NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006 and 2005
(in
thousands, unless otherwise indicated)
1.
Organization
Stamford
Industrial Group, Inc.
(
the
“Company”), through its wholly owned subsidiary Concord, is a leading
independent manufacturer of steel counterweights and structural weldments.
The
Company
sells
its products primarily in the United States to original equipment manufacturers
(“OEM”) of certain construction and industrial related equipment that employ
counterweights
for
stability through counterweight leverage in the operation of equipment used
to
hoist heavy loads, such as elevators and cranes. The counterweight market
the
Company
targets
is primarily comprised of OEMs within the (i) commercial and industrial
construction equipment industry that manufactures aerial work platforms,
telehandlers, scissor lifts, cranes, and a variety of other construction related
equipment and vehicles; and (ii) the elevator industry, that incorporates
counterweights as part of the overall elevator operating mechanism to balance
the weight of the elevator cab and load.
The
Company was initially established in 1996 under the name “Net Perceptions,
Inc.”, as a provider of marketing software solutions. In 2003, as a result of
continuing losses and the decline of its software business, the Company began
exploring various strategic alternatives, including sale or liquidation, and
ceased the marketing and development of its marketing solutions software
business in 2004. On April 21, 2004, the Company announced an investment into
the Company by Olden Acquisition LLC (“Olden”), an affiliate of Kanders &
Company, Inc., an entity owned and controlled by the Company’s Non-Executive
Chairman, Warren B. Kanders, for the purpose of initiating a strategy to
redeploy the Company’s assets and use its cash, cash equivalent assets and
marketable securities to enhance stockholder value. As part of this strategy,
on
October 3, 2006, the Company acquired the assets of CRC Acquisition Co. LLC
(“CRC”), a manufacturer of steel counterweights doing business as Concord Steel
(“Concord”). With this initial acquisition, management is now focused on
building a diversified global industrial manufacturing group through both
organic and acquisition growth initiatives that are expected to complement
and
diversify existing business lines. Because the Company had no operations at
the
time of the acquisition of the assets of Concord, the Concord business is
considered to be a predecessor company (“Predecessor”). Accordingly, relevant
financial information regarding the Predecessor, including financial statements
for the year ended December 31, 2005 and the period from January 1, 2006 through
October 3, 2006 has been presented (see Note 16 for a more detailed explanation
of the acquisition).
2.
Summary of significant accounting policies
Basis
of presentation
The
consolidated financial statements include accounts of the Company and its
wholly-owned subsidiaries. All inter-company accounts and transactions have
been
eliminated.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts therein.
Management’s estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Estimates inherent in the preparation of the accompanying consolidated financial
statements include the carrying value of long-lived assets, valuation allowances
for receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements, and potential liabilities related
to tax filings in the ordinary course of business. Management’s estimates and
assumptions are evaluated on an on-going basis. Due to the inherent uncertainty
involved in making estimates, actual results may differ from those
estimates.
Revenue
recognition
The
Company’s revenue recognition policy for the sale of steel counterweights or
structural weldments requires the recognition of sales when there is evidence
of
a sales agreement, the delivery of goods has occurred, the sales price is fixed
or determinable and the collectability of revenue is reasonably assured. The
Company generally records sales upon shipment of product to customers and
transfer of title under standard commercial terms.
Concentrations
of credit risk and significant customers
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable. The Company grants credit to customers in
the
ordinary course of business. Revenues for 2007 were primarily from three major
customers accounting for 38%, 13% and 9% of total revenues, respectively.
Revenues for 2006 were primarily from three major customers accounting for
38%,
10% and 9% of total revenues, respectively. Revenues for 2005 were primarily
from three major customers accounting for 42%, 9% and 8% of total revenues,
respectively. At December 31, 2007, outstanding accounts receivable from these
customers were $4.0 million.
Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Accounts
Receivable
Accounts
receivable consist of amounts billed and currently due from customers. The
Company extends credit to customers in the normal course of business and
maintains an allowance for estimated losses resulting from the inability or
unwillingness of customers to make required payments. The accrual for estimated
losses is based on its historical experience, existing economic conditions
and
any specific customer collection issues the Company has identified. The
allowance for doubtful accounts and accrued credits for returns amounted to
$0.1
million and $0 at December 31, 2007 and 2006, respectively.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out (“FIFO”)
average cost method. Costs included in inventories consist of materials, labor
and manufacturing overhead, which are related to the purchase and production
of
inventories.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost and depreciated over their estimated
useful lives utilizing the straight-line method. The estimated useful lives
range from 39 years for buildings and improvements, 10 years for machinery
and
equipment, 7 years for office equipment and furniture and 5 years for
transportation equipment. Depreciation expense was $0.6 million, $0.1 million
and $0 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Impairment
of Long-Lived Assets
Property,
plant and equipment and other purchased intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected undiscounted
cash flows is less than the carrying value of the related asset or group of
assets, a loss is recognized for the difference between the fair value and
carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment.
Fair
value of financial instruments
The
carrying amounts of the Company’s financial instruments, which include cash and
cash equivalents, note payable, long-term debt and interest rate swap
approximate their fair values at December 31, 2007 and 2006.
Deferred
financing costs
Deferred
financing costs are primarily related to the acquisition by the Company of
Concord Steel in the fourth quarter of 2006 and costs associated with the
issuance of long-term debt related to the investment in the Company by Olden
Acquisition LLC in the second quarter of 2004. Deferred financing costs are
amortized using the interest method over the term of the debt. Amortization
expense was $0.2 million, $0.1 million and $0, for the years ended December
31,
2007, 2006 and 2005, respectively.
Environmental
Remediation Costs
The
Company accrues for losses associated with environmental remediation obligations
when such losses are probable and reasonably estimable. The liabilities are
developed based on currently available information and reflect the participation
of other potentially responsible parties, depending on the parties’ financial
condition and probable contribution. The accruals are recorded at undiscounted
amounts and are reflected as liabilities on the accompanying consolidated
balance sheets. Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable. The accruals
are
adjusted as further information develops or circumstances change. There are
no
amounts accrued by the Company with respect to environmental remediation costs
at December 31, 2007 and 2006.
Income
taxes
The
Company calculates income taxes in accordance with the provisions of SFAS No.
109, “Accounting for Income Taxes,” which requires the use of the liability
method of accounting for income taxes. Income taxes are deferred for all
temporary differences between the financial statement and income tax basis
of
assets and liabilities. Further, deferred tax amounts are recognized for the
expected benefits of available net operating loss carryforwards and tax credit
carryforwards. Deferred taxes are recorded using the enacted tax rates scheduled
by tax law to be in effect when the temporary differences are expected to settle
or be realized. Deferred tax assets are reduced by a valuation allowance to
the
extent that utilization is considered uncertain. In addition, the Company
continuously evaluates its tax contingencies in accordance with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Company
will include interest and penalties related for uncertain tax positions as
a
component of its provision for income taxes.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”), on January 1, 2007. Upon the adoption of FIN 48, the Company commenced a
review of all open tax years in all jurisdictions. The Company does not believe
it has included any “uncertain tax positions” in its federal income tax return
or any of the state income tax returns it is currently filing, and has no
significant unrecognized tax benefits recorded. The Company has made an
evaluation of the potential impact of additional state taxes being assessed
by
jurisdictions in which the Company does not currently consider itself liable.
The Company does not anticipate that such additional taxes, if any, would result
in a material change to its financial position.
Income
per share
Basic
income per share is computed using net income (loss) and the weighted average
number of common shares outstanding. Diluted income per share reflects the
weighted average number of common shares outstanding plus any potentially
dilutive shares outstanding during the period. Potentially dilutive shares
consist of shares issuable upon the exercise of stock options, convertible
notes, and restricted stock awards.
Comprehensive
income (loss)
Comprehensive
income (loss), as defined by SFAS No. 130, “Reporting Comprehensive Income,”
includes net loss and items defined as other comprehensive income. SFAS No.
130
requires that items defined as other comprehensive income (loss), such as
foreign currency translation adjustments and unrealized gains and losses on
certain investments in debt securities, be separately classified in the
financial statements. Such disclosures are included in the accompanying
consolidated statements of stockholders’ equity and comprehensive income
(loss).
Stock-based
compensation
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), requiring
recognition of expense related to the fair value of stock option awards. The
Company recognizes the cost of the share-based awards on a straight-line basis
over the requisite service period of the award, which is usually the vesting
period. Prior to January 1, 2006, the Company accounted for stock option plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and
related interpretations, as permitted by Statement of Financial Accounting
Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
Effective January 1, 2006, the Company adopted the fair value provisions of
FAS
123R, using the modified prospective transition method. Under this transition
method, compensation cost recognized during the period ended December 31, 2006
includes compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123. Results for
prior periods have not been restated.
Derivatives
and hedging activities.
The
Company recognizes all derivatives on the balance sheet as either an asset
or
liability measured at fair value. Changes in the derivative’s fair value are
recognized currently in income unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative’s gains and
losses to offset related results on the hedged item in the statement of income
and requires the Company to formally document, designate and assess
effectiveness of transactions that receive hedge accounting. Derivatives that
are not hedges are adjusted to fair value through income. If the derivative
qualifies as a hedge, depending on the nature of the hedge, changes in the
fair
value of derivatives are either offset against the change in fair value of
hedged assets, liabilities, or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings.
Recently
issued accounting pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141R retains the underlying concepts of SFAS No. 141 in
that all business combinations are still required to be accounted for at fair
value under the acquisition method of accounting, but SFAS No. 141R changes
the
application of the acquisition method in a number of significant aspects.
Acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with
a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141R is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of
the
first annual period subsequent to December 15, 2008. Early adoption is not
permitted. The Company is currently evaluating the effects, if any, that SFAS
No. 141R may have on its financial statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157 “Fair Value Measurements” which provides enhanced guidance for using
fair value to measure assets and liabilities. The standard also expands the
amount of disclosure regarding the extent to which companies measure assets
and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new circumstances. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not anticipate any material impact to its financial
statements from the adoption of this standard.
3.
Inventories
Inventories
as of December 31, 2007 and 2006
are
as
follows:
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
101
|
|
$
|
89
|
|
Work-in-process
|
|
|
1,197
|
|
|
613
|
|
Raw
materials
|
|
|
12,527
|
|
|
13,392
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,825
|
|
$
|
14,094
|
|
4.
Property, Plant and Equipment
Property,
plant and equipment, net as of December 31, 2007 and 2006 are as
follows:
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Land
|
|
$
|
350
|
|
$
|
350
|
|
Building
and improvements
|
|
|
1,294
|
|
|
883
|
|
Leasehold
improvements
|
|
|
1,275
|
|
|
—
|
|
Machinery
and equipment
|
|
|
5,361
|
|
|
1,878
|
|
Office
equipment and furniture
|
|
|
985
|
|
|
196
|
|
Construction
in progress
|
|
|
—
|
|
|
537
|
|
|
|
|
9,265
|
|
|
3,844
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(657
|
)
|
|
(71
|
)
|
Property,
plant and equipment, net
|
|
$
|
8,608
|
|
$
|
3,773
|
|
5.
Intangible assets
As
part
of the acquisition of Concord, the Company allocated a portion of the purchase
cost to intangible assets consisting of trade names, customer relationships
and
non-compete agreements. These intangible assets are amortized over their
expected useful lives which are between 3 and 12 years using the straight-line
method (see Note 16 for further explanation of the acquisition).
Intangible
assets, net of amortization at December 31, 2007 and 2006 are as
follows:
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Life
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
12,399
|
|
$
|
(1,294
|
)
|
$
|
11,105
|
|
|
12
yrs
|
|
Non-compete
agreements
|
|
|
37
|
|
|
(15
|
)
|
|
22
|
|
|
3
yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name
|
|
|
9,397
|
|
|
—
|
|
|
9,397
|
|
|
—
|
|
Intangibles,
net
|
|
$
|
21,833
|
|
$
|
(1,309
|
)
|
$
|
20,524
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Life
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
12,399
|
|
$
|
(258
|
)
|
$
|
12,141
|
|
|
12
yrs
|
|
Non-compete
agreements
|
|
|
37
|
|
|
(3
|
)
|
|
34
|
|
|
3
yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name
|
|
|
9,397
|
|
|
—
|
|
|
9,397
|
|
|
—
|
|
Intangibles,
net
|
|
$
|
21,833
|
|
$
|
(261
|
)
|
$
|
21,572
|
|
|
|
|
The
following table shows the expected amortization of other intangible assets
over
the next five years:
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
1,033
|
|
$
|
1,033
|
|
$
|
1,033
|
|
$
|
1,033
|
|
$
|
1,033
|
|
Non-compete
agreements
|
|
|
12
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
1,045
|
|
$
|
1,043
|
|
$
|
1,033
|
|
$
|
1,033
|
|
$
|
1,033
|
|
6.
Accrued expenses and other liabilities
Accrued
expenses and other liabilities of the Company as of December 31, 2007 and 2006
are as follows:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Accrued
compensation, benefits and commissions
|
|
$
|
705
|
|
$
|
706
|
|
Accrued
interest payable
|
|
|
339
|
|
|
701
|
|
Accrued
professional services
|
|
|
343
|
|
|
25
|
|
Accrued
insurance
|
|
|
426
|
|
|
216
|
|
Accrued
property taxes
|
|
|
33
|
|
|
41
|
|
Accrued
other liabilities
|
|
|
969
|
|
|
1,201
|
|
|
|
$
|
2,815
|
|
$
|
2,890
|
|
7.
Long-term Debt and Notes Payable
In
connection with the Company’s acquisition of the assets of CRC, through Concord,
Concord entered into a senior secured credit facility (the “Credit Agreement”)
with LaSalle Bank National Association, as administrative agent (the “Agent”)
and the lenders party thereto.
The
Credit Agreement establishes a commitment to Concord to provide up to $40.0
million in the aggregate of loans and other financial accommodations consisting
of (i) a five-year senior secured term loan in an aggregate principal amount
of
$28.0 million (ii) a five year senior secured revolving credit facility in
the
aggregate principal amount of $10.0 million (the “Revolving Facility”) and (iii)
a five-year senior secured capital expenditure facility in the aggregate
principal amount of $2.0 million. The Revolving Facility is further subject
to a
borrowing base consisting of up to 85% of eligible accounts receivable and
up to
55% of eligible inventory. The Revolving Facility includes a sublimit of up
to
an aggregate amount of $5.0 million in letters of credit and a sublimit of
up to
an aggregate amount of $2.5 million in swing line loans. The capital expenditure
facility permitted the Company to draw funds for the purchase of machinery
and
equipment during the 6-month period ended March 3, 2007, and then converted
into
a 4.5-year term loan. Immediately following the closing of the Concord
acquisition, the Company drew down approximately $31.3 million and had
additional availability under the Revolving Facility of approximately $6.7
million. There were no amounts drawn under the capital expenditure facility
at
the time of closing of the credit facility nor were there any amounts drawn
down
prior to March 3, 2007. The capital expenditure facility expired on March 3,
2007. On March 13, 2008, we entered into a second amendment to the Credit
Agreement to provide for, among other thing, revisions to certain of
the financial covenants under the bank credit facilities.
At
December 31, 2007 and 2006, the outstanding balance from the revolving credit
facility amounted to $5.3 million and $3.3 million, respectively. At December
31, 2007, the Company had $3.1 million available in additional borrowings net
of
$1.6 million in outstanding letters of credit which have not been drawn upon.
The balance under the term loan at December 31, 2007 and 2006 was $23.0 million
and $28.0 million, respectively. At December 31, 2007 and 2006, the Company
had
$ 4.0 million and $3.5 million, respectively, classified as current and $19.0
million and $24.5 million, respectively classified as long-term. During the
period ended December 31, 2007 the Company was in compliance with
all
financial covenants under the bank credit facilities. The Company’s future
compliance with its financial covenants under the bank credit facilities will
depend on its ability to generate earnings and manage its assets effectively.
The bank credit facilities also has various non-financial covenants, requiring
the Company to refrain from taking certain actions (as described above) and
requiring it to take certain actions, such as keeping in good standing the
corporate existence, maintaining insurance, and providing the bank lending
group
with financial information on a timely basis.
Borrowings
under the Credit Agreement bear interest, at the Company’s election, at either
(i) a rate equal to three month variable London Interbank Offer Rate (“LIBOR”),
plus an applicable margin ranging from 1.25% to 2.5%, depending on certain
conditions, or (ii) an alternate base rate which will be the greater of (a)
the
Federal Funds rate plus 0.5% or (b) the prime rate publicly announced by the
Agent as its prime rate, plus, in both cases, an applicable margin ranging
from
0% to 1.0%, depending on certain conditions. At December 31, 2007 and 2006,
respectively, the applicable interest rate for the outstanding borrowings under
the Credit Agreement was 7.24% and 7.87%, respectively.
The
Credit Agreement is guaranteed by the Company and its direct and indirect
subsidiaries and is secured by, among other things, (a) (i) all of the equity
interests of Concord’s subsidiaries and (ii) a pledge by the Company of all of
the issued and outstanding shares of stock of Concord by Stamford Industrial
Group and (b) a first priority perfected security interest on substantially
all
the assets of the Company and its direct and indirect subsidiaries pursuant
to a
guaranty and collateral agreement dated October 3, 2006 and delivered in
connection with the Credit Agreement (the “Guaranty Agreement”). In addition,
LaSalle acting as the Agent, for the benefit of the lenders, has a mortgage
on
all owned real estate of the Company and its direct and indirect subsidiaries,
as well as deposit account control agreements with respect to funds on deposit
in bank accounts of the Company and its direct and indirect
subsidiaries.
The
Company is exposed to interest rate volatility with regard to existing issuances
of variable rate debt. Primary exposure includes movements in the U.S. prime
rate and LIBOR. The Company uses interest rate swaps to reduce interest rate
volatility. On January 2, 2007, the Company entered into an interest rate
protection agreement that has approximately $12.3 million of interest rate
swaps
fixing interest rates between 5.0% and 5.8%.
On
April
21, 2004, the Company closed on an investment into the Company by Olden
Acquisition LLC (“Olden”), an affiliate of Kanders & Company, Inc., for the
purpose of initiating a strategy to redeploy the Company’s assets and use the
Company’s cash, cash equivalent assets and marketable securities to enhance
stockholder value. The Company issued and sold to Olden a 2% ten-year
Convertible Subordinated Note, which is convertible after one year (or earlier
upon a call by the Company and in certain other circumstances) at a conversion
price of $0.45 per share of Company common stock into approximately 19.9% of
the
outstanding common equity of the Company as of the closing date. Proceeds to
the
Company from this transaction totaled approximately $2.5 million before
transaction costs of $0.3 million. The transaction costs are being amortized
over ten years, the term of the debt. Interest on the note accrues semi-annually
but is not payable currently or upon conversion of the note. The note matures
on
April 21, 2014. The convertible subordinated note was deemed to include a
beneficial conversion feature. At the date of issue, the Company allocated
$0.1
million to the beneficial conversion feature and amortized the beneficial
conversion feature over one year (the period after which the note is
convertible). As of December 31, 2007 and 2006, the outstanding balance on
the
note payable amounted to $2.5 million and is classified as long-term
debt.
As
of
December 31, 2007 and 2006, the Company had long-debt and notes payable
consisting of the following:
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Five-Year
Senior Secured Term Loan Due June 30, 2011
|
|
$
|
23,000
|
|
$
|
28,000
|
|
2%
Convertible Note Due April 21, 2014
|
|
|
2,533
|
|
|
2,533
|
|
Total
long-term debt and notes payable
|
|
$
|
25,533
|
|
$
|
30,533
|
|
Less:
Current portion of long-term debt
|
|
|
(4,000
|
)
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
Long-term
debt and notes payable, less current portion
|
|
$
|
21,533
|
|
$
|
27,033
|
|
Aggregate
maturities of long-term debt and notes payable at December 31, 2007 are
summarized below:
2008
|
|
$
|
4,000
|
|
2009
|
|
|
4,000
|
|
2010
|
|
|
4,000
|
|
2011
|
|
|
11,000
|
|
2012
|
|
|
—
|
|
Thereafter
|
|
|
2,533
|
|
Total
|
|
$
|
25,533
|
|
8.
Other long-term liabilities
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
$
|
699
|
|
$
|
—
|
|
Accrued
interest payable
|
|
|
190
|
|
|
139
|
|
|
|
$
|
889
|
|
$
|
139
|
|
Effective
December 27, 2007, the Company and Albert Weggeman entered into a deferred
compensation agreement pursuant to which Mr. Weggeman would be entitled to
receive deferred compensation of up to $1,519,766, which may be reduced if
the
stock price at the time of distribution is less than $1.25. The deferred
compensation shall vest on the following basis: (i) 19.4% shall be immediately
vested; (ii) 30.6% shall vest in twenty-two equal monthly consecutive tranches
commencing on December 27, 2007, subject to Mr. Weggeman being employed by
the Company on each vesting date; (iii) up to 50.0% shall vest as follows,
provided that Mr. Weggeman is actively employed as of the vesting date: (A)
16.7% shall vest as of March 31, 2008, if the Company’s Adjusted Earnings Before
Interest Taxes Depreciation and Amortization (“Adjusted EBITDA”), as more fully
described in the agreement, for the year ending December 31, 2007
(“Year 1”) is not less than $13,800,000 (the “Year 1 Target”); if the Year
1 Target is not achieved, and if the sum of the Company’s Adjusted EBITDA for
the years ending December 31, 2007 and 2008 is not less than the sum of the
Year
1 Target plus the Year 2 Target (as defined below), then such 16.7% shall
vest as of March 31, 2009; (B) 16.7% shall vest as of March 31, 2009, if the
Company’s Adjusted EBITDA for the year ending December 31, 2008 (“Year 2”)
is not less than $15,700,000 (the “Year 2 Target”); if the Year 2 Target is not
achieved, and if the sum of the Company’s Adjusted EBITDA for the years ending
December 31, 2008 and 2009 is not less than the sum of the Year 2 Target plus
the Year 3 Target (as defined below), then such 16.7% shall vest as of March
31,
2010; (C) 16.6% shall vest as of March 31, 2010, if the Company’s Adjusted
EBITDA for the year ending December 31, 2009 (“Year 3”) is not less than
$17,200,000 (the “Year 3 Target”); if (i) the Year 3 Target is not
achieved, and (ii) the Company renews the employment agreement of Mr.
Weggeman for another three-year term, and (iii) the sum of the Company’s
Adjusted EBITDA for the years ending December 31, 2009 and 2010 is not less
than
the sum of the Year 3 Target plus the Year 4 Target (as defined hereinafter),
then such 16.6% shall vest as of March 31, 2011. “Year 4 Target” means an amount
of the Company’s Adjusted EBITDA for the year ending December 31, 2010 that will
be agreed upon by the parties in the renewed employment agreement, if
any.
Amounts
vesting on or before October 1, 2009, shall be payable not later than October
31, 2009. Amounts vesting after October 1, 2009, shall be payable promptly
after
vesting. Payments shall be made in cash or in common stock of the Company,
as
determined by the Compensation Committee in its absolute
discretion.
This
deferred compensation agreement resulted from the modification of stock options
described in Note 12. In accordance with Internal Revenue Code Section 409A
and
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123R”), a portion of the current year’s deferred compensation
$699 thousand, was recorded as a $298 thousand reduction of paid-in
capital.
9.
Per Share Data
Basic
net
income (loss) per share is computed using net income (loss) and the weighted
average number of common shares outstanding. Diluted income per share reflects
the weighted average number of common shares outstanding plus any potentially
dilutive shares outstanding during the period. Potentially dilutive shares
consist of shares issuable upon the exercise of stock options, convertible
notes
and restricted stock awards. For the year ended December 31, 2007, diluted
net
income per share includes the impact of 132 potential common shares from
the exercise of stock options and restricted stock awards, 5,628 potential
common shares from the convertible note and 138 potential common shares from
the
stock fee agreement all of which were dilutive. For the year ended December
31,
2006, diluted net loss per share does not differ from basic net loss per share
since potentially dilutive shares were anti-dilutive. Shares used in the diluted
net loss per share for the period ended December 31, 2006 exclude the impact
of
513 common shares issuable upon the exercise of stock options, 5,628 common
shares issuable upon the conversion of the convertible note and 141 common
shares issuable pursuant to restricted stock awards. The diluted net income
per
share computation for the year ended December 31, 2005, includes the impact
of
299 potential common shares from the exercise of stock options and restricted
stock awards and 4,221 potential common shares from the convertible note all
of
which were dilutive.
The
following table shows the computation of the Company’s basic and diluted
earnings per share for the years ended December 31, 2007, 2006 and
2005.
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,032
|
|
$
|
(7,753
|
)
|
$
|
207
|
|
Weighted
average common shares - basic
|
|
|
41,749
|
|
|
32,577
|
|
|
28,918
|
|
Basic
net income (loss) per share
|
|
$
|
0.07
|
|
$
|
(0.24
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,032
|
|
$
|
(7,753
|
)
|
$
|
207
|
|
Weighted
average common shares - basic
|
|
|
41,749
|
|
|
32,577
|
|
|
28,918
|
|
Effect
of dilutive stock options
|
|
|
77
|
|
|
—
|
|
|
47
|
|
Effect
of restricted stock awards
|
|
|
55
|
|
|
—
|
|
|
252
|
|
Effect
of convertible note
|
|
|
5,628
|
|
|
—
|
|
|
4,221
|
|
Effect
of stock fee
|
|
|
138
|
|
|
—
|
|
|
-
|
|
Weighted
average common shares - diluted
|
|
|
47,647
|
|
|
32,577
|
|
|
33,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
0.06
|
|
$
|
(0.24
|
)
|
$
|
0.01
|
|
10.
Income taxes
The
Company files a consolidated federal income tax return with its wholly-owned
subsidiaries. The components of income tax expense are as follows (in
thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
60
|
|
$
|
—
|
|
$
|
—
|
|
State
|
|
|
143
|
|
|
223
|
|
|
—
|
|
|
|
$
|
203
|
|
$
|
223
|
|
$
|
—
|
|
Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$
|
42,036
|
|
$
|
42,986
|
|
Research
and development credit carry-forwards
|
|
|
151
|
|
|
151
|
|
Intangible
assets and other accrued / current Liabilities
|
|
|
1,251
|
|
|
1,216
|
|
AMT
credit
|
|
|
60
|
|
|
—
|
|
Total
deferred tax assets
|
|
|
43,498
|
|
|
44,353
|
|
Valuation
allowance
|
|
|
(35,446
|
)
|
|
(36,301
|
)
|
Total
net deferred income taxes
|
|
$
|
8,052
|
|
$
|
8,052
|
|
For
federal income tax purposes, the Company has available net operating loss
carryforwards of approximately $122.6 million and research and development
credit carryforwards of $0.2 million at December 31, 2007. The net operating
loss and research and development credit carryforwards expire in 2011 through
2026, if not previously utilized. The utilization of these carryforwards may
be
subject to limitations based on past and future changes in ownership of the
Company pursuant to Internal Revenue Code Section 382. The recognition of a
valuation allowance for deferred tax assets requires management to make
estimates about the Company’s future profitability. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more
likely than not that some portion or all of the deferred tax assets will not
be
realized. The estimates associated with the valuation of deferred tax assets
are
considered critical due to the amount of deferred tax assets recorded on the
consolidated balance sheet and the judgment required in determining the
Company’s future profitability. As described in Note 16, in conjunction with the
acquisition of Concord, the Company reduced $8.1 million of valuation allowance
as a reduction of goodwill and intangible assets acquired from the Concord
acquisition, based on the expectation that these deferred tax assets are more
likely than not to be realized. Deferred tax assets were $8.1 million at
December 31, 2007 and 2006.
The
following is a summary of the items that caused recorded income taxes to differ
from income taxes computed using the statutory federal income tax
rate:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Computed
"expected" income tax expense (benefit)
|
|
|
34.0
|
%
|
|
(34.0)
|
%
|
|
34.0
|
%
|
Increase
(decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
income taxes, net of federal income taxes and credits
|
|
|
2.5
|
|
|
—
|
|
|
5.0
|
|
State
net operating loss adjustment
|
|
|
—
|
|
|
—
|
|
|
(8.4
|
)
|
Non-cash
stock compensation
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
Change
in valuation allowance and other items
|
|
|
(29.8
|
)
|
|
24.3
|
|
|
(30.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
6.7
|
%
|
|
3.0
|
%
|
|
—
|
%
|
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”), on January 1, 2007. Upon the adoption of FIN 48, the Company commenced a
review of all open tax years in all jurisdictions. The Company does not believe
it has included any “uncertain tax positions” in its federal income tax return
or any of the state income tax returns it is currently filing, and has no
significant unrecognized tax benefits recorded. The Company has made an
evaluation of the potential impact of additional state taxes being assessed
by
jurisdictions in which the Company does not currently consider itself liable.
The Company does not anticipate that such additional taxes, if any, would result
in a material change to its financial position.
During
2007, the Company will have a tax deduction for the amortization of certain
intangible assets that will exceed the book amortization. The tax benefit for
this excess tax deduction is typically recorded as a decrease of intangible
assets. However, because the Company is in a net operating loss position for
tax
purposes and has a full valuation allowance recorded for its net deferred tax
asset, the Company has not recorded the tax benefit of this deduction in 2007,
and will not record such benefit until the Company’s net operating losses are
fully utilized. At December 31, 2007, approximately $0.1 million of net
operating losses resulting from this deduction, and related tax benefit of
approximately $43 thousand, have been excluded from the calculation of deferred
tax assets.
11.
Employee Benefit Plan
The
Company sponsors a 401(k) Plan (the "Plan"), covering substantially all
employees of the Company. Under this Plan, eligible employees who elect to
participate in the Plan may contribute between 2% and 20% of eligible
compensation (as defined herein) to the Plan. The Company made matching
contributions during the years ended December 31, 2007 and 2006 of approximately
$0.1 million, $0.1 million, respectively, and $0 million for the year ended
December 31, 2005.
12.
Stockholders’ equity
The
Company is authorized to issue two classes of stock designated as common and
preferred. As of December 31, 2007, the total number of shares that the Company
was authorized to issue was 105,000,000 shares, of which 100,000,000 were common
stock and 5,000,000 were preferred stock.
Stock
compensation plans
On
June
21, 2007 the Company’s stockholders approved the Company’s 2007 Stock Incentive
Plan (the “2007 Stock Incentive Plan”). Under the 2007 Stock Incentive Plan,
10,000,000 shares of the Company’s common stock were initially reserved for
issuance and available for awards, subject to an automatic annual increase
equal
to 4% of the total number of shares of the Company’s common stock outstanding at
the beginning of each fiscal year (the “Annual Share Increase”). Awards under
the 2007 Stock Incentive Plan may include non-qualified stock options, incentive
stock options, stock appreciation rights, restricted shares of common stock,
restricted units and performance awards. Awards under the 2007 Stock Incentive
Plan may be granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any subsidiary of the Company. In
any
calendar year, no participant may receive awards under the 2007 Stock Incentive
Plan for more than 2,500,000 shares of the Company’s common stock. Additionally,
no more than 2,500,000 of the total shares of common stock available for
issuance under the 2007 Stock Incentive Plan may be granted in the form of
restricted shares, restricted units or performance awards, subject to an
automatic annual increase, beginning with January in year 2008 and continuing
through January in year 2017, equal to 75% of the total number of shares of
the
Company’s common stock increased pursuant to the Annual Share Increase. The 2007
Stock Incentive Plan has a term of ten years expiring on June 21, 2017. As
of
December 31, 2007 the total number of options issued under 2007 Plan was 2.9
million and primarily represented replacement options issued to management
(see
below for further discussion).
On
June
21, 2007, the Company’s stockholders approved the Company’s 2007 Annual
Incentive Plan (the “2007 Annual Incentive Plan”). The 2007 Annual Incentive
Plan will enable the Company to award certain executive officers of the Company
or any subsidiary of the Company, with “performance-based compensation” under
Section 162(m) of the Internal Revenue Code of 1986, as amended, which will
enable the Company to deduct such compensation from its taxable income. As
of
December 31, 2007, no awards have been issued under this plan.
In
April
2000, the Company’s Board of Directors adopted the 2000 Stock Plan (the “2000
Plan”), which provides for the issuance of non-qualified stock options to
employees who are not officers. The options allow the holder to purchase shares
of the Company’s common stock at fair market value on the date of the grant.
Stock options granted under the 2000 Plan typically vest over three years and
generally expire ten years from the date of grant. As a result of shareholder
approval of the 2007 Stock Incentive Plan, the Company's 2000 Plan has been
frozen and will remain in effect only to the extent of awards outstanding under
the plan as of June 21, 2007.
In
February 1999, the Company’s Board of Directors adopted the 1999 Equity
Incentive Plan (the “1999 Plan”), which provides for the issuance of both
incentive and non-qualified stock options. The options allow the holder to
purchase shares of the Company’s common stock at fair market value on the date
of the grant. For options granted to holders of more than 10% of the outstanding
common stock, the option price at the date of the grant must be at least equal
to 110% of the fair market value of the stock. Stock options granted under
the
1999 Plan typically vest when performance conditions are met or over three
years
and generally expire ten years from the date of grant. As a result of
shareholder approval of the 2007 Stock Incentive Plan, the Company's 1999 Plan
has been frozen and will remain in effect only to the extent of awards
outstanding under the plan as of June 21, 2007.
Outstanding
options, consisting of incentive and non-qualified stock options, generally
vest
and become exercisable over a one to three year period from the date of grant.
The outstanding options generally expire ten years from date of grant or upon
retirement from the Company and are contingent upon continued employment during
the applicable ten-year period.
Stock
compensation expense related to all plans recorded in the general and
administrative expense category within operating expenses in 2007, 2006 and
2005, was $1.7 million, $0.4 million and $0.1 million,
respectively.
Prior
to
January 1, 2007, the Company estimated the fair value of our option awards
granted using the Black-Scholes option pricing model. Beginning in 2007, the
Company has used the binomial valuation model. The binomial valuation model
considers certain characteristics of fair value option pricing that are not
considered under the Black-Scholes model. Similar to the Black-Scholes model,
the binomial valuation model takes into account variables such as volatility,
dividend yield, and the risk-free interest rate. However, the binomial valuation
model also considers the expected exercise multiple (the multiple of exercise
price to grant price at which exercises are expected to occur on average) and
the termination rate (the probability of a vested option being cancelled due
to
the termination of the option holder) in computing the value of the option.
Accordingly, the Company believes that the binomial valuation model should
produce a fair value that is more representative of the value of an employee
option.
The
expected exercise multiple may be influenced by the Company’s future stock
performance, stock price volatility, and employee turnover rates.
Effective
December 27, 2007, the Company’s Board of Directors and Mr. Albert W. Weggeman,
the President and Chief Executive Officer of the Company, agreed to cancel
non-plan options to purchase 2,491,419 shares of the Company's common stock
at
an exercise price of $0.64 per share, which were granted to Mr. Weggeman
pursuant to the terms of his employment agreement dated as of September 22,
2006, and award to Mr. Weggeman options under the Company's 2007 Stock Incentive
Plan to purchase 2,491,419 shares of common stock at an exercise price of $1.25
per share, which was the closing price of the common stock as reported by
the OTC Pink Sheet Electronic Quotation Service on December 27, 2007.
Options to purchase (i) 484,442 shares are immediately vested and
exercisable, (ii) 761,267 shares shall vest and become exercisable in 22
equal consecutive monthly tranches commencing on January 3, 2008; provided,
that, upon the occurrence of a Change-of-Control Event as defined in the 2007
Stock Incentive Plan, the vesting of such 761,267 shares shall accelerate and
they shall automatically vest, to the extent not previously vested, immediately
prior to the effective time of such Change-of-Control Event, and
(iii) 1,245,710 shares shall vest and become exercisable upon the
occurrence of both of the following events: (A) the Company's common
stock reaching a price of at least $5.12 per share (subject to adjustment for
stock splits and similar events) for 20 consecutive trading days, and
(B) the aggregate amount of Adjusted Earnings Before Interest Taxes
Depreciation and Amortization (“Adjusted EBITDA”) for any four consecutive
calendar quarters, commencing with the calendar quarter beginning January 1,
2008, being not less than $70,000,000; provided, that, if the conditions
specified in clauses (A) and (B) of this clause (iii) have not been satisfied
on
or before the fourth anniversary of the date of grant of such options, then
the
options described in this clause (iii) shall have lapsed without vesting. The
1,245,710 shares acquirable under clause (iii) described above may not
be sold or otherwise transferred (except on the death of Mr. Weggeman) prior
to
December 27, 2011.
Also
effective December 27, 2007, the Company’s Board of Directors and Mr. Jonathan
LaBarre, Chief Financial Officer of the Company, agreed to cancel options
awarded to Mr. LaBarre
under
the Company's 1999 Equity Incentive Plan
and
pursuant to the terms of his employment agreement dated as of December 1, 2006,
to purchase 250,000 shares of the Company's common stock at an exercise price
of
$2.56 per share and award to Mr. LaBarre options under the Company’s 2007 Stock
Incentive Plan to purchase 250,000 shares of stock at an exercise price of
$1.25
per share, which was the closing price of the common stock as reported by the
OTC Pink Sheet Electronic Quotation Service on December 27, 2007. Options to
purchase 125,000 shares vest and become exercisable as follows: 41,666 options
vest immediately; 41,667 options vest on December 1, 2008; and 41,667 options
vest on December 1, 2009; provided, that upon the occurrence of a
Change-of-Control Event as defined in the 2007 Stock Incentive Plan, the vesting
of such 83,334 options shall accelerate, and they shall automatically vest,
to
the extent not previously vested, immediately prior to the effective time of
such Change-of-Control Event. The other 125,000 options vest and become
exercisable upon the occurrence of both of the following events: (A) the
Company's common stock reaching a price of at least $5.12 per share (subject
to
adjustment for stock splits and similar events) for 20 consecutive trading
days,
and (B) the aggregate amount of Adjusted EBITDA for any four consecutive
calendar quarters, commencing with the calendar quarter beginning January 1,
2008, being not less than $70,000,000; provided, that if the conditions
specified in clauses (A) and (B) above have not been satisfied on or before
the
fourth anniversary of the date of grant of such options, the options described
in this sentence shall have lapsed without vesting. The shares of common stock
acquirable on exercise of these options may not be sold or otherwise transferred
(except on the death of Mr. LaBarre) prior to December 27, 2011.
The
cancellation and award of new stock option awards to Albert Weggeman and
Jonathan LaBarre as described above resulted in a stock option modification.
The
effect of the modification and change in management's
estimates resulted in a reduction in stock compensation expense of
$1.0 million and was recorded in operating expenses for the year ended December
31, 2007.
The
fair
value of the options granted during the years ended December 31, 2007, 2006
and
2005 was estimated at the date of grant using the following
assumptions:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Expected
Volatility
|
|
|
46.0% - 51.9
|
%
|
|
50.0
|
%
|
|
57.0
|
%
|
Expected
dividends
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
term (in years)
|
|
|
4
|
|
|
5
|
|
|
5
|
|
Risk
free rate
|
|
|
4.4
|
%
|
|
4.7
|
%
|
|
4.0
|
%
|
Weighted-average
fair value of options granted
|
|
|
$0.58
|
|
|
$0.80
|
|
|
$0.37
|
|
A
summary
of option activity under the Plans as of December 31, 2007 and 2006 and changes
during the years ended is presented below:
Options
|
|
Shares
(000)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2006
|
|
|
321
|
|
$
|
0.68
|
|
|
|
|
|
|
|
Granted
|
|
|
1,370
|
|
$
|
0.81
|
|
|
|
|
|
|
|
Exercised
|
|
|
(100
|
)
|
$
|
0.75
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,591
|
|
$
|
0.80
|
|
|
8.2
|
|
$
|
2,625
|
|
Vested
or expected to vest at December 31, 2006
|
|
|
1,591
|
|
$
|
0.80
|
|
|
8.2
|
|
$
|
2,625
|
|
Exercisable
at December 31, 2006
|
|
|
186
|
|
$
|
0.61
|
|
|
8.0
|
|
$
|
342
|
|
Options
|
|
Shares
(000)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
1,591
|
|
$
|
0.80
|
|
|
|
|
|
|
|
Granted
|
|
|
1,533
|
|
$
|
1.29
|
|
|
|
|
|
|
|
Exercised
|
|
|
(84
|
)
|
$
|
0.57
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(1,499
|
)
|
$
|
0.87
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,541
|
|
$
|
1.22
|
|
|
6.4
|
|
$
|
39
|
|
Vested
or expected to vest at December 31, 2007
|
|
|
1,541
|
|
$
|
1.22
|
|
|
6.4
|
|
$
|
39
|
|
Exercisable
at December 31, 2007
|
|
|
576
|
|
$
|
1.20
|
|
|
7.0
|
|
$
|
28
|
|
The
weighted-average grant-date fair value of options granted during the years
2007,
2006, 2005 was $1.29, $0.80, and $0, respectively.
The
total
intrinsic value of options exercised during the years ended December 31, 2007,
2006, and 2005, was $0.1 million, $0.2 million, and $0, respectively.
Unrecognized compensation cost at December 31, 2007 was $1.2
million.
A
summary
of the status of the Company’s nonvested restricted share awards as of December
31, 2007 and 2006, and changes during the years ended is presented
below:
Nonvested Restricted Shares
|
|
Shares
(000)
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
310
|
|
$
|
0.54
|
|
Granted
|
|
|
506
|
|
$
|
0.92
|
|
Vested
|
|
|
(356
|
)
|
$
|
0.89
|
|
Forfeited
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
460
|
|
$
|
1.15
|
|
Nonvested Restricted Shares
|
|
Shares
(000)
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested
at January 1, 2007
|
|
|
460
|
|
$
|
1.35
|
|
Granted
|
|
|
—
|
|
|
—
|
|
Vested
|
|
|
(460
|
)
|
|
1.35
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Nonvested
at December 31, 2007
|
|
|
—
|
|
|
—
|
|
As
of
December 31, 2007, there was no unrecognized compensation cost related to
nonvested restricted share-based compensation arrangements granted under the
Plans. The cost was recognized over a weighted-average period of 1 year. The
total fair value of the shares vested during the years ended December 31, 2007,
2006 and 2005 was $0.6 million, $7.7 million, and $0.1 million,
respectively.
A
summary
of the activity under the performance plans as of December 31, 2007 and 2006,
and changes during the years then ended is presented below:
Performance Options
|
|
Shares
(000)
|
|
Weighted
Average
Exercise Price
|
|
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,371
|
|
$
|
0.81
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,371
|
|
$
|
0.81
|
|
|
9.75
|
|
$
|
2,255
|
|
Vested
or expected to vest at December 31, 2006
|
|
|
|
|
$
|
|
|
|
9.75
|
|
$
|
|
|
Exercisable
at December 31, 2006
|
|
|
|
|
$
|
|
|
|
—
|
|
$
|
|
|
Performance Options
|
|
Shares
(000)
|
|
Weighted
Average
Exercise Price
|
|
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2007
|
|
|
1,371
|
|
$
|
0.81
|
|
|
|
|
|
|
|
Granted
|
|
|
1,533
|
|
$
|
1.29
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(1,433
|
)
|
$
|
0.88
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,471
|
|
$
|
1.25
|
|
|
9.99
|
|
$
|
|
|
Vested
or expected to vest at December 31,
2007
|
|
|
1,471
|
|
$
|
1.25
|
|
|
9.99
|
|
$
|
|
|
Exercisable
at December 31, 2007
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
The
weighted-average grant-date fair value of performance options granted during
the
years 2007, 2006, 2005 was $1.29, $0.81, and $0, respectively. The total
intrinsic value of options exercised during the years ended December 31, 2007,
2006, and 2005 was $0 for all three years. As of December 31, 2007, there was
$0.8 million of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the performance plans that
may be recognized over a period of three years if performance conditions are
met.
The
following table shows the effect on December 31, 2005 net income and earnings
per share if the fair value method of accounting had been applied. For purposes
of this pro forma disclosure, the estimated fair value of an option utilizing
the Black-Scholes option-pricing model is assumed to be amortized to expense
over the option's vesting periods:
|
|
Year Ended
December 31, 2005
(000)
|
|
Net
income, as reported
|
|
$
|
207
|
|
Add:
Stock-based employee compensation expense included in reported
net
income
|
|
|
77
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards
|
|
|
(96
|
)
|
Pro
forma net income
|
|
$
|
188
|
|
Basic
net income per share:
|
|
|
|
|
As
reported
|
|
$
|
0.01
|
|
Pro
forma
|
|
$
|
0.01
|
|
Diluted
net income per share:
|
|
|
|
|
As
reported
|
|
$
|
0.01
|
|
Pro
forma
|
|
$
|
0.01
|
|
Cash
received from exercises under all stock-based compensation arrangements for
the
year ended December 31, 2007 was approximately $47 thousand. The Company did
not
realize any windfall tax benefits for the tax deductions resulting from option
exercises during the year ended December 31, 2007. The Company issues newly
certificated shares upon exercise of options granted under stock-based
compensation arrangements.
The
Company did not capitalize stock-based compensation expense as part of the
cost
of an asset for any periods presented.
Restricted
stock
Effective
December 27, 2007, the Company’s Board of Directors and Albert Weggeman agreed
to cancel the restricted stock award that was granted to Mr. Weggeman pursuant
to the terms of his employment agreement dated as of September 22, 2006,
and to
issue to Mr. Weggeman a new restricted stock award pursuant to the 2007 Stock
Incentive Plan. Under the new award, Mr. Weggeman shall earn shares of
restricted common stock on the following basis: (i) $1,000,000 of
Restricted Stock upon the Company achieving annual earnings before interest,
taxes, depreciation and amortization, and excluding capital gains ("Adjusted
EBITDA" as defined in the Plan) as computed by the Company on or prior to
its
filing of its annual report on Form 10-K, on a consistent basis, of at least
$25,000,000 in a fiscal year of the Company commencing after fiscal year
ended
December 31, 2007; (ii) $1,000,000 of Restricted Stock upon the Company
achieving annual Adjusted EBITDA as computed by the Company on or prior to
its
filing of its annual report on Form 10-K, on a consistent basis, of at least
$50,000,000 in a subsequent fiscal year of the Company; and
(iii) $1,000,000 of Restricted Stock upon the Company achieving annual
Adjusted EBITDA as computed by the Company on or prior to its filing of its
annual report on Form 10-K, on a consistent basis, of at least $75,000,000
in a
subsequent fiscal year of the Company. Each of the grants specified in (i)-(iii)
above are one-time grants which vest on the date on which the Company’s Form
10-K is filed in respect of the fiscal year for which the grant is being
made
and the grant price will be the closing price of the Common Stock of the
Company
on the principal exchange on which it is traded on such date.
The
right
Mr. Weggeman has to receive the shares of common stock underlying this
restricted stock award shall expire upon the earlier to occur of: (i)
termination of his employment agreement with the Company or (ii) the fifth
anniversary of the grant date of the award.
On
October 3, 2006, in connection with the acquisition of the assets of Concord,
the Company entered into an employment agreement with Mr. Paul Vesey, who
serves
as president of Concord, the Company's wholly-owned subsidiary which was
acquired in 2006. Under the employment agreement, Mr. Vesey received a
restricted stock award under the Company's 1999 Equity Incentive Plan, of
which
11,765 shares are fully vested, and 147,059 shares will vest if the Company
achieves, in the fiscal year ending December 31, 2007, (i) revenue of $90.0
million, or (ii) gross profit of at least $18.6 million, or
(iii) EBITDA of at least $14.8 million. The aggregate value of the award
was $0.3 million, which was based upon the Company’s closing stock price of
$1.80 per share on October 3, 2006, the date of the grant. As of December
31,
2007 Mr. Vesey is fully vested in his shares.
On
September 22, 2006, the Company entered into a Restricted Stock Award Agreement
with each of Mr. David A. Jones and Mr. Nicholas Sokolow, directors of
the
Company. Under each agreement, the directors have been awarded 100,000
shares of
restricted stock under the Company's 1999 Equity Incentive Plan, which
vested
immediately but are subject to prohibitions on transfer which expire in
eight
consecutive quarterly tranches of 12,500 shares, commencing September 30,
2006
and expiring June 30, 2008. The aggregate value of the awards was $0.2
million,
which was based upon the closing price of the Company’s common stock of $0.89 on
September 22, 2006, the date of the grant. The Company recorded compensation
expense of $0.2 million relating to these restricted stock awards for the
year
ended December 31, 2006.
On
April
1, 2005, the Company issued restricted stock to Nigel Ekern, the Company’s then
Chief Administrative Officer, in the amount of 66,667 shares of the Company’s
common stock under the Company’s incentive plans, vesting over three years. The
fair value of $0.1 million for the restricted stock will be amortized over
the
three-year vesting period.
On
April
21, 2004, the Company granted restricted stock to Nigel Ekern, the Company’s
then Chief Administrative Officer, in the amount of 364,583 shares of the
Company’s common stock under the Company’s incentive plans, vesting over three
years. The fair value of $0.2 million for the restricted stock was amortized
over the three-year vesting period. The Company recorded total compensation
expense of $0, $0.1 million, and $0.1 million relating to restricted stock
grants during the years ended December 31, 2007, 2006, and 2005,
respectively.
See
Note
15 regarding Equity Compensation Agreement with Kanders & Company, Inc. and
Note 16 for CRC’s investment in the Company.
Stockholders’
rights plan
In
June
2001, the Company entered into a Rights Agreement (the “Rights Agreement”),
commonly known as a “poison pill.” Under the Rights Agreement, stockholders of
record on June 14, 2001 were distributed Rights (the “Rights”) to acquire one
one-thousandth of a share of the Company’s Series A Junior Participating
Preferred Stock (the “Preferred Stock”), at a rate of one Right for each share
of the Company’s common stock held by stockholders on such date. Each share of
common stock issued after the June 14, 2001 record date has an attached Right.
The Rights trade together with the common stock and generally become exercisable
on the tenth day after a person or group (i) acquires 15% of more of the
outstanding common stock or (ii) commences a tender offer or exchange offer
that
would result in such a person or group owning 15% or more of the common stock.
In the event that a person or group acquires 15% or more of the Common Stock
(a
“Stock Acquisition”), each Right not owned by the 15% or more stockholder (the
“Acquiring Person”) and its affiliates would become exercisable for, upon
payment of the exercise price of the Right (currently, $15), either Preferred
Stock or common stock in an amount equal to the then current exercise price
of
the Right divided by one half the then current market price of the common
stock.
Alternatively, in the event of certain business combinations following a
Stock
Acquisition, each Right not owned by the Acquiring Person and its affiliates
would become exercisable for, upon payment of the exercise price of the Right,
common stock of the Acquiring Person in an amount equal to the then current
exercise price of the Right divided by one half the market price of the
Acquiring Person’s common stock. At any time until ten days following a Stock
Acquisition, the Rights are redeemable by the Company’s board of directors at a
price of $.01 per Right. The Rights have no voting privileges. The Rights
will
terminate upon the earlier of the date of their redemption or ten years from
the
date of issuance.
On
December 22, 2003, the Company’s Board of Directors adopted an amendment to the
Rights Agreement. The amendment provides, in effect, that the rights issued
under the Rights Agreement will not be separately distributed to the Company’s
stockholders and become exercisable solely as a result of the commencement
of a
tender offer or exchange offer for all outstanding shares of the Company’s
common stock. In addition, the amendment provides that the rights will not
“flip-in” and entitle a holder to purchase shares of the Company’s common stock
at a discount upon consummation of such an offer that results in the bidder
beneficially owning at least 85% of the outstanding shares of the Company’s
common stock, excluding for purposes of determining the number of shares of
common stock outstanding those shares owned by directors who are also officers
of the Company and shares owned by stock plans sponsored by the Company in
which
Company employee participants do not have the right to determine confidentially
whether shares of Company common stock held subject to such stock plan(s) will
be tendered in a tender offer or exchange offer. Also, pursuant to the
amendment, the rights will not be triggered by a subsequent merger of the
Company with such a bidder in which the Company’s stockholders receive the same
consideration as was paid or issued in the tender offer or exchange offer.
The
amendment was intended to remove the Rights Agreement as an impediment to a
bidder completing its offer and a subsequent merger, while also affording
protection to stockholders who did not tender their shares in the bidder’s
first-step tender or exchange offer, if the holders of a substantial majority
of
the Company’s stock elected to accept the bidder’s offer. The amendment also
clarified that stockholders who entered into voting agreements or understandings
solely regarding voting on the plan of liquidation would not be deemed, for
purposes of the Rights Agreement, to beneficially own the shares owned by the
other parties to such agreements or understandings. This aspect of the amendment
was intended to allow stockholders to freely consult with one another, form
groups, and enter into agreements, with respect to voting at the special meeting
on the plan of liquidation, without triggering the rights under the Rights
Agreement. However, since the plan of liquidation did not receive the requisite
stockholder vote required for approval, this aspect of the amendment is no
longer applicable.
On
April
21, 2004, in connection with closing of the Olden investment, the Company’s
Board of Directors adopted an amendment to the Company’s Rights Agreement such
that the transaction would not trigger the rights thereunder. Additionally,
on
September 22, 2006, in connection with the Company entering into an equity
compensation agreement with Kanders & Company, Inc., the Company’s Board of
Directors adopted an amendment to the Company’s Rights Agreement such that the
transaction would not trigger the rights thereunder.
On
February 11, 2008, the Company entered into an amendment to the Rights Agreement
that decreases the trigger threshold to 4.9%, from 15%, as the amount of the
Company’s outstanding Common Stock that a person must beneficially own before
being deemed to be an “Acquiring Person” under the Rights Agreement.
Stockholders who own 4.9% or more of the Company’s outstanding common stock as
of the effective date of the amendment would not trigger the Rights Agreement
so
long as they do not subsequently increase their ownership of the Company’s
common stock. The amendment also provides that if a person inadvertently becomes
an Acquiring Person by acquiring shares of the Company’s common stock, and
thereafter promptly disposes of shares to bring its ownership of shares below
4.9% of the common stock, such person shall not be deemed an Acquiring Person.
The Company’s Board of Directors determined that the amendment would be in the
best interests of the Company and its stockholders, because it is expected
to
assist in limiting the number of 5% or more owners and thus is expected to
reduce the risk of a possible “change of ownership” under Section 382 of the
Internal Revenue Code of 1986 as amended. Any such “change of ownership” under
these rules would limit or eliminate the ability of the Company to use its
existing NOL’s for federal income tax purposes. There is no guaranty that the
objective of the amendment of preserving the value of NOL’s will be achieved.
There is a possibility that certain stock transactions may be completed by
stockholders or prospective stockholders that could trigger a “change of
ownership,” and there are other limitations on the use of NOL’s set forth in the
Internal Revenue Code.
13.
Commitments and contingencies
Operating
leases
The
Company has lease obligations for facilities and equipment that expire at
various dates through 2017.
The
Company’s
corporate
headquarters is currently located in Stamford, Connecticut.
As
of
December 31, 2007, future minimum lease payments under non-cancelable operating
leases are as follow:
|
|
Operating
|
|
|
|
Leases
|
|
2008
|
|
$
|
1,051
|
|
2009
|
|
|
1,062
|
|
2010
|
|
|
1,072
|
|
2011
|
|
|
940
|
|
2012
|
|
|
728
|
|
Thereafter
|
|
|
2,702
|
|
|
|
|
|
|
|
|
$
|
7,555
|
|
Rent
expense for the years ended December 31, 2007, 2006 and 2005 was $1.2 million,
$0.2 million and $0, respectively.
Contingencies
Except
as
set forth below, t
he
Company
is not a
party to nor are any of its properties subject to any pending legal,
administrative or judicial proceedings other than routine litigation incidental
to our business.
Public
Offering Securities Litigation
On
November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
the Company; FleetBoston Robertson Stephens, Inc., the lead underwriter of
the
Company’s April 1999 initial public offering; several other underwriters who
participated in the initial public offering; Steven J. Snyder, the Company’s
then president and chief executive officer; and Thomas M. Donnelly, the
Company’s then chief financial officer. The lawsuit was filed in the United
States District Court for the Southern District of New York and was assigned
to
the pretrial coordinating judge for substantially similar lawsuits involving
more than 300 other issuers. An amended class action complaint, captioned
In
re
Net Perceptions, Inc. Initial Public Offering Securities
Litigation,
01
Civ.
9675 (SAS), was filed on April 22, 2002, expanding the basis for the action
to
include allegations relating to the Company’s March 2000 follow-on public
offering in addition to those relating to its initial public offering. The
action against the Company was thereafter coordinated with the other
substantially similar class actions as
In
re
Initial Public Offering Securities Litigation
,
21 MC
(SAS) (the “Coordinated Class Actions”).
The
amended complaint generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the underwriter
defendants in connection with the Company’s initial public offering and
follow-on public offering. The amended complaint alleges specifically that
the
underwriter defendants, with the Company’s direct participation and agreement
and without disclosure thereof, conspired to and did raise and increase their
underwriters’ compensation and the market prices of the Company’s common stock
following its initial public offering and in its follow-on public offering
by
requiring their customers, in exchange for receiving allocations of shares
of
the Company’s common stock sold in its initial public offering, to pay excessive
commissions on transactions in other securities, to purchase additional shares
of the Company’s common stock in the initial public offering aftermarket at
pre-determined prices above the initial public offering price, and to purchase
shares of the Company’s common stock in its follow-on public offering. The
amended complaint seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired the Company’s common
stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
prejudice, in return for their agreement to toll any statute of limitations
applicable to those claims; and those claims have been dismissed without
prejudice.
On
August
31, 2005, the Court gave preliminary approval to a settlement reached by the
plaintiffs and issuer defendants in the Coordinated Class Actions. On December
5, 2006, the United States Court of Appeals for the Second Circuit overturned
the District Court's certification of the class of plaintiffs who are pursuing
the claims that would be settled in the settlement against the underwriter
defendants. Plaintiffs filed a Petition for Rehearing and Rehearing En Banc
with
the Second Circuit on January 5, 2007 in response to the Second Circuit's
decision. On April 6, 2007, the Second Circuit denied plaintiffs' Petition
for
Rehearing but clarified that the plaintiffs may seek to certify a more limited
class in the District Court. On June 25, 2007, the District Court signed an
Order terminating the settlement. In the opinion of management, the ultimate
disposition of this matter will not have a material effect on the Company’s
financial position, results of operation or cash flows.
Concord
Steel, Inc. v. Wilmington Steel Processing Co., Inc., et al.
On
November 21, 2007, Concord Steel, Inc. (“Concord”) filed a Verified Complaint in
the Delaware Chancery Court against Wilmington Steel, Kenneth Neary and William
Woislaw for violation of non-compete provisions contained in an Asset Purchase
Agreement, dated September 19, 2006 and certain related agreements, and at
the
same time moved for a preliminary injunction to prohibit breaches of those
restrictive covenants. On January 18, 2008, the defendants in that case
served an Answer denying the material allegations of the Complaint and asserting
counterclaims for tortious interference with business relations and
defamation arising from alleged telephone calls made by Concord to the
customer to which Wilmington was selling. The case is in its early stages
and since discovery has not been completed, the Company cannot opine as to
the
ultimate outcome, although the Company believes that it has valid claims and
defenses.
14.
Segment data
The
Company views its operations and manages its business as one segment. Factors
used to identify the Company’s single operating segment include the
organizational structure of the Company and the financial information available
for evaluation by the chief operating decision maker in making decisions about
how to allocate resources and assess performance.
15.
Related Party Transactions
The
Company occupied space made available to it at no cost by Kanders & Company,
Inc., an entity owned and controlled by the Company's Non-Executive Chairman,
Warren B. Kanders until October 2007 at which time the Company relocated to
its
new offices.
On
September 22, 2006, the Company entered into an Equity Compensation Agreement
(the “Compensation Agreement”) with Kanders & Company, Inc. (“Kanders &
Company”), the sole stockholder of which is Warren B. Kanders, who was then the
Company’s Executive Chairman of the Board of Directors, for prior strategic,
consulting, investment banking and advisory services to the Company in
connection with Company’s asset redeployment strategy. As compensation for such
past services, the Company agreed to issue to Kanders & Company 8,274,000
shares of its common stock. Kanders & Company will receive no cash payment
for its services pursuant to the Compensation Agreement. Pursuant to the terms
and conditions of the Compensation Agreement, the Company granted “demand” and
“piggyback” registration rights to Kanders & Company with respect to the
shares of common stock that are issuable under the Compensation Agreement.
The
aggregate value of the awards was $7.4 million, which was based upon the closing
price of the Company’s common stock of $0.89 on September 22, 2006, the date of
the grant. The Company recorded compensation expense of $7.4 million relating
to
the grant of stock during the fourth quarter of the year ended December 31,
2006.
On
September 22, 2006, the Company entered into a five-year consulting agreement
(the “Consulting Agreement”) with Kanders & Company, which became effective
as of the closing of the Concord Acquisition (as described in Note 16) on
October 3, 2006. In addition, effective with the closing of the Concord
Acquisition, Mr. Kanders resigned as Executive Chairman of the Company’s Board
of Directors upon being nominated and elected to the position of Non-Executive
Chairman of the Board of Directors. The Consulting Agreement provides that
Kanders & Company will render investment banking and financial advisory
services to the Company on a non-exclusive basis, including strategic planning,
assisting in the development and structuring of corporate debt and equity
financings, introductions to sources of capital, guidance and advice as to
(i)
potential targets for mergers and acquisitions, joint ventures, and strategic
alliances, including facilitating the negotiations in connection with such
transactions, (ii) capital and operational restructuring, and
(iii) shareholder relations.
The
Consulting Agreement provides for Kanders & Company to receive a fee equal
of (i) $0.5 million in cash per year during the term of the Consulting
Agreement, payable monthly, and (ii) 1% of the amount by which the Company’s
revenues as reported in the Company’s Form 10-K, or if no such report is filed
by the Company, as reflected in the Company’s audited financial statements for
the applicable fiscal year, exceeds $60.0 million, payable in shares of common
stock of the Company (the “Stock Fee”) valued at the weighted average price of
the Company’s Common Stock for the applicable fiscal year. Upon a
“change-in-control” (as defined in the Consulting Agreement), Kanders &
Company will be entitled to a one-time lump sum cash payment equal to three
times the average amount Kanders & Company received during each of the two
fiscal years preceding such “change-in-control,” subject to certain limitations
as set forth in the Consulting Agreement. Upon the death or permanent disability
of Mr. Kanders, the Company has agreed to make a one-time lump sum cash payment
to Kanders & Company equal to that amount Kanders & Company would be
entitled to receive upon a “change-in-control”. Upon payment of the amounts due
to Kanders & Company either upon the occurrence of a “change-in-control”, or
upon the death or permanent disability of Mr. Kanders, the Consulting Agreement
will terminate. For the years ended December 31, 2007 and 2006, the Company
paid
Kanders and Company $0.5 million and $0.1 million, respectively. At December
31,
2007 and 2006, the Company had accrued liabilities of $0.6 million and $0.1
million, respectively, related to the Kanders and Company consulting
agreement.
During
both of the years ended December 31, 2007 and 2006, the Company reimbursed
Clarus Corporation (“Clarus”) an aggregate of $0.1 million and $0.1 million for
telecommunication, professional and general office expenses which Clarus
incurred on behalf of the Company. Warren B. Kanders, our Non-Executive
Chairman, also serves as the Executive Chairman of Clarus.
On
April
21, 2004, the Company closed on an investment into the Company by Olden
Acquisition LLC (“Olden”)
,
an
affiliate of Kanders & Company, Inc.,
for
the
purpose of initiating a strategy to redeploy the Company’s assets and use the
Company’s cash, cash equivalent assets and marketable securities to enhance
stockholder value. The Company issued and sold to Olden a 2% ten-year
Convertible Subordinated Note, which is convertible after one year
(or
earlier upon a call by the Company and in certain other circumstances)
at
a
conversion price of $0.45 per share of Company common stock into approximately
19.9% of the outstanding common equity of the Company as of the closing date.
Proceeds to the Company from this transaction totaled approximately $2.5 million
before transaction costs of $0.3 million. The transaction costs are being
amortized over ten years, the term of the debt. Interest on the note accrues
semi-annually but is not payable currently or upon conversion of the note.
The
note matures on April 21, 2014. The convertible subordinated note was deemed
to
include a beneficial conversion feature. At the date of issue, the Company
allocated $0.1 million to the beneficial conversion feature and amortized the
beneficial conversion feature over one year (the period after which the note
is
convertible). Also in connection with this transaction, the Company entered
into
a Registration Rights Agreement, which requires the Company, upon request of
the
purchaser of the note or its assignee, to register under the Securities Act
of
1933, as amended, the resale of the shares of common stock into which the note
is convertible. In connection with this transaction, the board of directors
adopted an amendment to the Company’s Rights Agreement such that the transaction
would not trigger the rights thereunder. As of December 31, 2007 and 2006,
the
outstanding balance on the note payable amounted to $2.5 million and is
classified as long-term debt.
16.
Acquisition
On
October 3, 2006, the Company acquired the assets of CRC Acquisition Co. LLC
(“CRC”), a manufacturer of steel counterweights doing business as Concord Steel
(“Concord”). Concord is one of the nation’s leading independent manufacturers of
steel counterweights that are incorporated into a variety of industrial
equipment including aerial work platforms, cranes, elevators and material
handling equipment.
The
acquisition was accounted for under the purchase method of accounting with
assets acquired and liabilities assumed recorded at their estimated fair values.
Accordingly, the results of operations of Concord are included in the Company’s
statement of operations since the date of acquisition. Goodwill was generated
to
the extent that the purchase price consideration exceeded the fair value of
net
assets acquired.
The
total
purchase price of the acquisition was $45.3 million, including transaction
costs
of approximately $3 million. In addition, CRC invested $3.0 million of their
proceeds from the sale of CRC to purchase 3,529,412 unregistered shares of
the
common stock of the Company at the closing price per share of $0.85. Such shares
are subject to a six-month lock-up agreement and a registration rights agreement
containing customary “demand” and “piggyback” registration rights. In addition,
pursuant to the purchase agreement, a final working capital adjustment of $0.5
million was returned to the Company as the opening balance sheet working capital
was reconciled with CRC.
The
funding of the consideration paid for the acquisition was as
follows:
Cash,
net
|
|
$
|
10,981
|
|
Notes
payable from bank
|
|
|
31,286
|
|
Transaction
costs
|
|
|
3,068
|
|
Purchase
price
|
|
$
|
45,335
|
|
The
total
purchase price of $45.3 million was initially allocated as follows:
Assets
acquired:
|
|
|
|
Accounts
receivable
|
|
$
|
10,231
|
|
Inventory
|
|
|
12,149
|
|
Property,
plant and equipment
|
|
|
3,220
|
|
Goodwill
|
|
|
3,154
|
|
Intangible
assets
|
|
|
24,516
|
|
Other
assets
|
|
|
868
|
|
|
|
|
54,138
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable
|
|
|
(6,704
|
)
|
Accrued
expenses and other liabilities
|
|
|
(1,034
|
)
|
Other
current liabilities
|
|
|
(1,065
|
)
|
|
|
|
(8,803
|
)
|
Net
purchase price
|
|
$
|
45,335
|
|
As
a
result of this business combination, the Company assessed the impact of
Concord’s operations in the determination of its required valuation allowance
for deferred tax assets. As a result of this assessment, the Company reduced
its
deferred tax valuation allowance by approximately $8 million. As a result of
the
Company’s estimated deferred tax asset valuation, goodwill was eliminated and
intangible assets were reduced by $2.6 million.
The
following unaudited pro forma consolidated results are presented to show the
results on a pro forma basis as if the 2006 acquisition of Concord had been
completed as of January 1, 2005.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
$
|
(1,461
|
)
|
$
|
3,550
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share:
|
|
$
|
(0.04
|
)
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) income per share:
|
|
$
|
(0.04
|
)
|
$
|
0.10
|
|
Pro
forma
results
including
historical financial statements and footnotes of Concord were included in the
Company’s amended Current Report on Form 8-K/A filed with the Security and
Exchange Commission on December 18, 2006.
17.
Subsequent event
On
February 11, 2008, the Company entered into
an
amendment to its shareholder rights agreement (the “Rights Agreement”)
that
decreases the trigger threshold to 4.9%, from 15%, as the amount of the
Company’s outstanding Common Stock that a person must beneficially own before
being deemed to be an “Acquiring Person” under the Rights Agreement.
Stockholders who own 4.9% or more of the Company’s outstanding common stock as
of the effective date of the amendment would not trigger the Rights Agreement
so
long as they do not subsequently increase their ownership of the Company’s
common stock. The amendment also provides that if a person inadvertently becomes
an Acquiring Person by acquiring shares of the Company’s common stock, and
thereafter promptly disposes of shares to bring its ownership of shares below
4.9% of the common stock, such person shall not be deemed an Acquiring Person.
The Company’s Board of Directors determined that the amendment would be in the
best interests of the Company and its stockholders, because it is expected
to
assist in limiting the number of 5% or more owners and thus is expected to
reduce the risk of a possible “change of ownership” under Section 382 of the
Internal Revenue Code of 1986 as amended. Any such “change of ownership” under
these rules would limit or eliminate the ability of the Company to use its
existing NOL’s for federal income tax purposes. There is no guaranty that the
objective of the amendment of preserving the value of NOL’s will be achieved.
There is a possibility that certain stock transactions may be completed by
stockholders or prospective stockholders that could trigger a “change of
ownership,” and there are other limitations on the use of NOL’s set forth in the
Internal Revenue Code.
Effective
February 6, 2008, the Company issued to Albert W. Weggeman, the Company's
President and Chief Executive Officer, a restricted stock award of 56,818 shares
of common stock pursuant to the Company's 2007 Stock Incentive Plan. The terms
of the award provide that the award would vest and Mr. Weggeman would be
entitled to receive the Common Stock on the earliest to occur of (i) a
Change-of-Control Event as defined in the 2007 Stock Incentive Plan,
(ii) the termination of his employment by the Company without "cause" as
defined in the 2007 Stock Incentive Plan and his employment agreement, and
(iii) the third anniversary of the grant of the restricted stock award,
provided that he is then employed by the Company as its President and Chief
Executive Officer. The award will become fully vested on the occurrence of
the
earliest of the aforesaid events.