AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1996
REGISTRATION NO. 333-07683
================================================================================
SECURITIES AND EXCHANGE COMMISSION
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
----------
PRE-EFFECTIVE AMENDMENT NO. 2 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 OCTOBER 21, 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, American Securities Transfer & Trust, Inc. (the "Transfer and
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 Securities Transfer & Trust, Inc.,
Denver, Colorado as 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) $ -- $ -- $ -- $ 1,701,000
======== ========== ========== ===========
</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. The Company's belief that transactions were exempt from registration is
based upon the nature and level of sophistication of the purchasers. 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.
*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. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, IN THE TOWN OF BURLINGTON, COMMONWEALTH OF
MASSACHUSETTS, ON OCTOBER 21, 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. 2. 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, October 21, 1996
ERIC T. CHASE and Chairman of the Board of Directors
(Principal Executive Officer)
/S/ JOHN R. FREEMAN
------------------------ Vice President of Finance and October 21, 1996
JOHN R. FREEMAN Treasurer (Principal Financial and
Principal Accounting Officer)
/S/ CHARLES H. FINE
------------------------ Director October 21, 1996
CHARLES H. FINE
/S/ YUTAKA GOTO
------------------------ Director October 21, 1996
YUTAKA GOTO
/S/ JOHN M. TARRH
------------------------ Director October 21, 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.
*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>
EXHIBIT 4f
WARRANT AGREEMENT
QC Optics, Inc., a Delaware corporation (the "Company"), and American
Securities Transfer & Trust, Inc. ("AST"), 1825 Lawrence Street, Denver,
Colorado, a Colorado corporation (the "Warrant Agent"), agree as follows:
1. PURPOSE. The Company proposes to publicly offer and issue up to
950,000 Redeemable Warrants (the "Warrants"), each Warrant permitting the holder
to purchase one (1) share of the Company's Common Stock, $.01 par value per
share (a "Share").
2. WARRANTS. Each Warrant will entitle the registered holder of a
Warrant (the "Warrant Holder") to purchase from the Company one (1) Share at
$7.80 per Share (the "Exercise Price"). A Warrant Holder may exercise all or any
number of Warrants resulting in the purchase of a whole number of Shares.
3. EXERCISE PERIOD. The Warrants may be exercised at any time during
the period commencing _____________, 1997 and ending at 5:00 p.m., New York time
on __________, 2001 (the "Expiration Date") except as changed by Section 13 of
this Agreement. 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. After the
Expiration Date, any unexercised warrants will be void and all rights of Warrant
Holders shall cease.
4. DETACHABILITY. The Shares and Warrants are immediately separate.
5. REDEMPTION OF WARRANTS.
a. Redemption; Redemption Price. Commencing ___________, 1997,
the Warrants are redeemable 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. "Market
Price" is defined as the closing bid price as quoted on the American Stock
Exchange. If the Company shall determine to redeem less than all of the Warrants
then outstanding, then the Warrant Agent shall determine the Warrants to be
redeemed by such manner or method as it shall deem fair and appropriate, either
by lot or pro-rata.
b. Notice of Redemption. The Company shall give notice to the
Warrant Agent of any redemption in sufficient time so that the Warrant Agent
shall give the Notice of Redemption to all Holders of Warrant Certificates to be
redeemed at least thirty (30) days prior to the date established for such
redemption (the "Redemption Date"). Each Notice of Redemption shall: (a) specify
the Redemption Date and the Redemption Price; (b) state that payment of the
Redemption Price will be made by the Warrant Agent upon presentation and
surrender to the Warrant Agent at its principal office of the Warrant
Certificates representing the Warrants being redeemed; (C) state that
1
the rights to exercise the Warrants shall terminate at 5:00 p.m. New York time,
on the fifth business day preceding the Redemption Date; and (d) if less than
all of the Warrants then outstanding are being redeemed, specify the serial
numbers or portions of the Warrants to be redeemed.
c. Payment of Redemption Price. On or prior to the opening of
business on the Redemption Date, the Company will deposit with the Warrant Agent
cash, or an irrevocable letter of credit issued by a national or state bank and
in form reasonably satisfactory to the Warrant Agent, sufficient in amount to
purchase all of the Warrants stated in the Notice of Redemption to be redeemed.
Payment of the Redemption Price shall be made by the Warrant Agent upon
presentation and surrender of the Warrant Certificates representing such
Warrants to the Warrant Agent at its principal office. If the Notice of
Redemption shall have been duly given and if the Company shall have duly
deposited with the Warrant Agent the cash or irrevocable letter of credit
required by this Section 4c, then any Warrants not exercised by 5:00 p.m., New
York City time, on the Redemption Date shall no longer be deemed to be
outstanding, and all rights with respect to such Warrants shall from and after
such time and date cease and terminate, except only for the right of the Holders
thereof to receive the Redemption Price, without interest.
6. CERTIFICATES. The Warrant Certificates shall be in registered form
only and shall be substantially in the form set forth in Exhibit A attached to
this Agreement. Warrant Certificates shall be signed by, or shall bear the
facsimile signature of, the President or a Vice President of the Company and the
Secretary or an Assistant Secretary of the Company and shall bear a facsimile of
the Company's corporate seal. If any person, whose facsimile signature has been
placed upon any Warrant Certificate as the signature of an officer of the
Company, shall have ceased to be such officer before such Warrant Certificate is
countersigned, issued and delivered, such Warrant Certificate shall be
countersigned, issued and delivered with the same effect as if such person had
not ceased to be such officer. Any Warrant Certificate may be signed by, or made
to bear the facsimile signature of, any person who at the actual date of the
preparation of such Warrant Certificate shall be a proper officer of the Company
to sign such Warrant Certificate even though such person was not such an officer
upon the date of this Agreement.
7. COUNTERSIGNING. Warrant Certificates shall be manually countersigned
by the Warrant Agent and shall not be valid for any purpose unless so
countersigned. The Warrant Agent hereby is authorized to countersign and deliver
to, or in accordance with the instructions of, any Warrant Holder any Warrant
Certificate which is properly issued.
8. REGISTRATION OF TRANSFERS AND EXCHANGES.
a. Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. The Warrant Agent shall from time to time
register the transfer of any outstanding Warrant Certificate upon records
maintained by the Warrant Agent for such purpose upon surrender of such Warrant
Certificate to the Warrant Agent for transfer, accompanied by appropriate
instruments of transfer in form satisfactory to the Company and the Warrant
Agent and duly executed by the Warrant Holder
2
or a duly authorized attorney. Upon any such registration of transfer, a new
Warrant Certificate shall be issued in the name of and to the transferee and the
surrendered Warrant Certificate shall be canceled.
b. With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Warrant Holder thereof or his attorney duly authorized in
writing.
9. EXERCISE OF WARRANTS.
a. Any one Warrant or any multiple of one Warrant evidenced by
any Warrant Certificate may be exercised upon any single occasion on or after
the Exercise Date, and on or before the Expiration Date. A Warrant shall be
exercised by the Warrant Holder by surrendering to the Warrant Agent the Warrant
Certificate evidencing such Warrant with the exercise form on the reverse of
such Warrant Certificate duly completed and executed and delivering to the
Warrant Agent, by good check or bank draft payable to the order of the Company,
the Exercise Price for each Share to be purchased.
b. Upon receipt of a Warrant Certificate with the exercise
form thereon duly executed together with payment in full of the Exercise Price
for the Shares for which Warrants are then being exercised, the Warrant Agent
shall requisition from any transfer agent for the Shares, and upon receipt shall
make delivery of, certificates evidencing the total number of whole Shares for
which Warrants are then being exercised in such names and denominations as are
required for delivery to, or in accordance with the instructions of, the Warrant
Holder. Such certificates for the Shares shall be deemed to be issued, and the
person to whom such Shares are issued of record shall be deemed to have become a
holder of record of such Shares, as of the date of the surrender of such Warrant
Certificate and payment of the Exercise Price, whichever shall last occur,
provided that if the books of the Company with respect to the Shares shall be
closed as of such date the Shares shall be deemed to be issued, and the person
to whom such Shares are issued of record shall be deemed to have become a record
holder of such Shares, as of the date on which such books shall next be open
(whether before, on or after the Expiration Date) but at the Exercise Price,
whichever shall have last occurred, to the Warrant Agent.
c. If less than all the Warrants evidenced by a Warrant
Certificate are exercised upon a single occasion, a new Warrant Certificate for
the balance of the Warrants not so exercised shall be issued and delivered to,
or in accordance with, transfer instructions properly given by the Warrant
Holder until the Expiration Date.
d. All Warrant Certificates surrendered upon exercise of
Warrants shall be canceled.
3
e. Upon the exercise, or conversion of any warrant, the
Warrant Agent shall promptly deposit the payment into an escrow account
established by mutual agreement of the Company and the Warrant Agent at a
federally insured commercial bank. All funds deposited in the escrow account
will be disbursed on a weekly basis to the Company once they have been
determined by the Warrant Agent to be collected funds. Once the funds are
determined to be collected, the Warrant Agent shall cause the share
certificate(s) representing the exercised warrants to be issued.
f. Expenses incurred by AST while acting in the capacity as
Warrant Agent will be paid by the Company. These expenses, including delivery of
exercised share certificate to the shareholder, will be deducted from the
exercise fee submitted prior to distribution of funds to the Company. A detailed
accounting statement relating to the number of shares exercised, names of
registered warrant holder and the net amount of exercised funds remitted will be
given to the Company with the payment of each exercise amount.
g. At the time of exercise of the warrant(s), the transfer fee
is to be paid by the Company.
h. The Company covenants that if any securities to be reserved
for the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post effective amendment, use its best efforts to cause the same to become
effective and use its best efforts to keep such registration statement current
while any of the Warrants are outstanding and deliver a prospectus which
complies with Section 10(a)(3) of the Securities Act of 1933, as amended (the
"Act"), to the Registered Holder exercising the Warrant (except, if in the
opinion of counsel to the Company, such registration is not required under the
federal securities law or if the Company receives a letter from the staff of the
Securities and Exchange Commission stating that it would not take any
enforcement action if such registration is not effected). The Company will use
best efforts to obtain appropriate approvals or registrations under state "blue
sky" securities laws. With respect to any such securities, however, Warrants may
not be exercised by, or shares of Common Stock issued to, any Registered Holder
in any state in which such exercise would be unlawful.
10. TAXES. The Company will pay all taxes attributable to the initial
issuance of Shares upon exercise of Warrants. The Company shall not, however, be
required to pay any tax which may be payable in respect to any transfer involved
in any issue of Warrant Certificates or in the issue of any certificates of
Shares in the name other than that of the Warrant Holder upon the exercise of
any Warrant.
11. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant
Certificate is mutilated, lost, stolen or destroyed, the Company and the Warrant
Agent may, on such terms as to indemnify or otherwise as they may in their
discretion impose (which shall, in the case of a mutilated Warrant Certificate,
include the surrender thereof), and upon receipt of evidence satisfactory to the
Company
4
and the Warrant Agent of such mutilation, loss, theft or destruction, issue a
substitute Warrant Certificate of like denomination and tenor as the Warrant
Certificate so mutilated, lost, stolen or destroyed. Applicants for substitute
Warrant Certificates shall comply with such other reasonable regulations and pay
any reasonable charges as the Company or the Warrant Agent may prescribe.
12. RESERVATION OF SHARES. For the purpose of enabling the Company to
satisfy all obligation to issue Shares upon exercise of Warrants, the Company
will at all times reserve and keep available free from preemptive rights, out of
the aggregate of its authorized but unissued Shares, the full number of Shares
which may be issued upon the exercise of Warrants will upon issue be fully paid
and nonassessable by the Company and free from all taxes, liens, charges and
security interests with respect to the issue thereof.
13. GOVERNMENTAL RESTRICTIONS. If any Shares issuable upon the exercise
of Warrants require registration or approval of any governmental authority, the
Company will endeavor to secure such registration or approval; provided, that in
no event shall such Shares be issued, and the Company shall have the authority
to suspend the exercise of all Warrants, until such registration or approval
shall have been obtained; but all Warrants, the exercise of which is requested
during any such suspension, shall be exercisable at the Exercise Price. If any
such period of suspension continues past the Expiration Date, all Warrants, the
exercise of which have been requested on or prior to the Expiration Date, shall
be exercisable upon the removal of such suspension until the close of business
on the business day immediately following the expiration of such suspension.
14. ADJUSTMENTS. If prior to the exercise of any Warrants the Company
shall have effected one or more stock split-ups, stock dividends or other
increases or reductions of the number of shares of its $.01 par value common
stock outstanding without receiving compensation therefore in money, services or
property, the number of Shares subject to the Warrant granted shall, (I) if a
net increase shall have been effected in the number of outstanding shares of the
Company's shares of common stock, be proportionately increased, and the cash
consideration payable per share shall be proportionately reduced, and, (ii) if a
net reduction shall have been effected in the number of outstanding shares of
the Company's common stock, be proportionately reduced and the cash
consideration payable per share be proportionately increased.
15. NOTICE TO WARRANT HOLDERS. Upon any adjustment as described in
Section 14, the Company within twenty (20) days thereafter shall (I) cause to be
filed with the Warrant Agent a certificate signed by a Company officer setting
forth the details of such adjustment, the method of calculation and the facts
upon which such calculation is based, which certificate shall be conclusive
evidence of the correctness of the matters set forth therein, and (ii) cause
written notice of such adjustments to be given to each Warrant Holder as of the
record date applicable to such adjustment. Also, if the Company proposes to
enter into any reorganization, reclassification, sale of substantially all of
its assets, consolidation, merger, dissolution, liquidation or winding up, the
Company shall give notice of such fact at least twenty (20) days prior to such
action to all Warrant Holders which notice shall set forth such facts as
indicate the effect of such action (to the extent such effect may be known at
the date of such notice) on the Exercise Price and the kind and amount of the
Shares or
5
other securities and property deliverable upon exercise of the Warrants. Without
limiting the obligation of the Company hereunder to provide notice to each
Warrant Holder, failure of the Company to give notice shall not invalidate
corporation action taken by the Company.
16. NO FRACTIONAL WARRANTS OR SHARES. The Company shall not be required
to issue fractions of Warrants upon the reissue of Warrants, any adjustments as
described in Section 14 or otherwise; but the Company in lieu of issuing any
such fractional interest, shall round up to the nearest full Warrant or pay cash
(computed to the nearest cent) for the value of such fractional interest. If the
total Warrants surrendered by exercise would result in the issuance of a
fractional share, the Company shall not be required to issue a fractional share
but rather shall round up the aggregate number of shares issuable to the nearest
full share or pay cash (computed to the nearest cent) for the value of such
fractional share.
17. RIGHTS OF WARRANT HOLDERS. No Warrant Holder, as such, shall have
any rights of a shareholder of the Company, either at law or equity, and the
rights of the Warrant Holders, as such, are limited to those rights expressly
provided in this Agreement or in the Warrant Certificates. The Company and the
Warrant Agent may treat the registered Warrant Holder in respect of any Warrant
Certificate as the absolute owner thereof (notwithstanding any notations of
ownership or writing thereon made by anyone other than the Company or the
Warrant Agent) for all purposes notwithstanding any notice to the contrary.
18. WARRANT AGENT. The Company hereby appoints the Warrant Agent to act
as the agent of the Company and the Warrant Agent hereby accepts such
appointment upon the following terms and conditions by all of which the Company
and every Warrant Holder, by acceptance of his Warrants, shall be bound:
a. Statements contained in this Agreement and in the Warrant
Certificates shall be taken as statements of the Company. The Warrant Agent
assumes no responsibility for the correctness of any of the same except such as
describes the Warrant Agent or for action taken or to be taken by the Warrant
Agent.
b. The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the Company's covenants contained in this
Agreement or in the Warrant Certificates.
c. The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any Warrant
Holder in respect of any action taken, suffered or omitted by it hereunder in
good faith and in accordance with the opinion or the advice of such counsel,
provided the Warrant Agent shall have exercised reasonable care in the selection
and continued employment of such counsel.
6
d. The Warrant Agent shall incur no liability or
responsibility to the Company or to any Warrant Holder for any action taken in
reliance upon any notice, resolution, waiver, consent, order, certificate or
other paper, document or instrument believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
e. The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and all other charges of any kind in nature incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for this Agreement except as a result of the Warrant
Agent's negligence or bad faith.
f. The Warrant Agent shall be under no obligation to institute
any action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more Warrant Holders shall furnish
the Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred in connection with such action, suit or legal
proceeding, but this provision shall not effect the power of the Warrant Agent
to take such action as the Warrant Agent may consider proper, whether with or
without any such security or indemnity. All rights of action under this
Agreement or under any of the Warrants may be enforced by the Warrant Agent
without the possession of any of the Warrant Certificates or the production
thereof at any trial or other proceeding relative thereto, and any such action,
suit or proceeding instituted by the Warrant Agent shall be brought in its name
as Warrant Agent, and any recovery of judgment shall be for the ratable benefit
of the Warrant Holders as their respective rights or interests may appear.
g. The Warrant Agent and any shareholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
19. SUCCESSOR WARRANT AGENT. Any corporation into which the Warrant
Agent may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Warrant Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent, shall be the successor to the Warrant Agent
hereunder without the execution or filing of any paper or any further act of a
party or the parties hereto. In any such event or if the name of the Warrant
Agent is changed, the Warrant Agent or such successor may adopt the
countersignature of the original Warrant Agent and may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent.
7
20. CHANGE OF WARRANT AGENT. The Warrant Agent may resign or be
discharged by the Company from its duties under this Agreement by the Warrant
Agent or the Company, as the case may be, giving notice in writing to the other,
and by giving a date when such resignation or discharge shall take effect, which
notice shall be sent at least thirty (30) days prior to the date so specified.
If the Warrant Agent shall resign, be discharged or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Warrant Agent.
If the Company shall fail to make such appointment within a period of thirty
(30) days after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by any Warrant
Holder or after discharging the Warrant Agent, then any Warrant Holder may apply
to the District Court for Denver County, Colorado, for the appointment of a
successor to the Warrant Agent. Pending appointment of a successor to the
Warrant Agent, either by the Company or by such Court, the duties of the Warrant
Agent shall be carried out by the Company. Any successor Warrant Agent, whether
appointed by the Company or by such Court, shall be a bank or a trust company,
in good standing, organized under the laws of the State of Colorado or of the
United States of America, having its principal office in Denver, Colorado and
having at the time of its appointment as Warrant Agent, a combined capital and
surplus of at least four million dollars. After appointment, the successor
Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed and the former Warrant Agent shall deliver and transfer to
the successor Warrant Agent any property at the time held by it thereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
effecting the delivery or transfer. Failure to give any notice provided for in
this section, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Warrant Agent or the appointment
of the successor Warrant Agent, as the case may be.
21. NOTICES. Any notice or demand authorized by this Agreement to be
given or made by the Warrant Agent or by any Warrant Holder to or on the Company
shall be sufficiently given or made if sent by mail, first class, certified or
registered, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent), as follows:
QC Optics, Inc.
154 Middlesex Turnpike
Burlington, Massachusetts 01803
Any notice or demand authorized by this Agreement to be given or made by any
Warrant Holder or by the Company to or on the Warrant Agent shall be
sufficiently given or made if sent by mail, first class, certified or
registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company), as follows:
American Securities Transfer & Trust, Inc.
1825 Lawrence Street
Denver, Colorado 80202
8
Any distribution, notice or demand required or authorized by this Agreement to
be given or made by the Company or the Warrant Agent to or on the Warrant
Holders shall be sufficiently given or made if sent by mail, first class,
certified or registered, postage prepaid, addressed to the Warrant Holders at
their last known addresses as they shall appear on the registration books for
the Warrant Certificates maintained by the Warrant Agent.
22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent may
from time to time supplement or amend this Agreement without the approval of any
Warrant Holders or the representatives of the underwriters in the Company's
initial public offering in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company and the Warrant Agent
may deem necessary or desirable.
23. SUCCESSORS. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
24. TERMINATION. This Agreement shall terminate at the close of
business on the Expiration Date or such earlier date upon which all Warrants
have been exercised; provided, however, that if exercise of the Warrants is
suspended pursuant to Section 13 and such suspension continues past the
Expiration Date, this Agreement shall terminate at the close of business on the
business day immediately following the expiration of such suspension. The
provisions of Section 18 shall survive such termination.
25. GOVERNING LAW. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Colorado and for all purposes shall be construed in accordance with the laws of
said State.
26. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give any person or corporation other than the Company, the Warrant
Agent and the Warrant Holders any legal or equitable right, remedy or claim
under this Agreement; but this Agreement shall be for the sole and exclusive
benefit of the Company, the Warrant Agent and the Warrant Holders.
27. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of such counterparts shall for all purposes be deemed to be
an original and all such counterparts shall together constitute but one and the
same instrument.
9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year indicated below.
Date:_________________________ QC OPTICS, INC., a Delaware corporation
By:_________________________________
Eric T. Chase, President
SEAL
ATTEST:
- ------------------------------
, Secretary
AMERICAN SECURITIES
TRANSFER & TRUST, INC.
a Colorado corporation
By:_________________________________
Gregory D. Tubbs, Vice President
SEAL
ATTEST:
- ------------------------------
10
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
October 21, 1996
