<PAGE> 1
Filed pursuant to Rule 424(b)(1)
Registration No. 333-79969
PROSPECTUS
2,000,000 SHARES OF COMMON STOCK
[DURASWITCH INDUSTRIES, INC. LOGO]
DuraSwitch Industries, Inc. is offering 2,000,000 shares of its common
stock. Prior to this offering, DuraSwitch's common stock was traded on the OTC
Bulletin Board under the symbol "DSWT." The common stock will be listed on the
American Stock Exchange under the symbol "DRA." The public offering price is
$5.00 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 3 FOR A DISCUSSION OF FACTORS YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF DURASWITCH'S COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
THE OFFERING PER SHARE TOTAL
- ------------ --------- -----------
<S> <C> <C>
Public Price................................................ $5.00 $10,000,000
----- -----------
Underwriting Discounts and Commissions...................... $0.40 $ 800,000
----- -----------
Proceeds to DuraSwitch...................................... $4.60 $ 9,200,000
----- -----------
</TABLE>
The underwriters have agreed to purchase all 2,000,000 of the shares if any
are purchased. Also, DuraSwitch and one of its stockholders have granted to the
underwriters a 45-day option to purchase up to an additional 300,000 shares of
common stock to cover over-allotments. If this option is exercised in full, the
underwriters will purchase 225,734 additional shares from DuraSwitch and 74,266
additional shares from the selling stockholder.
[Cruttenden Roth Logo]
The date of this prospectus is August 26, 1999.
<PAGE> 2
Inside Front Cover: The top half of the page shows a detailed view of the
DuraSwitch PushGate(TM) components. The bottom half of the page is the table of
contents.
Gatefold layout: Drawings arranged under the "DuraSwitch.com" logo depicting the
different products in which our PushGate switches have been incorporated, next
to a close up picture of the switches or ICPs next to the product. The captions
under each of the products surrounding the DuraSwitch logo read as follows:
"Automotive Repair Equipment," "Aeronautical Controls," "Irrigation Systems
Controls," "Medical Equipment," "Retail (Point of Sale)," "Restaurant
Equipment," "Theme Park Transportation," and "Ship Bridge Controls." On the
right side of the page, under a DuraSwitch logo, is a caption that reads:
"DuraSwitch's products have been custom designed, engineered and manufactured
for a wide variety of applications requiring a durable, reliable, low cost
switch for slim profile designs that provide excellent tactile feedback." Under
that caption is a picture which reads "Awarded BEST Electronics Product 1998 by:
design news" award logo.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus summary.................... 1
Summary consolidated financial
information......................... 2
Risk factors.......................... 3
Forward-looking statements............ 7
Use of proceeds....................... 8
Dilution.............................. 9
Capitalization........................ 10
Dividend policy....................... 10
Selected financial data............... 11
Management's discussion and analysis
of financial condition and results
of operations....................... 12
Business.............................. 18
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management............................ 29
Certain relationships and related
transactions........................ 33
Security ownership of certain
beneficial owners and management.... 35
Underwriting.......................... 36
Description of securities............. 38
Market for common stock and related
stockholder matters................. 40
Interest of named experts and
counsel............................. 42
Legal matters......................... 43
Experts............................... 43
Available information................. 43
Index to financial statements......... F-1
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors, financial statements and the notes to the
financial statements.
DURASWITCH INDUSTRIES, INC.
We design, manufacture and distribute custom electronic switches and
integrated controls panels, or ICPs, that are used to operate or control
products in a wide variety of commercial and consumer applications. Our switches
and ICPs are based upon an innovative technology that utilizes a magnetic-based
design we developed and patented.
Our executive offices are located at 234 S. Extension Road, Mesa, Arizona
85210. Our telephone number at that location is (480) 833-3131. Our web site
address is www.duraswitch.com. Information contained on our web site does not
constitute part of this prospectus.
THE OFFERING
Common stock offered: 2,000,000 shares.
Common stock
to be outstanding
after the offering: 7,495,407 shares. This number does not include: (a)
89,929 shares issuable upon the exercise of warrants
outstanding as of July 31, 1999, all of which were
exercisable at a weighted average exercise price of
$2.61 per share on that date; nor (b) 762,471 shares
issuable upon exercise of outstanding stock options at a
weighted average exercise price of $11.47 per share
granted under our 1997 and 1999 Stock Option Plans, of
which options for 536,942 shares were exercisable as of
July 31, 1999.
Over-allotment option: Up to 300,000 shares, 225,734 from DuraSwitch and 74,266
from a selling stockholder. If the underwriters exercise
the over-allotment option in full, the total public
price will be $11,500,000, the total underwriting
discounts will be $920,000, DuraSwitch will receive
total proceeds of $10,238,376, and the selling
stockholder will receive total proceeds of $341,624.
AMEX trading symbol: "DRA"
Use of proceeds: - Research and development
- Capital equipment acquisition
- Expansion of sales and marketing efforts
- Repayment of indebtedness
- Acquisitions
- Working capital
Reverse stock split: Unless we tell you otherwise, the information in this
prospectus reflects a 4.25 to 1 reverse stock split,
through which each 4.25 shares of our common stock were
combined into one share on August 19, 1999, and assumes
no exercise of the underwriters' over-allotment option
or the representative's warrant.
1
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statement of operations data for the year ended December
31, 1998 and for the six months ended June 30, 1998 includes the results of
operations of Aztec Industries, Inc. since our acquisition of Aztec on January
31, 1998. Prior to January 31, 1998, we were a development stage company. The
June 30, 1999 unaudited consolidated balance sheet As Adjusted column reflects
the sale of the 2,000,000 shares of common stock at the public offering price of
$5.00 per share after deducting underwriting discounts and estimated offering
expenses and the application of the estimated net proceeds from this offering.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM MAY 1, 1997 JUNE 30,
(DATE OF INCEPTION) TO YEAR ENDED -----------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
----------------------- ----------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 6 $ 1,355 $ 680 $ 858
Gross profit (loss)....................... (1) 55 40 (145)
Loss from operations...................... (453) ( 1,549) (627) (1,203)
Net loss.................................. (449) ( 1,599) (645) (1,204)
Non-cash discount(1)...................... -- (740) (740) --
Net loss attributable to common
stockholders............................ $ (449) $(2,339) $(1,385) $(1,204)
Net loss per common share, basic and
diluted................................. $(0.12) $ (0.55) $ (0.33) $ (0.22)
Weighted average common shares
outstanding, basic and diluted.......... 3,787 4,269 4,219 5,390
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED)
---------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 110 $8,011
Working capital............................................. (195) 7,746
Total assets................................................ 2,360 9,957
Long-term debt, net of current portion...................... 288 79
Total stockholders' equity.................................. 937 8,783
</TABLE>
- ---------------
(1) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998, which is described in more detail in note 11 to the
consolidated financial statements of DuraSwitch included in this prospectus.
2
<PAGE> 6
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before buying shares of our common stock.
WE HAVE NOT BEEN PROFITABLE AND WILL NEED TO INCREASE MARKET AWARENESS OF OUR
PRODUCTS AND FURTHER DEVELOP DISTRIBUTION AND SALES CHANNELS TO ACHIEVE
PROFITABILITY
We have not made a profit since beginning operations in May 1997. We lost
$1,204,000 in the first six months of 1999, and we are not certain whether we
will ever become profitable. In order to become profitable, we must, among other
things, achieve sufficient sales to cover our operating costs. To increase
sales, we must increase market awareness of our products, further develop
distribution channels and hire and retain key sales representatives. Our failure
to accomplish these objectives would have a material adverse effect upon our
business, financial condition and results of operations.
FAILURE OF OUR PRODUCTS TO ACHIEVE WIDESPREAD COMMERCIAL ACCEPTANCE WILL HINDER
OUR GROWTH
We have not yet proven conclusively that our products will achieve
widespread acceptance in the market. Our failure to achieve widespread market
acceptance for our products in a timely manner would have a material adverse
effect on our business, financial condition and results of operations. For our
products to achieve widespread commercial acceptance, we must establish that:
- products using our patented technology will comply with error rates that
are acceptable for market applications;
- our products can be successfully produced at a reasonable cost;
- our products will continue to perform reliably in the field with an
acceptable useful life; and
- customers and end users will continue to demand our products.
It is difficult this early in the market cycle to accurately predict the
level of market acceptance our products will achieve. There can be no assurance
that we will market our products successfully.
WE DO NOT HAVE INDEPENDENT MARKETING STUDIES THAT SUPPORT OUR BELIEFS THAT OUR
PRODUCTS ARE SUPERIOR TO THOSE OF OUR COMPETITORS AND WILL ACHIEVE COMMERCIAL
SUCCESS
In order for us to successfully implement our business strategy, we will
need to demonstrate that our switches are superior to any other switch currently
on the market. Our beliefs regarding the anticipated commercial success of our
products are based solely on the experience, judgment and assumptions of
management. We have not obtained third party feasibility studies relating to our
products nor do we plan to commission any such studies. If our expectations
prove to be incorrect, then our ability to successfully market our products will
be impaired.
AS AN EARLY STAGE COMPANY, WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR STRATEGY AND FORECAST OUR OPERATING RESULTS
We have a limited operating history which makes it difficult for investors
to evaluate us. Our prospects are subject to risks and uncertainties encountered
by companies that rely on new products for almost all their revenues. We cannot
assure you that our business strategy will be successful. In addition, our net
revenue in any given period is difficult to forecast because it is dependent
largely upon the timing of product purchases by our customers. Although we have
secured numerous purchase orders for prototypes and production models of our
products, our customers are not required to make subsequent purchases and the
timing of any future purchases may vary significantly from quarter to quarter
until we establish a larger customer base.
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<PAGE> 7
OUR ANTICIPATED SALES GROWTH DEPENDS ON CONVERTING OUR PROSPECTIVE CUSTOMERS AND
SMALLER EXISTING CUSTOMERS TO SIGNIFICANT ONGOING CUSTOMERS
Over 50% of our net sales in the fiscal year ended December 31, 1998 were
generated from sales to 13 accounts, including one account which constituted
over 11% of our net sales. We do not expect that these customers will account
for significant product sales in 1999, although we anticipate that one current
customer and several prospective customers will account for a significant
percentage of our sales for the balance of 1999. There can be no assurance,
however, that our current significant customer will order as much product in
1999 as we anticipate or that any of our prospective customers will order any
products. A reduction in orders from any principal customers or a failure to
receive significant purchase commitments from prospective customers could hinder
our anticipated growth and may have a material adverse effect on our business,
financial condition and results of operations.
INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY DIMINISH OUR PRODUCTS'
COMPETITIVE TECHNOLOGICAL ADVANTAGES COMPARED TO PRODUCTS USING EXISTING
TECHNOLOGIES
Our success depends, in large part, on our ability to protect our
technology through United States and foreign patents, to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties. We may be unable to secure patents for all of our products and
processes. In addition, the issuance of patent protection for all our products
may not afford us sufficient protection from competitors that develop similar or
superior technologies. We asked the U.S. Patent Office to reexamine one of our
patents after discovering two expired patents that concern related technology.
Our intent is to strengthen the protection provided by this patent, but there is
some chance the U.S. Patent Office could decide to modify or eliminate claims
made in the patent.
As we take our products to market, we could encounter unanticipated patent
barriers. A patent search will not disclose applications that are currently
pending in the U.S. Patent Office, and there could be one or more pending
applications that would take precedence over one of our applications. In
addition, the laws of some countries do not protect our proprietary rights to
the same extent as do the laws of the U.S. Accordingly, there can be no
assurance that we will be able to protect our proprietary technology against
unauthorized copying or use. We may have to engage in litigation to enforce our
proprietary rights, to determine the validity and scope of our proprietary
rights or to defend or assert claims of infringement. Any litigation or failure
to protect our proprietary rights could have a material adverse effect upon our
business, financial condition and results of operations.
OUR FAILURE TO EFFECTIVELY MANAGE EXPANSION OF OUR OPERATIONS MAY RESULT IN
STRAINED RELATIONSHIPS WITH OUR DISTRIBUTORS, CUSTOMERS AND STRATEGIC PARTNERS
Our anticipated expansion may significantly strain our resources. To manage
growth effectively, we must continue to enhance our operational, financial and
management systems, successfully manage our quality assurance program, and
expand, train and manage our employee base. If we are unable to achieve these
objectives, we may be forced to suspend or delay shipments, make expensive and
time consuming design modifications, recall previously shipped products, absorb
service and warranty costs, experience unfavorable publicity, or experience
strained relationships with distributors, customers and strategic partners. Due
to the custom nature of our products and the level of technical and design
engineering expertise necessary to support our customers, there may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult for us to hire those persons. There can
be no assurance that we will be able to manage our expansion effectively. Any
failure to effectively manage our anticipated future growth could have a
material adverse effect on our business, financial condition and results of
operations.
4
<PAGE> 8
OUR ABILITY TO SIGNIFICANTLY INCREASE SALES DEPENDS ON OVERCOMING OUR
COMPETITORS' LONG TERM RELATIONSHIPS WITH THEIR CUSTOMERS AND OUR CUSTOMERS'
RELUCTANCE TO TRY OUR NEW SWITCH TECHNOLOGY
The market for products similar to ours is highly competitive and well
established. We face competition from over 125 companies in the
electro-mechanical switch market and a substantial number of membrane switch and
integrated controls panel manufacturing companies in their respective markets.
Many of our competitors have established products, high name recognition, and
significantly greater resources than ours. Our competitors' long term
relationships with their customers along with OEMs' reluctance to try our new
switch technology could also result in our inability to achieve sufficient
sales. We also may encounter difficulties in convincing potential customers to
change over to our new technology because they may be required to incur
additional engineering and tooling costs. Direct and indirect competition could
materially and adversely affect our revenues and profitability through pricing
pressure and loss of sales.
In addition, it may be possible for one of our competitors to develop
technology that is superior to ours, which could adversely affect our
competitive position. Our failure to compete successfully would have a material
adverse effect on our business, financial condition and results of operations.
IF WE ARE UNABLE TO SECURE FAVORABLE LICENSING AGREEMENTS, WHICH IS A KEY
ELEMENT OF OUR STRATEGY TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR
ANTICIPATED GROWTH WILL BE IMPAIRED
In order to promote widespread market acceptance of our products, we intend
to license our technology to other electronic switch or ICP manufacturers.
However, we may be unable to enter into any favorable licensing agreements with
other manufacturers. Our inability to secure favorable licensing agreements
could negatively impact our anticipated growth and may materially and adversely
affect our business, financial condition and results of operations.
OUR FAILURE TO EFFECTIVELY MANAGE STRATEGIC ALLIANCES AND ACQUISITIONS MAY
RESULT IN INCREASED EXPENSES AND ADVERSELY AFFECT OUR PROFITABILITY
We intend to consider acquisitions of and strategic alliances with other
companies in our industry that could complement our business. There can be no
assurance that suitable acquisition or alliance candidates can be identified or,
if identified, that we will be able to consummate such transactions. Further,
there can be no assurance that we will be able to integrate successfully any
acquired companies into our existing operations, which could increase our
operating expenses. Moreover, any acquisition by us may result in potentially
dilutive issuances of equity securities, incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. Acquisitions and strategic alliances
involve numerous risks, such as diverting attention of our management from other
business concerns, our entrance into markets in which we have no or only limited
experience and the potential loss of key employees of the acquired company, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
TO IMPLEMENT OUR LONG TERM BUSINESS PLAN, WE MAY NEED MORE CAPITAL, WHICH COULD
BE DIFFICULT AND EXPENSIVE TO OBTAIN
We may not be able to fully implement our long term business plan with only
the net proceeds from this offering. We may need additional equity or debt
financing, collaborative arrangements with corporate partners, or funds from
other sources for these purposes. Additional financings may be dilutive to our
stockholders or may require us to relinquish rights to some of our technologies
or products. We may have difficulty obtaining these funds on acceptable terms,
if at all. If we cannot obtain adequate funds from operations or additional
sources of financing, we may experience operational difficulties and delays due
to a lack of working capital and, as a result, our business, financial condition
and results of operations will be materially and adversely affected.
5
<PAGE> 9
THE PUBLIC OFFERING PRICE OF OUR COMMON STOCK HAS BEEN DETERMINED ARBITRARILY
AND ITS FUTURE PUBLIC TRADING PRICE COULD BE ADVERSELY AFFECTED BY LACK OF AN
ACTIVE TRADING MARKET AND OVERALL STOCK MARKET CONDITIONS
Prior to this offering, there was limited trading in our common stock on
the OTC Bulletin Board, which was traded under Rule 15c2-11 under the Securities
Exchange Act of 1934. On August 19, 1999, we effected a 4.25 to one reverse
stock split through which each 4.25 shares of our common stock were combined
into one share. Although our common stock has been approved for listing on the
American Stock Exchange, there is no assurance that an active trading market
will develop or be sustained. In addition, we must maintain minimum listing
requirements for continued listing on the American Stock Exchange. If we are
unable to maintain these requirements on an ongoing basis, our common stock
could be delisted from the American Stock Exchange, which could have an adverse
effect on the price of our stock.
Because of our limited operating history and lack of an active trading
market prior to this offering, the public offering price of the common stock was
arbitrarily determined by negotiations between us and the underwriters rather
than the market prices that prevailed prior to this offering, and does not
necessarily bear any relationship to our assets, book value, results of
operations, or any other generally accepted indicia of value. Accordingly, the
public offering price may not be indicative of the prices that may prevail in
the public market following the offering. Therefore, the market price of our
common stock might decline below the public offering price, particularly if we
are unable to obtain widespread commercial acceptance for our products and
significantly increase our sales. Also, the trading price of our common stock
could be subject to significant fluctuations in response to variations in
quarterly operating results, regulatory actions, developments in the electronic
switch industry, the condition of the overall stock market or general economic
conditions.
WE MAY LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR COMPUTER SOFTWARE OR
SYSTEMS, OR THOSE OF MATERIAL THIRD PARTIES, ARE NOT YEAR 2000 COMPLIANT
Our business depends on the operation of systems that could potentially be
impacted by Year 2000 related problems. We have conducted an internal review and
believe our computer software and systems are Year 2000 compliant. We are in the
process of contacting key suppliers regarding their Year 2000 readiness. We are
also developing contingency plans for third party and internal failures related
to the Year 2000 issue. However, we may incur material unanticipated expenses to
remedy any problems caused by the Year 2000 related failures of our or third
parties' information or other systems. The incurrence of these expenses could
have a material adverse effect on our business, financial condition and results
of operation.
STOCKHOLDERS WHO ACQUIRE COMMON STOCK IN THIS OFFERING WILL NOT BE ABLE TO
EXERCISE SIGNIFICANT INFLUENCE OVER OUR CORPORATE AFFAIRS AS MINORITY
STOCKHOLDERS
Following the completion of this offering, our executive officers and
directors will own approximately 46% of the outstanding common stock, including
shares of common stock subject to options and warrants. Accordingly, as a group,
our executive officers and directors will have significant influence over
electing directors to our board, approving matters requiring stockholder
approval and our general affairs. This concentration of ownership could delay or
prevent a change of control that minority stockholders may believe is in their
best interests.
6
<PAGE> 10
FORWARD-LOOKING STATEMENTS
This prospectus, including the documents incorporated by reference in this
prospectus, contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Actual results could differ materially from
those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements in these documents include, but are not
necessarily limited to, those relating to our:
- beliefs regarding the competitive technological advantages and
anticipated commercial success of our products;
- intention to achieve widespread commercial acceptance of our technology
and products;
- ability to carry out our business strategy;
- objective to establish DuraSwitch technology as the design standard in
the electronic switch and ICP industries;
- estimates of the size of and anticipated growth in the switch and ICP
markets;
- success in developing new or enhanced products to take advantage of
market opportunities or to respond to competition;
- ability to complete any future acquisitions of products or businesses;
- achieving Year 2000 compliance or the impact on us of any third party's
failure to achieve Year 2000 compliance; and
- ability to protect our intellectual property.
When you consider the forward-looking statements in this prospectus, you
should keep in mind the information located in the "Risk Factors" section and
elsewhere in this prospectus because the risks discussed in that cautionary
information, among others, could cause our actual results to be worse than those
described in any forward-looking statements.
7
<PAGE> 11
USE OF PROCEEDS
We estimate that we will receive $8,150,000 in net proceeds from this
offering, $9,165,803 if the over-allotment option is exercised in full, after
deducting the estimated underwriting discounts and offering expenses. We
anticipate using the net proceeds from this offering as follows:
<TABLE>
<CAPTION>
APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT PERCENTAGE
- --------------------------- ------------------ ----------
<S> <C> <C>
Research and development.................................... $2,000,000 24.5%
Capital equipment acquisition............................... 2,000,000 24.5%
Sales and marketing......................................... 1,700,000 20.9%
Repayment of indebtedness................................... 449,000 5.5%
General corporate and working capital purposes, including
possible acquisitions of and investments in competing or
complementary businesses and technologies................. 2,001,000 24.6%
---------- -----
Total............................................. $8,150,000 100.0%
========== =====
</TABLE>
We anticipate using the net proceeds from this offering to:
- fund engineering, tooling, and testing equipment related to research and
development of additional switch and integrated controls panel
configurations using our patented technology as well as refinements and
patentable design variations as new applications are developed;
- expand our manufacturing capability through capital equipment purchases
for manufacturing cells dedicated to high-volume customers;
- expand our sales and marketing efforts, including increasing awareness of
our products' competitive advantages, enhancing our presence on the
Internet, and hiring more regional sales managers to support our
independent sales representative firms in the United States; and
- repay approximately $124,000 of outstanding debt we used to purchase
equipment, which bears interest at an annual rate of 13.2% and is due
March 31, 2002, and $325,000 we borrowed from two stockholders on April
30, 1999 and July 1, 1999 we used for working capital, which bears
interest at an annual rate of 10% and is due July 1, 2000.
The balance of the net proceeds of this offering, approximately 24.6%, will
be available for working capital and general corporate purposes such as
acquisitions, increased accounts receivable, increased inventory, increased
payroll expenses for new employees and professional services fees, and is not
committed to specific uses identified in this prospectus. As a result, we will
have broad discretion in using the net proceeds of this offering and you will
not have an opportunity to evaluate the relative merits of those unspecified
uses prior to your investment. In addition, the amounts actually expended on any
particular project may vary significantly from our current plans, particularly
given our early stage of operations. We also may use a portion of the proceeds
from the offering for possible acquisitions of, or investments in, companies
that expand, complement or are otherwise related to our current business.
However, we have no current plans, agreements or commitments with respect to any
acquisitions of, or investments in, other companies. Pending these uses, we will
invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
8
<PAGE> 12
DILUTION
Our net tangible book value as of June 30, 1999 was $(79,641) or $(0.01)
per share of common stock. Net tangible book value is total tangible assets less
total liabilities. Net tangible book value per share is determined by dividing
net tangible book value by the total number of outstanding shares of common
stock. Without taking into account any other changes in our net tangible book
value subsequent to June 30, 1999, other than to give effect to the sale of the
2,000,000 shares of common stock in this offering at the public offering price
of $5.00 per share and the receipt of the estimated net proceeds from this
offering after deducting the estimated underwriting discounts and other
estimated expenses of this offering, our as adjusted net tangible book value as
of June 30, 1999 would have been $8,070,359 or $1.08 per share. This represents
an immediate increase in net tangible book value of $8,150,000 or $1.09 per
share to existing holders of common stock and an immediate dilution to new
investors purchasing shares of common stock in this offering of $3.92 per share.
The following table illustrates the per share dilution to new investors
purchasing shares of common stock in this offering:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $5.00
Net tangible book value per share before offering......... $(0.01)
Increase in net tangible book value per share attributable
to new investors....................................... $ 1.09
Pro forma net tangible book value per share after
offering.................................................. $1.08
-----
Per share dilution to new investors......................... $3.92
=====
</TABLE>
The following table summarizes as of June 30, 1999, the number of shares of
common stock purchased, the percentage of total cash consideration paid, and the
average price per share paid by present stockholders and by investors purchasing
shares of common stock in this offering before deducting the estimated
underwriting discounts and other estimated expenses of this offering. The
following table excludes:
- 89,929 shares of common stock issuable upon the exercise of warrants
outstanding as of July 31, 1999 at a weighted average price of $2.61 per share,
all of which were exercisable,
- 762,471 shares of common stock issuable upon exercise of options
outstanding as of July 31, 1999 at a weighted average exercise price of $11.47
per share, of which options for 536,942 shares were exercisable, and
- up to 225,734 shares of common stock issuable by DuraSwitch upon exercise
of the underwriters' over-allotment option.
The exercise of these options and warrants could result in further dilution to
new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED CASH CONSIDERATION PAID
-------------------- ---------------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,495,407 73.3% $ 4,930,184 33.0% $0.90
New investors....................... 2,000,000 26.7% $10,000,000 67.0% $5.00
--------- ----- ----------- -----
Total..................... 7,495,407 100.0% $14,930,184 100.0%
========= ===== =========== =====
</TABLE>
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<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of DuraSwitch as of June
30, 1999. The table also reflects a 4.25 to one reverse stock split through
which every 4.25 shares of our common stock were combined into one share on
August 19, 1999. The As Adjusted column reflects the sale of the 2,000,000
shares of common stock offered by this prospectus at the public offering price
of $5.00 per share after deducting underwriting discounts and estimated offering
expenses and the application of the estimated net proceeds from this offering.
<TABLE>
<CAPTION>
1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt.............................................. $ 287,700 $ 79,571
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 5,495,407 shares issued and outstanding,
actual; 7,495,407 shares issued and outstanding, as
adjusted(1)............................................ 5,496 7,495
Additional paid in capital................................ 5,071,951 12,916,023
Accumulated deficit....................................... (3,992,799) (3,992,799)
Promissory note receivable................................ (147,263) (147,263)
----------- -----------
Total stockholders' equity................................ 937,385 8,783,457
----------- -----------
Total capitalization................................... $ 1,225,085 $ 8,863,028
=========== ===========
</TABLE>
- ---------------
(1) Excludes 89,929 shares of common stock issuable upon the exercise of
warrants outstanding as of July 31, 1999 at a weighted average price of
$2.61 per share, all of which were exercisable, and 762,471 shares of common
stock issuable upon exercise of options outstanding as of July 31, 1999 at a
weighted average exercise price of $11.47 per share, of which options for
536,942 shares were exercisable. Also excludes 206,353 shares of common
stock reserved for future issuance under our 1999 stock option plan.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock. We intend
to retain all future earnings to fund the operation of our business and,
therefore, do not anticipate paying cash dividends in the foreseeable future.
10
<PAGE> 14
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data has been derived from our audited
1997 and 1998 consolidated financial statements and unaudited 1998 and 1999
interim consolidated financial statements and does not provide all of the
information contained in our financial statements and the related notes. Our
unaudited 1998 and 1999 interim consolidated financial statements, in the
opinion of our management, reflect all adjustments, including only normal
recurring adjustments, that we consider necessary for fair presentation of our
consolidated financial position and results of operations for these periods. The
consolidated statement of operations data for the year ended December 31, 1998
and for the six months ended June 30, 1998 includes the results of operations of
Aztec Industries, Inc. since our acquisition of Aztec on January 31, 1998. Prior
to January 31, 1998, we were a development stage company.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, -----------------
1997 1998 1998 1999
------------------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales....................................... $ 6 $ 1,355 $ 680 $ 858
Cost of goods sold.............................. (7) (1,300) (640) (1,003)
------ ------- ------- -------
Gross profit (loss)............................. (1) 55 (40) (145)
Selling, general and administrative expenses.... (310) (1,195) (484) (807)
Research and development........................ (142) (409) (183) (251)
------ ------- ------- -------
Loss from operations............................ (453) (1,549) (627) (1,203)
Other income (expense).......................... 4 (50) (18) (1)
------ ------- ------- -------
Net loss........................................ (449) (1,599) (645) (1,204)
Non-cash discount(1)............................ -- (740) (740) --
------ ------- ------- -------
Net loss attributable to common stockholders.... $ (449) $(2,339) $(1,385) $(1,204)
====== ======= ======= =======
Net loss per common share, basic and diluted.... $(0.12) $( 0.55) $ (0.33) $ (0.22)
Weighted average common shares outstanding,
basic and diluted............................. 3,787 4,269 4,219 5,390
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
-------------- -------------
1997 1998 (UNAUDITED)
---- ------ -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $236 $ 144 $ 110
Working capital (deficit)................................... 203 (26) (195)
Total assets................................................ 380 1,528 2,360
Long-term debt, net of current portion...................... 0 158 288
Total stockholders' equity.................................. 324 752 937
</TABLE>
- ---------------
(1) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998, which is described in more detail in note 11 to the
consolidated financial statements of DuraSwitch included in this prospectus.
11
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and the related notes appearing elsewhere in this
prospectus.
GENERAL
We develop, manufacture, and distribute a new, patented electronic switch
based on magnetic technology. Using this unique technology, we produce custom
switches and integrated controls panels, or ICPs. We were incorporated on May 1,
1997 as "Total Switch, Inc." In order to use stock to acquire other businesses
necessary for our growth, we combined with SOS International, Inc., an inactive
publicly traded company, on December 31, 1997. SOS had nominal assets and no
liabilities on the date of the acquisition. Under a stock exchange agreement,
SOS changed its name to "DuraSwitch Industries, Inc." and acquired all of Total
Switch's stock in exchange for approximately 85% of SOS's outstanding common
stock. As a result of this transaction, Total Switch became a wholly-owned
subsidiary of DuraSwitch, and Total Switch's former stockholders acquired a
controlling interest in DuraSwitch.
During the period from our date of inception, May 1, 1997, to December 31,
1997, we focused on:
- developing our patented technology,
- financing our operations through private equity issuances, and
- searching for an acquisition candidate that had an existing customer
base, sales network and relevant manufacturing capability.
On January 31, 1998, we acquired Aztec Industries, Inc., a membrane switch
manufacturing and graphics printing firm, in exchange for 70,588 shares of our
common stock and the cancellation of approximately $60,000 of loans we made
previously to Aztec. As a result of this acquisition, we acquired:
- an established infrastructure of technical design and manufacturing
personnel,
- customer contacts, and
- manufacturing capabilities sufficient to support a significant increase
in our sales.
We generate revenues primarily from the design, development, production and
sale of our switches and ICPs. Because we typically custom design switches and
ICPs to meet a specific customer's needs, we initially charge our customer for
non-recurring engineering and tooling costs related to the new design. If the
new design meets specifications and the customer decides to proceed to the
prototype stage, we typically charge the customer for producing limited
quantities of the new product. Finally, if the customer proceeds to full
production of the product utilizing our switch or ICP, the customer will order
the desired quantity of product. In the future, we intend to generate additional
revenues through licensing our technology to other companies in the switch
industry from which we expect to receive a percentage of the revenues derived
from sales of products utilizing our switches and ICPs.
The majority of our net sales reported for the year ended December 31, 1998
were related to sales of membrane switches and graphic printing products to
existing customers. In addition, because our operations in 1998 were devoted
primarily to design engineering and creating DuraSwitch technology prototypes
for new customers, we did not generate significant sales from production
purchase orders during 1998. However, in the process of engineering and creating
prototype switches for several customers, we have since received production
purchase orders for delivery during 1999 and 2000. At June 30, 1999, we had
approximately $2 million of purchase orders outstanding.
The principal elements comprising our cost of sales are raw and packaging
materials, engineering and assembly, labor, and manufacturing overhead. The
major raw materials used in the manufacture of our products include magnets,
stamped metal, plastics and conductive inks. Costs related to engineering design
12
<PAGE> 16
work performed for customers and prototype models sold to customers are charged
to cost of goods sold. Costs of sales are affected by the efficiency of
production methods and utilization of manufacturing capacity, areas in which we
have significant experience.
Our research and development expenses are comprised mainly of labor and
leased equipment costs. Our selling, general and administrative expenses are
comprised mainly of labor costs associated with our sales and administrative
personnel and costs associated with our facilities.
We are in the early stage of operations and, as a result, the relationship
between net sales, cost of goods sold, and operating expenses reflected in the
financial information included in this prospectus may not represent future
expected financial relationships. Much of our cost of goods sold and operating
expenses are relatively fixed costs. We expect that these expenses will increase
if net sales and transaction volumes increase, but at a slower rate of growth
than the corresponding sales increase. Given our current stage of operations and
relatively short operating history, we do not believe period to period
comparisons of results of operations are meaningful.
MATTERS AFFECTING COMPARABILITY
For the six months ended June 30, 1998 and year ended December 31, 1998,
our financial results include Aztec's results of operations since the
acquisition date of January 31, 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales increased $177,314 or 26% from $680,466 in the six
months ended June 30, 1998, the "1998 Period", to $857,780 in the six months
ended June 30, 1999, the "1999 Period". The increase was primarily due to a low
level of sales during the six months ended June 30, 1998, which consisted of
only five months of consolidated operations compared to six months of
consolidated operations in the quarter ended June 30, 1999. Sales during the
1998 Period were attributable primarily to sales of membrane type switches and
graphic printing services provided to Aztec customers. During 1998, using
Aztec's sales and manufacturing capabilities, we began marketing our patented
technology and producing prototypes of custom-designed switches and ICPs. During
the 1999 Period, a majority of net sales represented sales of new switches and
ICPs relying on our patented technology rather than older membrane switch
technology.
COST OF GOODS SOLD. Cost of goods sold increased $362,487, or 57%, from
$640,119 in the 1998 Period to $1,002,606 in the 1999 Period. As a percentage of
net sales, cost of goods sold increased from 94% in the 1998 Period to 117% in
the 1999 Period primarily due to increased manufacturing overhead and
application engineering costs related to developing an infrastructure to
accommodate anticipated increased sales volumes of new products using our
patented technology.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $323,804 from $483,619 or 71% of net sales in
the 1998 Period to $807,423 or 94% of net sales in the 1999 Period. The increase
in selling, general and administrative expenses was directly related to building
an infrastructure to accommodate anticipated sales and production growth,
including an increase in personnel and occupancy costs relating to additional
manufacturing and office space in 1999.
RESEARCH AND DEVELOPMENT. Research and development costs for the 1998
Period increased 37% from $183,583 to $251,113 in the 1999 Period. Research and
development expenses have increased due to growth in our engineering staff over
the past 12 months. We do not expect prior levels of research and development
expenses to be indicative of research and development expenses for future
periods, which we expect to increase substantially.
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations increased from $626,855 in the 1998 Period to a loss of
$1,203,362 in the 1999 Period.
13
<PAGE> 17
OTHER INCOME/EXPENSE. We had other expense for the 1998 Period of
$18,025 compared to other expense of $923 for the 1999 Period. Other expense in
the 1998 Period consisted primarily of interest expense relating to notes
payable and capital equipment leases assumed in the Aztec acquisition. During
the 1999 Period, other expense was offset primarily by a gain on equipment sold.
PERIOD FROM MAY 1, 1997, DATE OF INCEPTION, TO DECEMBER 31, 1997 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased $1,349,028 from $5,762 in fiscal 1997,
commencing May 1, 1997 and ending December 31, 1997, to $1,354,790 in 1998. The
significant increase in sales was primarily a result of our transition from a
start-up company to an operating company during that period. We ceased to be
classified as a start-up company and became an operating company when we
acquired Aztec on January 31, 1998. Over 50% of our net sales in 1998 were
generated from 13 accounts, including one account which constituted over 11% of
our net sales.
COST OF GOODS SOLD. Cost of goods sold increased $1,293,573 from $6,617
in fiscal 1997 to $1,300,190 in 1998. The significant increase in cost of goods
sold was primarily a result of our transition from a start-up company to an
operating company as described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $309,951 in fiscal 1997 to $1,194,905 in
1998. The increase in 1998 was primarily a result of our transition during that
period from a start-up company to an operating company as described above.
During fiscal 1997, we also incurred lower occupancy and personnel related
expenses because the fiscal year consisted of only eight months.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $142,550 in fiscal 1997 to $409,425 in 1998, an increase of $266,875 or
187%. During fiscal 1997, we incurred research and development costs related to
the initial development of our patented technology. The significant increase in
these costs in fiscal 1998 was primarily due to the addition of development
engineering personnel and equipment in order to continue development of new
products and our patented technology.
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations increased from $453,356 in fiscal 1997 to a loss of $1,549,730
in 1998.
OTHER INCOME/EXPENSE. We had other income for fiscal 1997 of $4,270
compared to $49,698 of other expense in 1998. The primary components of other
expense during 1998 were interest expense related to notes payable and capital
equipment leases assumed in the Aztec acquisition.
NON-CASH DISCOUNT ON PROCEEDS OF PREFERRED STOCK FOR BENEFICIAL
CONVERSION FEATURE. We incurred a non-cash charge of $740,000 for a beneficial
conversion feature relating to the sale of convertible preferred stock on June
29, 1998, which increased the net loss attributable to common stockholders in
1998 to $2,339,428.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1999
Net cash used in operating activities in the 1998 Period was $463,954,
consisting primarily of net loss and a decrease in accounts payable, offset
primarily by depreciation and amortization and a decrease in inventory. Net cash
used in operating activities in the 1999 Period was $1,207,389, consisting
primarily of net loss and increases in accounts receivable, inventory, and
prepaid expenses and other current assets, which include deferred costs of this
offering of $303,928, offset by depreciation and amortization and increases in
accounts payable, accrued expenses and other current liabilities.
Net cash used in investing activities in the 1998 Period was $111,069,
consisting primarily of a $58,246 advance to Aztec prior to the acquisition of
Aztec and purchases of property and equipment relating to research and
development activities. Net cash used in investing activities in the 1999 Period
14
<PAGE> 18
was $381,225, consisting primarily of a $150,000 loan to Camplex/Concept W
Corporation and purchases of telephone system, computer and manufacturing
equipment. The loan to Camplex was made in anticipation of an acquisition of
Camplex, which we subsequently abandoned.
Net cash provided by financing activities in the 1998 Period was $376,469,
consisting primarily of net proceeds from the sale of stock, which was partially
offset by principal payments or notes payable and capital leases. Net cash
provided by financing activities in the 1999 Period was $1,554,270, consisting
primarily of net proceeds from the sale of stock, proceeds from notes payable to
stockholders, and a $158,670 increase in borrowings on our line of credit,
offset by principal payments on notes payable and capital leases and net
payments on loans from officers.
CASH FLOW FOR THE PERIOD FROM MAY 1, 1997, DATE OF INCEPTION, TO DECEMBER 31,
1997 AND YEAR ENDED DECEMBER 31, 1998
Net cash used in operating activities in fiscal 1997 was $260,727,
consisting primarily of net loss partially offset by depreciation and
amortization, issuance of stock for services, bad debt expense, decrease in
prepaid expenses and other current assets and an increase in accounts payable.
Net cash used in operating activities in 1998 was $1,235,824, consisting
primarily of net loss partially offset by depreciation and amortization,
issuance of stock for services, a decrease in inventory, and an increase in
accrued expenses and other current liabilities.
Net cash used in investing activities in fiscal 1997 was $104,527,
consisting primarily of an advance to Aztec and purchases of property and
equipment relating to research and development activities. Net cash used in
investing activities in 1998 was $180,195, consisting primarily of a $58,246
advance to Aztec prior to the acquisition of Aztec, $61,434 for capitalization
of patent filings costs, and purchases of a manufacturing air filtration system,
clean room, and various research and development testing equipment.
Net cash provided by financing activities in fiscal 1997 was $601,235,
consisting primarily of net proceeds from the sale of stock partially offset by
net payments on loans from officers. Net cash provided by financing activities
in 1998 was $1,323,898, consisting primarily of net proceeds from the sale of
stock and proceeds from loans from officers, partially offset by principal
payments on notes payable and capital leases and net payments on our line of
credit.
In December 1998, we obtained a $150,000 bank line of credit that bears
interest at the prime rate plus 2% and expires in December 1999. On May 27,
1999, we renegotiated the line of credit, which allows us to borrow up to
$250,000. The line of credit bears interest at the prime rate plus 2% and
matures in May 2000. Outstanding borrowings on the line of credit are secured by
a lien on our inventory, accounts receivable and bank accounts. As of June 30,
1999, $158,670 was outstanding under this credit facility. If the line of credit
is not renewed, we intend to seek alternative sources of financing, including
obtaining a replacement credit facility from an alternative lender, or the sale
of additional equity.
As part of the Aztec acquisition, we assumed a note payable, due March 31,
2002, which requires monthly payments of principal and interest of $4,536 with
interest at 13.2% per year. This note is secured by a lien on some of our
property and manufacturing equipment. As of June 30, 1999, the amount owed on
this note payable was $123,982. Also in connection with the Aztec acquisition,
we assumed an unsecured note payable to one of Aztec's former owners, due
January 31, 2000, which carried imputed interest at 8.0% per year. As of June
30, 1999, the amount owed on this note payable was $44,427.
During fiscal 1997 and 1998, we borrowed a total of approximately $280,000
from individuals affiliated with us. We repaid approximately $240,000 of these
loans as of December 31, 1998. These advances and unsecured notes accrued
interest at rates ranging from 9.5% to 18% per year. The balance of these notes
was paid in the first quarter of 1999.
We have entered into various capital leases for the purchase of property
and equipment. These capital leases bear interest at rates ranging from 11.7% to
24.0%. As of June 30, 1999, future principal payments under our existing capital
leases were approximately $116,000.
15
<PAGE> 19
On April 30, 1999, we borrowed $200,000 from two stockholders. These loans
mature on July 1, 2000 and bear an annual interest rate of 10%. On June 30,
1999, the promissory notes were reduced by $75,000 in connection with the
exercise of warrants. We borrowed an additional $200,000 from these stockholders
under the same terms on July 1, 1999.
At December 31, 1998, we had approximately $2,284,000 in net operating loss
carryforwards available for federal income tax purposes. We have not recognized
any benefit from these operating loss carryforwards, which are subject to
significant restriction under current tax law and begin to expire in 2011.
Assuming completion of this offering, we estimate that capital expenditures
through fiscal 2000 will be approximately $2 million, relating primarily to the
expansion of manufacturing capability through equipment purchases for large
volume customer production cells and automation as economically feasible.
We have experienced significant operating losses since our inception. We
expect our capital expenditure and working capital requirements in the
foreseeable future to increase depending on the rate of our expansion, our
operating results, and other adjustments in our operating plan as needed in
response to competition or unexpected events. We believe that the net proceeds
from this offering, together with available borrowings and our current cash and
cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital, capital expenditures and required debt payments through fiscal
2000. If we are unable to meet our liquidity requirements or if our liquidity
requirements increase, we may require additional financing. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. There can be no assurance that financing will be
available in sufficient amounts or on terms we find acceptable, if at all.
CHANGE IN AUDITORS
On January 3, 1999, DuraSwitch engaged Deloitte & Touche LLP as its
independent auditor for the fiscal year ending December 31, 1998, to replace the
firm of McGladrey & Pullen, LLP. Our management dismissed McGladrey & Pullen,
LLP on December 28, 1998 after consulting with the board of directors on an
informal basis. Our board of directors approved the change in auditors on March
8, 1999.
The reports of McGladrey & Pullen, LLP on DuraSwitch's financial statements
for 1997 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
There were no disagreements with McGladrey & Pullen, LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of McGladrey &
Pullen, LLP, would have caused McGladrey & Pullen, LLP to make reference to the
matter in their report.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement is effective
for our fiscal year ending December 31, 2001. We have not completed evaluating
the impact of implementing the provisions of SFAS No. 133.
YEAR 2000 COMPLIANCE
Our business depends on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others:
- computer hardware and software systems used by us to deliver services to
our customers, including hardware and custom and off-the-shelf software
supplied by third parties;
16
<PAGE> 20
- communications networks, such as the Internet, which we use to help
market our products by providing information to its existing customers
and potential customers;
- internal information technology and non-information technology systems of
our customers and suppliers;
- computer hardware and software systems we use internally to manage our
business, including hardware and custom and off-the-shelf software
supplied by third parties; and
- non-information technology systems and services we use in our business,
such as telephone systems and HVAC systems.
We have completed an internal review of the hardware and software systems
and communication networks we use to deliver services to our customers and to
manage our business, including non-information technology systems. We have
recently purchased software upgrades, computer systems and a phone system which
we believe are all Year 2000 compliant at a total cost of approximately $75,000.
We believe that all of the hardware and software we utilize in our business are
Year 2000 compliant, including non-information technology systems. Therefore, we
do not anticipate any additional expenditures to bring our systems into
compliance. However, failure of currently owned equipment or software to operate
properly with regard to the Year 2000 could require us to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
our business, financial condition and results of operations.
The success of our efforts may depend on the success of third parties in
dealing with their Year 2000 issues. Many of these organizations may not be Year
2000 compliant, and the impact of widespread supplier failure on our business is
difficult to determine. We are in the process of surveying our key suppliers
regarding their Year 2000 compliance programs and status. We have completed
approximately 75% of this process, and we expect to complete this process by
September 1, 1999. As a contingency against failure of a key supplier to provide
us with needed material or services, we have identified alternative sources for
our key suppliers. We are also developing additional contingency plans to deal
with any other issues that might arise because a key supplier is not Year 2000
compliant. We believe that we will have identified alternative third-party
suppliers and implemented any other necessary contingency plans by September 30,
1999.
The failure of a key supplier to become Year 2000 compliant could produce a
scenario in which that supplier is not able to supply us with needed material or
services and, as a result, we would not be able to provide a customer with
product until the supplier became Year 2000 compliant. We believe that we can
minimize the chances that this scenario will occur by identifying alternative
suppliers. No assurances can be given, however, that alternative third-party
suppliers will be successful in meeting our requirements or, if met, that the
terms of the arrangement will be as favorable as those of our current suppliers,
which could increase our expenses and have a material adverse effect on our
business, financial condition, and results of operations.
Any failure to address any unforeseen Year 2000 issue could adversely
affect our business, financial condition, and results of operations.
17
<PAGE> 21
BUSINESS
OVERVIEW
We design, manufacture and distribute custom electronic switches and
integrated controls panels, or ICPs, featuring an innovative technology we
developed and patented utilizing a magnetic-based design. We believe this
patented technology allows us to provide a complete solution to the design
challenges faced by original equipment manufacturers, or OEMs, and component
suppliers seeking durable, reliable, low cost switches and ICPs that can easily
be incorporated into a slim profile, flat panel design without sacrificing the
consistent tactile feedback response, or "click," highly desired by end users.
Design News, a trade magazine widely read by design engineers, named our
DuraSwitch PushGate switch "The Best New Product of 1998" in the
electrical/electronic category.
Since commencing operations in May 1997, we have provided design solutions
for a number of leading companies in a variety of industries by custom-designing
switches and ICPs that met critical needs. Examples include:
- the panel operating the doors of the monorail trains at Walt Disney
World,
- lawn irrigation systems made by Rain Bird/Clemar Manufacturing Corp.,
- boat trolling motors distributed by Johnson Worldwide Associates,
- mobile digital phones developed by Ericsson Inc.,
- ship bridge radar control systems produced by Raytheon Marine Company,
- peripheral controls for computers made by Covid Inc., and
- restaurant food preparation equipment made by Frymaster and by Ram
Center, Inc.
INDUSTRY ANALYSIS
Electronic switches and ICPs are used in a wide variety of consumer,
industrial and agricultural products, such as computers, consumer electronics,
mobile phones, consumer appliances, automobiles, fitness equipment, trains,
ships, airplanes, tractors, generators, medical devices and commercial food
preparation equipment. According to a report by Frost & Sullivan on the 1998
World Electronic Switch Market, electronic switches and ICPs represent a
multi-billion dollar global market.
HISTORY OF ELECTRONIC SWITCHES
In its simplest form, an electronic switch controls the flow of electric
current; press the switch to complete the circuit and the current flows to
operate a micro-processor, which in turn, performs the desired function. More
complex switches, such as volume control knobs on car radios, regulate the
precise voltage and electric current flowing through the circuit; turn the knob
to increase the voltage and the volume is increased.
ELECTRO-MECHANICAL SWITCHES. Prior to the early 1970s, traditional
electro-mechanical switches represented the design standard in the switch and
ICP industries. According to a report by Frost & Sullivan on the 1998 World
Electronic Switch Market, switches and ICPs relying on this traditional
technology represented approximately $2.75 billion of this market.
Electro-mechanical switches operate by pushing, turning or sliding a
button, knob or lever to mechanically activate a series of movable parts that
will close or complete an electrical circuit within the switch itself. The
primary advantage of electro-mechanical switches is their feedback response,
which permits the user to feel, and sometimes see or hear, changes in the switch
when it is activated. An example of feedback response is the clicking noise or
sensation perceived by a user when pushing a traditional car radio station
preset button or turning the mechanical volume control knob.
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<PAGE> 22
Although they offer excellent tactile feedback to the user,
electro-mechanical switches are bulky and mechanically complex. We believe the
mechanically complex design of these switches makes them prone to excessive
wear, resulting in high production and maintenance costs to customers and end
users. Originally designed prior to the trend toward miniaturization in
electronic components, electro-mechanical switches are not used in many
electronic products produced today because their bulkiness and cost hinders
their incorporation into the slim-profile designs currently desired by the
market. In addition, the typical design of products incorporating
electro-mechanical switches requires the switch to protrude through a panel,
making these products difficult to clean and environmentally seal, a design flaw
that makes this type of switch undesirable for products used in settings such as
hospitals, kitchens and outdoors.
MEMBRANE SWITCHES. In response to the increasing demand for slim
profile, low cost, flat controls panels and push-button switches for electronic
equipment, a new electronic switch design was introduced in the early 1970s
relying on membrane switch technology. Since their introduction, membrane
switches have captured a significant share of the electronic switch and ICP
markets.
Membrane switches consist of multiple, thin-film layers topped by an
overlay with printed graphics or instructions to operate the device in which the
switch is incorporated. A typical example of a membrane switch is found on most
microwave oven control panels, which feature a graphical overlay layer with
numbered buttons and other controls functions, such as "start," "cook" and
"defrost." Membrane switches generally are thinner, more durable and less
expensive to produce and maintain than electro-mechanical switches. They usually
feature a flat, washable surface, which can be easily cleaned and disinfected,
an important feature in products used in settings such as hospitals and
kitchens. Unfortunately, membrane switches, while responsive to customer demands
for a slimmer/flat profile, improved durability, and lower costs of production
and maintenance, provide no feedback response to the user. Without tactile
feedback, users cannot be certain they have activated the switch or they may
activate the switch several times, which could cause the opposite effect of what
the user intended. Also, the user may push the switch much harder than required
to activate the switch, resulting in excessive wear and premature failure.
To solve the feedback response problem, membrane switch manufacturers
typically have offered two solutions. The first solution is to add electronic
audio or visual feedback responses, such as a "beep" sound, light, or status
icons on a display, to inform the user when the switch has been activated.
However, this "solution" increases the cost, complexity and size of the product
to which it is added, thus decreasing the advantages of a membrane switch over
an electro-mechanical switch.
The second option to overcome the feedback response problem is to
incorporate a metal, rubber or plastic dome as part of the membrane switch. When
pressed by a user, the center of the dome will invert and contact the circuit on
the membrane layer beneath it. When functioning properly, the dome will return
back to its original shape as the user releases his or her finger from the
switch, which is intended to provide tactile feedback response to the user.
Domed membrane switches, however, require inconsistent amounts of force to be
activated, which has proven frustrating to the user, and often do not provide
the desired tactile feedback response. In addition, domes are prone to failure
due to materials fatigue and, as a result, are less reliable than membrane
switches without domes. Accordingly, using domes in membrane switches to solve
the feedback response problem does not provide the consistent tactile feedback
desired by the customer or end user, and increases the cost and design
complexity while decreasing the reliability of the switch.
ELECTRONIC INTEGRATED CONTROLS PANELS. An ICP typically combines various
types of switches, such as push-button, rotary, slider, toggle, dial and rocker
switches, into a single control panel with a printed circuit board, lighting,
displays and other components. ICPs may include membrane switches, electro-
mechanical switches, or a combination of both. The ICP industry consists of
several ICP component parts manufacturers producing printed circuit boards,
displays, panels and switches, which we believe represents a global
multi-billion dollar market that is significantly larger than the
electro-mechanical and membrane switch markets combined.
OEMs that produce products using ICPs typically have faced a number of
design challenges, involving tradeoffs between size, cost, durability and
customer preferences. To obtain the benefits offered
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by membrane switches without forfeiting the consistent tactile feedback response
characteristic of electro-mechanical switches, OEMs often combine
electro-mechanical rotary switches with flat panel membrane push-button
switches, requiring a marriage of incompatible technologies. In addition to
increasing the mechanical complexity and bulkiness of the ICP, this design also
requires that a hole be drilled through the membrane switch surface to insert
the electro-mechanical rotary switch, increasing the ICP's cost, compromising
its ability to be environmentally sealed, and disrupting the flat profile of a
typical ICP design using all membrane switches. Also, OEMs usually must deal
with a number of different component producers used in their ICPs, which
requires a relatively high level of coordination and technological
compatibility. As a result, both OEMs and component suppliers are seeking low
cost integrated solutions to the design challenges presented by traditional
switch technologies, which force designers to sacrifice desired features in
exchange for others.
THE DURASWITCH SOLUTION
We have developed a patented technology that enables us to custom design
switches and ICPs that overcome the design challenges presented by traditional
electro-mechanical and membrane switch technologies. We believe our
magnetic-based design enables us to provide switches and ICPs that:
- offer superior durability, enhanced reliability and better value compared
to switches utilizing traditional technologies,
- can be easily integrated into flat panel, slim profile designs, and
- provide the consistent tactile feedback response highly desired by end
users.
In short, our technology enables us to combine the best features of
membrane switches without sacrificing the consistent tactile feedback response
provided by electro-mechanical switches. Our patented technology and design
expertise, together with our strategic alliances with other companies engaged in
the electronic switch and ICP industries, also enables us to offer an integrated
solution to the design challenges faced by OEMs.
COMPETITIVE ADVANTAGES
The key to our technology is its simplicity of design and reliance on
magnetic force rather than mechanical parts or the elastic properties of
materials to operate a switch. Based on our management's experience in the
electronic switch and ICP industries, we believe our products offer the
following competitive advantages compared to switches and ICPs using traditional
electro-mechanical and membrane switch technologies:
SIGNIFICANTLY GREATER DURABILITY AND RELIABILITY. Because our products
rely on a magnetic-based design with few moving parts and virtually no stress,
fatigue, or potential breaking points, we believe they are significantly more
durable and reliable than traditional electro-mechanical and membrane switches.
Since January 1998, we have been testing one of our DuraSwitch PushGate
switches. To date, it has exceeded 250 million activations on an electronic
counter and is still operating without a single failure. We believe this test
result supports our belief in the reliability and durability of our products. By
eliminating or reducing the mechanical complexity and precision required by
traditional technologies, we believe our patented design makes our switches and
ICPs significantly more reliable than electro-mechanical and membrane switches.
CONSISTENT TACTILE FEEDBACK RESPONSE. Unlike membrane switches and some
electro-mechanical switches, our design consistently produces a distinctive
"click" each time the user activates our switch. This capability enables us to
design and produce switches that do not require the addition of audio or visual
cues, such as beeps, lights, or status icons, to artificially provide feedback
to the user, a solution that would otherwise increase the complexity, size, and
cost of the switch design. We are unaware of any other switch capable of
providing the consistent tactile feedback response highly desired by end users
in a low cost, slim profile design.
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EASE OF INTEGRATION IN SLIM PROFILE DESIGN. Because our switches use a
multiple thin layer design that incorporates a flexible circuit rather than
bulky mechanical parts, they are easily integrated into flat panel/slim profile
products currently desired by the market. This design also eliminates the need
to breach the surface of the ICP, enabling our ICPs to be easily sealed,
cleaned, disinfected, and protected from harsh environmental conditions.
ENHANCED VALUE TO COST RATIO. We believe our switches offer an enhanced
value to cost ratio compared to switches using traditional technologies. Our
switches cost significantly less to produce than comparable electro-mechanical
switches because our magnetic-based design typically requires fewer and less
expensive components. In addition, devices using our switches are more durable
and reliable than electro-mechanical switches and are therefore less costly to
maintain than devices using electro-mechanical switches. Although the initial
selling price of our switches may be higher than membrane switches in some
instances, we believe the durability and reliability of our switches, combined
with their ability to provide a consistent tactile feedback response, make our
switches more desirable to end users and less expensive to maintain than
membrane switches.
REPRESENTATIVE DESIGN SOLUTIONS
Despite our relatively short operating history, we have custom designed
solutions for a number of leading companies that have incorporated, or are in
the process of incorporating, our switches into their products. A representative
sample of these companies and the products in which our switches are being
incorporated is set forth below.
DISNEY WORLD/MONORAIL TRAINS. We designed and provided an integrated
controls panel that operates the doors on Disney World's monorail trains. Our
product, which replaced a controls panel that relied on dome membrane switches,
has been reported to us by Disney World to be significantly more durable and
reliable than its predecessor, which required frequent repairs and replacements
due to heavy usage, repeated daily cleanings by a power wash system and
continuous exposure to the elements.
ERICSSON/CELLULAR PHONES. We custom designed and are producing a unique
switch to be used in a new mobile phone developed by Ericsson Inc., a leading
mobile phone manufacturer. The design challenge presented by Ericsson was to
develop a small, durable, multi-function rotary switch featuring a pop-up
mechanism. Utilizing our patented technology and design experience, we custom
designed a switch that, according to Ericsson, met or exceeded all of Ericsson's
product specifications much more quickly and at a substantially lower cost than
our competitors. As a result, Ericsson has placed multiple orders with us for a
significant number of these switches. We believe Ericsson will place additional
orders for even greater numbers of our switches as they achieve full production
of their new mobile phone.
HENNESSEY/AUTOMOTIVE SERVICING EQUIPMENT. We custom designed and
produced an ICP incorporated in automobile tire balancing equipment manufactured
by Hennessey Industries, Inc. The ICP we developed replaced a controls panel
that used a flat panel membrane switch design that, according to Hennessey, was
prone to excessive wear due to the harsh treatment the switches received in auto
repair shops. In response to Hennessey's need for switches that were more
durable and provided consistent feedback response even through the work gloves
worn by mechanics, we designed an ICP utilizing our durable, responsive
push-button switches underneath a magnetic graphic overlay capable of being
replaced quickly and inexpensively if worn out, scratched, gouged, or otherwise
rendered unreadable.
STRATEGY
Our objective is to become a leader in the electronic switch and ICP
industries by making DuraSwitch technology the design standard for electronic
switches and ICPs. In order to achieve this objective, we intend to implement
the following strategies:
EXPLOIT AND MAINTAIN OUR PATENTED TECHNOLOGY'S COMPETITIVE ADVANTAGES
We intend to exploit and maintain our patented technology's competitive
advantages, compared to electro-mechanical and membrane switch technologies,
with the objective of making our technology the
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design standard in the industry. We intend to pursue this strategy by
aggressively marketing our products to broaden market awareness, implementing a
licensing program to more quickly achieve widespread distribution of our
technology, and investing heavily in research, development and testing to
further refine our technology and expand its possible applications in a wide
variety of industries.
INCREASE MARKET AWARENESS OF DURASWITCH'S PATENTED TECHNOLOGICAL ADVANTAGES
We will aggressively promote our patented technology and design expertise
to achieve widespread market awareness of our products' advantages compared to
switches and ICPs relying on traditional technologies. Our promotional efforts
will target design engineers and purchasing managers, whom we believe are the
primary decision makers within our potential customer base. These efforts will
include increased advertising in trade magazines, substantially increasing
traffic to our web site, participating actively in vendor-sponsored seminars for
design engineers, and aggressively promoting our products in the trade media. We
believe that promoting our success in providing custom-designed solutions for a
number of high-profile companies will further enhance market awareness of our
products and their unique competitive advantages.
LEVERAGE OUR STRATEGIC ALLIANCES AND ACQUISITIONS
We intend to leverage our current strategic alliances as well as pursue new
strategic alliances and acquisitions to increase market share. We have developed
strategic alliances with various companies that design and produce complementary
electronic component products. Through these strategic alliances, we have
expanded our customer base by making sales to new customers that have existing
relationships with our partners. These strategic alliances also allow us to
expand our manufacturing capacity and co-market our products with complementary
electronic components produced by our partners. We expect to establish
additional strategic alliances with electronic components manufacturers to gain
these sales, marketing and manufacturing advantages and to obtain high quality
electronic components, such as liquid crystal displays, that we incorporate into
some of our ICP products.
We also will continue to search for strategic acquisition candidates. We
believe the electronic switch industry is fragmented and contains numerous
competitors possessing sales and marketing expertise, customer contacts, brand
recognition or industry experience greater than our own. Acquisition of one or
more of these competitors would permit us to expand our business faster than if
we developed those resources internally.
PROVIDE FULL SERVICE DESIGN ENGINEERING, TESTING AND MANUFACTURING CAPABILITY
We intend to be a "one stop shop" for design engineering, testing and
manufacturing for our customers. OEMs searching for a switch or ICP to install
in their products typically may be required to hire multiple engineers to design
the switch or ICP, hire a manufacturer to produce components, and contract with
another vendor for assembly. This multi-vendor approach is costly, complex and
time consuming, and requires a relatively high level of coordination and
compatibility. With our patented technology, our experienced technical and
engineering staff, and our production capabilities, we are able to offer a
single source for custom-designed products that combine the best features of
membrane and electro-mechanical switch technologies in an integrated solution
offering superior value, durability and reliability.
PRODUCTS
We have a number of switch products based on our patented magnetic-based
technology in various stages of production and development. We are currently
producing the DuraSwitch PushGate, DuraSwitch Rotor and DuraSwitch SnapRotor.
Switches under development include the DuraSwitch Slider and DuraSwitch Slammer.
Prices of our switches and ICPs range from under $1 for our most basic push-
button design to in excess of $6,000 for a complex flight simulator ICP
involving several different custom-designed controls panels.
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THE DURASWITCH PUSHGATE
A typical DuraSwitch PushGate switch consists of up to five bonded
micro-thin layers of materials, which collectively measure less than 1/10th of
an inch. The top layer of the switch is printed with a graphical overlay that
indicates which buttons must be pressed to activate a desired function, such as
"on", "defrost" and "cook" buttons on a microwave oven. Below the top layer is a
metal shield which keeps the magnetic field inside the switch, and protects the
switch from external electrical and magnetic interference. Below the shield is a
thin, flexible layer of magnetic material. Below the magnetic layer is spacer
material containing a hole through which a patented metal disc is pushed. The
disc has a small raised, off-center button that is pushed by the user through
the surface of the switch. A flexible circuit is located at the bottom of the
switch. When the button is pressed, the disc separates from the magnet and the
underside of the disc completes the circuit by touching the contacts located on
the flexible circuit. When the button is released, the magnet pulls the disc
upward and away from the switch contacts, into its resting position, and the
circuit is broken. This magnetic-based design produces a consistent tactile
feedback response to the user each time the switch is activated. For a graphic
display of the DuraSwitch PushGate, see the diagram on the inside front cover of
this prospectus.
THE DURASWITCH ROTOR
The DuraSwitch Rotor resembles a typical volume control knob on a car
radio, except that, unlike an electro-mechanical rotary switch, the back of our
switch is flat. The entire assembly can be less than 1/10th of an inch thick.
The DuraSwitch Rotor consists of a rotary knob containing embedded magnets, all
fastened to a flat surface. The top of the surface displays instructions for the
user. The bottom of the surface seals a circular space below the magnet
containing small, 1 mm, gold-plated balls. Beneath the circular space are
printed electronic circuits, which are activated through contact with the
gold-plated balls. When the user turns the knob, the magnet within the rotary
knob causes the gold-plated balls to rotate within their circular space. As the
balls roll across the flex-circuit membrane, they close or open the circuit and
convey the user's instructions to the device. The design of the DuraSwitch Rotor
also produces a consistent tactile feedback response to the user, so that the
user can feel each "click" as the knob is turned.
THE DURASWITCH SNAPROTOR
The DuraSwitch SnapRotor is a combination of a push-button switch and a
rotary switch. When not in use, the top of the rotor knob is flush with the
surface of the device on which it is mounted. When the top of the rotor knob is
pressed, the push-button portion of the switch is activated, sending a signal to
a microprocessor and the rotor knob pops up from the device. After the rotor
knob pops up, it can then be operated in the same manner as a typical rotary
switch, such as a volume control knob. After using the rotary switch feature,
the rotor can be pushed back into the device, which again activates the
push-button portion of the switch and sends a signal to a microprocessor. A
typical application for this switch would be a combination on/off button and
volume control knob.
SWITCHES UNDER DEVELOPMENT
The DuraSwitch Slider is similar to the DuraSwitch Rotor, except that it
uses a sliding lever instead of a rotating knob. When the slide is moved, the
sealed, gold-plated balls underneath the lever move, activating a microprocessor
as they pass across contacts on a flexible circuit. As a result of the
flexibility of the materials used in its design, the DuraSwitch Slider has the
additional advantage of being able to be mounted not only on a flat surface but
also on a curved surface such as the dashboard of a car. The DuraSwitch Slider
is in the final engineering stage and we expect it to be ready for production by
late 1999.
The DuraSwitch Slammer is a tamper-resistant switch that can be used in
applications such as ATMs, vending machines, slot machines and prisons, which
require extreme durability to overcome heavy usage or abuse. The design is
similar to the DuraSwitch PushGate, but is designed to be more robust. The
DuraSwitch Slammer is in the design stage and we expect it to be ready for
production by late 1999.
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Generally, our switches are custom-designed to meet specific design
challenges or customer requirements dictated by the nature of specific
applications. Accordingly, all of these switch designs may be adapted quickly
and easily to fit various types of integrated controls panel arrays and
electronic products. We are constantly refining our products and designing new
variations to meet our customers' design needs.
CUSTOMERS
We offer a variety of switches and ICPs to original equipment manufacturers
and component manufacturers that, in turn, install them into various devices
used in a wide variety of industries. These industries, companies and products
include:
<TABLE>
<CAPTION>
INDUSTRY COMPANY APPLICATION
-------- -------------------------------- -------------------------------------
<S> <C> <C>
AMUSEMENT PARKS.................. VGS Systems Engineering Company* Amusement park turnstiles
Walt Disney World Co.* Monorail train/ride controls
AUTOMOTIVE....................... Hennessy Industries, Inc.+ Tire balancer
AVIONICS......................... Aerospace Instrument Support, Flight control simulator
Inc.*
IDD Aerospace+ Aircraft cockpit control panels
COMMUNICATIONS................... Ericsson Inc.* Two-way radio/cell phones
Quintron Systems, Inc.* Military telcom equipment
COMPUTERS........................ Covid, Inc.* Video conferencing equipment
Telegyr Systems, Inc.* Electrical power distribution
ELECTRONIC ENTRY................. Marks U.S.A.+ Keyless locks
INDUSTRIAL CONTROLS.............. Alpha Technologies U.S., L.P.* Chemical processor controls
Anatel Corporation* Water treatment analysis
Boonton Electronics Corporation* Volt meter front panel test equipment
Cummins-Allison Corp.* Paper shredder controls
Dinet Distributed Networks, Industrial process controls
Inc.*
ETEC Systems, Inc.* PCB manufacturing equipment
Innovative Control Systems, Car wash controls
Inc.*
Jancy Engineering Company+ Portable magnetic drill bases
Optimation, Inc.* Data entry stations
Paxar Corporation* Label stitching equipment
Rain Bird, Clemar Mfg. Corp.* Commercial sprinkler controls
Siemens Energy & Automation, Industrial test equipment
Inc.+
US Filter Consumer Products, Water purification controls
Inc.*
MARINE........................... Raytheon Marine* Ship board radar controls
Johnson Worldwide+ Boat trolling motors
MEDICAL.......................... Etymotic Research, Inc.* Hand-held temperature sensors
GTR Labs, LLC* X-Ray equipment
HP/Heartstream* Medical defibrillators
Heska Corporation* Veterinary oxygen sensor device
Medivators, Inc.* Endoscope disinfectors
MILITARY......................... Raytheon Systems, Company* "Land Warrior" M-16 computers
POINT-OF-SALE.................... ProTix* Cash registers
Scan Corporation* Terminals
RESTAURANT....................... Dynamic Cooking Systems, Inc.* Oven controls
Frymaster* Portion dispensers
Lancer Corporation* Beverage portion dispensers
Radiant Systems* Order processing systems
RAM Center, Inc.* Frozen food dispensers
</TABLE>
- ---------------
+ Prototype
* In Production
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INTELLECTUAL PROPERTY
Our success depends on maintaining and protecting our proprietary
technology. As a result, we have adopted an intellectual property protection
policy designed to deter and stop infringement. To deter infringement, we file
U.S. and foreign patents for all our relevant material technological advances
and warn against potential infringement by posting patent numbers on our
products, packaging, and published materials. These materials include our web
site, business cards, letterhead, brochures, and advertisements. We intend to
prosecute litigation aggressively against infringers. In order to protect our
trade secrets and other intellectual property, we also require our employees,
consultants, advisors and collaborators to enter into confidentiality agreements
which prohibit the disclosure of proprietary information to third parties or the
use of proprietary information for commercial purposes. Our technical and sales
employees also must agree to disclose and assign to us all methods,
improvements, modifications, developments, discoveries, and inventions conceived
or developed on our time, using our property, or relating to our business. Our
management team has extensive experience in protecting technology from global
competitors and will oversee our intellectual property protection program.
We currently hold three U.S. Patents (Nos. 5,523,730, 5,666,096 and
5,867,082), and one Taiwanese Patent (No. NI-090979), for a "switch with a
magnetically-coupled armature." We also have several patent applications pending
in the U.S., Mexico, Canada, France, Great Britain, China, Taiwan, Italy and
Germany. We have made further filings under the Patent Cooperation Treaty and
through the European Patent Committee. In total, we have over 18 patent
applications in various stages of filing both in the U.S. and globally.
We currently own the following trademarks and service marks: DuraSwitch(R),
PushGate(TM), Rotor(TM), SnapRotor(TM), Slider(TM), Slammer(TM), DuraSwitch
ICP(TM), Touch the Future(SM), and DuraSwitch.com(TM). Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
We also intend to enter into licensing agreements with leading switch and
ICP manufacturers in selected industries in order to increase distribution of
our technology and increase market awareness of our products. We believe that
our ability to convince leading switch and ICP manufacturers to use our
technology will more broadly and rapidly create awareness and acceptance of our
technology in multiple market segments.
MARKETING AND SALES
We believe that the primary decision makers related to switches and ICPs
for our OEM customers are design engineers and, to a lesser degree, purchasing
managers. Therefore, our marketing and sales efforts will be directed
specifically toward convincing these individuals to use our products by:
- aggressively expanding our sales force,
- substantially increasing our advertising efforts,
- significantly enhancing our web site, and
- aggressively competing for product awards.
SALES FORCE & MANUFACTURER'S REPRESENTATIVE ORGANIZATIONS
We currently have four regional sales managers supervised by a Vice
President of Business Development. Our regional sales managers maintain our
relationships with several independent sales representatives groups. We contract
with these groups to call on potential customers in 39 states. For example, our
sales representative group responsible for the states of Ohio, Michigan,
Indiana, Kentucky and Pennsylvania primarily employs engineers in its sales
force and calls principally on automobile and appliance manufacturers. Our
regional sales managers call on potential customers in the remainder of the
continental United States.
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We believe that independent sales representatives generally are more
efficient than our own sales force at this stage of our development. Independent
sales representatives often have existing relationships that offer us immediate
access to potential customers. Our agreements with these independent sales
representatives provide for compensation on a straight commission basis and
cancellation on 30 days notice, which lower our employee-related costs.
WEB SITE: WWW.DURASWITCH.COM
Design engineers and purchasing managers, the individuals most likely to
make the decision to incorporate our switches and ICPs in their products,
frequently use the Internet to search for design solutions. Therefore, our web
site, www.duraswitch.com, is a key component of our current marketing efforts.
All of our advertising and promotional materials direct readers to our web site.
In addition to attracting potential customers to our web site for information,
we use our web site to generate interest in our products. We have already made
significant sales as a result of initial contact with customers through our web
site. Using our web site as a promotional tool also is less expensive than other
methods, is interactive, and reaches a global audience. Our web site has several
features, including:
- information about the comparative advantages of our patented technology,
accompanied by articles published by third parties about our products;
- virtual demonstrations of our products;
- technical data about our products to assist design engineers in designing
ICPs and electronic products using DuraSwitch components;
- e-mail communications links to our design engineers and sales
representatives to facilitate dialogue about how our products can be
integrated into the customers' products; and
- on-line product ordering capability.
ADVERTISING AND PUBLIC RELATIONS
We advertise in technical periodicals such as Electronic Engineering Master
(EEM), Engineering Design News (EDN) and Design News. We believe this media
exposure is a cost-effective method of capturing the attention of design
engineers. For example, Design News weekly publications are read by
approximately 334,800 design professionals throughout the world. Our
advertisements are focused on directing new customers to our web site. We also
are listed in annual industry specifiers guides, including:
- Medical Device Link,
- Electronic Manufacturers on the Net,
- Thomas Register, and
- Electronic Engineering Master.
In addition, we are conducting a public relations campaign to generate
articles highlighting our products to be published in trade magazines. To date,
our products have been recognized in several trade magazines, including
Appliance Manufacturing and Engineering Design News. In fact, Design News named
the DuraSwitch PushGate switch as "The Best New Product of 1998" in the
electrical/electronic category. In the next six months, we expect further
articles about our products to appear in a wide variety of medical, avionics,
industrial, manufacturing, engineering, new product and technology publications,
each designed to attract the attention of design engineers and purchasing
managers in those industries.
SEMINARS AND TRADE SHOWS
We intend to give educational presentations about our products at
vendor-sponsored seminars for product design engineers. At these seminars, we
will be able to meet with and provide attendees with information about our
technology and products through multi-media presentations, product
demonstrations,
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brochures and samples. Attractive displays in our strategic partners' booths at
trade shows offer mutually advantageous opportunities by promoting our partners'
products as well as expanding awareness of our technology.
MANUFACTURING
We currently manufacture and assemble most of our products. We also have
the capability to manufacture off-site, including manufacturers and vendors in
other countries. To facilitate our expected growth, we are pursuing strategic
alliances and acquisitions to further enhance our manufacturing capabilities.
ON-SITE MANUFACTURING AND ASSEMBLY CAPABILITIES
Our on-site design, manufacturing and assembly capabilities include:
- an approximately 33,000 square foot facility consisting of manufacturing
and assembly space, a full service testing lab and a clean room;
- a full service engineering and design team comprised of 11 design
engineers and technical staff;
- strict quality standards in our operations reviewed regularly by an
in-house quality assurance team including an experienced quality
consultant; and
- state of the art information technology hardware and software, including
the latest versions of AutoCad, Pro Engineering, Mechanical Desktop and
Solid View software.
These features allow us to meet the standards of our customers' on-site
quality reviews of our design, testing and manufacturing capabilities.
We are also developing cellular manufacturing processes to manufacture
complete products, from start to finish, within a manufacturing cell. Each
manufacturing cell will produce related products, which allows the team members
in each cell to gain expert knowledge about their designated products as well as
the special processes, equipment, and specific quality control techniques
required to manufacture them. Immediate feedback, minimal supervision, ease of
expansion through duplication of manufacturing cells and minimal space
requirements are benefits of this manufacturing approach.
OFF-SHORE MANUFACTURING
Our executive management team has experience using companies in foreign
countries to provide manufacturing, assembly, acquisition, raw materials and
tooling services. During the past 12 months, we have contracted for production,
assembly, tooling and delivery services with companies in the People's Republic
of China. We have obtained high quality materials and products on a timely basis
from these companies, at a significantly lower cost than domestic vendors. To
the extent our products or raw materials are purchased from, or manufactured or
assembled by, our overseas suppliers, we are subject to the general risks of
conducting business internationally, including:
- unexpected changes in regulatory requirements;
- fluctuations in currency exchange rates;
- tariffs and other barriers and restrictions;
- potentially adverse tax consequences; and
- the burdens of complying with a variety of foreign laws.
In addition, our international operations will be subject to international
political and economic instability and changes in diplomatic and trade
relationships. These factors may force us to find more costly or less desirable
alternative sources for products, services or raw materials, which could
materially and adversely impact our business, financial condition and results of
operations in the future or require us
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to modify our business practices. Due to the risks of international political,
economic and geographic issues, we obtain quotes from alternative foreign and
domestic suppliers for each customer account that we outsource to our foreign
vendors.
COMPETITION
We operate in highly competitive markets, facing competition from over 125
other companies in the electro-mechanical switch industry, and a substantial
number of membrane switch and ICP manufacturing companies. Our five main
competitors in the electro-mechanical switch industry are Grayhill, Inc., Cherry
Corporation, C&K Components, Inc., Oak Grigsby, Inc., and Cole Instrument Corp.
Our five principal competitors in the membrane switch industry are Xymox
Technologies, GM Nameplate, Molex, Incorporated, Integrated Data Systems, Inc.
and Topflight Corporation. Our five main competitors in the ICP industry are
Lucas Controls, Inc., Eaton Corporation, Rockwell International, Inc./Allen
Bradley Division, Johnson Controls, Inc. and United Technologies Corporation.
Many of our present and potential competitors have more established products,
greater name recognition, stronger sales distribution arrangements, and
significantly greater resources than we have. We also expect to compete with
companies that have substantial manufacturing, marketing and distribution
capabilities; areas in which we may have less experience. Competition, direct
and indirect, could materially and adversely affect our revenues and
profitability through pricing pressure and loss of sales. Competitors' long term
relationships and manufacturers' reluctance to try a new technology could result
in loss of sales. The failure to compete successfully would have a material
adverse effect upon our business and financial condition.
EMPLOYEES
As of July 15, 1999, we had 61 employees, 55 of which work full time. We
have 16 employees in our engineering department, 10 in management and
administration, 10 in sales and marketing, and 25 in manufacturing. None of our
employees is represented by a union. We believe our relationship with our
employees is positive.
FACILITIES
Our principal administrative, design, testing, manufacturing, and assembly
facilities are located in Mesa, Arizona, where we presently lease 33,650 square
feet of office and manufacturing space in a building located at 234 South
Extension Road. This facility consists of approximately 10,000 square feet of
office space and 23,650 square feet of manufacturing space. Our lease terminates
on January 1, 2004, subject to our option to extend the term for an additional
two years. The base monthly rent for 1999 is $13,000. Future minimum monthly
rental payments are $16,000 for 2000 and $17,000 for 2001. We believe our
current facilities will be sufficient for our operational purposes for the
foreseeable future and any additional facilities needed thereafter will be
available on commercially reasonable terms.
ENVIRONMENTAL MATTERS
A portion of our operations involve screen printing and the use of inks.
Due to these operations, we emit a low volume of volatile organic compounds. We
believe we have satisfied all regulatory requirements necessary to conduct our
operations.
LEGAL PROCEEDINGS
From time to time, we may be subject to claims and litigation incident to
our business. As of the date of this prospectus, we are not involved in any
claim or legal proceeding.
Designing, testing, manufacturing, marketing and sale of our products
entail an inherent risk of product liability claims. Although we currently have
product liability insurance coverage of $2 million, product liability insurance
coverage can be expensive, difficult to obtain and may not be available on
acceptable terms, if at all, in the future. Product liability insurance coverage
might not be adequate to cover our costs of responding to product liability
claims, even ones without merit. Therefore, product liability claims could
materially and adversely affect our business, financial condition, or results of
operations.
28
<PAGE> 32
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of DuraSwitch, their ages, and their
positions held with DuraSwitch are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Terren Dunlap....................... 54 Chief Executive Officer, Chairman of the Board and
Director
Anthony J. Van Zeeland................. 58 Chief Operating Officer, Executive Vice President of
Engineering and Director
Robert J. Brilon....................... 39 President, Chief Financial Officer, Treasurer and
Secretary
J. Thomas Webb......................... 47 Executive Vice President of Marketing and Director
John W. Hail........................... 68 Director
Steven R. Green........................ 40 Director
William E. Peelle...................... 50 Director
Michael A. Van Zeeland................. 24 Director
</TABLE>
R. TERREN (TERRY) DUNLAP has served as Chairman of the Board of Directors
and Chief Executive Officer of DuraSwitch since our formation in May 1997. From
1983 to March 1994, Mr. Dunlap served as Chairman and Chief Executive Officer of
Sensory Science Corp. (formerly Go-Video, Inc.), a publicly held manufacturer of
consumer electronic video products which he founded. From April 1994 to present,
Mr. Dunlap has served as a consultant to Sensory Science Corp. Mr. Dunlap also
serves as a director of Advantage Marketing Systems, Inc., a publicly held
provider of health products. Mr. Dunlap received a B.S. degree in Business
Administration from Ashland University and a J.D. degree from Ohio Northern
University.
ANTHONY J. VAN ZEELAND has served as a director and as Chief Operating
Officer and Executive Vice President of Engineering of DuraSwitch since our
formation in May 1997. From 1990 to 1997, Mr. Van Zeeland was employed as Vice
President of Engineering at DataHand Systems, Inc., a computer keyboard
manufacturing company. During the same time period, he was also a director and
Director of Development Engineering of Monopanel Technologies, Inc., a membrane
switch manufacturing company. Mr. Van Zeeland holds a B.S. degree in Physics and
a Masters of Science in Materials Engineering from the University of Wisconsin.
Anthony J. Van Zeeland is the father of Michael A. Van Zeeland.
ROBERT J. BRILON became President and Chief Financial Officer of DuraSwitch
in November 1998. From May 1997 until November 1998, Mr. Brilon served as a
financial and business consultant to DuraSwitch. Between January 1997 and
November 1998, Mr. Brilon was Chief Financial Officer of Gary Gietz Master
Builder, a luxury custom home builder. Between April 1995 and December 1996, Mr.
Brilon was Corporate Controller for Rental Service Corp., a publicly held
industrial equipment rental company. Between April 1993 and April 1995, Mr.
Brilon served as Chief Financial Officer and Vice President of Operations and
Administration of DataHand Systems, Inc. Mr. Brilon holds a B.S. degree in
Business Administration from the University of Iowa and is a C.P.A.
J. THOMAS WEBB has served as a director of DuraSwitch since April 1998 and
part-time as Executive Vice-President of Marketing of DuraSwitch since November
1998. Since 1986, Mr. Webb has served as the Chief Executive Officer and
Chairman of the Board of Camplex/Concept W Corporation, a broadcast equipment
manufacturer. Mr. Webb attended Emporia State University.
JOHN W. HAIL has served as a director of DuraSwitch since March 1999. Since
1988, Mr. Hail has served as Chief Executive Officer and Chairman of the Board
of Directors of Advantage Marketing Systems, Inc., a publicly held provider of
health and beauty products. He also serves on the board of directors of Pre-Paid
Legal Services, Inc., a publicly held company engaged in the sale of legal
services contracts. Mr. Hail received an honorary doctorate degree from Oklahoma
City University.
29
<PAGE> 33
STEVEN R. GREEN has served as a director of DuraSwitch since June 1998. He
has been the Managing Director of Blackwater Capital Partners L.P., the selling
stockholder, since November 1997. Between 1990 and November 1997, Mr. Green
acted as a sole practitioner in the field of investment banking, specializing in
mergers and acquisitions, initial public offerings, refinancings,
recapitalizations, and reorganizations. Mr. Green holds a B.A. degree from
U.C.L.A.
WILLIAM E. PEELLE has served as a director of DuraSwitch since May 1999.
Mr. Peelle founded Peelle Law Offices Co. in 1994 and has practiced law and
represented a number of businesses since 1975. Mr. Peelle has also served as the
elected prosecuting attorney of Clinton County, Ohio, since 1994. Mr. Peelle has
served as counsel or as a member of the Board of several community
organizations. Mr. Peelle received his J.D. from Ohio Northern University, and
has a B.S. degree in Business Administration from Ohio State University.
MICHAEL A. VAN ZEELAND has served as a director of DuraSwitch since May
1997. Mr. Van Zeeland is currently a graduate student at U.C.L.A., working on
his Ph.D. in plasma physics. From January 1998 to September 1998, we employed
him as an engineering physicist. During the summer of 1997, he was employed at
Arizona State University working on theoretical physics. During the summer of
1996, Mr. Van Zeeland worked as an intern at the University of California-Irvine
in a program funded by the National Science Foundation. From August 1995 to May
1996, Mr. Van Zeeland worked as an intern under the NASA Space Grant Program,
where he wrote FORTRAN programs, ran simulations and collected data to use to
study hurricane formation. From May 1992 to August 1993, he worked as an
Engineer Technician with DataHand Systems, Inc. Mr. Van Zeeland holds a B.S.
degree in Engineering Physics from the University of Arizona.
Executive officers serve at the discretion of the board of directors.
Our success depends largely on the efforts of R. Terren Dunlap, Chief
Executive Officer and Chairman of the Board, and Anthony J. Van Zeeland, Chief
Operating Officer/Executive Vice President of Engineering and the inventor of
our patented technology. In particular, Mr. Van Zeeland has been the key
individual responsible for developing solutions to the design challenges
presented by our customers. We believe our relationships with these individuals
are good. However, we cannot ensure that the services of these individuals will
continue to be available to us in the future. Although we have obtained "key
man" life insurance with DuraSwitch as beneficiary, if we lose either of these
individuals and cannot find adequate replacements, there would be a material
adverse effect on our business, financial condition and results of operations.
STRUCTURE OF THE BOARD OF DIRECTORS
The bylaws provide for a board of directors of one to nine members. The
current board of directors consists of seven members. We are contemplating
adding one additional independent director or replacing one of our existing
directors with an independent director following this offering, although no
individual has been identified as of the date of this prospectus. All newly
elected directors will serve for a three year term and approximately one-third
of the directors will be elected annually. We have established an Audit
Committee and Compensation Committee, each of which have only independent
directors. The Audit Committee will review the professional services provided by
our independent auditors, our annual financial statements and our system of
internal controls. Our Audit Committee currently consists of Messrs. Green,
Peelle and Hail. The Compensation Committee will review executive salaries and
administer our bonus, incentive compensation and stock option plans. In
addition, the Compensation Committee will consult with our management regarding
our compensation policies and practices. The Compensation Committee currently
consists of Messrs. Hail and Peelle.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses incurred in attending
meetings. During the first three months of 1999, we also paid to Mr. Webb a
$21,630 referral fee in connection with shares of common stock sold by us.
30
<PAGE> 34
EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation
paid to our Chief Executive Officer. The All Other Compensation column includes
payments received by VanDun, LLC, of which Mr. R. Terren Dunlap is a 50% owner.
No executive officer who was serving as an executive officer on December 31,
1998 had an aggregate salary and bonus exceeding $100,000 for the fiscal year
ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. Terren Dunlap.................. 1998 $72,000 -- -- -- $780
Chief Executive Officer 1997 $58,154 $10,000 -- -- --
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No executive officer named in the Summary Compensation Table received stock
option grants during the fiscal year ended December 31, 1998.
FISCAL YEAR-END OPTION VALUES
No executive officer named in the Summary Compensation Table had options
outstanding as of December 31, 1998 nor exercised any options during the fiscal
year ended December 31, 1998.
STOCK OPTION PLANS
Our 1997 stock option plan was adopted by the board of directors and
approved by our stockholders effective as of May 1, 1997. Our 1999 stock option
plan was adopted by the board of directors and approved by our stockholders
effective as of March 8, 1999. Both plans authorize the board of directors or a
Compensation Committee of the board to grant stock options to employees,
directors and appropriate third parties. Under the 1997 plan, 823,535 shares are
authorized for issuance, and under the 1999 plan, 235,294 shares are authorized
for issuance. Under both plans, the exercise price is determined by the board of
directors or the compensation committee. The plans provide for the granting of
either "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, or nonqualified stock options. Incentive stock
options may be granted only to employees, including officers. The exercise price
of incentive stock options granted under the plans must be at least the fair
market value of the common stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who beneficially owns more than
10% of our voting stock must be at least 110% of the fair market value of the
underlying shares on the date of grant. The exercise price of nonqualified stock
options may be any amount determined in good faith by the board of directors or
the Compensation Committee. All outstanding options that we have granted under
the plans have exercise prices at least equal to the fair market value of the
common stock on the dates of grant, and we intend to continue this policy with
respect to future option grants.
No option may be exercised more than 10 years, or, in the case of an
incentive stock option granted to a 10% holder, more than five years, after its
grant date. Options granted under the plans are not transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee, or his or
her guardian or legal representative. Incentive stock options held by our
employees may be exercised by the participant only:
- while employed by us,
- within one year following termination resulting from death or permanent
disability,
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<PAGE> 35
- within three months after termination for any reason other than cause,
death or permanent disability, or
- or on or before the date the participant's employment with us is
terminated, if for cause.
Nonqualified stock options may be exercised:
- within one year after cessation of services to us for any reason other
than death, permanent disability, retirement or cause,
- within two years after cessation of services by reason of death,
permanent disability or retirement, or
- on or before the date of cessation of services for cause.
The 1997 plan expires in 2007, and the 1999 plan expires in 2009. As of
July 31, 1999, options to purchase 733,530 shares were outstanding under the
1997 plan, and options to purchase 28,941 shares were outstanding under the 1999
plan.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In May 1997, we entered into a seven-year employment agreement with Mr.
Dunlap providing that Mr. Dunlap will serve as our Chief Executive Officer at a
base salary of $72,000, increasing after 18 months to a level commensurate with
industry standards and our ability to pay.
In May 1997, we entered into a seven-year employment agreement with Mr.
Anthony Van Zeeland providing that Mr. Van Zeeland will serve as our Chief
Operating Officer at a base salary of $72,000, increasing after 18 months to a
level commensurate with industry standards and our ability to pay. We have also
agreed to pay Mr. Van Zeeland an annual one-time bonus of $5,000 for each United
States patent, and $1,000 for each foreign patent issued in his name as inventor
or co-inventor, with a maximum of $20,000 during any fiscal year.
In November 1998, we entered into a three-year employment agreement with
Mr. Brilon providing that Mr. Brilon will serve as our President and Chief
Financial Officer at a base salary of $75,000, increasing after December 31,
1998 to $95,000 or a level commensurate with industry standards, based on Mr.
Brilon's performance and our ability to pay. In addition, Mr. Brilon receives an
automobile allowance. Mr. Brilon is also entitled to receive an incentive profit
sharing bonus each year of 5% of our net profit before tax, goodwill
amortization and other non-cash charges. On November 20, 1998 we issued stock
options to Mr. Brilon to purchase 176,472 shares of common stock, which vest as
follows:
- 58,824 on December 31, 1998,
- 58,824 on December 31, 1999, and
- 58,824 on December 31, 2000.
In November 1998, we entered into an employment agreement with Mr. Webb
providing that, commencing on November 20, 1998 and continuing until January 1,
2000, Mr. Webb will serve on a part-time basis as our Executive Vice President
of Marketing at a base salary equal to $26,000. On November 20, 1998, we issued
stock options to Mr. Webb to purchase 65,882 shares of common stock, which vest
as follows:
- 28,235 on January 1, 1999,
- 18,824 on January 1, 2000, and
- 18,823 on January 1, 2001.
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<PAGE> 36
SEVERANCE AND CHANGE OF CONTROL PROVISIONS
Each of the employment agreements described above provide for benefits to
our executive officers upon their severance or upon a change of control of
DuraSwitch. If we terminate any of these individuals, with or without cause, we
would be required to pay him his gross annual base salary and continue all
standard employee benefits for an additional two year period after termination.
In addition, in the case of Mr. Brilon, all stock options held but not vested
would vest immediately. If Mr. Dunlap or Mr. Van Zeeland leaves voluntarily, we
have agreed to pay him his gross annual base salary and continue to provide all
standard employee benefits for an additional 18 months after termination. If Mr.
Brilon leaves voluntarily, we have agreed to pay him his gross annual base
salary and continue to provide standard employee benefits for an additional 12
months after termination. Each of these executive officers have agreed that they
will not, for the two year period following his termination, or in the case of
Mr. Dunlap and Mr. Van Zeeland, for the one year period following termination,
compete with us within the United States.
In the event that we are acquired and the executive officer is terminated
as a result of the takeover, we have agreed to make a lump sum payment to the
executive officer equal to 2.99 times his gross annual salary. In addition, in
the case of Mr. Brilon, all stock options held but not vested would vest
immediately.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, Mr. R. Terren Dunlap, our Chief Executive Officer, and Mr.
Anthony J. Van Zeeland, our Chief Operating Officer, formed an Arizona
corporation known as Total Switch, Inc. In connection with the formation of
Total Switch, Mr. Dunlap and Mr. Van Zeeland each received shares of common
stock representing a 49.5% equity interest in Total Switch and Mr. Michael Van
Zeeland, Mr. Anthony J. Van Zeeland's son, and Mr. Rhett Dunlap, Mr. R. Terren
Dunlap's son, each received shares of common stock representing a 0.5% equity
interest in Total Switch. These individuals contributed a nominal amount of
capital for Total Switch's initial capitalization. In addition, Mr. A. Van
Zeeland assigned to Total Switch his continuing rights in the patents for his
switch technology, and Total Switch issued a note payable to creditors of Mr. A.
Van Zeeland in the amount of $20,569 to satisfy loans made to Mr. A. Van Zeeland
to cover the costs of filing the patents for his switch technology.
On May 1, 1997, we granted Mr. Brilon 22,883 options to purchase common
stock at an exercise price of $0.02 per share and 1,525 shares of common stock
for financial and accounting consulting services.
We have entered into an employment agreement with Mr. A. Van Zeeland. Under
this agreement, Mr. A. Van Zeeland was granted options to purchase 83,903 shares
of common stock at fair market value, which were immediately exercised at $0.02
per share.
On May 1, 1997, we entered into an agreement with VanDun, LLC, a limited
liability company wholly-owned by Mr. A. Van Zeeland and Mr. R. Terren Dunlap,
under which VanDun provides intellectual property consulting services to us. The
agreement requires us to pay VanDun a management fee equal to 1.1% of invoiced
sales for all component switches and integrated component switch panels sold by
us during the term of this agreement. The agreement terminates upon the
expiration of our patents in approximately 20 years. In fiscal 1998 we paid
VanDun $780. This agreement obligates Messrs. A. Van Zeeland and R. T. Dunlap to
preserve all their personal notes and records regarding our intellectual
property and to assist us in protecting our intellectual property from
infringement, including testifying during legal or administrative proceedings.
These duties extend beyond the terms of Messrs. A. Van Zeeland's and R. T.
Dunlap's employment agreements and noncompetition covenants.
On June 29, 1998, we issued shares of Series A Preferred Stock convertible
into 504,311 shares of our common stock, together with warrants to purchase
252,155 additional shares of common stock, to Blackwater Capital Partners, L.P.
and another entity controlled by Blackwater. Blackwater purchased these
securities for a total payment of $1,000,000. As part of this transaction, we
granted registration rights to Blackwater with respect to all of the common
stock issuable upon exercise or conversion of the preferred stock and warrants.
On December 31, 1998, Blackwater converted all of their shares of preferred
stock into
33
<PAGE> 37
504,311 shares of our common stock. Blackwater may sell up to 74,266 shares to
the underwriters as part of the over-allotment option. Steven R. Green, a
director of DuraSwitch, is the managing director of Blackwater.
On November 1, 1998, we entered into a consulting agreement with Mr. Brilon
for financial and management services. Under this agreement, Mr. Brilon received
$1,380 and warrants to purchase 47,059 shares of common stock at $3.19 per
share. The agreement was terminated on November 20, 1998 when Mr. Brilon became
our full-time employee.
On January 15, 1999, we borrowed $100,000 from Blackwater Capital Partners,
L.P. The loan accrued interest at an annual rate of 9%. On April 30, 1999,
Blackwater exercised warrants to purchase 126,077 shares of common stock. As
payment for the exercise price, Blackwater agreed to cancel our $100,000 loan
and executed a note payable to us in the amount of $147,263. This note bears
interest at 8% per year and is payable on the earlier of the completion of this
offering or December 31, 1999.
During the first quarter of 1999, we loaned $150,000 to Camplex/Concept W
Corporation, an entity that we had considered as a possible acquisition
candidate. Subsequent to March 31, 1999, we determined that we would not acquire
Camplex. The $150,000 loan is due January 1, 2000, and bears interest at 9% per
year. J. Thomas Webb, one of our directors, is the CEO, Chairman of the Board
and a major stockholder of Camplex.
Based on a prior relationship of Anthony J. Van Zeeland, the inventor of
our technology, with his prior employer, we granted to that employer a
nonexclusive license to manufacture products using our technology. Because we
may unilaterally cancel the license in April 2000, we do not believe this
licensing arrangement will materially affect our business.
34
<PAGE> 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock by:
- each person or entity known to us to own beneficially more than 5% of the
outstanding shares of common stock,
- each of our directors, and
- all our directors and executive officers as a group,
as of July 31, 1999 and as adjusted to reflect the sale of the common stock
offered in this offering.
Shares beneficially owned and percentage of ownership are based on
5,495,407 shares of common stock outstanding immediately prior to the offering
and 7,495,407 shares of common stock outstanding immediately after the offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with SEC rules, shares which may
be acquired upon exercise of stock options or warrants which are currently
exercisable or which become exercisable within 60 days of the date of the table
are deemed beneficially owned by the holder. Except as indicated by footnote,
and subject to community property laws where applicable, the persons or entities
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
Except as otherwise noted, the mailing address of each of the stockholders
in the table below is 234 S. Extension Road, Mesa, Arizona 85210.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------------
PERCENT PRIOR PERCENT AFTER
IDENTITY OF STOCKHOLDER OR GROUP NUMBER TO OFFERING OFFERING
- -------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
R. Terren Dunlap...................................... 1,447,506 26.3% 19.3%
Anthony J. Van Zeeland................................ 1,447,506 26.3 19.3
Robert J. Brilon...................................... 130,290(1) 2.3 1.7
Steven R. Green....................................... 442,153(2) 8.0 5.9
John W. Hail.......................................... 5,624(3) 0.1 0.1
J. Thomas Webb........................................ 28,235(4) 0.5 0.4
Michael A. Van Zeeland................................ 15,255 0.3 0.2
William E. Peelle..................................... 15,863 0.3 0.2
All directors and executive officers as a group (8
persons)............................................ 3,532,432 62.5% 46.2%
</TABLE>
- ---------------
(1) Includes (i) 81,706 shares subject to options which are currently
exercisable, and (ii) 47,059 shares subject to warrants which are currently
exercisable.
(2) Represents 442,153 shares owned by Blackwater Capital Partners L.P., of
which Steven R. Green, one of our directors, is managing partner.
Blackwater's mailing address is 1800 Glenview Road, Glenview, Illinois
60025. Blackwater may sell up to 74,266 shares to the underwriters as part
of the over-allotment option. If the underwriters fully exercise the
over-allotment option, Blackwater will own 367,887 shares of common stock
after the offering, which will be 4.9% of our total issued and outstanding
shares following the offering.
(3) Includes 3,741 shares owned by TVC, Inc., of which John W. Hail is the
majority shareholder.
(4) Includes 28,235 shares subject to options which are currently exercisable.
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<PAGE> 39
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Cruttenden Roth Incorporated is acting as representative of the
underwriters. The underwriting agreement provides for the purchase of a specific
number of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
set forth in the underwriting agreement, each underwriter has agreed to purchase
the number of shares of common stock set forth opposite each underwriter's name
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................ 1,100,000
Fahnestock & Co. Inc. ...................................... 150,000
C.L. King & Associates, Inc. ............................... 150,000
Pennsylvania Merchant Group................................. 150,000
Paradise Valley Securities.................................. 150,000
C.E. Unterberg, Towbin...................................... 150,000
H.C. Wainwright & Co., Inc. ................................ 150,000
---------
Total.................................................. 2,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to a number of conditions, including the absence of any
material adverse change in our business and the receipt of certificates,
opinions and letters from our counsel and independent public accountants. The
underwriters are committed to purchase and pay for all the shares of common
stock if any are purchased.
We have granted an option to the underwriters, exercisable for a period of
45 days after the date of this prospectus, to purchase up to an additional
225,734 shares of our common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discounts and commissions.
Blackwater Capital Partners, L.P., the selling stockholder, has granted an
option to the underwriters to purchase an additional 74,266 shares of our common
stock on the same terms and conditions. The underwriters may exercise this
option only to cover over-allotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase the additional shares of common stock in approximately the same
proportion as set forth in the table above.
We have been advised by the representative that the underwriters propose to
offer the shares of common stock directly to the public at the public offering
price set forth on the cover page of this prospectus and to selected securities
dealers at that price less a concession not in excess of $0.22 per share. The
underwriters may allow, and those selected dealers may reallow, a discount not
in excess of $0.10 per share to other brokers and dealers. After the public
offering of the shares, the public offering price and other selling terms may be
changed by the representative. No change in these terms will change the amount
of proceeds to be received by us as set forth on the cover page of this
prospectus.
The representative has advised us that it does not expect any sales of the
shares of common stock offered by this prospectus to be made to discretionary
accounts controlled by the underwriters.
In connection with this offering, we have agreed to issue the
representative a warrant to purchase up to 200,000 shares of our common stock.
The representative's warrant will have a term of five years and will be
exercisable commencing one year after the effective date of this offering, at an
exercise price per share of 165% of the initial price of the common stock being
offered to the public. The representative's warrant may not be sold,
transferred, assigned, pledged or hypothecated, except in limited circumstances.
During the exercise period, the holders of the representative's warrant are
entitled to limited demand and incidental registration rights which will expire
five years after the date of this prospectus and which may require us to
register for public resale the shares of common stock issuable under the
warrant. The number
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<PAGE> 40
of shares covered by the representative's warrant and the exercise price of the
warrant are subject to adjustment to prevent dilution.
We have also agreed to pay the representative a non-accountable expense
allowance equal to 2% of the aggregate public offering price of the shares of
common stock sold in the offering. The representative's expenses in excess of
the non-accountable expense allowance, including its legal expenses, will be
borne by the representative. To the extent that the expenses of the
representative are less than the non-accountable expense allowance, the excess
will be considered compensation to the representative.
In total, we will pay compensation to the representative and the
underwriters as follows:
- commission of $0.40 per share of common stock sold;
- nonaccountable expense allowance of $0.10 per share of common stock sold;
and
- warrants to purchase up to 200,000 shares of common stock at 165% of the
per share offering price.
The public offering price for the common stock will be arbitrarily
determined by negotiation between us and the representative. In determining the
public offering price, consideration will be given to various factors,
including:
- market conditions for the public offering,
- the past history of and prospects for our business, operations, earnings
and financial position,
- an assessment of our management,
- the market for securities of companies in businesses similar to ours,
- the general condition of the securities markets, and
- other relevant factors.
There can be no assurance that the public offering price will correspond to
the price at which the common stock traded prior to this offering or will trade
in the public market subsequent to the offering or that an active trading market
will develop and continue after the offering.
Our executive officers, directors and shareholders beneficially owning more
than 5% of our outstanding common stock have agreed that they will not, without
the prior written consent of the representative, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock, or any security which
may be converted into or exchanged for any shares of common stock, for a period
of 180 days after the date of completion of this offering. The representative,
on behalf of the underwriters, may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements. In addition, we have agreed that, for a period of 180 days
after the date of completion of this offering, we will not, without the consent
of the representative, make any offering, purchase, sale or other disposition of
any shares of our common stock or other securities convertible into or
exchangeable or exercisable for shares of common stock. This limitation does not
apply to the grant of options to purchase shares of common stock under our stock
option plans and the issuance of shares of common stock issued pursuant to the
exercise of options granted under the plans or upon the exercise of any
outstanding warrants.
The representative has advised us that, under Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market.
- A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the common stock.
37
<PAGE> 41
- A "syndicate covering transaction" is a bid for or purchase of common
stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering.
- A "penalty bid" is an arrangement permitting the representative to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock
originally sold by that underwriter or syndicate member is purchased by
the representative in a syndicate covering transaction and has therefore
not been effectively placed by that underwriter or syndicate member.
The representative has advised us that such transactions may be effected on
the American Stock Exchange or otherwise and, if commenced, may be discontinued
at any time. Neither DuraSwitch nor the underwriters make any representation or
prediction as to the effect that the transactions described above may have on
the price of the shares.
The underwriting agreement provides that we and the selling stockholder
will indemnify the underwriters and their controlling persons against
liabilities under the Securities Act or will contribute to payments the
underwriters and their controlling persons may be required to make.
The foregoing is a summary of the principal terms of the underwriting
agreement. This summary is not complete and is qualified in its entirety by
reference to the form of underwriting agreement that is filed as an exhibit to
our registration statement of which this prospectus is a part.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. The following summary of provisions of our capital stock is
not complete and is subject to, and qualified in its entirety by, the provisions
of our articles of incorporation and bylaws which are included as exhibits to
the registration statement of which this prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
Immediately prior to the offering, there were 5,495,407 shares of common
stock outstanding which were held of record by approximately 300 stockholders.
The holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Stockholders are not entitled to cumulate
their votes for the election of directors. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive dividends pro rata, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share pro rata in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common stock
to be issued upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
Subject to the provisions of our articles of incorporation and the
limitations mandated by law, we are authorized to issue 10,000,000 shares of
preferred stock, 2,143,321 of which are designated Series A Convertible
Preferred Stock and the remainder of which are undesignated preferred stock. The
board of directors has the authority to issue the undesignated preferred stock
in one or more series and to determine the powers, preferences and rights and
the qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of the series, without any
further vote or action by the
38
<PAGE> 42
stockholders. Shares of preferred stock so designated may have voting,
conversion, liquidation preference, redemption, sinking fund provisions and
other rights which are superior to those of the common stock. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of DuraSwitch without further action by the stockholders, may
discourage bids for the common stock at a premium over the market price of the
common stock and may adversely affect the market price of and the voting and
other rights of the holders of common stock.
At present, we have no shares of preferred stock issued and outstanding.
WARRANTS AND OPTIONS
As of July 31, 1999, we had outstanding warrants to purchase 89,929 shares
of our common stock, all of which were exercisable. Of these warrants, warrants
to purchase 42,870 shares were exercisable at $1.98 per share and warrants to
purchase 47,059 shares were exercisable at $3.19 per share. Each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon exercise of the warrant in the event of stock
dividends, stock splits, reorganizations, reclassifications and consolidations.
As of July 31, 1999, options to purchase 762,471 shares of common stock
were outstanding, 536,942 of which were exercisable.
ANTI-TAKEOVER PROVISIONS
Provisions of our articles of incorporation and bylaws and provisions of
applicable Nevada law may affect potential changes in control. The cumulative
effect of these provisions may be to make it more difficult to acquire and
exercise control and to make changes in management.
According to our articles of incorporation, the affirmative vote of at
least two-thirds of the directors present at any meeting of the board of
directors at which a quorum is present is required for:
- a sale of all or substantially all of our assets,
- a merger with another entity,
- an amendment of the bylaws,
- a dissolution, or
- a sale of all of our issued and outstanding stock.
Nevada law prohibits business combinations between Nevada corporations and
interested stockholders for a period of three years after the interested
stockholder's date of acquiring shares unless the combination or the purchase of
the shares by the interested stockholder is approved by the board of directors.
Applicable Nevada law also prohibits business combinations between Nevada
corporations and interested stockholders following the expiration of three years
after the interested stockholder's date of acquiring shares unless the
combination meets the requirements specified in Section 78.439 for director and
stockholder approvals or Sections 78.441 to 78.444 inclusive with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable Nevada law defines "interested
stockholders" to include persons who, alone or together with affiliates,
beneficially own at least 10% of the outstanding stock of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless the voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
Nevada law does not require a stockholder vote of the surviving corporation
in a merger if:
- the merger does not amend the existing articles of incorporation,
39
<PAGE> 43
- each outstanding share of the surviving corporation before the merger is
unchanged, and
- the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior to
such issuance.
The effect of these provisions may be to make more difficult the
accomplishment of a merger or other takeover or change in control. To the extent
that these provisions have this effect, removal of our incumbent board of
directors and management may be rendered more difficult. Further, these
provisions may make it more difficult for stockholders to participate in a
tender or exchange offer for common stock and in so doing may diminish the
market value of the common stock.
PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Nevada law authorizes a Nevada corporation to eliminate or limit the
personal liability of directors and officers to the corporation and its
stockholders for damages for breach of fiduciary duties as a director. We
believe that such a provision is beneficial in attracting and retaining
qualified directors and officers, and accordingly, our articles of incorporation
include a provision eliminating liability for damages for any breach of
fiduciary duty as a director or officer, except for:
- acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or
- authorizing an unlawful distribution in violation of Nevada law.
Directors are not insulated from liability for breach of their duty of
loyalty or for claims arising under the federal securities laws. These
provisions of our articles of incorporation may reduce the likelihood of
derivative litigation against directors for breaches of their fiduciary duties,
even though such an action, if successful, might otherwise have benefitted us
and our stockholders. We have comprehensive directors' and officers' liability
insurance coverage, with an aggregate policy limit of $2,000,000 for the benefit
of our officers and directors insuring them against various liabilities,
including liabilities under the securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons under these
provisions of our articles of incorporation, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
REGISTRATION RIGHTS
Holders of 756,466 shares of common stock and a holder of warrants to
acquire 47,059 shares of common stock have the right to receive notice of
proposed registrations of securities by us and to cause us to include all or a
portion of their shares in those registrations, provided, among other
conditions, that the underwriters of any registered offering will have the right
to limit the number of shares included in the registration. We are obligated to
pay the offering expenses of each such offering. Holders of applicable
registration rights have waived their rights to participate in this offering
with the exception of 74,266 shares of common stock that may be sold if the
over-allotment option is exercised in full.
TRANSFER AGENT AND REGISTRAR
We have appointed American Securities Transfer & Trust, Inc., located in
Lakewood, Colorado, as the transfer agent and registrar for our common stock.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
REVERSE STOCK SPLIT
On August 19, 1999, we effected a 4.25 to one reverse stock split in which
we combined each 4.25 shares of our common stock into one share. The reverse
split had no effect on the number or par value of authorized shares of our
common stock or preferred stock. As a result, the number of shares of common
40
<PAGE> 44
stock outstanding was reduced from 23,355,475 to 5,495,407 shares. One
additional share will be issued to any stockholder who otherwise would have held
a fraction of a share as a result of the reverse stock split.
All outstanding options and warrants that include provisions for
adjustments in their number of shares covered, and their exercise or conversion
price, automatically will be appropriately adjusted for the reverse split.
The reverse split was accomplished by amending our articles of
incorporation upon approval by our board and stockholders. We will be contacting
our existing stockholders of record to request that they exchange their current
stock certificates for certificates stating the new number of shares. However,
upon filing our amendment, each share of common stock was converted,
automatically and without any action on the part of the stockholders, into a
lesser number of shares of common stock at a ratio of 4.25 to one, as adjusted
for any fractional shares, as described above.
Until a stockholder forwards to the transfer agent a completed letter of
transmittal together with certificates representing shares of their pre-reverse
split common stock and receives a new certificate, the stockholder's pre-reverse
split common stock will be deemed equal to the number of shares of common stock,
rounded up to the nearest whole share in the case of fractional shares, to which
the stockholder is entitled as a result of the reverse split.
MARKET INFORMATION
From January 1998 until August 26, 1999, our common stock was traded on the
OTC Bulletin Board under the symbol "DSWT". In light of the limited trading
market for our common stock, approximately 712,000 shares, we believe our past
trading prices are not meaningful when evaluating the offering price. The high
and low inter-dealer prices, as adjusted for the 4.25 to 1 reverse stock split,
for the calendar quarters since trading began on the OTC Bulletin Board are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ------------ ------ ------
<S> <C> <C>
March 31, 1998.............................................. $24.44 $17.47
June 30, 1998............................................... $21.25 $12.75
September 30, 1998.......................................... $20.40 $12.75
December 31, 1998........................................... $14.88 $ 6.38
March 31, 1999.............................................. $ 9.56 $ 6.38
June 30, 1999............................................... $11.69 $ 8.23
</TABLE>
These bid prices are inter-dealer prices without retail markup, markdown or
commission, and may not represent actual transactions. The source for the bid
price information is www.financialweb.com/stocktools/.
In connection with this offering, our common stock has been approved for
listing on the American Stock Exchange under the trading symbol "DRA".
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market,
or the perception that these sales could occur, could adversely affect the
prevailing market price of our common stock. Upon completion of this offering,
there will be 7,495,407 shares of common stock outstanding. Of these shares, the
2,000,000 shares sold in this offering plus the approximately 712,000 shares
which formerly traded on the OTC Bulletin Board will be freely transferable
without restriction or further registration under the Securities Act, except for
shares owned by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 4,783,407 shares of common stock outstanding will
be "restricted securities," as that term is defined in Rule 144, and may in the
future be sold without registration under the Securities Act to the extent
permitted by Rule 144 or any applicable exemption under the Securities Act.
41
<PAGE> 45
In general, under Rule 144 of the Securities Act as currently in effect, a
person who has beneficially owned "restricted securities" for at least one year
is entitled to sell within any three month period a number of shares of common
stock that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock, or 74,954
shares after giving effect to this offering, and
- the average weekly trading volume of the common stock on the
American Stock Exchange during the four calendar weeks preceding the
sale.
Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and the availability of current public information about
DuraSwitch. A person who has beneficially owned shares for at least two years
and who has not been an affiliate of DuraSwitch at any time during the 90 days
preceding a sale would be entitled to sell such shares without regard to the
volume limitations, manner of sale provisions or notice or other requirements of
Rule 144.
Officers, directors and beneficial owners of more than 5% of our
outstanding common stock that own an aggregate of 3,689,745 shares of common
stock and warrants and options to purchase 312,295 shares of common stock have
agreed with the underwriters not to sell or otherwise dispose of any shares of
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of the underwriters.
Prior to the expiration of the lock-up agreements with the underwriters, we
expect to file a registration statement on Form S-8 under the Securities Act to
register all of the shares of common stock reserved for issuance upon the
exercise of options issued under our 1997 and 1999 stock option plans. After the
effective date of that registration statement and the expiration of the lock-up
agreements, shares purchased upon exercise of options granted under the stock
option plans generally will be available for resale in the public market. As of
July 31, 1999, options to purchase 762,471 shares of common stock were
outstanding, 536,942 of which were exercisable. As of that date, 90,005 options
had been exercised.
Following completion of this offering, holders of 756,466 shares of common
stock and holders of warrants to acquire 47,059 shares of common stock will have
the right to cause us to register their shares under the Securities Act and to
participate in future registrations.
Prior to this offering, there has been only a small trading market for our
common stock, and no precise prediction can be made of the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock in the public market could adversely affect
prevailing market prices and limit our ability to raise additional capital.
HOLDERS
As of July 31, 1999, there were approximately 300 holders of record of our
common stock. We believe that our common stock is held by in excess of 400
beneficial holders.
INTEREST OF NAMED EXPERTS AND COUNSEL
Joel H. Bock, an attorney with the firm of Dorn, McEachran, Jambor &
Keating, who provides intellectual property-oriented legal services to us, owns
a total of 15,255 shares of common stock. We provided 7,628 of those shares to
Mr. Bock as partial payment for his firm's legal services. He purchased the
remaining shares on June 1, 1997 at $1.31 per share, which was the market price
at that time.
42
<PAGE> 46
LEGAL MATTERS
The legality of the common stock offered by this prospectus will be passed
upon for us by our general counsel, Quarles & Brady LLP, Phoenix, Arizona. Legal
issues related to intellectual property matters are being passed upon for us by
Dorn, McEachran, Jambor & Keating, Chicago, Illinois. Legal matters regarding
underwriting related issues will be passed upon for the underwriters by Snell &
Wilmer L.L.P., Phoenix, Arizona.
EXPERTS
The financial statements of DuraSwitch Industries, Inc. as of December 31,
1998 and for the year then ended, and the financial statements of Aztec
Industries, Inc. as of January 31, 1998 and for the year then ended included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing in this prospectus, and are so
included in reliance upon the reports of that firm given upon their authority as
experts in accounting and auditing. The financial statements of DuraSwitch
Industries, as of December 31, 1997 and the period then ended included in this
prospectus have been audited by McGladrey & Pullen LLP, independent auditors, as
stated in their reports appearing in this prospectus, and are included in
reliance upon the reports of that firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
DuraSwitch has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20549, a registration statement under the Securities Act
concerning the common stock offered by this prospectus. Certain portions of the
registration statement have not been included in this prospectus as permitted by
the Commission's regulations. For further information concerning DuraSwitch and
the shares of common stock offered by this prospectus, see the registration
statement and its exhibits, which may be inspected at the offices of the
Commission, without charge. Copies of the material contained in the registration
statement and its exhibits may be obtained from the Commission upon payment of
the prescribed fees. Statements contained in this prospectus as to the contents
of any contract or other documents are not necessarily complete. Where the
contract or other document is an exhibit to the registration statement, each
such statement is qualified in all respects by the provisions of the exhibit, to
which reference is hereby made for a full statement of the provisions of the
exhibit.
After completion of this offering, DuraSwitch will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance with the Exchange Act, will file reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information may be read and copied at public reference facilities of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549; and at the regional
offices maintained by the Commission at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; 7 World Trade Center, 13th Floor, New York, New York
10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of
these materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
Additionally, the Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330.
43
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DURASWITCH INDUSTRIES, INC.
Independent Auditors' Reports............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1997 and June 30, 1999 (Unaudited)..................... F-4
Consolidated Statements of Operations Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Six Months Ended June 30,
1998 and 1999 (Unaudited).............................. F-5
Consolidated Statements of Stockholders' Equity Period
from May 1, 1997 (Date of Inception) to December 31,
1997, Year Ended December 31, 1998 and Six Months Ended
June 30, 1998 and 1999 (Unaudited)..................... F-6
Consolidated Statements of Cash Flows Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Six Months Ended June 30,
1998 and 1999 (Unaudited).............................. F-7
Notes to Consolidated Financial Statements................ F-9
AZTEC INDUSTRIES, INC.
Independent Auditors' Report................................ F-20
Financial Statements:
Balance Sheet as of January 31, 1998...................... F-21
Statement of Operations Year Ended January 31, 1998....... F-22
Statement of Stockholders' Capital Deficiency Year Ended
January 31, 1998....................................... F-23
Statement of Cash Flows Year Ended January 31, 1998....... F-24
Notes to Financial Statements............................. F-25
</TABLE>
F-1
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
Mesa, Arizona
We have audited the accompanying consolidated balance sheet of DuraSwitch
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year 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 audit. The financial
statements of the Company for the period from May 1, 1997 (date of inception) to
December 31, 1997 were audited by other auditors whose report, dated October 1,
1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The Company was in the development stage at December 31, 1997. During the
year ended December 31, 1998, the Company completed its development activities
and commenced its planned principal operations.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 26, 1999, except for Note 2, as to which the date is August 19, 1999
F-2
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
(A Development Stage Company)
Mesa, Arizona
We have audited the accompanying balance sheet of DuraSwitch Industries,
Inc. (A Development Stage Company) as of December 31, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the period
from May 1, 1997 (date of inception) to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 DuraSwitch Industries, Inc.
(A Development Stage Company) as of December 31, 1997, and the results of its
operations and its cash flows for the period from May 1, 1997 (date of
inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
MCGLADREY & PULLEN, LLP
Phoenix, Arizona
October 1, 1998
F-3
<PAGE> 50
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998, AND JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 235,981 $ 143,860 $ 109,516
Accounts receivable (net of allowance for doubtful
accounts of $9,346 at December 31, 1998 and June
30, 1999)......................................... 5,762 136,078 204,887
Loan to Camplex / Concept W Corporation.............. 150,000
Inventory............................................ 235,567 408,938
Prepaid expenses and other current assets............ 16,955 76,640 66,689
--------- ----------- -----------
Total current assets.............................. 258,698 592,145 940,030
Property and equipment -- net.......................... 60,337 167,672 403,030
Goodwill -- net........................................ 662,767 626,288
Deferred offering costs................................ 303,928
Patents and other assets............................... 60,880 105,246 86,810
--------- ----------- -----------
Total assets........................................... $ 379,915 $ 1,527,830 $ 2,360,086
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 23,957 $ 221,243 $ 407,631
Accrued expenses and other current liabilities....... 19,568 223,331 446,540
Line of credit....................................... 158,670
Loans from officers.................................. 11,898 40,281
Current portion of notes payable and capital leases
payable........................................... 132,985 122,160
--------- ----------- -----------
Total current liabilities......................... 55,423 617,840 1,135,001
--------- ----------- -----------
Long-term debt:
Notes payable........................................ 107,701 208,129
Capital leases payable............................... 50,014 79,571
--------- ----------- -----------
Total long-term liabilities....................... 157,715 287,700
--------- ----------- -----------
Total liabilities................................. 55,423 775,555 1,422,701
--------- ----------- -----------
Commitments and contingencies (Notes 1 and 14)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value, 40,000,000 shares
authorized, 4,138,609 and 4,911,250 and 5,495,407
shares issued and outstanding, respectively....... 4,139 4,911 5,496
Common stock paid for but not issued (32,424
shares)........................................... 260,000
Additional paid-in capital........................... 509,439 3,535,878 5,071,951
Accumulated deficit.................................. (449,086) (2,788,514) (3,992,799)
Promissory note receivable........................... (147,263)
--------- ----------- -----------
Total stockholders' equity........................ 324,492 752,275 937,385
--------- ----------- -----------
Total liabilities and stockholders' equity............. $ 379,915 $ 1,527,830 $ 2,360,086
========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 51
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
------------- ------------ ------------ -----------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
Net sales............................... $ 5,762 $ 1,354,790 $ 680,466 $ 857,780
Cost of goods sold...................... 6,617 1,300,190 640,119 1,002,606
--------- ----------- ------------ -----------
Gross (loss) profit................ (855) 54,600 40,347 (144,826)
--------- ----------- ------------ -----------
Operating expenses:
Selling, general and administrative... 309,951 1,194,905 483,619 807,423
Research and development.............. 142,550 409,425 183,583 251,113
--------- ----------- ------------ -----------
Total operating expenses........... 452,501 1,604,330 667,202 1,058,536
--------- ----------- ------------ -----------
Loss from operations.................... (453,356) (1,549,730) (626,855) (1,203,362)
Other income (expense) -- net........... 4,270 (49,698) (18,025) (923)
--------- ----------- ------------ -----------
Net loss................................ (449,086) (1,599,428) (644,880) (1,204,285)
--------- ----------- ------------ -----------
Noncash discount on proceeds of
preferred stock for beneficial
conversion feature.................... (740,000) (740,000)
--------- ----------- ------------ -----------
Net loss attributable to common stock... $(449,086) $(2,339,428) $ (1,384,880) $(1,204,285)
========= =========== ============ ===========
Net loss per common share, basic and
diluted............................... $ (.12) $ (.55) $ (0.33) $ (0.22)
========= =========== ============ ===========
Weighted average shares outstanding,
basic and diluted..................... 3,786,898 4,268,642 4,219,096 5,390,206
========= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 52
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997,
YEAR ENDED DECEMBER 31, 1998 AND
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
PAID FOR
COMMON STOCK BUT NOT ISSUED PREFERRED STOCK PROMISSORY ADDITIONAL
--------------------- ------------------- -------------------- NOTE PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL
--------- --------- ------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK...... 470,588 $ 60,000
Effect of 6.4834 for 1 stock
split...................... 2,580,424
Effect of reverse merger
accounted for as a
recapitalization........... 620,792
Stock options exercised...... 83,903 1,650
Issuance of stock for cash... 305,101 $ 388,444
Issuance of stock for
services................... 32,036 1,989 45,765 60,000
Conversion of preferred stock
to common stock............ 350,866 448,444 (350,866) (448,444)
Cash for stock not issued.... 32,424 $ 260,000
Recapitalization due to
change in par value........ (507,944) $ 507,944
Compensation expense from
stock options.............. 1,495
Net loss.....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997.... 4,138,609 4,139 32,424 260,000 -- -- 509,439
Issuance of stock for cash
previously received........ 32,424 32 (32,424) (260,000) 259,968
Issuance of stock for
acquisition of Aztec
Industries, Inc............ 70,588 71 566,929
Net proceeds from sale of
common stock for cash...... 143,451 143 533,608
Net proceeds from sale of
preferred stock and common
stock warrants............. 504,311 740,000 883,085
Issuance of stock for
services................... 15,765 16 41,826
Stock options exercised...... 6,102 6 124
Compensation expense from
stock options.............. 1,403
Conversion of preferred stock
to common stock............ 504,311 504 (504,311) (740,000) 739,496
Net loss.....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1998.... 4,911,250 4,911 3,535,878
Net proceeds from sale of
common stock (unaudited)... 305,805 306 955,280
Stock warrant exercised
(unaudited)................ 275,685 276 $(147,263) 565,995
Issuance of stock for
services (unaudited)....... 2,667 3 8,497
Compensation expense from
stock options
(unaudited)................ 6,301
Net loss (unaudited).........
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED).................. 5,495,407 $ 5,496 -- $ -- -- $ -- $(147,263) $5,071,951
========= ========= ======= ========= ======== ========= ========= ==========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
ISSUANCE OF COMMON STOCK...... $ 60,000
Effect of 6.4834 for 1 stock
split......................
Effect of reverse merger
accounted for as a
recapitalization...........
Stock options exercised...... 1,650
Issuance of stock for cash... 388,444
Issuance of stock for
services................... 61,989
Conversion of preferred stock
to common stock............
Cash for stock not issued.... 260,000
Recapitalization due to
change in par value........
Compensation expense from
stock options.............. 1,495
Net loss..................... $ (449,086) (449,086)
----------- -----------
BALANCE, DECEMBER 31, 1997.... (449,086) 324,492
Issuance of stock for cash
previously received........
Issuance of stock for
acquisition of Aztec
Industries, Inc............ 567,000
Net proceeds from sale of
common stock for cash...... 533,751
Net proceeds from sale of
preferred stock and common
stock warrants............. (740,000) 883,085
Issuance of stock for
services................... 41,842
Stock options exercised...... 130
Compensation expense from
stock options.............. 1,403
Conversion of preferred stock
to common stock............
Net loss..................... (1,599,428) (1,599,428)
----------- -----------
BALANCE, DECEMBER 31, 1998.... (2,788,514) 752,275
Net proceeds from sale of
common stock (unaudited)... 955,586
Stock warrant exercised
(unaudited)................ 419,008
Issuance of stock for
services (unaudited)....... 8,500
Compensation expense from
stock options
(unaudited)................ 6,301
Net loss (unaudited)......... (1,204,285) (1,204,285)
----------- -----------
BALANCE, JUNE 30, 1999
(UNAUDITED).................. $(3,992,799) $ 937,385
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 53
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1997 1998 1998 1999
------------- ------------ --------- -----------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(449,086) $(1,599,428) $(644,880) $(1,204,285)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 18,868 131,169 58,343 95,602
Gain on sale of equipment................ 700 (12,500)
Stock option compensation expense........ 1,495 1,403 16,330 6,301
Issuance of stock for services........... 61,989 41,842 8,500
Bad debt expense......................... 59,797 11,033 5,505
Changes in operating assets and
liabilities net of the effects of
acquisition:
Accounts receivable.................... (5,762) 16,507 (33,999) (68,809)
Inventory.............................. 114,046 188,677 (173,371)
Prepaid expenses and other current
assets.............................. 21,447 (54,551) (15,557) (268,424)
Accounts payable....................... 23,957 (26,735) (74,383) 186,388
Accrued expenses and other current
liabilities......................... 6,568 128,890 35,310 223,209
--------- ----------- --------- -----------
Net cash used in operating
activities.......................... (260,727) (1,235,824) (463,954) (1,207,389)
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patents and other
assets................................... (9,330) (61,434) (22,461) (18,155)
Advances to Aztec
Industries, Inc. ........................ (59,797) 58,246 (58,246)
Loan to Camplex............................. (150,000)
Proceeds from sale of equipment............. 12,500
Purchases of property and equipment......... (35,400) (60,515) (30,362) (225,570)
--------- ----------- --------- -----------
Net cash used in investing
activities.......................... (104,527) (180,195) (111,069) (381,225)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock............. 650,094 1,416,966 390,571 1,199,594
Principal payments on notes payable and
capital leases........................... (80,451) (31,782) (63,713)
Proceeds from notes payable to
stockholder.............................. 300,000
Net (decrease) increase in line of credit... (41,000) 8,000 158,670
Net change in loans from officers........... (48,859) 28,383 9,680 (40,281)
--------- ----------- --------- -----------
Net cash provided by financing
activities.......................... 601,235 1,323,898 376,469 1,554,270
--------- ----------- --------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 235,981 (92,121) (198,554) (34,344)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................... 235,981 235,981 143,860
--------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 235,981 $ 143,860 $ 37,427 $ 109,516
========= =========== ========= ===========
</TABLE>
(Continued)
F-7
<PAGE> 54
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF SIX MONTHS
INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
------------- ------------ --------- ---------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION --
Cash paid for interest....................... $ 58,970 $ 24,818 $ 34,944
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Acquisition of equipment through capital
lease..................................... 55,684 57,873
Reduction of debt in connection with exercise
of warrants............................... 175,000
Purchase of Aztec Industries, Inc.:
Accounts receivable.......................... 157,856 157,856
Inventories.................................. 349,613 349,613
Prepaids and other current assets............ 5,134 5,134
Property and equipment....................... 38,352 38,352
Goodwill..................................... 729,652 729,652
Accounts payable............................. (224,021) (224,021)
Accrued expenses............................. (74,873) (74,873)
Advances from the Company.................... (58,246) (58,246)
Line of credit............................... (41,000) (41,000)
Notes payable................................ (287,124) (287,124)
Leases payable............................... (28,343) (28,343)
Common stock................................. (567,000) (567,000)
Initial capitalization of Company:
Prepaids and other assets.................... $ 38,402
Patents...................................... 60,010
Property and equipment....................... 35,345
Accrued expenses............................. (13,000)
Notes payable to stockholders................ (60,757)
Common stock................................. (60,000)
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-8
<PAGE> 55
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO
DECEMBER 31, 1997, YEAR ENDED DECEMBER 31, 1998 AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. NATURE OF BUSINESS
The Company was incorporated as Total Switch, Inc. ("TSI") on May 1, 1997.
On December 31, 1997, TSI entered into a stock exchange agreement with SOS
International, Inc. ("SOS"), a Nevada corporation that was traded on the OTC
Bulletin Board. SOS had nominal assets and no liabilities on the date of the
acquisition. Under the stock exchange agreement, SOS changed its name to
DuraSwitch Industries, Inc. (the "Company") and acquired all of TSI's stock in
exchange for approximately 85 percent of SOS's outstanding common stock. As a
result of this transaction, TSI became a wholly-owned subsidiary of the Company,
and TSI's former stockholders took controlling interest in the Company. For
accounting purposes, the acquisition has been treated as a recapitalization of
TSI with TSI as the acquirer (reverse merger). As a consequence of this
combination, the Company became a publicly-traded company.
At December 31, 1997, the Company was in the development stage. During
1998, through the acquisition of Aztec Industries, Inc. ("Aztec"), the Company
commenced operations and is no longer in the development stage. The Company
designs, manufactures, markets and distributes integrated electronic control
panels developed with its patented technology.
On January 31, 1998, the Company acquired 100 percent of the outstanding
stock of Aztec by issuing 70,588 shares of common stock valued at $8.03 per
share, which price was based on the price of recent sales of common stock at
such time, and the forgiveness of advances made to Aztec prior to the
acquisition. The purchase of Aztec was recorded using the purchase accounting
method, which requires an adjustment of all assets and liabilities of Aztec to
their estimated fair values on the date of acquisition. The excess of the
consideration paid by the Company over the estimated fair value of the net
assets acquired ("goodwill") was $729,652 and is being amortized over ten years.
The results of operations of Aztec have been included in the Company's
consolidated financial statements beginning on February 1, 1998. During 1997,
the Company had advanced $59,797 to Aztec. At December 31, 1997, the Company
recognized an allowance equal to the balance of the advance.
The following unaudited pro forma combined condensed financial information
for 1997 include the results of operations for the Company, presented as if the
Company and Aztec had been combined for all of 1997, along with adjustments
which give effect to events that are directly attributable to the transaction
and are expected to have a continuing impact.
<TABLE>
<S> <C>
Net sales................................................... $1,572,782
Loss from operations........................................ $ (649,027)
Net loss.................................................... $ (697,668)
Basic net loss per common share............................. $ (0.18)
</TABLE>
Pro forma financial information is not presented for 1998 because the
Company purchased Aztec on January 31, 1998, and the 1998 operations previous to
the purchase would not have a material effect on the Company's operations.
The Company has experienced significant operating losses since its
inception. The Company anticipates that it will be able to continue to raise
additional capital from the sale of its equity securities. (Through February 26,
1999, the Company has raised approximately $650,000 of additional proceeds from
the sale of its common stock subsequent to December 31, 1998). In addition, the
Company has a $150,000 line of credit it may utilize, if necessary. As a result,
management believes the Company will be able to generate cash sufficient to meet
the Company's presently projected cash and working capital
F-9
<PAGE> 56
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements for the next 12 months. The timing and amounts of cash used will
depend on many factors, including the Company's ability to increase revenues,
control expenditures, and become profitable. Additional funds may be required if
the Company is not successful in any of these areas. The Company's ability to
continue funding its operations is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
2. STOCK SPLIT
In connection with a proposed public offering of shares of the Company's
common stock, on August 16, 1999, the Company's Board of Directors declared a
4.25-to-1 reverse stock split which became effective on August 19, 1999. All
references in the financial statements to number of shares, per share amounts
and stock option data of the Company's common and preferred stock have been
restated to reflect the effect of the stock split.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION -- All material intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
("first-in, first-out") method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the
straight-line method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 3 years
Other machinery and equipment............................... 5 years
Office furniture and fixtures............................... 5 years
</TABLE>
PATENTS are recorded at cost and amortized using the straight-line method
over five years. Patents are recorded net of accumulated amortization of $8,460
and $25,528 at December 31, 1997 and 1998, respectively.
GOODWILL is recorded at cost and is being amortized on a straight-line
basis over ten years. Goodwill is recorded net of accumulated amortization of
$66,885 at December 31, 1998.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
LOSS PER COMMON SHARE -- Basic earnings or loss per share is computed by
dividing the loss attributable to the common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
or loss per share is computed using the weighted average number of shares of
common stock outstanding plus the effect of any stock options or warrants if
they are dilutive.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair market value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
F-10
<PAGE> 57
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of cash and
cash equivalents, accounts receivable, accounts payable and loans payable
approximate fair values due to the short-term maturities of these instruments.
The fair value of notes payable and capital leases approximate the carrying
value of these instruments because the terms are similar to those in the market
place under which they could be replaced.
SEGMENTS -- The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosure about Segments of an Enterprise and
Related Information, for the year ended December 31, 1998. SFAS No. 131 modifies
the disclosure requirements for reportable segments. The Company operates in
only one segment. Consequently, the implementation of this Statement had no
effect on the Company's financial statement presentation.
COMPREHENSIVE INCOME -- The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, for the year ended December 31, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income, and its
components in a full set of general-purpose financial statements. The adoption
of this pronouncement had no effect on the Company's consolidated financial
statements.
NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments as fair value. The statement is effective
for the Company's fiscal year ending December 31, 2001. The Company has not
completed evaluating the impact of implementing the provisions of SFAS No. 133.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. CONCENTRATIONS
The Company maintained its deposits in three financial institutions at
December 31, 1998 and in one financial institution at December 31, 1997. At
December 31, 1997 and 1998, the Company maintained deposits in excess of federal
depository insurance.
During 1998, over 50 percent of the Company's net sales were generated from
sales to 13 customers, including one customer which constituted over 11 percent
of the Company's net sales.
5. INVENTORY
Inventory consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $101,765
Work in process............................................. 111,764
Finished goods.............................................. 42,038
Less reserve for obsolete inventory......................... (20,000)
--------
Total inventory............................................. $235,567
========
</TABLE>
F-11
<PAGE> 58
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $ 51,331 $ 81,341
Office furniture and fixtures............................... 7,509 24,759
Other machinery and equipment............................... 11,905 116,378
-------- --------
Total....................................................... 70,745 222,478
Less accumulated depreciation............................... (10,408) (54,806)
-------- --------
Property, plant and equipment -- net........................ $ 60,337 $167,672
======== ========
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Note payable to bank, payments of principal and interest of
$4,536 with interest at 13.2% per annum, due March 31,
2002, collateralized by property and equipment............ $142,582
Note payable to former owner of Aztec, imputed interest at
8% per annum, due January 31, 2000, unsecured............. 72,787
--------
Total....................................................... 215,369
Less current portion........................................ 107,668
--------
Long term notes payable..................................... $107,701
========
</TABLE>
Future minimum maturities of notes payable as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $107,668
2000........................................................ 47,083
2001........................................................ 49,812
2002........................................................ 10,806
--------
Total....................................................... $215,369
========
</TABLE>
8. LOANS FROM OFFICERS
Loans from officers consist of two notes payable due to two stockholders
who are employees of the Company. The notes are due in 1999. The notes, which
bear interest at a rate of 9.5 percent and 18 percent, are not collateralized.
The note payable with the interest rate of 18% was repaid in January 1999.
In May 1998 and June 1998, the Company obtained additional funding of
$139,000 through the issuance of promissory notes to stockholders as well as to
a family member of one of the stockholders. These notes bear interest at a rate
of 18 percent. These notes were repaid in full on June 30, 1998.
9. LINE OF CREDIT
The Company maintains a $150,000 line of credit with a bank that bears
interest at the prime rate plus 2% (9.75% at December 31, 1998) and expires on
December 4, 1999. Outstanding borrowing on the line of credit are collateralized
by the Company's accounts, accounts receivable and inventory. The Company had no
borrowings on the line of credit at December 31, 1998. The Company borrowed
$95,000 against this line of credit in 1999.
F-12
<PAGE> 59
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL LEASES
The Company has property and equipment with a gross value of $92,643 and a
book value of $70,555 under various capital leases. The amortization of fixed
assets acquired in capital leases is included in depreciation expense. At
December 31, 1998, the present value of future minimum capital lease payments
are as follows:
<TABLE>
<S> <C>
1999........................................................ $34,429
2000........................................................ 31,289
2001........................................................ 27,177
-------
Total....................................................... 92,895
Less interest at rates ranging from 11.69% to 16.26%........ 17,564
-------
Present value of minimum capital lease obligations.......... 75,331
Less current portion of capital lease obligations........... 25,317
-------
Long term portion of capital lease obligations.............. $50,014
=======
</TABLE>
11. STOCKHOLDERS' EQUITY
COMMON STOCK -- On May 1, 1997, 470,588 shares of common stock were
issued to the founders in exchange for patents, services, equipment and cash.
On December 31, 1997, the stockholders approved a change in the par value
of its common stock from no par to a par value of $.001 per share.
In January 1998, the Company issued 32,424 shares of common stock for cash
that was received in December 1997.
SERIES A CONVERTIBLE PREFERRED STOCK -- The Series A convertible
preferred stock is convertible into common stock at a rate of one for one and
has the same voting rights as the common stock. Dividends accumulate as declared
by the Board of Directors and none have been declared. Preferred stockholders
have preferences in the event of liquidation and would receive dividends prior
to common stockholders if dividends are declared.
During the period ended December 31, 1997, the Company completed a private
placement offering. The Company sold 350,866 of Series A convertible preferred
stock for cash and services totaling $448,444, net of costs. The proceeds of
this offering were used to pay debt, general and administrative expenses,
research and development and for working capital. All Series A convertible
preferred stock outstanding during the period was converted to common stock in
December 1997 upon the reverse merger at a rate of one for one.
During 1998, the Company raised $1,000,000 in a private placement from the
sale of 504,311 shares of Series A convertible preferred stock and warrants to
purchase 252,155 shares of common stock at a price of approximately $1.98 per
share. The warrants expire June 30, 2001. All shares of Series A convertible
preferred stock were converted to common stock on December 31, 1998. The Company
incurred offering costs of $116,915, which were treated as a reduction of
additional paid-in capital. The Series A convertible preferred stock sold in
1998 had a beneficial conversion feature because the preferred stock was
immediately convertible into common stock at a price less than the then current
fair market value, which value was based on the price of recent sales of common
stock at such time. The carrying amount of the preferred stock was discounted by
the intrinsic value of the beneficial conversion feature, which was determined
to be $740,000. The $740,000 discount was immediately amortized and charged to
accumulated deficit and is treated in a manner similar to a dividend to
preferred stockholders.
F-13
<PAGE> 60
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK -- In connection with the sale of common stock during 1998,
the Company issued warrants to purchase 89,929 shares of common stock as
consideration for services provided by consultants who assisted the Company in
raising capital. The estimated fair value of the warrants issued was $185,844,
as determined using the Black-Scholes valuation model assuming an expected
average risk-free interest rate of 5 percent, an expected life of four to five
years, an expected volatility of 45 percent and expected dividend rate of 0
percent. These warrants expire on June 30, 2003 (42,870 warrants with an
exercise price of $1.98 per share) and November 20, 2003 (47,059 warrants with
an exercise price of $3.19 per share).
WARRANTS -- As discussed above, the Company has 342,084 of outstanding
warrants to purchase common stock.
<TABLE>
<CAPTION>
WARRANTS PRICE RANGE
-------- -----------
<S> <C> <C>
Balance, December 31, 1997.................................. -- --
Warrants issued during 1998................................. 342,084 $1.98-$3.19
------- -----------
Balance, December 31, 1998.................................. 342,084 $1.98-$3.19
======= ===========
</TABLE>
REVERSE MERGER -- On December 31, 1997, a reverse merger was effectuated
with SOSI as discussed in Note 1. Concurrent with the reverse merger, the
following occurred: all outstanding preferred stock was converted into common
stock, a 6.4834-for-1 stock split occurred for all common shares outstanding,
and 620,792 shares of common stock were retained by the stockholders of SOSI.
12. INCENTIVE STOCK OPTION PLAN
Effective May 1, 1997, the Board of Director's approved a stock option plan
("1997 plan"). This plan provides for the granting of incentive and nonqualified
stock options to officers, directors and employees of the Company. The plan also
provides for the granting of nonqualified stock options to any director,
consultant or other individual whose participation the Board of Directors
determines to be in the best interest of the Company.
Upon completion of the reverse merger, the Board of Directors ratified the
change of the plan name to the Company's 1997 Stock Option Plan. Furthermore,
the Board of Directors ratified the number of shares reserved to be granted
under the plan to adjust for the 6.4834-for-1 stock split. Subsequent to
December 31, 1998, in a stockholders' meeting, the stockholders ratified the
Board of Directors' proposal to increase the number of shares authorized for
options under this plan to 823,535.
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income for
1997 and 1998 for the plan options is $1,495 and $1,403, respectively. Options
granted to nonemployees were for services performed such as engineering,
consulting and public relations.
The fair value of all stock option grants is estimated on the date of grant
in accordance with SFAS No. 123 using minimum value option pricing for options
granted prior to December 31, 1997, with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Risk-free interest rate..................................... 5%
Expected life............................................... 10 years
</TABLE>
The assumptions used for options granted during 1998 are the same, except
the expected life of the options has been decreased from ten years to three
years and a volatility rate of 45 percent was used. During 1998, the Company
used the Black-Scholes valuation model to determine the options' fair value.
F-14
<PAGE> 61
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation cost has been recognized as the option prices are equal to or
greater than fair market value on the grant dates. Had compensation for the
Company's stock options granted to employees been determined based upon the fair
value at the grant date for awards consistent with a methodology prescribed in
SFAS No. 123, the Company's net loss attributable to common stock and net loss
per share for the periods ended December 31, 1997 and 1998 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(449,086) $(2,339,428)
Pro forma................................................ (450,382) (2,635,764)
Basic net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
Diluted net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
</TABLE>
Options granted under the plan expire up to ten years after the date of
grant. The exercise price of such shares is equal to the market price or current
asking price of the Company's stock on the date of grant. Options that expire or
terminate prior to exercise are added to the shares available for future grants.
A summary of changes in stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Options granted on May 1, 1997.............................. 140,347 $ 0.02
Options granted during 1997................................. 42,256 0.13
Exercised................................................... (83,903) (0.02)
------- ------
Balance, December 31, 1997.................................. 98,700 0.06
Options granted during 1998................................. 640,932 13.18
Exercised................................................... (6,102) (0.02)
------- ------
Balance, December 31, 1998.................................. 733,530 $11.60
======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1998
----- --------
<S> <C> <C>
Exercisable at the end of the period........................ -- 445,296
===== ========
Weighted average fair value of options
granted during the period................................. $0.13 $ 13.18
===== ========
</TABLE>
F-15
<PAGE> 62
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.02 $ 1.32 92,834 8.5 $ 0.60 92,834 $ 0.60
$ 6.38 $ 6.93 351,128 9.9 $ 6.38 68,776 $ 6.46
$16.19 $22.31 289,568 8.8 $21.51 283,686 $21.59
- ------ ------ ------- --- ------ ------- ------
$ 0.02 $22.31 733,530 9.3 $11.60 445,296 $14.96
====== ====== ======= === ====== ======= ======
</TABLE>
13. INCOME TAXES
Net deferred tax assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $ 135,600 $ 913,600
Contribution carryforwards................................ 1,600 6,800
Other..................................................... 16,000 18,900
--------- ---------
Total deferred tax assets................................... 153,200 939,300
Less valuation allowance.................................... (153,200) (939,000)
--------- ---------
Total....................................................... -- 300
Deferred tax liabilities -- Depreciation.................... -- (300)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
During the periods ended December 31, 1997 and 1998, the Company recognized
a valuation allowance of $153,200 and $611,000, respectively, against deferred
tax assets. The valuation allowance reduces deferred tax assets to an amount
that represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized. Realization of the deferred
tax assets is dependent upon sufficient future taxable income during the period
that temporary differences and carryforwards are expected to be available to
reduce taxable income.
The Company's net operating loss carryforwards of approximately $2,284,000
for federal income tax purposes begin to expire in 2011.
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the periods
ended December 31, 1997 and 1998 due to the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Benefit calculated at statutory rate........................ $ 157,000 $ 544,000
Increase (decrease) in income resulting from:
State income taxes, net................................... 36,000 96,000
Nondeductible expenses.................................... (39,800) (29,000)
Valuation allowance....................................... (153,200) (611,000)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
F-16
<PAGE> 63
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
MANAGEMENT SERVICES AGREEMENT -- The Company has a management services
agreement with a company owned and operated by the two major stockholders. This
management agreement requires the Company to pay a management service fee equal
to 1.1 percent of the invoiced sales price for all Company-patented technology
component switches and integrated switch panels sold by the Company. Also, the
Company has agreed to pay an equivalent percentage of any license or sublicense
fees received from the patented technology. This agreement remains in effect
until the expiration of the last patents which may issue on the switch
technology. During 1998, the Company expensed approximately $800 under this
agreement.
EMPLOYMENT AND SEPARATION AGREEMENTS -- The Company has several employment
and separation agreements with key members of management. These agreements call
for a base salary and bonuses based upon the performance of the Company. These
agreements also provide for salary and benefits in the event of termination.
LEASE AGREEMENTS -- Rent expense for the periods ended December 31, 1997
and 1998 approximated $11,000 and $81,500, respectively. Future minimum rental
payments, which includes a five-year lease for the Company's office and
manufacturing facilities, which expires January 1, 2004 and provides for one
two-year extension option, are as follows:
<TABLE>
<S> <C>
1999........................................................ $156,133
2000........................................................ 192,168
2001........................................................ 201,906
2002........................................................ 211,829
2003........................................................ 222,094
--------
Total....................................................... $984,130
========
</TABLE>
During 1998, the Company entered into an exclusive financial advisor
agreement with Duff & Phelps Securities ("D&P"). D&P is to assist the Company in
raising capital. The Company pays D&P a monthly fee, and the Company is required
to pay D&P additional fees if certain transactions occur. This agreement expires
May 2000 and can be terminated by either party with 30 days written notice.
15. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 1998 AND 1999
ORGANIZATION AND BASIS OF PRESENTATION -- The accompanying interim
financial statements have been prepared by the Company in accordance with the
rules and regulations of the Securities and Exchange Commission for interim
reporting. Accounting policies utilized in the preparation of financial
information herein presented are the same as set forth in the Company's annual
financial statements. Certain disclosures and information normally included in
financial statements have been condensed or omitted. In the opinion of the
management of the Company, these financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim financial statements. Interim results of operations
are not necessarily indicative of the results of operations for the full year.
F-17
<PAGE> 64
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a. INVENTORY -- Inventory consists of the following at June 30, 1999:
<TABLE>
<S> <C>
Raw materials............................................... $174,536
Work in process............................................. 222,363
Finished goods.............................................. 17,039
Less reserve for obsolete inventory......................... (5,000)
--------
Total inventory............................................. $408,938
========
</TABLE>
b. NOTES PAYABLE -- During the six months ended June 30, 1999, the Company
borrowed $100,000 from a stockholder. The outstanding balance under this
note payable bears interest at 9 percent per annum. This note was
cancelled on April 30, 1999, in connection with warrants that were
exercised on April 30, 1999. On April 30, 1999, the Company borrowed
$200,000 from two stockholders. The outstanding borrowings are due July
1, 2000 and bear interest at a rate of 10 percent per annum. The
promissory notes were reduced by $75,000 in connection with the exercise
of warrants on June 30, 1999. The Company borrowed an additional
$200,000 under the same terms on July 1, 1999.
c. LINE OF CREDIT -- The line of credit agreement was amended on May 27,
1999 to increase the amount available to the Company to $250,000 and to
extend the expiration date to May 27, 2000. At June 30, 1999, the
Company had borrowings against the line of credit of $158,670.
d. CAPITAL LEASES PAYABLE -- During the first six months of 1999, the
Company acquired equipment with a cost of $57,873 under three capital
leases that bear interest at rates ranging from 18.36 percent to 24.02
percent.
At June 30, 1999, the total amount outstanding on capital leases was
$116,450.
e. STOCK OPTIONS -- During the six months ended June 30, 1999, there were
no options granted, exercised or cancelled under the 1997 DuraSwitch
Stock Option Plan. Options exercisable totaled 515,883 at June 30, 1999.
The Company's 1999 Stock Option Plan (the "1999 Option Plan") was
adopted by the Company's Board of Directors and ratified by the
stockholders on March 8, 1999. The maximum number of shares of common
stock subject to options that may be outstanding at any time under the
1999 Option Plan is 235,294 shares of common stock. A summary of stock
option activity related to the 1999 Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION EXERCISE
SHARES AVERAGE
------ --------
<S> <C> <C>
Outstanding, January 1, 1999................................
Option granted during 1999.................................. 28,941 $8.07
Exercised...................................................
------ -----
Outstanding, June 30, 1999.................................. 28,941 $8.07
====== =====
Exercisable at June 30, 1999................................ 15,117
=====
</TABLE>
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income
for the six months ended June 30, 1998 and 1999 for stock options is $700
and $6,301, respectively. Options granted to nonemployees were for
services performed such as engineering, consulting and public relations.
F-18
<PAGE> 65
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using
the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no compensation cost has been recognized as the option prices
are equal to or greater than fair market value on the grant dates. Had
compensation for the Company's stock options granted to employees been
determined based upon the fair value at the grant date for awards
consistent with methodology prescribed in SFAS No. 123, the Company's net
loss attributable to common stock and net loss per share for the six months
ended June 30, 1998 and 1999 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net loss:
As reported.......................................... $(1,384,880) $(1,204,285)
Pro forma............................................ (1,556,140) (1,255,953)
Basic and diluted net loss per share:
As reported.......................................... (.33) (.22)
Pro forma............................................ (.37) (.23)
</TABLE>
The fair value of each stock option grant is estimated on the date of the
grant using the Black-Scholes valuation model to determine the option's
fair value with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield................................... 0%
Risk-free interest rate................................... 5%
Expected life............................................. 3 years
Volatility rate........................................... 41%
</TABLE>
f. LOAN TO CAMPLEX -- During the first six months of 1999, the Company
advanced $150,000 to Camplex/Concept W Corporation ("Camplex"), an
entity that the Company had considered as a possible acquisition
candidate. On May 14, 1999, the Company determined that it would not
acquire Camplex. The $150,000 unsecured loan to Camplex is due January
1, 2000 and bears interest at 9 percent per annum.
g. STOCKHOLDERS' EQUITY -- During the first six months of 1999, the Company
sold 305,805 shares of common stock for net cash proceeds of $955,586.
On March 1, 1999 the Company sold to two stockholders warrants to
purchase 23,530 shares of common stock at a price of $3.19 per share.
These warrants were purchased by the stockholders for $5,000. The
warrants were exercised on June 30, 1999 for a $75,000 reduction in
principal of promissory notes executed with the Company on April 30,
1999.
On April 30, 1999, warrants to purchase 252,155 shares of common stock
at a price of approximately $1.98 per share were exercised. The Company
received cash of approximately $250,000, a promissory note receivable of
$147,263, and cancellation of a $100,000 note payable and $2,733 of
accrued interest for the exercise of the warrants.
* * * * * *
F-19
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
Board of Directors
Aztec Industries, Inc.
Phoenix, Arizona
We have audited the accompanying balance sheet of Aztec Industries, Inc.
(the "Company") as of January 31, 1998, and the related statements of
operations, stockholders' capital deficiency, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix Arizona
February 26, 1999
F-20
<PAGE> 67
AZTEC INDUSTRIES, INC.
BALANCE SHEET
JANUARY 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 157,856
Inventory................................................. 349,613
Prepaid expenses and other current assets................. 5,134
---------
Total current assets................................... 512,603
Property and equipment -- net............................... 38,352
---------
Total assets................................................ $ 550,955
=========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 224,021
Line of credit............................................ 41,000
Accrued expenses and other current liabilities............ 74,873
Advances from DuraSwitch.................................. 117,197
Current portion of notes payable and capital leases
payable................................................ 97,152
---------
Total current liabilities.............................. 554,243
---------
Long-term liabilities:
Notes payable............................................. 199,502
Capital leases payable.................................... 18,813
---------
Total long-term liabilities............................ 218,315
---------
Total liabilities...................................... 772,558
---------
Commitments and contingencies (Notes 1 and 9)
Stockholders' capital deficiency:
Common stock, no par value, 10,000,000 shares authorized,
9,182 shares issued and outstanding.................... 121,909
Accumulated deficit....................................... (343,512)
---------
Total stockholders' capital deficiency................. (221,603)
---------
Total liabilities and stockholders' capital deficiency...... $ 550,955
=========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 68
AZTEC INDUSTRIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
Net sales................................................... $1,567,020
Cost of goods sold.......................................... 1,241,526
----------
Gross profit........................................... 325,494
Operating expenses -- Selling, general and administrative... 448,200
----------
Loss from operations........................................ (122,706)
Interest and other expense.................................. (52,911)
----------
Net loss.................................................... $ (175,617)
==========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 69
AZTEC INDUSTRIES, INC.
STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997....................... 9,182 $121,909 $(167,895) $ (45,986)
Net loss........................................ (175,617) (175,617)
----- -------- --------- ---------
BALANCE, JANUARY 31, 1998....................... 9,182 $121,909 $(343,512) $(221,603)
===== ======== ========= =========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 70
AZTEC INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(175,617)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 15,656
Gain on sale of fixed assets........................... (3,000)
Changes in assets and liabilities:
Accounts receivable.................................... 46,244
Inventory.............................................. (85,078)
Prepaid expenses and other current assets.............. (5,134)
Accounts payable....................................... (26,582)
Accrued expenses and other current liabilities......... 21,627
---------
Net cash used in operating activities................ (211,884)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from sale of equipment...................... 3,000
Purchases of property and equipment....................... (15,387)
---------
Net cash used in investing activities................ (12,387)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 204,958
Principal paid on notes payable and capital leases........ (83,926)
Net repayments of line of credit.......................... (9,000)
Advances from DuraSwitch.................................. 117,197
---------
Net cash provided by financing activities............ 229,229
---------
Increase in cash and cash equivalents....................... 4,958
Cash and cash equivalents, beginning of year................ (4,958)
---------
Cash and cash equivalents, end of year...................... $ --
=========
Supplemental disclosure of cash flow
information -- Cash paid for interest....................... $ 38,844
=========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 71
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
1. DESCRIPTION OF BUSINESS
Aztec Industries, Inc. (the "Company") was incorporated in Arizona on May
11, 1972. The Company designs, manufactures, markets and distributes membrane
switch products and overlays.
On January 31, 1998, DuraSwitch Industries, Inc. acquired 100 percent of
the Company's outstanding stock. The financial statements do not include any
adjustments to give effect to the acquisition.
2. SUMMARY OF ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
(first-in, first-out) method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the straight-line
method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-5 years
Office furniture and fixtures............................... 5 years
</TABLE>
Assets under capital leases are amortized over the shorter of the related
estimated useful lives or the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair market value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. INVENTORY
Inventory consists of the following at January 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $159,008
Work in process............................................. 174,906
Finished goods.............................................. 63,699
Less reserve for obsolete inventory......................... (48,000)
--------
Total inventory............................................. $349,613
========
</TABLE>
F-25
<PAGE> 72
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at January 31, 1998:
<TABLE>
<S> <C>
Equipment................................................... $517,649
Office furniture and fixtures............................... 2,080
--------
Total....................................................... 519,729
Less accumulated depreciation............................... (481,377)
--------
Property, plant and equipment -- net........................ $ 38,352
========
</TABLE>
5. NOTES PAYABLE
Notes payable at January 31, 1998 consist of the following:
<TABLE>
<S> <C>
Note payable to bank, which requires monthly payments of
principal and interest of $4,536 with interest at 13.2%,
due March 31, 2002, collateralized by property and
equipment................................................. $173,585
Note payable to Company president, interest at 7.5%, due
January 31, 2000, unsecured............................... 113,539
--------
Total....................................................... 287,124
Less current portion........................................ 87,622
--------
Long-term debt.............................................. $199,502
========
</TABLE>
Future minimum maturities of notes payable as of January 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 87,622
2000........................................................ 98,636
2001........................................................ 44,138
2002........................................................ 50,370
2003........................................................ 6,358
--------
Total....................................................... $287,124
========
</TABLE>
6. LINE OF CREDIT
The Company maintains a $50,000 line of credit with a bank that bears
interest at 10.5 percent and expires on March 31, 1998. At January 31, 1998, the
Company had outstanding borrowings of $41,000. Outstanding borrowings were
collateralized by accounts receivable and inventory.
7. CAPITAL LEASES PAYABLE
The Company has acquired property and equipment with a gross value of
$36,959 and a book value of $25,900 under various capital leases. The
amortization of fixed assets acquired in capital leases is included
F-26
<PAGE> 73
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in depreciation expense. At January 31, 1998, the present value of future
minimum capital lease payments with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999........................................................ $11,998
2000........................................................ 12,821
2001........................................................ 9,680
-------
Total....................................................... 34,499
Less interest at rates ranging from 11.69% to 16.25%........ 6,156
-------
Present value of minimum capital lease obligations.......... 28,343
Less current portion of capital lease obligations........... 9,530
-------
Long-term portion of capital lease obligations.............. $18,813
=======
</TABLE>
8. INCOME TAXES
Net deferred tax assets consist of the following components as of January
31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $176,200
Contribution carryforwards................................ 400
--------
Total deferred tax assets................................... 176,600
Less valuation allowance.................................... (175,300)
--------
Total....................................................... 1,300
Deferred tax liabilities -- Depreciation and amortization... (1,300)
--------
Total....................................................... $ --
========
</TABLE>
At January 31, 1998, the Company had a valuation allowance of $175,300
against the net deferred tax assets to reduce the total to zero. The valuation
allowance reduces deferred tax assets to an amount that represents management's
best estimate of the amount of such deferred tax assets that more likely than
not will be realized. Realization of the deferred tax assets is dependent upon
sufficient future taxable income during the period that temporary differences
and carryforwards are expected to be available to reduce taxable income.
The Company's net operating loss carryforwards of approximately $441,000
for federal and state income tax purposes begin to expire in 2016.
The income tax benefit differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the year ended
January 31, 1998 due to the following:
<TABLE>
<S> <C>
Benefit calculated at statutory rate........................ $59,700
Increase (decrease) in income resulting from:
State income tax benefit, net............................... 10,500
Nondeductible expenses.................................... (600)
Valuation allowance....................................... (69,600)
-------
Total....................................................... $ --
=======
</TABLE>
F-27
<PAGE> 74
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Rent expense for the year ended January 31, 1998 was $79,262. The Company
had operating leases for its manufacturing facilities that require total monthly
payments of $6,832 and that expire on December 31, 1998. The future minimum
rental payments remaining at January 31, 1998 total $75,152.
* * * * * *
F-28
<PAGE> 75
Inside Back Cover: At the top of the page is a "DuraSwitch.com" logo. On the top
right portion of the page is the following text: "Our Web site is a key
component of our current marketing efforts. All of our advertising and
promotional materials direct readers to the site. In addition to attracting
potential customers to our web site for information, we use our web site to
generate interest in our products. We have already made significant sales as a
result of initial contact with customers through our web site." Graphic at upper
left depicts the home page of the DuraSwitch web site. 3 graphics in the middle
of the page depict the product listing page, DuraSwitch PushGate page and
DuraSwitch Pushgate actuation demo page of the web site. Text, in bullet point
form, at bottom of page: "Our web site has several features including:
Information about the comparative advantages of our patented technology;
Articles published by third parties about our products; Technical data to assist
design engineers; e-mail communications links to our design engineers and sales
representatives to facilitate dialogue; and on-line product ordering
capability."
<PAGE> 76
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
August 26, 1999
[DURASWITCH INDUSTRIES, INC. LOGO]
2,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
[Cruttenden Roth Logo]
UNTIL SEPTEMBER 20, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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