As filed with the U.S. Securities and Exchange Commission on August 12, 1999
Registration No. 333 - 72173
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 1
ON FORM SB-2
TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SYTRON, INC.
(Name of Small Business Issuer in Its Charter)
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<CAPTION>
<S> <C> <C>
Pennsylvania 3600 22-3200841
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(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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2770 Industrial Lane
Broomfield, Colorado 80020
(303) 469-6100
(Address and telephone number of principal executive offices)
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2770 Industrial Lane
Broomfield, Colorado 80020
(303) 469-6100
(Address of principal place of business or
intended principal place of business)
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Robert B. Howard, President
2770 Industrial Lane
Broomfield Colorado 80020
(303) 469-6100
(Name, address and telephone number of agent for service)
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Copies to:
Andrew J. Goodman, Esq.
Jay J. Jacobson, Esq.
Bresler Goodman & Unterman, LLP
521 Fifth Avenue
New York, New York 10175
(212) 661-2150
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Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Share Price (1) Registration Fee (2)
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<S> <C> <C> <C> <C>
Common Stock,
$0.01 par value 4,658,822 shs. $0.3594 $866,073 $240.77
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 (a). 2,249,045 shares were registered with original
registration statement filed on February 11, 1999, leaving an additional
2,409,777 shares being originally registered with this Amendment No. 1.
(2) Pursuant to Rule 457(g), the registration fee has been calculated at the
average of the bid and asked price as reported on the Over- the-Counter
Bulletin Board as of August 9, 1999, which was $0.3594.
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 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
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Subject to Completion, Dated August 12, 1999
The information in this prospectus is not complete and may be changed. We
may complete or amend this prospectus without notice. These securities may not
be sold until the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Prospectus
SYTRON, INC.
4,658,822 shares of Common Stock
offered by Selling Stockholders
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This offering is being made on behalf of various selling stockholders,
principally Crescent International Limited (whom we call "Crescent"), and not by
Sytron. Crescent, which is offering 2,836,074 Shares out of the total of
4,658,822 Shares being offered, may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended. Any brokers or dealers who
are engaged by Crescent to represent it in making sales of the shares may also
be considered to be underwriters.
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Trading Symbol:
NASD OTC Bulletin Board - SITR
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You Should Consider Carefully The Risk Factors Beginning on Page 5 Of This
Prospectus.
Neither the Securities and Exchange Commission Nor Any State Securities
Commission Has Approved These Securities Or Determined That This Prospectus Is
Accurate Or Complete. Any Representation To The Contrary Is A Criminal Offense.
August 12, 1999.
<PAGE>
PROSPECTUS SUMMARY
The Company
Sytron, Inc. provides security and access control devices, systems and
services intended for commercial, industrial and governmental end-users. We
derive our revenues from the sale of products and services to customers who use
such access control and secure operations for a variety of facilities, including
commercial and industrial buildings, campuses, prisons, airports, and garages
and parking areas. Our main product categories include magnetic and radio
frequency card readers and encoders; security system communication devices, and
local stations; high security portals; integrated facilities management
software; and parking facilities control equipment.
Our business strategy has been:
o to market our products and services through independent sales
representatives and a variety of other distribution channels;
o to develop product and system upgrades and peripheral devices; and
o to continue acquiring smaller independent producers of commercial
security products.
Sytron's principal offices and its manufacturing and assembly facilities
are at 2770 Industrial Lane, Broomfield, Colorado, 80020. Our telephone number
is (303) 469-6100.
The Offering
The offering is made only by selling stockholders. The largest of them is
Crescent. In addition to Crescent, there are 14 other selling stockholders. The
offering consists of an aggregate of 4,658,822 shares of $0.01 par value common
stock of Sytron, Inc. Please see "Crescent Financing" to see how the shares have
been issued or are issuable to Crescent. Please see "Selling Stockholders" to
see how shares have been issued or are issuable to other selling stockholders.
The offering will consist of:
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Shares held by Crescent ......................................... 339,712
Shares to be issued to Crescent as a commitment
fee within 60 days .............................................. 76,019
Shares to be issued to Crescent as a commitment
fee within 6 months ............................................. 73,981
Shares issuable upon exercise of certain warrants held by
Crescent at exercise prices ranging
generally from $0.010 to $3.375 per share ....................... 826,000
Shares issuable to Crescent pursuant
to a Convertible Promissory Note ................................ 1,520,362
Shares held by Werren Holdings Limited .......................... 691,384
Shares held by Springhill Holdings Limited ...................... 554,841
Shares held by other selling stockholders ....................... 253,603
Shares issuable upon exercise of certain
warrants held by various selling
stockholders at exercise prices
ranging generally from $0.625 to $2.50 per share ................ 322,920
We will not receive any proceeds from the sale of these shares by any of
the selling stockholders. If a selling stockholder exercises a warrant to
acquire shares to sell, then we will receive proceeds from the exercise of
warrants. If we do receive any proceeds, we intend to use them for general
working capital.
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Summary Financial Data
The summary financial data presented below should be read in conjunction
with the Consolidated Financial Statements and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", both of which are
included in this Prospectus. Note 15 to the Consolidated Financial Statements
discusses Sytron's ability to continue as a going concern.
Statement of Operations Data
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<CAPTION>
(Unaudited)
Year Ended September 30, Six Months Ended March 31,
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1997 1998 1998 1999
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<S> <C> <C> <C> <C>
Sales $ 4,364,800 $ 5,087,100 $ 2,446,200 $ 3,325,300
Cost of Sales 2,375,100 2,898,900 1,404,000 2,386,200
----------- ----------- ----------- -----------
Gross Profit 1,989,700 2,188,200 1,042,200 939,100
Sales and Marketing 893,400 1,044,400 531,400 374,000
General and Administrative 1,593,900 1,669,100 826,700 542,500
Research and Development 652,500 769,200 330,400 239,900
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Loss from Operations (1,150.100) (1,294,500) (646,300) (217,300)
Interest Expense (859,900) (304,800) (130,400) (123,400)
Other income (expense) (155,300)0 (40,700) (27,200)
Loss on asset disposal 2,100 (1,322,000) (927,700)
Obsolete inventory loss (827,700) (827,700)
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Loss before extraordinary item (2,006,500) (3,904,300) (2,572,800) (367,900)
Discontinued Operations 900 (2,300)
Income from debt release 217,500 5,200
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Net Loss $(2,006,500) $(3,686,800) $(2,571,900) $ (365,000)
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Basic Income (Loss) per share
Before extraordinary item $ (0.61) $ (0.84) $ (0.60) $ (0.05)
Extraordinary item 0.05
Net (Loss) (0.61) (0.79) (0.60) (0.05)
Fully Diluted Income (Loss) per share
Before extraordinary item $ (0.39) $ (0.47) $ (0.60) $ (0.05)
Extraordinary item 0.03
Net (Loss) (0.39) (0.44) (0.60) (0.05)
Balance Sheet Data
(Unaudited)
As of September 30, March 31,
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1997 1998 1999
---- ---- ----
Cash and equivalents $ 99,200 $ 22,800 $ 2,100
Working capital (deficit) (1,371,000) (1,977,400) (1,916,700)
Total Assets 4,723,700 3,537,300 4,110,200
Total Liabilities 3,800,400 4,345,000 4,926,900
Stockholders' Equity 923,300 (807,700) (816,700)
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RISK FACTORS
Before you consider purchasing any common stock offered in this prospectus,
you should carefully consider all of the following risk factors with the rest of
the prospectus. We do not consider this list of risk factors as an exhaustive
list.
Sytron continues to have net losses from its operations
Since Sytron's founding in November 1992, we have generated aggregate
losses through March 31, 1999 of ($12,265,066). We expect to continue to incur
losses during the remainder of the fiscal year ending September 30, 1999. Our
ability to achieve a profitable level of operations will depend in large part on
increasing our revenues by expanding the acceptance of our products and services
in the market, by increasing our capital to support expanded inventories and
receivables, and by reducing costs and expenses of our operations. We can give
no assurance that Sytron will ever achieve profitable operations.
Sytron may not be able to continue as a going concern
Recurring operating losses and a growing working capital deficiency raise
substantial doubt about our ability to continue as a going concern. We urge
prospective investors to review our discussion of our plans both at Note 15 to
the Consolidated Financial Statements and at "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
prospectus.
Sytron will continue to need additional financing
As a result of continuing losses from continuing operations in 1998 and the
first half of our 1999 fiscal year, we had a working capital deficit of (
$2,525,989 ) as of March 31, 1999. We require additional equity or debt
financing to sustain our present operating levels. In the past, we have sold
shares to institutional investors or we have sold shares or issued convertible
promissory notes to Crescent. However, even with the opportunity to sell an
additional convertible promissory note to Crescent, there is no assurance that
adequate financing will be available on terms acceptable to us, or on any terms.
If we are unable to obtain additional financing, our ability to repay our
debts and our ability to maintain our current level of operations will be
materially and adversely affected. In such event, we will be required to reduce
our overall expenditures even further than we already have, including our
research and development activities, and may default on our obligations. For a
more extensive discussion of this topic, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
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Sytron will receive no funding from this offering
The securities we are offering through this prospectus will provide no
equity capital to us, unless Crescent or other selling stockholders exercise the
right to acquire shares under warrants, or we issue shares to Crescent pursuant
to its right to acquire shares under the convertible promissory notes. There can
be no assurance that any of these circumstances will occur.
Sytron has a limited ability for secured borrowing
We will be limited in our ability to obtain future secured loans from
potential lenders because we have already granted security interests in almost
all of our assets, including our inventory to Crescent and our accounts
receivable to other lenders. It is unlikely that we will be able to use our
proprietary technology to secure any loans. See "Certain Transactions."
Sytron has a limited sales force and limited channels of distribution
Our security system products and services are not aimed at consumers, but
are targeted to owners, operators and developers of commercial and institutional
facilities. Thus, we must offer and sell our services and products both to
owners and managers of existing structures and facilities, and to the owners and
designers involved in the development of structures and facilities. We also have
a limited number of sales and marketing employees. In order to cover additional
market areas and to increase our revenues, we will need to expand our marketing
and sales resources. We cannot assure that we will be able to do this,
particularly in light of our present financial resources. The failure to expand
our sales would have a material adverse effect on our business. See "Business --
Marketing."
Sytron faces intense competition in the security systems and services market
The market both for security and for parking systems services and products
is intensely competitive. We currently compete against other regional firms and
nationally represented companies which develop, design and manufacture security
electronics and related products. Since there are no substantial barriers to
enter the market, we believe competition in this market will intensify. Many of
our present competitors have much greater financial, technical, human, and
marketing resources than we do. See "Business -- Competition."
Due to rapid technological change, Sytron's products risk becoming obsolete
The high technology products we offer, such as computer-based security
access systems containing microelectronics, and computer hardware and software,
are subject to rapid and significant technological obsolescence by competitors
who develop more effective and efficient technology. Thus, our future success
will depend in part on our ability to adapt to rapidly changing technologies, to
adjust our services and products to evolving industry standards, and to
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continue to improve the performance, quality and reliability of our services and
products. We must do so not only to meet the demands of the marketplace, but
also to keep pace with competitive service and product offerings. Our failure to
adapt to such changes would have a material adverse effect on our business.
Sytron may have its proprietary rights infringed or misappropriated by others
We regard our technology as our property, and attempt to protect it through
trade secret laws, restrictions on disclosure and other methods. We enter
confidentiality agreements with our employees and contractors, and we try to
control access to and distribution of our documents and proprietary technology.
However, the steps we have taken may not prevent misappropriation or
infringement of our proprietary technology. Thus, we are exposed to the risk
that others may use our technology and processes without redress. We can also
offer no assurance that our technology or processes will not be found to
infringe upon the patents and proprietary technology of others.
Sytron will not be issuing dividends
Sytron has not paid cash dividends on its common stock. We do not
anticipate the payment of cash dividends in the future. That may make our stock
relatively unattractive to investors. We currently intend to retain all of our
earnings, if any, to finance the development and expansion of our business. See
"Dividend Policy."
As president of Private Capital Group, Ltd., Mitchel Feinglas has a potential
conflict of interest with Sytron.
Mitchell Feinglas is the Chair of the Board of Sytron and President of
Private Capital Group, Ltd. (Sometimes we refer to that company as "PCG".) PCG
is both a shareholder and a creditor of Sytron. The shares of PCG are owned by
Peggy Feinglas, the spouse of Mitchel Feinglas. PCG makes Mr. Feinglas' services
available to us through a consulting contract. Mr. Feinglas may have a conflict
of interest with respect to business opportunities presented to him, as he makes
no assurance that such business opportunities will first be offered to Sytron
rather than to PCG. Thus, Mr. Feinglas' responsibilities to PCG may have a
material adverse effect on Sytron. See "Management" and "Certain Transactions."
With a limited trading market for Sytron common stock, activity of only a few
shares may have a wide effect.
As of the date of this prospectus, Sytron common stock is traded on the
"Electronic Bulletin Board" under the symbol "SITR." The Electronic Bulletin
Board is a limited trading market operated by the National Association of
Securities Dealers, Inc. (the "NASD"). As a result, timely and accurate
quotations as to the price of the common stock may not always be available. You
may expect that trading volume will continue to be low in such market.
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<PAGE>
Consequently, the activity of only a few shares may affect the market and may
result in wide swings in price and in volume.
Sytron common stock is regulated by penny stock regulations.
Penny stock restrictions apply to our common stock. The additional burdens
imposed on broker/dealers by such requirements may discourage broker/dealers
from effecting transactions in our common stock. That, in turn, could materially
adversely affect the market price and severely limit liquidity of the common
stock and the ability of purchasers in this offering to sell common stock in the
secondary market.
Sytron will continue to be influenced by its present management.
Sytron's officers and directors hold 26.1% of the common shares issued.
Upon issuance of all of the shares herein registered for warrants presently
exercisable, and upon the exercise by the officers and directors (or by
affiliates of one or more of them) of all of the options and warrants held by
them, the officers and directors would hold 40.5% of all of the then-outstanding
common shares. Consequently, management can continue to exercise influence in
the election of the board of directors and in all matters requiring approval of
the shareholders, including approval of significant corporate transactions. See
"Principal Shareholders."
The market price of Sytron's common stock could be adversely affected by the
exercise of additional warrants and options
Future sales of a substantial number of shares of common stock of Sytron in
the public market could affect the market price of the common stock. This
existence of such options and warrants may make it more difficult for us to
raise capital when necessary and may depress the market price of Sytron's common
stock in any market that may develop for such securities. This could impair our
ability to raise capital through subsequent offerings of securities.
As Sytron continues to issue common stock, there may be an adverse effect on the
market price of Sytron common stock.
During the fiscal year ending September 30, 1998, Sytron issued 2,296,873
shares of common stock. For the six month period ending March 31, 1999, we
issued 949,686 shares. These shares were issued -
o on the conversion of some of our outstanding debt,
o for cash,
o to acquire the net assets of other businesses, and
o for services rendered by employees and by consultants.
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<PAGE>
Issuing common stock for these purposes may make it more difficult for us to
raise capital when necessary. Nonetheless, we intend to continue to issue
unregistered, legended common stock for such purposes to conserve our cash
resources. Such issuances may also depress the market price of Sytron's common
stock in any market that may develop for such securities.
Registering the shares for Crescent and for the selling stockholders may reduce
the market price of Sytron common stock.
The shares included in the registration statement of which this prospectus
forms a part have not previously been registered and available for public sale.
Future sales of significant numbers of shares of common stock in the public
market, especially if such shares are sold while the shares being registered
under this prospectus remain unsold, could have a depressing effect on the
prevailing market price of the common stock. Our agreements with Crescent do not
permit Crescent to exercise its rights to convert the $350,000 convertible
promissory note it holds into Sytron common stock if by reason of such
conversion, Crescent would own more than 4.9% of Sytron's outstanding common
stock. Similarly, Crescent has agreed that it may not exercise the warrant it
holds to acquire 726,000 shares of Sytron common stock for one penny a share if,
by reason of such exercise Crescent would own more than 9.9% of our common
stock. Considering the effect of these contractual limitations and assuming at
the date of this prospectus,
o Crescent exercises its warrant to acquire 337,000 shares of common stock,
o that 76,019 shares being registered for a commitment fee are issued to
Crescent,
o that every other selling stockholder exercises all of its warrants of which
the underlying shares are being registered hereunder, regardless of the
fact that the exercise price for any of the selling stockholder warrants
may be higher than the closing bid per share of stock on July 1, 1999,
there would be a total of 7,922,518 shares of Sytron common stock outstanding.
The shares owned by Crescent and being registered hereunder would represent 9.5%
of the total number of shares of common stock to be then issued and outstanding.
The shares owned, or to be owned by all of the selling stockholders and being
registered hereunder would represent 33% of the total number of shares of common
stock then to be issued and outstanding.
Sytron depends on third-party suppliers
Sytron is dependent on third-party suppliers for the various component
parts of its products. The failure of our current suppliers to supply such
component parts or the absence of readily available alternative sources could
have a material adverse effect on us, including delaying the implementation of
our business plan to achieve profitability. Sytron does not have supply
contracts with any third-party suppliers and purchases components pursuant to
purchase orders placed from time to time. See "Business."
Year 2000 compliance failures by our vendors may affect Sytron operations
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Many existing computer programs use only two digits to identify a year in
the date field. If not corrected, many computer applications could fail or
create erroneous results by, at or after the year 2000. Sytron's critical
internal information systems and programs have been provided by third party
vendors. We have inquired of these vendors and received specific assurances that
systems we use from them are Year 2000 compliant.
All of the systems we have developed for our customers currently use four
digits for identifying the year in dates rather than two digits. Recent
follow-up testing that we have conducted in 1998 and earlier in 1999 has
confirmed that for us. However, our products and services have not always been
Y2K compliant. Even where our products are Y2K compliant, other aspects of a
customer's system (such as the customer's computer and operating system) must
also be Y2K compliant in order to function without damage or interruption. While
we expect that our precautionary measures will reduce or eliminate any
significant impact within Sytron of "Year 2000" issues, there is no assurance
this will be the case. In addition, there is no assurance that "Year 2000"
problems that may be experienced by our customers or suppliers will not have a
negative impact on Sytron.
CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "continue" or other
similar words. These statements discuss future expectations, contain projections
of results of operations or of financial condition or state other
"forward-looking" information. When considering such forward-looking statements,
you should keep in mind the risk factors and other cautionary statements
included in this prospectus. The risk factors noted in the "Risk Factors"
section and other factors noted throughout this prospectus, including certain
risks and uncertainties, could cause our actual results to differ materially
from those contained in any forward-looking statement.
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<PAGE>
CRESCENT FINANCING
Since May of 1998, Crescent has been the primary source of financing for
Sytron. Two transactions have taken place. In May of 1998 (the "May
transaction"), Sytron sold to Crescent for $250,000 in cash, 166,667 shares of
common stock, and a warrant to acquire an additional 100,000 shares of common
stock at a price of $3.375 per share. Rights under the May transaction warrant
expire in May of 2003. Under the May transaction, Sytron had the conditional
right to sell additional shares to Crescent. Sytron also had an obligation to
file a registration statement for all of the shares issued and issuable to
Crescent under the various aspects of the May transaction. Sytron was not able
to meet its obligations. As a result both of that failure, and of the fall in
the price of Sytron's common stock on the market on which that stock is traded,
Sytron was unable to comply with the conditions underlying its right to sell to
Crescent certain additional shares of stock. In the autumn of 1998, Sytron and
Crescent agreed to terminate the May transaction, and to replace it with a
revised financing arrangement (the "January transaction").
The January transaction closed on January 15, 1999. It involves
o the sale to Crescent by Sytron of a convertible promissory note with a face
amount of $350,000 (the "First Note"), and the conditional right to sell to
Crescent a second convertible promissory note in the face amount of
$400,000 (the "Second Note");
o the issuance of 73,045 shares to Crescent as a commitment fee for entering
into the January transaction, and Sytron's agreement to issue an additional
number of shares every six months to Crescent so long as any portion of the
First Note or the Second Note remains unpaid;
o the sale to Crescent of 100,000 shares for an aggregate of $1.00;
o the issuance to Crescent of a warrant (the "Additional Warrant") to
purchase up to 726,000 shares from Sytron for $0.01 per share; and
o the payment by Sytron to Crescent of a note issuance fee of $10,500 in
cash.
The convertible promissory notes are secured by a first lien on Sytron's
inventory. Each note is convertible in $50,000 minimum segments at any time into
Sytron's common stock.
In the January transaction, share price formulas are part of the First
Note, the Additional Warrant, and the commitment fee. These formulas determine
the precise number of Sytron common shares that are required to be issued to
Crescent. Each formula is based on "Market Price". "Market Price" is defined,
for purposes of the January transaction, as the lowest three consecutive trading
day average of bid prices for Sytron's common stock during the thirty trading
days before the date on which Market Price is determined.
The conversion formula in the First Note is the lower of $0.8125 per share
or eighty five (85%) percent of Market Price. Using as an example, Market Price
as determined on July 20, 1999, then if the entire First Note were to be
converted, Sytron would be obligated to issue 1,520,362 shares of its common
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stock. If the entire First Note is converted at any time the Market Price has
risen to more than $0.96 a share, Sytron would be obligated to issue 430,769
shares of its common stock. The fewest number of shares of common stock that
Sytron is obligated to issue on conversion of the First Note is 430,769.
Our ability to sell the Second Note to Crescent is limited by several
important conditions over which we have no control. They are -
o that the average daily trading volume for Sytron common stock equals
or exceeds 20,000 shares per trading day;
o that Crescent shall have converted at least $175,000 of the First Note
to Sytron Common stock;
o that the collateral that Crescent holds to secure our obligations to
Crescent shall be worth at least 150% of the combined outstanding debt
evidenced by the Crescent Notes; and
o that the lowest three consecutive trading day average of bid prices
for Sytron common stock is not less than $1.50 per share.
We have no present expectation that we will be able to sell the Second Note to
Crescent, but if we are able to do so, the terms are substantially similar to
the terms of the First Note.
The precise number of shares Crescent may acquire under the Additional
Warrant is also determined by a formula. This formula is designed to reduce the
number of shares Crescent may acquire as the Market Price of Sytron's common
stock on the effective date of this registration statement increases. If the
Market Price on that effective date is $0.28 per share or lower, then Crescent
may acquire all 726,000 shares for $0.01 per share. But if, for example, the
Market Price on that effective date is $0.38 per share, then Crescent's right to
acquire shares under the Additional Warrant is reduced to 491,228 shares, at a
price of $0.01 per share.
The number of shares issuable each six months as a continuing commitment
fee is also based on Market Price on the date before the commitment fee is
payable. Shares are issuable if there is an unpaid balance under either of the
convertible promissory notes. Five (5%) percent of the unpaid balance of the
convertible promissory notes is divided by the Market Price, and the quotient is
the number of additional shares that Sytron is required to issue. At July 15,
1999, Sytron became obligated to issue an additional 76,019 shares of common
stock as a commitment fee for the six month period starting on that date.
The First Note may not be converted into Sytron common stock if by reason
of such conversion, Crescent would own (beneficially and through Crescent
affiliates) more than 4.9% of the outstanding shares of Sytron common stock. Nor
may the Additional Warrant be exercised to acquire Sytron common stock if, by
reason of such exercise, Crescent would own (beneficially and through Crescent
affiliates) more than 9.9% of the outstanding shares of Sytron common stock.
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As part of the January transaction, Sytron agreed to file an initial
registration statement with the Securities and Exchange Commission (the
"Commission"). This registration statement is being filed to carry out that
obligation. This registration statement covers, from the May transaction, both
the 166,667 shares of common stock issued, and 100,000 shares of common stock
that are issuable if Crescent exercises the May transaction warrant. This
registration statement also covers, from the January transaction, 73,045 shares
issued to Crescent as a commitment fee and an estimated 150,000 additional
shares that may be issued as a commitment fee over the next twelve months, which
include the 76,019 shares of common stock that Sytron is obligated to issue as
of July 15, 1999; 100,000 shares sold to Crescent for $1.00 in the aggregate;
1,520,362 shares which may be issued to Crescent on its conversion of the First
Note at the Market Price, as determined (for the sake of this registration
statement) at July 1, 1999; and 726,000 shares which may be issuable to Crescent
on its exercise of its rights to acquire shares at the lowest agreed price
pursuant to the Additional Warrant. Thus, this registration statement seeks to
register 2,836,074 shares of Sytron common stock on behalf of Crescent.
On January 14th, 1999, the closing price of Sytron's common stock was
$0.3125 per share.
DETERMINATION OF OFFERING PRICE
No offering price has been established by Sytron since it is not offering
any shares for sale.
DILUTION
All shares offered in this registration statement are being offered by
selling stockholders, and no shares are being offered by Sytron. Accordingly,
there is no dilution to the interest of any stockholder by reason of the
offering of Sytron shares in this registration statement.
USE OF PROCEEDS
The shares of common stock being offered hereby are for the account of
selling stockholders. Accordingly, Sytron will not receive any of the proceeds
from the sale of the shares. See "Selling Stockholders."
Sytron will receive, as payment for the purchase of certain of the shares
offered hereby, the exercise price of any warrants exercised by any selling
stockholder. If received, such payments will be added by Sytron to its working
capital. Sytron anticipates the exercise by Crescent of a warrant to acquire
726,000 shares at a price of $0.01 per share for a net payment of $7,260. Since
the exercise price of the remaining warrants held by all Selling Stockholders is
substantially above the current market price of the common stock (which averaged
$0.3125 per share on the NASDAQ Bulletin Board on July 1, 1999), Sytron does not
-13-
<PAGE>
anticipate the present exercise of those warrants. In the unlikely event that
all of the warrants are exercised, the aggregate payments to Sytron from such
exercise would be approximately $736,000.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to shares
offered by the selling stockholders. The number of shares that may actually be
sold by each selling stockholder will be determined by such selling stockholder,
and may depend upon a number of factors, including, among other things, the
market price of the common stock from time to time. The table below sets forth
information as of July 1, 1999. See "Crescent Financing."
<TABLE>
<CAPTION>
Shares of common stock Shares of common stock Shares of common stock
owned before or which offered in the offering owned after offering,
may be acquired during assuming that all shares
offering of common stock are sold.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Issued 339,712 339,712 0
to Crescent
- -------------------------------------------------------------------------------------------------------------------
Common Stock Issuable
to Crescent upon:
- -------------------------------------------------------------------------------------------------------------------
Exercise of Additional 0
Warrant at $0.01 per 726,000 726,000
share
- -------------------------------------------------------------------------------------------------------------------
Exercise of May 0
Transaction Warrant at 100,000 100,000
$3.375 per share
- -------------------------------------------------------------------------------------------------------------------
Conversion of First Note 1,520,362 1,520,362 0
as described in "Crescent
Financing"
- -------------------------------------------------------------------------------------------------------------------
Payment of Commitment
Fee as described in 76,019 76,019 0
issuable within 60 days
- -------------------------------------------------------------------------------------------------------------------
Payment of Commitment
Fee as described in
"Crescent Financing" 73,981 73,981
issuable within next 6
months
- -------------------------------------------------------------------------------------------------------------------
Total Common Stock 2,836,074 2,836,074 0
========= ========= =
Issued or Issuable to
Crescent
- -------------------------------------------------------------------------------------------------------------------
-14-
<PAGE>
- -------------------------------------------------------------------------------------------------------------------
Common Stock Issued
to Other Selling
Stockholders
- -------------------------------------------------------------------------------------------------------------------
Peter H. Allen 2,000 2,000 0
- -------------------------------------------------------------------------------------------------------------------
John R. Boor 19,605 19,605 0
- -------------------------------------------------------------------------------------------------------------------
Berndt Horrolt 59,000 25,000 34,000
- -------------------------------------------------------------------------------------------------------------------
Rolf Loos 68,996 68,996 0
- -------------------------------------------------------------------------------------------------------------------
Mesirov, Gelman, Cramer 6,000 6,000 0
& Jamieson
- -------------------------------------------------------------------------------------------------------------------
Werner Uhlmann 79,710 79,710 0
- -------------------------------------------------------------------------------------------------------------------
Ernst Shuster 20,000 20,000 0
- -------------------------------------------------------------------------------------------------------------------
Barry R Sharer for
Wagner Sharer Murtaugh 15,000 15,000 0
& Petree
- -------------------------------------------------------------------------------------------------------------------
Walter Murr 17,292 17,292 0
- -------------------------------------------------------------------------------------------------------------------
Werren Holdings Limited 1,391,384 691,384 700,000
- -------------------------------------------------------------------------------------------------------------------
Springhill Holdings 554,841 554,841 0
Limited ------- ---------
- -------------------------------------------------------------------------------------------------------------------
Total Common Stock
Issued to Crescent and 5,069,902 4,335,902 734,000
to all other Selling ========= ========== =======
Stockholders
- -------------------------------------------------------------------------------------------------------------------
Common Stock Issuable
to Other Selling
Stockholders upon
Exercise of Warrants,
and Warrant Exercise
Price
- -------------------------------------------------------------------------------------------------------------------
John R. Boor
(Exercisable at $1.625 18,500 18,500 0
per share)
- -------------------------------------------------------------------------------------------------------------------
-15-
<PAGE>
- ------------------------------------------------------------------------------------------------------------------
David Lloyd
(Exercisable at $1.625 2,500 2,500 0
per share)
- ------------------------------------------ ----------------------------- -----------------------------------------
Rolf Loos
(Exercisable at $2.500 6,670 6,670 0
per share)
- ------------------------------------------------------------------------------------------------------------------
Springhill Holdings
Limited
(Exercisable at $0.750 15,000 15,000 0
per share)
- ------------------------------------------------------------------------------------------------------------------
Werner Uhlmann
(Exercisable at $2.500 5,750 5,750 0
per share)
(Exercisable at $1.125 8,000 8,000 0
per share)
(Exercisable at $1.625 23,100 23,100 0
per share)
- ------------------------------------------------------------------------------------------------------------------
Walter Murr
(Exercisable at $2.500 2,300 2,300 0
per share)
- ------------------------------------------------------------------------------------------------------------------
Robert M. Long
(Exercisable at $1.625 3,100 3,100 0
per share)
- ------------------------------------------------------------------------------------------------------------------
John Weldon
(Exercisable at $1.125 78,000 78,000 0
per share)
(Exercisable at $1.375 80,000 80,000 0
per share)
(Exercisable at $0.750 80,000 80,000 0
per share)
- ------------------------------------------------------------------------------------------------------------------
Total Common Stock 0
Issuable to Selling
Stockholders other than 322,920 322,920
======= =======
Crescent upon exercise
of warrants
- ------------------------------------------------------------------------------------------------------------------
Total Common Stock
Issued and Issuable to 5,392,822 4,658,822 734,000
all Selling Stockholders
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Sytron will not receive any of the proceeds from the sales of the common
stock by the Selling Stockholders except to the extent that selling stockholders
exercise warrants prior to selling any common stock. There is no assurance that
any of the warrants will be exercised. Sytron will incur costs of approximately
-16-
<PAGE>
$20,000 in connection with the registration of the common stock underlying the
warrants, and of approximately $148,000 in connection with the preparation,
printing and filing of the registration statement of which this prospectus is a
part.
DIVIDEND POLICY
Sytron has never declared or paid cash dividends on its common stock and
does not anticipate that it will pay dividends in the foreseeable future. Sytron
currently intends to retain any future earnings for the operation and expansion
of Sytron's business. Any determination to pay dividends in the future will be
at the discretion of Sytron's board of directors and will be dependent upon
Sytron's results of operations, restrictions imposed by any applicable law and
other factors deemed relevant by the board of directors. Furthermore, Sytron and
its subsidiaries are restricted from paying dividends under certain of Sytron's
credit and capital lease agreements. See "Risk Factors-No Dividends" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources."
-17-
<PAGE>
CAPITALIZATION
The following table shows Sytron's capitalization as of September 30, 1998
and as of March 31, 1999. This information should be read along with the
Consolidated Financial Statements and related Notes beginning on page F-1 of
this Prospectus.
Unaudited
September 30, March 31,
1998 1999
------------ -------------
Current Liabilities $ 3,650,800 $ 4,507,500
Long-Term Debt 694,200 420,100
------------ ------------
Total Liabilities 4,345,000 4,927,600
Preferred Stock, no par value:
10,000,000 shares authorized,
none issued 0 0
Common Stock, $0.01 par value:
20,000,000 shares authorized
Issued and outstanding:
5,903,537 at September 30, 1998 59,000
6,854,123 at March 31, 1999 68,500
Additional Paid-in Capital 11,303,000 11,648,800
Stock Subscriptions Receivable (269,600) (269,600)
Accumulated Deficit (11,900,100) (12,265,100)
------------ ------------
Total Stockholders' Equity (807,700) (817,400)
------------ ------------
Liabilities and Stockholders' Equity $ 3,537,300 $ 4,110,200
-18-
<PAGE>
SELECTED FINANCIAL DATA
The financial data presented below are taken from the Consolidated
Financial Statements for the years ended September 31, 1998 and 1997 and for the
six months ended March 31, 1999 and 1998 (unaudited). These Consolidated
Financial Statements and the Independent Auditors' Report of Jones, Jensen &
Company, are included in this Prospectus. This selected information should be
read along with the Consolidated Financial Statements and with "Management's
Discussion and Analysis of Financial Condition". Note 15 to the Consolidated
Financial Statements discusses Sytron's plans to continue as a going concern.
Statement of Operations Data
<TABLE>
<CAPTION>
(Unaudited)
Year Ended September 30, Six Months Ended March 31,
------------------------ -------------------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 4,364,800 $ 5,087,100 $ 2,446,200 $ 3,325,300
Cost of Sales 2,375,100 2,898,900 1,404,000 2,386,200
----------- ----------- ----------- -----------
Gross Profit 1,989,700 2,188,200 1,042,200 939,100
Sales and Marketing 893,400 1,044,400 531,400 374,000
General and Administrative 1,593,900 1,669,100 826,700 542,500
Research and Development 652,500 769,200 330,400 239,900
----------- ----------- ----------- -----------
Loss from Operations (1,150.100) (1,294,500) (646,300) (217,300)
Interest Expense (859,900) (304,800) (130,400) (123,400)
Other income (expense) 1,400 (155,300) (40,700) (27,200)
Loss on asset disposal 2,100 (1,322,000) (927,700)
Obsolete inventory loss (827,700) (827,700)
----------- ----------- ----------- -----------
Loss before extraordinary item (2,006,500) (3,904,300) (2,572,800) (367,900)
Discontinued Operations 900 (2,300)
Income from debt release 217,500 5,200
----------- ----------- ----------- -----------
Net Loss $(2,006,500) $(3,686,800) $(2,571,900) $ (365,000)
----------- ----------- ----------- -----------
Basic Income (Loss) per share
Before extraordinary item $ (0.61) $ (0.84) $ (0.60) $ (0.05)
Extraordinary item 0.05
Net (Loss) (0.61) (0.79) (0.60) (0.05)
Fully Diluted Income (Loss) per share
Before extraordinary item $ (0.39) $ (0.47) $ (0.60) $ (0.05)
Extraordinary item 0.03
Net (Loss) (0.39) (0.44) (0.60) (0.05)
-19-
<PAGE>
Balance Sheet Data
(Unaudited)
As at September 30, March 31,
1997 1998 1999
---- ---- ----
Cash and equivalents $ 99,200 $ 22,800 $ 2,100
Working capital (deficit) (1,371,000) (1,977,400) (1,916,700)
Total Assets 4,723,700 3,537,300 4,110,200
Total Liabilities 3,800,400 4,345,000 4,926,900
Stockholders' Equity 923,300 (807,700) (816,700)
-20-
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
This discussion of the financial condition and results of operations of
Sytron should be read along with the Consolidated Financial Statements and
related Notes included later in this Prospectus. The forward-looking statements
made in this Prospectus involve risks and uncertainties. Sytron's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
General
Sytron, Inc. was incorporated under the laws of the Commonwealth of
Pennsylvania on November 9, 1992. Sytron participates in the security and the
parking industries. It designs, develops, assembles, sells and installs security
and parking products, systems, and services. Sytron operates through eight
subsidiaries, two of which are in the developmental stage. From its corporate
headquarters in Broomfield, Colorado, Sytron provides central financial
management, administrative, and marketing services and carries out light
manufacturing and product assembly for its operating subsidiaries.
Sytron is an integrated supplier of electronic products and services, both
to the security industry as a whole, and to owners and operators of government
and commercial facilities. Sytron's revenues come from the sale of its products
and services to end users, security dealers, distributors, integrators, and
original equipment manufacturers (OEMs). Order lead-time and delivery
expectations range significantly, from quick delivery for OEMs and distributors
to long-term projects of up to 18 months with dealers and end users. It is,
therefore, very difficult for Sytron to predict more than a few months in
advance the size and profitability of orders in a given period. Consequently,
the timing of projects in any quarter could have a negative impact on financial
results in that quarter.
In the fall of 1995, Sytron began a program to acquire innovative
technology from other small companies in the security business. Sytron acquired:
o Dorado Systems Corporation in September 1995
o Mundix Control Systems, Inc. in September 1996
o Certain assets of Stanley Parking Systems in November 1996 to enter
the parking industry
o The assets of Campbell Engineering Company (CAMENCO) in March 1997
o The assets of Point Automation, Inc. in September 1997
o The assets of Nautica Technology Group International, Inc. in June 1998
o Law Enforcement Technologic Resources, Inc. in October 1998
o ECSI Construction Services, Inc. (ECSI) in October 1998
Sytron has had losses from operations in every year since 1993. Although
losses continued through the first half of this fiscal year, Sytron has
succeeded in reducing its operating losses in line with its plan. Even though
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<PAGE>
sales growth has been slower than planned, reduced operating losses have been
achieved by tightly controlling expenditures. Some projects using Sytron
products have had slower construction progress than expected; therefore our
products have not been required as soon as we had anticipated.
Note 15 to Sytron's Consolidated Financial Statements discusses Sytron's
ability to continue as a going concern; these statements have been prepared on
the assumption that we would continue as a going concern. Management believes
Sytron would achieve operating profits and positive cash flow if operated for
maximum return in its current form. Prior to the present fiscal year, however,
Sytron had deliberately determined to forego profits in the short term in favor
of engaging in research, development, marketing and acquisition activities to
support its long-range plans. Recently, however, Sytron, while not abandoning
its long-term growth strategy, refocused existing operations towards achieving
profitability and generating cash flow.
For 1999, Sytron is deferring new acquisitions and focusing on achieving a
profit and positive cash flow. In October 1998, management reorganized sales and
marketing to use our resources more effectively. For fiscal 1999, the marketing
focus is on large companies, on systems integrators, and on the correctional
market. At the same time, management has taken steps to reduce operating costs.
These changes include personnel reductions, a renegotiated lease for less space,
rationalization of Sytron's product offerings, and the deferral of some product
development and marketing introduction activities. See "Risk Factors".
RESULTS OF OPERATIONS
1999 Profitability and Liquidity Improvement Program
Since October 1998 Sytron has taken a number of steps to reduce costs and
improve its return on assets, with an objective of generating a profit by the
fourth quarter of fiscal 1999.
Acquisitions made through FY 1998 have largely been integrated, and
operations acquired have been rationalized to remove overlapping costs and
duplicate facilities or assets. Each existing business continues to be evaluated
for its profit-generating potential both in the short term (six months to one
year) and over a longer time frame.
Based on this evaluation, Sytron will defer development of some of its
existing technology where the investment required to develop the technology to
the point of profitability is unavailable; divestitures will be considered when
the required funds are disproportionate to the profit potential, or where the
technology can be used to raise capital to fund more promising business
opportunities. We have decided to delay the development of LETR's fingerprint
technology and of the vehicle tracking and control software acquired from
Nautica Technologies Group International, Inc. We are looking at our options for
these technologies including licensing and possible divestiture to raise capital
to support our core businesses.
-22-
<PAGE>
Even though in 1999, we are focusing on profitability to improve internal
cash flow, growth in existing products is expected, and this will require
outside capital infusions. Further acquisitions remain part of Sytron's long
term strategy, but will be deferred until profitability of existing products is
addressed and until adequate additional long term capital is secured.
Cost Reductions
---------------
Since the start, in October 1998, of the 1999 fiscal year, labor and
overhead costs in all functions and businesses have been examined for and have
generated cost level reductions.
Labor cost for Sytron has been reduced by $18,600 (22%) per month from the
September 1998 level. This savings comes from all functions, and includes
efficiencies as a result of the reorganization of sales and marketing discussed
below, from closing Sytron-owned distribution operation in the United Kingdom,
and from manufacturing efficiencies. Additionally, the completion of the major
development projects of 1998 has allowed reductions in contract engineering
approximating $26,700 per month from average fiscal 1998 levels.
Rent was reduced by $9,000 per month (53%) beginning February 1, 1999, as a
result of consolidating manufacturing operations, contracting the manufacture of
the higher volume products with Pacific Rim sources, and closure of the United
Kingdom offices.
Other activities, such as the combination of Sytron Parking Systems, Inc.
and Sytron Security Products Inc. into Sytron Systems Group, Inc.(SSG), are more
difficult to quantify, but will reduce overhead by reducing the effort to
account for, manage, and market similar product lines.
Sales and Marketing
-------------------
With the completion of the major development efforts of 1998, Sytron is now
focusing its efforts on aggressively marketing its new products.
Dorado Systems completed development of the Universal Reader(TM) series of
proximity card readers. A proximity card reader captures information from a
user's card when the card is placed near the reader. It contrasts with a
magnetic stripe reader which requires the card to be "swiped" through the
reader. Dorado has developed technology for its proximity card readers which
permits that device to capture information from cards designed for use with
readers manufactured by various other enterprises. Sytron is seeking a patent on
this technology. Initial deliveries of this product began in March 1999.
SSG released its new, Microsoft Windows NT(R) compliant, security
management software (Maxx-Net NT(TM)) which is tailored for large commercial
projects such as airports and corporate security programs. Projects recently
installed include the Albany (NY) International Airport, Lincoln (Nebraska)
International Airport, and Papa John's corporate headquarters. Projects in
process include the Anchorage, Alaska International Airport, the St Croix
International Airport in the Virgin Islands, and the corporate security system
-23-
<PAGE>
for Jacor Communications. Now that the Maxx-Net NT(TM) software is fully
released and customer tested, a stronger sales focus will be placed on the large
jobs, such as airports and corporate headquarters, for which the system is
designed.
SSG also completed the development of a correctional facility-specific
product (Maxx-Net 5000(TM)). This product both monitors and controls all
security aspects of a detention or correctional facility, including cells,
doors, elevators, etc. Maxx-Net 5000(TM) may use either modern touch- sensitive
screens with graphic door controls on them, or standard control panels with
switches and lights connected to the system. This product is expected to account
for a major portion of sales in 1999. The $178,000 contract for the Missoula
Correctional Facility is currently in process. Sytron has recently received an
order for $500,000 in additional equipment to the $925,000 system Sytron has
provided for installation in the Sterling, Colorado prison, and letters of
intent for $423,000 for the Multnamoh County Detention Facility in Portland,
Oregon, and $518,000 for the Southwest County Justice Center in Riverside
County, California.
Proximity card readers, Maxx-Net NT(TM) and Maxx-Net 5000(TM), as well as
our parking products, are products which are currently deliverable. Sytron's
1999 focus is on these products.
ECSI Construction Services, Inc., acquired in October 1998, has been
organized to be Sytron's contracting division. ECSI will feature products
manufactured by other Sytron subsidiaries and will offer these products or
systems as part of a turn-key contract to an end user. ECSI, as an integrator
and general contractor, is capable of bidding directly to an end user in major
projects where previously Sytron served only as an equipment vendor. SSG and
Dorado will bid to resellers. At March 31, 1999, ECSI had a backlog of $900,000
in orders to be completed in fiscal 1999.
Six Months Ended March 31, 1999 Compared to 1998
In total, sales for the first half of 1999 grew by $879,100 or 36% over
sales for the comparable six months in 1998.
o ECSI Construction Services, Inc., acquired in October 1998, contributed
$776,700 of the sales increase.
o Security product sales through SSG increased by $318,100 (37%) with the
continuation of the Sterling, Colorado detention facility project which
began in mid 1998, the initial phases of the Anchorage International
Airport project, and the Papa Johns corporate security system.
o Parking systems sales decreased in 1999 from 1998 by $189,300 (30%) due to
the rationalization of this product line and the discontinuation of a DOS
based revenue control system.
o Dorado's reader business, less affected in 1999 by the trend from magnetic
card to proximity readers, increased $29,800 (4%).
o Sytron Security Systems (SSS) declined $56,200 (32%) due to an inadequate
dealer organization and to marketing issues which developed in the latter
part of 1998. Those marketing issues have been aggressively addressed,
including the addition of three new dealers in the first quarter of fiscal
1999. The benefits of these efforts are expected to begin in late fiscal
1999 and in early 2000.
-24-
<PAGE>
Gross profit for the first six months of 1999 decreased by $103,100 (10%)
from the comparable period in 1998 as the gross profit percentage declined to
28% from 45%, due to significant changes in the sales mix. ECSI contracts, as
well as those of SSG discussed above, had lower gross profit percentages than
were obtained on the sale of readers and other standard products. Operating
income from contracts, however, is enhanced by lower operating expenses.
Operating expenses decreased by $532,100 (32%) in the first half of fiscal
1999, due to decreases of $90,500 (27%) in R&D, $157,400 (30%) in sales and
marketing and $284,200 (34%) in administration.
o Development costs were lower in 1999, as the commercial and
correctional versions of the Maxx-Net NT(TM) based security system were
introduced and Dorado's innovative universal proximity reader completed
its final development stages. Heavier development spending for both
product lines had been incurred in 1998.
o Sales and marketing expense decreased in line with the strategy change
of October 1998, to focus on large corporate and correctional market
sales. Dealing with the designers and integrators who control bidding
on these projects requires substantially less sales resources than the
previous dealer oriented strategy.
o Administration expense was significantly reduced by eliminating the
integration costs and additional staff required in 1998 to deal with
newly acquired and planned subsidiaries, as well as by the economies
instituted in October 1998 as discussed above.
Interest expense in the first half of fiscal 1999 decreased $7,000 (5%)
from the comparable period in 1998, despite the higher average debt level. The
expense recognized for Sytron shares issued annually as interest payments to
holders of debt used by Sytron to acquire Dorado varies with the quoted market
value of Sytron's common stock. Market value was lower in the first half of 1999
than it was in 1998.
While 1999 had no write downs of recorded assets, 68% of the 1998 net loss
resulted from these write-downs. In 1998, with the release of new hardware and
software products, and as part of the integration of a series of acquisitions,
Sytron carefully reviewed the anticipated future business contribution from
recorded assets and adjusted them down by $927,700 to estimated realizable
value. The most significant asset write off was of capitalized security
software, particularly versions running under IBM OS/2, which were superseded by
the newly rewritten software running under Microsoft Windows NT(R). Similarly,
inventory valuation was written down by $827,000. These values were affected by
the introduction of the 386 hardware platform, as well as by a more precise
measurement (facilitated by improved operating systems and personnel) of
requirements for inventory held, including inventory obtained in past business
acquisitions.
-25-
<PAGE>
Sytron had Net Operating Loss Carry forwards at March 31, 1999, of
approximately $12,265,000, expiring in 2007 through 2014. However, until there
is net income available to offset these accumulated losses, this asset cannot be
used, and may expire before Sytron is able to take advantage of it.
Fiscal Year Ended September 30, 1998 Compared to 1997
Overall 1998 sales grew by $722,400 or 16.6% over 1997 sales.
o Security product sales through Sytron Systems Group (SSG) increased by
$865,600 (99%) due to two main projects, the Galileo corporate security
project and the Sterling, Colorado detention facility.
o Parking systems sales increased in 1998 over 1997 by $191,800 (24%).
o Dorado's reader business, impacted by the trend from magnetic card to
proximity readers, remained flat at $2 million.
o Sytron Security Systems (SSS) declined $398,500 (50%) due, in part, to the
recognition in 1997 of a very large sale to one customer, Pantex, and in
part in 1998 to an inadequate dealer organization and to marketing issues.
Those marketing issues have been aggressively addressed, including the
addition of three new dealers in the first quarter of fiscal 1999.
o Nautica Security Group, acquired in May 1998, contributed sales of $40,900
in 1998.
Gross profit in 1998 increased by $198,500 (10%) over 1997 as a result of
increased sales volume. The 1998 gross profit percentage declined to 43% from
45.5% with the sales mix change. SSG, focusing on penetrating the correctional
facility and large corporate market, accepted large contracts which both
generated cash to fund focused product enhancements and provided entry into
those segments. These contracts, however, had lower gross profit percentages
than were obtained on the sale of readers and other standard products.
Operating expenses increased by $343,000 (11%) in fiscal 1998, due to
growth of $116,700 (18%) in R&D, $151,100 (17%) in sales and marketing and
$75,100 (5%) in administration.
Development costs were heavy in 1998 as the commercial and correctional
versions of the Maxx-Net NT(TM) based security system were introduced and
Dorado's innovative universal proximity reader completed its final development
stages.
Sales and marketing expense increased with expansion of the sales force to
cover the broader product line and to increase sales volume in the existing
lines. Administration was affected by the integration costs and additional staff
required to deal with newly acquired subsidiaries (2 in 1997 and 3 in 1998);
however, Sytron continued its historical pattern of holding overhead cost
increases to a significantly slower pace than revenue growth.
Interest expense in 1998 decreased $555,000 (65%) from the unusually high
1997 level. Certain debt, incurred to acquire Dorado in 1995, requires annual
payment of a fixed number of Sytron common shares, in lieu of additional cash
interest, as long as the debt remains outstanding.
-26-
<PAGE>
The expense recognized by Sytron for the issuance of those shares varies with
the quoted market value of Sytron's common stock.
58% of the 1998 net loss was due to write downs and write offs of recorded
assets. With the release of new hardware and software products, and as part of
the integration of a series of acquisitions, Sytron carefully reviewed the
anticipated future business contribution from recorded assets and adjusted them
down by $1,321,000 to estimated realizable value. The most significant asset
write off was of capitalized security software, particularly versions running
under OS/2, which were superseded by the newly rewritten software running under
Microsoft Windows NT(R). Similarly, inventory valuation was written down by
$827,000. These values were affected by the introduction of the 386 hardware
platform, as well as by a more precise measurement (facilitated by improved
operating systems and personnel) of requirements for inventory held, including
inventory obtained in past business acquisitions.
In 1998, $217,500 of gain from extinguishing debt was recorded. As funds
are available, Sytron negotiates settlements of delinquent obligations,
sometimes at a discount to the recorded amount payable.
Sytron had Net Operating Loss Carryforwards at September 30, 1998, of
approximately $11,000,000, expiring in 2007 through 2013. However, until there
is net income available to offset, this asset cannot be used, and may expire
before Sytron is able to take advantage of it.
LIQUIDITY AND CAPITAL RESOURCES
Sytron's capital requirements have been primarily for working capital and
for acquisitions. Working capital consists primarily of accounts receivable and
inventories, the need for which increases proportionately as Sytron expands.
Capital equipment expenditures were only $98,900 in FY98 and $157,800 in FY97,
including the value of fixed assets contributed by acquisitions. New equipment
consists primarily of computer equipment. Sytron's policy is to lease rather
than purchase wherever possible.
Since 1995 Sytron's policy has been to acquire companies or product lines
in exchange for stock. These acquisitions required significant capital to
integrate them into existing related operations or to fund planned growth
opportunities. Sytron acquired two subsidiaries in October 1998, three
subsidiaries in FY98, two subsidiaries in FY97, one in FY96, and one in FY95.
The acquired companies have needed cash infusions of $100,000 to $250,000.
Mundix needed cash to fund the debt incurred in standardizing its Maxx-Net(TM)
system and Sytron Security Systems needed cash to replace outdated equipment and
pay off debt. Sytron will also need additional capital to market its existing
products appropriately and to maintain the technological competitiveness of
these products.
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Since Sytron has consistently sustained operating losses, funding for these
losses, for working capital, and for acquisitions has been provided by borrowing
and by sale of Sytron's common stock.
During fiscal year 1998, Sytron made significant strides in improving its
capital position. $567,300 of cash was raised from the sale of unregistered
shares, to two main offshore investors, Werren Holdings Limited and Crescent.
Sytron's receivables-secured, short-term debt was refinanced as $608,000 of two
year notes maturing on January 31, 2000. Net new fiscal 1998 borrowings totaled
$370,300. Sytron also issued 1,268,589 common shares in exchange for consulting
and other services valued at $169,200 and for debt totaling $1,029,300.
Sytron negotiated an agreement in December 1998 with Crescent for up to an
additional $750,000 of financing in the form of convertible notes, based upon
reaching certain benchmarks. In January 1999, Sytron received proceeds of a
$350,000 note it issued under this agreement. (See "Crescent Financing") We are
not assuming for our planning purposes that additional amounts under this
agreement will be available to Sytron in 1999.
In the first 6 months of fiscal 1999, Sytron issued 242,391 common shares
in exchange for services and for interest payments, totaling in the aggregate
$88,289. These shares are in addition to those issued to Crescent and for the
October 1998 acquisitions, both of which are described elsewhere in this
prospectus.
At March 31, 1999, Sytron was obligated to repay outstanding loans of
$1,543,400 (short term and long term), including $413,600 owed to related
parties. The related party loans are now due to various shareholders and accrue
interest at rates varying from 10% to 12% per annum. These loans are
collateralized by certain assets of Sytron. There are no present demands from
any note holder for repayment of the obligation owed by Sytron. Outstanding
notes aggregating $917,000 are also owed to various unaffiliated parties. See
Note 9 to the Consolidated Financial Statements in this prospectus for a
detailed description of these liabilities.
Additional Financing
While Sytron is focusing on the profitability of existing operations to
improve internal cash flow in 1999, additional financing will be required.
Additional growth in existing products is expected and will require working
capital. Any working capital financing is expected to be largely debt, secured
by the accounts receivable and inventory financed. Existing debt, which is now
due, will be retired as part of any substantial financing.
Further acquisitions remain part of Sytron's long term strategy, but will
be deferred until the profitability of existing products is addressed and until
adequate additional long term capital is secured. Long term capital will be
obtained largely from the sale of either common stock or debt convertible into
common stock.
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Sytron will pursue additional financing to continue its growth, but there
is no assurance that additional investment can be obtained. Constant effort is
focused on obtaining small, private investments to fund programs aimed at near
term profitability. Major financing will become more feasible after Sytron has
demonstrated an ability to generate profits.
YEAR 2000 COMPLIANCE
Many computer programs were designed to use only two digits to identify the
year, without considering the impact of the change in the century. If not
corrected, many computer applications could fail or create erroneous results
after December 31, 1999. "Year 2000" issues affect virtually all organizations,
including Sytron. If these issues were not addressed, Sytron's ability to build,
bill and collect for our products could be significantly impaired. These effects
could be caused by compliance problems of our suppliers or customers, as well as
problems within Sytron.
All Sytron products currently use four digits to identify the year. There
was no modification cost since these products were designed initially to use
four digits. We have done specific testing to confirm that these products are
Y2K compliant. We have notified customers of earlier products which may not be
Y2K compliant of the upgrade path available to them. We have also warned
customers that other aspects of their system, notably the operating system and
computer hardware, must also be Y2K compliant for the installation to function
without interruption.
Software used by Sytron to run its business is all provided by third party
vendors. We have been assured by these vendors that our accounting, operating
and manufacturing systems are Y2K compliant; we are in the process of verifying
these assurances with our own testing. The Microsoft Windows NT(R) operating
system and Microsoft Office(R) software has specific modifications, available
without charge, to assure these applications are Y2K compliant. We have obtained
these updates but have not yet applied them throughout Sytron.
Sytron uses many suppliers of components and services. We have received
assurances from our critical suppliers that they have addressed Y2K issues and
believe they are compliant. In many cases there are alternate sources of supply.
The Y2K problem is unique and pervasive. No one can fully predict the
possible effects of the date change on January 1, 2000. We believe that we have
developed an effective program to prevent disruptions to our business and have
complete implementation planned well before year-end 1999. There can be no
assurance, however, that significant impacts will not occur.
INFLATION
Although its operations are influenced by general economic conditions,
Sytron does not believe that inflation has had a material effect on the results
of operations during the fiscal year ended September 30, 1998 or during the six
months ended March 31, 1999. No material impact is anticipated in the remainder
of 1999.
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BUSINESS
The market data and industry forecasts that we refer to in this prospectus
were obtained from publicly available information and industry publications.
While we believe this data and information is materially correct, we have not
verified and cannot guarantee it.
Industry Overview
The U.S. market for nonresidential security products and services has
experienced impressive growth. In a report issued three years ago, Lehman
Brothers estimated a total electronic equipment market of $12 billion in 1995.
The access control segment of that market in 1995 was estimated at $1.1 billion.
The majority of that sum ($600 million) was estimated as spent on traditional
cards, readers, locks, intercoms, and other "door peripherals". The growth rate
for this segment was estimated at 10% per year. A second major segment of the
market ($400 million) is comprised of new access control technologies, such as
biometric photo ID, radio frequency ID, and computer system access. This segment
is seen as growing at an estimated 20% annually. The third and smallest segment
($100 million) is comprised of software driven security access systems which
form the common database integrating subsystems. The growth rate for this
segment was called very rapid.
We think there are several factors behind the growth in the markets we
serve. First, we believe that commercial and industrial companies are investing
in security products and services to confront their security concerns. Second,
insurance against certain risks (or other limits on coverage) is becoming more
difficult to obtain. Third, there is a growing concern about harm to employees
through workplace violence. Fourth, companies are concerned about potential
liability resulting from criminal or terrorist actions.
The Hallcrest Report II forecasts that product sales from the security
products and service industry's estimated 4,800 manufacturers and distributors
will grow to $23.7 billion by the year 2000. The Report further notes that
electronic security products are expected to continue to offer the highest
product growth to the year 2000 including those products based upon intelligent
chip technologies, including access control, video surveillance and alarm
processing. As a group, electronic security products are expected to have annual
growth rates from 11% to 40% depending on the product category. The Hallcrest
Report II: Private Security Trends (1970 to 2000) is a report of a research
project undertaken in 1989 and 1990 under a grant from the National Institute of
Justice, U.S. Department of Justice.
A new development in the industry is that with technology advancements,
security systems may now become integrated. Historically, a facility would
install separate systems to solve single security problems. When additional
needs were identified, additional systems were installed. This produced a number
of systems which were expensive, unwieldy and sometimes ineffective. In the
past, these separate systems needed to be coordinated to provide interaction
between them. Now, with integration, the functions of these several systems can
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be combined into one system using one database and possibly one main machine.
Such integration can lead to reduced initial cost, and lower maintenance costs.
Integration also allows many functions to be dependent or controlled because of
changes in other corresponding functions - for example, turning off utilities
after all personnel have left an area.
Company Overview
We summarized our company for you in Prospectus Summary at page 2. This
will provide more detail about our company, and its products and services.
We formed Sytron in 1992 as a Pennsylvania corporation under the name of
MHB Technology, Inc. We adopted our present name in August, 1995. Beginning at
about that date, we began to grow through a series of acquisitions of smaller,
independent producers or developers of security devices. These smaller companies
make up Sytron operating subsidiaries. The material subsidiaries are Dorado
Systems Corporation ("Dorado"), and Sytron Security Group, Inc.("SSG").
Sytron has partitioned its business into three segments. One segment, under
the leadership of Dorado, will focus its efforts on the sale of our
"off-the-shelf" products. A second segment, our "Systems Group", will be a major
integrator of our products and services, seeking to offer those products and
services to the largest customers we serve. This group will be responsible to
support contractors with whom we work on major projects. Current efforts include
the airports at St. Thomas and St. Croix, Virgin Islands and at Anchorage,
Alaska. Our third business segment will be conducted through ECSI Construction
Services, Inc., an acquisition made in October, 1998. ECSI will itself be a
direct contractor seeking to bid for projects where it can use, as part of its
comprehensive service to an owner or developer, the products and services of the
other parts of Sytron.
Since the fall of 1995, Sytron has grown through a series of acquisitions
of smaller, independent producers or developers of security devices. These
include:
o Dorado
o Sytron Systems Group, Inc. ("SSG")
o Sytron Security Systems, Inc. ("SSS")
o Mundix Control Systems, Inc. ("Mundix")
o Point Automation, Inc. ("Point Automation")
o Nautica Systems Group ("Nautica")
o ECSI
o Law Enforcement Technologic Resources, Inc. ("LETR")
At the end of the calendar year 1995, we adopted a plan to dispose of MHB
Manufacturing, Inc. This wholly owned subsidiary filed a bankruptcy petition in
1996. At the time of the subsidiary's bankruptcy filing, Sytron did not consider
it to be an important contributing subsidiary.
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In September 1996, we completed a private offering raising gross proceeds
of approximately $859,000. Approximately 50% of the proceeds were used for the
organization of Sytron Parking Systems, Inc. (a predecessor of SSG) and the
integration of Dorado into Sytron.
At our assembly manufacturing plant in Broomfield, Colorado, we assemble
and market access control systems, and security products, and we develop and
market a standard software product to integrate disparate electronic security
products. We call that "systems integration". By establishing multiple
security-related core businesses, we believe we have reduced our exposure to any
single business downturn or any single technological risk or competitive pricing
pressure.
Dorado Systems Corporation (Dorado)
Dorado was founded in 1971 and has been a Sytron subsidiary since 1995.
Although the market for magnetic stripe cards has been decreasing in recent
years, we believe Dorado is one of the leading manufacturers both of magnetic
stripe card readers and of accessories for use in card access security systems
in North America. For more than 25 years, Dorado has marketed these products to
original equipment manufacturers (OEMs), such as Honeywell and Westinghouse.
They combine Dorado's products with their own products for a complete system
sale to an end user or dealer network. We believe that the products offered by
Dorado provide a competitive advantage because of Dorado's use of EMPI(R), a
method of data encryption, for its card encoding.
To read a magnetic stripe card, it has to be "swiped" through a reader. The
magnetic stripe card format is a secure encoding and decoding format. It allows
any one of Dorado, the system supplier, the affiliated installing security
dealer, or even the end user's organization to encode cards on that user's
proprietary system. Additionally, Dorado's products support multiple "open"
magnetic stripe card formats for card encoding. This allows any entity chosen by
the customer to encode cards. We believe this encryption format leads to a more
secure magnetic stripe card than those of Dorado's competitors.
Dorado's cards and readers have been selected for use by many high security
facilities such as the Port Authority of New York, and by many international
airports such as Denver, LaGuardia (New York), San Francisco, Detroit, and
Philadelphia. Dorado readers are also in use in several nuclear power stations
such as Boston Edison, Duke Power, New Central Nuclear (Spain) and Zorita
Nuclear Power Plant (Spain). One of Dorado's OEMs was also awarded a contract to
provide EMPI(R) readers for San Onofre Nuclear Power in California.
Historically, the majority of Dorado products have been designed for
interior use. They were not suitable for outdoor use because they were not
designed to withstand the weather. In June 1997, Dorado introduced a
weatherproof version of one of its largest selling reader models. Some existing
users converted all of their standard readers to the weatherproof version. To
date, the weatherproof readers account for approximately 20% of Dorado sales,
some of which are new sales and some of which are replacement sales.
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As the market for magnetic stripe card readers has been steadily
decreasing, Dorado has responded by developing proximity-type readers. A
proximity reader is a step-saving device that makes it possible for information
to be read from a card near the reader rather than by "swiping" the card through
the reader. In 1996, Dorado introduced its EmpiProx TM Reader, a proximity-type
reader utilizing radio frequency (RF) identification. This product is flexible
in that the choices of reading format do not have to be made at the factory.
Dorado's proximity readers use the same outer casing as Dorado's Series 500
magnetic stripe readers. This makes it easy for existing customers to convert to
the convenience of a proximity reader without modifying wall mounts, or dealing
with other aesthetic considerations. Thus, the customer has a virtual "plug and
play" upgrade from magnetic stripe to proximity reader.
Dorado also manufactures fire alarm and security point transmitters and
receivers for sending alarm signals over standard telephone lines to a central
station. We believe this product provides a competitive advantage because it can
work with the equipment of any fire alarm system manufacturer. In January, 1999,
Dorado introduced a new product known as the Fiber Optic 5300 which permits
these units to be connected via fiber optic cable.
Sytron Security Group, Inc. (SSG)
SSG markets the products of Mundix Control Systems, Inc. Mundix was
acquired by our company in September, 1996. Its major product is the
"Maxx-Net(TM)" system. Although Maxx- Net(TM) is over 15 years old, it has had
continuous development to maintain its technical advantage.
The Maxx-Net(TM) system is a PC based facility management system.
Maxx-Net(TM) integrates card access, security and alarm-monitoring, electronic
photo badge identification, closed circuit television, temperature control and
other functions. The system uses a single software system at a central location.
This design allows devices (such as card or biometric readers, fire alarms or
motion detectors) to be connected to a control panel located near each device.
The control panel makes the decisions (such as to open a door when the proper
access code is used or to sound an alarm when the door is forced open). Since
the decision can be made where the problem is occurring, the system can respond
more rapidly to critical situations.
Until 1996, Maxx-Net(TM) was marketed through two of the largest and oldest
security OEMs, Thorn Automated Systems and Cardkey(R) Systems, a competitor of
Sytron. Maxx-Net(TM) has been used by these and other companies as it can be
tailored to the specific requirements of the customer. One project where it is
in use is the Denver International Airport (DIA) where 1,600 Dorado Readers are
connected to the Maxx-Net(TM) System. The DIA project has approximately 800
control panels located throughout the airport. A Local Area Network (LAN) with
more than 15 workstations (PC's) manages the system and displays alarms within
the airport's operations control center.
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Recent Maxx-Net(TM) projects include prisons (Sterling, Colorado and
Southwest County Justice Center, California), airport facilities at Anchorage,
Alaska and St. Croix in the U.S. Virgin Islands, airline facilities (United Air
Lines at Denver International Airport, and Lockheed-Martin in Colorado Springs),
government facilities (New Chelsea Trial Court, and Taoele Army Depot in Utah),
and office buildings in major cities such as Jacor Communications in Denver,
Colorado and Papa John's Corporate Headquarters in Louisville, Ky. Since
January, 1997, SSG has completed installation of access control systems for
Galileo International in ten locations in five countries, including the U.S.,
and has begun installation of similar access control systems for the same
customer in four other locations in two other countries.
Optional features that the Maxx-Net(TM) system may include are:
Access Control
--------------
Access cards grant or exclude access to a certain location. By using
access cards, Maxx-Net(TM) can control the ability of an individual to
enter an area by day of the week and time of day. Maxx-Net(TM) can also
accommodate disabled people by allowing them extra time to pass through a
door.
Electronic Badging
------------------
This feature stores a cardholder's photograph digitally to create high
quality badges and replacement badges. This reduces the cost of badging for
employers. In high security facilities, this feature can identify
cardholders positively by comparing an individual with that person's stored
picture before allowing the individual to enter a secure area.
Multi-Tenant Management
-----------------------
Property managers with multiple tenants within the same complex may
use the Multi-Tenant Management system to permit each tenant to install
workstations (PCs) for adding and deleting access cards and other functions
for that tenant's location, and that location only. A property manager may
let large tenants manage their own systems and cardholders and access
points, thereby reducing the property manager's overhead, system costs and
liabilities.
Guard Touring
-------------
Guard Touring tracks and documents patrolling guards at a facility.
Input devices installed at different sites in a facility can be used by
patrolling guards to log their position. The system can require the guard
to patrol in a specific sequence and the system will automatically monitor
his movement. This type of tracking helps ensure that all areas are
checked. In the event of an incident, the system has a record of the time
and locations checked by each guard.
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Intelligent Device Controller ("IDC")
-------------------------------------
An IDC panel is the connection point for the readers, motion
detectors, door locks, and door contacts. With Maxx-Net(TM) software, the
user can operate the system from the field, as opposed to one central
location. IDC permits a dealer or end user to customize such functions as
counting people passing through a doorway, turning lights on when
illumination level is too low, activating heating and cooling systems in
response to changes in temperature, and carrying out similar functions.
Ordinarily, this would require several separate systems running different
software. Maxx-Net(TM) reduces costs for system, training, personnel,
maintenance, and upgrades for the customer.
IDC-50 Single Door Controller
-----------------------------
In 1998, SSG released a single door version of the Intelligent Device
Control panel. It controls a single door from a location near the door. The
IDC-50 has been designed to be used either within the Maxx-Net(TM) system
or as stand-alone door controller program.
The IDC-50 was designed in part to replace and upgrade existing door
security systems, such as Cardkey(R) systems.
IDC-LAN Connection
------------------
As we see inter, intra and local area networks in many facilities, we
think it essential that SSG develop the means to connect IDC panels
directly to a network so a facility owner may install the panels and use
the existing network to communicate with workstations which are already on
the network. We think this development is useful to universities and other
large campus environments which may have a number of networks in place, and
which would recognize the value in the cost and control arising from an
integration of all aspects of facilities management.
Maxx-Net(TM) - Windows NT(R)
----------------------------
Before the middle of 1998, the Maxx-Net(TM) system used the IBM OS/2
operating system. But, this past year, Sytron adapted Maxx-Net(TM) to the
Microsoft Windows NT(R) operating system.
Smart Cards
-----------
Smart Cards are cards that are programmable. They allow one both to
read information from and to write information to a card. These cards can
be used as both security and debit cards. As debit cards, values are added
and subtracted automatically. In a university, a student can use a single
smart card at the dining hall, at the library both for access and to check
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out books, at the book store to buy books, at vending and copy machines all
over the campus, and at the student's dormitory for secure access. The
parking control market can use smart cards at several parking lots where
the driver's account can be automatically debited according to the time she
was parked. We think this feature would reduce the cost of parking lot
personnel. It would also cut the time needed for the customer to exit the
facility.
SSG also serves the parking industry. Its product line includes both those
items acquired from Stanley and new products, some of which have been designed
internally and others of which are being procured externally, with an exclusive
marketing arrangement held by SSG.
Sytron acquired Stanley Parking Systems from The Stanley Works in November
1996. This gave SSG an existing and established line of products to market under
the "Stanley" name as well as access to Stanley's existing distribution network
of more than 50 companies. Sytron's right to use the "Stanley" name for sales to
Stanley's distribution channels expired in November, 1998.
SSG is presently offering parking products such as gates and ticket
dispensers which have been produced and marketed by Stanley for several years.
Although SSG believes these products are of the highest quality, it is SSG's
plan to upgrade the Stanley-based products to state of the art technology and
integrate the product line with other Sytron products.
SSG offers a line of parking and access control products including revenue
collection and control, barrier gates, ticket dispensers, and vehicle
identification systems. These products can be fully integrated into a
comprehensive facility security system.
Access Control and Security
---------------------------
Integrating the parking system into Maxx-Net(TM), the same equipment
provides card access and security monitoring for both parking lots and for
buildings within the facility. This means people working within the facility
carry only one card for all functions. It also means that management can control
all the facility's functions on one system.
Electronic Ticket Dispensing
----------------------------
The present mechanical ticket dispenser has been modified for integration
with Maxx-Net(TM). We plan to offer a new generation electronic ticket dispenser
in the near future, and are presently evaluating several options. Additional
features will include the ability to encode a magnetic stripe on the cards or to
program a smart card.
CountMaster Lot Capacity Indicator
----------------------------------
In 1998, SSG began offering its new CountMaster system, available as an
optional feature. This system tracks the number of cars entering and leaving a
parking facility, and the residual number of spaces available. When capacity
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has been reached, it displays a "Lot Full" indicator at the entrance. The
CountMaster has been designed to display by area of a parking lot the number of
spaces available. With variable message signs at the entrance, this feature can
direct customers to areas with open spots more efficiently, improve customer
service by helping to avoid frustration and wasted time, and reduce pollution
created by fruitless searches for an available space.
Sytron Security Systems, Inc. (SSS)
SSS manufactures high security entry ways, which are sometimes popularly
called "mantraps." They incorporate a bulletproof enclosure with optional metal
detection and biometric access control. Biometric technology identifies a person
by automatically scanning distinguishing traits, such as finger, hand, voice or
eye patterns. A person seeking to enter a secured facility first enters a
security vestibule where that person's identity is confirmed. Once the
individual is verified, a second door opens and permits the person to enter the
facility. If approval is not given, the doors remain locked, and the system
automatically notifies appropriate security personnel. The technology also has
the ability to scan for weapons or drugs. These entry ways can be controlled
through the Maxx-Net(TM) system, another example of our planned product line
integration.
Mundix Control Systems, Inc.
Since it was acquired in September, 1996, Mundix has been the research and
development center for all projects taken on by the other Sytron subsidiaries.
Developments include waterproof and proximity readers for Dorado, and additional
Maxx-Net(TM) software features for Sytron Systems Group.
Marketing/Sales Strategy
Channels of Distribution:
Our primary channels of distribution include:
o Sale of 75% of the dollar volume of Dorado products to OEMs such as
Honeywell and Westinghouse which resell the product to end users
through the OEM's direct sales offices or authorized dealers.
o Sale of Dorado communications modules to security and fire alarm
dealers which use these products on projects the dealers have sold to
end users. These products are marketed by the dealers under Dorado's
name.
o Sale by SSG of its products and systems primarily to security and
access control dealers which actively resell the products and systems
directly to end users. SSG also contracts directly with end users in
some instances.
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o Sale by ECSI of products and services directly to end users as "turn
key" projects.
Marketing
Most marketing efforts are directed to a relatively small number of
potential purchasers. None of our products or services qualify as "consumer"
products or services.
Dorado markets products to end users and dealers through industry trade
magazines as well as directly to OEMs via mailing campaigns and direct contact.
With a customer base of approximately 25 companies who account for more than 80%
of Dorado sales, the target marketing is very focused for those accounts.
SSG markets its products to a select group of high level integrated systems
contractors. These contractors typically focus on larger projects where
Maxx-Net(TM) is not only capable of meeting the stringent specifications of the
owner or developer, but also is cost effective.
Mundix does no marketing.
ECSI is a contractor, able to bid on large projects which may require many
of the products and systems produced or marketed by one or more of Sytron's
other subsidiaries. ECSI is encouraged to offer, in its bids, one or more of
Sytron's range of products, and to take advantage of being a part of the Sytron
"family" of companies. As part of the family, ECSI can offer enterprises to
which a bid is made both a "turn key" solution and a high level of confidence
that quality and timely delivery deadlines will be met.
In 1999, as part of the Sytron profit improvement program, products
produced or marketed by each of the subsidiaries are sold by that subsidiary to
a target market. Moreover, each subsidiary is being managed to cross-sell other
products within the corporate family to enhance Sytron's role as an integrated
vendor in the industries in which it operates.
As part of our web site, Internet users are able to obtain general or
detailed information on specific products and to leave a request for a sales
call or for more in depth information. In addition, the site supports dealers,
OEMs and manufacturer representatives in processing orders, verifying shipping
dates and logging field problems.
Manufacturing and Assembly
The manufacturing assembly capacity for the entire company has been
consolidated into the Broomfield, Colorado facility. We have become more
efficient by centralizing activities such as purchasing, assembly, quality
control and shipping/receiving . Where components used by the subsidiaries are
common, we purchase in combined quantity, lower the unit cost for each item, and
reduce the space required to store the item.
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As part of the effort to consolidate similar functions, order entry and
customer service are also performed for all of the subsidiaries by a single
department where possible.
Acquisitions
In 1999, we will focus on generating profit and cash flow from existing
operations. We will defer further acquisitions. At such later date as Sytron is
able to consider acquisitions, we think that the fragmented make-up of the
security industry, characterized by a large number of participating companies
with a wide variance in annual revenues, will continue to provide Sytron with
opportunities for growth.
Terms of Recent Acquisitions
In September 1995, we began acquiring small businesses with technological
advantages in the field of electronic security products and services.
On September 29, 1995, we acquired all of the common stock of Dorado
Systems Corporation, a California corporation, from the 1995 Ragsdale Family
Charitable Remainder Trust for $1,083,850. We borrowed the funds for the
acquisition from three sources which subsequently became affiliates: Katonah
West Pension Plan, Springhill Holdings, Ltd. and Werren Holdings, Ltd. A total
of $332,750 remains outstanding from the indebtedness incurred to effect the
transaction. (See "Principal Shareholders" and "Selling Stockholders").
In September 1996, Sytron acquired all of the issued and outstanding
securities of Mundix Control Systems, Inc. for 300,000 unregistered shares of
the Company's common stock. The value of the Company's stock attributed to this
purchase was $1,500,000 ($5.00 per share). Richard Munz was employed by our
company as an officer. (See "Management" and "Principal Shareholders.")
Effective November 22, 1996, we acquired parking equipment assets from The
Stanley Works, a Connecticut corporation, for $25,000 in cash and royalties
payable to Stanley during a two-year period. Through the period ended September
30, 1998, we have accrued royalties payable in cash to Stanley, of $62,220.
In March 1997, we acquired certain assets from Camenco, Inc., a California
corporation which had been founded in 1969. We also assumed an aggregate of
$418,018 in Camenco liabilities. The purchase price for these assets was
established at $816,000, for which we issued 200,000 restricted, unregistered
shares of Sytron's Common stock and paid $10,000. Messrs. Feinglas and Howard
are personal guarantors of Sytron's obligations to Camenco.
In October, 1997, we purchased from Point Automation, Inc. substantially
all of the "Pro Series" product line assets, both tangible and intangible,
including the right to use the "Point Automation" name, in exchange for 25,000
shares of restricted, unregistered common stock, and a commitment to issue up to
an additional 50,000 shares of restricted, unregistered common stock to Gary
Handelin if, over the two year period following the closing of the transaction,
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Sytron would enjoy sales of more than $1,000,000 in Sytron Fire products
directly related to the products acquired within the agreement. We do not
anticipate that any additional shares will be issued under the commitment. In
June 1999, Sytron issued 50,000 shares of unregistered common stock in
settlement of obligations for inventory included in this acquisition.
In May of 1998, a newly formed Sytron subsidiary agreed to acquire the net
assets of Nautica Technology Group International, for 50,000 restricted,
unregistered shares of Sytron common stock valued at $190,000, and up to 550,000
additional restricted, unregistered shares of Sytron common stock in annual
amounts (not exceeding 200,000 shares per year) to be precisely determined over
a period of three years, depending on annual increases in Net Sales (a term
defined in the acquisition agreement) and on annual increases in related
earnings before income taxes. Among the assets acquired in this transaction are
all of the issued and outstanding shares of two wholly-owned Brazilian
subsidiaries, which specifically includes the rights of each of those Brazilian
subsidiary companies to all of its tangible and intangible technology and
intellectual property. Based on results of operations through May 31, 1999, no
additional shares will be issued in connection with this transaction.
In October, 1998, we acquired the outstanding shares of Law Enforcement
Technologic Resources, Inc. ("LETR"). LETR is in the business of biometric
recognition systems. We plan to integrate LETR's products into our access
control and security systems businesses. We issued 440,000 restricted,
unregistered shares of Common stock for LETR at the closing.
In October, 1998, we acquired all of the issued and outstanding stock of
ECSI Construction Services, Inc. Headquartered in California, ECSI operates
primarily along the Pacific Coast and in Nevada, and is in the business of the
commercial installation of security systems. Sytron issued 100,000 restricted,
unregistered shares of common stock for ECSI at the closing of the transaction.
Jim Power received 36,000 of these shares, while the balance went to other
principals at ECSI. ECSI will operate as a subsidiary of the company, and, with
its capability to carry out construction projects, presents the opportunity for
the vertical integration of our products and services.
Employees
We presently have 46 full-time employees functioning in the capacities of
management (4), manufacturing, purchasing and production (26), administration
(5), engineering (4) and sales, marketing and customer service (7). The number
of people employed will vary from time to time depending upon production levels.
From time to time and on an "as needed" basis, we will also employ additional
persons on a part or full time basis. None of our employees are covered by a
collective bargaining agreement. Management believes that its relationship with
its employees is excellent.
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Insurance
Sytron maintains casualty and liability insurance policies on its property,
including business interruption, property in transit and other coverages. We
also have an errors and omissions policy for our products. Sytron has been
approved for bonding on specific jobs.
Competition
Management believes that the security industry is fragmented and that there
is no one or group of companies with major market share having control of the
future of the industry. Right now, the market for our services and products is
changing rapidly. As a result, our products and our services may undergo
substantial changes as we react to competition. We think the principal
competitive factors in these markets are name recognition, performance, ease of
use and functionality of products.
Property
Our principal place of business is located at 2770 Industrial Lane,
Broomfield, Colorado. It consists of approximately 17,000 square feet of
executive offices and manufacturing and warehouse space. The applicable lease
agreement requires monthly lease payments of $8,094 and is effective until
December 31, 2002, at which time we intend to exercise an option to renew for an
additional five year term. Management believes that this space will be
sufficient to meet our needs in the immediate future.
ECSI leases approximately 1,460 square feet of space at 20610 Manhattan
Place, Torrance, California for under $1100 per month.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 (together with all
amendments, exhibits and schedules, the "registration statement") under the
Securities Act with the Commission with respect to the shares of common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to Sytron, please refer to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each such instance, please
refer to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. As a result of this offering, Sytron will become subject to the
information requirements of the Exchange Act, and in accordance therewith will
file reports, proxy statements and other information with the Commission. The
registration statement, as well as all periodic reports and other information to
be filed by the Company pursuant to the Exchange Act, may be inspected without
charge and copied upon payment of fees prescribed by the Commission at the
public reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, NW, Washington, DC 20549, and at the Commission's regional offices
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located at Seven World Trade Center, 7th Floor, New York, New York 10048 and
1801 California Street, Suite 4800, Denver, Colorado 80202-2648. The Commission
maintains a worldwide web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
We intend to furnish our stockholders with annual reports containing
consolidated audited financial statements which have been certified by our
independent public accountant, and quarterly reports containing unaudited
summary consolidated financial information for each of the first three quarters
of each fiscal year.
LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any legal
proceedings which it considers material, and is not aware of any threatened
litigation that could have a material adverse effect on the Company's business,
financial condition or results of operations.
HID Corporation of Irvine, California filed suit in January, 1998 in the
United States District Court for the District of Colorado claiming that Dorado's
Universal Reader(TM) infringes two HID patents because the reader is capable of
reading HID access control cards. While HID seeks damages and injunctive relief
in its Complaint, it recently withdrew its motion for preliminary injunction
after Sytron presented evidence that the Universal Reader(TM) does not infringe
the subject patents. HID has not itemized the money damages it is seeking in the
case. No trial date has been set, but discovery is being conducted by both HID
and by the Company. Management believes that the Dorado product does not
infringe either of the HID patents, and is vigorously defending the action. In
addition, Sytron has brought counterclaims against HID asking the Court to
declare the patents invalid and not infringed and requesting damages for HID's
misrepresentations to Sytron's customers regarding the Universal Reader(TM).
Camenco, Inc. is seeking to enforce an arbitrator's award against Sytron
Security Systems, Inc. arising from the transaction by which the Sytron
subsidiary purchased substantially all of Camenco's business assets. The
arbitrator's award has been converted into a judgment against the Sytron
subsidiary. The maximum estimated exposure would involve a payment by the Sytron
subsidiary of $173,500 (including $8,500 in attorneys fees), in exchange for
which Camenco would be required to return 160,000 shares of Sytron common stock
which Camenco received in the 1997 purchase transaction.
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MANAGEMENT
Directors, Executive Officers and Senior Management
Biographical Information of Directors and Executive Officers
The following table sets forth certain information with respect to each of
the directors and executive officers, and a member of management, of the
Company.
<TABLE>
<CAPTION>
Nominee Age Company Experience
- ------- --- ------- ----------
Position
--------
<S> <C> <C> <C>
Mitchel A. 50 Director, Mr. Feinglas has served as President since 1993 of
Feinglas August 1993 PCG, a financial consulting organization which
advises Sytron on financial and equity formation
matters. (See, "Certain Transactions.") From
August, 1993 to July, 1999, he served as Chief
Executive Officer of Sytron. Mr. Feinglas served
as Chief Executive Officer and Director of Great
Earth Vitamins, Ltd. from 1991 to 1993. Mr.
Feinglas organized and served as President,
Director, Principal, and Registered Broker of
Jonathan Alan & Co., Inc., a Registered Broker-
Dealer from 1983 to 1990. Mr. Feinglas serves on
the Board of Directors of Create-a-Check
Software, Inc. Mr. Feinglas received his Bachelor
of Arts in Accounting from New York University
in 1971.
Richard E. Munz 67 Secretary, Mr. Munz served as Vice President of Marketing
December for Mundix Control Systems, Inc., from 1992 to
1996 1996. Mr. Munz received Bachelor of Science
degree in engineering from Purdue University in 1954
and a Master's degree in business administration from
the University of Colorado in 1959.
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<PAGE>
Name Age Company Experience
- ---- --- ------- ----------
Position
--------
Robert B. Howard 36 President, Mr. Howard has, since February 1996, been Vice
Treasurer, President of Marketing and Sales of Sytron
Director Security Products, Inc., a subsidiary of the
May 1996 company. Mr. Howard assisted in the
establishment of Sytron's relationship with
Mundix beginning in October 1995. Mr. Howard
served as Sales Manager for the Integrated
Systems Group of Cardkey Systems, Inc. (later
acquired by AMTECH, Inc.) from 1992 to 1995,
and, in that capacity, was responsible for sales,
including both the Denver International Airport
project and security systems for several
correctional facilities. Mr. Howard served as
Project Engineer, Project Manager, Sales and
District Sales Manager for Kidde Automated
Systems (acquired by Thorn EMI during his
employment). Mr. Howard received his Bachelor
of Science from Ohio State University in 1985.
Michael B. 56 Chief Mr. Fitzsimons was Chief Financial Officer for
Fitzsimons Financial several high-tech companies, including FullDeck
Officer and Technologies (software) from 1995 to 1998,
VP, Finance, Sandhill Scientific (medical software and
March 1998 instruments) from 1990 to 1995, Rocky Mountain
Instrument (electro-optical manufacturer) from
1988 to 1990, and Sigma Design (computer hardware
and software) from 1984 to 1988. Additional operating
responsibilities included manufacturing at Sandhill Scientific,
and manufacturing and sales/marketing at Rocky Mountain
Instrument. Mr. Fitzsimons held a series of financial
management positions with Corning Glass Works from 1972 to
1983. He began his career with Price Waterhouse in New
York, holds a Bachelor of Science degree in Business
Administration from LeMoyne College, and is a CPA in New York
and Colorado.
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<PAGE>
Name Age Company Experience
- ---- --- ------- ----------
Position
--------
James W. Power 70 Director, Mr. Power is also President and CEO of ECSI
September Construction Services, Inc., a Sytron subsidiary
1998 operating as a general contractor for commercial
construction. He was also the chairman of the
board from 1996 to 1998 of Infographics, Inc. a
manufacturer of access control software and
hardware. Mr. Power founded Martec Systems,
Inc. and was a principal there from 1991 to 1995,
when it was sold to SAIC of San Diego. He also
acted as vice president and general manager of
Cardkey Systems, Inc. Mr. Power also served on
the board of directors and as treasurer of Citicorp
Credit Services and on the board of National
Semiconductor Corporation. He has also served as
vice president and general manager of TRW Data
Systems, a unit of TRW Inc. Mr. Power served in
the U.S. Air Force where he was trained in
electronics, languages and intelligence gathering.
</TABLE>
All Sytron directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Officers are elected by the board of directors and hold office for one year
terms, or until their death, resignation or removal from office.
There are no family relationships between the persons identified as
executive officers and directors.
At the end of the calendar year 1995, Sytron adopted a plan to dispose of
MHB Manufacturing, Inc. Margins in the business in which it was involved had
become too thin to sustain the enterprise, and Sytron was about to embark on a
new business direction. Accordingly, this wholly owned subsidiary filed a
bankruptcy petition in 1996. At the time this subsidiary filed its bankruptcy
petition, Messrs. Feinglas and Howard were officers and directors of Sytron.
Director Compensation and Stock Options
Members of the board of directors do not currently receive any cash
compensation for serving on the board of directors. Each member does receive an
option to acquire 20,000 shares of common stock through the Sytron's Non
Statutory Option Plan, which option vests at the rate of 5,000 shares per year.
We discuss the plan below.
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Options under the plan have been granted from time to time to members of
the board of directors and to executive and other officers and employees of
Sytron.
Executive Employment Agreements
Robert Howard and PCG have entered into agreements concerning employment
with Sytron, both of which became effective on May 1, 1997. PCG agrees to
provide the services of Mitchel Feinglas to Sytron. Each agreement continues to
January 1, 2000. Each agreement provides that Sytron may not terminate the
services of Mr. Howard or of Mr. Feinglas unless the individual has committed an
act of malfeasance. If Sytron considers an act of the employee or consultant to
be malfeasance, Sytron must give the individual 15 days notice of its intent to
terminate the individual's employment and provide the individual with an
opportunity to explain the act considered to be malfeasance.
The PCG agreement requires that it shall cause Mitchel Feinglas to serve as
a consultant to Sytron for an annual base salary of $104,546, plus an automobile
to be provided by the company. Mr. Feinglas has reduced the time he devotes to
the affairs of Sytron to less than ten (10%) percent of his time. He remains
available for assistance on strategic matters as a consultant and as the
Chairman of Sytron's board of directors.
Mr. Howard's employment agreement provides that he shall serve as President
of Sytron for an annual base salary of $96,000 plus an automobile to be provided
by the company.
1996 Non-Statutory Stock Option Plan
On June 28, 1996, Sytron's board of directors adopted a nonstatutory stock
option plan for employees, officers, directors, consultants and other persons
who, or enterprises which, have assisted Sytron. The plan became effective on
June 28, 1996. No more options will be granted after June 28, 2000, but options
granted prior to that date may extend beyond that date. At a special meeting of
Sytron shareholders on January 8, 1999, we restated, ratified and re-approved
the plan, and authorized an aggregate of three million five hundred thousand
(3,500,000) shares of common stock for its use.
We adopted the plan to attract and to retain people of ability and
initiative, and to offer an incentive for such persons to continue to render
outstanding service to our company. The board of directors considered it in the
best interests of Sytron and its shareholders to provide such able and
industrious people or the enterprises with which they are affiliated the
opportunity to participate in any appreciation in value of our common stock
which may result from their efforts. The plan, through the granting of stock
options, is designed to meet that goal.
The plan is administered by the board of directors or by an option
committee. Shares subject to options have been, and will continue to be, made
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<PAGE>
available from either authorized and unissued shares or previously issued
treasury shares. The Option Committee is authorized to establish rules and
regulations for administration of the plan; to interpret, correct or amend the
plan or any option granted thereunder; and to terminate the plan.
The plan provides for the grant of Nonstatutory Stock Options. The options
may be granted to our employees, including employee directors, to our
non-employee directors, and to others.
The exercise price per share will vary with the market price of the common
stock on the date the option is granted or on April 1 and October 1 dates over a
period of forty-eight (48) months. However, the option committee may determine
to grant an option at not less than 85% of the then-current market price. Any
lower price for an option must be specifically approved by the board of
directors, but, in any event, no option may be granted at less than 75% of the
then-market price. The Option Committee determines the time of exercise and the
term of each option when granted. Each option will expire not more than five (5)
years from the date of its grant unless the optionholder dies while the option
is exercisable. In that case, the option will not expire until one year from the
date of death. The plan permits the payment of the exercise price only in cash.
Options are not transferable, except by the laws of descent and
distribution. Options which for any reason cease to be exercisable shall be
considered terminated. Common stock subject to an expired or terminated option
is again available for grant.
With very limited exceptions, if any change is made in the shares subject
to the plan or to any option granted thereunder (through merger, reorganization,
stock dividend, issuance of subscription rights or similar events), such
adjustments or substitutions will be made in the number of shares and in the
exercise price as the Option Committee, with the approval of the board of
directors, deems equitable to prevent dilution or enlargement of option rights.
The board of directors may amend or terminate the plan in all respects,
except that without the approval of the shareholders, no such amendment or
modification may either increase the number of shares reserved for options
(except as described in the immediately preceding paragraph) or reduce the
exercise price below 75% of the fair market value at the applicable date.
Since the plan was adopted, options have been granted to 99 persons and
enterprises. Those options authorize the purchase of 1,762,511 shares of common
stock. As of June 30, 1999, 180,518 shares of common stock have been issued on
exercise of options, and options to acquire 1,581,993 shares are outstanding.
Under the outstanding options, common stock may be acquired at prices ranging
from $0.469 to $3.625 per share.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual
and long term compensation, paid or accrued, for Sytron's chief executive
officer and for each of the four highest paid other executives (the "Named
Executive Officers") for services in all capacities during the last three fiscal
years:
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
---------------------------------------------- ---------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Comp- Stock Options Compen-
Position Year Salary($) Bonus($) ensation Awards($) sation ($)
- ----------------- ----------- --------------- -------------- ------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mitchel 1998 0 0 106,574 - 497,416 $ 6,484
Feinglas, 1997 0 0 106,574 - 5,505
Director 1996 0 0 58,757 - 5,807
Robert 1998 96,000 0 - 500,549 5,486
Howard, 1997 78,200 0 - 4,875
President and 1996 67,385 0 - 3,656
Director
Richard 1998 21,000 0 0 26,259 0
Munz, 1997 51,500 0 0 0
Secretary 1996 19,462 0 0 0
Michael 1998 35,000 0 14,501 75,000 0
Fitzsimons, 1997 0 0 0 0
Chief 1996 0 0 0 0
Financial
Officer
</TABLE>
No direct salary is paid to Mitchel Feinglas as he is an employee of PCG.
Sytron's contract with PCG. requires that the services of Mitchel Feinglas be
made available as director and requires us to pay PCG. the sums listed in Column
(e). PCG., in its own right, is a lender to Sytron and the holder of certain
options and certain stock. In addition, PCG. holds options to acquire 1,351,355
shares of common stock at a price of $0.750 per share, on account of Mitchel
Feinglas' services.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Sytron's Articles of Incorporation provide that a director shall not be
personally liable to the company or any of its shareholders for monetary damages
for breach of fiduciary duty as a director, except liability for the following:
(a) any breach of the director's duty of loyalty to Sytron or its
shareholders;
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<PAGE>
(b) acts or omissions not in good faith or which involve gross negligence
intentional misconduct or a knowing violation of law;
(c) any transaction from which the director derived an improper personal
benefit, or
(d) any unlawful distribution as set forth in the Pennsylvania Business
Corporation Act.
These provisions may have the effect in certain circumstances of reducing the
likelihood of derivative litigation against directors. While these provisions
may eliminate the right to recover monetary damages from directors in various
circumstances, rights to seek injunctive or other non-monetary relief are not
eliminated.
Under our by-laws, we agree to indemnify our directors to the fullest
extent permitted by law. Our bylaws also permit Sytron, through action of the
board of directors, to indemnify the our officers or employees to the fullest
extent permitted by law.
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 Sytron pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the 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 Sytron of expenses incurred
or paid by a director, officer or controlling person of the company 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, Sytron 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.
PRINCIPAL SHAREHOLDERS
Security Ownership of Directors, Management and Certain Beneficial Owners
The following table sets forth certain information, as of June 30, 1999, as
to the beneficial ownership of Sytron's common stock as of that date by-
o each person known by us to own, beneficially, more than 5% of our common
stock,
o each director,
o each of our executive officers named in the Summary Compensation Table
contained herein, and
o all directors and executive officers of Sytron as a group.
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<TABLE>
<CAPTION>
Name and Address (1) of Amount and Nature Percentage of
Beneficial Stockholder of Beneficial Ownership (2) Shares Outstanding (2)
- ------------------------ --------------------------- ----------------------
<S> <C> <C>
Mitchel A. Feinglas 3,056,711 (3) 29.0%
Robert B. Howard 727,421 (4) 6.9
James W. Power 41,000 (5) .4
Michael B. Fitzsimons 99,944 .9
Richard E. Munz 193,878 (6) 1.8
Werren Holdings, Ltd. 2,098,976 (7) 19.9
8 Queensway House Queen Street
St. Helier, Jersey
Channel Islands JE2 4WD FC
Katonah West Pension Plan 881,375 (8) 8.3
Springhill Holdings, Ltd. 604,041 (9) 5.7
8 Queensway House Queen Street
St. Helier, Jersey
Channel Islands JE2 4WD FC
Crescent International Limited 752,731 (10) 7.1
Greenlight (Switzerland) SA
84, av. Louis-Casai, P.O. Box 161
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/ Maxi Brezzi
All executive officers and
directors as a group 4,118,954 39.0
(five persons)
- ---------------------------------
</TABLE>
(1) The address for each person named is c/o Sytron, Inc., 2770 Industrial
Lane, Broomfield, Colorado 80020, except as otherwise stated.
(2) For purposes hereof, a person or group of persons is deemed to have
"beneficial" ownership of any shares which such person or group of persons
has the right to acquire by option, warrant or otherwise (and without
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regard to the exercise price of any option or warrant) within 60 days of
the date of this prospectus. Except as otherwise noted, Sytron believes
that the persons in the table have sole voting and investment power with
respect to the shares of common stock indicated as being beneficially owned
by them.
(3) Includes 396,650 shares of common stock owned by PCG and warrants to
acquire 200,000 shares and options to acquire 1,323,230 shares, also owned
by PCG; 881,375 shares of common stock owned by Katonah West Pension Plan,
a pension plan of which Mr. Feinglas and his sister-in-law Susan Maisch are
trustees; 205,957 shares of common stock owned by Peggy Feinglas, Mitchel
Feinglas' spouse, in her individual capacity; 40,602 shares of common stock
owned by Stuart Feinglas, Mitchel Feinglas' brother; 3,138 shares of common
stock owned by Lori Feinglas, Mitchel Feinglas' daughter; 1,892 shares of
common stock owned jointly by Lori Feinglas and her husband Kevin Welty;
and 3,867 shares of common stock owned by Allison Feinglas, Mitchel
Feinglas' daughter. All of the issued and outstanding shares of PCG are
held by Peggy Feinglas. Mitchel Feinglas is a primary beneficiary of the
Katonah West Pension Plan, but there do exist other beneficiaries of the
plan. Mr. Feinglas disclaims any beneficial interest in the shares of
common stock, warrants or options owned by PCG, by his spouse, by his
brother, jointly by his daughter and son-in-law, or by either of his
daughters.
(4) Includes warrants to acquire 200,000 shares and options to acquire 483,615
shares of common stock. Also includes 2,000 shares of common stock held by
Robert Howard as custodian for his minor son Garrett, 25,000 shares of
common stock owned by Kerry Howard, Mr. Howard's wife and 16,806 shares of
common stock owned by Libby T. Howard, Mr. Howard's mother. Mr. Howard
disclaims any beneficial interest in the shares owned by his son and his
mother.
(5) Includes the 36,000 shares of common stock which were issued to James Power
in connection with Sytron's acquisition of ECSI Construction Services,
Inc., of which Mr. Power is President and CEO, and an option to acquire
5,000 shares of common stock.
(6) Includes an option held by Richard Munz to acquire 9,134 shares of common
stock.
(7) Werren Holdings, Ltd., is a trust which is both lender to, and stockholder
of, the company. Includes warrants to acquire 700,000 shares of common
stock. Springhill Holdings, Ltd. and Werren Holdings, Ltd. are unrelated
parties, but each is advised by the same investment advisor, operating from
the same address.
(8) Includes 881,375 shares of common stock owned by Katonah West Pension Plan,
a retirement plan for the primary benefit of Mitchel Feinglas, of which Mr.
Feinglas and Susan Maisch, his sister-in-law, are trustees.
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<PAGE>
(9) Springhill Holdings, Ltd. is a trust which is both lender to, and
stockholder of, the company. Includes warrants to acquire 15,000 shares of
common stock. Springhill Holdings, Ltd. and Werren Holdings, Ltd. are
unrelated parties, but each is advised by the same investment advisor,
operating from the same address.
(10) See "Crescent Financing." Includes warrant to acquire 337,000 shares of
common stock, but does not include stock which may not be currently
acquired by reason of restrictions in the governing instruments.
Sytron knows of no arrangements which may result in a change in control of
the company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mitchel Feinglas has been a Sytron director since August 6, 1993. As of
July1, 1999, Mr. Feinglas controlled, directly or indirectly, 1,533,481 shares
of common stock. This represents 21.3% of Sytron's issued and outstanding common
stock as of July 1, 1999.
On May 1, 1997, Sytron entered into an agreement with PCG, a company owned
by Peggy Feinglas, to provide the services of her husband, Mitchel Feinglas to
Sytron. For a discussion, please see "Management" herein.
Katonah West Pension Plan ("Katonah West") is a pension plan for the
benefit of Mitchel Feinglas, among others. Beginning in 1995, it has loaned
money to Sytron on terms that were more favorable to Sytron than were otherwise
available. The loans were used for the acquisition of Dorado and for working
capital. The trustees of Katonah West are Mr. Feinglas and his sister-in-law,
Susan Maisch. At March 31, 1999, Sytron owed Katonah West $249,750; the sum is
payable on demand, carries interest at the rate of 10% per year, and is secured
by certain of Sytron's assets.
Katonah West owns 881,375 shares of Sytron's common stock. Of this total,
87,927 were issued in payment of Sytron's debt to Katonah West arising from
loans by Katonah West to Sytron. In addition, 793,448 shares were issued in lieu
of interest on loans provided by Katonah West for use by Sytron in making the
down payment on the purchase of Dorado Systems Corporation in September 1995.
PCG now owns 396,650 shares of Sytron's common stock. Of this total, 32,528
shares were issued on August 20, 1996, upon the conversion of debentures
originally issued for cash in 1994. PCG also exercised warrants and, in December
1994, acquired 18,708 shares. In addition, unpaid consultant fees for the
services of Mitch Feinglas and related expenses were converted into 246,751
shares between June 1995 and October 1997. On April 1, 1996, Sytron entered into
an agreement with PCG pursuant to which PCG was permitted to convert certain
notes it held evidencing monies owed to it by Sytron into Sytron's common stock
at the rate of $1.31 of debt for each share of stock. At the time of the
agreement, the conversion rate was not lower than the price at which certain
shares of Sytron's common stock were trading on the NASDAQ Bulletin Board. The
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notes evidenced Sytron's obligation to PCG for $92,500 borrowed and for
reimbursement of unpaid expenses due to Mr. Feinglas totaling $36,748.97. The
agreement permitted the conversion to occur through September 30, 1996; pursuant
to it, PCG converted $129,248 into 98,663 shares of common stock on September 4,
1996.
Springhill Holdings Limited ("Springhill") is both a creditor and a
shareholder of Sytron. Springhill first loaned Sytron $45,000 in October 1995 to
assist in the acquisition of Dorado Systems Corporation. At various times
thereafter, Springhill was issued Sytron common stock, and Springhill loaned
Sytron additional funds or deferred the collection of sums due it. In May 1998,
Springhill was issued 10,000 shares of Sytron's common stock on assignment of
certain rights of Mitchel Feinglas. In September 1998, Springhill was issued
48,452 shares of common stock in exchange for waiving its right to $18,203.27,
accumulated unpaid interest. At March 31, 1999, Sytron was obligated to
Springhill for $73,000, evidenced by a note bearing interest at 10%, payable on
demand, and collateralized by certain of Sytron's assets.
Werren Holdings Limited ("Werren") is also both a creditor and a
shareholder of Sytron. Werren first loaned Sytron $10,000 in October 1995 to
assist in the acquisition of Dorado Systems Corporation. At various times
thereafter, Werren was issued Sytron common stock, and Werren loaned Sytron
additional funds or deferred the collection of sums due it. In April 1998,
Werren was issued 154,706 shares of Sytron's common stock in exchange for
releasing Sytron from an obligation for borrowed money and interest on borrowed
money of $205,758.82. In that same month, Werren also exchanged $12,704 due it
for 12,704 shares of Sytron common stock. In September 1998, Werren was issued
2,754 shares of common stock in exchange for waiving its right to $1,032.82
accumulated unpaid interest. At March 31, 1999, Sytron was obligated to Werren
for $10,000, evidenced by a note bearing interest at 10%, payable on demand, and
collateralized by certain of Sytron's assets.
We hired Robert Howard in February 1996. He became our President in May
1996 and added the responsibility of chief executive officer in July 1999. He is
also a director. In connection with his engagement, and in return for equipment
transferred to us, on December 31, 1995, Mr. Howard was awarded 45,000 shares of
common stock, which have been reissued in his wife's name in the amount of
25,000 shares, in the name of his mother in the amount of 10,000 shares and in
the name of his brother-in-law in the amount of 10,000 shares. As of June 30,
1999, Mr. Howard owns or controls 43,806 shares of our common stock. He
disclaims any ownership interest in 16,806 shares of common stock owned by his
mother, Libby T. Howard. Mr. Howard also disclaims any ownership interest in the
2,000 shares which he holds as custodian for his infant son Garrett.
For a discussion of our relationship to Crescent, please see "Crescent
Financing".
DESCRIPTION OF SECURITIES
The Articles of Incorporation of the Company authorized the issuance of
20,000,000 shares of common stock, par value $0.01 per share and 10,000,000
shares of preferred stock. As of June 30, 1999 there are 7,186,384 shares of
common stock issued and outstanding and no preferred shares issued or
outstanding. See "Capitalization."
-53-
<PAGE>
Common Shares
Holders of Sytron common stock, par value $0.01 per share, are entitled to
one vote for each share held on each matter submitted to a vote of the
shareholders. There are no preemptive rights to purchase any additional common
shares. The Articles of Incorporation of the company prohibit cumulative voting
in the election of directors. Since cumulative voting is not available to the
holders of common stock, the holders of more than 50% of the outstanding common
stock can elect all of the directors of Sytron if they so choose. In the event
of liquidation, dissolution or winding up of Sytron, holders of the common stock
would be entitled to receive, on a pro rata basis, all Sytron assets remaining
after satisfaction of all Sytron liabilities.
Preferred Stock
The Articles of Incorporation authorize issuance of a maximum of 10,000,000
preferred shares. The Articles of Incorporation vest the board of directors with
the authority to divide the class of preferred stock into series and to fix and
determine the relative rights and preferences of the shares of any such series
so established to the full extent permitted by the laws of the Commonwealth of
Pennsylvania and the Articles of Incorporation in respect of, among other
things:
o the number of preferred shares to constitute such series and the
distinctive designations thereof;
o the rate and preference of dividends (if any), the time of payment of
dividends, whether dividends are cumulative and the date from which any
dividend shall accrue;
o whether preferred shares may be redeemed and, if so, the redemption price
and the terms and conditions of redemption;
o the liquidation preferences payable on preferred stock in the event of
involuntary or voluntary liquidation;
o sinking fund or other provisions, if any, for redemption or purchase of
preferred stock;
o the terms and conditions by which preferred stock may be converted, if the
preferred stock of any series are issued with the privilege of conversion,
and
o voting rights, if any.
Because Sytron has not issued any preferred stock, no designation of the rights
and preferences of any such shares has been established as of the date of this
prospectus . The issuance of preferred stock could decrease the amount of money
and assets available for distribution to the holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of common stock.
No preferred stock is issued or outstanding on the date of this prospectus
and management has no plans to issue any preferred stock in the foreseeable
future. Prospective investors in this offering should be aware that some or all
-54-
<PAGE>
of the preferred stock may be issued to deter or delay a takeover bid that is
opposed by management, or for such other purposes as the board of directors may
so determine in the future, in their sole discretion.
Transfer Agent and Registrar
Corporate Stock Transfer Co., Inc., 370 17th Street, Suite 2350, Denver,
Colorado 80202 has been retained to act as the Transfer Agent for the Common
stock of the Company.
PLAN OF DISTRIBUTION
Sales of all or a portion of the shares registered hereunder may be made
from time to time by the Selling Stockholders, or, subject to applicable law, by
pledgees, donees, distributees, transferees or other successors in interest.
Such sales may be made on the Over the Counter Bulletin Board Market, in another
over-the-counter market, on a national securities exchange (any of which may
involve crosses and block transactions), in privately negotiated transactions or
otherwise, or in a combination of such transactions at prices and at terms then
prevailing or at prices related to the then current market price, or at
privately negotiated prices. In addition, any shares covered by this prospectus
which qualify for sale pursuant to Section 4(1) of the Securities Act and Rule
144 promulgated thereunder may be sold under such provisions rather than
pursuant to this prospectus. Without limiting the generality of the foregoing,
the shares may be sold in one or more of the following types of transactions:
o a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o face-to-face transactions between sellers and purchasers without a
broker-dealer;
o an exchange distribution in accordance with the rules of such exchange; and
o a combination of any such methods of sale.
In addition, the Selling Stockholders may use this prospectus to distribute the
shares in any other manner permitted under applicable securities laws. In
effecting sales, brokers or dealers engaged by any of the Selling Stockholders
may arrange for other brokers or dealers to participate in the resales.
Broker-dealers may agree with one or more of the Selling Stockholders to
sell a specified number of the shares at a stipulated price per share, and, to
the extent such broker-dealer is unable to do so acting as agent for a Selling
Stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to the Selling Stockholder. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve block transactions and sales to and
through other broker-dealers, including transactions of the nature described
-55-
<PAGE>
above) in the over-the-counter market or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such shares commissions as
described above. A Selling Stockholder may also sell the shares in accordance
with Rule 144 under the Securities Act, rather than pursuant to this prospectus.
In connection with distribution of the shares or otherwise, a Selling
Stockholder may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with the Selling Stockholder. A Selling Stockholder may also enter into
option or other transactions with broker-dealers which require the delivery to
the broker-dealer of the shares registered hereunder, which the broker-dealer
may resell pursuant to this prospectus. From time to time a Selling Stockholder
may pledge his or its shares pursuant to the margin provisions of customer
agreements with brokers. Upon a default by the pledging Selling Stockholder, the
broker may offer and sell the pledged shares from time to time.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from a Selling Stockholder in amounts to
be negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. Any dealer or brokerage firm participating
in any distribution of the shares may be required to deliver a copy of this
prospectus, including any supplement to this prospectus to any person who
purchases any of the shares from or through such dealer or broker.
Sytron has advised each Selling Stockholder that, during such time as he or
it may be engaged in a distribution of the shares included herein, that Selling
Stockholder is required to comply with Regulation M promulgated under the
Exchange Act. In general, Regulation M precludes any selling stockholder, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase, any security which is the subject of the
distribution until the entire distribution is complete. A "distribution" is
defined in the rules as an offering of securities that is distinguished from
ordinary trading activities and depends on the "magnitude of the offering and
the presence of special selling efforts and selling methods." Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security.
It is anticipated that each Selling Stockholder will offer the shares
listed in the table under "Selling Stockholder" from time to time, except that
Selling Stockholders may or may not choose to exercise warrants in order to
purchase the shares listed in the table, depending on the relationship between
the prevailing market price of the common stock from time to time and the
exercise prices of the various warrants (see the information with regard to
exercise prices in the table under "Selling Stockholder"). See "Risk
Factors-Effect of Additional Shares Traded."
-56-
<PAGE>
We are required to pay all fees and expenses incident to the registration
of the shares. We have agreed to indemnify Crescent against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain aspects of the validity of the common stock has been passed upon
for Sytron by Bresler Goodman & Unterman, LLP.
EXPERTS
The consolidated balance sheets of Sytron as of September 30, 1998 and
1997, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended September 30, 1998
included in this prospectus have been examined by Jones, Jensen & Company, LLC,
independent certified public accountants, to the extent and for the periods
indicated in their report with respect thereof and have been included in this
prospectus in reliance upon the authority of said firm as experts in auditing
and accounting.
-57-
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, September 30, 1998 and 1997
<PAGE>
C O N T E N T S
Independent Auditors' Report............................................. F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Operations.................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)................ F-7
Consolidated Statements of Cash Flows.................................... F-9
Notes to the Consolidated Financial Statements........................... F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Sytron, Inc. and Subsidiaries
Broomfield, Colorado
We have audited the accompanying consolidated balance sheets of Sytron, Inc. and
Subsidiaries as of September 30, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended September 30, 1998, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects the financial position of Sytron, Inc. and
Subsidiaries as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for the years ended September 30, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the consolidated financial statements, the Company has suffered losses from
operations since inception, which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 15. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
November 20, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
September 30,
March 31, ----------------------------------
1999 1998 1997
---------- ----------- ----------
(Unaudited)
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 2,133 $ 22,793 $ 99,222
Accounts receivable, net (Note 2) 1,145,584 755,361 602,137
Inventory (Note 2) 718,801 853,106 1,648,761
Prepaid expenses 114,941 42,083 6,358
----------- ----------- -----------
Total Current Assets 1,981,459 1,673,343 2,356,478
----------- ----------- -----------
PROPERTY AND EQUIPMENT (Note 3)
Equipment 1,306,936 1,297,639 1,198,768
Leasehold improvements 24,471 24,471 29,615
Software 10,753 10,753 29,227
Less - accumulated depreciation and
amortization (1,028,299) (992,221) (880,633)
----------- ----------- -----------
Total Property and Equipment 313,861 340,642 376,977
----------- ----------- -----------
OTHER ASSETS
Computer software (Notes 2 and 4) 1,177,327 1,270,308 1,583,479
Other assets 364,144 52,575 30,630
Organization costs, net (Note 4) -- -- 80,728
Goodwill (Note 2) 273,399 200,436 295,406
----------- ----------- -----------
Total Other Assets 1,814,870 1,523,319 1,990,243
----------- ----------- -----------
TOTAL ASSETS $ 4,110,190 $ 3,537,304 $ 4,723,698
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
September 30,
March 31, ----------------------------------
1999 1998 1997
------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,240,689 $ 2,058,325 $ 1,214,252
Accrued expenses 717,251 892,939 857,450
Convertible subordinated debentures
(Note 6) 42,263 42,263 42,263
Reserve for discontinued operations 27,416 27,416 27,416
Capital leases - current portion (Note 8) 38,129 11,140 --
Notes payable - related parties (Note 9) 344,250 344,250 344,250
Notes payable - current portion (Note 9) 1,097,450 274,445 1,241,879
------------ ------------ ------------
Total Current Liabilities 4,507,448 3,650,778 3,727,510
------------ ------------ ------------
LONG-TERM DEBT
Capital leases (Note 8) 21,520 51,707 --
Long-term debt (Note 9) 398,604 642,513 72,884
------------ ------------ ------------
Total Long-Term Debt 420,124 694,220 72,884
------------ ------------ ------------
Total Liabilities 4,927,572 4,344,998 3,800,394
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value,
20,000,000 shares authorized, 6,854,123,
5,903,537 and 3,606,664 shares issued and
outstanding, respectively 68,541 59,035 36,067
Additional paid-in capital 11,648,768 11,303,006 9,100,495
Stock subscriptions receivable (269,625) (269,625) --
Accumulated deficit (12,265,066) (11,900,110) (8,213,258)
------------ ------------ ------------
Total Stockholders' Equity (Deficit) (817,382) (807,694) 923,304
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 4,110,190 $ 3,537,304 $ 4,723,698
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Months Ended
March 31, For the Years Ended September 30,
------------------------------------ ---------------------------------------------------
1999 1998 1998 1997 1996
---------------- ---------------- --------------- ---------------- --------------
(Unaudited) (Unaudited)
REVENUES
Sales $ 3,325,321 $ 2,446,244 $ 5,087,136 $ 4,364,751 $ 2,409,310
Cost of sales 2,386,224 1,404,006 2,898,969 2,375,079 1,257,294
---------------- ---------------- --------------- ---------------- --------------
Gross Profit 939,097 1,042,238 2,188,167 1,989,672 1,152,016
---------------- ---------------- --------------- ---------------- --------------
EXPENSES
Sales and marketing 374,011 531,412 1,044,446 893,339 316,260
General and administrative 542,528 826,730 1,669,061 1,593,913 954,196
Research and development 239,818 330,349 769,156 652,475 284,995
---------------- ---------------- --------------- ---------------- --------------
Total Expenses 1,156,357 1,688,491 3,482,663 3,139,727 1,555,451
---------------- ---------------- --------------- ---------------- --------------
Loss from Operations (217,260) (646,253) (1,294,496) (1,150,055) (403,435)
---------------- ---------------- --------------- ---------------- --------------
OTHER INCOME (EXPENSES)
Interest expense (123,425) (130,411) (304,837) (859,854) (122,325)
Other income (expense) (27,221) (40,696) (155,346) 1,396 29,630
Gain (loss) on disposal of assets - (927,739) (1,321,958) 2,044 -
Loss from obsolete inventory - (827,698) (827,698) - -
---------------- ---------------- --------------- ---------------- --------------
Total Other Income (Expenses) (150,646) (1,926,544) (2,609,839) (856,414) (92,695)
---------------- ---------------- --------------- ---------------- --------------
(LOSS) BEFORE
EXTRAORDINARY ITEMS (367,906) (2,572,797) (3,904,335) (2,006,469) (496,130)
---------------- ---------------- --------------- ---------------- --------------
EXTRAORDINARY ITEMS
Gain (loss) from discontinued
operations (2,259) 868 - - 667,948
Income from debt release 5,209 - 217,483 - 70,694
---------------- ---------------- --------------- ---------------- --------------
Total Extraordinary Items 2,950 868 217,483 - 738,642
---------------- ---------------- --------------- ---------------- --------------
NET INCOME (LOSS) $ (364,956) $ (2,571,929) $ (3,686,852) $ (2,006,469) $ 242,512
================ ================ =============== ================ ==============
BASIC INCOME (LOSS) PER SHARE
Before extraordinary items $ (0.05) $ (0.60) $ (0.84) $ (0.61) $ (0.23)
Extraordinary items 0.00 0.00 0.05 - 0.34
---------------- ---------------- --------------- ---------------- --------------
BASIC INCOME (LOSS)
PER SHARE $ (0.05) $ (0.60) $ (0.79) $ (0.61) $ 0.11
================ ================ =============== ================ ==============
FULLY DILUTED INCOME
(LOSS) PER SHARE
Before extraordinary items $ (0.05) $ (0.60) $ (0.84) $ (0.61) $ (0.15)
Extraordinary items 0.00 0.00 0.05 - 0.23
---------------- ---------------- --------------- ---------------- --------------
FULLY DILUTED INCOME
(LOSS) PER SHARE $ (0.05) $ (0.60) $ (0.79) $ (0.61) $ 0.08
================ ================ =============== ================ ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Additional Stock
------------------------- Paid-in Subscriptions Accumulated
Shares Amount Capital Receivable Deficit
--------- -------------- --------------- ------------- ---------------
Balance, September 30, 1995 1,584,363 $ 15,844 $ 5,290,213 $ - $ (6,449,301)
Issuance of common stock options - - 250,000 - -
Common stock issued for:
Services 477,340 4,773 63,717 - -
Conversion of debt 155,750 1,557 431,254 - -
Cash from offering 20,000 200 99,800 - -
Stock offering costs - - (531,572) - -
Cash from exercising warrants 342,270 3,423 681,187 (352,342) -
Purchase of Mundix Control Systems 300,000 3,000 1,497,000 - -
Net income for the year ended
September 30, 1996 - - - - 242,512
-------------- -------------- --------------- ---------------- ---------------
Balance, September 30, 1996 2,879,723 28,797 7,781,599 (352,342) (6,206,789)
Cash received for stock subscriptions
receivable - - - 352,342 -
Common stock issued for:
Conversion of debt 58,772 588 85,246 - -
Cash from exercising warrants 25,923 259 70,222 - -
Converted debentures 9,761 98 19,424 - -
Equipment 45,000 450 4,050 - -
The purchase of the net assets of
Camenco, Inc. 200,000 2,000 448,000 - -
The purchase of the net assets of
Point Automation 25,000 250 49,750 - -
Interest expense 334,789 3,348 666,230 - -
Services rendered 34,446 344 9,656 - -
Common stock canceled as a result of
services not being performed (6,750) (67) (33,682) - -
Net (loss) for the year ended
September 30, 1997 - - - - (2,006,469)
--------------- -------------- --------------- ---------------- ---------------
Balance, September 30, 1997 3,606,664 36,067 9,100,495 - (8,213,258)
Common stock issued for:
Services rendered 188,970 1,890 167,337 - -
The purchase of the net assets
of Nautica Security Group, Inc. 50,000 500 189,500 - -
Conversion of debt 1,079,619 10,796 1,018,514 - -
Cash 978,284 9,782 905,578 (269,625) -
Stock offering costs - - (78,418) - -
Net (loss) for the year ended
September 30, 1998 - - - - (3,686,852)
-------------- -------------- --------------- ---------------- ---------------
Balance, September 30, 1998 5,903,537 $ 59,035 $ 11,303,006 $ (269,625) $ (11,900,110)
-------------- -------------- --------------- ---------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Common Stock Additional Stock
------------------------- Paid-in Subscriptions Accumulated
Shares Amount Capital Receivable Deficit
--------- -------------- --------------- ---------------- ---------------
Balance, September 30, 1998 5,903,537 $ 59,035 $ 11,303,006 $ (269,625) $ (11,900,110)
Common stock issued for:
Conversion of debt (unaudited) 900 9 2,484 - -
Interest expense (unaudited) 173,716 1,737 45,480 - -
Cash (unaudited) 3,852 39 2,780 - -
Services rendered (unaudited) 132,118 1,321 55,605 - -
The purchase of the net assets
Law Enforcement Technologic
Resources, Inc. (unaudited) 440,000 4,400 229,350 - -
The purchase of ECSI Construction
Services, Inc. (unaudited) 100,000 1,000 42,750 - -
Stock offering costs (unaudited) 100,000 1,000 (32,687) - -
Net loss for the six months ended
March 31, 1999 (unaudited) - - - - (364,956)
-------------- -------------- --------------- ---------------- ---------------
Balance, March 31, 1999 (unaudited) 6,854,123 $ 68,541 $ 11,648,768 $ (269,625) $ (12,265,066)
============== ============== =============== ================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended
March 31, For the Years Ended September 30,
------------------------------- -----------------------------------------------
1999 1998 1998 1997 1996
-------------- --------------- -------------- -------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (364,956) $ (2,571,929) $ (3,686,852) $ (2,006,469) $ 242,512
Adjustments to reconcile net income (loss)
to net cash (used) provided by
operating activities:
Depreciation and amortization 194,523 222,919 705,616 595,918 239,270
Income from debt release - - (217,483) - (70,694)
Bad debt expense - - 18,030 83,881 13,305
Stock issued for services rendered 56,926 77,797 169,226 (23,749) 68,490
Stock issued for interest 47,218 41,975 203,246 669,578 -
Loss on disposal of asset - 993,776 1,321,958 - 1,465
Loss from obsolete inventory - 827,698 827,698 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable and related receivables (354,970) (108,735) (171,254) (320,542) 205,743
(Increase) decrease in inventory 134,305 (27,675) 86,661 (634,544) (124,456)
(Increase) decrease in prepaid expenses (72,858) 6,358 (35,725) 25,209 2,067
(Increase) decrease in other assets (62,701) (25,296) (21,945) (262,076) (33,361)
Increase (decrease) in accrued expenses (177,081) 45,545 77,188 368,180 (450,395)
Increase (decrease) in accounts payable 102,282 518,400 896,323 660,155 (779,680)
-------------- --------------- -------------- -------------- -------------
Net Cash Provided (Used) by
Operating Activities (497,312) 833 172,687 (844,459) (685,734)
-------------- --------------- -------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in purchase of subsidiary 93,163 - - - -
Purchase of fixed assets (5,598) (32,961) (183,462) (157,827) (21,698)
Computer software development (18,322) (513,446) (737,312) - -
-------------- --------------- -------------- -------------- -------------
Net Cash Provided (Used) by
Investing Activities 69,243 (546,407) (920,774) (157,827) (21,698)
-------------- --------------- -------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock offering costs (31,687) - - - -
Proceeds from issuance of stock 2,818 - 567,317 422,823 865,079
Proceeds from note payable 452,494 675,022 190,659 629,298 211,999
Repayment of notes payable
and capital leases (16,216) (199,589) (86,318) (136,655) (250,757)
-------------- --------------- -------------- -------------- -------------
Net Cash Provided by Financing Activities 407,409 475,433 671,658 915,466 826,321
-------------- --------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH (20,660) (70,141) (76,429) (86,820) 118,889
CASH AT BEGINNING OF PERIOD 22,793 99,223 99,222 186,042 67,153
-------------- --------------- -------------- -------------- -------------
CASH AT END OF PERIOD $ 2,133 $ 29,082 $ 22,793 $ 99,222 $ 186,042
============== =============== ============== ============== =============
The accompanying notes are an integral part of these consolidated financial statements.
F-9
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended
March 31, For the Years Ended September 30,
-------------------------------- -----------------------------------------------
1999 1998 1998 1997 1996
-------------- --------------- -------------- -------------- -------------
(Unaudited) (Unaudited)
CASH PAID DURING THE PERIOD FOR:
Interest $ 76,208 $ 88,436 $ 162,027 $ 102,417 $ 61,031
Income taxes $ - $ - $ - $ - $ -
NON CASH FINANCING ACTIVITIES:
Issuance (cancellation) of common stock for
services rendered $ 56,926 $ 77,797 $ 169,226 $ (23,749) $ 68,490
Issuance of common stock for interest expense $ 47,218 $ 41,975 $ 203,246 $ 669,578 $ -
Conversion of debt to common stock $ 2,493 $ 644,412 $ 1,029,310 $ 774,934 $ 432,811
Purchase of subsidiaries by the issuance
of common stock $ 277,500 $ - $ 190,000 $ - $ 1,500,000
Purchase of equipment by the issuance
of common stock $ - $ - $ - $ 4,500 $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-10
</TABLE>
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Sytron, Inc. (the Company) was organized under the laws of the State
of Pennsylvania on November 9, 1992. Sytron Security Products, Inc.
became a separate division of the Company on August 1, 1995. Sytron
Parking Systems, Inc. was activated August 1, 1996. Sytron Security
Systems, Inc. was activated January 14, 1997. Sytron Security Group,
Ltd. was activated in June 1997. Point Automation, Inc. was activated
in August 1997. The Company is involved in the manufacture and
assembly of electronic components for the security, access control,
parking and alarm monitoring industries.
On March 4, 1997, System Security Systems, Inc. purchased the net
assets of Camenco, Inc., including the stock of its subsidiary
Biometrics, Inc. The purchase price was stated at $816,000, which was
comprised of $10,000, 200,000 shares of common stock and the
assumption of liabilities. The acquisition is accounted for as a
combination under the purchase method of accounting with acquired
assets and liabilities recorded at their fair market value.
The Company acquired Mundix Controls Systems, Inc. on September 6,
1996 for 300,000 shares of common stock valued at $1,500,000. The
acquisition is accounted for as a combination under the purchase
method of accounting with acquired assets and liabilities recorded at
their fair market values. Activity from the date of acquisition to
September 30, 1996 have been included in the statement of operations.
On September 29, 1995, the Company purchased Dorado Systems
Corporation for $1,029,137. The acquisition is accounted for as a
combination under the purchase method of accounting with acquired
assets and liabilities recorded at their fair market values.
The Company acquired Nautica Security Group, Inc. on May 10, 1998 for
50,000 shares of common stock valued at $190,000 and up to 550,000
additional restricted, unregistered shares of Sytron common stock in
annual amounts (not exceeding 200,000 shares per year) to be precisely
determined over a period of three years, depending on annual increases
in net sales and on annual increases in related earnings before income
taxes. Among the assets acquired in this transaction are all of the
issued and outstanding shares of two wholly-owned Brazilian
subsidiaries, which specifically includes the rights of each of those
Brazilian subsidiary companies to all of its tangible and intangible
technology and intellectual property. The additional shares if issued
will be recorded as expense at the trading value of the shares at the
date of issuance. The acquisition is accounted for as a combination
under the purchase method of accounting with acquired assets and
liabilities recorded at their fair market value.
In October 1997, the Company purchased from Point Automation, Inc.,
substantially all of the "Pro Series" product line assets, both
tangible and intangible, including the right to use the "Point
Automation" name, in exchange for 25,000 shares of restricted,
unregistered common stock valued at $50,000, and a commitment to issue
up to an additional 50,000 shares of restricted, unregistered common
stock if, over the two year period following the closing of the
transaction, the Company had sales of more than $1,000,000 directly
related to the products acquired within the agreement. At January 31,
1999, Sytron agreed in principle to pay the former owner of Point
Automation $25,000 plus interest at 8% from October 1998. In June
1999, this agreement was modified to settle this obligation by the
issuance of 50,000 unregistered shares of Sytron common stock. The
acquisition is accounted for as a combination under the purchase
method of accounting with acquired assets and liabilities recorded at
their fair value.
In October 1998, the Company acquired 100% of ECSI Construction
Services, Inc. (ECSI), by issuing 100,000 restricted shares of its
outstanding common stock valued at $43,750. The acquisition is
accounted for as a combination under the purchase method of accounting
with acquired assets and liabilities recorded at their fair market
value.
F-11
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)
On October 2, 1998, the Company acquired the net assets of Law
Enforcement Technologic Resources, Inc. (LETR), by issuing 440,000
shares of its outstanding common stock valued at $233,750. LETR is a
law enforcement software developer. LETR has a subsidiary, Ventura
Identification Systems, Inc., which is a first stage manufacturer of
optical fingerprint readers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a September 30 year end.
b. Basic and Fully Diluted Loss Per Share
The basic loss per share of common stock is based on the weighted
average number of shares issued and outstanding during the period of
the consolidated financial statements. Shares to be issued from
warrants and options have not been included in the computation of the
fully diluted loss per share because they would have an antidilutive
effect on the net loss per common share for the periods presented.
c. Provision for Taxes
At March 31, 1999, the Company has net operating loss carryforwards of
approximately $12,265,000 which will expire in 2007 through 2014. No
tax benefit has been reported in the consolidated financial statements
and the potential tax benefits of the loss carryforwards are offset by
a valuation allowance of the same amount.
d. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
e. Accounts Receivable
Accounts receivable are shown net of the allowance for doubtful
accounts of $86,396, $85,676 and $135,589 at March 31, 1999, September
30, 1998 and 1997, respectively.
f. Principles of Consolidation
The consolidated financial statements include those of Sytron, Inc.
and its wholly-owned subsidiaries: Dorado Systems Corporation
(Dorado), Sytron Security Products, Inc. (SSP), Sytron Parking
Systems, Inc. (SPS), Sytron Security Systems, Inc. (SSS), Sytron
Security Group, Ltd. (SSG), Biometrics, Inc, (Biometrics), Mundix
Control Systems, Inc. (Mundix), Nautica Security Group, Inc.
(Nautica), Point Automation, Inc. (PAI) and ECSI Construction
Services, Inc. (ECSI). All significant intercompany accounts and
transactions have been eliminated.
F-12
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Inventory
The inventory is carried at its lower of cost or market value using
the average cost method. At March 31, 1999, September 30, 1998 and
1997 inventories were as follows:
<TABLE>
<CAPTION>
September 30,
March 31, -------------------------------
1999 1998 1997
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Raw materials and supplies $ 1,099,215 $ 1,197,064 $ 1,366,610
Work-in-process 201,250 237,706 175,729
Finished goods 76,704 76,704 106,422
Reserve for obsolete items (658,368) (658,368) -
--------------- -------------- ----------
Total $ 718,801 $ 853,106 $ 1,648,761
=============== ============== ===============
</TABLE>
It is the policy of the Company to review on a quarterly basis its
perpetual inventory for items which have become obsolete to its
operations and to reserve for any items so identified. The reserve for
obsolete items relates to inventory held by the Company's existing
subsidiaries and was not acquired as part of any of the acquisitions
of subsidiaries.
h. 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 expenses during the reporting period. Actual results could differ
from those estimates.
i. Goodwill
The excess of the purchase price over the fair market value of the
assets and liabilities acquired in the purchase of Dorado and Mundix
has been recorded as goodwill.
Amortization of goodwill is determined using the straight-line method
over 5 years. Amortization expense was $62,261 for the six months
ended March 31, 1999 and $94,969, $94,969 and $84,472 for the years
ended September 30, 1998, 1997 and 1996, respectively.
It is the policy of the Company to review quarterly on a
subsidiary-by-subsidiary basis the goodwill recorded in the purchase
of its subsidiaries. When it becomes evident that the Company will not
recover its investment through sales of the subsidiaries' products,
then the goodwill is charged to expense in that period.
j. Computer Software
Intangibles are stated at cost less accumulated amortization.
Amortization is computed using the straight-line method over the
estimated useful lives of five years. Amortization expense was $96,185
for the six months ended March 31, 1999 and $418,329, $325,997 and
$24,001 for the years ended September 30, 1998, 1997 and 1996,
respectively. During the year ended September 30, 1998, the Company
recorded a write-down of its capitalized computer software costs of
$1,321,958.
F-13
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Concentrations of Credit Risk
The Company sells its product to various customers throughout the
United States. The Company extends credit to its customers.
Credit losses, if any, have been provided for in the consolidated
financial statements and are based on management's expectations. The
Company's accounts receivable are subject to potential concentrations
of credit risk. The Company does not believe that it is subject to any
unusual risks, nor significant risks in the normal course of its
business.
l. Revenue Recognition
Revenue is recognized upon shipment of goods to the customer. For
construction projects, revenue is recognized using the percentage of
completion method of accounting and, therefore, take into account the
cost, estimated earnings and revenue to date on contracts not yet
completed. The amount of revenue recognized at year end is the portion
of the total contract price that the cost expended to date bears to
the anticipated final total cost, based on current estimates of costs
to complete.
m. Reclassification
Certain September 30, 1997 balances have been reclassified to conform
with the September 30, 1998 consolidated financial statement
presentation.
n. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
o. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" during the year ended September 30,
1998. In accordance with SFAS No. 128, diluted earnings per share must
be calculated when an entity has convertible securities, warrants,
options, and other securities that represent potential common shares.
The purpose of calculating diluted earnings (loss) per share is to
show (on a pro forma basis) per share earnings or losses assuming the
exercise or conversion of all securities that are exercisable or
convertible into common stock and that would either dilute or not
affect basis EPS. As permitted by SFAS No. 128, the Company has
retroactively applied the provisions of this new standard by showing
the fully diluted income (loss) per common share for all years
presented.
p. Year 2000 Issue
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year
2000 Issue. The Issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. Based on the review of the
computer systems, management believes its products and software are
Year 2000 compliant.
q. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the
adjustments which, in the opinion of management, are necessary for a
fair presentation. Such adjustments are of a normal, recurring nature.
F-14
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major additions and
improvements are capitalized. Minor replacements, maintenance and
repairs that do not increase the useful life of the assets are
expensed as incurred. Depreciation of property and equipment is
determined using the straight-line method over the expected useful
lives of the assets as follows:
Description Useful Lives
----------- ------------
Equipment 5 years
Leasehold Improvements 5 years
Software 5 years
Depreciation expense was $36,078, $129,734, $146,673 and $114,700 for
the six months ended March 31, 1999 and for the years ended September
30, 1998, 1997 and 1996, respectively.
NOTE 4 - INTANGIBLE ASSETS
During the year ended September 30, 1998, the Company expensed all of
its organizational costs as a result of Statement of Position (SOP)
98-5. SOP 98-5 requires all organizational costs to be expensed.
The Company capitalized the costs incurred for software developed for
resale and amortizes the costs over the expected useful life of five
years.
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
September 30,
March 31, -----------------------------
1999 1998 1997
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
Computer software $ 1,394,212 $ 1,409,744 $ 1,933,477
Less accumulated amortization (216,885) (139,436) (349,998)
-------------- ------------- --------------
$ 1,177,327 $ 1,270,308 $ 1,583,479
============== ============= ==============
Organization costs $ - $ - $ 165,349
Less accumulated amortization - - (84,621)
-------------- ------------- --------------
$ - $ - $ 80,728
============== ============= ==============
</TABLE>
Amortization expense for the six months ended March 31, 1999 and for
the years ended September 30, 1998, 1997 and 1996 was $96,185,
$499,057, $354,276 and $40,098, respectively.
NOTE 5 - STOCK TRANSACTIONS
The Company completed an offering under Rule 504 to Regulation D of
the Securities Act of 1933 on July 12, 1996. The offering was
comprised of 20,000 units, each of which contained one share of common
stock, six "A" warrants, fourteen "B" warrants and one "C" warrant. A
total of $100,000 was raised from the sale of these units. The "A"
warrants are exercisable at $0.10; the "B" warrants are exercisable at
$3.00; and the "C" warrants are exercisable at $2.20.
In conjunction with the Company's offering, 120,000 A Warrants,
224,270 B Warrants and 1,860 C Warrants were converted into 368,193
shares of common stock with cash proceeds of $402,749.
F-15
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 5 - STOCK TRANSACTIONS (Continued)
The 300,000 shares issued to acquire Mundix are being held in escrow
pursuant to the provisions and terms of the escrow agreement. The
terms of the agreement require that over the next 30 months after
closing date that Mundix through Sytron Security Products, Inc. (SSP)
receive and accept orders in the amount of $4,000,000. If such orders
are received or accepted the full payment of said orders must be
received within a 36 month period following the 30 month selling
period. The purchase price shall be reduced by an amount equal to one
share of Sytron common stock valued at $5.00 per share for each $20.00
of shortfall.
NOTE 6 - CONVERTIBLE SUBORDINATED DEBENTURES
The Company has outstanding convertible, subordinated debentures that
matured on January 31, 1996, but remain unpaid. As of March 31, 1999,
September 30, 1998 and 1997, $42,263, $42,263 and $42,263 were payable
by the Company as a result of these debentures. During 1997, $14,856
of the debentures were converted to common stock.
10% interest on the debentures is payable annually, until the unpaid
principal balances are paid. The unpaid principal balances of the
debentures may be converted into fully-paid and non-assessable shares
of the Company's common stock. At the holders' option, these
debentures are convertible at the market price of the common stock at
the time of conversion.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a. Lease Agreement
On August 8, 1996, the Company entered into an operating lease
obligation for a period of five years and three months with the
ability to exercise option periods for its new office and
manufacturing space, located in Broomfield, Colorado. On June 13,
1998, the Company amended the operating lease to be effective February
1, 1999 through December 31, 2002. The lease requirements are as
follows:
Years Ending
September 30, Amount
------------- --------------
1999 $ 127,824
2000 97,128
2001 97,128
2002 97,128
2003 24,282
2004 and thereafter -
--------------
$ 443,490
==============
Rent expense for the six months ended March 31, 1999 and for the years
ended September 30, 1998, 1997 and 1996 was $85,090, $125,978, $75,213
and $14,588, respectively.
b. Litigation
HID Corporation ("HID") filed suit in January 1998 in the United
States District Court for the District of Colorado claiming that
Dorado's Universal Reader(TM) infringes two HID patents because the
reader is capable of reading HID access control cards, as well as
reading the cards of other manufacturers of access control equipment.
HID's complaint has been amended to seek injunctive relief. No
significant damages have accrued since sales of the Universal
Reader(TM) have recently begun. No trial date has been set, but
discovery is being conducted by both HID and by the Company.
Management believes that the Dorado product does not infringe either
of the HID patents, and is vigorously defending the action.
F-16
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
c. Employment Agreements
The Company has entered into employment agreements with two of its key
officers. These agreements expire January 1, 2000. The agreements
require a total of $200,546 to be paid on a yearly basis as
compensation to these individuals through the end of their agreements.
d. Commitments
In February 1998, the Company entered into a written agreement with
Camenco, Inc. (Camenco) settling an outstanding lawsuit through
arbitration. Pursuant to the terms of the settlement agreement, the
Company agreed to pay Camenco $237,500 in ten monthly installments and
Camenco would return 200,000 shares of the Company's common stock. At
September 30, 1998, the Company still owed $142,500 and the Company
will use the proceeds from the sale of the remaining unreturned shares
to pay off the settlement balance, which management believes will be
sufficient to cover the remaining unpaid balance. The Company will be
liable for any shortfall if the proceeds are not sufficient to cover
the debt. The Company is delinquent in its payments and Camenco is
seeking to enforce the arbitrator's award. The entire award has been
accrued in the financial statements. Accordingly, the Company expects
the agreement to not have a material effect on operations or its
financial position.
e. Joint Venture Agreement
Through the acquisition of Nautica, the Company became party to a
joint venture agreement with a Brazilian company to market the
monitoring device technology currently being used as an automatic
vehicle location system. The Brazilian company possesses its own radio
communication infrastructure and licenses for the operation of
frequencies in Brazil. The two companies have agreed to work together
to develop, market, sell, install and service the vehicle tracking
system.
NOTE 8 - CAPITAL LEASES
The Company leases certain equipment with lease terms ending in 2002
and 2003. Obligations under these capital leases have been recorded in
the accompanying consolidated financial statements at the present
value of future minimum lease payments.
Obligations under capital leases at March 31, 1999, September 30, 1998
and 1997 consisted of the following:
September 30,
March 31, ---------------------
1999 1998 1997
--------- ---------- ---------
(Unaudited)
Total $ 59,649 $ 62,847 $ -
Less: current portion (38,129) (11,140) -
--------- ---------- ---------
Long-term portion $ 21,520 $ 51,707 $ -
========= ========== =========
F-17
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 8 - CAPITAL LEASES (Continued)
The future minimum lease payments under these capital leases and the
net present value of the future minimum lease payments are as follows:
Years Ending
September 30, Amount
------------- -----------
1999 $ 21,272
2000 21,272
2001 21,272
2002 21,272
2003 5,122
2004 and thereafter -
----------
Total future minimum lease payments 90,210
Less, amount representing interest (27,363)
----------
Present value of future minimum lease payments $ 62,847
==========
NOTE 9 - NOTES PAYABLE AND NOTES PAYABLE-RELATED PARTIES
<TABLE>
<CAPTION>
September 30,
March 31, -----------------------------
1999 1998 1997
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
Note payable Springhill Holdings Limited
(Shareholder), at 10% interest rate, is due
on demand and is collateralized by certain
assets of the Company. $ 73,000 $ 73,000 $ 73,000
Note payable Werren Holdings Limited,
(Shareholder) at 10% interest rate, is due on
demand and is collateralized by certain
assets of the Company. 10,000 10,000 10,000
Note payable Katonah West Pension Plan, at
(Shareholder) 10% interest rate, is due on
demand and is collateralized by certain
assets of the Company. 249,750 249,750 249,750
Note payable Ragsdale Family Trust, at 9% interest
rate, the principal and interest is March 29,
1996, secured by free trading stock of the
same value as the note payable. - - 200,000
Note payable Ragsdale Family Trust, at 9%,
interest rate, the monthly payments shall
equal 20% of the gross accounts receivable
shipped during the preceding month, and is
secured by inventory of the Company. - - 107,122
Note payable Ragsdale Family Trust at 9% interest
rate, principal and interest payments of
$1,361 due monthly and is secured by fixed
assets. - - 14,577
Note payable Forum Trading, due from judgment
dated February 15, 1996, at 8.0% interest
rate, requires monthly payments of $2,000
beginning March 15, 1996 and is unsecured. 55,558 57,498 73,088
-------------- ------------- --------------
Balance forward $ 388,308 $ 390,248 $ 727,537
-------------- ------------- --------------
F-18
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 9 - NOTES PAYABLE AND NOTES PAYABLE-RELATED PARTIES (Continued)
September 30,
March 31, ------------------------
1999 1998 1997
(Unaudited)
Balance forward $ 388,308 $ 390,248 $ 727,537
Note payable Wagner Sharer & Co. due from judgment
dated September 12, 1996, at 7.0% interest
rate, requires monthly principal and interest
payments of $750, with lump sum payments of
$9,000 on November 1, 1997 and $7,000 on
November 1, 1998. Payments will reduce to
$500 per month for the last twelve months and
is unsecured. 30,233 30,233 31,750
Notes payable United Credit at 14.0% interest
rate, requires monthly principal and interest
payments of $5,000 beginning October 1, 1996
and is unsecured. - 571 28,569
Note payable to an individual, at 12.0% interest
rate, requires monthly principal and interest
payments of $3,000, beginning October 30,
1996 and is unsecured. - - 42,753
Note payable shareholder, non-interest bearing and
due by December 31, 1997 and is unsecured,
currently in default. 11,500 11,500 11,500
Note payable to various individuals at 10.5%
interest rate, principal and interest due
November 1997, secured by accounts
receivable. - - 128,000
Note payable to an individual, at 16.0% interest
rate, requires weekly principal and interest
payments of $2,000 beginning July 31, 1998,
unsecured. - 13,000 -
Notes payable to various individuals at 12.0%
interest rate, principal and interest due
April 1998, unsecured, currently in default. 50,000 50,000 451,298
Note payable to various individuals at 12.0%
interest rate, principal and interest due
June 1998, unsecured, currently in default. 40,000 40,000 50,000
Notes payable to various individuals at 9.5%
interest rate, interest payments due
quarterly, principal due January 31, 2000,
secured by accounts receivable. 608,656 608,656 -
Note payable United Credit at 14.0% interest rate,
balance not to exceed $250,000 or 75% of
accounts receivable, monthly payments based
on outstanding accounts receivable balance,
secured by accounts receivable, inventory and
equipment of Dorado. 226,277 117,000 187,606
-------------- ------------- -------------
Balance forward $ 1,354,974 $ 1,261,208 $ 1,659,013
-------------- ------------- -------------
F-19
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 9 - NOTES PAYABLE AND NOTES PAYABLE-RELATED PARTIES (Continued)
September 30,
March 31, --------------------------
1999 1998 1997
----------- ----------- -----------
(Unaudited)
Balance forward $ 1,354,974 $ 1,261,208 $ 1,659,013
Note payable to Colbie Pacific Capital at 34.2%
variable interest rate, secured by accounts
receivable of ECSI, balance not to exceed
$100,000, due on demand. 51,934 - -
Note payable Crescent International Limited at 10%
interest rate, convertible to common stock
based on market price, interest payments due
bi-annually in common stock, principal due
January 15, 2001. 350,000 - -
Note payable Bay Cities at 10.75% interest rate,
due on demand. 83,396 - -
-------------- ------------- --------------
Totals 1,840,304 1,261,208 1,659,013
Less related party notes (344,250) (344,250) (344,250)
-------------- ------------- --------------
Total notes payable 1,496,054 916,958 1,314,763
Less current portion (1,097,450) (274,445) (1,241,879)
-------------- ------------- --------------
Total Long-Term Debt $ 398,604 $ 642,513 $ 72,884
============== ============= ==============
</TABLE>
Scheduled maturities of notes payable are as follows:
For the
Years Ending
March 31,
---------
2000 $ 1,097,450
2001 48,604
2002 350,000
2003 -
2004 -
Thereafter -
-----------------
$ 1,496,054
=================
F-20
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 10 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS
The following summarizes the exercise price per share and expiration
date of the Company's outstanding options and warrants to purchase
common stock at March 31, 1999. These warrants may be extended at the
Company's discretion.
<TABLE>
<CAPTION>
Type Expiration Date Exercise Price Number
---- --------------- -------------- ------
<S> <C> <C> <C>
Options February 2002 $3.625 9,340
Options 2002 to 2003 $2.50 92,620
Options June 2001 $2.26 357,716
Options February 2003 $1.875 9,993
Options March to May 2002 $1.53 464,411
Options June 2002 $1.50 5,678
Options February 2003 $1.375 1,000
Options 2002 to 2003 $1.125 108,573
Options October 2002 $1.00 122,932
Options 2002 to 2003 $0.875 91,809
Options March 2002 $0.75 750,000
Options October 2003 $0.469 75,957
Options January 2004 $0.3125 5,000
Warrants 1999 to 2002 $2.50 80,153
Warrants May 2003 $2.00 100,000
Warrants April 2002 $1.75 2,000
Warrants 1999 to 2003 $1.625 157,200
Warrants 1999 to 2000 $1.50 72,000
Warrants February 2003 $1.375 80,000
Warrants July 2002 $1.125 86,000
Warrants 2002 to 2003 $1.00 38,000
Warrants 2001 to 2003 $0.75 415,000
Warrants October 2002 $0.625 700,000
Warrants January 2004 $0.75 80,000
Warrants June 2000 $0.01 726,000
------------
4,631,382
=========
</TABLE>
The Company has established a non statutory stock option plan dated
June 28, 1996 that provides options to purchase 2,000,000 shares of
common stock on a 1 for 1 basis. The plan was amended January 8, 1999
to increase the number of shares to 3,500,000. 1,440,738 options are
fully vested of which 176,666 options were exercised as of September
30, 1998. The remaining options will gradually vest between 1998
through 2003. No options shall be granted under the plan after June
28, 2000. Options issued will have a five year period to be exercised.
The plan was established to provide a special incentive to selected
individuals who have made significant contributions to the business
and its success. The plan shall be administered by the board of
directors of the Company or an option committee.
NOTE 11 - DISCONTINUED OPERATIONS
MHB Manufacturing, Inc. (MHB), a wholly-owned subsidiary of the
Company, has discontinued its operations as of March 31, 1996 and has
filed for bankruptcy. The investment and intercompany accounts have
been written off resulting in a gain from discontinued operations
during 1996.
F-21
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 12 - CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
The historical information contained herein has been consolidated on a
proforma basis and is presented as unaudited. The purchase of assets
and liabilities from Nautica Technology Group, Intl. (Nautica) on May
10, 1998 and ECSI Construction Services, Inc. (ECSI) in October 1998
are described in Note 1. The purchases have been presented as though
they were effective October 1, 1997. All significant accounting
policies for Nautica and ECSI are the same as the Company's as defined
in Note 2.
<TABLE>
<CAPTION>
For the Year Ended
For the September 30, 1998
Period Ended ----------------------------------------------------
May 10, 1998 Sytron and Proforma
Nautica ECSI Subsidiaries Combined
---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $ - $ 481,218 $ 5,087,136 $ 5,568,354
---------------- --------------- --------------- -----------------
COST AND EXPENSES
Cost of sales - 441,574 2,898,968 3,340,542
General and
administrative 97,341 164,138 3,483,315 3,744,794
Interest 6,805 20,369 303,514 330,688
Other expense (income) - - 2,305,674 2,305,674
Extraordinary items - - (217,483) (217,483)
---------------- --------------- --------------- -----------------
Total Costs and
Expenses 104,146 626,081 8,773,988 9,504,215
---------------- --------------- --------------- -----------------
NET LOSS $ (104,146) $ (144,863) $ (3,686,852) $ (3,935,861)
================ =============== =============== =================
</TABLE>
NOTE 13 - SECURITY INTEREST IN STOCK OF A SUBSIDIARY
In consideration for funds loaned to the Company by related parties
for the purchase of Dorado Systems Corporation (Dorado), the Company
granted a security interest in Dorado's common stock. 22,403 shares of
Dorado's common stock were issued and are being held in a nominee's
name until loans have been paid.
NOTE 14 - ROYALTY COMMITMENT
On November 22, 1996, the Company purchased the parking division of
The Stanley Works (Stanley) for $25,000 cash. In addition, the Company
has agreed to pay Stanley a royalty based on the Company's net sales
of parking products with the royalty agreement expiring November 22,
1998. The royalty commitment is 5% of the Company's net sales to
Stanley and its network of distribution companies and 1% of all other
net sales of the parking products.
NOTE 15 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has incurred
operating losses from its inception through March 31, 1999. It has not
established revenues sufficient to cover its operating costs and to
allow it to continue as a going concern.
F-22
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 15 - GOING CONCERN (Continued)
The Company feels it would achieve operating profits and positive cash
flow if operated for maximum return in its current form. Management
believes, however, that substantial opportunity exists in the highly
fragmented security industry for a broad line, full service provider.
Management is committed to creating such a provider through extensive
product development and through acquisition of companies with
complementary products and/or distribution networks. Many of these
acquisitions are early stage companies with limited cash flow and
heavy capital needs to realize their potential. Operating according to
this philosophy has required greater spending, and foregoing current
profit opportunities for future growth opportunities.
In October 1998, the Company restructured its sales and marketing
programs and made other changes intended to reduce operating costs.
These steps included personnel and overhead reductions and deferral of
some product development and marketing introduction activities.
Without abandoning its long-term growth strategy, the Company has
refocused existing operations to achieve profitability and positive
cash flow. Additional acquisitions will be undertaken as financing to
support them is obtained.
NOTE 16 - CRESCENT FINANCING
Since May of 1998, Crescent International Limited ("Crescent") has
been the primary source of financing for the Company. Two transactions
have taken place. In May of 1998 (the "May transaction"), the Company
sold to Crescent for $250,000 in cash, 166,667 shares of Common Stock,
and a Warrant to acquire an additional 100,000 shares of Common Stock
at a price of $3.375 per share. Rights under the May transaction
Warrant expire in May of 2003. Under the May transaction, the Company
had the conditional right to sell additional shares to Crescent.
Sytron also had an obligation to file a registration statement for all
of the shares issued and issuable to Crescent under the various
aspects of the May transaction. The Company was not able to meet its
obligations. As a result both of that failure, and of the fall in the
price of the Company's common stock on the market on which that stock
is traded, the Company was unable to comply with the conditions
underlying its right to sell to Crescent certain additional shares of
stock. In the autumn of 1998, the Company and Crescent agreed to
terminate the May transaction, and to replace it with a revised
financing arrangement (the "January transaction").
The January transaction closed on January 15, 1999. It involves (a)
the sale to Crescent by the Company of a Convertible Promissory Note
with a face amount of $350,000 (the "First Note"), and the conditional
right to sell to Crescent a second Convertible Promissory Note in the
face amount of $400,000 (the "Second Note"); (b) the issuance of
73,045 shares to Crescent as a commitment fee for entering into the
January transaction, and the Company's agreement to issue an
additional number of shares every six months to Crescent so long as
any portion of the First Note or the Second Note remains unpaid; (c)
the sale to Crescent of 100,000 shares for an aggregate of $1.00; (d)
the issuance to Crescent of a Warrant (the "Additional Warrant") to
purchase up to 726,000 shares from the Company for $0.01 per share;
and (e) the payment by Sytron to Crescent of a Note Issuance Fee of
$10,500 in cash. The Convertible Promissory Notes are secured by a
first lien on the Company's inventory. Each Note is convertible in
$50,000 minimum segments at any time into the Company's common stock.
In the January transaction, share price formulas are part of the First
Note, the Additional Warrant, and the commitment fee. These formulas
determine the precise number of Sytron common shares that are required
to be issued to Crescent. Each formula is based on "Market Price".
"Market Price" is defined, for purposes of the January transaction, as
the lowest three consecutive trading day average of bid prices for the
Company's common stock during the thirty trading days before the date
on which Market Price is determined.
F-23
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999, September 30, 1998 and 1997
NOTE 16 - CRESCENT FINANCING (Continued)
The conversion formula in the First Note is the lower of $0.8125 per
share and eighty-five (85%) percent of Market Price, but subject to a
minimum conversion price until July 15, 1999 of $0.375 per share. If
the entire First Note is converted before July 15, 1999 at the minimum
conversion price, the Company would be obligated to issue 933,333
shares of its common stock. If the entire First Note is converted at
any time the Market Price has risen to more than $0.96 a share, the
Company would be obligated to issue 430,769 shares of its common
stock. The fewest number of shares of common stock that the Company is
obligated to issue on conversion of the First Note is 430,769.
The precise number of shares Crescent may acquire under the Additional
Warrant is also determined by a formula. This formula is designed to
reduce the number of shares Crescent may acquire as the Market Price
of the Company's common stock on the effective date of this
registration statement increases. If the Market Price on that
effective date is $0.28 per share or lower, then Crescent may acquire
all 726,000 shares for $0.01 per share. But if, for example, the
Market Price on that effective date is $0.38 per share, then
Crescent's right to acquire shares under the Additional Warrant is
reduced to 491,228 shares, at a price of $0.01 per share.
The number of shares issuable each six months as a continuing
commitment fee is also based on Market Price on the date before the
commitment fee is payable. Shares are issuable if there is an unpaid
balance under either of the Convertible Promissory Notes. Five (5%)
percent of the unpaid balance of the Convertible Promissory Notes is
divided by the Market Price, and the quotient is the number of
additional shares that the Company is required to issue.
The First Note may not be converted into Sytron common stock, and the
Additional Warrant may not be exercised to acquire Sytron common stock
if, by reason of the conversion (of the First Note) or the exercise
(of the Additional Warrant), Crescent would own (beneficially and
through Crescent affiliates) more than 9.9% of the outstanding shares
of Sytron common stock.
As part of the January transaction, the Company agreed to file an
initial registration statement with the SEC. This registration
statement is being filed to carry out that obligation. This
registration statement covers, from the May transaction, both the
166,667 shares of common stock, and 100,000 shares of common stock
that are issuable if Crescent exercises the May transaction Warrant.
This registration statement also covers, from the January transaction,
73,045 shares issued to Crescent as a commitment fee and an estimated
150,000 additional shares that may be issued as a commitment fee over
the next twelve months; 100,000 shares sold to Crescent for $1.00 in
the aggregate; 933,333 shares which may be issued to Crescent on its
conversion of the First Note at the stated minimum price before July
15, 1999; and 726,000 shares which may be issuable to Crescent on its
exercise of its rights to acquire shares at the lowest agreed price
pursuant to the Additional Warrant. Thus, this registration statement
seeks to register 2,249,045 shares of Sytron common stock to cover its
maximum commitment to Crescent.
F-24
<PAGE>
TABLE OF CONTENTS
Prospectus Summary.........................................................2
Risk Factors...............................................................5
Crescent Financing........................................................11
Determination of Offering Price...........................................13
Dilution..................................................................13
Use of Proceeds...........................................................13
Selling Stockholder.......................................................14
Dividend Policy...........................................................17
Capitalization............................................................18
Selected Financial Data...................................................19
Management's Discussion and Analysis of Financial Condition...............21
Business..................................................................30
Additional Information....................................................41
Legal Proceedings.........................................................42
Management................................................................43
Executive Compensation....................................................47
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...........................................48
Principal Shareholders....................................................49
Certain Transactions......................................................52
Description of Securities.................................................53
Plan of Distribution......................................................55
Legal Matters.............................................................57
Experts...................................................................57
Financial Statements .....................................................F-1
<PAGE>
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , all dealers that effect transactions in these securities may be
required to deliver a prospectus.
<PAGE>
PART II
Item 24. Indemnification of Directors and Officers.
The following states the general effect of all statutes, charter
provisions, by-laws, contracts or other arrangement under which any controlling
person, director or officer of Sytron is insured or indemnified in any manner
against liability which he may incur in his capacity as such:
Under 15 Pa.C.S.A. ss. 513(a), if a by-law adopted by the shareholders
entitled to vote or members entitled to vote of a domestic corporation so
provides, a director shall not be personally liable, as such, for monetary
damages for any action taken unless the director breached or failed to perform
the duties of his office, and such breach or failure to perform constitutes
self-dealing, willful misconduct, or recklessness. However, subsection (b)
states that subsection (a) shall not apply to the liability of a director
pursuant to any criminal statute or the payment of taxes pursuant to federal,
state, or local law.
Whereas 15 Pa.C.S.A. ss. 513 deals with domestic corporations, 15 Pa.C.S.A.
ss. 1713 implements the very same language as it pertains to by-laws adopted by
the shareholders of a business corporation.
Additionally, 15 Pa.C.S.A. ss. 1721 states that persons upon whom the
liabilities of directors are imposed shall to that extent be entitled to the
rights and immunities conferred by or pursuant to law upon directors of a
corporation.
Article VIII of our amended and restated By-Laws provides, in pertinent
part:
8.1 Limitation of Liability. Directors of this corporation shall
not be personally liable for monetary damages as such for any
action other than as expressly provided in 15 Pa.C.S.A. ss. 513 of
the Associations Code and 15 Pa.C.S.A. Sections 1713 and 1721 of
the Pennsylvania Business Corporation Law of 1988. It is the
intention of this Section 8.1 to limit the liability of directors
of this corporation to the fullest extent permitted by 15 Pa.
C.S.A. ss.ss.513, 1713 and 1721, and any other present or future
provision of Pennsylvania law.
8.2 Indemnification. The corporation shall indemnify every
director and officer, and may indemnify any employee or agent, to
the full extent permitted by the Pennsylvania Business Corporation
Law of 1988, the Pennsylvania Directors' Liability Act and any
other present or future provision of Pennsylvania law. The
corporation shall pay and advance expenses to directors and
officers for matters covered by indemnification to the full extent
permitted by such law, and may similarly pay and advance expenses
for employees and agents. This Section 8.2 shall not exclude any
other indemnification or other rights to which any party may be
entitled in any manner.
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth our estimates of the expenses we incurred in
connection with the issuance and distribution of the securities being
registered:
Securities and Exchange Commission registration fee......... $ 500.00
Printing registration statement and other documents......... 7,000.00
Fees and expenses of Registrant's counsel................... $ 127,900.00
Accounting fees and expenses................................ $ 5,000.00
Blue Sky expenses........................................... $ 5,000.00
Miscellaneous............................................... $ 2,500.00
----------------
Total........................ $ 147,900.00
================
Item 26. Recent Sales of Unregistered Securities.
Described below is information regarding all securities that have been
issued by the Company over the past three years without registering the
securities under the Securities Act of 1933.
During the third quarter of 1996, the Company issued a total of 326,924
shares of restricted common stock, with a fair value of $383,344.98, to seven
individuals and seven institutions for consulting, accounting, contracting, and
other services, and for the sale of certain goods.
During the fourth quarter of 1996, the Company issued a total of 59,246
shares of restricted common stock, with a fair value of $30,245.67, to six
individuals for legal and other services.
During the first quarter of 1997, the Company issued a total of 341,084
shares of restricted common stock, with a fair value of $671,485.39, to one
individual and two institutions for services rendered to the Company.
During the second quarter of 1997, the Company issued a total of 9,761
shares of restricted common stock, with a fair value of $19,522.00, to four
individuals and one institution for services rendered to the Company.
During the third quarter of 1997, the Company issued a total of 24,036
shares of restricted common stock, with a fair value of $27,040.50, to five
individuals and one institution for services rendered to the Company.
During the fourth quarter of 1997, the Company issued a total of 135,432
shares of restricted common stock, with a fair value of $130,557.00, to three
individuals and one institution for services rendered to the Company.
During the first quarter of 1998, the Company issued a total of 185,667
shares of restricted common stock, with a fair value of $242,913.58, thirteen
individuals for legal, contracting, consulting, and other services, and for
goods sold to the Company.
-2-
<PAGE>
During the second quarter of 1998, the Company issued a total of 396,312
shares of restricted common stock, with a fair value of $539,810.49, to eight
individuals and nine institutions. Werren Holdings Limited and one other
institutional creditor were each issued 154,706 shares of the Company's Common
stock as each converted certain of the convertible subordinated debentures that
had matured on January 31, 1996. Werren also exchanged $12,704 due it for 12,704
shares of the Company's Common stock.
During the third quarter of 1998, the Company issued a total of 545,003
shares of restricted common stock, with a fair value of $249,020.30, to fifteen
individuals and six institutions for financial services, and for goods sold to
the Company.
During the fourth quarter of 1998, the Company issued a total of 122,689
shares of restricted common stock, with a fair value of $61,035.86, to ten
individuals and one institution for contracting and other services, and for
goods sold to the Company.
During the first quarter of 1999, the Company issued a total of 91,877
shares of restricted common stock, with fair value of $19,360.48, to nine
individuals and one institution for financial and other services, and for
accrued interest.
During the second quarter of 1999, the Company issued a total of 333,160
shares of restricted common stock, with fair value of $83,298.49, to ten
individuals and three institutions for financial and other services, and for
accrued interest.
The Company issued convertible, subordinated debentures that matured on
January 31, 1996. As of September 30, 1998 and 1997 and as of March 31, 1999,
$42,263 was payable by the Company on these debentures.
On July 12, 1996, the Company completed an offering under rule 504 to
Regulation D of the Securities Act of 1933. The offering was comprised of 20,000
units, each of which contained one share of common stock, six "A" Warrants,
fourteen "B" Warrants and one "C" Warrant. A total of $100,000 was raised from
the sale of these units. Thereafter, 120,000 A Warrants, 224,270 B Warrants, and
1,860 C Warrants were converted into 368,193 shares of Common stock for which
the Company received $402,749.
In September 1996, the Company acquired all of the issued and outstanding
securities of Mundix Control Systems, Inc. for 300,000 unregistered shares of
the Company's common stock. The value of the Company's stock attributed to this
purchase was $1,500,000 ($5.00 per share).
In March 1997, the Company acquired certain assets from Camenco, Inc. The
purchase price for these assets was established at $816,000, for which the
Company issued 200,000 restricted, unregistered shares of its Common stock and
paid $10,000.
-3-
<PAGE>
In October 1997, the Company purchased from Point Automation, Inc.
substantially all of the "Pro Series" product line assets, both tangible and
intangible, including the right to use the "Point Automation" name, in exchange
for 25,000 shares of restricted, unregistered Common stock, and a commitment to
issue up to an additional 50,000 shares of restricted, unregistered common stock
to Gary Handelin on certain conditions.
In May of 1998, a newly formed subsidiary of the Company agreed to acquire
the net assets of Nautica Technology Group International, a privately held
Georgia corporation for 50,000 restricted, unregistered shares of Sytron Common
stock valued at $190,000, and up to 550,000 additional restricted, unregistered
shares.
Also in May of 1998, the Company sold to Crescent International Limited
("Crescent") for $250,000 in cash, 166,667 shares of Common stock, and a Warrant
to acquire an additional 100,000 shares of Common stock at a price of $3.375 per
share. Rights under the Warrant expire in May of 2003.
In October 1998, the Company acquired the outstanding shares of Law
Enforcement Technologic Resources, Inc. for 440,000 restricted, unregistered
shares of Common stock.
In October 1998, the Company acquired all of the issued and outstanding
stock of ECSI Construction Services, Inc. for 100,000 restricted, unregistered
shares of Common stock.
A transaction with Crescent closed on January 15, 1999. It involved
o the sale to Crescent of our convertible promissory note with a face amount
of $350,000 (the "First Note"), and the conditional right to sell to
Crescent a second convertible promissory note in the face amount of
$400,000 (the "Second Note");
o the issuance of 73,045 shares to Crescent as a commitment fee for entering
into the January transaction, and our agreement to issue an additional
number of shares every six months to Crescent so long as any portion of the
First Note or the Second Note remains unpaid;
o the sale to Crescent of 100,000 shares for an aggregate of $1.00;
o the issuance to Crescent of a warrant (the "Additional Warrant") to
purchase up to 726,000 shares from us for $0.01 per share; and
o the payment by Sytron to Crescent of a Note Issuance Fee of $10,500 in
cash.
The First Note is convertible according to a formula, which, if it had been in
effect on July 1, 1999, would have required Sytron to issue 1,520,362 shares on
the conversion of that note. We have also agreed to pay a commitment fee to
Crescent every six months so long as any portion of the convertible notes is
outstanding. The commitment fee will vary from time to time depending, among
other things, on Market Price (a defined term) and the outstanding convertible
note balance.
Except as otherwise indicated above, the above transactions were private
transactions not involving a public offering and were exempt from the
registration provisions of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof. No underwriter was engaged in connection with the
foregoing sales of securities.
-4-
<PAGE>
Item 27. Exhibits and Financial Statement Schedules.
Exhibit
Number Description of Exhibit
------ ----------------------
3(i)(a) -- Articles of Incorporation as filed with Pennsylvania
Department of State on November 9, 1992
3(i)(b) -- Articles of Amendment authorizing change in
aggregate number of shares able to be issued, as filed
with Pennsylvania Department of State on July 3, 1995
3(i)(c) -- Articles of Amendment authorizing change of
corporate name, filed with Pennsylvania Department of
State on August 14, 1995
3(ii)(a) -- By-Laws (including amendments to Articles 3.2, 5.2,
5.5, 7.1, 7.3, and 7.8, as of August 8, 1993)
3(ii)(b) -- By-Law Amendment to Articles 7.3 and 7.8, as of
July 29, 1999*
10(a) -- Executive Employment Agreement dated May 1, 1997,
between Sytron, Inc. and Robert Howard
10(b) -- Executive Employment Agreement dated May 1, 1997,
between Sytron, Inc. and Private Capital Group Ltd.
for the services of Mitchel Feinglas
10(c) -- Lease of 2770, 2780 Industrial Lane, Broomfield, CO,
dated June 30, 1998, between the Robert Law Family
Trust and Sytron, Inc., with Addendum #1, dated
October 29, 1998
10(d) -- Stock Purchase Agreement dated October 7, 1998,
between Sytron, Inc. and ECSI Construction Services,
Inc.
10(e) -- Note Purchase Agreement dated January 15, 1999,
between Sytron, Inc. and Crescent International
Limited
-5-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
10(f) -- Convertible Note No. 1 dated January 15, 1999, and due January 15,
2001, in the principal amount of $350,000.00
10(g) -- Convertible Note No. 2 in the principal amount of $400,000.00
10(h) -- Amended and Restated Registration Rights Agreement dated
January 15, 1999, between Sytron, Inc. and Crescent International
Limited
10(i) -- Security Agreement dated January 15, 1999, between Sytron, Inc.
and Crescent International Limited
10(j) -- Termination Agreement dated January 15, 1999, between Sytron,
Inc. and Crescent International Limited
10(k) -- Additional Warrant dated January 15, 1999, to
purchase up to 726,000 shares of Common stock of
Sytron, Inc.
10(l) -- Promissory Note dated October 3, 1995, in the amount of
$45,000.00, due to Springhill Holdings, Ltd. from Sytron, Inc.
10(m) -- Promissory Note dated July 15, 1996, in the amount of $28,000.00,
due to Springhill Holdings, Ltd. from Sytron, Inc.
10(n) -- Promissory Note dated October 3, 1995, in the amount of
$10,000.00, due to Werren Holdings, Ltd. from Sytron, Inc.
10(o) -- Promissory Note dated October 3, 1995, in the amount
of $245,000.00, due to Katonah West Pension Plan from
Sytron, Inc.
10(p) -- Promissory Note dated July 15, 1996, in the amount
of $54,750.00, due to Katonah West Pension Plan from
Sytron, Inc.
10(q) -- Unsecured Note Payable to United Credit Corporation
executed September 13, 1996, with monthly principal
and interest payments of $5,000 beginning October 1,
1996
10(r) -- Promissory Note dated June 13, 1997, in the amount of $10,000.00,
due June 13, 1998, to Robert M. Long from Sytron, Inc.
-6-
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
10(s) -- Secured Promissory Note dated February 1, 1998, in the amount of
$56,000.00, due January 31, 2000, to John E. Stuart from Sytron, Inc.
10(t) -- Secured Promissory Note dated February 1, 1998, in
the amount of $107,856.00, due January 31, 2000, to
Irwin Associates Pension Scheme from Sytron, Inc.
10(u) -- Secured Promissory Note dated February 1, 1998, in
the amount of $100,000.00, due January 31, 2000, to
Basil and Susan Bicknell from Sytron, Inc.
10(v) -- Secured Promissory Note dated February 1, 1998, in the amount of
$100,000.00, due January 31, 2000, to V.W. Warren Pearl from
Sytron, Inc.
10(w) -- Secured Promissory Note dated February 1, 1998, in the amount of
$100,000.00, due January 31, 2000, to John and Kay Boor from
Sytron, Inc.
10(x) -- Secured Promissory Note dated February 1, 1998, in
the amount of $44,800.00, due January 31, 2000, to
Marion Bloch from Sytron, Inc.
10(y) -- Agreement between United Credit Corporation, Dorado
Systems Corporation, and Sytron, Inc., dated September
13, 1996 detailing Dorado's indebtedness to United
Credit as well as amendment of the security agreement
between Dorado and United Credit
10(z) -- Agreement between Dorado Systems Corporation and United Credit
Corporation, dated December 3, 1995
10(aa) -- Note dated September 15, 1996, and Addendum, payable to Richard
E. Munz and Irma B. Munz
10(bb) -- Secured Promissory Note dated February 1, 1998, in
the amount of $50,000.00, due January 31, 2000, to
Charles and Janet Robinson from Sytron, Inc.
-7-
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
10(cc) -- Warrant to Charles Robinson for purchase of 2,500 shares of
Sytron, Inc. Common stock, dated February 1, 1998
10(dd) -- Loan and Security Agreement dated February 1, 1998, and expiring
on February 1, 2000, between Sytron, Inc. and Charles Robinson
10(ee) -- Secured Promissory Note dated February 1, 1998, and
due January 31, 2000 to Janet Robinson, but stating
that Charles Robinson is the holder
10(ff) -- Warrant dated February 1, 1998, to Janet Robinson for purchase of
2,500 shares of Sytron, Inc. Common stock
10(gg) -- Loan and Security Agreement dated February 1, 1998, and expiring
on February 1, 2000, between Sytron, Inc. and Janet Robinson
10(hh) -- Registration Rights Agreement modified July 15,
1996, between Sytron, Inc., Katonah West Pension Plan,
Springhill Holdings, Ltd., Werren Holdings, Ltd., and
Private Capital Group Ltd.
10(ii) -- Registration Rights Agreement dated October 1995,
between Sytron, Inc., Katonah West Pension Plan,
Springhill Holdings, Ltd., Werren Holdings, Ltd., and
Private Capital Group Ltd.
10(jj) -- Security Agreement dated October 1995 between debtor Sytron,
Inc. and secured parties Katonah West Pension Plan, Springhill
Holdings, Ltd., and Werren Holdings, Ltd.
10(kk) -- Promissory Note dated October 3, 1995, and due one year from such
date, in the amount of $10,000.00, to Werren Holdings, Ltd. from
Sytron, Inc.
10(ll) -- Promissory Note dated October 3, 1995, and due one year from such
date, in the amount of $45,000.00, to Springhill Holdings, Ltd. from
Sytron, Inc.
10(mm) -- Promissory Note dated October 3, 1995, and due one
year from such date, in the amount of $245,000.00, to
Katonah West Pension Plan from Sytron, Inc.
-8-
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
10(nn) -- Letter Agreement dated as of April 1, 1999, between Werren
Holdings, Limited and Sytron, Inc.*
23(a) -- Letter of Consent from Jones, Jensen & Company, LLC, dated
August 10, 1999*
23(b) -- Consent from Bresler, Goodman & Unterman, LLP, dated August
10, 1999*
</TABLE>
* To be filed with this Amendment No. 1.
Item 28. Undertakings.
Sytron hereby undertakes to file, during any period in which offers or
sales are being made, a post-effective amendment to this registration statement
o to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
o to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
o to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Sytron hereby undertakes that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Sytron hereby undertakes to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
-9-
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
Sytron, we have been advised that in the opinion of the 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 Sytron of expenses incurred
or paid by a director, officer or controlling person of Sytron 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, Sytron
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 of 1933 and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act of 1933,
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 registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sytron, Inc.
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Broomfield, State of
Colorado, on the 12th day of August, 1999.
SYTRON, INC.
By: /s/ Robert B. Howard
----------------------------------------------
Robert B. Howard,
President and Director, Chief Executive Officer
By: /s/ Michael B. Fitzsimons
----------------------------------------------
Michael B. Fitzsimons
Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Howard and Michael B. Fitzsimons and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agents or any of
them or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or thereto has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Mitchel A. Feinglas Chairman and August 12, 1999
- ----------------------- Director
Mitchel A. Feinglas
/s/ James W. Power Director August 12, 1999
- ------------------
James W. Power
-11-
Exhibit 3.ii.b
ACTION BY SPECIAL MEETING
OF THE BOARD OF DIRECTORS
OF
SYTRON, INC.
Date: July 29, 1999
The undersigned, being all of the members of the Board of Directors of Sytron,
Inc. (the "Corporation"), a Pennsylvania corporation, have convened this special
meeting to consider the proposed attached amendments to the Corporation's
by-laws, which proposed amendments have been previously circulated and reviewed
by all of the members of the Board of Directors.
This meeting was held by telephone conference. Participating were Directors
Mitchel Feinglas, James W. Power and Robert Howard. Also in attendance by
invitation was Jay J. Jacobson, counsel to Sytron, Inc.
Mr. Feinglas acted as Chairman. Following a discussion of the proposed
amendments to the bylaws, the following motions were made, seconded and adopted:
RESOLVED, that the proposed amendments to the Corporation's By-laws,
as set forth in the attached memorandum, are approved effective this date; and
it is further
RESOLVED, that as President of the Corporation, Robert Howard, shall,
effective immediately, carry out the duties of chief executive officer.
Mr. Howard abstained from voting on the foregoing resolutions.
There being no further business, the meeting adjourned at 11:30AM, Mountain
Time.
/s/ Mitchel Feinglas /s/ Robert Howard
- -------------------------- -----------------------
Mitchel Feinglas, Director Robert Howard, Director
/s/ James W. Power
- ------------------------
James W. Power, Director
<PAGE>
MEMORANDUM OF PROPOSED BY-LAW AMENDMENTS
FOR SYTRON, INC.
July 23, 1999
Broomfield, Colorado
Sytron, Inc.'s present By-laws:
1. The original By-laws of the corporation provided that: "The President
shall be the chief executive officer of the corporation and shall
preside at all meetings of the Board of Directors and at all meetings
of the shareholders." The original By-laws also state (Section 7.1)
that "The officers of the corporation shall be chosen by the board of
Directors...."
2. On August 8, 1993, the By-laws were amended to, among other
things, (a) provide for a Chairman of the Board to be included in
the list of officers (Section 7.1); (b) provide that:"The
President shall be the chief operating officer of the
corporation, and shall manage the day-to-day affairs of the
corporation, and administer the general direction of the affairs
of the corporation except as otherwise determined by the Board.
He or she shall perform the duties and powers of the Chairman of
the Board during the absence or disability of the Chairman, and
such other duties and powers as the Board of Directors shall
designate."; and (c) add new Section 7.8 - Chairman of the Board
which provides, among other things, that: "The Chairman of the
Board shall be the chief executive officer of the corporation,
and shall preside at all meetings of the Board of Directors and
at all meetings of the shareholders."
Sytron, Inc.'s proposed amended By-laws:
7.3 President. The President shall be the chief executive officer of
the Corporation. The President shall manage the day-to-day
affairs of the corporation, and administer the general direction
of the affairs of the corporation except as otherwise determined
by the Board.
The remainder of Article 7.3 shall be unchanged.
7.8 Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the Board of Directors. If the Board has not
named a chief executive officer, or if that post shall be vacant
at the time of any shareholders' meeting, then the Chairman of
the Board shall preside at meetings of the shareholders. The
Chairman of the Board may hold other offices at the discretion of
the Board.
The remainder of Article 7.8 shall be unchanged.
Exhibit 10(nn)
SYTRON
2770 Industrial Lane
Broomfield, CO 80020-1630
Tel: (303) 469-6100
Fax: (303) 469-7100
As of April 1, 1999
Werren Holdings Limited
Attn: G. A. Witts, Director
8 Queensway House
Queen Street
St. Helier, Jersey JE2 4WD
British Channel Islands
Dear Mr. Witts:
Please refer to the Stock Purchase Agreement, and all amendments thereto,
between Sytron, Inc. (the "Company") and Werren Holdings, Limited (the
"Purchaser") dated April 7, 1998, (the "Stock Agreement"). Terms defined in the
Stock Agreement and used in this letter agreement are used in accordance with
their definitions. The Company and the Purchaser agree as follows:
(a) The Purchaser owes a remaining balance of $269,250 to the Company which
balance is due on April 1, 1999 under the Stock Agreement. The Company
hereby agrees to extend to April 30, 2001, the date by which the Purchaser
shall pay the Company the sum of $269,250.
(b) On or about February 11, 1999, the Company filed a registration
statement with the U.S. Securities and Exchange Commission (Registration
No. 333 - 72173) for the registration of the Company's common stock on
behalf of a selling stockholder. The Purchaser, under an agreement dated
October, 1995 and modified on July 15, 1996, has the right to demand that
the Company include in such registration statement all of the Company's
stock owned by the Purchaser. In consideration for the extension granted in
this letter agreement, the Purchaser agrees to limit its right to cause the
Company to include no more than 691,384 shares of the Company stock
heretofore issued to the Purchaser in the registration statement originally
filed on February 11, 1999. The Purchaser specifically waives its right (i)
to demand that the Company register any other shares issued by it to the
Purchaser in any amendment to the February 11, 1999 registration statement,
and (ii) to have the 700,000 shares underlying its presently outstanding
warrant dated April 7, 1998 to acquire 700,000 shares registered by the
Company in any amendment to the February 11, 1999 registration statement.
<PAGE>
This Agreement shall amend and supersede any and all provisions of the
Stock Agreement which are inconsistent herewith.
To confirm your understanding and agreement with the foregoing, please sign
where indicated and return to my attention on or before April 2, 1999.
Very truly yours,
SYTRON, INC.
/s/ Rob Howard
-------------------------------
Rob Howard, President
CONFIRMED AND AGREED
WERREN HOLDING, LIMITED
/s/ Graeme Alan Witts
- --------------------------------
Name: Graeme Alan Witts
Position: Director
-2-
Exhibit 12(a)
Jones, Jensen
& Company, LLC
--------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT AUDITORS'
--------------------------------
Board of Directors
Sytron, Inc. and Subsidiaries
Broomfield, Colorado
We consent to the use in this Registration Statement of Sytron, Inc. and
Subsidiaries on Form SB-2, of our report dated November 20, 1998 of Sytron, Inc.
and Subsidiaries for the years ended September 30, 1998 and 1997, which are part
of this Registration Statement, and to all references to our firm included in
this Registration Statement.
/s/ Jones, Jensen & Company
- ----------------------------
Jones, Jensen & Company
Salt Lake City, Utah
August 10, 1999
Exhibit 23(b)
Bresler Goodman & Unterman
521 Fifth Avenue
New York, NY 10175
Tel: (212) 661-2150
Fax: (212) 949-6131
August 10, 1999
Sytron, Inc.
2770 Industrial Lane
Broomfield, Colorado 80020
Re: Registration Statement on Form SB-2 under the Securities Act of 1933
--------------------------------------------------------------------
Gentlemen:
In our capacity as special counsel to Sytron, Inc. a Pennsylvania
corporation (the "Company"), we have been asked to render this opinion in
connection with a Registration Statement on Form SB-2 (the "Registration
Statement"), being filed contemporaneously herewith by the Company with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
covering an aggregate of 4,658,822 shares (the "Shares") of Common Stock, $0.01
par value, which have been included in the Registration Statement for the
respective accounts of the persons identified in the Registration Statement as
Selling Stockholders.
The Shares include (i) 150,000 shares issued and to be issued to Crescent
International Limited ("Crescent") as a commitment fee ("Commitment Shares"),
(ii) 826,000 shares issuable upon exercise of certain warrants held by Crescent
at exercise prices ranging generally from $0.010 to $3.375 per share ("Crescent
Warrant Shares"), (iii) 1,520,362 shares issuable to Crescent pursuant to a
formula set forth in a convertible promissory note ("Note Shares"), (iv) 322,920
shares issuable upon exercise of certain warrants held by various selling
stockholders at exercise prices ranging generally from $0.625 to $2.50 per
share, ("Warrant Shares") and (v) 339,712 shares held by Crescent, 691,384
shares held by Werren Holdings Limited, 554,841 shares held by Springhill
Holdings Limited, and 253,603 shares held by other Selling Stockholders ("Issued
Shares").
We have examined the Certificate of Incorporation and the By-Laws of the
Company, both as amended to date, the Registration Statement, corporate
proceedings of the Company relating to the issuance of the Shares and such other
instruments and documents as we have deemed relevant under the circumstances.
<PAGE>
In making the aforesaid examinations, we have assumed the genuineness of
all signatures and the conformity to original documents of all copies furnished
to us as original or photostatic copies. We have also assumed that the copies of
the corporate records furnished to us by the Company including all corporate
proceedings taken by the Company to date in connection with the issuance of the
Commitment Shares, the Crescent Warrant Shares, the Note Shares, the Warrant
Shares and the Issued Shares accurately reflect the events to which those
records relate.
We are members of the bar of the State of New York, and have made such
examination of the laws of the State of New York and the laws of the United
States of America as we have deemed relevant to this opinion. To the extent the
laws of any jurisdiction other than the State of New York or the United States
of America are applicable to any of the foregoing opinions, we have assumed the
laws of such jurisdiction are identical to the laws of the State of New York.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the
Commonwealth of Pennsylvania.
2. To the best of our knowledge after due inquiry, the Commitment
Shares, when duly issued, and the Crescent Warrant Shares and
the Warrant Shares, when duly issued and paid for pursuant to
the exercise of the several warrants, and the Note Shares,
when duly issued upon conversion of the note, will be, and the
Issued Shares are, duly and validly authorized and issued,
fully paid and non-assessable.
This opinion is as of the date hereof and we do not undertake and disclaim
any obligation to advise you of any change in any matter set forth herein.
Additionally, no opinion is expressed as to applicable bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of the rights of
shareholders under the United States Bankruptcy Code, and no opinion is
expressed as to any matter except as specifically set forth herein.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the prospectus forming a part of the Registration
Statement.
Very truly yours,
BRESLER GOODMAN & UNTERMAN, LLP
/s/ Bresler Goodman & Unterman
-2-
