sale will result. See "BUSINESS -- Sales and Marketing."
HEALTH AND SAFETY REGULATIONS AND STANDARDS
The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of operators
of manufacturing equipment. In particular, recent European Union ("EU")
regulations relating to electromagnetic fields, electrical
10
power and human exposure to laser radiation have been implemented. In addition,
numerous domestic semiconductor manufacturers, including certain of the
Company's customers, have subscribed to voluntary health and safety standards
and decline to purchase equipment not meeting such standards. The Company
believes that its products currently comply with all applicable material
governmental health and safety regulations and standards, including those of the
EU, and with the voluntary industry standards currently in effect. In part
because the future scope of these and other regulations and standards cannot be
predicted, there can be no assurance that the Company will be able to comply
with any future regulation or industry standard. Noncompliance could result in
governmental restrictions on sales or reductions in customer acceptance of the
Company's products. Compliance may also require significant product
modifications, potentially resulting in increased costs and impaired product
performance. See "BUSINESS -- Government Regulations and Industry Standards."
DEPENDENCE UPON KEY PERSONNEL; POSSIBLE LACK OF AVAILABILITY OF QUALIFIED
PERSONNEL
The Company is dependent to a large degree on the experience and abilities
of its Chief Executive Officer, President and Chairman, Eric T. Chase, and its
Vice President of Technology, Jay L. Ormsby. The loss of the services of either
of these individuals could have a material adverse effect on the Company. The
Company has entered into employment agreements, containing noncompetition
restrictions, with each of Messrs. Chase and Ormsby. The Company has and is the
sole beneficiary, subject to the bank's interest, of key-person life insurance
policies, each in the amount of $1,000,000, on the lives of Messrs. Chase and
Ormsby. See "MANAGEMENT -- Employment Agreements."
The Company's future success and growth strategy will depend in large part
upon its ability to attract and retain highly skilled managerial, technical and
marketing personnel. Competition for such personnel in the Company's industry is
intense. No assurance can be given that the Company will be successful in
attracting or retaining the qualified personnel necessary for its business and
anticipated growth, and the failure to attract or retain such personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
CONTROL BY CURRENT PRINCIPAL STOCKHOLDERS
Upon completion of the Offering and assuming no exercise of the
Underwriters' overallotment option, the Redeemable Warrants, the
Representative's Warrants or other outstanding options, the Company's current
principal stockholders, QC Optics Voting Trust and Kobe Steel USA Holdings,
Inc., will beneficially own approximately 69.4% of the outstanding shares of
Common Stock of the Company. As a result, they will be able to control all
matters requiring approval by the stockholders of the Company, including the
election of directors. The Company's bylaws do not provide for cumulative
voting. See "PRINCIPAL STOCKHOLDERS" and "DESCRIPTION OF SECURITIES."
DISCRETIONARY USE OF PROCEEDS; POSSIBLE NEED FOR ADDITIONAL FINANCING;
SUBSTANTIALLY ALL ASSETS PLEDGED
The Board of Directors of the Company will have broad discretion in
allocating the net proceeds of the Offering among the categories discussed in
"USE OF PROCEEDS." If the net proceeds of the Offering are not adequate for
completion of the Company's anticipated uses, additional financing may be
necessary. No assurance can be given that the Company will be able to secure
additional financing or that such financing will be available on favorable
terms. If the Company is unable to obtain such additional financing, the
Company's ability to maintain its current level of operations could be
materially adversely affected and the Company may be required to reduce its
overall expenditures. See "USE OF PROCEEDS," "BUSINESS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Company has a revolving line of credit facility with a bank, pursuant to
which it has pledged substantially all of its assets. The cancellation by the
bank, or any future lender, of the Company's credit facilities would have a
material adverse effect on the Company's operations and financial condition. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
11
CLASSIFIED BOARD OF DIRECTORS
The Company's bylaws provide for its Board of Directors to be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
Moreover, under the Delaware General Corporation Law, in the case of a
corporation having a classified Board of Directors, stockholders may remove a
director only for cause. This provision, when coupled with the provision of the
bylaws authorizing only the Board of Directors to fill vacant directorships,
will preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees. See "DESCRIPTION OF
SECURITIES -- Delaware Law and Certain Charter and Bylaw Provisions."
ELIGIBILITY FOR AMEX TRADING
Although the Company has applied for listing of the Common Stock and
Redeemable Warrants on the AMEX, their approval for listing and continued
inclusion will depend on the Company's ability to meet certain eligibility
requirements established for the system. Loss of AMEX eligibility would result,
for example, if the Company has continuous material operating losses or if the
market price of the Common Stock falls below certain specified levels. If the
Company's Securities become ineligible for trading on the system for this or any
other reason, such Securities may be subject to a rule under the Securities
Exchange Act of 1934 that imposes additional stringent sales practice
requirements on broker-dealers who sell the Company's Common Stock which could
result in significantly less liquidity for and/or a decreased trading price of
the Company's Common Stock.
POSSIBLE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK;
PREFERRED STOCK CURRENTLY OUTSTANDING
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
of which 3,100,000 shares of Common Stock will be issued and outstanding upon
completion of the Offering (3,242,500 shares assuming the Underwriters'
overallotment option is exercised in full). The Company's Board of Directors has
authority, without action or vote of the stockholders, to issue all or part of
the authorized but unissued shares. Any such issuance would dilute the
percentage ownership interest of stockholders and may further dilute the book
value of the Common Stock.
In addition, the Company is authorized to issue up to 1,000,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock"). Of these
shares of Preferred Stock, no shares are issued and outstanding as of the date
of this Prospectus. The Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions. The issuance of any shares of Preferred Stock could adversely affect
the rights of the holders of Common Stock and, therefore, reduce the value of
the Common Stock. In particular, specific rights granted to holders of Preferred
Stock could be used to restrict the Company's ability to merge with or sell its
assets to a third party, thereby preserving control of the Company by its then
owners, and may adversely affect the voting power of holders of the Common
Stock. See "DESCRIPTION OF SECURITIES."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
No public market for the Securities has existed prior to the Offering. No
assurance can be given that an active trading market in the Company's Securities
will develop after completion of the Offering or, if developed, that it will be
sustained. No assurance can be given that the market price of the Company's
Securities will not fall below the initial public offering price. The Company
believes factors such as quarterly fluctuations in financial results and
announcements of new technology in the semiconductor, computer hard disk drive
and flat panel display inspection industries may cause the market price of the
Company's Securities to fluctuate, perhaps substantially. These fluctuations, as
well as general stock market and economic conditions such as recessions or high
interest rates, may adversely affect the market price of the Securities.
12
ARBITRARY DETERMINATION OF OFFERING PRICE
The initial public offering price of the Securities has been arbitrarily
determined by negotiation between the Company and the Underwriters and does not
necessarily bear any relationship to the Company's assets, book value or
financial condition, or to any other recognized criteria of value. See
"UNDERWRITING."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors who purchase Securities in the Offering will incur immediate and
substantial dilution in the net tangible book value of the Common Stock of
approximately $4.00 per share (includes the purchase price of $.10 per
Redeemable Warrant) or approximately 66% of the public offering price per share.
See "DILUTION."
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its
inception and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to reinvest earnings,
if any, in the development and expansion of its business. The Company's
agreement with its primary bank lender prohibits the payment of dividends
without the bank's prior consent. See "DIVIDEND POLICY."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE LAW
Pursuant to the Company's Certificate of Incorporation, as authorized under
applicable Delaware law, directors of the Company are not liable for monetary
damages for breach of fiduciary duty, except in connection with a breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or for any transaction in which a
director has derived an improper personal benefit. In addition, the Company's
bylaws provide that the Company must indemnify its officers and directors to the
fullest extent permitted by Delaware law for all expenses incurred in the
settlement of any actions against such persons in connection with their having
served as officers or directors of the Company. See "MANAGEMENT -- Limitation on
Officers' and Directors' Liabilities."
ANTI-TAKEOVER MEASURES; POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER
PROVISIONS
The Company, as a Delaware corporation, is subject to the General
Corporation Law of the State of Delaware, including Section 203 thereof, an
anti-takeover law enacted in 1988. In general, the law restricts the ability of
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder. As a
result, potential acquirors of the Company may be discouraged from attempting to
effect an acquisition transaction with the Company, thereby possibly depriving
holders of the Company's securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions. As a result of the application of Section 203, certain provisions
in the Company's Certificate of Incorporation and bylaws, as amended, and
certain change in control provisions contained in the employment contracts of
the six officers of the corporation, potential acquirors of the Company may find
it more difficult or be discouraged from attempting to effect an acquisition
transaction with the Company, thereby possibly depriving holders of the
Company's securities of certain opportunities to sell or otherwise dispose of
such securities at above-market prices pursuant to such transactions. See
"MANAGEMENT -- Employment Agreements" and "DESCRIPTION OF SECURITIES -- Delaware
Law and Certain Charter and Bylaw Provisions."
FUTURE SALES OF COMMON STOCK
None of the 2,150,000 shares of Common Stock outstanding as of the date of
this Prospectus has been registered under the Securities Act, and all are
"restricted securities" under Rule 144 of the Securities Act ("Rule 144").
Ordinarily, under Rule 144, a person holding restricted securities for a period
of two years may, every three months, sell in ordinary brokerage transactions or
in transactions
13
directly with a market maker an amount equal to the greater of one percent of
the Company's then outstanding Common Stock or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule 144 also permits sales
by a person who is not an affiliate of the Company and who has satisfied a
three-year holding period without any quantity limitation. All of the officers,
directors and stockholders of the Company, with the exception of Kobe Steel USA
Holdings, Inc., have agreed not to sell any of their shares of Common Stock for
a period of at least 13 months from the date of this Prospectus without the
prior written consent of the Representative. Kobe Steel USA Holdings, Inc. has
agreed not to, directly or indirectly, offer to sell, contract to sell, or sell
any beneficial interest in the Company's Common Stock for a period of six months
from the date of this Prospectus without the prior written consent of the
Representative. Absent such agreements, 90 days from the date of this
Prospectus, 812,687 shares of Common Stock would be eligible for sale pursuant
to Rule 144. The remaining 1,337,313 shares of Common Stock would become
eligible for sale under Rule 144 on March 29, 1998. Future sales under Rule 144
may have a depressive effect on the market price of the Common Stock should a
public market develop for such stock. See "SHARES ELIGIBLE FOR FUTURE SALE."
SUBSTANTIAL SHARES OF COMMON STOCK RESERVED FOR THE EXERCISE OR GRANT OF
OPTIONS AND WARRANTS; REGISTRATION RIGHTS OF WARRANT HOLDERS
The Company has reserved 460,000 shares of Common Stock for issuance upon
exercise of options granted or available for grant to employees, officers,
directors, advisors and consultants pursuant to the Company's Plans, as well as
an aggregate of 1,140,000 shares of Common Stock for issuance upon (i) exercise
of the Redeemable Warrants, and (ii) exercise of the Representative's Warrants.
The existence of the aforementioned options and warrants may prove to be a
hindrance to future financing by the Company. The holders of such options and
warrants may exercise them at a time when the Company would otherwise be able to
obtain additional equity capital on terms more favorable to the Company.
The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws the Representative's Warrants and the
shares of Common Stock issuable thereunder. Exercise of these registration
rights could involve substantial expense to the Company at a time when it could
not afford such expenditures and may adversely affect the terms upon which the
Company may obtain additional financing. See "DESCRIPTION OF SECURITIES."
POSSIBLE LIMIT ON EXERCISE OF REDEEMABLE WARRANTS
In order for a holder to exercise a Redeemable Warrant, there must be a
current registration statement on file with the Securities and Exchange
Commission (the "Commission") and various state securities commissions to
register the shares of Common Stock underlying the Redeemable Warrants for sale
to the holder of the Redeemable Warrant. The Company has agreed, so long as the
Redeemable Warrants are outstanding, to use its best efforts to keep a
registration statement effective under the Securities Act and state securities
laws to permit the issuance of the shares of Common Stock upon exercise or
exchange of the Redeemable Warrants. Nevertheless, although the Company intends
to do so, no assurance can be given that the registration statement will be kept
current, the failure of which may result in the Redeemable Warrants not being
exercisable or exchangeable and therefore worthless. See "DESCRIPTION OF
SECURITIES -- Redeemable Warrants."
POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS
Beginning _____, 1997 (13 months after the date of this Prospectus), the
Redeemable Warrants are redeemable by the Company at $.20 per Redeemable Warrant
on 30 days' prior written notice, provided that the average closing bid price of
the Common Stock equals or exceeds $10.80 per share (180% of the public offering
price per share) for 20 consecutive trading days ending within 10 days prior to
the notice of redemption. See "DESCRIPTION OF SECURITIES." The Redeemable
Warrants can only be redeemed if they are then exercisable and a current
registration statement covering the Redeemable Warrants and the shares of Common
Stock issuable thereunder is then in effect. Redemption of the Redeemable
Warrants may force the holders to (i) exercise the Redeemable Warrants and pay
the exercise price at a time when it may be disadvantageous for them to do so or
(ii) sell the Redeemable Warrants at the current market price when they might
otherwise wish to hold the Redeemable Warrants. See "DESCRIPTION OF SECURITIES
- -- Redeemable Warrants."
14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities offered hereby, after deducting $579,500 for underwriting discounts
and approximately $860,000 for other estimated expenses of the Offering,
including the Representative's non-accountable expense allowance and the
consulting fee payable to the Representative, are expected to be approximately
$4,350,000 (approximately $5,150,000 if the Underwriters' overallotment option
is exercised in full). The net proceeds are intended to be used approximately as
follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Sales and Marketing .............................................. $ 500,000
Repayment of Debt ................................................ $ 750,000
Research and Development Activities .............................. $ 500,000
Working Capital and General Corporate Purposes ................... $ 2,600,000
------------
$ 4,350,000
============
</TABLE>
SALES AND MARKETING
Approximately $500,000 of the net proceeds of the Offering are intended for
use in expanding the Company's sales and marketing activities, particularly
outside of the United States. See "BUSINESS -- Sales and Marketing."
REPAYMENT OF DEBT
Approximately $750,000 of the net proceeds of the Offering will be used to
repay a loan due on December 31, 1996 to Kobe Steel USA Holdings, Inc. This loan
was made by Kobe Steel USA Holdings, Inc. to the Company in connection with the
management buyout in March 1996. The loan bears interest at 8% per annum. In
addition, the Company is required prior to repaying the $750,000 loan to Kobe
Steel USA Holdings, Inc. to first repay any overadvances outstanding from State
Street Bank and Trust Co. ("State Street") under a $4,000,000 revolving line of
credit issued in March 1996 (the "State Street Loan"). In connection with the
State Street Loan, State Street provided a $500,000 overadvance which is
required to be repaid by October 31, 1996. A portion of this overadvance was
used to complete the management buyout. However, the Company has not used the
State Street overadvance since May 31, 1996 and, as a result, no proceeds from
this Offering are expected to be necessary to repay any State Street
overadvance. See "CERTAIN TRANSACTIONS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
RESEARCH AND DEVELOPMENT ACTIVITIES
Prior to the management buyout, ownership of a greater than 50% interest in
the Company by a non-U.S. stockholder, Kobe Steel Ltd., through Kobe Steel USA
Holdings, Inc., precluded the Company from participating in certain research and
development activities sponsored by U.S. government agencies and federally
funded consortia, such as SEMATECH. As a result of the management buyout, the
Company intends to participate in these consortia and to seek federally provided
research and development funding, particularly in the fields of flat panel
displays and other inspection product areas. However, in addition to the
$500,000 of the net proceeds intended to be used for research and development
activities, the Company expects to continue to use a portion of its own funds to
support research and development activities. See "BUSINESS -- Engineering and
Product Development" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
15
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES
Approximately $2,600,000 of the net proceeds from the Offering will be used
for working capital and general corporate purposes. Although the Company intends
to routinely explore potential acquisitions, none is currently being negotiated
and no portion of the net proceeds has been allocated to specific acquisitions.
The Company's business strategy includes expanding its product lines and markets
through internal product development or acquisitions. Any acquisition may result
in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities, and amortization expense related to intangible
assets acquired, any of which could materially adversely affect the Company's
financial condition and results of operations.
In March 1996, the Company established a revolving line of credit facility
with State Street. At June 30, 1996, the Company had borrowings outstanding
under the State Street Loan of $500,000 and additional availability under the
line of credit of approximately $1,900,000. The line of credit is secured by the
personal unlimited guarantees of each of Eric T. Chase and K. Andrew Bernal, the
Company's Chief Executive Officer and President, and Vice President of Sales and
Marketing, respectively. The line of credit is also guaranteed on a limited
basis by other Company officers. The terms of the State Street Loan allow for
the termination of these guarantees provided that (i) any overadvance is paid in
full by October 31, 1996 and the qualified inventory is excluded from the
Company's borrowing base; or (ii) upon the receipt of $5,000,000 in net proceeds
from an equity financing (gross proceeds less underwriting discounts and
commissions) and, in either case, there are no defaults under the facility.
Following the completion of this Offering, and in order to reduce interest
expense, the Company may use a portion of the proceeds of the Offering to pay
down all or a portion of the State Street Loan. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "CERTAIN TRANSACTIONS."
Any net proceeds received from the exercise of the Underwriters'
overallotment option will be used to supplement general working capital.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimate based upon its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
future revenues and expenditures. The Company reserves the right to reallocate
the proceeds within the above described categories or to other purpose in
response to, among other things, changes in its plans, industry conditions, and
the Company's future revenues and expenditures.
Based on the Company's operating plan, management believes that the net
proceeds from the Offering, existing bank and other credit facilities, and
anticipated cash flow from operations will be sufficient to meet the Company's
anticipated cash needs and finance its plans for expansion for at least 12
months from the date of this Prospectus. See "RISK FACTORS -- Discretionary Use
of Proceeds; Possible Need for Additional Financing; Substantially All Assets
Pledged" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. government securities, short-term certificates of
deposit, money market funds, or other high- grade, short-term interest-bearing
investments.
16
DILUTION
At June 30, 1996, the net tangible book value of the Company's outstanding
shares of Common Stock was $2,146,472, or approximately $1.00 per share. "Net
tangible book value" per share represents the amount of the Company's total
assets less the amount of its total liabilities, divided by the number of shares
of Common Stock outstanding. Without taking into account any other changes in
net tangible book value after June 30, 1996, other than to give effect to the
sale of the Common Stock offered hereby at an assumed public offering price of
$6.10 per share(1), the pro forma net tangible book value of the Company's
outstanding shares of Common Stock at June 30, 1996 would have been $6,496,472,
or approximately $2.10 per share, representing an immediate increase in net
tangible book value of approximately $1.10 per share to current stockholders and
an immediate dilution of approximately $4.00 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price per share of Common Stock offered hereby(1) ....... $ 6.10
Net tangible book value per share of Common Stock at June 30, 1996 .... $ 1.00
Increase in net tangible book value per share of Common Stock ......... $ 1.10
------
Pro forma net tangible book value per share of Common Stock after Offering $ 2.10
-------
Dilution per share of Common Stock to investors in this Offering ......... $ 4.00
=======
</TABLE>
- ----------
(1) Includes the purchase price of $.10 per Redeemable Warrant.
In the event that the Underwriter exercises the overallotment option in
full, the pro forma net tangible book value per share of Common Stock after the
Offering (less underwriting commissions and discounts and estimated expenses of
the Offering) would be approximately $2.25 per share, representing an immediate
increase in net tangible book value of approximately $1.25 per share to current
stockholders and an immediate dilution of approximately $3.85 per share to new
investors.
The following table sets forth, at June 30, 1996 and as adjusted to give
effect to the sale of the Common Stock offered hereby, the number of shares of
Common Stock purchased, the percentage of Common Stock purchased, the total
consideration paid, the percentage of total consideration paid and the average
price per share paid by the existing stockholders of the Company and the
investors in the Offering, assuming a public offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID
---------------- ------------------------
AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
New Investors 950,000 30.65% $ 5,700,000 53.97% $6.00
Existing Stockholders(2) 2,150,000 69.35% $ 4,861,000 46.03% $2.26
--------- ----- ----------- -----
Total 3,100,000 100.00% $10,561,000 100.00%
========= ====== =========== ======
</TABLE>
- ----------
(2) See Note 7 of Notes to Financial Statements included elsewhere in this
Prospectus.
17
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, and as adjusted at June 30, 1996, to reflect the sale and issuance of the
Securities offered hereby and the initial application thereof as described in
"USE OF PROCEEDS."
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
Short-term debt(1):
Revolving line of credit ............................................................ $ -- $ --
Kobe Steel term loan ................................................................ 750,000 --
----------- -----------
Total short-term debt ............................................................. $ 750,000 $ --
=========== ============
Long-term debt(1):
Revolving line of credit, less current maturities ................................... $ 500,000 $ 500,000
Stockholders' equity:
Preferred stock -- $.01 par value, 1,000,000 shares authorized,
actual and as adjusted -- 0 shares issued and outstanding ......................... -- --
Common stock -- $.01 par value, 10,000,000 shares authorized,
actual shares issued and outstanding 2,150,000 and as adjusted 3,100,000 .......... 21,500 31,000
Additional paid-in capital ............................................................. 4,839,500 9,180,000
Accumulated deficit .................................................................... (2,714,528) (2,714,528)
----------- -----------
Total stockholders' equity ......................................................... 2,146,472 6,496,472
----------- -----------
Total capitalization ................................................................... $ 2,646,472 $ 6,996,472
=========== ===========
</TABLE>
- ----------
(1) See Notes 6 and 7 of Notes to Financial Statements included elsewhere in
this Prospectus for information regarding debt obligations of the Company.
(2) See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
inception and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to reinvest earnings,
if any, in the development and expansion of its business. Any future
determination with respect to the payment of dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements, and financial position of the Company, general
economic conditions, and other pertinent factors. In addition, the Company's
agreement with its primary bank lender prohibits the payment of dividends
without the bank's prior written consent.
18
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1995, 1994 and 1993 has been derived from the financial statements of the
Company which as of and for the years ended December 31, 1995, 1994 and 1993,
have been audited by Arthur Andersen LLP, independent public accountants. The
information as of and for the six months ended June 30, 1996 and 1995 has been
derived from unaudited financial statements of the Company which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the information
shown therein. The unaudited results as of and for the six months ended June 30,
1996 are not necessarily indicative of the results to be expected for the entire
fiscal year. This information should be read in conjunction with the Financial
Statements and Notes thereto set forth elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ --------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ............................................. $10,373,464 $ 8,394,932 $ 6,003,843 $ 6,782,522 $ 4,930,277
Cost of sales ......................................... 4,798,902 3,911,108 3,269,363 3,062,307 2,455,777
--------- --------- --------- --------- ---------
Gross profit .......................................... 5,574,562 4,483,824 2,734,480 3,720,215 2,474,500
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses ....... 2,843,266 2,465,479 1,986,663 1,922,028 1,544,121
Engineering expenses ............................... 1,586,951 1,347,480 1,334,364 693,442 807,108
Management buyout charge(1) ........................ -- -- -- 1,701,000 --
--------- --------- --------- --------- ---------
Total operating expenses ......................... 4,430,217 3,812,959 3,321,027 4,316,470 2,351,229
--------- --------- --------- --------- ---------
Operating income (loss) ............................... 1,144,345 670,865 (586,547) (596,255) 123,271
Interest expense, net ................................. 156,345 162,942 117,404 91,117 87,088
------- ------- ------- ------ ------
Income (loss) before provision for income taxes ....... 988,000 507,923 (703,951) (687,372) 36,183
Provision for income taxes(1) ......................... 79,781 37,866 11,101 320,994 13,320
-- ------ ------ ------ ------- ------
Net income (loss) ..................................... $ 908,219 $ 470,057 $ (715,052) $(1,008,366) $ 22,863
=========== =========== =========== =========== ===========
Net income (loss) per common and common
equivalent share .................................... $ .42 $ .22 $ (.33) $ (.46) $ .01
=========== =========== =========== =========== ===========
Weighted average common and common equivalent
shares outstanding .................................. 2,173,174 2,173,174 2,173,174 2,173,174 2,173,174
========= ========= ========= ========= =========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------
AT
DECEMBER 31,
1995 ACTUAL AS ADJUSTED(2)
---- ------ --------------
<S> <C> <C> <C>
Working capital $2,060,723 $2,504,157 $ 6,854,157
Total assets $7,721,910 $5,874,770 $ 9,474,770
Short-term debt $4,250,000 $ 750,000 $ --
Long-term debt, less current maturities $ -- $ 500,000 $ 500,000
Stockholders' equity $2,203,838 $2,146,472 $ 6,496,472
</TABLE>
- ----------
(1) Represents a non-recurring, non-cash charge associated with the acquisition
of a 62.2% equity interest in the Company by management with bank supplied
debt financing personally guaranteed by QCO's senior management. This charge
is not deductible for income tax purposes. See "CERTAIN TRANSACTIONS."
(2) Gives effect to the receipt by the Company of the estimated net proceeds of
approximately $4,350,000 from the sale of the Securities and the use of a
portion of the net proceeds therefrom to repay the term loan from Kobe Steel
USA Holdings, Inc. See "USE OF PROCEEDS" and "CERTAIN TRANSACTIONS."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company (including the Notes thereto) appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 ("INTERIM 1996") AND SIX MONTHS ENDED JUNE 30,
1995 ("INTERIM 1995")
Net sales for Interim 1996 were $6,782,522 as compared to $4,930,277 in
Interim 1995, an increase of 37.6%. This increase was due primarily to increased
demand for the Company's products for the inspection of computer hard disks.
Cost of sales for Interim 1996 was $3,062,307 as compared to $2,455,777 for
Interim 1995. As a result of increased sales, gross profit for Interim 1996 was
$3,720,215 (54.9% of net sales) as contrasted to $2,474,500 in Interim 1995
(50.2% of net sales), an increase of 50.3%. This improvement in gross profit as
a percentage of net sales was due to spreading fixed overhead costs over a
larger revenue base.
Selling, general and administrative expenses increased to $1,922,028 (28.3%
of net sales for Interim 1996) as compared to $1,544,121 (31.3% of net sales for
Interim 1995). This increase was due to increased commissions as well as
increased administrative expenses. However, selling, general and administrative
expenses increased by 24.5% in Interim 1996, as compared to an 37.6% increase in
net sales for the same time period.
Engineering expenses decreased in Interim 1996 compared to Interim 1995, due
to higher expenses incurred during Interim 1995 for developing the QCO-4000.
Engineering expenses were $693,442 and $807,108 for Interim 1996 and Interim
1995, respectively. Engineering expenses as a percent of net sales were 10.2% in
Interim 1996 as compared to 16.4% of net sales in Interim 1995.
The Company recorded a $1,701,000 management buyout charge in Interim 1996
which represents a non-cash, non-recurring charge associated with the
acquisition of a 62.2% equity interest in the Company by management with bank
supplied debt financing personally guaranteed by QCO's senior management. This
charge (25.1% of net sales) is not deductible for either federal or state income
taxes and as a result of this charge additional paid-in capital was increased by
a like amount. See "CERTAIN TRANSACTIONS" and footnote No. 7 to the financial
statements.
As a result of increased sales, total operating expenses, excluding the
non-recurring management buyout charge, as a percentage of net sales decreased,
to 38.6% in Interim 1996 as compared to 47.7% in Interim 1995. Net interest
expense remained relatively constant at $91,117 in Interim 1996 compared to
$87,088 in Interim 1995.
Loss before provision for income taxes was $687,372 in Interim 1996 ( 10.1%
of net sales) as compared to income before provision for income taxes of $36,183
in Interim 1995 (0.7% of net sales). Without the non-cash, non-recurring
management buyout charge, in Interim 1996 the income before provision for income
taxes would have been $1,013,628 (14.9% of net sales).
Due to the limitation on the utilization of the Company's net operating
loss("NOL's") carryforwards and the non-deductability for taxes of the
management buyout charge, there was a provision for income taxes for Interm 1996
of $320,994 even though there was a loss before provision for income taxes. With
the utilization of NOLs in Interim 1995 the provision for income taxes was
$13,320. In connection with the management buyout and the issuances of shares in
connections with this Offering, the Company is restricted in the NOLs it can use
in future fiscal years in accordance with Section 382 of the Internal Revenue
Code of 1986, as amended. Due to the non-deductiblity for taxes of the non-cash,
non-recurring management buyout charge, there was a provision for income taxes
for Interim 1996 even though there was a loss before provision for income taxes.
As a result of the management buyout, the Company is limited to approximately
$180,000 of loss utilization per year.
20
The improvement in net sales and gross profit offset by the non-recurring,
non-cash management buyout charge and the inability to fully utilize NOLs in
Interim 1996 resulted in the Company incurring a net loss for Interim 1996 of
$(1,008,366) (or 14.9% of net sales) as compared to a net income of $22,863 (or
.5% of net sales) in Interim 1995. Excluding the non-cash, non-recurring
management buyout charge, in Interim 1996 the Company would have had net income
of $692,634 (10.2% of net sales).
FISCAL YEAR ENDED DECEMBER 31, 1995 ("FISCAL 1995") COMPARED TO FISCAL YEAR
ENDED DECEMBER 31, 1994 ("FISCAL 1994")
Net sales for Fiscal 1995 were $10,373,464, as compared to net sales of
$8,394,932 in Fiscal 1994, an increase of 23.6%. This increase in net sales was
attributable to increased demand for the Company's products from both existing
and new customers.
Cost of sales for Fiscal 1995 was $4,798,902 (or 46.3% of net sales), as
compared to cost of sales of $3,911,108 in Fiscal 1994 (or 46.6% of net sales).
This slight improvement in gross profit was due to increased net sales covering
certain fixed manufacturing costs.
Selling, general and administrative expenses were $2,843,266 in Fiscal 1995
(27.4% of net sales) as compared to $2,465,479 in Fiscal 1994 (29.4% of net
sales). This increase was due to the expansion of field service staffing along
with related travel costs, increased professional fees and provision for bad
debts. However, as a percentage of net sales, selling, general and
administrative expenses decreased due to the spread of certain fixed costs over
the increase in net sales.
Engineering expenses for Fiscal 1995 were $1,586,951 (or 15.3% of net
sales), as compared to $1,347,480 in Fiscal 1994 (16.1% of net sales). Increased
engineering expenses were associated primarily with completion of engineering
costs of the Company's QCO-4000. However, engineering expenses as a percentage
of net sales decreased due to increased sales volume.
Net interest expense for Fiscal 1995 was $156,345 (1.5% of net sales) as
compared to $162,942 in Fiscal 1994 (1.9% of net sales). This interest expense
is primarily associated with a loan from Kobe Steel USA International, Inc., an
affiliate of the Company's then principal stockholder, which loan was repaid by
a capital contribution to the Company in March 1996.
As a result of increased net sales volume, income before provision for
income taxes for Fiscal 1995 was $988,000 (9.5% of net sales) as compared to
$507,923 in Fiscal 1994 (6.1% of net sales). Due to the use of the Company's
NOLs, taxes in Fiscal 1995 were $79,781 (8.1% of income before provision for
income taxes) as contrasted to $37,866 in Fiscal 1994 (7.5% of income before
provision for income taxes). The increase in taxes of 110.7% is due to the
increase in pretax income of 94.5% from Fiscal 1994 to Fiscal 1995. However,
taxes paid as a percentage of net income before taxes was at a low rate due the
use of both Federal and state NOLs.
As a result of the increase in net sales, the slight improvement in gross
profit and the improvements in reducing operating expenses as a percentage of
net sales, the Company had net income in Fiscal 1995 of $908,219 (8.8% of net
sales) as compared to net income in Fiscal 1994 of $470,057 (or 5.6% of net
sales). This represents a 93.2% increase in net income for Fiscal 1995
contrasted to Fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been funded primarily by equity investments and debt
financing by Kobe Steel. At June 30, 1996, the Company had stockholders' equity
of $2,146,472 and working capital of $2,504,157. Cash provided by operating
activities in Interim 1996 was $2,903,561. Net cash used in operating activities
was $115,364 in Interim 1995 and $1,102,581 in Fiscal 1995. During Interim 1996
and Fiscal 1995, the Company only made limited investments in property and
equipment. From time to time since inception, the Company has received loans
from Kobe Steel and it affiliates to meet certain obligations, capital
expenditures and general working capital requirements of the Company. On March
29, 1996, Kobe Steel USA Holdings, Inc. made a capital infusion of $4,250,000 to
repay a loan of $4,250,000 previously made to the Company by Kobe Steel USA
International, Inc. In addition, the Company repurchased 62.2% of the Company's
common stock (99.5% of the Company was previously held by Kobe Steel USA
Holdings, Inc.) for $5,000,000. Payment for the shares was made with
21
$3,250,000 from a revolving line of credit from the Company's bank, a $750,000
loan from Kobe Steel USA Holdings, Inc. due and payable on December 31, 1996 and
$1,000,000 of cash from the Company's cash accounts. In connection with this
transaction, a company formed by the management of QCO exchanged their interests
in that corporation for a 62.2% interest in the Company. Each of the several
stockholders of the QC Optics Voting Trust, pledged their QCO shares to the bank
as collateral for the bank loan. In addition, Eric Chase and K. Andrew Bernal
provided unlimited guarantees for the bank loan. Upon completion of this
Offering and if certain other conditions are satisfied, the bank has agreed to
release all personal guarantees. See "CERTAIN TRANSACTIONS."
In connection with the stock repurchase from Kobe Steel USA Holdings, Inc.,
the Company entered into a revolving line of credit with State Street Bank &
Trust Company. The revolving line of credit agreement allows for maximum
borrowings of $4,000,000 and requires monthly payment of interest on the
outstanding balance to maturity on June 30, 1998. Borrowings under the line of
credit are limited to 80% of qualifying accounts receivable and 10% (not to
exceed $350,000) of qualifying inventory. Borrowings under the revolving line
credit agreement bear interest at the bank's prime rate (8.25% at June 30, 1996)
plus 1.0%. The terms of the loan agreement provide for the maintenance of
certain specified financial ratios including, but not limited to, quick ratio,
debt to equity and net worth ratios, and restrict certain transactions without
the bank's prior written consent. As of the date of this Prospectus, the Company
is not in default of the covenants and provisions of the credit agreement.
Borrowings under the agreement are secured by substantially all the assets of
the Company. At June 30, 1996 the Company had borrowings outstanding under the
revolving credit agreement of $500,000 and additional availability of
approximately $1,900,000. Following the closing of the Offering, and in order to
reduce interest expense, the Company may use a portion of the proceeds of the
Offering to temporarily pay down all or a portion of the then outstanding
balance of the bank's revolving line of credit. See "USE OF PROCEEDS" and
"CERTAIN TRANSACTIONS."
The Company also intends to use approximately $750,000 of the proceeds of
the Offering to repay the term loan provided by Kobe Steel USA Holdings, Inc.
Following repayment of this term loan, the Company expects to have an additional
$3,600,000 available from the net proceeds of this Offering for working capital
and expansion purposes. See "CERTAIN TRANSACTIONS." The Company intends to use a
portion of these proceeds for expansion of sales and marketing activities both
in the United States and overseas, particularly in Asia. The Company also
intends to use a portion of the proceeds for further research and development
activities. The remainder of the proceeds will be used for working capital and
general corporate purposes. See "USE OF PROCEEDS."
The Company may use a portion of the net proceeds of the Offering to acquire
businesses or product lines similar, complementary, or related to the Company's
current business. The Company's business plan includes considering potential
acquisitions. However, none is currently being negotiated and no portion of the
net proceeds have been allocated to specific acquisitions. The Company's
expansion plans will subject the Company to all of the risks inherent to the
expansion of an emerging business, particularly the possible adverse impact
associated with the integration of new and acquired businesses into the
Company's existing operations and the coordination of operations in joint
ventures. In particular, newly acquired businesses and joint ventures frequently
encounter unforeseen expenses, difficulties, complications and delays and no
assurances can be given that the Company will be successful in meeting its
business objectives. In addition, no assurance can be given that the Company
will pursue or consummate any such business opportunities in the future or that
any such business opportunity, if consummated, will prove beneficial to the
Company. See "USE OF PROCEEDS."
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results may continue to fluctuate on a quarterly and annual basis due
to a variety of factors, including the cyclicality of the photomask making and
semiconductor industries, the timing of significant orders, order cancellations,
shipment reschedulings, market acceptance of the Company's products,
fluctuations in the granting and funding of development contracts, consolidation
of the number of customers, unanticipated delays in design, engineering or
production or in customer acceptance of product shipments, changes in pricing by
the Company or its competitors, the timing of product announcements or
introductions by the Company or its competitors,
22
the mix of systems sold, the relative proportions of product revenues and
service revenues, the timing of payments of sales commissions, changes in
product development costs, expenses associated with acquisitions and exchange
rate fluctuations. See "RISK FACTORS -- Fluctuation in Operating Results;
Accumulated Deficit." Historically, the Company has sold a significant
proportion of its systems to a limited number of customers as the markets the
Company participates in are primarily dominated by a few major companies. See
"RISK FACTORS -- Concentration of Customers."
The Company's net income and cash flow will also be affected by its ability
to apply its NOLs, which totaled approximately $1,818,000 for federal income tax
purposes at June 30, 1996, against taxable income in future periods. The
utilization of the Company's NOLs will in the future be significantly limited
due to the provisions of Section 382 of the Internal Revenue Code of 1986, as
amended. This provision allows the Company to utilize only a portion of its NOLs
on an annual basis following a change in control, which change occurred
following the management buyout. As a result of the management buyout, the
Company is limited to approximately $180,000 of loss utilization per year. Given
the limitations on the utilization of the Company's net operating losses as a
result of the management buyout and uncertainty surrounding the ability of the
Company to generate future income in order to realize such deferred tax assets
in the future, primarily due to such factors as dependence on a few customers,
rapid technological change and the cyclical nature of the semiconductor,
computer hard disk and flat panel display industries, management has concluded
that the ability to realize the deferred tax assets as of December 31, 1995 is
uncertain and has, therefore, provided a full valuation allowance against such
deferred tax assets. The Company cannot predict the impact of these and other
factors on its financial performance in any future period. See "RISK FACTORS --
Limitations on the Use of Net Operating Losses."
Based upon the anticipated proceeds of the Offering, current anticipated
bank and credit facilities, and anticipated results of operations, management
believes that the proceeds of the Offering will be adequate to meet its working
capital requirements for the 12 months following the Offering. Thereafter, the
Company anticipates that it could need additional financing to meet its current
plans for expansion. No assurance can be given of the Company's ability to
obtain financing on favorable terms, if at all. See "RISK FACTORS --
Discretionary Use of Proceeds; Possible Need for Additional Financing;
Substantially All Assets Pledged." If the Company is unable to obtain additional
financing, its ability to meet its current plan for expansion could be
materially adversely affected.
INFLATION
To date, inflation has not had a material effect on the Company's business.
23
BUSINESS
GENERAL
QC Optics, Inc. (the "Company" or "QCO"), is a rapidly growing company which
designs, manufactures and markets laser based defect detection systems for the
semiconductor, flat panel display and computer hard disk drive 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 believes that these features enable the Company to maintain a leading
market position in the U.S. in the semiconductor, flat panel display and
computer hard disk drive industries where high quality inspection capabilities
are required. The Company's customers include many of the world's largest
leading semiconductor and computer hard disk manufacturers. Currently, QCO has
over 200 systems installed in 14 countries.
QCO was formed in 1986 to acquire the assets of a division of GCA
Corporation. The Company funded its product development primarily with equity
investments and debt financing from Kobe Steel. From 1986 to 1990, the Company
focused its efforts in developing inspection systems for computer hard disk
inspection. Using the Company's patented and proprietary information, the
Company expanded its efforts to use this technology for inspection of photomasks
used to image integrated circuit patterns onto semiconductor wafers. In early
1996, management of the Company acquired a 62.2% equity interest in the Company
for $5 million through a management buyout with bank supplied debt financing
personally guaranteed by QCO's senior management. See "CERTAIN TRANSACTIONS."
The Company introduced its QCO-4000 automatic pelliclized photomask laser
based inspection systems in March 1996, which has the sensitivity to detect
defects or contamination of 0.3 micrometers (the equivalent of 0.06 micrometers
on the semiconductor wafer), which will be required to detect defects in the
next generation of semiconductors. As semiconductor devices have become more
complex, the semiconductor manufacturing process has become very sensitive to
photomask errors, requiring more complex photomasks and, as a result,
increasingly sophisticated photomask inspection tools.
The Company's systems, such as its API-3000/5 and DISKAN-6000, are designed
to fit into its customers' production line virtually eliminating the need for
special handling or special production procedures while performing 100%
inspection throughout the process. These systems sort out fatal defects on disks
and pelliclized photomasks before they cause manufacturing yield or other
quality problems. As more manufacturers of computer hard disks move toward total
inspection protocols versus statistical sampling, demand during the past year
for the Company's products which can inspect computer hard disks has increased
significantly. The Company is also working on research and development for
porting, which is applying the Company's technology in its other systems, to the
inspection of flat panel displays.
The Company's goal is to maintain a leadership position in the United States in
photomask inspection systems for soft defects (e.g., particulates and other
contamination) and use its knowledge and contacts to pursue other opportunities
in high performance inspection markets. The Company intends to use a portion of
the proceeds of this Offering to expand its sales and marketing activities,
continue research and development activities in inspection opportunities, and to
continue to work closely with major customers and seek strategic alliances with
other industry participants to maintain a leading edge position in the high
performance inspection markets. In addition, the Company may consider
acquisitions in complementary businesses in the inspection and handling markets.
QCO's principal offices and manufacturing facilities are based in
Burlington, Massachusetts. The Company also maintains regional sales or service
personnel in Texas, Florida, New Mexico, Oregon, Arizona and California. The
Company currently has approximately 60 employees and has manufacturer's
representatives in Europe and distributors in Asia.
24
MARKETS
The Company currently serves three markets with its inspection systems:
semiconductors, computer hard disks and flat panel displays. In addition, the
Company plans to continue to develop additional products, based on the Company's
existing patented and proprietary technologies, to further develop laser based
inspection systems.
The Company's core technology inspects by illuminating critical surfaces and
examining and analyzing light reflected from the surface. This analysis allows
the end user to analyze and determine the type of defect on the surface. Lasers
are used to provide the stable high intensity light source needed for these
inspection processes. Certain ultraviolet light lasers are used to detect
smaller defects. The angular distribution and the intensity of the reflected and
scattered light from the surface provides a "fingerprint" of the surface and its
defects. This information passes through analog and digital signal processes and
is then analyzed using the Company's proprietary software.
SEMICONDUCTOR PHOTOMASK INSPECTION SYSTEMS
In the manufacture of semiconductors, photomasks are used to image
integrated circuit patterns onto silicon wafers. Semiconductor manufacturing
begins with the creation of a photomask, in which the circuit design is written
onto the photomask, one layer at a time. A wafer stepper uses the photomask like
a photographic negative to rapidly make numerous repetitive images of the
circuit pattern on the wafer. The stepper transfers light through the photomask
onto photoresist that is spread over the surface of the wafer. Those areas of
the photoresist that have been exposed to light are dissolved by chemical
developers, and the exposed areas of the layer under the resist are then etched.
A different photomask is required for each layer of the integrated circuit.
Successive steps of deposition, lithography and etch build the layers of
patterns that make up a single integrated circuit.
In the 1990s, a number of advancements in photomask design have allowed
manufacturers to manufacture integrated circuits with increasingly smaller
linewidths. These linewidths are now as low as 0.5 micrometers and less. In the
late 1980s and early 1990s, the development of a number of technologies allowed
photomasks to be used much more efficiently. During this period, the demand for
photomask inspection equipment was less than the increased demand for
semiconductors as more advanced photomask technologies, such as
computer-automated design equipment and pellicles, were utilized. Pellicles are
a thin transparent membrane suspended over the photomask surface on a frame
mounted to the photomask. The pellicle increases semiconductor manufacturing
yields by preventing airborne particles from falling onto the surface of the
photomask and printing as defects on the wafer. Since their introduction in the
early 1980s, pellicles have significantly reduced the need to clean photomasks
during production, thus substantially extending the life of a photomask.
Accordingly, the introduction of pellicles significantly reduced the number of
photomasks required in high volume semiconductor device manufacturing.
Management believes that the increased complexity in semiconductor devices
has recently contributed to high demand for complex photomasks and for increased
sophistication in photomask inspection equipment. As semiconductors become more
and more complex, the potential for defects in photomasks has increased.
Similarly, demand for inspection of photomasks has increased to improve
manufacturing yields by identifying defects or contaminations in photomasks as
early as possible. Quickly attaining and then maintaining high yields is one of
the most important determinants of profitability in the semiconductor industry.
The Company believes that its customers typically experience rapid paybacks on
their investments in the Company's inspection systems. Semiconductor factories
are increasingly expensive to build and equip. Yield management and monitoring
systems, which typically represent a small percentage of the total investment
required to build and equip a fabrication facility, enable integrated circuit
manufacturers to leverage these expensive facilities and improve their returns
on investment. In addition to utilizing state-of-the-art inspection systems on a
statistical basis to improve manufacturing yields, semiconductor manufacturers
increasingly demand the ability to inspect photomasks during the manufacturing
process to provide real time inspection capability. In-process inspection is a
critical yield enhancement and cost reduction technique because it allows defect
detection in real-time rather than waiting until after final test results become
available to discover problems that have a significant negative impact on yield.
25
Although the semiconductor industry has recently experienced significant
growth, there can be no assurance that such growth can be sustained. The overall
semiconductor industry has been and could continue to be cyclical with periods
of oversupply. A downturn in the demand for semiconductors would likely reduce
the demand for photomasks and could reduce the demand for photomask inspection
equipment or, alternatively, place pricing pressure on photomask inspection
equipment vendors. The Company's ability to reduce expenses in response to any
such downturn is limited by its needs for continued research and development
expenses and in customer service and support. Previous downturns in capital
investment by the semiconductor fabrication industry have materially affected
the operating results of other businesses in the semiconductor capital equipment
industry and future downturns may have similar adverse effects. In order to
address these concerns, the Company sells its inspection technologies into other
markets, such as computer hard disk inspection, and plans to expand into other
emerging markets, such as flat panel displays.
COMPUTER HARD DISK INSPECTION
Disk drive manufacturers use advanced deposition processes to produce thin
film disks. In order to assure cost-effective yields, disk drive manufacturers
are switching from low-volume sample inspection to production line inspection
techniques, rapidly increasing the demand for inspection of computer hard disks.
This demand is also driven by more memory requirements on the same size or
smaller disks. Any defect or contaminant on the disk increases the risk that
memory cannot be properly stored. Defect detection includes inspection of
substrates and in process computer hard disks. The Company believes that the
demand for production line inspection of computer hard disks could dramatically
increase the demand for its computer hard disk inspection products.
FLAT PANEL DISPLAYS
Over time, the use of flat panel displays ("FPDs") is expected to
significantly replace vacuum tube monitors used in televisions and computer
monitors, providing users with quality images on less bulky displays. This
market is in the very early stages of commercial development in the United
States and extensive funding by government and industry consortia, as well as
private efforts to advance this technology, are proceeding at a fast pace. FPDs
are currently being designed to include electronic substrates which undergo a
lithography process similar to semiconductors as well as glass substrates which
require inspection prior to the lithography process. Following the management
buyout, the Company now qualifies to join United States government-industry
consortia which have been formed to help speed the development and
commercialization of the flat panel display industry in the United States. The
Company has already collaborated with several companies, including one Fortune
100 company, to speed the development of technology solutions in this market.
The market for FPDs has grown significantly in recent years as a result of
the increasing popularity of portable computers and other electronic devices
which utilize screens and other types of displays to provide information in
digital format and graphical displays to the end user. The weight and narrow
form factor of FPDs are enabling new display applications where the previously
predominant monitor technology, cathode ray tubes ("CRTs"), did not allow such
use. Laptop and notebook computers, personal digital assistants, portable video
games, digital phones and a variety of devices for the automotive, technical,
medical and military markets are examples of electronic products in fast growing
markets which cannot be served by CRT technology. The FPD market is estimated to
have grown from approximately $2 billion in 1990 to approximately $10.7 billion
in 1995, and is estimated to grow to approximately $18 billion by the year 2001.
The Company expects that FPD manufacturers will increase their purchases of
inspection equipment in response to both the growth in the FPD market as well as
the shift to larger and higher resolution displays.
Different applications for FPDs have varying cost, size and performance
requirements, and alternative FPD technologies have been developed to address
these different applications. Different types of FDPs that are currently being
produced to address certain segments in the broader FPD market include liquid
crystal ("LCD"), plasma, electroluminescent ("EL") and field emissive ("FED")
26
displays and digital micro-mirror devices ("DMDs"). Currently the most common
type of FPD is the LCD, which first emerged in the form of watch and calculator
displays in the 1970s. The most advanced form of LCD available today is the
AMLCD which utilizes three individual emissive transistors at each pixel,
enabling the AMLCD both to produce full color images and to operate at much
faster refresh rates than earlier passive monochrome LCDs. The color capability,
resolution, speed and picture quality of AMLCDs currently make these displays a
preferred choice for high performance portable computer, multimedia and other
applications requiring the display of video and graphics. It is estimated that
AMLCDs represented more than 50% of the overall dollar volume of the FPD market
in 1995. The trend toward higher resolution video and graphic displays has been
reflected in a generational movement from VGA displays (640 x 480 lines of
resolution) to higher resolution SVGA displays (800 x 600 lines of resolution)
which in turn are anticipated to be replaced by the next generation XGA displays
(1,280 x 1,024 lines of resolution). To achieve these higher resolution display
capabilities and enhanced picture quality, the number of pixels utilized in
AMLCDs is increased which in turn increases the complexity associated with the
manufacture of these displays.
STRATEGY
The Company's goal is to maintain a leadership position in the photomask and
computer hard disk inspection system markets and use its patented and
proprietary technology to pursue other opportunities in high performance
inspection systems. The Company intends to achieve this goal through the
implementation of the following strategies:
* Expand Marketing Efforts for Existing Products. Since its introduction of
photomask and computer hard disk inspection systems, the Company's
objective has been to expand its position in these fields. The Company is
also working to extend its sales and marketing activities outside of the
United States into Europe and Asia, where the Company believes very
sizable market demand exists for state-of-the-art inspection systems in
both photomasks and computer hard disks. In particular, the Company
believes that significant demand exists in Korea, Singapore, Malaysia, and
other areas in Asia. In addition, in the computer hard disk market, the
Company intends to market its computer hard disk inspection systems for
100% production line inspection versus statistical sampling inspection.
* Maintain Technology Leadership Position. Since its formation, the
Company's objective has been to maintain a leadership position in
inspection technology in the photomask and computer hard disk inspection
system markets. To maintain technology leadership, the Company intends to
continue to work closely with major customers, several of which are the
leading suppliers of microprocessors and computer hard disks in their
respective industries. Now that a majority of the Company is no longer
owned by a foreign company, the Company is eligible and intends to join
government-industry consortia to develop leading edge technologies for
existing and other inspection markets not yet served by the Company. In
addition, the Company believes that the recent management buyout, as well
as the funds to be received from this Offering, will increase its
attraction as a joint venture or strategic alliance partner with other
semiconductor and computer hard disk manufacturers.
* Broaden Product Offerings through Acquisitions. QCO plans to expand its
activities in related inspection markets, such as the expected market for
flat panel displays. In addition, there are a number of smaller companies
in the inspection market that have technology and market links with the
Company's existing businesses, including material handling and stocking
equipment, cleaning equipment, and related products.
* Provide Broad Range of Photomask Inspection Solutions. The Company's
strategy is to provide a broad range of technical solutions, leveraged off
of existing technologies, with different performance characteristics.
Certain of the Company's inspection systems currently address less complex
photomask designs while new products, such as the QCO-4000, are designed
to address the most sophisticated photomasks currently used.
27
* Leverage Installed Base. In marketing new products to existing customers,
the Company intends to leverage its existing customer base to upgrade the
over 200 Company systems currently in the field with new product
offerings. Many of the Company's products are built with modular systems
which are designed to facilitate future enhancements, as well as new
system software.
* Expand Customer Support Services. The Company currently provides local
support and service with personnel located in California, Texas, New
Mexico, Oregon, Florida and Arizona in addition to its principal
engineering services at its Burlington, Massachusetts headquarters. The
Company intends to expand the number of customer support sites in both the
United States and overseas to help facilitate customer support as well as
support future sales opportunities.
PRODUCTS AND SERVICES
QCO's current products consist of photomask, computer hard disk and flat
panel display inspection systems. The Company's systems are designed to provide
a lower cost of ownership through high performance, reliability and integration
into the manufacturing process. The Company utilizes a number of different forms
of lasers in its laser based inspection systems, allowing it to cover a broad
range of technical requirements and cost sensitivities for its customers.
Many of QCO's newer systems are designed to fit into its customer production
lines virtually eliminating the need for special handling or production
procedures while performing 100% inspection throughout the process. QCO's
systems sort out fatal defects on disks and pelliclized photomasks before they
become manufacturing yield or other quality problems. Many of QCO's systems have
the sensitivity to detect defects or contamination less than 0.5 micrometers.
The Company also introduced its new QCO-4000 in March 1996. This new system has
the ability to detect defects or contamination of 0.3 micrometers (the
equivalent of 0.06 micrometers on the semiconductor wafer), which will be
required to detect defects in the next generation of semiconductors. Specific
Company products include the following:
QCO-4000: The QCO-4000 represents what the Company believes is a
state-of-the-art breakthrough for inspecting pelliclized photomasks. Defects
on complex, small featured photomasks are non-destructively detected and
characterized with a sensitivity down to .25 micrometers, using the latest
technologies in ultraviolet argon ion laser optics and innovative signal
processing. The QCO-4000 is capable of inspecting all four critical surfaces
of the photomask, which are the front and back pellicles and the front and
back of the photomask. The QCO-4000 also provides for inspection both on a
sampling basis as well as 100% inspection. This allows this system to be
extremely versatile for needs ranging from incoming inspection to complete
process characterization and documentation. Utilizing advanced systems
control technology, the operator has complete control over all system
operations and decisions. Computers incorporated in the product and several
communication ports allow the QCO-4000 to be easily integrated into the
manufacturing process, manufacturing resource planning ("MRP") and similar
systems. The average selling price for this system is approximately $900,000
to $1,300,000, although various options can increase or reduce the cost of a
specific system.
API-3000: This automatic pelliclized photomask inspection system has a
sensitivity of 0.5 micrometers and is compatible with many of the photomasks
most commonly used in today's semiconductor manufacturing processes. This
product is used by semiconductor manufacturers to qualify the photomask just
prior to its use on lithography equipment as well as for incoming
inspection. Photomask manufacturers utilize the system for final inspection
as well as process control. The average selling price for this system is
approximately $500,000 to $750,000, although various options can increase or
reduce the cost of a specific system.
RSO (RETICLE SYSTEM ONE): The RSO is a cluster tool incorporating an
inspection system, a cassette handling system (which holds cassettes of
photomasks) which loads photomasks into lithography equipment cassettes, and
an original equipment manufacturer ("OEM") photomask stocker with a storage
capacity of between 740 and 1500 photomasks. The RSO is utilized by
28
semiconductor manufacturers for photomask management and can eliminate
manual handling and the associated risks of damage and contamination of the
photomask once incoming inspection is accomplished. The average selling
price for this system is approximately $1,500,000, although various options
can increase or reduce the cost of a specific system.
API-1100: This equipment is a photomask blank inspection system with full
automatic handling capable of detecting pinholes and particulates as small
as 0.3 micrometers. This product is utilized by photomask blank substrate
manufacturers for final inspection and transfers the finished product
directly into a shipping cassette from a process cassette. Quartz
manufacturers also use this equipment for final inspection. The average
selling price for this system is approximately $300,000 to $600,000,
although various options can increase or reduce the cost of a specific
system.
DISKAN SERIES: These are computer hard disk inspection systems with
integrated automatic handling, manual handling and external handling
systems. DISKANs are used by magnetic media and other substrate
manufacturers for both 100% inspection and sample inspection. In the United
States, all of the major media manufacturers use the DISKAN for sample
inspection on their lines to achieve process control. Over the past several
months, the Company has experienced increasing demand by manufacturers to
incorporate DISKANs directly in the production line for 100% inspection.
Selling prices for these systems range from approximately $130,000 to
$300,000, although various options can increase or reduce the cost of a
specific system.
API-1100FP: The API-1100FP is the Company's first product to address the
inspection demands for flat panel display substrates inspection systems,
including systems with automatic handling capability. This product is
utilized for process control by flat panel display manufacturers, as well as
flat panel display glass substrate manufacturers. The average selling price
for this system is approximately $300,000 to $600,000, although various
options can increase or reduce the cost of a specific system.
PRODUCTS UNDER DEVELOPMENT
The Company's product development strategy is to make continuous
improvements to its existing product line relying on its proprietary
technologies and to expand prior development efforts in applications related to
the markets it serves. The Company currently has an engineering and product
development staff of 16 individuals who assist the Company's customers in
integrating the Company's products into the customer's work environment. This
engineering work provides the Company an opportunity to keep abreast of new
market opportunities for the Company's technologies.
Currently the Company is working on product enhancements to both its
QCO-4000 and DISKAN product lines. The Company is commencing early development
activities for the next generation of the photomask inspection market and
anticipates introducing a new product in 1998 which will provide even higher
sensitivities in measurements then currently provided with the QCO-4000. The
Company is also working on a transfer system which will allow it to
automatically handle different photomask storage boxes. Currently many of the
photomasks are in different sizes and are kept in different sizes and types of
storage boxes. The new transfer system is designed to allow the systems to
automatically handle the boxes so that the photomasks will never be manually
handled. Management expects that this new system will significantly reduce the
risk of contamination or damage to the photomask. The Company believes that this
system will allow it to be the only Company that can handle all of the different
photomasks used in stepper systems. In addition, the Company continues its
efforts in the flat panel display market to modify its existing products for
research and development in the inspection of flat panel displays. The
technology used in flat panel displays will continue to evolve significantly in
the near term and as a result, the Company expects that it will be required to
continue to spend significant efforts in improving and developing new
technologies for the flat panel display markets.
The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements, introduction of new products on schedule, cost-effective
manufacturing and product performance in the field. The Company's new product
decisions and development commitments must anticipate the equipment needed to
satisfy the requirements for inspection processes one or more years in advance
of sales. Any failure to accurately predict customer requirements and to develop
new generations of products to meet
29
those requirements would have a sustained material adverse effect on the
Company's business, financial condition and results of operations. New product
transitions could adversely affect sales of existing systems, and product
introductions could contribute to quarterly fluctuations in operating results as
orders for new products commence and orders for existing products or
enhancements of existing products fluctuate. See "RISK FACTORS -- Rapid
Technological Change; Dependence on Product Development."
CUSTOMER SERVICE AND SUPPORT
In addition to selling and installing standard products and providing
support services, the Company also provides individualized engineering services
for customers as well as technical support worldwide. In addition to providing
technical support, the Company's service and support personnel advise customers
about product applications, provide customer training, coordinate upgrades,
manage spare parts and provide preventative maintenance.
The Company's warranty obligations for its systems generally cover a
12-month period beginning upon final customer acceptance. However, many
customers request service and support beyond the warranty period. The Company
has historically derived less than 10% of its revenues from annual service and
maintenance for its installed base of systems. Some of the Company's systems are
currently serviced under service contracts and other customers purchase repairs
on a labor and materials basis. Service revenues for the six months ended June
30, 1996, the fiscal year ended December 31, 1995 and the fiscal year ended
December 31, 1994 were $589,986, $614,590 and $745,335, respectively.
Historically, warranty expenses have been consistent with established
allowances.
CUSTOMERS
The Company's customers include semiconductor fabricators, photomask
fabricators and suppliers, computer hard disk manufacturers and customers
interested in developing flat panel displays. Repeat sales to existing customers
represent a significant portion of the Company's product revenues, and the
Company believes that its installed base of over 200 systems represents a
significant competitive advantage, particularly in the United States.
Historically, the Company has sold a significant proportion of its systems
to a limited number of customers as the markets that the Company participates in
are primarily dominated by a few major companies. Sales to the Company's ten
largest customers accounted for approximately 96% and 95% of net sales in Fiscal
1994 and Fiscal 1995, respectively. Sales to the largest customer during those
periods accounted for approximately 32% of net sales. The failure to replace
sales with sales to other customers in succeeding periods would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company expects that sales to relatively few customers will
continue to account for a high percentage of the Company's revenues in any
accounting period in the foreseeable future. A reduction in orders from any such
customer or the cancellation of any significant order could have a material
adverse effect on the Company's business, financial condition and results of
operations. None of the Company's customers has entered into a long-term
agreement requiring it to purchase the Company's products.
In addition, due to the substantial purchase price for the Company's
products and systems, revenues and operating results may vary significantly from
quarter to quarter depending upon the timing of orders and shipments.
SALES AND MARKETING
QCO markets and distributes its products directly in the United States. The
Company maintains sales offices in Burlington, Massachusetts and Santa Clara,
California, and service or sales personnel in Arizona, Oregon, New Mexico,
Florida and Texas. The Company also sells directly to certain customers in
Europe and uses ETEC Japan as its distributor in Japan.
Due to the significant involvement required to purchase QCO's systems and
their highly technical nature, the sales process is often complex, requiring
interaction with several levels of the customer's organization and extensive
technical exchanges, product demonstrations and commercial negotiations.
30
As a result, the sales cycle can often be quite long. Purchase decisions are
typically made at a high level within the customer's organization and the sales
process often requires broad participation across the QCO organization, from the
President to the engineers who designed the product. Accordingly, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management time and effort with no assurance that a sale
will result. See "RISK FACTORS -- Lengthy Sales Cycle."
ENGINEERING AND PRODUCT DEVELOPMENT
The Company directs its engineering and design efforts at products for which
the Company believes there is growing market demand and strong margins. In
particular, the Company seeks to meet the requirements of its customers for
products aimed at emerging applications in the semiconductor, computer hard disk
and flat panel display inspection markets by applying the latest available
technology and the design and engineering know-how gained from the Company's
focus on this market. For many of its customers, the Company provides
engineering and design support to help integrate the Company's products into
production environments. By working closely with these customers, the Company is
exposed to new market opportunities for its products.
The Company employed 14 individuals in engineering and product development
as of June 30, 1996. During Fiscal 1994, Fiscal 1995 and the first six months of
Fiscal 1996, the Company's engineering expenses totaled approximately
$1,347,000, $1,587,000 and $693,000, or 16.1%, 15.3% and 10.2% of sales,
respectively. The Company expenses all software development costs associated
with its manufactured hardware equipment as such amounts are immaterial to the
Company's financial position and results of operations. During Fiscal Years 1994
and 1995, engineering expenses increased due to efforts in connection with
development of the QCO-4000.
The Company's business strategy includes investing in or acquiring companies
which offer the Company access to complementary technologies, and new markets
within the Company's target industries. Historically, governmental sources did
not fund QCO's product development efforts as a majority of QCO was foreign
owned. As a result of the management buyout, the Company expects to join
SEMI-SEMATECH, an organization of equipment manufacturers and suppliers serving
SEMATECH, and expects to seek funding for product development efforts from
SEMATECH, a consortium of semiconductor manufacturers, Advanced Research
Projects Agency ("ARPA") and other governmental and quasi-governmental agencies,
including the U.S. Display Consortium. There can be no assurance that the
Company will be successful in obtaining such funding.
COMPETITION
The markets in which the Company competes are characterized by rapid
technological change, evolving industry standards, rapid product obsolescence
and intense competition. Competitors in the semiconductor photomask inspection
market include KLA Instruments, Hitachi and Nikon. In the computer hard disk
inspection market competitors include DPI Technology Systems and Hitachi. Based
on the number of installations, the Company believes it is a leading supplier of
semiconductor photomask soft defect inspection systems and computer hard disk
inspection systems in the United States. The Company competes based on its
installed base of customers, engineering and service capabilities, breadth of
products, patents and proprietary information, and reputation. Many of the
Company's competitors or potential competitors have greater financial, marketing
and technological resources than the Company.
The Company expects competition to continue in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative solutions that may be less costly or
provide additional features. The Company believes that its ability to compete
successfully depends on a number of factors, which include product quality and
performance, order turnaround, the provision of competitive design capabilities,
success in developing new applications, adequate manufacturing capacity,
efficiency of production, timing of new product introductions by the Company,
its customers and its competitors, the number and nature of the Company's
competitors in a given market, price and general market and economic conditions.
In
31
addition, increased competitive pressure may lead to intensified price
competition, resulting in lower prices and gross margins, which could materially
adversely affect the Company's business and results of operations. No assurance
can be given that the Company will compete successfully in the future.
The semiconductor, computer hard disk and flat panel display industries in
general, are characterized by rapid technological change and evolving industry
standards. As a result, the Company must continue to enhance its existing
products and to develop and manufacture new products and upgrades with improved
capabilities. This has required and will continue to require substantial
investments in research and development by the Company to advance a number of
state-of-the-art technologies. Continuous investments in research and
development will also be required to respond to the emergence of new
technologies. The failure to develop, manufacture and market new products, or to
enhance existing products, would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's competitors can be expected to continue to develop and introduce new
and enhanced products, any of which could cause a decline in market acceptance
of the Company's products or a reduction in the Company's margins as a result of
intensified price competition. See "RISK FACTORS -- Rapid Technological Change;
Dependence on Product Development."
Changes in manufacturing processes could also have a materially adverse
effect on the Company's business, financial condition and results of operations.
The Company anticipates continued changes in semiconductor and flat panel
display technologies and processes. There can be no assurance that the Company
will be able to develop, manufacture and sell products that respond adequately
to such changes.
BACKLOG
The Company's backlog for products and services was approximately $4,029,380
at June 30, 1996, compared to $4,021,242 at June 30, 1995. QCO defines backlog
to include only those systems, accessories and upgrades with respect to which a
purchase order has been received and a delivery schedule has been specified for
shipment over the next twelve (12) months, and contracts for services to be
provided for longer periods up to 36 months. Cancellations of product purchase
orders are subject to penalties, depending upon the time of cancellation.
Although a significant indicator of business levels, backlog is not necessarily
representative of future sales.
MANUFACTURING
The Company's manufacturing activities consist of final assembly of
subassemblies, which are then integrated into finished systems and tested for
compliance with customer requirements. The Company believes that production lead
time, product quality and customer response are key elements to its success.
Although the Company manufactures some of the subassemblies used in its
systems, most are purchased from unaffiliated subcontractors, typically to the
Company's specifications. None of the Company's suppliers is obligated to
provide the Company with any specific quantity of components or subassemblies
over any specific period. Certain of the components and subassemblies included
in the Company's products are obtained from a limited group of suppliers. In
addition, because the Company believes that subsystem vendors have increased
their manufacturing expertise, the Company expects to continue to obtain
virtually all of its components and subassemblies from third parties in order to
devote its resources toward systems design, software development and systems
integration, its primary areas of competence. To date, the Company has generally
been able to obtain adequate and timely delivery of critical subassemblies and
components, although it has experienced occasional delays. Because the
manufacture of these components and subassemblies is very complex and requires
long lead times, and although alternative sources are available, such sources
may not be readily available. As a result, there can be no assurance that delays
or shortages caused by suppliers will not occur in the future. Any disruption of
the Company's supply of critical components and subassemblies could prevent the
Company from meeting its manufacturing schedules, which could damage
relationships with customers and would have a materially adverse effect on the
Company's business, financial condition and results of operations.
32
The Company's systems have a large number of components and are highly
complex. To date, the Company has experienced only limited delays in
manufacturing and delivering systems and upgrades and may experience similar or
more extended delays in the future. Any inability to manufacture and ship
systems or upgrades on schedule could adversely affect the Company's
relationships with its customers and thereby materially adversely affect the
Company's business, financial condition and results of operations. Due to recent
increases in demand, the average time between order and shipment of the
Company's systems has increased over the last fiscal year. The Company's ability
to increase its manufacturing capacity in response to an increase in demand is
limited given the complexity of the manufacturing process, the lengthy lead
times necessary to obtain critical components and the need for highly skilled
personnel. The failure of the Company to keep pace with customer demand would
lead to further extensions of delivery times, which could deter customers from
placing additional orders, and could adversely affect product quality. There can
be no assurance that the Company will be successful in increasing its
manufacturing capacity. See "RISK FACTORS -- Lengthened Lead Times; Limited
Manufacturing Capacity."
GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of operators
of manufacturing equipment. In particular, the European Union ("EU") has
recently issued regulations relating to electromagnetic fields, electrical power
and human exposure to laser radiation. In addition, numerous domestic
semiconductor manufacturers including certain of the Company's customers, have
subscribed to voluntary health and safety standards and decline to purchase
equipment not meeting such standards. The Company believes that its products
currently comply with all applicable material governmental health and safety
regulations, including those of the EU, and with the voluntary industry
standards currently in effect. See "RISK FACTORS -- Health and Safety
Regulations and Standards."
PROTECTION OF PROPRIETARY INFORMATION
The Company holds six United States patents and has an additional seven
patent applications pending. Several of the issued patents are also issued in
Japan, France, Germany, Great Britain, the United Kingdom, Switzerland,
Liechtenstein and the Netherlands. The Company has many patent applications
pending in the United States, Japan, Germany, France and the United Kingdom, a
number of which are associated with the new QCO-4000. Most of the issued patents
relate to advanced inspection measurement techniques. The issued United States
patents expire from 2001 to 2112.
The Company's products require technical know-how to engineer and
manufacture and are based, in part, upon proprietary technology. To the extent
proprietary technology is involved, the Company relies on patents and trade
secrets that it seeks to protect, in part, through confidentiality agreements.
There can be no assurance that such agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to, or independently developed by,
existing or potential competitors of the Company. The Company may be involved
from time to time in litigation to determine the enforceability, scope and
validity of its rights. In addition, no assurance can be given that the
Company's products will not infringe any patents of others. Litigation could
result in substantial cost to the Company and diversion of effort by the
Company's management and technical personnel. See "RISK FACTORS -- Protection of
Proprietary Information."
EMPLOYEES
As of June 30, 1996, the Company had 58 full-time employees, of which 18
were in sales, marketing and service, 14 were in engineering and product
development, 5 were in administration and 21 were in manufacturing.
None of the Company's employees are represented by a labor union. The Company
considers its relationships with its employees to be good. The Company's
financial performance will depend significantly upon the continued contributions
of its officers and key management, technical, sales and
33
support personnel, many of whom would be difficult to replace. In addition, the
Company believes that certain of its former employees currently provide services
or technical support to the Company's customers or competitors. There can be no
assurance that the Company will be successful in attracting or retaining
qualified personnel.
FACILITIES
The Company maintains its principal executive offices, research and
development, and manufacturing operations in an approximately 30,000 square foot
facility in Burlington, Massachusetts leased from N.W. Building 24 Trust. The
Company currently pays base rent in the amount of approximately $16,250 per
month plus taxes, betterment assessments, insurance costs and utility charges
with respect to the facility, pursuant to a lease that expires on June 30, 1997.
The Company also maintains a sales office in an approximately 720 square
foot facility in Santa Clara, California, which is leased from Koll/Intereal Bay
Area on a month-to-month basis. The Company currently pays base rent of $936 per
month plus certain expenses related to the facility.
The Company believes that its facilities are adequate for its current needs
and that adequate facilities for expansion, if required, are available at
competitive rates. Although the Company has no present plans to acquire
additional research and development or manufacturing facilities, it may in the
future seek to establish additional research and development, manufacturing and
shipping facilities as a result of its anticipated growth or acquisitions.
LEGAL PROCEEDINGS
The Company is not involved in any litigation of a material nature.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company, their ages and
their positions held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Eric T. Chase ..................... 38 Chief Executive Officer, President, Chairman
of the Board, and Founder
John R. Freeman ................... 52 Vice President of Finance, and Treasurer
Karl Andrew Bernal ................ 47 Vice President of Sales and Marketing, and
Secretary
Abdu Boudour ...................... 43 Vice President of Engineering
Jay L. Ormsby ..................... 56 Vice President of Technology and Founder
Albert E. Tobey ................... 60 Vice President of Operations
Yutaka Goto ....................... 37 Director
Charles H. Fine ................... 39 Director
John M. Tarrh ..................... 48 Director
Michael R. Splinter ............... 45 Advisor to Board of Directors
</TABLE>
The Company's Certificate of Incorporation and Bylaws, as amended, provide
that the members of the Board of Directors (the "Board") shall be classified as
nearly as possible into three classes, each with, as nearly as possible,
one-third of the members of the Board. A classified board is designed to assure
continuity and stability in the Board's leadership and policies. Eric T. Chase
is classified as a Class I director and shall serve until the 1999 Annual
Meeting; Charles H. Fine and John M. Tarrh are classified as Class II directors
and shall serve until the 1998 Annual Meeting; and Yutaka Goto is classified as
a Class III director and shall serve until the 1997 Annual Meeting. The
successors to the class of directors whose terms expire at an annual meeting
would be elected for a term of office to expire at the third succeeding annual
meeting after their election and until their successors have been duly elected
by the stockholders. Directors chosen to fill vacancies on a classified board
shall hold office until the next election of the class for which directors shall
have been chosen, and until their successors are duly elected by the
stockholders. Officers are elected by, and serve at the discretion of, the Board
of Directors. No director, executive officer, or significant employee is related
by blood, marriage or adoption to any other director, executive officer, or
significant employee. The Board of Directors has established Audit and
Compensation Committees, which are composed of the Company's outside directors.
The following is a brief summary of the background of each director and
executive officer named above:
ERIC T. CHASE, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHAIRMAN OF THE BOARD,
AND FOUNDER. Mr. Chase co-founded the Company in July 1986 and served as its
Vice President of Sales and Marketing until May 1990 when he was elected
President of the Company. In June 1996, Mr. Chase was also elected the Chief
Executive Officer and Chairman of the Board. He was formerly with GCA
Corporation, a semiconductor equipment manufacturer, in the position of Staff
Scientist and Technical Marketing Specialist. Mr. Chase holds five patents and
has authored a variety of articles related to inspection equipment. Mr. Chase
graduated from the University of California, Irvine with Bachelor degrees in
both Physics and Economics.
35
JOHN R. FREEMAN, VICE PRESIDENT OF FINANCE, AND TREASURER. Mr. Freeman has
been the Company's Vice President of Finance since June 1996 and was elected
Treasurer in June 1996. Over the past 20 years, he has been involved with
several companies in various roles, including chief financial officer and
controller. In 1984, Mr. Freeman founded Freeman & Associates, a consulting firm
which provided chief financial officer/controller services to small businesses
and, through his firm, he served as the Company's part-time controller as a
consultant from January 1987 until he joined the Company as an employee in May
1996. Mr. Freeman has a Bachelor of Arts degree in accounting from Duke
University.
KARL ANDREW BERNAL, VICE PRESIDENT OF SALES AND MARKETING, AND SECRETARY.
In June 1993, Mr. Bernal joined the Company as a Sales Manager and advanced to
Director of Marketing and Sales in January 1994. In October 1994, he became the
Company's Vice President of Sales and Marketing and is responsible for
management of the sales, marketing and field services departments. In June 1996,
Mr. Bernal was elected Secretary of the Company. In May 1991 he joined Rippey
Corporation, also a manufacturer of semiconductor processing equipment, as a
Product Manager where he managed the sales of equipment. Mr. Bernal founded
Tritec Industries, a manufacturer of semiconductor processing equipment, in
August 1981 and held the position of Vice President of Sales and Marketing. Mr.
Bernal holds a Bachelor of Technology degree in Chemical Engineering from the
University of Dayton.
ABDU BOUDOUR, VICE PRESIDENT OF ENGINEERING. Mr. Boudour has held various
positions at the Company, including Senior Physicist in the Engineering
Department from April 1987 to February 1994, where he was responsible for design
and development of the Company's equipment, and Far East Marketing Manager for
which he was based in Japan from February 1994 to April 1995. In July 1995, Mr.
Boudour advanced to Director of Engineering and in June 1996, he was elected
Vice President of Engineering. Prior to joining the Company in April 1987, Mr.
Boudour was with PTR Optics, an optical component manufacturer. He earned his
Bachelor of Science degree from the University of Oran, Algeria and has a Master
of Science degree in Physics from Northeastern University.
JAY L. ORMSBY, VICE PRESIDENT OF TECHNOLOGY AND FOUNDER. Mr. Ormsby
co-founded the Company in July 1986 with Mr. Chase and served as the Company's
Vice President of Engineering until June 1996. In June 1996, he was elected as
the Company's Vice President of Technology. Mr. Ormsby has over 30 years
experience in design, development and marketing of high technology systems. Mr.
Ormsby was formerly with GCA Corporation, a company that was a semiconductor
equipment manufacturer, in the position of Chief Engineer, Technology Division.
Mr. Ormsby has a Bachelor of Science degree in Mechanical Engineering from The
Cooper Union for the Advancement of Science and Art and a Master of Science
degree in Engineering from Northeastern University.
ALBERT E. TOBEY, VICE PRESIDENT OF OPERATIONS. Since joining the Company in
June 1988, Mr. Tobey has served as its Vice President of Operations with
responsibility for manufacturing operations. Mr. Tobey has over 30 years
experience in engineering as a system designer and in various management
positions both in engineering and manufacturing. Mr. Tobey served as the
Principal Engineer -- RTOS Program at AVCO Systems ("AVCO"), a defense
contractor, and worked for over 19 years with AVCO, advancing from an
electronics technician to a senior systems engineer. His primary positions at
AVCO were in telemetry and instrumentation systems. Mr. Tobey received his
Bachelor of Science degree in Electrical Engineering from Northeastern
University.
YUTAKA GOTO, DIRECTOR. Mr. Goto has served as a director of the Company
since January 1994. In April 1981, Mr. Goto joined Kobe Steel, Ltd., a Japanese
steel company, and held various positions based in Japan until December 1990. In
January 1991, he moved to the United States, and was assigned to Kobe Steel USA,
Inc., a wholly owned subsidiary of Kobe Steel Ltd. Mr. Goto is a Senior Manager
for New Business Development for Kobe Steel USA, Inc., where he provides
coordination between the parent company and its affiliates and identifies new
business opportunities. Mr. Goto earned his Bachelor of Arts degree from the
University of Tokyo.
CHARLES H. FINE, DIRECTOR. Mr. Fine has served as a director of the Company
since June 1996. Since January 1983, Mr. Fine has served on the faculty of the
Sloan School of Management at Massachusetts Institute of Technology ("MIT"). Mr.
Fine has expertise in manufacturing and
36
technology management and his research has focused on the automotive,
semiconductor, and capital equipment industries. Mr. Fine received his Bachelor
of Arts degree from Duke University and earned both his Master of Science and
Ph.D. degrees from Stanford University.
JOHN M. TARRH, DIRECTOR. Mr. Tarrh has served as a director of the Company
since May 1996. Since January 1987, Mr. Tarrh has been the Senior Vice
President, Chief Financial Officer and a director of Applied Science and
Technology, Inc. ("ASTeX"), a publicly held corporation he co-founded that
manufactures systems and controls for advanced materials such as semiconductors
and diamond. Prior to January 1987, Mr. Tarrh was the Manager of the Mirror
Confinement Division of MIT's Plasma Fusion Center where he was responsible for
financial management, project management and administration. Mr. Tarrh earned
his Master of Science degree in Electrical Engineering from MIT.
MICHAEL R. SPLINTER, ADVISOR TO BOARD OF DIRECTORS. Mr. Splinter has served
as an advisor to the Board of Directors since June 1996. He joined Intel
Corporation ("Intel"), a manufacturer of computer chips, in 1984. Over the past
twelve years at Intel, Mr. Splinter has held various management positions with
responsibility for development and manufacturing operations and in 1991, he
advanced to Corporate Vice President of Manufacturing. Since 1981, and before
joining Intel, Mr. Splinter worked for Rockwell International, a defense and
electronic manufacturer, in various management capacities. Mr. Splinter earned
his Master of Science degree in Electrical Engineering from the University of
Wisconsin.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth the compensation paid to the Company's named
executive officers during the three year period ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
- ----------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E)
OTHER ANNUAL
NAME AND PRINCIPAL POSITION(1) YEAR SALARY(2) BONUS COMPENSATION(3)
------------------------------ ---- --------- ----- ---------------
<S> <C> <C> <C> <C>
Eric T. Chase ....................... 1995 $134,000 $-0- $6,000
Chief Executive Officer, President 1994 $127,000 $-0- $6,000
and Chairman of the Board 1993 $126,000 $-0- $6,000
Jay L. Ormsby ....................... 1995 $109,000 $-0- $ -0-
Vice President of Technology 1994 $104,000 $-0- $ -0-
1993 $102,000 $-0- $ -0-
Albert E. Tobey ..................... 1995 $105,000 $-0- $ -0-
Vice President of Operations 1994 $ 99,000 $-0- $ -0-
1993 $ 97,000 $-0- $ -0-
- -----------
(1) See "MANAGEMENT -- Employment Agreements."
(2) Amounts shown indicate cash compensation earned and received by executive
officers. Executive officers participate in group health and other benefits
generally available to all employees of the Company.
(3) The Company provides a $500 per month automobile allowance for Mr.
Chase.
</TABLE>
CASH COMPENSATION OF DIRECTORS
Each of the non-management and non-affiliated directors receives a fee of
$1,000 per meeting plus out-of-pocket expenses.
37
EMPLOYMENT AGREEMENTS
Effective as of July 1, 1996, the Company entered into employment and
non-competition agreements (the "Agreements") with each of Eric T. Chase, Jay L.
Ormsby, Albert E. Tobey, K. Andrew Bernal, Abdu Boudour and John R. Freeman.
Eric T. Chase's and Jay L. Ormsby's Agreements provide for annual base salaries
of $147,000 and $114,500, respectively, through June 30, 1997 and at least the
same base salaries, as determined by the Company's Board of Directors or
Compensation Committee, for the next two years until the Agreements expire on
June 30, 1999. Albert E. Tobey's, Abdu Boudour's and John R. Freeman's
Agreements provide for annual base salaries of $110,300, $90,000 and $100,000,
respectively, and expire on December 31, 1997. K. Andrew Bernal's Agreement
provides for an annual base salary of $79,000 plus incentive payments of
one-half ( 1/2 ) of one percent (1%), subject to reduction by the Company's
Board of Directors or Compensation Committee, of all "Major Orders," which are
defined as orders for systems or products of the Company other than orders for
spare parts or service less than $25,000 or from Company distributors or
representatives, and expires on December 31, 1997. The Agreements also provide
for vacation, insurance, participation in the Company's 401(k) plan, and certain
other benefits as may be determined by the Compensation Committee or the
Company's Board of Directors. Each individual is entitled to receive benefits
offered to the Company's employees generally. Each individual is also entitled
to receive severance in the event his employment is terminated by the Company
without cause (the "Severance Benefits"). The Severance Benefits are equal to
the individual's current annual base salary in Eric T. Chase's and Jay L.
Ormsby's Agreements and six (6) months of the individual's current annual base
salary in Albert E. Tobey's, Abdu Boudour's, John R. Freeman's and K. Andrew
Bernal's Agreements.
In the event of a Change in Control in the Company, each individual will
receive severance payments as provided in the Agreements. A Change in Control is
defined generally as: the acquisition by an individual, entity or group of
beneficial ownership of 25% or more of the outstanding shares of Common Stock;
unapproved changes in the Board of Directors; tender offers to acquire any of
the Common Stock; certain reorganizations, mergers or consolidations; a complete
or substantial liquidation or dissolution of the Company; or the sale or
disposition of all or substantially all of the assets of the Company.
In the event of a Change in Control during the term of an Agreement or any
renewal or extension thereof and provided the individual remains employed by the
Company for a period of twelve months from the date of the Change in Control,
the individual will receive, at the one-year anniversary of the Change in
Control, a supplemental amount in a lump sum, irrespective of whether he
thereafter actually terminates employment with the Company. The lump sum is
equal to the individual's annual Base Salary immediately preceding the Change in
Control in Eric T. Chase's and Jay L. Ormsby's Agreements and six (6) months of
the individual's annual Base Salary immediately preceding the Change in Control
in Albert E. Tobey's, Abdu Boudour's, John R. Freeman's and K. Andrew Bernal's
Agreements. In the event of the actual termination of an individual's employment
contemporaneous with or following a Change in Control, except (i) because of the
individual's death, (ii) by the Company for cause or disability (as defined in
the employment agreement), or (iii) by the individual other than for good reason
(as defined in the employment agreement) the individual shall be entitled to
receive an amount equal to 299% of the individual's annual Base Salary
immediately preceding the Change in Control in Eric T. Chase's and Jay L.
Ormsby's Agreements and 150% of the individual's annual Base Salary immediately
preceding the Change in Control in Albert E. Tobey's, Abdu Boudour's, John R.
Freeman's and K. Andrew Bernal's Agreements. Certain additional provisions also
apply.
Each Agreement also contains non-competition provisions for a period of two
(2) years following termination, a confidentiality provision and an ownership
provision in the Company's favor for techniques, discoveries and inventions
arising during the term of employment. The Agreements provide for successive
one-year renewals after the initial term.
1996 STOCK OPTION PLAN
In June 1996, the Board of Directors of the Company adopted a 1996 Stock Option
Plan that provides for the granting to employees, officers, directors,
consultants and non-employees of the Company of options to purchase up to
360,000 shares of Common Stock, $.01 par value per share.
38
Options granted under the 1996 Plan may be either "incentive stock options"
within the meaning of Section 422(a) of the United States Internal Revenue Code
of 1986, as amended (the "Code"), or non-qualified options. Incentive stock
options may be granted only to employees of the Company (including directors who
are employees), while non-qualified options may be issued to non-employee
directors, employees, consultants, and any other non-employee of the Company.
The per share exercise price of the Common Stock subject to all options
granted pursuant to the 1996 Plan shall be determined by the Board of Directors
at the time any option is granted. In the case of incentive stock options, the
exercise price shall not be less than 100% of the fair market value of the
shares covered thereby at the time the incentive stock option is granted (but in
no event less than par value). If, at any time an option is granted under the
Plan, the Company's Common Stock is publicly traded, "fair market value" shall
be determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such option is
granted and shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities exchange on which the
Common Stock is traded, if the Common Stock is then traded on a national
securities exchange; or (ii) the last reported sale price (on that date) of the
Common Stock on the NASDAQ National Market List, if the Common Stock is not then
traded on a national securities exchange; or (iii) the closing bid price (or
average of bid prices) last quoted (on that date) by an established quotation
service for over-the-counter securities, if the Common Stock is not reported on
the NASDAQ National Market List. However, if the Common Stock is not publicly
traded at the time an option is granted under the Plan, "fair market value"
shall be deemed to be the fair value of the Common Stock as determined by the
Board after taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the Common Stock
in private transactions negotiated at arm's length. No person who owns, directly
or indirectly, at the time of the granting of an incentive stock option to him,
10% or more of the total combined voting power of all classes of common stock of
the Company (a "10% Stockholder"), shall be eligible to receive any incentive
stock options under the 1996 Plan unless the option price is at least 110% of
the fair market value of the Common Stock subject to the option, determined on
the date of grant. Non-qualified options are not subject to this limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by the optionee. In the event of
termination of employment, other than by death or permanent total disability,
the optionee will have three months after such termination to exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, an option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the 1996 Plan must be granted within 10 years from the
effective date of the 1996 Plan. Incentive stock options granted under the 1996
Plan cannot be exercised more than 10 years from the date of grant, except that
incentive stock options issued to a 10% stockholder are limited to five year
terms.
All options granted under the 1996 Plan provide for the payment of the
exercise price in cash, by promissory note, or by delivery to the Company of
shares of Common Stock already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised, or by a combination
of such methods of payment. Therefore, an optionee may be able to tender shares
of Common Stock to purchase additional shares of Common Stock and may
theoretically exercise all of his or her stock options with no additional
investment other than his or her original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed with the Company become available once again for
issuance. To date, options to purchase 231,992 shares of the Company's Common
Stock have been granted under the 1996 Plan at a weighted average exercise price
of $5.66 per share.
DIRECTOR FORMULA STOCK OPTION PLAN
In June 1996, the Company's Board of Directors adopted a Formula Plan to
incentivize non-employee directors who will administer the Company's
discretionary stock option plans, but who are ineligible to receive option
grants pursuant to Rule 16b-3 promulgated under the Securities
39
Exchange Act of 1934 (the "Exchange Act"). Administration by such "disinterested
directors," as that term is defined under Rule 16b-3, allows the Company's
discretionary stock option plans to meet the requirements of the "short swing
profit" rules, which provide that an affiliate of the Company (broadly defined
as officers, directors, and 10% stockholders) may not buy and then sell stock
(or may not sell and then buy stock) within any six month period. An affiliate
of the Company who receives options under a discretionary plan that is not
administered by disinterested directors will be deemed to have purchased the
underlying Common Stock for purposes of the six-month "short swing" period.
Disinterested directors are defined as directors that have not received options
under any discretionary plan of the Company they serve during the preceding 12
months and who do not, directly or indirectly, own five percent (5%) or more of
the Company and its affiliated corporations. Disinterested directors may receive
options under a non-discretionary plan in which the grant of an option is based
on an objective formula. As of the date of this Prospectus, the Company's
directors who are eligible to participate in the Formula Plan are Messrs. Fine
and Tarrh.
Under the Formula Plan, options will be granted to eligible non-employee
directors pursuant to a formula that determines the timing, pricing and amount
of the option awards using only objective criteria, without discretion on the
part of the administrators of the Formula Plan. The Formula Plan provides that
its provisions may not be amended more than once every six months, other than to
comply with changes in the Internal Revenue Code, the Employee Retirement Income
Security Act, or the rules thereunder. Also, any provision for forfeiture or
termination of an option award will be specific and objective, rather than
general, subjective or discretionary.
Options granted under the Formula Plan will not exceed 100,000 shares.
Beginning on June 18, 1996, and every four years thereafter on the business day
immediately following the Company's annual meeting of stockholders, options
shall be granted under the Formula Plan, without approval or discretion on the
part of the Board, to eligible non-employee directors as follows. All
non-employee directors are eligible to be granted options under the Formula Plan
provided the person has not irrevocably elected to be ineligible to participate
in the Plan and provided the person is not a direct or indirect holder of more
than 5% of the outstanding shares of the stock of the Company and its affiliated
corporations or a person who is in control of such holder.
Each eligible non-employee director who is a director on June 18, 1996 will
receive options to purchase 15,000 shares of stock. These options shall vest and
be exercisable in sixteen (16) equal installments over a period of four (4)
years (the "Four Year, Fiscal Quarter Vesting") beginning with a one-sixteenth (
1/16 th) installment on the first day of the Company's fiscal quarter
immediately following the grant and continuing in one-sixteenth ( 1/16 th)
installments on the first day of the company's subsequent fifteen (15) fiscal
quarters, subject to the director's continued service as a director on such
dates.
Each non-employee director who becomes a director after June 18, 1996 and
does not, directly or indirectly, own five percent (5%) or more of the Company
and its affiliated corporations will receive, on the date he or she becomes a
director, options to purchase a total of 15,000 shares of Common Stock. Said
options shall vest and be exercisable pursuant to the Four Year, Fiscal Quarter
Vesting.
Upon complete vesting of any non-employee director's grant pursuant to this
Plan (i.e., after a sixteenth (16th) installment), on the date immediately
following the Company's next annual meeting of shareholders, said director shall
be granted options to purchase another 15,000 shares of stock. The options shall
be granted to a non-employee director only if he or she is a director on the
date of the grant and has attended, during the Company's fiscal year immediately
preceding the grant, at least 75% of the meetings of the Board of Directors and
the Committees on which the director has served. Said options shall also vest
and be exercisable pursuant to the Four Year, Fiscal Quarter Vesting.
The exercise price of options granted under the Formula Plan will be the
fair market value of the shares of stock on the date of the grant.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. In the event that the optionee
ceases to be a director for any reason other than death, the option will be
40
exercisable only to the extent of the purchase rights, if any, which have
accrued as of the date of such cessation; provided that upon any such cessation
of service, the remaining rights to purchase shall in any event terminate upon
the expiration of the original term of the option.
Upon termination of service as a director by reason of death, his or her
option remains exercisable until the expiration of the original term of the
options. However, any such exercise is limited to the purchase rights that have
accrued as of the date when the optionee ceased to be a director whether by
death or otherwise.
Options under the Formula Plan must be granted within ten years from the
effective date of the Formula Plan. The options granted under the Formula Plan
cannot be exercised more than ten years from the date of grant.
Under the Formula Plan, the number of options that will be granted to the
eligible recipients (only non-employee directors) can be determined; however,
the exercise price of such options cannot be determined, as the exercise price
will be that which is equal to the fair market value of the Company's Common
Stock on the date of each grant.
As of the date of this Prospectus, options to purchase 30,000 shares of
Common Stock have been granted under the Formula Plan at exercise prices of
$5.10 per share.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation and under Delaware
law, directors of the Company are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of loyalty, for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or for
dividend payments or stock repurchases in violation of Delaware law or for any
transaction in which a director has derived an improper personal benefit.
In addition, the Company's bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against such persons by reason of serving or having served
as officers, directors or in other capacities, except in relation to matters
with respect to which such persons shall be determined not to have acted in good
faith, lawfully or in the best interests of the Company. With respect to matters
to which the Company's officers, directors, employees, agents or other
representatives are determined to be liable for misconduct or negligence in the
performance of their duties, the Company's bylaws provide for indemnification
only to the extent that the Company determines that such person acted in good
faith and in a manner not opposed to the best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
41
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information concerning stock ownership of the Company by (i) each person who is
known by the Company to own of record or beneficially five percent (5%) or more
of the Company's Common Stock, (ii) each of the Company's directors and (iii)
all directors and executive officers as a group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS(1)
----------------------
NUMBER OF
SHARES
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING
--------------------------------------- ----- -------- --------
<S> <C> <C> <C>
QC Optics Voting Trust(3) 1,347,613 62.7% 43.5%
Kobe Steel USA Holdings, Inc. 802,387 37.3% 25.9%
Eric T. Chase(3)(4) 634,517 29.5% 20.5%
K. Andrew Bernal(3)(5) 314,754 14.6% 10.2%
Jay L. Ormsby(3)(6) 162,599 7.5% 5.2%
Yutaka Goto(7) 802,387 37.3% 25.9%
Charles H. Fine(8) 938 * *
John M. Tarrh(8) 938 * *
All Directors and Officers as a group
(9 people)(3)(4)(5)(7)(8)(9)(10) 2,151,876 100% 69.4%
- -------------
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(2) The address for all of these individuals is c/o QC Optics, Inc., 154
Middlesex Turnpike, Burlington, Massachusetts 01803.
(3) Eric T. Chase is the sole voting trustee of the QC Optics Voting Trust
(the "Voting Trust"). The stockholders participating in the Voting Trust
and the number of their shares subject to the Voting Trust are as follows:
Eric T. Chase -- 634,517 shares; Karl Andrew Bernal -- 314,754 shares; Jay
L. Ormsby -- 162,599 shares; John R. Freeman -- 78,581; Albert E. Tobey --
78,581 shares; Abdu Boudour -- 78,581 shares. See "CERTAIN TRANSACTIONS."
(4) Excludes an option to purchase 5,292 shares of the Company's Common Stock
at an exercise price of $5.10. The option expires on June 19, 2006 and
vests in equal installments over a three year period commencing one year
after the date of the grant. See "MANAGEMENT -- 1996 Stock Option Plan."
(5) Excludes an option to purchase 2,844 shares of the Company's Common Stock
at an exercise price of $5.10. The option expires on June 19, 2006 and
vests in equal installments over a three year period commencing one year
after the date of the grant. See "MANAGEMENT -- 1996 Stock Option Plan."
(6) Excludes an option to purchase 4,140 shares of the Company's Common Stock
at an exercise price of $5.10. The option expires on June 19, 2006 and
vests in equal installments over a three year period commencing one year
after the date of the grant. See "MANAGEMENT -- 1996 Stock Option Plan."
(7) Includes the shares of Common Stock held by Kobe Steel.
(8) Includes 938 shares of Common Stock issuable upon the exercise of an
option to purchase 15,000 shares of the Company's Common Stock at an
exercise price of $5.10. The option expires on June 17, 2006 and vests in
16 equal installments over a period of four years commencing July 1, 1996.
See "MANAGEMENT -- Director Formula Stock Option Plan."
(9) Includes the shares subject to the Voting Trust and owned by the officers
as set forth in footnote 6.
(10) Excludes (i) an option owned by Mr. Boudour to purchase 3,240 shares of
the Company's Common Stock; (ii) an option owned by Mr. Freeman to
purchase 3,600 shares of the Company's Common Stock; and (iii) an option
owned by Mr. Tobey to purchase 3,960 shares of the Company's Common Stock.
The exercise price for each of these options is $5.10. These options
expire on June 19, 2006 and vest in equal installments over a three year
period commencing one year after the date of the grant. See "MANAGEMENT --
1996 Stock Option Plan."
</TABLE>
42
CERTAIN TRANSACTIONS
RELATED TRANSACTIONS
In July 1996, the Company entered into employment agreements with Messrs.
Chase, Freeman, Bernal, Boudour, Ormsby and Tobey. See "MANAGEMENT -- Employment
Agreements."
In October 1995, the Company, Kobe Steel USA Holdings, Inc., a controlling
shareholder of the Company, and certain management employees of the Company
pursuant to the QC Optics Voting Trust (the "Voting Trust") entered into a Stock
Repurchase and Loan Repayment Agreement (the "Agreement"). Pursuant to the terms
of the Agreement, as amended on March 29, 1996, the Company purchased an
aggregate of 1,337,313 shares (the "Kobe Shares") of its voting and non-voting
Common Stock from Kobe Steel USA Holdings, Inc. or approximately 62.5% of all of
the Company's Common Stock then owned by Kobe Steel USA Holdings, Inc. for a
purchase price of $5,000,000. Of the $5,000,000 purchase price, $3,250,000 was
financed by State Street Bank and Trust Company pursuant to the terms of a
$4,000,000 revolving line of credit (the "Line of Credit") evidenced by a
promissory note secured by all of the assets of the Company (the "Bank Note"),
$1,000,000 was provided from available cash of the Company and $750,000 was
financed pursuant to a promissory note from the Company to Kobe Steel USA
Holdings, Inc., which is also secured by all of the assets of the Company (the
"Kobe Note"). The Kobe Note is subordinated to the Bank Note. In connection with
this transaction, a corporation formed in February 1995 by Messrs. Chase,
Bernal, Ormsby, Freeman, Tobey and Boudour (collectively, the "Stockholders") to
acquire an equity interest in the Company was merged into the Company. As a
result of this merger, the Stockholders exchanged their shares in such
corporation for an aggregate of 1,337,313 shares of the Company's Common Stock.
The consideration for the merger was the unlimited personal guarantees provided
to the Bank by Messrs. Chase and Bernal and the limited guarantees provided by
Messrs. Ormsby, Freeman, Tobey and Boudour to secure the Bank Note. In addition,
all of the shares issued to these individuals have been pledged as collateral to
secure both the Line of Credit and the Kobe Note. The Company recorded a
non-recurring, non-cash charge of $1,701,000 during the six months ended June
30, 1996 as a result of this merger.
The Line of Credit and Bank Note mature on June 30, 1998 and the interest
rate per annum is the bank's prime rate plus 1%. Upon the closing of this
Offering, the interest rate will be the bank's prime rate plus 1/2 %. The Line
of Credit has a fee on the daily unused portion of the facility at the rate of
1/4 % per annum. The aggregate amount outstanding under the Line of Credit shall
not exceed the sum of 80% of qualifying receivables and 10% (not to exceed
$350,000) of qualifying inventory, except that this maximum amount may be
exceeded by $500,000 through October 31, 1996 (the "Overadvance"). The Bank Note
is secured by unlimited personal guarantees from Messrs. Chase and Bernal. In
addition, each of the several stockholders of the Voting Trust pledged their QCO
shares held in the Voting Trust to the bank as collateral. Upon (i) the
completion of the Offering, or (ii) if the Overadvance is paid in full by
October 31, 1996 and the qualified inventory is excluded from the Company's
borrowing base and, in either case, if there are no defaults under the facility,
the guarantees and the pledges will be released by the bank.
The Kobe Note is due on December 31, 1996 and bears interest at the rate of
8% per annum. In the event that the Company fails to pay the Kobe Note when due,
Kobe Steel USA Holdings, Inc. has the option to repurchase from the Company the
Kobe Shares for an aggregate payment of $4,250,000; provided that any such
payment by Kobe Steel USA Holdings, Inc. to the Company shall be applied first
to payment of any indebtedness senior to the Company's indebtedness to Kobe
Steel USA Holdings, Inc.; and provided, further, that the aggregate principal
amount of any indebtedness senior to the Company's indebtedness to Kobe Steel
USA Holdings, Inc. will not exceed $4,000,000 without the prior written consent
of Kobe Steel USA Holdings, Inc. Kobe Steel USA Holdings, Inc.'s option to
repurchase the Kobe Shares can be exercised at any time during the pendency of a
default under the Kobe Note.
Of the remaining 802,387 shares held by Kobe Steel USA Holdings, Inc., the
Voting Trust holds an option (the "Option") to purchase up to 588,418 shares at
a price of $3.74 per share. The Option expires on the earlier of March 28, 1998
or the completion of an initial public offering. Notwithstanding the foregoing,
the Option may not be exercised until the Kobe Note has been paid in full. The
Voting Trust currently has no immediate plans to exercise the Option.
43
On October 27, 1995, the Company and Messrs. Chase, Bernal, Ormsby, Freeman,
Tobey and Boudour entered into a voting trust agreement known as the "QC Optics
Voting Trust, u/d/t dated as of October 27, 1995" (the "Voting Trust"). Mr.
Chase is the trustee of the Voting Trust. The Voting Trust holds all voting
rights to all Company shares held by each beneficiary and continues in force for
a period of 21 years from October 27, 1995, unless terminated earlier as a
result of a merger, dissolution, sale of all or substantially all of the
Company's assets or liquidation, or agreement of the parties.
Kobe Steel USA International, Inc. has provided loans to the Company since
July 1991 by means of a revolving credit arrangement. At March 29, 1996, the
principal amount due totaled $4,250,000. This amount plus accrued interest of
approximately $6,000 was paid in full by the Company on March 29, 1996 in
connection with the closing of the Agreement utilizing amounts received from
Kobe Steel USA Holdings, Inc. as a capital infusion in the same amount and on
the same date.
Until December 1994, Kobe Steel Ltd. and the Company were parties to a
distributor agreement. In connection with this distributor agreement, sales of
approximately $2.2 million were generated for the year ended December 31, 1994
and approximately $611,000 was generated for the year ended December 31, 1995.
Subsequent to December 31, 1995, Kobe Steel Ltd. has not been a distributor of
the Company's products.
Any future transactions between the Company and its officers, directors,
principal stockholders or other affiliates will be on terms no less favorable
than could be obtained from independent third parties and will be subject to
approval by a majority of the independent and disinterested directors.
44
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is believed
to reflect all material provisions of the Company's Certificate of
Incorporation, as amended, but is not necessarily complete and reference is made
to the Company's Certificate of Incorporation, as amended, filed as an exhibit
to the Registration Statement of which this Prospectus is a part for a detailed
description thereof.
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
$.01 par value per share. As of the date of this Prospectus, 2,150,000 shares of
Common Stock are issued and outstanding and held by two stockholders of record.
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors, with the result that the holders of
more than fifty percent (50%) of the shares voted for the election of directors
can elect all of the directors. Subject to the prior rights of any series of
Preferred Stock which may from time to time be outstanding, if any, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor and in the
event of liquidation, dissolution, or winding up of the Company, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on the Preferred Stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. All of the outstanding shares of
Common Stock are, and the shares of Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid, and
nonassessable.
Prior to the Offering, the Company's current principal stockholders, Kobe
Steel USA Holdings, Inc. and the Voting Trust beneficially own approximately
100% of the outstanding shares of Common Stock of the Company. Subsequent to the
Offering, the current principal stockholders, who consist of the Voting Trust
and Kobe Steel USA Holdings, Inc., will beneficially own 69.4% of the
outstanding shares of the Common Stock of the Company. As a result, they will
likely be able to control all matters requiring approval by the stockholders of
the Company, including the election of directors. The Company's bylaws do not
provide for cumulative voting.
REDEEMABLE WARRANTS
The following summary description of certain provisions of the Warrants is
believed to reflect all material provisions of the Warrants but is not
necessarily complete and reference is made to the Warrant Agreement by and among
the Company and American Stock Transfer and Trust Company (the "Warrant Agent")
filed as an exhibit to the Registration Statement of which this Prospectus is a
part for a detailed description thereof.
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $7.80 per share. Unless the Warrants are redeemed
as provided below, the Warrants may be exercised at any time on or
before_________ , at which time the Warrants expire.
The Warrants are redeemable by the Company at $.20 per Redeemable Warrant on
30 days' prior written notice, provided that the average closing bid price of
the Common Stock equals or exceeds $10.80 per share for 20 consecutive trading
days ending within 10 days prior to the notice of redemption. For purposes of
the Warrant Agreement, "average closing bid price" is defined as the closing bid
price as quoted on the AMEX. The Warrants may not be redeemed unless they are
then exercisable and a current prospectus covering the Warrants and the shares
of Common Stock issuable thereunder is then in effect. The Warrants will remain
exercisable until the close of business on the fifth business day prior to the
date of redemption. Redemption of the Warrants may force the holders to exercise
the Warrants and pay the exercise price at a time when it may be disadvantageous
for them to do so or sell the Warrants at the current market price when they
might otherwise desire to hold the Warrants.
The Company has agreed with the Representative that the Company will pay
the Representative a Warrant Solicitation Fee of 5% of the exercise price of the
Redeemable Warrants exercised commencing on ___________, 1997 and to the extent
not inconsistent with the guidelines of the NASD and the rules and regulations
of the Commission. Such Warrant Solicitation Fee will be paid to the
Representative if: (i)
45
the market price of the Common Stock on the date of the Redeemable Warrant is
exercised is equal to or greater than the exercise price of the Redeemable
Warrant; (ii) the exercise of the Redeemable Warrant was solicited by an NASD
member firm; (iii) prior specific written approval for exercise is received from
the customer if the Redeemable Warrant is held in a discretionary account; (iv)
disclosure of this compensation arrangement is made prior to or upon the
exercise of the Redeemable Warrant; (v) solicitation of the exercise is not in
violation of Rule 10b-6 of the Exchange Act; and (vi) solicitation of the
exercise is in compliance with NASD notice to Members 92-28. In addition, unless
granted an exemption by the Commission from its Rule 10b-6 under the Exchange
Act, the Representative will be prohibited from engaging in any market making
activities or solicited brokerage activities with regard to the Company's
securities for the period from nine business days prior to any solicitation of
the exercise of any Redeemable Warrant or nine business days prior to the
exercise of any Redeemable Warrant based on prior solicitation until the later
of the termination of such solicitation activity or the termination (by waiver
or otherwise) of any right the Representative may have to receive a fee for the
exercise of the Redeemable Warrants following such solicitation. As a result,
the Representative may be unable to continue to provide a market for the
Company's securities during certain periods while the Redeemable Warrants are
exercisable.
The holders of the Warrants will not have any of the rights or privileges of
stockholders of the Company (except to the extent they otherwise own Common
Stock) prior to the exercise of the Warrants. The Warrants will be entitled to
the benefit of adjustments in the exercise price and in the number of shares of
Common Stock deliverable upon the exercise thereof upon the occurrence of
certain events, including a stock dividend, stock split or similar
reorganization.
In order for a holder to exercise a Warrant, there must be a current
registration statement on file with the Commission and various state securities
commissions to register the shares of Common Stock underlying the Warrants for
sale to the holder of the Warrant. Pursuant to Section 10(a)(3) of the
Securities Act, the information contained in this Prospectus will be deemed
"stale" nine months from the date of this Prospectus. The Company has agreed, so
long as the Warrants are outstanding, to use its best efforts to keep a
registration statement effective under the Securities Act and state securities
laws to permit the issuance of the shares of Common Stock upon exercise or
exchange of the Warrants. Nevertheless, although the Company intends to do so,
no assurance can be given that the registration statement will be kept current,
the failure of which may result in the Warrants not being exercisable or
exchangeable and therefore worthless.
REPRESENTATIVE'S WARRANT
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
95,000 shares of Common Stock and 95,000 Redeemable Warrants (the
"Representative's Warrant"). The Representative's Warrant is initially
exercisable at a price of $9.60 per share of Common Stock and $12.48 per
Redeemable Warrant (160% of the respective initial public offering price) for a
period of four years commencing one year from the effective date of this
Prospectus and are restricted from sale, transfer, assignment or hypothecation
for a period of twelve months from the date hereof, except to officers of the
Representative and by operation of law. The exercise price of the
Representative's Warrant was determined in accordance with comments made by the
NASD and the NASD's regulations. The shares of Common Stock and the Redeemable
Warrants issuable upon exercise of the Representative's Warrant are identical to
those offered hereby except for the exercise prices and that the Redeemable
Warrants contained therein cannot be redeemed.
The Company has agreed to register, at its expense, under the Securities
Act, the Representative's Warrant and/or the securities underlying the
Representative's Warrant at the request of a majority in interest of the holders
thereof. Such request may be made at any time during a period ending five years
from the date of this Prospectus. The Company also granted the Representative
"piggyback" registration rights concerning the Representative's Warrant and the
underlying securities which may be exercised at any time during a four year
period beginning one year from the date of this Prospectus. Further, upon the
exercise the Representative's Warrant, the holders of the warrants thereunder
shall be entitled to tender a portion of the shares of Common Stock to be
granted upon the exercise of the warrants as payment for the exercise price.
46
For the term of the Representative's Warrant, the holder thereof has the
opportunity to profit from a rise in the market price of the Company's
securities which may result in a dilution of the interest of the stockholders.
The Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Representative's
Warrant is outstanding. At any time when the holders thereof might be expected
to exercise it, the Company would probably be able to obtain additional equity
capital on terms more favorable than those provided by the Representative's
Warrant.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $.01 par value (the "Preferred Stock") none of which are issued and
outstanding as of the date of this Prospectus. The Preferred Stock may be issued
in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by stockholders, and
may include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion, redemption
rights, and sinking fund provisions. The Company has no present plans for the
issuance of any shares of Preferred Stock. The issuance of any such Preferred
Stock could reduce the rights, including voting rights, of the holders of the
Common Stock, and, therefore, reduce the value of the Common Stock. In
particular, specific rights granted to future holders of Preferred Stock could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, thereby preserving control of the Company by existing management.
"RISK FACTORS -- Possible Issuance of Additional Shares of Common Stock and
Preferred Stock; Preferred Stock Currently Outstanding."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Delaware General Corporation Law, the Company's
Certificate of Incorporation and bylaws as summarized in the following
paragraphs and employment agreements with the Company's management, may be
deemed to have an anti-takeover effect and may delay, defer or prevent a hostile
tender offer or takeover attempt that a stockholder might consider in his or her
best interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders. See "MANAGEMENT -- Employment
Agreements."
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203") applies
to a Delaware corporation with a class of voting stock listed on a national
securities exchange, authorized for quotation on an interdealer quotation system
or held of record by 2,000 or more persons. In general, Section 203 prevents an
"interested stockholder" (defined generally as any person owning, or who is an
affiliate or associate of the corporation and has owned in the preceding three
years, fifteen percent (15%) or more of a corporation's outstanding voting stock
and affiliates and associates of such person) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (1) before such
person became an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (2) the
interested stockholder owned at least eighty-five percent (85%) of the voting
stock of the corporation outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the corporation and
by employee stock plans that do not provide employees with the rights to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (3) on or subsequent to the date
such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
47
SPECIAL MEETING OF STOCKHOLDERS
The Company's bylaws provide that special meetings of the stockholders of
the Company may be called only by the Board of Directors of the Company. This
provision will make it more difficult for stockholders to take action opposed by
the Board of Directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate of Incorporation, as amended, provides that no action
required or permitted to be taken at an annual or a special meeting of the
stockholders of the Company may be taken without a meeting unless such action is
authorized by unanimous consent in writing of all stockholders.
CLASSIFIED BOARD OF DIRECTORS
The Company's bylaws provide for a Board of Directors to be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
Moreover, under the Delaware General Corporation Law, in the case of a
corporation having a classified Board of Directors, stockholders may remove a
director only for cause. This provision, when coupled with the provision of the
bylaws authorizing only the Board of Directors to fill vacant directorships,
will preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Company's bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or a special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not less than 60 days nor more than 90 days
prior to such anniversary date, and (ii) in the case of an annual meeting that
is called for a date that is not within 30 days before or after the anniversary
date of the immediately preceding annual meeting, or in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever occurs first. The bylaws specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
AMENDMENTS TO THE BYLAWS
The Company's Certificate of Incorporation, as amended, and bylaws, as
amended, provide that the majority of all directors or the vote of holders of a
majority of the outstanding stock entitled to vote is required to alter, amend
or repeal the Bylaws.
TRANSFER AGENT
The Company has appointed American Stock Transfer and Trust Company, New
York, New York, as its Transfer and Warrant Agent for its Common Stock and
Redeemable Warrants.
48
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Schneider
Securities, Inc. is acting as the Representative, have severally agreed, subject
to the terms and conditions of the Underwriting Agreement (the form of which has
been filed as an exhibit to the Registration Statement), to purchase from the
Company the respective numbers of Shares and Redeemable Warrants set forth
opposite their names in the table below. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters shall be obligated to purchase all of the
Shares and Redeemable Warrants, if any are purchased.
NUMBER OF NUMBER OF
SHARES OF REDEEMABLE
NAME COMMON STOCK WARRANTS
---- ------------ --------
Schneider Securities, Inc.
------- -------
TOTAL 950,000 950,000
======= =======
Through the Representative, the several Underwriters have advised the
Company that they propose to offer the Shares and Redeemable Warrants to the
public at the initial public offering prices set forth on the cover of this
Prospectus. The Representative has advised the Company that it may allow to
certain dealers concessions of not in excess of $ per share of Common Stock and
$ per Redeemable Warrant, of which a sum not in excess of $ per share of Common
Stock and $ per Redeemable Warrant may in turn be reallowed by such dealers to
other dealers. After the issuance of the Shares, the public offering prices, the
concessions and the reallowances may be changed. The Representative has further
advised the Company that they do not expect sales to discretionary accounts to
exceed five percent of the total number of Shares offered hereby.
The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to three percent of the total proceeds of the Offering,
of which $50,000 has already been paid.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period following the effective date of the Underwriting Agreement, to
purchase up to 142,500 shares of Common Stock and/or 142,500 Redeemable Warrants
at the offering price less underwriting discounts and the non-accountable
expense allowance. The Underwriters may exercise such option only to satisfy
over-allotments in the sale of the Shares and Redeemable Warrants.
Upon the exercise of the Redeemable Warrants more than one year after this
Offering and to the extent not inconsistent with the guidelines of the National
Association of Securities Dealers, Inc., and the Rules and Regulations of the
Commission, the Company has agreed to pay the Representative a commission equal
to five percent of the exercise price of the Redeemable Warrants. However, no
compensation will be paid to the Representative in connection with the exercise
of the Redeemable Warrants if (a) the market price of the underlying shares of
Common Stock is lower than the exercise price, (b) the Redeemable Warrants are
exercised in an unsolicited transaction, or (c) the Redeemable Warrants are held
in any discretionary accounts and (d) advance disclosure is made to a Redeemable
Warrant holder. In addition, unless granted an exemption by the Commission from
Rule 10b-6 under the Exchange Act, the Representative will be prohibited from
engaging in any market making activities or solicited brokerage activities with
regard to the Company's securities for two to nine days before the solicitation
of the exercise of any Redeemable Warrant
49
or before the exercise of any Redeemable Warrant based upon a prior
solicitation, until the later of the termination of such solicitation activity
or the termination by waiver or otherwise of any right the Representatives may
have to receive a fee for the exercise of the Redeemable Warrants following such
solicitation.
In connection with this Offering, the Company has agreed to sell the
Representative, for nominal consideration, a Warrant (the "Representative's
Warrant"), which confers the right to purchase up to 95,000 shares of Common
Stock and up to 95,000 Redeemable Warrants. The Representative's Warrant is
initially exercisable at the price (the "Exercise Price") of $9.60 per share of
Common Stock and $12.48 per Redeemable Warrant (160% of the respective initial
public offering price) for a period of four years commencing one year from the
effective date of this Prospectus. The shares of Common Stock and Redeemable
Warrants issuable upon exercise of the Representative's Warrant are identical to
those offered hereby. The Representative's Warrant contains provisions providing
for adjustment of the Exercise Price and the number and type of securities
issuable upon the exercise thereof upon the occurrence of certain events. The
Representative's Warrant grants to the holders thereof certain demand and
"piggyback" rights of registration of the securities issuable upon the exercise
thereof upon the occurrence of certain events beginning one year after the date
of this Prospectus.
The Company has agreed to enter into a three-year consulting agreement with
the Representative, pursuant to which the Representative will act as a financial
consultant to the Company, commencing upon the closing date of this Offering.
The Representative will make available qualified personnel for this purpose. The
consulting fee of $3,000 per month for a period of 36 months is payable in full
at the closing of this Offering.
Certain principal stockholders and the Company have agreed that, for a
period of 13 months from the date of this Prospectus, they will not sell any
securities (except for shares of Common Stock issued pursuant to exercise of
options which may be granted under the Plan and for shares issued pursuant to
the exercise of the Redeemable Warrants) without the Representative's prior
written consent, which shall not be unreasonably withheld. Kobe Steel has agreed
not to, directly or indirectly, offer to sell, contract to sell, or sell any
beneficial interest in the Company's Common Stock for a period of six months
from the date of this Prospectus without the prior written consent of the
Representative, which shall not be unreasonably withheld.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement is on file with the Commission
as an exhibit to the Registration Statement of which this Prospectus is a part.
Prior to the Offering, there has been no public market for any of the
Company's securities. The initial public offering prices of the Shares and
Redeemable Warrants will be determined by negotiations between the Company and
the Representative and are not necessarily related to the Company's assets,
earnings, or book value or any other established criteria of value. Factors
considered in determining the Offering price of the Shares and Redeemable
Warrants included estimates of business potential, historical earnings, future
prospects, gross proceeds to be raised, percentage of stock owned by officers
and directors on the date hereof, the type of business in which the Company
engages, and an assessment of the Company's management. The foregoing factors
were evaluated in light of the existing state of the securities market.
50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,100,000 shares of
Common Stock outstanding (assuming no exercise of the over-allotment option, the
Redeemable Warrants, the Representative's Warrant or the Redeemable Warrants
underlying the Representative's Warrant or other outstanding options). Of these
shares, 950,000 shares will be freely tradeable without further registration
under the Securities Act.
Up to 95,000 additional shares of Common Stock and 95,000 additional
Redeemable Warrants may be purchased by the Representative at any time after ,
1997 through the exercise of the Representative's Warrant. Any and all shares of
Common Stock purchased upon exercise of the Representative's Warrant or issued
pursuant to the exercise of the Redeemable Warrants underlying the
Representative's Warrant may be freely tradeable, provided that the Company
satisfies certain securities registration and qualification requirements in
accordance with the terms of the Representative's Warrant.
To date, the Company and its directors and officers have agreed not to,
directly or indirectly, offer to sell, contract to sell, or sell any beneficial
interest in the Company's securities for a period of 13 months from the date of
this Prospectus without the prior written consent of the Representative. Kobe
Steel USA Holdings, Inc. has agreed not to, directly or indirectly, offer to
sell, contract to sell, or sell any beneficial interest in the Company's Common
Stock for a period of six months from the date of this Prospectus without the
prior written consent of the Representative. An appropriate legend shall be
marked on the face of certificates representing all such securities. As of the
date of this Prospectus, the Company is not aware of any plans, arrangements,
agreements or understandings regarding an intent to seek the Representative's
consent to release the lock-up. It is the general policy of the Representative
not to consent to the release of the lock-up, although any such requests would
be considered on an individual basis and would take into account, among other
factions, the trading price and trading volume of the Common Stock. Without the
restriction, 812,687 shares of the 2,150,000 shares outstanding prior to this
Offering would become eligible for sale under Rule 144 under the Act commencing
90 days after the date of this Prospectus. The remaining 1,337,313 shares of
Common Stock would become eligible for sale under Rule 144 on March 29, 1998.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice, and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person, and who has beneficially owned shares of Common Stock for at least
three years, may sell such shares without regard to the volume, manner of sale,
or notice requirements of Rule 144. See "RISK FACTORS -- Future Sales of Common
Stock."
Prior to this Offering, no public market for the Common Stock has existed.
No predictions can be made of the effect, if any, of future public sales of
restricted shares or the availability of restricted shares for sale in the
public market. Moreover, the Company cannot predict the number of shares of
Common Stock that may be sold in the future pursuant to Rule 144 because such
sales will depend upon, among other factors, the market price of the Common
Stock and individual circumstances of the holders thereof. Sales of substantial
amounts of Common Stock under Rule 144 could adversely affect prevailing market
prices of the Common Stock.
INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1996 and 1995 are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the financial data
for such periods. The unaudited results for the six months ended June 30, 1996
are not necessarily indicative of the results expected for the entire fiscal
year.
51
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby will be
passed upon for the Company by O'Connor, Broude & Aronson, Bay Colony Corporate
Center, 950 Winter Street, Suite 2300, Waltham, Massachusetts 02154. Certain
attorneys in the firm of O'Connor, Broude & Aronson were issued options, which
expire five years from the date of this Prospectus, to purchase up to 107,500
shares of Common Stock at a price equal to $6.30 per share. Payment of a portion
of the legal fees for services rendered in connection with the Offering is
contingent upon the completion of the Offering. William M. Prifti, Esquire, 220
Broadway, Suite 204, Lynnfield, Massachusetts 01940 is acting as counsel for the
Representative in connection with certain legal matters related to the Offering.
EXPERTS
The financial statements included in this Prospectus to the extent and for
the periods indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 7 World Trade Center, Suite 1300,
New York, New York 10048, a Registration Statement. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits thereto, as permitted by the Rules and Regulations of the Commission.
For further information with respect to the Company and to the securities
offered hereby, reference is made to the Registration Statement including the
exhibits thereto. Statements contained in this Prospectus as to the contents of
any contract or other document summarize only the material provisions thereof
and are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits thereto may be inspected
without charge at the office of the Commission in New York. Copies of such
materials may be obtained at prescribed rates by writing to the Commission's
Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at certain of the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Prior to this Offering, the Company has not been a reporting company under
the Securities Exchange Act of 1934, as amended. Subsequent to this Offering,
the Company intends to furnish to its stockholders annual reports, which will
include financial statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law.
52
GLOSSARY
COMPUTER HARD DISK -- The disk shaped object, with magnetic material,
located inside a hard disk drive, where information is actually recorded. The
computer hard disk is typically 48, 65, or 95 mm in diameter and approximately
1/40 of an inch thick. A computer hard disk is comprised of a nickel-plated
aluminum, glass or other material substrate which is used for mechanical
strength, and a thin-film of magnetic material which is applied to the substrate
for recording of information. The recording method is similar to that used when
recording an audio cassette tape.
FLAT PANEL DISPLAYS -- Screens used to display information, such as liquid
crystal displays (LCDs) commonly used in wrist watches, or Active Matrix Liquid
Crystal Displays (AMLCDs) commonly used in lap-top computers. See page 26 of the
Prospectus.
MICROMETER -- One millionth of a meter. As examples, a human hair,
wavelength of light, and minimum dimensions of an advanced computer chip are
approximately 75, 0.5 and 0.25 micrometers, respectively.
PELLICLE -- A protective cover, attached to a photomask, which protects the
patterned surface from adventitious contamination and particulates, similar to a
dust cover. Typically a pellicle consists of an aluminum frame, which suspends a
thin membrane above the patterned surface of the photomask. Particulates which
land on the membrane are then far enough away from the patterned surface to be
out of focus, and thus not imaged onto the computer chip.
PELLICILIZED PHOTOMASK -- A photomask with an attached pellicle (see photo
on inside cover).
PIXEL -- The small discrete elements that together constitute an image, such
as the "dots" on a television or flat panel display screen.
PHOTOMASK -- A glass or quartz plate, usually five or six inches square,
with an image of a layer of a computer chip on one surface (i.e., the patterned
surface). This pattern or image is then photographically reproduced on thousands
of individual computer chips each hour. This process is analogous to a snap-shot
negative being used to produce thousands of individual snap-shot prints. If
there is a defect on the photomask, it can result in the production of thousands
of defective computer chips each hour.
SOFT/HARD DEFECT -- Defects on photomasks are separated into two broad
categories: soft and hard defects. Soft defects are defects such as particulates
and contamination, which can be removed from the photomask through cleaning.
Hard defects are defects such as missing pattern, which cannot be removed by
cleaning.
53
QC OPTICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1995 and June 30, 1996 (Unaudited) F-3
Statements of Operations for the Years Ended December 31, 1994 and
1995 and for the Six Months Ended June 30, 1995 and 1996 (Unaudited) F-4
Statements of Stockholders' Equity for the Years Ended December 31,
1994 and 1995 and for the Six Months Ended June 30, 1996 (Unaudited) F-5
Statements of Cash Flows for the Years Ended December 31, 1994 and
1995 and for the Six Months Ended June 30, 1995 and 1996 (Unaudited) F-6
Notes to Financial Statements (Including Data Applicable to Unaudited
Periods) F-7
</TABLE>
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
QC OPTICS, INC.:
We have audited the accompanying balance sheets of QC Optics, Inc. (a
Delaware corporation) as of December 31, 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QC Optics, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 15, 1996 (except with respect to
the matters discussed in Note 7, as to
which the date is July 3, 1996)
F-2
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,430,964 $ 584,525
Accounts receivable, less allowance of
$75,000 at December 31, 1995 and June
30, 1996 3,236,706 2,236,191
Inventory 2,893,122 2,846,318
Prepaid expenses 18,003 65,421
----------- ------------
Total current assets 7,578,795 5,732,455
----------- ------------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 99,686 99,686
Machinery and equipment 296,193 296,193
Leasehold improvements 57,085 57,085
Motor vehicles 23,458 23,458
----------- ------------
476,422 476,422
Less -- Accumulated depreciation and amortization 358,243 384,043
----------- ------------
Property and equipment, net 118,179 92,379
----------- ------------
OTHER ASSETS 24,936 49,936
----------- ------------
Total assets $ 7,721,910 $ 5,874,770
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable to affiliate $ 4,250,000 $ --
Kobe term loan -- 750,000
Accounts payable 487,774 763,596
Accrued payroll and related expenses 332,829 403,350
Accrued expenses 411,552 1,016,531
Customer deposits 35,917 294,821
----------- ------------
Total current liabilities 5,518,072 3,228,298
REVOLVING LINE OF CREDIT, NET OF CURRENT
MATURITIES -- 500,000
----------- ------------
Total liabilities 5,518,072 3,728,298
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
Authorized, 1,000,000 shares; Issued and
outstanding, no shares at December 31,
1995 and June 30, 1996 -- --
Common stock, $.01 par value; Authorized,
10,000,000 shares; Issued and
outstanding, 2,150,000 shares 21,500 21,500
Additional paid-in capital 3,888,500 4,839,500
Accumulated deficit (1,706,162) (2,714,528)
----------- ------------
Total stockholders' equity 2,203,838 2,146,472
----------- ------------
Total liabilities and stockholders'
equity $ 7,721,910 $ 5,874,770
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
QC OPTICS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------------
1994 1995 1995 1996
------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 8,394,932 $10,373,464 $ 4,930,277 $ 6,782,522
COST OF SALES 3,911,108 4,798,902 2,455,777 3,062,307
----------- ----------- ---------- ---------
Gross profit 4,483,824 5,574,562 2,474,500 3,720,215
----------- ----------- ---------- ---------
OPERATING EXPENSES:
Selling, general and administrative
expenses 2,465,479 2,843,266 1,544,121 1,922,028
Engineering expenses 1,347,480 1,586,951 807,108 693,442
----------- ----------- ---------- ---------
Management buyout charge (Note 7) -- -- -- 1,701,000
----------- ----------- ---------- ---------
Total operating expenses 3,812,959 4,430,217 2,351,229 4,316,470
----------- ----------- ---------- ---------
Operating income (loss) 670,865 1,144,345 123,271 (596,255)
INTEREST EXPENSE, NET 162,942 156,345 87,088 91,117
----------- ----------- ---------- ---------
income (loss) before provision for income
taxes 507,923 988,000 36,183 (687,372)
PROVISION FOR INCOME TAXES 37,866 79,781 13,320 320,994
----------- ----------- ---------- ---------
Net income (loss) $ 470,057 $ 908,219 $ 22,863 $ (1,008,366)
=========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARES $ .22 $ .42 $ .01 $ (.46)
=========== =========== =========== ==========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,173,174 2,173,174 2,173,174 2,173,174
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
QC OPTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------- -----------
ADDITIONAL TOTAL
NUMBER PAR NUMBER PAR PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL DEFICIT EQUITY
------- ------- --------- ------ ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 4,120 $ 41 2,145,880 $ 21,459 $ 3,888,500 $ (3,084,438) $ 825,562
Net income -- -- -- -- -- 470,057 470,057
Conversion of preferred stock to
common stock (4,120) (41) 4,120 41 -- -- --
------- ------ --------- ------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1994 -- -- 2,150,000 21,500 3,888,500 (2,614,381) 1,295,619
Net income -- -- -- -- -- 908,219 908,219
------- ------ --------- ------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1995 -- -- 2,150,000 21,500 3,888,500 (1,706,162) 2,203,838
Net loss -- -- -- -- -- (1,008,366) (1,008,366)
Issuance of shares (Note 7) -- -- -- -- 1,701,000 -- 1,701,000
Recapitalization (Note 7) -- -- -- -- (750,000) -- (750,000)
--------- ------- --------- -------- ----------- ------------ -----------
BALANCE, JUNE 30, 1996
(UNAUDITED) -- $ -- 2,150,000 $ 21,500 $ 4,839,500 $ (2,714,528) $ 2,146,472
========= ======= ========= ======== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
QC OPTICS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ------------------
1994 1995 1995 1996
-------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 470,057 $ 908,219 $ 22,863 $ (1,008,366)
---------- --------- -------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Management buyout charge (Note 7) -- -- -- 1,701,000
Depreciation and amortization 86,632 55,504 26,100 25,800
Loss on sale of property -- 3,226 -- --
Changes in operating assets and liabilities --
Accounts receivable 385,550 (1,334,675) (235,293) 1,000,515
Inventory 86,936 (608,677) (339,202) 46,804
Prepaid expenses and other assets 1,131 (710) 8,476 (72,418)
Accounts payable 255,920 (89,864) 207,561 275,822
Accrued payroll and related expenses and accrued
expenses 58,099 182,028 180,535 675,500
Customer deposits 14,695 (217,632) 13,596 258,904
--------- ---------- ---------- ----------
Total adjustments 888,963 (2,010,800) (138,227) 3,911,927
-------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities 1,359,020 (1,102,581) (115,364) 2,903,561
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (30,651) (43,691) (27,151) --
Proceeds on sale of property and equipment -- 6,438 -- --
---------- ---------- ---------- ----------
Net cash used in investing activities (30,651) (37,253) (27,151) --
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Recapitalization and management buyout --
Capital contribution from Kobe Steel -- -- -- 4,250,000
Payment on loan payable to affiliate -- -- -- (4,250,000)
Borrowings from revolving line of credit -- -- -- 3,250,000
Redemption of common stock from Kobe Steel (cash
portion) -- -- -- (4,250,000)
Borrowings from revolving line of credit for working
capital -- -- -- 1,492,757
Payments on revolving line of credit -- -- -- (4,242,757)
-------- --------- -------- ----------
Net cash used in financing activities -- -- -- (3,750,000)
--------- ---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,328,369 (1,139,834) (142,515) (846,439)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,242,429 2,570,798 2,570,798 1,430,964
--------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,570,798 $ 1,430,964 $ 2,428,283 $ 584,525
========= ========== ========= ==========
SUPPLEMTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest $ 187,365 $ 288,886 $ 158,718 $ 94,555
======== ========== ========== ===========
Income taxes $ 12,866 $ 35,021 $ 30,021 $ 80,093
======== ========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Repurchase of common stock from Kobe Steel through the
issuance of Kobe term loan (see Note 7) $ -- $ -- $ -- $ 750,000
======== ========== ========== ===========
Issuance of Common Stock (see note 7) $ -- $ -- $ -- $ 1,401,000
======== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) DESCRIPTION OF BUSINESS
QC Optics, Inc. (the Company) was formed in 1986 and manufactures high-end
critical surface inspection systems for sales to the semiconductor, flat panel
display and computer hard disk drive industries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues from product sales are recognized at the time equipment is
shipped. Revenues from service and maintenance agreements are recognized ratably
over the period covered by the agreement. Service and maintenance revenues were
less than 10% of total net sales in each of the two years in the period ended
December 31, 1995.
Warranty Costs
The Company accrues warranty costs in the period the related revenue is
recognized. Warranty costs were not material for the fiscal years ended December
31, 1994 and 1995.
Research and Development Costs
Research and development costs are expensed as incurred and are included in
engineering expenses in the accompanying statements of operations. Research and
development costs for the years ended December 31, 1994 and 1995 amounted to
$969,301 and $925,938, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Raw materials and finished parts $ 1,390,362 $ 2,079,958
Work-in-process 1,502,760 766,360
----------- ------------
$ 2,893,122 $ 2,846,318
=========== ============
</TABLE>
Work-in-process and finished parts inventories include material, labor and
manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repair items are
charged to expense when incurred; renewals and betterments are capitalized. When
property and equipment are retired or sold, their costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in income.
The Company provides for depreciation using the straight-line method to
amortize the cost of plant and equipment over their estimated useful lives,
which generally are as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
------------------------ ------------
<S> <C>
Furniture and fixtures 5-8 Years
Machinery and equipment 3-8 Years
Leasehold improvements 8-10 Years
Motor vehicles 5 Years
</TABLE>
F-7
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Income Taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the temporary differences between the tax and
financial statement carrying amounts of assets and liabilities. Deferred tax
assets are recognized net of any valuation allowance. The Company and Kobe Steel
USA Holdings, Inc. (Kobe Steel), 99.5% owner of the Company prior to March 29,
1996 (see Note 7) have a tax-allocation agreement. Prior to March 29, 1996, the
Company's results of operations were included in the consolidated federal return
of Kobe Steel. The agreement calls for the provision (benefit) and payments
(refunds) to be made as if the Company were to file its own separate company tax
returns.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to a
concentration of credit risk include accounts receivable and cash and cash
equivalents.
The Company sells its products primarily to large corporate customers in
the semiconductor, flat panel displays and computer hard disk drive industries
and performs ongoing evaluations of its customers' financial conditions. The
Company's sales also include significant sales to Kobe Steel, Ltd. (Kobe Japan),
an affiliated Japanese company (see Note 6). Concentration of credit risk with
respect to sales and trade receivables is primarily due to the following:
<TABLE>
<CAPTION>
NET SALES FOR THE
YEARS ENDED DECEMBER 31, ACCOUNTS RECEIVABLE AS OF
------------------ ------------------------
NET SALES
FOR THE SIX
MONTHS ENDED DECEMBER 31, JUNE 30,
1994 1995 JUNE 30, 1996 1995 1996
---------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Company A $ 2,930,000 $ 3,295,000 $1,171,000 $ 1,945,000 $ 263,000
Company B 287,000 1,641,000 -- 113,000 --
Company C 48,000 1,309,000 -- 277,000 --
Company D -- 1,209,000 947,000 446,000 302,000
Company E 2,191,000 611,000 -- -- --
Company F 30,000 512,000 -- 344,000 --
Company G 550,000 -- -- -- --
Company H 330,000 -- -- -- --
Company I -- -- 1,242,000 -- 511,000
Company J -- -- 693,000 -- 69,000
Company K -- -- 534,000 -- 504,000
Company L -- -- 693,000 -- 69,000
Company M -- -- 583,000 -- 341,000
</TABLE>
The Company maintains cash balances and short-term investments in
commercial paper at a financial institution in Massachusetts. Accounts at the
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured cash and cash equivalent bank balances amounted to
approximately $1,501,000 at December 31, 1995.
Export net sales, denominated in U.S. dollars, were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
------------------- ------------------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia/Pacific $2,200,756 $1,819,717 $979,336 $2,340,598
Europe 1,274,190 37,462 5,565 49,905
Other 90,915 -- -- 16,718
</TABLE>
F-8
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and loan payable to
affiliate. The carry amounts of the Company's cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to their
short-term nature. See Note 6 for fair value information pertaining to the
Company's loan payable to affiliate.
Investments
On January 1, 1994, the Company adopted SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair market values and for all investments in debt securities. The
Company's financial condition and results of operations were not materially
impacted in fiscal 1994 as a result of adopting SFAS No. 115.
Impairment of Long-Lived Assets
Beginning on January 1, 1996, the Company was required to adopt SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of. SFAS No. 121 addresses accounting and reporting
requirements for long-term assets based on their fair market values. Adoption of
SFAS No. 121 did not have a material impact on its financial condition and
results of operations.
Stock Options
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which is to become effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 requires employee
stock-based compensation to be either recorded or disclosed at its fair value.
Management intends to continue to account for employee stock-based compensation
under Accounting Principles Board Opinion No. 25 and will not adopt the new
accounting provision for employee stock-based compensation under SFAS No. 123,
but will include the additional required disclosures in the fiscal 1996
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
periods. Actual results could differ from those estimates.
Interim Financial Statements
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited. In management's opinion, these unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the financial data
for such periods. The unaudited results for the six months ended June 30, 1996
are not necessarily indicative of the results expected for the entire fiscal
year.
F-9
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company derives most of its annual revenues from a relatively small
number of sales of products, systems and upgrades. As a result, any delay in the
recognition of revenue for single products, systems or upgrades would have a
material adverse effect on the Company's results of operations for a given
accounting period. In addition, some of the Company's net sales have been
realized near the end of a quarter. Accordingly, a delay in a shipment scheduled
to occur near the end of a particular quarter could materially adversely affect
the Company's results of operations for that quarter.
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate on a quarterly basis due to a
variety of factors, including the cyclicality of the industries served by the
Company's inspection products; patterns of capital spending by customers; the
timing of significant orders; order cancellations and shipment rescheduling;
unanticipated delays in design, engineering or production, or in customer
acceptance of product shipments; changes in pricing by the Company or its
competitors; the mix of systems sold; and the availability of components and
subassemblies, among others.
Net Income (Loss) per Common Share
Net income (loss) per common share has been determined by dividing net
income (loss) by the weighted average common and common equivalent shares
outstanding during the period. As required by the Securities and Exchange
Commission, common stock issued or sold and options issued at prices below the
offering price in the Company's proposed initial public offering in the year
before the offering have been included in the calculation as if outstanding for
all periods presented using the treasury stock method.
(3) INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995
----- ----
<S> <C> <C>
Current --
Federal $ -- $ --
State 37,866 79,781
------- --------
37,866 79,781
------- --------
Deferred --
Federal -- --
State -- --
-------- --------
-- --
-------- --------
$ 37,866 $ 79,781
======== ========
</TABLE>
The income tax provision differs from the amounts computed by applying the
statutory federal income tax rate of 34% to income before the provision for
income taxes, primarily as a result of state income taxes and the utilization of
federal net operating loss carryforwards in 1994 and 1995. Under the Tax Reform
Act of 1986, the amount of the benefit from NOLs may be impaired or limited in
certain circumstances, including a cumulative stock ownership change of more
than 50% over a three-year period, which occurred in connection with the
management buyout (see Note 7). As a result of the management buyout, the
Company is limited to approximately $180,000 of loss utilization per year.
F-10
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) INCOME TAXES -- (CONTINUED)
Deferred income taxes at December 31, 1995 consists primarily of net tax
assets for reserves not currently deductible and net operating loss
carryforwards, offset by a corresponding valuation allowance of $3,144,000 in
1995. Given the limitations on the utilization of the Company's net operating
losses as a result of the management buyout and uncertainty surrounding the
ability of the Company to generate future income in order to realize such
deferred tax assets in the future, primarily due to such factors as dependence
on a few customers, rapid technological change and the cyclical nature of the
semiconductor, computer hard disk and flat panel display industries, management
has concluded that the ability to realize the deferred tax assets as of December
31, 1995 is uncertain and has, therefore, provided a full valuation allowance
against such deferred tax assets.
For tax reporting purposes, the Company has a U.S. net operating loss
carryforward of approximately $2,163,000, subject to Internal Revenue Service
review and approval and certain IRS limitations on net operating loss
utilization. Utilization of the net operating loss carryforward is contingent on
the Company's ability to generate income in the future. The net operating loss
carryforwards will expire from 2000 to 2008 if not utilized.
For the six months ended June 30, 1995, the income tax provision reflects
the non-deductible nature of the management buyout charge. (See Note 7)
(4) COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities under two noncancelable
operating lease agreements, the largest of which expires in June 1997. Rent
expense for the years ended December 31, 1994 and 1995 amounted to approximately
$272,000 and $264,000, respectively. Future minimum commitments under all
noncancelable operating leases at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 203,000
1997 98,000
--------
$ 301,000
========
</TABLE>
(5) EMPLOYEE BENEFIT PLAN
The Company participates in the 401(k) retirement savings plan of an
affiliated company (the Plan). The Plan is a defined contribution plan which
covers substantially all of the Company's employees. Participants may make
voluntary contributions of 1% to 15% of their annual compensation. The Company
makes matching contributions up to a certain maximum percentage, and a future
Company contribution can be made at the Company's discretion.
The Company charged to expense approximately $78,000 and $92,000 related to
contributions to the Plan for the years ended December 31, 1994 and 1995,
respectively. Included in accrued expenses is approximately $53,000 and $63,000
for Company matching and discretionary contributions to the Plan for the years
ended December 31, 1994 and 1995, respectively.
(6) RELATED PARTY TRANSACTIONS
In 1987, the Company entered into an agreement with Kobe Japan which
granted Kobe Japan an exclusive license to distribute and manufacture the
Company's products in Japan and other Pacific Rim countries. During 1994, this
agreement was terminated by mutual consent.
The Company's sales to Kobe Japan amounted to approximately $2,191,000 or
26% and $611,000 or 6% of net sales for the years ended December 31, 1994 and
1995, respectively.
F-11
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) RELATED PARTY TRANSACTIONS -- (CONTINUED)
Kobe Japan, through its various subsidiaries, has provided loans to the
Company by means of a revolving credit arrangement (the Affiliate Loan) over the
years (interest rate of 6% at December 31, 1995). At December 31, 1995, the
amount due totaled $4,250,000 (see Note 7). The carrying value approximates fair
market value, as the amounts are payable upon demand. Interest on the loans
during the year ended December 31, 1994 and 1995 amounted to approximately
$200,000 and $269,000, respectively.
(7) SUBSEQUENT EVENTS
During October 1995, the Company, certain management employees (through its
wholly owned subsidiary, Sally, Inc.) and Kobe Steel entered into a series of
related agreements designed to restructure the capital of the Company and allow
management to acquire up to 89.6% of the common stock of the Company for
$7,200,000 (collectively referred to as the Management Buyout Agreement). The
Management Buyout Agreement allowed management to acquire 62.2% of the Company
by March 31, 1996 for $5,000,000 (the Original Repurchase) and an additional
27.4% of the Company for $2,200,000 within two years from the date of closing of
the Original Repurchase or upon the closing of an underwritten public offering,
pursuant to a registration statement declared effective under the Securities Act
of 1933, as amended. The Original Repurchase under the Management Buyout
Agreement, as amended on March 29, 1996, was accomplished on March 29, 1996
through the redemption of shares from Kobe Steel for $5,000,000 (the Redemption
Price) and the tax-free merger under Section 368 (a)(1)(A) of the Internal
Revenue Code of 1986, as amended, of Sally, Inc. and the Company. Of the
$5,000,000 Redemption Price, $3,250,000 was financed pursuant to the terms of a
$4,000,000 revolving credit agreement (the Revolving Line of Credit), $1,000,000
was provided from available cash of the Company and $750,000 was financed
pursuant to a promissory note from the Company to Kobe Steel (the Kobe Term
Note). The transaction has been accounted for as a recapitalization and
management buyout. The Company recorded a $1,701,000 non-recurring, non-cash
charge in the accompanying statement of operations for the six-month period
ending June 30, 1996 to reflect the estimated value of the shares issued to
management, with a corresponding increase in additional paid-in capital in the
accompanying balance sheet as of June 30, 1996. This charge is not deductible
for income tax purposes. Both the Revolving Line of Credit and the Kobe Term
Note are secured by all of the assets of the Company. The Kobe Term Note is due
on December 31, 1996, bears interest at the rate of 8% per annum and is
subordinated to the Revolving Line of Credit in an amount not to exceed
$4,000,000 without the prior written consent of Kobe Steel.
Simultaneous with the Original Repurchase and as required per the terms of
the Management Buyout Agreement, Kobe Steel made a capital contribution in cash
of $4,250,000 on March 29, 1996 to the Company. The Company used the proceeds
received to pay off the outstanding principal due on the Affiliate Loan in the
same amount. In addition, as required per the terms of the Management Buyout
Agreement, the Company filed a Restated Certificate of Incorporation providing
for the recapitalization of the Company such that all shares of Class A voting
common stock and Class B nonvoting common stock became one class of voting
common stock.
On October 27, 1995, the Company and certain management employees of the
Company entered into a voting trust agreement known as the QC Optics Voting
Trust (the Voting Trust), of which the President of the Company is trustee. The
Voting Trust continues in force for a period of 21 years from October 27, 1995,
unless terminated earlier as a result of a merger, dissolution, sale of all or
substantially all of the Company's assets or liquidation.
The Revolving Line of Credit matures on June 30, 1998, and the interest
rate per annum is the bank's prime rate (8.25% at June 30, 1996) plus 1%. The
Revolving Line of Credit has a fee on the daily unused portion of the facility
at the rate of 1/4 % per annum. The aggregate amount outstanding under the
F-12
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) SUBSEQUENT EVENTS -- (CONTINUED)
Revolving Line of Credit is limited to the sum of 80% of qualifying
receivables and 10% of qualifying inventory (not to exceed $350,000), except
that this maximum amount may be exceeded by $500,000 through October 31, 1996
(the Overadvance). Upon the elimination of the Overadvance, the interest rate
charged per annum shall be the bank's prime rate plus .5%. In addition, the
Revolving Line of Credit is secured by unlimited personal guarantees from two
management employees, and all of the stockholders of the Voting Trust have
pledged their Company shares to the bank as collateral (the Guarantees). The
terms of the Revolving Line of Credit allow for the termination of these
Guarantees provided that any Overadvance is paid in full by October 31, 1996 and
the qualified inventory is excluded as part of the borrowing base, or upon the
receipt of $5,000,000 in net proceeds from an equity financing (gross proceeds,
less underwriting discounts and commissions) and if no event of default exists,
as defined in the Revolving Line of Credit agreement. At June 30, 1996, the
Company had outstanding borrowings under the Revolving Line of Credit in the
aggregate of $500,000, reflected as a long-term liability in the accompanying
balance sheet as of June 30, 1996. The Revolving Line of Credit provides for the
maintenance of certain specified financial ratios, including, but not limited
to, a quick ratio, minimum capital funds, maximum debt/capital funds ratio and a
minimum earnings test, among other negative and affirmative covenants, and
restricts certain transactions without the bank's prior written consent.
In June 1996, the Company's Board of Directors approved an approximate
1.72-for-1 common stock split. Accordingly, all share and per share amounts of
common stock for all periods presented have been retroactively adjusted to
reflect the split. In addition, the stockholders increased the authorized
capital stock of the Company to 1,000,000 shares of $.01 par value preferred
stock and 10,000,000 shares of $.01 par value common stock.
In June 1996, the Board of Directors approved the 1996 Stock Option Plan
(the 1996 Plan) under which employees, including Directors who are employees,
may be granted options to purchase shares of the Company's common stock at not
less than fair market value on the date of grant, as determined by the Board of
Directors. The 1996 Plan also allows for nonqualified stock options to be issued
to employees and nonemployees at prices that are less than fair market value.
Options granted under the 1996 Plan are exercisable for up to a 10-year period
from the date of grant. The Company has reserved 360,000 shares of common stock
for issuance under the 1996 Plan. In June 1996, the Company granted options
under the 1996 Plan for the purchase of 124,492 shares at $5.10 per share,
estimated fair market value on the date of grant, which become exercisable over
three years, beginning on June 20, 1997, one year from the date of grant.
Additionally, in June 1996, the Company granted options to purchase 107,500
shares of common stock at $6.30 per share, which become exercisable at the time
the initial public offering becomes effective.
In June 1996, the Board of Directors approved a Director Formula Stock
Option Plan (the Formula Plan) in which options will be granted beginning on
June 18, 1996, and every four years thereafter, immediately following the
Company's annual meeting of stockholders, options shall be granted to eligible
nonemployee directors. Each director will receive options to purchase 15,000
shares of common stock, which vest and are exercisable in 16 equal installments
over a period of four years beginning on the first day of the fiscal quarter
immediately following the grant. The options may be exercised at the fair market
value of the shares of common stock on the date of grant. The Company has
reserved 100,000 shares of common stock for issuance under the Formula Plan. In
June 1996, the Company granted options under the Formula Plan for the purchase
of 30,000 shares at $5.10 per share, estimated fair market value on the date of
grant, which become exercisable as previously discussed.
F-13
[PHOTO]
API-1100 FP, FLAT PANEL DISPLAY INSPECTION SYSTEM
[PHOTO]
DISKAN-6000, RIGID DISK INSPECTION SYSTEM
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES OF WHICH SUCH INFORMATION IS FURNISHED.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary 3
Summary Financial Information 6
Risk Factors 7
Use of Proceeds 15
Dilution 17
Capitalization 18
Dividend Policy 18
Selected Financial Data 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20
Business 24
Management 35
Principal Stockholders 42
Certain Transactions 43
Description of Securities 45
Underwriting 49
Shares Eligible for Future Sale 51
Interim Financial Information 51
Legal Matters 52
Experts 52
Additional Information 52
Glossary 53
Financial Statements F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE LATER OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT OR THE FIRST DATE ON WHICH THE UNITS WERE OFFERED TO THE
PUBLIC) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER
OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
QC OPTICS, INC.
950,000 SHARES OF COMMON STOCK
950,000 REDEEMABLE WARRANTS
----------
PROSPECTUS
----------
SCHNEIDER SECURITIES, INC.
, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation or an amendment thereto validly
approved by stockholders to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend,
approving a stock repurchase which is deemed illegal or obtaining an improper
personal benefit. The Company's Certificate of Incorporation includes the
following language:
To the maximum extent permitted by Section 102(b)(7) of the General
Corporation Law of Delaware, a director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Section 13 of the Company's Certificate of Incorporation, as amended, which
is filed as Exhibit 3a hereto, provides the following:
A. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding"), by reason of the
fact that he or she, or a person for whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the
same now exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide prior to such amendment), against all expenses, liability and loss
(including attorney's fees, judgments, fines, liability under federal tax
laws or the Employee Retirement Income Security Act of 1974, as amended from
time to time with respect to employee benefit plans, and amounts to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith; provided however that the Corporation shall indemnify in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. The right to indemnification referred to in
the preceding sentence shall be a contract right and shall include the right
to be paid, by the Corporation, expenses incurred in defending any such
proceeding, in advance of its final disposition; provided, however, that the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to any employee benefit plan) in
advance of the final disposition of such proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Article 13 or otherwise.
II-1
B. Right of Claimant to Bring Suit.
If a claim under Part A of this Article 13 is not paid in full by the
Corporation within ninety (90) days after a written claim has been received
by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid
also the expense of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking has been tendered to the Corporation) that
the claimant has not met the standards of conduct which make it permissible
under the General Corporation Law of the State of Delaware for the
Corporation to indemnify the claimant for the amount claimed, but the burden
of providing such defense shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper
in the circumstance because he or she has met the applicable standard of
conduct set forth in said law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant had not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant had not met the applicable standard of conduct.
C. Non-Exclusivity of Rights.
The rights conferred on any person by Parts A and B of this Article 13
shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of this Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
D. Insurance.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including any employee benefit
plan, against any liability asserted against any such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power to indemnify such
person against such liability under the General Corporation Law of the State
of Delaware.
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware Law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. The bylaws of the Company include the following provision:
Reference is made to Section 145 and any other relevant provisions of the
General Corporation Law of the State of Delaware. Particular reference is
made to the class of persons, hereinafter called "Indemnitees," who may be
indemnified by a Delaware corporation pursuant to the provisions of such
Section 145, namely, any person, or the heirs, executors, or administrators
of such person, who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact
that such person is or was a director, officer, employee, or agent of such
corporation or is or was serving at the request of such corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise. The Corporation shall, and is
hereby obligated in addition to any obligation incurred pursuant to the
Corporation's Certificate of Incorporation, as amended, to indemnify the
Indemnitees, and each of them, in each and every situation where the
Corporation is obligated to make such indemnification pursuant to the
aforesaid statutory provisions. The Corporation shall indemnify
II-2
the Indemnitees, fand each of them, in each and every situation where, under
the aforesaid statutory provisions, the Corporation is not obligated, but is
nevertheless permitted or empowered, to make such indemnification, it being
understood that, before making such indemnification with respect to any
situation covered under this sentence, (i) the Corporation shall promptly
make or cause to be made, by any of the methods referred to in Subsection
(d) of such Section 145, a determination as to whether each Indemnitee acted
in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, in the case of any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful, and (ii) that no such indemnification shall be made
unless it is determined that such indemnification shall be made unless it is
determined that such Indemnitee acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, in the case of any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the Securities being offered hereby other
than underwriting discounts and commissions (items marked with an asterisk (*)
represent estimated expenses):
<TABLE>
<CAPTION>
<S> <C>
SEC Filing Fee $ 5,874.26
NASD Filing Fee $ 2,203.54
Blue Sky Filing Fees* $ 5,000.00
Listing Fee* $ 21,387.50
Printing and Engraving Costs* $ 60,000.00
Transfer Agent Fees* $ 5,000.00
Legal Fees* $ 300,000.00
Accounting Fees* $ 120,000.00
Representative's Expense Allowance $ 173,850.00
Financial Consulting Fee $ 108,000.00
Miscellaneous* $ 58,684.70
-------------
TOTAL* $ 860,000.00
=============
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the issuance
and sales of securities of the Company without registration under the Securities
Act in the past three (3) years. Except as otherwise indicated, no sales of
securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
1. On September 15, 1994, the Company issued 2,400 shares of Class B
Non-Voting Common Stock, $.01 par value per share to Kobe Steel USA Holdings,
Inc. in connection with a conversion of Class A Cumulative Preferred Stock, $.01
par value.
2. On March 29, 1996, the Company issued an aggregate of 785,000 shares of
Common Stock, $.01 par value per share to QC Optics, Inc. Voting Trust u/d/t
dated as of October 27, 1995 in connection with a merger of Sally, Inc., a
corporation owned by Messrs. Chase, Bernal, Ormsby, Freeman, Tobey and Boudour.
3. On June 19, 1996, the Company issued 334,987 shares of Common Stock, $.01
par value per share to Kobe Steel USA Holdings, Inc. in connection with an
approximate 1.716704:1 stock split accounted for in the form of a 0.716704:1
stock dividend.
4. On June 19, 1996, the Company issued 562,613 shares of Common Stock, $.01
par value to QC Optics, Inc. Voting Trust u/d/t dated as of October 27, 1995 in
connection with a 1.716704:1 stock split accounted for in the form of a
0.716704:1 stock dividend.
II-3
5. In June 1996, pursuant to its 1996 Stock Option Plan, the Company granted
options to employees and advisors to purchase an aggregate of 231,992 shares of
Common Stock at an exercise prices of $5.10 and $6.30, respectively. None of the
231,992 stock options have been exercised to date.
6. In June 1996, pursuant to its 1996 Director Formula Stock Option Plan,
the Company granted options to eligible disinterested directors to purchase
30,000 shares of Common Stock at an exercise price of $5.10. None of the 30,000
formula stock options have been exercised to date.
The foregoing transactions were exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) of the Securities
Act. Each purchaser of the securities described above has represented or will
represent prior to the purchase of the securities that he or she understands
that the securities acquired may not be sold or otherwise transferred absent
registration under the Securities Act or the availability of an exemption from
the registration requirements of the Securities Act, and each certificate
evidencing the securities owned by each purchaser bears or will bear upon
issuance a legend to that effect.
ITEM 27. EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
--- -----
<S> <C>
1a -- Form of Agreement Among Underwriters.
1b -- Form of Underwriting Agreement (revised).
*1c -- Form of Selected Dealers Agreement.
2 -- Not applicable.
*3a -- Certificate of Incorporation, as amended.
*3b -- Bylaws, as amended.
*4a -- Sections of Bylaws and Certificate of Incorporation defining
the rights of securityholders (contained in
Exhibits 3a and 3b).
4b -- Specimen Common Stock Certificate.
4c -- Form of Representative's Warrant Agreement (revised).
*4d -- Form of Lock-Up Letters.
4e -- Specimen Warrant Certificate.
+4f -- Form of Warrant Agreement between the Company and the
Warrant Agent.
*5 -- Opinion Letter of O'Connor, Broude & Aronson as to legality
of securities being registered.
6 -- Not applicable.
7 -- Not applicable.
8 -- Not applicable.
*9 -- QC Optics Voting Trust u/d/t dated as of October 27, 1995 by
and among Eric T. Chase, as trustee, and Eric T. Chase, Karl
Andrew Bernal, Jay L. Ormsby, John R. Freeman, Albert E.
Tobey and Abdu Boudour.
*10a -- Lease Agreement between the Company and Norwest Building 24
Trust, as extended and amended.
*10b -- Stock Repurchase and Loan Repayment Agreement among the
Company, Kobe Steel USA Holdings, Inc., and Eric T. Chase,
as trustee of the QC Optics Voting Trust, dated October 27,
1995.
*10c -- Agreement and Plan of Merger by and among the Company,
Sally, Inc. and the Stockholders of Sally, Inc., dated
October 30, 1995.
*10d -- First Amendment to the Stock Repurchase and Loan Repayment
Agreement by and among the Company, Kobe Steel USA Holdings,
Inc., and Eric T. Chase, as trustee and on behalf of the QC
Optics Voting Trust, dated March 29, 1996.
II-4
*10e -- Secured Subordinated Promissory Note of the Company to Kobe
Steel USA Holdings, Inc., dated March 29, 1996.
*10f -- Subordinated Security Agreement by and between the Company
and Kobe Steel USA Holdings, Inc., dated March 29, 1996.
*10g -- Intercreditor Agreement between State Street Bank and Trust
Company, Kobe Steel USA Holdings, Inc. and the Company,
dated March 29, 1996.
*10h -- Promissory Note of QC Optics, Inc. to State Street Bank and
Trust Company, dated March 29, 1996.
*10i -- Security Agreement (All Assets) by and between the Company
and State Street Bank and Trust Company, dated March 29,
1996.
*10j -- Credit Agreement by and between the Company and State Street
Bank and Trust Company, dated March 29, 1996.
*10k -- Collateral Assignment of Trademarks and Patents by and
between the Company and State Street Bank and Trust Company,
dated March 29, 1996.
*10l -- Collateral Pledge Agreement by Eric T. Chase, as trustee on
behalf of QC Optics Voting Trust, dated March 29, 1996.
*10m -- Unlimited Guarantee of Eric T. Chase as trustee of the QC
Optics Voting Trust for financing commitments of the Company
with State Street Bank and Trust Company, dated March 29,
1996.
*10n -- Unlimited Guaranty of Eric T. Chase for financing
commitments of the Company with State Street Bank and Trust
Company, dated March 29, 1996.
*10o -- Unlimited Guaranty of K. Andrew Bernal for financing
commitments of the Company with State Street Bank and Trust
Company, dated March 29, 1996.
*10p -- 1996 Stock Option Plan.
*10q -- 1996 Director Formula Stock Option Plan.
*10r -- Form of Employment Agreements effective as of July 1, 1996
entered into by and between the Company and Eric T. Chase,
Jay L. Ormsby, Albert E. Tobey, K. Andrew
Bernal, Abdu Boudour and John R. Freeman.
+10s -- Distribution Agreement by and between ETEC Systems, Inc. and
the Company, dated December 19, 1994.
11 -- Earnings Per Share Computations (revised).
12 -- Not applicable.
13 -- Not applicable.
14 -- Not applicable.
15 -- Not applicable.
16 -- Not applicable
17 -- Not applicable.
18 -- Not applicable.
19 -- Not applicable.
20 -- Not applicable.
21 -- Not applicable.
22 -- Not applicable.
*23a -- Consent of O'Connor, Broude & Aronson (contained as Opinion
filed as Exhibit 5).
23b -- Consent of Arthur Andersen LLP.
24 -- Not applicable.
25 -- Not applicable.
26 -- Not applicable.
II-5
27 -- Financial Data Schedule.
28 -- Not applicable.
</TABLE>
- ----------
* Previously filed
+ To be filed by amendment
ITEM 28. UNDERTAKINGS
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) include any additional or changed material information on
the plan of distribution;
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.
(b) The undersigned small business issuer will provide to the underwriter at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers, and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer, or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(d) The small business issuer hereby undertakes that for the purpose of
determining liability under the Securities Act:
(1) it will treat the information omitted from the form of Prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the issuer under Rule 424(b)(1),
or (4), or 497(h) under the Securities Act, as part of this registration
statement as of the time the Commission declared it effective; and
(2) it will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
II-6
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT
IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, IN THE TOWN OF BURLINGTON, COMMONWEALTH OF
MASSACHUSETTS, ON SEPTEMBER 20, 1996.
QC OPTICS, INC.
By: /s/ ERIC T. CHASE
--------------------------------------
ERIC T. CHASE,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THIS PRE-EFFECTIVE AMENDMENT NO. 1. TO THE REGISTRATION STATEMENT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ ERIC T. CHASE
------------------------ President, Chief Executive Officer, September 20, 1996
ERIC T. CHASE and Chairman of the Board of Directors
(Principal Executive Officer)
/S/ JOHN R. FREEMAN
------------------------ Vice President of Finance and September 20, 1996
JOHN R. FREEMAN Treasurer (Principal Financial and
Principal Accounting Officer)
/S/ CHARLES H. FINE
------------------------ Director September 20, 1996
CHARLES H. FINE
/S/ YUTAKA GOTO
------------------------ Director September 20, 1996
YUTAKA GOTO
/S/ JOHN M. TARRH
------------------------ Director September 20, 1996
JOHN M. TARRH
</TABLE>
II-7
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1a -- Form of Agreement Among Underwriters.
1b -- Form of Underwriting Agreement (revised).
*1c -- Form of Selected Dealers Agreement.
2 -- Not applicable.
*3a -- Certificate of Incorporation, as amended.
*3b -- Bylaws, as amended.
*4a -- Sections of Bylaws and Certificate of Incorporation defining
the rights of securityholders (contained In
Exhibits 3a and 3b).
4b -- Specimen Common Stock Certificate.
4c -- Form of Representative's Warrant Agreement (revised).
*4d -- Form of Lock-Up Letters.
4e -- Specimen Warrant Certificate.
+4f -- Form of Warrant Agreement between the Company
and the Warrant Agent.
*5 -- Opinion Letter of O'Connor, Broude & Aronson as to legality
of securities being Registered.
6 -- Not applicable.
7 -- Not applicable.
8 -- Not applicable.
*9 -- QC Optics Voting Trust u/d/t dated as of October 27, 1995 by
and among Eric T. Chase, as trustee, and Eric T. Chase, Karl
Andrew Bernal, Jay L. Ormsby, John R. Freeman, Albert E.
Tobey and Abdu Boudour.
*10a -- Lease Agreement between the Company and Norwest Building 24
Trust, as extended and amended.
*10b -- Stock Repurchase and Loan Repayment Agreement among the
Company, Kobe Steel USA Holdings, Inc., and Eric T. Chase, as
trustee of the QC Optics Voting Trust, dated October 27,
1995.
*10c -- Agreement and Plan of Merger by and among the Company, Sally,
Inc. and the Stockholders of Sally, Inc., dated October 30,
1995.
*10d -- First Amendment to the Stock Repurchase and Loan Repayment
Agreement by and among the Company, Kobe Steel USA Holdings,
Inc., and Eric T. Chase, as Trustee and On Behalf of the QC
Optics Voting Trust, dated March 29, 1996.
*10e -- Secured Subordinated Promissory Note of the Company to Kobe
Steel USA Holdings, Inc., dated March 29, 1996.
*10f -- Subordinated Security Agreement by and between the Company
and Kobe Steel USA Holdings, Inc., dated March 29, 1996.
*10g -- Intercreditor Agreement between State Street Bank and Trust
Company, Kobe Steel USA Holdings, Inc. and the Company, dated
March 29, 1996.
*10h -- Promissory Note of QC Optics, Inc. to State Street Bank and
Trust Company, dated March 29, 1996.
*10i -- Security Agreement (All Assets) by and between the Company
and State Street Bank and Trust Company, dated March 29,
1996.
*10j -- Credit Agreement by and between the Company and State Street
Bank and Trust Company, dated March 29, 1996.
*10k -- Collateral Assignment of Trademarks and Patents by and
between the Company and State Street Bank and Trust Company,
dated March 29, 1996.
*10l -- Collateral Pledge Agreement by Eric T. Chase, as Trustee on
behalf of QC Optics Voting Trust, dated March 29, 1996.
</TABLE>
INDEX TO EXHIBITS -- (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
*10m -- Unlimited Guarantee of Eric T. Chase as trustee of the QC
Optics Voting Trust for financing commitments of the Company
with State Street Bank and Trust Company, dated March 29,
1996.
*10n -- Unlimited Guaranty of Eric T. Chase for financing commitments
of the Company with State Street Bank and Trust Company,
dated March 29, 1996.
*10o -- Unlimited Guaranty of K. Andrew Bernal for financing
commitments of the Company with State Street Bank and Trust
Company, dated March 29, 1996
*10p -- 1996 Stock Option Plan.
*10q -- 1996 Director Formula Stock Option Plan.
*10r -- Form of Employment Agreements effective as of July 1, 1996
entered into by and between the Company and Eric T. Chase,
Jay L. Ormsby, Albert E. Tobey, K. Andrew Bernal, Abdu
Boudour and John R. Freeman.
+10s -- Distribution Agreement by and between Etec Systems, Inc. and
the Company, dated December 19, 1994.
11 -- Earnings Per Share Computations (revised).
12 -- Not applicable.
13 -- Not applicable.
14 -- Not applicable.
15 -- Not applicable.
16 -- Not applicable
17 -- Not applicable.
18 -- Not applicable.
19 -- Not applicable.
20 -- Not applicable.
21 -- Not applicable.
22 -- Not applicable.
*23a -- Consent of O'connor, Broude & Aronson (contained as Opinion
filed as Exhibit 5).
23b -- Consent of Arthur Andersen LLP.
24 -- Not applicable.
25 -- Not applicable.
26 -- Not applicable.
27 -- Financial Data Schedule.
28 -- Not applicable.
- -----------
* Previously filed
+ To be filed by amendment
</TABLE>
QC OPTICS, INC.
950,000 SHARES
OF COMMON STOCK
AND
950,000 REDEEMABLE WARRANTS
AGREEMENT AMONG UNDERWRITERS
, 19
Schneider Securities, Inc.
1120 Lincoln Street
Denver, CO 80203
GENTLEMEN:
We wish to confirm as follows the agreement among you, the undersigned and
the other members of the Underwriting Group named in Schedule I to the
Underwriting Agreement, as it is to be executed (all such parties being herein
called the "Underwriters"), with respect to the purchase by the Underwriters
severally from QC Optics, Inc. ("Company") of 950,000 shares of Common Stock and
950,000 Redeemable Warrant ("Securities") set forth in Schedule I to the
Underwriting Agreement. The number of Securities to be purchased by each
Underwriter from the Company shall be determined in accordance with Section 2 of
the Underwriting Agreement. It is understood that changes may be made in those
who are to be Underwriters and in the respective numbers of Securities to be
purchased by them, but that the Underwriting Agreement will not be changed
without our consent, except as provided herein, and in the Underwriting
Agreement. The obligations of the Underwriters to purchase the number of
Securities set opposite their respective names in Schedule I to the Underwriting
Agreement, are herein called their "underwriting obligations." The number of
Securities set opposite our name in said Schedule I, are herein called "our
Securities." For purposes of this Agreement the following definitions shall be
applicable:
(a) "Manager's Concession" shall be the compensation to you for acting as
Manager as provided in Paragraph 1 of not less than percent ( %) of the
underwriting discount. The Manager's Concession shall include the right to a
portion of the warrants to be issued pursuant to the Underwriting Agreement and,
the right to the nonaccountable expenses to be paid pursuant to the Underwriting
Agreement.
(b) "Underwriting Group Concession" shall mean compensation to members of
the Underwriting Group for assuming the underwriting risk and shall be not less
than percent ( %) of the underwriting discount.
(c) "Dealer's Concession" shall mean compensation to Dealers, who are
members of the Selling Group and shall, as to Dealers who have executed an
agreement with you, be not less than percent ( %) of the underwriting discount.
(d) "Dealer's Reallowance Concession" shall mean the compensation allowed
Dealers by Underwriters other than you and shall be one-half (1/2) of the
Dealer's Concession.
(e) It is contemplated that the underwriting discount will be ten percent
(10%) of the offering price. You, in your absolute discretion, shall determine,
within the foregoing limitations, the precise allocation of the underwriting
discount and shall notify us of same at least twenty-four (24) hours prior to
the execution of the Underwriting Agreement.
1. Authority and Compensation of Representative. We hereby authorize you,
as our Representative and on our behalf, (a) to enter into an agreement with the
Company substantially in the form attached hereto as Exhibit A ("Underwriting
Agreement"), but with such changes therein as in your judgment are not
materially adverse to the Underwriters, (b) to exercise all the authority and
discretion vested in the Underwriters and in you by the provisions of the
Underwriting Agreement, and (c) to take all such action as you, in your
discretion, may deem necessary or advisable in order to carry out the provisions
of the Underwriting Agreement and this Agreement and the sale and distribution
of the Securities, provided, however, that the time within which the
Registration Statement is required to become effective pursuant to the
Underwriting Agreement will not be extended more than forty-eight (48) hours
without the approval of a majority in interest of the Underwriters (including
you). We authorize you, in executing the Underwriting Agreement on our behalf,
to set forth in Schedule I of the Underwriting Agreement as our commitment to
purchase the number of Securities (which shall not be substantially in excess of
the number of Securities included in your invitation to participate unless we
have agreed otherwise) included in a wire, telex, or similar means of
communication transmitted by you to us at least twenty-four (24) hours prior to
the commencement of the offering as our finalized underwriting participation.
As our share of the compensation for your services hereunder, we will pay you,
and we authorize you to charge to our account, a sum equal to the Manager's
Concession.
2. Public Offering. A public offering of the Securities is to be made, as
herein provided, as soon after the Registration Statement relating thereto shall
become effective as in your judgment is advisable. The Securities shall be
initially offered to the public at the public offering price of $ per share and
$ per Redeemable Warrant. You will advise us by telegraph or telephone when the
Securities shall be released for offering. We authorize you as Representative of
the Underwriters, after the initial public offering, to vary the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise. The public offering price of the Securities at any time
in effect is herein called the "Offering Price."
We hereby agree to deliver all preliminary and final Prospectuses as
required for compliance with the provisions of Rule 15c2-8 under the Securities
Exchange Act of 1934 and Section 5(b) of the Securities Act of 1933. You have
heretofore delivered to us such preliminary Prospectuses as have been requested
by us, receipt of which is hereby acknowledged, and will deliver such final
Prospectuses as will be requested by us.
3. Offering to Dealers and Group Sales. We authorize you to reserve for
offering and sale, and on our behalf to sell, to institutions or other retail
purchasers (such sales being herein called "Group Sales") and to dealers
selected by you (such dealers being herein called the "Dealers") all or any part
of our Securities as you may determine. Such sales of Securities, if any, shall
be made (i) in the case of Group Sales, at the Offering Price, and (ii) in the
case of sales to Dealers, at -the Offering Price less the Dealer's Concession.
Any Group Sales shall be as nearly as practicable in proportion to the
underwriting obligations of the respective Underwriters. Any sales to Dealers
made for our account shall be as nearly as practicable in the ratio that the
Securities reserved for our account for offering to Dealers bears to the
aggregate of all Securities of all Underwriters, including you, so reserved. On
any Group Sales or sales to Dealers made by you on our behalf, we shall be
entitled to receive only the Underwriter's Concession.
You agree to notify us not less than twenty-four (24) hours prior to the
commencement of the public offering as to the number of Securities, if any,
which we may retain for direct sale. Prior to the termination of this Agreement,
you may reserve for offering and sale, as herein before provided, any Securities
remaining unsold theretofore retained by us and we may, with your consent,
retain any Securities remaining unsold theretofore reserved by you. Sales to
Dealers shall be made under a Selected Dealers Agreement, attached hereto as
Exhibit B and by this reference incorporated herein. We authorize you to
determine the form and manner of any communications with Dealers, and to make
such changes in the Selected Dealers Agreement, as you may deem appropriate. In
the event that there shall be any such agreements with Dealers, you are
authorized to act as managers thereunder, and we agree, in such event, to be
governed by the terms and conditions of such agreements. Each Underwriter agrees
that it will not offer any of the Securities for sale at a price below the
Offering Price or allow any concession therefrom,
2
except as herein otherwise provided. We, as to our Securities, may enter into
agreements with Dealers, but any Dealer's Reallowance Concession shall not
exceed half of the Dealer's Concession.
It is understood that any person to whom an offer may be made, as hereinbefore
provided, shall be a member of the National Association of Securities Dealers,
Inc. ("NASD") or dealers or institutions with their principal place of business
located outside of the United States, its territories or possessions, and who
are not eligible for membership under Section 1 of the Bylaws of the NASD who
agree to make no sales within the United States, its territories or possessions,
or to persons who are nationals thereof, or residents therein, and, in making
sales, to comply with the NASD's Rules of Fair Practice.
We authorize you to determine the form and manner of any public
advertisement of the Securities.
Nothing contained in this Agreement shall be deemed to restrict our right,
subject to the provisions of this Section 3, to offer our Securities prior to
the effective date of the Registration Statement, provided, however, that any
such offer shall be made in compliance with any applicable requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission thereunder and of any
applicable state securities laws.
4. Repurchases in the Open Market. Any Securities sold by us (otherwise
than through you) which, prior to the termination of this Agreement, or such
earlier date as you may determine, shall be contracted for or purchased in the
open market by you on behalf of any Underwriter or Underwriters, shall be
repurchased by us on demand at a price equal to the cost of such purchase plus
commissions and taxes, if any, on redelivery. Any Securities delivered on such
repurchase need not be the identical Securities originally sold by us. In lieu
of delivery of such Securities to us, you may (i) sell such Securities in any
manner for our account and charge us with the amount of any loss or expense, or
credit us with the amount of any profit, less any expense, resulting from such
sale, or (ii) charge our account . t with an amount not in excess of the
concession to Dealers on such Securities.
5. Delivery and Payment. We agree to deliver to you, at or before 9:00 A.M.,
New York, New York Time, on the Closing Date referred to in the Underwriting
Agreement, at your office, a certified or bank cashier's check payable to your
order for the offering price of the Securities less Dealer's Concession of the
Securities which we retained for direct sale by us, the proceeds of which check
shall be delivered to you, in the manner provided in the Underwriting Agreement,
to or for the account of the Company against delivery of certificates for such
Securities to you for our account. You are authorized to accept such delivery
and to give receipts therefor. You may advance funds for Securities which have
been sold or reserved for sale to retail purchasers or Dealers for our account.
If we fail (whether or not such failure shall constitute a default hereunder) to
deliver to you, or you fail to receive, our check and/or payment for sales made
by you for our account for the Securities which we have agreed to purchase, you,
individually and not as Representative of the Underwriters, are authorized (but
shall not be obligated) to make payment, in the manner provided in the
Underwriting Agreement, to or for the account of the Company for such Securities
for our account, but any such payment by you shall not relieve us of any of our
obligations under the Underwriting Agreement or under this Agreement and we
agree to repay you on demand the amount so advanced for our account.
We also agree on demand to take up and pay for or to deliver to you
funds sufficient to pay for at cost any Securities of the Company purchased by
you for our account pursuant to the provisions of Section 9 hereof, and to
deliver to you on demand any Securities sold by you for our account, pursuant to
any provision of this Agreement.
We authorize you to deliver our Securities, and any other Securities
purchased by you for our account pursuant to the provisions of Section 9 hereof,
against sales made by you for our account pursuant to any provision of this
Agreement.
Upon receipt by you of payment for the Securities sold by us and/or through
you for our account, you will remit to us promptly an amount equal to the
Underwriter's Concession on such Securities. You agree to cause to be delivered
to us, as soon as practicable after the Closing Date referred to in the
Underwriting Agreement, such part of our Securities purchased on such Closing
Date as shall not have been sold or reserved for sale by your for our account.
3
In case any Securities reserved for sale in Group Sales or to Dealers shall
not be purchased and paid for in due course as contemplated hereby, we agree to
accept delivery when tendered by you of any Securities so reserved for our
account and not so purchased and pay you the offering price less the Dealer's
and Underwriter's Concessions.
6. Authority to Borrow. We authorize you to advance your funds for our
account (charging current interest rates) and to arrange loans for our account
for the purpose of carrying out this Agreement, and in connection therewith to
execute and deliver any notes or other instruments, and to hold, or pledge as
security therefor, all or any part of our Securities of the Company purchased
hereunder for our account. Any lending bank is hereby authorized to accept your
instructions as Representative in all matters relating to such loans. Any part
of our Securities held by you, may be delivered to us for carrying purposes, and
if so delivered, will be redelivered to you upon demand.
7. Allocation of Expense and Liability. We authorize you to charge our
account with, and we agree to pay (a) all transfer taxes on sales made by you
for our account, except as herein otherwise provided, and (b) our proportionate
share (based on our underwriting obligations) of all expenses in excess of those
reimbursed by the Company incurred by you in connection with the purchase,
carrying and distribution, or proposed purchase and distribution, of the
Securities and all other expenses arising under the terms of the Underwriting
Agreement or this Agreement. Your determination of all such expenses and your
allocation thereof shall be final and conclusive. Funds for our account at any
time in your hands as our Representative may be held in your general funds
without accountability for interest. As soon as practicable after the
termination of this Agreement, the net credit or debit balance in our account,
after proper charge and credit for all interim payments and receipts, shall be
paid to or paid by us, provided, however, that you, in your discretion, may
reserve from distribution an amount to cover possible additional expenses
chargeable to the several Underwriters.
8. Liability for Future Claims. Neither any statement by you, as
Representative of the Underwriters, of any credit or debit balance in our
account nor any reservation from distribution to cover possible additional
expenses relating to the Securities shall constitute any representation by you
as to the existence or nonexistence of possible unforeseen expenses or
liabilities of or charges against the several Underwriters. Notwithstanding the
distribution of any net credit balance to us or the termination of this
Agreement, or both, we shall be and remain liable for, and will pay on demand,
(a) our proportionate share (based on our underwriting obligations) of all
expenses and liabilities which may be incurred by, or for the accounts of the
Underwriters, including any liability which may be incurred by the Underwriters
or any of them, and (b) any transfer taxes paid after such settlement on account
of any sale or transfer for our account.
9. Stabilization. We authorize you, until the termination of this
Agreement, (a) to make purchases and sales of the Securities, in the open market
or otherwise, for long or short account, and on such terms, and at such prices
as you in your discretion may deem desirable, (b) in arranging for sales of
Securities, to overallot, and (c) either before or after the termination of this
Agreement, to cover any short position incurred pursuant to this Section 9;
subject, however, to the applicable rules and regulations of the Securities and
Exchange Commission under the Securities Exchange Act of 1934. All such
purchases, sales and overallotments shall be made for the accounts of the
several Underwriters as nearly as practicable in proportion to their respective
underwriting obligations; provided, however, that our net position resulting
from such purchases and sales and overallotments shall not at any time exceed,
either for long or short account, fifteen percent (15%) of the number of
Securities agreed to be purchased by us.
If you engage in any stabilizing transactions as representative of the
underwriters, you shall promptly notify us of that fact and in like manner you
agree to promptly notify and file with us any stabilizing transaction in
accordance with the requirements of Rule 17a-2(d) under the Securities Exchange
Act of 1934.
We agree to advise you from time to time, upon request, until the settlement of
accounts hereunder, of the number of Securities at the time retained by us
unsold, and we will upon request sell to you, for the accounts of one or more of
the several Underwriters, such number of our unsold Securities as you may
designate, at the Offering Price less such amount, not in excess of the
concession to Dealers, as you may determine.
4
10. Open Market Transactions. We agree that, except with your consent and
except as herein provided upon advice from you, we will not make purchases or
sales on the open market or otherwise, or attempt to induce others to make
purchases or sales, either before or after the purchase of the Securities, and
prior to the completion (as defined in Rule 10b-6 of the Securities Exchange Act
of 1934) of our participation in the distribution, we will otherwise comply with
Rule 10b-6. Nothing in this Section 10 contained shall prohibit us from acting
as broker or agent in the execution of unsolicited orders of customers for the
purchase or sale of any securities of the Company.
11. Blue Sky. Prior to the initial offering by the Underwriters, you will
inform us as to the states under the respective securities or Blue Sky laws of
which it is believed that the Securities have been qualified or are exempt for
sale, but you do not assume any responsibility or obligation as to the accuracy
of such information or as to the right of any Underwriter or Dealer to sell the
Securities in any jurisdiction. We will not sell any Securities in any other
state or jurisdiction and we will not sell Securities in any state or
jurisdiction unless we are qualified or licensed to sell securities in such
state or jurisdiction. We authorize you, if you deem it unadvisable in arranging
sales of Securities for our account hereunder, to sell any of our Securities to
any particular Dealer, or other buyer, because of the securities or Blue Sky
laws of any jurisdiction, to sell our Securities to one or more other
Underwriters at the Offering Price less, in the case of a sale to any Dealer,
such amount, not in excess of the concession to Dealers thereon, as you may
determine. The transfer tax on any such sales among Underwriters shall be
treated as an expense and charged to the respective accounts of the several
Underwriters, in proportion to their respective underwriting obligations.
12. Default by Underwriters. Default by one or more Underwriters, in
respect to their obligations under the Underwriting Agreement shall not release
us from any of our obligations. In case of such default by one or more
Underwriters, you are authorized to increase, pro rata, with the other
nondefaulting Underwriters, the number of defaulted Securities which we shall be
obligated to purchase from the Company, provided, however, that the aggregate
amount of all such increases for all Underwriters shall not exceed ten percent
(10%) of such Securities, and, if the aggregate number of the Securities not
taken up by such defaulting Underwriters exceeds such ten percent (10%), you are
further authorized, but shall not be obligated, to arrange for the purchase by
other persons, who may include yourselves, of all or a portion of the Securities
not taken up by such Underwriters. In the event any such increases or
arrangements are made, the respective numbers of Securities to be purchased by
the nondefaulting Underwriters and by any such other person or persons shall be
taken as the basis for the underwriting obligations under this Agreement, but
this shall not in any way affect the liability of any defaulting Underwriters to
the other Underwriters for damages resulting from such default.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any Securities purchased
by your for their respective accounts, pursuant to Section 9 hereof, or to
deliver any such Securities sold or overallotted by you for their respective
accounts pursuant to any provisions of this Agreement, and to the extent that
arrangements shall not have been made by you for other persons to assume the
obligations of such defaulting Underwriter or Underwriters, each nondefaulting
Underwriter shall assume its proportionate share of the aforesaid obligations of
each such defaulting Underwriter without relieving any such Underwriter of its
liability therefor.
13. Termination of Agreement. Unless earlier terminated by you, the
provisions of Sections 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as
otherwise provided therein, terminate thirty (30) full business days after the
effective date of the Registration Statement herein referred to, but may be
extended by you for an additional period or periods not exceeding thirty (30)
full business days in the aggregate. You may, however, terminate this Agreement,
or any provisions hereof, at any time by written or telegraphic notice to us.
14. General Position of the Representative. In taking action under this
Agreement, you shall act only as agent of the several Underwriters. Your
authority as Representative of the several Underwriters shall include the taking
of such action as you may deem advisable in respect of all matters pertaining to
any and all offers and sales of the Securities, including the right to make any
modifications which you consider necessary or desirable in the arrangements with
Dealers or others. You shall be under no liability for or in respect of the
value of the Securities or the validity or the form thereof, the Registration
Statement, the Prospectus, the Underwriting Agreement, or other instruments
executed by the Company or others of any agreement on its or their part; nor
shall you, as such
5
Representative or otherwise, be liable under any of the provisions hereof, or
for any matters connected herewith, except for want of good faith, and except
for any liability arising under the Securities Act of 1933; and no obligation
not expressly assumed by you as such Representative herein shall be implied from
this Agreement. In representing the Underwriters hereunder, you shall act as the
representative of each of them respectively. Nothing herein contained shall
constitute the several Underwriters partners with you or with each other, or
render any Underwriter liable for the commitments of any other Underwriter,
except as otherwise provided in Section 12 hereof. The commitments and
liabilities of each of the several Underwriters are several in accordance with
their respective underwriting obligations and are not joint.
15. Acknowledgment of Registration Statement, etc. We hereby confirm that
we have examined the Registration Statement (including all amendments thereto)
relating to the Securities as heretofore filed with the Securities and Exchange
Commission, that we are familiar with the amendment(s) to the Registration
Statement and the final form of Prospectus proposed to be filed, that we are
willing to accept the responsibilities of an underwriter thereunder, and that we
are willing to proceed as therein contemplated. We further confirm that the
statements made under the heading "Underwriting" in such proposed final form of
Prospectus are correct and we authorize you so to advise the Company on our
behalf. We understand that the aforementioned documents are subject to further
change and that we will be supplied with copies of any amendment or amendments
to the Registration Statement and of any amended Prospectus promptly, if and
when received by you, but the making of such changes and amendments shall not
release us or affect our obligations hereunder or under the Underwriting
Agreement.
16. Indemnification. Each Underwriter, including you, agrees to indemnify
and hold harmless each other Underwriter and each person who controls any other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, as
amended, to the extent of their several commitments under the Underwriting
Agreement and upon the terms that such Underwriter agrees to indemnify and hold
harmless the Company as set forth in Section 7 of the Underwriting Agreement.
The Agreement contained in this Section 16 shall survive any termination of this
Agreement Among Underwriters.
17. Capital Requirements. We confirm that our ratio of aggregate
indebtedness to net capital is such that we may, in accordance with and pursuant
to Rule 15c 3-1, promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, agree to purchase the number of Securities we
may be obligated to purchase under any provision of the Underwriting Agreement
or this Agreement.
18. Miscellaneous. We have transmitted herewith a completed Underwriters'
Questionnaire on the form thereof supplied by you. Any notice hereunder from you
to us or from us to you shall be deemed to have been duly give if sent by
registered mail, telegram, teletype, telex, telecopier, graphic scan, or other
written form of telecommunication to us at our address as set forth in the
Underwriting Agreement, or to you at the address set forth on the first page of
this Agreement.
You hereby confirm that you are registered as a broker-dealer with the
United States Securities and Exchange Commission and that you are a member of
the NASD and we confirm that we are either a member of the NASD or a foreign
broker-dealer not eligible for membership under Section I of the Bylaws of the
NASD, who agrees to make no sales within the United States, its territories or
possessions, or to persons who are nationals thereof or residents therein, and,
in making sales, to comply with the requirements of the NASD's Interpretation
with Respect to Free Riding and Withholding, and with Sections 8, 24, and 25 to
the extent applicable to foreign nonmember brokers or dealers, and Section 36 of
the NASD's Rules of Fair Practice.
We will comply with all applicable federal laws, the laws of the states or
other jurisdictions concerned and the Rules and Regulations of the NASD,
including, but not limited to, Section 24 of the Rules of Fair Practice.
6
This instrument may be signed by the Underwriters in various counterparts
which together shall constitute one and the same agreement among all the
Underwriters and shall become effective as between us at such time as you shall
have confirmed same by returning an executed copy to us, and thereafter, as to
us and the other Underwriters, upon execution by them of counterparts which are
confirmed by you. In no event, however, shall we have any liability under this
Agreement if the Underwriting Agreement is not executed.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
--------------------------------------------
Attorney-in-Fact
for the several Underwriters
named in Schedule I
to the Underwriting Agreement
Confirmed as of the date first above written.
SCHNEIDER SECURITIES, INC.
As Representative
By
----------------------------------------
President
QC OPTICS INC.
950,000 SHARES
OF COMMON STOCK
AND
950,000 REDEEMABLE WARRANTS
UNDERWRITING AGREEMENT
Schneider Securities, Inc. , 1996
1120 Lincoln Street
Denver, Colorado 80203
DEAR SIRS:
QC Optics, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), 950,000 shares of common stock of the Company and 950,000
redeemable warrants (the "Securities"). The Company hereby confirms the
agreement made by it with respect to the purchase of the Securities by the
Underwriter, which Securities are more fully described in the Registration
Statement referred to below. Schneider Securities, Inc. is referred to herein as
the "Underwriter" or the "Representative."
You have advised the Company that the Underwriters desire to act on a firm
commitment basis to purchase the Securities from the Company and to publicly
offer and sell the Securities and that you are authorized to execute this
Agreement. The Company confirms the agreement made by it with respect to the
relationship with the Underwriters as follows:
1. Filing of Registration Statement with S.E.C. and Definitions. A Registration
Statement and Prospectus on Form SB-2 (File No. ) with respect to the Securities
has been carefully and accurately prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
published rules and regulations (the "Rules and Regulations") thereunder or
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
has been filed with the Securities and Exchange Commission (the "Commission")
and such other states that the Underwriter deems necessary in its discretion to
so file to permit a public offering and trading thereunder. Such registration
statement, including the prospectus, Part II, and all financial schedules and
exhibits thereto, as amended at the time when it shall become effective, is
herein referred to as the "Registration Statement," and the prospectus included
as part of the Registration Statement on file with the Commission that discloses
all the information that was omitted from the prospectus on the effective date
pursuant to Rule 430 A of the Rules and Regulations with any changes contained
in any prospectus filed with the commission by the Company with the Underwriters
consent after the effective date of the Registration Statement, is herein
referred to as the "Final Prospectus." The prospectus included as part of the
Registration Statement of the Company and in any amendments thereto prior to the
effective date of the Registration Statement is referred to herein as a
"Preliminary Prospectus."
2. Discount, Delivery, and Sale of the Securities
(a) Subject to the terms and conditions of this Agreement, and on the basis
of the representations, warranties, and agreements herein contained, the Company
agrees to sell to, and the Underwriters agree to buy from the Company at a
purchase price of $6.00 per Share and at $0.10 per Redeemable Warrant before any
underwriter expense allowance, an aggregate of 950,000 shares of Common Stock,
and 950,000 Redeemable Warrants on a firm commitment basis the "Initial
Securities".
It is understood that the Underwriters propose to sell the Securities to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
(b) Delivery of the Securities against payment of the purchase price
therefor by certified or official bank check or checks or wire transfer in
next-day funds, payable to the order of the Company shall take place at the
offices of the clearing broker for the Underwriter at New York City, within four
(4) business days after the Securities are first traded (or such other place as
may be designated by agreement between you and the Company) at 11:00 A.M., New
York time or such time and date as you and the Company may agree upon in
writing, such time and date of payment and delivery for the Securities being
herein called the "Initial Closing Date."
The Company will make the certificates for the shares of Common Stock and
Redeemable Warrants to be purchased by the Underwriters hereunder available to
the Underwriter for inspection and packaging at least two (2) full business days
prior to the Initial Closing Date. The certificates shall be in such names and
denominations as the Underwriter may request to the Company in writing at least
two (2) full business days prior to any Closing Date.
(c) In addition, subject to the terms and conditions of this Agreement and
on the basis of the representations, warranties and agreements herein contained,
the Company grants an option to the Underwriters to purchase up to an additional
142,500 shares of Common Stock and/or up to 142,500 additional Warrants ("Option
Securities") at the same terms as the Underwriters shall pay for the Initial
Securities being sold by the Company pursuant to the provisions of Section 2(a)
hereof. This option may be exercised from time to time, for the purpose of
covering overallotments, within forty-five (45) days after (i) the effective
date of the Registration Statement if the Company has elected not to rely on
Rule 430A under the Rules and Regulations or (ii) the date of this Agreement if
the Company has elected to rely upon Rule 430A under the Rules and Regulations,
upon written notice by the Underwriter setting forth the number of Option
Securities as to which the Representative is exercising the option and the time
and date at which such certificates are to be delivered. Such time and date
shall be determined by the Representative. Nothing herein shall obligate the
Representative to make any overallotment.
(d) Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriter hereunder will be delivered at the closing by the
Company to the Underwriters against payment of the purchase price by the
Underwriters as described in section 2(b) above.
(e) The information set forth under "Underwriting" in any preliminary
prospectus and Prospectus relating to the Securities and the information set
forth in the last paragraph on the front cover page, under the last paragraph on
page 2 concerning stabilization and over-allotment by the Underwriters, and
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriter to the Company for inclusion therein,
and you represent and warrant to the Company that the statements made therein
are correct.
(f) On the Initial Closing Date, the Company shall issue and sell to the
Representative, warrants (the "Representative's Warrants") at a purchase price
of $.001 per Representative's Warrant, which shall entitle the holders thereof
to purchase an aggregate of 95,000 shares of Common Stock and 95,000 Redeemable
Warrants. The shares of Common Stock and Redeemable Warrants issuable upon the
exercise of the Representative's Warrants are hereafter referred to as the
"Representative's Securities" or "Representative's Warrants." The shares of
common stock issuable upon exercise of the redeemable warrants are hereinafter
referred to collectively as the "Warrant Shares". The Representative's Warrants
shall be exercisable for a period of four (4) years commencing one (1) year from
the effective date of the Registration Statement at a price equaling one hundred
and sixty percent (160%)of the initial public offering price of the Securities.
The form and terms of the of Representative's Warrant Certificate shall be
substantially in the form filed as an Exhibit to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Initial Closing
Date.
3. Representations and Warranties of the Company.
(a) The Company represents and warrants to you as follows:
2
(i) The Company has prepared and filed with the Commission a registration
statement, and an amendment or amendments thereto, on Form SB-2 (No._______),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities, the Representative's Warrant and the Warrant
Shares (sometimes referred to herein collectively as the "Registered
Securities"), under the Act, which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the Rules and Regulations. The Company will promptly file a
further amendment to said registration statement in the form heretofore
delivered to the Underwriter and will not file any other amendment thereto to
which the Underwriter shall have objected verbally or in writing after having
been furnished with a copy thereof. Except as the context may otherwise require,
such registration statement, as amended, on file with the Commission at the time
the registration statement becomes effective (including the prospectus,
financial statements, any schedules, exhibits and all other documents filed as a
part thereof or that may be incorporated therein (including, but not limited to
those documents or information incorporated by reference therein) and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the Rules and Regulations), is hereinafter called the
"Registration Statement," and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulations, is
hereinafter called the "Prospectus."
(ii) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Prospectus or the Registration
Statement and no proceeding for an order suspending the effectiveness of the
Registration Statement or any of the Company's securities has been instituted or
is pending or threatened. Each such Prospectus and/or any supplement thereto has
conformed in all material respects with the requirements of the Act and the
Rules and Regulations and on its date did not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein not misleading, in light of the circumstances under which they were
made; and when the Prospectus becomes legally effective and for twenty-five (25)
days subsequent thereto (i) the Prospectus and/or any supplement thereto will
contain all statements which are required to be stated therein by the Act and
Rules and Regulations, and (ii) the Prospectus and/or any supplement thereto
will not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances under which they were
made; provided, however, that no representations, warranties or agreements are
made hereunder as to information contained in or omitted from the Prospectus in
reliance upon, and in conformity with, the written information furnished to the
Company by you as set forth in Section 2(e) above.
(iii) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of its incorporation,
with full power and authority (corporate and other) to own its properties and
conduct its businesses as described in the Prospectus and is duly qualified to
do business as a foreign corporation in good standing in all other jurisdictions
in which the nature of its business or the character or location of its
properties requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the business, properties or
operations of the Company and the subsidiaries as a whole.
(iv) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, the Option Securities and the
Representative's Securities and to enter into this Agreement, the
Representative's Warrant dated as of the initial closing date to be exercised
and delivered by the Company to the Representative (the "Representative's
Warrant Agreement"), and the Financial Advisory and Investment Banking Agreement
dated as of the Initial Closing Date between the Company and the Representative
(the "Consulting Agreement"), and to consummate the transactions provided for in
such agreements, and each of such agreements has been duly and properly
authorized, and on the Initial Closing Date will be duly and properly executed
and delivered by the Company. This Agreement constitutes and on the Initial
Closing Date each of the Representative's Warrant Agreement and the Consulting
Agreement will then constitute valid and binding agreements, enforceable in
accordance with their respective terms (except as the enforceability thereof may
be limited by bankruptcy or other similar laws affecting the rights of creditors
generally or by general equitable principles and except as the enforcement of
indemnification provisions may be limited by federal or state securities laws).
(v) Except as disclosed in the Prospectus, the Company is not in
violation of its respective certificate or articles of incorporation or bylaws
or in default in the performance or observance of any material obligation,
agreement,
3
covenant or condition contained in any material bond, debenture, note or other
evidence of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture, partnership or other agreement or instrument to
which the Company is a party or by which it may be bound or is not in material
violation of any law, order, rule, regulation, writ, injunction or decree of any
governmental instrumentality or court, domestic or foreign; and the execution
and delivery of this Agreement, the Representative's Warrant Agreement and the
Consulting Agreement, and the consummation of the transactions contemplated
therein and in the Prospectus and compliance with the terms of each such
agreement will not conflict with, or result in a material breach of any of the
terms, conditions or provisions of, or constitute a material default under, or
result in the imposition of any material lien, charge or encumbrance upon any of
the property or assets of the Company pursuant to, any material bond, debenture,
note or other evidence of indebtedness or any material contract, indenture,
mortgage, loan agreement, lease, joint venture, partnership or other agreement
or instrument to which the Company is a party nor will such action result in the
material violation by the Company of any of the provisions of its respective
certificate or articles of incorporation or bylaws or any law, order, rule,
regulation, writ, injunction, decree of any government, governmental
instrumentality or court, domestic or foreign, except where such violation will
not have a material adverse effect on the financial condition of the Company.
(vi) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus and the Company will have the adjusted
capitalization set forth therein on the Initial Closing Date; all of the shares
of issued and outstanding capital stock of the Company set forth therein have
been duly authorized, validly issued and are fully paid and nonassessable; the
holders thereof do not have any rights of rescission with respect therefor and
are not subject to personal liability for any obligations of the Company by
reason of being stockholders under the laws of the State in which the Company is
incorporated; none of such outstanding capital stock is subject to or was issued
in violation of any preemptive or similar rights of any stockholder of the
Company; and such capital stock (including the Securities, the Option Securities
and the Representative's Securities) conforms in all material respects to all
statements relating thereto contained in the Prospectus.
(vii) The Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement or as described in the
Prospectus. The Securities, the Option Securities and the Representative's
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the respective descriptions thereof
contained in the Prospectus; except for payment of the applicable purchase price
paid upon exercise of the options or warrants, as the case may be the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities, the Option Securities and the Representative's Securities has
been duly and validly taken; and the certificates representing the Securities,
the Option Securities and the Representative's Securities will be in due and
proper form. Upon the issuance and delivery pursuant to the terms hereof of the
Securities, the Option Securities and the Representative's Securities to be sold
by the Company hereunder, the Underwriter will acquire good and marketable title
to such Securities, Option Securities and Representative's Securities free and
clear of any lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction of any kind whatsoever other than restrictions as may be
imposed under the securities laws.
(viii) The Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described or referred
to in the Prospectus or which are not materially significant or important in
relation to its business or which have been incurred in the ordinary course of
business; except as described in the Prospectus all of the leases and subleases
under which the Company holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and the Company is not
in material default in respect of any of the terms or provisions of any of such
leases or subleases, and no claim has been asserted by anyone adverse to the
Company's rights as lessor, sublessor, lessee or sublessee under any of the
leases or subleases mentioned above or affecting or questioning the Company's
right to the continued possession of the leased or subleased premises or assets
under any such lease or sublease; and the Company owns or leases all such
properties as are necessary to its operations as now conducted and as
contemplated to be conducted, except as otherwise stated in the Prospectus.
4
(ix) The financial statements, together with related notes, set forth
in the Prospectus fairly present the financial position and results of
operations of the Company at the respective dates and for the respective periods
to which they apply. Said statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent in all material respects during the periods involved but any
stub period has not been audited by an independent accounting firm. There has
been no material adverse change or material development involving a prospective
change in the condition, financial or otherwise, or in the prospects, value,
operation, properties, business or results of operations of the Company whether
or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus.
(x) Subsequent to the respective dates as of which information is
given in the Prospectus as it may be amended or supplemented, and except as
described in the Prospectus, the Company has not, directly or indirectly,
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business or entered into any transactions not in the ordinary
course of business, which are material to the business of the Company as a whole
and there has not been any change in the capital stock of, or any incurrence of
long term debts by, the Company or any issuance of options, warrants or rights
to purchase the capital stock of the Company or declaration or payment of any
dividend on the capital stock of the Company or any material adverse change in
the condition (financial or other), net worth or results of operations of the
Company as a whole and the Company has not become a party to, any material
litigation whether or not in the ordinary course of business.
(xi) To the knowledge of the Company, there is no pending or
threatened, action, suit or proceeding to which the Company is a party before or
by any court or governmental agency or body, which might result in any material
adverse change in the condition (financial or other), business or prospects of
the Company as a whole or might materially and adversely affect the properties
or assets of the Company as a whole nor are there any actions, suits or
proceedings against the Company related to environmental matters or related to
discrimination on the basis of age, sex, religion or race which might be
expected to materially and adversely affect the conduct of the business,
property, operations, financial condition or earnings of the Company as a whole;
and no labor disturbance by the employees of the Company individually exists or
is, to the knowledge of the Company, imminent which might be expected to
materially and adversely affect the conduct of the business, property,
operations, financial condition or earnings of the Company as a whole.
(xii) Except as may be disclosed in the Prospectus, the Company has
properly prepared and filed all necessary federal, state, local and foreign
income and franchise tax returns, has paid all taxes shown as due thereon, has
established adequate reserves for such taxes which are not yet due and payable,
and does not have any tax deficiency or claims outstanding, proposed or assessed
against it.
(xiii) The Company has sufficient licenses, permits, right to use trade
or service marks and other governmental authorizations currently required for
the conduct of its business as now being conducted and as contemplated to be
conducted and the Company is in all material respects complying therewith.
Except as set forth in the Prospectus, the expiration of any such licenses,
permits, or other governmental authorizations would not materially affect the
Company's operations. To its knowledge, none of the activities or businesses of
the Company are in material violation of, or cause the Company to materially
violate any law, rule, regulations, or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality.
(xiv) The Company has not at any time (i) made any contributions to any
candidate for political office in violation of law, or failed to disclose fully
any such contribution, or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasipublic duties, other than payments required or allowed by applicable law.
(xv) Except as set forth in the Prospectus the Company knows of no
outstanding claims for services either in the nature of a finder's fee,
brokerage fee or otherwise with respect to this financing for which the Company
or the Underwriters may be responsible, or which may affect the Underwriter's
compensation as determined by the
5
National Association of Securities Dealers, Inc. ("NASD") except as otherwise
disclosed in the Prospectus or known by the Underwriters.
(xvi) The Company has its property adequately insured against loss or
damage by fire and maintains such other insurance as is customarily maintained
by companies in the same or similar business.
The Representative's Warrants herein described are duly and validly
authorized and upon delivery to the Representative in accordance herewith will
be duly issued and legal, valid and binding obligations of the Company, except
as the enforceability thereof may be limited by bankruptcy or other similar laws
affecting the rights of creditors generally or by equitable principles, and
except as the enforcement of indemnification provisions may be limited by
federal or state securities laws.
(xvii) The Representative's Securities issuable upon exercise of any of
the Representative's Warrants have been duly authorized, and when issued upon
payment of the exercise price therefor, will be validly issued, fully paid and
nonassessable.
(xviii) Except as set forth in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition of any
material license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders agreement, note, loan
or credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the property or assets (tangible or intangible) of the Company is
subject or affected.
(xix) To the best of the Company's knowledge it has generally enjoyed a
satisfactory employer-employee relationship with its employees and, to the best
of its knowledge, is in substantial compliance in all material respects with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours. To the best of the Company's knowledge, there are no pending
investigations involving the Company, by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. To the best of the Company's
knowledge, there is no unfair labor practice charge or complaint against the
Company pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or to its knowledge involving the Company, or any predecessor entity, and none
has ever occurred. To the best of the Company's knowledge, no representation
question is pending respecting the employees of the Company, and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company. To the best of the Company's knowledge, no grievance or arbitration
proceeding is pending or to its knowledge threatened under any expired or
existing collective bargaining agreements of the Company. No labor dispute with
the employees of the Company is pending, or, to its knowledge is imminent; and
the Company is not aware of any pending or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors which
may result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company.
(xx) Except as may be set forth in the Registration Statement, the
Company does not maintain, sponsor or contribute to any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Internal Revenue Code (the "Code"), which could subject the Company
to any tax penalty on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401 (a), stating that such ERISA
6
Plan and the attendant trust are qualified thereunder. The Company has never
completely or partially withdrawn from a "multiemployer plan."
(xxi) None of the Company, or any of its employees, directors,
stockholders, or affiliates (within the meaning of the Rules and Regulations)
has taken or will take, directly or indirectly, any action designed to or which
has constituted or which might be expected to cause or result in, under the
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities,
Option Securities, Representative's Securities or otherwise.
(xxii) None of the patents, patent applications, trademarks, service
marks, trade names, copyrights, and licenses and rights to the foregoing
presently owned or held by the Company, are in dispute or, to the best knowledge
of the Company's management are in any conflict with the right of any other
person or entity. The Company (i) except as disclosed in the Prospectus owns or
has the right to use, all patents, trademarks, service marks, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any of
the foregoing, and except as set forth in the Prospectus or otherwise disclosed
to the Underwriter in writing, to the best knowledge of the Company's management
is not obligated or under any liability whatsoever to make any material payments
by way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(xxiii) Except as disclosed in the Prospectus the Company owns and has
adequate right to use to the best knowledge of the Company's management all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") required for or
incident to the development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company. The Company is not aware of
any such development of similar or identical trade secrets or technical
information by others. The Company has valid and binding confidentiality
agreements with all of its officers, covering its intellectual property (subject
to the equitable powers of any court), which agreements have remaining terms of
at least two years from the effective date of the Registration Statement except
where the failure to have such agreements would not materially and adversely
effect the Company's business taken as a whole. The Company has good and
marketable title to, or valid and enforceable leasehold estates in, all items of
real and personal property stated in the Prospectus, to be owned or leased by it
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, or other restrictions or equities of any kind whatsoever,
other than those referred to in the Prospectus and liens for taxes not yet due
and payable.
(xxiv) Arthur Andersen, LLP whose reports are filed with the Commission
as a part of the Registration Statement, are independent certified public
accountants as required by the Act and the Rules and Regulations.
(xxv) Except for Kobe Steel Co. and except in connection with
acquisitions or pursuant to warrants and options outstanding immediately prior
to the closing, the Company has agreed to execute and the Company has also
caused to be duly executed, agreements pursuant to which each of the Company's
officers and directors and shareholders and any person or entity deemed to be an
affiliate of the Company pursuant to the Rules and Regulations has agreed not
to, directly or indirectly, sell, assign, transfer, or otherwise dispose of any
shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) for a period of not less than thirteen (13) months following such
effective date without the prior written approval of the Representative and if
such approval is granted, then to be extended on a pro-rata basis to all other
restricted shareholders. The Company will cause the Transfer Agent, as defined
below, to mark an appropriate legend on the face of stock certificates
restricting the transfer of all of such securities and to place "stop transfer"
orders on the Company's stock ledgers.
7
(xxvi) The Registered Securities have been approved for listing on
NASDAQ-National Market System, NASDAQ or an Exchange.
(xxvii) Except as set forth in the Prospectus or disclosed in writing
to the Underwriter (which writing specifically refers to this Section), no
officer or director of the Company, holder of 5% or more of securities of the
Company or any "affiliate" or "associate" (as these terms are defined in Rule
405 promulgated under the Rules and Regulations) of any of the foregoing persons
or entities has or has had, either directly or indirectly, (i) an interest in
any person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficiary interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Certain Transactions" or disclosed in writing to the
Underwriter (which writing specifically refers to this Section) there are no
existing agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director, principal stockholder of the Company, or any
partner, affiliate or associate of any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of the Company, and
delivered to the Underwriter or to the Underwriter's counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
(xxix) Each of the minute books of the Company has been made available
to the Underwriter and contains a complete summary of all meetings and actions
of the directors and stockholders of the Company, since the time of its
incorporation and reflect all transactions referred to in such minutes
accurately in all respects.
(xxx) As of the Initial Closing Date, the Company will enter into the
Consulting Agreement substantially in the form filed as an Exhibit to the
Registration Statement with respect to the furnishing of consulting services by
the Representative to the Company.
(xxxi) Except and only to the extent described in the Prospectus or
disclosed in writing to the Underwriter (which writing specifically refers to
this Section), no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to require
the Company to file a registration statement under the Act and no person or
entity holds any anti-dilution rights with respect to any securities of the
Company. Except as disclosed in the Prospectus, all rights so described or
disclosed have been waived or have not been triggered with respect to the
transactions contemplated by this Agreement, the Consulting Agreement and the
Representative's Warrant Agreement (including the warrants issuable thereunder).
(xxxii) The Company has not entered into any employment agreements with
its executive officers, except as disclosed in the Prospectus.
(xxxiii) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Registered Securities pursuant to
the Prospectus and the Registration Statement, the issuance of the Underwriter's
Warrants, the performance of this Agreement, the Representative's Warrant
Agreement and the Consulting Agreement, and the transactions contemplated hereby
and thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue and/or
sale of any of the Securities, the Option Securities and the Underwriter's
Securities, except such as have been or may be obtained under the Act, otherwise
or may be required under state securities or blue sky laws in connection with
the Underwriter's purchase and distribution of the Securities, the Option
Securities, the Representative's Securities and the Underwriter's Warrants to be
sold by the Company hereunder or may be required by the Rules of the National
Association of Securities Dealer, Inc. ("NASD").
8
(xxxiv) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
(xxxv) Within the past five (5) years, none of the Company's
independent public accountants has brought to the attention of the Company's
management any "material weakness" as defined in the Statement of Auditing
Standard No. 60 in any of the Company's internal controls.
4. Covenants of the Company. The Company covenants and agrees with you that:
(a) It will cooperate in all respects in making the Prospectus effective and
will not at any time, whether before or after the effective date, file any
amendment to or supplement to the Prospectus of which you shall not previously
have been advised and furnished with a copy or to which you or your counsel
shall have reasonably objected or which is not in material compliance with the
Act and the Rules and Regulations or applicable state law.
As soon as the Company is advised thereof, the Company will advise you, and
confirm the advice in writing, of the receipt of any comments of the Commission
or any state securities department, when the Registration Statement becomes
effective if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A, of the effectiveness of any posteffective amendment to the Registration
Statement or Prospectus, or the filing of any supplement to the Prospectus or
any amended Prospectus, of any request made by the Commission or any state
securities department for amendment of the Prospectus or for supplementing of
the Prospectus or for additional information with respect thereto, of the
issuance of any stop order suspending the effectiveness of the Prospectus or any
order preventing or suspending the use of any Prospectus or any order suspending
trading in the Common Stock of the Company, or of the suspension of the
qualification of the Securities, the Option Securities or the Representatives
Securities for offering in any jurisdiction, or of the institution of any
proceedings for any such purposes, and will use its best efforts to prevent the
issuance of any such order and, if issued, to obtain as soon as possible the
lifting or dismissal thereof.
The Company has caused to be delivered to you copies of such Prospectus, and the
Company has consented and hereby consents to the use of such copies for the
purposes permitted by law. The Company authorizes you and the dealers to use the
Prospectus and such copies of the Prospectus in connection with the sale of the
Securities, the Option Securities and the Representative's Securities for such
period as in the opinion of your counsel and our counsel the use thereof is
required to comply with the applicable provisions of the Act and the Rules and
Regulations. The Company will prepare and file with the states, promptly upon
your request, any such amendments or supplements to the Prospectus, and take any
other action, as, in the opinion of your counsel, may be necessary or advisable
in connection with the initial sale of the Securities, the Option Securities and
the Underwriter's Securities and will use its best efforts to cause the same to
become effective as promptly as possible.
The Company shall file the Prospectus (in form and substance satisfactory to
the Underwriter) or transmit the Prospectus by a means reasonably calculated to
result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to
Rule 424(b)(3) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement, and (ii) the fifth business day after the effective date of the
Registration Statement.
9
In case of the happening, at any time within such period as a Prospectus is
required under the Act to be delivered in connection with the initial sale of
the Securities, the Option Securities and the Representative's Securities of any
event of which the Company has knowledge and which materially affects the
Company, or the securities thereof, and which should be set forth in an
amendment of or a supplement to the Prospectus in order to make the statements
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is required under the Act to be delivered, or in case it shall be
necessary to amend or supplement the Prospectus to comply with the Act, the
Rules and Regulations or any other law, the Company will forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they are made. The preparation and
furnishing of any such amendment or supplement to the Prospectus or supplement
to be attached to the Prospectus shall be without expense to you.
The Company will to the best of its ability comply with the Act, the
Exchange Act and applicable state securities laws so as to permit the initial
offer and sales of the Securities, the Option Securities and the Representatives
Securities under the Act, the Rules and Regulations, and applicable state
securities laws.
(b) It will cooperate to qualify the Securities and the Option Securities
and the Representative's Securities for initial sale under the securities laws
of such jurisdictions as you may designate and will make such applications and
furnish such information as may be required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long as the Underwriter may reasonably request.
(c) So long as any of the Securities, the Option Securities or the
Representative's Securities remain outstanding in the hands of the public, the
Company, at its expense, will annually furnish to its shareholders a report of
its operations to include financial statements audited by independent public
accountants, and will furnish to the Underwriter as soon as practicable after
the end of each fiscal year, a balance sheet of the Company as at the end of
such fiscal year, together with statements of operations, shareholders' equity,
and changes in cash flow of the Company for such fiscal year, all in reasonable
detail and accompanied by a copy of the certificate or report thereon of
independent public accountants.
(d) It will deliver to you at or before the Initial Closing Date two signed
copies of the Registration Statement including all financial statements and
exhibits filed therewith, whether or not incorporated by reference. The Company
will deliver to you, from time to time until the effective date of the
Prospectus, as many copies of the Prospectus as you may reasonably request. The
Company will deliver to you on the effective date of the Prospectus and
thereafter for so long as a Prospectus is required to be delivered under the Act
and the Rules and Regulations as many copies of the Prospectus, in final form,
or as thereafter amended or supplemented, as you may from time to time
reasonably request.
(e) The Company will apply the net proceeds from the sale of the Securities
and the Option Securities substantially in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly
or indirectly, to acquire any securities issued by the Company, without the
prior written consent of the Underwriter.
(f) As soon as it is practicable, but in any event not later than the first
(lst) day of the fifteenth (15th) full calendar month following the effective
date of the Registration Statement, the Company will make available to its
security holders and the Underwriter an earnings statement (which need not be
audited) covering a period of at least twelve (12) consecutive months beginning
after the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations.
10
(g) Non-Accountable Expense Allowance. The Company shall pay to the
Representative at each closing date, and to be deducted from the purchase price
for the Securities and the Option Securities, an amount equal to three percent
(3%) of the gross proceeds received by the Company from the sale of the
Securities and the Option Securities at such closing date less in the case of
the Initial Closing Date, the sum of $50,000 previously paid by the Company. If
the sale of the Securities by the Underwriter is not consummated for any reason
not attributable to the Underwriter, or if (i) the Company withdraws the
Registration Statement from the Commission or does not proceed with the public
offering, or (ii) the representations in Section 3 hereof are not correct or the
covenants cannot be complied with, or (iii) there has been a materially adverse
change in the condition, prospects or obligations of the Company or a materially
adverse change in stock market conditions from current conditions, all as
determined by the Underwriter, then the Company shall reimburse the Underwriter
for its out of pocket expenses including without limitation, its legal fees and
disbursements all on an accountable basis but not to exceed $100,000 (less the
$50,000 previously paid by the Company), and if any excess remains from the
advance previously paid, such excess will be returned to the Company.
If however, in the event of the sale or merger of the Company, or any
significant subsidiary or significant assets of the Company or substitution of
Underwriter's or the Representative (the "Transaction") after such date as the
Company has filed a Registration Statement with the Securities and Exchange
Commission the Company shall reimburse the Representative for its fees and
expenses in accordance with the preceding paragraph and shall also pay the
Representative an amount in cash equal to two percent (2%) of the total legal
consideration of the Transaction up to a maximum of $250,000 less the fees and
expenses so reimbursed. Such amount will be paid on the date of closing of the
Transaction.
(h) The Company shall not, without the Representative's prior written
consent which shall not be unreasonably withheld, sell or offer to sell any
shares of Common Stock for thirteen (13) months after the effective date
including other equity securities or warrants or options to purchase any shares
of Common Stock or equity securities except (i) in connection with acquisitions,
(ii) pursuant to warrants and options outstanding immediately prior to or as a
result of the Closing, or (iii) pursuant to options granted under Company's
Stock Option Plan as described in the Prospectus
(i) During a date five years after the date hereof, the Company will make
available to its shareholders, as soon as practicable, and deliver to the
Representative:
(1) as soon as they are available, copies of all reports (financial or
other) mailed to shareholders;
(2) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD or any
securities exchange;
(3) every press release and every material news item or article of
interest to the financial community in respect of the Company or its
affairs which was prepared and released by or on behalf of the Company;
and
(4) any additional information of a public nature concerning the
Company (and any future subsidiaries) or its businesses which the
Underwriter may request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(j) The Company will maintain a Transfer Agent and, if necessary under the
jurisdiction of incorporation of the Company, a Registrar (which may be the same
entity as the Transfer Agent) for its Common Stock.
(k) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Final Prospectus the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be
11
signed and will include all financial statements and exhibits), the Prospectus,
and all amendments and supplements thereto, including any prospectus prepared
after the effective date of the Registration Statement, in each case as soon as
available and in such quantities as the Representative may request.
(1) Neither the Company nor any of its officers, directors, stockholders or
any of its affiliates will take, directly or indirectly, any action designed to,
or which might in the future reasonably be expected to cause or result in
stabilization or manipulation of the price of any of the Company's securities.
(m) The Company shall timely file all such reports, forms or other documents
as may be required (including, but not limited to, a Form SR as may be required
pursuant to Rule 463 under the Act) from time to time, under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(n) The Company shall cause the Securities to be listed on NASDAQ-NMS for a
period of five (5) years from the date hereof, use its best efforts to maintain
the listing of the Securities to the extent they are outstanding.
(o) As soon as practicable, (i) before the effective date of the
Registration Statement, file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Securities and (ii) but in no event
more than 30 days from the effective date of the Registration Statement, take
all necessary and appropriate actions to be included in Standard and Poor's
Corporation Descriptions and/or Moody's OTC Manual and to continue such
inclusion for a period of not less than five years if the securities are not
listed on NASDAQ-NMS.
(p) Until the completion of the distribution of the Securities, the Company
shall not without the prior written consent of the Underwriter and its counsel
which consent shall not be unreasonably withheld or delayed, issue, directly or
indirectly, any press release or other communication or hold any press
conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in 'the ordinary course of
the Company's business consistent with past practices with respect to the
Company's operations.
(q) Commencing one year from the effective date of the registration
statement, the Company agrees to pay the Representative a 5% solicitation fee
for the exercise of the publicly-held warrants such solicitation being subject
to applicable SEC and NASD Rules.
5. Conditions of the Underwriter's Obligations. The obligation of the
Underwriters to offer and sell the Securities and the Option Securities is
subject to the accuracy (as of the date hereof, and as of the Closing Dates) of
and compliance with the representations and warranties of the Company to the
performance by it of its agreement and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become effective as and when
cleared by the Commission, and you shall have received notice thereof, on or
prior to any closing date no stop order suspending the effectiveness of the
Prospectus shall have been issued and no proceedings for that or similar purpose
shall have been instituted or shall be pending, or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriter; and
qualification, under the securities laws of such states as you may designate, of
the issue and sale of the Securities upon the terms and conditions herein set
forth or contemplated and containing no provision unacceptable to you shall have
been secured, and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order proceedings with
respect thereto be instituted or pending or threatened under such law.
(b) On any closing date and, with respect to the letter referred to in
subparagraph (iii), as of the date hereof, you shall have received:
(i) the opinion, together with such number of signed or photostatic copies
of such opinion as you may reasonably request, addressed to you by O'Connor,
Broude & Aronson, counsel for the Company, and in form and
12
substance reasonably satisfactory to the Representative and William M. Prifti,
Esq., counsel to the Representative, dated each such closing date, to the effect
that:
(A) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the jurisdiction in which it is
incorporated and has all necessary corporate power and authority to carry on its
business as described in the Prospectus.
(B) The Company is qualified to do business in each jurisdiction in which
conducting its business requires such qualification, except where the failure to
be so qualified would not have a material adverse effect on the Company's
business or assets.
(C) The Company has the full corporate power and authority to enter into
this Agreement, the Representative's Warrant Agreement and the Consulting
Agreement and to consummate the transactions provided for therein and each such
Agreement has been duly and validly authorized, executed and delivered by the
Company. Each of this Agreement, the Consulting Agreement and the
Representative's Warrant Agreement, assuming due authorization, execution and
delivery by each other party thereto, constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms, subject to bankruptcy, insolvency or similar laws governing the rights of
creditors and to general equitable principles, and provided that no opinion need
be given as to the enforceability of any indemnification or contribution
provisions, and none of the Company's execution or delivery of this Agreement,
the Consulting Agreement or the Representative's Warrant Agreement, its
performance hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
material breach or violation of any of the terms or provisions of, or
constitutes or will constitute a material default under, or result in the
creation or imposition of any material lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to the terms
of (A) the articles of incorporation or by-laws of the Company, (B) to the
knowledge of such counsel, any material license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company is a
party or by which it is or may be bound, or (C) to the knowledge of such
counsel, any statute, judgment, decree, order, rule or regulation applicable to
the Company, whether domestic or foreign.
(D) The Company had authorized and outstanding capital stock as set forth in
the Prospectus under the heading "Capitalization" as of the date set forth
therein, and all of such issued and outstanding shares of capital stock have
been duly and validly authorized and issued, and to the knowledge of such
counsel are fully paid and nonassessable, and to the knowledge of such counsel
no stockholder of the Company is entitled to any preemptive rights to subscribe
for, or purchase shares of the capital stock and to the knowledge of such
counsel none of such securities were issued in violation of the preemptive
rights of any holders of any securities of the Company.
(E) To the knowledge of such counsel, the Company is not a party to or bound
by any instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for this
Agreement, the Representative's Warrant Agreement, and except as described in
the Prospectus. The Common Stock, the Warrants and the Representative's Warrants
each conforms in all material respects to the respective descriptions thereof
contained in the Prospectus. The outstanding shares of Common Stock and the
Warrants the Warrant Stock and the Representative's Warrant Stock will have been
upon payment and delivery, in the manner described herein, the Warrant Agreement
and the Representative Agreement, as the case may be, will be, duly authorized,
validly issued, fully paid and nonassessable. There are no preemptive or other
rights to subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the Company's articles of
incorporation, by-laws, other governing documents or any agreement or other
instrument known to such counsel to which the Company is a party or by which it
is bound.
(F) The certificates representing the Securities are in due and proper form
and each of the Warrant Stock and the Representative's Warrant Stock has been
duly authorized and reserved for issuance and when issued and
13
delivered in accordance with the respective terms of the Warrant Agreement and
Representative's Warrant Agreement, respectively, will duly and validly issued,
fully paid and nonassessable.
(G) To the knowledge of such counsel, there are no claims, suits or other
legal proceedings pending or threatened against the Company in any court or
before or by any governmental body which might materially affect the business of
the Company or the financial condition of the Company as a whole, except as set
forth in or contemplated by the Prospectus.
(H) Based on oral and/or written advice from the staff of the Commission,
the Registration Statement has become effective and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the Prospectus is in
effect and no proceedings for that purpose are pending before, or threatened by,
federal or by a state securities administrator.
(I) To the knowledge of such counsel, there are no legal or governmental
proceedings, actions, arbitrations, investigations, inquiries or the like
pending or threatened against the Company of a character required to be
disclosed in the Prospectus which have not been so disclosed, questions the
validity of the capital stock of the Company or this Agreement or the
Representative's Warrant Agreement or might adversely affect the condition,
financial or otherwise, or the prospects of the Company or which could adversely
affect the Company's ability to perform any of its obligations under this
Agreement, the Representative's Warrant Agreement or the Consulting Agreement.
(J) To such counsel's knowledge, there are no material agreements, contracts
or other documents known to such counsel required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
and the Prospectus and filed as exhibits thereto, and to such counsel's
knowledge (A) the exhibits which have been filed are correct copies of the
documents of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company is a party or by
which it is bound, including any document to which the Company is a party or by
which it is bound incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate in all material respects and
fairly represent the information required to be shown by Form SB-2.
(K) No consent, approval, order or authorization from any regulatory board,
agency or instrumentality having jurisdiction over the Company, or its
properties (other than registration under the Act or qualification under state
or foreign securities law or approval by the NASD) is required for the valid
authorization, issuance, sale and delivery of the Securities, the Option
Securities or the Representative's Warrant.
(L) The statements in the Prospectus under "Risk Factors-Control by Existing
Stockholders," "Management-Limitation of Liability" "Description of the
Securities," and "Shares Eligible For Future Sale" have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions, are correct in
all material respects.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Representative's Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not certified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are to
be purchased, the Registration Statement and any amendment or supplement, when
such documents became effective or were filed with the Commission (other than
the financial statements including the notes thereto and supporting schedules
and other financial and statistical information derived therefrom, as to which
such counsel need express no comment) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or at the Closing
Date or any later date on which the
14
Option Shares are to be purchased, as the case may be, the Prospectus and any
amendment or supplement thereto (other than the financial statements including
the notes thereto and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Such opinion shall also cover such other matters incident to the
transactions contemplated hereby and the offering Prospectus as you or counsel
to the Representative shall reasonably request. In rendering such opinion, to
the extent deemed reasonable by them, such counsel may rely upon certificates of
any officer of the Company or public officials as to matters of fact of which
the maker of such certificate has knowledge.
(ii) a certificate, signed by the Chief Executive Officer and the Principal
Financial or Accounting Officer of the Company dated the Closing Date, to the
effect that with regard to the Company, each of the conditions set forth in
Section 5(d) have been satisfied.
(iii) a letter, addressed to the Representative and in form and substance
satisfactory to the Representative in all respects (including the nonmaterial
nature of the changes or decreases, if any, referred to in clause (D) below),
from Arthur Andersen, LLP dated, respectively, as of the effective date of the
Registration Statement and as of the Closing Date, as the case may be:
(A) Confirming that they are independent public accountants with respect to
the Company and its consolidated subsidiaries, if any, within the meaning of the
Act and the applicable published Rules and Regulations.
(B) Stating that, in their opinion, the financial statements, related notes
and schedules of the Company and its consolidated subsidiaries, if any, included
in the Registration Statement examined by them comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations thereunder.
(C) Stating that, with respect to the period from December 31, 1995, to a
specified date (the specified date") not earlier than five (5) business days
prior to the date of such letter, they have read the minutes of meetings of the
stockholders and board of directors (and various committees thereof) of the
Company and its consolidated subsidiaries, if any, for the period from December
31, 1995 through the specified date, and made inquiries of officers of the
Company and its consolidated subsidiaries, if any, responsible for financial and
accounting matters and, especially as to whether there was any decrease in
sales, income before extraordinary items or net income as compared with the
corresponding period in the preceding year; or any change in the capital stock
of the Company or any change in the longterm debt or any increase in the
short-term bank borrowings or any decrease in net current assets or net assets
of the Company or of any of its consolidated subsidiaries, if any, and further
stating that while such procedures and inquiries do not constitute an
examination made in accordance with generally accepted auditing standards,
nothing came to their attention which caused them to believe that during the
period from December 31, 1995, through the specified date there were any
decreases as compared with the corresponding period in the preceding year in
sales, income before extraordinary items or net income; or any change in the
capital stock of the Company or consolidated subsidiary, if any, or any change
in the longterm debt or any increase in the short-term bank borrowings (other
than any increase in short-term bank borrowings in the ordinary course of
business) of the Company or any consolidated subsidiary, if any, or any decrease
in the net current assets or net assets of the Company or any consolidated
subsidiary, if any; and
(D) Stating that they have carried out certain specified procedures
(specifically set forth in such letter or letters) as specified by the
Underwriter (after consultations with Arthur Andersen, LLP relating to such
procedures), not constituting an audit, with respect to certain tables,
statistics and other financial data in the Prospectus specified by the
Underwriter and such financial data not included in the Prospectus but from
which information in the Prospectus is derived, and which have been obtained
from the general accounting records of the Company or consolidated subsidiaries,
if any, or from such accounting records by analysis or computation, and having
compared such
15
financial data with the accounting records of the Company or the consolidated
subsidiaries, if any, stating that they have found such financial data to agree
with the accounting records of the Company.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Prospectus and other related matters shall be satisfactory to or
approved by counsel to the Underwriter and you shall have received from
O'Connor, Broude & Aronson, a signed opinion dated as of each closing date, with
respect to the incorporation of the Company, the validity of the Securities, the
form of the Prospectus, (other than the financial statements together with
related notes and other financial and statistical data contained in the
Prospectus or omitted therefrom, as to which such counsel need express no
opinion), the execution of this Agreement and other related matters as you may
reasonably require.
(d) At each closing date, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects with the same effect as if made on and as of such closing date; (ii)
the Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations and in all material respects conform to the
requirements thereof, and neither the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary, in light of the
circumstances under which they were made, in order to make the statements
therein not misleading; (iii) there shall have been since the respective dates
as of which information is given no material adverse change in the business,
properties or condition (financial or otherwise), results of operations, capital
stock, longterm debt or general affairs of the Company from that set forth in
the Prospectus, except changes which the Prospectus indicates might occur after
the effective date of the Prospectus, and the Company shall not have incurred
any material liabilities or material obligations, direct or contingent, or
entered into any material transaction, contract or agreement not in the ordinary
course of business other than as referred to in the Prospectus and which would
be required to be set forth in the Prospectus; and (iv) except as set forth in
the Prospectus, no action, suit or proceeding at law or in equity shall be
pending or threatened against the Company which would be required to be set
forth in the Prospectus, and no proceedings shall be pending or threatened
against the Company or any subsidiary before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company.
(e) On the Initial Closing Date, the Company shall have executed and
delivered to the Underwriter, (i) the Representatives' Warrant Agreement
substantially in the form filed as an Exhibit to the Registration Statement in
final form and substance satisfactory to the Underwriter, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(f) On or before the Initial Closing Date, the Securities shall have been
duly approved for listing on NASDAQ-NMS.
(g) On or before the Initial Closing Date, there shall have been delivered
to the Representative all of the Lock-up Agreements required to be delivered
pursuant to Section 3(a)(xxv) and 4(h), in form and substance satisfactory to
the Representative and Representative's counsel.
(h) On or before the Initial Closing Date, the Company shall have (i)
executed and delivered to the Underwriter the Consulting Agreement, in the form
filed as an Exhibit to the Registration Statement and (ii) paid the Underwriter
the full retainer pursuant to the Consulting Agreement.
If any condition to the Representative's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
6. Conditions of the Company's Obligations. The obligation of the Company to
sell and deliver
16
the Securities is subject to the following:
(a) The provisions regarding the effective date, as described in Section
10.
(b) At the Initial Closing Date, no stop order suspending the
effectiveness of the Prospectus shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission or by any state
securities department.
(c) Tender of payment by the Representative in accord with Section 2
hereof.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
its employees and each person, if any, who controls you within the meaning of
the Act, against any losses, claims, damages or liabilities, joint or several
(which shall, for any purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), to which
each Underwriter or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission made in the Prospectus, or such amendment or supplement to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, which is in reliance upon and in conformity
with written information furnished by the Company to you specifically for use in
the preparation thereof, and provided further that the indemnity agreement
contained in this subsection (a) shall not inure to the benefit of you with
respect to any person asserting any such loss, claim, damage or liability who
has purchased the Securities which are the subject thereof if you or any
participants failed to send or give a copy of the Prospectus to such person at
or prior to the written confirmation of the sale of such Securities to such
person and except that, with respect to any untrue statement or omission or any
alleged untrue statement or omission, made in any Pre-Effective Prospectus, the
indemnity agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter ( or to any person controlling any such underwriter)
from whom the person asserting any such loss, claim, damage or liability
purchased the securities concerned to the extent that such untrue statement or
omission, or alleged untrue statement or omission, has been corrected in a later
Pre-Effective Prospectus or in the Final Prospectus unless the Underwriter
circulated a later Pre-Effective Prospectus or the Final Prospectus to such
person
(b) Each Underwriter will indemnify and hold harmless the Company, each of
its directors, each of its officers, each person, if any, who controls the
Company within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission was made in the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by you specifically for use in the preparation thereof. This indemnity
will be in addition to any liability which any Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party, similarly notified, to assume the
defense
17
thereof, subject to the provisions herein stated, with counsel satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that, if the indemnified party is you or a person who controls you, the fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both you or such controlling person
and the indemnifying party and you or such controlling person shall have been
advised by such counsel that there is a conflict of interest which would prevent
counsel for the indemnifying party from representing the indemnifying party and
you or such controlling person (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of you or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction or which are consolidated
into the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for you and all such controlling persons, which firm
shall be designated in writing by you). No settlement of any action against an
indemnified party shall be made without the consent of the indemnified party,
which shall not be unreasonably withheld in light of all factors of importance
to such indemnified party.
8. Contribution. In order to provide for just and equitable contribution
tinder the Act in any case in which (i) the indemnifying party makes a claim for
indemnification pursuant to Section 7 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriters, then the Company and the Underwriters in the aggregate shall
contribute to the aggregate losses, claims, damages, or liabilities to which
they may be subject (which shall, for all purposes of this Agreement, include,
but not be limited to, all costs of defense and investigation and all attorneys'
fees) in either such case (after contribution from others) in such proportions
that the Underwriters are responsible in the aggregate for that portion of such
losses, claims, damages or liabilities determined by multiplying the total
amount of such losses, claims, damages or liabilities times the difference
between the public offering price and the commission to the Underwriter and
dividing the product thereof by the public offering price, and the Company, if
applicable, shall be responsible for that portion of such losses, claims,
damages or liabilities times the commission to the Underwriters and dividing the
product thereof by the public offering price; provided, however, that the
Underwriters shall not be required to so contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriters
hereunder if such allocation is not permitted by applicable law, then the
relative fault of the Company and the Underwriters in connection with the
statements or omissions which resulted in such damages and other relevant
equitable considerations shall also be considered. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 12(2) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The foregoing contribution agreement shall in no
way affect the contribution liabilities of any person having liability under
Section 12 of the Act other than the Company and the Underwriter. As used in
this paragraph, the term "Underwriters" includes any person who controls the
Underwriters within the meaning of Section 15 of the Act. If the full amount of
the contribution specified in this paragraph is not permitted by law, then any
Underwriter and each person who controls any Underwriter shall be entitled to
contribution from the Company, to the full extent permitted by law.
9. Costs and Expenses. Subject to the provisions of Section 4(g) the Company
will pay all costs and expenses incident to the performance of this Agreement by
the Company including, but not limited to, the fees and expenses of counsel to
the Company and of the Company's accountants; the costs and expenses incident to
the preparation, printing, filing and distribution under the Act of the
Registration Statement and Prospectus (including the fee of the Commission, any
securities exchange and the NASD in connection with the filing required by the
NASD relating to
18
the offering of the Securities contemplated hereby); all expenses, including
fees of counsel, which shall be due and payable on the Closing Date in
connection with the qualification of the Securities under the state securities
or blue sky laws; the cost of furnishing to you copies of the Prospectus, this
Agreement, the cost of printing the certificates representing the Securities and
of preparing and photocopying the Underwriting Agreement and related
Underwriting documents, the cost of four (4) underwriter's bound volumes, any
advertising costs and expenses, including but not limited to the Company's
expenses on "road show" information meetings and presentations, prospectus
memorabilia, issue and transfer taxes, if any. The Company will also pay all
costs and expenses incident to the furnishing of any amended Prospectus of or
any supplement to be attached to the Prospectus.
10. Effective Date. This Agreement shall become effective at 11:00 a.m. New
York time on the next full business day following the effective date of the
Registration Statement, or at such other time after the effective date of the
Prospectus as you in your discretion shall first commence the public offering of
any of the Securities covered thereby, provided, however, that at all times the
provisions of Sections 7, 8, 9 and 11 shall be effective.
11. Termination.
(a) This Agreement, may be terminated at any time prior to the Closing
Date by you if in your judgment it is impracticable to offer for sale or to
enforce contracts made by you for the sale of the Securities agreed to be sold
hereunder by reason of (i) the Company as a whole having sustained a material
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree, (ii) trading in securities of the Company having been suspended by a
state securities administrator or by the Commission, (iii) material governmental
restrictions having been imposed on trading in securities generally (not in
force and effect on the date hereof) or trading on the New York Stock Exchange,
American Stock Exchange, or in the over-the-counter market shall have been
suspended, (iv) a banking moratorium having been declared by federal or New York
State authorities, (v) an outbreak or escalation of hostilities or other
national or international calamity having occurred, (vi) the passage by the
Congress of the United States or by any state legislative body, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is believed likely by you to have a material impact on the
business, financial condition or financial statements of the Company; or (vii)
any material adverse change having occurred, since the respective dates as of
which information is given in the Prospectus, in the condition, financial or
otherwise, of the Company as a whole, whether or not arising in the ordinary
course of business, (viii) David Nicholson ceases to be employed by the Company
in his present capacity; (ix) the Securities are not listed the or on NASDAQ-NMS
or NASDAQ.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11 or in Section 10, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
12. Representations, Warrants and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company (or its officers) and the Underwriter set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of the Representative, the Company, or
any of their officers or directors and will survive delivery of and payment for
the Securities.
13. Notices. All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to you, will be mailed, delivered
or telephoned and confirmed to you at Schneider Securities, Inc. 1120 Lincoln
Street Denver, Colorado 80203 Attn: T.J. O'Rourke, President; to the Company
Attn: Eric Chase, QC Optics, Inc., 154 Middlesex Turnpike, Burlington, MA 01803.
14. Parties in Interest. This Agreement is made solely for the benefit of
the Underwriter(s), and the Company, and their respective controlling persons,
directors and officers, and their respective successors, assigns, executors and
administrators. No other person shall acquire or have any right under or by
virtue of this Agreement.
19
15. Headings. The Section headings in this Agreement have been inserted as a
matter of convenience of reference and are not a part of this Agreement.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflict of law principles.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same
instrument.
If the foregoing correctly sets forth the understanding between the Company
and you, as Representative of the several underwriters, please so indicate in
the space provided below for such purpose, whereupon this letter and your
acceptance shall constitute a binding agreement between us.
Very truly yours,
QC OPTICS, INC.
By:
-----------------------------
(Authorized Officer)
Eric Chase, President
Accepted as of the date first above written:
SCHNEIDER SECURITIES, INC.
As Representative of the several Underwriters
By:
----------------------------
(Authorized Officer)
T.J. O'Rourke, President
20
EXHIBIT A
SCHEDULE I
UNDERWRITERS
Underwriter Common Stock
- ----------- and
Redeemable Warrant
------------------
Schneider Securities, Inc.
-------------
TOTAL
- ----- 950,000
21
QCQC OPTICS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 746934 10 8
THIS
CERTIFIES
that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE $.01 PAR VALUE COMMON STOCK OF
QC OPTICS, INC.
transferable only on the books of the corporation by the holder hereof in person
or by a duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent. This certificate and the shares represented hereby are issued and shall
be held subject to all of the provisions of the Certificate of Incorporation and
By-Laws of the Corporation and all amendments thereto, copies of which are on
file with the Transfer Agent, to all of which the holder of this certificate, by
acceptance hereof, assents.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Corporation.
Dated,
BY BY
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT
BY
AUTHORIZED OFFICER
QC OPTICS, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ____________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minor
Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________ Shares
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation will
full power of substitution in the premises.
Dated _______________________
_______________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate in
every particular, without alteration or
enlargement or any change whatever.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO SUCH
SECURITIES FILED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION, AND
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THE ISSUER MAY REQUIRE AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER HEREOF THAT SUCH REGISTRATION IS
NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED WITH.
VOID AFTER 3:30 P.M., EASTERN TIME, ON . 199
REPRESENTATIVE'S
WARRANT TO PURCHASE
COMMON STOCK AND REDEEMABLE WARRANTS
QC OPTICS, INC.
This is to Certify That, FOR VALUE RECEIVED, Schneider Securities, Inc. (the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from QC Optics, Inc. ("Company"), a Delaware corporation, at any time on or
after______________ , and not later than 3:30 p.m., Eastern Time, on____________
,1997 _______________ shares of Common Stock and ______________ Redeemable
Warrants of the Company ("Securities") exercisable at a purchase price for the
Securities which is 160% of the public offering price ,in the case of the 95,000
shares of Common Stock at $_____ per share and, in the case of the 95,000
Redeemable Warrants at $ per Redeemable Warrant .The number of Securities to be
received upon the exercise of this Warrant and the price to be paid for the
Securities may be adjusted from time to time as hereinafter set forth. The
purchase price of a Security in effect at any time and as adjusted from time to
time is hereinafter sometimes referred to as the "Exercise Price." This Warrant
is or may be one of a series of Warrants identical in form issued by the Company
to purchase an aggregate of 950,000 Shares of Common Stock and 95,000 Redeemable
Warrants or 50,000 Units. The Securities, as adjusted from time to time,
underlying the Warrants are hereinafter sometimes referred to as "Warrant
Securities". The Securities issuable upon the exercise hereof are in all
respects identical to the securities being purchased by the Underwriter for
resale to the public pursuant to the terms and conditions of the Underwriting
Agreement entered into on this date between the Company and Holder, except that
the Exercise Price per share of Common Stock to be acquired upon the exercise of
the Redeemable Warrants issuable to Holder pursuant hereto shall be $ per share.
(a) Exercise of Warrant. Subject to the provisions of Section (g) hereof, this
Warrant may be exercised in whole or in part at anytime or from time to time on
or after ____________ , 1997, but not later than 3:30 p.m., Eastern Time on
___________, 2001, or if _____________, 2001, is a day on which banking
institutions are authorized by law to close, then on the next succeeding day
which shall not be such a day, by presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of shares of Common Stock or Redeemable Warrants, as the
case may be as speficied in such Form, together with all federal and state taxes
applicable upon such exercise. The Company agrees to provide notice to the
Holder that any tender offer is being made for the Securities no later than the
day the Company becomes aware that any tender offer is being made for the
Securities. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the shares
purchasable hereunder along with any additional Redeemable Warrants not
exercised. Upon receipt by the Company of this Warrant at the office of the
Company or at the office of the Company's stock transfer agent, in proper form
for exercise and accompanied by the total Exercise Price, the Holder shall be
deemed to be the holder of record of the Securities issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such Securities shall not then be
actually delivered to the Holder.
(b) Reservation of Securities. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of Securities as shall be required for issuance or
delivery upon exercise of this Warrant. The Company covenants and agrees that,
upon exercise of the Warrants and payment of the Exercise Price therefor, all
Securities and other securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all Securities issuable upon the
exercise of the Warrants to be listed (subject to official notice of issuance)
on all securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on NASDAQ.
(c) Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
(1) If the Securities are listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price of the Common Stock on such exchange on
the last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average of the closing bid and asked prices
for such day on such exchange; or
(2) If the Securities are not so listed or admitted to unlisted trading
privileges, the current value shall be the mean of the last reported bid and
asked prices reported by the National Association of Securities Dealers
Automated Quotation System (or, if not so quoted on NASDAQ or by the National
Quotation Bureau, Inc.) on the last business day prior to the date of the
exercise of this Warrant; or
(3) If the Securities are not so listed or admitted to unlisted trading
privileges and bid and asked prices are not so reported, the current value shall
be an amount, not less than book value, determined in such reasonable manner as
may be prescribed by the Board of Directors of the Company, such determination
to be final and binding on the Holder.
(d) Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable,
without expense, at the option of the Holder, upon presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, for
other Warrants of different denominations entitling the Holder thereof to
purchase (under the same terms and conditions as provided by this Warrant) in
the aggregate the same number of Securities purchasable hereunder. This Warrant
may not be sold, transferred, assigned, or hypothecated until after one year
from the effective date of the registration statement except that it may be (i)
assigned in whole or in part to the officers of the "Underwriter(s)", and
(ii)transferred to any successor to the business of the "Underwriter(s)." Any
such assignment shall be made by surrender of this Warrant to the Company, or at
the office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and with funds sufficient to pay any transfer tax;
whereupon the Company shall, without charge, execute and deliver a new Warrant
in the name of the assignee named in-such instrument of assignment, and this
Warrant shall promptly be canceled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
office of the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants issued in substitution for or
replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
2
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not the Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
(e) Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) Notices to Warrant Holders. So long as this Warrant shall be outstanding
and unexercised (i) if the Company shall pay any dividend exclusive of a cash
dividend, or make any distribution upon the Common Stock, or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any shares of stock of any class or any other rights, or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then,
in any such case, the Company shall cause to be delivered to the Holder, at
least ten (10) days prior to the date specified in (x) or (y) below, as the case
may be, a notice containing a brief description of the proposed action and
stating the date on which (x) a record is to be taken for the purpose of such
dividend, distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding up
is to take place and the date, if any, is to be fixed, as of which the holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for equivalent securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
(g) Adjustment of Exercise Price and Number of Shares of Common Stock
Deliverable.
(A)(i) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof, issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such issuance, subdivision or combination being herein call a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Exercise Price of the Common Stock issuable upon the exercise of the Warrant
and the Redeemable Warrant in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of a cent to the
nearest cent) determined by dividing (i) the sum of (a) the total number of
shares of Common Stock outstanding immediately prior to such Change of Shares,
multiplied by the Exercise Price in effect immediately prior to such Change of
Shares, and (b) the consideration, if any, received by the Company upon such
issuance, subdivision or combination by (ii) the total number of shares of
Common Stock outstanding immediately after such Change of Shares; provided,
however, that in no event shall the Exercise Price be adjusted pursuant to this
computation to an amount in excess of the Exercise Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section (g) the following provisions shall be applicable:
(I) Shares of Common Stock issuable by way of dividend or other distribution
on any capital stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(II) The number of shares of Common Stock at any one time outstanding shall
not be deemed to include the number of shares issuable (subject to readjustment
upon the actual issuance thereof) upon the exercise of options, rights or
warrants and upon the conversion or exchange of convertible or exchangeable
securities.
(ii) Upon each adjustment of the Exercise Price pursuant to this Section
(g), the number of shares of Common Stock and Redeemable Warrants purchasable
upon the exercise of each Warrant shall be the number derived by
3
multiplying the number of shares of Common Stock and Redeemable Warrants
purchasable immediately prior to such adjustment by the Exercise Price in effect
prior to such adjustment and dividing the product so obtained by the applicable
adjusted Exercise Price.
(B) In case of any reclassification or change of outstanding Securities
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or in case of any consolidation or merger of
the Company with or into another corporation other than a merger with a
"Subsidiary" (which shall mean any corporation or corporations, as the case may
be, of which capital stock having ordinary power to elect a majority of the
Board of Directors of such corporation (regardless of whether or not at the time
capital stock of any other class or classes of such corporation shall have or
may have voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned by the Company or by one or more Subsidiaries)
or by the Company and one or more Subsidiaries in which merger the Company is
the continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of subdivision or combination) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the Holder of each Warrant then outstanding shall have the right
thereafter to receive on exercise of such Warrant the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the principal office of the Company a statement signed by its
President or a Vice President and by its Treasurer or an Assistant Treasurer or
its Secretary or an Assistant Secretary evidencing such provision. Such
provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
(g)(A). The above provisions of this Section (g)(B) shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(C) Irrespective of any adjustments or changes in the Exercise Price or the
number of Securities purchasable upon exercise of the Warrants, the Warrant
Certificates theretofore and thereafter issued shall, unless the Company shall
exercise its option to issue new Warrant Certificates pursuant hereto, continue
to express the Exercise Price per share and the number of shares purchasable
thereunder as the Exercise Price per share and the number of shares purchasable
thereunder as expressed in the Warrant Certificates when the same were
originally issued.
(D) After each adjustment of the Exercise Price pursuant to this Section
(g), the Company will promptly prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so
adjusted, (ii) the number of Securities purchasable upon exercise of each
Warrant, after such adjustment, and (iii' a brief statement of the facts
accounting for such adjustment. The Company will promptly file such certificate
in the Company's minute books and cause a brief summary thereof to be sent by
ordinary first class mail to each Holder at his last address as it shall appear
on the registry books of the Company. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an officer
or the Secretary or an Assistant Secretary of the Company that such notice has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(E) No adjustment of the Exercise Price shall be made as a result of or in
connection with the issuance or sale of Securities if the amount of said
adjustment shall be less than $.10, provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried
4
forward, to at least $.10. In addition, Holders shall not be entitled to cash
dividends paid by the Company prior to the exercise of any Warrant or Warrants
held by them.
(F) In the event that the Company shall at any time prior to the exercise of
all Warrants declare a dividend consisting solely of shares of Common Stock or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, the Holders of the unexercised Warrants shall thereafter be
entitled, in addition to the Securities or other securities and property
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same property, assets, rights, evidences of indebtedness, that
they would have been entitled to receive at the time of such dividend or
distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Section (g).
(h) Piggyback Registration. If, at any time commencing one year from the
effective date of the registration statement and expiring four (4) years
thereafter, the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Act") (other than in connection with a
merger or pursuant to Form S-8, S-4 or other comparable registration statement)
it will give written notice by registered mail, at least thirty (30) days prior
to the filing of each such registration statement, to the Holders and to all
other Holders of the Warrants and/or the Warrant Securities of its intention to
do so. If the Holder or other Holders of the Warrants and/or Warrant Securities
notify the Company within twenty (20) days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford each of the Underwriter and such Holders of
the Warrants and/or Warrant Securities the opportunity to have any such Warrant
Securities registered under such registration statement.
Notwithstanding the provisions of this Section, the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
(i) Demand Registration.
(1) At any time commencing one year from the effective date of the registration
statement and expiring four (4) years thereafter, the Holders of the Warrants
and/or Warrant Securities representing a "Majority" (as hereinafter defined) of
such securities (assuming the exercise of all of the Warrants) shall have the
right (which right is in addition to the registration rights under Section (i)
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Underwriter and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for nine (9) consecutive months by such Holders
and any other holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.
(2) The Company covenants and agrees to give written notice of any
registration request under this Section (i) by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(3) In addition to the registration rights under this Section (i) at any
time commencing one year after the effective date of the registration statement
and expiring four (4) years thereafter, the Holders of Representative's Warrants
and/or Warrant Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for nine (9) consecutive months by such Holders of its Warrant Securities;
provided, however, that
5
the provisions of Section (i)(2) hereof shall not apply to any such registration
request and registration and all costs incident thereto shall be at the expense
of the Holder or Holders making such request.
(j) Covenants of the Company With Respect to Registration. In connection with
any registration under Section (h) or (i) hereof, the Company covenants and
agrees as follows:
(i) The Company shall use its best efforts to file a registration statement
within sixty (60) days of receipt of any demand therefor, shall use its best
efforts to have any registration statement declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell Warrant Securities
such number of prospectuses as shall reasonably be requested.
(ii) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections (h), (i) and (j) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. If the
Company shall fail to comply with the provisions of Section (j)(i), the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), extend the Exercise Period by such number of days as shall equal the
delay caused by the Company's failure.
(iii) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as are reasonably requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process to qualify as a foreign corporation to do business under the laws of any
such jurisdiction.
(iv) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from
and against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter contained in Section 7 of the
Underwriting Agreement relating to the offering.
(v) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent with the
same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriter has agreed to indemnify the Company.
(vi) The Holder(s) may exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(vii)The Company shall not permit the inclusion of any securities other than
the Warrant Securities to be included in any registration statement filed
pursuant to Section (i) hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section (i) hereof, other than a secondary offering of equity
securities of the Company, without the prior written consent of the Holders of
the
6
Warrants and Warrant Securities representing a Majority of such securities
(assuming an exercise of all the Warrants underlying the Warrants).
(viii) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (x) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (y) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(ix) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
(x) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD") or an Exchange. Such investigation shall include access
to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder or
underwriter shall reasonably request.
(xi) The Company shall enter into an underwriting agreement with the
managing underwriters, which may be the Underwriter. Such agreement shall be
satisfactory in form and substance to the Company, and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter; provided however, that no Holder
shall be required to make any representations, warranties or covenants or grant
any indemnity to which it shall object in any such underwriting agreement. The
Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Warrant Securities and may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(xii) For purposes of this Agreement, the term " Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
(50%) of the then outstanding Warrants and Warrant Securities that (i) are not
held by the Company, an affiliate, officer, creditor, employee or agent thereof
or any of their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith or (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under the
Act.
(k) Conditions of Company's Obligations. The Company's obligation under Section
j hereof shall be conditioned as to each such public offering, upon a timely
receipt by the Company in writing of:
7
(A) Information as to the terms of such public offering furnished by or on
behalf of the Holders making a public distribution of their Warrant Securities;
and
(B) Such other information as the Company may reasonably require from such
Holder, or any underwriter for any of them, for inclusion in such registration
statement or offering statement or post-effective amendment.
(C) An agreement by the Holder to sell his Warrants and Warrant Securities
on the basis provided in the Underwriting Agreement.
(1) Continuing Effect of Agreement. The Company's agreements with respect to
the Warrant Securities in this Warrant will continue in effect regardless of the
exercise or surrender of this Warrant.
(m) Notices. Any notices or certificates by the Company to the Holder and by
the Holder to the Company shall be deemed delivered if in writing and delivered
personally or sent by certified mail, to the Holder, addressed to him or sent
to, Schneider Securities, Inc. 1120 Lincoln Street, Denver, CO 80203, or, if the
Holder has designated, by notice in writing to the Company, any other address,
to such other address, and, if to the Company, addressed to it at 154 Middlesex
Turnpike, Burlington, MA 01803. The Company may change its address by written
notice to Schneider Securities, Inc.
(n) Limited Transferability. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the effective date of the Registration Statement except to underwriters of the
Offering referred to in the Underwriting Agreement or to individuals who are
either partners or officers of such an underwriter or by will or by operation of
law. The Warrant may be divided or combined, upon request to the Company by the
Warrantholder, into a certificate or certificates evidencing the same aggregate
number of Warrants. The Warrant may not be offered, sold, transferred, pledged
or hypothecated in the absence of any effective registration statement as to
such Warrant filed under the Act, or an exemption from the requirement of such
registration, and compliance with the applicable federal and state securities
laws. The Company may require an opinion of counsel satisfactory to the Company
that such registration is not required and that such laws are complied with. The
Company may treat the registered holder of this Warrant as he or it appears on
the Company's book at any time as the Holder for all purposes. The Company shall
permit the Holder or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants.
(o) Transfer to Comply With the Securities Act of 1933. The Company may
cause the following legend, or one similar thereto, to be set forth on the
Warrants and on each certificate representing Warrant Securities, or any other
security issued or issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for distribution to the public
pursuant to Sections (h) or (i) hereof; unless counsel satisfactory to the
Company is of the opinion as to any such certificate that such legend, or one
similar thereto, is unnecessary:
"The warrants represented by this certificate are restricted securities and
may not be offered for sale, sold or otherwise transferred unless an opinion of
counsel satisfactory to the Company is obtained stating that such offer , sale
or transfer is in compliance wrath state and federal securities law.
(p) Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
conflict of law principles.
(q) Assignability. This Warrant may not be amended except in a writing signed by
each Holder and the Company.
8
(r) Survival of Indemnification Provisions. The indemnification provisions of
this Warrant shall survive until , 2003.
QC Optics, Inc.
By
------------------------
Eric Chase, President
Date:
----------------------
Attest:
- -------------------------------
, Secretary
Schneider Securities, Inc.
-------------------------------
9
PURCHASE FORM
Dated 19
----------------- -----
The undersigned hereby irrevocably elects to exercise the Warrant to the
extent of purchasing ________ shares of Common Stock and Redeemable Warrants and
hereby makes payment of $ _______ in payment of the actual exercise price
thereof. ____________
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
----------------------------------------------------------------------------
(please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
Signature
----------------------------------------------------------------------
ASSIGNMENT FORM
FOR VALUE RECEIVED,
-------------------------------------------------------------
hereby sells, assigns and transfers unto
Name
----------------------------------------------------------------------------
(please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
the right to purchase shares of Common Stock and Redeemable Warrants as
represented by this Warrant to the extent of shares of Common Stock and
Redeemable Warrants as to which such right is exercisable and does hereby
irrevocably constitute and appoint ,____________________________ attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises.
Signature
-----------------------------------------------------------------------
Dated: 19
-------------- -------
10
VOID AFTER
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
QCW QC OPTICS, INC.
NUMBER WARRANTS
THIS CERTIFIES THAT, FOR VALUE RECEIVED CUSIP 746934 11 6
or registered assigns (the ``Registered Holder'') is the owner of the number of
Redeemable Warrants (the ``Warrants'') specified above. One (1) Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one (1) fully paid and nonassessable share of Common
Stock, $.01 par value, of QC Optics, Inc., a Delaware corporation (the
``Company''), at any time between ___________ , 1997 (the ``Initial Warrant
Exercise Date''), and the Expiration Date (as hereinafter defined) upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 as
Warrant Agents, or their successors (collectively, the ``Warrant Agents''),
accompanied by payment of $7.80 subject to adjustment (the ``Purchase Price''),
in lawful money of the United States of America by check made payable to the
Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the ``Warrant Agreement''), dated ________ ,
1996, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term ``Expiration Date'' shall mean 5:00 p.m. (New York time) on
___________ . If such date shall in the State of New York be a holiday or a day
on which the banks are authorized to close, then the Expiration Date shall mean
5:00 p.m. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the ``Act''), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that it will file a registration statement under the
federal securities laws, use its best efforts to cause the same to become
effective, to keep such registration statement current, if required under the
Act, while any of the Warrants are outstanding, and deliver a prospectus which
complies with Section 10(a)(3) of the Act to the Registered Holder exercising
this Warrant. This Warrant shall not be exercisable by a Registered Holder in
any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, commencing _________ ,
1997, this Warrant may be redeemed by the Company, in whole or in part, at $.20
per Warrant on thirty (30) days' prior written notice provided that the market
price of the Common Stock equals or exceeds $10.80 for twenty (20) consecutive
trading days ending within ten (10) days prior to the notice of redemption. On
and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to the Warrants except to receive the $.20 per Warrant upon
surrender of this Warrant Certificate.
Under certain circumstances, Schneider Securities, Inc. shall be entitled
to receive an aggregate of five percent (5%) of the Purchase Price of the
Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to its conflict of
law principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
QC OPTICS, INC.
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
(NEW YORK, NY)
AS WARRANT AGENT
BY:
AUTHORIZED OFFICER
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder irrevocably elects to execute
_________________ Warrants represented by this Warrant Certificate, and to
purchase the shares of Common Stock issuable upon the exercise of such Warrants,
and requests that Certificates for such shares shall be issued in the name of:
_______________________________________________________________________________
(PLEASE TYPE OR PRINT NAME AND ADDRESS)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER)
and be delivered to __________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
_________________________________________________________________ and, if such
number of Warrants shall not be all the Warrants evidenced by this Warrant
Certificate, that a new Warrant Certificate for the balance of such Warrants be
registered in the name of, and delivered to, the Registered Holder at the
address stated below.
Dated: __________________________ __________________________________
(SIGNATURE)
__________________________________
(SIGNATURE)
__________________________________
(ADDRESS)
__________________________________
__________________________________
(TAX IDENTIFICATION NUMBER)
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Transfer Warrants
For Value Received, _____________________ hereby sell, assign and transfer unto:
_______________________________________________________________________________
(PLEASE TYPE OR PRINT NAME AND ADDRESS)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER)
________________________________________________________________ of the Warrants
represented by this Warrant Certificate, and hereby irrevocably constitute and
appoint
__________________________________________________________ Attorney, to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
Dated: ______________________ __________________________________
(SIGNATURE)
__________________________________
(SIGNATURE)
THE SIGNATURE TO THE ASSIGNMENT OF THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAMES WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE
OR MIDWEST STOCK EXCHANGE.
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, December 31, June 30, June 30,
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income (loss) $470,057 $908,219 $(22,863) $1,008,366
======== ======== ========= ========
Weighted average common
shares outstanding 2,150,000 2,150,000 2,150,000 2,150,000
Weighted shares issued from
exercise and assumed exercise
of:
Warrants -- -- -- --
Options 23,174 23,174 23,174 23,174
-------- -------- --------- --------
Weighted average common and
common equivalent shares
outstanding 2,173,174 2,173,174 2,173,174 2,173,174
======== ======== ========= ========
REPORTED EARNINGS PER SHARE:
Net income (loss) per common
and common equivalent share $0.22 $0.42 $0.01 ($0.46)
======== ======== ========= ========
FULLY DILUTED EARNINGS PER SHARE:
Fully diluted EPS is not shown as there is no dilution from Primary EPS.
</TABLE>
Ths exhibit should be reviewed in conjunction with Note 2
of Notes to Financial Statements.
EXHIBIT 23b
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To QC Optics, Inc.:
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/S/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 JUN-30-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 1,430,964 584,525
<SECURITIES> 0 0
<RECEIVABLES> 3,311,706 2,311,191
<ALLOWANCES> 75,000 75,000
<INVENTORY> 2,893,122 2,846,318
<CURRENT-ASSETS> 7,578,795 5,732,455
<PP&E> 476,422 476,422
<DEPRECIATION> 358,243 384,043
<TOTAL-ASSETS> 7,721,910 5,874,770
<CURRENT-LIABILITIES> 5,518,072 3,228,298
<BONDS> 0 500,000
21,500 21,500
0 0
<COMMON> 0 0
<OTHER-SE> 2,182,338 2,124,972
<TOTAL-LIABILITY-AND-EQUITY> 7,721,910 5,874,770
<SALES> 10,373,464 6,782,522
<TOTAL-REVENUES> 10,373,464 6,782,522
<CGS> 4,798,902 3,062,307
<TOTAL-COSTS> 4,798,902 3,062,307
<OTHER-EXPENSES> 4,355,217 4,316,470
<LOSS-PROVISION> 75,000 0
<INTEREST-EXPENSE> 156,345 91,117
<INCOME-PRETAX> 988,000 (687,372)
<INCOME-TAX> 79,781 320,994
<INCOME-CONTINUING> 908,219 (1,008,366)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 908,219 (1,008,366)
<EPS-PRIMARY> 0.42 (0.46)
<EPS-DILUTED> 0.42 (0.46)
</TABLE>
