<PAGE> 1
As filed with the Securities and Exchange Commission on November 6, 1997.
Registration No. 333-33597
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DAYTON GENERAL SYSTEMS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Pennsylvania 7372 31-1551295
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number Identification Number)
</TABLE>
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Address and telephone number
of principal executive offices and principal place of business)
THOMAS C. HAAS
DAYTON GENERAL SYSTEMS, INC.
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Name, address
and telephone number
of agent for service)
COPIES TO:
TIMOTHY E. HOBERG, ESQ. CHARLES F. HERTLEIN, JR., ESQ.
Taft, Stettinius & Hollister Dinsmore & Shohl LLP
1800 Star Bank Center 1900 Chemed Center
425 Walnut Street 255 East Fifth Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(513) 381-2838 (513) 977-8200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
____________________
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: [ ]
==============================================================================
<PAGE> 2
--------------
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.
<PAGE> 3
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
DAYTON GENERAL SYSTEMS, INC.
900,000 UNITS
$10.00 per Unit
Each Unit Consisting of
Two Shares of Common Stock
and One Common Stock Purchase Warrant
Dayton General Systems, Inc. (the "Company") is offering for sale a
minimum of 550,000 Units and, together with certain shareholders of the Company
(the "Selling Shareholders"), a maximum of 900,000 Units (the "Offering"). The
per Unit offering price is $10.00. Each Unit consists of two shares of the
Company's common stock, no par value (the "Common Stock"), and a warrant (the
"Warrant") to purchase one share of Common Stock at an exercise price of $6.50
per share. The Common Stock and Warrants will become separately transferable 90
days after the date the subscription purchase funds held in escrow are released
into the Company's account (the "Escrow Release Date"). The Warrants will be
exercisable for a period of five years from the date of this Prospectus.
After the sale of the initial 550,000 Units, an additional 350,000
Units will be offered ratably by the Company, which is offering up to 332,000
additional Units, and the Selling Shareholders, who are offering up to 18,000
Units (the "Selling Shareholders' Units"). See "Selling Shareholders." The
Warrants included in the Selling Shareholders' Units will be issued by the
Company, and the Selling Shareholders will reimburse the Company at the rate of
$0.10 per Warrant sold. The Company will not receive any other proceeds from the
sale of the Selling Shareholders' Units; however, the Company will receive
proceeds from the exercise, if any, of the Warrants included in the Selling
Shareholders' Units. See "Use of Proceeds."
The Offering is being made on a "best efforts" basis through J. V.
Delaney & Associates (the "Underwriter"). Prior to the Offering there has been
no public market for the Company's Units, Common Stock or Warrants. The initial
public offering price of the Units and the exercise price and other terms of the
Warrants have been arbitrarily determined by negotiation between the Company and
the Underwriter and are not necessarily related to or indicative of the
Company's assets, book value, financial condition or any other recognized
criteria of value. Application has been made for quotation of the Units, Common
Stock and Warrants on The Nasdaq SmallCap Market under the proposed symbols DGSU
for the Units, DGSI for the Common Stock and DGSW for the Warrants. See
"Description of Securities" and "Underwriting."
________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
________________
<PAGE> 4
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.
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======================================================================================================================
Underwriting Proceeds to the Proceeds to Selling
Price to Public Commissions(1) Company (2) Shareholders(3)
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<S> <C> <C> <C> <C>
Per Unit $10.00 $1.00 $9.00 $9.00
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Total Minimum $5,500,000 $550,000 $4,950,000 ---
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Total Maximum $9,000,000 $900,000 $7,938,000 $162,000
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</TABLE>
(See Notes on following page)
During the Offering, all subscription amounts will be held in escrow
with the National Bank of Southern California (the "Escrow Agent"). Unless
extended, the Offering will begin on the date of this Prospectus and end on
__________, 1998, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of
6-1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any
such case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate
of 6-1/2% per annum from the date of deposit with the Escrow Agent. See
"Underwriting."
SUBSCRIPTIONS MAY NOT BE WITHDRAWN OR CANCELLED DURING THE OFFERING.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed. The Offering also
may be cancelled without notice.
J.V. Delaney & Associates
Established in 1981
The date of this Prospectus is _________ __, 1997
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<PAGE> 5
Notes
(1) Two points (2%) of the commissions payable to the Underwriter have been
denominated as an investment banking fee. Does not reflect additional
compensation to be received by the Underwriter in the form of the grant of
warrants (the "Underwriter's Warrants"), at a price of $.0005 per Warrant, to
purchase up to 72,630 Units, at 125% of the initial public offering price per
Unit, exercisable for a period of four years beginning one year from the date of
this Prospectus. Additionally, the Company has agreed to indemnify the
Underwriter against certain liabilities under the Securities Act
of 1933 (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$250,175 and a non-accountable expense allowance of between $165,000 (if the
minimum number of Units is sold) and $264,600 (if the maximum number of Units is
sold) payable to the Underwriter by the Company, of which $80,500 has been
advanced by the Company, and before deducting offering expenses payable by the
Selling Shareholders proportionate to the number of shares sold by them.
Excludes proceeds of $0.10 per Warrant, up to a maximum of $1,800, payable by
the Selling Shareholders to the Company. See "Underwriting."
(3) Before deducting $0.10 per Warrant, up to a maximum of $1,800, payable by
the Selling Shareholders to the Company.
- -------------------------------
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
This Prospectus makes reference to the trademarks of other companies.
LonWorks(R), LON(R), LonBuilder(R) and Neuron(R) are trademarks of Echelon
Corporation registered in the United States and other countries. Windows(R) and
Windows NT(R) are registered trademarks of Microsoft Corporation. MFC(R) is a
registered trademark of Lis Holdings Limited. QNX(R) is a registered trademark
of Quantum Software Systems, Ltd. Pentium(R) is a registered trademark of Intel
Corporation. UNIX(R) is a registered trademark of Unix System Laboratories, Inc.
VMS(R) is a registered trademark of Digital Equipment Corporation.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read
in conjunction with the more detailed information and Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus has been adjusted to give effect
to a 1,000-for-1 split of the Company's Common Stock in connection with the
Company's re-incorporation in the Commonwealth of Pennsylvania on October 9,
1997. As used in this Prospectus, the term the "Company" or "DGS" means Dayton
General Systems, Inc. unless the context indicates otherwise.
THE COMPANY
The Company has its origins in the Controls Division of the General
Motors Corporation. In March 1993, Mr. Thomas C. Haas, former Treasurer of
Tomkins Corporation, the holding company for the U.S. operations of Tomkins PLC
(Philips Industries, formerly a Fortune 500 company, Smith & Wesson and Murray
Ohio) incorporated DGS, Inc., which purchased the assets which now comprise the
Company. See "History of the Company." DGS's profitable core business has been
designing, building, installing and servicing state-of-the- art computerized
building automation systems. These systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other facility functions. DGS markets a
combination of these products and services to the facilities management
industry. DGS's systems are currently installed in high-rise buildings,
manufacturing facilities, wastewater treatment plants and educational
institutions, including the General Motors Building in New York City and the
entire University of Pennsylvania. See "Business-Products: Building Control
Products."
Although DGS plans to continue servicing its installed base of building
automation systems, it has recently changed its focus to becoming a software
technology solution provider to an emerging segment of the control and
automation industry marketplace. Company management has identified a major
technological revolution from closed control systems, where customers were
"locked in" to one vendor's control devices, to open control systems, where
customers decide which mix of vendors' devices they will use in their control or
automation systems. See "Business-Industry Overview: The Old Technology" and
"-: The New Technology."
A driving force in this technology revolution is the development by
Echelon Corporation of its LonWorks control network, forming the foundation of
an open control system. At the heart of this network is the Neuron C computer
chip developed by Echelon. The Neuron C chip includes three dedicated
microprocessors, integrated input and output hardware and drivers and internal
timers for real-time control. It is programmed in high-level (Neuron C)
programming language. Lonworks Network Services ("LNS") architecture provides
the functionality of the LonWorks control network and allows maintenance,
control and multiple non-proprietary device access to the network. See
"Business-Industry Overview: LonWorks Control Network."
Configuration of the network, however, currently requires knowledge of
the programming language Neuron C. Coding a control application in Neuron C (a
derivative of ANSI C) requires that the configuration engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged. This adds expense and delay.
DGS estimates that a programmer using Neuron C language to develop a building
automation solution or application with LonWorks technology will devote
approximately 25% of the total project time to program coding, 25% to
documentation of the application and as much as 50% to code debugging. See
"Business-Industry Overview: The LonWorks Network Services."
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<PAGE> 7
In response, DGS has developed a complementary graphical programming
tool, VisualControl, which can reduce project development time by over 75%.
VisualControl significantly simplifies access to, monitoring and modification
of, the LNS architecture functions.
The commercial value of VisualControl necessarily derives from LNS
architecture. LNS technology was commercially released in April 1997. DGS
believes that, as of November 1997, VisualControl is the only product of its
type to work with LNS.
VisualControl saves time, manpower and money in the implementation of
LonWorks technology by eliminating the need to program. VisualControl provides
control product designers, systems integrators (SIs) and end users a Windows 95
and Windows NT operating environment for configuring the control network.
VisualControl includes standard IEC-1131 device blocks that allow the engineer
to view the control scheme from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable commercialized software product
designed for control network technology product development that (i) functions
as a network/Windows NT graphical user interface, (ii) generates user defined
control strategies or modifications and (iii) functions as a control network
management tool. Although it may be possible to develop software with the
multiple functionality described above, DGS is not aware of any software which
has been created specifically for LonWorks control networks or products in the
precise manner of the VisualControl software.
VisualControl also permits Local Operating Network ("LON")
configuration without knowledge of Neuron C. VisualControl virtually eliminates
the possibility of syntax errors, compiles the network devices, configures the
variable passing routines and self documents the application.
Additionally, DGS believes VisualControl can alleviate the numerous
problems that designers, contractors and end-users can typically encounter in
the development of control network design by materially enhancing the
functionality and reliability of control application products.
DGS believes that VisualControl's features make it a significant add-on
product for use by the control industry. Additionally, DGS believes that
original equipment manufacturers (OEMs), control product developers, value added
resellers (VARs), systems integrators (SIs) and end users of LonWorks systems
can improve the overall functionality of their applications with the
VisualControl technology set. DGS has also developed other new software
products. See "Business-Industry Overview: VisualControl" and
"Business-Products: VisualControl."
DGS believes it can become a major player in the building control and
industrial automation industry by marketing its new product -- VisualControl,
developing other software products and acquiring other companies.
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<PAGE> 8
THE OFFERING
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Units Offered by the 550,000 Units if the minimum number of
Company.......................................... Units is sold or 882,000 Units if the
maximum number of Units is
sold. Each Unit consists of
two shares of Common Stock and
one Warrant. The Common Stock
and Warrants are detachable
and separately transferable 90
days from the Escrow Release
Date. See "Description of
Securities."
Units Offered by the Selling Up to 18,000 Units (to be sold only after
Shareholders..................................... the minimum number of Units is sold). The
Warrants included in these
Units will be issued by the
Company.
Offering Price................................... $10.00 per Unit
Warrants......................................... Each Warrant will be exercisable to purchase
one share of Common Stock, at a price of
$6.50, for a period of five years from the
date of this Prospectus. See "Risk Factors"
and "Description of Securities."
Common Stock Outstanding
Prior to the Offering (1)........................ 1,281,286 shares
Common Stock to be Outstanding
after the Offering if the
Minimum Number of Units is
Sold (1)(2)...................................... 2,381,286 shares
Common Stock to be Outstanding
after the Offering if the
Maximum Number of Units is
Sold (1)(3)...................................... 3,045,286 shares
Warrants to be Outstanding if the
Minimum Number of Units is
Sold (1)(2)...................................... 550,000
Warrants to be Outstanding if the
Maximum Number of Units is
Sold (1)(3)...................................... 900,000
Use of Proceeds.................................. The Company intends to use the net
proceeds of this Offering to establish sales,
marketing and distribution infrastructure for
its software products, for research and
development, to purchase additional
computer hardware and software, for
potential acquisitions and for working capital.
See "Use of Proceeds."
</TABLE>
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<PAGE> 9
<TABLE>
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Risk Factors..................................... An investment in the Units involves a high
degree of risk and immediate substantial
dilution. See "Risk Factors" for a discussion
of certain factors that should be considered
by prospective purchasers of the Units.
Recent Developments.............................. See "Management's Discussion and Analysis or Plan
of Operation" for certain financial information for
the Company's third quarter ended September 30, 1997.
Federal Tax Considerations....................... For certain federal tax considerations which may be
applicable to purchasers in the Offering, see
"Certain Federal Tax Considerations."
Proposed Nasdaq SmallCap Market Units: DGSU
Symbols.......................................... Common Stock: DGSI
Warrants: DGSW
</TABLE>
(1) Excludes 50,000 shares of Common Stock issuable upon exercise, at a price of
$0.90 per share, of outstanding warrants issued to two shareholders of the
Company (the "1996 Warrants"), 13,229 shares of Common Stock issuable upon
exercise, at a price of $4.95 per share, of outstanding warrants issued to the
Underwriter as compensation for assisting the Company in privately placing
shares of Common Stock (the "Broker's Warrants") and 175,000 shares of Common
Stock issuable upon exercise of outstanding stock options. See "Capitalization."
(2) Excludes 88,770 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 44,385 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
(3) Excludes 145,260 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 72,630 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
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<PAGE> 10
SUMMARY FINANCIAL INFORMATION
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Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
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STATEMENT OF OPERATIONS
DATA:
Revenues $799,664 $814,629 $423,528 $390,201
Gross profit $524,929 $545,998 $295,958 $260,976
Operating income (loss) $ 6,635 $ 12,023 $43,572 $(150,741)(1)
Income (loss) before taxes $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net income (loss) $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net loss per common $(0.11)
share
Pro forma net income (2) $ 6,992 $ 11,301 $35,996
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
Weighted average
common shares
outstanding (4) 1,344,569 1,345,895 1,344,569 1,374,615
</TABLE>
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June 30, 1997
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Pro Forma As Adjusted(5)(6)
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BALANCE SHEET DATA: Actual Pro Forma(5) Minimum Maximum
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Working capital $6,794 $212,635 $4,747,635 $7,635,635
Total assets $464,481 $609,322 $5,144,322 $8,032,322
Long term debt --- --- --- ---
Shareholders' equity $114,488 $320,329 $4,855,329 $7,743,329
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(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S-
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<PAGE> 11
Corporation does not pay federal or state income taxes since its
shareholders are liable to pay federal and state taxes on their
proportionate shares of the Company's federal and state taxable income
allocable to them. For purposes of this presentation, federal and state
income taxes have been calculated at an effective rate of 20% for the
years ended December 31, 1995 and 1996, and for the six months ended
June 30, 1996, as if the Company was a C-Corporation for these periods.
See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issued shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
(5) Assumes that the sale, subsequent to June 30, 1997, of 146,286 shares
of the Company's Common Stock, at a price of $1.75 per share, occurred
as of June 30, 1997. The sales were made as part of a private placement
offering which commenced in December 1996 and terminated in July 1997
(the "Private Placement"). See Note O to the financial statements.
(6) Adjusted to reflect the Offering and the use of the Company's net
proceeds from the Offering, after deducting underwriting commissions
and other estimated offering expenses payable by the Company including
the Underwriter's expense allowance. See "Use of Proceeds,"
"Capitalization" and Notes E, F and O to the financial statements.
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<PAGE> 12
RISK FACTORS
An investment in the securities offered by this Prospectus involves a
high degree of risk. Accordingly, prospective investors should consider
carefully the following risk factors, in addition to other information
concerning the Company and its business contained in this Prospectus, before
purchasing the Units offered.
RECENT TRANSITION TO NEW LINE OF BUSINESS. Since 1993, the Company has
operated primarily as a manufacturer, designer, installer and servicer of
building automation systems and hardware. In the last quarter of 1995, the
Company made a strategic decision to develop and market software that
facilitates the design and implementation of control networks. The Company is
now in the early stages of introducing its VisualControl product line, a
software application tool designed to ease the use of Echelon Corporation's
LonWorks control platform. The Company's strategy is to increase substantially
the percentage of its revenues derived from this internally developed software
product line. Implementation of the plan will be subject to all the problems,
delays, expenses and risks inherent in establishing a new business enterprise,
and there can be no assurance that the Company will succeed in this strategy.
The market for this product line is new. If the market fails to develop, if it
develops more slowly than expected or becomes saturated with competitors, or if
the Company's product line does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
RECENT LOSS; RISKS OF ASSUMPTIONS. While the Company has operated
profitably in recent years, it incurred a loss of approximately $151,000 during
the first half of 1997 as it focused its marketing efforts on its VisualControl
product line and other new software products. There can be no guarantee that
losses will not continue. The Company has formulated its business plan and
strategies based on assumptions of the gross revenue that can be generated over
a three year period through the unit sales of software into an emerging
marketplace. These assumptions are based on numerous factors, some of the most
important of which are outside the Company's control. There can be no assurance
that these assessments will prove to be correct.
PRODUCT DEVELOPMENT RISKS. The substantial costs incurred to develop
new software products together with the length of time necessary to complete
such products may result in products that are no longer competitive or that no
longer address customer needs. Further, announcement of new Company products may
cause customers to defer purchases of existing Company software products and may
necessitate substantial modifications to other products under development.
Additionally, it is common for complex software programs such as the Company's
to contain undetected errors when first released which are discovered only after
the product has been used over time with different computer systems and in
varying applications and environments. If the Company fails to release
commercially viable versions of its products, if customers experience
significant problems with implementation of these products or are otherwise
dissatisfied with their functionality or performance, or if the products fail to
achieve market acceptance for any other reason, the Company's business,
operating results and financial condition will be materially adversely affected.
DEPENDENCE ON A SINGLE LINE OF PRODUCTS. For the foreseeable future,
the Company will be dependent upon the sales of a single software tool product
line, consisting of various applications, to generate forecasted revenue growth.
The Company currently has no other product line or service which will support
significant growth.
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<PAGE> 13
DEPENDENCE ON ECHELON LONWORKS AND MICROSOFT WINDOWS. The Company's
VisualControl product line is a software application tool for Echelon
Corporation's LonWorks as used on Microsoft Corporation's Windows operating
systems. VisualControl incorporates certain technology which the Company
licenses from Echelon. The Company currently is certified by Echelon Corporation
as a LonWorks Independent Developer. There can be no assurance that this
relationship will continue, that Echelon will continue to license its technology
to the Company, that Echelon will continue to support the LonWorks product lines
or that the Company will have access to any enhancements. In addition, there can
be no assurance that Echelon will not significantly alter its pricing in a
manner adverse to the Company.
The Company's success currently is dependent on the anticipated use and
acceptance of the Echelon Corporation's LonWorks architecture and, derivatively,
the continued widespread acceptance of Microsoft's Windows 95 and Windows NT.
Although the LonWorks control platform has received favorable industry comment,
it has not yet been widely implemented in the control network market segment.
While Windows operating systems are currently widely used, other companies have
developed or are developing other operating systems that compete, or will
compete, with Windows. In the event that LonWorks fails to achieve market
acceptance or any of these alternative operating systems becomes widely
accepted, demand for the Company's products could be adversely affected. In
addition, Echelon or Microsoft could introduce an enhanced control platform or
operating system to replace LonWorks or Windows or could incorporate some or
many of the key features of the Company's design control products in a new
version of their respective platforms and operating systems, thereby eliminating
the need for users to purchase the Company's products. Any of the negative
developments discussed in this section may have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Products."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately 25% of the
estimated net proceeds from this Offering have been allocated to potential
acquisitions, working capital and general corporate purposes. The Company
intends to pursue acquisitions of software businesses or technology that
complement its existing automation and control software products. Should the
opportunity arise, the Company would consider acquisitions from parties with
which the Company's executive officers and directors are affiliated if such
acquisitions could be made on terms favorable to the Company. See "Certain
Transactions." The Company currently has no commitments with respect to future
acquisitions. Accordingly, the Company's management will have broad discretion
as to the application of the proceeds of the Offering. See "Use of Proceeds."
ANTICIPATED DECLINE IN SOFTWARE PRICES AND GROSS MARGINS. Software
products are subject to price pressures over their life cycles that result in
price declines and reductions in gross profit margins. Reductions in profit
margins for existing and new software products can be expected to occur if the
Company succeeds in increasing its penetration of the control design
marketplace. See "Business--Products."
COMPETITION. The market for software application tool products is
intensely competitive. Competing products can be expected to be introduced by
companies with significantly greater financial, technical, research and
development and marketing resources than the Company and by other software
development companies. These companies may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products, than the Company. The Company cannot assure that it will be able to
compete effectively in this environment. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE. The control design technology systems
market is characterized by rapid technological change, changing customer needs,
frequent new software product introductions and evolving industry standards. The
Company believes that its future success will depend upon its ability to enhance
its current product line and to develop and introduce new software product lines
that keep pace with technological developments and
- 11 -
<PAGE> 14
emerging industry standards. The introduction of competing products embodying
new technologies and the emergence of new industry standards could render the
Company's existing product line obsolete and unmarketable. Accordingly, the
Company anticipates that significant amounts of future revenue will need to be
derived from product enhancements and new products. If the Company is unable to
develop and introduce product enhancements and new products in a timely and
cost-effective manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected.
PRODUCT DEFECTS. The Company's software products are highly complex and
sophisticated and could, from time to time, contain design defects or software
errors that are difficult to detect and correct. In addition, implementation of
the Company's products generally involves a significant amount of
customer-specific customization, as well as integration with systems developed
by third parties. Difficulties relating to the integration of the Company's
products with other hardware or software in the customer's environment may arise
that are unrelated to defects in the Company's products. Any such defects,
errors or difficulties may cause delays in product introductions and shipments,
result in increased costs and diversion of development resources, require design
modifications or impair customer satisfaction with the Company's products.
PRODUCT LIABILITY. The Company's products may be used by its customers
to perform critical functions. As a result, design defects, software errors,
misuse of the Company's products, incorrect data from external sources or other
potential problems within or out of the Company's control could result in
financial or other damages to the Company's customers. The Company does not
maintain product liability insurance. Although the Company's license agreements
with its customers contain provisions designed to limit the Company's exposure
to potential claims as well as any liabilities and costs arising from such
claims, such provisions may not effectively protect the Company. Any such claim
could have a material adverse effect upon the Company's business, operating
results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success and ability
to compete is dependent in part upon its proprietary technology, including its
software source codes. The Company presently has no registered trademarks or
copyrights and no patents, nor does it have any applications pending. The
Company relies on a combination of trade secret and nondisclosure law, which may
afford only limited protection. The Company is aware that unauthorized copying
occurs within the industry. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties,
including customers who receive listings of the source code for the Company's
products pursuant to the terms of their license agreements with the Company, or
former employees of the Company, may attempt to reverse engineer or copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. As a result, there can be no assurance that unauthorized
use of the Company's technology may not occur. See "Business--Patents,
Trademarks & Copyrights."
PROPRIETARY TECHNOLOGY INFRINGEMENT. In the future the Company may
receive notices claiming that it is infringing the proprietary rights of third
parties and may become the subject of infringement claims or legal proceedings
by third parties with respect to current or future products. Any such claim
could be time consuming, result in costly litigation, cause product shipment
delays or force the Company to enter into royalty or license agreements rather
than dispute the merits of such claims and have a material adverse effect on the
Company's
- 12 -
<PAGE> 15
business, operating results and financial condition. See "Business--Patents,
Trademarks & Copyrights."
DEPENDENCE ON KEY EMPLOYEES. The Company's success is largely dependent
on the continued services of certain key members of management, particularly
Thomas C. Haas, the Company's Chief Executive Officer. The Company does not have
employment agreements with any of its key employees. Although the Company is the
beneficiary of a $500,000 insurance policy on the life of Mr. Haas (to be
increased to $1 million), there can be no assurance that this insurance will be
available in the future or that it would be adequate to compensate the Company
for the loss of his services. The loss of Mr. Haas could have a material adverse
effect on the Company's business, operating results or financial condition. The
loss of several other key employees simultaneously or within a relatively short
period of time also could have such an effect. See "Management."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The Company is heavily
dependent upon its ability to attract, retain and motivate skilled technical and
managerial personnel, especially highly skilled engineers involved in ongoing
product development and consulting personnel who assist in the license and
implementation of the Company's product line. In particular, the Company's
ability to install, maintain and enhance its software product line is
substantially dependent upon its ability to locate, hire and train qualified
software engineers. The market for such individuals is intensely competitive.
Given the critical role of the Company's product development and consulting
staffs, the inability to recruit successfully or the loss of a significant part
of its product development or consulting staffs would have a material adverse
effect on the Company. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. The Company
may not be able to retain its current personnel, or be able to attract the
personnel necessary to effectuate the Company's business plan.
MANAGEMENT OF GROWTH. If the Company's products are successful, it
expects to experience growth which will impose significant pressure on operating
procedures, financial resources, information systems and employees. The Company
will need to increase its software production capacity and research and
development expenditures, expand its sales initiatives and increase its
workforce. The Company's business, results of operations and financial condition
could be adversely affected if it is unable to plan and manage anticipated
growth effectively. See "Business--Business Strategy."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company's strategy also
is to grow through the acquisition of companies that will complement its
existing operations or provide it with an entry into new markets. Growth through
acquisitions involves substantial risks, including the risk of improper
valuation of the acquired business and the risk of inadequate integration.
Suitable acquisition candidates may not be available, the Company may not be
able to complete desired acquisitions and future acquisitions may not produce
returns that justify the Company's investment.
The Company may finance future acquisitions with cash from operations
or additional equity or debt financings. The issuance of additional Common Stock
to finance acquisitions may result in substantial dilution to existing
shareholders. Any debt financing could significantly increase the Company's
leverage and involve restrictive covenants which limit the Company's operations.
See "Management's Discussion and Analysis or Plan of Operations--Liquidity and
Capital Resources."
- 13 -
<PAGE> 16
If the Company is successful in acquiring additional businesses, the
Company may experience a period of rapid growth which could place significant
additional demands on the Company's management, resources and management
information systems. The Company's failure to manage any such rapid growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company currently anticipates
that the proceeds of the Offering, together with forecasted cash flow from
operations, will be sufficient to finance operations for twenty-four months.
However, the Company may encounter unforeseen expenses or difficulties that
deplete its capital resources more rapidly than anticipated and require the
Company to seek additional financing. There can be no assurance that additional
capital will be available to the Company, either at all or on acceptable terms,
if and when required, or that such additional capital would not result in
substantial dilution of the equity interest of existing shareholders.
UNDERWRITER'S LIMITED UNDERWRITING EXPERIENCE; RIGHT TO DESIGNATE
DIRECTORS. While the Underwriter has significant experience in corporate
financing and the private placement of securities, the Underwriter has not
previously underwritten any public offering. Accordingly, the Underwriter's lack
of public offering experience may affect the Offering and the subsequent
development of a trading market, if any, in the securities of the Company.
The Company has granted to the Underwriter the right to designate two
members of the Company's Board of Directors for a period of three years from
the date of this Prospectus or, in the alternative, to designate two persons to
serve as advisors to the Board (subject to approval by the Board). To date, the
Underwriter has not designated any members of the Company's Board of Directors
or designated any persons to serve as advisors to the Board. If the Underwriter
should exercise its right to designate members of the Board, there can be no
assurance that these persons would work harmoniously with the Company's other
directors and management or that disputes over Company goals and strategies
would not result. See "Underwriting."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
quarterly results are subject to fluctuations from a wide variety of factors
including, but not limited to, new product introductions, domestic and
international economic conditions, customer budgetary considerations, the timing
of product upgrades and customer support agreement renewal cycles. As a result
of the foregoing factors, the Company's operating results for any quarter are
not necessarily indicative of results for any future period.
ARBITRARY DETERMINATION OF OFFERING PRICE. The price at which the Units
are being offered and the exercise price of the Warrants included in the Units
were arbitrarily determined by negotiation between the Company and the
Underwriter. The initial offering price of the Units and the exercise price of
the Warrants are not necessarily related to or indicative of the Company's
assets, book value, earnings, net worth or any other recognized criteria of
value. The Unit price of this Offering and the exercise price of the Warrants
should not be construed as an indication of any future market price for the
Company's Common Stock.
NO ASSURANCE OF PUBLIC MARKET; VOLATILITY OF PRICE. Prior to this
Offering, there has been no public trading market for the Units, Common Stock or
Warrants. Although it is currently anticipated that the Units, Common Stock and
Warrants will be listed on The Nasdaq SmallCap Market ("Nasdaq"), there can be
no assurance that a regular trading market for these securities will develop
after this Offering or that, if developed, can be sustained. Therefore,
purchasers of the Units may be unable to resell the securities at or near their
original offering price or at any price. Furthermore, it is unlikely that a
lending institution will accept the Company's securities as pledged collateral
for loans even if a regular market develops. The trading price of the Units,
Common Stock and Warrants could be subject to wide fluctuations in response to
quarterly variations in the Company's operating results, announcements by the
Company or others, developments affecting the Company and other events or
factors. Additionally, the small public float will result in high price
sensitivity even on low trading volume. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. Continued inclusion on Nasdaq will require the Company
to have a $1,000,000 market value of
- 14 -
<PAGE> 17
its public float, a minimum bid price of $1.00 per share, two market makers and
either net tangible assets of $2,000,000, net income of $500,000 in the most
recent fiscal year or in two of the last three years or a market capitalization
of at least $35,000,000. Failure to meet Nasdaq's maintenance criteria may
result in the delisting of the Units, Common Stock and Warrants. Thereafter,
trading, if any, in these securities would be conducted outside Nasdaq in the
over-the-counter market. As a result, an investor might find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
securities. In addition, if the Common Stock were delisted from trading on
Nasdaq and the trading price of the Common Stock were less than $5.00 per share,
trading in the Common Stock would be subject to certain rules promulgated under
the Securities Exchange Act of 1934, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any equity security outside Nasdaq that has a market
price of less than $5.00 per share). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and its risks, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors (generally institutions). In particular, 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 them from effecting transactions in the Common Stock, thereby
severely limiting the market 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 BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus under the Securities
Act of 1933 (the "Securities Act") which will permit the purchase and sale of
the Common Stock underlying the Warrants, but the Company may not be able to do
so. Also, although the Company intends to qualify the shares of Common Stock
underlying the Warrants for sale in those states in which the Units are to be
offered, such qualification may not occur. Holders of the Warrants may be
deprived of their value if a prospectus covering the shares issuable upon
Warrant exercise is not kept effective or if such underlying shares are not, or
cannot be, qualified in the applicable states. See "Description of
Securities--Warrants."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of
shares of the Company's Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock.
Upon completion of the Offering, the Company will have a minimum of 2,381,286
shares and a maximum of 3,045,286 shares of Common Stock outstanding (assuming
no exercise of outstanding stock options and warrants and without giving effect
to the exercise of the Warrants included in the Units or the Underwriter's
Warrants). The 1,100,000 (minimum) and the 1,800,000 (maximum) shares of Common
Stock included in the Units offered will be freely tradeable without restriction
under the Securities Act. The remaining shares of outstanding Common Stock
(1,281,286 shares if the minimum number of Units is sold and 1,245,286 shares if
the maximum number of Units is sold) are held by existing shareholders. Of
these, 221,286 currently are unrestricted. The remainder may not be resold
unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including Rule 144 under the Securities
Act. Upon completion of this Offering (if 550,000 Units are sold), 416,286
shares of Common Stock may be sold immediately without regard to the volume,
manner of sale and other restrictions of Rule 144 and an additional 30,000
shares of Common
- 15 -
<PAGE> 18
Stock will become eligible for sale 90 days later in compliance with the
restrictions of Rule 144. All of the outstanding shares owned by the Company's
executive officers and directors (815,000 shares) are subject to "lock-up"
agreements expiring 12 months after the date of this Prospectus and may be sold
during that period only with the prior written consent of the Underwriter. The
Underwriter, in its sole discretion, and at any time without prior notice, may
release all or any portion of the Common Stock subject to the lock-up
agreements. When the lock-up restrictions lapse, these 815,000 shares of Common
Stock will be eligible for sale in compliance with the restrictions of Rule 144.
The remaining shares outstanding prior to this Offering will be eligible for
sale in compliance with the restrictions of Rule 144 beginning in early 1998.
There are no current or anticipated agreements or other understandings between
the Underwriter and the Selling Shareholders as to any transaction other than as
disclosed in this Prospectus. See "Shares Eligible for Future Sale."
DILUTION. Purchasers of the Units will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock of between $2.48 and $2.99 based upon an initial public offering price of
$5.00 per share. See "Dilution."
NO DIVIDENDS. The Company currently intends to retain any earnings for
operations and the expansion of its business and does not anticipate paying any
dividends in the foreseeable future.
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET
PRICE OF CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS AND THE
PENNSYLVANIA BUSINESS CORPORATION LAW. Certain provisions of the Company's
Articles of Incorporation and By-Laws and the Pennsylvania Business Corporation
Law (the "PBCL") may discourage certain transactions involving a change in
control of the Company. For example, the Company's Articles of Incorporation
contain provisions which (i) permit the Board to issue "blank check" preferred
stock without shareholder approval and (ii) prohibit the Company from engaging
in certain business combinations with a holder of 20% or more of the Company's
voting securities without super-majority board or shareholder approval. These
provisions and certain provisions of the PBCL could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock. See "Description
of Securities--Provisions Affecting Business Combinations and Changes in
Control."
HISTORY OF THE COMPANY
The Company has its origins in the Controls Division of General Motors
Corporation. Systems Research Laboratories, Inc., an Ohio corporation ("SRL"),
purchased the division from General Motors in 1978. In 1984, SRL sold the
division to certain of its employees who had formed Dayton General Systems,
Inc., an Ohio corporation ("Ohio Dayton General"). In 1992, the assets of Ohio
Dayton General were purchased by Computer Health & Safety, Inc., a Delaware
corporation and a supplier of Sun Microsystems computers and CAD/CAM software.
In March 1993, Mr. Thomas C. Haas formed DGS, Inc., an Ohio corporation, which
purchased substantially all of the assets of the Dayton General Systems division
of Computer Health & Safety, Inc, including the Dayton General Systems name. On
October 9, 1997, in anticipation of the Offering, the Company re-incorporated in
Pennsylvania as Dayton General Systems, Inc.
The Company's executive offices are located at 2492 Technical Drive,
Miamisburg, OH 45342. Its telephone number is (937) 847-7800 and its fax number
is (937) 847-7810. The Company's Worldwide web site is "www.visualcontrol.com"
and its e-mail address is "[email protected]".
- 16 -
<PAGE> 19
USE OF PROCEEDS
The following table sets forth, in order of priority of use, the
expected application by the Company of its net proceeds from the Offering. After
deducting underwriting commissions and other estimated offering expenses
(including the Underwriter's expense allowance) payable by the Company, the net
proceeds to the Company are estimated to be approximately $4,535,000 from the
sale of 550,000 Units and approximately $7,423,000 from the sale of 882,000
Units. Other than a fee of $0.10 per Warrant, the Company will not receive any
proceeds from the sale of Units by the Selling Shareholders (although the
Company will receive proceeds from any subsequent exercise of the Warrants
included in those Units).
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
Percent of Percent of
---------- ----------
Application of Net Proceeds Amount Net Amount Net Proceeds
- --------------------------- ------ --- ------ ------------
Proceeds
--------
<S> <C> <C> <C> <C>
Sales, marketing & distribution $1,295,000 29% $1,697,000 23%
Research & development $1,240,000 27% $2,295,000 31%
Computer hardware & software acquisition $ 900,000 20% $1,600,000 22%
Potential acquisitions $ 800,000 17% $1,000,000 13%
Working capital and general corporate $ 300,000 7% $ 831,000 11%
purposes
</TABLE>
The allocation of the net proceeds set forth above represents the
Company's estimates based on its current operating plans and on assumptions and
forecasts regarding the sales of its new products. The Company anticipates that
the minimum net proceeds of this Offering, together with forecasted cash flow
generated from operations, will be sufficient to meet anticipated working
capital needs for the next twenty-four months. If the Company's assumptions,
estimates or forecasts prove to be inaccurate, the Company will have to reduce
its operations to a level consistent with available funding. While the Company
does not have any commitments with respect to future acquisitions, the Company
is in the process of evaluating potential acquisition candidates. See "Risk
Factors," "Management's Discussion and Analysis or Plan of Operation" and
"Underwriting."
Pending the uses set forth above, the Company's net proceeds from this
Offering will be invested in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
The Company currently intends to retain all earnings for operations and
expansion of its business and does not anticipate paying any dividends in the
foreseeable future.
- 17 -
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 on an actual basis; pro forma as of such date to reflect the sale
of Common Stock, described in Note (1) below, and the reincorporation of the
Company in Pennsylvania; and pro forma as adjusted as of such date to reflect
the sales described in Note (1) and the reincorporation and as adjusted to give
effect to the sale in this Offering of both the minimum and maximum number of
Units and the application of the estimated net proceeds from each, assuming no
exercise of the Warrants, the Broker's Warrants and the Underwriter's Warrants.
See "Use of Proceeds." This table should be read in conjunction with the
Company's financial statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Pro Forma
As Adjusted(2)
---------------------
Actual Pro Minimum Maximum
------ --- ------- -------
Forma(1)
--------
<S> <C> <C> <C> <C>
Short-term debt(3) $ 61,000 $ -- $ -- $ --
========= ========= =========== ===========
Long-term debt $ -- $ -- $ -- $ --
--------- --------- ----------- -----------
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares authorized:
1,135,000 shares outstanding; 1,281,286 shares outstanding
as adjusted for the sale of shares in the Private
Placement Offering; 2,381,286 shares outstanding as
adjusted for the sale of the minimum number of Units and
3,045,286 shares outstanding as adjusted for the sale of
the maximum number of
Units (4) 208,846 414,687 4,949,687 7,837,687
Additional paid-in capital 36,168 36,168 36,168 36,168
Accumulated deficit (130,526) (130,526) (130,526) (130,526)
--------- --------- ----------- -----------
Total shareholders' equity 114,488 320,329 4,855,329 7,743,329
--------- --------- ----------- -----------
Total capitalization $ 175,488 $ 320,329 $ 4,855,329 $ 7,743,329
========= ========= =========== ===========
</TABLE>
(1) Reflects the sale of 146,286 shares of Common Stock after June 30, 1997 from
the Private Placement Offering and the application of the net proceeds of the
Private Placement Offering. See Note O to the financial statements.
(2) Reflects the transactions set forth in Note 1 and the application of the net
proceeds of this Offering.
(3) See Note E to the financial statements.
(4) Excludes 175,000 shares of Common Stock issuable upon exercise of
outstanding options, 50,000 shares of Common Stock issuable upon exercise of the
1996 Warrants and 13,229 shares of Common Stock issuable upon exercise of the
Broker's Warrants.
- 18 -
<PAGE> 21
DILUTION
The pro forma net tangible book value of the Company as of June 30,
1997, as adjusted to reflect the Private Placement, was approximately $253,000
or $0.20 per share of Common Stock. Net tangible book value per share represents
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding (assuming no exercise of the
Company's outstanding stock options or warrants). Assuming the sale by the
Company of 550,000 Units, or 1,100,000 shares of Common Stock (and deducting
underwriting commissions and other estimated offering expenses payable by the
Company, including the Underwriter's expense allowance), the pro forma as
adjusted net tangible book value of the Company as of June 30, 1997 would have
been approximately $4,788,000, or $2.01 per share. This represents an immediate
increase in net tangible book value of approximately $1.81 per share to existing
shareholders and an immediate dilution of $2.99 per share to new investors
purchasing Units in the Offering. Assuming the sale by the Company of 882,000
Units, or 1,764,000 shares of Common Stock (and deducting underwriting
commissions and other estimated offering expenses payable by the Company,
including the Underwriter's expense allowance), the pro forma as adjusted net
tangible book value of the Company as of June 30, 1997 would have been
approximately $7,676,000, or $2.52 per share. This represents an immediate
increase in net tangible book value of approximately $2.32 per share to existing
shareholders and an immediate dilution of $2.48 per share to new investors
purchasing Units in the Offering. The following table illustrates this per share
dilution in net tangible book value per share to new investors as of June 30,
1997:
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
<S> <C> <C> <C> <C>
Initial public offering price per share (1) $5.00 $5.00
Pro forma net tangible book value per share as of
June 30, 1997 $0.20 $0.20
Increase in net tangible book value per share
attributable to new investors 1.81 2.32
Pro forma as adjusted net tangible book value per
share after the Offering 2.01 2.52
Dilution per share to new investors $2.99 $2.48
===== =====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30,
1997, as adjusted to reflect the Private Placement, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company for those shares and the average price per share paid by the existing
shareholders and by new investors assuming the sale of both the minimum number
and the maximum number of Units, or a total of 1,100,000 and 1,764,000 shares of
Common Stock, respectively, in the Offering (without giving effect to
underwriting commissions or estimated offering expenses payable by the Company,
including the Underwriter's expense allowance):
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<PAGE> 22
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- -------------------
Minimum Units Average Price
- ------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......................... 1,281,286 53.8% $ 476,446 8.0% $0.37
New investors................................. 1,100,000 46.2 5,500,000 92.0 $5.00(1)
--------- ------ --------- ----
Total....................................... 2,381,286 100.0% $5,976,446 100.0%
========= ====== ========== =====
Maximum Units
Existing shareholders(2)...................... 1,281,286 42.1% $ 476,446 5.1% $0.37
New investors(2).............................. 1,764,000 57.9 8,820,000 94.9 $5.00(1)
--------- ----- --------- ----
Total....................................... 3,045,286 100.0% $9,296,446 100.0%
========= ====== ========== =====
</TABLE>
(1) Assumes no consideration was paid for the Warrants included in the
Units.
(2) Sales by Selling Shareholders in the Offering will reduce the number of
shares of Common Stock held by existing shareholders to 1,245,286
shares or 40.9% of the total number of shares of Common Stock
outstanding after the Offering, and will increase the number of shares
of Common Stock held by new investors to 1,800,000 shares or 59.1%
of the total number of shares of Common Stock outstanding after the
Offering. See "Selling Shareholders."
The foregoing table assumes no exercise of the Broker's Warrants, the
Underwriter's Warrants, the 1996 Warrants or outstanding stock options (see
"Underwriting," "Capitalization" and "Management -- Stock Option Plan"). To the
extent that these or future options and warrants are exercised, there will be
additional dilution to new investors.
- 20 -
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended
December 31, 1995 and 1996 have been derived from the audited financial
statements of the Company. The selected historical financial data for the six
months ended June 30, 1996 and 1997 have been derived from the Company's
unaudited financial statements. In the opinion of management, the six-month
financial data reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such data and are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1997. The selected financial data are qualified in their entirety, and
should be read in conjunction with the Company's financial statements and the
Notes thereto and "Management's Discussion and Analysis or Plan of Operation"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------------- ---------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 799,664 $ 814,629 $ 423,528 $ 390,201
Cost of revenues 274,735 268,631 127,570 129,225
---------- ---------- --------- ---------
Gross profit 524,929 545,998 295,958 260,976
Selling, general & administrative 431,533 492,796 231,170 386,475
expenses
Research & development expenses 86,761 41,179 21,216 25,242
---------- ---------- --------- ---------
Operating income (loss) 6,635 12,023 43,572 (150,741)(1)
Interest expense (5,328) (1,702) (95) (595)
Other income 7,685 3,980 1,519 398
---------- ---------- --------- ---------
Income (loss) before taxes 8,992 14,301 44,996 (150,938)(1)
Income taxes --- --- --- ---
---------- ---------- --------- ---------
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)(1)
========== ========== ========= ==========
Net loss per common share $ (0.11)
==========
Pro forma net income (2) $ 6,992 $ 11,301 $ 35,996
========== ========== =========
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
========== ========== =========
Weighted average common shares
outstanding(4) 1,344,569 1,345,895 1,344,569 1,374,615
</TABLE>
- 21 -
<PAGE> 24
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
---------------------- ----------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 76,637 $ 46,984 $ 86,586 $ 6,794
Net property and equipment 25,964 24,701 26,531 22,251
Total assets 317,634 315,854 353,779 464,481
Total liabilities 179,939 170,078 190,308 349,993
Shareholders' equity 137,695 145,776 163,471 114,488
</TABLE>
- ------------------------------
(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S- Corporation does not pay federal or state income
taxes since its shareholders are liable to pay federal and state taxes
on their proportionate shares of the Company's federal and state
taxable income allocable to them. For purposes of this presentation,
federal and state income taxes have been calculated at an effective
rate of 20% for the years ended December 31, 1995 and 1996, and for the
six months ended June 30, 1996, as if the Company was a C-Corporation
for these periods. See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issues shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
In the last quarter of 1995, the Company made a strategic decision to
develop and sell software for microcomputers that enhances the design,
installation and use of control network
- 22 -
<PAGE> 25
technology. The Company intends to sell its software into the corporate
marketplace through the formation of joint ventures with other companies,
strategic alliances with software distributors and direct and indirect marketing
and sales activities.
The Company's new software product, VisualControl, addresses the
control and automation engineering and end-user marketplace that is based on the
LonWorks control network design platform. The Company also intends to leverage
its technical design expertise to enter into strategic alliances and joint
ventures with other companies to develop software products for a more general
and larger share of the control design market. As a result, the Company's future
revenue mix is expected to shift from predominantly designing, installing and
maintaining building automation systems and hardware, its historical business,
to selling a broad array of software add-ons for applications and application
development in the general control market. The Company's historical revenues and
operating results therefore are not necessarily indicative of future operating
results.
RESULTS OF OPERATIONS
The Company's strategic decision to focus its efforts on its
VisualControl product line and other software products has affected the
Company's results of operations. While the Company operated profitably in each
of the two years ended December 31, 1995 and 1996, it reported a loss of
approximately $151,000 during the six months ended June 30, 1997. The 1997
period results were affected by a total of $155,000 of costs associated with the
Company's strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial consulting
expenses and approximately $15,000 in marketing and related costs incurred in
connection with the Company's corporate financing plan, approximately $31,000 of
expenses associated with a new marketing executive and other additional
employees, and $8,000 in amortization of capitalized software costs.
The Company's historic revenues have been project related sales which
can be subject to volatile fluctuations when measured on a period-to-period
basis. The Company has recently commercialized the development of software
products for introduction into the distributed control network marketplace and
has done so primarily from operating cash flows. Management believes that, with
additional paid-in capital, increased production capacity and software
distribution capability, the Company will be in position to implement
successfully its business strategy.
The following table sets forth, for the periods indicated, the items
noted as a percentage of net sales:
- 23 -
<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues 34.4 33.0 30.1 33.1
----- ----- ----- -----
Gross profit 65.6 67.0 69.9 66.9
Selling, general & administrative 54.0 60.5 54.6 99.0
Research & development 10.8 5.0 5.0 6.5
----- ----- ----- -----
Operating income (loss) 0.8 1.5 10.3 (38.6)
Interest expense (0.7) (0.2) (0.1) (0.2)
Other income 1.0 0.5 0.4 0.1
----- ----- ----- -----
Income (loss) before taxes 1.1 1.8 10.6 (38.7)
Income taxes --- --- --- ---
----- ----- ----- -----
Net income (loss) 1.1% 1.8% 10.6% (38.7)%
====== ====== ====== =======
Pro forma net income 0.9% 1.4% 8.5%
==== ==== ====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Total revenues decreased approximately 8% from $423,500 to
$390,200 partially due to a decrease in traditional system and software sales of
approximately $76,000. Revenue from systems and software sales, as opposed to
service contracts, has historically been variable from period to period. In the
six months ended June 30, 1997, sales to one such customer were approximately
$55,400 lower than in the comparable period of 1996. Additionally, during the
first half of 1997, the Company focused its marketing efforts on VisualControl
product line and other new software products, and away from its traditional
product lines. Sales of VisualControl and other new products were approximately
$10,300 and $41,100 for the six months ended June 30, 1996 and 1997,
respectively. Service revenues increased approximately $12,000 for the six
months ended June 30, 1997 over the same period last year.
Gross Profit. Gross profit margin for the six months ended June 30,
1997 of 66.9% decreased slightly from 69.9% for the six months ended June 30,
1996. This is primarily a result of increases in service labor costs without a
corresponding increase in the sales price of service contracts.
Expenses. Selling, general and administrative expenses increased
significantly from $231,200 for the six months ended June 30, 1996 to $386,500
for the six months ended June 30, 1997. This increase was principally due to
legal, audit and financial consulting expenses of approximately $101,000, and
marketing and related costs of approximately $15,000, incurred in 1997 in
connection with the Company's corporate financing plan approved in November
1996. The plan included a private placement offering as well as an initial
public offering. In addition, approximately $31,000 of additional expenses
associated with a new marketing
- 24 -
<PAGE> 27
executive and other additional employees hired as part of the strategic plan for
the Company's new products contributed to the increase. Amortization of
capitalized software costs of approximately $8,000 was incurred in 1997 due to
the general release of the Company's VisualControl product line to the market in
April 1997.
Income Taxes. No income tax expense was recorded in 1997 as a full
valuation allowance was recorded against the net deferred tax asset arising from
the net operating loss carryforward generated in 1997. Because the Company was
taxed as an S-Corporation prior to 1997, it had no tax provision in 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Total revenues increased 2% from $800,000 to $815,000 due to
a minor increase in service contract revenue which was offset by a nominal
decline in system and software sales.
Expenses. General and administrative expenses increased from $432,000
to $493,000 or 14% primarily due to increases in salaries and employee benefits,
early stage product research costs and market research costs. Product
development costs declined 47% from $87,000 to $41,000 due to new product
completion and transition into the commercialization phase, whereby $51,747 of
software development costs were capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has financed its business primarily with cash
flow from operations. The Company's strategic decision made in late 1995 to
develop and market control network software tools altered its traditional
capital needs. In November 1996 the Company's shareholders approved a corporate
financing plan. Pursuant to that authorization, the Company generated $119,650
in net proceeds from the private placement of 75,000 shares of its Common Stock
during the six months ended June 30, 1997, primarily to finance the costs of the
Offering described herein and its business strategy. During July 1997, the
Company raised an additional $256,000 from the private placement of 146,286
shares of its Common Stock. The Company has a short-term commercial bank line of
credit totaling $75,000. As of June 30, 1997, the Company had $14,000 available
under the line of credit.
As of December 31, 1996 and June 30, 1997, the Company had cash and
cash equivalents of $24,480 and $14,907, respectively, and working capital of
$46,984 and $6,794, respectively. Cash provided by (used in) operating
activities in 1996 and the six months ended June 30, 1997 was $58,040 and
($109,916), respectively. The decrease was primarily due to the 1997 net loss.
Cash used in investing activities in 1996 and the six months ended June 30, 1997
was $60,538 and $23,438, respectively. The 1996 and 1997 investing outlays
include $51,747 and $21,388 for software development costs related to control
network products. Cash used in financing activities was $27,008 in 1996 which
was comprised of distributions to shareholders of $59,220 and stock issuance
costs of $20,788, partially offset by proceeds from sale of Common Stock of
$53,000. Cash provided by financing activities in the six months ended June 30,
1997 was $123,781 which was comprised of gross proceeds from the private
placement of 75,000 shares of Common Stock of $131,250, partially offset by
additional stock issuance costs of $68,469. Additionally, the Company borrowed
$61,000 under its line of credit to help fund its operating activities.
- 25 -
<PAGE> 28
Management believes the net proceeds of the Offering, combined with the
Company's net working capital and anticipated cash flow from operations, will be
sufficient to meet capital and liquidity needs for the next twenty-four months.
RECENT DEVELOPMENTS
Although the Company has not prepared complete financial statements
for the quarter ending September 30, 1997, certain unaudited financial
information is available.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996. During the three months ended September 30, 1997, the
Company generated revenues of $221,400. Revenues during the comparable three
month period ended September 30, 1996 were $178,400. This revenue increase of
$43,000 or 24% was due to an increase in traditional system and software sales
of $26,500, an increase in service revenues of $11,100, and an increase in
sales of VisualControl products of $5,400.
Net loss for the three months ended September 30, 1997 was $78,000
compared to a net loss of $27,800 incurred during the three months ended
September 30, 1996. The increased loss was primarily a result of an increase of
$80,700 in selling, general and administrative expenses, partially offset by an
increase in gross profit of $26,800 resulting from the revenue increase
discussed above. Selling, general and administrative expenses were $203,500 for
the three months ended September 30, 1997 compared to $122,800 for the three
months ended September 30, 1996. The increase in selling, general and
administrative expenses was principally due to additional professional fees of
approximately $23,300, and marketing and related costs of approximately $8,500,
incurred in 1997 in connection with the Company's corporate financing plan
approved in November 1996. In addition, approximately $40,500 of additional
expenses associated with a new marketing executive and other additional
employees hired as part of the strategic plan for the Company's new products
contributed to the increase. Amortization of capitalized software costs of
approximately $8,000 was also incurred in 1997 due to the general release of
the Company's VisualControl product line to the market in April 1997.
Balance Sheet Data as of September 30, 1997. As of September 30, 1997,
the Company had cash and cash equivalents of $120,157, working capital of
$127,115, total assets of $625,581, total liabilities of $383,216, and total
shareholders' equity of $242,365.
- 26 -
<PAGE> 29
BUSINESS
DGS is a high technology company in the automation and control
industry.
INDUSTRY OVERVIEW
The industry is comprised of over 60 publicly traded U.S. and foreign
companies. This group includes conglomerates and utilities which generate an
estimated $47 billion in annual control related sales. DGS estimates there are
more than 4,000 other companies worldwide that generate an additional $10
billion in control and automation related sales annually.
Honeywell and Johnson Controls are leaders in this industry.
The Demand. The control market is now undergoing a major technological
shift resulting from new powerful chip technologies. The Company believes that
this shift is analogous to what has occurred in the computing industry, in which
closed mainframe systems have been supplanted by open networks of interoperative
personal computers. In the control market, the power of new hardware and
software has created a strong user demand for solutions that can use a mix of
various vendors' hardware and software (open) rather than the existing single
vendor (closed) solutions. This shift has created a significant market for new
software and software tools.
The major revenue categories within the control and automation industry
have traditionally been (i) space and aviation technology, (ii) home and
building control and (iii) factory and industrial automation and control. DGS
will concentrate on sales to suppliers of products and systems in the building
control segment, and the industrial automation and control segments, of the
second and third of these categories.
The worldwide demand for products and services in the building control
and industrial control and automation industries increased over 10% in 1996. In
the building control market the increase stems from the demand for performance
contracts (energy savings pay for a system upgrade) and integrated facilities
management services for existing buildings. Of the 6,000,000 buildings in Europe
and the United States only a small percentage currently have building control
systems installations.
Industrial automation and control growth is due primarily to the
increasing multi-industry demand for the installation of smart distributed
systems technology (factory and plant automation solutions that use intelligent
distributed sensors and control). As one example, upgrades of industrial and
municipal wastewater treatment control systems comprise a large market.
Currently, over 80% of the 67,000 industrial and municipal wastewater treatment
sites in the United States use old technology. Industry sources estimate that
the industrial control and automation demand will generate over $10 billion in
sales over the next five to seven years.
The Old Technology. In selecting a process control or automation
solution, customers had to decide whether they wanted to use a single
proprietary control system such as those provided by Johnson or Honeywell. Once
the vendor was selected, the customer was committed to the single system. The
customer could not change systems, replace components of the existing system
with components from a different vendor or expand the system without incurring
great expense. A vendor's device could only function with other devices from the
same vendor. The customer was at the mercy of the single vendor whom he had
chosen. This is known as a closed (architecture) system.
- 27 -
<PAGE> 30
The New Technology. Today, the same customer could choose an open
system for his project. That customer can now select the appropriate vendors'
devices that provide the most cost effective automation solution. New technology
enables a Honeywell device, for example, to communicate with a Johnson device.
The customers can upgrade to state of the art devices in the future without
losing their initial investment. This is known as an open (architecture) system.
The introduction of open systems represents a major technological
shift. Thousands of limited function, closed systems currently in use in
building control and automation and control systems will be replaced or upgraded
with PC or other powerful and cost effective technologies. This shift has
created an increasing demand for new, user-friendly software tools to capitalize
on the power of technologies.
Additionally, no central controller or computer is required for
communication in an open system. Sensor and control devices, called nodes,
communicate peer-to-peer using a common protocol. The interaction among nodes
enables a control network to perform multiple complex tasks simultaneously.
The "backbone" of open systems is the communication network, or "device
network." The network is dependent on software to provide communication. The
leading industrial device networks are Devicebus, CAN, SDS, ASI and LonWorks.
DGS believes that the introduction of open systems represents a major
technological shift in the industry. As a direct result, thousands of limited
functionality, vendor-defined systems currently used in building control,
industrial automation and process control will be replaced or upgraded by PC
based applications or systems. Open control systems will be integrated into
enterprise-wide, software solutions to meet the continuing demand for increased
business efficiencies. This fundamental shift from vendor-defined stand alone
control solutions to interoperable user-defined solutions offers a substantial
opportunity for DGS to supply specialized PC based, software tools to a wide
variety of industries using the new open systems technology.
LonWorks Control Network. Technology analysts consider the LonWorks
architecture developed by Echelon Corporation (www.echelon.com) to be the most
technologically advanced and flexible control network design platform available.
The LonWorks system is a multi-industry control networking solution that will
port to any processor. Controllers, sensors, devices with other host CPUs, other
networks, PLCs, actuators, switches and operator interfaces from different
vendors each can be an intelligent device in a LonWorks control network.
Echelon has stated that there are currently ten thousand LonWorks
systems installed worldwide. Echelon has estimated further that it has to date
shipped three million Neuron C Chips and expects to ship eight million such
chips in 1997 and 25 million chips per year by 2000. Generally, these shipments
correspond to an equal number of LonWorks control network devices or nodes
currently or to be installed worldwide. Currently, the installed base of
LonWorks systems is divided between the building control industry (35%), the
discrete and hybrid industrial automation marketplace (35%) and transportation
and other industries (30%). A leading consultant has predicted that the LonWorks
system will become the de facto building industry standard. DGS estimates that
the LonWorks control network design platform will underpin 15% to 25% of all
worldwide building control systems installations by the year 2000. Industry
analysts have forecasted that cumulative 1997-2000 period worldwide overall
building
- 28 -
<PAGE> 31
control marketplace revenue, when combined with building protection systems
revenues, will be in excess of $43 billion.
The LonWorks Network Services ("LNS"). LNS architecture, released by
Echelon in April 1997, provides the functionality of the LonWorks network and
allows maintenance, control and multiple device access to the network.
LonWorks technology is a powerful tool. At the heart of LonWorks
technology is the Neuron C computer chip developed by Echelon. The Neuron C chip
includes three dedicated microprocessors, integrated input and output hardware
and drivers, and internal timers for real-time control. It is programmed in
high-level (Neuron C) programming language. Coding a control application in
Neuron C (a derivative of ANSI C) requires that the engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged.
DGS estimates that a programmer using Neuron C language to develop a
building automation application with LonWorks technology will devote 25% of the
total project time to program coding, 25% to application documentation and as
much as 50% to code debugging. To improve the efficiency of such projects, DGS
has developed a graphical programming tool, VisualControl. In DGS's experience,
VisualControl reduces project development time by over 75% resulting in
significant savings in implementation time and engineering costs.
DGS's new software is used to access, monitor and configure the LNS
control network. It is the use and popularity of LNS architecture that the
Company believes will create the market for VisualControl in the control
industry. As of November 1997 DGS believes that VisualControl is the only
product of its type to work with LNS.
VisualControl. VisualControl is a graphical programming tool that
provides control system designers, systems integrators (SIs) or end users with a
powerful link to the Windows 95 and Windows NT operating environment.
VisualControl has standard Windows functions (e.g., tool bars, Multiple Document
Interface, Help files) for ease of configuring the control network. It includes
standard IEC-1131 graphical device blocks that enable the engineer to recognize
the control sequence logic from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable, commercialized software product
designed for control network development that functions as a Windows NT
graphical user interface to the network, generates user defined control
strategies or modifications and functions as a control network management tool.
Although it is possible to develop software with the functionality described
above, DGS is not aware of any software specifically for LonWorks control
networks or products with the features and functions of the VisualControl
software package.
VisualControl also permits LON configuration without knowledge of
Neuron C. VisualControl virtually eliminates the possibility of syntax errors,
compiles the network devices, configures the variable passing routines and self
documents the application. Additionally, DGS believes that VisualControl can
alleviate numerous problems that designers, contractors and end-users encounter
with the development of control network design by shortening development time
and materially enhancing the functionality and reliability of the control
application. In DGS's experience, VisualControl reduces project development time
by over 75% resulting in significant savings in implementation time and
engineering costs.
- 29 -
<PAGE> 32
DGS believes that the VisualControl features and functions make it a
significant add-on product for LonWorks users in the control industry.
Additionally, DGS believes that original equipment manufacturers
(OEMs), control product developers, value added resellers (VARs), systems
integrators (SIs) and end users of existing LonWorks systems can improve the
overall functionality of their applications by using VisualControl technology.
VisualControl provides the control product designer or systems end-user
measurable cost benefits and productivity gains by allowing each to focus on
core professional competencies, rather than learning to be programmers.
VisualControl also improves the operating reliability of the control
system, application or product. The Company has been advised by a building
control system integrator who purchased VisualControl software that, if
VisualControl had been used, such integrator's installation time of a recently
completed project could have been reduced from eight man- months to two
man-months, a major project installation cost savings. DGS believes this
commentary to be highly significant in that industry analysts have estimated
that over 64% of the total expenditures in the building control market are for
the system installation, maintenance and spare parts.
BUSINESS STRATEGY
DGS's business strategy is to establish itself as a leading software
developer that specializes in developing add-ons for Neuron C based distributed
control networks. The pursuit of this strategy requires DGS to invest a portion
of the offering proceeds (see "Use of Proceeds") in relatively high fixed
upfront expenses in the areas of sales, marketing, programming and research and
development, which it believes will enhance DGS's ability to capture an
increasing share of the fast growing high margin markets for products in the
distributed controls arena. DGS is committed to the development of other control
network products and the modification of its VisualControl software with a view
towards capitalizing upon important industry trends. Microsoft and Sun
Microsystems are developing ActiveX and Java communication technologies that
will allow industrial control applications to run over the Internet and on
corporate intranets. DGS believes that a modified version of VisualControl will
be an important component within control applications that run on corporate
intranets.
In the execution of its business strategy DGS believes that it can
exploit four key advantages: (i) it can fill the role of a knowledge-based
technology provider to the industry group, not a competitor, (ii) DGS's
VisualControl product is the only currently available graphical programming tool
that simplifies the creation of an open control network and is a Windows-control
network interface, (iii) willingness exists by large original equipment
manufacturers (OEMs) and system integrators within the industry to purchase
software enhancements from third party vendors like DGS to improve their own
products, and (iv) certain of DGS's officers and directors have substantial
experience in the worldwide sale and distribution of software products into the
corporate marketplace.
The key elements of DGS's business strategy are:
- Expand DGS's software production and customer support capacity
and increase research and development. DGS plans to hire four
programmers immediately, then attract and retain up to six
additional programmers and three systems analysts and acquire
additional computers necessary to support an increased level
of software production capacity, quality control and customer
support.
- Establish DGS's software distribution channels. DGS recently
hired Mr. William C. Kaesche, III. Mr. Kaesche has substantial
experience in sales and marketing from nearly twenty years of
service with Honeywell Inc. DGS is pursuing the control design
software market primarily through strategic alliances and
- 30 -
<PAGE> 33
relationships with software distributors, original equipment
manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software
innovation and existing product interest, DGS intends to hire
two additional Sales and Marketing professionals to contact
the marketplace of LonWorks systems users. In addition to a
direct mail product promotion campaign, the LonWorks Software
print and electronic catalogs and aggressive advertising in
professional trade publications and engineering journals, DGS
is using new communications technology for product promotion,
such as fax on demand.
- Establish the VisualControl brand name as a leader in software
add-ons for the LonWorks based control design platform.
Management intends to establish brand recognition for the
VisualControl software name. As design engineers become
familiar with DGS's software brand name, the Company
anticipates they will purchase later software releases,
upgrades and related tool box products.
- Leverage DGS's intelligent control design knowledge-based
creative capabilities and technical expertise into application
and new product development. Management believes that DGS's
(i) control design experience and history, (ii) controller
hardware manufacturing background, (iii) automated systems
installation experience and (iv) creative understanding of
distributed control technology and its Neuron C programming
capabilities, collectively, represent a major core asset which
will facilitate the rapid development of new software
applications and products. As product designers purchase
VisualControl for application development and solutions, DGS
will offer project consulting services (for a fee) to speed
the completion of customer's application.
- Pursue complementary strategic business and technology
acquisitions. DGS will pursue the acquisition of businesses or
technology that will extend its software distribution
channels, broaden engineering areas of expertise, increase
technology levels or complement its software products. The
control and automation industry remains highly diverse and
fragmented with the majority of participants being small,
localized companies with outdated products or services. DGS
believes that this industry structure and the recent industry
technology transition create substantial acquisition
opportunities. DGS believes that it can exploit these
opportunities by acquiring small companies and improving their
productivity through product technology improvements and
economies of scale.
- Create additional worldwide interest in DGS and its products
through the innovative use of the DGS global web site. The
internet is a powerful marketing tool for technology
companies, and is particularly valuable to DGS in generating
additional awareness of its products and other developments at
DGS. Potential customers are able to download demonstration
versions of the Company's software from the web site for their
evaluation. In May 1997, the Company's web site had over 95
downloads and over 450 visitors from around the world. Many of
the visits expressed interest in becoming a reseller, sales
representative or distributor of the Company's products. DGS
updates the site regularly to encourage repeat visits from
potential clients. The address of DGS's web site is
"www.visualcontrol.com".
DGS believes that the marketplace for control design software and
control products has significantly broadened. The control marketplace is
experiencing demand from participants
- 31 -
<PAGE> 34
such as appliance manufacturers, refining and petrochemical companies, textile
manufacturers, original equipment manufacturers (OEMs) of microprocessors and
consumer electronic equipment, oil and gas producers, automotive companies, data
processing firms, companies within the transportation industry and
telecommunications companies. Virtually all complex telecommunication systems
applications are now developed using some form of open control network
architecture allowing the system wide integration of sensors, circuit boards,
optoelectronics, cable assemblies and wireless components that constitute the
systems signal path. The Company believes it is well positioned to take
advantage of these continuing developments.
PRODUCTS
VisualControl. DGS is marketing a line of VisualControl products and
other LonWorks software enhancements for use with the Windows 95 and Windows NT
operating system with prices that start from $4,495 per base license. The
following table describes DGS's new products:
<TABLE>
<CAPTION>
NEW PRODUCT DESCRIPTION FUNCTION UNIT PRICE
<S> <C> <C> <C>
LVC-FULL VisualControl full product. Graphical programmer and $4495
Network Manager.
LVC-GRA VisualControl software single user license. Graphical programmer. $2995
LVC-NET VisualControl software network manager tool. Management of control networks $1995
(Single user license).
LVC-SITE Basic VisualControl software site license. Multiple user LVC-FULL site Negotiable
license.
LVC-TECH Service option. One year technical support, No additional cost for upgrades 10% of site
upgrades and new releases for VisualControl to VisualControl user. license
package.
LUC-11 Hardware. 11 point controller that can be HVAC, process, electrical - $395
programmed with VisualControl. mechanical or automation
controller.
LTF-1001 Signal path "test box" for network Two node test circuit for $1295
input sources control network.
INTERFACE LNS interface card. PC connection to network. $499
CARD
LVC-DEB* VisualControl software network debugger. Debugging tool for control TBA
network architecture.
LVC-SIM* What-if analysis and simulation software for Real time simulation of complex TBA
control networks. control networks.
</TABLE>
*Under development
The Company permits discounts of up to 50% from the prices set forth
above to large volume purchases. DGS offers a 90 day software warranty.
VisualControl software has high gross profit margins. As DGS's revenue
shifts from building control to software products, expanding overall margins are
expected to accompany any increase in sales. Software products are, however,
subject to price pressures over their life cycle that result in reduced margins.
DGS anticipates that reductions in profit margins for its software products will
occur as technological advances are made and as the market for software
application tools such as VisualControl becomes more established. For this
reason DGS intends to develop new software products and enhancements.
- 32 -
<PAGE> 35
Other DGS Software Products. DGS is developing a portfolio of new
network software enhancements and control application products with new
functionality (including drivers, control libraries, control network management
and control network integration tools) for a broad range of customers who
develop and use LON based systems and products.
DGS recently has developed a 32 bit driver to enable Ci Technologies,
Inc.'s man- machine interface ("MMI") software, CiTect, to interface the
LonWorks network. This driver is designed to take advantage of DGS's Network
Management software, a real-time monitor for LonWorks control networks. DGS
completed the driver on March 28, 1997 and shipped it to distributors and system
integrators for testing and use in industrial and building automation projects.
The driver was developed in response to strong customer demand in installations
combining LonWorks, CiTect software and the VisualControl Network Manager. The
Company intends to develop additional LNS 32 bit drivers to interface with other
MMIs.
Building Control Products. DGS has two established product lines:
computer systems that automate non-residential dwellings and wastewater
treatment plants and related software tools. DGS's facilities management system
is composed of a single unit host computer, optional local computers and DGS
series controllers.
DGS's software programs allow the user to monitor and control thousands
of points and to coordinate multiple systems. All current DGS systems and
software work on multiple operating platforms (Windows 95, Windows NT, VMS and
QNX (UNIX subset)) and enable the facility operator to monitor and control
through a layered graphical interface. DGS currently manufactures these products
at the Miamisburg facility.
As part of any DGS facilities management project, the customer enters
into a service contract that includes remote, real-time diagnostic system
service provided by DGS's systems analysts. The service contract also includes
software updates, maintenance manuals, installation service, debugging
procedures, on-site training and parts inventory. Service contracts are renewed
annually and are a significant source of DGS's current gross revenue.
DGS's current hardware and software products are supported by manuals
and training and installation services. The following table describes DGS's
current building control products and services, all of which DGS intends to
continue to sell and service:
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION FUNCTION UNIT
PRICE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Building Automation Hardware and software system. PC based Non residential energy Per
System software modules allow multiple systems management system. project
coordination and point monitoring.
Mark IV Controller Intelligent DDC controller. Controller for up to 64 $835
points.
Mark V Controller Intelligent DDC multi-function controller. Controller for up to 24 $600
points.
LID LonWorks Software and Hardware design consultant. Control design & Per
Independent Developer development services to project
corporate clients.
</TABLE>
- 33 -
<PAGE> 36
CUSTOMERS
The Company believes that its potential customers are original
equipment manufacturers (OEMs), control product developers, value-added
resellers (VARs), systems integrators (SIs) and end users. The OEMs consist of
large companies which manufacture complete control systems and who would
incorporate the Company's products in their systems. The control product
developers manufacture various hardware items which would be programmed using
the Company's products so that they can be incorporated in control systems.
Value-added resellers create both hardware and software products which would
include the Company's products and which would then be sold to other users.
Systems integrators put together full, or partial, control systems utilizing
software and hardware products generally acquired from other parties, which
would include the Company's products. End users include companies with control
systems, which desire to upgrade or to add new features to existing or future
systems, including those of the Company's products. DGS is initially selling its
VisualControl software products in the LonWorks segment of the control
automation marketplace. DGS has provided over 200 demonstration copies of the
VisualControl product to potential customers.
A major distributor of LonWorks automation products for the system
integrator marketplace stated, "VisualControl is one of the most important tools
available for working with LonWorks technology because it gives the system
integrator a modern, graphical environment to create a custom control sequence.
The product is significant in that it addresses the most important problem
facing control system integrators - how to lower the engineering costs
associated with developing custom control sequences."
The majority of DGS's initial target users are engineers and designers
within corporate multiple-site computing environments. DGS believes that as
engineers and designers become familiar with DGS's new software products, they
will incorporate ("embed") them into numerous control applications with wide
distribution potential in factory automation systems, building and home control
products and process control systems. For example, a manufacturer of wastewater
treatment control solutions can license VisualControl technology and include it
as an enhancement, extension or upgrade to its own existing or new product
lines. A building control and automation manufacturer can include VisualControl
software as a "soft wiring" tool that enables the user to accommodate changes to
a facility's occupancy rate without costly physical re-wiring. The binding done
within VisualControl software is the equivalent of connecting physical wires.
DGS has entered into a formal agreement with Weidmuller EuroLon AB for
their exclusive marketing of VisualControl in Scandinavian countries.
Additionally, the Company is in late-stage negotiations on two other
agreements. One of these is an OEM agreement with Weidmuller GmbH, a
manufacturer of electronics whose products are distributed globally and the
parent of Weidmuller EuroLon AB, pursuant to which VisualControl would be
incorporated into future automated control software and hardware produced by
Weidmuller GmbH. The second is a distribution agreement with Yamatake Co.,
Ltd., which currently supplies approximately 77% of the Japanese building
control market, to distribute VisualControl in Japan.
A list of companies that have purchased VisualControl software since
mid-1996 includes: ANCO Technologies, Inc., BP Chemicals, Inc., Victory
Controls, Co., Leybold Vacuum Products, Inc., Solutions Direct, Yokogawa
Advanced Applications, Inc., Control Solutions, Inc., Mat. Co. Ltd., Encorp,
Inc., Weidmuller EuroLon AB (for use by Volvo) and EMC Engineers, Inc.
The Company has installed its building control products at over twenty
locations. A representative sample is set forth in the following table:
- 34 -
<PAGE> 37
<TABLE>
<CAPTION>
CLIENT LOCATION DGS PRODUCT OR SERVICE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
University of Pennsylvania Philadelphia, Pennsylvania Facilities Management System
Philadelphia Wastewater Treatment Philadelphia, Pennsylvania Process Control
Delco Moraine Dayton, Ohio Energy Management System
General Motors Building New York, New York Fire & Security Systems
Delco Electronics Kokomo, Indiana Security System
Electromotive LaGrange, Illinois Energy Management System
AC Rochester Grand Rapids, Michigan Energy Resource Accounting
Chevrolet Assembly Plant Moraine, Ohio Energy Management System
GM Group Assembly Plant Oshawa, Ontario Maintenance Monitoring System
Harrison Radiator Moraine, Ohio Security System
Oldsmobile Plant Lansing, Michigan Maintenance Dispatch System
RCA Scranton, Pennsylvania Energy Management System
SmithKline Philadelphia, Pennsylvania Multi-Bldg security & access control
======================================================================================================
</TABLE>
The Company has service contracts with most of the customers listed in
the above table. The Company believes that these companies constitute potential
end users for its VisualControl and other new software products.
The University of Pennsylvania and the City of Philadelphia accounted
for 38% and 14%, respectively, of total revenues during the six months ended
June 30, 1997, and 48% and 12%, respectively, of total revenues during the six
months ended June 30, 1996. These same two customers accounted for 47% and 12%,
respectively, of total revenues during the year ended December 31, 1996, and 39%
and 26%, respectively, of total revenues during the year ended December 31,
1995. One additional customer accounted for 10% of total revenues during the
year ended December 31, 1995.
MARKETING & SALES
DGS is pursuing the control design software market primarily through
strategic alliances and relationships with software distributors, original
equipment manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software innovation and existing
product interest, DGS intends to hire immediately two additional Sales and
Marketing professionals to contact the LonWorks users marketplace. In addition
to a direct mail product promotion campaign, the LonWorks Software print and
electronic catalogs and aggressive advertising in professional trade
publications and engineering journals, DGS is using new communications
technology for product promotion such as fax on demand.
ENGINEERING & DEVELOPMENT
DGS currently employs four full time software engineers and intends to
hire another four programmers immediately. An additional six programmers and
four systems and control engineers will be added to round out the staff. All of
DGS's current software engineering staff are versed in the application languages
used to develop its products (i.e., ActiveX
- 35 -
<PAGE> 38
controls, C++ with MFC, Windows 95 and Windows NT). Equally important, three of
these staff members have extensive backgrounds in controls engineering and
automation coupled with system integration experience in both building and
industrial environments. All of the engineering and development staff is trained
and fluent in the LonWorks hardware and software to which DGS products are
directed.
DGS currently owns hardware resources to conduct its product research
and development and to test and evaluate software products for its target
market. These resources include microcomputers based on Intel P5/P6 Pentium
technology, application software, and CASE tools. DGS also has a complete
electronics shop with hardware design and build capability to support test and
evaluation of its software products. In addition to commercially available
sensors and controllers that DGS uses for testing and evaluating DGS software
products prior to release, the electronics facility permits DGS to construct
proprietary state-of- the-art test boxes and other hardware to further its
advanced software development projects.
Due to the fluidity and speed of change in software development
environments, DGS develops software on two tracks -- enhancement of its current
line of software products and the invention and development of new products
directed at the future control network technology market. Current projects that
will enhance its VisualControl product line include a debugger, a simulator,
drivers for a variety of control system interfaces, and upgrades for its
graphical support tool and network manager. Upgrade activities include using OLE
and ActiveX based 32 bit solutions to integrate "factory floor" input and output
data from DGS network management software to users throughout the enterprise who
use standard office software such as spreadsheets and databases. Certain other
proprietary activities are also underway to penetrate the market.
COMPETITION
To the best of the Company's knowledge, VisualControl is the only
commercialized software product designed for control network technology product
development that (i) functions as a network/Windows NT graphical user interface,
(ii) generates user-defined control strategies or modifications and (iii)
functions as a control network management tool. Additionally, DGS believes that
VisualControl is the only product of its type to work with LNS architecture. DGS
is aware of one possible competitor in the graphical programming area and three
companies that develop network management tools that might become competitors of
the Company.
DGS was one of a few companies that worked closely with Echelon for
over two years as part of the "beta team" developing new 32 bit LNS technology.
This relationship facilitated the Company's development of the VisualControl
software package so that it was available when LNS was introduced in April 1997.
To the Company's knowledge, no other software company took advantage of this
opportunity to create packages specifically for LNS prior to its release.
Companies such as DGS that sell software application tools which
incorporate LonWorks technology must pay royalty fees to Echelon on a per node
basis. Royalty payments to Echelon can be a significant cost to companies
promoting software and hardware for LNS. Recently, Echelon raised its per node
royalty fees. Due, in part, to the Company's beta team role noted above, this
increase will not apply to DGS for at least the next three years. Potential
competitors to DGS, however, will be subject to the new royalty structure which
will raise their costs. The Company believes that this will create a barrier to
those companies wishing to compete with DGS.
- 36 -
<PAGE> 39
While there are companies that offer a 16 bit network manager software
and C++ programming software, only DGS offers a combined 32 bit graphical
programming tool and network manager for LNS. The Company believes that
development costs for such technology, coupled with the burden of the new
royalty structure, will tend to discourage new entrants to this market. Perhaps
in response to such barriers, several potential competitors to DGS have sought
an alliance with the Company permitting them to resell VisualControl and thereby
gain entry to the new LNS market.
Notwithstanding the foregoing, the market for software add-on products
is intensely competitive, and there can be no assurance that competing products
will not be introduced at any time. In general, the competitive factors
affecting the market for software and services include: vendor and product
reputation, availability of products on preferred computer and communications
platforms, scalability, integration with other applications, functionality and
features, ease of use, quality of support, documentation and training, product
quality, product innovation, price and the effectiveness of marketing and sales
efforts. The relative importance of each of these factors depends upon the
market segment. Certain of DGS's competitors and potential competitors have
significantly greater financial, technical, research and development and
marketing resources. As a result, they may be able to devote greater resources
to the development, promotion, sale and support of their products than DGS.
PATENTS, TRADEMARKS & COPYRIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary technology, including its software source codes. The Company
presently has no registered trademarks or copyrights and no patents, nor does it
have any applications pending. The Company relies on a combination of trade
secret and nondisclosure law, which may afford only limited protection. The
Company is aware that unauthorized copying occurs within the industry. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties, including customers who receive
listings of the source code for the Company's products pursuant to the terms of
their license agreements with the Company, or former employees of the Company,
may attempt to reverse engineer or copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. As a result,
there can be no assurance that unauthorized use of the Company's technology may
not occur.
In the future the Company may receive notices claiming that it is
infringing the proprietary rights of third parties and may become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products. Any such claim could be time consuming, result in
costly litigation, cause product shipment delays or force the Company to enter
into royalty or license agreements rather than dispute the merits of such claims
and have a material adverse effect on the Company's business, operating results
and financial condition.
FACILITIES
DGS's corporate offices and manufacturing, research and development
operations are located at 2492 Technical Drive, Miamisburg, Ohio. This 5,000
square foot facility is leased for a term extending through March 31, 1998. The
lease includes a month to month renewal option. DGS believes that its facility
is in good condition, well maintained and suitable for its long-term needs.
- 37 -
<PAGE> 40
EMPLOYEES
DGS had 14 employees as of November 1, 1997. Of these, five are engaged
in software development, three in administration and finance and six in sales,
production, customer support and service. None of the Company's employees is
represented by a union, and no work stoppages have occurred.
LEGAL PROCEEDINGS
DGS is a party from time to time to litigation or proceedings incident
to its business. There is no pending or, to the Company's knowledge, threatened
legal proceeding to which DGS is or would be a party.
- 38 -
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas C. Haas 53 Chairman of the Board, President and Chief
Executive Officer
Edward T. Hurd 59 Director
William R. Winkler 49 Director
William C. Kaesche III 55 Executive Vice President of Sales and Marketing
Jay G. Pollack, Ph.D. 49 Executive Vice President of Research and
Development
</TABLE>
Thomas C. Haas has been Chairman of the Board of Directors and Chief Executive
Officer of DGS since its inception in 1993 and has been President since 1996.
From 1991 until 1993, he was self employed reviewing acquisition opportunities
and managing his assets. Mr. Haas served as Treasurer of Philips Industries,
Inc., a Fortune 500 diversified manufacturer of products for the construction,
transportation and material handling industries ("Philips"), from 1984 until
1989 and of Tomkins Corporation, the holding company for the U.S. operations of
Tomkins PLC (Philips, Smith & Wesson and Murray Ohio) from 1989 to 1991. From
1968 until 1984 he had held various financial management and analysis positions
with Philips. In addition to his responsibilities for cash management, budgeting
and strategic planning, Mr. Haas provided financial analytical support for the
acquisitions of over twenty-five companies. During his career, Philips grew from
$100 million to over $930 million in annual sales prior to being acquired by
Tomkins. He received his B.B.A. from Ohio University.
Edward T. Hurd has over 35 years of experience in global automation markets.
He became a director of DGS in July 1997. From 1962 to 1996 Mr. Hurd held many
positions with Honeywell Inc. ("Honeywell"). From 1990 to 1996, Mr. Hurd was
President of the Industrial Business Division of Honeywell and Executive Vice
President of Honeywell from 1995 to 1996. From 1962 to 1990, Mr. Hurd held
positions of increasing responsibility within Honeywell including Director of
Engineering, Vice President of Operations, General Manager and Group Vice
President of the Industrial Automation and Control Division and Worldwide
Industrial Group. He is currently an independent consultant. Mr. Hurd serves as
the Chairman of the Board of Directors of Moore Products Co. and is a director
of Total Control Products, Inc.
- 39 -
<PAGE> 42
and Iconics Inc., all of which are in the process control industry. He received
his B.S.E.E. from Drexel University and his M.S.E.E. from the University of
Pennsylvania.
William R. Winkler became a director of DGS in June 1997. He is a Certified
Public Accountant and has been President of Winkler Enterprises, a tax,
accounting and specialty retail business, since 1996. From 1977 to 1996 he was
employed by Philips Industries, Inc. ("Philips"), serving as Corporate
Controller from 1990 to 1996. From 1991 to 1996 he also served as Corporate
Controller of Tomkins Corporation, the holding company for the U.S. operations
of Tomkins PLC (Philips, Smith & Wesson and Murray Ohio). As Corporate
Controller for Philips, Mr. Winkler was part of that company's mergers and
acquisitions team and in that capacity participated in the due diligence effort
on many acquisitions. From 1970 until 1977, he was employed as a Certified
Public Accountant with Deloitte & Touche and was involved primarily in the
audits of large publicly-held clients. He received his B.S. from Drexel
University.
William C. Kaesche, III joined DGS as Executive Vice President of Sales and
Marketing in June 1997. He has had over nineteen years experience with Honeywell
Inc.'s ("Honeywell's") Industrial Automation and Control ("IAC") Division, a
global provider of industrial process control systems, software and services.
During 1996 and early 1997, he served as a consultant to several companies in
the technology industry. From 1987 until 1996, Mr. Kaesche was employed by
Honeywell's IAC Division, in the following capacities: Manager of Business
Development (1994-1996); Director of Marketing and Sales for ICOTRON, a
subsidiary of Honeywell specializing in advanced process control software and
services (1991-1994); Western Regional Sales Manager (1989-1991); and Chicago
Branch Sales Manager (1987-1989). From 1983 to 1987, Mr. Kaesche served as Vice
President Marketing and Sales for August Systems Inc., a manufacturer of fault
tolerant computer systems. He received his B.S.M.E. from Brigham Young
University and his M.B.A. from Keller Graduate School of Management.
Jay G. Pollack, Ph.D. joined DGS as Executive Vice President of Research and
Development in July 1997. Prior to joining DGS, Dr. Pollack was President and
Chief Scientist of Joshua Technology Corporation, a product development
consultancy. From 1987 to 1995, he was a Senior Manager at the University of
Dayton Research Institute. Under his direction, the Institute grew to national
stature and produced several patents and over two hundred technical papers in
support of commercial and governmental sponsors. Dr. Pollack received his Naval
wings in 1978 and spent ten years in increasingly responsible positions in Navy
research and development commands. He received his M.S. and Ph.D. in
Neuroscience from the University of Miami and his B.S. from Colorado State
University.
- 40 -
<PAGE> 43
Directors of the Company are elected annually. Officers of the Company are
elected annually and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the Offering, the Board of Directors will establish
an Audit Committee, initially to be composed of Messrs. Winkler (Chairman), Hurd
and Haas. The Audit Committee will be responsible for reviewing the Company's
financial statements, audit reports, internal financial controls and the
services performed by the Company's certified independent public accountants and
for making recommendations with respect to those matters to the Board of
Directors. The Board of Directors may establish other committees in the future.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive an annual fee of $2,500 as compensation for his or her
services as a member of the Board of Directors. Non-employee directors also will
receive fees of $500 for each Board and Board committee meeting attended in
person and $250 for each telephonic meeting in which the director participates.
A separate committee meeting fee will not be paid if the committee meeting
occurs on the same day as a Board meeting. All directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors and its committees and for other expenses incurred in their
capacities as directors of the Company. All directors own securities of the
Company. Including shares of Common Stock issuable upon exercise of outstanding
stock options which are currently exercisable or are exercisable within 60 days
of November 1, 1997, the directors of the Company as a group will own 35.8% of
the outstanding shares of Common Stock of the Company, assuming the sale of the
minimum number of Units, or 28.2%, assuming the sale of the maximum number of
Units. See "Holdings of Management and Principal Shareholders."
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
paid by the Company in respect of fiscal year 1996, for services in all
capacities, to Mr. Haas, the Company's Chief Executive Officer. No executive
officer earned over $100,000 in salary and bonus for fiscal year 1996.
- 41 -
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------------- ------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
------------------ ------ ------------ ---------- ------------
Position Year Salary Bonus Compensation Options (#) ($)
-------- ---- ------ ----- ------------ ----------- ----
($) ($) (1) ($)
--- --- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Haas,
President, Chief
Executive Officer 1996 $82,136 --- --- --- ---
</TABLE>
(1) None, other than perquisites which did not exceed the lesser of $50,000
or 10% of salary and bonus.
The Board of Directors has voted to increase Mr. Haas' salary to
$125,600 per annum, effective October 12, 1997.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") provides for the
grant, to the Company's employees, directors and advisors, of options to
purchase up to 300,000 shares of the Company's Common Stock. As of November 1,
1997, options for 175,000 shares of Common Stock, having an exercise price of
between $1.75 and $1.93 per share, had been granted under the Plan including
options to directors and executive officers as follows: Mr. Haas, 50,000 shares;
Mr. Hurd, 25,000 shares; Mr. Kaesche, 25,000 shares; and Dr. Pollack, 25,000
shares. In addition, upon completion of the Offering, the Company will grant
options to purchase 25,000 shares of Common Stock, at the initial public
offering price, to each of Mr. Hurd and Mr. Kaesche. The Company will grant Mr.
Hurd options for 25,000 additional shares, at the then current market price, a
year after the completion of the Offering.
CERTAIN TRANSACTIONS
The Board of Directors of the Company has adopted a policy requiring
that any future transactions, including loans, between the Company and its
officers, directors, principal shareholders and their affiliates be on terms no
less favorable to the Company than could be obtained from unrelated third
parties and that any such transaction be approved by a majority of the
disinterested members of the Company's Board of Directors. If they desire, the
disinterested members of the Board reviewing any such transaction will have
access, at the Company's expense, to the Company's or independent legal
counsel.
The Company has a line of credit with a bank in the aggregate amount of
$75,000, all of which was available to the Company on November 1, 1997. The line
of credit is personally guaranteed by Mr. Haas. In October 1994, the Company
loaned Mr. Haas $18,000, secured by a promissory note, which was originally due
in November 1995 and which bore interest at 8% per annum. Repayment of the
indebtedness subsequently was extended to October 31, 1997. In October 1997, by
vote of the Company's Board of Directors, repayment of the indebtedness was
further extended to October 31, 1998 and the interest rate payable was increased
to 8.5% per annum, with repayment to be made by payroll deduction. As of
November 1, 1997, $17,847 was due the Company under the note.
Prior to July 1997, the Company had no disinterested or independent
directors. Therefore, the loan to Mr. Haas described above was not initially
approved or extended by a disinterested vote. Its further extension in October
1997 was approved by the Company's two disinterested directors, who believe
that the terms of the loan are reasonable, especially in light of Mr. Haas'
personal guarantee of the Company's bank line of credit.
HOLDINGS OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock on November 1, 1997, on an
actual basis and as adjusted to reflect the sale of both the minimum and maximum
number of Units offered by this Prospectus, by (i) each beneficial owner of more
than five percent of the Common Stock immediately prior to the Offering, (ii)
Mr. Haas and each director and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated, all shares are owned directly
and the indicated owner has sole voting and dispositive power over the shares.
- 42 -
<PAGE> 45
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Prior to Offering Shares Beneficially Owned
----------------- -------------------------
After Offering
-------------------------
Minimum Maximum
------- -------
Name Number (Percent) Number (Percent) Number (Percent)
---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Thomas C. Haas(1)(2) 804,000 (60.4%) 804,000 (33.1%) 804,000 (26.0%)
Edward T. Hurd(2) 25,000 ( 1.9%) 25,000 ( 1.0%) 25,000 ( 0.8%)
William R. Winkler 50,000 ( 3.9%) 50,000 ( 2.1%) 50,000 ( 1.6%)
All directors and executive 940,000 (66.8%) 940,000 (37.5%) 940,000 (29.6%)
officers as a group (five
persons)(2)
Vernon F. Brannon(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
James E. Cogan(2) 71,000 ( 5.4%) 71,000 ( 3.0%) 63,000 ( 2.1%) (3)
Daniel B. Lackey(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
</TABLE>
- -------------------------
(1) The address for Messrs. Haas, Brannon and Lackey is 2492 Technical
Drive, Miamisburg, Ohio 45342. Mr. Cogan's address is 502 South
Koenigheim, Suite 2F, San Angelo, Texas 76903.
(2) Includes shares of Common Stock issuable upon exercise of outstanding
stock options and warrants which are currently exercisable or are
exercisable within 60 days of November 1, 1997 as follows: Mr. Haas,
50,000 shares; Mr. Hurd, 25,000 shares; all directors and executive
officers as a group, 125,000 shares; and Mr. Cogan, 24,000 shares.
(3) Gives effect to the sale of 8,000 shares as a Selling Shareholder if
the maximum number of Units are sold. See "Selling Shareholders."
SELLING SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership, by the persons listed below as Selling Shareholders (the
"Selling Shareholders"), of the Company's Common Stock on November 1, 1997 and
as adjusted to reflect the sale of the maximum number of Units offered by this
Prospectus.
- 43 -
<PAGE> 46
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Shares to Owned After
to Offering Be Offered Offering
----------- ---------- --------
Selling Shareholder Number Number Number Percent
- ------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Harold H. Croghan 50,000 20,000 30,000 1.0%
James E. Cogan (1) 71,000 8,000 63,000 2.1%
Church Street Financial 52,000 8,000 44,000 1.4%
Corp.(2)
TOTAL 173,000 36,000 137,000 4.5%
</TABLE>
(1) Includes 24,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant. Mr. Cogan is a shareholder and
employee of Church Street Financial Corporation.
(2) Includes 26,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant.
Church Street Financial Corporation ("Church Street") is an investment
research firm that has provided analytical and advisory services to the Company
during 1997, including corporate financing services in connection with the
Private Placement and the Offering. In this connection, the Company is indebted
to Church Street in the amount of $75,000, represented by a note bearing
interest at 8.5% per annum and due on the earlier of the completion of this
Offering or December 15, 1998.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, without par value, and 100,000 shares of undesignated preferred
stock, without par value. As of the date of this Prospectus, the Company's
outstanding securities consist of 1,281,286 shares of Common Stock. No shares of
preferred stock have been issued. The following description of certain matters
relating to the capital stock of the Company is a summary and is qualified in
its entirety by the provisions of the Company's Articles of Incorporation and
By-Laws and by the Pennsylvania Business Corporation Law (the "PBCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. Subject to preferences which may be granted to
holders of any outstanding preferred stock, holders of Common Stock are entitled
to receive dividends when, as, and if declared by the Board of Directors out of
legally available funds. In the event of liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and after the provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption privileges applicable to the
Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock issued in this Offering will be, fully paid and nonassessable. The
vote of holders of a majority of all outstanding shares of Common Stock is
required to amend the Articles of Incorporation and to approve mergers,
reorganizations and similar transactions.
- 44 -
<PAGE> 47
PREFERRED STOCK
Up to 100,000 shares of preferred stock may be issued from time to time
in series having such designations, preferences and rights, qualifications, and
limitations as the Board of Directors may determine without any approval of
shareholders. Preferred stock could be given rights, including voting and/or
conversion rights, which would adversely affect the voting power and equity of
holders of Common Stock and could have preferences to Common Stock with respect
to dividend and liquidation rights. Issuance of preferred stock could have the
effect of acting as an anti-takeover device to prevent a change in control of
the Company. The Company currently has no plans to issue any preferred stock.
WARRANTS
The shares of Common Stock and Warrants offered as Units hereby are
detachable and separately transferable 90 days from the Escrow Release Date.
Each Warrant entitles its holder to purchase one share of Common Stock, at a
price of $6.50. Warrants are exercisable at any time until their expiration at
3:00 p.m., Cincinnati time, five years following the date of this Prospectus.
The exercise price of the Warrants is subject to adjustment under certain
circumstances, including but not limited to, the Company selling shares of
Common Stock for a price per share less than the prevailing fair market price of
shares of Common Stock, issuing any shares of Common Stock as a dividend or
subdividing or combining the outstanding shares of Common Stock into a greater
or lesser number of shares. Warrants may be exercised by completing and signing
the notice of exercise forms attached to the Warrants and mailing or delivering
them (together with the Warrants) to The Fifth Third Bank (the "Warrant Agent")
in time to reach the Warrant Agent prior to their expiration, accompanied by
payment in full of the warrant exercise price. Payment of the warrant exercise
price must be made in United States currency by check, cash or bank draft
payable to the order of the Company. A certificate representing the shares of
Common Stock issuable upon exercise of the Warrants will be issued as soon as
practicable after receipt of the holder's request, exercise notice and payment.
Copies of the Warrant Agreement are available for inspection upon request to the
Company. The Company has reserved a sufficient number of shares of Common Stock
for issuance upon exercise of the Warrants, and such shares, when issued, will
be fully paid and nonassessable.
Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus which will permit
the purchase and sale of the Common Stock underlying the Warrants, but there can
be no assurance that the Company will be able to do so. Although the Company
intends to qualify the shares of Common Stock underlying the Warrants for sale
in those states in which the Units are to be offered, no assurance can be given
that such qualification will occur. Holders of the Warrants may be deprived of
their value if a prospectus covering the shares issuable upon Warrant exercise
is not kept effective or if such underlying shares are not, or cannot be,
registered in the applicable states.
Holders of the Warrants may be able to sell the Warrants if a market
develops rather than exercise them. Although application has been made to list
the Warrants on The Nasdaq SmallCap Market, there can be no assurance that
trading market for the Warrants will develop or, if developed, can be sustained.
- 45 -
<PAGE> 48
A holder of Warrants is not entitled to vote, receive dividends or
exercise any rights as a shareholder in respect of the shares of Common Stock
underlying the Warrants until the Warrants have been duly exercised and payment
of the exercise price has been made.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Provisions of the Company's Articles of Incorporation, By-Laws and the
PBCL may have the effect of delaying, deferring or preventing a change in
control of the Company as a result of an extraordinary corporate transaction,
such as a merger, reorganization, tender offer, sale or transfer of
substantially all of its assets or liquidation. These provisions might
discourage a potentially interested purchaser from attempting a unilateral
takeover bid for the Company on terms which some shareholders might favor. Set
forth below is a discussion of certain of these provisions.
Special Shareholder Meetings. The PBCL provides that unless
specifically permitted in a corporation's articles, shareholders are not
entitled to call a special meeting of shareholders. Although the Company's
Articles do not so permit, the Company's By-Laws permit shareholders owning 10%
or more of the voting power of the Company to call a special meeting of
shareholders.
Advance Notice of Nominees for the Board. The By-Laws restrict the
ability of a shareholder to nominate individuals for election as directors. A
shareholder nomination must be made by written notice, containing specified
information, to the Secretary of the Company at least 60 days in advance of the
meeting of the shareholders at which such election is to be held (or if less
than 60 days' notice of the date of such annual meeting is given, not later than
10 days after the date of mailing of such notice). This requirement is intended
to provide the Company with time to assess the qualifications of any person
proposed for election to the Board and to institute litigation or take other
steps to prevent the nominee from being elected or serving, if such prevention
is thought to be necessary or desirable for any reason. Such provisions also may
inhibit shareholders who do not have any intention of controlling the Company or
the Board from participating in the nomination process.
PBCL Anti-Takeover Provisions. The PBCL contains a number of statutory
"anti-takeover" provisions, including Subchapters E, F, G, H, I and J of Chapter
25 and Section 2538, which will apply automatically to the Company upon
consummation of the Offering. The following descriptions are qualified in their
entirety by reference to the respective provisions of the PBCL:
Subchapter E provides that, if any person or group acquires 20% or more
of the voting power of a covered corporation (a "Control-Share Acquisition") the
remaining shareholders may object to the acquisition and put their shares to
such person or group in exchange for the fair value of their shares, including a
proportionate amount of any control premium. Subchapter F generally delays for
five years and restricts "business combinations" between an "interested
shareholder" and the corporation. The term "business combination" is defined
broadly to include various transactions between a corporation and an interested
shareholder including mergers, sales or leases of specified amounts of assets,
liquidations, reclassifications and issuances of specified amounts of additional
shares of stock of the corporation. An "interested shareholder" is defined
generally as the beneficial owner of at least 20% of a corporation's voting
shares.
Subchapter G prevents a person or group who has acquired 20% or more of
the voting power of a covered corporation from voting its shares without the
approval of the
- 46 -
<PAGE> 49
"disinterested" shareholders. Failure to obtain such approval exposes the owner
to the risk of a forced redemption of that owner's control shares by the issuer
as provided by the statute.
Subchapter H applies in the event that any person or group publicly
discloses that the person or group may acquire control of the corporation or a
person or group effects (or publicly discloses an offer or intent to effect) a
Control-Share Acquisition and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation by
the person or the group during the 18-month period must be remitted to the
corporation if the securities that were sold were acquired during the 18-month
period or within the preceding 24 months.
Subchapter I provides for minimum severance payments to certain
employees terminated within two years of a Control-Share Acquisition. Subchapter
J prohibits the abrogation of certain labor contracts prior to their stated date
of expiration through any business combination. Section 2538 of the PBCL
generally establishes certain shareholder approval requirements with respect to
specified transactions with "interested shareholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Company's
Units, Common Stock and Warrants is The Fifth Third Bank, Cincinnati, Ohio.
CERTAIN FEDERAL TAX CONSIDERATIONS
THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS IS
NOT INTENDED TO CONSTITUTE ADVICE REGARDING THE FEDERAL INCOME TAX CONSEQUENCES
OF PURCHASING UNITS. THIS SUMMARY DOES NOT DISCUSS TAX CONSEQUENCES UNDER THE
LAWS OF STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER JURISDICTION OR TAX
CONSEQUENCES TO CATEGORIES OF SHAREHOLDERS THAT MAY BE SUBJECT TO SPECIAL
RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES, INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND SECURITIES. ANY PERSON
CONSIDERING THE PURCHASE OF UNITS IS URGED TO OBTAIN, AND SHOULD RELY ONLY
UPON, THE ADVICE OF HIS OR HER OWN TAX ADVISOR.
The Company satisfies the criteria for a qualified small business
issuer as defined by Section 1202 of the Internal Revenue Code of 1986, as
amended. Therefore, a purchaser of securities offered by this Prospectus, other
than a corporation, can exclude 50% of any gain from the sale or exchange of
such securities provided such purchaser has held the securities for more than
five years. Gain eligible for the 50% exclusion may not exceed the greater of
$10,000,000 or 10 times the purchaser's basis in the stock. The remaining gain
is capital gain, taxable at the applicable rate. However, one half of any
exclusion claimed is an alternative minimum tax preference item which will
require the purchaser to recompute certain regular tax deductions in a
different, less preferential, manner.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,381,286 shares of Common Stock if 550,000 Units are sold and 3,045,286 shares
of Common Stock if 900,000 Units are sold (assuming no exercise of outstanding
stock options and warrants and without giving effect to the exercise of the
Warrants included in the Units or the Underwriter's Warrants). The 1,100,000
(minimum) and the 1,800,000 (maximum) shares of Common Stock included in the
Units offered by this Prospectus will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. Also, a minimum of 550,000 and a maximum of 900,000 shares of
Common Stock will be issuable upon exercise of the Warrants included in the
Units and up to an additional 217,890 shares of Common Stock will be issuable
upon exercise of the Underwriter's Warrants and the Warrants contained therein,
all of which are expected to be freely tradeable upon issuance. The remaining
1,281,286 shares if 550,000 Units are sold and 1,245,286 shares if 900,000 Units
are sold will be held by the Company's current shareholders. Of these 221,286
currently are unrestricted. The remainder may not be sold unless they are
registered under the Act or sold pursuant to an applicable exemption from
registration, including an exemption pursuant to Rule 144.
Rule 144 governs the public sale in ordinary trading transactions of
restricted securities and of securities owned by affiliates of a company and
imposes volume and manner of sale restrictions, as well as other requirements,
on the sale of restricted securities held for less than two years by
non-affiliates and on all securities held by affiliates. The Company anticipates
that 416,286 shares of Common Stock (if 550,000 Units are sold) will be eligible
for sale immediately after the Offering without regard to the restrictions of
Rule 144 and an additional 30,000 shares of Common Stock will be eligible for
sale 90 days after the Offering pursuant to the restrictions of Rule 144. The
Company's executive officers and directors (who hold a total of 815,000 shares)
have agreed not to offer, sell or otherwise dispose of any shares of Common
Stock for a period of 12 months from the date of
- 47 -
<PAGE> 50
this Prospectus, without the prior written consent of the Underwriter. After the
expiration of 12 months and assuming 550,000 Units are sold, these 815,000
shares of Common Stock may be sold pursuant to the restrictions of Rule 144. The
remaining shares outstanding prior to this Offering will be eligible for sale in
compliance with the restrictions of Rule 144 beginning in early 1998.
The Company has reserved up to 300,000 shares of its Common Stock for
issuance under its 1997 Stock Option Plan. Upon the completion of the Offering
there will be options for 225,000 shares of Common Stock outstanding under the
Plan. The Company currently intends to register the shares of Common Stock
issuable under the Plan. Subject to the expiration of the 12 month lock-up
period, and subject to compliance with Rule 144 by affiliates of the Company and
to Section 16 of the Securities Exchange Act of 1934 by directors, officers and
10% beneficial owners, any shares issued upon exercise of options granted under
the Plan will become freely tradeable at the effective date of the registration
statement for the Plan shares.
The Company has issued warrants to two of its shareholders, the 1996
Warrants, to purchase a total of 50,000 shares at $0.90 per share expiring on
November 15, 2003. The Company has no plans to register either the 1996 Warrants
or the shares issuable upon their exercise. Therefore, if and when issued, these
shares will be Restricted Shares and cannot be sold without compliance with Rule
144. The Company has also issued the Broker's Warrants to the Underwriter to
purchase 13,229 shares at $4.95 per share expiring on July 25, 2002. The Company
has agreed to register the shares issuable upon exercise of the Broker's
Warrants. Therefore, if and when issued and assuming their registration as
agreed to by the Company, such shares will be freely tradeable.
Prior to the Offering, there has been no public market for the
Company's Units, Common Stock or Warrants, and no prediction can be made as to
the effect, if any, that market sales of such securities or the availability of
such securities for sale will have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of such securities in the
public market could adversely affect prevailing market prices and the Company's
ability to raise capital at favorable prices. The Company has submitted an
application to list the Units, Common Stock and Warrants on The Nasdaq SmallCap
Market under the symbols "DGSU", "DGSI" and "DGSW," respectively.
UNDERWRITING
J. V. Delaney & Associates (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the underwriting agreement by and among
the Company, the Selling Shareholders and the Underwriter (the "Underwriting
Agreement"), to use its best efforts to sell a minimum of 550,000 Units and a
maximum of 900,000 Units to the public. The Underwriter has made no commitment
to purchase any of the Units offered.
During the Offering, all subscription amounts will be held in escrow
with the National Bank of Southern California, as Escrow Agent. The Offering
will begin on the date of this Prospectus and, unless extended, end on
__________, 1998, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
Units may be subscribed for by completing and signing the Subscription
Agreement furnished with this Prospectus and returning it with full payment to
the Underwriter. Checks should be made payable to "National Bank of Southern
California, Escrow Agent for Dayton General Systems."
Subscriptions will be deposited with the Escrow Agent by noon of the
next business day following receipt and approval by the Underwriter. All funds
held in escrow will be invested by the Escrow Agent; escrowed amounts will not
be subject to claims of the Company's
- 48 -
<PAGE> 51
creditors or to deduction for expenses of the Offering. During the period of
escrow, subscribers will not be entitled to withdraw or cancel their
subscriptions and will have no rights as shareholders of the Company.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any such
case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
The Underwriter has informed the Company that it will not confirm sales
to any accounts over which it exercises discretionary authority.
The Company and its executive officers and directors have agreed not
to, directly or indirectly, offer, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, or any securities convertible into or
exercisable for shares of Common Stock, for a period of 12 months after the
date of this Prospectus without the prior written consent of the Underwriter,
except for the issuance of shares upon the exercise of outstanding warrants
(including the Warrants included in the Units) and for the grant and exercise
of options under the 1997 Stock Option Plan.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to three percent of the aggregate price of all Units
sold, including those Units offered by the Selling Shareholders. As of the date
of this Prospectus, $80,500 of this fee had been advanced by the Company. Upon
completion of this Offering, the Company has also agreed to sell to the
Underwriter, as additional compensation, warrants (the "Underwriter's Warrants")
to purchase that amount of Units equal to 8.07% of the total amount of Units
sold to the public. Each Underwriter's Warrant is exercisable to purchase one
Unit at a price of $12.50 per Unit beginning on the first anniversary and
continuing until the fifth anniversary of the date of this Prospectus. The price
of the Underwriter's Warrants is $.0005 per Warrant.
The Underwriter's Warrants contain provisions which require, under
certain circumstances, the Company to register the securities underlying such
Warrants for sale to the public. The Underwriter's Warrants are nontransferable
for a period of one year except to officers or partners of the Underwriter and
members of the selling group and/or their officers or partners. The exercise
price and number of Units covered by the Warrants are subject to adjustment to
protect the holders thereof against dilution in certain events.
From June 20, 1997 through July 25, 1997 the Underwriter assisted the
Company in privately placing $231,500 (132,286 shares) of Common Stock. For
these services, the Underwriter received $23,150 in commission and the Broker's
Warrants, exercisable through July 25, 2002, to purchase 13,229 shares of Common
Stock at a price of $4.95 per share. The Company has agreed to register the
shares issuable upon exercise of the Broker's Warrants. In
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<PAGE> 52
addition, the Company reimbursed the Underwriter's legal expenses in connection
with the private placement.
The Company has granted to the Underwriter the right to designate two
members of the Company's Board of Directors for a period of three years from the
date of this Prospectus or, in the alternative, to designate two persons to
serve as advisors to the Board (subject to approval by the Board). To date, the
Underwriter has not designated any members of the Company's Board of Directors
or designated any persons to serve as advisors to the Board.
Additionally, the Company has granted the Underwriter a right of first
refusal, expiring on the earlier of its use or three years from the date of this
Prospectus, to be the exclusive underwriter of any one public or private debt or
equity offering made by the Company. If such an offering were to be proposed by
the Company and the Underwriter were to elect to underwrite the proposed
offering, the Company could, instead, extinguish the right of first refusal by
paying the Underwriter an amount equal to the greater of (i) 1% of the proceeds
of this initial public offering or (ii) 5% of any underwriting commissions and
discounts payable in the proposed offering.
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. Consequently, the offering price of the Units and the
exercise price of the Warrants have been arbitrarily determined by negotiation
between the Company and the Underwriter. The initial offering price of the Units
and the exercise price of the Warrants are not necessarily related to or
indicative of the Company's assets, book value, earnings, net worth or any other
recognized criteria of value.
While the Underwriter has significant experience in corporate financing
and the private placement of securities, the Underwriter has not previously
underwritten any public offering. The Underwriter's lack of public offering
experience may affect the Offering and the subsequent development of a trading
market, if any, in the securities of the Company.
As indicated under "Use of Proceeds," approximately 25% of the
Company's net proceeds from the Offering are allocated to potential
acquisitions, working capital and general corporate purposes. Although it could
have elected to make a smaller offering, the Company believes that the current
Offering size ultimately will be to the advantage of investors. The Offering
size is necessary for the Units, Common Stock and Warrants to qualify for
listing on The Nasdaq SmallCap Market, thus improving the liquidity of the
investment, and should decrease the risk that the Company will need to access
the capital markets in the near future. There can be no assurance, however, that
the Company can maintain a Nasdaq listing or that the Company's estimates and
assumptions concerning its future needs for working capital will prove correct.
See "Risk Factors."
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the securities offered and certain legal matters
relating to the Offering hereby will be passed upon for the Company by Taft,
Stettinius & Hollister. Dinsmore & Shohl LLP has acted as counsel for the
Underwriter in connection with this Offering.
EXPERTS
The financial statements of the Company for the years December 31, 1995
and 1996 included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, whose report has been included in
reliance upon the authority of such accounting firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
Prior to the Offering the Company was not a reporting company. The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration
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<PAGE> 53
Statement under the Securities Act with respect to the securities offered by
this Prospectus. The Prospectus does not contain all of the information set
forth in the Registration Statement. For further information with respect to the
Company and such securities, reference is made to the Registration Statement.
The Registration Statement can be obtained from and inspected and copied, at
prescribed rates, at the public reference facilities of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the Commission's Regional Offices at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048. The Commission also maintains an Internet web site at
http://www.sec.gov that contains documents filed electronically by issuers,
including the Registration Statement.
- 51 -
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 1995 and 1996 and
at June 30, 1997 (unaudited) F-3
Statements of Operations for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-4
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1997 (unaudited) F-5
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-6
Notes to Financial Statements F-7
F-1
<PAGE> 55
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Dayton General Systems, Inc.
We have audited the accompanying balance sheets of Dayton General Systems, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Dayton General Systems, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 14, 1997 (except for Notes B, I, L, O, and P, as to
which the date is October 31, 1997)
F-2
<PAGE> 56
Dayton General Systems, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1996 1997
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 53,986 $ 24,480 $ 14,907
Accounts receivable 108,455 57,383 71,414
Inventories 93,487 112,659 111,496
Prepaid expenses 648 1,752 8,552
Deferred stock issuance costs -- 20,788 150,418
-------- -------- ---------
Total current assets 256,576 217,062 356,787
PROPERTY AND EQUIPMENT - NET 25,964 24,701 22,251
OTHER ASSETS
Note receivable - shareholder 18,000 18,000 18,000
Capitalized software costs -- 51,747 65,324
Noncompete covenant 14,600 2,100 --
Goodwill 1,896 1,646 1,521
Deposits 598 598 598
-------- -------- ---------
Total other assets 35,094 74,091 85,443
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ -- $ 61,000
Accounts payable 21,630 13,621 172,548
Accrued expenses 36,332 33,629 29,947
Unearned revenue 106,925 108,327 71,997
Other current liabilities 15,052 14,501 14,501
-------- -------- ---------
Total current liabilities 179,939 170,078 349,993
COMMITMENTS -- -- --
SHAREHOLDERS' EQUITY
Common stock at aggregate cost, no par value;
10,000,000 shares authorized; 1,000,000 shares issued
at December 31, 1995, 1,060,000 at December 31, 1996
and 1,135,000 at June 30, 1997 36,196 89,196 208,846
Preferred stock, 100,000 shares authorized,
no shares issued or outstanding -- -- --
Additional paid-in capital -- 36,168 36,168
Retained earnings (deficit) 101,499 20,412 (130,526)
-------- -------- ---------
Total shareholders' equity 137,695 145,776 114,488
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 57
Dayton General Systems, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Systems and related software sales $ 283,943 $ 269,214 $ 152,106 $ 107,088
Service revenue 515,721 545,415 271,422 283,113
----------- ----------- ----------- ---------
799,664 814,629 423,528 390,201
Cost of revenues 274,735 268,631 127,570 129,225
----------- ----------- ----------- ---------
Gross margin 524,929 545,998 295,958 260,976
Operating expenses:
Selling, general and administrative 431,533 492,796 231,170 386,475
Research and development 86,761 41,179 21,216 25,242
----------- ----------- ----------- ---------
518,294 533,975 252,386 411,717
Income (loss) from operations 6,635 12,023 43,572 (150,741)
Other income (expense):
Interest income 3,549 2,853 818 201
Miscellaneous income 4,136 1,127 701 197
Interest expense (5,328) (1,702) (95) (595)
----------- ----------- ----------- ---------
2,357 2,278 1,424 (197)
----------- ----------- ----------- ---------
Income (loss) before income taxes 8,992 14,301 44,996 (150,938)
Income taxes -- -- -- --
----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 8,992 $ 14,301 $ 44,996 $(150,938)
=========== =========== =========== =========
Weighted average common shares
outstanding 1,374,615
=========
Net loss per common share $ (.11)
=========
Pro forma:
Historical income before income taxes $ 8,992 $ 14,301 $ 44,996
Pro forma income taxes 2,000 3,000 9,000
----------- ----------- -----------
Pro forma net income $ 6,992 $ 11,301 $ 35,996
=========== =========== ===========
Weighted average common shares
outstanding 1,344,569 1,345,895 1,344,569
=========== =========== ===========
Pro forma net income per common share $ .01 $ .01 $ .03
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 58
Dayton General Systems, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Additional Retained Total
Common paid-in earnings shareholders'
stock capital (deficit) equity
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 36,196 $ -- $ 132,507 $ 168,703
Net income -- -- 8,992 8,992
S-Corporation cash distributions -- -- (40,000) (40,000)
-------- ------- --------- ---------
Balance at December 31, 1995 36,196 -- 101,499 137,695
Issuance of common stock 53,000 -- -- 53,000
Net income -- -- 14,301 14,301
S-Corporation cash distributions -- -- (59,220) (59,220)
Constructive distribution and contribution
of undistributed S-Corporation earnings -- 36,168 (36,168) --
-------- ------- --------- ---------
Balance at December 31, 1996 89,196 36,168 20,412 145,776
Issuance of common stock, net of
offering costs (unaudited) 119,650 -- -- 119,650
Net loss (unaudited) -- -- (150,938) (150,938)
-------- ------- --------- ---------
Balance at June 30, 1997 (unaudited) $208,846 $36,168 $(130,526) $ 114,488
======== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 59
DAYTON GENERAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation on property and equipment 10,843 9,849 4,332 4,500
Amortization of intangible assets 12,750 12,750 6,375 10,036
Loss on disposition of property and equipment 205 205 -
Changes in assets and liabilities:
Accounts receivable 125,908 51,072 (27,194) (14,031)
Inventories (8,054) (19,172) (37,855) 1,163
Prepaid expenses (648) (1,104) - (6,800)
Accounts payable (18,771) (8,009) (7,248) 86,166
Accrued expenses 2,102 (2,703) (4,255) (3,682)
Unearned revenue 15,750 1,402 (31,628) (36,330)
Other current liabilities - (551) - -
--------- -------- -------- ---------
Net cash provided by (used in) operating activities 149,077 58,040 (52,477) (109,916)
Cash flows from investing activities:
Purchases of property and equipment (4,771) (8,791) (4,899) (2,050)
Capitalization of software development expenditures - (51,747) (21,635) (21,388)
--------- -------- -------- ---------
Net cash used in investing activities (4,771) (60,538) (26,534) (23,438)
Cash flows from financing activities:
Net borrowings under line of credit - - 53,500 61,000
Payments on long-term debt (65,000) - - -
Proceeds from issuance of common stock - 53,000 - 131,250
Stock issuance costs - (20,788) (1,712) (68,469)
Distributions (40,000) (59,220) (19,220) -
--------- -------- -------- ---------
Net cash provided by (used in) financing activities (105,000) (27,008) 32,568 123,781
Net increase (decrease) in cash and cash equivalents 39,306 (29,506) (46,443) (9,573)
Cash and cash equivalents at beginning of period 14,680 53,986 53,986 24,480
--------- -------- -------- ---------
Cash and cash equivalents at end of period $ 53,986 $ 24,480 $ 7,543 $ 14,907
========= ======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,328 $1,702 $ 60 $ 595
========= ======== ======== =========
Local income taxes $ 1,600 $1,104 $ - $ -
========= ======== ======== =========
Supplemental disclosure of non-cash financing activities:
Stock issuance costs included in accounts payable $ - $ - $ - $ 72,761
========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 60
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
1. Business
Dayton General Systems, Inc. (the "Company") was formed on March 5, 1993,
and has been primarily in the business of designing, building, installing
and servicing computerized building automation systems for use in
non-residential buildings, wastewater treatment plants and educational
institutions. The Company's systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other electrical/mechanical functions.
Although the Company plans to continue servicing its in-place building
automation systems, it has recently changed its business focus to becoming a
software technology solution provider to the building control and automation
industry marketplace through recently commercialized software products that
simplify, enhance and accelerate the design of intelligent open control
networks. The Company's administrative and main production facilities are
located near Dayton, Ohio.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company's
exposure to credit risk for accounts receivable is impacted by the economic
climate affecting its industry and its customer base, which is primarily in
Ohio and Pennsylvania. The Company manages this risk by performing ongoing
credit evaluations of its customers. The Company has not experienced
significant credit losses and no reserve for its accounts receivables is
considered necessary.
4. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. Inventories
The Company values its inventories at the lower of cost (determined using
the first-in, first-out method) or market.
F-7
<PAGE> 61
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated service lives of the assets,
which are principally five years.
7. Capitalized Software Costs
Software development costs are expensed as research and development until
technological feasibility of the software product has been established.
After technological feasibility has been established, the Company
capitalizes all costs incurred for software development in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs are amortized on a product-by-product basis using
the straight-line method over the estimated product life and amortization
begins when the software product is available for general release to
customers. Amortization expense was $0 for the year ended December 31, 1996,
and $7,811 for the six months ended June 30, 1997.
8. Noncompete Covenant and Goodwill
The noncompete covenant and goodwill result from the acquisition of assets
which began the Company on March 5, 1993. The noncompete covenant is being
amortized on a straight-line basis over the term of the covenant, which is
four years. The goodwill is being amortized on a straight-line basis over
ten years.
Amortization expense for these assets was $12,750 for each of the years
ended December 31, 1995 and 1996. Amortization expense was $6,375 and $2,225
for the six months ended June 30, 1996 and 1997, respectively. Accumulated
amortization as of December 31, 1995 and 1996 for the noncompete covenant
was $35,400 and $47,900, respectively, and $700 and $950, respectively, for
goodwill. Accumulated amortization as of June 30, 1997 was $50,000 for the
noncompete covenant and $1,075 for goodwill.
9. Revenue Recognition and Cost of Revenues
The Company recognizes revenue for systems and related software sales upon
product shipment.
The Company recognizes service revenue when the service is completed or, for
annual service contracts, the revenue is recognized ratably over the period
of the contract. Cash payments received in advance of revenue recognition
are recorded as unearned revenue.
Cost of revenues includes the direct material, labor and overhead costs
necessary to generate the revenues. Indirect costs are recorded as general
and administrative expenses.
F-8
<PAGE> 62
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Income Taxes
Upon inception, the Company with the consent of its shareholders, elected
under the Internal Revenue Code to be taxed as an S-Corporation. Effective
December 20, 1996, the Company terminated its S-Corporation election and
became a C-Corporation for income tax purposes. Accordingly, prior to
December 20, 1996, federal and state income taxes on the income of the
Company were paid by the shareholders and, therefore, no provision for such
taxes has been made in the accompanying financial statements during 1995 or
1996. Federal and state income taxes for the period from December 20, 1996
to December 31, 1996 were not material. Local income taxes are recorded as
administrative expenses.
Had the Company been subject to tax at the corporate level, the federal and
state income tax provision would have been approximately $2,000 and $3,000
for the years ended December 31, 1995 and 1996, respectively, and $9,000 for
the six months ended June 30, 1996.
The net deferred tax liability arising from the Company's conversion from an
S-Corporation to a C-Corporation on December 20, 1996 was not material at
December 31, 1996. Deferred income taxes are provided for temporary
differences between the tax basis and reported amount of assets and
liabilities.
11. Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates fair
value.
12. Earnings Per Share
Pro forma earnings (loss) per share are based on the weighted average number
of common shares outstanding for the periods presented. Weighted average
number of common shares is computed giving retroactive recognition for the
stock split in November 1996 (Note F) and the reincorporation and merger
(Note P), and includes adjustments to all periods presented for the effect
of recently issued shares of common stock for consideration below the
anticipated initial public offering (IPO) price and for outstanding options
and warrants with exercise prices below the anticipated IPO price using the
treasury stock method. The share effect for these issuances is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Weighted average shares outstanding 1,000,000 1,006,795 1,000,000 1,114,702
Effect of issuances below
IPO price 344,569 339,100 344,569 259,913
---------- ---------- ---------- ----------
Weighted average common shares 1,344,569 1,345,895 1,344,569 1,374,615
========= ========= ========= =========
</TABLE>
F-9
<PAGE> 63
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Earnings Per Share (continued)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 requires the presentation of basic earnings per share and diluted
earnings per share, instead of primary and fully diluted earnings per share.
The Company will implement this statement in the fourth quarter 1997. The
effect of adopting SFAS No. 128 has not been determined.
13. Stock-Based Compensation
The provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" are
effective for the Company in 1997. This recent standard requires that
employee stock-based compensation either continue to be determined under
Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock
Issued to Employees" or in accordance with the provisions of SFAS No. 123,
whereby compensation expense is recognized based on the fair value of
stock-based awards on the grant date. The Company accounts for such awards
under the provisions of APB No. 25 and, accordingly, no compensation cost
has been recognized for the stock awards. The Company has made the required
additional disclosures under SFAS No. 123 for 1997 (Note L).
14. Segment Reporting
The Company operates in a single business segment. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 requires
public enterprises to report certain information about operating segments,
products and services, customers and geographic areas in which they operate.
SFAS No. 131 supersedes existing pronouncements requiring segment reporting
and is effective for the Company beginning fiscal 1998. The Company has not
yet determined whether this statement will have any impact on its financial
reporting requirements.
15. Interim Financial Statements
The financial statements as of June 30, 1997, and for the six months ended
June 30, 1996 and 1997 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations have
been made. The results of operations for the six months ended June 30, 1996
and 1997 are not necessarily indicative of annualized results which may be
expected for an entire fiscal year.
F-10
<PAGE> 64
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE B - NOTE RECEIVABLE - SHAREHOLDER
The Company had an $18,000 note receivable from its majority shareholder
due October 31, 1997. During October 1997, the note was extended until
October 31, 1998. Interest accrues at 8.5% and is payable monthly. The
note is unsecured.
NOTE C - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
Parts and components $44,458 $54,716 $ 66,477
Finished parts 25,727 31,600 27,157
Projects in progress 23,302 26,343 17,862
------ -------- --------
$93,487 $112,659 $111,496
====== ======= =======
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
Computer and office equipment $48,809 $56,571 $58,669
Vehicles 1,928 1,928 -
------- ------- -------
50,737 58,499 58,669
Less accumulated depreciation 24,773 33,798 36,418
------ ------ ------
Net property, plant and equipment $25,964 $24,701 $22,251
====== ====== ======
</TABLE>
NOTE E - LINE OF CREDIT
The Company maintains a line of credit with a bank of $75,000. The line of
credit bears interest at the bank's prime rate plus .75%. Borrowings
outstanding under the line were $61,000 at June 30, 1997. There were no
borrowings under this line at December 31, 1995 or 1996. Amounts borrowed
on the line of credit are due on demand and are guaranteed by the majority
shareholder. The line of credit is secured by cash, accounts receivable,
inventories and equipment.
F-11
<PAGE> 65
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE F - COMMON STOCK
During November 1996, the board of directors and shareholders authorized an
amendment of the Company's articles of incorporation to increase the number
of authorized shares of common stock to enable the Company to implement its
plan of recapitalization. This plan has four components.
- - The Company split its stock 10-to-1 effective November 11, 1996.
- - The shareholders authorized the Company to reserve 1,600,000 of the newly
authorized shares for future use in a stock option plan (Note L) and for
common stock warrants for certain individuals and investors.
- - The Company will make a private placement offering of up to 285,000 shares
of common stock at $1.75 per share.
- - The Company expects to offer additional shares to the general public in an
initial public offering (Note P).
On November 15, 1996, the Company, under its stock warrant program, issued
common stock warrants to two existing shareholders. No consideration was
paid for the warrants since the exercise price exceeded the fair value of
the underlying stock on the date of grant. The warrants give the two
shareholders the right to purchase 50,000 shares of the Company's common
stock at a price of $.90 per share at any time prior to November 15, 2003.
As of December 31, 1996 and June 30, 1997, the Company has deferred $20,788
and $150,418, respectively, in costs related to the private offering and
the IPO. During the six months ended June 30, 1997, the Company raised
$131,250 from the private offering through the sale of 75,000 shares of
common stock, of which $11,600 in offering costs were offset against these
proceeds. Of the $150,418 of deferred stock issuance costs recorded at June
30, 1997, $123,901 relates to the IPO. If the IPO is successful, these
costs will be offset against the IPO proceeds. If the IPO is not
successful, these costs will be immediately expensed. The remaining $26,517
of deferred stock issuance costs at June 30, 1997 relate to the private
offering which generated additional proceeds in July 1997 (Note O).
NOTE G - RETAINED EARNINGS
As discussed in Note A-10, the Company terminated its S-Corporation
election effective December 20, 1996. Undistributed taxable earnings as of
that date have been included in the financial statements as additional
paid-in capital. This assumes a constructive distribution to the owners
followed by a contribution to the capital of the Company. Earnings for the
period from December 20, 1996 to December 31, 1996 were not material.
F-12
<PAGE> 66
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE H - INCOME TAXES
The following is a reconciliation between the statutory federal income tax
rate and the amount recognized in the financial statements for the six
months ended June 30, 1997.
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Computed credit for federal income
taxes at the statutory rate $(22,641)
Valuation allowance 22,563
Permanent differences 78
---------
Total $ -
=========
</TABLE>
At June 30, 1997, the net deferred tax components consisted of the
following:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax depreciation over book depreciation $ 2,100
Capitalized software costs 9,800
-------
11,900
-------
Deferred tax assets:
Inventory 1,200
Intangible assets 5,382
Net operating loss carryforward 27,881
-------
34,463
Valuation allowance (22,563)
-------
11,900
-------
Net deferred tax components $ -
=======
</TABLE>
The federal tax net operating loss carryforward of approximately $185,000
expires in 2012. The valuation allowance is required due to the uncertainty
of realizing the net deferred tax asset through future operations.
F-13
<PAGE> 67
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE I - PROFIT-SHARING PLAN
Prior to October 10, 1997, the Company maintained a profit-sharing plan
covering all employees. On October 10, 1997, the Plan was terminated. No
contributions were made for the years ended December 31, 1995 or 1996, or
for the six months ended June 30, 1996 and 1997.
NOTE J - MAJOR CUSTOMERS
Two customers accounted for 39% and 26% of total revenues during the year
ended December 31, 1995, and 47% and 12% of total revenues during the year
ended December 31, 1996. The same two customers accounted for 38% and 14%
of total revenues during the six months ended June 30, 1997, and 48% and
12% of total revenues during the six months ended June 30, 1996. One
additional customer accounted for 10% of total revenues for the year ended
December 31, 1995.
NOTE K - COMMITMENTS
Leases
The Company has noncancelable operating lease agreements for certain
equipment and its office facilities. Certain of the leases have renewal
options for varying lengths of time. The Company incurred $59,708 and
$58,347 in rent expense under operating lease agreements for the years
ended December 31, 1995 and 1996, respectively. The Company incurred
$30,669 and $25,025 in rent expense for the six months ended June 30, 1996
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $51,600 in 1997, $21,500 in 1998, $10,300 in 1999 and $3,700
in 2000.
F-14
<PAGE> 68
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE K - COMMITMENTS (continued)
License Agreement
In January 1994, the Company entered into an agreement to license certain
computer software programs from Echelon Corporation. Under the terms of the
agreement, the Company pays one-time license fees for each of the software
programs it licenses. In 1994, the Company incurred a license fee of $9,450
which was added to the payments under an operating lease for certain
equipment leased from Echelon Corporation and is being expensed over a
three-year period. During 1996, the Company licensed two additional
software programs totaling $6,745 which are being used in product
development and are included in capitalized software costs.
The license agreement also requires the Company to pay royalties to Echelon
Corporation for each copy of an executable file of the software that is
distributed by the Company. The royalties range from $18 to $800 per
executable file distributed. Royalty expense under the agreement was $0 and
$5,720 for the years ended December 31, 1995 and 1996, respectively.
Royalty expense for the six months ended June 30, 1996 and 1997 was $2,400
and $6,206, respectively.
Consulting Agreement
In November 1996, the Company entered into an agreement with a consulting
firm which provided for six monthly payments of $5,000 beginning December
1996 for corporate development services, including capital formation
services and commerce development. In the event that an equity transaction
occurs within twenty-four months of the date of the agreement with a party
introduced by this firm, the Company is required to pay a fee ranging from
3% to 5% of the total value of the transaction. In the event a commercial
sales transaction attributable to the consulting firm's efforts occurs
within twenty-four months of the date of the agreement, the Company is
required to pay a commission of 10% of the gross revenues resulting from
the commercial sales transaction for a two year period from the date of the
transaction. No such fees or commissions were incurred under this agreement
as of June 30, 1997.
F-15
<PAGE> 69
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE L - STOCK OPTION PLAN
Effective June 1, 1997, the Company adopted a stock option plan covering
certain employees, directors and advisors. The number of shares issuable
under the plan is 300,000. Stock options granted under the plan enable the
holder to purchase common stock at an exercise price not less than the
market value on the date of grant in the case of an incentive stock option,
and not less than 85% of the market value on the date of the grant in the
case of a non-qualified option. To the extent not exercised, options will
expire not more than ten years after the date of grant. The applicable
options vest immediately or ratably over a three year period. A summary of
the changes in the options outstanding during 1997 is set forth below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding at December 31, 1996 - -
Granted 125,000 $1.82
------- -----
Outstanding at June 30, 1997 125,000 $1.82
======= ====
Exercisable (vested) options at June 30, 1997 85,000 $1.86
======== ====
</TABLE>
The following summarizes options outstanding and exercisable at June 30,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$1.75 to $1.93 125,000 7.92 $1.82 85,000 $1.86
</TABLE>
The weighted average fair value at date of grant for options granted during
1997 was $0.13. The fair value of options at the date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
Expected life (years) 2
Interest rate 6%
Volatility 1%
Dividend yield 0%
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and loss per
share for the six months ended June 30, 1997 would have been increased by
approximately $9,000 and $.01, respectively. The initial application of
SFAS No. 123 for pro forma disclosure may not be representative of the
future effects of applying this statement.
Subsequent to June 30, 1997, immediately exercisable options to purchase a
total of 50,000 shares were granted under the plan to an officer and a
director. Additionally, options for a total of 75,000 shares will be
granted to an officer and a director upon or after the completion of the
IPO.
F-16
<PAGE> 70
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE M - RELATED PARTY TRANSACTIONS
During 1997, the Company was provided financial advisory services in the
amount of $75,000 from a corporate shareholder of the Company. The Company
expensed $50,000 of this amount during the six months ended June 30, 1997
and deferred $25,000 as stock issuance costs. The entire amount is included
in accounts payable at June 30, 1997. During September 1997, this payable
was converted into an 8.5% term note, payable in six quarterly principal
and interest installments of $13,171, beginning September 15, 1997.
However, the note must be redeemed in full by the Company upon the
successful completion of the proposed initial public offering.
NOTE N - PRO FORMA DATA (UNAUDITED)
As discussed in Note A-10, the Company was an S-Corporation prior to
December 20, 1996. Accordingly, federal and state income taxes prior to
this date have not been reflected in the accompanying financial statements.
Effective December 20, 1996, the Company terminated its S-Corporation
election and became a regular C-Corporation for income tax purposes.
Therefore, pro forma amounts have been provided for federal and state
income taxes at an effective rate of approximately 20%.
NOTE O - SUBSEQUENT EVENTS
In July 1997, the Company raised an additional $256,000 from its private
placement of 146,286 shares of common stock. Deferred stock issuance costs
of $26,517 at June 30, 1997 were offset against these proceeds.
Additionally, the Company paid the underwriter it is using for its proposed
initial public offering a commission of $23,150 for selling 132,286 shares
of this common stock. The underwriter was also awarded warrants to purchase
13,229 shares of the Company's common stock at $4.95 per share at any time
prior to July 25, 2002.
NOTE P - PROPOSED INITIAL PUBLIC OFFERING, REORGANIZATION AND MERGER
On August 14, 1997, the Company filed a Registration Statement on Form SB-2
with the Securities and Exchange Commission for an offering of its common
stock. The Company was incorporated in Pennsylvania in July 1997 by DGS,
Inc. ("Ohio Dayton General"), an Ohio Corporation. The Company has
authorized 10,000,000 common shares with no par value.
On October 9, 1997, Ohio Dayton General was merged with and into the
Company and the Company is the surviving company. Each outstanding share of
Ohio Dayton General was converted into 1,000 shares of common stock of the
Company.
The Board of Directors is authorized to issue one or more series of
preferred stock. The Board, without shareholder approval, may determine
voting, conversion and other rights. Under the certificate of
incorporation, the Board of Directors has authorized 100,000 shares of
preferred stock.
The financial statements have been restated to reflect the reincorporation
and merger.
F-17
<PAGE> 71
MANAGEMENT'S FORECAST OF FUTURE OPERATING RESULTS
Assuming the completion of the Offering at the minimum level, the forecasts set
forth in the table below (the "Forecasts") are the Company's unaudited estimates
based upon its recently formulated operating plans and currently available
marketplace information. In the process of estimating future annual revenue and
income in the table set forth below, the Company was unable to consider
assumptions and factors such as the impact of changing industry competitive
conditions, unanticipated technological announcements, changing general economic
conditions and the potential effect of any business combinations or
acquisitions. Additionally, the estimated amount and timing of revenue from
VisualControl software sales could be materially influenced by numerous other
micro-economic and specific factors related to the product. These factors
include but are not limited to: (i) the success or lack thereof of the Company's
sales, marketing and distribution efforts, (ii) an unanticipated increase in the
time between initial sales solicitation of a prospective customer and revenue
recognition (the "sales cycle"), and (iii) unanticipated price discounting for
large volume unit sales ("large volume pricing").
See "Risk Factors" and "Business Strategy".
The Forecasts should not be regarded as a representation by the Company or any
other person (including the Underwriter) that the results set forth in the
Forecasts will be achieved. The Forecasts were not prepared with a view toward
compliance with published guidelines of the American Institute of Certified
Public Accountants, or any other regulatory or professional agency or body of
generally accepted accounting principles. Moreover, Grant Thornton LLP, the
Company's independent certified public accountants, has not compiled or examined
the Forecasts; accordingly, they do not express an opinion or any other form of
assurance with respect to the Forecasts and assume no responsibility for and
disclaim any association with the Forecasts. No other independent expert has
reviewed the Forecasts. In light of the foregoing, prospective investors in the
Offering are cautioned not to place undue reliance on the Forecasts.
The Company does not intend to update or otherwise revise the Forecasts to
reflect events or circumstances existing or arising after the date of this
Prospectus or to reflect the occurrence of unanticipated events.
S-1
<PAGE> 72
Management's forecasted operating results in the two years following the
completion of the Offering at the minimum level are as follows:
<TABLE>
<CAPTION>
Year 1 Year 2
------ ------
<S> <C> <C>
Revenues $ 2,278,200 $ 4,900,500
Cost of revenues (853,000) (938,000)
----------- -----------
Gross profit 1,425,200 3,962,500
Operating expenses (2,437,000) (3,003,900)
----------- -----------
Income (loss) from operations (1,011,800) 958,600
Interest and other income 156,540 165,000
----------- -----------
Income (loss) before taxes (855,260) 1,123,600
Income taxes -- --
----------- -----------
Net income (loss) $ (855,260) $ 1,123,600
=========== ===========
Earnings (loss) per share $ (.36) $ .44
=========== ===========
</TABLE>
The Forecasts are primarily based on a combination of the following factors and
assumptions. As noted above, the Company was unable to consider assumptions and
factors such as the impact of changing industry competitive conditions,
unanticipated technological announcements, changing general economic conditions
and the potential effect of any business combinations or acquisitions.
Revenues
VisualControl Products
The Company obtained quantitative and qualitative marketplace information from
independent industry analysts, major industry participants that manufacture
related products, and professional publications to create a model that estimates
the size of marketplace for its VisualControl software products in terms of
units. The model was built by first defining the existing marketplace segments
the Company's products will penetrate and then determining the number of units
of the Company's products each segment represents. A growth rate was applied to
the identified marketplace segments as follows:
(i) an estimated growth rate in the current installed LonWorks original
equipment manufacturer (OEM) base of 11.96% per year was used. Currently there
are approximately 3,500 OEMs that use LonWorks to develop control products.
Echelon Corporation estimates this number will increase to approximately 5,500
at the end of the Year 2000.
(ii) an estimated growth rate in the number of existing distributed
control network devices of 77.31% per year was used. Currently there are
2,000,000 LonWorks control network devices or chips installed. Motorola Inc., a
major manufacturer and distributor of Neuron C chips, has
S-2
<PAGE> 73
estimated that 20,000,000 devices or chips will be installed in LonWorks
networks by the end of the Year 2000.
The Company then estimated its expected market share within the identified
marketplace segments as follows:
(i) estimates of the percentage shares of the identifiable marketplace
segments are 1.25% of the OEM segment, .025% of the building control segment,
2.5% of the SI market segment, 2.5% of the industrial automation segment and
2.5% of the process control segment. For the purposes of forecasting
VisualControl product sales, the Company's weighted percentage share of
identifiable marketplace total revenue was estimated to be approximately 0.7%.
Upon completion of this marketplace model, the Company reviewed its pending and
existing agreements and conducted interviews with existing and potential
customers regarding future orders. Based on these interviews, a range of
expected unit sales were then compared to the marketplace model described above.
Given the results of the above analyses, the Company expects to sell
approximately 4,100 units of its existing VisualControl software products over
the two-year forecast period. The Company assumes no new products will be sold
during the forecast period and the selling prices of existing products are
discounted for volume and life cycle.
The resulting period-to-period forecasted revenue increases are primarily due to
the method by which the Company forecasted the expected sale of its
VisualControl software products. For example, if a prospective customer was
interested in purchasing 35 units over a two-year period, the Forecasts assume 7
units will be delivered in Year 1 and 28 units in Year 2.
Building Control Products
Revenues from the Company's established building control products are expected
to remain substantially consistent with historical revenues during the two-year
forecast period.
Cost of Revenues and Operating Expenses
These expense estimates are derived from the Company's budgeted cost of
revenues, sales and marketing, R&D and other operating expense categories. Cost
of revenues is based on estimated actual costs using historical cost
information.
Sales and marketing and R&D expenses included in operating expenses are
primarily based upon a percentage of revenues and comprise 62% and 67% of total
operating expenses in Year 1 and Year 2, respectively. Administrative payroll
and payroll taxes included in operating expenses are estimated using expected
number of employees and salary rates, and comprise approximately 11% of total
operating expenses each year.
S-3
<PAGE> 74
As sales of VisualControl software products, with much higher gross profit
margin relative to the existing business, become the major component of total
sales, overall margins are effected accordingly (as is evidenced greatly in
moving from Year 1 to Year 2). The largest expense increases in Year 2 are in
sales and marketing and R&D. This relates to establishing new departments and
the associated staffing, promotions, and product development costs.
Income Taxes
No income taxes for Year 1 or Year 2 are forecasted since in Year 1 a loss is
forecasted, and in Year 2 there will exist enough net operating loss
carryforwards from the forecasted 1997 operating loss and the loss forecasted in
Year 1 following the Offering to offset the provision for income taxes.
Earnings (Loss) Per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share are computed using the
expected weighted average number of outstanding common and dilutive common
equivalent shares outstanding. Options and warrants with exercise prices greater
than $5.00 per share are assumed to have no dilutive effect. An additional
75,000 and 50,000 options are expected to be granted during Year 1 and Year 2,
respectively, while no options are assumed to be exercised during the periods.
Fully diluted earnings per share have not been presented because the differences
are insignificant. Expected weighted average number of shares outstanding for
Year 1 are 2,381,286 and 2,548,726 for Year 2.
Significant Changes in Financial Position
Upon the completion of the Offering at the minimum level, the Company's cash and
cash equivalents are expected to be approximately $4.6 million. Cash and cash
equivalents are expected to be approximately $3.5 million by the end of Year 1,
and $4.3 million by the end of Year 2. Accounts receivable are expected to
increase annually by approximately $200,000 following the completion of the
Offering, and property and equipment is expected to increase annually by
approximately $100,000. All other balance sheet items are not expected to change
significantly. No additional capital is expected to be raised during Year 1 and
Year 2.
The estimates underlying the Forecasts are based on forecasting models developed
by the Company using both public and proprietary information available to the
Company. No assurance can be given that the Company's revenue and income (loss)
estimates will materialize or that, if revenue and income occur at all, the
Forecasts will prove to be correct.
S-4
<PAGE> 75
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, ON BEHALF OF THE COMPANY OR THE SELLING SHAREHOLDERS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE HEREBY,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO
ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. 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.
________________
TABLE OF CONTENTS
Page
Prospectus Summary..................................... 4
Risk Factors........................................... 10
History of the Company................................. 16
Use of Proceeds........................................ 17
Dividend Policy........................................ 17
Capitalization......................................... 18
Dilution............................................... 19
Selected Financial Data................................ 21
Management's Discussion and Analysis or
Plan of Operation............................... 22
Business............................................... 27
Management............................................. 39
Certain Transactions................................... 42
Holdings of Management and
Principal Shareholders.......................... 42
Selling Shareholders................................... 43
Description of Securities.............................. 44
Certain Federal Tax Considerations..................... 47
Shares Eligible for Future Sale........................ 47
Underwriting........................................... 48
Legal Matters.......................................... 50
Experts................................................ 50
Available Information.................................. 50
Index to Financial Statements.......................... F-1
Management's Forecast of Future Operating Results...... S-1
____________________
UNTIL __________, 1997 (____ DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
900,000 Units
DAYTON
GENERAL
SYSTEMS, INC.
PROSPECTUS
, 1997
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Articles of Incorporation authorize the registrant to
indemnify the directors of the registrant to the fullest extent permitted by
Pennsylvania Business Corporation Law (the PBCL). The registrant's By-Laws limit
the liability of directors of the registrant to the registrant or its
shareholders to the fullest extent permitted by PBCL. Pursuant to terms of the
PBCL presently in effect, the registrant's directors are not liable to the
registrant or its shareholders for monetary damages for any action unless: (i)
the director has breached or failed to perform the duties of his office under
the PBCL, and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The registrant's By-Laws also provide that the registrant shall
indemnify each of its directors and officers from liability arising from acting
as an authorized representative of the registrant, so long as such person acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the registrant. Such indemnification may be made
only upon a determination by the Board of Directors, or a court of competent
jurisdiction, that indemnification is proper in the circumstances because the
person indemnified has met the applicable standard of conduct to permit
indemnification under the law.
The registrant intends to maintain director and officer liability
insurance which provides coverage against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable by the registrant (other than underwriting
commissions and a non-accountable expense allowance of between $165,000
(minimum) and $264,600 (maximum) to be paid to the Underwriter by the
registrant, and $5,400 (maximum) to be paid to the Underwriter by the Selling
Shareholders) are estimated to be as follows:
<TABLE>
<S> <C>
SEC registration fee................................................... $5,771
NASD fee................................................................ 2,404
Nasdaq Stock Market listing fee........................................ 9,000
Printing costs.......................................................... 16,000
Legal fees.............................................................. 70,000
Accounting fees......................................................... 50,000
Financial advisory fees................................................. 10,000
Transfer agent fees..................................................... 2,000
Blue sky fees and expenses............................................. 25,000
Premium on directors and officers liability insurance................... 21,000
Miscellaneous........................................................... 39,000
------
$250,175
========
</TABLE>
Of the foregoing expenses, the Selling Shareholders will pay an amount
proportionate to the number of shares sold by them. All of the amounts listed
are estimates except the SEC and NASD fees.
II-1
<PAGE> 77
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since November 1, 1994, the registrant (including its predecessor Ohio
corporation) has made the following sales of unregistered securities (all share
amounts give effect to the 1000:1 split of the registrant's Common Stock
resulting from the registrant's re-incorporation in Pennsylvania):
On March 15, 1996, for nominal consideration, the registrant issued a
warrant to Church Street Financial Corporation to purchase 20,000 shares of
Common Stock for $.65 per share. On December 19, 1996 the warrant was exercised
and the registrant issued 20,000 shares of Common Stock to Church Street
Financial Corporation in exchange for $13,000. Both issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipient acquired the securities for its own account
and not with a view to distribution.
On November 5, 1996 the registrant issued 40,000 shares of Common Stock
to Sterling Trust Company (for the benefit of William Winkler) in exchange for
$40,000. The issuance was exempt pursuant to Section 4(2) of the Securities Act
as a transaction not involving a public offering, as the recipient acquired the
securities for its own account and not with a view to distribution.
On November 15, 1996, for nominal consideration, the registrant issued
warrants, exercisable until November 15, 2003, to Church Street Financial
Corporation and James E. Cogan to purchase 26,000 and 24,000 shares of Common
Stock, respectively, for $.90 per share. Both such issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipients acquired the securities for their own
accounts and not with a view to distribution.
Between January 23, 1997 and July 21, 1997, the registrant issued an
aggregate of 221,286 shares of Common Stock to twenty-two different persons in
exchange for an aggregate of $387,250 (the "Private Placement"). The Underwriter
assisted the Company in placing a portion of these shares for which it received
a commission of $23,150 and a warrant, exercisable through July 25, 2002, to
purchase 13,229 shares of Common Stock for $4.95 per share. Shares issued in
connection with the Private Placement were exempt pursuant to Rule 504 of
Regulation D of the Securities Act.
ITEM 27. EXHIBITS.
The list of exhibits is set forth beginning on page E-1 of this
registration statement and is incorporated herein by reference. Exhibit Numbers
correspond to those of Regulation S-B, Item 601.
ITEM 28. UNDERTAKINGS.
*(a) The small business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement. Notwithstanding the
foregoing, any increase or
II-2
<PAGE> 78
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 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
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining 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.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
*(d) The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
*(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
*(f) The small business issuer 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 small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(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 the offering of the securities at that time as the initial bona fide
offering of those securities.
- --------------
*Paragraph references correspond to those of Regulation S-B, Item 512.
II-3
<PAGE> 79
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 amendment to
registration statement to be signed on its behalf by the undersigned, in the
City of Dayton, State of Ohio, as of the 5th day of November, 1997.
DAYTON GENERAL SYSTEMS, INC.
By: /s/ Thomas C. Haas
-------------------------------------
Thomas C. Haas
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities indicated as of the 5th day of November, 1997.
Signatures Title
---------- -----
/s/ Thomas C. Haas Chairman of the Board, President and Chief
- ---------------------- Executive Officer (Principal Executive, Accounting
Thomas C. Haas and Financial Officer)
/s/ Edward T. Hurd Director
- ----------------------
Edward T. Hurd
/s/ William R. Winkler Director
- ----------------------
William R. Winkler
II-4
<PAGE> 80
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
1.1 Amended and restated form of Underwriting Agreement
1.2 Revised form of Underwriter's Warrant
3.1 Articles of Incorporation*
3.2 By-Laws, as amended
4.1 Form of Warrant issuable as part of Units sold in Offering
4.2 Form of Unit Certificate
5 Opinion of Taft, Stettinius & Hollister
10.1 OEM License Agreement between Echelon Corporation and the
Registrant dated May 26, 1995*
10.2 Software License Agreement between Echelon Corporation and the
Registrant dated December 27, 1993*
10.3 Sales Agreement between Echelon Corporation and the Registrant
dated November 30, 1993*
10.4 Master Lease Agreement between Echelon Corporation and the
Registrant dated November 30, 1993*
10.5 1997 Stock Option Plan*
23.1 Consent of Taft, Stettinius & Hollister (contained in Exhibit
5)
23.2 Consent of Grant Thornton LLP
24 Power of Attorney
27 Financial Data Schedules*
99.1 Form of Escrow Agreement between the Registrant and the
National Bank of Southern California, as Escrow Agent
99.2 Form of Warrant Agreement between the Registrant and The
Fifth Third Bank, as Warrant Agent
99.3 Form of Subscription Agreement
* Previously filed.
E-1
<PAGE> 1
EXHIBIT 1.1
900,000 Units
DAYTON GENERAL SYSTEMS, INC.
AMENDED AND RESTATED
UNDERWRITING AGREEMENT
J.V. Delaney & Associates
17 Muir Beach Circle
Corona del Mar, California 92625
Dear Sirs:
Dayton General Systems, Inc., a Pennsylvania corporation ("DGS" or the
"Company"), together with certain of its shareholders executing this Agreement
(the "Selling Shareholders"), propose to publicly offer and sell through J.V.
Delaney & Associates (the "Underwriter"), certain units (the "Units") at a
public offering price of $10.00 per Unit, with each Unit consisting of (i) two
shares of the Company's common stock, no par value ("Common Stock") and (ii) a
warrant to purchase one share of Common Stock from the Company at an exercise
price of $6.50 per share ("Offering Warrants"). The offering will consist of (a)
an initial 550,000 Units (the "Initial Units") to be provided by the Company and
to be offered for sale on a $5,500,000 minimum proceeds, "best efforts,
all-or-none" basis and (b) up to an additional 350,000 Units (the "Additional
Units") including up to 320,000 Units to be provided by the Company and up to
30,000 Units consisting of Common Stock to be provided by the Selling
Shareholders (in the individual amounts listed beside their names on the
signature pages hereto) and Offering Warrants to be provided by the Company,
which shall be offered for sale ratably by the Company and the Selling
Shareholders on a "best efforts" basis.
The Company and the Selling Shareholders wish to confirm as follows
their respective agreements with you in connection with the offering of Units
through the Underwriter:
1. OFFERING AND SALE OF THE UNITS.
1.1 AGENCY. The Company and the Selling Shareholders hereby
appoint the Underwriter as their exclusive agent for a period (the "Offering
Period") of 90 days from the Effective Date (as such term is defined in Section
3 below), which period may be extended for not more than an additional 90 days
upon the mutual written agreement of the Underwriter and the Company, to sell
the Initial Units on a "best efforts, all-or-none" basis and to sell the
Additional Units on a "best efforts" basis at an offering price of $10.00 per
Unit and the terms hereinafter set forth.
1.2 UNDERWRITER'S COMPENSATION.
<PAGE> 2
1.2.1 Investment Banking Fee. The Underwriter shall
be entitled to an investment banking fee equal to 2% of the public offering
price, or $.20 per Unit, payable on the Closing Date.
1.2.2 Commission. The Underwriter shall be entitled
to a commission equal to 8% of the public offering price, or $.80 per Unit,
payable at the relevant Closing Date(s).
1.2.3 Expense Allowance. The Company shall pay the
Underwriter as a nonaccountable expense allowance an amount equal to 3% of the
gross offering proceeds of the Initial Units and the Additional Units, if any,
payable on the Initial Closing Date less a credit of $___________ (the "Credit")
representing advances previously paid by the Company. In the event the offering
is not consummated for any reason (i) the Underwriter shall be entitled to be
reimbursed only for its actual accountable out-of-pocket expenses, and (ii) if
such actual accountable expenses are less than the amount of the Credit, the
excess of the Credit over such actual accountable expenses shall be returned to
the Company.
1.2.4 Warrant. The Company shall issue and deliver to
the Underwriter a warrant (the "Warrant") to purchase Units in an amount equal
to 8.07% of the number of Initial Units and Additional Units, if any, placed by
the Underwriter hereunder, such Warrant to be dated as of the Effective Date and
to be in the form appended hereto as Annex A. The Company represents and
warrants that the Warrant has been duly authorized and, when issued and
delivered in accordance with the terms hereof, will be a valid, binding and
enforceable obligation of the Company.
2. DELIVERY AND PAYMENT.
2.1 ESCROW PROCEDURES. The Underwriter and the Company shall
enter into an escrow agreement (the "Escrow Agreement") in substantially the
form appended hereto as Annex B with The National Bank of Southern California,
Newport Beach, California (the "Escrow Agent") pursuant to which the Underwriter
will deposit subscription funds it receives on behalf of the Company for Units
prior to the Closing Date with the Escrow Agent, to be released by the Escrow
Agent as provided in the Escrow Agreement. The Underwriter and/or any
broker/dealers which are members of the selling group shall transmit any checks
received from subscribers directly to the Escrow Agent by noon, California time,
of the next business day after receipt of such checks.
2.2 CLOSING DATE. Delivery by the Company and the Selling
Shareholders, if applicable, of the Units and the Additional Units, if any, and
the release of funds from escrow to the Company in same day funds to the Company
and to the Selling Shareholders, if applicable, shall take place at the offices
of the Underwriter's counsel, Dinsmore & Shohl LLP, 1900 Chemed Center,
Cincinnati, Ohio 45202, at 10:00 am. Eastern Time, on the third full business
day (the "Closing Date") following the date on which the Underwriter and the
Company notify the Escrow Agent to release the offering proceeds held by the
Escrow Agent, provided that the conditions to release specified in the Escrow
Agreement have then been satisfied.
2
<PAGE> 3
2.3 REGISTRATION AND AVAILABILITY OF CERTIFICATES.
Certificates representing the Units shall be registered in such names and shall
be in such denominations as the Underwriter shall request at least three full
business days before the Closing Date and shall be made available to the
purchasers of Units one full business day after the Closing Date.
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING.
3.1 REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared in conformity with the requirements of the Securities Act of 1933 (the
"Securities Act"), and the published rules and regulations adopted by the
Securities and Exchange Commission (the "Commission") thereunder (the "Rules"),
a registration statement on Form SB-2 (No. 333-33597), including a prospectus
subject to completion relating to the Units, and has filed with the Commission
the registration statement and such amendments thereof as have been required to
the date of this Agreement. Copies of such registration statement (including all
amendments thereof) and of the related prospectus subject to completion relating
to the Units have heretofore been delivered by the Company to you. The term
"Registration Statement" as used in this Agreement means such registration
statement (including all financial schedules and exhibits), as amended or
supplemented at the time it becomes effective, or, if it becomes effective prior
to the execution of this Agreement, as supplemented or amended prior to the
execution of this Agreement. If it is contemplated, at the time this Agreement
is executed, that a post-effective amendment to the Registration Statement will
be filed and must be declared effective before the offering of the Units may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by such post-effective amendment. The term
"Effective Date" as used in this Agreement means the time and date upon which
the Commission shall declare the Registration Statement to be effective. The
term "Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement. The Company will not file any amendment
of the Registration Statement or supplement to the Prospectus to which you shall
reasonably object in writing after being furnished with a copy thereof.
3.2 PUBLIC OFFERING. The Company understands that the
Underwriter proposes to make a public offering of the Units, as set forth in and
pursuant to the Prospectus, as soon after the Effective Date as the Underwriter
and the Company deem advisable. The Company hereby confirms that the Underwriter
has been authorized to distribute or cause to be distributed the Prospectus (as
from time to time amended or supplemented if the Company furnishes amendments
thereof or supplements thereto to the Underwriter).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Underwriter as follows:
4.1 COMPLIANCE OF REGISTRATION STATEMENT AND PROSPECTUS. The
Prospectus, at the time of filing thereof, contained all material statements
which were required to be stated
3
<PAGE> 4
therein in accordance with the Securities Act and the Rules, and conformed in
all material respects with the requirements of the Securities Act and the Rules,
and did not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Commission has not issued any order suspending or preventing the
use of Prospectus. When the Registration Statement shall become effective, when
the Prospectus is first filed pursuant to Rule 424(b) of the Rules, when any
post-effective amendment of the Registration Statement shall become effective,
when any supplement to or preeffective amendment of the Prospectus is filed with
the Commission and at the Closing Date, the Registration Statement and the
Prospectus (and any amendment thereof or supplement thereto) will comply with
the applicable provisions of the Securities Act and the Securities Exchange Act
of 1934 (the "Exchange Act"), and the respective rules and regulations of the
Commission thereunder, and neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will contain any
untrue statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representation or
warranty as to the information contained in or omitted from the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of and with respect to the Underwriter, specifically for
use in connection with the preparation thereof.
4.2 DESCRIPTIONS IN AND EXHIBITS TO REGISTRATION STATEMENT AND
PROSPECTUS. All contracts and other documents required to be described in or
filed as exhibits to the Prospectus or the Registration Statement have been
described in or filed with the Commission as exhibits to the Prospectus or the
Registration Statement in accordance with the Securities Act and the Rules.
4.3 FINANCIAL INFORMATION. The financial statements of the
Company (including all notes and schedules thereto) included in the Registration
Statement and the Prospectus fairly present, respectively, the financial
position, the results of operations, the changes in financial position and the
changes in shareholders' equity of the Company at the respective dates and for
the respective periods to which they apply; such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all adjustments
necessary for a fair presentation of the results for such periods have been
made; and the other financial and statistical information and data included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
4.4 INDEPENDENT ACCOUNTANTS. To the best knowledge of the
Company, Grant Thornton LLP, whose certified reports are filed with the
Commission as part of the Registration Statement, are, and during the periods
covered by their respective reports were, independent public accountants as
required by the Securities Act and the Rules.
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4.5 ORGANIZATION AND AUTHORITY OF COMPANY. The Company has
been duly organized and is validly existing as a corporation in good standing
under the laws of the Commonwealth of Pennsylvania. The Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction,
including Ohio, in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary and where such failure to be qualified would have a
Material Adverse Effect (as hereinafter defined). Except as described in the
Prospectus, the Company has no subsidiaries. Except as described in the
Prospectus, the Company does not own, lease or license any material property or
conduct any material business outside the United States of America. Except as
described in the Prospectus, the Company has all requisite power and authority,
and all necessary material authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all federal, state and foreign
governmental or regulatory officials, bodies and tribunals, to own, lease,
license and operate its properties and conduct its business as now being
conducted and as described in the Prospectus; the Company has fulfilled and
performed all of its material obligations with respect to such permits and no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment of
the rights of the holder of any such permit; no such authorization, approval,
consent, order, license, certificate or permit contains a materially burdensome
restriction other than as disclosed in the Prospectus; and the Company has all
such power, authority, authorizations, approvals, consents, orders, licenses,
certificates and permits (except such as may be necessary to make the
Registration Statement effective and to qualify the Shares for public offering
by the Underwriter under state securities or "Blue Sky" laws) to enter into,
deliver and perform this Agreement and to issue and sell the Units.
4.6 INTANGIBLES. Except as described in the Prospectus, the
Company owns, or possesses adequate and enforceable rights to use, all patents,
patent applications, trademarks, trademark applications, service marks,
copyrights, copyright applications, licenses, inventions, trade secrets and
other similar rights (collectively, "Intangibles") necessary for the conduct of
the material aspects of its business in the United States as described in the
Prospectus and has not to the knowledge of the Company infringed, is not to the
knowledge of the Company infringing, or has not received any notice of
infringement of, any Intangibles of any other person which is reasonably likely
to have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company or on
the transactions contemplated hereby (a "Material Adverse Effect"), and the
Company does not know of any basis therefor.
4.7 PROPERTY. The Company has good and marketable title to all
of the items of real property and good title to all of the items of personal
property which are reflected in the financial statements referred to in Section
4.3 or are referred to in the Prospectus as being owned by it and valid and
enforceable leasehold estates in each of the items of real and personal property
which are referred to in the Prospectus as being leased by it, in each case free
and clear of all liens, encumbrances, claims, security interests and defects,
other than those properly described in the Prospectus and those which do not and
will not have a Material Adverse Effect.
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4.8 PROCEEDINGS AND INVESTIGATIONS. Except as described in the
Prospectus, there are no material legal or governmental or other proceedings or
investigations pending before any court or before or by any public body or board
or, to the Company's knowledge, threatened (or any reasonable basis therefor)
against, or involving the properties or business of, the Company.
4.9 TAXES. The Company has filed all federal, state, local and
foreign tax returns required to be filed by it, which returns are complete and
correct in all material respects, and has paid all taxes shown due on such
returns as well as all other taxes, assessments and governmental charges which
have become due; no deficiency with respect to any such return has been assessed
or proposed; except in each case where the failure to file, failure to pay or
deficiency would not be reasonably likely to have a Material Adverse Effect.
4.10 MATERIAL CHANGES. Subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, the Company has not (i) issued any securities, (ii) incurred any
liability or obligation, direct or contingent, or entered into any transaction,
not in the ordinary course of business, or (iii) declared or paid any dividend
or made any distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares
of its stock. In addition, subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in or contemplated by the Registration Statement and the Prospectus,
there has not been any change in the capital stock and there has not been any
material adverse change, or any development involving or which may reasonably be
expected to involve, a prospective material adverse change, in the condition
(financial or other), earnings, business, properties, net worth, results of
operations or prospects of the Company, whether or not arising from transactions
in the ordinary course of business.
4.11 NO DEFAULT: AGREEMENTS. No default exists, and no event
has occurred which with notice or lapse of time, or both, would constitute a
default in the due performance and observance of any material term, covenant or
condition, by the Company, or, to the best of the Company's knowledge, any other
party, of any indenture, mortgage, deed of trust, note or any other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses may be bound or affected and where such default would
be reasonably likely to have a Material Adverse Effect.
4.12 NO DEFAULT: ARTICLES AND BYLAWS; PERMITS, JUDGMENTS, AND
REGULATIONS. The Company is not in violation of any term or provision of its
Articles of Incorporation or Bylaws. The Company is not in violation of, nor is
it required to take any action to avoid any violation of, any franchise,
license, permit, judgment, decree, order, statute, rule or regulation, where the
consequences of such violation or prospective violation is reasonably likely to
have a Material Adverse Effect.
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4.13 NO DEFAULT: EXECUTION AND PERFORMANCE OF THIS AGREEMENT.
Except for instances which do not and will not have a Material Adverse Effect,
neither the execution, delivery and performance of this Agreement by the
Company, nor the consummation of the transactions contemplated hereby
(including, without limitation, the issuance and sale by the Company of the
Units), will give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an, event which with notice or lapse
of time, or both, would constitute a default) under, or require any consent
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to the terms
of, any indenture, mortgage, deed of trust, note or other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses is bound or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation or violate any provision of the
Articles of Incorporation or Bylaws of the Company.
4.14 CAPITAL STOCK; SHARES. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and none of them was issued in violation of any preemptive or
other right. The issuance, sale and delivery of the Units have been duly
authorized by all necessary corporate action by the Company and, when issued,
sold and delivered against payment therefor pursuant to this Agreement, will be
duly and validly issued, fully paid and nonassessable and none of them will have
been issued in violation of any preemptive or other right. Except as disclosed
in the Prospectus, there is no outstanding option, warrant or other right
calling for the issuance of, and no commitment, plan or arrangement to issue,
any share of stock of the Company or any security convertible into or
exchangeable for stock of the Company. The capital stock of the Company conforms
in all material respects to all statements in relation thereto contained in the
Registration Statement and the Prospectus.
4.15 EXCHANGE ACT; NASDAQ. The Company has filed a Form 8-A
registration statement under the Exchange Act and the Common Stock will be
registered with the Commission pursuant to Section 12 of the Exchange Act as of
the Effective Date. The Company has applied to have both the Common Stock and
the Offering Warrants designated for trading on the National Association of
Securities Dealers, Inc. Nasdaq SmallCap Market, which application will be
effective on the Effective Date (subject, however, to compliance with all
listing criteria at the time of issuance).
4.16 REGISTRATION RIGHTS. No holder of any security of the
Company has the right or, because of the filing of the Registration Statement or
the consummation of the transactions contemplated in this Agreement, will have
the right, which right has not been waived, to (i) have any security owned by
such holder included in the Registration Statement or (ii) require any other
registration statement to be filed in connection with any capital stock of the
Company within 180 days from the date of the Prospectus.
4.17 AUTHORIZATION; ENFORCEABILITY. This Agreement and the
performance by the Company of its obligations under this Agreement, has been
duly and validly authorized,
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executed and delivered by the Company and is the legal, valid and binding
agreement and obligation of the Company, enforceable against the Company in
accordance with its terms, except as (i) the enforceability hereof may be
limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, or other laws relating to creditors, rights generally, (ii) the
remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and to the discretion of the courts before
which the proceeding may be brought, and (iii) rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy.
4.18 PROHIBITED ACTIVITIES. Neither the Company nor, to the
Company's knowledge, any director, officer, agent, employee or other person
authorized to act on behalf of the Company has (i) used any funds of the Company
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity, (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from funds of
the Company, (iii) violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977 in respect of the Company, or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment in respect
of the Company.
4.19 BOOKS AND RECORDS. The Company makes and keeps accurate
books and records reflecting its assets and maintains internal accounting
controls which provide reasonable assurance that (i) transactions are executed
with management's authorization, (ii) transactions are recorded as necessary to
permit preparation of the Company's consolidated financial statements and to
maintain accountability for the assets of the Company, (iii) access to the
assets of the Company is permitted only in accordance with management's
authorization, and (iv) the reported accountability of the assets of the Company
is compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
4.20 STABILIZATION AND MANIPULATION. Neither the Company nor,
to the Company's knowledge, any affiliate of the Company has taken, and the
Company will not take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of the
Common Stock in order to facilitate the sale or resale of any of the Shares.
4.21 AFFILIATED TRANSACTIONS. No transaction has occurred
between or among the Company and any of its officers or directors or any of the
shareholders holding 10% or more of the outstanding shares of any class of the
Company's stock or any affiliate or affiliates of any such officer, director or
shareholder, that is required to be described in and is not described in the
Prospectus.
4.22 INVESTMENT COMPANY. The Company is not now, and after the
sale of the Shares to be sold by it hereunder and application of the net
proceeds from such sale as described in the Prospectus under the caption "Use of
Proceeds" will not be, an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
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4.23 GOVERNMENTAL AUTHORITIES AND REGULATIONS. Except as set
forth in the Registration Statement and the Prospectus, to the Company's
knowledge (i) the Company is not in violation of any order of any governmental
authority directing the Company to make any material change in the method of
conducting its business, (ii) the Company has conducted and is conducting its
business so as to comply in all material respects with all applicable statutes
and regulations, (iii) neither the Company nor any affiliated persons thereof is
a party or directly or indirectly subject to any supervisory agreement or other
similar operating restrictions imposed by any governmental authority which have
had or may be expected to have a material effect on the conduct of any of the
business of the Company.
4.24 LOCK-UP ARRANGEMENTS. The Company has obtained from all
of its officers and directors and their written letters of agreement that for a
period beginning on the Closing Date and ending on the close of business 12
months thereafter they will not, without the prior written consent of the
Underwriter, offer, sell, contract to sell or grant any option for the sale of
or otherwise dispose of, directly or indirectly, any shares of Common Stock of
the Company (or any securities convertible into or exercisable for such shares
of Common Stock) owned by them, except as provided herein or in the Registration
Statement, and except for bona fide gifts to persons who agree in writing with
the Underwriter to be bound by this clause.
4.25 LABOR DISPUTES. The Company is not involved in any labor
dispute which would have a Material Adverse Effect and no such dispute is
threatened.
4.26 CONSENTS AND APPROVALS. Except for the order of the
Commission declaring the Registration Statement effective and permits and
similar authorizations required under the securities or Blue Sky laws of certain
jurisdictions, no consent, authorization, or approval is required from any
federal, state or local governmental agency or body or from any other third
party in connection with this Agreement and the transactions contemplated hereby
other than such consents, authorizations or approvals as have been obtained.
4.27 EQUITY INTERESTS. The Company does not own any shares of
stock or any securities of any corporation and does not have any equity interest
in any firm, partnership, association or other entity that is required to be
disclosed, and is not disclosed, in the Registration Statement and the
Prospectus.
4.28 DISTRIBUTION OF OFFERING MATERIALS. The Company has not
distributed and, prior to the later to occur of (i) the Closing Date and (ii)
the completion of the distribution of the Units, will not distribute any
offering material in connection with the offering and sale of the Units other
than the Registration Statement, the Prospectus or other materials, if any,
permitted by the Securities Act and the Rules.
4.29 ENVIRONMENTAL MATTERS. The Company (i) is in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants
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or contaminants ("Environmental Laws"), (ii) has received all permits, licenses
or other approvals required of it under applicable Environmental Laws to conduct
its business, and (iii) is in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or approvals
or, failure to comply with the terms and conditions of such permits, licenses or
approvals would not, singly or in the aggregate, have a Material Adverse Effect.
4.30 DOING BUSINESS WITH CUBA. The Company has complied with
all provisions of Florida Statutes, Section 517.075, relating to issuers doing
business with Cuba.
5. REPRESENTATION AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder represents and warrants, as to such Selling Shareholder only
and not as to the other Selling Shareholders, severally and not jointly, to the
Underwriter (a) that such Selling Shareholder now has, and on the Closing Date
will have valid title to such of the shares of Common Stock as are to be sold by
such Selling Shareholder pursuant to this Agreement, free and clear of any
security interests, claims, liens, equities and other encumbrances, (b) that
such Selling Shareholder now has, and on the Closing Date will have, the legal
right and power, and all consents, approvals and authorizations required by law,
to enter into this Agreement and to sell, transfer and deliver such shares of
Common Stock in the manner provided in this Agreement and that no such action
will contravene any provision of applicable law or any material agreement or
other instrument binding upon such Selling Shareholder, (c) that all information
furnished in writing by or on behalf of such Selling Shareholder for use in the
Registration Statement and Prospectus is, and on the Closing Date will be, true,
correct and complete in all material respects, and (d) without having undertaken
to determine the accuracy or completeness of the information contained in the
Registration Statement (except as provided by such Selling Shareholder), nothing
has come to the attention of such Selling Shareholder which leads it to believe
that the Registration Statement contains any untrue statement of a material fact
or omits to state any material fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
6. CONDITIONS TO CLOSING. The Closing shall be subject to each of the
following terms and conditions:
6.1 EFFECTIVENESS OF REGISTRATION STATEMENT; NO STOP ORDER.
The Registration Statement shall have become effective not later than 5:00 P.M.,
Eastern Time, on the date of this Agreement or on such later date and time as
shall be consented to in writing by the Underwriter. At the Closing Date, if
any, no stop order shall have been issued or proceedings therefor initiated or
threatened by the Commission and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
6.2 OPINION OF COMPANY COUNSEL. At each Closing Date, you
shall have received the favorable opinion of Taft, Stettinius & Hollister,
counsel for the Company, dated the
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Closing Date and addressed to the Underwriter and in form and scope satisfactory
to counsel for the Underwriter, to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the Commonwealth of
Pennsylvania, is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed), the maintenance of an office or the nature of its business
makes such qualification necessary, except where the failure so to qualify would
not have a Material Adverse Effect, and has full corporate power and authority
and, to the best of such counsel's knowledge after due inquiry, all necessary
and material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory officials and bodies, to own,
lease, license and operate its properties and to conduct its business in the
United States as now being conducted as described in the Registration Statement
and Prospectus;
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Registration Statement and the Prospectus; all the shares of capital stock of
the Company outstanding prior to the issuance of the Units to be issued and sold
by the Company hereunder have been duly authorized and validly issued and are
fully paid and nonassessable and none of them were issued in violation of any
preemptive or other right; the Units to be issued and sold by the Company
hereunder have been duly authorized and, when issued, sold and delivered against
payment therefor pursuant to this Agreement, will be validly issued, fully paid
and nonassessable, and none of them will have been issued in violation of any
preemptive or, to the knowledge of such counsel after due inquiry, similar
rights that entitle or will entitle any person to acquire any shares of Common
Stock upon the issuance of the Units by the Company (other than upon exercise of
the Offering Warrants contained in the Units); and the Units and the other
capital stock of the Company conform as to legal matters to the description
thereof contained under the caption "Description of Securities" in the
Registration Statement and the Prospectus;
(iii) To such counsel's knowledge after due inquiry,
the Company does not own any shares of stock or any securities of any
corporation or have any equity interest in any firm, partnership, association or
other entity that is required to be disclosed, and is not disclosed, in the
Registration Statement and the Prospectus;
(iv) The certificates evidencing the Shares are in
the form approved by the Board of Directors of the Company and comply with the
Bylaws and the Articles of Incorporation of the Company and the laws of the
Commonwealth of Pennsylvania.
(v) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver the Units to be sold
by it as provided herein, and this Agreement has been duly and validly
authorized, executed and delivered by the Company, and is a valid, legal and
binding agreement and obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public
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policy and subject to the qualification that the enforceability of the Company's
obligations hereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium, and other laws relating to or affecting
creditors' rights generally and by general equitable principles;
(vi) To the best of such counsel's knowledge after
due inquiry, there are (A) no contracts or other documents which are required to
be described in or filed as exhibits to the Registration Statement or the
Prospectus other than those described in or filed as exhibits thereto, (B) no
legal or governmental or other proceedings or investigations pending or
threatened against, or involving the assets, properties or business of, the
Company, of a character required to be disclosed in the Registration Statement
and Prospectus, which have not been so disclosed and properly described therein,
and (C) no statutes or regulations applicable to the Company, or material
certificates, permits, grants or other consents, approvals, orders, licenses or
authorizations from regulatory officials or bodies, required to be obtained or
maintained by the Company, of a character required to be disclosed in the
Registration Statement and Prospectus, which have not been so disclosed and
properly described therein;
(vii) Neither the execution, delivery and performance
of this Agreement by the Company, nor the consummation of the transactions
herein contemplated (including, without limitation, the issuance and sale by the
Company of the Units), will give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result in a breach of any
term or provision of, or constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, or require consent
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or asset of the Company pursuant to the terms of
any agreement or instrument known to such counsel (having made due inquiry with
respect thereto) to which the Company is a party or by which the Company or any
of the properties or business of the Company is bound, nor will such action
result in any violation of the provisions of the Articles of Incorporation or
Bylaws of the Company or, to the knowledge of such counsel, any statute or any
order, rule, or regulation applicable to the Company or, to the knowledge of
such counsel, any court or any federal, state, local or other regulatory
authority or other governmental body having jurisdiction over the Company;
(viii) To the best of such counsel's knowledge after
due inquiry, no consent, approval, authorization or order of, or registration or
filing with, any court or governmental agency or body, domestic or foreign, is
required to be obtained by or on behalf of the Company in connection with the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby (including, without limitation, the issuance
and sale by the Company of the Units), except such as may be required under the
Securities Act, by the National Association of Securities Dealers, Inc. or under
state securities or Blue Sky laws;
(ix) To the best of such counsel's knowledge after
due inquiry, and except for those instances which do not and will not have a
Material Adverse Effect, the
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Company (a) is not in default (nor has an event occurred which, with notice or
lapse time or both, would constitute a default) under, any indenture, mortgage,
deed of trust, note, bank loan or credit agreement or any other material
agreement or instrument to which the Company is a party or by which it or any of
its properties or assets may be bound or affected, (b) is not in violation of
any term or provision of its Articles of Incorporation or Bylaws, and, (c) is
not in violation of any material franchise, license, grant, permit, judgment,
decree, order, statute, rule or regulation or has received any notice of
conflict with the asserted rights of others in respect of Intangibles necessary
for the conduct of its business, where, in each case, such matter is required to
be described in the Registration Statement and the Prospectus and is not
described therein;
(x) The Registration Statement and the Prospectus and
any amendments or supplements thereto (other than the financial statements, the
forecasts and other financial and statistical data included therein, as to which
no opinion need be rendered) comply as to form in all material respects with the
requirements of the Securities Act and the Rules;
(xi) The Registration Statement (including all
post-effective amendments, if any) is effective under the Securities Act and the
Rules, and, to the best of such counsel's knowledge after due inquiry, no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose are pending or threatened under the
Securities Act; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(xii) To the best of such counsel's knowledge after
due inquiry, (A) the Company has good and marketable title to, or valid and
enforceable leasehold estates in, the items of real and personal property stated
in the Prospectus to be owned or leased by it, in each case free and clear of
all liens, encumbrances, and security interests, other than those referred to in
Prospectus and those which do not have a Material Adverse Effect, and (B) the
Company owns, or possesses adequate and enforceable rights to use, the
Intangibles (subject, with respect to copyrights owned by the Company, to
registration of those copyrights in the U.S. Copyright Office, upon which
registration the Company will be entitled to sue for infringement of those
copyrights), except as described in the Prospectus or where the lack of such
ownership or possession would not have a Material Adverse Effect; and
(xiii) The Company is not, after giving effect to the
sale of the Units sold by it hereunder and application of the net proceeds from
such sale as described in the Prospectus under the caption "Use of Proceeds", an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
In addition, such counsel will state that, in the course of preparation
of the Registration Statement and the Prospectus, (X) such counsel had
conferences with officials of the Company, its independent auditors, and with
representatives of the Underwriter and its counsel, and also had discussions
with such officials of the Company with a view toward a clear understanding on
their part of the requirements of the Securities Act and the Rules with
reference to the preparation of
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registration statements and prospectuses, and (Y) such counsel's examination of
the Registration Statement and Prospectus and its discussions in the
above-mentioned conferences did not disclose to it any information which gives
it reason to believe that the Registration Statement or the Prospectus (other
than the schedules, financial statements, forecasts and other financial and
statistical information as to which such counsel need express no comment or
opinion) at the time the Registration Statement became effective contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus (other than the schedules, financial
statements, forecasts and other financial and statistical information as to
which such counsel need express no comment or opinion) contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
Such opinion shall be to such further effect with respect to other
legal matters relating to this Agreement and the sale of the shares as counsel
for the Underwriter may reasonably request.
In rendering the foregoing opinion, such counsel may rely (A) as to
matters not governed by federal law or the laws of jurisdictions in which they
are admitted on opinions of other legal counsel reasonably satisfactory to the
Underwriter and its counsel and upon which, in such counsel's opinion, such
counsel is justified in relying, and (B) as to matters of fact upon certificates
of public officials and officers of the Company. Where such opinion shall state
that a matter is to the best of such counsel's knowledge after due inquiry, it
shall mean actual knowledge of those attorneys who have provided substantive
services in connection with the matters contemplated by this Agreement and may
be based upon certificates of a responsible officer of the Company and letters
received by the Company or such counsel from other legal counsel to the Company.
Copies of all such opinions and certificates shall be furnished to counsel to
the Underwriter on the Closing Date.
6.3 OPINION OF COUNSEL TO SELLING SHAREHOLDERS. At the Closing Date you
shall have received the opinion of Taft, Stettinius & Hollister, counsel to the
Selling Shareholders, to the effect that:
(i) This Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling Shareholders and is a valid
and binding agreement of each of the Selling Shareholders, except as rights to
indemnity hereunder may be limited under applicable law;
(ii) To the best of such counsel's knowledge in
reliance upon one or more certificates from the Selling Shareholders, without
independent verification, (A) the execution, delivery and performance of this
Agreement will not contravene any material agreement or other instrument binding
upon any Selling Shareholder or any writ, order of injunction of any court or
other governmental body and (B) no consent, approval, authorization or order of,
or registration or filing with, any court or governmental body or agency is
required for the performance of this Agreement by any Selling Shareholder,
except such as are specified
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and have been obtained and such as may be required by the securities or Blue Sky
laws of the various states in connection with the offering of the Shares by the
Underwriter (as to which such counsel need not express any opinion);
(iii) Each of the Selling Shareholders has good,
valid and marketable title to the shares of Common Stock to be sold by such
Selling Shareholder and has the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and to sell, transfer and
deliver such shares to be sold by such Selling Shareholder pursuant to the terms
of this Agreement.
(iv) To the best knowledge of such counsel, the
delivery of the certificates representing the shares of Common Stock to be sold
by each Selling Shareholder pursuant to this Agreement against payment therefor
as provided in this Agreement will pass valid title to such shares to the
purchase thereof free and clear of any security interests, claims, liens,
equities and other encumbrances, assuming that such purchasers are each "bona
fide purchasers (as defined under Pennsylvania Law).
6.4 REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Company and the Selling Shareholders contained in this
Agreement shall be true and correct on and as of the date of this Agreement and
on and as of the Closing Date as if made on and as of the Closing Date.
6.5 PERFORMANCE. Neither the Company nor any of the Selling
Shareholders shall have failed at or prior to the Closing Date to have performed
or complied with any of its or their agreements herein contained and required to
be performed or complied with by it or them hereunder at or prior to the Closing
Date.
6.6 OFFICER'S CERTIFICATE. At each Closing Date, the
Underwriter shall have received a certificate of the principal executive officer
of the Company dated the Closing Date, stating that (i) the Company shall not
have failed at or prior to the Closing Date to have performed or complied with
any of its agreements herein required to be performed or complied with it
hereunder at or prior to the Closing Date, and (ii) all of the representations
and warranties of the Company contained in this Agreement are be true and
correct on and as of the date of this Agreement and on and as of the Closing
Date, as if made on and as of the Closing Date.
6.7 ACCOUNTANT'S LETTER. At the time this Agreement is
executed and at the Closing Date, you shall have received a letter, addressed to
the Underwriter and in form and substance satisfactory to the Underwriter in all
respects (including the nonmaterial nature of the changes or decreases, if any,
referred to in clause 6.7 (iii) below), from Grant Thornton LLP dated as of the
date of this Agreement and as of the Closing Date:
(i) Confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published Rules and
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stating that the answer to Item 13 of Part I of Registration Statement is
correct insofar as it relates to them;
(ii) Stating that, in their opinion, the financial
statements of the Company examined by them and included in the Registration
Statement and in the Prospectus comply as to form in all material respects with
the applicable accounting requirements of the Securities Act and the related
published Rules as they relate to small business issuers;
(iii) Stating that, on the basis of procedures used,
including a formal review, made in accordance with generally accepted auditing
standards but not an examination, which included a reading of the latest
available unaudited interim financial statements of the Company (with an
indication of the date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the shareholders and
board of directors of the Company and committees of such boards and inquiries to
certain officers and other employees of the Company responsible for financial
and accounting matters and other specified procedures and inquiries, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
financial statements and related schedules of the Company, included in the
Registration Statement and Prospectus, if any, (1) do not comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act and the related Rules, or (2) were not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and Prospectus; (B) at a specified date not more
than five business days prior to the date of such letter, there was any change
in the capital stock or long-term debt of the Company as compared with the
amounts shown on the balance sheet of the Company included in the Registration
Statement and Prospectus, other than as set forth in or contemplated by the
Registration Statement and Prospectus or, if there was any change or decrease,
setting forth the amount of such change or decrease; and (C) during the period
from _______, 1997 to a specified date not more than five business days prior to
the date of such letter, there was any decrease in total revenues, operating
income, net income or earnings per share of the Company, as compared with the
corresponding period beginning _______, 1996 other than as set forth in or
contemplated by the Registration Statement and Prospectus, or, if there was any
such decrease, setting forth the amount of such decrease; and
(iv) Stating that they have compared the selected
financial data, specific dollar amounts, numbers of shares, percentages of
revenues and earnings and other financial information pertaining to the Company
set forth in the Prospectus, which have been specified by the Underwriter prior
to the date of this Agreement, to the extent that such amounts, numbers,
percentages and information may be derived from the general accounting records
of the Company, and excluding the forecasts and any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
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6.8 SATISFACTORY OFFERING PROCEEDINGS; OPINION OF
UNDERWRITER'S COUNSEL. All proceedings taken in connection with the sale of the
Shares as herein contemplated shall be reasonably satisfactory in form and
substance to the Underwriter and to counsel for the Underwriter, and the
Underwriter shall have received from said counsel for the Underwriter a
favorable opinion, dated as of each Closing Date, with respect to such of the
matters set forth under subsection 6.2, and with respect to such other related
matters, as the Underwriter may reasonably require.
6.9 NO STOP ORDER. No order suspending the sale of the Units,
in any jurisdiction designated by the Underwriter pursuant to subsection 7.4
hereof, shall have been issued on the Closing Date, and no proceedings for that
purpose shall have been instituted or, to the Underwriter's knowledge or that of
the Company, shall be contemplated.
6.10 NASD REVIEW. The National Association of Securities
Dealers (the "NASD"), upon review of the terms of the public offering of the
Units, shall not have objected to the Underwriter's participation in the same.
6.11 NASDAQ. The Common Stock and the Offering Warrants each
shall have been designated or approved for designation upon notice of issuance
on the Nasdaq SmallCap Market without waiver of any quantitative criterion for
such designation.
6.12 LOCK-UP LETTERS. You shall have received on or before the
Closing Date all "lock-up" letters described in subsections 4.24 and 7.9 hereof.
6.13 OTHER. The Company shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
reasonably requested.
Any certificate signed by any officer of the Company and delivered to
the Underwriter or to counsel for the Underwriter shall be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein. If any condition to the Underwriter's obligations
hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled,
the Underwriter may terminate this Agreement or, if the Underwriter so elects,
waive any such conditions which have not been fulfilled or extend the time of
their fulfillment.
7. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriter as follows:
7.1 REGISTRATION STATEMENT. The Company will use its best
efforts to cause the Registration Statement to become effective and will notify
the Underwriter immediately, and confirm the notice in writing, (i) when the
Registration Statement and any post-effective amendment thereto becomes
effective, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceedings for that purpose, and (iii)
of the receipt of any comments from the Commission. The Company will make every
reasonable effort to
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prevent the issuance of a stop order, and, if the Commission shall enter a stop
order at any time, the Company will make every reasonable effort to obtain the
lifting of such order at the earliest possible moment.
7.2 DELIVERY OF PROSPECTUS; AMENDMENTS AND SUPPLEMENTS. During
the time when a prospectus is required to be delivered under the Securities Act,
the Company will comply so far as it is able with all requirements imposed upon
it by the Securities Act, as now and hereafter amended, and by the Rules, from
time to time in force, so far as necessary to permit the continuance of sales of
or dealings in the Units in accordance with the provisions hereof and the
Prospectus. If at any time when a prospectus relating to the Units is required
to be delivered under the Securities Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Registration Statement or Prospectus as then amended or
supplemented includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend or supplement
the Registration Statement or Prospectus to comply with the Securities Act, the
Company will notify the Underwriter promptly and prepare and file with the
Commission an appropriate amendment or supplement in form satisfactory to the
Underwriter. The cost of preparing, filing and delivering copies of such
amendment or supplement shall be paid by the Company.
7.3 DELIVERY AND USE OF PROSPECTUS. The Company will deliver
to the Underwriter one copy of the Registration Statement, including exhibits,
and all post-effective amendments thereto and such number of copies of the
Prospectus as the Underwriter may reasonably request for the purposes
contemplated by the Securities Act.
7.4 BLUE SKY QUALIFICATION. The Company will endeavor in good
faith, in cooperation with the Underwriter and its counsel, at or prior to the
time the Registration Statement becomes effective, to qualify the Units for
offering and sale under the securities laws relating to the offering or sale of
the Units of such jurisdictions as the Underwriter may reasonably designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
no such qualification shall be required in any jurisdiction in which such
qualification will require the Company to qualify to do business as a foreign
corporation where it is not now so qualified or to take action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Units, in any jurisdictions where it is not now so
subject. In each jurisdiction where such qualification shall be effected, the
Company will, unless the Underwriter agrees that such action is not at the time
necessary or advisable, file and make such statements or reports at such times
as are or may reasonably be required by the laws of such jurisdiction.
7.5 DOCUMENTS TO BE FURNISHED TO THE UNDERWRITER. For a period
of three years from the effective date of the Registration Statement, the
Company will furnish to the Underwriter the following:
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(i) As soon as practicable after they have been sent
to shareholders of the Company or filed with the Commission, three copies of
each annual and interim financial and other report or communication sent by the
Company to its shareholders or filed with the Commission; and
(ii) As soon as practicable, three copies of every
press release and every material news item and article in respect of the Company
or the affairs of the Company which was released by the Company.
7.6 APPLICATION OF NET PROCEEDS. The Company will apply the
net proceeds from the sale of the Units sold by it hereunder in the manner set
forth under "Use of Proceeds" in the Prospectus.
7.7 UNAUDITED INTERIM FINANCIAL STATEMENTS. The Company will
furnish to the Underwriter as early as practicable prior to the Closing Date,
but not later than two full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company which have been
read by the Company's independent public accountants as stated in their letters
to be furnished pursuant to subsection 6.7 hereof.
7.8 SECURITIES ACT AND EXCHANGE ACT REQUIREMENTS. The Company
will use its best efforts to comply with all registration, filing and reporting
requirements of the Securities Act or the Exchange Act, which may from time to
time be applicable to the Company.
7.9 LOCK-UP ARRANGEMENTS. The Company will not, without the
prior written consent of the Underwriter offer, sell, contract to sell or grant
any option for the sale or otherwise dispose of, directly or indirectly, any
shares of Common Stock of the Company (or any securities convertible into or
exercisable for such shares of Common Stock) or register with the Commission any
securities of the Company prior to the close of business on the date 12 months
from the Effective Date, except for (i) the registration of the Units pursuant
to the Registration Statement, (ii) shares issuable upon the exercise of options
granted under the Company's 1997 Stock Option Plan, (iii) the exercise of
Warrants associated with the Units, and (iv) the exercise of outstanding
warrants.
7.10 STABILIZATION AND MANIPULATION. Except as stated in this
Agreement and in the Preliminary Prospectus and Prospectus, the Company has not
taken, nor will it take, directly or indirectly, any action designed to or that
might reasonably by expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Units.
7.11 SECONDARY TRADING QUALIFICATIONS. Until such time as the
Common Stock becomes eligible for trading on the Nasdaq National Market or a
registered stock exchange reasonably acceptable to the Underwriter, the Company
shall use its best efforts to maintain the listing of the Common Stock on the
Nasdaq SmallCap Market for at least five years from the Effective Date.
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7.12 KEY MAN INSURANCE. The Company shall obtain and maintain
in full force and effect a key man life insurance policy in the amount of at
least $500,000 on the life of the Company's President, Thomas C. Haas, for a
minimum period of the longer of (a) three years from the Effective Date, or (b)
the term of any employment agreement between Mr. Haas and the Company.
7.13 BOARD OF DIRECTORS. For a period of three years from the
Effective Date, the Company shall take all necessary actions to secure the
election or appointment to its Board of Directors of two persons designated by
the Underwriter, or the appointment of two such persons as advisors to the Board
provided any such designees are subject to the approval of the Company's Board
of Directors.
7.14 PUBLIC RELATIONS. For a period of three years from the
Effective Date, the Company shall retain, at its expense, and utilize a public
relations firm acceptable to the Underwriter.
7.15 ANALYST. At the expiration of the "quiet period"
applicable to the Registration Statement under the Securities Act, and again six
months thereafter, the Company shall retain, at its expense, a securities
analyst acceptable to the Underwriter who shall then prepare research reports on
the Company.
7.16 CERTAIN RECORDS. For a period of three years from the
Effective Date, the Company at its expense, shall provide the Underwriter with
copies of the Company's daily stock transfer sheets, which the Company shall
send to the Underwriter at least weekly.
7.17 RIGHT OF FIRST REFUSAL. If at any time during the period
ending on the third anniversary of the Effective Date, the Company proposes to
effect a public or private offering of equity or debt securities, prior to
commencing such offering, the Company shall notify the Underwriter in writing of
such proposed offering. Such notice shall include a complete description of the
proposed offering, including the amount and nature of the security to be
offered, the total dollar amount of anticipated or desired proceeds, the price
per share or other investment unit, the type of offering, the proposed
underwriting or other placement consideration and all other material details.
The Underwriter shall have the exclusive right, for a period of 30 days from the
date of such notice, to enter into an agreement to act as the Company's
exclusive underwriter, placement agent or financial advisor with respect to such
proposed offering on the proposed terms and conditions as set forth in the
notice.
Upon the earlier of the Company's receipt of a
written notice from the Underwriter that the Underwriter will not exercise such
right of first refusal, or the expiration of such 30-day period, the Company may
effect the proposed offering with an underwriter, placement agent or financial
advisor other than the Underwriter on the same terms and conditions contained in
the notice to the Underwriter. The foregoing right of first refusal shall
terminate on the earlier of (i) successful completion of the proposed offering
on the terms proposed, (ii)
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expiration of the three year period set forth above, or (iii) the Company's
payment of a Termination Fee, as described below, to the Underwriter. The
Termination Fee shall be an amount in cash equal to the greater of 1% of the
total offering proceeds of the public offering to which this Agreement relates
or 5% of the underwriting discount or commission that would be payable under an
offering proposed by the Company under this Section 7.18.
8. INDEMNIFICATION AND CONTRIBUTION.
8.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act from and against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they or any of them, may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that such indemnity shall not inure to the benefit of the Underwriter (or any
person controlling the Underwriter) on account of any losses, claims, damages or
liabilities arising from the sale of the Shares if such untrue statement or
omission or alleged untrue statement or omission was made in the Registration
Statement or the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with information furnished in writing to the Company by the
Underwriter specifically for use therein. The Company shall not be liable
hereunder to the Underwriter, or any controlling person thereof, to the extent
that any loss, claim, damage or other liability incurred by the Underwriter
arises from the Underwriter's fraudulent act or omission.
8.2 INDEMNIFICATION BY THE UNDERWRITER. The Underwriter agrees
to indemnify and hold harmless the Company, the Selling Shareholders, each
person, if any, who controls the Company or any Selling Shareholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
each director of the Company and each officer of the Company who signs the
Registration Statement, to the same extent as the foregoing indemnity from the
Company to the Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or omission or
alleged untrue statement or mission which was made in the Registration Statement
or the Prospectus, or any amendment thereof or supplement thereto, in reliance
upon and in conformity with information furnished in writing to the Company by
the Underwriter specifically for use therein. The Underwriter shall not be
liable hereunder to the Company or any Selling Shareholder (including any
controlling person, director or officer thereof) to the extent that any loss,
claim, damage or other liability incurred by the Company arises from a
fraudulent act or omission by the Company or such Selling Shareholder.
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8.3 INDEMNIFICATION BY THE SELLING SHAREHOLDERS. Each Selling
Shareholder, severally and not jointly, agrees to indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities to which any such person may
become subject under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement of any material
fact contained in the Registration Statement, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse such person for any legal or other expenses
reasonably incurred by such person in connection with investigating or defending
any such loss, claim, damage, liability, action or proceeding; provided,
however, that a Selling Shareholder will only be liable in any such case and to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement, or alleged untrue statement, or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any such amendment or supplement, in conformity with written
information furnished by or on behalf of such Selling Shareholder specifically
for use in the preparation thereof. In no event, however, shall the liability of
any Selling Shareholder for indemnification under this Section exceed an amount
equal to the offering price of the Common Stock sold by such Selling
Shareholder, less applicable underwriting discounts and commissions.
8.4 PROCEDURES. Any party that proposes to assert the right to
be indemnified under this Section 8 shall, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section 8, notify each such indemnifying party of the commencement of such
action, suit or proceeding, but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party otherwise than under this
Section. In the event any such action, suit or proceeding is brought against any
indemnified party and such indemnified party notifies the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses, except as provided below and except for the reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the indemnifying
parties, (ii) the indemnified party shall have reasonably concluded that,
because of the existence of different or additional defenses available to the
indemnified party or of other
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reasons, there may be a conflict of interest between the indemnifying parties
and the indemnified party in the conduct of the defense of such action (in which
case the indemnifying parties shall not have the right to direct the defense of
such action on behalf of the indemnified party) or (iii) the indemnifying
parties shall not have employed counsel to assume the defense of such action
within a reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying parties, provided that the Company shall not be required to pay the
fees and expenses of more than one additional law firm representing the
Underwriter. An indemnifying party shall not be liable for any settlement of any
action, suit, proceeding or claims effected without its written consent, and no
settlement shall be made without including a full and complete release of the
indemnifying parties in form and content reasonably satisfactory to such
indemnifying party.
8.5 CONTRIBUTION. If the indemnification provided for herein
is unavailable to an indemnified party under subsections 8.1, 8.2 or 8.3 hereof
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling shareholders, and the Underwriter respectively, from the
offering of the Units, or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, the Selling Shareholders, and the Underwriter,
respectively, in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Shareholders and the Underwriter, respectively, shall be
deemed to be in the same proportion as the total net proceeds from the offering
and sale of the Units contemplated hereby (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriter, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault of the
Company, the Selling Shareholders and the Underwriter, respectively, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Shareholders, or the Underwriter, respectively, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company, the Selling Shareholders, and the Underwriter agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by a pro rata allocation or by any other method of allocation
that does not take account of the equitable considerations referred to in this
subsection 8.5. The amount paid or payable to an indemnified party as a result
of the losses, claims, damages, liabilities and expenses referred to in this
subsection 8.5 shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the investment banking fees, underwriting commissions, and expense allowance
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amounts applicable to the Units offered by the Underwriter hereunder exceeds the
amount of any damages which the Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission and, notwithstanding any other provision of this Agreement, no Selling
Shareholder shall be required to contribute any amount in excess of the product
of the number of shares sold by such Selling Shareholder times the price per
share paid to such Selling Shareholder pursuant hereto. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Securities
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
Any party entitled to contribution shall, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another party or
parties under this Section 8, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve the party or parties from
whom contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section except to the extent that such
party has been harmed materially by the failure to receive such notice. No party
shall be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent.
8.6 SCOPE. The obligations of the Company under this Section 8
shall be in addition to any liability which the Company may otherwise have and
obligations of the Underwriter under this Section 8 shall be in addition to any
liability which the Underwriter may otherwise have. In addition a successor to
the Underwriter or any person controlling the Underwriter or to the Company, its
directors or officers who signed the Registration Statement, or any person
controlling the Company shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
8.7 PAYMENTS. Any losses, claims, damages, liabilities or
expenses for which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred, subject to the agreement of such indemnified party to return any
amounts paid to it if it should be determined ultimately that the indemnified
party is not entitled to indemnification under this Section 8.
9. EFFECTIVENESS AND TERMINATION.
9.1 EFFECTIVENESS. This Agreement shall become effective on
the later of (i) the execution and delivery hereof by the parties hereto, or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective by the Commission before the offering of the Shares may
commence, notification of the effectiveness of the Registration Statement or
such post-effective amendment by the Commission.
9.2 TERMINATION. This Agreement may be terminated by the
Underwriter by notifying the Company at any time prior to the Closing Date in
the Underwriter's sole and
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<PAGE> 25
absolute discretion. If this Agreement is terminated pursuant to any of its
provisions, except as otherwise provided in this Agreement, the Company shall
not be under any liability to the Underwriter, and the Underwriter shall be
under no liability to the Company, except that if this Agreement is terminated
by the Underwriter because of any failure, refusal or inability on the part of
the Company to comply with the terms or to fulfill any of the conditions of this
Agreement, the Company will reimburse the Underwriter for all reasonable
out-of-pocket expenses (including the fees and disbursements of its counsel)
reasonably incurred by it in connection with the proposed offering of the Units
or in contemplation of performing its obligations hereunder.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates, and such representations, warranties and
agreements of the Company and the Underwriter, including the indemnity and
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of (i) any investigation made by or an behalf
of the Underwriter or any person controlling the Underwriter or the Company, its
directors or officers or any person controlling the Company and (ii) any
termination of this Agreement.
11. INFORMATION FURNISHED BY UNDERWRITER. The information set forth in
the last paragraph of the cover page and the section captioned "Underwriting" in
the Prospectus constitute the only information furnished by or on behalf of the
Underwriter as such information is referred to in this Agreement, including,
without limitation, as such information is referred to in subsection 4.1 and
Section 8 hereof.
12. EXPENSES. The Company agrees to pay whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated, all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including those relating to (i) the preparation, printing,
filing and delivery of the Registration Statement, including all exhibits
thereto, the Prospectus, all amendments of and supplements to the Registration
Statement and the Prospectus, and any duplicating of the Underwriting Agreement,
(ii) the issuance of the Units and the preparation and delivery of certificates
for the Common Stock and Offering Warrants, (iii) the registration or
qualification of the Units for offer and sale under the securities or "Blue Sky"
laws of the various jurisdictions referred to in subsection 7.4, including the
fees and disbursements of counsel for the Underwriter in connection with such
registration and qualification and the preparation and printing of preliminary
and supplemental Blue Sky memoranda, (iv) the furnishing (including costs of
shipping and mailing) to the Underwriter of copies of the Prospectus and all
amendments of or supplements to the Prospectus, and of the several documents
required by this Section to be so furnished, (v) the filing requirements of the
NASD in connection with its review of the terms of the public offering, (vi) the
furnishing (including costs of shipping and mailing) to the Underwriter of
copies of all reports and information required by subsection 7.5, (vii) the
inclusion of the Common and Stock and Offering Warrants on the Nasdaq SmallCap
Market, (viii) the transportation and other expenses of the Company in
connection with presentations to prospective purchasers of the Units, (ix) the
fees and expenses of the Company's accountants, and (x) all other incidental
costs of the offering not specifically assumed by the Underwriter.
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<PAGE> 26
13. MISCELLANEOUS.
13.1 PARTIES IN INTEREST. This Agreement has been and is made
for benefit of the Underwriter, the Company, the Selling Shareholders, and their
respective successors and assigns, and, to the extent expressed herein, for the
benefit of persons controlling any of the Underwriter or the Company, and
directors and certain officers of the Company, and their respective successors
and assigns, and no other person, partnership, association or corporation shall
acquire or have any right under or by virtue of this Agreement.
13.2 NOTICES. All notices and communications hereunder shall
be in writing and mailed, telecopied or delivered or given by telephone or
verbally if subsequently confirmed in writing as follows:
(i) To the Underwriter: J.V. Delaney & Associates, 17
Muir Beach Circle, Corono del Mar, California 92625, Attention: Joseph V.
Delaney, Chairman and CEO (with a copy to Dinsmore & Shohl LLP, 1900 Chemed
Center, 255 East Fifth Street, Cincinnati, Ohio 45202, Attention: Charles F.
Hertlein, Jr., Esq.);
(ii) To the Company: Dayton General Systems, Inc.,
2492 Technical Drive, Miamisburg, Ohio 45342, Attention: Thomas C. Haas,
President (with copies to Taft, Stettinius & Hollister, 1800 Star Bank Center,
425 Walnut Street, Cincinnati, Ohio 45202-3957, Attention: Timothy E. Hoberg,
Esq.)
13.3 COUNTERPARTS. This Agreement may be executed by any one
or more of the parties hereto in any number of counterparts, each of which shall
be deemed an original, but all such counterparts shall together constitute one
and the same instrument.
13.4 CAPTIONS. The captions of the sections and subsections
have been inserted as a matter of convenience and reference only and shall not
control or affect the meaning or construction of this Agreement.
13.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to principles of conflicts of laws.
13.6 ENTIRE AGREEMENT. This Agreement is the entire agreement
and understanding of the parties and shall supercede any prior agreement of the
parties, whether oral or written.
If the foregoing correctly sets forth your understanding of the
agreement between us, please sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement by and among the Company and the
several Underwriter in accordance with its terms.
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<PAGE> 27
Very truly yours,
DAYTON GENERAL SYSTEMS, INC.
By______________________________
Thomas C. Haas, President
SELLING SHAREHOLDERS:
CHURCH STREET FINANCIAL CORP.
By___________________________________
Name:
No. of Shares Offered: 8,000
_____________________________________
Name: H.H. Croghan
No. of Shares Offered: 20,000
_____________________________________
Name: James E. Cogan
No. of Shares Offered: 8,000
The foregoing Agreement is hereby confirmed and accepted by the undersigned.
J.V. DELANEY & ASSOCIATES
By:__________________________________
Joseph V. Delaney,
Chairman and CEO
27
<PAGE> 28
EXHIBITS
Annex A - Form of Common Stock Warrant
Annex B - Form of Escrow Agreement
28
<PAGE> 1
Exhibit 1.2
ANNEX A
TO
UNDERWRITING AGREEMENT
THE SECURITY EVIDENCED HEREBY MAY NOT BE TRANSFERRED EXCEPT (I) IN
ACCORDANCE WITH THE PROVISIONS OF PARAGRAPH 1 HEREOF AND (II) WITH EITHER (A) AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY BE
LAWFULLY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 OR (B) SUCH
REGISTRATION.
UNIT PURCHASE WARRANT
To Purchase _____ Units Each Consisting of Two Shares of
Common Stock of Dayton General Systems, Inc. and
One Warrant to Purchase One Additional Share of Common Stock
______________, 1997
THIS CERTIFIES THAT, in consideration for its payment of $______ to the
Company, J. V. Delaney & Associates ("Initial Holder") or its registered assigns
is entitled to subscribe for and purchase from Dayton General Systems, Inc. (the
"Company"), a Pennsylvania corporation, at any time after the first anniversary
of the date hereof (which is the effective date of the registration statement to
which this warrant (herein referred to as the "Warrant") relates) to and
including _________, 2002 (the fifth anniversary of the effective date of the
registration statement for the public offering to which this Warrant relates),
_______ units ("Units") each consisting of (i) two fully paid and nonassessable
shares of the Company's Common Stock without par value ("Common Stock") together
with (ii) a warrant to purchase one additional share of Common Stock at a price
of $6.50 per share, all such warrants ("Offering Warrants") to have terms and
conditions identical to those described in the Company's Registration Statement
on Form SB-2, No. 333-___ (the "Registration Statement") under the Securities
Act of 1933 for the offering of securities to which this Unit Purchase Warrant
relates. The exercise price of this Warrant shall be $12.50 per Unit (which
price is equal to 125% of the price of the Company's Units offered in the public
offering to which this Warrant relates).
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY. The rights represented by this Warrant
may be exercised by the holder hereof, in whole or in part (but not as to a
fractional Unit), by written notice of exercise delivered to the Company 20 days
prior to the intended date of exercise and by the surrender of this Warrant
(properly endorsed if required) at the principal office of the Company and upon
payment to it by check of the purchase price for such Units. During the first
year after the date hereof, the Warrant may not be exercised, sold, transferred,
assigned or hypothecated by the holder hereof, except (i) the transfer of all or
any portion of this Warrant by operation of law or by reason of reorganization
of the Company shall not be prohibited, and
<PAGE> 2
(ii) this Warrant shall be transferable in whole or in part to officers or
partners of the Initial Holder to National Association of Securities Dealers,
Inc. member firms which participate in the selling group for the public offering
to which this Warrant relates, and to the officers or partners of such member
firms, provided that if so transferred, the Warrant or part thereof shall remain
subject to the restrictions on transfer specified herein for the remainder of
such one year time period. To the extent permitted under the foregoing
provisions, this Warrant may be transferred, or divided into two or more
warrants of smaller denominations (collectively, the "Warrants"), subject to the
Company's receipt of the opinion of counsel as provided by paragraph 7 herein to
the effect that such transfer is not in violation of federal or state securities
laws.
2. ISSUANCE OF UNITS. The Company agrees that the Units purchasable
hereunder shall be and are deemed to be issued to the registered holder hereof
as of the close of business on the date on which payment shall have been made
for such Units as aforesaid. Subject to the provisions of the next succeeding
paragraph, certificates for the Units so purchased shall be delivered to the
registered holder hereof within a reasonable time, not exceeding ten days after
the rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of Units, if
any, with respect to which this Warrant shall not then have been exercised shall
also be delivered to the registered holder hereof within such time.
Notwithstanding the foregoing, however, the Company shall not be required to
deliver any certificate for Units upon exercise of this Warrant, except in
accordance with the provisions, and subject to the limitations, of paragraph 7
hereof.
3. COVENANTS OF COMPANY. The Company covenants and agrees that all
shares of Common Stock which may be included in Units issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized and issued, fully paid, nonassessable and free from all taxes, liens
and charges with respect to the issue thereof, and, without limiting the
generality of the foregoing, the Company covenants and agrees that it will from
time to time take all such action as may be required to assure that the par
value per share of Common Stock is at all times equal to or less than the then
effective purchase price per share of the Common Stock issuable pursuant to this
Warrant. The Company further covenants and agrees that, during the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized, and reserved for the purpose of issue or transfer
upon exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of its Common Stock and Offering Warrants to provide for the
exercise of the rights represented by this Warrant.
4. ANTI-DILUTION ADJUSTMENTS. The above provisions are, however,
subject to the following:
(a) In case the Company shall at any time hereafter subdivide or
combine the outstanding shares of Common Stock or declare a dividend payable in
Common Stock, the exercise price of this Warrant in effect immediately prior to
the subdivision, combination or record date for such dividend payable in Common
Stock shall forthwith be proportionately increased, in the case of combination,
or decreased, in the case of subdivision or dividend payable in Common Stock,
and each share of Common Stock purchasable upon exercise of this Warrant
2
<PAGE> 3
shall be changed to the number determined by dividing the then current exercise
price by the exercise price as adjusted after the subdivision, combination or
dividend payable in Common Stock.
(b) No fractional Units are to be issued upon the exercise of this
Warrant, but the Company shall pay a cash adjustment in respect of any fraction
of a Unit which would otherwise be issuable in an amount equal to the same
fraction of the market price per share of Common Stock on the day of exercise as
determined in good faith by the Company.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of Common Stock and/or Offering
Warrants of the Company immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such stock, securities or assets
as may be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby (assuming, for this purpose, the exercise of the
Offering Warrants) had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of the holder of this
Warrant to the end that the provisions hereof (including without limitation
provisions for adjustments of the Warrant purchase price and of the number of
Units purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof.
(d) Upon any adjustment of the Warrant purchase price, then, and in
each such case, the Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the registered holder of this Warrant at the
address of such holder as shown on the books of the Company, which notice shall
state the Warrant purchase price resulting from such adjustment and the increase
or decrease, if any, in the number of Units purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
5. COMMON STOCK. As used herein, the term "Common Stock" shall mean and
include the Company's presently authorized shares of Common Stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution, dissolution
or winding up of the Company.
3
<PAGE> 4
6. NO VOTING RIGHTS. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF UNITS. The holder of this
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring any Units issued upon the exercise hereof ("Warrant Units"),
of such holder's intention to do so, describing briefly the manner of any
proposed transfer. Promptly upon receiving such written notice, the Company
shall present copies thereof to the Company's counsel and to counsel to the
original purchaser of this Warrant. If in the opinion of each such counsel the
proposed transfer may be effected without registration or qualification (under
applicable federal and state laws), the Company, as promptly as practicable,
shall notify such holder of such opinions, whereupon such holder shall be
entitled to transfer the Warrant Units or to dispose of shares of Common Stock
received upon the previous exercise hereof in accordance with the notice
delivered by such holder to the Company, provided that an appropriate legend may
be endorsed on this Warrant or the certificates for such Warrant Units
respecting restrictions upon transfer thereof necessary or advisable in the
opinion of counsel satisfactory to the Company to prevent further transfers
which would be in violation of Section 5 of the Securities Act of 1933.
If, in the reasonable opinion of either of the counsel referred to in
this paragraph 7, the proposed transfer or disposition described in the written
notice given pursuant to this paragraph 7 may not be effected without
registration or qualification of the Warrant Units, the Company shall promptly
give written notice thereof to the holder hereof, and such holder will limit its
activities in respect to such proposed transfer or disposition as, in the
opinion of both such counsel, are permitted by law.
8. REGISTRATION RIGHTS. (a) If the Company proposes to claim an
exemption under Regulation A promulgated under Section 3(b) of the Securities
Act of 1933 for a public offering of any of its securities, or to register under
the Securities Act of 1933 (except by a registration statement on a form that
does not permit the inclusion of shares by its security holders) any of its
securities, it will give written notice to all registered holders of Warrants,
and all registered holders of Units acquired upon the exercise of Warrants, of
its intention to do so and, on the written request of any registered holders
given within 20 days after receipt of any such notice (which request must be
made on or before ____________, 2004 (the seventh anniversary of the effective
date of the Registration Statement) and which notice shall specify the Warrant
Units intended to be sold or disposed of by such registered holder and describe
the nature of any proposed sale or other disposition thereof), the Company will
use its best efforts to cause all such Warrant Units, the registered holders of
which shall have requested the registration or qualification thereof, to be
included in such notification or registration statement proposed to be filed by
the Company. All expenses of such offering, except the fees of special counsel
and brokers' commissions to such holders, shall be borne by the Company.
(b) Further, on a one-time basis only, upon request by a majority in
interest of Warrants, or by the holders of a majority of the Warrant Units
issued upon exercise thereof, the Company will, at the expense of such holders,
promptly take all necessary steps to register or
4
<PAGE> 5
qualify the Warrant Units under Section 3(b) or Section 5 of the Securities Act
of 1933 and such state laws as such holders may reasonably request; provided
that such request must be made within five years from the effective date of the
Registration Statement. The Company shall use its best efforts to keep effective
and maintain any registration, qualification, notification or approval specified
in this paragraph for such period as may be necessary for the holders of the
Warrant Units to dispose of such Units and from time to time shall amend or
supplement, at the holder's expense, the prospectus, or offering circular used
in connection therewith to the extent necessary in order to comply with
applicable law, provided that the Company shall not be obligated to maintain any
registration for a period of more than six months after effectiveness except
that a Form S-3 registration statement or successor thereof shall be maintained
for up to 12 months after effectiveness.
(c) The Company shall indemnify the holder of this Warrant and of any
Warrant Units issued or issuable hereunder, its officers and directors, and any
person who controls such Warrant holder or such holder of Units within the
meaning of Section 15 of the Securities Act of 1933, against all losses, claims,
damages and liabilities caused by any untrue statement of a material fact
contained in any registration statement, prospectus, notification or offering
circular (and as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus relating to the
registration or qualification of the Warrant Units or caused by any omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading except insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or omission contained in
information furnished in writing to the Company by such Warrant holder or such
holder of Warrant Units expressly for use therein, and each such holder by its
acceptance hereof severally agrees that it will indemnify and hold harmless the
Company and each of its officers who signs such registration statement and each
of its directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act of 1933 with respect to losses,
claims, damages or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
holder expressly for use therein.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and this Warrant to be dated ______________, 1997.
DAYTON GENERAL SYSTEMS, INC.
By_________________________________
Its______________________________
5
<PAGE> 6
TO: DAYTON GENERAL SYSTEMS, INC.
ASSIGNMENT FORM -- To be Executed By the Registered Holder in Order to Transfer
the Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers _____
of the Warrants represented by the attached Warrant Certificate unto
__________________________________________________ (please print or typewrite
name and address including postal zip code of assignee) having the Social
Security or other identifying number of ________________, and does irrevocably
constitute and appoint ________________________ attorney to transfer the Warrant
Certificate on the records of the Company with full power of substitution in the
premises.
Date:__________________, 19____.
PLEASE NOTE: The signature(s) to the Purchase Form or the Assignment
Form must correspond to the name as written upon the face of the
Warrant Certificate in every particular without alteration or
enlargement or any change whatsoever.
6
<PAGE> 7
EXERCISE NOTICE
The undersigned Warrant holder hereby irrevocably elects to exercise
the attached Warrant Certificate. The Warrant is hereby exercised for
_____________________ shares and is accompanied by a check in the amount of
$__________ to cover the exercise price thereof.
Date:____________________ ___________________________________
(Name)
___________________________________
(Address)
___________________________________
(Tax ID No.)
___________________________________
(Signature)
7
<PAGE> 1
EXHIBIT 3.2
DAYTON GENERAL SYSTEMS, INC.
BY-LAWS
(as amended through November 5, 1997)
ARTICLE I
SHAREHOLDERS
SECTION 1. Meetings.
(a) Annual Meetings. The annual meeting of the shareholders of this
Corporation shall be held on such day, at such place within or without the
Commonwealth of Pennsylvania, and at such time of day as may be specified by the
Board of Directors.
(b) Special Meetings. Special meetings of the shareholders of the
Corporation, or of any class or series of shares of stock, may be called at any
time by the Board of Directors, the Chairman of the Board, any shareholder or
group of shareholders owning 10% or more of the voting power of the Corporation,
or such class or series of shares of stock, or such other person or persons as
may be authorized by law or the Articles of Incorporation. Such meetings shall
be held on such date and at such place, within or without the Commonwealth of
Pennsylvania, and time of day as may be fixed by the Board of Directors or the
Secretary.
(c) Record Date and Notice. The date of record for shareholders of the
Corporation, or of the holders of any class or series of shares of stock,
entitled to notice of and to vote at any annual or special meeting shall be
ninety days, or such lesser number of days prior to the meeting as the Board of
Directors shall fix.
SECTION 2. Notice.
Written notice of the date, place and time of all meetings of
shareholders of the Corporation, or of the holders of any class or series of
shares of stock, and of the purpose of each special meeting, shall be given to
each shareholder entitled to vote thereat at least ten days before the date of
the meeting, unless a greater period of notice is required by law or the terms
of the class or series of stock, or unless notice is waived.
SECTION 3. Voting.
Every shareholder entitled to vote may vote either in person or by
proxy in accordance with applicable law, these By-Laws and the Corporation's
Articles of Incorporation.
SECTION 4. Quorum.
The presence at a meeting, in person or by proxy, of the holders of
outstanding shares of stock of the Corporation entitled to cast at least a
majority of the votes which all shareholders are entitled to cast on any matter
to come before the meeting shall
<PAGE> 2
constitute a quorum for the purpose of considering such matter at the meeting;
provided, however, that whenever under the provisions of law, these By-Laws, the
Articles of Incorporation or the terms of a class or series of shares of stock,
the holders of a class or series of shares are entitled to vote on any matter as
a separate class or series of shares of stock, the presence at the meeting, in
person or by proxy, of the holders of shares of such class or series entitled to
cast at least a majority of the votes which all shareholders of the particular
class or series are entitled to cast on the particular matter to be voted on
shall constitute a quorum of such class or series for the purpose of considering
such matter. If a quorum is not present for the purpose of considering any
matter, those present in person and by proxy may adjourn the consideration of
such matter to an adjourned meeting at such time and place as they may
determine.
SECTION 5. Presiding Officer.
The President shall act as chairman of each meeting of shareholders, or
of the holders of a class or series of shares, unless another person has been
designated for such purpose by the Board of Directors. In the absence of the
Chairman of the Board, the President shall act as the chairman of meeting or, in
the absence of the President, the chairman of the meeting shall be chosen by the
Board of Directors or, in their absence, by a majority of the votes cast by the
holders of the shares of stock present in person or by proxy and entitled to
vote at such meeting. The Secretary or such other person as the chairman of the
meeting shall appoint, shall act as secretary of the meeting and keep the
minutes thereof.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers.
The authority of the Corporation shall be exercised by or under the
direction of the Board of Directors, except where any applicable law, the
Articles of Incorporation or these By-Laws require action to be authorized or
taken by the shareholders.
SECTION 2. Terms of Office and Vacancies.
Each director shall serve until his or her successor is elected and
qualified. Unless otherwise provided in the Articles of Incorporation or
required by law, vacancies in the Board of Directors may be filled by the
remaining members of the Board of Directors, though less than a quorum, and any
director so selected shall serve for the balance of the term of the director he
or she replaces.
SECTION 3. Meetings.
(a) Regular Meetings. Regular meetings of the Board of Directors shall
be held on dates specified by the Board of Directors, or if it fails to so
specify, as called by the
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<PAGE> 3
Chairman of the Board. Notice of regular meetings shall be given unless
otherwise ordered by the Board of Directors.
(b) Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board or the President and shall be
called by either of them upon the written request of not less than the majority
of the directors then in office. Notice of each special meeting shall be given
by the Secretary to each director before such meeting.
(c) Place. Meetings of the Board of Directors shall be held at such
place as the Board of Directors, the Chairman of the Board or the President may
designate, within or without the Commonwealth of Pennsylvania.
(d) Notice of Meetings. Notice of each special meeting of the Board of
Directors, or of any regular meeting of which notice is to be given, shall
specify the date, place and time of the meeting and shall be given to each
director at least 24 hours before the meeting if given personally, by telephone,
electronic mail or telecopier, at least 48 hours if given by telegram or similar
mode of communication, and at least three days before the meeting if given by
mail. Notice of any meeting shall be deemed to be given when (i) personally
delivered, (ii) dispatched to the electronic mail address or telecopier number
supplied by the director to the Corporation, (iii) mailed by first class United
States mail, postage prepaid, addressed to the business address of the director
or (iv) a telegram or similar mode of communication is delivered to the
telegraph or other transmitting company addressed to the business address of the
director. Any director may waive notice of any meeting before or after the
meeting. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where the director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
(e) General Powers. The business and affairs of the Corporation shall
be managed by its Board of Directors.
(f) Limitation of Liability. To the fullest extent allowed by law, a
director, as such, shall not be personally liable for monetary damages for any
action taken, or any failure to take any action.
SECTION 4. Quorum.
Except as otherwise provided in these By-Laws, the Articles of
Incorporation or by law, a majority of all directors in office shall constitute
a quorum for the transaction of business at any meeting, and the act of a
majority of the directors present and acting at a meeting at which a quorum is
present shall be the act of the Board of Directors.
SECTION 5. Committees.
(a) Committees. The Board of Directors may, by resolution adopted by a
majority of the whole board, create such committees as it may deem appropriate,
each committee to consist of two or more directors of the Corporation and to
have such functions, duties and powers as the Board of Directors from time to
time may specify by
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<PAGE> 4
resolution. Except as otherwise provided in Section 5(b) of this Article, any
such committee shall have and exercise the authority of the Board of Directors
to the extent provided in the resolution(s) designating the committee.
(b) Limitations on Committees' Authority. No committee shall have or
exercise the authority of the Board of Directors over the business of the
Corporation in respect of (i) matters the delegation of which to a committee
shall be limited by, or contrary to, law, the Articles of Incorporation, or
these By-Laws, (ii) amending the Articles of Incorporation or By-Laws of the
Corporation, (iii) filling vacancies in the Board of Directors of the
Corporation, (iv) electing or removing officers of the Corporation, (v) adopting
or approving a plan of merger, consolidation or sale of a substantial portion of
the assets of the Corporation or the dissolution or reorganization of the
Corporation or (vi) such other matters as may be specified by the Board of
Directors.
(c) Committee Minutes and Meetings. Each committee shall fix the time
and place of its meetings and shall meet on call of its chairman or of any two
members of the committee. It shall keep minutes of its meetings and report the
same to the Board of Directors. Each committee shall be organized in such
manner, not inconsistent with these By-Laws, as it may determine.
(d) Quorum. The presence of a majority of the members of a committee
shall constitute a quorum for the transaction of its business. The act of a
majority of the members present at any meeting of a committee at which a quorum
is present shall be the act of the committee.
SECTION 6. Participation in Meetings.
One or more directors may participate in a meeting of the Board of
Directors or a committee of the Board of Directors by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, with the same effect as if
such directors were present in person.
SECTION 7. Compensation.
By resolution of the Board of Directors, each director may be paid his
or her expenses of attendance at meetings of the Board of Directors and of
committees of the Board of Directors, and may be paid a stated fee as a director
or committee member, or a stated fee for attendance at meetings, or both, and
each director may be paid his or her expenses and a stated fee for his or her
time devoted to special matters or projects of the Corporation at the request of
the Chairman of the Board or the President.
SECTION 8. Action by Consent.
Any action which may be taken at a meeting of the Board of Directors,
or of a committee of the Board of Directors, may be taken without a meeting if
consents in writing setting forth the action so taken shall be signed by all of
the directors or the members of the committee, as the case may be, and filed
with the Secretary of the Corporation.
- 4 -
<PAGE> 5
SECTION 9. Nomination of Directors.
At any meeting of shareholders for the election of directors, the only
candidates who shall be eligible for election as directors shall be those who
have been nominated by or at the direction of the Board of Directors (which
nominations shall be either made at such meeting or disclosed in a proxy
statement or supplement thereto, distributed to shareholders for such meeting by
or at the direction of the Board of Directors) and those who have been nominated
at such meeting by a shareholder who has complied with the procedures set forth
in this Section 9. A shareholder may make a nomination for the office of
director only if such shareholder has first delivered to the Secretary of the
Corporation notice in writing at least 60 days in advance of the meeting of the
shareholders at which such election is to be held (or if less than 60 days'
notice or prior public disclosure of the date of such annual meeting is given,
not later than 10 days after the date of mailing of such notice or the date of
such public disclosure, whichever occurs first). Such shareholder notice shall
set forth the following information: (i) the name and address of the shareholder
who intends to make the nomination(s) and of the person(s) to be nominated; (ii)
the class, series and number of shares of the Company's capital stock owned by
such shareholder and a representation that the shareholder is a holder of record
of such stock of the Company and intends to appear in person or by proxy at the
meeting to nominate the person(s) specified in the notice; (iii) a description
of all arrangements or understandings between such shareholder and any other
person(s), naming such person(s), pursuant to which the nomination or
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated by the Board;
and (v) the consent of each nominee to serve as a director of the Company if so
elected.
SECTION 10. Personal Liability of Directors.
(A) A director of the Corporation shall not be personally liable, as
such, for monetary damages for any action taken by such director unless:
(i) The director has breached or failed to perform the duties
of his or her office under Subchapter B of Chapter Seventeen of the Pennsylvania
Business corporation Law of 1988 as in effect on July 14, 1997; and
(ii) The breach or failure to perform constitutes
self-dealing, wilful misconduct or recklessness.
(B) The provisions of this Section 9 shall not apply to:
(i) The responsibility or liability of a director pursuant to
any criminal statute; or
(ii) The liability of a director for the payment of taxes
pursuant to federal, state or local law.
SECTION 11. Election and Removal of Directors.
Subject to Article II, Section 2 of these By-Laws, the shareholders of
the Corporation shall elect each director. The shareholder vote necessary to
elect each director is the affirmative vote of a majority of votes cast. At any
properly convened meeting of the shareholders of the Corporation, the
shareholders of the Corporation may remove any director or the entire Board of
Directors, with or without cause, upon the affirmative vote of a majority of
the votes cast. Any director removed pursuant to this section shall continue to
serve until such time that a successor has been duly elected and qualified.
- 5 -
<PAGE> 6
ARTICLE III
OFFICERS
SECTION 1. Selection of Officers.
(a) Principal Officers. The principal officers of the Corporation shall
be elected by the Board of Directors. They shall include a President, Secretary,
Treasurer and such other principal officers as the Board of Directors may from
time to time determine. Every officer elected by the Board of Directors shall
serve at the pleasure of the Board of Directors.
(b) Other Officers. Officers of the Corporation, assistant officers and
subordinate officers other than the principal officers elected by the Board of
Directors pursuant to Section 1(a) of this Article, shall be selected by the
Chairman of the Board, or such other officer or officers as the Chairman of the
Board may designate, and shall have such authority and duties as the Chainman of
the Board or officers designated by the Chairman of the Board shall specify.
SECTION 2. Compensation.
The compensation of the Chairman of the Board and the President of the
Corporation shall be fixed by the Board of Directors or by a committee of the
Board. The compensation of other officers or employees of the Corporation shall
be fixed in such manner as the Board of Directors may determine, or in the
absence of such a determination, shall be fixed by the Chairman of the Board or
such other officer or officers designated by the Chairman of the Board.
SECTION 3. Powers and Duties of Specified Officers.
(a) President. The President shall be the chief executive officer of
the Corporation. The President shall have such other powers and perform such
other duties as may from time to time be assigned to the President by the Board
of Directors or the Chairman of the Board.
(c) Secretary. The Secretary shall attend all meetings of the
shareholders and the Board of Directors and shall keep an accurate record of the
proceedings at such meetings and shall notify the several officers of the
Corporation of action taken concerning matters in their respective areas of
responsibility. Upon request of any committee of the Board of Directors, he or
she shall attend a meeting or meetings of such committee and keep an accurate
record of the proceedings at its meeting or meetings. The Secretary shall be the
custodian of the seal of the Corporation. The Secretary shall give notice of all
meetings of shareholders (or of a class or series of shares of stock) and, when
requested, of any meeting of the Board of Directors or a committee thereof. The
Secretary, or the designated agent of the Corporation, shall keep and have
custody of the stock books required by law to be kept, and the Secretary or one
or more agents approved by the Board of Directors shall transfer all shares of
stock of the Corporation.
- 6 -
<PAGE> 7
(d) Treasurer. The Treasurer shall have custody of the corporate funds
and securities of the Corporation. The Treasurer shall maintain accounts in such
banks or places of deposit, and shall invest the funds of the Corporation, in
such manner as the Board of Directors or a committee of the Board of Directors
may from time to time designate. He or she shall disburse the funds of the
Corporation. The Treasurer shall keep full and accurate accounts of receipts and
disbursements and shall be bonded with one or more sureties against loss of
money, securities and other property which the Corporation may sustain through
any fraudulent or dishonest act in the discharge of his of her duties.
ARTICLE IV
SHARE CERTIFICATES AND TRANSFERS
SECTION 1. Share Certificates.
The shares of stock of the Corporation shall be represented by share
certificates, which shall be signed by manual, facsimile, printed or engraved
signatures of the Chairman of the Board or the President and of the Secretary or
an Assistant Secretary and shall be manually countersigned by a transfer agent
or a registrar if the Board of Directors has appointed such transfer agent or
registrar if one has been appointed. In case any officer who has signed or whose
facsimile signature has been placed on any share certificate shall have ceased
to be such officer before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer had not ceased to be such at
the date of its issue.
SECTION 2. Lost Certificates.
Any person or persons desiring the issue of a certificate of shares of
stock in lieu of one alleged to be lost, stolen or destroyed, shall apply
therefor to the Secretary or the Corporation's transfer agent describing, under
oath or affirmation, the certificate and the time, place and manner of its loss;
whereupon the Board of Directors, a committee thereof or an officer designated
by the Board of Directors or a committee thereof may direct the issue of a new
certificate, of the same tenor as the original. Before such new certificate
shall be issued, the applicant shall furnish an open-penalty bond indemnifying
the Corporation and its transfer agents and registrars against any loss or
damage that may arise from the issuance of a new certificate. The Board of
Directors, or a committee thereof, at its discretion may waive the furnishing of
such bond of indemnity.
- 7 -
<PAGE> 8
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
SECTION 1. Indemnification of Authorized Representatives.
The Corporation shall, to the fullest extent allowed by law, indemnity
any person who was or is an "authorized representative" of the Corporation
(which shall mean for purposes of this Article a director, officer or employee
of the Corporation, or any agent of the Corporation designated as an "authorized
representative" for purposes of this Article by the Board of Directors, or any
such director, officer, employee or designated agent serving at the request of
the Corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other entity or 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 "proceeding" (which
shall mean for purposes of this Article any threatened, pending or completed
action, suit, appeal or proceeding of any nature, whether civil, criminal,
administrative or investigative, whether formal or informal, including an action
by or in the right of the Corporation or a class of its security holders) by
reason of the fact that he or she was or is an authorized representative of the
Corporation, against any liability (which shall mean for purposes of this
Article any damage, judgment, penalty, fine, amount paid in settlement, punitive
damages, excise tax assessed with respect to an employee benefit plan or cost or
expense of any nature (including, without limitation, attorneys' fees and
disbursements)) including, without limitation, liabilities resulting from any
actual or alleged breach or neglect of duty, error, misstatement or misleading
statement, negligence, gross negligence or act giving rise to strict or products
liability. If an authorized representative is entitled to indemnification in
respect of a portion, but not all, of any liabilities to which such person may
be subject, the Corporation shall indemnity such authorized representative to
the maximum extent for such portion of the liabilities. The termination of any
proceeding by judgment, order, settlement, indictment or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the authorized representative is not entitled to
indemnification.
SECTION 2. Proceedings Initiated by Authorized Representatives.
Notwithstanding any other provision of this Article, the Corporation
shall not indemnify under this Article an authorized representative for any
liability incurred in a proceeding initiated (which shall not be deemed to
include counter-claim or affirmative defenses) or participated in as an
intervenor or amicus curiae by the person seeking indemnification unless such
initiation of or participation in the proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
in office. This section does not apply to successfully prosecuting or defending
the rights of an authorized representative granted by or pursuant to this
Article.
- 8 -
<PAGE> 9
SECTION 3. Advancing Expenses.
Expenses (including attorneys' fees and disbursements) incurred in good
faith shall be paid by the Corporation on behalf of an authorized representative
in advance of the final disposition of a proceeding described in Section 1 of
this Article upon receipt of an undertaking by or on behalf of the authorized
representative to repay such amount if it shall ultimately be determined
pursuant to Section 6 of this Article that such person is not entitled to be
indemnified by the Corporation as authorized in this Article. The financial
ability of such authorized representative to make such repayment shall not be a
prerequisite to the making of an advance.
SECTION 4. Securing of Indemnification Obligations.
To further effect, satisfy or secure the indemnification obligations
provided herein or otherwise, the Corporation may maintain insurance, obtain a
letter of credit, act as self- insurer, create a reserve, trust, escrow, cash
collateral or other fund or account, enter into indemnification agreements,
pledge or grant a security interest in any assets or properties of the
Corporation, or use any other mechanism or arrangement whatsoever in such
amounts, at such costs and upon such other terms and conditions as the Board of
Directors shall deem appropriate. Absent fraud, the determination of the Board
of Directors with respect to such amounts, costs, terms and conditions shall be
conclusive against all security holders, officers and directors and shall not be
subject to voidability.
SECTION 5. Payment of Indemnification.
An authorized representative shall be entitled to indemnification
within 30 days after a written request for indemnification has been received by
the Secretary of the Corporation.
SECTION 6. Arbitration.
Any dispute related to the right to indemnification or advancement of
expenses as provided under this Article, except with respect to indemnification
for liabilities arising under the Securities Act of 1933 which the Corporation
has undertaken to submit to a court for adjudication, shall be decided only by
arbitration in the metropolitan area in which the Corporation's executive
offices are located, in accordance with the commercial arbitration rules then in
effect of the American Arbitration Association, before a panel of three
arbitrators, one of whom shall be selected by the Corporation, the second of
whom shall be selected by the authorized representative and the third of whom
shall be selected by the other two arbitrators. In the absence of the American
Arbitration Association or if for any reason arbitration under the arbitration
rules of the American Arbitration Association cannot be initiated, or if the
arbitrators selected by the Corporation and the authorized representative cannot
agree on the selection of the third arbitrator within 30 days after such time as
the Corporation and the authorized representative have each been notified of the
selection of the other's arbitrator, the necessary arbitrator shall be selected
by the presiding judge of the court of general jurisdiction in such metropolitan
area. Each arbitrator selected shall have been a director of a corporation whose
shares of common
- 9 -
<PAGE> 10
stock were listed during at least one year of such service on the New York Stock
Exchange or the American Stock Exchange or quoted on the National Association of
Securities Dealers Automated Quotations System. The party or parties challenging
the right of an authorized representative to the benefits of this Article shall
have the burden of proof. The Corporation shall reimburse an authorized
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration. Any award
entered by the arbitrators shall be final, binding and nonappealable, and
judgment may be entered thereon by any party in accordance with applicable law
in any court of competent jurisdiction; provided, however, that if the conduct
giving rise to the liability for which indemnification is being sought has been
the subject of another proceeding not directly involving the authorized
representative's right to indemnification under this Article or otherwise, the
Corporation shall be entitled to interpose, as a defense in any judicial
enforcement proceeding on the arbitrators' award, any prior final judicial
determination adverse to the authorized representative in such other proceeding.
This arbitration provision shall be specifically enforceable.
SECTION 7. Discharge of Duty.
An authorized representative shall be deemed to have discharged such
person's duty to the Corporation if he or she has relied in good faith on
information, opinions, reports or statements, including financial statements and
other financial data, prepared by:
(1) one or more officers or employees of the Corporation whom such
authorized representative reasonably believes to be reliable and competent with
respect to the matter presented;
(2) legal counsel, public accountants or other persons as to matters
that the authorized representative reasonably believes are within the person's
professional or expert competence; or
(3) a committee of the Board of Directors upon which he or she does not
serve as to the matters within its area of designated authority, which committee
he or she reasonably believes to merit confidence.
SECTION 8. Contract Rights; Amendment or Repeal.
All rights under this Article shall be deemed a contract between the
Corporation and the authorized representative pursuant to which the Corporation
and each authorized representative intend to be legally bound. Any repeal,
amendment or modification hereof shall be prospective only and shall not affect
any rights or obligations then existing.
SECTION 9. Scope of Article.
The rights granted pursuant to this Article shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any statute, Articles of
Incorporation, By-Law, agreement, vote of shareholders or directors or
otherwise, both as to action in his or her official capacity and as to action in
any other capacity, and shall continue as to a person who has ceased to be
- 10 -
<PAGE> 11
an authorized representative in respect of matters arising prior to such time
and shall inure to the benefit of the heirs, executors, administrators and
personal representatives of such person.
SECTION 10. Reliance on Provisions.
Each person who shall act as an authorized representative of the
Corporation shall be deemed to be doing so in reliance upon the rights provided
by this Article.
ARTICLE VI
OFFICES
The principal office of the Corporation shall be as fixed from time to
time by action of the Board of Directors and may be within or without the
Commonwealth of Pennsylvania. The Corporation may have such other offices within
or without the Commonwealth of Pennsylvania as the Board of Directors may
designate, or as the business of the Corporation may require, from time to time.
The registered office of the Corporation specified in the Articles of
Incorporation may be changed at any time by action of the Board of Directors.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on January 1 and end on
December 31.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
Except as otherwise required by law, the authority to adopt, repeal and
amend the By-laws is expressly vested in the Board of Directors, subject to the
power of the shareholders to change such action.
- 11 -
<PAGE> 1
Exhibit 4.1
DAYTON GENERAL SYSTEMS, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
-------
VOID AFTER 3:00 P.M.
CINCINNATI TIME, ON , 2003
----------------
WA-
CUSIP 239751 11 8
THIS CERTIFIES THAT, FOR VALUE RECEIVED
the registered holder hereof (the "Holder") is entitled to purchase from DAYTON
GENERAL SYSTEMS, INC., a Pennsylvania corporation (the "Company"), at any time
before 3:00 p.m., Cincinnati time, on ___________________, 2003, the number of
shares of Common Stock, no par value (the "Common Stock"), of the Company set
forth above (the "Shares") at the purchase price of $6.50 per share (the
"Warrant Price"). The number of Shares purchasable upon exercise of this
Warrant and the Warrant Price are subject to adjustment from time to time as
set forth in the Warrant Agreement referred to below.
This Warrant may be exercised in whole or in part by its presentation
with the Purchase Form on the reverse side duly executed (and signature
guaranteed) and payment of the Warrant Price for each Share purchased at the
principal office in Cincinnati, Ohio, of The Fifth Third Bank (the "Warrant
Agent"). Payment of such price shall be made at the option of the Holder in
cash or by bank cashier's check, money order or certified check made payable to
the Company.
This Warrant is part of a duly authorized issue of Common Stock
Purchase Warrants of the Company, is issued under and in accordance with a
Warrant Agreement dated as of _________________, 1997, between the Company and
the Warrant Agent and is subject to the provisions contained in such Warrant
Agreement, all of which are incorporated by reference herein and to all of
which the Holder of this Warrant by acceptance hereof consents. A copy of the
Warrant Agreement is available at the executive offices of the Company.
Upon any partial exercise of this Warrant, there shall be
countersigned and issued to the Holder a new Warrant in respect of the Shares
as to which this Warrant shall not have been exercised. This Warrant also may
be exchanged at the office of the Warrant Agent by its surrender, properly
endorsed (with signature guarantee), for one or more new Warrants to purchase
the same aggregate number of Shares as are evidenced by this Warrant. No
fractional Shares will be issued upon the exercise of rights to purchase
hereunder. This Warrant is transferable at the office of the Warrant Agent in
the manner and subject to the limitations set forth in the Warrant Agreement.
The registered Holder hereof may be deemed by the Company, the Warrant
Agent and all other persons dealing with this Warrant as the absolute owner
hereof for all purposes and as the person entitled to enforce the rights
represented hereby, any notice to the contrary notwithstanding.
This Warrant does not entitle the Holder hereof to any rights of a
shareholder of the Company.
This Warrant shall not be valid or obligatory for any purpose until it
shall have been countersigned by the Warrant Agent.
Dated:
DAYTON GENERAL SYSTEMS, INC.
By:
-------------------------------------
SECRETARY
By:
-------------------------------------
PRESIDENT
COUNTERSIGNED:
THE FIFTH THIRD BANK
38 FOUNTAIN SQUARE PLAZA
CINCINNATI, OHIO 45263
By:
------------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
DAYTON GENERAL SYSTEMS, INC.
PURCHASE FORM
Mailing Address:
c/o The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant, and to purchase hereunder, _____
shares of Common Stock provided for herein, and requests that certificates for
such Shares be issued in the name of:
--------------------------------------------------------------------------
(Please Print or Type Name, Address and Social Security Number)
and, if said number of Shares shall not be all the Shares purchasable
hereunder, that a new Warrant for the balance of the Shares purchasable under
the within Warrant be registered in the name of the undersigned Holder or his
Assignee as below indicated and delivered to the address stated below.
Name of Holder or Assignee:
----------------------------------------------------
(Please Print)
Address:
-----------------------------------------------------------------------
Dated: Signature:
-------------------------- ----------------------------
Note: The above signature must correspond with the name as it appears upon
the face of the within Warrant in every particular without alteration
or enlargement or any change whatsoever.
Signature Guaranteed:-----------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION,
(Bank, Stockbroker, Savings and Loan Association or Credit Union) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
- -------------------------------- the within Warrant, hereby irrevocably
(Please Print or Type Name, Address and Social Security Number)
constituting and appointing ---------------------------- Attorney to transfer
said Warrant on the books of the Company, with full power of substitution in
the premises.
Dated:
---------------------- --------------------------------------------------
Signature of Registered Holder
Note: The signature of this assignment must correspond with the name as it
appears upon the face of this Warrant in every particular, without
alteration, impairment or any change whatever.
Signature Guaranteed:
----------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION,
(Bank, Stockbroker, Savings and Loan Association or Credit Union) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
- 2 -
<PAGE> 3
<PAGE> 1
Exhibit 4.2
UNIT NO. DAYTON GENERAL SYSTEMS, INC. UNITS
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
UNIT CERTIFICATE
EACH UNIT COMPOSED OF TWO SHARES OF COMMON STOCK AND ONE COMMON
STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that
or registered assigns, is the registered holder of the number of Units ("Units")
set forth above, each of which represents two shares of Common Stock, no par
value ("Common Stock"), of Dayton General Systems, Inc. (the "Company"), and one
Common Stock Purchase Warrant ("Warrant"). The shares of Common Stock and the
Warrant included in each Unit are referred to hereinafter as the "Securities."
Each Warrant entitles the holder to purchase one share of the Company's Common
Stock, at an exercise price of $6.50, subject to adjustment as set forth in the
Warrant Agreement dated _______________ between the Company and The Fifth Third
Bank (the "Warrant Agreement"), at any time after the Securities become
separately transferable through _________________, 2003.
The Securities may not be traded separately until ___________________
or until such earlier date as may be specified upon the mutual agreement of the
Company and J.V. Delaney & Associates in their sole discretion. At any time
after the Securities are separately transferable, this Unit Certificate is
exchangeable upon surrender by its registered holder to The Fifth Third Bank
(the "Transfer Agent") for one or more certificates, representing in the
aggregate the number of shares of Common Stock comprising the Units represented
hereby, and one or more certificates, representing in the aggregate the number
of Warrants comprising the Units represented hereby.
The Company agrees at all times to reserve or hold available a
sufficient number of shares of Common Stock to cover the number of shares of
Common Stock issuable upon the exchange of this Certificate and the exercise of
the Warrants included herein. This Unit Certificate entitles the holder hereof
to such rights, if any, as may pertain to the shares of Common Stock and
Warrants contained herein. This Unit Certificate is exchangeable at any time
upon the surrender hereof by the registered holder to the Transfer Agent for
one or more new Unit Certificates of like tenor and date representing in the
aggregate the number of Units represented hereby.
The Company may deem and treat the registered holder of this Unit
Certificate at any time as the absolute owner hereof and of the Securities for
all purposes and shall not be affected by any notice to the contrary. The
Warrants covered by this Certificate are subject to the terms of the Warrant
Agreement, a copy of which is available at the executive offices of the
Company. The Warrant Agreement is incorporated herein by reference and made a
part hereof and reference is made thereto for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder. This Unit
Certificate shall not be valid or obligatory for any purpose unless
countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Company has caused this Unit Certificate to be
executed by its duly authorized officers.
DAYTON GENERAL SYSTEMS, INC.
Dated:
By:
--------------------------------
PRESIDENT
By:
--------------------------------
SECRETARY
COUNTERSIGNED AND REGISTERED:
THE FIFTH THIRD BANK
38 FOUNTAIN SQUARE PLAZA
CINCINNATI, OHIO 45263
Transfer Agent and Registrar
By:
----------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
DAYTON GENERAL SYSTEMS, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN ACT - Custodian
in common ---------- -----------
(Cust) (Minor)
TEN ENT - as tenants
by the entireties
under Uniform Gift to Minors
Act
-------------------------
(State)
JT TEN - as joint tenants
with right of
survivorship and not
as tenants in common
UNIF TRF MIN ACT - Custodian (until age
--------
(Cust)
under Uniform
--------
(Minor)
Transfers to Minors Act
-------
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Units
represented by the within Certificate and do hereby irrevocably constitute and
appoint
- --------------------------------------------------------------------------------
Attorney
to transfer the said units on the books of the within-named Company with full
power of substitution in the premises.
Dated
---------------------------
--------------------------------
SIGNATURE
Signature(s) Guaranteed
By
---------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (bank, stockbroker, savings and loan association or credit
union) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15.
- 2 -
<PAGE> 1
Exhibit 5
Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
November 5, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Dayton General Systems, Inc.
-----------------------------
Dear Sir or Madam:
We have acted as counsel for Dayton General Systems, Inc., a
Pennsylvania corporation (the "Company"), in connection with its Registration
Statement on Form SB-2, No. 333-33597 (the "Registration Statement"), relating
to the issuance and/or sale by the Company and by the Selling Shareholders
named in the Registration Statement of up to (i) 900,000 units (the "Units"),
each Unit consisting of two shares of the Company's common stock, without par
value (the "Common Stock") and one warrant to purchase an additional share of
Common Stock ("Warrant"); (ii) 900,000 shares of Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares"); (iii) 90,000 Unit Purchase
Warrants (the "Underwriter Warrants"); (iv) 90,000 Units issuable upon exercise
of the Underwriter Warrants (the "Underwriter Units") and (v) 90,000 shares of
Common Stock issuable upon exercise of the Warrants included in the Underwriter
Units the ("Underwriter Warrant Shares"). The Units, the shares of Common Stock
contained in the Units, the Warrants, the Warrant Shares, the Underwriter
Warrants, the Underwriter Units (including the shares of Common Stock contained
in the Underwriter Units) and the Underwriter Warrant Shares are hereinafter
referred to as the "Securities."
It is our opinion that the registration and issuance of the Securities
covered by the Registration Statement have been duly authorized by all
necessary corporate action by the Company and that the Securities have been or,
when issued and sold as contemplated by the Registration Statement and in
accordance with their respective terms, will be validly issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
TAFT, STETTINIUS & HOLLISTER
<PAGE> 1
[GRANT THORNTON LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 14, 1997 (except for Notes B, I, L, O, P,
as to which the date is October 31, 1997), accompanying the financial statements
of Dayton General Systems, Inc. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Cincinnati, Ohio
November 6, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of Dayton General Systems, Inc., hereby
appoint Thomas C. Haas and Jay G. Pollack, Ph.D., or either of them, our true
and lawful attorneys and agents, to do any and all acts and things in our names
and on our behalf in our capacities indicated below, which said attorneys and
agents, or each of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with a Registration Statement on Form SB-2 or any amendment
thereto to be filed in connection with the corporation's initial public
offering of securities including, without limitation, power and authority to
sign for us, or any of us, in our names in the capacities indicated below, any
and all amendments to such Registration Statement, and we hereby ratify and
confirm all that said attorneys and agents, or each of them, shall do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Power of Attorney has been signed below by the following persons as of the
6th day of November, 1997, in the capacities indicated:
Signature Title
--------- -----
/s/ Thomas C. Haas Chairman of the Board
- ---------------------------
Thomas C. Haas
/s/ Edward T. Hurd Director
- ---------------------------
Edward T. Hurd
- --------------------------- Director
William R. Winkler
<PAGE> 1
Exhibit 99.1
ANNEX B TO UNDERWRITING AGREEMENT
ESCROW AGREEMENT
THIS AGREEMENT made and entered into this ___ day of _____, 1997, by
and among Dayton General Systems, Inc., a Pennsylvania corporation (hereinafter
referred to as the "Issuer"), J. V. Delaney & Associates, a duly registered
broker/dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (hereinafter referred to as the
"Underwriter"), Church Street Financial Corp., James E. Cogan and Harold H.
Croghan (hereinafter collectively referred to as the "Selling Shareholders"),
and National Bank of Southern California, a national bank (hereinafter referred
to as the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Issuer desires to make through the Underwriter a best
efforts public offering (the "Offering") of securities units, each consisting of
two shares of Issuer's common stock and a warrant to purchase one additional
share of common stock (hereinafter referred to as the "Units") at the rate of
$10.00 per Unit under an arrangement whereby a minimum of $5,500,000 of the
Units (or 550,000 Units) up to a maximum of $8,820,000 of the Units (or 882,000
Units) are to be offered by the Underwriter on a "best efforts, all-or-none"
basis, and the remaining Units are to be offered on a "best efforts" basis; and
WHEREAS, the Selling Shareholders desire to sell up to an aggregate of
36,000 shares of the Issuer's common stock owned by them (to be sold only after
the minimum number of Units is sold) as Units, with a warrant purchased from the
Issuer, through the Underwriter on the same terms as the Units offered by the
Issuer.
WHEREAS, the Offering is to be made pursuant to a registration
statement on Form SB-2 filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and pursuant to appropriate filings to
be made with the securities regulators of the various states in which the
Offering may be made, if and as required; and
WHEREAS, the parties wish to make provision to impound the cash
proceeds from the Units sold in the Offering in escrow, which cash proceeds are
to be released to the Issuer, the Selling Shareholders and the Underwriter in
accordance with the terms of this Agreement only in the event of the sale of and
payment for at least $5,500,000 of the Units and otherwise the escrowed cash
proceeds are to be returned by the Escrow Agent to the Unit purchaser(s); and
WHEREAS, the Escrow Agent has agreed to act as a depository only and is
not a party to nor has it reviewed or approved the content of the disclosure
documents prepared in connection with the Offering (hereinafter collectively
referred to as the "Prospectus") and is not responsible or liable in any manner
for the sufficiency, correctness, genuineness, or validity of any representation
concerning the Offering and undertakes no responsibility or liability for the
form thereof; and
WHEREAS, the Issuer, the Selling Shareholders, the Underwriter, and the
Escrow Agent desire to enter into an agreement with respect to the above
described escrow.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants contained herein, it is hereby agreed as follows:
1. On receipt thereof by the Underwriter, all cash proceeds from the
sale of any Units in the Offering shall be promptly delivered to the Escrow
Agent together with a written account of each sale, which account shall set
forth the purchaser's name and address, and amount of Units purchased. The
Escrow Agent shall not be required to nor have any responsibility in enforcing
collections of any check which has been delivered in payment of the purchase
price of each subscription.
2. During the entire term of this Agreement, all funds held by the
Escrow Agent as cash awaiting distribution shall be invested as collected by the
Escrow Agent in such short term cash equivalent or money market obligations
and/or investments (which may include deposits in the Escrow Agent's Commercial
Banking Department) as in the Escrow Agent's sole discretion may be appropriate
(the "Escrow Account"). All interest derived from investing funds held in the
Escrow Account shall accrue to the Escrow Account.
3. During the Escrow Period (as hereinafter defined), none of the
amounts deposited in the Escrow Account shall become the property of the Issuer
or any other entity, the Selling Shareholders or any other entity or be subject
to the debts of the Issuer or any other entity or the debts of the Selling
Shareholders or any other entity, except as expressly provided herein with
respect to all payments by the Escrow Agent to the Issuer and/or the Selling
Shareholders, and the Escrow Agent shall make or permit no disbursement from the
Escrow Account except as expressly provided herein.
4. The Escrow Period shall begin on the date of this Agreement, and
shall terminate on the first to occur of the following dates:
(a) ____________, 1997, unless extended for 90 days, at the discretion
of the Issuer by written agreement between the Issuer and Underwriter, provided
that a copy of such agreement is provided to the Escrow Agent;
(b) The date established by the agreement of the Issuer and the
Underwriter, provided that proceeds from the sale of at least $5,500,000 of the
Units offered in the Offering have been deposited with the Escrow Agent;
provided further that a copy of such agreement has been submitted to the Escrow
Agent.
5. If on the termination of the Escrow Period the Escrow Agent has
received the deposit of proceeds received from the sale of $5,500,000 or more of
the Units (i.e., 550,000 Units) offered, the Escrow Agent shall, upon receipt of
joint written instructions from the Underwriter and the Issuer, deliver and pay
over all deposits in the Escrow Account as follows: An amount equal to 90% of
the total proceeds (excluding the amounts due to the Selling Shareholders and
interest earned on such proceeds) shall be paid to Issuer, an amount equal to
10% of the total proceeds (excluding interest earned on such proceeds) shall be
payable to the Underwriter and an amount equal to the proceeds of the sale of
their shares shall be payable to the Selling Shareholders. Interest earned on
funds deposited in the Escrow Account shall be retained by the Escrow Agent and
paid out in accordance with Section
2
<PAGE> 3
6 hereof. The Escrow Agent, upon compliance with the foregoing, shall be
completely discharged and released of any further liabilities or
responsibilities herein.
6. The Issuer shall deposit with the Escrow Agent funds ("Interest
Funds") which shall be used, along with any interest earned on the Escrow
Account, to pay the interest due on funds paid into Escrow by the purchasers of
Units in the Offering prior to the expiration of the Escrow Period. Such
Interest Funds will be in an amount sufficient to cover the difference between
the interest earned on the Escrow Account and the amounts due to the purchasers
of the Units in the Offering. At the expiration of the Escrow Period, the Issuer
shall provide written instructions to the Escrow Agent to deliver and pay over
the interest due to the purchaser of Units in the Offering in such amounts as
specified in the written instructions.
7. (a) If the Issuer and the Underwriter reject any subscription for
which the Escrow Agent has already collected funds, the Escrow Agent shall
promptly issue a refund check to the rejected subscriber, inclusive of interest
earned thereon. If the Issuer and the Underwriter reject any subscription for
which the Escrow Agent has not yet collected funds but has submitted the
subscriber's check for collection, the Escrow Agent shall promptly issue a check
to the rejected subscriber in the amount of the subscriber's original check
after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet
submitted a rejected subscriber's check for collection, the Escrow Agent shall
promptly return the subscriber's check directly to the subscriber.
(b) If on the termination of the Escrow Period proceeds from the sale
of at least 550,000 Units ($5,500,000 total sales proceeds) have not been
deposited with the Escrow Agent, the Escrow Agent on the basis of its records of
the Escrow Account, shall return to each of the purchasers of Units in the
Offering the amounts paid in by them, with interest, for the purchaser of Units
and without any deductions. Each amount paid or payable to each purchaser
pursuant to this Escrow Agreement shall be deemed to be the property of each
purchaser, free and clear of any or all claims of Issuer or any of its
creditors, and the subscription agreements to purchaser the Units made and
entered into in connection with the Offering shall thereupon be deemed ipso
facto to be canceled without any further liability of said purchasers to pay for
the Units purchased. The Escrow Agent shall be required to make such payment
only to the person named in the written account of each sale to be furnished
pursuant to Paragraph 1. At such times as the Escrow Agent shall have made all
the payments and remittances provided for in this paragraph, the Escrow Agent
shall be completely discharged and released of any further liabilities and
responsibilities hereunder.
8. The Escrow Agent, in its actions pursuant to this Agreement, shall
be fully protected in every reasonable exercise of its discretion and shall have
no obligations hereunder either to Issuer or to any other party, except as
expressly set forth herein.
9. No purchaser of Units for which funds are deposited hereunder shall
have any right to have funds refunded except in accordance with the provisions
of paragraph 7 hereof.
10. The Escrow Agent shall not be obligated to issue any certificate of
deposit to the Issuer, the Underwriter or any other party or any other
instrument or document representing any interest in the deposited funds, but
written notice acknowledging receipt of the deposited funds will be delivered
from
3
<PAGE> 4
time to time by the Escrow Agent to the Issuer and the Underwriter. The Escrow
Agent shall not release any proceeds received until such proceeds are received
by the Escrow Agent in collected funds and subject to the provisions contained
in this Agreement.
11. In performing any of its duties hereunder, the Escrow Agent shall
not incur any liability to anyone for damages, losses, or expenses, except for
willful default or gross negligence, and it shall, accordingly, not incur any
such liability with respect to (i) any action taken or omitted in good faith
upon advice of its counsel, or (ii) any action taken or omitted in reliance upon
any instrument, including the written advice provided for herein, which the
Escrow Agent shall, in good faith, believe to be genuine, to have been signed or
presented by a proper person or persons, and to conform with the provisions of
this Agreement.
12. In consideration of this appointment by Escrow Agent, the Issuer
agrees to indemnify and hold Escrow Agent harmless as to any liability incurred
by Escrow Agent to any person, firm or corporation by reason of its having
accepted same or in carrying out any of the terms hereof, except as provided in
Section 11 herein, and to reimburse Escrow Agent for all its expenses, including
among other things, counsel fees and court costs incurred by reason of its
position or actions taken pursuant to this Agreement. The Issuer, Underwriter
and Selling Shareholders hereby agree that the Escrow Agent shall not be liable
to any of them for any actions taken by Escrow Agent pursuant to the terms
hereof.
13. Escrow Agent is hereby authorized, in its exclusive discretion, to
obey and comply with all writs, orders, judgments or decrees issued by any court
or administrative agency affecting any money, documents or things held by Escrow
Agent, Escrow Agent shall not be liable to any of the parties hereto, their
successors, heirs or personal representatives by reason of Escrow Agent's
compliance with any such writ, order, judgment or decree, notwithstanding if
such writ, order, judgment or decree is later reversed, modified, set aside or
vacated.
14. If any action be brought to interpret or enforce these
instructions, or any part thereof, the Issuer agrees to pay to Escrow Agent's
attorney fees, accounting fees, special and extra service fees and other costs
related to such action.
15. In the event the escrow established hereby is canceled, the Issuer
shall nevertheless pay to the Escrow Agent the initial fee together with all
costs and expenses of Escrow Agent, including attorney fees. Notwithstanding
anything in these instructions to the contrary, Escrow Agent may, in its sole
discretion, upon ten (10) days written notice to the Issuer, resign as Escrow
Agent and shall be entitled to reimbursement for those costs and expenses
incurred to the date of such resignation. Upon cancellation by the Issuer or
resignation by Escrow Agent, after deducting Escrow Agent's fees, costs and
expenses, the balance of any funds shall be returned to the Issuer who shall
have deposited same.
16. In the event that (a) Escrow Agent performs any services not
specifically provided for herein or (b) there is an assignment or attachment of
any interest in the subject matter of the escrow established hereby or any
modification thereof, or (c) any dispute or controversy arises hereunder, or (d)
Escrow Agent is named a party to, or intervenes in, any litigation pertaining to
this escrow or the subject matter thereof, Escrow Agent shall, in addition to
fees and charges for ordinary services, be
4
<PAGE> 5
reasonably compensated therefore and reimbursed for all costs and expenses,
including attorneys' fees, occasioned thereby.
Escrow Agent shall be entitled to an initial, non-refundable
set-up fee ("initial fee") of $1,000.00, payable concurrently with its
acceptance, and to additional compensation as follows: An additional $1.00 per
$1,000 of subscription funds deposited herein in excess of $1,500,000, wire
fees, messenger fees, $100.00 yearly hold-open fee (due if escrow open over 1
year from the date of these instructions), and/or any other reasonable and
necessary out-of-pocket expenses incurred by Escrow Agent, which shall be
deducted from the accrued interest, if any, and/or subscription funds as
incurred.
The Issuer, Underwriter and Selling Shareholders understand
that Escrow Agent will charge additional fees, including premium hourly fees,
for any services performed according to this Agreement, or any modification or
any service not specifically provided therein, that involve concerted effort,
employees working overtime, expedited handling of any aspect of the Escrow, or
other similar services.
17. These instructions may be executed in counterparts, each of which
so executed shall be deemed as original, irrespective of the date of its
execution and delivery, and said counterparts together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the Issuer and the Underwriter, and the Escrow
Agent have executed this Escrow Agreement on the day and year first above
written.
"ISSUER" DAYTON GENERAL SYSTEMS, INC.
By:
-------------------------------------
Thomas C. Haas, President
"UNDERWRITER" J. V. DELANEY & ASSOCIATES
By:
-------------------------------------
Joseph V. Delaney, Chairman and CEO
"SELLING SHAREHOLDERS" CHURCH STREET FINANCIAL CORP.
By:
-------------------------------------
Its:
------------------------------------
5
<PAGE> 6
----------------------------------------
James E. Cogan
----------------------------------------
Harold H. Croghan
Escrow Agent hereby acknowledges receipt of the Escrow Agreement and
hereby assigns Escrow No. _______________-GG to same. Upon receipt of the money
referred to in this Agreement, Escrow Agent agrees in consideration of the
foregoing to hold and dispose of the same in accordance with said Agreement, and
upon the terms and conditions set forth.
"ESCROW AGENT" NATIONAL BANK OF
SOUTHERN CALIFORNIA
By:
-------------------------------------
Title:
----------------------------------
6
<PAGE> 1
Exhibit 99.2
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement") is dated as of
_________________, 1998 by and between Dayton General Systems, Inc., a
Pennsylvania corporation (the "Company"), and The Fifth Third Bank (the
"Warrant Agent").
WHEREAS, the Company has issued units (the "Units"), each Unit
consisting of two shares of its common stock, without par value ("Common
Shares"), and one Warrant ("Warrant") entitling the holder to purchase one
Common Share; and
WHEREAS the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act on the terms and subject to
the conditions contained herein, in connection with the issuance, registration,
transfer and exchange of certificates representing the Warrants and the
exercise of the Warrants.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth and for the purpose of defining the terms and provisions of the
Warrants and the respective rights and obligations thereunder of the Company,
the holders of certificates representing the Warrants and the Warrant Agent,
the parties hereto do hereby agree as follows:
1. Definitions. In addition to the capitalized terms defined
elsewhere herein, the following terms shall have the following meanings, unless
the context shall otherwise require:
"Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located at the date hereof at 38 Fountain
Square Plaza, Cincinnati, OH 45263.
"Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash or by bank cashier's check, money order or certified check made
payable to the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price.
"Purchase Price" shall mean the price payable for each Common
Share of the Company upon exercise of a Warrant, equal to $6.50 per share,
subject to adjustment as provided herein.
"Registered Holder" shall mean the person in whose name any
Warrant Certificate shall be registered on the books maintained by the Warrant
Agent pursuant to Section 6.
"Transfer Agent" shall mean The Fifth Third Bank, or its
authorized successor, in its capacity as transfer agent and registrar for the
Common Shares of the Company.
"Warrant Expiration Date" shall mean 3:00 p.m., Cincinnati
time, on ______________________. If such date shall be a holiday or a day on
which banks are authorized to close in the State of Ohio, then 3:00 p.m.,
Cincinnati time, on the next
<PAGE> 2
following day which in the State of Ohio is not a holiday or a day on which
banks are authorized to close.
"Warrant Certificate" shall mean a certificate evidencing the
right of the Registered Holder thereof to Warrants of the Company.
2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase that number of Common
Shares designated thereon, upon the exercise thereof, subject to adjustment as
provided herein.
(b) The Warrant Agent shall prepare, countersign and
deliver Warrant Certificates, upon receipt of written instructions from the
Company, which instructions (i) set forth the name or names in which such
Warrant Certificates shall be registered and (ii) verify that the Units of
which such Warrants constitute a part have been sold and fully paid for.
(c) From time to time prior to the Warrant Expiration Date,
the Warrant Agent shall request the Transfer Agent to countersign and deliver
certificates in required whole number denominations representing Common Shares
issuable upon the exercise of Warrants in accordance with the terms of the
Warrants and this Agreement.
(d) From time to time prior to the Warrant Expiration Date,
as requested in accordance with this Agreement, the Warrant Agent shall
countersign and deliver Warrant Certificates in required whole number
denominations to the persons entitled thereto in connection with any transfer
or exchange permitted under this Agreement.
3. Form and Execution of Warrant Certificates. The Warrant
Certificates shall be substantially in the form annexed hereto as Exhibit A
(the provisions of which are incorporated herein by reference) and may have
such letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange or quotation system on which the Warrants may
be listed, or to conform to usage. The Warrant Certificates shall be dated the
date of issuance thereof (whether upon initial issuance, transfer, exchange or
in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates).
Warrants shall be numbered serially.
Warrant Certificates shall be executed on behalf of the Company by its
President, or any authorized Vice President, and by its Secretary or Treasurer,
by manual signatures or by facsimile signatures printed thereon. Warrant
Certificates shall be countersigned manually or by facsimile by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may
nevertheless be countersigned by the Warrant Agent and issued and delivered
with the same force and effect as though the person who signed such Warrant
Certificate had not ceased to be such officer of the Company.
- 2 -
<PAGE> 3
4. Exercise. Each Warrant may be exercised at any time prior to
the Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. The person entitled to
receive the securities deliverable upon such exercise shall be treated for all
purposes as the holder upon exercise thereof as of the close of business on the
Exercise Date. The Warrant Agent shall deposit the proceeds received from the
exercise of a Warrant and shall notify the Company in writing of the exercise
of any Warrant. No later than five days after the date of such notice from the
Warrant Agent, the Company shall cause the Transfer Agent to issue and deliver
to the person or persons entitled to receive the same, a certificate or
certificates for the securities deliverable upon such exercise. No fractional
share shall be issued upon exercise of a Warrant. Upon full exercise of all
Warrants held by a Registered Holder, cash (in an amount equal to the current
market price (as defined in subsection (c) of Section 8) per Common Share less
the Purchase Price times the fractional amount) shall be paid in lieu of any
fractional share then remaining.
5. Reservation of Shares; Listing; Payment of Taxes; etc. The
Company covenants that it will at all times reserve and keep available out of
its authorized Common Shares, such number of Common Shares as shall then be
issuable upon exercise of all outstanding Warrants. Before taking any action
which would cause an adjustment pursuant to Section 8 reducing the Purchase
Price below the then par value (if any) of the Common Shares issuable upon
exercise of the Warrants, the Company will take any corporate action which may,
in the opinion of its counsel (which may be counsel employed by the Company), be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Common Shares at the Purchase Price as so adjusted. The Company
covenants that all of the Common Shares which shall be issuable upon exercise of
the Warrants shall be duly and validly issued, fully paid, nonassessable (except
as provided under applicable law) and free from all taxes, liens and charges
with respect to the issue thereof, and that it will use its best efforts to have
such shares listed on each securities exchange or quotation system, if any, on
which the other outstanding Common Shares of the Company are then listed.
The Company covenants that if any Common Shares reserved for issuance
upon the exercise of Warrants require registration with, or approval of, any
governmental authority under any federal or state law before such Common Shares
may be validly issued or delivered upon such exercise, then the Company will
endeavor, in good faith and as expeditiously as possible, to secure such
registration or approval; however, Warrants may not be exercised by, or Common
Shares issued to, any Registered Holder in any state in which such exercise
would be unlawful or if such issuance would be unlawful pursuant to federal law
and regulation. The Company also covenants that it will give notice to the
Warrant Agent of the jurisdictions in which Common Shares may be issued upon
the exercise of Warrants.
The Company shall pay all documentary, stamp, or similar taxes and any
other governmental charges that may be imposed with respect to the initial
issuance of Warrants, or the initial issuance or delivery of any Common Shares
upon exercise of the Warrants; provided, however, that if the Common Shares are
to be delivered in a name other than the name of the Registered Holder of the
Warrant being exercised then no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of transfer taxes
or charges incident thereto, if any.
- 3 -
<PAGE> 4
The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing Common
Shares acquired upon exercise of the Warrants, and the Company will authorize
the Transfer Agent to comply with all such proper requisitions. If requested
by the Warrant Agent, the Company will, from time to time, file with the
Warrant Agent a statement setting forth the name and address of the transfer
agent of the Company for the Common Shares or other capital stock issuable upon
exercise of the Warrants.
6. Exchange and Registration of Transfer. Warrant Certificates
may be exchanged for other Warrant Certificates representing an equal aggregate
number of Warrants and, subsequent to _____________, 1998, may be transferred in
whole or in part. Warrant Certificates to be exchanged shall be surrendered to
the Warrant Agent at its Corporate Office, and the Company shall execute and the
Warrant Agent shall countersign, issue and deliver in exchange therefor the
Warrant Certificate(s) which the Registered Holder making the exchange shall be
entitled to receive.
The Warrant Agent shall keep, at its Corporate Office, books in which
it shall register Warrant Certificates and the transfer thereof in accordance
with its regular practice. Upon due presentment for registration of transfer
of any Warrant Certificate at such office, the Company shall execute and issue
and the Warrant Agent shall deliver to the transferee or transferees a new
Warrant Certificate or Certificates representing an equal aggregate number of
Warrants.
With respect to all Warrant Certificates presented for assignment or
registration of transfer, or for exchange or exercise, the form of assignment
on the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Company and
the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing. In addition, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
All Warrant Certificates surrendered for exercise, assignment,
transfer or exchange (in case of mutilated Warrant Certificates) shall be
promptly canceled by the Warrant Agent and thereafter destroyed by the Warrant
Agent unless the Company directs their return. The Warrant Agent shall furnish
to the Company written confirmation of the destruction of the Warrant
Certificates so canceled.
Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof (notwithstanding any
notations of ownership or writing thereon made by anyone other than the Company
or the Warrant Agent) for all purposes and shall not be affected by any notice
to the contrary.
7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall countersign and deliver in lieu thereof a
new Warrant Certificate representing an equal aggregate number of Warrants.
Applicants for a substitute Warrant Certificate shall comply with such other
- 4 -
<PAGE> 5
reasonable regulations and pay such other reasonable charges as the Warrant
Agent may prescribe.
8. Adjustment of Purchase Price and Number of Shares
Purchasable. The Purchase Price and the number of Common Shares purchasable
upon the exercise of each Warrant are subject to adjustment from time to time
as provided in this Section 8.
(a) In case the Company shall at any time after the date of
this Agreement (i) declare a dividend or other distribution on its Common
Shares in Common Shares, (ii) subdivide or reclassify the outstanding Common
Shares into a greater number of Common Shares or (iii) combine or reclassify
the outstanding Common Shares into a smaller number of Common Shares, the
Purchase Price to be in effect after the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification shall be determined by multiplying the Purchase Price in
effect immediately prior to such time by a fraction, the numerator of which
shall be the number of Common Shares outstanding immediately prior to such time
and the denominator of which shall be the number of Common Shares to be
outstanding immediately after giving effect to such dividend, subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall fix a record date for the
making of a distribution to all holders of Common Shares of evidences of its
indebtedness or assets (other than dividends or distributions in cash payable
out consolidated earnings or earned surplus) or subscription rights or
warrants, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the current
market price per Common Share (as defined in subsection (c) of this Section 8)
on such record date, less the fair market value (as determined in good faith by
the Board of Directors of the Company) of the portion of the evidences of
indebtedness, assets, subscription rights or warrants applicable to one Common
Share, and the denominator of which shall be such current market price per
Common Share. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.
(c) For the purpose of any computation herein, the "current
market price" per Common Share on any record date shall be deemed to be the
average of the highest reported bid and lowest reported asked prices of the
Common Shares on The Nasdaq Stock Market on that date. If the Company's Common
Shares are not quoted on The Nasdaq Stock Market, the current market value of a
Common Share shall be as determined in good faith by the Board of Directors of
the Company.
(d) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of this
subsection (d) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
8 shall be made to the nearest cent or to the nearest one-hundredth of a Common
Share as the case may be.
(e) In any case in which this Section 8 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the
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<PAGE> 6
Company may elect to defer until the occurrence of such event the issuing to
the Registered Holder of any Warrant exercised on or after such record date the
Common Shares issuable upon such exercise over and above the Common Shares
issuable upon such exercise on the basis of Purchase Price in effect prior to
such adjustment; provided, however, that the Company shall deliver to such
Registered Holder a due bill or other appropriate instrument evidencing such
Registered Holder's right to receive such additional Common Shares contingent
upon the occurrence of the event.
(f) Upon each adjustment of the Purchase Price pursuant to
this Section 8, each Warrant outstanding immediately prior to such adjustment
shall thereafter constitute the right to purchase, at the adjusted Purchase
Price per share, an adjusted number of Common Shares determined (to the nearest
whole share) by multiplying the number of Common Shares purchasable upon
exercise of a Warrant immediately prior to such adjustment by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(g) Irrespective of any adjustments in the Purchase Price
or the number or kind of shares purchasable upon the exercise of the Warrants,
Warrant Certificates theretofore or thereafter issued may continue to express
the same Purchase Price per share and number and kind of shares as are stated
on the Warrant Certificates initially issuable pursuant to this Agreement.
(h) Anything in this Section 8 to the contrary
notwithstanding, the Company shall be entitled to (but is not required to) make
such reductions in the Purchase Price or increase in the number of Common
Shares purchasable upon the exercise of each Warrant, in addition to those
adjustments required by this Section 8, as the Company in its sole discretion
shall determine to be advisable in order that any consolidation or subdivision
of Common Shares, or any issuance wholly for cash or of any Common Shares at
less than the current market price, or any issuance wholly for cash, Common
Shares or securities that by their terms are convertible into or exchangeable
for Common Shares, or any stock dividend, or any issuance of rights, options or
warrants referred to above in this Section 8, made by the Company to its common
shareholders shall not be taxable to them.
9. Reclassification, Reorganization, Merger, etc.
Notwithstanding any other provisions of this Agreement, if, prior to the Warrant
Expiration Date, there shall occur a capital reorganization, recapitalization,
reclassification or other change of the outstanding Common Shares of the
Company, or in case of any consolidation or merger of the Company with or into
any other corporation (other than a merger with a subsidiary in which the
Company is the continuing corporation and which does not result in the
reclassification, capital reorganization or other change of the outstanding
Common Shares), or in case of any sale or conveyance to any other entity of all
or substantially all of the properties and assets of the Company, then, and in
each such case, the Company shall cause effective provision to be made so that
the Registered Holders of Warrants shall have the right to receive, upon the
exercise of the Warrants after the consummation of such event, the kind and
amount of shares of stock or other securities or property receivable upon such
event by a holder of the number of Common Shares issuable upon exercise of
Warrants immediately prior to such event. Any such provision shall include
provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. A copy of such
provision shall be furnished to
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<PAGE> 7
the Registered Holders of Warrants within ten days after execution of the
appropriate agreement pertaining to same and, in any event, prior to any
consolidation, merger, conversion, sale or conveyance subject to the provisions
of this Section 9. The foregoing provisions of this Section 9 shall similarly
apply to successive reclassifications, capital reorganizations and changes of
Common Shares and to successive consolidations, mergers, conversions, sales or
conveyances. In the event that in any such capital reorganization or
reclassification, consolidation, merger, conversion, sale or conveyance,
additional Common Shares shall be issued in exchange, conversion, substitution
or payment, in whole or in part, for or of a security of the Company other than
Common Shares, any such issue shall be treated as an issue of Common Shares
covered by the provisions of Section 8(a) hereof with the amount of the
consideration received upon the issue thereof being determined by the Board of
Directors of the Company, such determination to be final and binding on the
holder.
10. Determination of Adjusted Purchase Price. Upon the occurrence
of each event requiring an adjustment of the Purchase Price and of the number of
Common Shares purchasable in accordance with, and as required by, the terms of
the Warrants, the Company shall promptly cause a firm of certified public
accountants (who may be the regular accountants for the Company) to compute the
adjusted Purchase Price and the adjusted number of shares purchasable at such
adjusted Purchase Price by reason of such event in accordance with the
provisions hereof. The Company shall mail forthwith to each Registered Holder
of Warrants a copy of such computation, which shall be conclusive and shall be
binding upon such Registered Holder; and shall also provide the Warrant Agent
with a copy of the computation.
11. Form of Warrant. The Company may at any time in its sole
discretion (which shall be conclusive) make any change in the form of Warrant
that the Company may deem appropriate and that does not affect the substance
thereof, and any Warrant thereafter issued or countersigned, whether in exchange
or substitution for any outstanding Warrant or otherwise, may be in the form as
so changed. Additionally, notwithstanding any provision of this Agreement or of
the Warrants, the Company may, at its option, issue new Warrant Certificates
evidencing Warrants in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares of stock or other securities or property purchasable under the
Warrant Certificates made in accordance with the provisions of this Agreement.
The Company may, at its option, require Registered Holders of Warrants to
surrender their old Warrant Certificates for any such new Warrant Certificates.
12. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company and does not
assume any obligation or relationship of agency or trust for or with any of the
owners or Registered Holders of the Warrant Certificates. The Warrant Agent's
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not, by delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value or authorization of
the Warrant Certificates or the Warrant represented thereby or of any securities
or other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any Registered Holder of Warrant Certificates to make or
cause to be made adjustment of the Purchase Price provided in this Agreement,
or to determine whether any fact exists which
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<PAGE> 8
may require any such adjustment, or with respect to the method employed in
making the same. It shall not be liable for (i) any recital or statement of
facts contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed by
it in good faith to be genuine and to have been signed or presented by the
proper party or parties or (ii) any act or omission in connection with this
Agreement except for its own negligence or willful misconduct. Whenever in the
performance of its duties under this Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a certificate signed
by the President and an authorized Vice President or the Treasurer of the
Company and delivered to the Warrant Agent; and such certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificates.
The Warrant Agent may at any time consult with counsel satisfactory to
the Warrant Agent (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the President, any authorized Vice President, the Secretary, or Treasurer
(unless other evidence in respect hereof is herein specifically prescribed).
The Warrant Agent shall not be liable for any action taken, suffered or omitted
by it in accordance with such notice, statement, instruction, request,
direction, order or demand.
The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder including a reasonable special handling fee for those services deemed
by the Warrant Agent to require special handling; it further agrees to
indemnify the Warrant Agent, its respective directors, officers, employees,
affiliates, agents and advisors (each, an "Indemnified Party") against any and
all losses, expenses and liabilities, including judgments, costs and counsel
fees and disbursements, which may be incurred by or asserted or awarded against
any Indemnified Party in each case arising out of or in connection with or by
reason of, or in connection with the preparation for a defense of, any
investigation, litigation or proceeding arising out of, related to or in
connection with anything done or omitted by the Warrant Agent in the execution
of its duties and powers hereunder, except to the extent that such loss,
expense or liability is found in a final, non-appealable judgment by a court of
competent jurisdiction to have resulted from such Indemnified Party's
negligence or willful misconduct. The Company will not settle or consent to
judgment with respect to any such investigation, litigation or proceeding
without the prior written consent of the Warrant Agent unless such settlement
or consent includes an unconditional release of such Indemnified Party. The
Warrant Agent agrees to indemnify the Company and save it harmless against any
and all losses, expenses and liabilities, including judgments, costs and
counsel fees, for losses, expenses and liabilities arising as a result of the
Warrant Agent's negligence or willful misconduct.
The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days prior written notice to the Company.
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<PAGE> 9
At least 15 days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed to
the Registered Holder of each Warrant Certificate at the Company's expense.
The Company, in its discretion, shall be entitled to remove the Warrant Agent
with or without cause at any time specified in written notice to the Warrant
Agent, and the Company then shall carry out the duties of the Warrant Agent or
shall appoint a successor to the Warrant Agent. Any new Warrant Agent
appointed by the Company shall be a bank or trust company having capital and
surplus, as shown by its last published report to its stockholders, of not less
than $50,000,000 or a stock transfer company. After acceptance in writing of
such appointment by the new Warrant Agent is received by the Company, such new
Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant
Agent, without any further assurance, conveyance, act or deed; but if for any
reason it shall be necessary or expedient to execute and deliver any further
assurance, conveyance, act or deed, the same shall be done at the expense of
the Company and shall be legally and validly executed and delivered by the
resigning Warrant Agent.
The Company shall cause notice of the appointment of any successor
Warrant Agent to be mailed by first-class mail, postage prepaid, to each
Registered Holder of a Warrant Certificate not later than the effective date of
any such appointment. The Company or the Warrant Agent's failure to give any
notice provided for in this Section 12, or any defect therein, shall not,
however, affect the legality or validity of the appointment of a successor
Warrant Agent.
Any corporation into which the Warrant Agent or any successor Warrant
Agent may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Warrant Agent shall be a party, or any corporation succeeding to the corporate
trust business of the Warrant Agent or any successor Warrant Agent, shall be
the successor to the Warrant Agent hereunder without the execution or filing of
any paper or any further act on the part of any of the parties hereto, provided
that such corporation would be eligible for appointment as a successor Warrant
Agent as set forth above. In case at the time any such successor to the
Warrant Agent succeeds to the agency created by this Agreement, any of the
Warrant Certificates have been countersigned but not delivered, such successor
to the Warrant Agent may adopt the countersignature of the original Warrant
Agent and deliver such Warrant Certificate so countersigned; and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent is changed, and any
of the Warrant Certificates have not been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its
changed name, and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in the Agreement.
The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
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<PAGE> 10
13. Notices to the Company and Warrant Amount. Any notice
pursuant to this Agreement to be given by the Warrant Agent or by the Registered
Holder of any Warrant Certificate to the Company, or to be given by the Company
or by any Registered Holder of any Warrant Certificate to the Warrant Agent,
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed as follows (except that any such notice must be sent to such other
address as the Company or the Warrant Agent may have subsequently furnished in
writing to the other for this purpose):
To the Company: Dayton General Systems, Inc.
2492 Technical Drive
Miamisburg, OH 45342
Attention: President
To the Warrant Agent: The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attention: Dana S. Hushak
14. Modification of Agreement. The Warrant Agent and the Company
may by supplemental agreement make any changes or corrections in this Agreement
(i) that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the Registered Holders of Warrant
Certificates; provided, however, that this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders representing not less than 50% of the Warrants
then outstanding; and provided, further, that, except as provided in (i) or (ii)
above, no change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or the Purchase Price therefore, shall be made without
the consent in writing of the Registered Holder of the Warrant Certificate
representing such Warrant, other than such changes as are specifically
prescribed by this Agreement as originally executed.
15. Warrant Holder Not Deemed a Shareholder. No Registered
Holder, as such, shall be entitled to vote or receive dividends or be deemed the
holder of shares of the Company for any purpose, nor shall anything contained in
this Agreement or in the Warrants be construed to confer upon a Registered
Holder, as such, any of the rights of a shareholder of the Company (including,
but not limited to) any right to vote, give or withhold consent to any corporate
action, receive notice of meeting or receive dividends or subscription rights.
16. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the Registered Holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement, and this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the Registered Holders of the Warrant Certificates.
17. Headings and Table of Contents. The section and subsection
headings herein and the table of contents are for convenience only and shall
not affect the construction hereof.
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<PAGE> 11
18. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
19. Governing Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Ohio and shall be governed by and
construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
Dayton General Systems, Inc.
By:__________________________________
Title:_______________________________
The Fifth Third Bank
By:__________________________________
Title:_______________________________
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<PAGE> 1
Exhibit 99.3
SUBSCRIPTION AGREEMENT
The undersigned desires to purchase Units offered by Dayton General Systems,
Inc., a Pennsylvania corporation (the "Company"), pursuant to the Company's
Prospectus dated _________________, 1997 (the "Prospectus"). In that
connection, the undersigned is providing the following information and
representations.
Name:_____________________________________________
Address:__________________________________________
__________________________________________
Telephone Number:_________________________________
1. The undersigned desires to purchase ____ Units at a cost of $10.00 per Unit.
A check in the amount of $_________, payable to "National Bank of Southern
California, Escrow Agent for Dayton General Systems," is enclosed.
2. The undersigned represents as follows:
(a) I have received a copy of the Prospectus.
(b) I understand that this subscription may not be withdrawn or
cancelled during the Offering described in the Prospectus.
(c) FOR OHIO PURCHASERS ONLY. Either (i) my liquid net worth (net
worth exclusive of home, home furnishings and automobile) is at least
$250,000 and my gross annual income is at least $65,000 or (ii) my
liquid net worth is at least $500,000 or (iii) my net worth
(inclusive) is at least $1,000,000 or (iv) my gross annual income is
at least $200,000. __________ (initial)
3. My broker for this investment is:
Broker's Name:____________________________________
Firm Name:________________________________________
Address:__________________________________________
Telephone Number:_________________________________
<PAGE> 2
4. Overnight this Agreement and check to:
J.V. Delaney & Associates
17 Muir Beach Circle
Corona del Mar, CA 92625
Attn: Joseph V. Delaney
Signed:_______________________________
_______________________________
(Instructions: If joint subscribers, each
should sign. If subscriber is a corporation,
or other entity, please sign full corporate
or other name by duly authorized officer or
representative.)
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