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As Filed with the Securities and Exchange Commission on May 13, 1997
Registration No. ___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
IntelliSys Automotive Systems, Inc.
(Name of small business issuer in its charter)
Delaware __________ 13-3841920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Primary Standard Industrial Identification No.)
Classification Number)
27777 Franklin Road - Suite 1420
Southfield, Michigan 48034
(810) 213-0284
(Address and telephone number of
principal executive offices and place of business)
Douglas Dick, President
IntelliSys Automotive Systems, Inc.
27777 Franklin Road - Suite 1420
Southfield, Michigan 48034
(810) 213-0284
(Name, address and telephone
number of agent for service)
Copies to:
Frederick M. Mintz, Esq. Neil S. Baritz, Esq.
Mintz & Fraade, P.C. Dreier & Baritz
488 Madison Avenue 1515 No. Federal Highway, Suite 300
New York, New York 10022 Boca Raton, FL 33432
Telephone No.: (212) 486-2500 Telephone No.: (561) 750-0910
Facsimile No.: (212) 486-0701 Facsimile No.: (561) 750-5045
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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, please 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, please check the following box. [ ] _______________________.
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
____________________________________________________________________________________________________________________________________
Proposed Proposed
maximum offering maximum
Title of each class of Amount to be price aggregate Amount of
securities to be registered registered per unit (1) offering price (1) registration fee
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Units, each consisting of.............. 250,000 $10.00 $2,500,000 $757.58
(a) 2 shares of Common Stock,
$.001 par value............... 500,000
(b) 1 Redeemable Common Stock
Purchase Warrant.............. 250,000
____________________________________________________________________________________________________________________________________
Common Stock, issuable upon
exercise of the Redeemable
Warrants (2)...................... 250,000 $ 7.50 $1,875,000 $568.18
____________________________________________________________________________________________________________________________________
Underwriter's Warrants (3)............. 25,000 $ .001 $25 --
____________________________________________________________________________________________________________________________________
Units, issuable upon exercise of the
Underwriter's Warrants, each
consisting of..................... 25,000 $12.00 $ 300,000 $ 90.91
(a) 2 shares of Common Stock (2).. 50,000
(b) 1 Redeemable Common Stock
Purchase Warrant (2).......... 25,000
____________________________________________________________________________________________________________________________________
Common Stock, issuable upon
exercise of the Redeemable
Warrants underlying the
Underwriter's Warrants (2)........ 25,000 $7.50 $ 187,500 $ 56.82
____________________________________________________________________________________________________________________________________
Total Registration Fee................................................................................ $1,473.49
____________________________________________________________________________________________________________________________________
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock and Redeemable Warrants as may become
issuable pursuant to anti-dilutive provisions contained in the Redeemable
Warrants and the Underwriter's Warrants.
(3) To be sold to the Underwriter. Pursuant to Rule 457(g), no separate
registration fee is required for the Underwriter's Warrants.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED_________, 1997
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
250,000 UNITS
Each Unit Consisting of Two Shares of Common Stock
and One Redeemable Common Stock Purchase Warrant
IntelliSys Automotive Systems, Inc. (the "Company") hereby offers (the
"Offering") 250,000 units (each, a "Unit"). Each Unit consists of two shares
(the "Shares") of common stock, par value $.001 per share (the "Common Stock"),
and one Redeemable Common Stock Purchase Warrant (each, a "Warrant"). The Shares
and Warrants are sometimes hereinafter collectively referred to as the
"Securities." The Warrants shall be detachable and separately transferable from
the Units and exercisable commencing one year after the Effective Date of this
Offering. The Units offered hereby are offered on a "best efforts, 250,000 Units
all or none" basis. Each Warrant entitles the registered holder thereof to
purchase one share of Common Stock at an exercise price of $7.50 per share, at
any time during the five year period commencing on the date of this Prospectus.
The Warrant exercise price is subject to adjustment under certain circumstances.
Commencing 18 months after the date of this Prospectus, the Warrants are subject
to redemption by the Company, in whole but not in part, at $.10 per Warrant, on
30 days prior written notice provided that the per share closing bid quotation
of the Common Stock as reported on the Nasdaq SmallCap Market ("Nasdaq") equals
or exceeds $ 10 per share (subject to adjustment under certain circumstances)
for any twenty trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
See "Description of Securities - Warrants."
Prior to this Offering, there has been no public market for the
Securities, and there can be no assurance that any such market will develop
after the consummation of this Offering, or, if developed, that it will be
sustained. It is currently contemplated that the initial public offering price
will be $10.00 per Unit. For information regarding the factors considered in
determining the initial public offering price of the Units and the terms of the
Warrants, see "Risk Factors" and "Underwriting." Application has been made to
include the Common Stock and Warrants on Nasdaq under the symbols "____" and
"____W", respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS," COMMENCING ON PAGE 8, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
Price to Underwriting Proceeds to
Public (1) Discount (2) Company (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit........................... $ 10.00 $ 1.00 $ 9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Offering..................... $2,500,000 $250,000 $2,250,000
===================================================================================================================================
See inside front cover for footnotes
</TABLE>
THE AGEAN GROUP, INC.
The date of this Prospectus is , 1997.
<PAGE>
(1) The Company, through The Agean Group, Inc. (the "Underwriter"), is offering
the Units for sale hereunder on a "best efforts, 250,000 Units all or none"'
basis. The Underwriter has made no commitment to purchase any part of the
Units offered hereby but has agreed to use its best efforts to find
purchasers for such Units. The Units will be offered during the 30-day
period commencing on the date of this Prospectus subject to an extension at
the election of the Company for an additional period not to exceed fifteen
days (plus, in either event, an additional seven business day period to
allow checks deposited in escrow to clear) (the "Offering Period"). All
proceeds from the sale of the Units will be deposited in a special
non-interest bearing escrow account with [Bank Name], at [Bank Address], as
Escrow Agent. Unless a minimum of 250,000 Units is sold and paid for within
the Offering Period, all funds deposited in the escrow account will be
promptly refunded to the subscribers in full, without interest or deduction.
If 250,000 Units are sold and paid for during the Offering Period, the
Company will close on the sale of such Units (the "Closing"). Subscribers
will have no refund rights and the Underwriter may allocate among or reject
subscribers. See "Underwriting."
(2) Does not include additional compensation payable to the Underwriter, in the
form of a non-accountable expense allowance. In addition, see "Underwriting"
for information concerning indemnification and contribution arrangements
with the Underwriter and other compensation payable to the Underwriter.
(3) Before deducting estimated expenses of the Offering of $350,000, excluding
the Underwriter's non-accountable expense allowance.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as the Company
may deem appropriate or as may be required by law.
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[PHOTOGRAPHS AND CAPTIONS]
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise noted, the information
in this Prospectus (i) assumes that none of the Warrants included in the Units
being offered hereby, Underwriter's Warrants or Warrants issuable upon exercise
of the Underwriter's Warrants will be exercised, (ii) does not include any of
the 400,000 shares of Common Stock reserved for issuance upon the exercise of
options for grant under the Company's 1997 Stock Option Plan (the "Stock Option
Plan"), of which no options have been granted as of the date of this Prospectus,
and (iv) does not include the 7,500 shares of Common Stock issuable upon
exercise of options granted to Mintz & Fraade, P.C., counsel to the Company,
previously issued and presently outstanding. This Prospectus contains certain
forward looking statements concerning the Company's operations, economic
performance and financial condition. Such statements are subject to a number of
risks and uncertainties. The Company's actual results could differ materially
from those currently anticipated due to a number of factors including those
identified under "Risk Factors" and elsewhere in this Prospectus.
The Company
The Company is engaged in providing and servicing RT/AI(R) Agentware
computer software, which utilize Real Time Artificial Intelligence ("RT/AI"),
and related computer hardware, for automated manufacturing and control systems
directly to manufacturers of automotive vehicles including, but not limited to,
automobiles, buses, trucks and vans and manufacturers of automotive vehicles
(the "Automotive Industry") and to entities that supply manufacturing and other
equipment and software to the Automotive Industry; provided, however that such
entities can only utilize the RT/AI in connection with the portion of their
business which is engaged in the Automotive Industry. In general, "Real Time"
refers to the ability of a computer to process and respond to current
information and data input contemporaneously with the receipt of such
information and data, while "Artificial Intelligence" refers to computer
software programmed to mimic the human decision-making process. In addition to
providing RT/AI software and hardware, the Company enhances production and
control machinery manufactured by third parties with its RT/AI products and
installs the enhanced machinery in the manufacturing plants of its Automotive
Industry customers.
The Automotive Industry is experiencing a substantial shift in its
manufacturing process and control systems as automated machinery and the entire
manufacturing and administrative process becomes increasingly computerized. The
present Automotive Industry environment of "just-in-time" manufacturing, with
the typical production line handling numerous installation functions involving a
multitude of exterior and interior colors, interior fabrics, individual options
and option packages, engines and transmissions types and other features and,
possibly, different automobile models, has created a demand for computer
software application programs capable of controlling the complexity of
machinery, process and quality control systems and planning and scheduling
systems in a manner that reduces response time and costs. There are in excess of
350 Automotive Industry manufacturing plants located in North America, with the
typical plant having an average of 500 automated machines involved in the
production and inspection processes. The Company has targeted each manufacturing
plant within the Automotive Industry in North America as a potential customer,
with the control systems of each automated machine in such manufacturing plants
as capable of being enhanced by one or more of the Company's products. In
addition, each manufacturing plant has one or more management information system
("MIS"), overseeing the maintenance, supply acquisition, order fulfilment and
other administrative functions within the plant. Such MIS systems can also be
augmented by the Company's line of RT/AI products.
The RT/AI computer software being licensed by the Company was developed
by IntelliSys Systems, Inc. ("ISI"). In August 1995, the Company acquired from
ISI the exclusive license in perpetuity (the "License") to sell RT/AI computer
software and related technology (the "Products") to the Automotive Industry in
North America. In addition, the Company
4
<PAGE>
acquired all of ISI's rights under various purchase orders (each, a "Purchase
Order") and, perhaps more importantly, certain blanket purchase orders (each, a
"Blanket Purchase Order" or "BPO"), including a BPO with the purchasing agent of
The Ford Motor Company ("Ford"), SNAPP. In the automotive manufacturing
business, a BPO operates as a pre-approval of the vendor as a provider to the
BPO issuer of the items listed in the BPO. Although issuing a BPO does not
constitute a firm commitment, and the issuer of the BPO is under no obligation
to purchase the items listed thereon from such vendor, a BPO increases the
probability that such vendor will be chosen to supply those items listed in the
BPO if and when such items are ordered. Although the BPO with Ford has expired,
Management believes that as a practical matter no replacement is required in
view of the relationship between the Company and Ford. See "Risk Factors: Risk
of Loss of Material Customers, Lack of Firm Contracts." See "Business - License
Agreement with IntelliSys Systems, Inc." The Company has been approved as a
direct vendor to Ford and has received a vendor number which facilitates its
sales. There can be no assurance that sales to Ford will occur.
ISI is an artificial intelligence software and engineering firm
headquartered in Syracuse, New York. In 1987, ISI developed a "knowledged based"
computer software program called "RT/AI(R) Agentware(TM)" ("Agentware"), a
computer aided software engineering ("CASE") tool which is used to develop
knowledged based software applications in the form of "intelligent agents." In
general, "knowledge based" means that the software has certain attributes
normally associated with human knowledge, while "intelligent agent" refers to
software in which the "knowledge" is organized and placed in modules call
"agents." Management believes that, when incorporated into computer software
used in connection with manufacturing, process and quality control and MIS
systems, these attributes can increase the productivity and lower the costs of
manufacture within the Automotive Industry. Under the terms of the License, ISI
is required to provide all innovations, improvements, upgrades, modifications,
substitutions, replacements and enhancements to the Products and to correct any
errors to the Products. ISI has informed the Company that it intends to continue
to develop and produce upgrades, enhancements and additions to the Products for
the foreseeable future. The Company has received regular updates to the Products
since it first acquired the License. See "Business - License Agreement with
IntelliSys Systems, Inc." and "- Products."
The Offering
Securities Offered....................... 250,000 Units are being offered
hereby. Each Unit consists of two
Shares and one Warrant. The Warrants
shall be detachable and separately
transferable from the Units and
exercisable commencing one year after
the Effective Date of this Offering
and will trade separately immediately
upon issuance.
Terms of Warrants........................ Each Warrant entitles the registered
holder thereof to purchase, at any
time commencing on the date of this
Prospectus and until ,
2002 [five years from the date of
this Prospectus], one share of Common
Stock at a price of $ 7.50 per share,
subject to adjustment in certain
circumstances. Commencing eighteen
months after the date of this
Prospectus, the Warrants are subject
to redemption by the Company, in
whole but not in part, at $.10 per
Warrant, on 30 days' prior written
notice provided that the per share
closing bid quotation of the Common
Stock as reported on Nasdaq equals or
exceeds $ 10 per share, subject to
adjustment, for any twenty trading
days within a period of 30
consecutive trading days ending on
the fifth trading day prior to the
date of the notice of redemption. See
"Description of Securities -
Warrants."
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Unit Offering Price...................... $ 10 per Unit.
Common Stock and Warrants
Outstanding:
Prior to the Offering........... 4,000,000 shares of Common Stock and
-0- Warrants.
After the Offering.............. 4,500,000 shares of Common Stock and
250,000 Warrants.
Use of Proceeds.......................... For sales and marketing, enhancement
of productivity, increase in capacity
and general corporate purposes.
Risk Factors............................. The securities offered hereby involve
a high degree of risk and immediate
and substantial dilution. See "Risk
Factors" and "Dilution."
Proposed Nasdaq Symbols (1):
Common Stock.................... ____
Warrants........................ ____W
- ----------
(1) Application has been made for quotation of the Common Stock and
Warrants on Nasdaq.
Summary Financial Data
The following table presents summary financial data of the Company. The
summary consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, and notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Statement of Operations Data:
July 14, 1995
(Date of Inception) 3 Months 3 Months
Through Year Ended Ended Ended
September 30, September 30, December December
1995 1996 31, 1995 31, 1996
---- ---- -------- ---------
<S> <C> <C> <C> <C>
Revenues................................... $41,826 $793,457 $ 178,163 $ 201,266
Costs and expenses......................... 143,171 1,125,250 226,914 416,293
(Loss) from operations..................... (101,345) (331,793) (48,755) ( 215,027)
Net (loss)................................. (100,707) (331,846) (49,154) (214,893)
Net (loss) per share (.05) (.17) (.01) (.05)
Weighted average shares outstanding........ 2,000,000 2,005,479 2,000,000 4,000,000
</TABLE>
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<TABLE>
<CAPTION>
Balance Sheet Data:
December 31, 1996
September As
30, 1996 Actual Adjusted(1) Pro Forma (2)
---------- ------- ---------- -------------
<S> <C> <C> <C> <C>
Working capital (deficit) . . . . . $ 359,422 $ 151,220 $ 886,220 $2,711,220
Total assets. . . . . . . . . . . . 1,509,897 1,889,954 2,624,954 3,714,954
Total liabilities . . . . . . . . . 141,450 736,400 736,400 736,400
Stockholders' Equity . . . . . . . 1,368,447 1,153,554 1,888,554 3,713,554
</TABLE>
(1) Gives effect to the sale by the Company of 2,000,000 shares of the Class A
Stock, par value $.01 per share (the "Class A Stock"), of the Company, in
January 1997 and the application of the net proceeds of approximately
$735,000 therefrom (the "Pro Forma Adjustments").
(2) Gives effect to the Pro Forma Adjustments and assumes the sale of the
250,000 Units being offered for sale by the Company in the Offering and the
initial application of the estimated net proceeds therefrom. See "Use of
Proceeds," "Description of Securities" and "Underwriting."
7
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RISK FACTORS
Prospective investors should carefully consider the following factors,
in addition to the other information contained in this Prospectus, in evaluating
an investment in the Securities offered hereby. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward
looking statements as a result of certain factors, including those set forth in
the following risk factors and elsewhere in this Prospectus.
Limited Operating History; History of Losses; No Assurance of
Profitability. The Company was incorporated in July 1995. Accordingly, it has a
relatively short operating history upon which an evaluation of its prospects and
performance can be made. Further, the Company's operations are subject to all of
the risks inherent in a new business enterprise including, but not limited to,
high expense levels relative to revenues, complications and delays frequently
encountered in connection with the development and introduction of new products
and services, the ability to recruit and retain accomplished management and
support personnel, competition from established businesses, lack of capital,
lack of experience in the marketing of products, the ability to establish and
sustain product and service quality and unanticipated costs and expenses. The
Company has incurred net losses in each of its fiscal years since inception and,
as of December 31, 1996, had an accumulated deficit of $647,446. In addition,
the Company has been advised by ISI that ISI expended in excess of $5,300,000 to
develop the technology which, with respect to the Automotive Industry, is the
subject of the License and in its efforts in marketing the RT/AI technology to
the North American Automotive Industry prior to the granting of the License to
the Company which resulted in aggregate losses of $________ . Accordingly, there
can be no assurance that the Company will ever achieve or be able to sustain
profitability. In addition, unfavorable general economic conditions including,
but not limited to, any possible future downturn in the Automotive Industry or
the domestic or international economies in general, could materially and
adversely affect the Company's future operating results. See "Management
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto, included elsewhere in this
Prospectus.
Reliance upon ISI. The success of the Company will depend upon many
factors beyond the Company's control, including its contractual and working
relationship with ISI. The Company relies and will rely upon ISI to correct any
errors in the RT/AI technology forming the basis of the Company's products and
to provide substantially all of the research and development with respect to
innovations, upgrades, modifications, substitutions, replacements and
enhancements to the RT/AI technology. In addition, as a licensee of ISI, the
Company will benefit from any positive publicity regarding ISI and ISI's
standing as a developer and provider of artificial intelligence technology for
industrial applications, and will be harmed by any negative reports concerning
ISI. Accordingly, the long term viability of the Company is, to a material
extent, dependent upon the continued existence and success of ISI. The cessation
of operations by ISI or the discontinuance of ISI research and development of
artificial intelligence technology as it may benefit the marketability of the
Company's products, could have a material adverse effect on the Company. The
Company has been informed that ISI has expended of in excess of $5,300,000 to
develop the technology of which, with respect to the Automotive Industry, is the
subject of the license and incurred losses of $______ as of December 31, 1996.
See "Business - General," "- RT/AI Technology," "- License Agreement with
IntelliSys Systems, Inc." and "- Business Strategy."
Possibility of Undetected Errors. One or more of the products offered
by the Company when installed within or for a manufacturing production line may
contain undetected errors or defects. Products with reliability, quality or
compatibility problems could result in returns, reduced orders, uncollectible
accounts receivable; expenses in correcting any such errors or defects under
warranty, product redevelopment costs, and loss of, or delay in, product
acceptance. Any such event could have a material adverse effect upon the
Company's business and financial condition.
Possibility of Need For Design Change. There can be no assurance that
the technology incorporated into the Company's products or new products will be
operational as expected for all potential customer needs. As the products are
tested in the marketplace, the Company may discover that design changes are
necessary to achieve the expected performance. There can be no assurance that
any design changes required will be developed and incorporated in a timely or
economical manner, or at all.
Need to Develop Product Enhancements and New Products; Risk of
Obsolescence. The markets for the
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Company's products are characterized by rapid technological change, evolving
industry standards and customer demands, and frequent new product introductions
and enhancements. As a result, the Company's ability to remain competitive will
depend in significant part upon ISI's and the Company's ability to continually
develop and introduce, in a timely and cost-effective manner, enhancements for
its existing products in response to both evolving demands of the marketplace
and competitive product offerings. In addition, over the longer term, the
Company's ability to remain competitive will depend in significant part upon
ISI's and the Company's ability to develop and introduce, in a timely and
cost-effective manner, enhancements to its present line of products and new
products to expand and diversify the Company's product offerings. There can be
no assurance that ISI or the Company will be successful in developing and
introducing, in a timely and cost-effective manner, any enhancements or
extensions for its existing products or any new products. In addition, there can
be no assurance that competitors of the Company will not achieve technological
advances that provide a competitive advantage over the Company's products or
that make such products obsolete.
Settlement with United States Government. A criminal indictment has
been brought against Intelligent Military Systems (the "Subsidiary") an 81%
owned subsidiary of ISI (the licensor of the technology), and the former
president of ISI (the "Individual Defendant") who is the co-inventor of an
important aspect of the RT/AI(R) technology (together, the "Defendants"). The
Defendants have advised Management that they believe that the indictment was the
result of a lawsuit seeking damages for breach of contract brought by the
Subsidiary against the United States Navy. The United States Navy recently paid
$2,000,000 to settle such claim. Although the Defendants have advised Management
that they have not engaged in any illegal activities and for a substantial
period of time they vigorously defended the allegations contained in the
indictment. The Defendants recently pled guilty to certain of the charges
against them in order to avoid a trial with respect to the subject charges due
to the expense, uncertainty and disruption of ISI's business that would result
from a trial.
Although the Individual Defendant (who will be incarcerated for up to
eight months) has made past contributions to ISI, including, but not limited to,
the relationships established by ISI in the Automotive Industry, Management does
not believe that there will be any material adverse effect upon the Company.
There can be no assurance that Management's opinion is correct
Risk of Loss of Material Customers; Lack of Firm Contracts. The Company
is dependent upon a limited number of customers for a substantial portion of its
revenues. Revenues derived from two customers accounted for all of the Company's
revenues for the fiscal year ended September 30, 1996 (the "1996 Fiscal Year").
Those same two customers also represented over 60% of the value of all orders on
hand at November 30, 1996. An unexpected decline in sales to either of such
customers could have a material adverse effect upon the Company. In addition,
there are no firm contracts governing the Company's relationship with any of its
customers. Accordingly, such business relationships could be terminated or
curtailed at any time. Although the Company has no firm contracts, it does have
Purchase Orders (each, a "PO") and, more importantly, it previously had a
Blanket Purchase Order (each, a "BPO") with Ford. In the business of Automotive
Industry manufacturing, a BPO operates as a pre-approval of a vendor as a
provider of the items listed in the BPO and increases the probability that the
Company will be chosen to supply those items listed in a given BPO. However,
because the issuer of a BPO is under no obligation to purchase the items listed
therein, and because a BPO does not contain a firm commitment for the purchase
of any of the items listed therein, there can be no assurance that the Company
will continue to benefit from BPOs it has received to date. The Company's BPO
from the Ford purchasing agent, which generated 11% of the Company's total
revenues from inception through December 31, 1996, terminated in February, 1997.
Although Management believes that this BPO will be extended or replaced with a
new BPO, or that the issuer of the BPO will continue to place orders with the
Company for additional products notwithstanding the fact that this BPO has
expired, there can be no assurance that the issuer of this BPO will extend the
term of this BPO, issue a new BPO upon expiration of the original BPO or
otherwise continue to place orders with the Company. The Company has been
approved as a direct vendor to Ford and has received a vendor number which
facilitate its sales. There can be no assurance that sales to Ford will occur.
The lack of firm contracts between the Company and its customers, the inadequacy
of BPOs as substitutes for firm contracts and the failure to extend or replace a
key BPO could each independently have a material adverse impact on the Company.
See "Business License Agreement with IntelliSys Systems, Inc." and "- Key
Customers."
Competition. The Company competes in the highly competitive automation
and control systems software market and, in particular, in providing control
systems using RT/AI technology to the Automotive Industry in North America.
Other companies offer products and services similar to those of the Company and
target the same customers as the Company. The
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Company believes its ability to compete effectively depends upon many factors
both within and outside its control, including, but not limited to, the
quantities of such products required by the market, the timing of such
requirements, the continued ability of ISI to provide innovative and competitive
RT/AI technology, the ability of the Company to retain and increase its customer
base and market share, changes and innovations in the RT/AI technology and in
the Automotive Industry, and the financial health of the Company, ISI and
certain of the Company's customers. Many of the Company's competitors are
substantially larger than the Company and have significantly greater financial
resources and marketing capabilities than the Company, together with better name
recognition. It is also possible that new competitors may emerge and acquire
significant market share. Competitors with superior resources and capabilities
may be able to utilize such advantages to market their products and services
better, faster and/or cheaper than the Company. Increased competition is likely
to result in price reductions, reduced gross margins and loss of market share,
any one of which could have a material adverse effect upon the Company's
business, results of operations and financial condition. In addition, there can
be no assurance that the Company will be able to compete successfully against
its present or future competitors. See "Business - Competition."
Dependence Upon Key Personnel. The Company is substantially dependent
upon the continued services of its executive management and certain key
personnel including, but not limited to, Douglas Dick and Fred Shadko. The loss
of the services of Messrs. Dick or Shadko or any other key personnel could have
a material adverse effect upon the Company. The Company has no employment
agreements with any of its employees, nor does it maintain "key man" life
insurance on the lives of any of them. To the extent that the services of any
key employee of the Company become unavailable, the Company will be required to
retain other qualified persons; however, there can be no assurance that it will
be able to employ qualified persons upon acceptable terms. The success of the
Company also is dependent upon its ability to identify, hire and retain
additional qualified personnel, for whose services the Company will be in
competition with other prospective employers, many of which may have
significantly greater resources than the Company. There can be no assurance that
the Company will be able to hire and, if so, retain, such additional qualified
personnel. See "Management."
Product Liability Exposure. Although the nature of the Company's
business exposes it to some risk from product liability claims, the Company does
not currently maintain product liability insurance. While the Company has taken
and will continue to take precautions to minimize exposure to product liability
claims, there can be no assurance that it will be able avoid product liability
claims. A successful product liability claim brought against the Company could
have a material adverse effect upon the Company.
Uncertain Ability to Manage Growth. The Company's ability to achieve
its planned growth is dependent upon a number of factors including, but not
limited to, its ability to hire, train and assimilate management and other
employees, the adequacy of the Company's financial resources, the Company's
ability to identify and efficiently provide and perform such new products and
services as the Company's customers may require in the future and its ability to
adapt its own systems to accommodate its expanded operations. In addition, there
can be no assurance that the Company will be able to achieve its planned
expansion or that it will be able to manage successfully such expanded
operations. Failure to manage anticipated growth effectively and efficiently
could have a material adverse effect on the Company. See "Business - Business
Strategy."
Broad Discretion in Application of Proceeds. Approximately $157,000, or
8.6% of the Company's estimated net proceeds of this Offering has been allocated
to working capital and general corporate purposes. Accordingly, Management will
have broad discretion as to the application of such proceeds. Additionally,
although the Company intends to apply the net proceeds of this Offering in the
manner described elsewhere in this Prospectus, it has broad discretion of the
use thereof. Further, the Company reserves the right to reallocate the net
proceeds of this Offering among the various categories set forth under "Use of
Proceeds" as it, in its sole discretion, deems necessary or advisable. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Possible Need for Additional Financing. Management believes that the
net proceeds to the Company from the Offering and cash from operations will be
sufficient to finance the Company's operations for at least the twelve months
following the date of this Prospectus. However, to the extent that the net
proceeds from this Offering and cash flow from operations prove to be
insufficient to fund the Company's activities, the Company may be required to
raise additional funds through the sale of additional equity or debt securities
and/or to obtain bank financing. If this additional capital were raised through
borrowing or other debt financing, the Company would incur substantial
additional interest expense. Sales of additional equity securities would dilute,
on a pro-rata basis, the percentage ownership of all holders of Common Stock.
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There can be no assurance that any such financing would be available upon terms
and conditions acceptable to the Company, if at all. The inability to obtain
additional financing in a sufficient amount when needed and upon acceptable
terms and conditions could have a material adverse effect upon the Company. See
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business."
No Firm Commitment to Purchase Units. No commitment exists from the
Underwriter or any other party to purchase all or any of the Units offered by
this Prospectus. The Offering is being made on a "best efforts, 250,000 Units
all or none" basis. The proceeds from the sale of the Units offered hereby will
not be returned to subscribers if 250,000 Units are sold. There can be no
assurance that any of the Units will be sold. See "Use of Proceeds" and
"Underwriting."
Subscriber Funds May be Tied Up for Forty Five Days. Under the terms of
this Offering, subscribers' funds may be tied up for an initial 30 days, which
may be extended for a period of fifteen days and then returned without interest
in the event the Units are not sold within the Offering Period. During the
Offering Period, public investors will not have the opportunity to have their
funds returned. See "Underwriting."
Protection of Proprietary Technology and Rights; Infringement. The
Company's commercial success depends materially upon the proprietary technology
licensed by it from ISI and the ability of ISI to protect such proprietary
technology. In addition, all trademarks to the Products are held by ISI.
Furthermore, neither ISI nor the Company holds any patents or copyrights to the
Products or the artificial intelligence technology related to the Products. ISI
has advised the Company that it relies and will rely, as it deems appropriate,
upon a combination of contractual rights, trade secrets, proprietary knowledge,
copyrights, trademarks, non-competition, confidentiality and non-disclosure
agreements and technical resources to protect its proprietary rights. There can
be no assurance that the measures used and to be used by ISI to protect the
proprietary technology licensed to the Company will be sufficient to prevent
misappropriation of the proprietary technology or the independent development by
others of products with features derived from or otherwise similar to those of
the Products. In addition, although Management believes that the proprietary
technology licensed to the Company has been developed by ISI independently and
does not infringe upon the proprietary rights of others, there can be no
assurance that the Products do not and will not so infringe, that third parties
will not successfully assert infringement claims against ISI and the Company in
the future or that ISI and/or the Company will have the resources to defend
against an infringement claim. If a third party infringement claim was upheld,
the Company could be liable for damages, be required to modify the Products so
that they no longer infringe upon the rights of third parties, be required to
license such infringed-upon rights on terms not favorable to the Company and/or
be prohibited from marketing the Products utilizing such infringed-upon rights.
In such an event, there can be no assurance that ISI and/or the Company would be
able to pay such damages or sufficiently modify the Products or to obtain
licenses upon acceptable terms and conditions, if at all. The imposition of
damage awards, a requirement to license third parties proprietary rights or the
inability to adequately modify the Products so as to avoid infringement on the
proprietary rights of others could have a material adverse effect upon the
Company. See "Business Intellectual Property."
Control by Existing Stockholders. Upon consummation of this Offering,
the four founders of the Company, one of which is an affiliate of a director of
the Company, will beneficially own, in aggregate approximately 48.9% of the
outstanding Common Stock. Accordingly, such stockholders, if they choose to act
together, will likely be in a position to effectively control the Company, the
election of all of the directors of the Company and the approval of major
transactions such as a merger or a sale of all or substantially all of the
assets of the Company. See "Principal Stockholders."
Shares Eligible for Future Sale. The Shares and Warrants comprising the
Units being offered hereby will be freely tradeable unless acquired by
affiliates of the Company. The market price of the Common Stock and/or Warrants
could be adversely affected by the sale of substantial amounts of Common Stock
in the public market following this Offering. No prediction can be made as to
the effect that future sales of substantial amounts of Common Stock and the
availability of the shares of Common Stock for future sale will have on the
market prices of the Common Stock and/or Warrants prevailing from time to time.
The officers and directors of the Company and all beneficial owners of 5% or
more of the outstanding Common Stock have agreed not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for purchase or sale of, pledge, hypothecate or otherwise dispose of any
beneficial interest in such securities for a period of 12 months from
___________, 1997 [the date of this Prospectus], without the prior written
consent of the Company and the Underwriter. The registration, sale or issuance
of Common Stock after such 12 month period could have an adverse impact on the
market prices of Common Stock and/or Warrants. Upon expiration of such 12 month
period, all
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such shares may be sold subject to the limitations of, and in accordance with,
Rule 144 under the Securities Act of 1933 (the "Securities Act"). Additional
shares of Common Stock, including shares underlying the Warrants and
Underwriter's Warrants, will also become eligible for sale in the public market
from time to time in the future. See "Certain Transactions," "Description of
Securities," "Shares Eligible for Future Sale" and "Underwriting."
Conflicts of Interest. The law firm of Mintz & Fraade, P.C. ("Mintz &
Fraade") has been retained as counsel to the Company in connection with this
Offering. Mintz & Fraade has been granted options to purchase 7,500 shares of
Common Stock at $.001 per share. In addition, Mintz & Fraade has previously
represented and may in the future represent FMC Group, Inc., a Florida
corporation ("FMC") which is a stockholder of and consultant to the Company, as
well as officers and principals of FMC, including, but not limited to, Paul
Michelin, President of FMC and the husband of the sole shareholder of FMC, in
transactions unrelated to the Company. In the past, Mintz & Fraade has
represented certain other companies which have some of the same stockholders as
those of the Company and for which FMC is a consultant in transactions unrelated
to the Company. Mintz & Fraade also owns shares in other companies which have
some of the same stockholders as those of the Company and for which FMC is a
consultant. See "Principal Stockholders" and "Legal Matters."
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), with such designations, rights and preferences as may be determined
from time to time by its Board of Directors. Accordingly, the Company's Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion or other rights which could adversely
affect the rights of the holders of Common Stock. The issuance of shares of
Preferred Stock could, among other things, adversely affect the voting power of
the holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, discourage bids for
the Company's Common Stock at a premium or otherwise adversely affect the market
price for shares of Common Stock. See "Description of Securities - Preferred
Stock."
Delaware's Limited Liability Provision. Section 145 of the Delaware
General Corporation Law contains provisions entitling the Company's directors
and officers to indemnification from judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys fees, as a result of an
action or proceeding in which they may be involved by reason of being or having
been a director or officer of the Company. The Company has authorized the
indemnification of its officers and directors to the fullest extent available to
them under the Delaware General Corporation Law, which may reduce the likelihood
of derivative litigation against directors and officers and may discourage or
deter stockholders from suing directors or officers for breaches of their duties
to the Company, though such an action, if successful, might otherwise benefit
the Company and its stockholders. See "Management - Indemnification of Directors
and Officers and Related Matters."
Potential Expenses Arising from Indemnification of Officers and
Directors. The Company's By-Laws provides for the indemnification of directors
and officers of the Company from judgments, fines, amounts paid in settlement
and reasonable expenses as a result of an action or proceeding in which they may
be involved by reason of being or having been a director or officer of the
Company as long as the acts were done in good faith. Such provisions do not
eliminate the personal liability of the Company's directors and officers for
monetary damages as a result of a breach of fiduciary duty. The Company will
indemnify against reasonable costs and expenses incurred in connection with any
action, suit or proceeding to which any of such individuals were made a party by
reason of his or her being or having been such a director of officer, unless
such person has been adjudicated to have been liable for negligence or
misconduct in his or her corporate duties. As of the date of this Prospectus,
the Company is not aware of any pending or threatened litigation involving a
current director or officer. Although the Company may obtain an insurance policy
which will cover such indemnity, there can be no assurance that such a policy
will be available or that, if available, it will be adequate. To the extent that
the Company is required to expend funds to indemnify officers and directors,
there could be a material adverse effect on the financial condition of the
Company. See "Management - Indemnification of Directors and Officer and Related
Matters."
Indemnification of Underwriter. The Company and the Underwriters have
agreed to indemnify each other against certain liabilities which may be incurred
by reason of misstatements or omissions of material facts in connection with the
statements which are made in this Prospectus and the Registration Statement of
which it forms a part. See "Underwriting."
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No Dividends. The Company has never paid any cash or stock dividends on
its Common Stock and has no plans to pay cash or stock dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
Dilution. Purchasers of shares of Common Stock offered hereby will
experience immediate and substantial dilution in net tangible book value of
$4.85 per share of Common Stock from the assumed initial public offering price
of $10.00 per Unit and attributing (for this purpose only) no value to the
Warrants included in the Units. The current stockholders of the Company,
including an affiliate of one of the Company's directors, acquired their shares
of Common Stock for consideration substantially less than the public offering
price of the shares of Common Stock offered hereby. As a result, new investors
will bear substantially all of the risks inherent in an investment in the
Company. See "Dilution."
Limited Underwriting History. The Underwriter has not previously
participated in any public offerings as an underwriter. In evaluating an
investment in the Company, prospective investors in the Securities offered
hereby should consider the Underwriter's lack of experience as an underwriter of
public offerings. See "Underwriting."
Effect of Outstanding Options and Warrants. Upon the consummation of
this Offering, the Company will have outstanding: (i) 250,000 Warrants, (ii) the
Underwriter's Warrants exercisable to purchase an aggregate of 75,000 shares of
Common Stock (including the 25,000 shares of Common Stock underlying the
Warrants issuable upon exercise of the Underwriter's Warrants) and (iii) options
held by Mintz & Fraade to purchase 7,500 shares of Common Stock . In addition,
the Company has reserved 400,000 shares of Common Stock for issuance upon
exercise of options granted or available for grant under the Stock Option Plan,
none of which have been granted as of the date of this Prospectus. To the extent
that such warrants and options are exercised, dilution of the percentage
ownership of the Company's stockholders will occur, and any sales in the public
market of the Common Stock underlying such outstanding warrants and options
and/or warrants and options issued and granted in the future may adversely
affect prevailing market prices for the Common Stock. Holders of such warrants
and options are likely to exercise such securities when, in all likelihood, the
Company could obtain additional capital on terms more favorable than those
provided by such warrants and options. Furthermore, while such warrants and
options are outstanding, the Company's ability to obtain additional financing on
favorable terms may be affected adversely. The holders of the Underwriter's
Warrants have been granted certain registration rights with respect to
Underwriter's Warrants and the securities underlying the Underwriter's Warrants.
Exercise of such registration rights could require substantial expenditure by
the Company at a time when funds could be devoted to other applications for the
benefit of the Company. See "Certain Transactions," "Description of Securities"
and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering
Price; Possible Volatility of Market Price of Common Stock and Warrants. Prior
to this Offering, there has been no public trading market for the Units, Common
Stock or Warrants. There can be no assurance that a regular trading market for
either the Units, Common Stock or Warrants will develop or that, if developed,
it will be sustained. The initial public offering prices of the Units and
exercise prices of the Warrants have been determined arbitrarily by negotiations
between the Company and the Underwriter and are not necessarily related to the
Company's book value, net worth, results of operations or any other established
criteria of value and may not be indicative of prices that may prevail in the
public market. In addition, the market prices of the Company's securities
following this Offering may be highly volatile, as has been usual with the
securities of other small capitalization companies. Factors such as the
Company's operating results, announcements as to technological developments in
the industry and various factors affecting the automation and control systems
software market and the Automotive Industry in general, may have a significant
impact on the market price of the Company's securities. In addition, in recent
years, the stock market has experienced a high level of price and volume
volatility and the market prices for the securities of many companies
(particularly of small and emerging growth companies) which trade in the
over-the-counter market have experienced wide price fluctuations which have not
necessarily been related to the operating performance of such companies. See
"Description of Securities" and "Underwriting."
Underwriter's Influence on the Market. A significant number of the
Units offered hereby may be sold to customers of the Underwriter. Such customers
subsequently may engage in transactions for the sale or purchase of Common Stock
or Warrants through or with the Underwriter. Although it has no obligation to do
so, the Underwriter has indicated to the Company the Underwriter's intent to
make a market in the Common Stock and Warrants and may otherwise effect
transactions in such securities following consummation of this Offering. If it
participates in such markets, the Underwriter may exert a dominating influence
on the markets, if they develop, for the Common Stock and Warrants. Such market
activity
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may be discontinued at any time. The price and liquidity of the Units, Common
Stock and Warrants may be significantly affected by the degree, if any, of the
Underwriter's participation in such markets. See "Underwriting."
No Assurance of Continued Nasdaq Inclusion; Risk of Low-Priced Stocks.
The Company anticipates that the Common Stock and Warrants will be eligible for
quotation on Nasdaq. In order to qualify for continued quotation on Nasdaq, a
company, among other things, must have $2,000,000 in total assets, $1,000,000 in
total capital and surplus and a minimum bid price of $1.00 per share. In
addition, Nasdaq has proposed to raise the continued-listing requirements,
subject to further internal review and approval by the Securities and Exchange
Commission, to require that Nasdaq-listed companies have net tangible assets of
at least $2,000,000. If the Company is unable to satisfy the maintenance
requirements for quotation on Nasdaq, of which there can be no assurance, it is
anticipated that the Securities would be quoted in the over-the counter market
National Quotation Bureau "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, an investor could find it more difficult to dispose of, or
to obtain accurate quotations as to the market value of, the Securities. In
addition, if the Securities were to become delisted from Nasdaq and the trading
price of the Common Stock were to fall below $5.00 per share, trading in the
Securities would also be subject to the requirements of the "penny stock" rules
promulgated by the Securities and Exchange Commission (the "Commission") under
the Exchange Act. Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally defined as institutions or an investor with
a net worth in excess of $1,000,000 or annual income exceeding $200,000,
$300,000 together with spouse). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market price and liquidity of the Common Stock
and the ability of purchasers in this Offering to sell the Common Stock in the
secondary market.
Current Prospectus and State Registration Required to Exercise
Warrants. The Warrants are not exercisable unless, at the time of exercise, the
Company has in effect a current prospectus covering the shares of Common Stock
issuable upon exercise of the Warrants and such shares have been registered,
qualified under or deemed to be exempt securities under the "blue sky" laws of
the state of residence of the exercising holder of the Warrants. In addition, in
the event that any holder of the Warrants attempts to exercise any Warrants at
any time after nine months from the date of this Prospectus, the Company will be
required to file a post-effective amendment to the Registration Statement of
which this Prospectus is a part and deliver a current prospectus before the
Warrants may be exercised. Although the Company has undertaken to use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there is no assurance that it will be able to do so. The value of the Warrants
may be greatly reduced if a current prospectus covering the Common Stock
issuable upon the exercise of the Warrants is not kept effective or if such
Common Stock is not qualified or exempt from qualification in the states in
which the holders of the Warrants then reside. The Warrants will be separately
tradeable immediately upon issuance. Although the Securities will not knowingly
be sold to purchasers in jurisdictions in which the Securities are not
registered or otherwise qualified for sale, investors may purchase the Warrants
in the secondary market or may move to jurisdictions in which the shares
underlying the Warrants are not registered or qualified during the period that
the Warrants are exercisable. In such event, the Company will be unable to issue
shares to those persons desiring to exercise their Warrants unless and until the
shares are qualified for sale in jurisdictions in which such purchasers reside,
or an exemption from such qualification exists in such jurisdictions, and
holders of the Warrants would have no choice but to attempt to sell the Warrants
in a jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities-Warrants."
Speculative Nature of Warrants; Possible Redemption of Warrants. The
Warrants do not confer any rights of Common Stock ownership on the holders
thereof, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, holders of the Warrants may,
immediately upon issuance, exercise their right to acquire Common Stock and pay
an exercise price of $7.50 per share, subject to adjustment in the event of
certain dilative events, prior to five years from the date of this Prospectus,
after which date any unexercised Warrants will expire and have no further value.
There can be no assurance that the market price of the Common Stock will ever
equal or exceed the exercise price of the Warrants and, consequently, whether it
will ever be profitable for holders of the Warrants to exercise the Warrants.
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Commencing 18 months after the date of this Prospectus, the Warrants
are subject to redemption by the Company, in whole but not in part, at $.10 per
Warrant on 30 days' prior written notice, provided that the per share closing
bid quotation of the Common Stock as reported on Nasdaq equals or exceeds $10
per share (subject to certain adjustments) for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. If the Warrants are called for redemption,
holders of the Warrants will lose their right to exercise the Warrants after the
expiration of the 30 day notice period. Upon receipt of a notice of redemption,
holders would be required to: (i) exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so, (ii) sell the
Warrants at the then-prevailing market price, if any, when they might otherwise
wish to hold the Warrants or (iii) accept the redemption price which is likely
to be substantially less than the market value of the Warrants at the time of
redemption. In the event that holders of the Warrants elect not to exercise
their Warrants upon notice of redemption, the unexercised Warrants will be
redeemed and the holders thereof will lose the benefit of the appreciated market
price of the Warrants, if any, and/or the difference between the market price of
the underlying Common Stock as of such date and the exercise price of such
Warrants, as well as any possible future price appreciation in the Common Stock.
See "Description of Securities Warrants."
Possible Restrictions on Market-Making Activities in the Company's
Securities. The Underwriter has advised the Company that it may make a market in
the Company's securities. Rule 10b-6 under the Exchange Act may prohibit the
Underwriter from engaging in any market-making activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period as Rule 10b-6 may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be unable
to provide a market for the Company's securities during certain periods while
the Warrants are exercisable. Any temporary cessation of such market-making
activities could have an adverse effect on the market price of the Company's
securities. See "Underwriting".
Forward Looking Statements. This Prospectus contains certain forward
looking statements concerning the Company's operations, economic performance and
financial condition. Such statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors including those identified under "Risk
Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company was incorporated in Delaware on July 17, 1995, and is
engaged in providing intelligent manufacturing systems based upon proprietary
RT/AI technology to the Automotive Industry in North America. The Company
markets its products directly to automotive manufacturers, including the Big
Three auto makers and the North American manufacturing plants of European and
Japanese automotive manufacturers and to suppliers of automotive manufacturing
machinery.
The Company's executive offices are located at 27777 Franklin Road -
Suite 1420, Southfield, Michigan 48034, and its telephone number is (810)
213-0284.
DIVIDEND POLICY
The Company has never declared or paid any dividends or distributions
to its stockholders since its inception. The Company intends to retain all
earnings for the foreseeable future for use in the operation and expansion of
its business and, accordingly, the Company currently has no plans to declare or
pay any dividends on its Common Stock. Future declaration and payment of
dividends, if any, will be determined by the Board of Directors after
consideration of the then current circumstances of the Company including, but
not limited to, its operations, earnings, prospects, financial condition,
capital requirements, restrictions in order to comply with credit facilities and
any other factors deemed relevant from time to time.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Units offered hereby, after deducting underwriting discounts and estimated
offering expenses, are estimated to be approximately $1,825,000, assuming an
initial public offering price of $10.00 per Unit. The Company intends to use the
net proceeds as follows:
Percentage of
Application Amount Net Proceeds
- ----------- ------ ------------
Sales and marketing (1) . . . . . $ 710,000 38.9
Enhancement of productivity (2) . 680,000 37.3
Increase in capacity (3) . . . . 278,000 15.2
Working capital (4) . . . . . . . 157,000 8.6
------------ -----
$1,825,000 100%
(1) Represents the estimated costs to establish a demonstration system and
center and Internet web site, production of marketing materials,
conduct a telemarketing campaign and hire additional sales personnel.
(2) Represents costs to enhance certain of the Company's products and
create the infrastructure for network capabilities with customers.
(3) Represents the costs to increase integration capacity, training
facility, customer site monitoring, the Company's MIS capabilities and
network.
(4) Working capital will be used to pay salaries, to purchase furniture,
fixtures and equipment, and to pay rent, office and telecommunications
expenses, professional fees, trade payables and other general operating
expenses.
The allocation of the net proceeds to the Company from this Offering
set forth above represents the Company's best estimate based upon its present
plans and certain assumptions regarding general economic and industry conditions
and the Company's future revenues and expenditures. If any of these factors
change, the Company may find it necessary or advisable to reallocate some of the
proceeds within the above described categories or to other purposes.
The Company anticipates, based on its currently proposed plans and
assumptions relating to its operations, that the net proceeds from this
Offering, together with projected cash flow generated by operations, will be
sufficient to finance the Company's contemplated cash requirements for at least
twelve months following date of this Prospectus. In the event the Company's
plans change or its assumptions change or prove to be inaccurate or the
Company's net proceeds from this Offering prove to be insufficient to fund
operations (due to unanticipated expenses, delays, problems or otherwise), the
Company would be required to seek additional financing. The Company has no
current arrangements with respect to, or sources for additional financing and it
is not anticipated that any of the Company's current stockholders will provide
any portion of the Company's future financing requirements. There can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. The inability to obtain additional
financing when needed could have a material adverse effect on the Company,
including possibly requiring the Company to curtail or cease operations.
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Proceeds not immediately required for the purposes described above will
be invested in interest-bearing, government securities and/or other short-term,
interest-bearing securities.
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<PAGE>
DILUTION
The Company had a net tangible book value of $188,971, or approximately
$.05 per share of Common Stock, as of December 31, 1996. After giving
retroactive effect to the Pro Forma Adjustments (see Note (1) to "Prospectus
Summary - Summary Financial Information"), the pro forma net tangible book value
of the Company at December 31, 1996 would be $923,971, or approximately $.15 per
common share. Net tangible book value per share is equal to the total tangible
assets of the Company less total liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the receipt of the net proceeds
from the sale of the Units offered hereby (after deducting the underwriting
discount and estimated expenses of the Offering and attributing, for this
purpose only, no value to the warrants included in the Units) and the initial
application of the net proceeds therefrom, the adjusted pro forma net tangible
book value of the Company at December 31, 1996, would have been approximately
$2,748,971, or $.42 per share of Common Stock, representing an immediate
dilution of $4.58 (or approximately 91.6%) per share to the public investors, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock . . . . . . . . . . . . . . . . $ 5.00
Net tangible book value per share of Common Stock before this Offering . . . . . . . . $.05
Increase attributable to the Pro Forma Adjustments . . . . . . . . . . . . . . . . . . .10
---
Pro forma net tangible book value before this Offering . . . . . . . . . . . . . . . . .15
Increase in pro forma net tangible book value per share of Common Stock
attributable to public investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Adjusted proforma net tangible book value per share of Common Stock after Offering . . . . . . . .15
------
Dilution to investors in this Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.85
======
</TABLE>
The following table sets forth, with respect to existing stockholders
and new investors purchasing the minimum number of Units offered by the Company
hereby, a comparison of the number of shares of Common Stock acquired from the
Company, the percentage ownership of such shares, the total consideration paid
and the average price paid per share (assuming an initial public offering price
of $10.00 per Unit and attributing, for this purpose only, no value to the
Warrants included in the Units). The table does not give effect to the 250,000
Warrants that will be issued by the Company pursuant to this Prospectus.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------------- -------------------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 4,000,000 88.9 $1,801,000 41.9 $0.45
New investors.................. 500,000 11.1 2,500,000 58.1 $5.00
---------- ---- ----------- --------
Total................. 4,500,000 100.0% $4,301,000 100.0%
========= ====== ========== ======
</TABLE>
The new investors will have paid $2,500,000 for 500,000 shares of
Common Stock, representing approximately 58.1% of the total consideration paid
to date for 11.1% of the total number of shares to then be outstanding. In
addition, the above table also assumes no exercise of outstanding warrants and
stock options, the Warrants or the Underwriter's Warrants. Upon consummation of
this Offering, there will be outstanding warrants and options to purchase an
aggregate 7,500 shares of Common Stock, the 250,000 Warrants and the
Underwriter's Warrants, which would entitle the holders thereof to purchase an
aggregate of 75,000 shares of Common Stock (including the shares issuable upon
exercise of the Warrants underlying the Underwriter's Warrants), as well as the
Company's Stock Option Plan pursuant to which the Company has reserved 400,000
shares for issuance upon exercise of options granted and available for grant
thereunder. See "Certain Transactions," "Description of Securities," "Shares
Eligible for Future Sale" and "Underwriting."
18
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the Company's
capitalization, on (i) a historical basis, (ii) a pro forma basis giving effect
to the Pro Forma Adjustments and (iii) and on an adjusted basis, giving effect
to the sale of the 250,000 Units being offered by the Company hereby and the
initial application of the net proceeds therefrom.
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Actual Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 $-0- $-0- $-0-
shares authorized, no shares issued or
outstanding
Common Stock, par value $.0001 per share,
15,000,000 shares authorized; 4,000,000
issued and outstanding (actual and pro
forma); and 4,500,000 shares issued and
outstanding 4,000 4,000 4,500
Class A Stock, par value $.01 per share,
3,000,000 shares authorized, no shares
issued or outstanding (actual); 2,000,000
shares issued and outstanding (pro forma
and as adjusted) -0- 20,000 20,000
Additional paid-in capital 1,797,000 2,528,000 4,352,500
Accumulated (deficit) 647,446 647,446 647,446
Total stockholders' equity 1,153,554 1,888,554 3,207,446
Total capitalization 1,889,954 2,624,954 4,449,954
</TABLE>
SELECTED FINANCIAL DATA
The balance sheet data presented below as of December 31, 1995 and 1996 and the
income statement data presented below for the period of July 14, 1995 (date of
inception) through September 31, 1995 and the fiscal year ended September 30,
1996 have been derived from the financial statements of the Company which have
been audited by Daszkal, Bolton & Manela, independent certified public
accountants. The interim financial statements of the Company for the three month
periods ended December 31, 1995 and 1996 are unaudited. The interim financial
statements for the three month periods ended December 31, 1995 and 1996 include
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position and results of operation for the periods then
ended. The selected financial data should be read in conjunction with the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
19
<PAGE>
Statement of Operations Data:
<TABLE>
<CAPTION>
July 14, 1995
(Date of Inception) 3 Months Ended
Through Year Ended December 31
September 30, September 30, -----------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 41,826 793,457 $178,163 $ 201,266
Cost and expenses 143,171 1,125,250 226,914 416,293
(Loss) from operations (101,345) (331,793) (48,755) (215,027)
Net (loss) (100,707) (331,846) (49,154) (214,893)
Net (loss) per share (.05) (.17) (.01) (.05)
Weighted average shares
outstanding 2,000,000 2,005,479 2,000,000 4,000,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
September
30, 1995 Actual Actual As Adjusted Pro Forma(2)
--------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $(829,909) $ 359,422 $ 151,220 $ 886,200 $2,711,220
Total assets 1,265,820 1,509,897 1,889,954 2,624,954 3,714,954
Total liabilities 1,065,527 141,450 736,400 736,400 736,400
Stockholders' equity 200,293 1,368,447 1,153,554 1,888,554 3,763,554
</TABLE>
(1) Gives effect to the Pro Forma Adjustments.
(2) Gives effect to the Pro Forma Adjustments and assumes the sale of the
minimum 250,000 Units being offered for sale by the Company in the
Offering and the initial application of the estimated net proceeds
therefrom. See "Use of Proceeds," "Description of Securities" and
"Underwriting."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - 12 months Ended September 30, 1996
The following table sets forth the Company's operating results as a
percentage of revenue for the periods indicated:
% For the
Period from
% For the July 14, 1995
Year Ended (Inception) to
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
Statement of Operations Data:
Revenue 100.0 100.0
----- -----
Cost of revenue 58.7 120.5
Marketing 11.0 75.2
General and administrative 32.4 91.7
Amortization - license costs 3.1 10.0
Royalties 33.5 25.6
Research and Development 3.1 19.3
----- -----
Total Costs and Expenses 141.8 342.3
----- -----
Loss from Operations (41.8) (242.3)
----- -----
Interest Income 0.1 1.5
Interest expense 0.1
----- -----
Net Loss (41.8) (240.8)
===== =====
REVENUES
Revenues increased to $793,457 for the year ended September 30, 1996
from $41,826 for the period from July 14, 1995 (inception) to September 30,
1995. The increase was attributable to favorable consumer acceptance of the
Company's product, limited operations in 1995, and the proven success of the
product in the industry.
Cost of the Revenues
Cost of the revenues as a percentage of revenues decreased to 58.7% for
the year ended September 30, 1996, compared to 120.5% for the period from
inception to September 30, 1995. The decrease for the year ended September 30,
1996 was due to product installation and modification efficiencies gained
through experience. The newly engineered technology required the development of
an entirely new production process and resulted in inefficiencies during the
initial period from inception to September 30, 1995, that were later refined.
Marketing
Marketing expense increased to $87,175 for the year ended September 30,
1996 from $31,439 for the period from inception to September 30, 1995. As a
percentage of revenue, marketing expense was 11.0% for the year ended September
30, 1995, compared to 75.2% for the period from inception to September 30, 1995.
This decrease as a percentage of revenue is attributable to limited operations
and greater emphasis on fixed marketing salaries in 1995.
21
<PAGE>
General and Administrative
General and administrative expenses increased to $256,947 for the year
ended September 30, 1996 from $38,368 for the period from inception to September
30, 1995. As a percentage of revenue, however, these expenses decreased to 32.4%
from 91.7% for the year ended September 30, 1996 and the period from inception
to September 30, 1995, respectively. This decrease as a percentage of revenue is
due to limited operations in 1995, causing fixed expenses to represent a larger
proportion of total general and administrative expenses. The primary components
allocated to general and administrative expenses were salaries, consulting fees,
rent and travel expenditures.
Amortization
Amortization expense is comprised of amortization of the license
agreement costs using the straight line method over forty years. Amortization
expense increased to $25,000 for the year ended September 30, 1996 from $4,167
for the period from inception to September 30, 1995.
Royalties
Royalty expense increased to $265,420 for the year ended September 30,
1996 from $10,712 for the period from inception to September 30, 1995. The
royalty agreement calls for forty percent of the Company's revenues, net of
direct material costs, to be paid on a monthly basis. Due to the nature of the
initial installations, royalties were not charged to the first two product
sales.
Research and Development
Research and development expenses increased to $24,978 for the year
ended September 30, 1996 from $8,088 for the period from inception to September
30, 1995. As a percentage of sales, research and development was 3.1% and 19.3%
for the year ended September 30, 1996 and the period from inception to September
30, 1995, respectively. The decrease as a percentage of sales from 1995 to 1996
was due to the limited operations in 1995. The Company believes that research
and development expenditures are necessary, given the nature of its business,
and expects them to continue.
Income Taxes
At September 30, 1996, the Company had a net operating loss carry
forward of $403,386 for federal income tax purposes. At this time, the Company
does not anticipate utilizing this carry forward during fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The cash balance increased to $90,881 at September 30, 1996 from its
balance of $51,753 at September 30, 1995. Also, working capital increased to
$359,422 at September 30, 1996 from a negative $829,909 at September 30, 1995.
During 1996 the Company financed its operations principally through private
sales of common stock and during 1995 through short-term borrowing. The Company
believes that by the end of February, 1997 sales and their collections will be
at a level sufficient to fund operations. Cash used in operations increased to
$640,817 in 1996 from $115,041 during the period from July 14, 1995 (inception)
to September 30, 1995.
During the year ended September 30, 1996, the Company invested $16,713
in capital expenditures, down from $30,990 during the period from inception to
September 30, 1995. Capital expenditures consist principally of computer
equipment used in the office facility and in the production process.
During the year ended September 30, 1996, the Company extinguished the
liability owed for its license agreement in the amount of $900,000 with a
portion of its funds raised in the stock issuance for $1,500,000.
INFLATION
The rate of inflation has not had a material affect on the Company's
revenues and expenses since its inception, and it is not anticipated that
inflation will have a material effect on the Company in the near term.
BACKLOG
The backlog at September 30, 1996 was $878,265.
22
<PAGE>
RESULTS OF OPERATIONS -- 3 months ended December 31, 1996
The following table sets forth the Company's operating results as a
percentage of revenue for the periods indicated:
% For the % For the
Three months Three Months
Ended Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Statement of Operations Data:
Revenue 100.0 100.0
----- -----
Cost of revenue 107.1 51.7
Marketing 7.8 9.2
General and administrative 57.9 28.8
Amortization - license costs 3.1 3.5
Royalties 29.9 32.7
Research and development 1.1 1.5
----- -----
Total Costs and Expenses 206.8 127.4
----- -----
Loss from Operations (106.8) (27.4)
----- -----
Interest income 0.1 .1
Interest expense (.1)
----- -----
Net Loss (106.7) (27.4)
===== =====
Revenues
Revenues increased 10% for the three months ended December 31, 1996 due
to the continued success of the product and from the Company's marketing
efforts.
Cost of Revenues
Cost of revenues as a percentage of revenues increased to %107.1 for
the three months ended December 31, 1996 compared to 51.7% for the three months
ended December 31, 1995 due to inefficiencies in the production process.
Management believes that the problems have been corrected and does not expected
them to reoccur.
Marketing
Marketing expense remained constant for the three months ended December
31, 1996 when compared to the three months ended December 31, 1995 representing
the Company's commitment toward a aggressive advertising philosophy.
23
<PAGE>
General and Administrative
General and administrative expenses increased to $116,469 for the three
months ended December 31, 1996 from $51,400 for the three months ended December
31, 1995 as the Company postures itself for expected future growth.
Amortization
Amortization expense is comprised of amortization of the license
agreement costs using the straight line method over forty years.
Royalties
Royalty expense increased to $60,255 for the three months ended
December 31, 1996 from $58,181 for the period for the three months ended
December 31, 1995. The agreement calls for royalty payments of forty percent of
the Company's revenues, net of direct material costs, to be paid on a monthly
basis.
Income Taxes
At December 31, 1996 the Company had a net operating loss carry forward
of $600,779 for federal income tax purposes. At this time, the Company does not
anticipate utilizing this carry forward during fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The cash balance decreased $90,881 to its balance of -0- at December
31, 1996 due to the Company's negative cash flows from operations. During 1996
the Company financed its operations principally through private sales of common
stock. The Company believes that by the end of June, 1997 sales and their
collections, will be at a level sufficient to fund operations.
INFLATION
The rate of inflation has not had a material affect on the Company's
revenues and expenses since its inception, and it is not anticipated that
inflation will have a material effect on the Company in the near term.
BACKLOG
The backlog at December 31, 1996 was $982,556.
24
<PAGE>
BUSINESS
General
The Company is engaged in providing intelligent manufacturing and
control systems, which utilize Real Time Artificial Intelligence ("RT/AI"), and
related maintenance, service and consulting services directly to manufacturers
of automotive vehicles including, but not limited to, automobiles, buses,
trucks, and vans and manufacturers of parts for automotive vehicles (the
"Automotive Industry") and to entities which supply manufacturing and other
equipment and systems to the Automotive Industry; provided, however, that such
entities can only utilize the RT/AI in connection with the portion of their
business which is engaged in the Automotive Industry. The Company's products are
a complete line of industrial productivity enhancing systems, each of which is
capable of performing independently or in tandem with any or all of the
Company's other products. Each of the Company's products has been designed to
add further value to the typical manufacturing production line, beginning at the
machine sensor level (industrial vision system level) through machine control,
machine diagnostics, process control devices and department and plant
scheduling. The Company is currently a direct supplier to Ford Motor Company
("Ford") and Chrysler Corporation ("Chrysler") and has targeted General Motors
Corporation ("GMC") and the North American manufacturing plants of the major
European and Japanese automotive manufacturers for future sales. The Company's
sales personnel provide regular briefings on and demonstrations of the
capabilities of RT/AI technology and Company products to plant and project
managers. Such briefings have resulted in agreements to begin "pilot programs"
involving one or more of the products being placed into service with the
customer, in which the customer is obligated to pay for the products upon the
products performing in accordance with the specifications. If the products do
not perform in accordance with the specifications, the customer is not obligated
to purchase the products.
All of the Company's products utilize proprietary RT/AI technology
licensed to the Company. Management believes that the use of RT/AI technology
allows the Company's Products to perform more demanding and complex functions
and to provide more flexibility and adaptability than is possible from products
which cannot offer this technology. In general, "Real Time" refers to the
ability of a computer or machine control device to process and respond to
current information and data input contemporaneously with the receipt of such
information and data, while "Artificial Intelligence" refers to software or
control process being programmed to mimic the human decision-making process. In
addition to providing RT/AI technology directly to automotive manufacturers, the
Company's RT/AI products enhance production and control machinery manufactured
by third parties. The Company is seeking to install the enhanced machinery in
the manufacturing plants of its Automotive Industry customers.
The Automotive Industry is experiencing a substantial shift in its
manufacturing process and control systems as automated machinery and the entire
manufacturing and administrative process becomes increasingly computerized. The
present Automotive Industry environment of "just-in-time" manufacturing, with
the typical production line handling numerous installation functions involving a
multitude of exterior and interior colors, interior fabrics, individual options
and option packages, engines and transmissions types and other features and,
possibly, different automobile models, has created a demand for the Company's
products which Management believes have the ability to aid in controlling the
complexity of machinery, process and quality control systems and planning and
scheduling systems in a manner that reduces response time and costs. There are
in excess of 350 Automotive Industry manufacturing plants located in North
America, with the typical plant having an average of 500 automated machines
involved in the production and inspection processes. The Company has targeted
each manufacturing plant within the Automotive Industry in North America as a
potential customer. The control systems of each automated machine in such
manufacturing plants, and the entire operating process of each plant, is capable
of being enhanced by one or more of the Company's products.
The RT/AI technology licensed by the Company for use in creating the
Company's products was developed by IntelliSys Systems, Inc. ("ISI"). In August
1995, the Company acquired from ISI the exclusive license in perpetuity (the
"License") to sell the RT/AI technology to the Automotive Industry in North
America. In addition, the Company acquired all of ISI's rights under various
purchase orders (each, a "Purchase Order") and, perhaps more importantly,
certain blanket purchase orders (each, a "Blanket Purchase Order" or "BPO"),
including a BPO issued by the purchasing agent for Ford. In the automotive
manufacturing business, a BPO operates as a pre-approval of the vendor as a
provider to the BPO issuer of the items listed in the BPO. Although issuing a
BPO does not constitute a firm commitment, and the issuer of the BPO is under no
obligation to purchase the items listed thereon from such vendor, a BPO
increases the probability that such vendor will be chosen to supply those items
listed in the BPO if and when such items are ordered. Although the BPO with Ford
has expired, Management believes that as a practical matter no replacement is
required in view of the relationship between the Company and Ford. See "Risk
Factors - Risk of Loss of Material Customers, Lack of Firm Contracts"and
"Business License Agreement with IntelliSys Systems, Inc."
25
<PAGE>
Industry Overview
Managing Automation, a trade journal, reported that it anticipated that
the overall market for intelligent industrial systems would grow to
approximately $98.8 Billion, by the end of 1994. In fact, Managing Automation
reported in 1995 that the market for intelligent industrial systems had grown to
$99.3 Billion by the end of 1994, and has continued to grow at annual rate of
6%. Further, according to the most recent information available to the Company,
Ford spent approximately $2.1 Billion through 1994 on intelligent industrial
systems, and GM, Ford and Chrysler (collectively, the "Big Three") together
spent an aggregate $8.7 Billion on such systems through 1994.
Webster's Dictionary defines artificial intelligence as "The
characteristics of a machine programmed to imitate human intelligence functions"
and "Research in methods of such programming (to imitate human intelligence
functions) designed to supplement human intellectual abilities." In general,
artificial intelligence is any technology which emulates the analysis and
decision making capability of a human expert or organization in a specific area
of expertise. This will typically include the ability to reason with
uncertainty, with vague or "fuzzy" values (as opposed to only absolutes); the
ability to learn from experience; the ability to adapt the processing to the
environment or situation presented; to use multiple types of reasoning (e.g.,
inductive, deductive, forward decision trees, search for evidence of, etc.) to
reach a conclusion, decision or recommendation; and the ability to "explain" the
facts used and the deductions, results, conclusions or recommendations reached,
made in arriving at a particular action or recommendation. In addition,
artificial intelligence has the attribute, like the human mind, to be able to
learn and automatically (without reprogramming) alter or adopt its behavior
and/or decision making process based upon the difference between a desired
outcome and the actual outcome of a prior decision, conclusion or
recommendation. Artificial intelligent computers can learn in one or more ways,
such as: (i) a human can teach the computer (program/write the software),
correcting the computer's errors while it is running (reprogramming or
supplementing the software); (ii) the computer can learn through actually
manipulating the objects and processes it is designed to manipulate or control;
(iii) the computer can learn by example; and (iv) the computer can conduct a
simulation of the processes or objects and use this model to introspect, or
reflect upon, what decisions will affect what variables and achieve what
possible outcomes.
Within the computer software industry, the term "knowledge based" means
that the resulting software has certain attributes which are normally associated
with human knowledge, while "intelligent agent" indicates a special type of
computer software architecture in which the "knowledge" is organized and placed
in modules called "agents." Typically, each agent contains fairly specialized
knowledge, such as factory machine control, financial analysis, inventory
management, etc. These agents interconnect with and communicate with other
agents, reasoning together about a particular problem or situation, similar to a
committee or group of individual human experts meeting together on a specific
matter. Numerous industry reports support the proposition that adding
intelligent agents to a conventional software program typically makes that
program more flexible and adaptive, easier to use and more powerful than its
"non-intelligent" alternatives.
Critical to intelligent agent software application programs is the
speed at which the agents process data input (throughput) and the volume of
information and knowledge within each agent. The faster the intelligent agents
and the larger their data capacity throughput, the more powerful, useful and
practical the program is. Accordingly, the power of the artificial intelligence
software application program is a result of the capabilities of the CASE tool
which is used to codify the knowledge and information within the program's
intelligent agents. Management believes that Agentware is the most advanced CASE
tool presently available to create RT/AI application programs.
According to many management and technology analysts, intelligent
agent/knowledge based technology is the most important innovation since the
invention of the computer. As reported in the April 1995 issue of DBMS Magazine
"No software application in the future can be competitive without Intelligent
Agents." In its edition, Intelligent Manufacturing Newsletter stated that
"knowledge-based systems such as autonomous agents will dominate the
manufacturing landscape of the late 1990's."
RT/AI Technology
All of the Company's products were developed with the use of the
Agentware CASE tool. This manner of application software and control system
development has permitted the RT/AI technology to be incorporated into each of
the products. Management believes that Agentware is the only CASE tool capable
of inserting knowledge based intelligent agents directly into application
software programs and machinery control systems.
Most knowledge based software programs can process approximately 300
analytical pieces of knowledge (called "rules") per second with 100 changing
facts per second. Software developed with Agentware, however, is capable of
running approximately 2,500,000 such rules and 1,200,000 changing facts per
second. Intelligent agent systems developed using Agentware were independently
benchmarked by the Northeast Parallel Architecture Center of Syracuse University
in June 1992 as being approximately 1,000 times more powerful (higher amount of
information processed in a given unit of time) than any competing system.
26
<PAGE>
License Agreement with IntelliSys Systems, Inc.
In order to capitalize upon what management believes to be a
substantial, growing market for RT/AI systems within the Automotive Industry due
to the increase in the complexity and demands of the manufacture process and the
machinery, process and quality control systems employed in the current
competitive automotive market, on August 1, 1995, the Company entered into a
License Agreement (the "License Agreement") with ISI for the exclusive right, in
perpetuity, to market ISI's RT/AI technology to the Automotive Industry within
North America; provided, however, that such entities can only utilize the RT/AI
in connection with the portion of their business which is engaged in the
Automotive Industry. It is possible that in the future, the Companies will seek
the license for other geographic areas. Besides Agentware, ISI developed
products which the Company markets, to the North American Automotive Industry.
In addition to the right to utilize the RT/AI technology, pursuant to the
License Agreement, the Company acquired all of ISI's rights under various
contracts and Purchase Orders and, more importantly, Blanket Purchase Orders,
including a BPO with the purchasing agent for Ford which expired in February,
1997. See "Risk Factors-Risk of Loss of Material Customers; Lack of Firm
Contracts." In the Automotive Industry, a BPO operates as a pre-approval of the
vendor as a provider of the items listed in the BPO. Although issuing a BPO does
not constitute a firm commitment, and the issuer of the BPO is under no
obligation to purchase the items listed therein from such vendor, a BPO
increases the probability that such vendor will be chosen to supply those items
listed in the BPO if or when such items are ordered. The Company reserved the
right pursuant to the License Agreement to engage in other businesses although
at this time there are no plans to do so.
As consideration for the License and rights the Company acquired
pursuant to the License Agreement, the Company paid ISI an up front royalty of
$1,000,000 and agreed to pay ISI, for as long as the License remains in effect,
royalties of 40% of the Company's "gross revenues" derived from the Company
products which are based upon the technology subject to the License. For
purposes of the License Agreement, gross revenues means monies actually received
by the Company from the use of the products with respect to the use and
operation of the licensed software and does not include revenues derived from
the sale, installation or servicing of computer hardware or other equipment that
may be used in connection with the Company's products subject to the License.
Moreover, the Company is required to make royalty payments on revenues generated
from maintenance and support services on the products subject to the License.
The Company's continuing royalty obligations are payable on a monthly basis
based upon monies actually received by the Company from its customers. Through
December 1996, the Company has paid ISI an aggregate $336,387 in royalties.
Under the terms of the License Agreement, ISI is required to provide
all innovations, improvements, upgrades, modifications, substitutions,
replacements and enhancements to its RT/AI technology and to correct any errors
to the technology. ISI has informed the Company that it intends to continue to
develop and produce upgrades, enhancements and additions to its RT/AI
technology, software application programs and devices for the foreseeable
future. The Company has received regular updates from ISI since it first
acquired the License. In addition, ISI is entitled to be paid such amounts as
may be mutually agreed upon in good faith for all support, consultation or
educational services provided by ISI at the Company's request. The Company has
the right to make modifications, enhancements or other changes to the RT/AI
technology or develops additional devices utilizing the RT/AI technology;
provided however, that the Company is required by the License Agreement to
provide any such modifications, enhancements or other changes or new products to
ISI upon ISI's payment of 50% of the Company's development costs incurred in
connection with such modifications, enhancements or other changes or new
products.
Business Strategy
In order to take advantage of the opportunities available in the
expanding market for artificial intelligence technology applications within the
North American Automotive Industry, the Company's strategy is to emphasize the
RT/AI CASE tool capabilities of Agentware in creating software applications and
control devices and the RT/AI qualities and capabilities of the Company's
product line. Key elements of the Company's strategy include:
Continuing to Target the Big Three and their Vendors. The Company now
targets, and intends to continue to target, Ford and Chrysler, and their major
vendors in North America for additional sales, and intends to conduct future
sales and marketing campaigns directed at GM and the North American Automotive
Industry plants of Japanese and European manufacturers and their vendors. Prior
to granting the License to the Company, ISI established relationships at the
Vice President, General Manager and Plant Manager levels of the Big Three
automotive manufacturers, and up to the level of President at some of the major
vendors to the Big Three. In addition to the Company's position as the only
source for RT/AI technology, and the real and perceived value of the RT/AI
capabilities of the Company's products to the Automotive Industry, the Company's
relationship with ISI and the relationships initially established by ISI have
aided the Company in gaining access to and achieving credibility with high-level
personnel at the Big Three and their major vendors. Relationships initially
established by ISI have, Management believes, played a part in the Company being
awarded business with other manufacturers. Management intends to further develop
such relationships, as well as seek to establish additional relationships with
their associates within their companies and their counterparts at other North
American Automotive Industry manufacturers and their vendors.
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The Company treats each department within each automotive manufacturing
plant as a separate potential customer. In fact, within the Automotive Industry,
a significant number of departments operate as semi-autonomous companies, with
departments having separate budgets and the authority to make many independent
equipment purchase. However, department heads, product managers and plant
managers do consult with each other and the reputation of suppliers is typically
disseminated throughout a manufacturing plant and to a manufacturer's other
facilities. The Company attempts to use the positive satisfaction of a
department head, product manager or plant manager as a steppingstone for further
sales to each manufacturer.
New Plant Pilot Programs. Management currently intends to continue to
promote plant pilot programs. Plant pilot programs are on-site trial uses of the
RT/AI technology and Company products, enabling the customer to judge firsthand
the benefits of the RT/AI technology and Company products. When the RT/AI
technology and products perform in accordance with the specifications for the
pilot program results, the customer is obligated to purchase the products and
the Company receives payment. If the products do not perform in accordance with
the specifications, the customer is not obligated to purchase the products.
Aggressive Sales and Marketing Program. The Company intends to
implement an aggressive sales and marketing program to take advantage of what
management believes are significant opportunities for the RT/AI technology and
Company products within the North American Automotive Industry. It is the
Company's plan to increase its marketing efforts primarily focusing on the Big
Three and their major vendors, and to the North American plants of Japanese and
European manufacturers and, to the extent located in North America, their major
vendors. Management intends to utilize $708,000 of the net proceeds from the
Offering to increase its sales, marketing and public relations efforts including
the engagement of additional sales, marketing and public relations personnel,
the creation of additional sales materials, the creation of an advertising
campaign for trade publications and the attendance at trade shows.
Products
Management believes that the Company's products have the capacity to
gather and process much more data, and to do so faster and more accurately, than
the products presently available from others, and to utilize such processed
information to give operating directions, reports and recommendations for the
efficient and cost-conscious control of the production process within an
Automotive Industry manufacturing plant. The major products currently offered by
the Company for installation in Automotive Industry manufacturing plants are:
NexGen(TM) is a small, yet powerful, personal computer with RT/AI
technology embedded in proprietary computer processing chips installed
on the computer's circuit cards. This intelligent next generation
controller is designed for manufacturing and process control. NexGen
open systems hardware is manufactured by Motorola according to
specifications supplied by ISI. The main computer processing unit
("CPU") in the NexGen is the Power PC(R) chip manufactured by Motorola
in partnership with International Business Machines Corporation ("IBM")
and the Apple Computer Company ("Apple").
IVIS(TM), an acronym for Intelligent Vision System, is an
intelligent machine vision device whose performance functions are
programmed with the use of Agentware software. IVIS is installed as
part of the Automotive Industry manufacturer's product line as an
in-line inspection and control device. IVIS is capable of recognizing
colors, patterns, shapes, textures, sizes and positioning of parts, as
well as characters stamped on the parts. IVIS performs its inspections
in less than one second in most cases. The device then combines these
various recognition methods to perform more complex, integrated
inspections on the work pieces and provides commands to machines and/or
recommendations to operator personnel regarding how to act upon the
interpreted data. The Company's internal documentation of studies and
tests done cooperatively with Ford demonstrates that, in automotive
manufacturing plant installations, IVIS pays for itself in a matter of
days, that it makes less than 1 error in 1,000 recognition cycles,
which ensures consistently better quality products than formerly
possible, and that, in applications where there are only two sources of
information to interpret, the error rate drops to about 1 error in
10,000 recognition cycles. Management believes that it is unique in the
automotive industry in its combination of recognition methods, its
ability to reliably recognize colors and the fact that the paint need
not be stopped for the inspections to be performed. In addition, tests
on IVIS establish that:
o IVIS, which produced 78% of the Company's gross revenues for the
1996 Fiscal Year, is fast enough to detect data and "capture" an
image in real time without stopping, lifting or locating a part;
o Unlike other systems, does not need to use strobe lights to
"freeze" the images;
o IVIS cameras are stationary; their speed is such that they do
not require motion to catch the full image required for IVIS to
perform its recognition and inspection duties; and
o IVIS sees the image's true colors (not just gray scale),
recognizes color changes and adjusts itself when color varies.
In addition, cooperative studies and tests performed with Ford have
established that IVIS has features not found in other visions systems, such as:
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o IVIS provides information on part counts and machine cycle times;
o IVIS is fully network ready and can communicate with other
IVIS installations, MRP [Manufacturing Resource Planning] systems
and MIS systems, as well as with the Company's central facilities
for automatic upgrading and assistance;
o User documentation and training can be provided on-line, which
means on-the-job training and no more lost manuals;
o IVIS can use multiple cameras, can be integrated using
commercial, "off-the-shelf" components, can be easily
reconfigurable for new applications and is easily upgradeable to
increase speed or add other enhancements; and
o IVIS systems are easy to install, with one system was designed,
developed, installed and operating at a Ford plant within five
days of initial order (and this system has an error rate of less
than 0.0001 percent).
IVIS functions in a capacity beyond a mere machine vision system.
Beyond its basic function of recognizing colors, patterns, shapes and characters
in multitude of varying environments, IVIS is a high speed artificial
intelligence data processor which can provide process control feedback and
recommendations for improving overall plant efficiency and productivity. It thus
becomes part of the plant's "team network."
Based upon the results of systems already in use, both in the
Automotive Industry and elsewhere, management believes that the benefits from
installation of IVIS include increased throughput, improved quality and greater
overall productivity. Management also believes that working conditions are
improved and work related environment stress is reduced because IVIS allows
people to make better, faster and more accurate decisions due to its ability to
process and report on greater levels of data at faster speeds than would
otherwise be possible with conventional equipment.
Virtual Machine is a computerized machine control system capable of
providing faster and more thorough controls with greater flexibility, in terms
of the number of part types it can process, than conventional, non-intelligent
machine control systems. The Virtual Machine can also process a greater number
of part types than competing control systems. The Company believes that
installation of the Virtual Machine will provide the following customer
benefits:
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<TABLE>
<CAPTION>
Product Feature Customer Benefit
- --------------- ----------------
<S> <C>
Reduced cycle time, higher throughput..................... Productivity increases
More reliable machine controls............................ Recurring cost reduction
Reduced maintenance costs................................. Recurring cost reduction
Simultaneous development of control systems with
machine designing............................... Investment cost reduction and faster product
development
</TABLE>
AddA(TM), an acronym for Advanced Diagnostic Acquisition, which is
available as a stand alone product or as a module within a Virtual Machine
and/or IVIS product, provides exhaustive diagnostics for finding and correcting
machine component failures. AddA operates in parallel with either conventional
machine controls or a Virtual Machine RT/AI controls. AddA is included within
all Company products and is also available as a stand alone product. The product
also provides in-depth recording of machine subsystem productivity, cycle time,
throughput and other data. In industrial applications, due to its intelligence
and ability to learn, AddA can further provide direct control or back-up control
of both machines and processes. AddA can lead maintenance personnel through
diagnostic and repair procedures and learns new knowledge from its "experience"
of monitoring and/or controlling the process. The time needed to repair a failed
machine or process shrinks by 50% to 90% with the installation of AddA and, in
many instances, failures can be anticipated. In this manner, repairs can be made
prior to, and can prevent, the actual failures.
Agility(TM) is a process control product which is used to integrate the
controls of multiple machines or whole assembly lines so that the productivity
of the whole, rather than just each part, is optimized. Often, a manufacturing
plant productivity problem will derive not from the failure of one machine, but
from the lack of coordination among the various machines within the plant.
Agility was designed to solve this problem by having the intelligence to observe
the entire manufacturing process, and utilize its knowledge and experience to
produce recommendations to better coordinate the plant machine to act together.
Beyond coordination of the machinery on the plant floor, Agility is designed to
serve as the "bridge" between plant floor controls and MIS systems, so that
scheduling of personnel and supplies is optimized.
Adapt(TM) is a department and plant-wide planning and execution system
that provides real time, optimum scheduling and performance of complex
operations to maximize the department's or plant's throughput. Beyond
traditional scheduling, Adapt monitors the real time status of work and
resources and provides moment-by-moment directions to plant machinery and
stations to adapt their actions to the overall condition of the production
process in order to minimize disruptions and maximize output.
InfoView(R) is a comprehensive decision support system, gathering data
through local area networks ("LANs"), telephone modems and myriad other sources
and converts the data to information "maps" through which the user "navigates."
InfoView also applies knowledge to the information gathered; it analyzes the
information, finds trends and makes recommendations as to specific actions for
the user to meet the user's own goals and objectives. Infoview is included
within all Company products.
Installations
As of November 30, 1996, the Products were in use at the following
installations:
Ford Romeo: This Ford manufacturing plant has two AddA and four IVIS
units in operation. Both AddA are designed to diagnose faults and
failures in complex, multi-robot production line machines. The IVIS
systems are utilized in the following functions -
o Two systems perform color detection/identification for the
"select fit" of various sized pistons to various size bores in
engine blocks. This detection occurs every eighteen seconds,
eighteen hours per day, six days per week.
o One system reads pin stamped characters on engine blocks for the
"select fit" of various sized pistons to various size bores in
engine blocks. The system reads the characters at an eighteen
second cycle rate, eighteen hours per day, six days per week.
o The final system reads both colors and characters on pistons.
This occurs every two and one-quarter seconds, sixteen hours per
day, seven days per week.
Ford Sterling. This Ford plant has eight IVIS systems, three
of which are also equipped with AddA modules. The modules perform trend
analyses and process diagnostics. The IVIS systems, listed by function,
are:
o Reads colored tapes indicating axle type.
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o Reads colored marks for brake types.
o Gauges gear ratios.
o Reads colored marks for brake types.
o Recognizes several complex bracket shapes of differential types.
o Measures lubrication levels.
o Detects unlubricated axles.
o Recognizes and measures various suspension parts and
machined slots in such parts.
Chrysler Kenosha. This plant has three IVIS systems and one AddA
module. The AddA manages the IVIS units via a network, performs trend analyses
and process diagnostics. The IVIS units perform the following functions:
o Reads painted pallet numbers.
o Gathers information for "select fit" operations.
o Recognizes crank shaft size/type for main bearing "select fit"
operation.
Product Development
Under the License Agreement, ISI is required to provide the Company
with all innovations, improvements, upgrades, modifications, substitutions or
replacement for, or enhanced versions of the RT/AI technology and products
previously developed or subsequently developed by ISI.
Pricing
The Company attempts, with respect to each potential and current job,
to be completely aware of all pertinent costs. Company personnel evaluate each
job to meet the customer's specifications. They determine the materials
(hardware) required for the particular job, calculate the cost of all materials
required and add a multiplier when developing the quotation for the customer.
Next, the Company personnel evaluate the man hours required to complete the job
and the various types of engineering staff needed. Here, too, a reasonable
multiplier is applied to account for general and administrative expenses
incurred for that job. After amounts for both materials and personnel are
determined, an overall quotation is submitted to the potential client for
review.
The demands of each particular job affect the length of time until
completion and installation. Jobs are not billed, nor is any revenue recognized,
until the job is completed and installed at the customer's required location.
The Company's administrative team then takes over and insures that billing of
completed jobs is performed in a timely fashion so that cash flow remains
consistent and supports the growth of the Company. The administrative team
constantly evaluates the multipliers that the Company uses for quotation
development purposes in order to insure that the most accurate and current
figures are being applied.
Production and Service
The Company's NexGen open systems hardware is manufactured by Motorola
pursuant to specifications provided by ISI. However, ISI has advised the Company
that ISI has the proprietary rights to the key components of NexGen and that
NexGen can be manufactured by any of a number of other computer manufacturers.
Accordingly, management does not believe that the Company is dependent upon
Motorola or any other manufacturer for NexGen. In addition, neither Motorola or
any other manufacturer can produce the proprietary aspects of the hardware
except by virtue of a license from ISI.
The Company currently purchases other hardware from various computer
hardware and machinery manufacturers. Management believes the Company is not
dependent upon any manufacturer for hardware or machinery due to the fact that
adequate alternative sources are available. All software application programs
licenced to customers are written by the Company's in-house staff utilizing the
Agentware CASE tool and basic programs previously developed by ISI.
The Company's products carry a two-year warranty against defects in
workmanship, which is the standard requirement of manufacturers in the
Automotive Industry. Installation of the Company's products are made by the
customer, under the supervision of the Company. In fact, the Company has found
that some customers, including Ford, have sufficient experience with installing
the Company's products that the installation process can be completed with
limited Company supervision. Service is performed by the Company's field
engineers. The Company also provides maintenance, support and training services,
either pursuant to annual contracts or on a time billing basis. At present, the
Company does not have any maintenance or service agreements in effect with any
of its customers. The Company anticipates that maintenance, service and support
services will not generate significant revenues for the foreseeable future.
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ISI is obligated to correct any errors in the RT/AI technology and
products and, where correction may take some time to accomplish, to work with
the Company in determining ways to use the Products pending correction of such
error. ISI is entitled to charge reasonable rates for consultation, education
and support services.
Research and Development
Pursuant to the License Agreement, the Company has the right to
complete and prompt access to all of the results of research and development
conducted by ISI. In addition, if the Company develops any modifications,
enhancements or other changes to the RT/AI technology or any of the products
previously developed by ISI, the Company is entitled to make full use of such
modifications, enhancements or other changes. All such Company developed
modifications, enhancements or other changes must be offered to ISI for ISI's
use, subject to ISI reimbursing the Company one-half of the Company's research
and development costs related to such modifications, enhancements or other
changes.
Intellectual Property
The Company is not the owner of any trademarks, copyrights, patents or
similar intellectual property with respect to the RT/AI technology, the
Company's products or otherwise. ISI represented to the Company in the License
Agreement that all of the intellectual property rights with respect to the RT/AI
technology and Company products are owned by ISI. Accordingly, all of the
Company's rights or interests in the RT/AI technology used in the Company's
products are based upon the Company's status as the licensee of ISI for the
North American Automotive Industry. ISI has agreed in the License Agreement to
indemnify and hold the Company harmless with respect to the validity of ISI's
representations contained in the License Agreement.
Sales and Marketing
The Company's marketing strategy seeks to increase sales by (i)
continuing to target the Big Three and their major vendors in North America (ii)
targeting other Automotive Industry manufacturers, particularly the North
American plants of Japanese and European manufacturers, and their vendors and
(iii) continuing to promote plant pilot programs as a means to demonstrate the
benefits of the Company's products.
The Company presently targets, and intends to continue to target, Ford
and Chrysler, and their major vendors in North America for additional sales, and
intends to conduct future sales and marketing campaigns directed at GM and the
North American Automotive Industry plants of Japanese and European manufacturers
and their vendors. Prior to granting the License to the Company, ISI established
relationships at the Vice President, General Manager and Plant Manager levels of
the Big Three automotive manufacturers, and up to the level of President at some
of the major vendors to the Big Three. In addition to the Company's position as
the only source for RT/AI technology, and the real and perceived value of the
RT/AI capabilities of the Company's products to the Automotive Industry, the
Company's relationship with ISI and the relationships initially established by
ISI have aided the Company in gaining access to and achieve credibility with
high-level personnel at the Big Three and their major vendors. The Company has
found that Automotive Industry manufacturers regularly contact the Company to
learn of the latest RT/AI technology enhancements available through the Company
and to ascertain how the Company's products can improve their plant
productivity. Relationships initially established by ISI have, management
believes, played a part in the Company being approved as a direct vendor to Ford
and receiving a vendor number. Management intends to further develop such
relationships, as well as seek to establish additional relationships with their
associates within their companies and their counterparts at other North American
Automotive Industry manufacturers and their vendors.
The Company treats each department within each automotive manufacturing
plant as a separate potential customer. In fact, within the Automotive Industry,
a significant number of departments operate as semi-autonomous companies, with
departments having separate budgets and the authority to make independent supply
and machinery acquisition decisions (within the overall company's approved
vendors, such as those receiving BPOs). However, department heads, product
managers and plant managers do consult with each other and the reputation of
suppliers is typically disseminated throughout a manufacturing plant and to a
manufacturer's other facilities. The Company attempts to use the positive
satisfaction of a department head, product manager or plant manager as a
steppingstone for further sales to each manufacturer.
Management currently intends to continue to promote plant pilot
programs. The Company's sales personnel provide regular briefings on and
demonstrations of the capabilities of RT/AI technology and Company products to
plant and project managers. Generally, one or more of the Company's engineers
will accompany business development salespersons to each sales presentation, at
which one member of the customer's management and appropriate engineers are in
attendance. The number of engineers and their specialties will depend upon the
product being presented and the customer's needs. Such briefings have resulted
in agreements to begin "pilot programs" involving one or more of the products
being placed into service with the customer. Plant pilot programs are on-site
trial uses of the RT/AI technology and Company products, enabling the customer
to judge firsthand the benefits of the RT/AI technology and Company products.
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If the products do not perform in accordance with the specifications, the
customer is not obligated to purchase the products.
The Company intends to implement an aggressive sales and marketing
program to take advantage of what management believes are significant
opportunities for the RT/AI technology and Company products within the North
American Automotive Industry and supplement the Company's present practice of
periodic exhibitions at the annual Detroit Automotive Trade Show and direct mail
promotions. It is the Company's plan to increase its marketing efforts primarily
focusing on the Big Three and their major vendors, and to the North American
plants of Japanese and European manufacturers and their major vendors located in
North America. Management intends to utilize $708,000 of the net proceeds from
the Offering to increase its sales, marketing and public relations efforts
including the engagement of additional sales, marketing and public relations
personnel, the creation of additional sales materials, the creation of an
advertising campaign for trade publications and expansion of the Company's
attendance at trade shows.
Key Customers
For the 1996 Fiscal Year, Ford accounted for 69% of the Company's
revenues and Chrysler for the remaining 31% of revenues. In its effort to
broaden its customer base, the Company is continuing to target the Big Three and
their major vendors in North America, as well as other Automotive Industry
manufacturers, particularly the North American plants of Japanese and European
manufacturers. On November 30, 1996, 39% of the orders on hand were from
customers which had not contributed to the Company's 1996 Fiscal Year revenues.
An additional 36% of the orders on hand were from Ford and Chrysler plants which
had not contributed to 1996 Fiscal Year revenues.
Although there are other Automotive Industry manufacturers having
similar needs for the Company's RT/AI technology and products as those of Ford
and Chrysler, and although the Company believes that its relations with both
Ford and Chrysler are satisfactory, the Company lacks any firm contracts for the
purchase of the Company's products. There can be no assurance that the Company
will be able to sustain its level of business with Ford and/or Chrysler, that
Ford and/or Chrysler will place new orders with the Company, or that the Company
will be able to generate additional alternative customer demand for the RT/AI
technology and products to replace the revenues derived from Ford and/or
Chrysler in the event that the Company's relationships with either or both of
them is or are terminated. The Company's BPO from the Ford purchasing agent,
which generated 11% of the Company's total revenues from inception through
December 31, 1996, terminated in February, 1997. Although the BPO with Ford has
expired, Management believes that as a practical matter no replacement is
required in view of the relationship between the Company and Ford. The Company
has been approved as a direct vendor to Ford and has received a vendor number
which facilitate its sales. There can be no assurance that sales will occur. The
loss of, or any material reduction in, the Company's business relationship with
Ford and/or Chrysler could have a material adverse affect upon the Company.
Although the Company expects to continue to expand its customer base, sales to
its key customers will continue to have a significant impact on the Company's
overall level of revenues for the foreseeable future.
Competition
The Company competes in the highly competitive automation and control
systems software market and, in particular, in providing control systems using
RT/AI technology to the North American Automotive Industry. Other companies
offer products and services similar to those of the Company and target the same
customers as the Company. The Company believes its ability to compete
effectively depends upon many factors both within and outside its control,
including, but not limited to, the timing and quantities of such products
required by the market, the continued ability of ISI to provide innovative and
competitive RT/AI technology, the ability of the Company to retain and increase
its customer base and market share, changes and innovations in the RT/AI
technology and in the Automotive Industry, and the financial health of the
Company, ISI and certain of the Company's customers. Many of the Company's
competitors are substantially larger than the Company and have significantly
greater financial resources and marketing capabilities than the Company,
together with better name recognition. It is also possible that new competitors
may emerge and acquire significant market share. Competitors with superior
resources and capabilities may be able to utilize such advantages to market
their products and services better, faster and/or cheaper than the Company.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could have a material adverse
effect upon the Company's business, results of operations and financial
condition. In addition, there can be no assurance that the Company will be able
to compete successfully against its present or future competitors.
The most significant of the Company's competitors, and the only truly
industry-wide artificial intelligent manufacturing systems competitor, is GenSym
Corp. ("GenSym"), a Cambridge, Massachusetts company which has achieved
recognition in the artificial intelligent industrial systems market in general
and the Automotive Industry manufacturing market in particular. GenSym offers a
product to the Automotive Industry called "G2," an "expert system shell," or
tool, which, according to GenSym, offers "real time" capabilities. However,
management believes that GenSym has no application software or products as such.
Rather, GenSym provides specialized installation of artificial intelligent
industrial systems based upon customer specifications. GenSym is much larger and
better capitalized than the Company, has a history of reasonable growth and
profitability, and has a much larger number of installations than the Company.
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Notwithstanding GenSym's G2 product, management believes that the
Company has a technology-based competitive advantage over its competitors
because no other company has a product with the capabilities and attributes of
Agentware. According to two independent studies, the Products are currently at
the cutting-edge of RT/AI technology. The June 1992 study by Syracuse University
showed that approximately 650,000 rules were capable of being processed by
Agentware, a significantly greater number of rules than could be produced by any
other known competitor. In 1993, Ford performed a detailed study of Agentware
finding, among other matters, that:
o Agentware ran over 650,000 rules analyzing over 238,000
constantly-changing facts in a single second when running on a
single Motorola 88110 CPU, with the nearest competitor running
just over 300 rules with less than 90 changing facts on the
same CPU;
o Agentware, coupled with ISI's open architecture control hardware,
was 40% less expensive (this does not take into account resulting
labor savings);
o Agentware logic in a machine control and diagnostic application
was 1/13th as lengthy/complex as traditional control logic written
by an experienced controls engineer; and
o Agentware logic contained more functionality than the traditional
control program and was developed in 80% less time than the
traditional control program.
The Ford study, along with the experiences of ISI and the Company to
date, lead management to believe that ISI can continue to field products that
are 1,000 times more powerful than competing expert systems, quicker and cheaper
to produce and are less difficult to maintain than competing conventional
products.
There can be no assurance that the Company can maintain any competitive
advantage that it may have as a result of the power and productivity advantages
of Agentware. Increased competition from the Company's competitors may result in
price reductions, reduced gross margins and loss of market share, any one of
which could have a material adverse effect on the Company.
Government Regulation
The technology forming the basis of Agentware, and thereby the
Company's products, is on the U.S. Critical Technology List and, accordingly,
cannot be exported or disclosed to any foreign national. However, the Company's
products themselves are approved for export licensing, although the Company's
license is limited to North America.
Employees
The Company currently has nine full-time staff members and one
part-time staff member, performing executive, administrative, sales and
software, control and electrical engineering functions. The Company's employees
are supplemented by nine consultants engaged on an as-needed, task-by-task
basis. The Company's in-house and consultant engineers perform field work and
provide engineering analysis at the Company's offices. In addition, the
engineers work with the Company's business development staff in the preparation
of customer proposals. The Company does not have any employment agreements in
effect. The Company is not a party to any collective bargaining agreement and
believes relations with its employees are good.
Facilities
The Company has executive offices in Southfield, Michigan, which it is
occupying on a month-to-month basis at a monthly base rent of $2,663.75, while
negotiating for new office space also in Southfield. Assuming that such
negotiations are successful, the new office and warehouse space will be
available to the Company in Spring 1997. It is anticipated that these new
facilities will house administration, sales and engineering personnel, and will
service a majority of the Company's planned activities, including sales
demonstrations, product application development, systems integration and
customer and staff training, will be conducted at these from managed in that
building. All engineering, inventory storage, systems integration and testing
will take place in one facility instead of outlying workshops, and all personnel
will be centralized for smoother, more efficient operations. Management intends
for these facilities to have all necessary capabilities, including the ability
to network and interface with its customers' computers for data transfer,
product monitoring and support. In addition to standard telephone, facsimile and
e-mail communication, the premises also will have video conferencing
capabilities, which is expected to dramatically reduce the need for travel and,
accordingly, reduce response time in order to better serve the Company's
customers. In addition, the proposed new facilities will be located
approximately one-quarter of a mile from major road arteries and is centrally
located to automotive manufacturing plants of the Big Three and the facilities
of their major vendors in the metropolitan Detroit area.
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Litigation
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of the date of this Prospectus, the
Company is not a party to any material pending legal proceeding.
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MANAGEMENT
Executive Officers and Directors
Upon completion of the Offering the executive officers and directors of
the Company will be as follows:
Name Age Position
- ---- --- --------
Douglas Dick 53 President, Chief Executive Officer and
Director
Fred Shadko 50 Vice President and Director
James Perretty 33 Chief Financial Officer, Corporate Secretary
and Director
Paul Michelin 58 Director
Douglas Dick has been a Director of the Company since 1995. Mr. Dick
was a career Royal Navy officer who brings leadership, management, and vital
training skills to the Company. Mr. Dick's 20 years' experience in the Royal
Navy includes the training of multiple specialist skills up through for entire
ships crews of over 400 individuals. He spent his last four years service
training over 1,200 U.S. Navy Surface Warfare Officers at Newport, Rhode Island.
During the mid 1980s, Mr. Dick was a training systems development manager for
General Electric, where he coordinated the efforts of a large instructional
design and software development team for the development of high technology
training simulators. He co-founded IntelliSys Systems, Inc. in 1987 and served
as the Program Manager and Chief Operating Officer for that Company until 1996.
Fred Shadko has been a Director and Vice President of the Company since
1995. Mr. Shadko is a former Vice-President of Coma, the fifth largest tool
manufacturer in the world and the largest in Europe. Mr. Shadko has in-depth
experience in all aspects of automotive manufacturing and has developed business
relationships within the automotive community.
James Perretty has been a Director of the Company since 1995. From
1984 to 1994, Mr. Perretty served as Public Relations Consultant for the
Communications Group, a public relations marketing firm. From 1994 to 1995, Mr.
Perretty was an Advertising Account Executive and Vice President of Finance for
Creative Communications Advantage, an advertising agency. Mr. Perretty has
served since 1995 as Vice President of FMC Group, Inc., a financial consulting
firm. Mr. Perretty has also served since 1996 as President and a director of
Nationwide Resources, Inc., which, through its ownership of ETi International,
Ltd., a United Kingdom Corporation, develops and markets computer software. Mr.
Perretty has also served since 1995 as Vice President and a Director of
Stratosphere Multimedia Corp., which markets tele-conferencing equipment and has
facilities for tele-conferencing. Mr. Perretty received a B.A.A. degree in
Business Administration from Broward Community College.
Paul Michelin has been a Director of the Company since inception.
Since 1992, Mr. Michelin has been the President and a Director of FMC Group,
Inc., a financial consulting firm. Mr. Michelin has also served since 1995 as
the Secretary and a Director of International Software Technologies Corp., a
publicly traded corporation, which makes investments in other companies and
holds certain licensing rights for computer training schools in Europe. Mr.
Michelin has also served since 1995 as the Secretary and a Director of
Stratosphere Multimedia Corp., which markets tele-conferencing equipment and has
facilities for tele-conferencing. Mr. Michelin has also served since 1995 as the
Secretary and a Director of Stratosphere Communications Corp., a publicly traded
corporation, which has a majority interest in Stratosphere Multimedia Corp. Mr.
Michelin has also served since 1994 as a Director of On Track Computer Training
Corp., which owns and operates computer training schools in the United States.
Mr. Michelin has also served since 1996 as a director of ETi International,
Ltd., a United Kingdom corporation which develops and markets computer software.
Mr. Michelin has also served since 1996 as Secretary and a Director of
Nationwide Resources, Inc., which owns of 50% of ETi International, Ltd. Mr.
Michelin has also served since 1990 as a Director of Your Travel Connections,
Inc., a travel agency. Mr. Michelin attended McGill University in Montreal,
Canada. (See "PRINCIPAL SHAREHOLDERS" for a discussion of the stock interest in
the Company of FMC Group, Inc.)
From 1983 to 1987, Mr. Michelin was a Principal of Michelin & Company,
Inc., a brokerage firm. In 1986 and 1987, certain allegations were made against
Mr. Michelin and Michelin & Company, Inc. by the Florida and Wisconsin State
Securities Authorities and the National Association of Securities Dealers, Inc.
(the "NASD") to wit: unsuitability of securities, the sale of unregistered
securities, misrepresentations with respect to the sale of certain securities,
failure to make full disclosure and allegations with respect to state and NASD
administrative regulations. Mr. Michelin has advised Management that the
foregoing allegations were totally without merit.
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<PAGE>
Nevertheless, he chose not to litigate such claims in order to avoid the
expenditure of substantial time and money and in lieu of litigation, he chose to
do the following: (1) Michelin & Company, Inc. withdrew from doing business in
Florida and such state withdrew its charges, (2) Michelin & Company, Inc. paid a
fine to the State of Wisconsin and such state withdrew its charges, (3) Mr.
Michelin and Michelin & Company, Inc. settled the claims made by the NASD,
received a two week suspension and a fine of $20,000, and (4) sell certain
assets of Michelin & Company, Inc. As a result of their failure to pay the fine
to the NASD, the NASD suspended Mr. Michelin and Michelin & Company, Inc. in
March, 1988. In connection with another complaint by the NASD alleging sales of
securities at prices which were not fair and reasonable in 1986, Mr. Michelin
and Michelin & Company, Inc. paid $8,500 to customers and paid a fine of $2,500
to the NASD.
Board of Directors
All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. The Company
reimburses directors for their reasonable expenses incurred in connection with
their activities on behalf of the Company. None of the directors of the Company
currently receive any compensation for serving in their capacities as directors.
However, the Company reserves the right to compensate its directors in the
future.
Audit Committee. Upon the consummation of the Offering, the Company
will establish an Audit Committee of the Board of Directors consisting of at
least two directors, a majority of which shall not be employees of the Company.
It is currently anticipated that Messrs. Michelin and Perretty will comprise the
initial Audit Committee. Audit Committee members will meet regularly, both
separately and with the Company's management and independent auditors, to review
the results of the auditors' examination, the scope of audits, the auditors'
opinions on the adequacy of internal controls and quality of financial
reporting, and the Company's accounting and reporting principles, policies and
practices, as well as the Company's accounting, financial and operating controls
and staff.
Compensation Committee. Upon the consummation of the Offering, the
Company will establish a Compensation Committee of the Board of Directors
consisting of at least two directors, each of whom shall not be employees of the
Company. It is currently anticipated that Messrs. Michelin and Perretty will
comprise the initial Compensation Committee. The Committee will make
recommendations to the Board of Directors concerning the salaries of all
executive officers. In addition, the Compensation Committee will administer the
Company's Stock Option Plan and determine the amounts of, and the individuals to
whom, awards shall be made thereunder. See "Management - Stock Option Plan."
Executive Compensation
The following table sets forth information concerning the compensation
paid or accrued by the Company during the two years ended September 30, 1996 to
those individuals who served as Chief Executive Officer of the Company during
the 1996 Fiscal Year and all other executive officers of the Company at
September 30, 1996 who received total annual salary and bonuses in excess of
$100,000 during the 1996 Fiscal Year (collectively, the "Named Executive
Officers").
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
Name and Principal Other Annual Underlying
Positions Year Salary ($) Bonus ($) Compensation ($) Options/SARs (#)
--------- ---- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Douglas Dick, President 1996 $ 58,413 $-0- $-0- $-0-
(1) 1995 -0- -0- -0- -0-
Fred Shadko, Vice- 1996 117,308 -0- -0- -0-
President 1995 20,768 -0- -0- -0-
</TABLE>
- ----------
(1) Mr. Dick also received $22,499 and $79,888 from ISI for services rendered
to ISI and/or its subsidiary, Intelligent Military Systems, during the
Company's fiscal years ended September 30, 1996 and 1995, respectively.
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<PAGE>
Stock Option Plan
In _____ 1997, the Board of Directors and the Company's stockholders
approved the Company's 1997 Stock Option Plan (the "Stock Option Plan"). The
purpose of the Stock Option Plan is to provide directors, officers and key
employees of, and consultants to, the Company with additional incentives by
increasing their ownership interests in the Company. Directors, officers and
other key employees of the Company are eligible to participate in the Stock
Option Plan. Awards may also be granted to consultants providing valuable
services to the Company. In addition, individuals who have agreed to become a
key employee of, or a consultant to, the Company are eligible for option grants,
conditional in each case on actual employment or consultant status. Awards of
options to purchase Common Stock may include incentive stock options ("ISOs")
and/or non-qualified stock options ("NQSOs").
The maximum number of shares of Common Stock that may be subject to
outstanding options, determined immediately after the grant of any option, shall
be no greater than 400,000 shares, any portion of which may be granted as ISOs.
The Board of Directors intends, upon consummation of the Offering, to
establish a Compensation Committee, consisting of two or more directors who
qualify as "non-employee directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to administer
the Stock Option Plan. The Compensation Committee will generally have discretion
to determine the terms of an option grant, including the number of option
shares, option price, term, vesting schedule, the post-termination exercise
period, and whether the grant will be as ISO or NQSO. Notwithstanding this
discretion, (i) the number of shares subject to options granted to any
individual in any calendar year may not exceed ______, (ii) the option price per
share of Common Stock may not be less than 100% of the market value of such
share at the time of grant (or 110% if granted as an ISO to a holder of 10% or
more of the then outstanding shares of Common Stock), (iii) the term of any
option may not exceed ten years (unless granted as an ISO to a 10% or more
stockholder, which term may not exceed five years), and (iv) an option shall
automatically become void upon the termination of employment of the grantee for
cause. In addition, unless otherwise specified by the Compensation Committee,
all outstanding options vest upon a "change of control" of the Company (as
defined in the Stock Option Plan), and all options will no longer be exercisable
three months following any termination of employment (except in the event of the
death or permanent disability of a holder of an ISO, where such ISO may be
exercised for a period of up to one year from the date of death or permanent
disability).
The Stock Option Plan also provides for automatic option grants to
directors who are not otherwise employed by the Company. Upon commencement of
service (or upon agreeing to serve in the case of the initial non-employee
directors), a non-employee director will receive a NQSO to purchase __,000
shares of Common Stock, and continuing non-employee directors will receive
annual NQSO grants to purchase __,000 shares of Common Stock. NQSOs granted to
non-employee directors become exercisable one-third on the date of grant and
one-third on each of the next two anniversaries of the date of the grant.
Non-employee directors' NQSOs have a term of five years from the date of the
grant.
The Stock Option Plan will remain in effect until terminated by the
Board of Directors (except that ISOs may only be granted through _______, 2007)
or until all shares issuable under the Stock Option Plan have been so issued.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted. In
addition, the Stock Option Plan may not be amended more than once every six
months, other than to comport with changes to the Internal Revenue Code,
Employee Retirement Income Security Act, or the rules and regulations
promulgated thereunder.
<PAGE>
Indemnification of Directors and Officers and Related Matters
Section 145 of the Delaware General Corporation Law contains provisions
entitling directors and officers of the Company to indemnification from
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, as the result of an action or proceeding in which they may be
involved by reason of being or having been a director or officer of the Company
provided said officers or directors acted in good faith. This provision does not
eliminate or limit the liability of a director for violating his duty of loyalty
(which includes the obligation of a director of the Company to refrain from self
dealing with respect to the Company, improperly competing with the Company or
usurping Company opportunities), failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law or participating in the
payment of a dividend or a stock repurchase or redemption for himself. This
provision also does not affect any director's liability under federal securities
laws or the availability of equitable remedies such as an injunction or
rescission for breach of fiduciary duty.
In addition, the Company's Bylaws provide that, with respect to third
party actions, the Company shall indemnify any person who was or is a party to
any threatened, pending or completed action (other than a derivative action by
or in the right of the corporation) by reason of the fact that such person is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company in such capacity for another entity, if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, had no reasonable
38
<PAGE>
cause to believe the conduct was unlawful. Indemnification is not to be made for
acts or failures to act which constitute willful misconduct or recklessness.
The Company's Bylaws also provide that, with respect to derivative
actions, the Company shall indemnify any person who was or is now a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company, or is or was so serving at the request of the Company in
such capacity for another entity, if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company. Indemnification is not to be made for acts or failures
to act which constitute willful misconduct or recklessness.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of
this Prospectus regarding the beneficial ownership of the Common Stock, and as
adjusted to give effect to the sale by the Company of the securities offered
hereby, by: (i) each director; (ii) each executive officer named in the
"Management" section; (iii) each person known by the Company to own beneficially
more than 5% of the outstanding Common Stock; and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Shares of Common
of Beneficial Owner (2) Stock Beneficially Owned (1) Prior to Offering After Offering
- ----------------------- ---------------------------- ----------------- --------------
<S> <C> <C> <C>
Douglas Dick -0- 0.0 0.0
Fred Shadko -0- -0- 0.0
Marcel Brun (3) 600,000 15.0 13.3
Paul Michelin (4) 500,000 12.5 11.1
FMC Group, Inc. (5) 500,000 12.5 11.1
Paul Ulli, Jr. (3) 600,000 15.0 13.3
Suzanne Wolf (3) 500,000 12.5 11.1
</TABLE>
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities which may be acquired by such person within 60 days from the
date on which beneficial ownership is to be determined, upon the exercise of
options, warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options that are held by such person
(but not those held by any other person) and which are exercisable within such
60 day period, have been exercised.
(2) Unless otherwise indicated, the address for each named individual is c/o
IntelliSys Automotive Systems, Inc., 27777 Franklin Road - Suite 1420,
Southfield, Michigan 48034.
(3) The address for Messrs. Brun and Ulli and Ms. Wolf is c/o Investa, A.G.,
Hardstrasse 4, CH-4127, Birsfelden, Switzerland.
(4) Represents the 500,000 shares of Common Stock owned of record by FMC Group,
Inc., of which Mr. Michelin is President and a director and his wife is the sole
shareholder thereof.
(5) The address for FMC Group, Inc. is 2255 Glades Road - Suite 124A, Boca
Raton, Florida 33431.
CERTAIN TRANSACTIONS
Effective July 14, 1995, the Company issued and delivered shares of Common Stock
to the individuals and entities listed below for the consideration set forth
opposite their respective names.
Name Number of Shares Aggregate Consideration
- ---- ---------------- -----------------------
Marcel Brun.............. 500,000 $ 75,250
FMC Group, Inc. (1)...... 500,000 75,250
Paul Ulli, Jr. .......... 500,000 75,250
Suzanne Wolf ............ 500,000 75,250
--------- --------
Totals...... 2,000,000 $301,000
- ----------
(1) Paul Michelin, a director of the Company, is the President and a director
of FMC and his wife is the sole shareholder.
40
<PAGE>
In the 1996 Fiscal Year, FMC, a principal stockholder whose
President is a director of the Company, advanced the Company funds totaling
$93,442 as of September 30, 1996. The advances have been treated as a demand
loan bearing interest at four (4%) percent per annum, interest payable at
maturity. Subsequent to September 30, 1996, FMC made further advances to the
Company on the same terms as the prior advances, to the effect that the
aggregate principal amount due FMC was $436,809 as of January 31, 1997.
During the 1996 Fiscal Year, the Company paid FMC, a principal
stockholder, fees totaling $39,000 for consulting services rendered to the
Company. Commencing April, 1996 the Company has been paying FMC $5,000 per month
for consulting services.
Effective September 30, 1996, Marcel Brun and Paul Ulli, Jr.,
principal stockholders of the Company, each purchased an additional 100,000
shares of Common Stock for $75,000 ($.75 per share) in connection with the
Company's off-shore private placement of an aggregate 2,000,000 shares of Common
Stock.
41
<PAGE>
DESCRIPTION OF THE SECURITIES
General
The Company is authorized by its Certificate of Incorporation to
issue an aggregate 15,000,000 shares of Common Stock, par value $.01 per share,
3,000,000 shares of Class A Stock, par value $.01 per share, and 2,000,000
shares of Preferred Stock
Common Stock
The Company is authorized by its Certificate of Incorporation to
issue 15,000,000 shares of Common Stock, of which 4,000,000 Shares are issued
and outstanding. Holders of Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed below),
to receive dividends (together with holders of Class A Stock) when and as
declared by the Board of Directors and to share ratably (with the holders of
Class A Stock) in the assets of the Company legally available for distribution
in the event of the liquidation, dissolution or winding up of the Company.
Except as specifically provided by the GCL with respect to the voting by all
classes of stock, the Common Stock is the only class of the Company's securities
having voting rights. Holders of the Common Stock do not have subscription,
redemption or conversion rights, nor do they have any preemptive rights.
Accordingly, in the event the Company were to elect to sell additional shares of
its Common Stock following this Offering, investors in this Offering would have
no right to purchase such additional shares, as a result of such a sale, their
percentage equity interest in the Company would be diluted. The shares of Common
Stock offered hereby will be, when issued and paid for, fully-paid and not
liable for further call or assessment. Holders of the Common Stock do not have
cumulative voting rights, which means that the holders of more than half of the
outstanding shares of Common Stock (subject to the rights of the holders of the
Preferred Stock) can elect all of the Company's directors, if they choose to do
so. In such event, the holders of the remaining shares would not be able to
elect any directors. The Board of Directors is empowered to fill any vacancies
on the Board. Except as otherwise required by the GCL, all stockholder action is
taken by vote of a majority of the outstanding shares of Common Stock voting as
a single class present at a meeting of stockholders at which a quorum
(consisting of a majority of the outstanding shares of Common Stock) is present
in person or by proxy.
Class A Stock
The Company is authorized by its Certificate of Incorporation to
issue 3,000,000 Shares of Class A Stock, of which 2,000,000 Shares are issued
and outstanding. Holders of Class A stock are entitled to receive dividends
(together with holders of Common Stock) when and as declared by the Board of
Directors and to share ratably (with the holders of Common Stock) in the assets
of the Company legally available for distribution in the event of the
liquidation, dissolution or winding up of the Company. Except as specifically
provided by the GCL with respect to the voting by all classes of stock, the
holders of Class A Stock have no voting rights. In addition, holders of Class A
Stock do not have subscription, redemption or conversion rights, nor do they
have any preemptive rights.
Preferred Stock
The Company is authorized by its Certificate of Incorporation to
issue a maximum of 2,000,000 shares of Preferred Stock, in one or more series
and containing such rights, privileges and limitations, including conversion
privileges and/or redemption rights, as may, from time to time, be determined by
the Board of Directors of the Company. Except as specifically provided by the
GCL with respect to the voting by all classes of stock, the holders of Preferred
Stock will have no voting rights. Preferred Stock may be issued in the future in
connection with acquisitions, financings or such other matters as the Board of
Directors deems to be appropriate. In the event that any such shares of
Preferred Stock shall be issued, a Certificate of Designation, setting forth the
series of such Preferred Stock and the relative rights, privileges and
limitations with respect thereto, shall be filed with the Secretary of State of
the State of Delaware. The effect of such Preferred Stock is that the Company's
Board of Directors alone, within the bounds and subject to the federal
securities laws and the Delaware law, may be able to authorize the issuance of
Preferred Stock which could have the effect of delaying, deferring or preventing
a change in control of the Company without further action by the stockholders
and may adversely affect the rights of holders of Common Stock.
Warrants
The following is a brief summary of certain provisions of the
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company and Liberty Transfer Co. (the "Warrant Agent"). A copy of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
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<PAGE>
Exercise Price and Terms. Each Warrant entitles the registered
holder thereof to purchase, at any time during the 18 month period commencing on
the date of this Prospectus, one share of Common Stock at a price of $ 7.50 per
share, subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together with payment of the exercise price. Commencing on the date of this
Prospectus, the Warrants may be exercised at any time in whole or in part at the
applicable exercise price until expiration of the Warrants. No fractional shares
will be issued upon the exercise of the Warrants.
Adjustments. The exercise price and the number of shares of Common
Stock purchasable upon the exercise of the Warrants are subject to adjustment
upon the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock
(exclusive of options and shares under the Stock Option Plan, and other limited
exceptions) at a price below the then applicable exercise price of the Warrants.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation) or sale of all or substantially all of the assets
of the Company, in order to enable warrant holders to acquire the kind and
number of shares of stock or other securities or property receivable in such
event by a holder of the number of shares of Common Stock that might have been
purchased upon the exercise of the Warrant.
Redemption Provisions. Commencing eighteen months after the date of
this Prospectus, the Warrants are subject to redemption by the Company, in whole
but not in part, at $.10 per Warrant on 30 days' prior written notice, provided
that the per share closing bid quotation of the Common Stock as reported on
Nasdaq equals or exceeds $ 10 per share (subject to adjustment for stock
dividends, stock splits, combinations or reclassification of the Common Stock)
for any twenty trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
In the event the Company exercises the right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the business day
immediately preceding the date for redemption fixed in such notice. If any
Warrant called for redemption is not exercised by such time, it will cease to be
exercisable and the holder will be entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered
form and may be presented to the Warrant Agent for transfer, exchange or
exercise at any time on or prior to their expiration date five years from the
date of this Prospectus, at which time the Warrants become wholly void and of no
value. If a market for the Warrants develops, the holder may sell the Warrants
instead of exercising them. There can be no assurance, however, that a market
for the Warrants will develop or continue.
Modification of Warrants. The Company and the Warrant Agent may
make such modifications to the Warrants as they deem necessary and desirable
that do not adversely affect the interests of the warrant holders. The Company
may, in its sole discretion, lower the exercise price of the Warrants for a
period of not less than 30 days on not less than 30 days' prior written notice
to the warrant holders and the Underwriter. Modification of the number of
securities purchasable upon the exercise of any Warrant, the exercise price and
the expiration date with respect to any Warrant requires the consent of
two-thirds of the warrant holders. No other modifications may be made to the
Warrants, without the consent of two-thirds of the warrant holders.
The Warrants are not exercisable unless, at the time of the
exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the Warrants. Although the
Company will use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to do
so.
The Warrants will not be separately transferable until one year
after issuance. Although the Securities will not knowingly be sold to purchasers
in jurisdictions in which the Securities are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the aftermarket or may move
to jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable. In
this event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and holders of Warrants would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised.
Certain Federal Income Tax Consideration
The following discussion sets forth certain federal income tax
consequences, under current law, relating to the purchase and ownership of the
Units, and the Common Stock and Warrants constituting the Units. The Company has
not requested and does not intend to request a ruling from the Internal Revenue
Service or a tax opinion from its counsel on any tax
43
<PAGE>
aspect of the Offering. This tax discussion does not purport to be a complete
analysis or list of all potential federal income tax consequences of the
purchase, ownership and sale of the Common Stock or Warrants. The discussion
does not address the tax treatment for certain unique taxpayers, such as
insurance companies, tax exempt organizations, financial institutions and
dealers in securities which may be subject to special rules not discussed
herein. This discussion presents no analysis of the tax attributes of the
Company either before or after this Offering. PROSPECTIVE PURCHASERS OF THE
UNITS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND SALE OF SUCH SECURITIES AND THE
APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
An investor must allocate the cost of each Unit between its three
elements (two Shares and one Warrant) in accordance with their relative fair
market values at the time of issuance. The portion of the aggregate cost
allocated to each element will constitute the investor's initial federal income
tax basis for that element.
No gain or loss will be recognized by a holder of a Warrant held
for investment on the holder's purchase of Common Stock for cash upon exercise
of the Warrant. The adjusted tax basis of the Common Stock so acquired will be
equal to the tax basis of the Warrant plus the exercise price. The holding
period of the Common Stock acquired upon the exercise of the Warrant will begin
on the date the Warrant is exercised and the Common Stock is purchased.
The sale of a share of Common Stock or the sale of a Warrant will
result in the recognition of gain or loss to the holder in an amount equal to
the difference between the amount realized (generally the cash and the fair
market value of any other property received) and the holder's adjusted tax basis
for the property sold. The sale of Common Stock will result in capital gain or
loss, provided the Common Stock is a capital asset in the hands of the holder.
The sale of a Warrant (other than a sale to the Company) will also result in a
capital gain or loss, provided the Warrant is a capital asset in the hands of
the holder and the Common Stock underlying the Warrant would be a capital asset
to the holder if acquired by the holder. Such capital gain or loss will be
long-term capital gain or loss if the Common Stock or Warrant being sold or
exchanged has been held for more than one year at the time of such sale or
exchange.
If the repurchase of a Warrant by the Company is treated as a sale
or exchange of a capital asset, any gain or loss recognized on the transaction
will be capital gain or loss and will be long-term capital gain or loss if the
holding period of the Warrant exceeds one year at the time of repurchase.
However, it is unclear whether the repurchase of a Warrant by the Company will
be treated as the sale or exchange of a capital asset, and if such repurchase is
not treated as the sale or exchange of a capital asset, the holder of a Warrant
could potentially recognize ordinary income on such repurchase because of a
constructive distribution recharacterization.
Long-term capital gains of individuals, trusts and estates are
currently taxed at a maximum rate of 28% , while ordinary income is currently
taxed at a maximum rate of 39.6%. Section 1202 of the Code in certain
circumstances allows certain noncorporate taxpayers to exclude from income
one-half of the gain (up to certain limits) from the sale or exchange of
"qualified small business stock" held for more than five years. In addition, 25%
of such gain (up to certain limits) is excluded for alternative minimum tax
purposes. In order for stock to be "qualified small business stock," the issuer
of the stock must meet certain requirement, some of which apply to the period
after the stock is issued. Consequently, it is unclear whether the Common Stock
acquired upon exercise of a Warrant will qualify as qualified small business
stock.
Under Section 305 of the Code, certain actual or constructive
distributions of stock (including warrants to purchase stock) with respect to
such stock (or warrants) may be taxable to the stockholders (or Warrant holders)
of the Company. Adjustments in the exercise price of the Warrants, or the number
of shares purchasable upon exercise of the Warrants, in each case made pursuant
to the anti-dilution provisions of the Warrants, among other things, may result
in a distribution which is taxable as a dividend to the holders of Warrants.
Distributions may be taxed as ordinary dividend income, return of capital, or
gain from the sale or exchange of stock, depending on the earnings and profits
of the Company and the tax basis of each of its stockholders or Warrant holders.
A Warrant that expires unexercised will be deemed to have been sold
or exchanged for no consideration on the expiration date. The holder of an
expired Warrant would recognize loss to the extent of the holder's basis in that
Warrant. Any loss to the holder of any expired Warrant will be a capital loss if
the Warrant was held as a capital asset and if the Common Stock underlying the
Warrant would have been a capital asset had such Warrant been exercised. Any
capital loss will be long-term if the holding period of the Warrant exceeds one
year when it expires. The use of capital losses to offset ordinary income is
strictly limited for noncorporate stockholders and prohibited for corporate
stockholders.
No gain or loss will be recognized by the Company upon the
acquisition, exercise or expiration of any Warrants.
44
<PAGE>
Section 203 of the Delaware Law
Section 203 of the GCL prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date, the business combination is approved by the board of directors
and by the affirmative vote of at least 66-2/3% of the outstanding voting stock
that is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person, who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
Transfer Agent
The Transfer Agent for the Common Stock and Warrant Agent for the
Warrants is Liberty Transfer Co., Box 558, Huntington, NY 11743-0588.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have
outstanding 4,500,000 shares of Common Stock and 250,000 Warrants. Of these
securities, 500,000 shares of Common Stock and 250,000 Warrants maximum being
sold in the Offering (along with 2,000,000 shares of Common Stock presently
outstanding) will be freely transferable by persons other than "affiliates" of
the Company (as that term is defined under the Securities Act) without
restriction or further registration under the Securities Act. In addition, the
250,000 shares of Common Stock issuable upon exercise of the Warrants being sold
in the Offering will also be freely tradeable without restrictions or further
registration.
All of the remaining 2,000,000 shares of Common Stock outstanding
are "restricted securities," as that term is defined in Rule 144 promulgated
under the Securities Act, and may only be sold pursuant to an effective
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. The 2,000,000 restricted shares will be eligible for sale,
without registration, under Rule 144 (subject to certain volume limitations
prescribed by such rule and to the contractual restrictions described below), on
July 17, 1997.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the issuer's common stock or the average weekly trading
volume during the four calendar weeks preceding such sale, provided that certain
public information about the issuer as required by Rule 144 is then available
and the seller complies with certain other requirements. Affiliates may sell
unrestricted securities in compliance with Rule 144, other than the holding
period requirement. A person who is not an affiliate, has not been affiliate
within two months prior to sale, and has beneficially owned the restricted
securities for at least two years, is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
The Company's officers, directors [and certain other stockholders]
beneficially owning in aggregate ______________ shares of Common Stock have
agreed not to sell or dispose of any of their securities of the Company prior to
___________, 1998 [twelve months from the date of this Prospectus], without the
Underwriter's prior written consent.
In addition to the shares of Common Stock that are currently
outstanding, the Company has reserved (i) 7,500 shares for issuance upon
exercise of warrants and stock options presently outstanding and (ii) 400,000
shares for issuance upon the exercise of options granted and available for
future grant under the Stock Option Plan, none of which have been granted as of
the date of this Prospectus.
Prior to this Offering, there has been no public trading market for
the Common Stock and no prediction can be made as to the effect, if any, that
public sales of shares of Common Stock or the availability of shares for sale
will have on the market prices of the Common Stock and Warrants prevailing from
time to time. Nevertheless, the possibility that a substantial amount of Common
Stock and/or Warrants may be sold in the public market may adversely effect
prevailing market prices and could impair the Company's ability to raise capital
through the sale of its equity securities in the future.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
between the Company and the Underwriter, the Underwriter has agreed to offer to
the public, as agent for the Company, 250,000 Units on a "best efforts, 250,000
Units all or none" basis. The Underwriter will be paid the per Unit underwriting
commissions set forth on the cover page of this Prospectus provided the Units
being offered hereby are sold.
The Underwriting Agreement between the Company and the Underwriter
(the "Underwriting Agreement") provides that the obligations of the Underwriter
are subject to the approval of certain legal matters by its counsel and various
other conditions. The Underwriter has advised the Company that it proposes to
offer the Common Stock and Warrants to the public at the public offering prices
set forth on the cover page of this Prospectus. The Underwriter may allow
certain dealers who are members of the National Association of Securities
Dealers, Inc. (the "NASD") concessions, not in excess of $____ per Unit, of
which not in excess of $___ per Unit may be reallowed to other dealers which are
members of the NASD.
The Units are being offered on a "best efforts, 250,000 Units or
none" basis. The Underwriter has made no commitment to purchase or take down all
or any part of the Units offered hereby. The Underwriter has agreed to use its
best efforts to find purchasers for the Units offered hereby within a 30 day
period from the date of this Prospectus, subject to an extension at the
discretion of the Company for an additional period not to exceed fifteen days
(plus, in either event, an additional seven business day
46
<PAGE>
period to allow checks deposited in escrow to clear) (the "Offering Period").
After the sale of the first 250,000 Units, subscribers will have no refund
rights and the Underwriter may allocate among or reject subscribers.
The Company has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the Underwriters may be required to make. The Company has also agreed to
pay to the Underwriter an expense allowance on a non-accountable basis equal to
3% of the gross proceeds derived from the sales of the Units underwritten, of
which $50,000 has been paid to date.
The Underwriter has informed the Company that it does not expect
sales to discretionary accounts by the Underwriter to exceed 5% of the Units
offered hereby.
In connection with the Offering, the Company has agreed to sell to
the Underwriter, for nominal consideration, Underwriter's Warrants to purchase
from the Company such number of Units equal to 10% of the Units actually sold by
the Company in the Offering. The Underwriter's Warrants are initially
exercisable at a price of $12 per Unit for a four-year period commencing on the
first anniversary of the issuance of the Underwriter's Warrants. The
Underwriter's Warrants provide for adjustments in the number of Units issuable
upon the exercise thereof and in the exercise price of the Underwriter's
Warrants as a result of certain events, including subdivisions and combinations
of the Common Stock.
The Underwriter has not previously participated in any public
offerings as an underwriter. In evaluating an investment in the Company,
prospective investors in the Securities offered hereby should consider the
Underwriter's lack of experience as an underwriter of public offerings.
Upon the exercise of any Warrants more than one year after the date
of this Prospectus, which exercise was solicited by the Underwriter, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. ("NASD") and the Rules and Regulations of the
Commission, the Company has agreed to pay the Underwriter a commission which
shall not exceed five percent (5%) of the aggregate exercise price of such
Warrants in connection with bona fide services provided by the Underwriter
relating to any warrant solicitation undertaken by the Underwriter. In addition,
the individual must designate the firm entitled to payment of such warrant
solicitation fee. A warrant solicitation fee will only be paid to the
Underwriter or another NASD member when such NASD member is specifically
designated in writing as the soliciting broker. However, no compensation will be
paid to the Underwriter in connection with the exercise of the Warrants if (a)
the market price of the Common Stock is lower than the exercise price, (b) the
Warrants were held in a discretionary account, or (c) the exercise of the
Warrants is not solicited by the Underwriter. Unless granted an exemption by the
Commission from its Rule 10b-6 under the Exchange Act, the Underwriter will be
prohibited from engaging in any market-making activities with regard to the
Company's securities for the period from nine business days (or other such
applicable periods as Rule 10b-6 may provide) prior to any solicitation of the
exercise of the Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Common Stock or Warrants during
certain periods while the Warrants are exercisable. If the Underwriter has
engaged in any of the activities prohibited by Rule 10b-6 during the periods
described above, the Underwriter undertakes to waive unconditionally its rights
to receive a commission on the exercise of such Warrants.
Prior to this Offering, there has been no public market for the
Common Stock or the Warrants. Consequently, the initial public offering price of
the Units has been determined by negotiation between the Company and Underwriter
and does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital
structure, the market for initial public offerings and certain other factors as
were deemed relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
The validity of the Securities comprising the Units offered hereby
will be passed upon for the Company by Mintz & Fraade, P.C., New York, New York,
counsel to the Company in connection with this Offering. Dreier & Baritz, Boca
Raton, Florida has acted as counsel to the Underwriter in connection with this
Offering. Mintz & Fraade, P.C. has been granted options to purchase 7,500 shares
of Common Stock at $.001 per share. See "Risk Factors - Conflicts of Interest".
47
<PAGE>
EXPERTS
The financial statements of the Company as of September 30, 1995
and 1996, and for the periods ended September 30, 1995 and 1996, have been
included in this Prospectus in reliance upon the report of Daszkal, Bolton &
Manela, Boca Raton, Florida 33433, independent certified public accountants,
given upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement
on Form SB-2 under the Securities Act (together with all amendments and exhibits
thereto, the "Registration Statement") with respect to the securities offered
hereby. This Prospectus, filed as a part of such Registration Statement, does
not contain all of the information set forth in, or annexed as exhibits to, 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 the Company and this Offering, reference is made to the Registration
Statement, including the exhibits and schedules filed therewith, which may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, NW, Washington, D.C. 20549, or at the following regional offices of the
Commission: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10007. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document are not necessarily
complete and, where the contract, agreement or other document referred to has
been filed as an exhibit to the Registration Statement, each such statement is
qualified in all respects by reference to the applicable document filed with the
Commission.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................................ F-2
Balance sheets as of September 30, 1996 ................................................ F-3
Statements of Operations, for the Period of Inception Through September 30, 1995
and the Fiscal Year Ended September 30, 1996 ........................................... F-4
Statements of Shareholders' Equity (Deficit), for the Period of Inception
Through September 30, 1995 and the Fiscal Year Ended September 30, 1996
Statements of Cash Flows, for the Period of Inception Through September 30, 1995 ....... F-5
and the Fiscal Year Ended September 30, 1996............................................ F-6
Notes to Financial Statements .......................................................... F-7
</TABLE>
F - 1
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1996 AND
PERIOD FROM JULY 14, 1995 (INCEPTION)
TO SEPTEMBER 30, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
INDEPENDENT AUDITOR'S REPORT............................................... 1-2
FINANCIAL STATEMENTS:
BALANCE SHEETS......................................................... 3-4
STATEMENTS OF OPERATIONS............................................... 5
STATEMENT OF STOCKHOLDERS' EQUITY...................................... 6
STATEMENT OF CASH FLOWS................................................ 7-8
NOTES TO FINANCIAL STATEMENTS..........................................9-15
<PAGE>
DASZKAL, BOLTON & MANELA
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
240 W. PALMETTO PARK ROAD, SUITE 300 - BOCA RATON, FLORIDA 33432
TELEPHONE (561)367-1040 FAX (561)750-3236
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Intellisys Automotive Systems, Inc.
We have audited the accompanying balance sheets of Intellisys Automotive
Systems, Inc. as of September 30, 1996 and 1995, the related statements of
operations, stockholders' equity and cash flows for the year ended September 30,
1996 and for the period from July 14, 1995 (Inception) to September 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intellisys Automotive System,
Inc. as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for the year ended September 30, 1996 and for the period from
July 14, 1995 (Inception) to September 30, 1995 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced substantial losses from
operations since its inception as well as negative cash flows from operation.
The Company has a negative cash position at December 31, 1996. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The accompanying financial
-1-
<PAGE>
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the resolution of these uncertainties.
Daszkal, Bolton & Manela, CPA's
-------------------------------
Boca Raton, Florida
January 13, 1997, except as to the information
in the last paragraph in Note 12, for which the
date is January 30, 1997, and except for Notes 1
and 4 for which the date is April 23, 1997.
-2-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS
1996 1995
----------- -------
CURRENT ASSETS
Cash $ 90,881 $ 51,753
Contract receivables 12,933 --
Costs and estimated earnings in excess of
billings on uncompleted contracts 367,146 30,170
Loan receivable - stockholders -- 151,000
Prepaid expenses 29,912 --
Rent deposit -- 2,695
----------- ---------
Total Current Assets 500,872 235,618
----------- ---------
PROPERTY AND EQUIPMENT
Office furniture and equipment 4,922 4,922
Computer equipment 42,781 26,068
Less: Accumulated depreciation (13,675) (785)
----------- ---------
Property and Equipment, net 34,028 30,205
----------- ---------
OTHER ASSETS
License Agreement, net of amortization 970,833 995,833
Deposits 4,164 4,164
----------- ---------
Total Other Assets 974,997 999,997
----------- ---------
TOTAL ASSETS $ 1,509,897 1,265,820
=========== =========
See accompanying notes to financial statements.
-3-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 24,054 151
Accrued expenses 23,954 16,648
Billings in excess of costs and estimated
earnings on uncompleted contracts -- 944
Contract payable - license -- 900,000
Loan payable - stockholders 93,442 --
Loan payable - Licensor -- 147,784
----------- -----------
Total Current Liabilities 141,450 1,065,527
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.001 par value - 20,000,000
shares authorized; shares issued and
outstanding: 1996 - 4,000,000 and
1995 - 2,000,000 4,000 2,000
Additional paid-in-capital 1,797,000 299,000
Accumulated deficit (432,553) (100,707)
----------- -----------
Total Stockholders' Equity 1,368,447 200,293
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,509,897 $ 1,265,820
=========== ===========
See accompanying notes to financial statements.
-4-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 AND
PERIOD FROM JULY 14, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
For the For the
Year Ended Period Ended
September September
30, 1996 30, 1995
----------- -----------
Revenues $ 793,457 $ 41,826
----------- -----------
Costs and Expenses
Cost of revenues 465,730 50,397
Marketing 87,175 31,439
General and administrative 256,947 38,368
Amortization - license costs 25,000 4,167
Royalties 265,420 10,712
Research and development 24,978 8,088
----------- -----------
Total Costs and Expenses 1,125,250 143,171
----------- -----------
Loss from Operations (331,793) (101,345)
----------- -----------
Other Income (Expense)
Interest Income 780 638
Interest Expense (833) --
----------- -----------
Total Other Income (Expense) (53) 638
----------- -----------
Net Loss Before Income Tax Benefit (331,846) (100,707)
Income Tax Benefit -- --
----------- -----------
Net Loss $ (331,846) $ (100,707)
=========== ===========
Weighted Average Common
Shares Outstanding 2,005,479 2,000,000
=========== ===========
Net Loss per Common Share $ (.17) $ (.05)
=========== ===========
See accompanying notes to financial statements.
-5-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1996 AND
PERIOD FROM JULY 14, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at July 14,
1995 -- $ -- $ -- $ -- $ --
Stock issued 1,000,000 1,000 -- -- 1,000
Stock issued 1,000,000 1,000 299,000 -- 300,000
Net Loss for the
Period -- -- -- (100,707) (100,707)
----------- ----------- ----------- ----------- -----------
Balance at September
30, 1995 2,000,000 2,000 299,000 (100,707) 200,293
Stock issued 2,000,000 2,000 1,498,000 -- 1,500,000
Net Loss for the Year -- -- -- (331,846) (331,846)
----------- ----------- ----------- ----------- -----------
Balance at September
30, 1996 4,000,000 $ 4,000 $1,797,000 $ (432,553) $ 1,368,447
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1996 AND
PERIOD FROM JULY 14, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
For the For the
Year Period
Ended Ended
September September
30, 1996 30, 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (331,846) $ (100,707)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 12,890 785
Amortization 25,000 4,167
Changes in Assets and Liabilities:
(Increase) Decrease in:
Contract receivables (12,933) --
Prepaid expenses (29,912) --
Costs and estimated earnings in excess of billings
on uncompleted contracts (336,976) (30,170)
Other assets 2,695 (6,859)
Increase (Decrease) in:
Accounts payable 23,903 151
Billings in excess of costs and estimated earnings
on uncompleted contracts (944) 944
Accrued expenses 7,306 16,648
----------- -----------
Total Adjustments (308,971) (14,334)
----------- -----------
Net Cash Used in Operations (640,817) (115,041)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (16,713) (30,990)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance 1,500,000 300,000
Proceeds from stockholder loan 244,442 --
Proceeds from other loans - ISI -- 147,784
Payment of contract payable - license (900,000) (100,000)
Increase in stockholder loan -- (150,000)
Payment on other loans - ISI (147,784) --
----------- -----------
Net Cash Provided by Financing Activity 696,658 197,784
----------- -----------
</TABLE>
(Continued on next page)
See accompanying notes to financial statements.
-7-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1996 AND
PERIOD FROM JULY 14, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
For the For the
Year Period
Ended Ended
September September
30, 1996 30, 1995
--------- ---------
<S> <C> <C>
NET INCREASE IN CASH 39,128 51,753
CASH, BEGINNING OF PERIOD 51,753 --
--------- ----------
CASH, END OF PERIOD $ 90,881 $ 51,753
========= ==========
Supplemental Disclosure of Cash flow Information
Cash Paid During the Period for:
Interest $ 833 $ --
========= ==========
Income taxes $ -- $ --
========= ==========
Supplemental Disclosure of Non-cash Transactions
License agreement acquired for contract $ -- $1,000,000
========= ==========
Stock Acquired for Stockholder Loan $ -- $ 1,000
========= ==========
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Intellisys Automotive Systems, Inc. (the Company) was incorporated on July 14,
1995 in the State of Delaware. The Company began operations after acquiring
significant assets from Intellisys Systems, Inc. The Company supplies diagnostic
and control systems to the automotive industry using advanced engineering. The
Company's customers are two of the big three in the automotive industry.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced
substantial operating losses and negative cash flows from operation since its
inception. The Company has a negative cash balance at December 31, 1996. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to continue in existence as a going
concern, is dependent upon its ability to attain profitable operations and to
obtain equity and/or debt financing. Management projects profitable operations
over the next year but plans to rely on the Company's ability to successfully
complete a proposed initial public offering in the near term.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
- ----------------
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Revenue and Cost Recognition
- ----------------------------
Revenues from fixed-price contracts are recognized on the percentage-of-
completion method, measured by the percentage of cost incurred to date to
estimated total cost for each contract. That method is used because management
considers total cost to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance such as indirect labor, supplies, tools,
repairs, and depreciation. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
-9-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
- ----------------------
Property and equipment is recorded at cost and is depreciated using accelerated
methods over their estimated useful lives. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense was $12,890 for 1996 and $785 for 1995.
Amortization
- ------------
License agreement costs are being amortized using the straight line method over
forty years. For the years ended September 30, 1996 and the period ended
September 30, l995, the amortization of the license agreement amounted to
$25,000 and $4,167, respectively.
Research and Development Expenses
- ---------------------------------
Research and development expenditures are expended as incurred and totaled
$24,978 for the year ended September 30, 1996 and $8,088 for the period ended
September 30, 1995.
Income Taxes
- ------------
The Company has adopted Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes". This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between financial statement and income tax
basis of assets and liabilities, and available net operating losses to the
extent that the realization of such benefit is more likely than not. SFAS 109
requires a valuation allowance against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
-10-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The following schedule presents the status of costs and estimated earnings on
uncompleted contracts:
1996 1995
---------- ----------
Costs incurred on uncompleted contracts $ 344,386 $ 14,888
Estimated earnings 490,899 26,938
--------- --------
835,285 41,826
Less: Billings to date (468,138) 12,600
--------- --------
$ 367,147 $ 29,226
========= ========
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 367,147 $ 30,170
Billings in excess of costs and estimated
earnings on uncompleted contracts - (944)
--------- --------
$ 367,147 $ 29,226
========= ========
NOTE 4 - RELATED PARTY TRANSACTIONS
The following transactions occurred during the periods:
License Agreement
- -----------------
The Company entered into a license agreement with Intellisys Systems, Inc.,
("Licensor"), for the North American rights to use certain computer technology,
knowledge, and documentation associated with the sale of computer products to
the automotive industry, as defined in the license agreement. Under the
agreement, the Licensor will provide certain maintenance and support services to
the Company. In addition, the Licensor provides certain marketing and management
services to the Company. The agreement remains in force in perpetuity unless
terminated by reason of the non-payment of royalties or other factors of the
agreement including bankruptcy of the Company.
The agreement calls for the initial payment of $1,000,000, plus royalties of
forty percent (40%) of the Company's gross revenue less the cost of direct
materials. The payment of the $1,000,000 was to be made by paying $100,000 upon
execution of the agreement and then ten percent (10%) of the Company's monthly
revenue until the $900,000 balance had been paid. The Company subsequently paid
the remaining $900,000 balance from the $1,500,000 proceeds from the common
stock issued during the year.
The royalties paid to ISI are paid monthly. During the year ended September 30,
1996 and the period ended September 1995, the Company paid $265,420 and $10,712,
respectively.
-11-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
Transaction Involving Stockholders
- ----------------------------------
Activity with the Company's stockholders during the year ended September 30,
1996 and the period ended September 30, 1995 is summarized as follows:
September September
30, 1996 30, 1995
--------- ---------
Due from stockholders - Beginning of Period $ 151,000 $ -
Cash receipts (244,442) -
Cash disbursements - 150,000
Debt incurred for common stock - 1,000
--------- --------
Due from (due to) stockholders - End of Period $ (93,442) $151,000
========= ========
Also, during the year ended September 30, 1996, the Company paid a stockholder
$39,000 in consulting fees.
Advance Payable Licensor
- ------------------------
The Company borrowed $147,700 from Licensor during the period ended September
30, 1995. This advance was repaid during the year ended September 30, l996.
NOTE 5 - ISSUANCE OF COMMON STOCK
On July 14, 1995, the Company issued 1,000,000 shares of common stock at a price
of .001 cents a share. On July 14, 1995, the Company issued an additional
1,000,000 shares of common stock which increased the total shares outstanding
from 1,000,000 to 2,000,000 and raised $S300,000.
During the year ended September 30, 1996, the Company issued 2,000,000 shares
for $1,500,000.
NOTE 6 - LEASE AGREEMENT
The Company leases office space under an operating lease agreement. The lease
was executed July 14, 1995 and covers office space located in Southfield,
Michigan. The lease has a one-year term from its commencement date and provides
for a monthly rent of $2,664.
-12-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - LEASE AGREEMENT (Continued)
The Company also leases an apartment under an operating lease agreement. The
lease agreement provides for a one-year term with monthly payments of $1,800.
Rent expenses for the year ended September 30, 1996 and the period ended
September 30, 1995 were $53,568 and $8,928, respectively.
NOTE 7 - INCOME TAXES
Temporary differences between the financial statement carrying amounts and tax
basis of assets and liabilities did not give rise to significant portions of
deferred taxes at September 30, 1996 and 1995. There is a permanent difference
between pretax income and taxable income due to the amortization of the license
agreement. This amount was $25,000 for 1996 and $4,167 for 1995.
As of September 30, 1996, the Company had an unused net operating loss carry
forward of $403,386 available for use on its future corporate federal tax
returns. The Company's evaluation of the tax benefit of its net operating loss
carry forward is presented in the following table. The tax amounts have been
calculated using the 34% tax rate resulting from the use of graduated rates.
Deferred Tax Asset:
Tax Benefit of Net Operating Loss $137,151
Less: Evaluation allowance (137,151)
--------
Deferred Tax Asset $ -
========
The net operating loss carryover is summarized below:
Year Loss Originated Year Expiring Amount
- -------------------- ------------- ------
September 30, 1995 2010 $ 96,540
September 30, 1996 2011 306,846
--------
Total Available Net Operating Loss $403,386
========
-13-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - CONCENTRATION OF CREDIT RISK
The Company's financial instruments which are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash and temporary investments with high credit quality financial
institutions. At times, such investments may be in excess of the FDIC insurance
limit. The Company sells its products to two of the big three in the automotive
industry and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited.
NOTE 9 - MAJOR CUSTOMERS
As described in Note 1, the Company is involved in the business of creating and
selling computer systems to the automotive industry. Specifically, the majority
of the Company's sales have been to members of the big three auto manufacturers.
During the year end, September 30, 1996 and the period from July 14, 1995
(Inception) to September 30, 1995, one hundred percent of the Company's
contracts were with members of the big three auto manufacturers.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at September 30, 1996 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet.
NOTE 11 - CONTINGENCIES
The Company is involved in various legal proceedings incident to the character
of its business. Although it is not possible to predict the outcome of these
proceedings, or any claims against the Company related thereto, the Company
believes that such proceedings will not, individually or in the aggregate, have
a material adverse effect on its financial condition or results of operations.
NOTE 12 - SUBSEQUENT EVENTS
On January 6, 1997, the capital structure of the Company was changed so that the
originally authorized 20,000,000 shares of .001 par value common stock were
replaced by 15,000,000 shares of .001 par value common stock, 3,000,000 shares
of Class A .01 par value stock, and 2,000,000 shares of .01 par value preferred
stock.
-14-
<PAGE>
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS (Continued)
On January 10, 1997, the Company sold 2,000,000 shares of Class A $.01 par value
common stock for 37.5 cents per share for a total of $750,000. The Company
received stock subscriptions for this amount. At the time of the sale of stock,
a stockholder loan payable existed in the amount of $390,684. The stock
subscription receivable extinguished the stockholder loan payable, and as of
January 30, 1997, after $276,650 of payments had been received, the balance in
the stock subscription receivable was $82,666.
-15-
<PAGE>
<TABLE>
<CAPTION>
=================================================================== ==========================================
<S> <C>
No dealer, salesperson or any other person has [LOGO]
been authorized to give any information or to make any IntelliSys Automotive Systems, Inc.
representations other than those contained in this
Prospectus, and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Company or any Underwriter. Neither
the delivery of this Prospectus, nor any sale made
hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of
the Company since the date hereof or that the information
contained herein is correct as of any date subsequent to the
date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered 250,000 UNITS
hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making Each Unit Consisting of
such offer or solicitation is not qualified to do so or to Two Shares of Common Stock
anyone to whom it is unlawful to make such offer or and
solicitation. One Common Stock Purchase Warrants
______________
TABLE OF CONTENTS
Prospectus Summary.................................. 4
Risk Factors ....................................... 8 ----------
The Company ........................................15 PROSPECTUS
Dividend Policy ....................................15 ----------
Use of Proceeds ....................................16
Dilution ...........................................18
Capitalization .....................................19
Selected Financial Data ............................19
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...21 The Agean Group, Inc.
Business ...........................................23
Management .........................................36
Principal Stockholders .............................40
Certain Transactions ...............................40
Description of the Securities ......................42
Shares Eligible for Future Sale ....................46
Underwriting .......................................46 , 1997
Legal Matters ......................................47
Experts ............................................48
Available Information ..............................48
Index to Financial Statements ......................F-1
______________
Until ____, 1997 (25 days after the date of this
Prospectus), all dealers effecting transactions in the
registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This
is in addition to the obligations of dealers to deliver a
Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
=================================================================== ==========================================
</TABLE>
<PAGE>
PART II
Item 24. Indemnification of Directors and Officers.
Article EIGHTH of the Registrant's Certificate of Incorporation, as
amended, contains the following provision with respect to the indemnification of
directors of the Company:
"EIGHTH: The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by
the provisions of Section 102(b)(7) of the General Corporation Law
of the State of Delaware, as the same may be amended or
supplemented."
Sections 1,2, 3 and 4 of Article 8 of the Registrant's By-laws
contain the following provision with respect to the indemnification of
directors, officers, and authorized representatives:
"Section 1. Indemnification of Directors and Officers in Third
Party Proceedings. The Corporation shall indemnify any director or
officer of the Corporation who was or is an "authorized
representative" of the Corporation (which shall mean for the
purposes of this Article a director or officer of the Corporation,
or a person serving at the request of the Corporation as a
director, officer, partner or trustee of another corporation,
partnership, joint venture, trust or other enterprise) and who was
or is a "party" (which shall include for purposes of this Article
the giving of testimony or similar involvement) or is threatened to
be made a party to any "third party proceeding " (which shall mean
for purposes of this Article any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative
or investigative, other than an action by or in the right of the
Corporation) by reason of the fact that such person was or is an
authorized representative of the Corporation, against expenses
(which shall include for purposes of this Article attorney's fees
and disbursements), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such third party proceeding if such person acted in
good faith and in a manner such person reasonably believed to be
in, or not opposed to, the best interests of the Corporation and,
with respect to a criminal third party proceeding (which shall
include for purposes of this Article any investigation which could
or does lead to a criminal third party proceeding) had not
reasonable cause to believe such conduct was unlawful. The
termination of any third party proceeding by judgment, order,
settlement, indictment, conviction or upon a plea of no contest or
its equivalent, shall not, of itself, create a presumption that the
authorized representative did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any
criminal third party proceeding, had reasonable cause to believe
that such conduct was unlawful."
"Section 2. Indemnification of Directors and Officers in
Corporate Proceedings. The Corporation shall indemnify any director
or officer of the Corporation who was or is an authorized
representative of the Corporation and who was or is a party or is
threatened to be made a party to any "corporate proceeding" (which
shall mean for purposes of this Article any threatened, pending or
completed action or suit by or in the right of the Corporation to
procure a judgment in its favor or any investigative proceeding by
or on behalf of the Corporation) by reason of the fact that such
person was or is an authorized representative of the Corporation,
against expenses (including attorneys' fees and disbursements)
actually and reasonably incurred by such person in connection with
the defense or settlement of such corporate proceeding if such
person acted in good faith and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the
performance of such person's duty to the Corporation unless and
only to the extent that the court in which such corporate
proceeding was pending shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, such authorized representative is fairly
and reasonably entitled to indemnity for such expenses which the
court shall deem proper."
<PAGE>
"Section 3. Indemnification of Authorized Representatives. To
the extent that an authorized representative of the Corporation who
neither was nor is a director or officer of the Corporation has
been successful on the merits or otherwise in defense of any third
party or corporate proceeding or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses
actually and reasonably incurred by such person in connection
therewith. Such an authorized representative may, at the discretion
of the Corporation, be indemnified by the Corporation in any other
circumstances to any extent if the Corporation would be required by
Section 1 or 2 of this Article VIII to indemnify such person in
such circumstances to such extent as if such person were or had
been a director or officer of the Corporation."
"Section 4. General Terms. Any indemnification under Section 1
and Section 2 of this Article VIII (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because
he had met the applicable standard of conduct set forth in Section
1 and Section 2 of this Article VIII. Such determination shall be
made (i) by the Board of
II - 1
<PAGE>
Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in
written opinion, or (iii) by the shareholders.
"Expenses incurred in defending a civil or criminal action, suit
or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the
Corporation as authorized in these By-laws."
Section 145 of the Delaware General Corporation Law also contains
provisions entitling directors and officers of the Company to indemnification
from judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, as the result of an action or proceeding in which
they may be involved by reason of being or having been a director or officer of
the Company (or, at the request of the Company, a director or officer of another
corporation or other enterprise); provided the officers or directors acted in
good faith. The Company also may obtain an insurance policy which will cover
officers and directors for any liability arising out of their actions in such
capacity.
The foregoing do not and will not eliminate or limit the liability
of a director for violating his duty of loyalty (which includes the obligation
of a director of the Company to refrain from self dealing with respect to the
Company, improperly competing with the Company or usurping Company
opportunities), failing to act in good faith, engaging in intentional misconduct
or knowingly violating a law or participating in the payment of a dividend or a
stock repurchase or redemption for himself. The foregoing also do not and will
not affect any director's liability under federal securities laws or the
availability of equitable remedies such as an injunction or rescission for
breach of fiduciary duty.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemized list of all expenses to
be borne by the Registrant in connection with the issuance and distribution of
the securities being registered hereby other than underwriting discounts and
commissions and non-accountable expenses.
SEC Registration Fee.............................................. $ 1,473.49
NASD Filing Fee................................................... 750.00
State Securities Laws (Blue Sky) Fees and Expenses................ 30,000.00*
Nasdaq SmallCap Market Listing Fee................................ 10,000.00*
Printing and Engraving............................................ 60,000.00*
Legal Fees and Expenses........................................... 45,000.00*
Accounting Fees and Expenses...................................... 50,000.00*
Escrow Agent Fee.................................................. 10,000.00*
Transfer Agent Fees............................................... 5,000.00*
Miscellaneous Expenses............................................ 37,776.51*
-----------
TOTAL................................................ $350,000.00*
===========
- ---------------
* Estimated.
Item 26. Sales of Unregistered Securities.
Effective July 17, 1995, the Registrant issued and delivered shares
of Common Stock to the individuals and entities listed below for the
consideration set forth opposite their respective names. All of such shares of
Common stock were issued pursuant to an exemption from the registration
requirements of the Securities Act afforded by Section 4(2) thereof.
II - 2
<PAGE>
Name Number of Shares Aggregate Consideration
- ---- ---------------- -----------------------
Marcel Brun........... 500,000 $ 75,250
FMC Group, Inc........ 500,000 75,250
Paul Ulli, Jr......... 500,000 75,250
Suzanne Wolf 500,000 75,250
---------
Totals... 2,000,000 $301,000
Effective September 30, 1996, the Registrant sold and issued an
aggregate 2,000,000 shares of Common Stock to a total of twenty individuals
(100,000 shares each) for the aggregate consideration of $1,500,000 ($.75 per
share). The issuance of all of such shares of Common Stock did not require
registration under the Securities Act in that they were not issued or sold
pursuant to an "offer," "offer to sell," "sale" or "offer to buy" for the
purposes of Section 5 of the Securities Act as provided by Rule 501 of
Regulation S promulgated under said Section 5.
Effective January 10, 1997, the Registrant sold and issued an
aggregate 2,000,000 shares of its Class A Stock to a total of 29 individuals for
the aggregate consideration of $750,000 ($.375 per share). All of such shares of
Common stock were issued pursuant to an exemption from the registration
requirements of the Securities Act afforded by Section 4(2) thereof.
Item 27. Exhibits.
Number Description
1.1+ Form of Underwriting Agreement, to be entered into between
Registrant and The Agean Group, Inc.
1.2+ Form of Underwriter's Warrant Agreement, to be entered into
between Registrant and The Agean Group, Inc.
1.3+ Form of Warrant Agreement, to be entered into between the
Registrant and Liberty Transfer Co.
3.1 Articles of Incorporation of Registrant, as amended to date.
3.2 By-Laws of Registrant, as amended to date.
4.1+ Specimen Common Stock Certificate.
4.2+ Specimen Common Stock Purchase Warrant.
4.3+ Form of Underwriter's Warrant.
4.4+ Form of Common Stock Certificate.
5.1+ Opinion of Mintz & Fraade, P.C.
10.1+ 1997 Stock Option Plan.
10.2+ Form of Escrow Agreement to be entered into between the
Registrant, The Agean Group, Inc. and [BANK NAME].
23.1+ Consent of Mintz & Fraade, P.C.
23.2+ Consent of Daszkal, Bolton & Manela
24.1 Power of Attorney (set forth on the signature page of this
Registration Statement).
- ----------
+ To be filed by amendment.
II - 3
<PAGE>
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to any of the provisions
described under Item 24 above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant 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 governed by the final
adjudication of such issue.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(a) include any prospectus required by Section 10(a)(3) of
the Securities Act;
(b) reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and, notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the 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
(c) Include any additional or changed material information
with respect to the plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering; and
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
II - 4
<PAGE>
The Registrant hereby further undertakes to provide to the Underwriters
at the closing as specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The Registrant hereby further undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this Registration
Statement as of the time the Commission declared it effective; and
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement, and that offering of such securities at that time as the
initial bona fide offering of those securities.
II - 5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in Southfield, State of
Michigan, on May 9, 1997.
INTELLISYS AUTOMOTIVE SYSTEMS, INC.
By: /s/ Douglas Dick
----------------------------
Douglas Dick, President
POWER OF ATTORNEY
We, the undersigned officers and directors of IntelliSys Automotive
Systems, Inc., hereby severally constitute and appoint Douglas Dick and James
Perretty, and each of them (with full power to each of them to act alone), our
true and lawful attorneys-in-fact and agents, with full power of substitution,
for us and in our stead, in any and all capacities, to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement and all documents in connection thereto, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting to said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing necessary or advisable to be done in and about the
premises, as full to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all the said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Name Title Date
---- ----- ----
/s/ Douglas Dick President, Chief Executive Officer
- -------------------- and Director May 9, 1997
Douglas Dick
/s/ Fred Shadko Director May 8, 1997
- --------------------
Fred Shadko
/s/ James Perretty Chief Financial Officer (Principal
- -------------------- Financial and Accounting Officer)
James Perretty and Director May 7, 1997
/s/ Paul Michelin Director May 7, 1997
- --------------------
Paul Michelin
II - 6
