Rule 424(b)(3)
Registration Statement File number 33-81350
1,270,000 SHARES
DATA SYSTEMS NETWORK CORPORATION
COMMON STOCK, $.01 PAR VALUE
SUPPLEMENT TO PROSPECTUS DATED DECEMBER 16, 1996
On January 29, 1997, Data Systems Network Corporation (the
"Company") gave notice to the Company's warrant agent, American Stock
Transfer and Trust Company (the "Warrant Agent"), that it is calling for
redemption all of its outstanding Redeemable Common Stock Purchase Warrants
(the "Purchase Warrants") on March 10, 1997 (the "Redemption Date") at the
price of $.05 per Purchase Warrant (the "Redemption Price"). Notice of such
redemption is expected to be mailed to holders of the Purchase Warrants on
or about February 4, 1997.
THE RIGHT TO EXERCISE THE PURCHASE WARRANTS EXPIRES AT 5:00 P.M.,
EASTERN STANDARD TIME, ON THE REDEMPTION DATE. THEREAFTER, THE PURCHASE
WARRANTS WILL NO LONGER BE EXERCISABLE AND THE HOLDERS OF PURCHASE WARRANTS
WILL HAVE ONLY THE RIGHT TO RECEIVE THE REDEMPTION PRICE.
The Purchase Warrants may be exercised upon surrender of the
certificate therefor at any time prior to 5:00 p.m., Eastern Standard Time,
on the Redemption Date at the offices of the Warrant Agent, with the form of
"Election to Purchase" on the reverse side of the certificate filled out
(with signature guaranteed by a member firm of a national securities
exchange, a commercial bank or a trust company located in the United States,
or a member of the National Association of Securities Dealers, Inc.) and
executed as indicated, accompanied by payment (in the form of cash, a
certified or official bank check, or a postal money order, in each case
payable in United States currency to the order of American Stock Transfer
and Trust Company) of the full exercise price for the number of Purchase
Warrants being exercised. Holders of the Purchase Warrants will
automatically forfeit all rights thereunder except the right to receive the
$.05 Redemption Price unless the Purchase Warrants are exercised on or
before the Redemption Date. On January 27, 1997, the last sale prices of
the Common Stock and the Purchase Warrants on the Nasdaq Stock Market were
$8.31 per share and $2.19 per Purchase Warrant.
The Company has entered into an agreement with First Colonial
Securities Group, Inc. ("First Colonial") pursuant to which First Colonial
will solicit exercises of the Purchase Warrants beginning February 7, 1997
and the Company would allow a commission of 4% upon any exercise of Purchase
Warrants occurring from February 7, 1997 through the Redemption Date. In
addition, an expense allowance of $30,000 and an incentive fee of up to
$30,000 may be paid. A portion of such commission may be reallowed to other
members of the National Association of Securities Dealers, Inc. ("NASD").
Such commission shall be paid only in the event that (i) at the time of
exercise, the market price of the Company's Common Stock is then higher than
the exercise price of the Purchase Warrant; (ii) the exercise was solicited
by an NASD member; (iii) the Purchase Warrant was not held in a
discretionary account; (iv) disclosure of the compensation arrangements has
been made in documents provided to customers at the time of exercise; and
(v) the solicitation of the exercise of the Purchase Warrant did not violate
Rule 10b-6 promulgated under the Securities Exchange Act of 1934.
The Company has agreed that it would allow a commission of 4% to
Josephthal, Lyon & Ross ("Josephthal") and to A.G. Edwards and Sons, Inc.
("Edwards") upon any exercise of Purchase Warrants solicited by Josephthal
up to a total of 300,000 or any exercise of Purchase Warrants solicited by
Edwards up to a total of 100,000 occurring on or prior to February 6, 1997.
A portion of such commission may be reallowed to other members of the
National Association of Securities Dealers, Inc. ("NASD"). Such commission
shall be paid only in the event that (i) at the time of exercise, the market
price of the Company's Common Stock is then higher than the exercise price
of the Purchase Warrant; (ii) the exercise was solicited by an NASD member;
(iii) the Purchase Warrant was not held in a discretionary account; (iv)
disclosure of the compensation arrangements has been made in documents
provided to customers at the time of exercise; (v) the solicitation of the
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exercise of the Purchase Warrant did not violate Rule 10b-6 or Regulation M
promulgated under the Securities Exchange Act of 1934 and (vi) Josephthal
and Edwards provide to each Purchase Warrant holder, prior to exercise, a
copy of the Company's Prospectus, as supplemented. A total of 11,750
Purchase Warrants have been exercised as of January 27, 1997.
If all of the Purchase Warrants are exercised, the Company will
receive an aggregate of approximately $7,580,000 in net proceeds from the
issuance of the Common Stock upon exercise of all of the Purchase Warrants,
assuming a commission of 4% is paid on all exercises and after deducting
expenses of this Offering of approximately $40,000 (not including the
proceeds to be received upon the issuance of shares not covered by the
Registration Statement of which this Prospectus is a part upon exercise of
Purchase Warrants held by the Representative (as defined below)). There can
be no assurance as to the number of Purchase Warrants that will be exercised
or the net proceeds to be received by the Company upon exercise of the
Purchase Warrants.
The net proceeds from the sale of shares upon exercise of Purchase
Warrants, if any, will be used to develop the Company's infrastructure to
support further expansion of its business, to reduce outstanding
indebtedness under its bank line of credit and for other general corporate
purposes. The line of credit currently bears interest at a rate of 9.0% per
annum and is due on demand. A total of approximately $9.2 million was
outstanding under the line of credit as of December 31, 1996, all of which
was incurred for working capital purposes.
The Company is calling the Purchase Warrants for redemption for the
purpose of encouraging the exercise of the Purchase Warrants. Management
believes that the receipt of a substantial amount of net proceeds from the
exercise of Purchase Warrants will strengthen the Company's financial
position and make the Company better able to take advantage of opportunities
arising from time to time to expand the Company's customer base. Management
also believes that the redemption of the Purchase Warrants will simplify the
Company's equity structure, thereby permitting the investment community to
more accurately assess the Company's financial performance.
The Company is permitted to redeem the Purchase Warrants because it
has received written consent to the redemption from H. J. Meyers & Co., Inc.
(as successor to Thomas James Associates, Inc.), the representative of the
several underwriters in the Company's initial public offering (the
"Representative"), as provided in the Warrant Agreement, dated October 28,
1994, setting forth the terms of the Purchase Warrants. In connection with
the receipt of such consent, the Company and the Representative entered into
a consulting agreement pursuant to which the Representative has agreed to
render certain consulting services for a fee of $75,000 from the Company.
In addition, the exercise price of the warrant issued to the Representative
in connection with the initial public offering (the "Representative's
Warrant") was reduced from $16.50 to $12.50 per unit (each unit consisting
of two shares of Common Stock and two Purchase Warrants) and the exercise
price of the Purchase Warrants acquired upon exercise of the
Representative's Warrant was reduced from $10.3125 per share to $6.25 per
share. The Representative also agreed to waive its rights, under the
Underwriting Agreement with the Company dated October 28, 1994, to a
commission for soliciting exercises of Purchase Warrants. As a condition to
receiving consent to the redemption, the Company agreed to file a
registration statement with the Securities and Exchange Commission with
respect to the shares and Purchase Warrants underlying the Representative's
Warrant.
The date of this Prospectus Supplement is January 29, 1997.
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PROSPECTUS
DATA SYSTEMS NETWORK CORPORATION
1,270,000 SHARES
COMMON STOCK, $.01 PAR VALUE
This Prospectus relates to 1,270,000 shares of Common Stock, $.01
par value (the "Common Stock"), of Data Systems Network Corporation (the
"Company") registered for issuance by the Company upon exercise of the
Redeemable Common Stock Purchase Warrants (the "Purchase Warrants") issued
by the Company to investors in its initial public offering in November 1994
(the "IPO").
Each Purchase Warrant entitles the holder to purchase one share of
Common Stock at a price of $6.25 per share until October 27, 1997 and $7.50
per share thereafter until the Purchase Warrants expire on October 27, 1999.
Such exercise prices are subject to anti-dilution adjustments under certain
circumstances. The Purchase Warrants are redeemable by the Company at $.05
per Purchase Warrant on 30 days prior written notice (i) with the prior
written consent of H. J. Meyers & Co., Inc. (as successor to Thomas James
Associates, Inc.), the Representative of the several underwriters in the IPO
(the "Representative") or (ii) if the average closing bid price of the
Common Stock for a period of 30 consecutive trading days exceeds $12.00 per
share. In the event the Company exercises the right to redeem the Purchase
Warrants, such Purchase Warrants would be exercisable until the close of
business on the date fixed for redemption in such notice. If any
outstanding Purchase Warrant called for redemption is not exercised by such
date, it will cease to be exercisable and the holder will be entitled only
to the redemption price. The Company intends to seek the consent of the
Representative to permit the redemption of the Purchase Warrants at the
earliest possible date.
SEE "RISK FACTORS" ON PAGE 3 FOR CERTAIN INFORMATION WHICH SHOULD BE
CAREFULLY CONSIDERED BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED
HEREBY.
The total gross proceeds to the Company from this offering may range
from zero to $9,525,000, if all of the Purchase Warrants are exercised at a
time when the highest exercise price for the Purchase Warrants is in effect.
The Company will pay estimated expenses relating to this offering of
approximately $40,000. This offering is not being underwritten.
The Company's Common Stock and Purchase Warrants are traded on the
Nasdaq Stock Market's SmallCap Market ("Nasdaq") under the symbols "DSYS"
and "DSYSW," respectively, and on the Pacific Stock Exchange under the
symbols "DSY" and "DSYWS", respectively. On December 9, 1996, the last
reported sale price of the Company's Common Stock and Purchase Warrants on
Nasdaq was $9.63 per share and $3.56 per Purchase Warrant.
The Company's principal executive offices are located at 34705 West
Twelve Mile Road, Suite 300, Farmington Hills, Michigan 48331 (telephone
number: (810) 489-7117).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 16, 1996
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTING SHAREHOLDER. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "Commission") and the Pacific Stock Exchange,
Inc. (the "PSE"). Such reports, proxy statements and other information may
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048; and Chicago
Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511, and may be inspected at the PSE at 301 Pine Street, San
Francisco, California 94104. In addition, copies of such material can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding the Company.
This Prospectus is a part of a Registration Statement filed by the
Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus omits certain of the information
included in such Registration Statement. The Registration Statement may be
inspected by anyone at the office of the Commission without charge, and
copies of all or any part of it may be obtained upon payment of the
Commission's charge for copying. For further information about the Company
and its securities, reference is hereby made to such Registration Statement,
and to the exhibits filed as part thereof or otherwise incorporated herein.
Each summary herein of additional information included in the Registration
Statement or any exhibit thereto is qualified in its entirety by reference
to such information or exhibit.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents (and the amendments thereto) filed by the
Company (Commission File No. 1-13424) with the Commission are hereby
incorporated by reference and made a part hereof:
(a) The description of the Company's Common Stock contained in
the Prospectus forming a part of the Company's Registration
Statement on Form S-1 (No. 33-81350) (incorporated by
reference into the Company's Exchange Act Registration
Statement on Form 8-A, filed on October 25, 1994);
(b) Annual Report on Form 10-K for the year ended December 31,
1995;
(c) Quarterly Reports on Form 10-Q for the Quarters Ended March
31, 1996, June 30, 1996 and September 30, 1996; and
(d) Current Report on Form 8-K filed September 27, 1996.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the offering of the
Securities covered by this Prospectus shall be deemed to be incorporated
herein by reference and to be a part hereof from the respective date of
filing of each such document. Any statement contained in a document
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incorporated by reference or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
To the extent the foregoing documents are incorporated by reference
herein, copies may be obtained without charge (other than for exhibits to
such documents) upon written request directed to: Shareholder Relations,
34705 West Twelve Mile Road, Suite 300, Farmington Hills, Michigan 48331
(telephone number: (810) 489-7117).
RISK FACTORS
Prospective investors should consider carefully the following
factors before purchasing the securities offered hereby.
RECENT OPERATING LOSSES
The Company reported losses of $160,000, $613,000 and $291,000 for
the nine months ended September 30, 1996 and the years ended December 31,
1995 and 1994, respectively. The results for the nine months ended
September 30, 1996 include a $165,000 extraordinary loss relating to the
settlement of the Company's 1992 bankruptcy plan of reorganization and a
$75,000 extraordinary gain relating to the extinguishment of debt, while the
results for the year ended December 31, 1995 include a $620,000 increase in
the Company's inventory reserves to cover the likely risk of future
inventory obsolesence and a gain of $320,000 on the extinguishment of debt.
The recent losses have also been affected by the fact that the Company's
revenue mix has not optimized gross profits. In each period, lower margin
equipment sales comprised a higher percentage of total revenue than desired
by the Company. Although the Company during 1996 has made two strategic
acquisitions, begun several new projects and taken other internal measures
to increase the level of service revenue as a component of total revenue,
there can be no assurance that profit margins will improve to a level
sufficient to cover the operating expense increases anticipated as a result
of the recent acquisitions and geographic expansion.
FUTURE CAPITAL NEEDS
The Company had working capital of $2.0 million at December 31, 1995
and a working capital deficit of $1.8 million at September 30, 1996. The
Company's principal credit facility is a bank line of credit. As of
September 30, 1996, the Company was indebted under the line of credit in the
amount of approximately $5.4 million, all of which is due on demand. There
can be no assurance that the bank will not demand payment at a time at which
the Company is unable to repay or refinance such indebtedness.
In addition, the Company's future capital requirements will depend
on many factors, including cash flow from operations, competing market
developments and future expansion plans, and may require the Company to
raise additional funds through equity or debt financings. Any equity
financings could result in dilution to the Company's shareholders, and any
financing, if available at all, may be on terms unfavorable to the Company.
If adequate funds are not available, the Company may be required to curtail
its activities significantly. The Company may seek to raise capital by
calling the Purchase Warrants for redemption, which would likely influence
the holders of the Purchase Warrants to exercise them prior to the date of
redemption. The Company is not permitted to redeem the Purchase Warrants
except on 30 days prior written notice (i) with the prior written consent of
the Representative or (ii) if the average closing bid price of the Common
Stock for a period of 30 consecutive trading days exceeds $12.00 per share.
POTENTIAL INABILITY TO MANAGE GROWTH
The Company is experiencing rapid and significant growth which has
placed, and may continue to place, a strain on the Company's management and
resources. From August 1996 through November 1996, the number of the
<PAGE>
Company's employees increased from approximately 80 to 245 and further
increases are anticipated during 1997. The Company's future performance and
profitability will depend, in large part, on its ability to manage this
growth, particularly with respect to its decentralized workforce, which will
require the Company to continue to improve its operational, financial and
other internal systems. In addition, the Company will need to train,
motivate and integrate its new employees. If the Company is unable to
manage growth effectively or perform its services at anticipated levels, the
Company's business, financial condition and results of operations may be
materially adversely affected.
VARIABILITY OF OPERATING RESULTS
The Company's quarterly and annual operating results have been
subject to variation, and will continue to be subject to variation, from
period to period depending upon factors such as the Company's revenue mix;
the cost of materials, labor and technology; the costs associated with
initiating new contracts or opening new offices; the economic condition of
the Company's target markets; and the costs of acquiring and integrating new
businesses. As a result of these factors and others, there can be no
assurance that the Company will be profitable in the future on a quarterly
or annual basis. It is possible that in some future quarter the Company's
operating results will be below the expectations of public market analysts
and investors. In such event, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Common Stock may be materially
adversely affected.
DEPENDENCE ON MAJOR VENDORS
In general, the Company must be directly authorized by a
manufacturer in order to sell that manufacturer's products. The Company is
an authorized dealer for the microcomputer and related products of over 30
manufacturers. Sales by the Company of products manufactured by Compaq,
Hewlett-Packard, Dell, NetFrame and IBM together accounted for more than 50%
of the Company's total revenues during the nine months ended September 30,
1996 and during each of the years ended December 31, 1995 and 1994. The
Company's authorized dealer agreements with manufacturers are typically
subject to periodic renewal and to termination on short notice. The
Company's authorized dealer agreements, including those with Compaq,
Hewlett-Packard, Dell, NetFrame and IBM, may be terminated by the
manufacturer without cause on 30 to 90 days' notice or immediately upon the
occurrence of certain events. The loss of a major manufacturer or the
deterioration of the Company's relationship with a major manufacturer could
have a material adverse effect on the Company's business. There can be no
assurance that the Company will continue as an authorized dealer for any
manufacturer, or that the current terms of its dealer agreements and other
manufacturer arrangements, including pricing terms, will not be changed.
Some of these major manufacturers have responded to increasing competition
in the microcomputer industry by discounting prices, which could adversely
affect the profitability of the Company.
COMPETITION
The network integration and management market is highly competitive.
The Company competes with local, regional and national computer retail
chains, network integration specialist companies and manufacturers.
Depending on the customer, the Company competes on the basis of
technological capability, price, breadth of product offerings and quality of
service. Many of the Company's competitors are larger and have greater
financial, marketing and human resources and geographic coverage than the
Company. There can be no assurance that the Company will be able to compete
successfully against existing companies or new entrants to the marketplace.
TECHNOLOGICAL CHANGE
The network integration and management market is characterized by
rapid technological change and frequent introduction of new products and
product enhancements. Although technological change generally increases
demand for the Company's services, there can be no assurance that the
<PAGE>
Company's current manufacturers and suppliers will be able to achieve the
technological advances necessary to remain competitive, or that the Company
will be able to obtain authorizations from new manufacturers or for new
products that gain market acceptance. In addition, technological change may
effect the value of inventory and spare parts. While the Company maintains
an allowance for obsolescence which it believes is adequate, there can be no
assurance that material adjustments will not be necessary.
DEPENDENCE ON KEY MANAGEMENT AND SERVICE PERSONNEL
The success of the Company has been largely dependent on the skills,
experience and efforts of its senior management and especially its President
and Chief Executive Officer, Michael Grieves. The loss of the services of
Mr. Grieves or other members of the Company's senior management could have a
material adverse effect on the Company's business and prospects. The
Company maintains a key man life insurance policy on Mr. Grieves in the
amount of $1,000,000.
The Company's business is service-oriented and labor-intensive. The
Company believes that its future success will also depend, to a large
extent, on the continued service of its key technical employees and client
and project managers and on its ability to continue to attract and retain
such personnel. Competition for such personnel is intense, particularly for
highly skilled and experienced technical personnel. Such personnel are in
great demand and are likely to remain a limited resource for the
foreseeable future. There can be no assurance that the Company will be able
to attract, retain and motivate such personnel in the future, and the
inability to do so may have a material adverse effect upon the Company's
business, financial condition and results of operations.
POTENTIAL CLAIMS BY PRE-BANKRUPTCY CREDITORS
The order confirming the Company's bankruptcy plan of reorganization
was entered on May 22, 1992. The Plan provided for certain distributions to
holders of claims against the Company which arose prior to the bankruptcy
petition filing and which have been allowed by the bankruptcy court. These
claims were settled, and the settlement was approved by the bankruptcy court
on October 3, 1996. The settlement requires the payment of certain amounts
and the distribution of certain warrants to such claim holders. Amounts due
pursuant to the settlement have been accrued by the Company but have not yet
been paid.
Some persons who may have had prepetition claims against the Company
did not receive distributions because no proper proof of claim was filed or
because the claim was disallowed based on the Company's objection. Those
persons could file a motion in the bankruptcy court asserting that they did
not receive proper notice of (i) the bankruptcy, (ii) the requirement that
they file a claim or (iii) the objection to their claim. The Company
believes that all required notices were given to all known prepetition
creditors of the Company in connection with the bankruptcy. If one of those
assertions could be proved, however, such a person may have the right to
have their prepetition claim allowed and to receive distributions under the
plan of reorganization. The aggregate amount of claims of such creditors is
not readily quantifiable.
CONTROL OF THE COMPANY
The Company's executive officers and directors beneficially own
approximately 39% of the outstanding shares of Common Stock. Since there
are no cumulative voting rights provided for in the Company's Articles of
Incorporation, these persons, if they act in concert, are likely to be in a
position to effectively control the election of the members of the Board of
Directors and to control most corporate actions requiring shareholder
approval.
POSSIBLE DELISTING OF SECURITIES
If the Company's securities are subsequently delisted from the
Nasdaq and the PSE, they may become subject to the so-called "penny stock"
<PAGE>
rule that imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors if the market price per share (as defined) falls below
$5.00. For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received
the purchaser's written consent to the transaction prior to sale.
Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of
shareholders to sell their securities in the secondary market.
In addition, for any non-exempt transaction involving a "penny
stock," the rules require the delivery, prior to the transaction, of a
disclosure schedule relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities.
Finally, monthly statements must be sent disclosing recent price information
for the penny stock held in the account and information on the limited
market in penny stock. Generally, transactions with respect to stock of
issuers having at least $2,000,000 in tangible assets, transactions in which
the customer is an institutional accredited investor and transactions that
are not recommended by the broker-dealer are exempt from the disclosure
rule.
POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of
Preferred Stock. Preferred Stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by shareholders, and may include voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. No Preferred Stock is currently
outstanding and the Company has no present plans for the issuance thereof.
The issuance of any Preferred Stock could affect the rights of the holders
of Common Stock, and therefore, reduce the value of the Common Stock and
make it less likely that holders of Common Stock would receive a premium for
the sale of their shares of Common Stock. In particular, specific rights
granted to future holders of Preferred Stock could be issued to restrict the
Company's ability to merge with or sell its assets to a third party, thereby
preserving control of the Company by its present owners.
SALES PURSUANT TO RULE 144
Approximately 1.3 million shares of Common Stock are "restricted
securities" within the meaning of Rule 144 promulgated under the Securities
Act. Except for 300,000 shares which are held in escrow through no later
than October 28, 1999, these "restricted securities" will be eligible for
sale, subject to the volume limitation and other conditions imposed by Rule
144, on February 5, 1997 upon the expiration of an agreement among certain
shareholders and warrant holders prohibiting sales of such shares until such
date. Under Rule 144, a person holding restricted securities for a period
of two years may, every three months, sell in ordinary brokerage
transactions or in transactions directly with a market maker an amount equal
to the greater of one percent of the Company's then outstanding Common Stock
or the average weekly trading volume during the four calendar weeks prior to
such sale. Future sales of such shares and sales of shares underlying
outstanding warrants or options could have an adverse effect on the market
price of the Common Stock.
USE OF PROCEEDS
The Company will receive all of the net proceeds from the sale of
shares of Common Stock offered hereby. The Company intends to use the
proceeds for general corporate and working capital purposes.
PLAN OF DISTRIBUTION
The shares of Company Common Stock are issuable from time to time
upon the exercise of Purchase Warrants by the holders thereof. Upon
exercise of a Purchase Warrant in accordance with the terms thereof, the
<PAGE>
Company shall cause to be delivered, to or upon the written order of such
holder, certificates representing the shares of Common Stock to which such
holder is entitled. The Common Stock issuable upon exercise of the
Warrants, when issued, will be included in the outstanding shares of the
Company listed on Nasdaq and the PSE. The Company will pay the expenses
incident to the registration of the securities being offered hereby.
Pursuant to the terms of the Underwriting Agreement dated October
28, 1994 between the Company and the Representative, the Company agreed that
it would allow a commission of 7% to the Representative upon exercise of any
Purchase Warrant which is exercised after October 28, 1995, a portion of
which commission may be reallowed to other members of the National
Association of Securities Dealers, Inc. ("NASD"), provided that (i) at the
time of exercise, the market price of the Common Stock is then higher than
the exercise price of the Purchase Warrant; (ii) the exercise was solicited
by an NASD member; (iii) the Purchase Warrant was not held in a
discretionary account; (iv) disclosure of the compensation arrangements has
been made in documents provided to customers, both as part of the IPO and at
the time of exercise; and (v) the solicitation of the exercise of the
Purchase Warrant did not violate Rule 10b-6 promulgated under the Exchange
Act. The Representative is not entitled to a commission on any Purchase
Warrant exercised without solicitation by the Representative.
DETERMINATION OF OFFERING PRICE
The offering price of the Common Stock issuable upon exercise of the
Purchase Warrants was contractually established between the Company and the
Representative in connection with and at the time of the IPO.
TRANSFER AGENT
The Transfer Agent for the Common Stock and the Purchase Warrants is
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York 10005.
LEGAL MATTERS
The validity under Michigan law of the authorization and issuance of
the shares offered hereby will be passed upon for the Company by Dykema
Gossett PLLC, Detroit, Michigan.
EXPERTS
The balance sheet as of December 31, 1995, and the statements of
operations, stockholders' equity and cash flows for the year ended December
31, 1995, included in the Form 10-K which is incorporated by reference in
this Prospectus, have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as indicated by their report with respect
thereto, and are incorporated herein upon the authority of said firm as
experts in accounting and auditing.
The balance sheet as of December 31, 1994, and the statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1994 and 1993, included in the Form 10-K which is incorporated by
reference in this Prospectus, have been audited by Deloitte & Touche LLP,
independent certified public accountants, as stated in their report with
respect thereto, and are incorporated herein in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
