<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
File Number 333-33597
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.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
----------
<PAGE> 2
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)
- -----------------------------------------------------------------------------------------------------
<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)
J.V. Delaney & Associates
Established in 1981
(714) 720-0063; [email protected]
The date of this Prospectus is February 2, 1998
<PAGE> 3
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.
- -------------------------------
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
May 3, 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 August 1,
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.
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
This Prospectus makes reference to the trademarks of other companies.
LonWorks(R), LON(R), LonBuilder(R) and Neuron(R) are trademarks of Echelon
Corporation registered in the United States and other countries. Windows(R) and
Windows NT(R) are registered trademarks of Microsoft Corporation. MFC(R) is a
registered trademark of Lis Holdings Limited. QNX(R) is a registered trademark
of Quantum Software Systems, Ltd. Pentium(R) is a registered trademark of Intel
Corporation. UNIX(R) is a registered trademark of Unix System Laboratories, Inc.
VMS(R) is a registered trademark of Digital Equipment Corporation.
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<PAGE> 4
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> 5
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> 6
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> 7
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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<PAGE> 8
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>
- ---------------------------
(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> 9
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.
-8-
<PAGE> 10
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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<PAGE> 11
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."
-10-
<PAGE> 12
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
-11-
<PAGE> 13
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."
-12-
<PAGE> 14
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,
-13-
<PAGE> 15
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
-14-
<PAGE> 16
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.
-15-
<PAGE> 17
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."
-16-
<PAGE> 18
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> 19
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> 20
<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.
-19-
<PAGE> 21
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>
-20-
<PAGE> 22
<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> 23
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> 24
<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> 25
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
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<PAGE> 26
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
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<PAGE> 27
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> 28
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> 29
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> 30
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> 31
- 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> 32
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> 33
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> 34
<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> 35
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> 36
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> 37
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
-36-
<PAGE> 38
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> 39
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> 40
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> 41
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> 42
<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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<PAGE> 43
<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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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 May 3,
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 August 1, 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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 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)
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> 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 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> 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 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> 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 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> 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 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> 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 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> 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 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.
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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.
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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
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<PAGE> 70
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
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<PAGE> 71
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.
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<PAGE> 72
SUBSCRIPTION FORM
The person whose name, address and telephone number is set forth below
(the "Purchaser") desires to purchase Units offered by Dayton General Systems,
Inc., a Pennsylvania corporation (the "Company"), pursuant to the Company's
Prospectus dated ____________, 1998 (the "Prospectus").
Name:
--------------------------------------------------------
(exactly as it is to appear on stock certificate)
Address:
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--------------------------------------------------------
Telephone No.: /Fax No.: /E-mail:
------------------ ---------- ----------
1. The Purchaser is hereby purchasing __________________ Units at a cost of
$10.00 per Unit. A check in the amount of $___________________, payable to
"National Bank of Southern California, Escrow Agent for Dayton General Systems,"
is enclosed.
2. The Purchaser, by returning this Form and such Purchaser's check to purchase
Units, acknowledges that:
(a) He or she has received a copy of the Prospectus.
(b) He or she understands that this subscription may not be
withdrawn or canceled during the Offering described in the
Prospectus.
(c) FOR OHIO PURCHASERS ONLY. Either (i) my liquid net worth (net
worth exclusive of home, home furnishings and automobile) is
at least $250,000 and my gross annual income is at least
$65,000 or (ii) my liquid net worth is at least $500,000 or
(iii) my net worth (inclusive) is at least $1,000,000 or (iv)
my gross annual income is at least $200,000. (Signature)
_______________________________
3. My broker for this investment is:
Broker's Name:
---------------------------------------------------------
Firm Name:
------------------------------------------------------------
Account No.:
-----------------------------------------------------------
Address:
---------------------------------------------------------------
Telephone Number:
------------------------------------------------------
Please issue the Units being purchased (check one) [ ] to the above
broker to be held in the indicated account, or [ ] directly to the Purchaser.
(If neither box is checked, the Units will be issued to the broker to be held in
the Purchaser's account.)
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<PAGE> 73
4. Please either:
(a) Overnight this Form and check to:
J.V. Delaney & Associates
17 Muir Beach Circle
Corona del Mar, California 92625
Attn: Joseph V. Delaney
OR
(b) Overnight this Form to:
J.V. Delaney & Associates
17 Muir Beach Circle
Corona del Mar, California 92625
Attn: Joseph V. Delaney
and wire the Purchase Price to:
National Bank of Southern California
3951 South Plaza Drive
Santa Ana, California 92704
Account No.: 01900307
ABA/Routing No.: 1222-3980-1
Account Name: Southern California Bank
Escrow Division Trust Account
Escrow No.: 11961-GG
Purchaser Name: [insert name]
------------------------------------
Credit to: Dayton General Systems, Inc.
SCB Escrow #11961-GG
Contact: Gloria Garriott, CEO
AVP/Asst. Manager (714) 863-2485
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<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.
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TABLE OF CONTENTS
Page
Prospectus Summary....................................3
Risk Factors..........................................9
History of the Company...............................15
Use of Proceeds......................................16
Dividend Policy......................................17
Capitalization.......................................17
Dilution.............................................18
Selected Financial Data..............................20
Management's Discussion and Analysis or
Plan of Operation.............................22
Business.............................................26
Management...........................................37
Certain Transactions.................................40
Holdings of Management and
Principal Shareholders........................40
Selling Shareholders.................................41
Description of Securities............................42
Certain Federal Income Tax
Considerations................................46
Shares Eligible for Future Sale......................46
Underwriting.........................................48
Legal Matters........................................50
Experts..............................................50
Available Information................................50
Index to Financial Statements.......................F-1
Management's Forecast of Future
Operating Results...................................S-1
Subscription Form...................................G-1
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UNTIL TWENTY-FIVE DAYS AFTER THE DATE OF THE CLOSING OF THIS OFFERING
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
-------------
900,000 Units
DAYTON GENERAL SYSTEMS, INC.
PROSPECTUS
February 2, 1998
