<PAGE> 1
As filed with the Securities and Exchange Commission on January 20, 1998.
Registration No. 333-33597
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
POST-EFFECTIVE
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)
Pennsylvania 7372 31-1551295
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification Number)
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 LLP 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.
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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: [ ] ___________
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
---------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 3
SUBJECT TO COMPLETION, DATED JANUARY 20, 1998
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 be separately transferable upon
completion of the Offering. 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 securities. 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 Common Stock and Warrants on The
Nasdaq SmallCap Market ("Nasdaq") under the proposed symbols DGSY for the Common
Stock and DGSYW for the Warrants. See "Description of Securities" and
"Underwriting." Nasdaq has granted approval to the listing conditioned on the
Company meeting its quantitative and qualitative listing criteria at the
conclusion of the Offering.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
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<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.
<TABLE>
<CAPTION>
=====================================================================================================
Underwriting Proceeds to the Company Proceeds to Selling
Price to Public Commissions(1) (2) Shareholders(3)
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<S> <C> <C> <C> <C>
Per Unit $10.00 $1.00 $9.00 $9.00
- -----------------------------------------------------------------------------------------------------
Total Minimum $5,500,000 $550,000 $4,950,000 ---
- -----------------------------------------------------------------------------------------------------
Total Maximum $9,000,000 $900,000 $7,938,000 $162,000
- -----------------------------------------------------------------------------------------------------
</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 (the "Escrow Release Date"), and certificates for the Common Stock and
Warrants 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
(714) 720-0063; [email protected]
The date of this Prospectus is January __, 1998
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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 90,000 Units, at 165% 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 $57,250 (if the
minimum number of Units is sold) and $107,050 (if the maximum number of Units is
sold) payable to the Underwriter by the Company, of which $57,250 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.
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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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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 January 1998, 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
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
will be separately transferable upon
completion of the Offering. 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."
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<PAGE> 9
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.
Federal Income Tax Considerations... For certain federal income tax
considerations which may be applicable to
purchasers in the Offering, see "Certain
Federal Income Tax Considerations."
Proposed Nasdaq SmallCap Market Common Stock: DGSY
Symbols............................. Warrants: DGSYW
- ---------------
(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 110,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 55,000 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 180,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 90,000 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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SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
----------------------- -------------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues $799,664 $814,629 $601,968 $611,553
Gross profit $524,929 $545,998 $398,088 $389,902
Operating income (loss) $ 6,635 $ 12,023 $16,718 $(229,154)(1)
Income (loss) before taxes $ 8,992 $ 14,301 $17,203 $(228,902)(1)
Net income (loss) $ 8,992 $ 14,301 $17,203 $(228,902)(1)
Net loss per common share $(0.17)
Pro forma net income(2) $ 6,992 $ 11,301 $13,703
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.01
Weighted average common
shares outstanding(4) 1,344,569 1,345,895 1,344,569 1,377,033
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------
Pro Forma(5)
--------------------------------
BALANCE SHEET DATA: Actual Minimum Maximum
------ ------- -------
<S> <C> <C> <C>
Working capital $127,115 $4,770,115 $7,708,115
Total assets $625,580 $5,018,580 $7,956,580
Long term debt --- --- ---
Shareholders' equity $242,365 $4,885,365 $7,823,365
<FN>
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(1) Includes a total of $235,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $124,000 in legal, audit and financial
consulting expenses and approximately $24,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $71,000 of expenses associated with a new marketing
executive and other additional employees, and $16,000 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
</TABLE>
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<PAGE> 11
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 nine months ended September 30, 1996, as if
the Company was a C-Corporation for these periods.
See Note M 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) 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 and L 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 $229,000 during
the first nine months of 1997 as it focused its marketing efforts on its
VisualControl product line and other new software products. The Company
anticipates a net loss for the full fiscal year 1997 of approximately $325,000.
The Company also expects operating losses to continue at least through 1998 as
it builds its base of customers for Visual Control. 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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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. See Note J to the financial statements. 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, proposals, arrangements
or understandings 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."
-11-
<PAGE> 14
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 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
-12-
<PAGE> 15
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. 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 Company's securities.
Although it is currently anticipated that the Common Stock and Warrants will be
listed on The Nasdaq SmallCap Market, 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 Common Stock and Warrants could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results,
-14-
<PAGE> 17
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 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 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 and
either (i) may not be sold unless they are registered under the Securities Act
or sold pursuant to an applicable exemption from registration, including Rule
144 under the Securities Act or (ii) are
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<PAGE> 18
subject to one or more "lock-up" agreements. Upon completion of this Offering
(if 550,000 Units are sold), 210,000 shares of Common Stock may be sold
immediately without regard to the volume, manner of sale and other restrictions
of Rule 144, an additional 50,000 shares of Common Stock will become eligible
for sale 90 days later in compliance with the restrictions of Rule 144 and
206,286 shares are subject to lock-up agreements which expire on November 14,
1998. Additionally, 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.
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 $2.45 (49%) and $2.98 (60%) 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.
-16-
<PAGE> 19
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]".
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 $4,643,000 from the
sale of 550,000 Units and approximately $7,581,000 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 Proceeds Amount Net Proceeds
- --------------------------- ------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Research & development $1,240,000 27% $2,295,000 30%
Sales, marketing & distribution $1,153,000 25% $1,605,000 21%
Computer hardware & software acquisition $ 900,000 19% $1,600,000 21%
Potential acquisitions $ 800,000 17% $1,000,000 13%
Repayment of indebtedness(1) $ 250,000 5% $ 250,000 4%
Working capital and general corporate $ 300,000 7% $ 831,000 11%
purposes
<FN>
- ------------------------------
(1) Comprised of (a) $75,000 owed to Church Street Financial Corporation,
represented by a note bearing interest at 8.5% per annum, for corporate
financing services (see "Selling Shareholders") and (b) up to an
estimated $175,000 in bank borrowings which may be outstanding
(including $25,000 under the Company's bank line of credit, which bears
interest at the rate of prime plus .75% per annum (9.25% at January 1,
1998), and $150,000 which may be borrowed pursuant to an additional
commitment (the "Commitment") from the same bank to loan the Company
$150,000 until April 14, 1998 at which time the entire Commitment would
be due and which, if advanced, would bear interest at the rate of prime
plus .75% per annum). To the extent that, upon completion of the
Offering, borrowings under the line of credit exceed or are less than
$175,000, the difference will be made up from or credited to the amount
of proceeds otherwise allocated to sales, marketing and distribution.
</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, proposals, arrangements or understandings 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."
-17-
<PAGE> 20
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 on an actual basis and on a pro forma basis as of such date
giving 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>
September, 30, 1997
--------------------------------------
Pro Forma(1)
------------------------
Actual Minimum Maximum
------ ------- -------
<S> <C> <C> <C>
Short-term debt(2) $75,000 $ --- $ ---
======= ====== ======
Long-term debt $ --- $ --- $ ---
-------- ------ ------
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares
authorized: 1,281,286 shares outstanding; 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 (3) 414,687 5,057,687 7,995,687
Additional paid-in capital 36,168 36,168 36,168
Accumulated deficit (208,490) (208,490) (208,490)
------------------- --------- --------- ---------
Total shareholders' equity 242,365 4,885,365 7,823,365
-------------------------- ------- --------- ---------
Total capitalization $317,365 $4,885,365 $7,823,365
======= ========= =========
<FN>
(1) Reflects the application of the net proceeds of this Offering.
(2) See Notes E and L to the financial statements.
(3) 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.
</TABLE>
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<PAGE> 21
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
approximately $170,000 or $0.13 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 net tangible book value of the Company as of September 30, 1997
would have been approximately $4,813,000, or $2.02 per share. This represents an
immediate increase in net tangible book value of approximately $1.89 per share
to existing shareholders and an immediate dilution of $2.98 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 net tangible book
value of the Company as of September 30, 1997 would have been approximately
$7,751,000, or $2.55 per share. This represents an immediate increase in net
tangible book value of approximately $2.42 per share to existing shareholders
and an immediate dilution of $2.45 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 September 30, 1997:
<TABLE>
<CAPTION>
Minimum Offering Maximum Offering
---------------- ----------------
<S> <C> <C> <C> <C>
Initial public offering price per share(1) $5.00 $5.00
Net tangible book value per share
as of September 30, 1997 $0.13 $0.13
Increase in net tangible book value per share
attributable to new investors 1.89 2.42
Pro forma net tangible book value per
share after the Offering 2.02 2.55
----- -----
Dilution per share to new investors $2.98 $2.45
===== =====
</TABLE>
The following table summarizes, on a pro forma basis as of September
30, 1997, 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%
========= ====== ========== ======
<FN>
(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."
</TABLE>
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 nine
months ended September 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 Nine Months Ended
December 31, September 30,
------------------------ --------------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 799,664 $ 814,629 $ 601,968 $ 611,553
Cost of revenues 274,735 268,631 203,880 221,651
---------- ---------- --------- ---------
Gross profit 524,929 545,998 398,088 389,902
Selling, general & administrative 431,533 492,796 353,993 589,990
expenses
Research & development expenses 86,761 41,179 27,377 29,066
---------- ---------- --------- ---------
Operating income (loss) 6,635 12,023 16,718 (229,154)(1)
Interest expense (5,328) (1,702) (1,152) (1,264)
Other income 7,685 3,980 1,637 1,516
---------- ---------- --------- ----------
Income (loss) before taxes 8,992 14,301 17,203 (228,902)(1)
Income taxes --- --- --- ---
---------- ---------- ----------- ---------
Net income (loss) $ 8,992 $ 14,301 $ 17,203 $(228,902)(1)
========== ========== ========= ==========
Net loss per common share $ (0.17)
==========
Pro forma net income(2) $ 6,992 $ 11,301 $ 13,703
========== ========== =========
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.01
========== ========== =========
Weighted average common shares
outstanding(4) 1,344,569 1,345,895 1,344,569 1,377,033
</TABLE>
-21-
<PAGE> 24
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
---------------------- ----------------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 76,637 $ 46,984 $ 48,749 $127,115
Net property and equipment 25,964 24,701 25,084 24,372
Total assets 317,634 315,854 378,223 625,580
Total liabilities 179,939 170,078 242,545 383,215
Shareholders' equity 137,695 145,776 135,678 242,365
<FN>
- -----------------------------
(1) Includes a total of $235,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $124,000 in legal, audit and financial
consulting expenses and approximately $24,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $71,000 of expenses associated with a new marketing
executive and other additional employees, and $16,000 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
nine months ended September 30, 1996, as if the Company was a
C-Corporation for these periods. See Note M 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.
</TABLE>
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<PAGE> 25
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 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 $229,000 during the nine months ended September 30, 1997. The 1997
period results were affected by a total of $235,000 of costs associated with the
Company's strategic decision to emphasize its software development activities,
consisting of approximately $124,000 in legal, audit and financial consulting
expenses and approximately $24,000 in marketing and related costs incurred in
connection with the Company's corporate financing plan, approximately $71,000 of
expenses associated with a new marketing executive and other additional
employees, and $16,000 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:
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<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 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 33.9 36.2
----- ----- ----- -----
Gross profit 65.6 67.0 66.1 63.8
Selling, general & administrative 54.0 60.5 58.8 96.5
Research & development 10.8 5.0 4.5 4.8
----- ----- ----- -----
Operating income (loss) 0.8 1.5 2.8 (37.5)
Interest expense (0.7) (0.2) (0.2) (0.2)
Other income 1.0 0.5 0.3 0.3
----- ----- ----- -----
Income (loss) before taxes 1.1 1.8 2.9 (37.4)
Income taxes --- --- --- ---
----- ----- ----- -----
Net income (loss) 1.1% 1.8% 2.9% (37.4)%
====== ====== ====== =======
Pro forma net income 0.9% 1.4% 2.3%
==== ==== ====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Total revenues increased approximately 2% from $602,000 to
$611,600 primarily due to an increase in VisualControl and other new software
products sales of $37,800 and service revenues of $22,800, offset by a decrease
in traditional system and software sales of approximately $51,000. Sales of
VisualControl and other new products were approximately $13,000 and $50,800 for
the nine months ended September 30, 1996 and 1997, respectively. Revenue from
traditional systems and software sales, as opposed to service contracts, has
historically been variable from period to period. In the nine months ended
September 30, 1997, sales to one such customer were approximately $72,000 lower
than in the comparable period of 1996. Additionally, during the first three
quarters of 1997, the Company focused its marketing efforts on VisualControl
product line and other new software products, and away from its traditional
product lines.
Gross Profit. Gross profit margin for the nine months ended September
30, 1997 of 63.8% decreased from 66.1% for the nine months ended September 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 $354,000 for the nine months ended September 30, 1996 to
$590,000 for the nine months ended September 30, 1997. This increase was
principally due to legal, audit and financial consulting expenses of
approximately $124,000, and marketing and related costs of approximately
$24,000, 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 $71,000 of
additional expenses associated with a new
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<PAGE> 27
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 $16,000 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.
Net Loss. For the nine months ended September 30, 1997, the Company had
a net loss of $228,902, as compared to net income of $17,203 for the nine months
ended September 30, 1996. The net loss for the three months ended September 30,
1997 was $78,000 compared to a net loss of $27,800 for the three months ended
September 30, 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 53% from $87,000 to $41,000 due to new product
completion and transition into the commercialization phase, whereby $51,700 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 $325,491
in net proceeds from the private placement of 221,286 shares of its Common Stock
during the nine months ended September 30, 1997, primarily to finance the costs
of the Offering described herein and its business strategy. The Company has a
short-term commercial bank line of credit, due April 17, 1998, totaling $75,000,
which bears interest at prime plus .75% per annum (9.25% at January 1, 1998) and
is secured by the Company's cash, accounts receivable, inventories and
equipment, as well as being personally guaranteed by Mr. Haas. As of September
30, 1997, the Company had $75,000 available under the line of credit. On January
14, 1998, the Company's bank agreed to make available to the Company an
additional $150,000 until April 14, 1998 (the "Commitment") at which time the
entire Commitment would be due. If advanced, the Commitment would bear interest
at prime plus .75% per annum and would be cross-collateralized with the line of
credit and personally guaranteed by Mr. Haas. The Company is indebted to an
investment research firm for certain financial services in the amount of
$75,000, represented by a note bearing interest at 8.5% and due on the earlier
of the completion of this Offering or December 15, 1998.
As of December 31, 1996 and September 30, 1997, the Company had cash
and cash equivalents of $24,480 and $120,157, respectively, and working capital
of $46,984 and $127,115, respectively. Cash provided by (used in) operating
activities in 1996 and the nine months ended September 30, 1997 was $58,040 and
($110,140), respectively. The decrease was primarily due to the 1997 net loss,
offset by noncash expenses. Cash used in investing activities in 1996 and the
nine months ended September 30, 1997 was $60,538 and $42,881, respectively. The
1996 and 1997 investing outlays include $51,747 and $34,400 for software
development costs related to
-25-
<PAGE> 28
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 nine months ended
September 30, 1997 was $248,698 which was comprised of gross proceeds from the
private placement of 221,286 shares of Common Stock of $387,250, partially
offset by additional stock issuance costs of $138,552.
The Company estimates that its net loss for the fourth quarter will
approximate that of the third quarter. Additionally, the Company anticipates
that operating losses will continue at least through 1998 as it builds its base
of customers for VisualControl. As previously indicated, due to the Commitment
and the Company's existing line of credit, the Company's short-term borrowing
ability increased from $75,000 to $225,000. At January 1, 1998, the Company had
outstanding borrowings of approximately $58,000 under the $75,000 line of credit
and approximately $18,100 in cash. Borrowings under the line of credit and the
Commitment, if any, will be repaid from the proceeds of the Offering. Management
believes the net proceeds of the Offering, combined with the Company's
anticipated cash flow from operations, will be sufficient to meet capital and
liquidity needs for the next twenty-four months.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs having been
written using two digits rather than four to define the applicable year.
Computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a recent assessment, the Company has determined that it has no
exposure to contingencies related to the Year 2000 Issue for its internal
accounting and information systems. The Company also has determined that no
exposure exists for the VisualControl software products it has sold or will
sell, as these products are not date-sensitive. However, the Company has
determined that it will be required to modify portions of the building control
software products it has sold so that its computer systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that, with
modifications to existing software for its building control products, the Year
2000 Issue can be mitigated.
The Company also has initiated communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to failure on the part of these third parties to remediate
their own Year 2000 Issues. The Company does not expect the impact of third
party Year 2000 Issues to be material, because either the Company's systems do
not rely on these third party systems or the software programs are not
date-sensitive.
The Company will utilize internal resources to reprogram, or replace,
and test the building control software products for Year 2000 modifications. The
Company plans to complete this project no later than December 31, 1998. The
total remaining cost of the Year 2000 project, which will be expensed as
incurred, is not expected to have a material effect on the results of
operations. To date, the Company has incurred and expensed an immaterial amount
of internal labor costs related to its preliminary efforts in connection with
its Year 2000 project.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not
-26-
<PAGE> 29
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
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
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<PAGE> 30
was at the mercy of the single vendor whom he had chosen. This is known as a
closed (architecture) system.
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 control marketplace
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<PAGE> 31
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 January 1998 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.
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<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.
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<PAGE> 33
- 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
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".
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<PAGE> 34
DGS believes that the marketplace for control design software and
control products has significantly broadened. The control marketplace is
experiencing demand from participants 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 Network $4495
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 to 10% of site
upgrades and new releases for VisualControl package. VisualControl user. license
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 input sources. Two node test circuit for control $1295
network.
INTERFACE LNS interface card. PC connection to network. $499
CARD
LVC-DEB* VisualControl software network debugger. Debugging tool for control network TBA
architecture.
LVC-SIM* What-if analysis and simulation software for control Real time simulation of complex TBA
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.
DGS obtains software from Echelon for use in the development of DGS
products and for inclusion in products sold by DGS. DGS generally pays one-time
licensing fees for software used for the development of its products and royalty
fees for software included in products sold by it. The royalty fees vary
depending on the product. In addition to a base royalty fee, an additional fee
may be charged based on the number of nodes in a customer's network. Currently,
Echelon software is included in the full VisualControl product and in two of the
nine segmented VisualControl products (LVC-GRA and LVC-NET). The royalty fees
are established by agreements which expire during 2000. See Note J to the
financial statements.
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<PAGE> 35
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.
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:
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<PAGE> 36
<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 points. $835
Mark V Controller Intelligent DDC multi-function controller. Controller for up to 24 points. $600
LID LonWorks Software and Hardware design consultant. Control design & development Per project
Independent Developer services to corporate clients.
</TABLE>
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 rewiring. 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
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<PAGE> 37
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:
<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 36% and 20%, respectively, of total revenues during the nine months ended
September 30, 1997, and 48% and 14%, respectively, of total revenues during the
nine months ended September 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.
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<PAGE> 38
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 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.
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<PAGE> 39
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.
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
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<PAGE> 40
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.
EMPLOYEES
DGS had 13 employees as of January 1, 1998. Of these, five are engaged
in software development, three in administration and finance and five 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.
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 54 Chairman of the Board, President and Chief
Executive Officer
Edward T. Hurd 59 Director
William R. Winkler 50 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
===========================================================================================================
<FN>
* As of January 1, 1998
</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
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<PAGE> 41
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. 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.
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<PAGE> 42
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 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. 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 $100,000 in salary and bonus for fiscal year 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Other Annual Securities All Other
Name and Principal Fiscal ------------ Underlying Compensation
Position Year Salary Bonus Compensation Options (#) ($)
-------- ---- ------ ----- ------------ ----------- ----
($) ($) (1)($)
--- --- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Haas,
President, Chief
Executive Officer 1996 $82,136 --- --- --- ---
<FN>
(1) None, other than perquisites which did not exceed the lesser of $50,000 or 10% of salary
and bonus.
</TABLE>
Effective October 12, 1997, the Board of Directors increased Mr. Haas'
salary to $125,600 per annum.
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<PAGE> 43
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. The per share
exercise price of options granted under the Plan may not be less than 85% of the
fair market value of a share of Common Stock on the date of grant. As of January
1, 1998, 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, $58,000 of which was borrowed as of January 1, 1998. The line of credit
is personally guaranteed by Mr. Haas. On January 14, 1998, the Company's bank
agreed to make available to the Company an additional $150,000 until April 14,
1998, which, if advanced, would be 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 January 1, 1998, $12,023 in principal and accrued interest 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 January 1, 1998, 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.
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<PAGE> 44
<TABLE>
<CAPTION>
Shares Beneficially
Owned Shares Beneficially Owned
Prior to Offering 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%)
<FN>
- -------------------------
(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 January 1, 1998 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."
</TABLE>
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 January 1, 1998 and as
adjusted to reflect the sale of the maximum number of Units offered by this
Prospectus.
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<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%
<FN>
(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.
</TABLE>
Church Street Financial Corporation ("Church Street") is an investment
research firm that 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 principal 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. As of January 1, 1998, the full principal
amount and $1,869 in accrued interest were outstanding under the note.
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.
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<PAGE> 46
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 Warrants offered as a part of the Units are separately transferable
from and after 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 in cash or by cashier's check, money order or certified
check made 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.
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<PAGE> 47
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 "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.
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<PAGE> 48
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
Common Stock and Warrants is The Fifth Third Bank, Cincinnati, Ohio.
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<PAGE> 49
CERTAIN FEDERAL INCOME 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, FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND
SECURITIES. EACH 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 is a "qualified small business" within the meaning of
Section 1202 of the Internal Revenue Code (the "Code"). As a result, if you
purchase Units in the Offering and you are a taxpayer other than a corporation
(i.e., an individual, a trust, an estate, a partnership or a limited liability
company), Section 1202 of the Code permits you to exclude from gross income 50%
of any gain resulting from the sale of the shares of Common Stock contained in
the Units, and/or any shares acquired on exercise of the Warrants included in
the Units, if you have held the shares for at least five years. The amount of
gain excluded cannot exceed $10,000,000 or 10 times your basis in the shares
sold, whichever is greater. If you are subject to the alternative minimum tax
provisions of the Code, however, 42% of any gain excluded as a result of Section
1202 is an item of tax preference, thereby partially reducing the overall tax
benefit of the Section 1202 exclusion. The time during which a Warrant is held
prior to its exercise is not included in computing the five-year holding period
(or the six-month holding period described below).
Section 1045 of the Code permits taxpayers who are individuals and
purchase Units in the Offering to roll over, on a tax-free basis, any gain on
the sale of shares of Common Stock contained in the Units, and/or acquired on
Warrant exercise, so long as (i) the shares have been held for at least six
months, (ii) within sixty days of the sale, all of the proceeds of the sale are
used to purchase, directly from the issuer, stock of another "qualified small
business" and (iii) that "qualified small business" remains a "qualified small
business" for at least six months after the purchase. Similarly, if the
requirements of Code Section 1045 are met, taxpayers who are individuals may
roll over gain from the sale of other "qualified small business stock" to the
purchase of the Common Stock contained in the Units in the Offering. The time
you hold the Company's Common Stock may be aggregated with the time you hold the
other "qualified small business" stock for purposes of determining capital gains
treatment and rates. Holding periods may not be aggregated, however, for
purposes of meeting the five year holding period required by Section 1202 for
exclusion of 50% of any gain; you must hold the Company's Common Stock at least
five years to take advantage of this provision.
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 270,000 shares of Common Stock will be
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<PAGE> 50
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 and
either (i) 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 or (ii) are subject to one or more lock-up agreements.
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 210,000 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, 50,000 shares of Common Stock will be eligible for sale 90 days after
the Offering pursuant to the restrictions of Rule 144 and 206,286 shares will be
released from lock-up restrictions on November 14, 1998. 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 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 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 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 Common Stock and Warrants on The Nasdaq SmallCap Market under the
symbols "DGSY", and "DGSYW," respectively, and Nasdaq has granted approval to
the listing conditioned on the Company meeting its quantitative and qualitative
listing criteria at the conclusion of the Offering.
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<PAGE> 51
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
Form 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 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.
There are no restrictions or limitations on the ability of affiliates
of the Company to purchase Units in the Offering. The Company and its executive
officers and directors have
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<PAGE> 52
agreed, however, 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. In addition,
certain shareholders of the Company have agreed not to sell certain of the
shares owned by them prior to November 14, 1998.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to 1.5% less $25,250 of the aggregate price of all Units
sold, including those Units offered by the Selling Shareholders. As of the date
of this Prospectus, $57,250 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 10% of the total amount of Units sold
to the public. Each Underwriter's Warrant is exercisable to purchase one Unit at
a price of $16.50 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 may not be
exercised, sold, transferred, assigned or hypothecated except as provided in the
Warrants for a period of one year following the effective date of the Offering.
However, the Underwriter's Warrants may be transferred to any officer or partner
of the Underwriter or to any member of the National Association of Securities
Dealers, Inc. participating in the Offering and the bona fide officers and
partners thereof and if the Underwriter's Warrants are so transferred or
received, they will remain subject to such restrictions for the remainder of the
initial one year term. 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 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.
Prior to this offering, there has been no public market for the
Company's securities. 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.
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<PAGE> 53
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 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 LLP. 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 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.
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<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 September 30, 1997 (unaudited).................................F-3
Statements of Operations for the years ended
December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997 (unaudited).....................F-4
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and for the nine months
ended September 30, 1997 (unaudited)..............................F-5
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997 (unaudited).....................F-6
Notes to Financial Statements..............................................F-7
F-1
<PAGE> 55
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
513 762-5000
FAX 513 241-6125
[Grant Thornton Logo]
GRANT THORNTON LLP Accountants and
Management Consultants
The U.S. Member firm of
Grant Thornton International
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 GRANT THORNTON LLP
Cincinnati, Ohio
March 14, 1997 (except for Notes B, F, K, and N, as to which the date is October
31, 1997)
F-2
<PAGE> 56
DAYTON GENERAL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 53,986 $ 24,480 $ 120,157
Accounts receivable 108,455 57,383 104,537
Inventories 93,487 112,659 102,631
Prepaid expenses 648 1,752 7,472
Deferred stock issuance costs - 20,788 175,533
--------- --------- ---------
Total current assets 256,576 217,062 510,330
PROPERTY AND EQUIPMENT - NET 25,964 24,701 24,372
OTHER ASSETS
Note receivable - shareholder 18,000 18,000 18,000
Capitalized software costs - 51,747 70,525
Noncompete covenant 14,600 2,100 -
Goodwill 1,896 1,646 1,458
Deposits 598 598 895
--------- --------- ---------
Total other assets 35,094 74,091 90,878
--------- --------- ---------
$ 317,634 $ 315,854 $ 625,580
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ - - $ 75,000
Accounts payable 21,630 13,621 90,244
Accrued expenses 36,332 33,629 19,870
Unearned revenue 106,925 108,327 183,600
Other current liabilities 15,052 14,501 14,501
--------- --------- ---------
Total current liabilities 179,939 170,078 383,215
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 1,281,286 at September 30, 1997 36,196 89,196 414,687
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 (208,490)
--------- --------- ---------
Total shareholders' equity 137,695 145,776 242,365
--------- --------- ---------
$ 317,634 $ 315,854 $ 625,580
========= ========= =========
</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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 997
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Systems and related software sales $ 283,943 $ 269,214 $ 205,945 $ 192,753
Service revenue 515,721 545,415 396,023 418,800
----------- ------------ ------------- ------------
799,664 814,629 601,968 611,553
Cost of revenues 274,735 268,631 203,880 221,651
----------- ------------ ------------- ------------
Gross margin 524,929 545,998 398,088 389,902
Operating expenses:
Selling, general and administrative 431,533 492,796 353,993 589,990
Research and development 86,761 41,179 27,377 29,066
----------- ------------ ------------- ------------
518,294 533,975 381,370 619,056
Income (loss) from operations 6,635 12,023 16,718 (229,154)
Other income (expense):
Interest income 3,549 2,853 821 1,937
Miscellaneous income (expense) 4,136 1,127 816 (421)
Interest expense (5,328) (1,702) (1,152) (1,264)
----------- ------------ ------------- ------------
2,357 2,278 485 252
----------- ------------ ------------- ------------
Income (loss) before income taxes 8,992 14,301 17,203 (228,902)
Income taxes - - - -
----------- ------------ ------------- ------------
NET INCOME (LOSS) $ 8,992 $ 14,301 $ 17,203 $ (228,902)
=========== ============ ============= ============
Weighted average common shares
outstanding 1,377,033
============
Net loss per common share $ (.17)
============
Pro forma:
Historical income before income taxes $ 8,992 $ 14,301 $ 17,203
Pro forma income taxes 2,000 3,000 3,500
----------- ------------ -------------
Pro forma net income $ 6,992 $ 11,301 $ 13,703
=========== ============ =============
Weighted average common shares
outstanding 1,344,569 1,345,895 1,344,569
=========== ============ =============
Pro forma net income per common share $ .01 $ .01 $ .01
=========== ============ =============
</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 nine months ended September 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) 325,491 - - 325,491
Net loss (unaudited) - - (228,902) (228,902)
----------- ------------- ----------- -------------
Balance at September 30, 1997 (unaudited) $ 414,687 $ 36,168 $ (208,490) $ 242,365
=========== ============= =========== =============
</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 NINE MONTHS ENDED
DECEMBER SEPTEMBER 30,
1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,992 $ 14,301 $ 17,203 $ (228,902)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation on property and equipment 10,843 9,849 6,729 8,810
Amortization of intangible assets 12,750 12,750 9,562 17,910
Loss on disposition of property and equipment 205 205 - -
Expenses not requiring cash outlay - - - 50,000
Changes in assets and liabilities:
Accounts receivable 125,908 51,072 (11,449) (47,154)
Inventories (8,054) (19,172) (12,194) 10,028
Prepaid expenses and deposits (648) (1,104) (304) (6,017)
Accounts payable (18,771) (8,009) 6,200 23,671
Accrued expenses 2,102 (2,703) (23,974) (13,759)
Unearned revenue 15,750 1,402 80,380 75,273
Other current liabilities - (551) - -
------------ ------------ ------------ -----------
Net cash provided by (used in) operating activities 149,077 58,040 72,153 (110,140)
Cash flows from investing activities:
Purchases of property and equipment (4,771) (8,791) (5,849) (8,481)
Capitalization of software development expenditures - (51,747) (36,313) (34,400)
------------ ------------ ------------ -----------
Net cash used in investing activities (4,771) (60,538) (42,162) (42,881)
Cash flows from financing activities:
Payments on long-term debt (65,000) - - -
Proceeds from issuance of common stock - 53,000 - 387,250
Stock issuance costs - (20,788) (1,712) (138,552)
Distributions (40,000) (59,220) (19,220) -
------------ ------------ ------------ -----------
Net cash provided by (used in) financing activities (105,000) (27,008) (20,932) 248,698
Net increase (decrease) in cash and cash equivalents 39,306 (29,506) 9,059 95,677
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 $ 63,045 $ 120,157
============ ============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,328 $ 1,702 $ 1,152 $ 1,264
============ ============ ============ ===========
Local income taxes $ 1,600 $ 1,104 $ - $ -
============ ============ ============ ===========
Supplemental disclosure of non-cash financing activities:
Stock issuance costs included in note and accounts payable $ - $ - $ - $ 77,952
============ ============ ============ ===========
</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 nine months ended September 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 nine months ended September 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 $15,622 for the nine months ended September 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 $9,562 and $2,288
for the nine months ended September 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 September 30,
1997 was $50,000 for the noncompete covenant and $1,138 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 nine months ended September 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 $3,500 for
the nine months ended September 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 N), 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Weighted average shares outstanding 1,000,000 1,006,795 1,000,000 1,121,542
Effect of issuances below
IPO price 344,569 339,100 344,569 255,491
---------- ---------- ---------- ----------
Weighted average common shares 1,344,569 1,345,895 1,344,569 1,377,033
========= ========= ========= =========
</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 nine months ended September 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 K).
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 September 30, 1997, and for the nine months
ended September 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 nine
months ended September 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 nine months ended September 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, SEPTEMBER 30,
1995 1996 1997
<S> <C> <C> <C>
Parts and components $44,458 $54,716 $64,709
Finished parts 25,727 31,600 25,714
Projects in progress 23,302 26,343 12,208
-------- -------- --------
$93,487 $112,659 $102,631
======== ======== ========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
<S> <C> <C> <C>
Computer and office equipment $48,809 $56,571 $63,365
Vehicles 1,928 1,928 -
------ ------ ------
50,737 58,499 63,365
Less accumulated depreciation 24,773 33,798 38,993
------ ------ ------
Net property, plant and equipment $25,964 $24,701 $24,372
====== ====== ======
</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%. There were no
borrowings under this line at December 31, 1995 or 1996 or at September 30,
1997. 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 nine months ended September 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 K) and for
common stock warrants for certain individuals and investors.
- The Company made a private placement offering of its common stock at $1.75
per share.
- The Company expects to offer additional shares to the general public in an
initial public offering (Note N).
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 September 30, 1997, the Company had deferred
$20,788 and $175,533, respectively, in costs related to the private
offering and the IPO. During the nine months ended September 30, 1997, the
Company raised $387,250 from the private offering through the sale of
221,286 shares of common stock, of which $61,759 in offering costs were
offset against these proceeds. 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.
The deferred stock issuance costs recorded at September 30, 1997 relate
entirely 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.
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 nine months ended September 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 nine
months ended September 30, 1997.
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Computed credit for federal income
taxes at the statutory rate $(34,335)
Valuation allowance 34,196
Permanent differences 139
------
Total $ -
======
</TABLE>
At September 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 10,579
------
12,679
------
Deferred tax assets:
Inventory 1,200
Intangible assets 5,259
Net operating loss carryforward 40,416
------
46,875
Valuation allowance (34,196)
------
12,679
Net deferred tax components $ -
======
</TABLE>
The federal tax net operating loss carryforward of approximately $269,000
expires in 2012. The valuation allowance is required due to the uncertainty
of realizing the net deferred tax asset through future operations.
NOTE I - 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 36% and 20%
of total revenues during the nine months ended September 30, 1997, and 48%
and 14% of total revenues during the nine months ended September 30, 1996.
One additional customer accounted for 10% of total revenues for the year
ended December 31, 1995.
F-13
<PAGE> 67
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997 (unaudited)
NOTE J - 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
$42,557 and $38,276 in rent expense for the nine months ended September 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.
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 nine months ended September 30, 1996 and 1997 was
$2,400 and $6,950 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 September 30, 1997.
F-14
<PAGE> 68
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997 (unaudited)
NOTE K - 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 175,000 $1.80
------- -----
Outstanding at September 30, 1997 175,000 $1.80
======= ====
Exercisable (vested) options at September 30, 1997 135,000 $1.82
======= ====
</TABLE>
The following summarizes options outstanding and exercisable at September
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 $1.93 175,000 8.28 $1.80 135,000 $1.82
</TABLE>
The weighted average fair value at date of grant for options granted during
1997 was $0.14. 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 nine months ended September 30, 1997 would have been
increased by approximately $16,000 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.
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-15
<PAGE> 69
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997 (unaudited)
NOTE L - 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 nine months ended September 30,
1997 and deferred $25,000 as stock issuance costs to be offset against the
private placement and IPO proceeds. The entire amount is represented by an
8.5% term note, payable in five quarterly principal and interest
installments of approximately $16,000, with the last payment due December
15, 1998. However, the note must be redeemed in full by the Company upon
the successful completion of the proposed initial public offering, and
accordingly, the Company has classified the note as short-term at September
30, 1997.
NOTE M - 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 N - PROPOSED INITIAL PUBLIC OFFERING, REORGANIZATION AND MERGER
On August 14, 1997, the Company filed a Registration Statement (since
amended) 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-16
<PAGE> 70
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> 71
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> 72
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. The 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. Standard unit prices for the various products in the
VisualControl product array range from $500 to $4,000. Forecasted revenues
reflect management's estimates of sales as distributed across the entire product
array and include discounts from these standard unit prices for customer volume
purchases (i.e., a customer purchasing multiple licenses) and for life cycle
(i.e., greater discounts granted as time elapses).
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
S-3
<PAGE> 73
estimated using expected number of employees and salary rates, and comprise
approximately 11% of total operating expenses each year.
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> 74
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.............................23
Business.............................................26
Management...........................................38
Certain Transactions.................................40
Holdings of Management and
Principal Shareholders........................41
Selling Shareholders.................................42
Description of Securities............................42
Certain Federal Income Tax
Considerations................................45
Shares Eligible for Future Sale......................46
Underwriting.........................................47
Legal Matters........................................49
Experts..............................................49
Available Information................................50
Index to Financial Statements.......................F-1
Management's Forecast of Future
Operating Results...................................S-1
----------
UNTIL __________, 1998 (____ 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
_________, 1998
<PAGE> 75
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 $57,250 (minimum)
and $107,050 (maximum) to be paid to the Underwriter by the registrant, and
$2,700 (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.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the registrant (including its predecessor Ohio
corporation) has made the following sales of unregistered securities (all share
amounts give effect to the 1000:1
II-1
<PAGE> 76
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 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
II-2
<PAGE> 77
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> 78
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 20th day of January, 1998.
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 20th day of January, 1998.
Signatures Title
---------- -----
/s/ Thomas C. Haas Chairman of the Board, President and Chief
- ----------------------- Officer (Principal Executive, Accounting and
Thomas C. Haas Financial Officer)
/s/ Edward T. Hurd Director
- -----------------------
Edward T. Hurd
/s/ William R. Winkler Director
- -----------------------
William R. Winkler
II-4
<PAGE> 79
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 Form of Warrant issuable as part of Units sold in Offering*
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 LLP (contained in
Exhibit 5)*
23.2 Consent of Grant Thornton LLP
24 Power of Attorney*
27.1 Financial Data Schedule
27.2 Financial Data Schedule
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 332,000 Units to be provided by the Company and up to
18,000 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.
<PAGE> 2
1.2 UNDERWRITER'S COMPENSATION.
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
on the Closing Date.
1.2.3 Expense Allowance. The Company shall pay the Underwriter
as a nonaccountable expense allowance an amount equal to 1.5% of the gross
offering proceeds of the Initial Units and the Additional Units, if any, (minus
$25,250) payable on the 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. Upon the expiration of the Offering Period and
any extensions thereof, the Company shall issue and deliver to the Underwriter a
warrant (the "Warrant") to purchase Units in an amount equal to 10% 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, if applicable,
the Selling Shareholders of the Units and the release of funds from escrow (in
same day funds) to the Company and, if applicable, to the Selling Shareholders
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
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proceeds held by the Escrow Agent, provided that the conditions to release
specified in the Escrow Agreement have then been satisfied.
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:
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4.1 COMPLIANCE OF REGISTRATION STATEMENT AND PROSPECTUS. The
Commission has not issued any order suspending or preventing the use of
Prospectus. When the Registration Statement became 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 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) complied and 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, contained or will contain any untrue
statement of a material fact or omitted 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.
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
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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.
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
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(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.
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
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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, 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
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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.
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
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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 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 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
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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. On the Closing Date, you shall
have received the favorable opinion of Taft, Stettinius & Hollister, counsel for
the Company, dated the 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
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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 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;
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(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 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
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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 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
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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 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 Units by the Underwriter (as to which such counsel need not
express any opinion);
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(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. On the 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 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 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
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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.
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
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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 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.
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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:
(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
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(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 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.
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.
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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.
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.
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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.
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, 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
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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 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
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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
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
23
<PAGE> 24
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 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 Date, 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,
24
<PAGE> 25
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 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, and (ix) the fees and expenses of the
Company's accountants.
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.
25
<PAGE> 26
13.4 CAPTIONS. The captions of the sections and subsectio ns
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.
Very truly yours,
DAYTON GENERAL SYSTEMS, INC.
By: --------------------------
Thomas C. Haas, President
SELLING SHAREHOLDERS:
CHURCH STREET FINANCIAL CORP.
By: --------------------------------------
Name:
No. of Shares Contained in Units
Offered: 16,000
--------------------------------------
Name: Harold H. Croghan
No. of Shares Contained in Units
Offered: 40,000
--------------------------------------
Name: James E. Cogan
No. of Shares Contained in Units
Offered: 16,000
26
<PAGE> 27
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
______________, 1998
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. 333-33597 (the "Registration Statement") under the Securities
Act of 1933 for the offering of securities to which this Warrant relates. The
exercise price of this Warrant shall be $16.50 per Unit (which price is equal to
165% 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. This Warrant may not be exercised nor may
the shares underlying the Warrant be resold, transferred or assigned for a
period of one year from the date of the prospectus associated with this
offering. After a period of one year, 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. This Warrant is
non-transferable other than by will or pursuant to the laws of descent and
distribution except as provided herein. The Warrant may not be exercised, sold,
transferred,
<PAGE> 2
assigned or hypothecated by the holder hereof following the effective date of
the offering for a period of one year, except by operation of law or by reason
of reorganization of the issuer, and except that this Warrant may be transferred
to officers or partners of the Initial Holder or 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 bona fide 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 STOCK AND WARRANTS. 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 Common Stock and Offering
Warrants 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
2
<PAGE> 3
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 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 purchasable 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 purchasable 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 shares of Common Stock or Offering Warrants issued upon
the exercise hereof ("Warrant Securities"), 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 Securities 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 Securities 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 Securities, 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 its Common Stock, 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 Common
Stock, it will give written notice to all registered holders of Warrants, and
all registered holders of Warrant Securities, 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 number of shares of Common Stock 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 shares of Common Stock, 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 shares of Common
Stock issued upon exercise thereof, the Company will, at the expense of such
holders, promptly take all necessary steps to register or qualify such shares of
Common Stock under Section 3(b) or Section 5 of the Securities
4
<PAGE> 5
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 may delay filing a registration statement
for such shares of Common Stock for up to 90 days if the Board of Directors of
the Company determines that the filing of a registration statement at that time
would not be in the best interests of the Company and its shareholders. 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 such shares of
Common Stock to dispose of such shares and from time to time shall amend or
supplement, (at the holder's expense, which shall include legal, accounting,
printing and all other fees and expenses associated with such amendment or
supplement), 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 Securities issued or issuable hereunder, its officers and directors, and
any person who controls such Warrant holder or such holder of Warrant Securities
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 Securities 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 Securities 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
_____________________ Units 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 23.2
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
513 762-5000
FAX 513 241-6125
[Grant Thornton Logo]
GRANT THORNTON LLP Accountants and
Management Consultants
The U.S. Member Firm of
Grant Thornton International
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 14, 1997 (except for Notes B, F, K, and N,
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 THRONTON LLP
------------------
GRANT THORNTON LLP
Cincinnati, Ohio
January 20, 1998
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<SECURITIES> 0
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<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
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