1
As filed with the Securities and Exchange Commission on November 6, 1997.
Registration No. 333-33597
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
DAYTON GENERAL SYSTEMS, INC.
(Name of small business issuer in its charter)
Pennsylvania 7372 31-1551295
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number Identification Number)
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Address and telephone number
of principal executive offices and principal place of business)
THOMAS C. HAAS
DAYTON GENERAL SYSTEMS, INC.
2492 TECHNICAL DRIVE
MIAMISBURG, OHIO 45342
(937) 847-7800
(Name, address
and telephone number
of agent for service)
COPIES TO:
TIMOTHY E. HOBERG, ESQ. CHARLES F. HERTLEIN, JR., ESQ.
Taft, Stettinius & Hollister Dinsmore & Shohl LLP
1800 Star Bank Center 1900 Chemed Center
425 Walnut Street 255 East Fifth Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(513) 381-2838 (513) 977-8200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
____________________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] ___________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
DAYTON GENERAL SYSTEMS, INC.
900,000 UNITS
$10.00 per Unit
Each Unit Consisting of
Two Shares of Common Stock
and One Common Stock Purchase Warrant
Dayton General Systems, Inc. (the "Company") is offering for sale a
minimum of 550,000 Units and, together with certain shareholders of the Company
(the "Selling Shareholders"), a maximum of 900,000 Units (the "Offering"). The
per Unit offering price is $10.00. Each Unit consists of two shares of the
Company's common stock, no par value (the "Common Stock"), and a warrant (the
"Warrant") to purchase one share of Common Stock at an exercise price of $6.50
per share. The Common Stock and Warrants will become separately transferable 90
days after the date the subscription purchase funds held in escrow are released
into the Company's account (the "Escrow Release Date"). The Warrants will be
exercisable for a period of five years from the date of this Prospectus.
After the sale of the initial 550,000 Units, an additional 350,000
Units will be offered ratably by the Company, which is offering up to 332,000
additional Units, and the Selling Shareholders, who are offering up to 18,000
Units (the "Selling Shareholders' Units"). See "Selling Shareholders." The
Warrants included in the Selling Shareholders' Units will be issued by the
Company, and the Selling Shareholders will reimburse the Company at the rate of
$0.10 per Warrant sold. The Company will not receive any other proceeds from the
sale of the Selling Shareholders' Units; however, the Company will receive
proceeds from the exercise, if any, of the Warrants included in the Selling
Shareholders' Units. See "Use of Proceeds."
The Offering is being made on a "best efforts" basis through J. V.
Delaney & Associates (the "Underwriter"). Prior to the Offering there has been
no public market for the Company's Units, Common Stock or Warrants. The initial
public offering price of the Units and the exercise price and other terms of the
Warrants have been arbitrarily determined by negotiation between the Company and
the Underwriter and are not necessarily related to or indicative of the
Company's assets, book value, financial condition or any other recognized
criteria of value. Application has been made for quotation of the Units, Common
Stock and Warrants on The Nasdaq SmallCap Market under the proposed symbols DGSU
for the Units, DGSI for the Common Stock and DGSW for the Warrants. See
"Description of Securities" and "Underwriting."
________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
________________
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================================================================================
Underwriting Proceeds to the Proceeds to Selling
Price to Public Commissions(1) Company (2) Shareholders(3)
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Per Unit $10.00 $1.00 $9.00 $9.00
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Total Minimum $5,500,000 $550,000 $4,950,000 ---
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Total Maximum $9,000,000 $900,000 $7,938,000 $162,000
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(See Notes on following page)
During the Offering, all subscription amounts will be held in escrow
with the National Bank of Southern California (the "Escrow Agent"). Unless
extended, the Offering will begin on the date of this Prospectus and end on
__________, 1998, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of
6-1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any
such case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate
of 6-1/2% per annum from the date of deposit with the Escrow Agent. See
"Underwriting."
SUBSCRIPTIONS MAY NOT BE WITHDRAWN OR CANCELLED DURING THE OFFERING.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed. The Offering also
may be cancelled without notice.
J.V. Delaney & Associates
Established in 1981
The date of this Prospectus is _________ __, 1997
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Notes
(1) Two points (2%) of the commissions payable to the Underwriter have been
denominated as an investment banking fee. Does not reflect additional
compensation to be received by the Underwriter in the form of the grant of
warrants (the "Underwriter's Warrants"), at a price of $.0005 per Warrant, to
purchase up to 72,630 Units, at 125% of the initial public offering price per
Unit, exercisable for a period of four years beginning one year from the date of
this Prospectus. Additionally, the Company has agreed to indemnify the
Underwriter against certain liabilities under the Securities Act
of 1933 (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$250,175 and a non-accountable expense allowance of between $165,000 (if the
minimum number of Units is sold) and $264,600 (if the maximum number of Units is
sold) payable to the Underwriter by the Company, of which $80,500 has been
advanced by the Company, and before deducting offering expenses payable by the
Selling Shareholders proportionate to the number of shares sold by them.
Excludes proceeds of $0.10 per Warrant, up to a maximum of $1,800, payable by
the Selling Shareholders to the Company. See "Underwriting."
(3) Before deducting $0.10 per Warrant, up to a maximum of $1,800, payable by
the Selling Shareholders to the Company.
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The Company intends to distribute to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
This Prospectus makes reference to the trademarks of other companies.
LonWorks(R), LON(R), LonBuilder(R) and Neuron(R) are trademarks of Echelon
Corporation registered in the United States and other countries. Windows(R) and
Windows NT(R) are registered trademarks of Microsoft Corporation. MFC(R) is a
registered trademark of Lis Holdings Limited. QNX(R) is a registered trademark
of Quantum Software Systems, Ltd. Pentium(R) is a registered trademark of Intel
Corporation. UNIX(R) is a registered trademark of Unix System Laboratories, Inc.
VMS(R) is a registered trademark of Digital Equipment Corporation.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read
in conjunction with the more detailed information and Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus has been adjusted to give effect
to a 1,000-for-1 split of the Company's Common Stock in connection with the
Company's re-incorporation in the Commonwealth of Pennsylvania on October 9,
1997. As used in this Prospectus, the term the "Company" or "DGS" means Dayton
General Systems, Inc. unless the context indicates otherwise.
THE COMPANY
The Company has its origins in the Controls Division of the General
Motors Corporation. In March 1993, Mr. Thomas C. Haas, former Treasurer of
Tomkins Corporation, the holding company for the U.S. operations of Tomkins PLC
(Philips Industries, formerly a Fortune 500 company, Smith & Wesson and Murray
Ohio) incorporated DGS, Inc., which purchased the assets which now comprise the
Company. See "History of the Company." DGS's profitable core business has been
designing, building, installing and servicing state-of-the- art computerized
building automation systems. These systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other facility functions. DGS markets a
combination of these products and services to the facilities management
industry. DGS's systems are currently installed in high-rise buildings,
manufacturing facilities, wastewater treatment plants and educational
institutions, including the General Motors Building in New York City and the
entire University of Pennsylvania. See "Business-Products: Building Control
Products."
Although DGS plans to continue servicing its installed base of building
automation systems, it has recently changed its focus to becoming a software
technology solution provider to an emerging segment of the control and
automation industry marketplace. Company management has identified a major
technological revolution from closed control systems, where customers were
"locked in" to one vendor's control devices, to open control systems, where
customers decide which mix of vendors' devices they will use in their control or
automation systems. See "Business-Industry Overview: The Old Technology" and
"-: The New Technology."
A driving force in this technology revolution is the development by
Echelon Corporation of its LonWorks control network, forming the foundation of
an open control system. At the heart of this network is the Neuron C computer
chip developed by Echelon. The Neuron C chip includes three dedicated
microprocessors, integrated input and output hardware and drivers and internal
timers for real-time control. It is programmed in high-level (Neuron C)
programming language. Lonworks Network Services ("LNS") architecture provides
the functionality of the LonWorks control network and allows maintenance,
control and multiple non-proprietary device access to the network. See
"Business-Industry Overview: LonWorks Control Network."
Configuration of the network, however, currently requires knowledge of
the programming language Neuron C. Coding a control application in Neuron C (a
derivative of ANSI C) requires that the configuration engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged. This adds expense and delay.
DGS estimates that a programmer using Neuron C language to develop a building
automation solution or application with LonWorks technology will devote
approximately 25% of the total project time to program coding, 25% to
documentation of the application and as much as 50% to code debugging. See
"Business-Industry Overview: The LonWorks Network Services."
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In response, DGS has developed a complementary graphical programming
tool, VisualControl, which can reduce project development time by over 75%.
VisualControl significantly simplifies access to, monitoring and modification
of, the LNS architecture functions.
The commercial value of VisualControl necessarily derives from LNS
architecture. LNS technology was commercially released in April 1997. DGS
believes that, as of November 1997, VisualControl is the only product of its
type to work with LNS.
VisualControl saves time, manpower and money in the implementation of
LonWorks technology by eliminating the need to program. VisualControl provides
control product designers, systems integrators (SIs) and end users a Windows 95
and Windows NT operating environment for configuring the control network.
VisualControl includes standard IEC-1131 device blocks that allow the engineer
to view the control scheme from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable commercialized software product
designed for control network technology product development that (i) functions
as a network/Windows NT graphical user interface, (ii) generates user defined
control strategies or modifications and (iii) functions as a control network
management tool. Although it may be possible to develop software with the
multiple functionality described above, DGS is not aware of any software which
has been created specifically for LonWorks control networks or products in the
precise manner of the VisualControl software.
VisualControl also permits Local Operating Network ("LON")
configuration without knowledge of Neuron C. VisualControl virtually eliminates
the possibility of syntax errors, compiles the network devices, configures the
variable passing routines and self documents the application.
Additionally, DGS believes VisualControl can alleviate the numerous
problems that designers, contractors and end-users can typically encounter in
the development of control network design by materially enhancing the
functionality and reliability of control application products.
DGS believes that VisualControl's features make it a significant add-on
product for use by the control industry. Additionally, DGS believes that
original equipment manufacturers (OEMs), control product developers, value added
resellers (VARs), systems integrators (SIs) and end users of LonWorks systems
can improve the overall functionality of their applications with the
VisualControl technology set. DGS has also developed other new software
products. See "Business-Industry Overview: VisualControl" and
"Business-Products: VisualControl."
DGS believes it can become a major player in the building control and
industrial automation industry by marketing its new product -- VisualControl,
developing other software products and acquiring other companies.
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THE OFFERING
Units Offered by the 550,000 Units if the minimum number of
Company.......................................... Units is sold or 882,000 Units if the
maximum number of Units is
sold. Each Unit consists of
two shares of Common Stock and
one Warrant. The Common Stock
and Warrants are detachable
and separately transferable 90
days from the Escrow Release
Date. See "Description of
Securities."
Units Offered by the Selling Up to 18,000 Units (to be sold only after
Shareholders..................................... the minimum number of Units is sold). The
Warrants included in these
Units will be issued by the
Company.
Offering Price................................... $10.00 per Unit
Warrants......................................... Each Warrant will be exercisable to purchase
one share of Common Stock, at a price of
$6.50, for a period of five years from the
date of this Prospectus. See "Risk Factors"
and "Description of Securities."
Common Stock Outstanding
Prior to the Offering (1)........................ 1,281,286 shares
Common Stock to be Outstanding
after the Offering if the
Minimum Number of Units is
Sold (1)(2)...................................... 2,381,286 shares
Common Stock to be Outstanding
after the Offering if the
Maximum Number of Units is
Sold (1)(3)...................................... 3,045,286 shares
Warrants to be Outstanding if the
Minimum Number of Units is
Sold (1)(2)...................................... 550,000
Warrants to be Outstanding if the
Maximum Number of Units is
Sold (1)(3)...................................... 900,000
Use of Proceeds.................................. The Company intends to use the net
proceeds of this Offering to establish sales,
marketing and distribution infrastructure for
its software products, for research and
development, to purchase additional
computer hardware and software, for
potential acquisitions and for working capital.
See "Use of Proceeds."
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Risk Factors..................................... An investment in the Units involves a high
degree of risk and immediate substantial
dilution. See "Risk Factors" for a discussion
of certain factors that should be considered
by prospective purchasers of the Units.
Recent Developments.............................. See "Management's Discussion and Analysis or Plan
of Operation" for certain financial information for
the Company's third quarter ended September 30, 1997.
Federal Tax Considerations....................... For certain federal tax considerations which may be
applicable to purchasers in the Offering, see
"Certain Federal Tax Considerations."
Proposed Nasdaq SmallCap Market Units: DGSU
Symbols.......................................... Common Stock: DGSI
Warrants: DGSW
(1) Excludes 50,000 shares of Common Stock issuable upon exercise, at a price of
$0.90 per share, of outstanding warrants issued to two shareholders of the
Company (the "1996 Warrants"), 13,229 shares of Common Stock issuable upon
exercise, at a price of $4.95 per share, of outstanding warrants issued to the
Underwriter as compensation for assisting the Company in privately placing
shares of Common Stock (the "Broker's Warrants") and 175,000 shares of Common
Stock issuable upon exercise of outstanding stock options. See "Capitalization."
(2) Excludes 88,770 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 44,385 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
(3) Excludes 145,260 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants, 72,630 shares of Common Stock issuable upon exercise of
the Warrants included in the Underwriter's Warrants and 75,000 shares of Common
Stock issuable upon exercise of stock options to be granted on or after
completion of the Offering. See "Management-Stock Option Plan" and
"Underwriting."
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SUMMARY FINANCIAL INFORMATION
Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
STATEMENT OF OPERATIONS
DATA:
Revenues $799,664 $814,629 $423,528 $390,201
Gross profit $524,929 $545,998 $295,958 $260,976
Operating income (loss) $ 6,635 $ 12,023 $43,572 $(150,741)(1)
Income (loss) before taxes $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net income (loss) $ 8,992 $ 14,301 $44,996 $(150,938)(1)
Net loss per common $(0.11)
share
Pro forma net income (2) $ 6,992 $ 11,301 $35,996
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
Weighted average
common shares
outstanding (4) 1,344,569 1,345,895 1,344,569 1,374,615
June 30, 1997
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Pro Forma As Adjusted(5)(6)
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BALANCE SHEET DATA: Actual Pro Forma(5) Minimum Maximum
------ ------------ ------- -------
Working capital $6,794 $212,635 $4,747,635 $7,635,635
Total assets $464,481 $609,322 $5,144,322 $8,032,322
Long term debt --- --- --- ---
Shareholders' equity $114,488 $320,329 $4,855,329 $7,743,329
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(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S-
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Corporation does not pay federal or state income taxes since its
shareholders are liable to pay federal and state taxes on their
proportionate shares of the Company's federal and state taxable income
allocable to them. For purposes of this presentation, federal and state
income taxes have been calculated at an effective rate of 20% for the
years ended December 31, 1995 and 1996, and for the six months ended
June 30, 1996, as if the Company was a C-Corporation for these periods.
See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issued shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
(5) Assumes that the sale, subsequent to June 30, 1997, of 146,286 shares
of the Company's Common Stock, at a price of $1.75 per share, occurred
as of June 30, 1997. The sales were made as part of a private placement
offering which commenced in December 1996 and terminated in July 1997
(the "Private Placement"). See Note O to the financial statements.
(6) Adjusted to reflect the Offering and the use of the Company's net
proceeds from the Offering, after deducting underwriting commissions
and other estimated offering expenses payable by the Company including
the Underwriter's expense allowance. See "Use of Proceeds,"
"Capitalization" and Notes E, F and O to the financial statements.
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RISK FACTORS
An investment in the securities offered by this Prospectus involves a
high degree of risk. Accordingly, prospective investors should consider
carefully the following risk factors, in addition to other information
concerning the Company and its business contained in this Prospectus, before
purchasing the Units offered.
RECENT TRANSITION TO NEW LINE OF BUSINESS. Since 1993, the Company has
operated primarily as a manufacturer, designer, installer and servicer of
building automation systems and hardware. In the last quarter of 1995, the
Company made a strategic decision to develop and market software that
facilitates the design and implementation of control networks. The Company is
now in the early stages of introducing its VisualControl product line, a
software application tool designed to ease the use of Echelon Corporation's
LonWorks control platform. The Company's strategy is to increase substantially
the percentage of its revenues derived from this internally developed software
product line. Implementation of the plan will be subject to all the problems,
delays, expenses and risks inherent in establishing a new business enterprise,
and there can be no assurance that the Company will succeed in this strategy.
The market for this product line is new. If the market fails to develop, if it
develops more slowly than expected or becomes saturated with competitors, or if
the Company's product line does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
RECENT LOSS; RISKS OF ASSUMPTIONS. While the Company has operated
profitably in recent years, it incurred a loss of approximately $151,000 during
the first half of 1997 as it focused its marketing efforts on its VisualControl
product line and other new software products. There can be no guarantee that
losses will not continue. The Company has formulated its business plan and
strategies based on assumptions of the gross revenue that can be generated over
a three year period through the unit sales of software into an emerging
marketplace. These assumptions are based on numerous factors, some of the most
important of which are outside the Company's control. There can be no assurance
that these assessments will prove to be correct.
PRODUCT DEVELOPMENT RISKS. The substantial costs incurred to develop
new software products together with the length of time necessary to complete
such products may result in products that are no longer competitive or that no
longer address customer needs. Further, announcement of new Company products may
cause customers to defer purchases of existing Company software products and may
necessitate substantial modifications to other products under development.
Additionally, it is common for complex software programs such as the Company's
to contain undetected errors when first released which are discovered only after
the product has been used over time with different computer systems and in
varying applications and environments. If the Company fails to release
commercially viable versions of its products, if customers experience
significant problems with implementation of these products or are otherwise
dissatisfied with their functionality or performance, or if the products fail to
achieve market acceptance for any other reason, the Company's business,
operating results and financial condition will be materially adversely affected.
DEPENDENCE ON A SINGLE LINE OF PRODUCTS. For the foreseeable future,
the Company will be dependent upon the sales of a single software tool product
line, consisting of various applications, to generate forecasted revenue growth.
The Company currently has no other product line or service which will support
significant growth.
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DEPENDENCE ON ECHELON LONWORKS AND MICROSOFT WINDOWS. The Company's
VisualControl product line is a software application tool for Echelon
Corporation's LonWorks as used on Microsoft Corporation's Windows operating
systems. VisualControl incorporates certain technology which the Company
licenses from Echelon. The Company currently is certified by Echelon Corporation
as a LonWorks Independent Developer. There can be no assurance that this
relationship will continue, that Echelon will continue to license its technology
to the Company, that Echelon will continue to support the LonWorks product lines
or that the Company will have access to any enhancements. In addition, there can
be no assurance that Echelon will not significantly alter its pricing in a
manner adverse to the Company.
The Company's success currently is dependent on the anticipated use and
acceptance of the Echelon Corporation's LonWorks architecture and, derivatively,
the continued widespread acceptance of Microsoft's Windows 95 and Windows NT.
Although the LonWorks control platform has received favorable industry comment,
it has not yet been widely implemented in the control network market segment.
While Windows operating systems are currently widely used, other companies have
developed or are developing other operating systems that compete, or will
compete, with Windows. In the event that LonWorks fails to achieve market
acceptance or any of these alternative operating systems becomes widely
accepted, demand for the Company's products could be adversely affected. In
addition, Echelon or Microsoft could introduce an enhanced control platform or
operating system to replace LonWorks or Windows or could incorporate some or
many of the key features of the Company's design control products in a new
version of their respective platforms and operating systems, thereby eliminating
the need for users to purchase the Company's products. Any of the negative
developments discussed in this section may have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Products."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately 25% of the
estimated net proceeds from this Offering have been allocated to potential
acquisitions, working capital and general corporate purposes. The Company
intends to pursue acquisitions of software businesses or technology that
complement its existing automation and control software products. Should the
opportunity arise, the Company would consider acquisitions from parties with
which the Company's executive officers and directors are affiliated if such
acquisitions could be made on terms favorable to the Company. See "Certain
Transactions." The Company currently has no commitments with respect to future
acquisitions. Accordingly, the Company's management will have broad discretion
as to the application of the proceeds of the Offering. See "Use of Proceeds."
ANTICIPATED DECLINE IN SOFTWARE PRICES AND GROSS MARGINS. Software
products are subject to price pressures over their life cycles that result in
price declines and reductions in gross profit margins. Reductions in profit
margins for existing and new software products can be expected to occur if the
Company succeeds in increasing its penetration of the control design
marketplace. See "Business--Products."
COMPETITION. The market for software application tool products is
intensely competitive. Competing products can be expected to be introduced by
companies with significantly greater financial, technical, research and
development and marketing resources than the Company and by other software
development companies. These companies may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, sale and support of their
products, than the Company. The Company cannot assure that it will be able to
compete effectively in this environment. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE. The control design technology systems
market is characterized by rapid technological change, changing customer needs,
frequent new software product introductions and evolving industry standards. The
Company believes that its future success will depend upon its ability to enhance
its current product line and to develop and introduce new software product lines
that keep pace with technological developments and
- 11 -
14
emerging industry standards. The introduction of competing products embodying
new technologies and the emergence of new industry standards could render the
Company's existing product line obsolete and unmarketable. Accordingly, the
Company anticipates that significant amounts of future revenue will need to be
derived from product enhancements and new products. If the Company is unable to
develop and introduce product enhancements and new products in a timely and
cost-effective manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially and adversely affected.
PRODUCT DEFECTS. The Company's software products are highly complex and
sophisticated and could, from time to time, contain design defects or software
errors that are difficult to detect and correct. In addition, implementation of
the Company's products generally involves a significant amount of
customer-specific customization, as well as integration with systems developed
by third parties. Difficulties relating to the integration of the Company's
products with other hardware or software in the customer's environment may arise
that are unrelated to defects in the Company's products. Any such defects,
errors or difficulties may cause delays in product introductions and shipments,
result in increased costs and diversion of development resources, require design
modifications or impair customer satisfaction with the Company's products.
PRODUCT LIABILITY. The Company's products may be used by its customers
to perform critical functions. As a result, design defects, software errors,
misuse of the Company's products, incorrect data from external sources or other
potential problems within or out of the Company's control could result in
financial or other damages to the Company's customers. The Company does not
maintain product liability insurance. Although the Company's license agreements
with its customers contain provisions designed to limit the Company's exposure
to potential claims as well as any liabilities and costs arising from such
claims, such provisions may not effectively protect the Company. Any such claim
could have a material adverse effect upon the Company's business, operating
results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success and ability
to compete is dependent in part upon its proprietary technology, including its
software source codes. The Company presently has no registered trademarks or
copyrights and no patents, nor does it have any applications pending. The
Company relies on a combination of trade secret and nondisclosure law, which may
afford only limited protection. The Company is aware that unauthorized copying
occurs within the industry. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties,
including customers who receive listings of the source code for the Company's
products pursuant to the terms of their license agreements with the Company, or
former employees of the Company, may attempt to reverse engineer or copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. As a result, there can be no assurance that unauthorized
use of the Company's technology may not occur. See "Business--Patents,
Trademarks & Copyrights."
PROPRIETARY TECHNOLOGY INFRINGEMENT. In the future the Company may
receive notices claiming that it is infringing the proprietary rights of third
parties and may become the subject of infringement claims or legal proceedings
by third parties with respect to current or future products. Any such claim
could be time consuming, result in costly litigation, cause product shipment
delays or force the Company to enter into royalty or license agreements rather
than dispute the merits of such claims and have a material adverse effect on the
Company's
- 12 -
15
business, operating results and financial condition. See "Business--Patents,
Trademarks & Copyrights."
DEPENDENCE ON KEY EMPLOYEES. The Company's success is largely dependent
on the continued services of certain key members of management, particularly
Thomas C. Haas, the Company's Chief Executive Officer. The Company does not have
employment agreements with any of its key employees. Although the Company is the
beneficiary of a $500,000 insurance policy on the life of Mr. Haas (to be
increased to $1 million), there can be no assurance that this insurance will be
available in the future or that it would be adequate to compensate the Company
for the loss of his services. The loss of Mr. Haas could have a material adverse
effect on the Company's business, operating results or financial condition. The
loss of several other key employees simultaneously or within a relatively short
period of time also could have such an effect. See "Management."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The Company is heavily
dependent upon its ability to attract, retain and motivate skilled technical and
managerial personnel, especially highly skilled engineers involved in ongoing
product development and consulting personnel who assist in the license and
implementation of the Company's product line. In particular, the Company's
ability to install, maintain and enhance its software product line is
substantially dependent upon its ability to locate, hire and train qualified
software engineers. The market for such individuals is intensely competitive.
Given the critical role of the Company's product development and consulting
staffs, the inability to recruit successfully or the loss of a significant part
of its product development or consulting staffs would have a material adverse
effect on the Company. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. The Company
may not be able to retain its current personnel, or be able to attract the
personnel necessary to effectuate the Company's business plan.
MANAGEMENT OF GROWTH. If the Company's products are successful, it
expects to experience growth which will impose significant pressure on operating
procedures, financial resources, information systems and employees. The Company
will need to increase its software production capacity and research and
development expenditures, expand its sales initiatives and increase its
workforce. The Company's business, results of operations and financial condition
could be adversely affected if it is unable to plan and manage anticipated
growth effectively. See "Business--Business Strategy."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. The Company's strategy also
is to grow through the acquisition of companies that will complement its
existing operations or provide it with an entry into new markets. Growth through
acquisitions involves substantial risks, including the risk of improper
valuation of the acquired business and the risk of inadequate integration.
Suitable acquisition candidates may not be available, the Company may not be
able to complete desired acquisitions and future acquisitions may not produce
returns that justify the Company's investment.
The Company may finance future acquisitions with cash from operations
or additional equity or debt financings. The issuance of additional Common Stock
to finance acquisitions may result in substantial dilution to existing
shareholders. Any debt financing could significantly increase the Company's
leverage and involve restrictive covenants which limit the Company's operations.
See "Management's Discussion and Analysis or Plan of Operations--Liquidity and
Capital Resources."
- 13 -
16
If the Company is successful in acquiring additional businesses, the
Company may experience a period of rapid growth which could place significant
additional demands on the Company's management, resources and management
information systems. The Company's failure to manage any such rapid growth
effectively could have a material adverse effect on the Company's business,
operating results and financial condition.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. The Company currently anticipates
that the proceeds of the Offering, together with forecasted cash flow from
operations, will be sufficient to finance operations for twenty-four months.
However, the Company may encounter unforeseen expenses or difficulties that
deplete its capital resources more rapidly than anticipated and require the
Company to seek additional financing. There can be no assurance that additional
capital will be available to the Company, either at all or on acceptable terms,
if and when required, or that such additional capital would not result in
substantial dilution of the equity interest of existing shareholders.
UNDERWRITER'S LIMITED UNDERWRITING EXPERIENCE; RIGHT TO DESIGNATE
DIRECTORS. While the Underwriter has significant experience in corporate
financing and the private placement of securities, the Underwriter has not
previously underwritten any public offering. Accordingly, the Underwriter's lack
of public offering experience may affect the Offering and the subsequent
development of a trading market, if any, in the securities of the Company.
The Company has granted to the Underwriter the right to designate two
members of the Company's Board of Directors for a period of three years from
the date of this Prospectus or, in the alternative, to designate two persons to
serve as advisors to the Board (subject to approval by the Board). To date, the
Underwriter has not designated any members of the Company's Board of Directors
or designated any persons to serve as advisors to the Board. If the Underwriter
should exercise its right to designate members of the Board, there can be no
assurance that these persons would work harmoniously with the Company's other
directors and management or that disputes over Company goals and strategies
would not result. See "Underwriting."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
quarterly results are subject to fluctuations from a wide variety of factors
including, but not limited to, new product introductions, domestic and
international economic conditions, customer budgetary considerations, the timing
of product upgrades and customer support agreement renewal cycles. As a result
of the foregoing factors, the Company's operating results for any quarter are
not necessarily indicative of results for any future period.
ARBITRARY DETERMINATION OF OFFERING PRICE. The price at which the Units
are being offered and the exercise price of the Warrants included in the Units
were arbitrarily determined by negotiation between the Company and the
Underwriter. The initial offering price of the Units and the exercise price of
the Warrants are not necessarily related to or indicative of the Company's
assets, book value, earnings, net worth or any other recognized criteria of
value. The Unit price of this Offering and the exercise price of the Warrants
should not be construed as an indication of any future market price for the
Company's Common Stock.
NO ASSURANCE OF PUBLIC MARKET; VOLATILITY OF PRICE. Prior to this
Offering, there has been no public trading market for the Units, Common Stock or
Warrants. Although it is currently anticipated that the Units, Common Stock and
Warrants will be listed on The Nasdaq SmallCap Market ("Nasdaq"), there can be
no assurance that a regular trading market for these securities will develop
after this Offering or that, if developed, can be sustained. Therefore,
purchasers of the Units may be unable to resell the securities at or near their
original offering price or at any price. Furthermore, it is unlikely that a
lending institution will accept the Company's securities as pledged collateral
for loans even if a regular market develops. The trading price of the Units,
Common Stock and Warrants could be subject to wide fluctuations in response to
quarterly variations in the Company's operating results, announcements by the
Company or others, developments affecting the Company and other events or
factors. Additionally, the small public float will result in high price
sensitivity even on low trading volume. See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. Continued inclusion on Nasdaq will require the Company
to have a $1,000,000 market value of
- 14 -
17
its public float, a minimum bid price of $1.00 per share, two market makers and
either net tangible assets of $2,000,000, net income of $500,000 in the most
recent fiscal year or in two of the last three years or a market capitalization
of at least $35,000,000. Failure to meet Nasdaq's maintenance criteria may
result in the delisting of the Units, Common Stock and Warrants. Thereafter,
trading, if any, in these securities would be conducted outside Nasdaq in the
over-the-counter market. As a result, an investor might find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
securities. In addition, if the Common Stock were delisted from trading on
Nasdaq and the trading price of the Common Stock were less than $5.00 per share,
trading in the Common Stock would be subject to certain rules promulgated under
the Securities Exchange Act of 1934, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any equity security outside Nasdaq that has a market
price of less than $5.00 per share). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and its risks, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors (generally institutions). In particular, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage them from effecting transactions in the Common Stock, thereby
severely limiting the market liquidity of the Common Stock and the ability of
purchasers in this Offering to sell the Common Stock in the secondary market.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus under the Securities
Act of 1933 (the "Securities Act") which will permit the purchase and sale of
the Common Stock underlying the Warrants, but the Company may not be able to do
so. Also, although the Company intends to qualify the shares of Common Stock
underlying the Warrants for sale in those states in which the Units are to be
offered, such qualification may not occur. Holders of the Warrants may be
deprived of their value if a prospectus covering the shares issuable upon
Warrant exercise is not kept effective or if such underlying shares are not, or
cannot be, qualified in the applicable states. See "Description of
Securities--Warrants."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of
shares of the Company's Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock.
Upon completion of the Offering, the Company will have a minimum of 2,381,286
shares and a maximum of 3,045,286 shares of Common Stock outstanding (assuming
no exercise of outstanding stock options and warrants and without giving effect
to the exercise of the Warrants included in the Units or the Underwriter's
Warrants). The 1,100,000 (minimum) and the 1,800,000 (maximum) shares of Common
Stock included in the Units offered will be freely tradeable without restriction
under the Securities Act. The remaining shares of outstanding Common Stock
(1,281,286 shares if the minimum number of Units is sold and 1,245,286 shares if
the maximum number of Units is sold) are held by existing shareholders. Of
these, 221,286 currently are unrestricted. The remainder may not be resold
unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including Rule 144 under the Securities
Act. Upon completion of this Offering (if 550,000 Units are sold), 416,286
shares of Common Stock may be sold immediately without regard to the volume,
manner of sale and other restrictions of Rule 144 and an additional 30,000
shares of Common
- 15 -
18
Stock will become eligible for sale 90 days later in compliance with the
restrictions of Rule 144. All of the outstanding shares owned by the Company's
executive officers and directors (815,000 shares) are subject to "lock-up"
agreements expiring 12 months after the date of this Prospectus and may be sold
during that period only with the prior written consent of the Underwriter. The
Underwriter, in its sole discretion, and at any time without prior notice, may
release all or any portion of the Common Stock subject to the lock-up
agreements. When the lock-up restrictions lapse, these 815,000 shares of Common
Stock will be eligible for sale in compliance with the restrictions of Rule 144.
The remaining shares outstanding prior to this Offering will be eligible for
sale in compliance with the restrictions of Rule 144 beginning in early 1998.
There are no current or anticipated agreements or other understandings between
the Underwriter and the Selling Shareholders as to any transaction other than as
disclosed in this Prospectus. See "Shares Eligible for Future Sale."
DILUTION. Purchasers of the Units will experience immediate and
substantial dilution in the net tangible book value per share of the Common
Stock of between $2.48 and $2.99 based upon an initial public offering price of
$5.00 per share. See "Dilution."
NO DIVIDENDS. The Company currently intends to retain any earnings for
operations and the expansion of its business and does not anticipate paying any
dividends in the foreseeable future.
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET
PRICE OF CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS AND THE
PENNSYLVANIA BUSINESS CORPORATION LAW. Certain provisions of the Company's
Articles of Incorporation and By-Laws and the Pennsylvania Business Corporation
Law (the "PBCL") may discourage certain transactions involving a change in
control of the Company. For example, the Company's Articles of Incorporation
contain provisions which (i) permit the Board to issue "blank check" preferred
stock without shareholder approval and (ii) prohibit the Company from engaging
in certain business combinations with a holder of 20% or more of the Company's
voting securities without super-majority board or shareholder approval. These
provisions and certain provisions of the PBCL could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock. See "Description
of Securities--Provisions Affecting Business Combinations and Changes in
Control."
HISTORY OF THE COMPANY
The Company has its origins in the Controls Division of General Motors
Corporation. Systems Research Laboratories, Inc., an Ohio corporation ("SRL"),
purchased the division from General Motors in 1978. In 1984, SRL sold the
division to certain of its employees who had formed Dayton General Systems,
Inc., an Ohio corporation ("Ohio Dayton General"). In 1992, the assets of Ohio
Dayton General were purchased by Computer Health & Safety, Inc., a Delaware
corporation and a supplier of Sun Microsystems computers and CAD/CAM software.
In March 1993, Mr. Thomas C. Haas formed DGS, Inc., an Ohio corporation, which
purchased substantially all of the assets of the Dayton General Systems division
of Computer Health & Safety, Inc, including the Dayton General Systems name. On
October 9, 1997, in anticipation of the Offering, the Company re-incorporated in
Pennsylvania as Dayton General Systems, Inc.
The Company's executive offices are located at 2492 Technical Drive,
Miamisburg, OH 45342. Its telephone number is (937) 847-7800 and its fax number
is (937) 847-7810. The Company's Worldwide web site is "www.visualcontrol.com"
and its e-mail address is "dgs@erinet.com".
- 16 -
19
USE OF PROCEEDS
The following table sets forth, in order of priority of use, the
expected application by the Company of its net proceeds from the Offering. After
deducting underwriting commissions and other estimated offering expenses
(including the Underwriter's expense allowance) payable by the Company, the net
proceeds to the Company are estimated to be approximately $4,535,000 from the
sale of 550,000 Units and approximately $7,423,000 from the sale of 882,000
Units. Other than a fee of $0.10 per Warrant, the Company will not receive any
proceeds from the sale of Units by the Selling Shareholders (although the
Company will receive proceeds from any subsequent exercise of the Warrants
included in those Units).
Minimum Offering Maximum Offering
---------------- ----------------
Percent of Percent of
---------- ----------
Application of Net Proceeds Amount Net Amount Net Proceeds
- --------------------------- ------ --- ------ ------------
Proceeds
--------
Sales, marketing & distribution $1,295,000 29% $1,697,000 23%
Research & development $1,240,000 27% $2,295,000 31%
Computer hardware & software acquisition $ 900,000 20% $1,600,000 22%
Potential acquisitions $ 800,000 17% $1,000,000 13%
Working capital and general corporate $ 300,000 7% $ 831,000 11%
purposes
The allocation of the net proceeds set forth above represents the
Company's estimates based on its current operating plans and on assumptions and
forecasts regarding the sales of its new products. The Company anticipates that
the minimum net proceeds of this Offering, together with forecasted cash flow
generated from operations, will be sufficient to meet anticipated working
capital needs for the next twenty-four months. If the Company's assumptions,
estimates or forecasts prove to be inaccurate, the Company will have to reduce
its operations to a level consistent with available funding. While the Company
does not have any commitments with respect to future acquisitions, the Company
is in the process of evaluating potential acquisition candidates. See "Risk
Factors," "Management's Discussion and Analysis or Plan of Operation" and
"Underwriting."
Pending the uses set forth above, the Company's net proceeds from this
Offering will be invested in short-term, interest bearing, investment grade
securities.
DIVIDEND POLICY
The Company currently intends to retain all earnings for operations and
expansion of its business and does not anticipate paying any dividends in the
foreseeable future.
- 17 -
20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 on an actual basis; pro forma as of such date to reflect the sale
of Common Stock, described in Note (1) below, and the reincorporation of the
Company in Pennsylvania; and pro forma as adjusted as of such date to reflect
the sales described in Note (1) and the reincorporation and as adjusted to give
effect to the sale in this Offering of both the minimum and maximum number of
Units and the application of the estimated net proceeds from each, assuming no
exercise of the Warrants, the Broker's Warrants and the Underwriter's Warrants.
See "Use of Proceeds." This table should be read in conjunction with the
Company's financial statements appearing elsewhere in this Prospectus.
June 30, 1997
---------------------------------------------------
Pro Forma
As Adjusted(2)
---------------------
Actual Pro Minimum Maximum
------ --- ------- -------
Forma(1)
--------
Short-term debt(3) $ 61,000 $ -- $ -- $ --
========= ========= =========== ===========
Long-term debt $ -- $ -- $ -- $ --
--------- --------- ----------- -----------
Shareholder's equity:
Common Stock, no par value, 10,000,000 shares authorized:
1,135,000 shares outstanding; 1,281,286 shares outstanding
as adjusted for the sale of shares in the Private
Placement Offering; 2,381,286 shares outstanding as
adjusted for the sale of the minimum number of Units and
3,045,286 shares outstanding as adjusted for the sale of
the maximum number of
Units (4) 208,846 414,687 4,949,687 7,837,687
Additional paid-in capital 36,168 36,168 36,168 36,168
Accumulated deficit (130,526) (130,526) (130,526) (130,526)
--------- --------- ----------- -----------
Total shareholders' equity 114,488 320,329 4,855,329 7,743,329
--------- --------- ----------- -----------
Total capitalization $ 175,488 $ 320,329 $ 4,855,329 $ 7,743,329
========= ========= =========== ===========
(1) Reflects the sale of 146,286 shares of Common Stock after June 30, 1997 from
the Private Placement Offering and the application of the net proceeds of the
Private Placement Offering. See Note O to the financial statements.
(2) Reflects the transactions set forth in Note 1 and the application of the net
proceeds of this Offering.
(3) See Note E to the financial statements.
(4) Excludes 175,000 shares of Common Stock issuable upon exercise of
outstanding options, 50,000 shares of Common Stock issuable upon exercise of the
1996 Warrants and 13,229 shares of Common Stock issuable upon exercise of the
Broker's Warrants.
- 18 -
21
DILUTION
The pro forma net tangible book value of the Company as of June 30,
1997, as adjusted to reflect the Private Placement, was approximately $253,000
or $0.20 per share of Common Stock. Net tangible book value per share represents
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding (assuming no exercise of the
Company's outstanding stock options or warrants). Assuming the sale by the
Company of 550,000 Units, or 1,100,000 shares of Common Stock (and deducting
underwriting commissions and other estimated offering expenses payable by the
Company, including the Underwriter's expense allowance), the pro forma as
adjusted net tangible book value of the Company as of June 30, 1997 would have
been approximately $4,788,000, or $2.01 per share. This represents an immediate
increase in net tangible book value of approximately $1.81 per share to existing
shareholders and an immediate dilution of $2.99 per share to new investors
purchasing Units in the Offering. Assuming the sale by the Company of 882,000
Units, or 1,764,000 shares of Common Stock (and deducting underwriting
commissions and other estimated offering expenses payable by the Company,
including the Underwriter's expense allowance), the pro forma as adjusted net
tangible book value of the Company as of June 30, 1997 would have been
approximately $7,676,000, or $2.52 per share. This represents an immediate
increase in net tangible book value of approximately $2.32 per share to existing
shareholders and an immediate dilution of $2.48 per share to new investors
purchasing Units in the Offering. The following table illustrates this per share
dilution in net tangible book value per share to new investors as of June 30,
1997:
Minimum Offering Maximum Offering
---------------- ----------------
Initial public offering price per share (1) $5.00 $5.00
Pro forma net tangible book value per share as of
June 30, 1997 $0.20 $0.20
Increase in net tangible book value per share
attributable to new investors 1.81 2.32
Pro forma as adjusted net tangible book value per
share after the Offering 2.01 2.52
Dilution per share to new investors $2.99 $2.48
===== =====
The following table summarizes, on a pro forma basis as of June 30,
1997, as adjusted to reflect the Private Placement, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company for those shares and the average price per share paid by the existing
shareholders and by new investors assuming the sale of both the minimum number
and the maximum number of Units, or a total of 1,100,000 and 1,764,000 shares of
Common Stock, respectively, in the Offering (without giving effect to
underwriting commissions or estimated offering expenses payable by the Company,
including the Underwriter's expense allowance):
- 19 -
22
Shares Purchased Total Consideration
---------------- -------------------
Minimum Units Average Price
- ------------- -------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing shareholders......................... 1,281,286 53.8% $ 476,446 8.0% $0.37
New investors................................. 1,100,000 46.2 5,500,000 92.0 $5.00(1)
--------- ------ --------- ----
Total....................................... 2,381,286 100.0% $5,976,446 100.0%
========= ====== ========== =====
Maximum Units
Existing shareholders(2)...................... 1,281,286 42.1% $ 476,446 5.1% $0.37
New investors(2).............................. 1,764,000 57.9 8,820,000 94.9 $5.00(1)
--------- ----- --------- ----
Total....................................... 3,045,286 100.0% $9,296,446 100.0%
========= ====== ========== =====
(1) Assumes no consideration was paid for the Warrants included in the
Units.
(2) Sales by Selling Shareholders in the Offering will reduce the number of
shares of Common Stock held by existing shareholders to 1,245,286
shares or 40.9% of the total number of shares of Common Stock
outstanding after the Offering, and will increase the number of shares
of Common Stock held by new investors to 1,800,000 shares or 59.1%
of the total number of shares of Common Stock outstanding after the
Offering. See "Selling Shareholders."
The foregoing table assumes no exercise of the Broker's Warrants, the
Underwriter's Warrants, the 1996 Warrants or outstanding stock options (see
"Underwriting," "Capitalization" and "Management -- Stock Option Plan"). To the
extent that these or future options and warrants are exercised, there will be
additional dilution to new investors.
- 20 -
23
SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended
December 31, 1995 and 1996 have been derived from the audited financial
statements of the Company. The selected historical financial data for the six
months ended June 30, 1996 and 1997 have been derived from the Company's
unaudited financial statements. In the opinion of management, the six-month
financial data reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such data and are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1997. The selected financial data are qualified in their entirety, and
should be read in conjunction with the Company's financial statements and the
Notes thereto and "Management's Discussion and Analysis or Plan of Operation"
appearing elsewhere in this Prospectus.
Year Ended Six Months Ended
December 31, June 30,
-------------------- ---------------------
1995 1996 1996 1997
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $ 799,664 $ 814,629 $ 423,528 $ 390,201
Cost of revenues 274,735 268,631 127,570 129,225
---------- ---------- --------- ---------
Gross profit 524,929 545,998 295,958 260,976
Selling, general & administrative 431,533 492,796 231,170 386,475
expenses
Research & development expenses 86,761 41,179 21,216 25,242
---------- ---------- --------- ---------
Operating income (loss) 6,635 12,023 43,572 (150,741)(1)
Interest expense (5,328) (1,702) (95) (595)
Other income 7,685 3,980 1,519 398
---------- ---------- --------- ---------
Income (loss) before taxes 8,992 14,301 44,996 (150,938)(1)
Income taxes --- --- --- ---
---------- ---------- --------- ---------
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)(1)
========== ========== ========= ==========
Net loss per common share $ (0.11)
==========
Pro forma net income (2) $ 6,992 $ 11,301 $ 35,996
========== ========== =========
Pro forma net income per
common share(3) $ 0.01 $ 0.01 $ 0.03
========== ========== =========
Weighted average common shares
outstanding(4) 1,344,569 1,345,895 1,344,569 1,374,615
- 21 -
24
As of As of
December 31, June 30,
---------------------- ----------------------
1995 1996 1996 1997
---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 76,637 $ 46,984 $ 86,586 $ 6,794
Net property and equipment 25,964 24,701 26,531 22,251
Total assets 317,634 315,854 353,779 464,481
Total liabilities 179,939 170,078 190,308 349,993
Shareholders' equity 137,695 145,776 163,471 114,488
- ------------------------------
(1) Includes a total of $155,000 of costs associated with the Company's
strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial
consulting expenses and approximately $15,000 in marketing and related
costs incurred in connection with the Company's corporate financing
plan, approximately $31,000 of expenses associated with a new marketing
executive and other additional employees, and $8,000 in amortization of
capitalized software costs.
(2) Prior to December 20, 1996, the Company had elected to be taxed as an
S-Corporation under Section 1362 of the Internal Revenue Code. As a
general matter, an S- Corporation does not pay federal or state income
taxes since its shareholders are liable to pay federal and state taxes
on their proportionate shares of the Company's federal and state
taxable income allocable to them. For purposes of this presentation,
federal and state income taxes have been calculated at an effective
rate of 20% for the years ended December 31, 1995 and 1996, and for the
six months ended June 30, 1996, as if the Company was a C-Corporation
for these periods. See Note N to the financial statements.
(3) Pro forma net income per common share is calculated using weighted
average common shares outstanding. See Note A-12 to the financial
statements.
(4) Includes adjustments for the effect of recently issues shares of Common
Stock for consideration below the initial public offering price and for
options and warrants with exercise prices below the initial public
offering price. Such Common Stock, options and warrants are treated as
outstanding for all periods presented using the treasury stock method
in determining the dilutive effect of the issuances and warrants. See
Note A- 12 to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
In the last quarter of 1995, the Company made a strategic decision to
develop and sell software for microcomputers that enhances the design,
installation and use of control network
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25
technology. The Company intends to sell its software into the corporate
marketplace through the formation of joint ventures with other companies,
strategic alliances with software distributors and direct and indirect marketing
and sales activities.
The Company's new software product, VisualControl, addresses the
control and automation engineering and end-user marketplace that is based on the
LonWorks control network design platform. The Company also intends to leverage
its technical design expertise to enter into strategic alliances and joint
ventures with other companies to develop software products for a more general
and larger share of the control design market. As a result, the Company's future
revenue mix is expected to shift from predominantly designing, installing and
maintaining building automation systems and hardware, its historical business,
to selling a broad array of software add-ons for applications and application
development in the general control market. The Company's historical revenues and
operating results therefore are not necessarily indicative of future operating
results.
RESULTS OF OPERATIONS
The Company's strategic decision to focus its efforts on its
VisualControl product line and other software products has affected the
Company's results of operations. While the Company operated profitably in each
of the two years ended December 31, 1995 and 1996, it reported a loss of
approximately $151,000 during the six months ended June 30, 1997. The 1997
period results were affected by a total of $155,000 of costs associated with the
Company's strategic decision to emphasize its software development activities,
consisting of approximately $101,000 in legal, audit and financial consulting
expenses and approximately $15,000 in marketing and related costs incurred in
connection with the Company's corporate financing plan, approximately $31,000 of
expenses associated with a new marketing executive and other additional
employees, and $8,000 in amortization of capitalized software costs.
The Company's historic revenues have been project related sales which
can be subject to volatile fluctuations when measured on a period-to-period
basis. The Company has recently commercialized the development of software
products for introduction into the distributed control network marketplace and
has done so primarily from operating cash flows. Management believes that, with
additional paid-in capital, increased production capacity and software
distribution capability, the Company will be in position to implement
successfully its business strategy.
The following table sets forth, for the periods indicated, the items
noted as a percentage of net sales:
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26
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1996 1997
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Costs of revenues 34.4 33.0 30.1 33.1
----- ----- ----- -----
Gross profit 65.6 67.0 69.9 66.9
Selling, general & administrative 54.0 60.5 54.6 99.0
Research & development 10.8 5.0 5.0 6.5
----- ----- ----- -----
Operating income (loss) 0.8 1.5 10.3 (38.6)
Interest expense (0.7) (0.2) (0.1) (0.2)
Other income 1.0 0.5 0.4 0.1
----- ----- ----- -----
Income (loss) before taxes 1.1 1.8 10.6 (38.7)
Income taxes --- --- --- ---
----- ----- ----- -----
Net income (loss) 1.1% 1.8% 10.6% (38.7)%
====== ====== ====== =======
Pro forma net income 0.9% 1.4% 8.5%
==== ==== ====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Total revenues decreased approximately 8% from $423,500 to
$390,200 partially due to a decrease in traditional system and software sales of
approximately $76,000. Revenue from systems and software sales, as opposed to
service contracts, has historically been variable from period to period. In the
six months ended June 30, 1997, sales to one such customer were approximately
$55,400 lower than in the comparable period of 1996. Additionally, during the
first half of 1997, the Company focused its marketing efforts on VisualControl
product line and other new software products, and away from its traditional
product lines. Sales of VisualControl and other new products were approximately
$10,300 and $41,100 for the six months ended June 30, 1996 and 1997,
respectively. Service revenues increased approximately $12,000 for the six
months ended June 30, 1997 over the same period last year.
Gross Profit. Gross profit margin for the six months ended June 30,
1997 of 66.9% decreased slightly from 69.9% for the six months ended June 30,
1996. This is primarily a result of increases in service labor costs without a
corresponding increase in the sales price of service contracts.
Expenses. Selling, general and administrative expenses increased
significantly from $231,200 for the six months ended June 30, 1996 to $386,500
for the six months ended June 30, 1997. This increase was principally due to
legal, audit and financial consulting expenses of approximately $101,000, and
marketing and related costs of approximately $15,000, incurred in 1997 in
connection with the Company's corporate financing plan approved in November
1996. The plan included a private placement offering as well as an initial
public offering. In addition, approximately $31,000 of additional expenses
associated with a new marketing
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27
executive and other additional employees hired as part of the strategic plan for
the Company's new products contributed to the increase. Amortization of
capitalized software costs of approximately $8,000 was incurred in 1997 due to
the general release of the Company's VisualControl product line to the market in
April 1997.
Income Taxes. No income tax expense was recorded in 1997 as a full
valuation allowance was recorded against the net deferred tax asset arising from
the net operating loss carryforward generated in 1997. Because the Company was
taxed as an S-Corporation prior to 1997, it had no tax provision in 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Total revenues increased 2% from $800,000 to $815,000 due to
a minor increase in service contract revenue which was offset by a nominal
decline in system and software sales.
Expenses. General and administrative expenses increased from $432,000
to $493,000 or 14% primarily due to increases in salaries and employee benefits,
early stage product research costs and market research costs. Product
development costs declined 47% from $87,000 to $41,000 due to new product
completion and transition into the commercialization phase, whereby $51,747 of
software development costs were capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has financed its business primarily with cash
flow from operations. The Company's strategic decision made in late 1995 to
develop and market control network software tools altered its traditional
capital needs. In November 1996 the Company's shareholders approved a corporate
financing plan. Pursuant to that authorization, the Company generated $119,650
in net proceeds from the private placement of 75,000 shares of its Common Stock
during the six months ended June 30, 1997, primarily to finance the costs of the
Offering described herein and its business strategy. During July 1997, the
Company raised an additional $256,000 from the private placement of 146,286
shares of its Common Stock. The Company has a short-term commercial bank line of
credit totaling $75,000. As of June 30, 1997, the Company had $14,000 available
under the line of credit.
As of December 31, 1996 and June 30, 1997, the Company had cash and
cash equivalents of $24,480 and $14,907, respectively, and working capital of
$46,984 and $6,794, respectively. Cash provided by (used in) operating
activities in 1996 and the six months ended June 30, 1997 was $58,040 and
($109,916), respectively. The decrease was primarily due to the 1997 net loss.
Cash used in investing activities in 1996 and the six months ended June 30, 1997
was $60,538 and $23,438, respectively. The 1996 and 1997 investing outlays
include $51,747 and $21,388 for software development costs related to control
network products. Cash used in financing activities was $27,008 in 1996 which
was comprised of distributions to shareholders of $59,220 and stock issuance
costs of $20,788, partially offset by proceeds from sale of Common Stock of
$53,000. Cash provided by financing activities in the six months ended June 30,
1997 was $123,781 which was comprised of gross proceeds from the private
placement of 75,000 shares of Common Stock of $131,250, partially offset by
additional stock issuance costs of $68,469. Additionally, the Company borrowed
$61,000 under its line of credit to help fund its operating activities.
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28
Management believes the net proceeds of the Offering, combined with the
Company's net working capital and anticipated cash flow from operations, will be
sufficient to meet capital and liquidity needs for the next twenty-four months.
RECENT DEVELOPMENTS
Although the Company has not prepared complete financial statements
for the quarter ending September 30, 1997, certain unaudited financial
information is available.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996. During the three months ended September 30, 1997, the
Company generated revenues of $221,400. Revenues during the comparable three
month period ended September 30, 1996 were $178,400. This revenue increase of
$43,000 or 24% was due to an increase in traditional system and software sales
of $26,500, an increase in service revenues of $11,100, and an increase in
sales of VisualControl products of $5,400.
Net loss for the three months ended September 30, 1997 was $78,000
compared to a net loss of $27,800 incurred during the three months ended
September 30, 1996. The increased loss was primarily a result of an increase of
$80,700 in selling, general and administrative expenses, partially offset by an
increase in gross profit of $26,800 resulting from the revenue increase
discussed above. Selling, general and administrative expenses were $203,500 for
the three months ended September 30, 1997 compared to $122,800 for the three
months ended September 30, 1996. The increase in selling, general and
administrative expenses was principally due to additional professional fees of
approximately $23,300, and marketing and related costs of approximately $8,500,
incurred in 1997 in connection with the Company's corporate financing plan
approved in November 1996. In addition, approximately $40,500 of additional
expenses associated with a new marketing executive and other additional
employees hired as part of the strategic plan for the Company's new products
contributed to the increase. Amortization of capitalized software costs of
approximately $8,000 was also incurred in 1997 due to the general release of
the Company's VisualControl product line to the market in April 1997.
Balance Sheet Data as of September 30, 1997. As of September 30, 1997,
the Company had cash and cash equivalents of $120,157, working capital of
$127,115, total assets of $625,581, total liabilities of $383,216, and total
shareholders' equity of $242,365.
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29
BUSINESS
DGS is a high technology company in the automation and control
industry.
INDUSTRY OVERVIEW
The industry is comprised of over 60 publicly traded U.S. and foreign
companies. This group includes conglomerates and utilities which generate an
estimated $47 billion in annual control related sales. DGS estimates there are
more than 4,000 other companies worldwide that generate an additional $10
billion in control and automation related sales annually.
Honeywell and Johnson Controls are leaders in this industry.
The Demand. The control market is now undergoing a major technological
shift resulting from new powerful chip technologies. The Company believes that
this shift is analogous to what has occurred in the computing industry, in which
closed mainframe systems have been supplanted by open networks of interoperative
personal computers. In the control market, the power of new hardware and
software has created a strong user demand for solutions that can use a mix of
various vendors' hardware and software (open) rather than the existing single
vendor (closed) solutions. This shift has created a significant market for new
software and software tools.
The major revenue categories within the control and automation industry
have traditionally been (i) space and aviation technology, (ii) home and
building control and (iii) factory and industrial automation and control. DGS
will concentrate on sales to suppliers of products and systems in the building
control segment, and the industrial automation and control segments, of the
second and third of these categories.
The worldwide demand for products and services in the building control
and industrial control and automation industries increased over 10% in 1996. In
the building control market the increase stems from the demand for performance
contracts (energy savings pay for a system upgrade) and integrated facilities
management services for existing buildings. Of the 6,000,000 buildings in Europe
and the United States only a small percentage currently have building control
systems installations.
Industrial automation and control growth is due primarily to the
increasing multi-industry demand for the installation of smart distributed
systems technology (factory and plant automation solutions that use intelligent
distributed sensors and control). As one example, upgrades of industrial and
municipal wastewater treatment control systems comprise a large market.
Currently, over 80% of the 67,000 industrial and municipal wastewater treatment
sites in the United States use old technology. Industry sources estimate that
the industrial control and automation demand will generate over $10 billion in
sales over the next five to seven years.
The Old Technology. In selecting a process control or automation
solution, customers had to decide whether they wanted to use a single
proprietary control system such as those provided by Johnson or Honeywell. Once
the vendor was selected, the customer was committed to the single system. The
customer could not change systems, replace components of the existing system
with components from a different vendor or expand the system without incurring
great expense. A vendor's device could only function with other devices from the
same vendor. The customer was at the mercy of the single vendor whom he had
chosen. This is known as a closed (architecture) system.
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30
The New Technology. Today, the same customer could choose an open
system for his project. That customer can now select the appropriate vendors'
devices that provide the most cost effective automation solution. New technology
enables a Honeywell device, for example, to communicate with a Johnson device.
The customers can upgrade to state of the art devices in the future without
losing their initial investment. This is known as an open (architecture) system.
The introduction of open systems represents a major technological
shift. Thousands of limited function, closed systems currently in use in
building control and automation and control systems will be replaced or upgraded
with PC or other powerful and cost effective technologies. This shift has
created an increasing demand for new, user-friendly software tools to capitalize
on the power of technologies.
Additionally, no central controller or computer is required for
communication in an open system. Sensor and control devices, called nodes,
communicate peer-to-peer using a common protocol. The interaction among nodes
enables a control network to perform multiple complex tasks simultaneously.
The "backbone" of open systems is the communication network, or "device
network." The network is dependent on software to provide communication. The
leading industrial device networks are Devicebus, CAN, SDS, ASI and LonWorks.
DGS believes that the introduction of open systems represents a major
technological shift in the industry. As a direct result, thousands of limited
functionality, vendor-defined systems currently used in building control,
industrial automation and process control will be replaced or upgraded by PC
based applications or systems. Open control systems will be integrated into
enterprise-wide, software solutions to meet the continuing demand for increased
business efficiencies. This fundamental shift from vendor-defined stand alone
control solutions to interoperable user-defined solutions offers a substantial
opportunity for DGS to supply specialized PC based, software tools to a wide
variety of industries using the new open systems technology.
LonWorks Control Network. Technology analysts consider the LonWorks
architecture developed by Echelon Corporation (www.echelon.com) to be the most
technologically advanced and flexible control network design platform available.
The LonWorks system is a multi-industry control networking solution that will
port to any processor. Controllers, sensors, devices with other host CPUs, other
networks, PLCs, actuators, switches and operator interfaces from different
vendors each can be an intelligent device in a LonWorks control network.
Echelon has stated that there are currently ten thousand LonWorks
systems installed worldwide. Echelon has estimated further that it has to date
shipped three million Neuron C Chips and expects to ship eight million such
chips in 1997 and 25 million chips per year by 2000. Generally, these shipments
correspond to an equal number of LonWorks control network devices or nodes
currently or to be installed worldwide. Currently, the installed base of
LonWorks systems is divided between the building control industry (35%), the
discrete and hybrid industrial automation marketplace (35%) and transportation
and other industries (30%). A leading consultant has predicted that the LonWorks
system will become the de facto building industry standard. DGS estimates that
the LonWorks control network design platform will underpin 15% to 25% of all
worldwide building control systems installations by the year 2000. Industry
analysts have forecasted that cumulative 1997-2000 period worldwide overall
building
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31
control marketplace revenue, when combined with building protection systems
revenues, will be in excess of $43 billion.
The LonWorks Network Services ("LNS"). LNS architecture, released by
Echelon in April 1997, provides the functionality of the LonWorks network and
allows maintenance, control and multiple device access to the network.
LonWorks technology is a powerful tool. At the heart of LonWorks
technology is the Neuron C computer chip developed by Echelon. The Neuron C chip
includes three dedicated microprocessors, integrated input and output hardware
and drivers, and internal timers for real-time control. It is programmed in
high-level (Neuron C) programming language. Coding a control application in
Neuron C (a derivative of ANSI C) requires that the engineer be trained as a
programmer and/or a programmer be trained as an engineer. The control function
calls and variable passing routines for the application have to be written for
each individual control scheme and then debugged.
DGS estimates that a programmer using Neuron C language to develop a
building automation application with LonWorks technology will devote 25% of the
total project time to program coding, 25% to application documentation and as
much as 50% to code debugging. To improve the efficiency of such projects, DGS
has developed a graphical programming tool, VisualControl. In DGS's experience,
VisualControl reduces project development time by over 75% resulting in
significant savings in implementation time and engineering costs.
DGS's new software is used to access, monitor and configure the LNS
control network. It is the use and popularity of LNS architecture that the
Company believes will create the market for VisualControl in the control
industry. As of November 1997 DGS believes that VisualControl is the only
product of its type to work with LNS.
VisualControl. VisualControl is a graphical programming tool that
provides control system designers, systems integrators (SIs) or end users with a
powerful link to the Windows 95 and Windows NT operating environment.
VisualControl has standard Windows functions (e.g., tool bars, Multiple Document
Interface, Help files) for ease of configuring the control network. It includes
standard IEC-1131 graphical device blocks that enable the engineer to recognize
the control sequence logic from a familiar blueprint or schematic diagram.
DGS is not aware of any comparable, commercialized software product
designed for control network development that functions as a Windows NT
graphical user interface to the network, generates user defined control
strategies or modifications and functions as a control network management tool.
Although it is possible to develop software with the functionality described
above, DGS is not aware of any software specifically for LonWorks control
networks or products with the features and functions of the VisualControl
software package.
VisualControl also permits LON configuration without knowledge of
Neuron C. VisualControl virtually eliminates the possibility of syntax errors,
compiles the network devices, configures the variable passing routines and self
documents the application. Additionally, DGS believes that VisualControl can
alleviate numerous problems that designers, contractors and end-users encounter
with the development of control network design by shortening development time
and materially enhancing the functionality and reliability of the control
application. In DGS's experience, VisualControl reduces project development time
by over 75% resulting in significant savings in implementation time and
engineering costs.
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32
DGS believes that the VisualControl features and functions make it a
significant add-on product for LonWorks users in the control industry.
Additionally, DGS believes that original equipment manufacturers
(OEMs), control product developers, value added resellers (VARs), systems
integrators (SIs) and end users of existing LonWorks systems can improve the
overall functionality of their applications by using VisualControl technology.
VisualControl provides the control product designer or systems end-user
measurable cost benefits and productivity gains by allowing each to focus on
core professional competencies, rather than learning to be programmers.
VisualControl also improves the operating reliability of the control
system, application or product. The Company has been advised by a building
control system integrator who purchased VisualControl software that, if
VisualControl had been used, such integrator's installation time of a recently
completed project could have been reduced from eight man- months to two
man-months, a major project installation cost savings. DGS believes this
commentary to be highly significant in that industry analysts have estimated
that over 64% of the total expenditures in the building control market are for
the system installation, maintenance and spare parts.
BUSINESS STRATEGY
DGS's business strategy is to establish itself as a leading software
developer that specializes in developing add-ons for Neuron C based distributed
control networks. The pursuit of this strategy requires DGS to invest a portion
of the offering proceeds (see "Use of Proceeds") in relatively high fixed
upfront expenses in the areas of sales, marketing, programming and research and
development, which it believes will enhance DGS's ability to capture an
increasing share of the fast growing high margin markets for products in the
distributed controls arena. DGS is committed to the development of other control
network products and the modification of its VisualControl software with a view
towards capitalizing upon important industry trends. Microsoft and Sun
Microsystems are developing ActiveX and Java communication technologies that
will allow industrial control applications to run over the Internet and on
corporate intranets. DGS believes that a modified version of VisualControl will
be an important component within control applications that run on corporate
intranets.
In the execution of its business strategy DGS believes that it can
exploit four key advantages: (i) it can fill the role of a knowledge-based
technology provider to the industry group, not a competitor, (ii) DGS's
VisualControl product is the only currently available graphical programming tool
that simplifies the creation of an open control network and is a Windows-control
network interface, (iii) willingness exists by large original equipment
manufacturers (OEMs) and system integrators within the industry to purchase
software enhancements from third party vendors like DGS to improve their own
products, and (iv) certain of DGS's officers and directors have substantial
experience in the worldwide sale and distribution of software products into the
corporate marketplace.
The key elements of DGS's business strategy are:
- Expand DGS's software production and customer support capacity
and increase research and development. DGS plans to hire four
programmers immediately, then attract and retain up to six
additional programmers and three systems analysts and acquire
additional computers necessary to support an increased level
of software production capacity, quality control and customer
support.
- Establish DGS's software distribution channels. DGS recently
hired Mr. William C. Kaesche, III. Mr. Kaesche has substantial
experience in sales and marketing from nearly twenty years of
service with Honeywell Inc. DGS is pursuing the control design
software market primarily through strategic alliances and
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33
relationships with software distributors, original equipment
manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software
innovation and existing product interest, DGS intends to hire
two additional Sales and Marketing professionals to contact
the marketplace of LonWorks systems users. In addition to a
direct mail product promotion campaign, the LonWorks Software
print and electronic catalogs and aggressive advertising in
professional trade publications and engineering journals, DGS
is using new communications technology for product promotion,
such as fax on demand.
- Establish the VisualControl brand name as a leader in software
add-ons for the LonWorks based control design platform.
Management intends to establish brand recognition for the
VisualControl software name. As design engineers become
familiar with DGS's software brand name, the Company
anticipates they will purchase later software releases,
upgrades and related tool box products.
- Leverage DGS's intelligent control design knowledge-based
creative capabilities and technical expertise into application
and new product development. Management believes that DGS's
(i) control design experience and history, (ii) controller
hardware manufacturing background, (iii) automated systems
installation experience and (iv) creative understanding of
distributed control technology and its Neuron C programming
capabilities, collectively, represent a major core asset which
will facilitate the rapid development of new software
applications and products. As product designers purchase
VisualControl for application development and solutions, DGS
will offer project consulting services (for a fee) to speed
the completion of customer's application.
- Pursue complementary strategic business and technology
acquisitions. DGS will pursue the acquisition of businesses or
technology that will extend its software distribution
channels, broaden engineering areas of expertise, increase
technology levels or complement its software products. The
control and automation industry remains highly diverse and
fragmented with the majority of participants being small,
localized companies with outdated products or services. DGS
believes that this industry structure and the recent industry
technology transition create substantial acquisition
opportunities. DGS believes that it can exploit these
opportunities by acquiring small companies and improving their
productivity through product technology improvements and
economies of scale.
- Create additional worldwide interest in DGS and its products
through the innovative use of the DGS global web site. The
internet is a powerful marketing tool for technology
companies, and is particularly valuable to DGS in generating
additional awareness of its products and other developments at
DGS. Potential customers are able to download demonstration
versions of the Company's software from the web site for their
evaluation. In May 1997, the Company's web site had over 95
downloads and over 450 visitors from around the world. Many of
the visits expressed interest in becoming a reseller, sales
representative or distributor of the Company's products. DGS
updates the site regularly to encourage repeat visits from
potential clients. The address of DGS's web site is
"www.visualcontrol.com".
DGS believes that the marketplace for control design software and
control products has significantly broadened. The control marketplace is
experiencing demand from participants
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34
such as appliance manufacturers, refining and petrochemical companies, textile
manufacturers, original equipment manufacturers (OEMs) of microprocessors and
consumer electronic equipment, oil and gas producers, automotive companies, data
processing firms, companies within the transportation industry and
telecommunications companies. Virtually all complex telecommunication systems
applications are now developed using some form of open control network
architecture allowing the system wide integration of sensors, circuit boards,
optoelectronics, cable assemblies and wireless components that constitute the
systems signal path. The Company believes it is well positioned to take
advantage of these continuing developments.
PRODUCTS
VisualControl. DGS is marketing a line of VisualControl products and
other LonWorks software enhancements for use with the Windows 95 and Windows NT
operating system with prices that start from $4,495 per base license. The
following table describes DGS's new products:
NEW PRODUCT DESCRIPTION FUNCTION UNIT PRICE
LVC-FULL VisualControl full product. Graphical programmer and $4495
Network Manager.
LVC-GRA VisualControl software single user license. Graphical programmer. $2995
LVC-NET VisualControl software network manager tool. Management of control networks $1995
(Single user license).
LVC-SITE Basic VisualControl software site license. Multiple user LVC-FULL site Negotiable
license.
LVC-TECH Service option. One year technical support, No additional cost for upgrades 10% of site
upgrades and new releases for VisualControl to VisualControl user. license
package.
LUC-11 Hardware. 11 point controller that can be HVAC, process, electrical - $395
programmed with VisualControl. mechanical or automation
controller.
LTF-1001 Signal path "test box" for network Two node test circuit for $1295
input sources control network.
INTERFACE LNS interface card. PC connection to network. $499
CARD
LVC-DEB* VisualControl software network debugger. Debugging tool for control TBA
network architecture.
LVC-SIM* What-if analysis and simulation software for Real time simulation of complex TBA
control networks. control networks.
*Under development
The Company permits discounts of up to 50% from the prices set forth
above to large volume purchases. DGS offers a 90 day software warranty.
VisualControl software has high gross profit margins. As DGS's revenue
shifts from building control to software products, expanding overall margins are
expected to accompany any increase in sales. Software products are, however,
subject to price pressures over their life cycle that result in reduced margins.
DGS anticipates that reductions in profit margins for its software products will
occur as technological advances are made and as the market for software
application tools such as VisualControl becomes more established. For this
reason DGS intends to develop new software products and enhancements.
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35
Other DGS Software Products. DGS is developing a portfolio of new
network software enhancements and control application products with new
functionality (including drivers, control libraries, control network management
and control network integration tools) for a broad range of customers who
develop and use LON based systems and products.
DGS recently has developed a 32 bit driver to enable Ci Technologies,
Inc.'s man- machine interface ("MMI") software, CiTect, to interface the
LonWorks network. This driver is designed to take advantage of DGS's Network
Management software, a real-time monitor for LonWorks control networks. DGS
completed the driver on March 28, 1997 and shipped it to distributors and system
integrators for testing and use in industrial and building automation projects.
The driver was developed in response to strong customer demand in installations
combining LonWorks, CiTect software and the VisualControl Network Manager. The
Company intends to develop additional LNS 32 bit drivers to interface with other
MMIs.
Building Control Products. DGS has two established product lines:
computer systems that automate non-residential dwellings and wastewater
treatment plants and related software tools. DGS's facilities management system
is composed of a single unit host computer, optional local computers and DGS
series controllers.
DGS's software programs allow the user to monitor and control thousands
of points and to coordinate multiple systems. All current DGS systems and
software work on multiple operating platforms (Windows 95, Windows NT, VMS and
QNX (UNIX subset)) and enable the facility operator to monitor and control
through a layered graphical interface. DGS currently manufactures these products
at the Miamisburg facility.
As part of any DGS facilities management project, the customer enters
into a service contract that includes remote, real-time diagnostic system
service provided by DGS's systems analysts. The service contract also includes
software updates, maintenance manuals, installation service, debugging
procedures, on-site training and parts inventory. Service contracts are renewed
annually and are a significant source of DGS's current gross revenue.
DGS's current hardware and software products are supported by manuals
and training and installation services. The following table describes DGS's
current building control products and services, all of which DGS intends to
continue to sell and service:
PRODUCT OR SERVICE DESCRIPTION FUNCTION UNIT
PRICE
- ---------------------------------------------------------------------------------------------------------
Building Automation Hardware and software system. PC based Non residential energy Per
System software modules allow multiple systems management system. project
coordination and point monitoring.
Mark IV Controller Intelligent DDC controller. Controller for up to 64 $835
points.
Mark V Controller Intelligent DDC multi-function controller. Controller for up to 24 $600
points.
LID LonWorks Software and Hardware design consultant. Control design & Per
Independent Developer development services to project
corporate clients.
- 33 -
36
CUSTOMERS
The Company believes that its potential customers are original
equipment manufacturers (OEMs), control product developers, value-added
resellers (VARs), systems integrators (SIs) and end users. The OEMs consist of
large companies which manufacture complete control systems and who would
incorporate the Company's products in their systems. The control product
developers manufacture various hardware items which would be programmed using
the Company's products so that they can be incorporated in control systems.
Value-added resellers create both hardware and software products which would
include the Company's products and which would then be sold to other users.
Systems integrators put together full, or partial, control systems utilizing
software and hardware products generally acquired from other parties, which
would include the Company's products. End users include companies with control
systems, which desire to upgrade or to add new features to existing or future
systems, including those of the Company's products. DGS is initially selling its
VisualControl software products in the LonWorks segment of the control
automation marketplace. DGS has provided over 200 demonstration copies of the
VisualControl product to potential customers.
A major distributor of LonWorks automation products for the system
integrator marketplace stated, "VisualControl is one of the most important tools
available for working with LonWorks technology because it gives the system
integrator a modern, graphical environment to create a custom control sequence.
The product is significant in that it addresses the most important problem
facing control system integrators - how to lower the engineering costs
associated with developing custom control sequences."
The majority of DGS's initial target users are engineers and designers
within corporate multiple-site computing environments. DGS believes that as
engineers and designers become familiar with DGS's new software products, they
will incorporate ("embed") them into numerous control applications with wide
distribution potential in factory automation systems, building and home control
products and process control systems. For example, a manufacturer of wastewater
treatment control solutions can license VisualControl technology and include it
as an enhancement, extension or upgrade to its own existing or new product
lines. A building control and automation manufacturer can include VisualControl
software as a "soft wiring" tool that enables the user to accommodate changes to
a facility's occupancy rate without costly physical re-wiring. The binding done
within VisualControl software is the equivalent of connecting physical wires.
DGS has entered into a formal agreement with Weidmuller EuroLon AB for
their exclusive marketing of VisualControl in Scandinavian countries.
Additionally, the Company is in late-stage negotiations on two other
agreements. One of these is an OEM agreement with Weidmuller GmbH, a
manufacturer of electronics whose products are distributed globally and the
parent of Weidmuller EuroLon AB, pursuant to which VisualControl would be
incorporated into future automated control software and hardware produced by
Weidmuller GmbH. The second is a distribution agreement with Yamatake Co.,
Ltd., which currently supplies approximately 77% of the Japanese building
control market, to distribute VisualControl in Japan.
A list of companies that have purchased VisualControl software since
mid-1996 includes: ANCO Technologies, Inc., BP Chemicals, Inc., Victory
Controls, Co., Leybold Vacuum Products, Inc., Solutions Direct, Yokogawa
Advanced Applications, Inc., Control Solutions, Inc., Mat. Co. Ltd., Encorp,
Inc., Weidmuller EuroLon AB (for use by Volvo) and EMC Engineers, Inc.
The Company has installed its building control products at over twenty
locations. A representative sample is set forth in the following table:
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37
CLIENT LOCATION DGS PRODUCT OR SERVICE
- ----------------------------------------------------------------------------------------------
University of Pennsylvania Philadelphia, Pennsylvania Facilities Management System
Philadelphia Wastewater Treatment Philadelphia, Pennsylvania Process Control
Delco Moraine Dayton, Ohio Energy Management System
General Motors Building New York, New York Fire & Security Systems
Delco Electronics Kokomo, Indiana Security System
Electromotive LaGrange, Illinois Energy Management System
AC Rochester Grand Rapids, Michigan Energy Resource Accounting
Chevrolet Assembly Plant Moraine, Ohio Energy Management System
GM Group Assembly Plant Oshawa, Ontario Maintenance Monitoring System
Harrison Radiator Moraine, Ohio Security System
Oldsmobile Plant Lansing, Michigan Maintenance Dispatch System
RCA Scranton, Pennsylvania Energy Management System
SmithKline Philadelphia, Pennsylvania Multi-Bldg security & access control
======================================================================================================
The Company has service contracts with most of the customers listed in
the above table. The Company believes that these companies constitute potential
end users for its VisualControl and other new software products.
The University of Pennsylvania and the City of Philadelphia accounted
for 38% and 14%, respectively, of total revenues during the six months ended
June 30, 1997, and 48% and 12%, respectively, of total revenues during the six
months ended June 30, 1996. These same two customers accounted for 47% and 12%,
respectively, of total revenues during the year ended December 31, 1996, and 39%
and 26%, respectively, of total revenues during the year ended December 31,
1995. One additional customer accounted for 10% of total revenues during the
year ended December 31, 1995.
MARKETING & SALES
DGS is pursuing the control design software market primarily through
strategic alliances and relationships with software distributors, original
equipment manufacturers (OEMs), value added resellers (VARs) and system
integrators (SIs). To capitalize on its recent software innovation and existing
product interest, DGS intends to hire immediately two additional Sales and
Marketing professionals to contact the LonWorks users marketplace. In addition
to a direct mail product promotion campaign, the LonWorks Software print and
electronic catalogs and aggressive advertising in professional trade
publications and engineering journals, DGS is using new communications
technology for product promotion such as fax on demand.
ENGINEERING & DEVELOPMENT
DGS currently employs four full time software engineers and intends to
hire another four programmers immediately. An additional six programmers and
four systems and control engineers will be added to round out the staff. All of
DGS's current software engineering staff are versed in the application languages
used to develop its products (i.e., ActiveX
- 35 -
38
controls, C++ with MFC, Windows 95 and Windows NT). Equally important, three of
these staff members have extensive backgrounds in controls engineering and
automation coupled with system integration experience in both building and
industrial environments. All of the engineering and development staff is trained
and fluent in the LonWorks hardware and software to which DGS products are
directed.
DGS currently owns hardware resources to conduct its product research
and development and to test and evaluate software products for its target
market. These resources include microcomputers based on Intel P5/P6 Pentium
technology, application software, and CASE tools. DGS also has a complete
electronics shop with hardware design and build capability to support test and
evaluation of its software products. In addition to commercially available
sensors and controllers that DGS uses for testing and evaluating DGS software
products prior to release, the electronics facility permits DGS to construct
proprietary state-of- the-art test boxes and other hardware to further its
advanced software development projects.
Due to the fluidity and speed of change in software development
environments, DGS develops software on two tracks -- enhancement of its current
line of software products and the invention and development of new products
directed at the future control network technology market. Current projects that
will enhance its VisualControl product line include a debugger, a simulator,
drivers for a variety of control system interfaces, and upgrades for its
graphical support tool and network manager. Upgrade activities include using OLE
and ActiveX based 32 bit solutions to integrate "factory floor" input and output
data from DGS network management software to users throughout the enterprise who
use standard office software such as spreadsheets and databases. Certain other
proprietary activities are also underway to penetrate the market.
COMPETITION
To the best of the Company's knowledge, VisualControl is the only
commercialized software product designed for control network technology product
development that (i) functions as a network/Windows NT graphical user interface,
(ii) generates user-defined control strategies or modifications and (iii)
functions as a control network management tool. Additionally, DGS believes that
VisualControl is the only product of its type to work with LNS architecture. DGS
is aware of one possible competitor in the graphical programming area and three
companies that develop network management tools that might become competitors of
the Company.
DGS was one of a few companies that worked closely with Echelon for
over two years as part of the "beta team" developing new 32 bit LNS technology.
This relationship facilitated the Company's development of the VisualControl
software package so that it was available when LNS was introduced in April 1997.
To the Company's knowledge, no other software company took advantage of this
opportunity to create packages specifically for LNS prior to its release.
Companies such as DGS that sell software application tools which
incorporate LonWorks technology must pay royalty fees to Echelon on a per node
basis. Royalty payments to Echelon can be a significant cost to companies
promoting software and hardware for LNS. Recently, Echelon raised its per node
royalty fees. Due, in part, to the Company's beta team role noted above, this
increase will not apply to DGS for at least the next three years. Potential
competitors to DGS, however, will be subject to the new royalty structure which
will raise their costs. The Company believes that this will create a barrier to
those companies wishing to compete with DGS.
- 36 -
39
While there are companies that offer a 16 bit network manager software
and C++ programming software, only DGS offers a combined 32 bit graphical
programming tool and network manager for LNS. The Company believes that
development costs for such technology, coupled with the burden of the new
royalty structure, will tend to discourage new entrants to this market. Perhaps
in response to such barriers, several potential competitors to DGS have sought
an alliance with the Company permitting them to resell VisualControl and thereby
gain entry to the new LNS market.
Notwithstanding the foregoing, the market for software add-on products
is intensely competitive, and there can be no assurance that competing products
will not be introduced at any time. In general, the competitive factors
affecting the market for software and services include: vendor and product
reputation, availability of products on preferred computer and communications
platforms, scalability, integration with other applications, functionality and
features, ease of use, quality of support, documentation and training, product
quality, product innovation, price and the effectiveness of marketing and sales
efforts. The relative importance of each of these factors depends upon the
market segment. Certain of DGS's competitors and potential competitors have
significantly greater financial, technical, research and development and
marketing resources. As a result, they may be able to devote greater resources
to the development, promotion, sale and support of their products than DGS.
PATENTS, TRADEMARKS & COPYRIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary technology, including its software source codes. The Company
presently has no registered trademarks or copyrights and no patents, nor does it
have any applications pending. The Company relies on a combination of trade
secret and nondisclosure law, which may afford only limited protection. The
Company is aware that unauthorized copying occurs within the industry. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties, including customers who receive
listings of the source code for the Company's products pursuant to the terms of
their license agreements with the Company, or former employees of the Company,
may attempt to reverse engineer or copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. As a result,
there can be no assurance that unauthorized use of the Company's technology may
not occur.
In the future the Company may receive notices claiming that it is
infringing the proprietary rights of third parties and may become the subject of
infringement claims or legal proceedings by third parties with respect to
current or future products. Any such claim could be time consuming, result in
costly litigation, cause product shipment delays or force the Company to enter
into royalty or license agreements rather than dispute the merits of such claims
and have a material adverse effect on the Company's business, operating results
and financial condition.
FACILITIES
DGS's corporate offices and manufacturing, research and development
operations are located at 2492 Technical Drive, Miamisburg, Ohio. This 5,000
square foot facility is leased for a term extending through March 31, 1998. The
lease includes a month to month renewal option. DGS believes that its facility
is in good condition, well maintained and suitable for its long-term needs.
- 37 -
40
EMPLOYEES
DGS had 14 employees as of November 1, 1997. Of these, five are engaged
in software development, three in administration and finance and six in sales,
production, customer support and service. None of the Company's employees is
represented by a union, and no work stoppages have occurred.
LEGAL PROCEEDINGS
DGS is a party from time to time to litigation or proceedings incident
to its business. There is no pending or, to the Company's knowledge, threatened
legal proceeding to which DGS is or would be a party.
- 38 -
41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
executive officers and directors of the Company.
Name Age Position
- ---- --- --------
Thomas C. Haas 53 Chairman of the Board, President and Chief
Executive Officer
Edward T. Hurd 59 Director
William R. Winkler 49 Director
William C. Kaesche III 55 Executive Vice President of Sales and Marketing
Jay G. Pollack, Ph.D. 49 Executive Vice President of Research and
Development
Thomas C. Haas has been Chairman of the Board of Directors and Chief Executive
Officer of DGS since its inception in 1993 and has been President since 1996.
From 1991 until 1993, he was self employed reviewing acquisition opportunities
and managing his assets. Mr. Haas served as Treasurer of Philips Industries,
Inc., a Fortune 500 diversified manufacturer of products for the construction,
transportation and material handling industries ("Philips"), from 1984 until
1989 and of Tomkins Corporation, the holding company for the U.S. operations of
Tomkins PLC (Philips, Smith & Wesson and Murray Ohio) from 1989 to 1991. From
1968 until 1984 he had held various financial management and analysis positions
with Philips. In addition to his responsibilities for cash management, budgeting
and strategic planning, Mr. Haas provided financial analytical support for the
acquisitions of over twenty-five companies. During his career, Philips grew from
$100 million to over $930 million in annual sales prior to being acquired by
Tomkins. He received his B.B.A. from Ohio University.
Edward T. Hurd has over 35 years of experience in global automation markets.
He became a director of DGS in July 1997. From 1962 to 1996 Mr. Hurd held many
positions with Honeywell Inc. ("Honeywell"). From 1990 to 1996, Mr. Hurd was
President of the Industrial Business Division of Honeywell and Executive Vice
President of Honeywell from 1995 to 1996. From 1962 to 1990, Mr. Hurd held
positions of increasing responsibility within Honeywell including Director of
Engineering, Vice President of Operations, General Manager and Group Vice
President of the Industrial Automation and Control Division and Worldwide
Industrial Group. He is currently an independent consultant. Mr. Hurd serves as
the Chairman of the Board of Directors of Moore Products Co. and is a director
of Total Control Products, Inc.
- 39 -
42
and Iconics Inc., all of which are in the process control industry. He received
his B.S.E.E. from Drexel University and his M.S.E.E. from the University of
Pennsylvania.
William R. Winkler became a director of DGS in June 1997. He is a Certified
Public Accountant and has been President of Winkler Enterprises, a tax,
accounting and specialty retail business, since 1996. From 1977 to 1996 he was
employed by Philips Industries, Inc. ("Philips"), serving as Corporate
Controller from 1990 to 1996. From 1991 to 1996 he also served as Corporate
Controller of Tomkins Corporation, the holding company for the U.S. operations
of Tomkins PLC (Philips, Smith & Wesson and Murray Ohio). As Corporate
Controller for Philips, Mr. Winkler was part of that company's mergers and
acquisitions team and in that capacity participated in the due diligence effort
on many acquisitions. From 1970 until 1977, he was employed as a Certified
Public Accountant with Deloitte & Touche and was involved primarily in the
audits of large publicly-held clients. He received his B.S. from Drexel
University.
William C. Kaesche, III joined DGS as Executive Vice President of Sales and
Marketing in June 1997. He has had over nineteen years experience with Honeywell
Inc.'s ("Honeywell's") Industrial Automation and Control ("IAC") Division, a
global provider of industrial process control systems, software and services.
During 1996 and early 1997, he served as a consultant to several companies in
the technology industry. From 1987 until 1996, Mr. Kaesche was employed by
Honeywell's IAC Division, in the following capacities: Manager of Business
Development (1994-1996); Director of Marketing and Sales for ICOTRON, a
subsidiary of Honeywell specializing in advanced process control software and
services (1991-1994); Western Regional Sales Manager (1989-1991); and Chicago
Branch Sales Manager (1987-1989). From 1983 to 1987, Mr. Kaesche served as Vice
President Marketing and Sales for August Systems Inc., a manufacturer of fault
tolerant computer systems. He received his B.S.M.E. from Brigham Young
University and his M.B.A. from Keller Graduate School of Management.
Jay G. Pollack, Ph.D. joined DGS as Executive Vice President of Research and
Development in July 1997. Prior to joining DGS, Dr. Pollack was President and
Chief Scientist of Joshua Technology Corporation, a product development
consultancy. From 1987 to 1995, he was a Senior Manager at the University of
Dayton Research Institute. Under his direction, the Institute grew to national
stature and produced several patents and over two hundred technical papers in
support of commercial and governmental sponsors. Dr. Pollack received his Naval
wings in 1978 and spent ten years in increasingly responsible positions in Navy
research and development commands. He received his M.S. and Ph.D. in
Neuroscience from the University of Miami and his B.S. from Colorado State
University.
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43
Directors of the Company are elected annually. Officers of the Company are
elected annually and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the Offering, the Board of Directors will establish
an Audit Committee, initially to be composed of Messrs. Winkler (Chairman), Hurd
and Haas. The Audit Committee will be responsible for reviewing the Company's
financial statements, audit reports, internal financial controls and the
services performed by the Company's certified independent public accountants and
for making recommendations with respect to those matters to the Board of
Directors. The Board of Directors may establish other committees in the future.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive an annual fee of $2,500 as compensation for his or her
services as a member of the Board of Directors. Non-employee directors also will
receive fees of $500 for each Board and Board committee meeting attended in
person and $250 for each telephonic meeting in which the director participates.
A separate committee meeting fee will not be paid if the committee meeting
occurs on the same day as a Board meeting. All directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors and its committees and for other expenses incurred in their
capacities as directors of the Company. All directors own securities of the
Company. Including shares of Common Stock issuable upon exercise of outstanding
stock options which are currently exercisable or are exercisable within 60 days
of November 1, 1997, the directors of the Company as a group will own 35.8% of
the outstanding shares of Common Stock of the Company, assuming the sale of the
minimum number of Units, or 28.2%, assuming the sale of the maximum number of
Units. See "Holdings of Management and Principal Shareholders."
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
paid by the Company in respect of fiscal year 1996, for services in all
capacities, to Mr. Haas, the Company's Chief Executive Officer. No executive
officer earned over $100,000 in salary and bonus for fiscal year 1996.
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44
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
----------------------------------------- ------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
------------------ ------ ------------ ---------- ------------
Position Year Salary Bonus Compensation Options (#) ($)
-------- ---- ------ ----- ------------ ----------- ----
($) ($) (1) ($)
--- --- -------
Thomas C. Haas,
President, Chief
Executive Officer 1996 $82,136 --- --- --- ---
(1) None, other than perquisites which did not exceed the lesser of $50,000
or 10% of salary and bonus.
The Board of Directors has voted to increase Mr. Haas' salary to
$125,600 per annum, effective October 12, 1997.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") provides for the
grant, to the Company's employees, directors and advisors, of options to
purchase up to 300,000 shares of the Company's Common Stock. As of November 1,
1997, options for 175,000 shares of Common Stock, having an exercise price of
between $1.75 and $1.93 per share, had been granted under the Plan including
options to directors and executive officers as follows: Mr. Haas, 50,000 shares;
Mr. Hurd, 25,000 shares; Mr. Kaesche, 25,000 shares; and Dr. Pollack, 25,000
shares. In addition, upon completion of the Offering, the Company will grant
options to purchase 25,000 shares of Common Stock, at the initial public
offering price, to each of Mr. Hurd and Mr. Kaesche. The Company will grant Mr.
Hurd options for 25,000 additional shares, at the then current market price, a
year after the completion of the Offering.
CERTAIN TRANSACTIONS
The Board of Directors of the Company has adopted a policy requiring
that any future transactions, including loans, between the Company and its
officers, directors, principal shareholders and their affiliates be on terms no
less favorable to the Company than could be obtained from unrelated third
parties and that any such transaction be approved by a majority of the
disinterested members of the Company's Board of Directors. If they desire, the
disinterested members of the Board reviewing any such transaction will have
access, at the Company's expense, to the Company's or independent legal
counsel.
The Company has a line of credit with a bank in the aggregate amount of
$75,000, all of which was available to the Company on November 1, 1997. The line
of credit is personally guaranteed by Mr. Haas. In October 1994, the Company
loaned Mr. Haas $18,000, secured by a promissory note, which was originally due
in November 1995 and which bore interest at 8% per annum. Repayment of the
indebtedness subsequently was extended to October 31, 1997. In October 1997, by
vote of the Company's Board of Directors, repayment of the indebtedness was
further extended to October 31, 1998 and the interest rate payable was increased
to 8.5% per annum, with repayment to be made by payroll deduction. As of
November 1, 1997, $17,847 was due the Company under the note.
Prior to July 1997, the Company had no disinterested or independent
directors. Therefore, the loan to Mr. Haas described above was not initially
approved or extended by a disinterested vote. Its further extension in October
1997 was approved by the Company's two disinterested directors, who believe
that the terms of the loan are reasonable, especially in light of Mr. Haas'
personal guarantee of the Company's bank line of credit.
HOLDINGS OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock on November 1, 1997, on an
actual basis and as adjusted to reflect the sale of both the minimum and maximum
number of Units offered by this Prospectus, by (i) each beneficial owner of more
than five percent of the Common Stock immediately prior to the Offering, (ii)
Mr. Haas and each director and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated, all shares are owned directly
and the indicated owner has sole voting and dispositive power over the shares.
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45
Shares Beneficially
Owned
Prior to Offering Shares Beneficially Owned
----------------- -------------------------
After Offering
-------------------------
Minimum Maximum
------- -------
Name Number (Percent) Number (Percent) Number (Percent)
---- ---------------- ---------------- ----------------
Thomas C. Haas(1)(2) 804,000 (60.4%) 804,000 (33.1%) 804,000 (26.0%)
Edward T. Hurd(2) 25,000 ( 1.9%) 25,000 ( 1.0%) 25,000 ( 0.8%)
William R. Winkler 50,000 ( 3.9%) 50,000 ( 2.1%) 50,000 ( 1.6%)
All directors and executive 940,000 (66.8%) 940,000 (37.5%) 940,000 (29.6%)
officers as a group (five
persons)(2)
Vernon F. Brannon(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
James E. Cogan(2) 71,000 ( 5.4%) 71,000 ( 3.0%) 63,000 ( 2.1%) (3)
Daniel B. Lackey(1) 80,000 ( 6.2%) 80,000 ( 3.4%) 80,000 ( 2.6%)
- -------------------------
(1) The address for Messrs. Haas, Brannon and Lackey is 2492 Technical
Drive, Miamisburg, Ohio 45342. Mr. Cogan's address is 502 South
Koenigheim, Suite 2F, San Angelo, Texas 76903.
(2) Includes shares of Common Stock issuable upon exercise of outstanding
stock options and warrants which are currently exercisable or are
exercisable within 60 days of November 1, 1997 as follows: Mr. Haas,
50,000 shares; Mr. Hurd, 25,000 shares; all directors and executive
officers as a group, 125,000 shares; and Mr. Cogan, 24,000 shares.
(3) Gives effect to the sale of 8,000 shares as a Selling Shareholder if
the maximum number of Units are sold. See "Selling Shareholders."
SELLING SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership, by the persons listed below as Selling Shareholders (the
"Selling Shareholders"), of the Company's Common Stock on November 1, 1997 and
as adjusted to reflect the sale of the maximum number of Units offered by this
Prospectus.
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46
Shares Beneficially Shares Beneficially
Owned Prior Shares to Owned After
to Offering Be Offered Offering
----------- ---------- --------
Selling Shareholder Number Number Number Percent
- ------------------- ------ ------ ------ -------
Harold H. Croghan 50,000 20,000 30,000 1.0%
James E. Cogan (1) 71,000 8,000 63,000 2.1%
Church Street Financial 52,000 8,000 44,000 1.4%
Corp.(2)
TOTAL 173,000 36,000 137,000 4.5%
(1) Includes 24,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant. Mr. Cogan is a shareholder and
employee of Church Street Financial Corporation.
(2) Includes 26,000 shares issuable upon exercise, at a price of $0.90 per
share, of an outstanding warrant.
Church Street Financial Corporation ("Church Street") is an investment
research firm that has provided analytical and advisory services to the Company
during 1997, including corporate financing services in connection with the
Private Placement and the Offering. In this connection, the Company is indebted
to Church Street in the amount of $75,000, represented by a note bearing
interest at 8.5% per annum and due on the earlier of the completion of this
Offering or December 15, 1998.
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, without par value, and 100,000 shares of undesignated preferred
stock, without par value. As of the date of this Prospectus, the Company's
outstanding securities consist of 1,281,286 shares of Common Stock. No shares of
preferred stock have been issued. The following description of certain matters
relating to the capital stock of the Company is a summary and is qualified in
its entirety by the provisions of the Company's Articles of Incorporation and
By-Laws and by the Pennsylvania Business Corporation Law (the "PBCL").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. Subject to preferences which may be granted to
holders of any outstanding preferred stock, holders of Common Stock are entitled
to receive dividends when, as, and if declared by the Board of Directors out of
legally available funds. In the event of liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and after the provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption privileges applicable to the
Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock issued in this Offering will be, fully paid and nonassessable. The
vote of holders of a majority of all outstanding shares of Common Stock is
required to amend the Articles of Incorporation and to approve mergers,
reorganizations and similar transactions.
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47
PREFERRED STOCK
Up to 100,000 shares of preferred stock may be issued from time to time
in series having such designations, preferences and rights, qualifications, and
limitations as the Board of Directors may determine without any approval of
shareholders. Preferred stock could be given rights, including voting and/or
conversion rights, which would adversely affect the voting power and equity of
holders of Common Stock and could have preferences to Common Stock with respect
to dividend and liquidation rights. Issuance of preferred stock could have the
effect of acting as an anti-takeover device to prevent a change in control of
the Company. The Company currently has no plans to issue any preferred stock.
WARRANTS
The shares of Common Stock and Warrants offered as Units hereby are
detachable and separately transferable 90 days from the Escrow Release Date.
Each Warrant entitles its holder to purchase one share of Common Stock, at a
price of $6.50. Warrants are exercisable at any time until their expiration at
3:00 p.m., Cincinnati time, five years following the date of this Prospectus.
The exercise price of the Warrants is subject to adjustment under certain
circumstances, including but not limited to, the Company selling shares of
Common Stock for a price per share less than the prevailing fair market price of
shares of Common Stock, issuing any shares of Common Stock as a dividend or
subdividing or combining the outstanding shares of Common Stock into a greater
or lesser number of shares. Warrants may be exercised by completing and signing
the notice of exercise forms attached to the Warrants and mailing or delivering
them (together with the Warrants) to The Fifth Third Bank (the "Warrant Agent")
in time to reach the Warrant Agent prior to their expiration, accompanied by
payment in full of the warrant exercise price. Payment of the warrant exercise
price must be made in United States currency by check, cash or bank draft
payable to the order of the Company. A certificate representing the shares of
Common Stock issuable upon exercise of the Warrants will be issued as soon as
practicable after receipt of the holder's request, exercise notice and payment.
Copies of the Warrant Agreement are available for inspection upon request to the
Company. The Company has reserved a sufficient number of shares of Common Stock
for issuance upon exercise of the Warrants, and such shares, when issued, will
be fully paid and nonassessable.
Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus which will permit
the purchase and sale of the Common Stock underlying the Warrants, but there can
be no assurance that the Company will be able to do so. Although the Company
intends to qualify the shares of Common Stock underlying the Warrants for sale
in those states in which the Units are to be offered, no assurance can be given
that such qualification will occur. Holders of the Warrants may be deprived of
their value if a prospectus covering the shares issuable upon Warrant exercise
is not kept effective or if such underlying shares are not, or cannot be,
registered in the applicable states.
Holders of the Warrants may be able to sell the Warrants if a market
develops rather than exercise them. Although application has been made to list
the Warrants on The Nasdaq SmallCap Market, there can be no assurance that
trading market for the Warrants will develop or, if developed, can be sustained.
- 45 -
48
A holder of Warrants is not entitled to vote, receive dividends or
exercise any rights as a shareholder in respect of the shares of Common Stock
underlying the Warrants until the Warrants have been duly exercised and payment
of the exercise price has been made.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Provisions of the Company's Articles of Incorporation, By-Laws and the
PBCL may have the effect of delaying, deferring or preventing a change in
control of the Company as a result of an extraordinary corporate transaction,
such as a merger, reorganization, tender offer, sale or transfer of
substantially all of its assets or liquidation. These provisions might
discourage a potentially interested purchaser from attempting a unilateral
takeover bid for the Company on terms which some shareholders might favor. Set
forth below is a discussion of certain of these provisions.
Special Shareholder Meetings. The PBCL provides that unless
specifically permitted in a corporation's articles, shareholders are not
entitled to call a special meeting of shareholders. Although the Company's
Articles do not so permit, the Company's By-Laws permit shareholders owning 10%
or more of the voting power of the Company to call a special meeting of
shareholders.
Advance Notice of Nominees for the Board. The By-Laws restrict the
ability of a shareholder to nominate individuals for election as directors. A
shareholder nomination must be made by written notice, containing specified
information, to the Secretary of the Company at least 60 days in advance of the
meeting of the shareholders at which such election is to be held (or if less
than 60 days' notice of the date of such annual meeting is given, not later than
10 days after the date of mailing of such notice). This requirement is intended
to provide the Company with time to assess the qualifications of any person
proposed for election to the Board and to institute litigation or take other
steps to prevent the nominee from being elected or serving, if such prevention
is thought to be necessary or desirable for any reason. Such provisions also may
inhibit shareholders who do not have any intention of controlling the Company or
the Board from participating in the nomination process.
PBCL Anti-Takeover Provisions. The PBCL contains a number of statutory
"anti-takeover" provisions, including Subchapters E, F, G, H, I and J of Chapter
25 and Section 2538, which will apply automatically to the Company upon
consummation of the Offering. The following descriptions are qualified in their
entirety by reference to the respective provisions of the PBCL:
Subchapter E provides that, if any person or group acquires 20% or more
of the voting power of a covered corporation (a "Control-Share Acquisition") the
remaining shareholders may object to the acquisition and put their shares to
such person or group in exchange for the fair value of their shares, including a
proportionate amount of any control premium. Subchapter F generally delays for
five years and restricts "business combinations" between an "interested
shareholder" and the corporation. The term "business combination" is defined
broadly to include various transactions between a corporation and an interested
shareholder including mergers, sales or leases of specified amounts of assets,
liquidations, reclassifications and issuances of specified amounts of additional
shares of stock of the corporation. An "interested shareholder" is defined
generally as the beneficial owner of at least 20% of a corporation's voting
shares.
Subchapter G prevents a person or group who has acquired 20% or more of
the voting power of a covered corporation from voting its shares without the
approval of the
- 46 -
49
"disinterested" shareholders. Failure to obtain such approval exposes the owner
to the risk of a forced redemption of that owner's control shares by the issuer
as provided by the statute.
Subchapter H applies in the event that any person or group publicly
discloses that the person or group may acquire control of the corporation or a
person or group effects (or publicly discloses an offer or intent to effect) a
Control-Share Acquisition and, in either case, sells shares within 18 months
thereafter. Any profits from sales of equity securities of the corporation by
the person or the group during the 18-month period must be remitted to the
corporation if the securities that were sold were acquired during the 18-month
period or within the preceding 24 months.
Subchapter I provides for minimum severance payments to certain
employees terminated within two years of a Control-Share Acquisition. Subchapter
J prohibits the abrogation of certain labor contracts prior to their stated date
of expiration through any business combination. Section 2538 of the PBCL
generally establishes certain shareholder approval requirements with respect to
specified transactions with "interested shareholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Company's
Units, Common Stock and Warrants is The Fifth Third Bank, Cincinnati, Ohio.
CERTAIN FEDERAL TAX CONSIDERATIONS
THE FOLLOWING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS IS
NOT INTENDED TO CONSTITUTE ADVICE REGARDING THE FEDERAL INCOME TAX CONSEQUENCES
OF PURCHASING UNITS. THIS SUMMARY DOES NOT DISCUSS TAX CONSEQUENCES UNDER THE
LAWS OF STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER JURISDICTION OR TAX
CONSEQUENCES TO CATEGORIES OF SHAREHOLDERS THAT MAY BE SUBJECT TO SPECIAL
RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES, INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND SECURITIES. ANY PERSON
CONSIDERING THE PURCHASE OF UNITS IS URGED TO OBTAIN, AND SHOULD RELY ONLY
UPON, THE ADVICE OF HIS OR HER OWN TAX ADVISOR.
The Company satisfies the criteria for a qualified small business
issuer as defined by Section 1202 of the Internal Revenue Code of 1986, as
amended. Therefore, a purchaser of securities offered by this Prospectus, other
than a corporation, can exclude 50% of any gain from the sale or exchange of
such securities provided such purchaser has held the securities for more than
five years. Gain eligible for the 50% exclusion may not exceed the greater of
$10,000,000 or 10 times the purchaser's basis in the stock. The remaining gain
is capital gain, taxable at the applicable rate. However, one half of any
exclusion claimed is an alternative minimum tax preference item which will
require the purchaser to recompute certain regular tax deductions in a
different, less preferential, manner.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,381,286 shares of Common Stock if 550,000 Units are sold and 3,045,286 shares
of Common Stock if 900,000 Units are sold (assuming no exercise of outstanding
stock options and warrants and without giving effect to the exercise of the
Warrants included in the Units or the Underwriter's Warrants). The 1,100,000
(minimum) and the 1,800,000 (maximum) shares of Common Stock included in the
Units offered by this Prospectus will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. Also, a minimum of 550,000 and a maximum of 900,000 shares of
Common Stock will be issuable upon exercise of the Warrants included in the
Units and up to an additional 217,890 shares of Common Stock will be issuable
upon exercise of the Underwriter's Warrants and the Warrants contained therein,
all of which are expected to be freely tradeable upon issuance. The remaining
1,281,286 shares if 550,000 Units are sold and 1,245,286 shares if 900,000 Units
are sold will be held by the Company's current shareholders. Of these 221,286
currently are unrestricted. The remainder may not be sold unless they are
registered under the Act or sold pursuant to an applicable exemption from
registration, including an exemption pursuant to Rule 144.
Rule 144 governs the public sale in ordinary trading transactions of
restricted securities and of securities owned by affiliates of a company and
imposes volume and manner of sale restrictions, as well as other requirements,
on the sale of restricted securities held for less than two years by
non-affiliates and on all securities held by affiliates. The Company anticipates
that 416,286 shares of Common Stock (if 550,000 Units are sold) will be eligible
for sale immediately after the Offering without regard to the restrictions of
Rule 144 and an additional 30,000 shares of Common Stock will be eligible for
sale 90 days after the Offering pursuant to the restrictions of Rule 144. The
Company's executive officers and directors (who hold a total of 815,000 shares)
have agreed not to offer, sell or otherwise dispose of any shares of Common
Stock for a period of 12 months from the date of
- 47 -
50
this Prospectus, without the prior written consent of the Underwriter. After the
expiration of 12 months and assuming 550,000 Units are sold, these 815,000
shares of Common Stock may be sold pursuant to the restrictions of Rule 144. The
remaining shares outstanding prior to this Offering will be eligible for sale in
compliance with the restrictions of Rule 144 beginning in early 1998.
The Company has reserved up to 300,000 shares of its Common Stock for
issuance under its 1997 Stock Option Plan. Upon the completion of the Offering
there will be options for 225,000 shares of Common Stock outstanding under the
Plan. The Company currently intends to register the shares of Common Stock
issuable under the Plan. Subject to the expiration of the 12 month lock-up
period, and subject to compliance with Rule 144 by affiliates of the Company and
to Section 16 of the Securities Exchange Act of 1934 by directors, officers and
10% beneficial owners, any shares issued upon exercise of options granted under
the Plan will become freely tradeable at the effective date of the registration
statement for the Plan shares.
The Company has issued warrants to two of its shareholders, the 1996
Warrants, to purchase a total of 50,000 shares at $0.90 per share expiring on
November 15, 2003. The Company has no plans to register either the 1996 Warrants
or the shares issuable upon their exercise. Therefore, if and when issued, these
shares will be Restricted Shares and cannot be sold without compliance with Rule
144. The Company has also issued the Broker's Warrants to the Underwriter to
purchase 13,229 shares at $4.95 per share expiring on July 25, 2002. The Company
has agreed to register the shares issuable upon exercise of the Broker's
Warrants. Therefore, if and when issued and assuming their registration as
agreed to by the Company, such shares will be freely tradeable.
Prior to the Offering, there has been no public market for the
Company's Units, Common Stock or Warrants, and no prediction can be made as to
the effect, if any, that market sales of such securities or the availability of
such securities for sale will have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of such securities in the
public market could adversely affect prevailing market prices and the Company's
ability to raise capital at favorable prices. The Company has submitted an
application to list the Units, Common Stock and Warrants on The Nasdaq SmallCap
Market under the symbols "DGSU", "DGSI" and "DGSW," respectively.
UNDERWRITING
J. V. Delaney & Associates (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the underwriting agreement by and among
the Company, the Selling Shareholders and the Underwriter (the "Underwriting
Agreement"), to use its best efforts to sell a minimum of 550,000 Units and a
maximum of 900,000 Units to the public. The Underwriter has made no commitment
to purchase any of the Units offered.
During the Offering, all subscription amounts will be held in escrow
with the National Bank of Southern California, as Escrow Agent. The Offering
will begin on the date of this Prospectus and, unless extended, end on
__________, 1998, which is 90 days after the date of this Prospectus. The
Offering may be extended for up to an additional 90 days, or until __________,
1998, by the mutual agreement of the Company and the Underwriter. In either
case, the Offering is subject to an additional 10-day extension solely to permit
the clearance of previously received funds.
Units may be subscribed for by completing and signing the Subscription
Agreement furnished with this Prospectus and returning it with full payment to
the Underwriter. Checks should be made payable to "National Bank of Southern
California, Escrow Agent for Dayton General Systems."
Subscriptions will be deposited with the Escrow Agent by noon of the
next business day following receipt and approval by the Underwriter. All funds
held in escrow will be invested by the Escrow Agent; escrowed amounts will not
be subject to claims of the Company's
- 48 -
51
creditors or to deduction for expenses of the Offering. During the period of
escrow, subscribers will not be entitled to withdraw or cancel their
subscriptions and will have no rights as shareholders of the Company.
The Company and the Underwriter each have the right to reject any
subscription, in whole or in part, for any reason including, among other
possible reasons, because the Offering has not been qualified for sale in the
subscriber's jurisdiction or the Offering is oversubscribed.
If paid and cleared subscriptions for 550,000 Units are not obtained
within the maximum 190-day Offering period, all escrowed funds will be returned
promptly to subscribers, without deduction and with interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
If paid and cleared subscriptions for at least 550,000 Units are
received prior to the expiration of the Offering period, the Offering will
continue until the earliest of (i) the date on which it is fully subscribed,
(ii) the date on which it is terminated by the Company prior to being fully
subscribed or (iii) the end of the maximum 190-day Offering period. In any such
case, the Offering will be closed promptly following the date on which it
terminates. At the time of closing all escrowed funds will be released to the
Company, and certificates for the Units will be available for delivery. In
addition to their certificates, investors will receive interest at the rate of 6
1/2% per annum from the date of deposit with the Escrow Agent.
The Underwriter has informed the Company that it will not confirm sales
to any accounts over which it exercises discretionary authority.
The Company and its executive officers and directors have agreed not
to, directly or indirectly, offer, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, or any securities convertible into or
exercisable for shares of Common Stock, for a period of 12 months after the
date of this Prospectus without the prior written consent of the Underwriter,
except for the issuance of shares upon the exercise of outstanding warrants
(including the Warrants included in the Units) and for the grant and exercise
of options under the 1997 Stock Option Plan.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance equal to three percent of the aggregate price of all Units
sold, including those Units offered by the Selling Shareholders. As of the date
of this Prospectus, $80,500 of this fee had been advanced by the Company. Upon
completion of this Offering, the Company has also agreed to sell to the
Underwriter, as additional compensation, warrants (the "Underwriter's Warrants")
to purchase that amount of Units equal to 8.07% of the total amount of Units
sold to the public. Each Underwriter's Warrant is exercisable to purchase one
Unit at a price of $12.50 per Unit beginning on the first anniversary and
continuing until the fifth anniversary of the date of this Prospectus. The price
of the Underwriter's Warrants is $.0005 per Warrant.
The Underwriter's Warrants contain provisions which require, under
certain circumstances, the Company to register the securities underlying such
Warrants for sale to the public. The Underwriter's Warrants are nontransferable
for a period of one year except to officers or partners of the Underwriter and
members of the selling group and/or their officers or partners. The exercise
price and number of Units covered by the Warrants are subject to adjustment to
protect the holders thereof against dilution in certain events.
From June 20, 1997 through July 25, 1997 the Underwriter assisted the
Company in privately placing $231,500 (132,286 shares) of Common Stock. For
these services, the Underwriter received $23,150 in commission and the Broker's
Warrants, exercisable through July 25, 2002, to purchase 13,229 shares of Common
Stock at a price of $4.95 per share. The Company has agreed to register the
shares issuable upon exercise of the Broker's Warrants. In
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52
addition, the Company reimbursed the Underwriter's legal expenses in connection
with the private placement.
The Company has granted to the Underwriter the right to designate two
members of the Company's Board of Directors for a period of three years from the
date of this Prospectus or, in the alternative, to designate two persons to
serve as advisors to the Board (subject to approval by the Board). To date, the
Underwriter has not designated any members of the Company's Board of Directors
or designated any persons to serve as advisors to the Board.
Additionally, the Company has granted the Underwriter a right of first
refusal, expiring on the earlier of its use or three years from the date of this
Prospectus, to be the exclusive underwriter of any one public or private debt or
equity offering made by the Company. If such an offering were to be proposed by
the Company and the Underwriter were to elect to underwrite the proposed
offering, the Company could, instead, extinguish the right of first refusal by
paying the Underwriter an amount equal to the greater of (i) 1% of the proceeds
of this initial public offering or (ii) 5% of any underwriting commissions and
discounts payable in the proposed offering.
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. Consequently, the offering price of the Units and the
exercise price of the Warrants have been arbitrarily determined by negotiation
between the Company and the Underwriter. The initial offering price of the Units
and the exercise price of the Warrants are not necessarily related to or
indicative of the Company's assets, book value, earnings, net worth or any other
recognized criteria of value.
While the Underwriter has significant experience in corporate financing
and the private placement of securities, the Underwriter has not previously
underwritten any public offering. The Underwriter's lack of public offering
experience may affect the Offering and the subsequent development of a trading
market, if any, in the securities of the Company.
As indicated under "Use of Proceeds," approximately 25% of the
Company's net proceeds from the Offering are allocated to potential
acquisitions, working capital and general corporate purposes. Although it could
have elected to make a smaller offering, the Company believes that the current
Offering size ultimately will be to the advantage of investors. The Offering
size is necessary for the Units, Common Stock and Warrants to qualify for
listing on The Nasdaq SmallCap Market, thus improving the liquidity of the
investment, and should decrease the risk that the Company will need to access
the capital markets in the near future. There can be no assurance, however, that
the Company can maintain a Nasdaq listing or that the Company's estimates and
assumptions concerning its future needs for working capital will prove correct.
See "Risk Factors."
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the securities offered and certain legal matters
relating to the Offering hereby will be passed upon for the Company by Taft,
Stettinius & Hollister. Dinsmore & Shohl LLP has acted as counsel for the
Underwriter in connection with this Offering.
EXPERTS
The financial statements of the Company for the years December 31, 1995
and 1996 included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, whose report has been included in
reliance upon the authority of such accounting firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
Prior to the Offering the Company was not a reporting company. The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration
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53
Statement under the Securities Act with respect to the securities offered by
this Prospectus. The Prospectus does not contain all of the information set
forth in the Registration Statement. For further information with respect to the
Company and such securities, reference is made to the Registration Statement.
The Registration Statement can be obtained from and inspected and copied, at
prescribed rates, at the public reference facilities of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the Commission's Regional Offices at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048. The Commission also maintains an Internet web site at
http://www.sec.gov that contains documents filed electronically by issuers,
including the Registration Statement.
- 51 -
54
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 1995 and 1996 and
at June 30, 1997 (unaudited) F-3
Statements of Operations for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-4
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1997 (unaudited) F-5
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited) F-6
Notes to Financial Statements F-7
F-1
55
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Dayton General Systems, Inc.
We have audited the accompanying balance sheets of Dayton General Systems, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dayton General Systems, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 14, 1997 (except for Notes B, I, L, O, and P, as to
which the date is October 31, 1997)
F-2
56
Dayton General Systems, Inc.
BALANCE SHEETS
December 31, June 30,
ASSETS 1995 1996 1997
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 53,986 $ 24,480 $ 14,907
Accounts receivable 108,455 57,383 71,414
Inventories 93,487 112,659 111,496
Prepaid expenses 648 1,752 8,552
Deferred stock issuance costs -- 20,788 150,418
-------- -------- ---------
Total current assets 256,576 217,062 356,787
PROPERTY AND EQUIPMENT - NET 25,964 24,701 22,251
OTHER ASSETS
Note receivable - shareholder 18,000 18,000 18,000
Capitalized software costs -- 51,747 65,324
Noncompete covenant 14,600 2,100 --
Goodwill 1,896 1,646 1,521
Deposits 598 598 598
-------- -------- ---------
Total other assets 35,094 74,091 85,443
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ -- $ 61,000
Accounts payable 21,630 13,621 172,548
Accrued expenses 36,332 33,629 29,947
Unearned revenue 106,925 108,327 71,997
Other current liabilities 15,052 14,501 14,501
-------- -------- ---------
Total current liabilities 179,939 170,078 349,993
COMMITMENTS -- -- --
SHAREHOLDERS' EQUITY
Common stock at aggregate cost, no par value;
10,000,000 shares authorized; 1,000,000 shares issued
at December 31, 1995, 1,060,000 at December 31, 1996
and 1,135,000 at June 30, 1997 36,196 89,196 208,846
Preferred stock, 100,000 shares authorized,
no shares issued or outstanding -- -- --
Additional paid-in capital -- 36,168 36,168
Retained earnings (deficit) 101,499 20,412 (130,526)
-------- -------- ---------
Total shareholders' equity 137,695 145,776 114,488
-------- -------- ---------
$317,634 $315,854 $ 464,481
======== ======== =========
The accompanying notes are an integral part of these statements.
F-3
57
Dayton General Systems, Inc.
STATEMENTS OF OPERATIONS
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
Revenues:
Systems and related software sales $ 283,943 $ 269,214 $ 152,106 $ 107,088
Service revenue 515,721 545,415 271,422 283,113
----------- ----------- ----------- ---------
799,664 814,629 423,528 390,201
Cost of revenues 274,735 268,631 127,570 129,225
----------- ----------- ----------- ---------
Gross margin 524,929 545,998 295,958 260,976
Operating expenses:
Selling, general and administrative 431,533 492,796 231,170 386,475
Research and development 86,761 41,179 21,216 25,242
----------- ----------- ----------- ---------
518,294 533,975 252,386 411,717
Income (loss) from operations 6,635 12,023 43,572 (150,741)
Other income (expense):
Interest income 3,549 2,853 818 201
Miscellaneous income 4,136 1,127 701 197
Interest expense (5,328) (1,702) (95) (595)
----------- ----------- ----------- ---------
2,357 2,278 1,424 (197)
----------- ----------- ----------- ---------
Income (loss) before income taxes 8,992 14,301 44,996 (150,938)
Income taxes -- -- -- --
----------- ----------- ----------- ---------
NET INCOME (LOSS) $ 8,992 $ 14,301 $ 44,996 $(150,938)
=========== =========== =========== =========
Weighted average common shares
outstanding 1,374,615
=========
Net loss per common share $ (.11)
=========
Pro forma:
Historical income before income taxes $ 8,992 $ 14,301 $ 44,996
Pro forma income taxes 2,000 3,000 9,000
----------- ----------- -----------
Pro forma net income $ 6,992 $ 11,301 $ 35,996
=========== =========== ===========
Weighted average common shares
outstanding 1,344,569 1,345,895 1,344,569
=========== =========== ===========
Pro forma net income per common share $ .01 $ .01 $ .03
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
58
Dayton General Systems, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997 (unaudited)
Additional Retained Total
Common paid-in earnings shareholders'
stock capital (deficit) equity
Balance at January 1, 1995 $ 36,196 $ -- $ 132,507 $ 168,703
Net income -- -- 8,992 8,992
S-Corporation cash distributions -- -- (40,000) (40,000)
-------- ------- --------- ---------
Balance at December 31, 1995 36,196 -- 101,499 137,695
Issuance of common stock 53,000 -- -- 53,000
Net income -- -- 14,301 14,301
S-Corporation cash distributions -- -- (59,220) (59,220)
Constructive distribution and contribution
of undistributed S-Corporation earnings -- 36,168 (36,168) --
-------- ------- --------- ---------
Balance at December 31, 1996 89,196 36,168 20,412 145,776
Issuance of common stock, net of
offering costs (unaudited) 119,650 -- -- 119,650
Net loss (unaudited) -- -- (150,938) (150,938)
-------- ------- --------- ---------
Balance at June 30, 1997 (unaudited) $208,846 $36,168 $(130,526) $ 114,488
======== ======= ========= =========
The accompanying notes are an integral part of these statements.
F-5
59
DAYTON GENERAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Year ended Six months ended
December 31, June 30,
1995 1996 1996 1997
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 8,992 $ 14,301 $ 44,996 $(150,938)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation on property and equipment 10,843 9,849 4,332 4,500
Amortization of intangible assets 12,750 12,750 6,375 10,036
Loss on disposition of property and equipment 205 205 -
Changes in assets and liabilities:
Accounts receivable 125,908 51,072 (27,194) (14,031)
Inventories (8,054) (19,172) (37,855) 1,163
Prepaid expenses (648) (1,104) - (6,800)
Accounts payable (18,771) (8,009) (7,248) 86,166
Accrued expenses 2,102 (2,703) (4,255) (3,682)
Unearned revenue 15,750 1,402 (31,628) (36,330)
Other current liabilities - (551) - -
--------- -------- -------- ---------
Net cash provided by (used in) operating activities 149,077 58,040 (52,477) (109,916)
Cash flows from investing activities:
Purchases of property and equipment (4,771) (8,791) (4,899) (2,050)
Capitalization of software development expenditures - (51,747) (21,635) (21,388)
--------- -------- -------- ---------
Net cash used in investing activities (4,771) (60,538) (26,534) (23,438)
Cash flows from financing activities:
Net borrowings under line of credit - - 53,500 61,000
Payments on long-term debt (65,000) - - -
Proceeds from issuance of common stock - 53,000 - 131,250
Stock issuance costs - (20,788) (1,712) (68,469)
Distributions (40,000) (59,220) (19,220) -
--------- -------- -------- ---------
Net cash provided by (used in) financing activities (105,000) (27,008) 32,568 123,781
Net increase (decrease) in cash and cash equivalents 39,306 (29,506) (46,443) (9,573)
Cash and cash equivalents at beginning of period 14,680 53,986 53,986 24,480
--------- -------- -------- ---------
Cash and cash equivalents at end of period $ 53,986 $ 24,480 $ 7,543 $ 14,907
========= ======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,328 $1,702 $ 60 $ 595
========= ======== ======== =========
Local income taxes $ 1,600 $1,104 $ - $ -
========= ======== ======== =========
Supplemental disclosure of non-cash financing activities:
Stock issuance costs included in accounts payable $ - $ - $ - $ 72,761
========= ======== ======== =========
The accompanying notes are an integral part of these statements.
F-6
60
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
1. Business
Dayton General Systems, Inc. (the "Company") was formed on March 5, 1993,
and has been primarily in the business of designing, building, installing
and servicing computerized building automation systems for use in
non-residential buildings, wastewater treatment plants and educational
institutions. The Company's systems monitor and control heating, air
conditioning, ventilation, lighting, fire detection, security, indoor air
quality, water processing and other electrical/mechanical functions.
Although the Company plans to continue servicing its in-place building
automation systems, it has recently changed its business focus to becoming a
software technology solution provider to the building control and automation
industry marketplace through recently commercialized software products that
simplify, enhance and accelerate the design of intelligent open control
networks. The Company's administrative and main production facilities are
located near Dayton, Ohio.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
3. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company's
exposure to credit risk for accounts receivable is impacted by the economic
climate affecting its industry and its customer base, which is primarily in
Ohio and Pennsylvania. The Company manages this risk by performing ongoing
credit evaluations of its customers. The Company has not experienced
significant credit losses and no reserve for its accounts receivables is
considered necessary.
4. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. Inventories
The Company values its inventories at the lower of cost (determined using
the first-in, first-out method) or market.
F-7
61
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated service lives of the assets,
which are principally five years.
7. Capitalized Software Costs
Software development costs are expensed as research and development until
technological feasibility of the software product has been established.
After technological feasibility has been established, the Company
capitalizes all costs incurred for software development in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs are amortized on a product-by-product basis using
the straight-line method over the estimated product life and amortization
begins when the software product is available for general release to
customers. Amortization expense was $0 for the year ended December 31, 1996,
and $7,811 for the six months ended June 30, 1997.
8. Noncompete Covenant and Goodwill
The noncompete covenant and goodwill result from the acquisition of assets
which began the Company on March 5, 1993. The noncompete covenant is being
amortized on a straight-line basis over the term of the covenant, which is
four years. The goodwill is being amortized on a straight-line basis over
ten years.
Amortization expense for these assets was $12,750 for each of the years
ended December 31, 1995 and 1996. Amortization expense was $6,375 and $2,225
for the six months ended June 30, 1996 and 1997, respectively. Accumulated
amortization as of December 31, 1995 and 1996 for the noncompete covenant
was $35,400 and $47,900, respectively, and $700 and $950, respectively, for
goodwill. Accumulated amortization as of June 30, 1997 was $50,000 for the
noncompete covenant and $1,075 for goodwill.
9. Revenue Recognition and Cost of Revenues
The Company recognizes revenue for systems and related software sales upon
product shipment.
The Company recognizes service revenue when the service is completed or, for
annual service contracts, the revenue is recognized ratably over the period
of the contract. Cash payments received in advance of revenue recognition
are recorded as unearned revenue.
Cost of revenues includes the direct material, labor and overhead costs
necessary to generate the revenues. Indirect costs are recorded as general
and administrative expenses.
F-8
62
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Income Taxes
Upon inception, the Company with the consent of its shareholders, elected
under the Internal Revenue Code to be taxed as an S-Corporation. Effective
December 20, 1996, the Company terminated its S-Corporation election and
became a C-Corporation for income tax purposes. Accordingly, prior to
December 20, 1996, federal and state income taxes on the income of the
Company were paid by the shareholders and, therefore, no provision for such
taxes has been made in the accompanying financial statements during 1995 or
1996. Federal and state income taxes for the period from December 20, 1996
to December 31, 1996 were not material. Local income taxes are recorded as
administrative expenses.
Had the Company been subject to tax at the corporate level, the federal and
state income tax provision would have been approximately $2,000 and $3,000
for the years ended December 31, 1995 and 1996, respectively, and $9,000 for
the six months ended June 30, 1996.
The net deferred tax liability arising from the Company's conversion from an
S-Corporation to a C-Corporation on December 20, 1996 was not material at
December 31, 1996. Deferred income taxes are provided for temporary
differences between the tax basis and reported amount of assets and
liabilities.
11. Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximates fair
value.
12. Earnings Per Share
Pro forma earnings (loss) per share are based on the weighted average number
of common shares outstanding for the periods presented. Weighted average
number of common shares is computed giving retroactive recognition for the
stock split in November 1996 (Note F) and the reincorporation and merger
(Note P), and includes adjustments to all periods presented for the effect
of recently issued shares of common stock for consideration below the
anticipated initial public offering (IPO) price and for outstanding options
and warrants with exercise prices below the anticipated IPO price using the
treasury stock method. The share effect for these issuances is as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
Weighted average shares outstanding 1,000,000 1,006,795 1,000,000 1,114,702
Effect of issuances below
IPO price 344,569 339,100 344,569 259,913
---------- ---------- ---------- ----------
Weighted average common shares 1,344,569 1,345,895 1,344,569 1,374,615
========= ========= ========= =========
F-9
63
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Earnings Per Share (continued)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 requires the presentation of basic earnings per share and diluted
earnings per share, instead of primary and fully diluted earnings per share.
The Company will implement this statement in the fourth quarter 1997. The
effect of adopting SFAS No. 128 has not been determined.
13. Stock-Based Compensation
The provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" are
effective for the Company in 1997. This recent standard requires that
employee stock-based compensation either continue to be determined under
Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock
Issued to Employees" or in accordance with the provisions of SFAS No. 123,
whereby compensation expense is recognized based on the fair value of
stock-based awards on the grant date. The Company accounts for such awards
under the provisions of APB No. 25 and, accordingly, no compensation cost
has been recognized for the stock awards. The Company has made the required
additional disclosures under SFAS No. 123 for 1997 (Note L).
14. Segment Reporting
The Company operates in a single business segment. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 requires
public enterprises to report certain information about operating segments,
products and services, customers and geographic areas in which they operate.
SFAS No. 131 supersedes existing pronouncements requiring segment reporting
and is effective for the Company beginning fiscal 1998. The Company has not
yet determined whether this statement will have any impact on its financial
reporting requirements.
15. Interim Financial Statements
The financial statements as of June 30, 1997, and for the six months ended
June 30, 1996 and 1997 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations have
been made. The results of operations for the six months ended June 30, 1996
and 1997 are not necessarily indicative of annualized results which may be
expected for an entire fiscal year.
F-10
64
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE B - NOTE RECEIVABLE - SHAREHOLDER
The Company had an $18,000 note receivable from its majority shareholder
due October 31, 1997. During October 1997, the note was extended until
October 31, 1998. Interest accrues at 8.5% and is payable monthly. The
note is unsecured.
NOTE C - INVENTORIES
Inventories are summarized as follows:
DECEMBER 31, JUNE 30,
1995 1996 1997
Parts and components $44,458 $54,716 $ 66,477
Finished parts 25,727 31,600 27,157
Projects in progress 23,302 26,343 17,862
------ -------- --------
$93,487 $112,659 $111,496
====== ======= =======
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
DECEMBER 31, JUNE 30,
1995 1996 1997
Computer and office equipment $48,809 $56,571 $58,669
Vehicles 1,928 1,928 -
------- ------- -------
50,737 58,499 58,669
Less accumulated depreciation 24,773 33,798 36,418
------ ------ ------
Net property, plant and equipment $25,964 $24,701 $22,251
====== ====== ======
NOTE E - LINE OF CREDIT
The Company maintains a line of credit with a bank of $75,000. The line of
credit bears interest at the bank's prime rate plus .75%. Borrowings
outstanding under the line were $61,000 at June 30, 1997. There were no
borrowings under this line at December 31, 1995 or 1996. Amounts borrowed
on the line of credit are due on demand and are guaranteed by the majority
shareholder. The line of credit is secured by cash, accounts receivable,
inventories and equipment.
F-11
65
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE F - COMMON STOCK
During November 1996, the board of directors and shareholders authorized an
amendment of the Company's articles of incorporation to increase the number
of authorized shares of common stock to enable the Company to implement its
plan of recapitalization. This plan has four components.
- - The Company split its stock 10-to-1 effective November 11, 1996.
- - The shareholders authorized the Company to reserve 1,600,000 of the newly
authorized shares for future use in a stock option plan (Note L) and for
common stock warrants for certain individuals and investors.
- - The Company will make a private placement offering of up to 285,000 shares
of common stock at $1.75 per share.
- - The Company expects to offer additional shares to the general public in an
initial public offering (Note P).
On November 15, 1996, the Company, under its stock warrant program, issued
common stock warrants to two existing shareholders. No consideration was
paid for the warrants since the exercise price exceeded the fair value of
the underlying stock on the date of grant. The warrants give the two
shareholders the right to purchase 50,000 shares of the Company's common
stock at a price of $.90 per share at any time prior to November 15, 2003.
As of December 31, 1996 and June 30, 1997, the Company has deferred $20,788
and $150,418, respectively, in costs related to the private offering and
the IPO. During the six months ended June 30, 1997, the Company raised
$131,250 from the private offering through the sale of 75,000 shares of
common stock, of which $11,600 in offering costs were offset against these
proceeds. Of the $150,418 of deferred stock issuance costs recorded at June
30, 1997, $123,901 relates to the IPO. If the IPO is successful, these
costs will be offset against the IPO proceeds. If the IPO is not
successful, these costs will be immediately expensed. The remaining $26,517
of deferred stock issuance costs at June 30, 1997 relate to the private
offering which generated additional proceeds in July 1997 (Note O).
NOTE G - RETAINED EARNINGS
As discussed in Note A-10, the Company terminated its S-Corporation
election effective December 20, 1996. Undistributed taxable earnings as of
that date have been included in the financial statements as additional
paid-in capital. This assumes a constructive distribution to the owners
followed by a contribution to the capital of the Company. Earnings for the
period from December 20, 1996 to December 31, 1996 were not material.
F-12
66
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE H - INCOME TAXES
The following is a reconciliation between the statutory federal income tax
rate and the amount recognized in the financial statements for the six
months ended June 30, 1997.
AMOUNT
Computed credit for federal income
taxes at the statutory rate $(22,641)
Valuation allowance 22,563
Permanent differences 78
---------
Total $ -
=========
At June 30, 1997, the net deferred tax components consisted of the
following:
Deferred tax liabilities:
Tax depreciation over book depreciation $ 2,100
Capitalized software costs 9,800
-------
11,900
-------
Deferred tax assets:
Inventory 1,200
Intangible assets 5,382
Net operating loss carryforward 27,881
-------
34,463
Valuation allowance (22,563)
-------
11,900
-------
Net deferred tax components $ -
=======
The federal tax net operating loss carryforward of approximately $185,000
expires in 2012. The valuation allowance is required due to the uncertainty
of realizing the net deferred tax asset through future operations.
F-13
67
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE I - PROFIT-SHARING PLAN
Prior to October 10, 1997, the Company maintained a profit-sharing plan
covering all employees. On October 10, 1997, the Plan was terminated. No
contributions were made for the years ended December 31, 1995 or 1996, or
for the six months ended June 30, 1996 and 1997.
NOTE J - MAJOR CUSTOMERS
Two customers accounted for 39% and 26% of total revenues during the year
ended December 31, 1995, and 47% and 12% of total revenues during the year
ended December 31, 1996. The same two customers accounted for 38% and 14%
of total revenues during the six months ended June 30, 1997, and 48% and
12% of total revenues during the six months ended June 30, 1996. One
additional customer accounted for 10% of total revenues for the year ended
December 31, 1995.
NOTE K - COMMITMENTS
Leases
The Company has noncancelable operating lease agreements for certain
equipment and its office facilities. Certain of the leases have renewal
options for varying lengths of time. The Company incurred $59,708 and
$58,347 in rent expense under operating lease agreements for the years
ended December 31, 1995 and 1996, respectively. The Company incurred
$30,669 and $25,025 in rent expense for the six months ended June 30, 1996
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are
approximately $51,600 in 1997, $21,500 in 1998, $10,300 in 1999 and $3,700
in 2000.
F-14
68
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE K - COMMITMENTS (continued)
License Agreement
In January 1994, the Company entered into an agreement to license certain
computer software programs from Echelon Corporation. Under the terms of the
agreement, the Company pays one-time license fees for each of the software
programs it licenses. In 1994, the Company incurred a license fee of $9,450
which was added to the payments under an operating lease for certain
equipment leased from Echelon Corporation and is being expensed over a
three-year period. During 1996, the Company licensed two additional
software programs totaling $6,745 which are being used in product
development and are included in capitalized software costs.
The license agreement also requires the Company to pay royalties to Echelon
Corporation for each copy of an executable file of the software that is
distributed by the Company. The royalties range from $18 to $800 per
executable file distributed. Royalty expense under the agreement was $0 and
$5,720 for the years ended December 31, 1995 and 1996, respectively.
Royalty expense for the six months ended June 30, 1996 and 1997 was $2,400
and $6,206, respectively.
Consulting Agreement
In November 1996, the Company entered into an agreement with a consulting
firm which provided for six monthly payments of $5,000 beginning December
1996 for corporate development services, including capital formation
services and commerce development. In the event that an equity transaction
occurs within twenty-four months of the date of the agreement with a party
introduced by this firm, the Company is required to pay a fee ranging from
3% to 5% of the total value of the transaction. In the event a commercial
sales transaction attributable to the consulting firm's efforts occurs
within twenty-four months of the date of the agreement, the Company is
required to pay a commission of 10% of the gross revenues resulting from
the commercial sales transaction for a two year period from the date of the
transaction. No such fees or commissions were incurred under this agreement
as of June 30, 1997.
F-15
69
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE L - STOCK OPTION PLAN
Effective June 1, 1997, the Company adopted a stock option plan covering
certain employees, directors and advisors. The number of shares issuable
under the plan is 300,000. Stock options granted under the plan enable the
holder to purchase common stock at an exercise price not less than the
market value on the date of grant in the case of an incentive stock option,
and not less than 85% of the market value on the date of the grant in the
case of a non-qualified option. To the extent not exercised, options will
expire not more than ten years after the date of grant. The applicable
options vest immediately or ratably over a three year period. A summary of
the changes in the options outstanding during 1997 is set forth below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding at December 31, 1996 - -
Granted 125,000 $1.82
------- -----
Outstanding at June 30, 1997 125,000 $1.82
======= ====
Exercisable (vested) options at June 30, 1997 85,000 $1.86
======== ====
The following summarizes options outstanding and exercisable at June 30,
1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
$1.75 to $1.93 125,000 7.92 $1.82 85,000 $1.86
The weighted average fair value at date of grant for options granted during
1997 was $0.13. The fair value of options at the date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
Expected life (years) 2
Interest rate 6%
Volatility 1%
Dividend yield 0%
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards in 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and loss per
share for the six months ended June 30, 1997 would have been increased by
approximately $9,000 and $.01, respectively. The initial application of
SFAS No. 123 for pro forma disclosure may not be representative of the
future effects of applying this statement.
Subsequent to June 30, 1997, immediately exercisable options to purchase a
total of 50,000 shares were granted under the plan to an officer and a
director. Additionally, options for a total of 75,000 shares will be
granted to an officer and a director upon or after the completion of the
IPO.
F-16
70
DAYTON GENERAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997 (unaudited)
NOTE M - RELATED PARTY TRANSACTIONS
During 1997, the Company was provided financial advisory services in the
amount of $75,000 from a corporate shareholder of the Company. The Company
expensed $50,000 of this amount during the six months ended June 30, 1997
and deferred $25,000 as stock issuance costs. The entire amount is included
in accounts payable at June 30, 1997. During September 1997, this payable
was converted into an 8.5% term note, payable in six quarterly principal
and interest installments of $13,171, beginning September 15, 1997.
However, the note must be redeemed in full by the Company upon the
successful completion of the proposed initial public offering.
NOTE N - PRO FORMA DATA (UNAUDITED)
As discussed in Note A-10, the Company was an S-Corporation prior to
December 20, 1996. Accordingly, federal and state income taxes prior to
this date have not been reflected in the accompanying financial statements.
Effective December 20, 1996, the Company terminated its S-Corporation
election and became a regular C-Corporation for income tax purposes.
Therefore, pro forma amounts have been provided for federal and state
income taxes at an effective rate of approximately 20%.
NOTE O - SUBSEQUENT EVENTS
In July 1997, the Company raised an additional $256,000 from its private
placement of 146,286 shares of common stock. Deferred stock issuance costs
of $26,517 at June 30, 1997 were offset against these proceeds.
Additionally, the Company paid the underwriter it is using for its proposed
initial public offering a commission of $23,150 for selling 132,286 shares
of this common stock. The underwriter was also awarded warrants to purchase
13,229 shares of the Company's common stock at $4.95 per share at any time
prior to July 25, 2002.
NOTE P - PROPOSED INITIAL PUBLIC OFFERING, REORGANIZATION AND MERGER
On August 14, 1997, the Company filed a Registration Statement on Form SB-2
with the Securities and Exchange Commission for an offering of its common
stock. The Company was incorporated in Pennsylvania in July 1997 by DGS,
Inc. ("Ohio Dayton General"), an Ohio Corporation. The Company has
authorized 10,000,000 common shares with no par value.
On October 9, 1997, Ohio Dayton General was merged with and into the
Company and the Company is the surviving company. Each outstanding share of
Ohio Dayton General was converted into 1,000 shares of common stock of the
Company.
The Board of Directors is authorized to issue one or more series of
preferred stock. The Board, without shareholder approval, may determine
voting, conversion and other rights. Under the certificate of
incorporation, the Board of Directors has authorized 100,000 shares of
preferred stock.
The financial statements have been restated to reflect the reincorporation
and merger.
F-17
71
MANAGEMENT'S FORECAST OF FUTURE OPERATING RESULTS
Assuming the completion of the Offering at the minimum level, the forecasts set
forth in the table below (the "Forecasts") are the Company's unaudited estimates
based upon its recently formulated operating plans and currently available
marketplace information. In the process of estimating future annual revenue and
income in the table set forth below, the Company was unable to consider
assumptions and factors such as the impact of changing industry competitive
conditions, unanticipated technological announcements, changing general economic
conditions and the potential effect of any business combinations or
acquisitions. Additionally, the estimated amount and timing of revenue from
VisualControl software sales could be materially influenced by numerous other
micro-economic and specific factors related to the product. These factors
include but are not limited to: (i) the success or lack thereof of the Company's
sales, marketing and distribution efforts, (ii) an unanticipated increase in the
time between initial sales solicitation of a prospective customer and revenue
recognition (the "sales cycle"), and (iii) unanticipated price discounting for
large volume unit sales ("large volume pricing").
See "Risk Factors" and "Business Strategy".
The Forecasts should not be regarded as a representation by the Company or any
other person (including the Underwriter) that the results set forth in the
Forecasts will be achieved. The Forecasts were not prepared with a view toward
compliance with published guidelines of the American Institute of Certified
Public Accountants, or any other regulatory or professional agency or body of
generally accepted accounting principles. Moreover, Grant Thornton LLP, the
Company's independent certified public accountants, has not compiled or examined
the Forecasts; accordingly, they do not express an opinion or any other form of
assurance with respect to the Forecasts and assume no responsibility for and
disclaim any association with the Forecasts. No other independent expert has
reviewed the Forecasts. In light of the foregoing, prospective investors in the
Offering are cautioned not to place undue reliance on the Forecasts.
The Company does not intend to update or otherwise revise the Forecasts to
reflect events or circumstances existing or arising after the date of this
Prospectus or to reflect the occurrence of unanticipated events.
S-1
72
Management's forecasted operating results in the two years following the
completion of the Offering at the minimum level are as follows:
Year 1 Year 2
------ ------
Revenues $ 2,278,200 $ 4,900,500
Cost of revenues (853,000) (938,000)
----------- -----------
Gross profit 1,425,200 3,962,500
Operating expenses (2,437,000) (3,003,900)
----------- -----------
Income (loss) from operations (1,011,800) 958,600
Interest and other income 156,540 165,000
----------- -----------
Income (loss) before taxes (855,260) 1,123,600
Income taxes -- --
----------- -----------
Net income (loss) $ (855,260) $ 1,123,600
=========== ===========
Earnings (loss) per share $ (.36) $ .44
=========== ===========
The Forecasts are primarily based on a combination of the following factors and
assumptions. As noted above, the Company was unable to consider assumptions and
factors such as the impact of changing industry competitive conditions,
unanticipated technological announcements, changing general economic conditions
and the potential effect of any business combinations or acquisitions.
Revenues
VisualControl Products
The Company obtained quantitative and qualitative marketplace information from
independent industry analysts, major industry participants that manufacture
related products, and professional publications to create a model that estimates
the size of marketplace for its VisualControl software products in terms of
units. The model was built by first defining the existing marketplace segments
the Company's products will penetrate and then determining the number of units
of the Company's products each segment represents. A growth rate was applied to
the identified marketplace segments as follows:
(i) an estimated growth rate in the current installed LonWorks original
equipment manufacturer (OEM) base of 11.96% per year was used. Currently there
are approximately 3,500 OEMs that use LonWorks to develop control products.
Echelon Corporation estimates this number will increase to approximately 5,500
at the end of the Year 2000.
(ii) an estimated growth rate in the number of existing distributed
control network devices of 77.31% per year was used. Currently there are
2,000,000 LonWorks control network devices or chips installed. Motorola Inc., a
major manufacturer and distributor of Neuron C chips, has
S-2
73
estimated that 20,000,000 devices or chips will be installed in LonWorks
networks by the end of the Year 2000.
The Company then estimated its expected market share within the identified
marketplace segments as follows:
(i) estimates of the percentage shares of the identifiable marketplace
segments are 1.25% of the OEM segment, .025% of the building control segment,
2.5% of the SI market segment, 2.5% of the industrial automation segment and
2.5% of the process control segment. For the purposes of forecasting
VisualControl product sales, the Company's weighted percentage share of
identifiable marketplace total revenue was estimated to be approximately 0.7%.
Upon completion of this marketplace model, the Company reviewed its pending and
existing agreements and conducted interviews with existing and potential
customers regarding future orders. Based on these interviews, a range of
expected unit sales were then compared to the marketplace model described above.
Given the results of the above analyses, the Company expects to sell
approximately 4,100 units of its existing VisualControl software products over
the two-year forecast period. The Company assumes no new products will be sold
during the forecast period and the selling prices of existing products are
discounted for volume and life cycle.
The resulting period-to-period forecasted revenue increases are primarily due to
the method by which the Company forecasted the expected sale of its
VisualControl software products. For example, if a prospective customer was
interested in purchasing 35 units over a two-year period, the Forecasts assume 7
units will be delivered in Year 1 and 28 units in Year 2.
Building Control Products
Revenues from the Company's established building control products are expected
to remain substantially consistent with historical revenues during the two-year
forecast period.
Cost of Revenues and Operating Expenses
These expense estimates are derived from the Company's budgeted cost of
revenues, sales and marketing, R&D and other operating expense categories. Cost
of revenues is based on estimated actual costs using historical cost
information.
Sales and marketing and R&D expenses included in operating expenses are
primarily based upon a percentage of revenues and comprise 62% and 67% of total
operating expenses in Year 1 and Year 2, respectively. Administrative payroll
and payroll taxes included in operating expenses are estimated using expected
number of employees and salary rates, and comprise approximately 11% of total
operating expenses each year.
S-3
74
As sales of VisualControl software products, with much higher gross profit
margin relative to the existing business, become the major component of total
sales, overall margins are effected accordingly (as is evidenced greatly in
moving from Year 1 to Year 2). The largest expense increases in Year 2 are in
sales and marketing and R&D. This relates to establishing new departments and
the associated staffing, promotions, and product development costs.
Income Taxes
No income taxes for Year 1 or Year 2 are forecasted since in Year 1 a loss is
forecasted, and in Year 2 there will exist enough net operating loss
carryforwards from the forecasted 1997 operating loss and the loss forecasted in
Year 1 following the Offering to offset the provision for income taxes.
Earnings (Loss) Per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share are computed using the
expected weighted average number of outstanding common and dilutive common
equivalent shares outstanding. Options and warrants with exercise prices greater
than $5.00 per share are assumed to have no dilutive effect. An additional
75,000 and 50,000 options are expected to be granted during Year 1 and Year 2,
respectively, while no options are assumed to be exercised during the periods.
Fully diluted earnings per share have not been presented because the differences
are insignificant. Expected weighted average number of shares outstanding for
Year 1 are 2,381,286 and 2,548,726 for Year 2.
Significant Changes in Financial Position
Upon the completion of the Offering at the minimum level, the Company's cash and
cash equivalents are expected to be approximately $4.6 million. Cash and cash
equivalents are expected to be approximately $3.5 million by the end of Year 1,
and $4.3 million by the end of Year 2. Accounts receivable are expected to
increase annually by approximately $200,000 following the completion of the
Offering, and property and equipment is expected to increase annually by
approximately $100,000. All other balance sheet items are not expected to change
significantly. No additional capital is expected to be raised during Year 1 and
Year 2.
The estimates underlying the Forecasts are based on forecasting models developed
by the Company using both public and proprietary information available to the
Company. No assurance can be given that the Company's revenue and income (loss)
estimates will materialize or that, if revenue and income occur at all, the
Forecasts will prove to be correct.
S-4
75
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, ON BEHALF OF THE COMPANY OR THE SELLING SHAREHOLDERS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE HEREBY,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO
ANY PERSON TO WHOM SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
________________
TABLE OF CONTENTS
Page
Prospectus Summary..................................... 4
Risk Factors........................................... 10
History of the Company................................. 16
Use of Proceeds........................................ 17
Dividend Policy........................................ 17
Capitalization......................................... 18
Dilution............................................... 19
Selected Financial Data................................ 21
Management's Discussion and Analysis or
Plan of Operation............................... 22
Business............................................... 27
Management............................................. 39
Certain Transactions................................... 42
Holdings of Management and
Principal Shareholders.......................... 42
Selling Shareholders................................... 43
Description of Securities.............................. 44
Certain Federal Tax Considerations..................... 47
Shares Eligible for Future Sale........................ 47
Underwriting........................................... 48
Legal Matters.......................................... 50
Experts................................................ 50
Available Information.................................. 50
Index to Financial Statements.......................... F-1
Management's Forecast of Future Operating Results...... S-1
____________________
UNTIL __________, 1997 (____ DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
900,000 Units
DAYTON
GENERAL
SYSTEMS, INC.
PROSPECTUS
, 1997
76
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Articles of Incorporation authorize the registrant to
indemnify the directors of the registrant to the fullest extent permitted by
Pennsylvania Business Corporation Law (the PBCL). The registrant's By-Laws limit
the liability of directors of the registrant to the registrant or its
shareholders to the fullest extent permitted by PBCL. Pursuant to terms of the
PBCL presently in effect, the registrant's directors are not liable to the
registrant or its shareholders for monetary damages for any action unless: (i)
the director has breached or failed to perform the duties of his office under
the PBCL, and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The registrant's By-Laws also provide that the registrant shall
indemnify each of its directors and officers from liability arising from acting
as an authorized representative of the registrant, so long as such person acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the registrant. Such indemnification may be made
only upon a determination by the Board of Directors, or a court of competent
jurisdiction, that indemnification is proper in the circumstances because the
person indemnified has met the applicable standard of conduct to permit
indemnification under the law.
The registrant intends to maintain director and officer liability
insurance which provides coverage against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable by the registrant (other than underwriting
commissions and a non-accountable expense allowance of between $165,000
(minimum) and $264,600 (maximum) to be paid to the Underwriter by the
registrant, and $5,400 (maximum) to be paid to the Underwriter by the Selling
Shareholders) are estimated to be as follows:
SEC registration fee................................................... $5,771
NASD fee................................................................ 2,404
Nasdaq Stock Market listing fee........................................ 9,000
Printing costs.......................................................... 16,000
Legal fees.............................................................. 70,000
Accounting fees......................................................... 50,000
Financial advisory fees................................................. 10,000
Transfer agent fees..................................................... 2,000
Blue sky fees and expenses............................................. 25,000
Premium on directors and officers liability insurance................... 21,000
Miscellaneous........................................................... 39,000
------
$250,175
========
Of the foregoing expenses, the Selling Shareholders will pay an amount
proportionate to the number of shares sold by them. All of the amounts listed
are estimates except the SEC and NASD fees.
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77
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since November 1, 1994, the registrant (including its predecessor Ohio
corporation) has made the following sales of unregistered securities (all share
amounts give effect to the 1000:1 split of the registrant's Common Stock
resulting from the registrant's re-incorporation in Pennsylvania):
On March 15, 1996, for nominal consideration, the registrant issued a
warrant to Church Street Financial Corporation to purchase 20,000 shares of
Common Stock for $.65 per share. On December 19, 1996 the warrant was exercised
and the registrant issued 20,000 shares of Common Stock to Church Street
Financial Corporation in exchange for $13,000. Both issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipient acquired the securities for its own account
and not with a view to distribution.
On November 5, 1996 the registrant issued 40,000 shares of Common Stock
to Sterling Trust Company (for the benefit of William Winkler) in exchange for
$40,000. The issuance was exempt pursuant to Section 4(2) of the Securities Act
as a transaction not involving a public offering, as the recipient acquired the
securities for its own account and not with a view to distribution.
On November 15, 1996, for nominal consideration, the registrant issued
warrants, exercisable until November 15, 2003, to Church Street Financial
Corporation and James E. Cogan to purchase 26,000 and 24,000 shares of Common
Stock, respectively, for $.90 per share. Both such issuances were exempt
pursuant to Section 4(2) of the Securities Act as transactions not involving a
public offering, as the recipients acquired the securities for their own
accounts and not with a view to distribution.
Between January 23, 1997 and July 21, 1997, the registrant issued an
aggregate of 221,286 shares of Common Stock to twenty-two different persons in
exchange for an aggregate of $387,250 (the "Private Placement"). The Underwriter
assisted the Company in placing a portion of these shares for which it received
a commission of $23,150 and a warrant, exercisable through July 25, 2002, to
purchase 13,229 shares of Common Stock for $4.95 per share. Shares issued in
connection with the Private Placement were exempt pursuant to Rule 504 of
Regulation D of the Securities Act.
ITEM 27. EXHIBITS.
The list of exhibits is set forth beginning on page E-1 of this
registration statement and is incorporated herein by reference. Exhibit Numbers
correspond to those of Regulation S-B, Item 601.
ITEM 28. UNDERTAKINGS.
*(a) The small business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement. Notwithstanding the
foregoing, any increase or
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78
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
*(d) The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
*(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
*(f) The small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that the offering of the securities at that time as the initial bona fide
offering of those securities.
- --------------
*Paragraph references correspond to those of Regulation S-B, Item 512.
II-3
79
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to
registration statement to be signed on its behalf by the undersigned, in the
City of Dayton, State of Ohio, as of the 5th day of November, 1997.
DAYTON GENERAL SYSTEMS, INC.
By: /s/ Thomas C. Haas
-------------------------------------
Thomas C. Haas
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities indicated as of the 5th day of November, 1997.
Signatures Title
---------- -----
/s/ Thomas C. Haas Chairman of the Board, President and Chief
- ---------------------- Executive Officer (Principal Executive, Accounting
Thomas C. Haas and Financial Officer)
/s/ Edward T. Hurd Director
- ----------------------
Edward T. Hurd
/s/ William R. Winkler Director
- ----------------------
William R. Winkler
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80
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
1.1 Amended and restated form of Underwriting Agreement
1.2 Revised form of Underwriter's Warrant
3.1 Articles of Incorporation*
3.2 By-Laws, as amended
4.1 Form of Warrant issuable as part of Units sold in Offering
4.2 Form of Unit Certificate
5 Opinion of Taft, Stettinius & Hollister
10.1 OEM License Agreement between Echelon Corporation and the
Registrant dated May 26, 1995*
10.2 Software License Agreement between Echelon Corporation and the
Registrant dated December 27, 1993*
10.3 Sales Agreement between Echelon Corporation and the Registrant
dated November 30, 1993*
10.4 Master Lease Agreement between Echelon Corporation and the
Registrant dated November 30, 1993*
10.5 1997 Stock Option Plan*
23.1 Consent of Taft, Stettinius & Hollister (contained in Exhibit
5)
23.2 Consent of Grant Thornton LLP
24 Power of Attorney
27 Financial Data Schedules*
99.1 Form of Escrow Agreement between the Registrant and the
National Bank of Southern California, as Escrow Agent
99.2 Form of Warrant Agreement between the Registrant and The
Fifth Third Bank, as Warrant Agent
99.3 Form of Subscription Agreement
* Previously filed.
E-1