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| • | | Permits the grant of annual and long-term cash bonus awards for IRC Section 162(m) purposes; |
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| • | | Includes a provision requiring that awards be adjusted in certain circumstances, such as in the event of a stock split, to avoid potential adverse accounting consequences; |
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| • | | Imposes a10-year limit on the term of a stock option; |
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| • | | Permits cashless exercises of stock options through a broker-dealer; |
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| • | | Adds restricted stock units as a form of award available under the plan; |
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| • | | Caps the amount of an award that may vest or be paid upon a change of control to the extent needed to preserve our deduction under the IRC “excess parachute payment” rules; |
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| • | | Permits awards to be assumed under the plan in the event we acquire another entity; |
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| • | | Prohibits the repricing or backdating of stock options and stock appreciation rights; and |
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| • | | Expands the list of plan provisions that may be amended only with shareholder approval. |
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| • | | We have revised and amended our compensation committee charter to reflect our compliance with current rules and guidelines of the Nasdaq Global Market, the Exchange Act, and Sarbanes Oxley. |
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| • | | We are consideringhave implemented a management cash bonus program connected tocontingent upon the closing of this offering and, in the case of our chief executive officer, also upon the post-offering price performance of our common stock.stock, which is described below under “Short-Term Cash Bonus Incentive Compensation and Other Cash Bonus Compensation.” |
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| • | Our compensation committee has recommended that our board of directors adopt stock ownership guidelines for our executive officers and non-employee directors. |
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| | |
| • | Our compensation committee has recommended that our board of directors adopt a new compensation program for our non-employee directors. |
Elements of Compensation
Our current compensation program for our NEOs consists of the following elements:
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| • | | Base salary; |
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| • | | Short-term incentive cash bonus compensation and other cash bonus compensation; |
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| • | | Long-term equity incentive compensation; and |
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| • | | Retirement and other benefits. |
Base Salary
Prior to the Closing of this Offering
We pay our NEOs a base salary to compensate them for services rendered and to provide them with a steady source of income for living expenses throughout the year. WeIn the past, we set the base salaries of our NEOs initially through an arm’s-length negotiation with each individual executive during the hiring
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process, and based upon the individual’s level of responsibility and our assessment of the individual’s experience, skills and knowledge. Currently, as in previous fiscal years, we generally pay lower base salaries than what we believe our competitors may pay for similar positions, based on our compensation committee’s experience in our industry and general knowledge, and offer what our compensation committee believes to be comparatively higher levels of long-term equity-based incentive compensation in order to link pay with performance and with the creation of shareholder value.
Our chief executive officer and our compensation committee review the base salaries of our NEOs (other than our chief executive officer) for potential increases once per year. Our chief executive officer recommends changes in base salaries, and our compensation committee accepts, modifies or rejects our chief executive officer’s recommendation, based upon various factors, including the individual NEO’s experience, level of responsibility, skills, knowledge, base salary in prior years, contributions to our company in prior years and compensation received through elements other than base salary. Pursuant to the terms of our chief executive officer’s existing employment agreement, his base salary is subject to a guaranteed increase of 8% each year, so the compensation committee did not review his base salary for potential increases in fiscal 2008 along with the other NEOs. Under the terms of our proposed new employment agreement with our chief executive officer, the compensation committee may increase our chief executive officer’s base salary from time to time in its discretion, and there is no guaranteed annual increase in his salary. We generally pay lower base salaries than what we believe our competitors may pay for similar positions, based on our informal review of publicly available data, and offer what we believe to be comparatively higher levels of short-term and long-term incentive compensation in order to better link pay with performance.
In fiscal 2007, we increased the base salary of Mr. Scribante from $135,000 to $150,000 in recognition of his increasing responsibilities, including leadership of our sales function, which was significantly responsible for a substantial part of our increased revenue in fiscal 2007, development of internal sales tracking tools, responsibility for an increasing number of national accounts, and in recognition of his experience, knowledge, and skill and in light of his past and expected future contributions to our company. In fiscal 2007, we also increased Mr. Verfuerth’s base salary by 8%, from $250,000 to $270,000 and, effective at the beginning of fiscal 2008, we increased Mr. Verfuerth’s base salary from $270,000 to $291,600, in each case pursuant to the terms of his existing employment agreement. In fiscal 2008, we increased the base salaries of Ms. Verfuerth and Messrs. Waibel and Potts by $15,000 each, to $165,000,$165,000. We increased Ms. Verfuerth’s base salary in viewlight of the length of time since theirher base salariessalary had last been adjusted and her increasing responsibilities associated with our growth, including her oversight of increasingly significant transactions with vendors and complex scheduling and production issues. We increased Mr. Waibel’s base salary in light of the length of time since his base salary had last been adjusted and his increasing responsibilities associated with our growth, including his oversight of the growing capital needs of our company. We increased Mr. Potts’s base salary in light of the length of time since his base salary had last been adjusted and his increasing responsibilities associated with our growth, including his oversight of the formalization and systematization of our company’s management procedures and processes.
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As a Public Company
Our compensation committee believes that, as a public company, annual base salaries for our executives should generally be established at a relative level that is equal to or exceeds the median level for similarly situated executives at comparable public companies. In the case of individual executives who are deemed to be key contributors to our current and future performance, we believe that, as a public company, we should establish annual base salaries at a relative level that equals or exceeds the 75th percentile for similarly situated executives at comparable public companies. These general philosophies and relative target levels are subject to exceptions based on the judgment of our compensation committee in order to further reward and incentivize outstanding key contributors to our current and future performance, as well as in cases where it may be necessary or advisable to attractand/or retain executives who our compensation committee believes are or will be key contributors to creating and sustaining shareholder value, as determined by our compensation committee based on the recommendations of our chief executive officer (in all cases other than our chief executive officer’s own compensation).
For fiscal 2009, subject to the closing of this offering, our compensation committee has approved the following base salaries for our currently serving NEOs:
| | | | |
Name and Position | | Base Salary ($) |
|
Neal R. Verfuerth | | | | |
President and Chief Executive Officer | | | 460,000 | |
Daniel J. Waibel | | | | |
Chief Financial Officer & Treasurer | | | 225,000 | |
John H. Scribante | | | | |
Senior Vice President of Business Development | | | 225,000 | |
Michael J. Potts | | | | |
Executive Vice President | | | 225,000 | |
Patricia A. Verfuerth | | | | |
Vice President of Operations | | | 175,000 | |
Our compensation committee based the fiscal 2009 salaries on the recommendations of our chief executive officer (other than our chief executive officer’s base salary), the benchmarking data provided by Towers Perrin, data relating to the industry peer group companies described above, and our compensation committee’s views of the relative contributions of the NEOs to our company’s current and future performance. Mr. Verfuerth’s base salary for fiscal 2009 was established at the 75th percentile of the benchmarking data for chief executive officers provided by Towers Perrin and is higher than the base salaries of our other NEOs due in part to our use of benchmarking data, which indicates that chief executive officers typically receive higher base salaries than other executive officers in their increasing responsibilities.organizations, and in part to our compensation committee’s recognition of Mr. Verfuerth’s critical importance to our company and his key role in our past performance and our future performance. We established the fiscal 2009 base salaries of Mr. Potts and Ms. Verfuerth at approximately the median level for similarly-situated executives based on the benchmarking data provided by Towers Perrin. We set the base salaries of Messrs. Waibel and Scribante for fiscal 2009 at a level higher than the 75th percentile of the benchmarking data provided by Towers Perrin based on the recommendation of our chief executive officer and our compensation committee’s view that Messrs. Waibel and Scribante are key contributors to our company’s current and future performance. Since we believe that each of Messrs. Potts, Waibel and Scribante are equally important to our company, we set Mr. Waibel’s and Mr. Scribante’s respective base salaries at a level that is $5,000 and $90,000 above their applicable 75th percentile benchmark so that their base salaries would be equal to Mr. Potts’ fiscal 2009 base salary.
Short-Term Cash Bonus Incentive Compensation and Other Cash Bonus Compensation
Prior to the Closing of this Offering
In fiscal 2007, we provided certain of our NEOs with performance-based cash incentive bonus opportunities to provide them with competitive compensation packages and to reward achievement of our performance objectives. We also granted discretionary cash bonuses to other NEOs to reward
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them for high levels of individual performance during fiscal 2007. The NEOs who participated in performance-based cash incentive bonus opportunities in fiscal 2007 were Messrs. Verfuerth, Scribante and Wadman, and the NEOs who received discretionary cash bonuses were Ms. Verfuerth and Messrs. Waibel and Potts.
We provided Mr. Verfuerth’s bonus opportunity pursuant to his employment agreement, and established the performance measures and targets applicable to the bonus opportunity at the time we entered into his agreement in fiscal 2006. Under his agreement, Mr. Verfuerth’s bonus opportunity for fiscal 2007 was tied to achievement of the following company-wide financial performance targets, which were calculated in accordance with GAAP, to the extent applicable, and with the related bonus payments based on a percentage of his base salary for fiscal 2007: (i) a revenue target of $70 million, which corresponded to a potential bonus payment of 35% of base salary; (ii) an EBITDA target of $12 million, which corresponded to a potential bonus payment of 35% of base salary; (iii) a capital raising target of $20 million, which corresponded to a potential bonus payment of 15% of base salary; and (iv) a share price target of $10 per share, which corresponded to a potential bonus payment of 15% of base salary.
Our compensation committee based Mr. Verfuerth’s target performance levels on our business plan, setting the targets at what it considered a “stretch” level at the time of grant. Our compensation committee viewed achievement of 75% of the designated targets as more likely to be achieved than target performance. Our compensation committee selected the four performance metrics described above as appropriate measures of key elements of our company’s financial performance that were consistent with
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the overall goals and objectives of our executive compensation program. The committee allocated Mr. Verfuerth’s bonus potential among the metrics seeking to balance metrics relating to growth and profitability in order to reflect the relative importance of each metric to what the committee considered the desired performance of our company consistent with our executive compensation philosophy.
If we had achieved target performance for all of the measures, Mr. Verfuerth would have been eligible to receive a cash bonus equal to 100% of his base salary for fiscal 2007. Our compensation committee viewed a target payout of 100% of base salary as appropriate for Mr. Verfuerth as part of a competitive compensation package and in light of his skills, experience, past performance and expected contributions to our company in the future. Mr. Verfuerth’s employment agreement also specified that our board had discretion to award a bonus ranging from 0% to 60% of the amount due for target performance related to any measure for which we achieved performance equal to 75% or more of the specified target.
Any short-term incentive compensation earned by Mr. Verfuerth could, under the terms of his existing employment agreement, be paid in cash, equity or a combination of the two, as determined by our board in consultation with Mr. Verfuerth. We did not achieve 75% or more of any of the specified performance targets in fiscal 2007, so Mr. Verfuerth did not receive a bonus payment for fiscal 2007.
Mr. Scribante’s existing employment agreement provided for a bonus of up to 100% of his base salary if our company achieved $70 million in revenue for fiscal 2007. The agreement also specified that our board had discretion to award a bonus, ranging from 0% to 60% of Mr. Scribante’s base salary, if we achieved performance equal to 75% or more of the revenue target. We set Mr. Scribante’s target payout at 100% of his base salary to provide competitive compensation and in view of the importance of his position to our growth strategies. We did not achieve 75% or more of the revenue target for fiscal 2007. However, in view of Mr. Scribante’s significant contributions in fiscal 2007 to the performance of our company, including his contributions to our revenue growth in fiscal 2007, his development of substantial national account opportunities and his importance to our continued success, based on the recommendation of our chief executive officer,performance, our compensation committee authorized a discretionary cash bonus of $50,000 to be paid to Mr. Scribante. Our compensation committee based the amount of Mr. Scribante’s bonus, which was $50,000, on our chief executive officer’s subjective evaluation of Mr. Scribante’s contributions to our company’s performance in fiscal 2007 and our chief executive officer’s corresponding recommendations.
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Our compensation committee also awarded discretionary cash bonuses of $20,000 each to Ms. Verfuerth and Messrs. Waibel and Potts in light of their high levels of performance and significant contributions to our company in fiscal 2007. Our compensation committee based the amounts of these bonuses on our chief executive officer’s subjective evaluation of the recipients’ contributions to our company’s performance in fiscal 2007 and his corresponding recommendation.
Mr. Wadman was eligible under the terms of his employment agreement for a bonus equal to 30% of his base salary based on achievement of the same performance targets applicable to Mr. Verfuerth’s bonus opportunity. Because those targets were not achieved, Mr. Wadman did not receive any bonus payment for fiscal 2007. Mr. Wadman’s employment with us ended on February 19, 2007. We describe the terms of his separation agreement below under “— Payments upon Termination or Change of Control.”
Beginning upon the closing
As a Public Company
Following completion of this offering, as a public company, we intend our annual cash bonus program to reward executives with annual cash bonuses based on a broad combination of factors, including our financial performance and the executive’s individual performance. Our compensation committee believes that an executive’s annual cash performance bonus potential should generally be established at a relative level that is equal to or exceeds the median level for similarly situated executives at comparable public companies. In the case of individual executives who are deemed to be key contributors to our company’s current and future performance, our compensation committee believes we should establish potential annual cash bonus amounts at a level that equals or exceeds the 75th percentile for similarly situated executives at comparable public companies. This general philosophy is subject to exceptions based on the judgment of our compensation committee in order to further reward and incentivize outstanding key contributors to our company’s current and future performance, as well as in cases where it may be necessary or advisable to attractand/or retain executives who our compensation committee believes are or will be key contributors to creating and sustaining shareholder value, as determined by our compensation committee based on the recommendations of our chief executive officer (in all cases other than our chief executive officer’s compensation).
For fiscal 2008, consistent with this philosophy, and based on the recommendations of Towers Perrin, we intend to implement a new short-term cash bonus incentiveour compensation programcommittee has approved an Executive Fiscal Year 2008 Annual Cash Incentive Program under our new 2004 Stock and Incentive Awards PlanPlan. This program, which we refer to as our “Cash Incentive Program,” will become effective upon the closing of this offering. Our compensation committee set payout ranges for our NEOs, expressed as a percentage of fiscal 2008 base salary, as follows:
| | | | |
| | Approximate Fiscal
| |
| | 2008 Bonus Range
| |
| | (% of Fiscal 2008 Base
| |
Name and Position | | Salary) | |
|
Neal R. Verfuerth | | | | |
President and Chief Executive Officer | | | 75-125 | |
Daniel J. Waibel | | | | |
Chief Financial Officer & Treasurer | | | 29-49 | |
John H. Scribante | | | | |
Senior Vice President of Business Development | | | 30-50 | |
Michael J. Potts | | | | |
Executive Vice President | | | 29-49 | |
Patricia A. Verfuerth | | | | |
Vice President of Operations | | | 23-38 | |
Our compensation committee established these bonus ranges at a level such that they are centered near the median of the target annual bonuses indicated by the benchmarking data described above for each of our NEOs, other than Messrs. Verfuerth, Waibel and Scribante. For Messrs. Verfuerth and Waibel, our compensation committee established ranges centered at the 75th percentile, and for Mr. Scribante at 60% above the 75th percentile, of base salary indicated by the benchmarking data,
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because our compensation committee (i) views Messrs. Verfuerth, Waibel and Scribante as key contributors to our company’s current and future performance and (ii) desired each of Messrs. Waibel and Scribante to be entitled to approximately the same bonus opportunity as Mr. Potts because of their equivalent relative importance to our company. The final bonus payout amounts payable to our NEOs under our Cash Incentive Program, if any, will be determined in our compensation committee’s subjective judgment based on a range of fiscal 2008 financial performance guidelines and each NEO’s individual performance for fiscal 2008, and may be higher or lower than the ranges shown in the table above. Our compensation committee has not yet established fiscal 2008 individual performance goals for our NEOs. The range of fiscal 2008 financial performance-based bonus guidelines under our Cash Incentive Program will begin if we achieve a minimum of 11/4 times our fiscal 2007 revenue and/or 31/4 times our fiscal 2007 operating income, and will correspondingly increase on a pro rata basis up to a maximum of 12/3 times those initial measures. We established this range of financial performance guidelines based on our financial performance during the first half of fiscal 2008 compared to the first half of fiscal 2007. These measures were established solely for the purpose of qualifying our NEOs and other executive officers for fiscal 2008 cash bonuses under our Cash Incentive Program. These financial performance measures do not represent our performance expectations for fiscal 2008 and should not be construed as earnings guidance or management’s expectations or estimates of results or future performance.
The Cash Incentive Program will, in connection with the new employment agreements we propose to enterare entering into with our NEOs, supersede the existing short-term incentive compensation arrangements for Messrs. Verfuerth and Scribante. Our compensation committee has not yet taken action
In connection with respect to a short-term cash bonus incentive compensation program for fiscal 2008 pending the recommendations of Towers Perrin.
Our compensation committee is also currently seeking the recommendations of Towers Perrin relating to the implementation of a management cash bonus program connected toand effective upon the closing of this offering, our compensation committee also has established a cash bonus program contingent upon the closing of this offering. Under this program, our compensation committee awarded a cash bonus of $100,000 to Mr. Waibel and a cash bonus of $500,000 to Mr. Verfuerth. It also approved cash bonuses totaling $150,000 to key employees other than our NEOs payable upon the post-offeringclosing of this offering. Our compensation committee also granted an additional award to Mr. Verfuerth consisting of a potential stock price performance cash bonus of $100,000 per each $1.00 that the price of a share of our common stock.stock has increased over the initial public offering price in this offering as of the first annual anniversary date of the closing of this offering. Mr. Verfuerth’s stock price performance cash bonus is capped at $1.5 million. In establishing these bonus awards, our compensation committee focused in particular on similar types of bonus awards granted to certain executives of two companies in our industry peer group, EnerNOC, Inc. and Comverge, Inc., in connection with their recent initial public offerings. EnerNOC, Inc. granted its chief executive officer and chief operating officer stock grants that had an approximate fair market value of $1.4 million each at the time of its initial public offering and an approximate fair market value of $2.5 million each at the time our compensation committee was establishing the cash bonus awards for our executives. Comverge, Inc. granted its chief executive officer and chief financial officer initial public offering bonuses of $383,000 and $10,000, respectively. Based on this quantitative information, our compensation committee subjectively determined that the foregoing award levels were appropriate to reward the extraordinary efforts of Messrs. Verfuerth and Waibel on behalf of our company and our shareholders prior to and in connection with this offering and, in Mr. Verfuerth’s case, to help mitigate the potential adverse tax consequences that may be realized by Mr. Verfuerth and Ms. Verfuerth in connection with their repayment of certain loans from our company. See “— Long-Term Equity Incentive Compensation” for a description of the circumstances of Mr. Verfuerth’s and Ms. Verfuerth’s repayment of the loans and the related potential adverse tax consequences. Our compensation committee granted the stock price performance award to Mr. Verfuerth based on the foregoing quantitative data and as a means of providing significant additional motivation for Mr. Verfuerth to increase our share price and market capitalization over the first year after the closing of this offering. We determined the appropriate stock price thresholds and related bonus payment amounts with respect to Mr. Verfuerth’s stock price performance cash bonus subjectively and with the understanding that each $1.00 per share increase in our share price would approximate a $25 million increase in our company’s market capitalization after completion of this offering. We decided to cap Mr. Verfuerth’s total potential stock price performance bonus at $1.5 million so that, when taken together with Mr. Verfuerth’s $500,000 cash bonus to be paid upon
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closing of this offering, his total potential bonus amount would approximate the value of the initial public offering bonus award provided by EnerNOC, Inc. to its chief executive officer.
Long-Term Equity Incentive Compensation
Prior to the Closing of this Offering
We provide the opportunity for our NEOs to earn long-term equity incentive awards under our 2003 Stock Option Plan and our 2004 Equity Incentive Plan, which will be replaced by our new 2004 Stock and Incentive Awards Plan effective afterupon the closing of this offering. Our employees, officers, directors and consultants are eligible to participate in these plans. We believe that long-term equity incentive awards enhance the alignment of the interests of our NEOs and the interests of our shareholders and provide our NEOs with incentives to remain in our employment. For these reasons, in fiscal 2007, as in previous years, we provided a significant component of our NEOs’ compensation through means of long-term equity incentive awards.
We have generally granted long-term equity incentive awards in the form of options to purchase shares of our common stock, which are initially subject to forfeiture if the executive’s employment terminates for any reason. The options generally vest and become exercisable ratably over five years, contingent on the executive’s continued employment. In the past, we have granted both incentive stock options and non-qualified stock options to our NEOs. We use time-vesting stock options as our primary source of long-term equity incentive compensation to our NEOs because we believe that (i) stock options help to align the interests of our NEOs with the interests of our shareholders by linking their compensation with the increase in value of our common stock over time, (ii) stock options conserve our cash resources for use in growing our business and (iii) vesting requirements on stock options and the limited liquidity of our stock provide our NEOs with incentive to continue their employment with us which, in turn, provides us with greater stability.
Our compensation committee made awards for fiscal 2007 in December 2006, when we granted time-vesting stock options to Ms. Verfuerth and Messrs. Verfuerth, Waibel and Potts under our 2004 Equity Incentive Plan. ForTo determine the number of options granted to Mr. Verfuerth, our compensation committee took into account for comparative purposes the past grants in fiscal 2001 and fiscal 2002 of options to purchase, in each case, 500,000 shares. Our compensation committee also considered the scope of our NEOs who received an option award, we based the decision to grant the option award, and the determination of the amount of the option award, on various factors, including theMr. Verfuerth’s increasing responsibilities, of the individual executive, the executive’shis past performance and anticipated future contributions to our company’s performance, both with respect to operations and our organization, prior option grants (including the vesting schedule of such prior grants), the executive’s to Mr. Verfuerth, Mr. Verfuerth’s total cash compensation and the desirability of retaining the executive. TakingMr. Verfuerth, and determined upon consideration of these factors into account,facts, as well as upon their subjective judgment formed by their collective professional experience and expertise, that a grant of an option to purchase 250,000 shares was appropriate in light of Mr. Verfuerth’s historical and current compensation to provide a reward that would be significant in amount to Mr. Verfuerth if he performed as anticipated and increased shareholder value. Based on this number as a starting point, our compensation committee initially determined the number of option shares that it would grant to Mr. Verfuerth and then, working from this number, determined the proportionately smaller numbers of option shares that it considered appropriate for grants to our other executives, including our other NEOs.NEOs, based directly on the compensation committee’s perception of each NEO’s respective importance to our company’s ongoing performance. Our compensation committee granted Mr. Verfuerth an option to purchase 250,000 shares of our common stock, Mr. Waibel an option to purchase 100,000 shares, Mr. Potts an option to purchase 75,000 shares, and Ms. Verfuerth an option to purchase 50,000 shares, in each case at an exercise price of $2.20 per share. Following approval of the grants by our compensation committee, our board of directors ratified and approved the compensation committee’s actions.
All of the options that we granted to our NEOs in December 2006 are subject to ratable vesting over five years of continuous employment, measured from the grant date, and have an exercise price equal to the fair market value of our common stock on the date of grant as determined at the time of grant by our compensation committee and board of directors. Our compensation committee and board of directors used various sources to determine the fair market value of our common stock for purposes of establishing the exercise price of stock options, including (i) independent third-party sales of our common stock; (ii) transactions in which we issued shares of our common
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and preferred stock to third-party investors; and (iii) independent valuations of the fair market value of our common stock. For the options we granted to our NEOs in December 2006, our compensation committee and board of directors determined the fair market value or our common stock primarily in reliance on a November 30, 2006 independent valuation of the fair market value of our common stock performed by Wipfli LLP, an independent third-party valuation firm that we retained to perform such valuation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation –— Critical Accounting Policies and Estimates –Stock-Based— Stock-Based Compensation.”
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In June 2006, we granted Mr. Scribante an option to purchase 100,000 shares of our common stock in connection with his entering into his new employment agreement. We granted Mr. Scribante this option in view of his increasing responsibilities and his past and expected future contributions to our financial performance. The option is subject to ratable vesting over five years of continuous employment, measured from March 31, 2006, and has an exercise price of $2.50 per share, the price at which we offered shares in our most recent offering of our Series B preferred stock at the time of the option grant. We determined the number of options granted to Mr. Scribante through an arm’s-length negotiation over the terms of his employment agreement and with a goal of providing compensation commensurate with his responsibilities and position within our company.
In March 2007, Mr. Verfuerth and Ms. Verfuerth exercised previously granted non-qualified stock options for 1,000,000 and 750,000 shares of our common stock, respectively, and paid the exercise price of such options in the form of a promissory note in the principal amount of $812,500 and $565,625, respectively. Under Sarbanes-Oxley, a company may not have loans outstanding to its executive officers at the time it files its registration statement for an initial public offering with the SEC. As a result, in order to extinguish these outstanding loans to Mr. Verfuerth and Ms. Verfuerth prior to the filing with the SEC of the registration statement of which this prospectus is a part, effective on July 27, 2007, Mr. Verfuerth redeemedsurrendered 180,958 shares of common stock to us in satisfaction of the $812,500 outstanding principal amount under his March 2007 promissory note. He paid the accrued interest on such note to us in cash on August 2, 2007. Similarly, effective on July 27, 2007, Ms. Verfuerth redeemedsurrendered 125,974 shares of common stock to us in satisfaction of the $565,625 outstanding principal amount under her March 2007 promissory note. She paid the accrued interest on such note to us in cash on August 2, 2007. We redeemed Mr. Verfuerth’s and Ms. Verfuerth’s shares were redeemed using a fair market value of $4.49 per share, which is the same value as the per share conversion price of the Convertible Notes issued to an indirect affiliate of GEEFS, Clean Technology and affiliates of Capvest on August 3, 2007. At the same time in order not to economically penalize Mr. Verfuerth and Ms. Verfuerth in connection with such share redemptions, our compensation committee granted Mr. Verfuerth and Ms. Verfuerth a non-qualified stock option to purchase 180,958 and 125,974 shares of our common stock, respectively. The options have an exercise price of $4.49 per share, a one-year vesting period and a four-year term. The options granted were designated as non-qualified stock options instead of incentive stock options in order to provide our company with a tax deduction for the difference between the fair market value of such shares on the date of option exercise and their exercise price. The one-year vesting period was determined to be important by our committee to enhance the retention benefits to our company of granting such options. The four-year exercise period is shorter than our more typical option exercise period because our compensation committee decided to carry over the then remaining exercise period that was applicable to the stock options that were exercised by Mr. Verfuerth and Ms. Verfuerth in March 2007. Our compensation committee determined that this method of satisfying Mr. Verfuerth’s and Ms. Verfuerth’s outstanding loans was fair to our company and its shareholders because it (i) allowed us to proceed with this initial public offering; (ii) was not dilutive to our shareholders; (iii) provided us with additional retention benefits; and (iv) provided approximately the same economic consequences to Mr. Verfuerth and Ms. Verfuerth as originally contemplated, although Mr. Verfuerth and Ms. Verfuerth willmay recognize certain originally unintended adverse tax consequences, and we willmay recognize certain originally unintended tax benefits, upon their ultimate exercise of the stock options granted.
We made all of the option grants to our NEOs in fiscal 2007 under our 2004 Equity Incentive Plan. As required by the 2004 Equity Incentive Plan, all options granted in fiscal 2007 to our NEOs had an exercise price equal to or higher than the fair market value of our common stock on the
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date of grant as determined at the time of grant by our compensation committee and our board of directors. An exercise
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price equal to or higher than the fair market value of our common stock on the date of grant is also required to prevent the options from being classified as “deferred compensation” subject to the election and payment timing requirements of Section 409A of the IRC. The number of shares of our common stock covered by the options granted to each of our NEOs in fiscal 2007 is reflected in the Grants of Plan-Based Awards table below. Except as described above, the options expire to the extent unexercised on the earliest of the tenth anniversary of the grant date, a termination of employment for cause, three months following a termination other than for cause or due to death, retirement or disability and one year following a termination of employment due to death or disability. See “—Payments upon Termination or Change of Control” for a description of the terms of the options relating to a change inof control of our company.
As a Public Company
As a public company, we intend to base a significant portion of the total direct compensation payable to our executives on the creation of shareholder value in order to link executive pay to shareholder value, and also to reward executives for increasing shareholder value. Following the completion of this offering, our compensation committee generally intends to establish our executives’ long-term incentive compensation potential at or above the median level for similarly situated executives at comparable companies. In the case of individual executives whom we deem to be key contributors to our current and future performance, we believe we should target long-term incentive compensation at a level that equals or exceeds the 75th percentile for similarly situated executives at comparable public companies. These general philosophies and relative target levels are subject to exceptions based on the judgment of our compensation committee in order to further reward and incentivize outstanding key contributors to our current and future performance, as well as in cases where it may be necessary or advisable to attractand/or retain executives who our compensation committee believes are or will be key contributors to creating and sustaining shareholder value, as determined by our compensation committee based on the recommendations of our chief executive officer (in all cases other than our chief executive officer’s own compensation). Our compensation committee also believes that this emphasis on long-term equity-based incentive compensation will facilitate executive retention and loyalty and will motivate our executives to achieve strong financial performance.
Our compensation committee intends to award long-term equity incentives to our executives on an annual basis although morebeginning in fiscal 2009. More frequent awards may be made at the discretion of our compensation committee on other occasions. Future awards will be made under our 2004 Stock and Incentive Awards Plan, which we have modified as described above under “Changes to Executive Compensation in Connection with Our Initial Public Offering” and which will become effective upon closing of this offering.
Retirement and Other Benefits
Welfare and Retirement Benefits. As part of a competitive compensation package, we sponsor a welfare benefit plan that offers health, life and disability insurance coverage to participating employees. In addition, to help our employees prepare for retirement, we sponsor the Orion Energy Systems Ltd 401(k) Plan and match employee contributions at a rate of 3% of the first $5,000 of an employee’s contributions. Our NEOs participate in the broad-based welfare plans and the 401(k) Plan on the same basis as our other employees. We also provide enhanced life and disability insurance benefits for our NEOs. Under our enhanced life insurance benefit, we pay the full cost of premiums for life insurance policies for our NEOs. The amounts of the premiums are reflected in the Summary Compensation Table below. Our enhanced disability insurance benefit includes a higher maximum benefit level than under our broad-based plan, cost of living adjustments and a portability feature.
Perquisites and Other Personal Benefits. We provide perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable our executives to perform their duties and to enable us to attract and retain employees for key positions. Under their employment agreements, we provided Mr. Verfuerth and, until his
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termination of employment, Mr. Wadman with a car allowance of $1,000 per month. We also provide Ms. Verfuerth and Messrs. Waibel and Potts with a car allowance of $1,000 per month, and we provided Mr. Scribante with a similar car allowance for the first part of fiscal 2007, until we discontinued the allowance with respect to all of our sales group members in May 2006. Mr. Scribante now participates in a program under which we provide mileage reimbursement for business travel.
In connection with the formation of our company, we loaned Mr. Verfuerth $47,069 to purchase common stock. This noteloan bore interest at 1.46% and was payable upon demand. Interest of $19,883 had accrued on the noteloan through June 30, 2007. Mr. Verfuerth paid this noteloan and all accrued interest in cash on August 2, 2007. In addition, from time to time, we advanced Mr. Verfuerth and Ms. Verfuerth amounts net of payment of the guarantee fees described below. Pursuant to Mr. Verfuerth’s existing employment agreement, we forgave $36,667 of these outstanding advances in fiscal 2007, as reflected in the Summary Compensation Table. The outstanding advances were $229,307 as of June 30, 2007 and did
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not bear interest. Mr. Verfuerth paid the balance outstanding, net of amounts that we forgave pursuant to his existing employment agreement, in cash on August 2, 2007.
Mr. Verfuerth’s existing employment agreement entitled him to a guarantee fee of 1% of portions of our indebtedness that he personally guaranteed. We determined the amount of the guarantee fee as a result of an arm’s length negotiation with Mr. Verfuerth and based on our compensation committee’s and our management’s collective experience with third-party debt obligation guarantee fees in other contexts indicating that 1% was generally a reasonable approximation of a market rate for such fees. Historically, we used this arrangement to permit us to borrow money at lower interest rates. These guarantees have been released. In fiscal 2007, we paid Mr. Verfuerth $77,880 in related guarantee fees, as reflected in the Summary Compensation Table.
Mr. Verfuerth’s existing employment agreement also entitles him to ownership of any intellectual property work product he creates during the term of his agreement, but requires him to disclose to us, and give us the option to acquire, all such work product. Under his existing employment agreement, the price of such patented or patent pending work product is subject to negotiation, but may not exceed $1,500 per month per item of work product during the period in which we significantly used or rely upon the item. The existing employment agreement entitles us to acquire all of Mr. Verfuerth’s intellectual property work product with respect to which he does not intend to file a patent for a single flat fee of $1,000. The agreement also requires Mr. Verfuerth to communicate with us regarding any of his intellectual property work product that we acquired and to provide reasonable assistance to us in enforcing our rights in any such work product. We provided this arrangement to give Mr. Verfuerth an incentive to create potentially valuable intellectual property for use in our business, to compensate him for any such intellectual property he might create and to ensure that we would have the option to acquire any such intellectual property. In fiscal 2007, we paid MrMr. Verfuerth $27,000 in intellectual property fees for intellectual property work product that we acquired, as reflected in the Summary Compensation Table.Table, and such fees currently total $12,000 per month. Under Mr. Verfuerth’s proposed new employment agreement, we will continue the existing arrangement with Mr. Verfuerth with respect to intellectual property until the end of fiscal 2008. See “Risk Factors — Risks Relating to Our Business — Some of the intellectual property we use in our business is owned by our chief executive officer.” In determining the other elements of Mr. Verfuerth’s total direct compensation, our compensation committee considered the intellectual property fees that we will pay to Mr. Verfuerth under this arrangement as part of his total direct compensation.
Severance and Change of Control Arrangements
Under our proposed new employment agreements with our NEOs, we will provide certain protections to our NEOs in the event of certain terminations of their employment, including enhanced protections for certain terminations that may occur after a change of control of our company after this offering. In general, under the proposed new employment agreements, our NEOs wouldwill become entitled to severance benefits on the occurrence of an involuntary termination without cause or a voluntary termination with good reason, and these benefits wouldwill be enhanced following a change of control of our company after this
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offering. Our NEOs wouldwill only receive the enhanced severance benefits following a change in control, however, if their employment terminates without cause or for good reason. We describe this type of arrangement as subject to a “double trigger.” Subject to receivingUnder the recommendations and advice of Towers Perrin, under the proposednew employment agreements, all payments, including any double trigger payments, to be made to our NEOs in connection with a change of control under the employment agreements and any other of our agreements or plans are proposed towill be subject to a potential “cut-back” in the event any such payments or other benefits become subject to non-deductibility or excise taxes as “excess parachute payments” under Code Section 280G or 4999. The proposed cut-back provisions would behave been structured such that all amounts payable under the employment agreement and other of our agreements or plans that constitute change of control payments wouldwill be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a greater amount by receiving the full amount of the payment and paying the related excise taxes.
Our 2003 Stock Option Plan and our 2004 Equity Incentive Plan also provide potential protections to our NEOs in the event of certain changes of control. Under these plans, our NEOs’ stock options that are unvested at the time of a change of control may become vested on an accelerated basis in the event of certain changes of control. This offering will not constitute a “change in control” under our plans.
We have selected these triggering events to afford our NEOs some protection in the event of a termination of their employment, particularly after a change of control, that might occur after the closing of this offering. We believe these types of protections better enable them to focus their efforts on behalf of our company. We also provide severance benefits in order to obtain from our NEOs certain concessions that protect our interests, including their agreement to confidentiality, intellectual property rights waiver, non-solicitation and non-competition provisions. See below under the heading “Payments upon Termination or Change of Control” for a description of the specific circumstances that would trigger payment or the provision of other benefits under these arrangements, as well as a description, explanation and quantification of the payments and benefits under each circumstance. This offering will not constitute a “change in control” under the proposed new employment agreements.
In connection with the termination of employment of Messrs. Wadman and Prange in fiscal 2007, we entered into separation agreements providing for certain payments and other benefits. The terms of the separation agreements are described below under “Payments upon Termination or Change of Control.” We agreed to provide these payments and other benefits in order to obtain certain
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protections for our company, including a release of claims and certain restrictive covenants, and to settle any disputes that might otherwise arise in connection with the termination of employment.
Other Policies
Policies On Timing of Option GrantsGrants.. As a privately-owned company, there has been no public market for our common stock. Accordingly, in fiscal 2007, we did not have a policy on the timing of option grants appropriate for a public company. In connection with this offering, our compensation committee and board of directors adopted such a policy, under which our compensation committee generally will make annual option grants beginning in fiscal 2009 effective as of the date two business days after our next quarterly (or year-end) earnings release following the decision to make the grant, regardless of the timing of the decision. Our compensation committee has elected to grant and price option awards shortly following our earnings releases so that options are priced at a point in time when the most important information about our company then known to management and our board is likely to have been disseminated in the market.
Our board of directors has also delegated limited authority to our chief executive officer, acting as a subcommittee of our compensation committee, to grant equity-based awards under our 2004 Stock and Incentive Awards Plan. Our chief executive officer may grant awards covering up to 250,000 shares of our common stock per year to certain non-executive officers in connection with offers of employment, promotions and certain other circumstances. Under this delegation of authority, any options or stock appreciation rights granted by our chief executive officer must have an effective grant date on the first business day of the month following the event giving rise to the award.
As amended and restated in connection with this offering, our 2004 Stock and Incentive Awards Plan will not permit awards of stock options or stock appreciation rights with an effective grant date
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prior to the date our compensation committee or our chief executive officer takes action to approve the award.
Executive Officer Stock Ownership Guidelines. One of the key objectives of our executive compensation program is alignment of the interests of our executive officers with the interests of our shareholders. We believe that ensuring that executive officers are shareholders and have a significant financial interest in our company is an effective means to accomplish this objective. Our compensation committee has, therefore, adopted stock ownership guidelines for our executive officers effective upon the closing of this offering. The guidelines will require executive officers to hold shares of our common stock with a value equal to or in excess of a multiple of, for our current executive officers, the officer’s fiscal 2008 base salary and, for subsequently hired, promoted, elected or appointed newly serving officers, their base salary at the time of such hiring, promotion, election or appointment. In determining to adopt these stock ownership guidelines, and in determining the multiples set forth below, our compensation committee reviewed and discussed information provided by Towers Perrin regarding the prevalence of stock ownership guidelines, the various ways in which companies determine the parameters for those guidelines, and, for companies that use a multiple of salaries as the basis for their guidelines, the relevant multiples typically utilized. The relevant multiples utilized were the same as those adopted for our executive officers set forth below. The information provided by Towers Perrin was based on those companies with stock ownership guidelines included in Towers Perrin’s database of 96 surveyed companies. Our compensation committee considered the information provided and the recommendations of Towers Perrin in this regard, which it subjectively believed to be reasonable, and determined the multiples for each position to be as follows:
| | |
Position | | Multiple of Base Salary |
|
Chief Executive Officer | | Five |
Executive Vice President | | Three |
Chief Financial Officer | | Three |
General Counsel | | Three |
Vice President | | One |
We will determine the number of shares the ownership guidelines require our executive officers to hold based on, for our current executive officers, the initial public offering price of our common stock and, for subsequently hired, promoted, elected or appointed newly serving executive officers, the closing sale price of our common stock on the first trading day on or after their date of hiring, promotion, election or appointment, as the case may be. Executive officers will be permitted to satisfy the ownership guidelines with shares of our common stock that they acquire through the exercise of stock options or other similar equity-based awards, through retention upon vesting of restricted shares or other similar equity-based awards and through direct share purchases. Our current executive officers will have five years following the closing of this offering to satisfy their ownership guidelines, and subsequently hired, promoted, elected or appointed newly serving executive officers will be required to satisfy their ownership guidelines within five years after such hiring, promotion, election or appointment.
Tax and Accounting ConsiderationsConsiderations.. In setting compensation for our NEOs, our compensation committee considers the deductibility of compensation under the IRC. As a private company, we were able to deduct all compensation that we paid to our NEOs as long as it was reasonable. After the closing of this offering, we will be subject to the provisions of Section 162(m) of the IRC. Section 162(m) prohibits us from taking a tax deduction for compensation in excess of $1.0 million that is paid to our chief executive officer and our NEOs, excluding our chief financial officer, and that is not considered “performance-based” compensation under Section 162(m). However, certain transition rules of Section 162(m) permit us to treat as performance-based compensation that is not subject to the $1.0 million cap (i) the compensation resulting from the exercise of stock options that we granted prior to this offering; (ii) the compensation payable under bonus arrangements that were in place prior to this offering; and (iii) compensation resulting from the exercise of stock options and stock appreciation rights, or the vesting of restricted stock, that we may grant during the period that begins after the closing of this offering and generally ends on the date of our annual shareholders meeting that occurs in 2011. Effective upon closing of this offering, our amended and restated 2004 Stock and Incentive Awards Plan will provide for the grant of performance-based compensation under Section 162(m). Our compensation
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committee may, however, approve compensation that will not meet the requirements of Section 162(m) in order to ensure competitive levels of total compensation for our executive officers.
Effective April 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards 123(R),Share Based Payment, or “SFAS 123(R),” which requires us to expense the estimated fair
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value of employee stock options and similar awards based on the fair value of the award on the date of grant. Prior to fiscal 2007, we accounted for our stock option awards under the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock issued to Employees, and we did not recognize the fair value expense of our stock option awards in our statement of operations, although we did report our pro forma stock option award fair value expense in the footnotes to our financial statements. The new method of expensing share-based payments will result generally in an increase in the near-term expense associated with awards of stock options. We recognized $0.4 million of stock-based compensation expense in fiscal 2007. As of March 31, 2007, we expected to recognize $3.0 million of total unrecognized stock option compensation cost over a weighted average period of three years. We expect to recognize $0.7 million of stock-based compensation expense in fiscal 2008 based on our stock options outstanding as of March 31, 2007. This expense will increase further to the extent we have granted additional stock options in fiscal 2008. Taking into account our stock options granted during fiscal 2008 through the date of this prospectus, a total of $3.9 million of stock option compensation is expected to be recognized by us over a weighted average period of three years, including $1.0 million in fiscal 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –— Critical Accounting Policies and Estimates –— Stock-Based Compensation.” Despite these charges, we continue to believe that stock options are an effective method of compensation and we anticipate that we will continue to use stock options as an integral part of our compensation program.
In fiscal 2007, as in past years, we granted incentive stock options to our NEOs under our 2004 Equity Incentive Plan. We have also granted non-qualified stock options under our equity-based plans. We intend for the incentive stock options that we grant to qualify under Section 422 of the IRC, which would result in favorable tax treatment to the recipient of the option if the recipient complies with various restrictions and disposes of the stock acquired under the option in a so-called “qualifying” disposition. Our company does not receive an income tax deduction with respect to incentive stock options unless there is a disqualifying disposition of the stock acquired under the option. Our compensation committee believes that the favorable tax treatment of incentive stock options to the recipient is a valuable tool in our efforts to provide competitive compensation to attract and retain excellent employees for key positions and therefore, despite the potential loss of income tax deductions to our company, may continue to grant incentive stock options to our executives.
We maintain certain deferred compensation arrangements for our employees and non-employee directors that are potentially subject to IRC Section 409A. If such an arrangement is neither exempt from the application of IRC Section 409A nor complies with the provisions of IRC Section 409A, then the employee or non-employee director participant in such arrangement is considered to have taxable income when the deferred compensation vests, even if not paid at such time, and such income is subject to an additional 20% income tax. In such event, we are obligated to report such taxable income to the IRS and, for employees, withhold both regular income taxes and the 20% additional income tax. If we fail to do so, we could be liable for the withholding taxes and interest and penalties thereon. Stock options with an exercise price lower than the fair market value of our common stock on the date of grant are not exempt from coverage under IRC Section 409A. We believe that all of our stock option grants are exempt from coverage under IRC Section 409A. Our deferred compensation arrangements are intended to either qualify for an exemption from, or to comply with, IRC Section 409A.
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Summary Compensation Table for Fiscal 2007
The following table sets forth for our NEOs: (i) the dollar amount of base salary earned during fiscal 2007; (ii) the dollar value of bonuses earned during fiscal 2007; (iii) the dollar value of our SFAS 123(R) expense during fiscal 2007 for all equity-based awards held by our NEOs; (iv) all other compensation for fiscal 2007; and (v) the dollar value of total compensation for fiscal 2007.
| | | | | | | | | | | | |
| | Fiscal | | | | | | Option Awards | | All Other | | |
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | ($)(1) | | Compensation ($) | | Total ($) |
Neal R. Verfuerth President and Chief Executive Officer | | 2007 | | 270,000 | | — | | 18,572 | | 156,739 (2) | | 445,311 |
| | | | | | | | | | | | |
Daniel J. Waibel Chief Financial Officer & Treasurer | | 2007 | | 150,000 | | 20,000 | | 18,562 | | 13,014 (3) | | 201,576 |
| | | | | | | | | | | | |
John H. Scribante Senior Vice President of Business Development | | 2007 | | 149,375 | | 50,000 | | 53,291 | | 15,764 (4) | | 268,430 |
| | | | | | | | | | | | |
Michael J. Potts Executive Vice President | | 2007 | | 150,000 | | 20,000 | | 16,705 | | 15,053 (3) | | 201,758 |
| | | | | | | | | | | | |
Patricia A. Verfuerth Vice President of Operations | | 2007 | | 150,000 | | 20,000 | | 14,848 | | 12,366 (5) | | 197,214 |
| | | | | | | | | | | | |
Bruce Wadman Former Chief Operating Officer (6) | | 2007 | | 160,413 | | — | | 17,042 | | 112,589 | | 290,044 |
| | | | | | | | | | | | |
James L. Prange Former Vice President of Business Development (7) | | 2007 | | 126,500 | | — | | 13,419 | | 40,306 | | 180,225 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Option
| | | | | | | |
| | Fiscal
| | | Salary
| | | Bonus
| | | Awards
| | | All Other
| | | Total
| |
Name and Principal Position | | Year | | | ($) | | | ($) | | | ($)(1) | | | Compensation ($) | | | ($) | |
|
Neal R. Verfuerth | | | | | | | | | | | | | | | | | | | | | | | | |
President and Chief Executive Officer | | | 2007 | | | | 270,000 | | | | — | | | | 18,572 | | | | 156,739 | (2) | | | 445,311 | |
Daniel J. Waibel | | | | | | | | | | | | | | | | | | | | | | | | |
Chief Financial Officer & Treasurer | | | 2007 | | | | 150,000 | | | | 20,000 | | | | 18,562 | | | | 13,014 | (3) | | | 201,576 | |
John H. Scribante | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Vice President of Business Development | | | 2007 | | | | 149,375 | | | | 50,000 | | | | 53,291 | | | | 15,764 | (4) | | | 268,430 | |
Michael J. Potts | | | | | | | | | | | | | | | | | | | | | | | | |
Executive Vice President | | | 2007 | | | | 150,000 | | | | 20,000 | | | | 16,705 | | | | 15,053 | (3) | | | 201,758 | |
Patricia A. Verfuerth | | | | | | | | | | | | | | | | | | | | | | | | |
Vice President of Operations | | | 2007 | | | | 150,000 | | | | 20,000 | | | | 14,848 | | | | 12,366 | (5) | | | 197,214 | |
Bruce Wadman | | | | | | | | | | | | | | | | | | | | | | | | |
Former Chief Operating Officer(6) | | | 2007 | | | | 160,413 | | | | — | | | | 17,042 | | | | 112,589 | | | | 290,044 | |
James L. Prange | | | | | | | | | | | | | | | | | | | | | | | | |
Former Vice President of Business Development(7) | | | 2007 | | | | 126,500 | | | | — | | | | 13,419 | | | | 40,306 | | | | 180,225 | |
| | |
(1) | | Represents the amount of expense recognized for financial accounting purposes pursuant to SFAS 123(R) for fiscal 2007 in our financial statements included elsewhere in this prospectus. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. |
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| | |
(2) | | Includes (i) $77,880 in guarantee fees we paid to Mr. Verfuerth in exchange for his personal guarantee of certain of our outstanding indebtedness (see “Related Party Transactions”); (ii) $36,667 in forgiveness of outstanding indebtedness pursuant to Mr. Verfuerth’s existing employment agreement (see “Related Party Transactions”); (iii) $27,000 in intellectual property fees we paid to Mr. Verfuerth pursuant to his existing employment agreement; (iv) an automobile allowance of $12,000; and (v) $3,192 in life insurance premiums and health club membership dues. |
|
(3) | | Includes (i) an automobile allowance of $12,000; (ii) matching contributions under our 401(k) Plan; and (iii) life insurance premiums. |
|
(4) | | Includes (i) an automobile allowance of $1,000; (ii) life insurance premiums; and (iii) reimbursement of health and disability insurance premiums pursuant to the terms of Mr. Scribante’s employment agreement. |
|
(5) | | Includes (i) an automobile allowance of $12,000 and (ii) life insurance premiums. |
|
(6) | | Mr. Wadman’s employment with us ended on February 19, 2007. The amounts shown in “All Other Compensation” include (i) $101,439 of payments and other benefits pursuant to a separation agreement that we entered into in connection with Mr. Wadman’s termination of employment (see “Payments upon Termination or Change of Control”); (ii) $11,000 as an automobile allowance; and (iii) matching contributions under our 401(k) Plan. |
|
(7) | | Mr. Prange’s employment with us ended on March 12, 2007. The amounts shown in “All Other Compensation” consist of payments for services rendered in fiscal years prior to fiscal 2007 that we made to Mr. Prange pursuant to a separation agreement in connection with the termination of his employment (see “Payments upon Termination or Change of Control”). |
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Grants of Plan-Based Awards for Fiscal 2007
As described above in the Compensation Discussion and Analysis, under our current 2004 Equity Incentive Plan and employment agreements with certain of our NEOs, we granted stock options and non-equity incentive awards (i.e., cash bonuses) to our NEOs in fiscal 2007. The following table sets forth information regarding all such stock options and awards.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | All Other | | | | | | | | | | | | All Other
| | | | |
| | Option | | Grant | | | | | | | | | | Option
| | | | Grant
|
| | Awards: | | Date | | | | | | | | | | Awards:
| | | | Date
|
| | Estimated Future Payouts | | Number of | | Exercise | | Fair | | | | | | | | | | Number of
| | Exercise
| | Fair
|
| | Under Non-Equity | | Securities | | Price of | | Value of | | | | | | | | | | Securities
| | Price of
| | Value of
|
| | Incentive Plan Awards(1) | | Underlying | | Option | | Option | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) | | Underlying
| | Option
| | Option
|
| | Grant | | Threshold | | Target | | Max | | Options | | Awards | | Awards | | Grant
| | Threshold
| | Target
| | Max
| | Options
| | Awards
| | Awards
|
Name | | Date | | ($) | | ($) | | ($) | | (#)(2) | | ($/Sh) | | ($)(3) | | Date | | ($) | | ($) | | ($) | | (#)(2) | | ($/Sh) | | ($)(3) |
| |
Neal R. Verfuerth | | — | | | 162,000 | (4) | | 270,000 | | 270,000 | | | | — | | | | 162,000 | (4) | | | 270,000 | | | | 270,000 | | | | | | | | | | |
| | 12/20/2006 | | — | | — | | — | | 250,000 | | | 2.20 | (5) | | 329,965 | | | | 12/20/2006 | | | | — | | | | — | | | | — | | | | 250,000 | | | | 2.20 | (5) | | | 329,965 | |
| | |
Daniel J. Waibel | | 12/20/2006 | | — | | — | | — | | 100,000 | | | 2.20 | (5) | | 131,986 | | | | 12/20/2006 | | | | — | | | | — | | | | — | | | | 100,000 | | | | 2.20 | (5) | | | 131,986 | |
| | |
John H. Scribante | | — | | | 90,000 | (4) | | 150,000 | | 150,000 | | — | | — | | — | | | | — | | | | 90,000 | (4) | | | 150,000 | | | | 150,000 | | | | — | | | | — | | | | — | |
| | 6/2/2006 | | — | | — | | — | | 100,000 | | | 2.50 | (6) | | 126,697 | | | | 6/2/2006 | | | | — | | | | — | | | | — | | | | 100,000 | | | | 2.50 | (6) | | | 126,697 | |
| | |
Michael J. Potts | | 12/20/2006 | | — | | — | | — | | 75,000 | | | 2.20 | (5) | | 98,990 | | | | 12/20/2006 | | | | — | | | | — | | | | — | | | | 75,000 | | | | 2.20 | (5) | | | 98,990 | |
| | |
Patricia A. Verfuerth | | 12/20/2006 | | — | | — | | — | | 50,000 | | | 2.20 | (5) | | 65,993 | | | | 12/20/2006 | | | | — | | | | — | | | | — | | | | 50,000 | | | | 2.20 | (5) | | | 65,993 | |
| | |
Bruce Wadman | | — | | — | | 52,499 | | — | | — | | — | | — | | | | — | | | | — | | | | 52,499 | | | | — | | | | — | | | | — | | | | — | |
| | |
James L. Prange | | — | | — | | — | | — | | — | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
(1) | | Amounts in the three columns below represent possible payments for the cash bonus incentive compensation awards that we granted with respect to the performance period of fiscal 2007. No amounts were actually earned under these awards, although we did pay Messrs. Scribante, Potts and Waibel and Ms. Verfuerth discretionary bonuses of $50,000, $20,000, $20,000 and $20,000, respectively. |
|
(2) | | We granted the stock options listed in this column under our 2004 Equity Incentive Plan in fiscal 2007. As described under “Compensation Discussion and Analysis –— Elements of Compensation –— Long-Term Equity Incentive Compensation” we granted stock options on July 27, 2007 to Mr. Verfuerth and Ms. Verfuerth for 180,958 shares and 125,974 shares, respectively, at an exercise price of $4.49 per share, in connection with their satisfaction of certain loans from us through their redemptionsurrender of an equal number of shares of our common stock. |
|
(3) | | Represents the grant date fair value of the stock options computed in accordance with SFAS 123(R). |
|
(4) | | Represents the maximum discretionary payout of 60% of the target payout for achievement of 75% of target performance with respect to each performance measure under the award. |
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| | |
(5) | | The exercise price per share was equal to the fair market value of a share of our common stock on the grant date, as determined by our compensation committee and board of directors. |
|
(6) | | The exercise price per share of $2.50 was equal to the price at which we offered shares in our most recent offering of our Series B preferred stock at the time of the option grant. |
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Outstanding Equity Awards at Fiscal 2007 Year End
The following table sets out information on outstanding stock option awards held by our NEOs as of March 31, 2007, including the number of shares underlying both exercisable and unexercisable portions of each stock option, as well as the exercise price and expiration date of each outstanding option.
| | | | | | | | | | | | | | | | | |
| | | Option Awards |
| | | Number of Shares | | Number of Shares | | | | |
| | | Underlying | | Underlying | | | | |
| | | Unexercised | | Unexercised | | Option | | Option |
| | | Options (#) | | Options (#) | | Exercise Price | | Expiration |
Name | | | Exercisable | | Unexercisable (1) | | ($) | | Date |
Neal R. Verfuerth | | | | — | | | | 250,000 | (1)(2) | | | 2.20 | | | | 12/20/2016 | |
| | | | | | | | | | | | | | | | | |
Daniel J. Waibel | | | | — | | | | 100,000 | (3) | | | 2.20 | | | | 12/20/2016 | |
| | | | | | | | | | | | | | | | | |
John H. Scribante | | | | 20,000 | | | | 80,000 | (4) | | | 2.50 | | | | 06/02/2016 | |
| | | | 50,000 | | | | 125,000 | (5) | | | 2.25 | | | | 07/31/2014 | |
| | | | 24,000 | | | | 16,000 | (6) | | | 2.25 | | | | 03/24/2014 | |
| | | | | | | | | | | | | | | | | |
Michael J. Potts | | | | — | | | | 75,000 | (7) | | | 2.20 | | | | 12/20/2016 | |
| | | | 250,000 | | | | — | | | | 0.938 | | | | 10/01/2011 | |
| | | | 340,318 | | | | — | | | | 0.688 | | | | 06/01/2011 | |
| | | | | | | | | | | | | | | | | |
Patricia A. Verfuerth | | | | — | | | | 50,000 | (1)(8) | | | 2.20 | | | | 12/20/2016 | |
| | | | 50,000 | | | | — | | | | 0.938 | | | | 10/01/2011 | |
| | | | 16,666 | | | | — | | | | 0.688 | | | | 10/01/2011 | |
| | | | | | | | | | | | | | | | | |
Bruce Wadman (9) | | | | 20,000 | | | | — | | | | 2.25 | | | | 05/20/2007 | |
| | | | | | | | | | | | | | | | | |
James L. Prange (10) | | | | 172,222 | | | | — | | | | 0.688 | | | | 06/10/2007 | |
| | | | | | | | | | | | | | | | |
| | Option Awards | |
| | Number of Shares
| | | Number of Shares
| | | | | | | |
| | Underlying
| | | Underlying
| | | | | | | |
| | Unexercised
| | | Unexercised
| | | Option
| | | Option
| |
| | Options (#)
| | | Options (#)
| | | Exercise Price
| | | Expiration
| |
Name | | Exercisable | | | Unexercisable(1) | | | ($) | | | Date | |
|
Neal R. Verfuerth | | | — | | | | 250,000 | (1)(2) | | | 2.20 | | | | 12/20/2016 | | Daniel J. Waibel | | | — | | | | 100,000 | (3) | | | 2.20 | | | | 12/20/2016 | |
John H. Scribante | | | 20,000 | | | | 80,000 | (4) | | | 2.50 | | | | 06/02/2016 | | | | | 50,000 | | | | 125,000 | (5) | | | 2.25 | | | | 07/31/2014 | |
| | | 24,000 | | | | 16,000 | (6) | | | 2.25 | | | | 03/24/2014 | | Michael J. Potts | | | — | | | | 75,000 | (7) | | | 2.20 | | | | 12/20/2016 | |
| | | 250,000 | | | | — | | | | 0.938 | | | | 10/01/2011 | |
| | | 340,318 | | | | — | | | | 0.688 | | | | 06/01/2011 | |
Patricia A. Verfuerth | | | — | | | | 50,000 | (1)(8) | | | 2.20 | | | | 12/20/2016 | | | | | 50,000 | | | | — | | | | 0.938 | | | | 10/01/2011 | |
| | | 16,666 | | | | — | | | | 0.688 | | | | 10/01/2011 | | Bruce Wadman(9) | | | 20,000 | | | | — | | | | 2.25 | | | | 05/20/2007 | |
James L. Prange(10) | | | 172,222 | | | | — | | | | 0.688 | | | | 06/10/2007 | |
| | |
(1) | | Does not reflect the July 27, 2007 grant of options to purchase 180,958 and 125,974 shares of our common stock, respectively, to Mr. Verfuerth and Ms. Verfuerth described above under “Compensation Discussion and Analysis –— Elements of |
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| | |
| | Compensation — Long-Term Equity Incentive Compensation,” because such stock options were not outstanding as of March 31, 2007. |
|
(2) | | The option will vest with respect to 50,000 shares on December 20 of each of 2007, 2008, 2009, 2010 and 2011, contingent on Mr. Verfuerth’s continued employment through the applicable vesting date. |
|
(3) | | The option will vest with respect to 20,000 shares on December 20 of each of 2007, 2008, 2009, 2010 and 2011, contingent on Mr. Waibel’s continued employment through the applicable vesting date. |
|
(4) | | The option will vest with respect to 20,000 shares on March 31 of each of 2008, 2009, 2010 and 2011, contingent on Mr. Scribante’s continued employment through the applicable vesting date. |
|
(5) | | The option will vest with respect to 50,000 shares on March 31 of each of 2008 and 2009, and with respect to 25,000 shares on March 31, 2010, contingent on Mr. Scribante’s continued employment through the applicable vesting date. |
|
(6) | | The option will vest with respect to 8,000 shares on March 31 of each of 2008 and 2009, contingent on Mr. Scribante’s continued employment through the applicable vesting date. |
|
(7) | | The option will vest with respect to 15,000 shares on December 20 of each of 2007, 2008, 2009, 2010 and 2011, contingent on Mr. Potts’s continued employment through the applicable vesting date. |
|
(8) | | The option will vest with respect to 10,000 shares on December 20 of each of 2007, 2008, 2009, 2010 and 2011, contingent on Ms. Verfuerth’s continued employment through the applicable vesting date. |
|
(9) | | Subsequent to March 31, 2007, in connection with Mr. Wadman’s termination of employment, we entered into a separation agreement with Mr. Wadman in which we agreed to amend his option agreement to permit Mr. Wadman to exercise the option with respect to an additional 20,000 shares during a nine-month period between June 30, 2009 and March 31, 2010, so long as he complies with his obligations under his separation agreement. The amendment also extends the exercise period of the option with respect to the original 20,000 shares beyond the normal expiration date of the option. |
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| | |
(10) | | Subsequent toMr. Prange’s employment with us ended on March 31, 2007, in12, 2007. In connection with Mr. Prange’s termination of employment, we entered into a separation agreement with Mr. Prange. In early October 2007, we notified Mr. Prange in whichthat we agreedbelieved that he had violated his obligations of non-disparagement under his separation agreement, and that we had taken action to amendcancel his existing option agreement covering 220,222options to purchase 172,222 shares of our common stock which was exercisable with respectand also to 172,222cancel 23,000 shares of our common stock onthat he received upon his previous exercise of options in connection with the date of termination, to permitseparation agreement. Mr. Prange to exercise the option with respect to the 48,000 shareshas contested these actions and has threatened legal action if we do not otherwise exercisable during a 90-day period following the effective date ofreinstate his separation agreement. We also agreed to amend Mr. Prange’s option agreement to permit him to exercise his option with respect to 17,222 shares for a 90-day period commencing on the closing of our initial public offering,options and to exercise his option with respect to the remaining 172,222 shares (less any of the 17,222 shares he acquires following our initial public offering) between March 12, 2009 and June 10, 2009, in each case so long as Mr. Prange complies with his obligations under his separation agreement.shares. |
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Option Exercises and Stock Vested for Fiscal 2007
The following table sets forth information regarding the exercise of stock options that occurred during fiscal 2007 for each of our NEOs on an aggregated basis.
| | | | | | | | | |
| | | Option Awards | |
| | | | | | | | | | Number of Shares
| | | |
| | Option Awards | | Acquired on
| | Value Realized
| |
| | Number of Shares Acquired on | | | | Exercise
| | on Exercise
| |
Name | | Exercise (#) | | Value Realized on Exercise ($) (1) | | (#) | | ($)(1) | |
| |
Neal R. Verfuerth | | 1,000,000 | | 1,387,500 | | | | 1,000,000 | | | | 1,387,500 | |
| | |
Daniel J. Waibel | | 650,000 | | 920,625 | | | | 650,000 | | | | 920,625 | |
| | |
John H. Scribante | | 75,000 | | — | | | | 75,000 | | | | — | |
| | |
Michael J. Potts | | 59,682 | | 90,239 | | | | 59,682 | | | | 90,239 | |
| | |
Patricia A. Verfuerth | | 783,334 | | 1,134,776 | | | | 783,334 | | | | 1,134,776 | |
| | |
Bruce Wadman | | — | | — | | | | — | | | | — | |
| | |
James L. Prange | | — | | — | | | | — | | | | — | |
| | |
(1) | | Represents the difference, if any, between the fair market value on the date of exercise of the shares purchased as determined by our compensation committee and our board of directors and the aggregate exercise price paid by the executive. |
Payments Upon Termination or Change of Control
Arrangements in Effect Prior to this Offering
Under Mr. Verfuerth’s employment agreement, in the event of a termination other than for cause, he would be entitled to a severance payment equal to 150% of his then-current base salary, paid in a lump sum within 30 days of his termination of employment, and a pro rated bonus, paid in a lump sum within 90 days after the close of the otherwise applicable bonus period. If Mr. Verfuerth’s employment had terminated on the last day of fiscal 2007, other than for cause, his employment agreement would have entitled him to a lump sum severance payment of $405,000.
Mr. Wadman’s employment with us terminated on February 19, 2007. In connection with Mr. Wadman’s termination of employment, we entered into a separation agreement, effective July 5, 2007, pursuant to which we agreed to provide him with six months’ severance pay and COBRA coverage at our expense for six months. The severance pay was equal to $87,500 in the aggregate, and the value of the COBRA coverage was approximately $5,435. We also agreed to amend Mr. Wadman’s existing option agreement, which was exercisable with respect to 20,000 shares of common stock on the date of termination, to permit Mr. Wadman to exercise the option with respect to an additional 20,000 shares during a nine-month period between June 30, 2009 and March 31, 2010 so long as he complies with his obligations under his separation agreement. The amendment also extends the exercise period of the option with respect to the original 20,000 shares beyond the normal expiration date of the option.
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The weighted average exercise price per share of Mr. Wadman’s option is $2.25. Based on an assumed initial public offering price of $$13.00 per share (the mid-point of the range set forth on the cover page of this prospectus), we estimatethe aggregate “intrinsic value” of Mr. Wadman’s option, or the aggregate difference between the exercise price and the value of the amendment toshares that Mr. Wadman could acquire on a hypothetical exercise of his option with respect to all 40,000 of the shares underlying his options, would be $ .$430,000. In exchange for these benefits, Mr. Wadman agreed to a release of claims and to certain restrictive covenants, including mutual non-disparagement, confidentiality and customary non-competitionnon-
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competition and non-solicitation restrictions for a period of 20 months following the effective date of his separation agreement. The20-month period will expire on March 5, 2009.
In connection with Mr. Prange’s termination of employment effective March 12, 2007, we entered into a separation agreement, effective July 18, 2007, pursuant to which we agreed to provide him with approximately $40,306 in allegedly owed back pay and approximately $7,725 in business expenses. We also agreed to amend Mr. Prange’s existing option agreement, which was exercisable with respect to 172,222 shares of common stock on the date of termination, to permit Mr. Prange to exercise the option with respect to the 48,000 shares not otherwise exercisable under his option during a90-day period following the effective date of his separation agreement. We also agreed to amend Mr. Prange’s option agreement to permit him to exercise his option with respect to 17,222 shares for a90-day period commencing upon the closing of our initial public offering, and to exercise his option with respect to the remaining 172,222 shares (less any of the 17,222 shares he acquires following our initial public offering) between March 12, 2009 and June 10, 2009, in each case so long as Mr. Prange compliescomplied with his obligations under his separation agreement. Based on an assumed initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus), we estimate the value of the amendment to his option to be $ . In exchange for these benefits, Mr. Prange agreed to a release of claims and certain restrictive covenants, including mutual non-disparagement, confidentiality and customary non-competition and non-solicitation restrictions for a period of 24 months following the date of his termination of employment. The24-month period will end on March 12, 2009.
In early October 2007, we notified Mr. Prange that we believed that he had violated his obligations of non-disparagement under his separation agreement, and that we had taken action to cancel his options to purchase 172,222 shares of our common stock and also to cancel 23,000 shares of our common stock that he received upon his previous exercise of options in connection with the separation agreement. Mr. Prange has contested these actions and has threatened legal action if we do not reinstate his options and shares.
New Employment Agreements
Subject to the recommendations of Towers Perrin, our
Our proposed new employment agreements with our NEOs which, if adopted, wouldwill become effective upon the closing of this offering will provide thatand their execution by our NEOs. Under these new agreements, our NEOs becomewill be entitled to certain severance payments and other benefits on a qualifying employment termination, including certain enhanced protections under such circumstances occurring after a change in control of our company. If the executive’s employment is terminated without “cause” or for “good reason” prior to the end of the employment period, the executive will be entitled to a lump sum severance benefit equal to a multiple (indicated in the table below) of the sum of his base salary plus the average of the prior three years’ bonuses; a pro rata bonus for the year of the termination; and COBRA premiums at the active employee rate for the duration of the executive’s COBRA continuation coverage period.
“Cause”
“Cause” is defined in the new employment agreements as a good faith finding by our board of directors that the executive has (i) failed, neglected, or refused to perform the lawful employment duties related to his position or that we assigned to him (other than due to disability); (ii) committed any willful, intentional, or grossly negligent act having the effect of materially injuring our interests, business, or reputation; (iii) violated or failed to comply in any material respect with our published rules, regulations, or policies; (iv) committed an act constituting a felony or misdemeanor involving moral turpitude, fraud, theft, or dishonesty; (v) misappropriated or embezzled any of our property (whether or not an act constituting a felony or misdemeanor); or (vi) breached any material provision of the employment agreement or any other applicable confidentiality, non-compete, non-solicit, general release, covenant not-to-sue, or other agreement with us.
“Good
“Good reason” is defined in the new employment agreements as the occurrence of any of the following without the executive’s consent: (i) a material diminution in the executive’s base salary; (ii) a material diminution in the executive’s authority, duties or responsibilities; (iii) a material diminution in
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the authority, duties or responsibilities of the supervisor to whom the executive is required to report; (iv) a material diminution in the budget over which the executive retains authority; (v) a material change in the geographic location at which the executive must perform services; or (vi) a material breach by us of any provision of the employment agreement.
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The severance multiples, employment and renewal terms and restrictive covenants under the proposed new employment agreements, prior to any change of control occurring after this offering, are as follows:
| | | | | | | | | | | | | | |
| | | | Employment
| | | Renewal
| | | Noncompete and
| |
Executive | | Severance | | Term | | | Term | | | Confidentiality | |
|
Chief executive officer | | 2 X× Salary + | | | 2 Years | | | | 2 Years | | | | Yes | |
| | Avg. Bonus | | | | | | |
| | | | | | | | |
Chief financial officer | | 1 X× Salary + | | | 1 Year | | | | 1 Year | | | | Yes | |
General counsel
Executive vice presidents | | Avg. Bonus | | | | | | | | | | | | |
General counsel | | 1 × Salary + | | | 1 Year | | | | 1 Year | | | | Yes | |
| | Avg. Bonus | | | | | | | | | | | | |
Executive vice presidents | | 1 × Salary + | | | 1 Year | | | | 1 Year | | | | Yes | |
| | Avg. Bonus | | | | | | | | | | | | |
Vice presidents | | 1/2 X× Salary + | | | 1 Year | | | | 1 Year | | | | Yes | |
| | Avg. Bonus | | | | | | | | | | | | |
We set the severance multiples, employment and renewal terms and restrictive covenants under the new employment agreements based on advice from Towers Perrin that such multiples and terms are consistent with general public company practice and our subjective belief that these amounts and terms were necessary to provide our NEOs with compensation arrangements that will help us to retain and attract high-quality executives in a competitive job market. The proposedseverance multiples and employment and renewal terms vary among our individual NEOs based on the advice of Towers Perrin that such multiples and terms are consistent with general public company practice and our subjective judgment. We did not ascertain the basis or support for Towers Perrin’s advice that such multiples and other terms are consistent with general public company practice.
The new employment agreements would also provide enhanced benefits for our NEOs following a change of control after closing of this offering. Upon a change of control, the executive’s employment term would automatically be extended for a specified period, which would vary based upon the executive’s position, as shown in the chart below. Following the change of control, the executive would be guaranteed the same base salary and a bonus opportunity at least equal to 100% of the prior year’s target award and with the same general probability of achieving performance goals as was in effect prior to the change of control. In addition, the executive would be guaranteed participation in salaried and executive benefit plans that provide benefits, in the aggregate, at least as great as the benefits being provided prior to the change of control.
The severance provisions would remain the same as in the pre-change of control context as described above, except that the multiplier used to determine the severance amount and the post change of control employment term would increase, as is shown in the table below. The table also indicates the provisions in the proposed employment agreements regarding triggering events and the treatment of payments under the agreements if the non-deductibility and excise tax provisions of Code Sections 280G and 4999 were triggered, as discussed below.
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| | | | | | | | | | |
| | | | Post Change
| | | | | | |
| | | | of Control
| | | | | | |
| | | | Employment
| | | | Excise Tax
| | |
Executive | | Severance | | Term | | Trigger | | Gross-Up | | Valley |
|
Chief executive officer | | 3 X× Salary + | | 3 Years | | Double | | No | | Yes |
| | Avg. Bonus | | | | | | | | |
| | | | | | | | | | |
Chief financial officer | | 2 X× Salary + | | 2 Years | | Double | | No | | Yes |
General counsel
Executive vice presidents | | Avg. Bonus | | | | | | | | |
| | | | | | | | | | |
Vice presidents | | 1 X Salary + | | 1 Years | | Double | | No | | Yes |
| | Avg. Bonus | | | | | | | | |
General counsel | | 2 × Salary + | | 2 Years | | Double | | No | | Yes |
| | Avg. Bonus | | | | | | | | |
Executive vice presidents | | 2 × Salary + | | 2 Years | | Double | | No | | Yes |
| | Avg. Bonus | | | | | | | | |
Vice presidents | | 1 × Salary + | | 1 Year | | Double | | No | | Yes |
| | Avg. Bonus | | | | | | | | |
We set the post change of control severance multiples and employment terms under the new employment agreements based on our belief that these amounts and terms will provide appropriate
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levels of protection for our NEOs to enable them to focus their efforts on behalf of our company without undue concern for their employment following a change in control. In making this determination, our compensation committee considered information provided by Towers Perrin indicating that the proposed change of control severance multiples and employment terms were generally consistent with the practices of Towers Perrin’s 96 surveyed companies.
A change of control under the proposed new employment agreements would generally occur when a third party acquires 20% or more of our outstanding stock, there is a hostile board election, a merger occurs in which our shareholders cease to own 50% of the equity of the successor, or we are liquidated or dissolved, or substantially all of our assets are sold, in each case after the closing of this offering. We have agreed to treat these events as triggering events under the new employment agreements because such events would represent significant changes in the ownership of our company and could signal potential uncertainty regarding the job security of our NEOs. Specifically, we believe that an acquisition by a third party of 20% or more of our outstanding stock would constitute a significant change in ownership of our company after this offering because we anticipate having a diverse, widely-dispersed shareholder base. We believe the types of protections provided under our new employment agreements better enable our executives to focus their efforts on behalf of our company during such times of uncertainty.
The proposed new employment agreements contain a “valley” excise tax provision to address the issue of Code Sections 280G and 4999 non-deductibility and excise taxes on “excess parachute payments.” Code Sections 280G and 4999 may affect the deductibility of, and impose additional excise taxes on, certain payments that are made upon or in connection with a change of control. The valley provision provides that all amounts payable under the employment agreement and any other of our agreements or plans that constitute change of control payments will be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a greater amount by receiving the full amount of the payment and personally paying the excise taxes. Under the proposed new employment agreements, we would not be obligated to gross up executives for any excise taxes imposed on excess parachute payments under Code Section 280G or 4999.
The proposed new employment agreements were not in effect as of March 31, 2007, and the payments and other benefits, if any, to which our NEOs would have been entitled if a triggering event had occurred on March 31, 2007 under their existing employment agreements are summarized above under “— Arrangements in Effect Prior to this Offering.” The following table summarizes the estimated value of certain payments and other benefits to which our currently-serving NEOs would be entitled under the proposed new employment agreements upon certain terminations of employment, assuming, solely for purposes of calculation,such calculations, that (i) the triggering event or events occurred on JuneSeptember 30, 2007; (ii) the proposed new employment agreements were then in effect; (iii) the Cash Incentive Program was then in effect; (iv) in the case of a change of control, the vesting of all stock options held by our NEOs was accelerated; and (iv)(v) the value of a share of our common stock as of such change of control was $$13.00 per share (the mid-point of the range set forth on the cover page of this prospectus), which impacts. The per share value of our common stock could affect the amounts receivable by the NEOs upon the acceleration of non-vested stock options as a result of the change of control as set forth below under “Equity Plans” and, therefore, affectscould affect the amounts set forth in the column below entitled “After ApplicationChange in Control Without Cause or Good Reason” by triggering application of ‘Valley’ Provision”:the “valley” provision. Under the assumptions set out in clauses (i) through (v) above, the valley provision would not result in a reduction of any change in
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92
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | After Change in Control Without |
| | | | | | | | | | | Cause or for Good Reason |
| | | | | | | Before Change in | | Before | | |
| | | | | | | Control Without | | Application of | | After Application of |
| | | | | | | Cause or for Good | | “Valley” | | “Valley” |
Name | | | Benefit | | Reason ($) | | Provision ($)(1) | | Provision ($)(1) |
Neal R. Verfuerth | | | Severance | | | 583,200 | | | | 874,800 | | | | | |
| | | Pro Rata Target Bonus | | | 71,901 | | | | 71,901 | | | | | |
| | | Benefits | | | 11,029 | | | | 11,029 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | 666,130 | | | | 957,730 | | | | | |
| | | | | | | | | | | | | | | | | |
Daniel J. Waibel | | | Severance | | | 171,667 | | | | 336,667 | | | | | |
| | | Pro Rata Target Bonus | | | — | | | | — | | | | | |
| | | Benefits | | | 16,304 | | | | 16,304 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | 187,971 | | | | 352,971 | | | | | |
| | | | | | | | | | | | | | | | | |
John H. Scribante | | | Severance | | | 166,667 | | | | 316,667 | | | | | |
| | | Pro Rata Target Bonus | | | 36,986 | | | | 36,986 | | | | | |
| | | Benefits | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | 203,653 | | | | 353,653 | | | | | |
| | | | | | | | | | | | | | | | | |
Michael J. Potts | | | Severance | | | 171,667 | | | | 336,667 | | | | | |
| | | Pro Rata Target Bonus | | | — | | | | — | | | | | |
| | | Benefits | | | 16,304 | | | | 16,304 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | 187,971 | | | | 352,971 | | | | | |
| | | | | | | | | | | | | | | | | |
Patricia A. Verfuerth | | | Severance | | | 171,667 | | | | 336,667 | | | | | |
| | | Pro Rata Target Bonus | | | — | | | | — | | | | | |
| | | Benefits | | | 11,029 | | | | 11,029 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | 182,696 | | | | 347,696 | | | | | |
| | | | | | | | | | | | | | | | | |
Total for all NEOs | | | | | | | | 1,428,421 | | | | 2,365,021 | | | | | |
97
control payments, and would not, therefore, affect the amounts set forth in the column entitled “After Change in Control Without Cause or for Good Reason.”
| | |
(1) | | The valley provision in the proposed new employment agreements provides that all amounts payable under the employment agreement and any other of our agreements or plans that constitute change of control payments will be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a greater amount by receiving the full amount of the payment and paying the excise taxes. |
| | | | | | |
| | | | Before Change in
| | After Change in
|
| | | | Control Without
| | Control Without
|
| | | | Cause or for Good
| | Cause or for
|
Name | | Benefit | | Reason ($) | | Good Reason |
|
Neal R. Verfuerth | | Severance | | 583,200 | | 874,800 |
| | Pro Rata Target Bonus | | 146,000 | | 146,000 |
| | Benefits | | 11,029 | | 11,029 |
| | | | | | |
| | Total | | 740,229 | | 1,031,829 |
Daniel J. Waibel | | Severance | | 171,667 | | 343,333 |
| | Pro Rata Target Bonus | | 32,500 | | 32,500 |
| | Benefits | | 16,304 | | 16,304 |
| | | | | | |
| | Total | | 220,471 | | 392,137 |
John H. Scribante | | Severance | | 83,333 | | 166,667 |
| | Pro Rata Target Bonus | | 30,000 | | 30,000 |
| | Benefits | | — | | — |
| | | | | | |
| | Total | | 113,333 | | 196,667 |
Michael J. Potts | | Severance | | 171,667 | | 343,333 |
| | Pro Rata Target Bonus | | 32,500 | | 32,500 |
| | Benefits | | 16,304 | | 16,304 |
| | | | | | |
| | Total | | 220,471 | | 392,137 |
Patricia A. Verfuerth | | Severance | | 85,833 | | 171,667 |
| | Pro Rata Target Bonus | | 25,000 | | 25,000 |
| | Benefits | | 11,029 | | 11,029 |
| | | | | | |
| | Total | | 121,862 | | 207,696 |
Total for all NEOs | | | | 1,416,366 | | 2,220,466 |
Equity Plans
Our equity plans provide for certain benefits in the event of certain changes of control. Under both our existing 2003 Stock Option Plan and our 2004 Equity Incentive Plan, and under our amended and restated 2004 Stock and Incentive Awards Plan, if there is a change of control, our compensation committee may, among other things, accelerate the exercisability of all outstanding stock optionsand/or require that all outstanding options be cashed out. Our 2003 Stock Option Plan defines a change of control as the occurrence of any of the following:
| | |
| • | With certain exceptions, any “person” (as such term is used in sections 13(d) and l4(d) of the Exchange Act), becomes a “beneficial owner” (as defined inRule 13d-3 under the Exchange Act), directly or indirectly, of securities representing more than 50% of the voting power of our then outstanding securities. |
|
| • | Our shareholders approve (or, if shareholder approval is not required, our board approves) an agreement providing for (i) our merger or consolidation with another entity where our shareholders immediately prior to the merger or consolidation will not beneficially own, immediately after the merger or consolidation, securities of the surviving entity representing more than 50% of the voting power of the then outstanding securities of the surviving entity, (ii) the sale or other disposition of all or substantially all of our assets, or (iii) our liquidation or dissolution. |
|
| • | Any person has commenced a tender offer or exchange offer for 30% or more of the voting power of our then outstanding shares. |
|
| • | Directors are elected such that a majority of the members of our board shall have been members of our board for less than two years, unless the election or nomination for election of each new director who was not a director at the beginning of such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. |
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With certain exceptions, any “person” (as such term is used in sections 13(d) and l4(d) of the Exchange Act), becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities representing more than 50% of the voting power of our then outstanding securities.
Our shareholders approve (or, if shareholder approval is not required, our board approves) an agreement providing for (i) our merger or consolidation with another entity where our shareholders immediately prior to the merger or consolidation will not beneficially own, immediately after the merger or consolidation, securities of the surviving entity representing more than 50% of the voting power of the then outstanding securities of the surviving entity, (ii) the sale or other disposition of all or substantially all of our assets, or (iii) our liquidation or dissolution.
Any person has commenced a tender offer or exchange offer for 30% or more of the voting power of our then outstanding shares.
Directors are elected such that a majority of the members of our board shall have been members of our board for less than two years, unless the election or nomination for election of each new director who was not a director at the beginning of such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
Following this offering, a change of control under our 2004 Stock and Incentive Awards Plan wouldwill generally occur when a third party acquires 20% or more of our outstanding stock, there is a hostile board election, a merger occurs in which our shareholders cease to own 50% of the equity of the successor, or we are liquidated or dissolved or substantially all of our assets are sold. We have agreed to treat these events as triggering events under the new employment agreements because such events would represent significant changes in the ownership of our company and could signal potential uncertainty regarding the job security of our NEOs, and we believe these types of protections will better enable our NEOs to focus their efforts on behalf of our company during such times of uncertainty.
If a change of control had occurred on March 31,September 30, 2007, and our compensation committee had cashed out all of the stock options then held by our NEOs, whether or not vested, for a payment equal to the product of (i) the number of shares underlying such options and (ii) the difference between an assumed initial public offering price of $$13.00 per share (the mid-point of the range set forth on the cover page of this prospectus), and the exercise price per share of such options, our currently-serving NEOs would have received approximately the following benefits:
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| | | | | | | | | | | | | |
| | | Number of Option | | Weighted Average Exercise | | |
Name | | | Shares Cashed Out (#) | | Price per Option Share ($) | | Value Realized ($) |
Neal R. Verfuerth (1) | | | | 250,000 | | | | 2.20 | | | | | |
| | | | | | | | | | | | | |
Daniel J. Waibel | | | | 100,000 | | | | 2.20 | | | | | |
| | | | | | | | | | | | | |
John H. Scribante | | | | 315,000 | | | | 2.33 | | | | | |
| | | | | | | | | | | | | |
Michael J. Potts | | | | 665,318 | | | | 0.952 | | | | | |
| | | | | | | | | | | | | |
Patricia A. Verfuerth (2) | | | | 116,666 | | | | 1.44 | | | | | |
| | |
(1) | | The option shares shown in this table for Mr. Verfuerth do not reflect his receipt of the July 27, 2007 grant of options to purchase 180,958 shares of our common stock at an exercise price of $4.49 per share, which is described above under “Compensation Discussion and Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation,” because such stock options were not outstanding as of March 31, 2007. If the stock options granted to Mr. Verfuerth on July 27, 2007 were reflected in the table, his total value realized would be $ . |
|
(2) | | The option shares shown in this table for Ms. Verfuerth do not reflect her receipt of the July 27, 2007 grant of options to purchase 125,974 shares of our common stock at an exercise price of $4.49 per share, which is described above under “Compensation Discussion and Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation,” because such stock options were not outstanding as of March 31, 2007. If the stock options granted to Ms. Verfuerth on July 27, 2007 were reflected in the table, her total value realized would be $ . |
| | | | | | | | | | | | |
| | | | | Weighted Average
| | | | |
| | Number of Option
| | | Exercise
| | | | |
| | Shares Cashed Out
| | | Price per Option
| | | | |
Name | | (#) | | | Share ($) | | | Value Realized ($) | |
|
Neal R. Verfuerth | | | 430,958 | | | | 3.16 | | | $ | 4,240,627 | |
Daniel J. Waibel | | | 100,000 | | | | 2.20 | | | | 1,080,000 | |
John H. Scribante | | | 241,000 | | | | 2.35 | | | | 2,566,650 | |
Michael J. Potts | | | 665,318 | | | | 0.95 | | | | 8,017,082 | |
Patricia A. Verfuerth | | | 233,639 | | | | 3.11 | | | | 2,310,690 | |
Director Compensation
We currently compensate our non-employee directors pursuant to our directors compensation policy, under which we pay each non-employee director a monthly retainer fee of $500, plus an additional monthly retainer fee of $500 for non-employee directors who also serve as chairman of our board or a committee (subject to a $1,500 monthly maximum for a director who chairs both our board and a committee). Our current policy also calls for grants of options to our non-employee directors representing 5,000 shares of our common stock per year of service. In early fiscal 2006, in accordance with this policy, we granted each non-employee director (other than Mr. Kackley) an option to purchase 20,000 shares of our common stock at an exercise price of $0.75 per share. In light of his commitment and contributions as chairman of our audit and finance committee, we granted Mr. Kackley an option to purchase 100,000 shares of our common stock in early fiscal 2006 at an exercise price of $0.75 per share. These option grants representedwere intended in part to acknowledge our directors’ service for periods prior to fiscal 2006 and in part to compensate our directors for future services. We intended the grants made to our longest-serving directors to approximate the amounts that we believed would be appropriate for four yearsyears’ worth of service covering a period of approximately fiscal 2004 through fiscal 2007. For the sake of future consistency in the compensation of our non-employee directors, we made a subjective determination to issue the same amount of options and thefor all directors, regardless of their respective years of service. These options were subject to vesting in four equal installments on March 31 of each of 2006, 2007, 2008 and 2009. We therefore made no option grants in fiscal 2007 to our non-employee directors, other than to Mr. Kackley, as described below. Since these options represented four years’ worth of options, theThe per share exercise price was determined based on an approximation of the fair market value of our common stock over the prior four-year period. We recognized $33,000 of stock-based compensation expense in fiscal 2006 as a result of these grants.
On December 20, 2006, we granted Mr. Kackley an additional option to purchase 60,000 more shares of our common stock to compensate him for his significant time commitment and substantial contributions in his capacity as chairman of our audit and finance committee. The exercise price per share of the option was $2.20, which was the fair market value of a share of our common stock on the date of grant as determined by our compensation committee and board of directors based principally on the November 30, 2006 independent valuation of the fair market value of our common stock prepared by Wipfli LLP.
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In October 2006, we paid Messrs. Kackley and Trotter $5,000 each in respect of consulting services they provided us in connection with our evaluation in early fiscal year 2007.2007 of our personnel and
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management structure and related governing and reporting processes. Messrs. Kackley and Trotter conducted extensive interviews with employees and a detailed evaluation of our company’s practices in the areas under consideration for restructuring, and summarized their conclusions in a report to our board of directors. We made the payments, and Messrs. Kackley and Trotter rendered the consulting services, pursuant to written agreements.
In connection with this offering, our compensation committee retained Towers Perrin to provide it with recommendations regarding our compensation program for non-employee directors subsequent to this offering, and is currently considering changes tooffering. Based on Towers Perrin’s recommendations, our non-employee director compensation policies and programs based on such recommendations. In addition, in recognitioncommittee has recommended that our director compensation program has not adequately compensated our directors for their role in and commitment to date, and in consideration of the substantial additional time commitments and increased liability associated with our becoming a public company, on July 27, 2007, our board of directors granted optionsadopt the following new compensation program for 10,000our non-employee directors effective upon the closing of this offering: (a) an annual retainer of $40,000, payable in cash or shares each to the non-employee chairmen of our various committees, Messrs. Kackley, Quadracci and Grohmann, and 5,000common stock at the election of the recipient; (b) an annual stock option grant, vesting ratably over three years, with a grant date fair value of $45,000; (c) an annual retainer of $15,000 for each toof the independent chairman of our two other non-employee directors, Ms. Propper de Callejon and Mr. Trotter. Our board of directors establishedand the exercise pricechairman of the optionsaudit and finance committee of our board of directors, payable in cash or shares of common stock at $4.49 per sharethe election of the recipient; and (d) an annual retainer of $10,000 for each of the chairmen of the compensation committee and the nominating and corporate governance committee of our board of directors, payable in cash or shares of common stock at the election of the recipient. In order to attract potential new independent directors in the future, our compensation committee also is recommending that our board of directors retain the flexibility to make an initial stock option or other form of equity-based grant or a cash award to any such new non-employee directors upon joining our board.
Also in connection with this offering, based on the $4.49 per share conversionrecommendation of Towers Perrin, our compensation committee has recommended for approval by our board of directors stock ownership guidelines for our non-employee directors effective upon the closing of this offering. The guidelines would require non-employee directors to hold shares of our common stock with a value equal to or in excess of, for current non-employee directors, five times their fiscal 2008 retainer and, for subsequently elected directors, five times their retainer for the fiscal year of their election. We would determine the number of shares the ownership guidelines would require the non-employee directors to hold based on, for our current non-employee directors, the initial public offering price of our common stock and, for subsequently elected non-employee directors, the Convertible Notes issuedclosing sale price of our common stock on August 3, 2007. Thethe first trading day on or after their election. Non-employee directors would be able to satisfy the ownership guidelines with shares of our common stock that they acquire through the exercise of stock options become exercisableor other similar equity-based awards, through retention upon vesting of restricted shares or other similar equity-based awards or through direct share purchases. Our currently serving non-employee directors would have five years from the closing of this offering to satisfy the ownership guidelines, and subsequently elected directors would be required to satisfy the guidelines within five years after one year and have a 10-year term.their election.
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Director Compensation for Fiscal 2007
The following table summarizes the compensation of our non-employee directors for fiscal 2007. As employee directors, none of Richard J. Olsen, our vice president of technical services and former director, Mr. Verfuerth nor Mr. Potts received any compensation for their service as directors, and they are therefore omitted from the table. Mr. Olsen retired from our board on July 28, 2007 in connection with this offering to reduce the number of employee directors on our board. We reimbursed each of our directors, including our employee directors, for expenses incurred in connection with attendance at meetings of our board and its committees.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fees Earned | | Option | | | | | | Fees Earned
| | Option
| | | | | |
| | or Paid in | | Awards | | All Other | | | | or Paid in
| | Awards
| | All Other
| | | |
Name | | Cash ($) | | ($)(1)(2) | | Compensation ($) | | Total ($) | | Cash ($) | | ($)(1)(2) | | Compensation ($) | | Total ($) | |
| |
Thomas A. Quadracci | | 7,000 | | — | | — | | 7,000 | | | | 7,000 | | | | — | | | | — | | | | 7,000 | |
| | |
James R. Kackley | | 12,000 | | 26,827 | | 5,000 | | 43,827 | | | | 12,000 | | | | 26,827 | | | | 5,000 | | | | 43,827 | |
| | |
Eckhart G. Grohmann | | 6,000 | | 5,225 | | — | | 11,225 | | | | 6,000 | | | | 5,225 | | | | — | | | | 11,225 | |
| | |
Patrick J. Trotter | | 9,000 | | 4,180 | | 5,000 | | 18,180 | | | | 9,000 | | | | 4,180 | | | | 5,000 | | | | 18,180 | |
| | |
Diana Propper de Callejon(3) | | — | | — | | — | | — | | | | — | | | | — | | | | — | | | | — | |
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| | |
(1) | | Represents the amount of expense recognized for financial accounting purposes pursuant to SFAS 123(R) for fiscal 2007 as reflected in our financial statements included elsewhere in this prospectus. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. |
|
(2) | | The aggregate number of option awards outstanding as of March 31, 2007 for each director was as follows: Mr. Kackley held options to purchase an aggregate of 114,000 shares of our common stock at a weighted average exercise price of $1.44 per share; Mr. Grohmann held an option to purchase 20,000 shares of our common stock at an exercise price of $0.75 per share; and Mr. Trotter held an option to purchase 20,000 shares of our common stock at an exercise price of $0.75 per share. The grant date fair value of our special fiscal 2007 option grant to Mr. Kackley, computed in accordance with SFAS 123(R), was $53,110. We also granted our non-employee directors additional stock options on July 27, 2007, as follows: Messrs. Kackley, Quadracci and Grohmann each received an option to purchase 10,000 shares of our common stock, and Ms. Propper de Callejon and Mr. Trotter each received an option to purchase 5,000 shares of our common stock. All of the options granted on July 27, 2007 have an exercise price of $4.49 per share. |
|
(3) | | Ms. Propper de Callejon, who is associated with Clean Technology Fund II, LP, one of our principal shareholders, received no additional compensation in fiscal 2007 for her service as a director. |
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial ownership of our common stock and the shares beneficially owned by all principal and selling shareholders as of June 30,October 31, 2007, and as adjusted to reflect the sale of our common stock offered by this prospectus, by:
| | |
• | • | each person (or group of affiliated persons) known to us to be the beneficial owner of more than 5% of our common stock (assuming the conversion of all of our preferred stock into 4,808,012 shares of common stock on a one-for-one basis and the conversion of our Convertible Notes into 2,360,802 shares of common stock upon closing of this offering); |
|
• | • | each of our named executive officers; |
|
• | • | each of our directors; |
|
• | • | all of our directors and current and certain former executive officers as a group; and |
|
• | • | all selling shareholders. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes any shares over which a person exercises sole or shared voting or investment power. Under these rules, beneficial ownership also includes any shares as to which the individual or entity has the right to acquire beneficial ownership of within 60 days of June 30,October 31, 2007 through the exercise of any warrant, stock option or other right. Except as noted by footnote, and subject to community property laws where applicable, we believe that the shareholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
As of June 30,October 31, 2007, there were 12,219,96912,535,205 shares of common stock and 4,808,012 shares of Series B and Series C preferred stock outstanding (with each such share of preferred stock converting automatically into shares of common stock on a one-for-one basis upon closing of this offering). See “Description of Capital Stock.”
On August 3, 2007, we issued the Convertible Notes to an indirect affiliate of GEEFS, Clean Technology and affiliates of Capvest. The Convertible Notes will convert automatically upon closing of this offering into 2,360,802 shares of our common stock. Neither GEEFS nor any of its indirect or direct affiliates owned any shares of our common stock or securities convertible into shares of our common stock prior to the issuance of the Convertible Notes. See “Description of Capital Stock.”
The percentage of beneficial ownership set forth in the table below is based on (i) prior to this offering, 19,388,78319,704,019 shares of common stock outstanding (assuming the conversion of all outstanding shares of preferred stock and the Convertible Notes); and (ii) after this offering, 25,399,265 shares of common stock outstanding (assuming the conversion of all outstanding shares of preferred stock and the Convertible Notes).
The information contained in the footnotes to the table below regarding the specific shares being sold by each selling shareholder is based solely on the stock certificates delivered by each such selling shareholder to Wells Fargo Bank, N.A., acting in its capacity as the custodian for the shares to be sold by the selling shareholders in this offering, as of the date of this prospectus.
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Except as set forth below, the address of all shareholders listed under “Directors and current and certain former executive officers” and “Principal shareholders” isc/o Orion Energy Systems, Inc. 1204 Pilgrim Road, Plymouth, WI 53073.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Percentage of Shares Beneficially Owned |
| | Number of Shares | | Number of | | | | | | | | | | After Offering |
| | Beneficially Owned | | Shares to be | | | | | | | | | | if Over- |
| | Before | | After | | Sold in | | Before | | After | | allotment |
| | Offering | | Offering | | Offering | | Offering | | Offering | | is Exercised |
Directors and current and certain former executive officers | | | | | | | | | | | | | | | | | | | | | | | | |
Neal R. Verfuerth (1) | | | 3,341,993 | | | | | | | | | | | | 17.2 | % | | | | | | | | | |
Daniel J. Waibel (2) | | | 1,050,000 | | | | | | | | | | | | 5.4 | | | | | | | | | |
Michael J. Potts (3) | | | 806,986 | | | | | | | | | | | | 4.0 | | | | | | | | | |
John Scribante (4) | | | 270,340 | | | | | | | | | | | | 1.4 | | | | | | | | | |
Patricia A. Verfuerth (5) | | | 3,341,993 | | | | | | | | | | | | 17.2 | | | | | | | | | |
Thomas A. Quadracci (6) | | | 36,409 | | | | | | | | | | | | * | | | | | | | | | |
Diana Propper de Callejon (7) | | | 2,193,157 | | | | | | | | | | | | 11.3 | | | | | | | | | |
James R. Kackley (8) | | | 211,000 | | | | | | | | | | | | 1.1 | | | | | | | | | |
Eckhart G. Grohmann (9) | | | 1,270,000 | | | | | | | | | | | | 6.5 | | | | | | | | | |
Patrick J. Trotter (10) | | | 514,790 | | | | | | | | | | | | 2.7 | | | | | | | | | |
Bruce Wadman (11) | | | 20,000 | | | | | | | | | | | | * | | | | | | | | | |
James L. Prange (12) | | | 72,023 | | | | | | | | | | | | * | | | | | | | | | |
All directors and current and certain former executive officers as a group (14 individuals) | | | 9,906,698 | | | | | | | | | | | | 48.2 | % | | | | | | | | |
| | |
Principal shareholders | | | | | | | | | | | | | | | | | | | | | | | | |
Clean Technology Affiliates(13) | | | 2,193,157 | | | | | | | | | | | | 11.3 | % | | | | | | | | |
GEEFS Indirect Affiliate (14) | | | 1,781,737 | | | | | | | | | | | | 9.2 | | | | | | | | | | |
Richard J. Olsen (15) | | | 1,011,639 | | | | | | | | | | | | 5.2 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Percentage of Shares
| |
| | | | | | | | | | | Beneficially Owned | |
| | | | | | | | | | | | | | | | | After
| |
| | Number of Shares
| | | Number
| | | | | | | | | Offering
| |
| | Beneficially Owned | | | of Shares
| | | | | | | | | if Over-
| |
| | Before
| | | After
| | | to be Sold
| | | Before
| | | After
| | | Allotment
| |
| | Offering | | | Offering | | | in Offering | | | Offering | | | Offering | | | is Exercised | |
|
Directors and current and certain former executive officers | | | | | | | | | | | | | | | | | | | | | | | | |
Neal R. Verfuerth(1) | | | 3,092,561 | | | | 2,789,306 | | | | 303,255 | | | | 15.6 | % | | | 10.9 | % | | | 10.5 | % |
Daniel J. Waibel(2) | | | 920,000 | | | | 920,000 | | | | — | | | | 4.7 | | | | 3.6 | | | | 3.5 | |
Michael J. Potts(3) | | | 821,986 | | | | 741,288 | | | | 80,698 | | | | 4.0 | | | | 2.9 | | | | 2.7 | |
John Scribante(4) | | | 270,340 | | | | 243,340 | | | | 27,000 | | | | 1.4 | | | | * | | | | * | |
Patricia A. Verfuerth(5) | | | 3,092,561 | | | | 2,789,306 | | | | 303,255 | | | | 15.6 | | | | 10.9 | | | | 10.5 | |
Thomas A. Quadracci(6) | | | 36,409 | | | | 36,409 | | | | — | | | | * | | | | * | | | | * | |
Diana Propper de Callejon(7) | | | 2,193,157 | | | | 1,184,066 | | | | 1,009,091 | | | | 11.2 | | | | 4.7 | | | | 4.5 | |
James R. Kackley(8) | | | 264,000 | | | | 264,000 | | | | — | | | | 1.3 | | | | 1.0 | | | | * | |
Eckhart G. Grohmann(9) | | | 1,270,000 | | | | 1,270,000 | | | | — | | | | 6.5 | | | | 5.0 | | | | 4.8 | |
Patrick J. Trotter(10) | | | 514,790 | | | | 463,311 | | | | 51,479 | | | | 2.6 | | | | 1.8 | | | | 1.7 | |
Bruce Wadman(11) | | | 20,000 | | | | 20,000 | | | | — | | | | * | | | | * | | | | * | |
James L. Prange(12) | | | 6,801 | | | | 6,801 | | | | — | | | | * | | | | * | | | | * | |
All directors and current and certain former executive officers as a group (14 individuals) | | | 9,540,044 | | | | 8,058,521 | | | | 1,481,523 | | | | 46.3 | % | | | 30.6 | % | | | 29.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Principal shareholders | | | | | | | | | | | | | | | | | | | | | | | | |
Clean Technology Affiliates(13) | | | 2,193,157 | | | | 1,184,066 | | | | 1,009,091 | | | | 11.2 | % | | | 4.7 | % | | | 4.5 | % |
GEEFS Indirect Affiliate(14) | | | 1,781,737 | | | | 1,781,737 | | | | — | | | | 9.1 | | | | 7.0 | | | | 6.7 | |
Richard J. Olsen(15) | | | 1,021,414 | | | | 920,273 | | | | 101,141 | | | | 5.2 | | | | 3.6 | | | | 3.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling shareholders | | | | | | | | | | | | | | | | | | | | | | | | |
Edmund R. Knauf, Jr.(16) | | | 452,000 | | | | 408,000 | | | | 44,000 | | | | 2.3 | % | | | 1.6 | % | | | 1.5 | % |
Mel Blanke(17) | | | 307,216 | | | | 276,495 | | | | 30,721 | | | | 1.5 | | | | 1.1 | | | | 1.0 | |
Capvest(18) | | | 204,090 | | | | 95,000 | | | | 109,090 | | | | 1.0 | | | | * | | | | * | |
Stephen Heins(19) | | | 184,433 | | | | 161,090 | | | | 17,343 | | | | * | | | | * | | | | * | |
Northland Capital Group(20) | | | 160,072 | | | | 144,072 | | | | 16,000 | | | | * | | | | * | | | | * | |
William E. and Patricia A. Frost(21) | | | 135,200 | | | | 121,680 | | | | 13,520 | | | | * | | | | * | | | | * | |
Joshua Kurtz(22) | | | 138,530 | | | | 134,130 | | | | 4,400 | | | | * | | | | * | | | | * | |
Zachary Kurtz(23) | | | 134,272 | | | | 130,272 | | | | 4,000 | | | | * | | | | * | | | | * | |
Eric von Estorff(24) | | | 130,000 | | | | 120,000 | | | | 10,000 | | | | * | | | | * | | | | * | |
Gary Mazzie(25) | | | 96,000 | | | | 86,400 | | | | 9,600 | | | | * | | | | * | | | | * | |
Leah Kurtz(26) | | | 83,000 | | | | 78,850 | | | | 4,150 | | | | * | | | | * | | | | * | |
Henry and Karen Schneider(27) | | | 80,000 | | | | 72,000 | | | | 8,000 | | | | * | | | | * | | | | * | |
Donald C. Heimermam(28) | | | 76,010 | | | | 68,409 | | | | 7,601 | | | | * | | | | * | | | | * | |
Liesl M. Testwuide 1992 Trust(29) | | | 74,354 | | | | 66,919 | | | | 7,435 | | | | * | | | | * | | | | * | |
Mark and Toni McBride(30) | | | 69,000 | | | | 65,300 | | | | 3,700 | | | | * | | | | * | | | | * | |
James C. and Cynthia Naleid(31) | | | 64,000 | | | | 57,600 | | | | 6,400 | | | | * | | | | * | | | | * | |
Denis Peters(32) | | | 60,000 | | | | 58,000 | | | | 2,000 | | | | * | | | | * | | | | * | |
Gary Schomburg(33) | | | 60,000 | | | | 54,000 | | | | 6,000 | | | | * | | | | * | | | | * | |
Robinson J. Kirby(34) | | | 57,976 | | | | 52,179 | | | | 5,797 | | | | * | | | | * | | | | * | |
George Lockwood Survivors Trust(35) | | | 56,000 | | | | 50,400 | | | | 5,600 | | | | * | | | | * | | | | * | |
Darrell Otto and Shana Hill(36) | | | 56,000 | | | | 54,000 | | | | 2,000 | | | | * | | | | * | | | | * | |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Percentage of Shares
| |
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| | Number of Shares
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| | Beneficially Owned | | | of Shares
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| | Before
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| | Offering | | | Offering | | | in Offering | | | Offering | | | Offering | | | is Exercised | |
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Charles Gardner(37) | | | 55,500 | | | | 50,000 | | | | 5,500 | | | | * | | | | * | | | | * | |
John F. Schwalbach(38) | | | 51,822 | | | | 47,640 | | | | 4,182 | | | | * | | | | * | | | | * | |
Chuck Van Horn(39) | | | 42,816 | | | | 38,535 | | | | 4,281 | | | | * | | | | * | | | | * | |
Blakney Corporation(40) | | | 42,000 | | | | 37,800 | | | | 4,200 | | | | * | | | | * | | | | * | |
Judith M. Gannon(41) | | | 40,000 | | | | 36,000 | | | | 4,000 | | | | * | | | | * | | | | * | |
Robert E. Roenitz(42) | | | 40,000 | | | | 36,000 | | | | 4,000 | | | | * | | | | * | | | | * | |
Willard M. Hunter 2002 Revocable Trust(43) | | | 33,053 | | | | 29,748 | | | | 3,305 | | | | * | | | | * | | | | * | |
John R. and Margot Dunn(44) | | | 32,000 | | | | 30,000 | | | | 2,000 | | | | * | | | | * | | | | * | |
Mike and Kathy Sieren Revocable Living Trust(45) | | | 32,000 | | | | 28,800 | | | | 3,200 | | | | * | | | | * | | | | * | |
Gary R. and Judy Kuphall(46) | | | 32,000 | | | | 28,800 | | | | 3,200 | | | | * | | | | * | | | | * | |
Richard K. Huber(47) | | | 32,000 | | | | 28,800 | | | | 3,200 | | | | * | | | | * | | | | * | |
Gary Kleinjan(48) | | | 32,000 | | | | 28,800 | | | | 3,200 | | | | * | | | | * | | | | * | |
Kevin and Catherine Markey(49) | | | 32,000 | | | | 29,600 | | | | 2,400 | | | | * | | | | * | | | | * | |
Gerald Hill(50) | | | 30,000 | | | | 29,000 | | | | 1,000 | | | | * | | | | * | | | | * | |
Alvin and Renee Verfeurth(51) | | | 24,896 | | | | 23,396 | | | | 1,500 | | | | * | | | | * | | | | * | |
Brian Henke Trust(52) | | | 22,000 | | | | 19,800 | | | | 2,200 | | | | * | | | | * | | | | * | |
David Crowley, Jr.(53) | | | 22,000 | | | | 20,000 | | | | 2,000 | | | | * | | | | * | | | | * | |
Leif G. and Patricia L. Gigstad(54) | | | 21,840 | | | | 19,656 | | | | 2,184 | | | | * | | | | * | | | | * | |
Stephen G. and Jared S. Arn(55) | | | 21,334 | | | | 19,201 | | | | 2,133 | | | | * | | | | * | | | | * | |
Thomas Rettler(56) | | | 20,000 | | | | 18,000 | | | | 2,000 | | | | * | | | | * | | | | * | |
Carl and Irene Dittrich(57) | | | 17,582 | | | | 15,824 | | | | 1,758 | | | | * | | | | * | | | | * | |
Mark and Deborah Hansen(58) | | | 16,000 | | | | 14,400 | | | | 1,600 | | | | * | | | | * | | | | * | |
Alfred Kleppek(59) | | | 14,600 | | | | 13,600 | | | | 1,000 | | | | * | | | | * | | | | * | |
Armin F. and Jerry A. Kuehl Revocable Trust of 1999(60) | | | 14,548 | | | | 13,093 | | | | 1,455 | | | | * | | | | * | | | | * | |
James T. and Virginia Petrie(61) | | | 14,446 | | | | 13,280 | | | | 1,166 | | | | * | | | | * | | | | * | |
Jeff Sohn(62) | | | 12,000 | | | | 10,800 | | | | 1,200 | | | | * | | | | * | | | | * | |
Thomas Barber(63) | | | 11,850 | | | | 10,850 | | | | 1,000 | | | | * | | | | * | | | | * | |
Thomas Heck(64) | | | 11,112 | | | | 10,001 | | | | 1,111 | | | | * | | | | * | | | | * | |
Yvonne A. Lockwood Living Trust of 2006(65) | | | 10,914 | | | | 9,914 | | | | 1,000 | | | | * | | | | * | | | | * | |
Robert E. and Ronna M. Cline Living Trust of 1996(66) | | | 10,668 | | | | 9,602 | | | | 1,066 | | | | * | | | | * | | | | * | |
Thomas Cornell(67) | | | 9,820 | | | | 8,820 | | | | 1,000 | | | | * | | | | * | | | | * | |
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Other selling shareholders (34 individuals)(68) | | | 155,846 | | | | 121,846 | | | | 34,000 | | | | * | | | | * | | | | * | |
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Total selling shareholders | | | 11,551,048 | | | | 9,547,986 | | | | 1,997,062 | | | | 54.2 | % | | | 35.6 | % | | | 34.1 | % |
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99
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(1) | | IncludesConsists of (i) 2,534,3282,124,896 shares of common stock, 75,000434,196 of which have been pledged as security for a personal loan;loans (as pledged in 2003 and March 2007); (ii) 750,000850,000 shares of common stock held by Mr. Verfuerth’s wife, Patricia A. Verfuerth; (iii) 50,000 shares of common stock issuable upon the exercise of vested and (iii) 57,665exercisable options; and (iv) 67,665 shares of common stock issuable upon the exercise of vested and exercisable options held by Mr. Verfuerth’s wife, Patricia A. Verfuerth. The number does not reflect 250,000380,958 shares of common stock subject to options held by Mr. Verfuerth on June 30, 2007 that will not become exercisable within 60 days.days of October 31, 2007. Mr. Verfuerth is our President and Chief Executive Officer. The number also does not reflectshares being offered by Mr. Verfuerth’s redemptionVerfuerth indicated in the table are shares of 180,958 sharescommon stock described in repayment of the principal amount of a loan or the offsetting grant of an optionclause (i) above and were acquired by Mr. Verfuerth from us prior to purchase 180,958 shares, each effective on July 27, 2007. See “Executive Compensation – Compensation Discussion and Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation.” Additionally, the number does not reflect Mr. Verfuerth’s gift of 125,974 shares to Ms. Verfuerth in connection with the repayment of the principal amount of a loan. See note (5) below.2004. |
103
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(2) | | DoesConsists of (i) 900,000 shares of common stock and (ii) 20,000 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 100,00080,000 shares of common stock subject to an option held by Mr. Waibel that will not become exercisable within 60 days.days of October 31, 2007. |
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(3) | | IncludesConsists of (i) 216,668 shares of common stock and (ii) 590,318605,318 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 75,00060,000 shares of common stock subject to options that will not become exercisable within 60 days.days of October 31, 2007. Mr. Potts is our Executive Vice President. The shares being offered by Mr. Potts indicated in the table are shares of common stock described in clause (i) above and were acquired by Mr. Potts from us prior to 2004. |
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(4) | | IncludesConsists of (i) 157,110231,110 shares of common stock;stock held in the TMS Trust; (ii) 19,230 shares of common stock issuable upon the conversion of Series B preferred stock;stock held in the TMS Trust; and (iii) 94,00020,000 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 221,000 shares of common stock subject to an option that will not become exercisable within 60 days.days of October 31, 2007. Mr. Scribante is our Senior Vice President of Business Development. The shares being offered by Mr. Scribante indicated in the table are shares of common stock described in clause (i) above and were acquired by Mr. Scribante on May 1, 2004 and November 1, 2004 from a third party. |
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(5) | | IncludesConsists of (i) 750,000850,000 shares of common stock; (ii) 2,534,3282,124,896 shares of common stock held by Ms. Verfuerth’s husband, Neal R. Verfuerth, 75,000434,196 of which have been pledged as security for a loan;personal loans (as pledged in 2003 and March 2007); (iii) 57,66567,665 shares of common stock issuable upon the exercise of vested and exercisable options.options; and (iv) 50,000 shares of common stock issuable upon the exercise of vested and exercisable options held by Ms. Verfuerth’s husband, Neal R. Verfuerth. The number does not reflect 50,000165,974 shares of common stock subject to options held by Ms. Verfuerth on June 30, 2007 that will not become exercisable within 60 days.days of October 31, 2007. Ms. Verfuerth is our Vice President of Operations. The number also does not reflectshares being offered by Ms. Verfuerth’s receiptVerfuerth indicated in the table are shares of 125,974 shares gifted fromcommon stock described in clause (i) above and were transferred to Ms. Verfuerth by Mr. Verfuerth. See note (1) above. Additionally, the number does not reflect Ms. Verfuerth’s redemption of such shares in repayment of the principal amount of a loan, or the offsetting grant of an option to purchase 125,974 shares, each effectiveVerfeurth (for no consideration) on July 27,September 28, 2007. See “Executive Compensation – Compensation Discussion and Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation.” |
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(6) | | ExcludesDoes not include 10,000 shares of common stock subject to an option held by Mr. Quadracci that will not become exercisable within 60 days of 10,000 shares granted on July 27,October 31, 2007. |
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(7) | | IncludesConsists of (i) 1,636,364 shares of common stock issuable upon the conversion of Series C preferred stock owned by Clean Technology and (ii) 556,793 shares of common stock issuable upon the conversion of the Convertible NoteNotes held by Clean Technology. Ms.Clean Technology is the name we use for Clean Technology Fund II, LP. Diana Propper de Callejon, one of our directors, is one of the managing membermembers of Expansion Capital Partners II –— General Partner, LLC. Expansion Capital Partners II — General Partner, LLC which is the general partner of Expansion Capital Partners II, LP, which is the general partner of Clean Technology. By virtue of her position, Ms. Propper de Callejon shares voting and dispositive power over the shares owned by Clean Technology. Ms. Propper de Callejon disclaims beneficial ownership of the shares held by Clean Technology except to the extent of her pecuniary interest therein. The address of Clean Technology is 90 Park Avenue, Suite 1700, New York, NY 10016. Excludes an option of 5,000 shares granted on July 27, 2007. |
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(8) | | IncludesConsists of (i) 207,000213,000 shares of common stock andstock; (ii) 4,0006,000 shares of common stock issuable upon the exercise of options that are vested and exercisable or that will become vestedoptions; and exercisable in the next 60 days.(iii) 45,000 shares of common stock beneficially owned by Mr. Kackley’s grandchildren. The number does not include 104,000106,000 shares of common stock subject to an optionoptions held by Mr. Kackley on June 30, 2007 that will not become exercisable within 60 days. Excludes an optiondays of 10,000 shares granted on July 27,October 31, 2007. |
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(9) | | IncludesConsists of (i) 620,000790,000 shares of common stock;stock held in the Eckhart Grohmann Revocable Trust and (ii) 480,000 shares of common stock issuable upon the conversion of Series B preferred stock; (iii) 160,000 shares of common stock issuable uponheld in the exercise of warrants; and (iv) 10,000 shares of common stock issuable upon the exercise of vested and exercisable options.Eckhart Grohmann Revocable Trust. The number does not include 10,00020,000 shares of common stock subject to an optionoptions held by Mr. Grohmann on June 30, 2007 that will not become exercisable within 60 days or the July 27, 2007 option grant for 10,000 shares.of October 31, 2007. |
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(10) | | IncludesConsists of (i) 504,790 shares of common stock, 400,000 of which have been pledged as security for a loan (as pledged in August 2007), and (ii) 10,000 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 10,00015,000 shares of |
104
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| | common stock subject to an optionoptions held by Mr. Trotter on June 30, 2007 that will not become exercisable within 60 days. Excludes an optiondays of 5,000October 31, 2007. Mr. Trotter is one of our directors. The shares granted on July 27, 2007.being offered by Mr. Trotter indicated in the table are shares of common stock described in clause (i) above and were acquired by Mr. Trotter from us prior to 2004. |
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(11) | | IncludesConsists of 20,000 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 20,000 shares of common stock subject to an option held by Mr. Wadman that will not become exercisable within 60 days.days of October 31, 2007. |
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(12) | | Includes (i)Consists of 6,801 shares of common stock; (ii) 48,000stock. In early October 2007, we notified Mr. Prange that we believed that he had violated his obligations of non-disparagement under his July 18, 2007 separation agreement, and that we had taken action to cancel options to purchase 172,222 shares of our common stock issuableand also to cancel 23,000 shares of our common stock held by him that he received upon thehis previous exercise of vestedoptions in connection with his separation agreement. See “Executive Compensation - Payments Upon Termination or Change of Control — Agreements in Effect Prior to this Offering.” Mr. Prange has contested these actions and exercisable options;has threatened legal action if we do not reinstate his options and (iii) 17,222 shares of common stock subject to an option that will become exercisable during a 90-day period commencing upon the closing of this offering. The number does not include 155,000 shares of common stock subject to an option that will not become exercisable within 60 days.shares. |
|
(13) | | IncludesConsists of (i) 1,636,364 shares of common stock issuable upon the conversion of Series C preferred stock and (ii) 556,793 shares of common stock issuable upon the conversion of the Convertible Notes. Clean Technology is the name |
100
| | |
| | we use for Clean Technology Fund II, LP. The general partner of Clean Technology is Expansion Capital Partners II, LP and the general partner of Expansion Capital Partners II, LP is Expansion Capital Partners II — General Partner, LLC. The managing members of Expansion Capital Partners II — General Partner, LLC are Diana Propper de Callejon, Mark T. Donohue and Bernardo H. Llovera. By virtue of their positions, these individuals collectively exercise voting and dispositive power over the shares owned by Clean Technology. Each of these individuals disclaims beneficial ownership of the shares held by Clean Technology except to the extent of his or her pecuniary interest therein. The address of Clean Technology is 90 Park Avenue, Suite 1700, New York, NY 10016. The shares being offered by Clean Technology indicated in the table are shares of common stock into which shares of Series C preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by Clean Technology from us in a private placement of Series C preferred stock on July 31, 2006 for $2.75 per share. |
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(14) | | IncludesConsists of 1,781,737 shares of common stock issuable upon the conversion of itsthe Convertible Note.Notes. GEEFS is the name we use for GE Capital Equity Investments, Inc., an indirect affiliate of GE Energy Financial Services, Inc. GEEFS’ indirect affiliate, GE Capital Equity Investments, Inc., is the holder of the Convertible Note.Notes. The address of GEEFS isc/o GE Capital Equity Investments, Inc., 201 Merritt 7, P.O. Box 5201, Norwalk, Connecticut 06851. |
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(15) | | DoesConsists of (i) 1,011,414 shares of common stock and (ii) 10,000 shares of common stock issuable upon the exercise of vested and exercisable options. The number does not include 50,00040,000 shares of common stock subject to an option held by Mr. Olsen that will not become exercisable within 60 days.days of October 31, 2007. Mr. Olsen is our vice presidentVice President of technical servicesTechnical Services and a former director. The shares being offered by Mr. Olsen indicated in the table are shares of common stock acquired by Mr. Olsen from us prior to 2004. |
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(16) | | Consists of (i) 2,000 shares of common stock; (ii) 440,000 shares of common stock held by the Edmund R. Knauf Jr. Living Trust; and (iii) 10,000 shares of common stock issuable upon the exercise of vested and exercisable options. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (ii) above and were acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(17) | | Consists of (i) 64,796 shares of common stock and (ii) 242,420 shares of common stock issuable upon the exercise of vested and exercisable options. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exchange for shares of Series A preferred stock on April 6, 2005. |
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(18) | | Consists of (i) 181,818 shares of common stock issuable upon the conversion of Series C preferred stock and (ii) 22,272 shares of common stock issuable upon the conversion of the Convertible Notes. Capvest is the name we use for Capvest Venture Fund, L.P. and its affiliate, Technology Transformation Venture Fund, L.P. The investment decisions of Capvest Venture Fund, L.P. are made by William Custer and Jackie Haussler, managing members of Capvest Venture Partners LLC, the general partner of Capvest Venture Fund, L.P. The investment decisions of Technology Transformation Venture Fund, L.P. are made by William Custer, president of Custer Capital Fund IV, Inc., the general partner of Transformation Venture Fund, L.P. Mr. Custer and Ms. Haussler each disclaim beneficial ownership of the shares held by the foregoing entities except to the extent of his or her pecuniary interest therein. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series C preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series C preferred stock on September 28, 2006 for $2.75 per share. |
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(19) | | Consists of 184,433 shares of common stock issuable upon the exercise of vested and exercisable options. On November 2, 2007, Mr. Heins exercised options for 179,433 shares of common stock and transferred 6,000 shares of common stock. The selling shareholder is currently employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exercise of stock options on November 2, 2007 at an exercise price of $0.69 per share. |
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(20) | | Consists of (i) 55,778 shares of common stock; (ii) 78,220 shares of common stock issuable upon the conversion of Series B preferred stock; and (iii) 26,074 shares of common stock issuable upon the exercise of warrants. Northland Capital Group’s affiliate, Northland Capital Financial Services, LLC, holds the common stock. Northland Capital Group holds the Series B preferred stock and warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (ii) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on October 22, 2004 for $2.25 per share. |
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(21) | | Consists of (i) 30,000 shares of common stock; (ii) 70,000 shares of common stock held by First Trust Company of Onaga as Custodian for the benefit of William E. Frost; (iii) 24,000 shares of common stock issuable upon the conversion of Series B preferred stock held by First Trust Company of Onaga as Custodian for the benefit of William E. Frost; (iv) 8,000 shares of common stock issuable upon the exercise of warrants; and (v) 3,200 shares of common stock issuable upon the exercise of vested and exercisable options. Mr. Frost is currently employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exchange for shares of Series A preferred stock on March 1, 2005. |
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(22) | | Consists of (i) 133,530 shares of common stock and (ii) 5,000 shares of common stock issuable upon the exercise of vested and exercisable options. The selling shareholder is currently employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
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(23) | | Consists of (i) 129,272 shares of common stock and (ii) 5,000 shares of common stock issuable upon the exercise of vested and exercisable options. The selling shareholder is currently employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
105
101
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(24) | | Consists of (i) 10,000 shares of common stock and (ii) 120,000 shares of common stock issuable upon the exercise of vested and exercisable options. The selling shareholder is currently employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exercise of stock options on September 26, 2007 at an exercise price of $1.50 per share. |
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(25) | | Consists of (i) 72,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 24,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on September 29, 2004 for $2.25 per share. |
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(26) | | The selling shareholder was employed by us within the past three years. The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
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(27) | | Consists of 80,000 shares of common stock issuable upon the conversion of Series B preferred stock. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on May 27, 2005 for $2.50 per share. |
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(28) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
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(29) | | Consists of (i) 66,354 shares of common stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exchange for shares of Series A preferred stock on January 6, 2005. |
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(30) | | Consists of (i) 37,000 shares of common stock issuable upon the conversion of Series B preferred stock; (ii) 16,000 shares of common stock issuable upon the exercise of warrants; and (iii) 16,000 shares of common stock issuable upon the exercise of vested and exercisable options. Mr. McBride was employed by us within the past three years. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on September 10, 2004 for $2.25 per share. |
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(31) | | Consists of (i) 24,000 shares of common stock; (ii) 24,000 shares of common stock issuable upon the conversion of Series B preferred stock; and (iii) 16,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (ii) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on May 27, 2004 for $2.25 per share. |
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(32) | | Consists of (i) 20,000 shares of common stock and (ii) 40,000 shares of common stock issuable upon the exercise of vested and exercisable options. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder from us prior to 2004. |
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(33) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on March 15, 2005. |
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(34) | | Consists of (i) 17,452 shares of common stock; (ii) 31,636 shares of common stock held by First Trust Company Onaga Custodian for the benefit of Robinson J. Kirby; and (iii) 8,888 shares of common stock issuable upon the exercise of vested and exercisable options. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder from us prior to 2004. |
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(35) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(36) | | Consists of (i) 24,000 shares of common stock; (ii) 28,000 shares of common stock held in an IRA; and (iii) 4,000 shares of common stock issuable upon the conversion of Series B preferred stock held in an IRA. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exchange for shares of Series A preferred stock on July 11, 2005. |
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(37) | | Consists of (i) 40,000 shares of common stock and (ii) 15,500 shares of common stock issuable upon the conversion of Series B preferred stock. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (ii) above will be converted upon closing of this offering and were acquired by the selling shareholder on September 25, 2006 from a third party. |
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(38) | | Consists of (i) 41,822 shares of common stock and (ii) 10,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder from us in a private placement of common stock prior to 2004. |
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(39) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(40) | | Consists of (i) 34,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on February 15, 2006 for $2.50 per share. |
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(41) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder on April 25, 2006 from a third party. |
102
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(42) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
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(43) | | Consists of (i) 20,937 shares of common stock and (ii) 12,116 shares of common stock issuable upon the conversion of Series B preferred stock. Willard M. Hunter 2002 Rev. Trust is the name we use for Williard M. Hunter, Trustee for the Williard M. Hunter 2002 Revocable Trust. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder on August 29, 2007 from a third party. |
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(44) | | Consists of (i) 24,000 shares of shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on July 19, 2004 for $2.25 per share. |
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(45) | | Consists of (i) 24,000 shares of shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on August 31, 2004 for $2.25 per share. |
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(46) | | Consists of (i) 16,000 shares of common stock; (ii) 12,000 shares of common stock issuable upon the conversion of Series B preferred stock; and (iii) 4,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder on March 25, 2005 from a third party. |
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(47) | | Consists of (i) 24,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on May 27, 2004 for $2.25 per share. |
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(48) | | Consists of (i) 24,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on November 30, 2004 for $2.25 per share. |
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(49) | | Consists of (i) 24,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 8,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on September 17, 2004 for $2.25 per share. |
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(50) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(51) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(52) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder on March 25, 2005 from a third party. |
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(53) | | Consists of (i) 16,000 shares of common stock and (ii) 6,000 shares of common stock issuable upon the conversion of Series B preferred stock. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder on October 21, 2005 from a third party. |
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(54) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(55) | | Consists of (i) 16,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 5,334 shares of common stock issuable upon the exercise of warrants. Jared S. Arn was employed by us within the past three years. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on July 19, 2004 for $2.25 per share. |
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(56) | | Consists of (i) 2,000 shares of common stock and (ii) 18,000 shares of common stock issuable upon the exercise of vested and exercisable options. The selling shareholder was employed by us within the past three years. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder upon exercise of stock options on October 12, 2007 at an exercise price of $2.25 per share. |
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(57) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us in a private placement of common stock prior to 2004. |
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(58) | | Consists of (i) 12,000 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 4,000 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on September 30, 2004 for $2.25 per share. |
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(59) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder upon exchange for shares of Series A preferred stock on April 4, 2005. |
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(60) | | Armin F. and Jerry A. Kuehl Rev. Trust of 1999 is the name we use for Armin F. Kuehl and Jerry A. Kuehl, T’ee, Armin F. and Jerry A. Kuehl Rev Trust of 1999 UAD 7.9 99 as amd. The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us prior to 2004. |
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(61) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder on July 8, 2005 from a third party. |
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(62) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder from us in a private placement of common stock prior to 2004. |
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(63) | | Consists of (i) 8,888 shares of common stock issuable upon the conversion of Series B preferred stock and (ii) 2,962 shares of common stock issuable upon the exercise of warrants. The shares being offered by the selling shareholder indicated in the table are shares of common stock into which shares of Series B preferred stock described in clause (i) above will be converted upon closing of this offering and were acquired by the selling shareholder from us in a private placement of Series B preferred stock on October 22, 2004 for $2.25 per share. |
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(64) | | The shares being offered by the selling shareholder indicated in the table are shares of common stock acquired by the selling shareholder on August 2, 2004 from a third party. |
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(65) | | Yvonne A. Lockwood Living Trust of 2006 is the name we use for Yvonne A. Lockwood, as Trustee Yvonne A. Lockwood Living Trust of 2006 U/A dated June 20, 2006. The shares being offered by the selling shareholder indicated in the table are shares of common stock upon exchange for shares of Series A preferred stock on February 17, 2005. |
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(66) | | Consists of (i) 6,668 shares of common stock and (ii) 4,000 shares of common stock issuable upon the conversion of Series B preferred stock. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder from us in a private placement of common stock prior to 2004. |
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(67) | | Consists of (i) 5,820 shares of common stock and (ii) 4,000 shares of common stock issuable upon the exercise of vested and exercisable options. The selling shareholder is employed by us. The shares being offered by the selling shareholder indicated in the table are shares of common stock described in clause (i) above and were acquired by the selling shareholder from us in a private placement of common stock prior to 2004. |
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(68) | | None of these other selling shareholders beneficially owns individually or in the aggregate more than 1% of our outstanding common stock prior to this offering, nor do they have prior to this offering (or will they have after this offering) a significant role in our management. The selling shareholders indicated in this footnote are selling in the aggregate 34,000 shares of our common stock. Of these shares, (i) 1,000 shares were acquired upon exercise of warrants to purchase shares of common stock issued by us at an exercise price of $1.50 per share; (ii) 8,000 shares represent shares of common stock to be received upon conversion of shares of Series B preferred stock on the closing of this offering, which shares of Series B preferred stock were purchased from us between January 2004 and July 2006 at a purchase price of $2.25 per share; (iii) 2,000 shares were acquired upon exercise of options to purchase shares of our common stock granted by us under our 2003 Stock Option Plan at an exercise price of $1.50 per share; (iv) 3,000 shares were acquired upon conversion of shares of Series A preferred stock that were purchased from us prior to 2004; (v) 6,000 shares were purchased or received from us prior to 2004; and (vi) 14,000 shares were purchased or received in various private transactions from a variety of third parties. |
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RELATED PARTY TRANSACTIONS
Our policy is to enter into transactions with related persons on terms that, on the whole, are no less favorable to us than those available from unaffiliated third parties. In June 2007, our board of directors adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:
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| • | | a “related person” means any of our directors, executive officers, nominees for director, holder of 5% or more of our common stock or any of their immediate family members; and |
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| • | | a “related person transaction” generally is a transaction (including any indebtedness or a guarantee of indebtedness) in which we were or are to be a participant and the amount involved exceeds $120,000, and in which a related person had or will have a direct or indirect material interest. |
Each of our executive officers, directors or nominees for director is required to disclose to our audit and finance committee certain information relating to related person transactions for review, approval or ratification by our audit and finance committee. In making a determination about approval or ratification of a related person transaction, our audit and finance committee will consider the information provided regarding the related person transaction and whether consummation of the transaction is believed by the committee to be in our best interests. Our audit and finance committee may take into account the effect of a director’s related person transaction on the director’s status as an independent member of our board of directors and eligibility to serve on committees of our board under SEC rules and the listing standards of the Nasdaq Global Market. Any related person transaction must be disclosed to our full board of directors.
Set forth below are certain transactions that have occurred in our fiscal years 2005, 2006 and 2007, and in our fiscal year 2008 through the date of this prospectus. Based on our experience in the business sectors in which we participate and the terms of our transactions with unaffiliated third persons, we believe that all of the transactions set forth below (i) were on terms and conditions that were not materially less favorable to us than could have been obtained from unaffiliated third parties and (ii) complied with the terms of our new policies and procedures regarding related person transactions. All of the transactions set forth below have been ratified by our audit and finance committee.
Clean Technology Fund II, LP and Diana Propper de Callejon
On August 3, 2007, we issued a $2.5 million Convertible Note to Clean Technology as part of our $10.6 Convertible Note placement described under “Description of Capital Stock.” All material economic terms and conditions of the Convertible Note issued to Clean Technology are the same as those negotiated with and provided to an indirect affiliate of GEEFS, and Ms. Propper de Callejon did not participate in such negotiations. The Convertible Note issued to Clean Technology will convert automatically upon closing of this offering into 556,793 shares of our common stock.
Ms. Propper de Callejon is the managing member of Expansion Capital Partners II –— General Partner, LLC, the general partner of Expansion Capital Partners II, LP, the general partner of Clean Technology. Ms. Propper de Callejon is one of our directors and a member of our compensation committee. Ms. Propper de Callejon was recused from all of our board of director decisions regarding this transaction.
Clean Technology also is a holder of 1,636,364 shares of our Series C preferred stock, which will automatically convert into shares of our common stock on a one-for-one basis upon closing of this offering. Clean Technology purchased its Series C preferred shares from us in a private placement on July 31, 2006 at a purchase price of $2.75 per share. Holders of Series C preferred shares are entitled to certain registration rights with respect to the common stock issuable upon conversion of those Series C preferred shares according to the terms of an agreement between us and the Series C holders. Clean Technology is selling certain of its previously acquired shares in this offering. See “Principal and Selling Shareholders” and “Description of Capital Stock.”
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GEEFS
On August 3, 2007, we issued an $8.0 million Convertible Note to an indirect affiliate of GEEFS as part of our $10.6 Convertible Note placement described under “Description of Capital Stock.” This Convertible
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Note will convert automatically upon closing of this offering into 1,781,738 shares of our common stock. GEEFS is an indirect affiliate of General Electric Co. Neither GEEFS nor any other affiliates of General Electric Co. owned any interest in our company prior to the issuance of the Convertible Note.
During fiscal 2005, 2006 and 2007, we recognized an aggregate of $9,000, $1.0 million, and $3.7 million, respectively, in revenue for products and services we sold to certain operating affiliates of General Electric Co. In addition, during fiscal 2005, 2006 and 2007, we purchased an aggregate of $2.5 million, $3.2 million and $8.4 million, respectively, of component parts from a different operating affiliate of General Electric Co. GEEFS and the indirect affiliate of GEEFS that was issued the Convertible Note are principally financial investment affiliates of General Electric Co. Neither GEEFS nor the indirect affiliate of GEEFS that was issued the Convertible Note were involved in negotiating the terms or conditions of our ongoing business relationships with the operating affiliates of General Electronic Co. with which we conduct business. Similarly, such operating affiliates of General Electric Co. were not involved in negotiating the terms and conditions of the Convertible Note. We do not believe that the investment in us represented by the Convertible Note issued to the indirect affiliate of GEEFS will result in any change or modification to the terms and conditions of our purchases from, or sales to, any operating affiliate of General Electric Co.
Richard J. Olsen
Richard J. Olsen is our vice president of technical services, a former director and one of our principal shareholders. We paid Mr. Olsen approximately $157,000 in cash and equity compensation for his service as our vice president of technical services in fiscal 2007. We did not provide Mr. Olsen any additional compensation for his service as a director, but reimbursed him for expenses incurred in connection with his attendance at meetings of our board on the same basis as the rest of our directors. We also lease, on a month-to-month basis, an aircraft owned by an entity controlled by Mr. Olsen. In fiscal 2005, 2006 and 2007, we paid that entity $102,191, $106,715 and $94,225, respectively, for use of the aircraft.
During fiscal 2007, we held a note receivable due from Mr. Olsen in the principal amount of $375,000, bearing interest at 7.65% per annum. This note was fully repaid on August 2, 2007. This note was recorded as a shareholder note receivable in our consolidated financial statements.
Thomas A. Quadracci
During fiscal 2005, 2006 and 2007, we received an aggregate of $209,996, $90,639 and $31,767, respectively, for products and services we sold to Quad/Graphics, Inc. Thomas A. Quadracci, our chairman of the board, was the executive chairman of Quad/Graphics, Inc. until January 1, 2007 and is a shareholder of Quad/Graphics, Inc.
Patrick J. Trotter
During fiscal 2006, we received a promissory note from Patrick J. Trotter, one of our directors, in the principal amount of $375,000 to purchase 400,000 shares of common stock through his exercise of vested stock options. The note bore interest at 4.23% per annum.annum, which was then the applicable federal rate. During fiscal 2007, Mr. Trotter paid $15,862 in interest on this note by surrendering 7,210 shares of common stock to us at a value of $2.20 per share. The principal and all accrued interest on the note were fully repaid in cash on August 2, 2007. This note was recorded as a shareholder note receivable in our consolidated financial statements.
We had previously believed that this transaction did not result in additional stock-based compensation. We subsequently determined that, underEITF 00-23,Issues Related to the Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44(EITF 00-23), the exercise of the option through payment with a full recourse promissory note, which subsequently was determined to bear a below-market interest rate for accounting purposes, was effectively a repricing of the option for accounting purposes and resulted in the recognition of a variable accounting adjustment for the award on the date the note was issued and the option was exercised, in the amount of the intrinsic value difference between the then current fair value of our common stock and the exercise price of the option. This adjustment resulted in an increase of $0.5 million to operating expenses in fiscal
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2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control over Financial Reporting.”
Neal and Patricia Verfuerth
We provided certain non-interest bearing advances to Neal R. Verfuerth, our president and chief executive officer,and/or Patricia Verfuerth, our vice president of operations, during fiscal 2005, 2006 and 2007. The largest aggregate amount of principal advances outstanding at the end of any month during fiscal 2005, 2006 and 2007 was $124,640, $159,912 and $167,690, respectively. During fiscal 2005, 2006 and 2007, Mr. Verfuerth paid $46,500, $74,604 and $125,880 in principal on these advances, respectively. All such advances have been fully repaid as of August 2, 2007.
We also held an unsecured note receivable due from Mr. Verfuerth in fiscal 2005, 2006 and 2007 bearing interest at 1.46% per annum. The largest aggregate amount of principal outstanding on this note during fiscal 2005, 2006 and 2007, including accrued interest, was $63,344, $65,849 and $66,780, respectively. The note was fully repaid on August 2, 2007. During fiscal 2007, we also held a note receivable due from Mr. Verfuerth in the aggregate principal amount of $812,500 and a note receivable due from Ms. Verfuerth in the aggregate principal amount of $565,625, each bearing interest at 7.65% per annum. These notes were fully repaid as described under “Executive Compensation –— Compensation Discussion and Analysis –— Long-Term Equity Compensation.” These notes were recorded as shareholder notes receivable in our consolidated financial statements.
As part of our employment agreement with Mr. Verfuerth, we paid guarantee fees to Mr. Verfuerth of $146,069, $109,808 and $77,880 in fiscal 2005, 2006 and 2007, respectively, as consideration for guaranteeing certain of our notes payable and accounts payable, as described below. These fees were based on a percentage applied to the monthly outstanding balances or revolving credit commitments. These guarantees related to the following debt arrangements:
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| • | | In December 2004, we refinanced a mortgage loan agreement with a local bank to provide a $1.1 million note, as amended, for the purpose of acquiring our manufacturing facility. The note expires in September 2014 and bears interest a prime plus 2.0% per annum. The note is secured by a first mortgage on our manufacturing facility and was previously secured by a personal guarantee of Mr. Verfuerth, which was released effective August 15, 2007. As of March 31, 2007, the remaining note balance was $1.1 million. |
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| • | | In December 2004, we entered into a debenture payable issued by a certified development company to provide $1.0 million for the purpose of acquiring our manufacturing and warehousing facility. The instrument expires in December 2024 and carries an effective interest rate, including service fees, of 6.18% per annum. The note is guaranteed by the United States Small Business Administration 504 program and is secured by a second mortgage position on our manufacturing facility. Mr. Verfuerth previously personally guaranteed the note, which guarantee was released effective August 2, 2007. As of March 31, 2007, the remaining balance on the note was $1.0 million. |
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| • | | In March 2005, we entered into a loan and security agreement with the State of Wisconsin to provide a $0.5 million federal block grant loan to be used for the purchase of manufacturing equipment. The loan expires in October 2012 and bears interest at a rate of 2.0% per annum. The loan is secured by a purchase money security interest and was previously secured by a personal guarantee of Mr. Verfuerth, which was released effective June 25, 2007. As of March 31, 2007, the remaining balance on the loan was $0.4 million. |
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| • | | In September 2005, we entered into an agreement with the Industrial Development Corporation of the City of Manitowoc to provide a $0.5 million loan for the purpose of acquiring manufacturing equipment for our manufacturing facility. The loan expires in October 2011 and bears interest a fixed rate of 2.925% per annum. The loan is secured by a |
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| | | purchase money security interest and was also previously secured by a personal guarantee of Mr. Verfuerth, which was released effective July 5, 2007. As of March 31, 2007, the remaining balance on the loan was $0.4 million. |
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| • | | In March 2004, we received a secured note from a local bank to provide a $3.3 million loan for working capital purposes. We pay principal and interest payments of $24,755 per month on the note, which are payable through the expiration of the note in February 2014. The note bears interest at a fixed rate of 6.9% per annum. The note is 75% guaranteed by the United States Department of Agriculture Rural Development Association and was also previously guaranteed by a personal guarantee of Mr. Verfuerth, which was released effective August 15, 2007. As of March 31, 2007, the remaining balance on the note was $1.6 million. |
In May 2004, we entered into an agreement with Mr. Verfuerth and Ms. Verfuerth to indemnify them for all liabilities and expenses they may incur in connection with their guarantees of our indebtedness, and to pay them a fee in consideration of these guarantees. To secure our obligations to Mr. Verfuerth and Ms. Verfuerth under this agreement, in July 2006, we granted them a security interest in all of our assets and in our real estate located in Plymouth, Wisconsin. This security interest was junior to the security interests held by our other lenders. The indemnification agreement and the security agreements were terminated in August 2007, after the termination of the Verfuerths’ guarantees of our indebtedness.
During fiscal 2006 and 2007, we forgave $36,942 and $36,667, respectively, of indebtedness owed to us by Mr. Verfuerth as part of his existing employment agreement. In fiscal 2008, we forgave $33,667 of indebtedness owed to us under this arrangement. This loan was fully repaid effective August 2, 2007.
In fiscal 2005, 2006 and 2007, Josh Kurtz and Zach Kurtz, two of our national account managers, each received $109,661, $113,400 and $127,300, respectively, of compensation from us in their capacities as employees. Messrs. Kurtz and Kurtz are the sons of Patricia A. Verfuerth and the stepsons of Neal R. Verfuerth.
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DESCRIPTION OF CAPITAL STOCK
Upon closing of this offering and the effectiveness of our amended and restated articles of incorporation, we will be authorized to issue up to 200 million shares of common stock, no par value per share, and up to 30 million shares of preferred stock, par value $.01$0.01 per share. The description below summarizes the material terms of our common stock, preferred stock, and options and warrants to purchase our common stock, the Convertible Notes that will be converted into our common stock, and provisions of our amended and restated articles of incorporation and amended and restated bylaws that will be effective upon the closing of this offering. This description is only a summary. For more detailed information, you should refer to our amended and restated articles of incorporation and bylaws filed with thisas exhibits to the registration statement, and to the applicable provisions of Wisconsin law.which this prospectus is a part.
Common Stock
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders and do not have cumulative voting rights. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive proportionately our net assets available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
As of June 30,October 31, 2007, there were 12,219,96912,535,205 shares of our common stock outstanding held by approximately 365366 shareholders.
Preferred Stock
Effective immediately upon closing of this offering and the conversion of our 4,808,012 shares of preferred stock outstanding into shares of common stock, there will be no shares of preferred stock outstanding. Upon closing of this offering and the effectiveness of our amended and restated articles of incorporation, our board of directors will be authorized to issue from time to time up to 30 million shares of preferred stock in one or more series without shareholder approval. Our board of directors will have the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until our board of directors determines the specific rights associated with that preferred stock. Although we have no current plans to issue shares of preferred stock, the effects of issuing preferred stock could include one or more of the following:
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| • | | decreasing the amount of earnings and assets available for distribution to holders of common stock; |
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| • | | restricting dividends on the common stock; |
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| • | | diluting the voting power of the common stock; |
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| • | | impairing the liquidation rights of the common stock; or |
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| • | delaying, deferring or preventing changes in our control or management. |
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delaying, deferring or preventing changes in our control or management.
As of June 30,October 31, 2007, there were outstanding 2,989,830 shares of Series B preferred stock held by approximately 135 shareholders and 1,818,182 shares of Series C preferred stock held by two shareholders. No shares of Series A preferred stock were outstanding as of June 30,October 31, 2007.
Warrants
As of June 30,October 31, 2007, there were outstanding warrants, issued in connection with our offerings of common stock and Series B preferred stock, to purchase 954,390716,822 shares of our common stock at
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exercise prices ranging between $1.50 and $2.60 per share, with a weighted average exercise price of $2.24 per share. These warrants were held by approximately 130109 holders and expire in various periods from December 31, 2007 through December 31, 2014.
Stock Options
As of June 30,October 31, 2007, we had granted options to purchase a total of 4,712,0774,554,687 shares of common stock at a weighted average exercise price of $1.57$1.89 per share. Of this total, 2,530,7771,966,155 options have vested and 2,181,3002,588,532 remain unvested. As of June 30,October 31, 2007, an additional 646,700396,490 shares of common stock were available for future option grants under our 2003 Stock Option and 2004 Equity Incentive Plans. Upon the closing of this offering, an additional 2.5 million shares of our common stock will be available for future option grants under our 2004 Stock and Incentive Awards Plan.
Convertible Notes
On August 3, 2007, we completed a placement of $10.6 million in aggregate principal amount of Convertible Notes to an indirect affiliate of GEEFS, Clean Technology and affiliates of Capvest. The Convertible Notes are subordinated to our current and future outstanding indebtedness and bear interest at 6% per annum.
The Convertible Notes contain customary terms and conditions, including: (i) automatic conversion into 2,360,802 shares of our common stock upon a qualified initial public offering resulting in at least $30.0 million of proceeds to us at an offering price of at least $11.23 per share; (ii) information and observation rights; (iii) customary restrictionsand/or approval rights with respect to, incurring additional indebtedness, acquiring additional assets, issuing new securities, paying dividends on or repurchasing our equity securities, selling our assets, merging, or undergoing a change in control, making material increases in compensation to our management, incurring liens, making certain investments, entering into transactions with our affiliates, amending our articles of incorporation or bylaws (except in connection with this offering), commencing or consenting to bankruptcy events or entering non-core lines of business; (iv) customary events of default; (v) customary anti-dilution and preemptive rights protections; (vi) various registration rights with respect to the shares of our common stock received upon conversion of the notes (see “–“— Registration Rights”); and (viii) tag along and first offer rights with respect to sales of any of our equity securities by certain of our management members (other than in connection with this offering). These terms and conditions are each subject to customary exceptions and limitations.
All of these terms and conditions (other than the registration rights related to the shares of our common stock received upon conversion), will terminate upon conversion of the Convertible Notes into common stock. Subject to certain exceptions and extensions, the holders of the Convertible Notes have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of their shares of our common stock, enter into any transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any economic consequences of ownership of our common stock received upon conversion of the Convertible Notes in this offering or for 180 days after the date of this prospectus, although Clean Technology and Capvest may sell certain of their previously acquired shares in this offering. However, if certain individual members of our management individually sell more than 15% of their respective fully-diluted beneficially owned shares in this offering, then the holders of the Convertible Notes may sell any or all of their shares in this offering, subject to theirlock-up agreements with the underwriters and any other limitations imposed by our underwriters. See “Principal and Selling Shareholders.”
Registration Rights
Upon closing of this offering, all outstanding shares of our convertible preferred stock will be automatically converted into shares of our common stock on a one-for-one basis according to our current articles of incorporation. The shares of our Series C preferred stock, which we call our Series C shares, will be automatically converted into 1,818,182 shares of our common stock. Holders of Series C shares are entitled to certain registration rights with respect to common stock issuable upon conversion of those Series C preferred shares according to the terms of an agreement between us and the Series C holders. Additionally, the holders of our Convertible Notes will also be entitled to certain registration rights with respect to their shares of common stock received upon conversion of the Convertible Notes
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according to the terms of an agreement between us and the holders of the Convertible Notes. We are generally required to pay all expenses incurred in connection with registrations effected in connection with the exercise of these registration rights, excluding underwriting discounts and commissions, and fees and expenses of counsel to the Series C holders in excess of $50,000 per offering.
The holders of the Convertible Notes may not exercise these registration rights for their shares of our common stock received upon conversion of the Convertible Notes in connection with this offering unless certain members of our management individually determine to sell more than 15% of their fully-diluted beneficially owned shares in this offering. Based on discussions with suchNo member of management members, we do not believe that any of them willintends to sell more than 15% of their full-diluted beneficially owned shares in this offering. See “Principal and Selling Shareholders.”
The holders of our Series C preferred stock and the Convertible Notes have entered intolock-up agreements described under the caption “Underwriting,” pursuant to which they have agreed, subject to
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certain exceptions and extensions, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock, enter into any transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any economic consequences of their ownership of our common stock for a period of 180 days from the date of this prospectus or to exercise registration rights during such period with respect to such shares, although they may sell certain shares in this offering.
Demand Rights
At any time beginning six months after the closing date of this offering, subject to specified limitations, any Series C holder may require that we register all or a portion of their common shares received upon conversion of their Series C shares for sale under the Securities Act, if the anticipated gross proceeds from the sale of such shares would be at least $10 million. We may be required to effect up to two such registrations. Series C holders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their own shares of common stock in such registration.
Also, at any time beginning six months after the closing date of this offering, the holders of the Convertible Notes may require, subject to specified limitations, that we register all or a portion of their common shares received upon conversion of the Convertible Notes for sale under the Securities Act, other than onForm S-3, if the anticipated aggregate gross proceeds from the sale of such shares would be at least $5 million.
Piggyback Rights
If we propose to register any of our equity securities under the Securities Act, other than in connection with this offering (if the underwriters make the determination that not all of the Series C shares to be registered can be included in the offering), the Series C holders are entitled to notice of such registration and are entitled to include their shares of common stock in such registration. Clean Technology and affiliates of Capvest are selling certain of their previously acquired shares in this offering. See “Principal and Selling Shareholders.” Under certain circumstances, the underwriters in any future offering may limit the number of shares sold by selling shareholders in such offering, in which case the Series C holders will have the first right to participate in such offering as selling shareholders. The Series C holders have agreed, subject to certain exceptions and extensions, not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any of their common stock received upon conversion of their preferred stock or enter into any transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any economic consequences of their ownership of our common stock for 180 days after the date of this prospectus, although they may sell certain shares in this offering. See “Principal and Selling Shareholders.”
At any time beginning six months after the closing of this offering, if we propose to register any of our equity securities under the Securities Act, the holders of the common shares received upon conversion of the Convertible Notes are entitled to notice of such registration and are entitled to include their shares of common stock in such registration. Such holders have agreed not to exercise this right in connection with this offering and, subject to certain exceptions and extensions described below, have
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agreed not to sell any of their common stock received upon conversion of the Convertible Notes in this offering or for 180 days after the date of this prospectus.
In the event that certain of our management members elect to sell more than 15% of his or her fully-diluted beneficially owned common stock in this offering, the holders of the Convertible Notes may sell any or all of their common stock in this offering, subject to any limitations that may be imposed by the underwriters in this offering. In this case, registration rights of the holders of the Convertible Notes will be senior to any other selling shareholder, except for Series C holders and sales of shares by any individual management member in this offering that do not exceed 15% of his or her fully-diluted beneficial holdings. Based on our discussions with suchNo member of management members, we do not currently believe that any such management members willintends to sell more than 15% of his or her fully-diluted shares beneficially owned of common stock in this offering.
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Form S-3 Rights
If we become eligible to file registration statements onForm S-3 (which cannot occur until at least 12 months after the closing of this offering), subject to specified limitations, the Series C holders of not less than 25% of the converted Series C preferred stock, and the holders of the common shares received upon conversion of the Convertible Notes, can require us to register all or a portion of the these shares onForm S-3. Shareholders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their shares of common stock in the registration.
Wisconsin Anti-Takeover Law and Certain Articles of Incorporation and Bylaw Provisions
Wisconsin law and our amended and restated articles of incorporation and amended and restated bylaws that will be effective upon closing of this offering contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our shareholders might consider favorable. The following is a summary of these provisions.
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws
Classified board of directors; removal of directors for cause.Our amended and restated articles of incorporation and amended and restated bylaws that will be effective upon closing of this offering provide that our board of directors will be divided into three classes, with the term of office of the first class to expire at the 2008 annual meeting of shareholders, the term of office of the second class to expire at the 2009 annual meeting of shareholders, and the term of office of the third class to expire at the 2010 annual meeting of shareholders. At each annual meeting of shareholders, each director will be elected for a term ending on the date of the third annual shareholders’ meeting following the annual shareholders’ meeting at which such director was elected and until his or her successor shall be elected and shall qualify, subject to prior death, resignation or removal from office. Our amended and restated articles of incorporation also provide that the affirmative vote of shareholders possessing at least 75% of the voting power of the then outstanding shares of our capital stock is required to amend, alter, change or repeal, or to adopt any provision inconsistent with, the relevant sections of the bylaws establishing the classified board; provided that the board of directors may amend, alter, change or repeal, or adopt any provision inconsistent with such sections without the vote of the shareholders by resolution adopted by the affirmative vote of at least two-thirds of the directors then in office plus one director. Our amended and restated articles of incorporation also provide that the affirmative vote of shareholders possessing at least 75% of the voting power of the then outstanding shares of our capital stock is required to amend, alter, change or repeal, or adopt any provision inconsistent with, the provisions of the amended and restated articles of incorporation concerning the classified board. The board of directors (or its remaining members, even if less than a quorum) is also empowered to fill vacancies on the board of directors occurring for any reason for the remainder of the term of the class of directors in which the vacancy occurred, unless the vacancy was caused by the action of shareholders (in which event such vacancy will be filled by the shareholders and may not be filled by the directors).
Members of the board of directors may be removed only for cause at a meeting of the shareholders called for the purpose of removing the director, and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director and must state the alleged cause upon which the director’s removal would be based.
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These provisions are likely to increase the time required for shareholders to change the composition of our board of directors. For example, in general, at least two annual meetings will be necessary for shareholders to effect a change in a majority of the members of our board of directors.
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Advance notice provisions for shareholder proposals and shareholder nominations of directors. Our amended and restated bylaws that will become effective upon closing of this offering provide that, for nominations to the board of directors or for other business to be properly brought by a shareholder before a meeting of shareholders, the shareholder must first have given timely notice of the proposal in writing to our secretary. For an annual meeting, a shareholder’s notice generally must be delivered on or before December 31 of the year immediately preceding the annual meeting, unless the date of the annual meeting is on or after May 1 in any year, in which case notice must be received not later than the close of business on the day which is determined by adding to December 31 of the year immediately preceding such annual meeting the number of days starting with May 1 and ending on the date of the annual meeting in such year. Detailed requirements as to the form of the notice and information required in the notice are specified in the amended and restated bylaws. If it is determined that business was not properly brought before a meeting in accordance with our amended and restated bylaws, such business will not be conducted at the meeting.
Wisconsin Business Corporation Law
We are subject to the provisions of the Wisconsin Business Corporation Law.
Business Combination Statute.Wisconsin law regulates a broad range of business combinations between a “resident domestic corporation” and an “interested shareholder.”
A business combination is defined to include any of the following transactions:
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| • | | a merger or share exchange; |
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| • | | a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets equal to 5% or more of the market value of the stock or consolidated assets of the resident domestic corporation or 10% of its consolidated earning power or income; |
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| • | | the issuance of stock or rights to purchase stock with a market value equal to 5% or more of the outstanding stock of the resident domestic corporation; |
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| • | | the adoption of a plan of liquidation or dissolution; or |
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| • | | certain other transactions involving an interested shareholder. |
A “resident domestic corporation” is defined to mean a Wisconsin corporation that has a class of voting stock that is registered or traded on a national securities exchange or that is registered under Section 12(g) of the Exchange Act and that, as of the relevant date, satisfies any of the following:
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| • | | its principal offices are located in Wisconsin; |
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| • | | it has significant business operations located in Wisconsin; |
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| • | | more than 10% of the holders of record of its shares are residents of Wisconsin; or |
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| • | | more than 10% of its shares are held of record by residents of Wisconsin. |
Following the closing of this offering, we will be considered a resident domestic corporation for purposes of these statutory provisions.
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An “interested shareholder” is defined to mean a person who beneficially owns, directly or indirectly, 10% or more of the voting power of the outstanding voting stock of a resident domestic corporation or who is an affiliate or associate of the resident domestic corporation and beneficially owned 10% or more of the voting power of its then outstanding voting stock within the last three years.
Under Wisconsin law, a resident domestic corporation cannot engage in a business combination with an interested shareholder for a period of three years following the date such person becomes an interested shareholder, unless the board of directors approved the business combination or the acquisition of the stock that resulted in the person becoming an interested shareholder before such acquisition. A resident domestic corporation may engage in a business combination with an interested
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shareholder after the three-year period with respect to that shareholder expires only if one or more of the following conditions is satisfied:
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| • | | the board of directors approved the acquisition of the stock prior to such shareholder’s acquisition date; |
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| • | | the business combination is approved by a majority of the outstanding voting stock not beneficially owned by the interested shareholder; or |
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| • | | the consideration to be received by shareholders meets certain fair price requirements of the statute with respect to form and amount. |
Fair Price Statute.The Wisconsin law also provides that certain mergers, share exchanges or sales, leases, exchanges or other dispositions of assets in a transaction involving a significant shareholder and a resident domestic corporation require a supermajority vote of shareholders in addition to any approval otherwise required, unless shareholders receive a fair price for their shares that satisfies a statutory formula. A “significant shareholder” for this purpose is defined as a person or group who beneficially owns, directly or indirectly, 10% or more of the voting stock of the resident domestic corporation, or is an affiliate of the resident domestic corporation and beneficially owned, directly or indirectly, 10% or more of the voting stock of the resident domestic corporation within the last two years. Any such business combination must be approved by 80% of the voting power of the resident domestic corporation’s stock and at least two-thirds of the voting power of its stock not beneficially owned by the significant shareholder who is party to the relevant transaction or any of its affiliates or associates, in each case voting together as a single group, unless the following fair price standards have been met:
the aggregate value of the per share consideration is equal to the highest of:
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| • | the aggregate value of the per share consideration is equal to the highest of: |
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| • | the highest price paid for any common shares of the corporation by the significant shareholder in the transaction in which it became a significant shareholder or within two years before the date of the business combination; |
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| • | | the market value of the corporation’s shares on the date of commencement of any tender offer by the significant shareholder, the date on which the person became a significant shareholder or the date of the first public announcement of the proposed business combination, whichever is higher; or |
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| • | | the highest preferential liquidation or dissolution distribution to which holders of the shares would be entitled; and |
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| • | either cash, or the form of consideration used by the significant shareholder to acquire the largest number of shares, is offered. |
either cash, or the form of consideration used by the significant shareholder to acquire the largest number of shares, is offered.
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Limitations of Directors’ Liability and Indemnification
Our amended and restated bylaws, which will become effective upon closing of this offering, provide that, to the fullest extent permitted or required by Wisconsin law, we will indemnify all of our directors and officers, any trustee of any of our employee benefit plans, and person who is serving at our request as a director, officer, employee or agent of another entity, against certain liabilities and losses incurred in connection with these positions or services. We will indemnify these parties to the extent the parties are successful in the defense of a proceeding and in proceedings in which the party is not successful in defense of the proceeding unless, in the latter case only, it is determined that the party breached or failed to perform his or her duties to us and this breach or failure constituted:
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| • | | a willful failure to deal fairly with us or our shareholders in connection with a matter in which the director or officer has a material conflict of interest; |
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| • | | a violation of criminal law, unless the director or officer had reasonable cause to believe his or her conduct was unlawful; |
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| • | | a transaction from which the director or officer derived an improper personal profit; or |
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| • | | willful misconduct. |
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Our amended and restated bylaws provide that we are required to indemnify our directors and executive officers and may indemnify our employees and other agents to the fullest extent required or permitted by Wisconsin law. Additionally, our amended and restated bylaws require us under certain circumstances to advance reasonable expenses incurred by a director or officer who is a party to a proceeding for which indemnification may be available.
Wisconsin law further provides that it is the public policy of the State of Wisconsin to require or permit indemnification, allowance of expenses and insurance to the extent required or permitted under Wisconsin law for any liability incurred in connection with a proceeding involving a federal or state statute, rule or regulation regulating the offer, sale or purchase of securities.
Under Wisconsin law, a director is not personally liable for breach of any duty resulting solely from his or her status as a director, unless it is proved that the director’s conduct constituted conduct described in the bullet points above. In addition, we intend to obtain directors’ and officers’ liability insurance that will insure against certain liabilities, subject to applicable restrictions.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Wells Fargo Shareowner Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could also adversely affect the market price of our common stock and our ability to raise equity capital in the future. See “Risk Factors.”
Eligibility of Restricted Shares for Resale in the Public Markets
Upon closing of this offering, we will have outstanding an aggregate of 25,399,265 shares of common stock, assuming no exercise of options or warrants that were outstanding as of June 30,October 31, 2007 and that the underwriters do not exercise their over-allotment option. Of these shares, the 7,692,308 shares sold in this offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by one of our existing “affiliates,” as that term is defined in Rule 144 under the Securities Act, who may sell only the volume of shares described below and whose sales would be subject to additional restrictions described below. The remaining 17,706,957 shares of common stock will be held by our existing shareholders and will be considered “restricted securities” as defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 of the Securities Act, as described below.
Taking into account thelock-up agreements described below and the provisions of Rules 144, 144(k) and 701 as currently in effect, the number of shares of common stock that will be available for sale in the public market is as follows:
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| • | | 344,284 shares, which are not subject to the 180-day lock-up180-daylock-up period described under the caption “Underwriting”, may be sold immediately upon the date of this prospectus; |
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| • | | 29,290 shares, which are not subject to the 180-day lock-up180-daylock-up period described under the caption “Underwriting”, may be sold beginning 90 days after the date of this prospectus; |
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| • | | 14,619,578 additional shares may be sold upon expiration of the 180-day lock-up180-daylock-up period described under the caption “Underwriting”, of which 6,724,898 would be subject to volume, manner of sale and other limitations under Rule 144; and |
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| • | | the remaining 2,713,805 shares will be eligible for resale pursuant to Rule 144 upon the expiration of various one-year holding periods during the six months following the expiration of the 180-day lock-up180-daylock-up period. |
In addition, the shares underlying options and warrants will become available for resale into the public markets as described below under “— Stock Options” and “–“— Warrants.”
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ock-upLock-up Agreements
We, our executive officers, directors and shareholders representing approximately %97.6% of our outstanding common stock have entered intolock-up agreements with the underwriters described under the caption “Underwriting.”
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Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of this prospectus, a person, or persons whose shares are aggregated, who owns shares that were purchased from us or an affiliate of us at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of:
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| • | | one percent of our then-outstanding shares of common stock, which is expected to equal approximately 253,993 shares immediately after this offering; and |
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| • | | the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice of the sale on Form 144. |
Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. Rule 144 also provides that our affiliates that are selling shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement. We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the shareholder and other factors.
On November 15, 2007, the Securities and Exchange Commission approved certain changes to Rule 144 including changes allowing non-affiliates of reporting companies to freely resell restricted securities (i) after satisfying a six-month holding period, subject to public information requirements, and (ii) after satisfying a 12-month holding period. As of the date of this prospectus, these rule changes are not yet effective. After giving effect to these rule changes, approximately 17,333,383 shares would be available for sale upon expiration of the 180-day lock-up period described under the caption “Underwriting.”
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who acquires common stock from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering, to the extent not subject to alock-up agreement, is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to thelock-up agreements described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates, as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirement.
Stock Options
As of June 30,October 31, 2007, we had granted options to purchase a total of 4,712,0774,554,687 shares of common stock at a weighted average exercise price of $1.57$1.89 per share. As of June 30,October 31, 2007, an additional 646,700396,490 shares of common stock were available for future option grants under our 2003 Stock Option and 2004 Equity Incentive Plans. Upon the closing of this offering, an additional 2.5 million shares of our common stock will be available for future option grants under our 2004 Stock and Equity Awards Plan.
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We intend to file one or more registration statements onForm S-8 under the Securities Act following closing of this offering to register all shares of our common stock relating to awards that we have granted or may grant under our outstanding equity incentive compensation plans as in effect on the date of this prospectus. These registration statements are expected to become effective upon filing. Subject to Rule 144 volume limitations applicable to affiliates and restrictions imposed bylock-up agreements, the amount of shares referenced above, once registered under any registration statements, will be immediately available for sale in the open market, except to the extent that the shares are subject to vesting restrictions with us or thelock-up agreements described described under the caption “Underwriting.”
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Warrants
As of June 30,October 31, 2007, there were outstanding warrants to purchase 954,390716,822 shares of our common stock at exercise prices ranging between $1.50 and $2.60 per share, with a weighted average exercise price of $2.24 per share. These warrants expire in various periods from December 31, 2007 through December 31, 2014. Any purchase of our common shares by affiliates pursuant to the exercise of warrants will be subject to the one-year holding period under Rule 144, which holding period will begin on the date of the exercise of any warrant.
Rule 10b5-1 Trading Plans
Upon closing of this offering, certain of our directors and executive officers may adopt written plans, known asRule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under theseRule 10b5-1 plans, a broker may execute trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction from such director or executive officer. Such sales would not commence until expiration of the applicablelock-up agreements entered into by such directors and executive officers in connection with this offering. Any director or executive officer party to aRule 10b5-1 plan may amend or terminate it in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of aRule 10b5-1 plan in accordance with our insider trading plan. Each of Messrs. Verfuerth, Waibel, Potts and von Estorff has adopted aRule 10b5-1 plan in accordance with guidelines specified byRule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in accordance with our policies with respect to insider trading andRule 10b5-1 plans. Sales under Messrs. Verfuerth’s, Waibel’s, Potts’ and von Estorff’s Rule10b5-1 plans provide directions to potentially sell up to 250,000, 100,000, 200,000 and 30,000 shares, respectively, based on certain predetermined terms and conditions, in each case beginning after expiration of theirlock-up agreements.
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MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS FORNON-UNITED STATES HOLDERS OF OUR COMMON STOCK
The following is a general discussion of the material United States federal income and estate tax considerations applicable to anon-United States holder with respect to such holder’s acquisition, ownership and disposition of shares of our common stock. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-United States holders of our common stock should consult their own tax advisors with respect to the United States federal, state, local and non-United States tax consequences of the acquisition, ownership and disposition of our common stock. For purposes of this discussion, anon-United States holder means a beneficial owner of our common stock who is not for United States federal income tax purposes:
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| • | | an individual who is a citizen or resident of the United States; |
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| • | | a corporation, partnership or any other organization taxable as a corporation or partnership for United States federal income tax purposes, created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia; |
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| • | | an estate, the income of which is included in gross income for United States federal income tax purposes regardless of its source; or |
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| • | | a trust (A) if (i) a United States court is able to exercise primary supervision over the trust’s administration and (ii) one or more United States persons have the authority to control all of the trust’s substantial decisions or (B) that has a valid election in effect under applicable United States Treasury Regulations to be treated as a United States person. |
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner and partnership should consult its tax advisor as to its tax consequences.
This discussion is based on current provisions of the IRC, existing, proposed and temporary United States Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, in each case as in effect and available as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences tonon-United States holders described in this prospectus.
This description addresses only the United States federal income tax considerations ofnon-United States holders that are initial purchasers of our common stock pursuant to the offering and that will hold our common stock as capital assets. This discussion does not address all aspects of United States federal income and estate taxation that may be relevant to a particularnon-United States holder in light of thatnon-United States holder’s individual circumstances nor does it address any aspects of United States state or local ornon-United States taxation. This discussion also does not consider any specific facts or circumstances that may apply to anon-United States holder and does not address the special tax rules applicable to particularnon-United States holders, such as:
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| • | | insurance companies; |
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| • | | real estate investment companies, regulated investment companies or grantor trusts; |
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| • | | corporations that accumulate earnings to avoid United States federal income tax; |
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| • | | tax-exempt organizations; |
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| • | | financial institutions; |
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| • | | brokers or dealers in securities or currencies; |
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| • | | partnerships and other pass-through entities; |
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| • | | pension plans; |
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| • | | holders that own or are deemed to own more than 5% of our common stock; |
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| • | | owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; |
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| • | | persons that received our common stock as compensation for performance of services; |
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| • | | persons that have a functional currency other than the United States dollar; and |
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| • | | certain former citizens or residents of the United States. |
Moreover, except as set forth below, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of our common stock.
There can be no assurance that the Internal Revenue Service, referred to as the IRS, will not challenge one or more of the tax consequences described herein or that any such contrary position would not be sustained by a court, and we have not obtained, nor do we intend to obtain, an opinion of counsel or ruling from the IRS with respect to the United States federal income or estate tax consequences to anon-United States holder of the acquisition, ownership, or disposition of our common stock.
We urge you to consult with your own tax advisor regarding the United States federal, state, local andnon-United States income and other tax considerations of acquiring, holding and disposing of shares of our common stock.
Distributions on Our Common Stock
We have not declared or paid distributions on our common stock since our inception and do not intend to pay any distributions on our common stock in the foreseeable future. In the event we do pay distributions on our common stock, however, these distributions generally will constitute dividends for United States federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits as determined under United States federal income tax principles, the excess will be treated first as a tax-free return of your adjusted tax basis in our common stock and thereafter as capital gain.
Generally, but subject to the discussions below under “Status as United States Real Property Holding Corporation” and “Backup Withholding and Information Reporting,” distributions of cash or property paid to you generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be provided by an applicable United States income tax treaty. You are
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urged to consult your own tax advisor regarding your entitlement to benefits under a relevant United States income tax treaty. If we determine, at a time reasonably close to the date of payment of a distribution on our common stock, that the distribution will not constitute a dividend because we do not anticipate having current or accumulated earnings and profits as determined under United States federal income tax principles, we intend not to withhold any United States federal income tax on the distribution as permitted by United States Treasury Regulations.
Except as may be otherwise provided in an applicable United States income tax treaty, if you conduct a trade or business within the United States, you generally will be taxed at graduated United States federal income tax rates applicable to United States persons (on a net income basis) on dividends that are effectively connected with the conduct of such trade or business and such dividends will not be subject to the withholding described above. If you are a corporation, you may also be subject to a 30% “branch profits tax” unless you qualify for a lower rate under an applicable United States income tax treaty.
To claim the benefit of any applicable United States tax treaty or an exemption from withholding because the income is effectively connected with your conduct of a trade or business in the United States, you must provide a properly executed IRSForm W-8BEN certifying your qualification for a reduced rate under an applicable treaty or IRSForm W-8ECI certifying that the dividends are effectively connected with your conduct of a trade or business within the United States (or such successor form as the IRS designates), before the distributions are made. These forms must be periodically updated. You may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. You should consult your tax advisors regarding any applicable tax treaties that may provide for different rules.
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Sale, Exchange or Other Taxable Disposition of Our Common Stock
Generally, but subject to the discussions below under “Status as United States Real Property Holding Corporation” and “Backup Withholding and Information Reporting,” you will not be subject to United States federal income tax or withholding tax on any gain realized on the sale, exchange or other taxable disposition of shares of our common stock unless:
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| • | the gain is effectively connected with your conduct of a trade or business in the United States (and if an applicable United States income tax treaty so provides, is also attributable to a permanent establishment or a fixed base in the United States maintained by you), in which case you generally (unless an applicable tax treaty provides otherwise) will be taxed at the graduated United States federal income tax rates applicable to United States persons and, if you are a corporation, the additional branch profits tax described above in “Distributions on Our Common Stock” may apply; or |
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| • | you are an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or disposition and certain other conditions are met, in which case you will be subject to a 30% tax on the net gain derived from the disposition, which may be offset by your United States source capital losses, if any. |
the gain is effectively connected with your conduct of a trade or business in the United States (and if an applicable United States income tax treaty so provides, is also attributable to a permanent establishment or a fixed base in the United States maintained by you), in which case you generally (unless an applicable tax treaty provides otherwise) will be taxed at the graduated United States federal income tax rates applicable to United States persons and, if you are a corporation, the additional branch profits tax described above in “Distributions on Our Common Stock” may apply; or
you are an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or disposition and certain other conditions are met, in which case you will be subject to a 30% tax on the net gain derived from the disposition, which may be offset by your United States source capital losses, if any.
Status as a United States Real Property Holding Corporation
Under certain circumstances, gain recognized on the sale, exchange or other disposition of, and certain distributions in excess of basis with respect to, our common stock would be subject to United States federal income tax, notwithstanding your lack of other connections with the United States, if we are or have been, at any time during the shorter of (i) your holding period of our common stock or (ii) the five-year period ending on the date of such sale, exchange or other disposition (or distribution in excess
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of basis) a “United States real property holding corporation” for United States federal income tax purposes, unless our common stock is regularly traded on an established securities market and you actually or constructively hold no more than 5% of our outstanding common stock. If we are determined to be a United States real property holding corporation and the foregoing exception does not apply, then a purchaser must withhold 10% of the proceeds payable to you from your sale or other taxable disposition of our common stock (unless our common stock is regularly traded on an established securities market), and you generally will be taxed on the net gain derived from the disposition at the graduated United States federal income tax rates applicable to United States persons. Generally, a corporation is a United States real property holding corporation only if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, currently we do not believe that we are, or have been, a United States real property holding corporation, or that we are likely to become one in the future. Furthermore, no assurance can be provided that our stock will be regularly traded on an established securities market for purposes of the rules described above.
United States Federal Estate Tax
Shares of our common stock owned or treated as owned at the time of death by an individual who is not a citizen or resident of the United States, as specifically defined for United States federal estate tax purposes, will be considered United States situs assets and will be included in the individual’s gross estate for United States federal estate tax purposes. Such shares, therefore, may be subject to United States federal estate tax, unless an applicable estate tax or other treaty provides otherwise.
Backup Withholding and Information Reporting
We must report annually to the IRS and to eachnon-United States holder the amount of dividends on our common stock paid to such holder and the amount of any tax withheld with respect to those dividends, together with other information. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with the holder’s conduct of a United States trade or business, or withholding was reduced or eliminated by an applicable tax treaty. This information also may be made available under a specific treaty or agreement to the tax authorities
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of the country in which thenon-United States holder resides or is established. Under certain circumstances, the Code imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. However, backup withholding generally will not apply to payments of dividends to anon-United States holder of our common stock provided thenon-United States holder furnishes to us or our paying agent the required certification as to itsnon-United States status, such as by providing a valid IRSForm W-8BEN orW-8ECI, or otherwise establishes an exemption.
Payments of the proceeds from a disposition by anon-United States holder of our common stock made by or through anon-United States office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting (but not backup withholding) will apply to those payments if the broker is a United States person, a controlled foreign corporation for United States federal income tax purposes, a foreign person 50% or more of whose gross income is effectively connected with a United States trade or business for a specified three-year period or a foreign partnership if at any time during its tax year (1) one or more of its partners are United States persons who hold in the aggregate more than 50 percent of the income or capital interest in such partnership or (2) it is engaged in the conduct of a United States trade or business, unless the broker has documentary evidence that the beneficial owner is anon-United States holder or an exemption is otherwise established, provided that the broker does not have actual knowledge or reason to know that the holder is a United States person or that the conditions of any other exemption are not, in fact, satisfied.
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Payment of the proceeds from anon-United States holder’s disposition of our common stock made by or through the United States office of a broker may be subject to information reporting. Backup withholding will apply unless thenon-United States holder certifies as to itsnon-United States holder status under penalties of perjury, such as by providing a valid IRSForm W-8BEN orW-8ECI, or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the holder is a United States person or that the conditions of any other exemption are not, in fact, satisfied.Non-United States holders should consult their tax advisors on the application of information reporting and backup withholding to them in their particular circumstances.
Backup withholding tax is not an additional tax. Any amounts withheld under the backup withholding tax rules from a payment to anon-United States holder can be refunded or credited against thenon-United States holder’s United States federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our common stock. You should consult your own tax advisor concerning the tax consequences of your particular situation.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement, each of the underwriters named below has severally agreed to purchase from us and the selling shareholders the aggregate number of shares of common stock set forth opposite its name below:
| | | | |
| | Number of
| |
Underwriter | | Shares | |
|
Thomas Weisel Partners LLC | | | | |
Canaccord Adams Inc. | | | | |
Pacific Growth Equities, LLC | | | | |
| | | | |
Total | | | 7,692,308 | |
| | | | |
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
We have granted to the underwriters a30-day option to purchase on a pro rata basis up to 1,153,846 additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the underwriters may change the public offering price and concession and discount to broker/dealers.
The following table summarizes the compensation to be paid to the underwriters by us and the selling shareholders and the proceeds, before expenses, payable to us and the selling stockholders:
| | | | | | | | | | | | |
| | | | | | Total | |
| | | | | | With
| | | Without
| |
| | Per Share | | | Over-Allotment | | | Over-Allotment | |
|
Public offering price | | | | | | | | | | | | |
Underwriting discount | | | | | | | | | | | | |
Proceeds, before expenses, to us | | | | | | | | | | | | |
Proceeds, before expenses, to the selling shareholders | | | | | | | | | | | | |
The underwriters have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.
We have agreed that we will not (i) offer, sell, issue contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exchangeable or exercisable for any shares of our common stock; (ii) offer, sell, issue, contract to sell, contract to purchase or grant any option, right or warrant to purchase shares of our common stock or any securities convertible into or exchangeable for shares of our common stock; (iii) enter into any swap, hedge or any other agreement that transfers, in whole or in part, the economic consequences of ownership of shares of our common stock or any securities convertible or exchangeable into shares of our common stock; (iv) establish or increase a put equivalent position or liquidate or decrease a call equivalent position in shares of our common stock or any securities
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convertible or exchangeable into shares of our common stock within the meaning of Section 16 of the Exchange Act or (v) file with the SEC a registration statement under the Securities Act relating to shares of our common stock or any securities convertible into or exchangeable for shares of our common stock, or publicly disclose the intention to take any such action, in each case, without the prior written consent of Thomas Weisel Partners LLC, for a period of 180 days after the date of this prospectus except for issuances pursuant to or the conversion of convertible securities, options or warrants outstanding on the date of this prospectus and the filing of a registration statement onForm S-8 for shares of common stock relating to awards that we have granted or may grant under our outstanding equity incentive compensation plans, as in effect on the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up”
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“lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up”“lock-up” period, we announce that we will release earnings results during the16-day period beginning on the last day of the “lock-up”“lock-up” period, then in each case the “lock-up”“lock-up” period will be extended until the expiration of the18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or material event, as applicable, unless Thomas Weisel Partners LLC waives, in writing, such extension.
Our officers, directors and shareholders representing %97.6% of our outstanding common stock have agreed that, subject to certain exceptions, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Thomas Weisel Partners LLC for a period of 180 days after the date of this prospectus. In addition, our officers, directors and these shareholders agree that, without the prior written consent of Thomas Weisel Partners LLC, they will not, during the period of thelock-up period, make any demand for or exercise any right with respect to, the registration of our common stock or any security convertible into or exercisable or exchangeable for our common stock. However, in the event that either (1) during the last 17 days of the “lock-up”“lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up”“lock-up” period, we announce that we will release earnings results during the16-day period beginning on the last day of the “lock-up”“lock-up” period, then in each case the “lock-up”“lock-up” period will be extended until the expiration of the18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Thomas Weisel Partners LLC waives, in writing, such an extension.
Notwithstanding the foregoing, the restrictions described in the paragraph above will not apply to transfers to a family member or trust, provided the transferee agrees to be bound in writing by the terms of the lock up agreement prior to such transfer, such transfer shall not involve a disposition for value and no filing by any party (donor, donee, transferor or transferee) under the Exchange Act is required or voluntarily made in connection with such transfer (other than a filing on a Form 5 made after the expiration of the “lock up” period).
The underwriters have reserved for sale at the initial public offering price up to 384,615 shares, or %5% of the total number of shares offered in this prospectus by the company, of the common stock for employees, directors, customers, vendors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.
We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.
We intend to applyhave applied to list the shares of common stock on the Nasdaq Global Market under the symbol “OESX.”
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In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Exchange Act.
Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of
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shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment optionand/or purchasing shares in the open market.
Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages presale of the shares.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Global Market or otherwise and, if commenced, may be discontinued at any time.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the underwriters. Among the factors to be considered in determining the initial public offering price will be our future prospects and those of our industry in general, our financial operating information in recent periods, and market prices of securities and financial and operating information of companies engaged in activities similar to ours. There can be no assurance that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market will develop and continue after this offering.
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In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each Underwriter has represented and agreed that, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
| | |
| (a) | • | to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
| | |
| (b) | • | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000€43,000,000 and (3) an annual net turnover of more than €50,000,000,€50,000,000, as shown in its last annual or consolidated accounts; or |
| | |
| (c) | • | in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any
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measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each of the underwriters has represented and agreed that:
| | |
| (a) | | it has not made or will not make an offer of shares to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended), or FSMA except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or FSA; |
| | |
| (b) | | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to us; and |
| | |
| (c) | | it has complied with, and will comply with, all applicable provisions of FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom. |
The underwriters will not offer or sell any of our shares directly or indirectly in Japan or to, or for the benefit of any Japanese person or to others, for re-offering or re-sale directly or indirectly in Japan or to any Japanese person, except in each case pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law of Japan and any other applicable
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laws and regulations of Japan. For purposes of this paragraph, “Japanese person” means any person resident in Japan, including any corporation or other entity organized under the laws of Japan.
The underwriters and each of their affiliates have not (i) offered or sold, and will not offer or sell, in Hong Kong, by means of any document, our shares other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap.571)(Cap. 571) of Hong Kong and any rules made under that Ordinance or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance or (ii) issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere any advertisement, invitation or document relating to our shares which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to our shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance any rules made under that Ordinance. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
This prospectus or any other offering material relating to our shares has not been and will not be registered as a prospectus with the Monetary Authority of Singapore, and the shares will be offered in Singapore pursuant to exemptions under Section 274 and Section 275 of the Securities and Futures Act, Chapter 289 of Singapore, or the Securities and Futures Act. Accordingly our shares may not be offered or sold, or be the subject of an invitation for subscription or purchase, nor may this prospectus or any other offering material relating to our shares be circulated or distributed, whether directly or indirectly, to the public or any member of the public in Singapore other than (a) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act, (b) to a sophisticated investor, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act or (c) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.
In the ordinary course, the underwriters and their affiliates may in the future provide investment banking, commercial banking, investment management, or other financial services to us and our affiliates for which services they may receive compensation in the future.
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LEGAL MATTERS
The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by the law firm of Foley & Lardner LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by the law firm of Latham & Watkins LLP, New York, New York.
EXPERTS
Grant Thornton LLP, independent registered public accounting firm, has audited our financial statements as of March 31, 2006 and 2007 and for each of the three years in the period ended March 31, 2007 appearing in this prospectus and the related registration statement, as set forth in their report thereon appearing elsewhere herein, and are included in reliance on such report given on the authority of such firm as experts in accounting and auditing.
Wipfli LLP, acted as an independent third party evaluator and provided a valuation of the fair value of our common stock as of April 30, 2007 and as of November 30, 2006, in each case in connection with the board of directors determination of stock value for financial reporting of stock option grants.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement onForm S-1 under the Securities Act, with respect to our common stock offered hereby. This prospectus, which forms part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. This prospectus omits information contained in the registration statement as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and the exhibits and schedules to the registration statement filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit are qualified in all respects by reference to the actual text of the exhibit. You may read and copy the registration statement, including the exhibits and schedules to the registration statement, at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. In addition, the SEC maintains an Internet site atwww.sec.gov, from which you can electronically access the registration statement, including the exhibits and schedules to the registration statement.
Upon the closing of this offering, we will become subject to the informational and reporting requirements of the Exchange Act and we intend to file periodic reports and other information with the SEC. After the closing of this offering, our future SEC filings will be available to you on our website atwww.oriones.comwww.oriones.com.. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page
|
| | Number |
|
| | | F-2 | |
| | | F-3 | |
| | F-3 |
| | |
Consolidated Statements of Operations | | F-4 |
| | |
| | | F-5 |
| | |
| | | F-6 |
| | |
| | | F-7 | |
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
Orion Energy Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion Energy Systems, Inc. and Subsidiaries (the Company) as of March 31, 2006 and 2007, and the related consolidated statements of operations, temporary equity and shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2006 and 2007, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended March 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A, effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment.Payment.
/s/ Grant Thornton LLP
Milwaukee, Wisconsin
August 16, 2007
F-2
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| | | | | | | | | | | | |
| | March 31, | | | June 30, 2007 | |
| | 2006 | | | 2007 | | | (Unaudited) | |
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,089 | | | $ | 285 | | | $ | 696 | |
Accounts receivable, net of allowances of $38, $89 and $83 (unaudited) | | | 6,051 | | | | 11,197 | | | | 13,172 | |
Inventories | | | 6,167 | | | | 9,496 | | | | 10,672 | |
Deferred tax assets | | | 419 | | | | 345 | | | | 458 | |
Prepaid expenses and other current assets | | | 745 | | | | 1,296 | | | | 1,457 | |
| | | | | | | | | |
Total current assets | | | 14,471 | | | | 22,619 | | | | 26,455 | |
| | | | | | | | | | | | |
Property and equipment, net | | | 8,106 | | | | 7,588 | | | | 7,946 | |
Patents and licenses, net | | | 194 | | | | 243 | | | | 316 | |
Investment | | | — | | | | 794 | | | | 794 | |
Deferred tax assets | | | 1,607 | | | | 1,907 | | | | 1,354 | |
Other long-term assets | | | 360 | | | | 432 | | | | 854 | |
| | | | | | | | | |
Total assets | | $ | 24,738 | | | $ | 33,583 | | | $ | 37,719 | |
| | | | | | | | | |
Liabilities, Temporary Equity and Shareholders’ Equity | | | | | | | | | | | | |
Accounts payable | | $ | 4,767 | | | $ | 5,607 | | | $ | 8,116 | |
Accrued expenses | | | 1,889 | | | | 2,196 | | | | 3,326 | |
Current maturities of long-term debt | | | 859 | | | | 736 | | | | 707 | |
| | | | | | | | | |
Total current liabilities | | | 7,515 | | | | 8,539 | | | | 12,149 | |
| | | | | | | | | | | | |
Long-term debt, less current maturities | | | 10,492 | | | | 10,603 | | | | 9,998 | |
Other long-term liabilities | | | 109 | | | | 133 | | | | 171 | |
| | | | | | | | | |
Total liabilities | | | 18,116 | | | | 19,275 | | | | 22,318 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Commitments and contingencies (See Note E) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Temporary equity: | | | | | | | | | | | | |
Series C convertible redeemable preferred stock, $0.01 par value: zero shares issued and outstanding at March 31, 2006 and 1,818,182 at March 31, 2007 and June 30, 2007 (unaudited) | | | — | | | | 4,953 | | | | 5,028 | |
| | | | | | | | | | | | |
Shareholders’ equity: | | | | | | | | | | | | |
Preferred stock, $0.01 par value: Shares authorized including Series C convertible redeemable preferred stock: 20,000,000 at March 31, 2006 and 2007 and June 30, 2007 (unaudited) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Series A convertible preferred stock, $0.01 par value: 20,000 shares issued and outstanding at March 31, 2006 and none at March 31, 2007 and June 30, 2007 (unaudited) | | | 116 | | | | — | | | | — | |
| | | | | | | | | | | | |
Series B convertible preferred stock, $0.01 par value: 2,847,400, 2,989,830 and 2,989,830 shares issued and outstanding at March 31, 2006 and 2007 and June 30, 2007 (unaudited) | | | 5,591 | | | | 5,959 | | | | 5,959 | |
| | | | | | | | | | | | |
Common stock, no par value: Shares authorized: 80,000,000 as of March 31, 2006 and 2007 and June 30, 2007 (unaudited); shares issued: 8,982,764, 12,107,573 and 12,289,043 as of March 31, 2006 and 2007 and June 30, 2007 (unaudited); shares outstanding: 8,920,900, 12,038,499 and 12,219,969 as of March 31, 2006 and 2007 and June 30, 2007 (unaudited) | | | — | | | | — | | | | — | |
Additional paid-in capital | | | 5,859 | | | | 9,438 | | | | 9,993 | |
Treasury stock: 61,864, 69,074 and 69,074 common shares as of March 31, 2006 and 2007 and June 30, 2007 (unaudited) | | | (345 | ) | | | (361 | ) | | | (361 | ) |
Shareholder notes receivable | | | (398 | ) | | | (2,128 | ) | | | (2,128 | ) |
Accumulated deficit | | | (4,201 | ) | | | (3,553 | ) | | | (3,090 | ) |
| | | | | | | | | |
Total shareholders’ equity | | | 6,622 | | | | 9,355 | | | | 10,373 | |
| | | | | | | | | |
Total liabilities, temporary equity and shareholders’ equity | | $ | 24,738 | | | $ | 33,583 | | | $ | 37,719 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | March 31, | | | September 30,
| |
| | 2006 | | | 2007 | | | 2007 | |
| | | | | | | | (Unaudited) | |
|
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,089 | | | $ | 285 | | | $ | 6,864 | |
Short-term investments | | | — | | | | — | | | | 3,900 | |
Accounts receivable, net of allowances of $38, $89 and $88 (unaudited) | | | 6,051 | | | | 11,197 | | | | 13,542 | |
Inventories | | | 6,167 | | | | 9,496 | | | | 15,678 | |
Deferred tax assets | | | 419 | | | | 345 | | | | 735 | |
Prepaid expenses and other current assets | | | 745 | | | | 1,296 | | | | 3,045 | |
| | | | | | | | | | | | |
Total current assets | | | 14,471 | | | | 22,619 | | | | 43,764 | |
Property and equipment, net | | | 8,106 | | | | 7,588 | | | | 8,084 | |
Patents and licenses, net | | | 194 | | | | 243 | | | | 354 | |
Investment | | | — | | | | 794 | | | | 794 | |
Deferred tax assets | | | 1,607 | | | | 1,907 | | | | 1,227 | |
Other long-term assets | | | 360 | | | | 432 | | | | 2,505 | |
| | | | | | | | | | | | |
Total assets | | $ | 24,738 | | | $ | 33,583 | | | $ | 56,728 | |
| | | | | | | | | | | | |
Liabilities, Temporary Equity and Shareholders’ Equity | | | | | | | | | | | | |
Accounts payable | | $ | 4,767 | | | $ | 5,607 | | | $ | 13,178 | |
Accrued expenses | | | 1,889 | | | | 2,196 | | | | 3,640 | |
Current maturities of long-term debt | | | 859 | | | | 736 | | | | 708 | |
| | | | | | | | | | | | |
Total current liabilities | | | 7,515 | | | | 8,539 | | | | 17,526 | |
Long-term debt, less current maturities | | | 10,492 | | | | 10,603 | | | | 8,933 | |
Convertible notes | | | — | | | | — | | | | 10,666 | |
Other long-term liabilities | | | 109 | | | | 133 | | | | 183 | |
| | | | | | | | | | | | |
Total liabilities | | | 18,116 | | | | 19,275 | | | | 37,308 | |
| | | | | | | | | | | | |
Commitments and contingencies (See Note F) | | | | | | | | | | | | |
Temporary equity: | | | | | | | | | | | | |
Series C convertible redeemable preferred stock, $0.01 par value: zero, 1,818,182 and 1,818,182 shares issued and outstanding at March 31, 2006 and 2007 and September 30, 2007 (unaudited) | | | — | | | | 4,953 | | | | 5,103 | |
Shareholders’ equity: | | | | | | | | | | | | |
Preferred stock, $0.01 par value: Shares authorized including Series C convertible redeemable preferred stock: 20,000,000 at | | | | | | | | | | | | |
March 31, 2006 and 2007 and September 30, 2007 (unaudited) | | | | | | | | | | | | |
Series A convertible preferred stock, $0.01 par value: 20,000 shares issued and outstanding at March 31, 2006 and none at March 31, 2007 and September 30, 2007 (unaudited) | | | 116 | | | | — | | | | — | |
Series B convertible preferred stock, $0.01 par value: 2,847,400, 2,989,830 and 2,989,830 shares issued and outstanding at March 31, 2006 and 2007 and September 30, 2007 (unaudited) | | | 5,591 | | | | 5,959 | | | | 5,959 | |
Common stock, no par value: Shares authorized: 80,000,000 as of March 31, 2006 and 2007 and September 30, 2007 (unaudited); shares issued: 8,982,764, 12,107,573 and 12,856,711 as of March 31, 2006 and 2007 and September 30, 2007 (unaudited); shares outstanding: 8,920,900, 12,038,499 and 12,480,705 as of March 31, 2006 and 2007 and September 30, 2007 (unaudited) | | | — | | | | — | | | | — | |
Additional paid-in capital | | | 5,859 | | | | 9,438 | | | | 12,209 | |
Treasury stock: 61,864, 69,074 and 376,006 common shares as of March 31, 2006 and 2007 and September 30, 2007 (unaudited) | | | (345 | ) | | | (361 | ) | | | (1,739 | ) |
Shareholder notes receivable | | | (398 | ) | | | (2,128 | ) | | | — | |
Accumulated deficit | | | (4,201 | ) | | | (3,553 | ) | | | (2,112 | ) |
| | | | | | | | | | | | |
Total shareholders’ equity | | | 6,622 | | | | 9,355 | | | | 14,317 | |
| | | | | | | | | | | | |
Total liabilities, temporary equity and shareholders’ equity | | $ | 24,738 | | | $ | 33,583 | | | $ | 56,728 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated statements.
F-3
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | | | Six Months Ended
| |
| | Fiscal year ended | | June 30, | | | Fiscal Year Ended March 31, | | September 30, | |
| | March 31, | | (unaudited) | | | 2005 | | 2006 | | 2007 | | 2006 | | 2007 | |
| | 2005 | | 2006 | | 2007 | | 2006 | | 2007 | | | | | | | | | (Unaudited) | |
Revenue | | $ | 21,783 | | $ | 33,280 | | $ | 48,183 | | $ | 9,680 | | $ | 16,721 | | |
Cost of revenue | | 14,043 | | 22,524 | | 32,487 | | 6,255 | | 11,118 | | |
| |
Product revenue | | | $ | 19,628 | | | $ | 29,993 | | | $ | 40,201 | | | $ | 17,444 | | | $ | 28,752 | |
Service revenue | | | | 2,155 | | | | 3,287 | | | | 7,982 | | | | 2,867 | | | | 6,374 | |
| | | | | | | | | | | | |
Total revenue | | | | 21,783 | | | | 33,280 | | | | 48,183 | | | | 20,311 | | | | 35,126 | |
Cost of product revenue | | | | 12,099 | | | | 20,225 | | | | 26,511 | | | | 11,422 | | | | 18,821 | |
Cost of service revenue | | | | 1,944 | | | | 2,299 | | | | 5,976 | | | | 2,211 | | | | 4,381 | |
| | | | | | | | | | | | |
Total cost of revenue | | | | 14,043 | | | | 22,524 | | | | 32,487 | | | | 13,633 | | | | 23,202 | |
| | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | 7,740 | | 10,756 | | 15,696 | | 3,425 | | 5,603 | | | | 7,740 | | | | 10,756 | | | | 15,696 | | | | 6,678 | | | | 11,924 | |
| | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | |
General and administrative | | 3,461 | | 4,875 | | 6,162 | | 1,269 | | 1,571 | | | | 3,461 | | | | 4,875 | | | | 6,162 | | | | 2,605 | | | | 3,478 | |
Sales and marketing | | 5,416 | | 5,991 | | 6,459 | | 1,518 | | 2,111 | | | | 5,416 | | | | 5,991 | | | | 6,459 | | | | 3,126 | | | | 4,049 | |
Research and development | | 213 | | 1,171 | | 1,078 | | 211 | | 437 | | | | 213 | | | | 1,171 | | | | 1,078 | | | | 440 | | | | 880 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | 9,090 | | 12,037 | | 13,699 | | 2,998 | | 4,119 | | | | 9,090 | | | | 12,037 | | | | 13,699 | | | | 6,171 | | | | 8,407 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) from operations | | | (1,350 | ) | | | (1,281 | ) | | 1,997 | | 427 | | 1,484 | | | | (1,350 | ) | | | (1,281 | ) | | | 1,997 | | | | 507 | | | | 3,517 | |
| | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (570 | ) | | | (1,051 | ) | | | (1,044 | ) | | | (253 | ) | | | (295 | ) | | | (570 | ) | | | (1,051 | ) | | | (1,044 | ) | | | (513 | ) | | | (624 | ) |
Dividend and interest income | | 3 | | 5 | | 201 | | 1 | | 40 | | | | 3 | | | | 5 | | | | 201 | | | | 12 | | | | 194 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total other income (expense) | | | (567 | ) | | | (1,046 | ) | | | (843 | ) | | | (252 | ) | | | (255 | ) | | | (567 | ) | | | (1,046 | ) | | | (843 | ) | | | (501 | ) | | | (430 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) before income tax and cumulative effect of change in accounting principle | | | (1,917 | ) | | | (2,327 | ) | | 1,154 | | 175 | | 1,229 | | | | (1,917 | ) | | | (2,327 | ) | | | 1,154 | | | | 6 | | | | 3,087 | |
| | |
Income tax expense (benefit) | | | (702 | ) | | | (762 | ) | | 225 | | 34 | | 481 | | | | (702 | ) | | | (762 | ) | | | 225 | | | | 1 | | | | 1,286 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Income (loss) before cumulative change in accounting principle | | | (1,215 | ) | | | (1,565 | ) | | 929 | | 141 | | 748 | | | | (1,215 | ) | | | (1,565 | ) | | | 929 | | | | 5 | | | | 1,801 | |
| | |
Cumulative effect of change in accounting principle, net of income tax benefit of $38 | | | (57 | ) | | — | | — | | — | | — | | | | (57 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Net income (loss) | | | (1,272 | ) | | | (1,565 | ) | | 929 | | 141 | | 748 | | | | (1,272 | ) | | | (1,565 | ) | | | 929 | | | | 5 | | | | 1,801 | |
| | |
Accretion of redeemable preferred stock and preferred stock dividends | | | (104 | ) | | | (3 | ) | | | (201 | ) | | (1 | ) | | | (75 | ) | | | (104 | ) | | | (3 | ) | | | (201 | ) | | | (46 | ) | | | (150 | ) |
Conversion of preferred stock | | | (972 | ) | | — | | | (83 | ) | | — | | — | | | | (972 | ) | | | — | | | | (83 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Participation rights of preferred stock in undistributed earnings | | | | — | | | | — | | | | (205 | ) | | | — | | | | (511 | ) |
| | | | | | | | | | | | |
Net income (loss) attributable to common shareholders | | $ | (2,348 | ) | | $ | (1,568 | ) | | $ | 645 | | $ | 140 | | $ | 673 | | | $ | (2,348 | ) | | $ | (1,568 | ) | | $ | 440 | | | $ | (41 | ) | | $ | 1,140 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
Basic net income (loss) per common share attributable to common shareholders | | $ | (0.36 | ) | | $ | (0.18 | ) | | $ | 0.07 | | $ | 0.02 | | $ | 0.07 | | |
Weighted average common shares outstanding | | 6,470,413 | | 8,524,012 | | 9,080,461 | | 8,998,944 | | 9,950,486 | | |
| | |
Diluted net income (loss) per common share attributable to common shareholders | | $ | (0.36 | ) | | $ | (0.18 | ) | | $ | 0.04 | | $ | 0.01 | | $ | 0.04 | | |
Weighted average common shares and share equivalents outstanding | | 6,470,413 | | 8,524,012 | | 16,432,647 | | 15,072,660 | | 18,087,951 | | |
Basic net income (loss) per share attributable to common shareholders | | | $ | (0.36 | ) | | $ | (0.18 | ) | | $ | 0.05 | | | $ | (0.00 | ) | | $ | 0.11 | |
Weighted-average common shares outstanding | | | | 6,470,413 | | | | 8,524,012 | | | | 9,080,461 | | | | 9,002,919 | | | | 10,711,695 | |
Diluted net income (loss) per share attributable to common shareholders | | | $ | (0.36 | ) | | $ | (0.18 | ) | | $ | 0.05 | | | $ | (0.00 | ) | | $ | 0.09 | |
Weighted-average common shares and share equivalents outstanding | | | | 6,470,413 | | | | 8,524,012 | | | | 16,432,647 | | | | 15,665,720 | | | | 19,782,208 | |
The accompanying notes are an integral part of these consolidated statements
F-4
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Temporary Equity | | | Preferred Stock | | | Common Stock | | | | | | | | | | | | | | | |
| | Series C Redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | | Series A | | | Series B | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional | | | | | | | Shareholder | | | | | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Paid-in | | | Treasury | | | Notes | | | Accumulated | | | Shareholders’ | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Capital | | | Shares | | | Receivable | | | Deficit | | | Equity | |
Balance, March 31, 2004 | | | — | | | $ | — | | | | 732,010 | | | $ | 1,007 | | | | 392,000 | | | $ | 710 | | | | 6,355,776 | | | $ | 2,229 | | | $ | — | | | $ | — | | | $ | (392 | ) | | $ | 3,554 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of stock | | | — | | | | — | | | | — | | | | — | | | | 1,842,400 | | | | 3,457 | | | | 119,802 | | | | 551 | | | | — | | | | (63 | ) | | | — | | | | 3,945 | |
Conversion of Series A shares to common stock | | | — | | | | — | | | | (648,010 | ) | | | (891 | ) | | | — | | | | — | | | | 1,944,030 | | | | 1,863 | | | | — | | | | — | | | | (972 | ) | | | — | |
Purchase of stock for treasury | | | — | | | | — | | | | (64,000 | ) | | | — | | | | — | | | | — | | | | (61,864 | ) | | | — | | | | (345 | ) | | | — | | | | — | | | | (345 | ) |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,272 | ) | | | (1,272 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2005 | | | — | | | $ | — | | | | 20,000 | | | $ | 116 | | | | 2,234,400 | | | $ | 4,167 | | | | 8,357,744 | | | $ | 4,643 | | | $ | (345 | ) | | $ | (58 | ) | | $ | (2,636 | ) | | $ | 5,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of stock and warrants | | | — | | | | — | | | | — | | | | — | | | | 613,000 | | | | 1,424 | | | | 55,778 | | | | 153 | | | | — | | | | — | | | | — | | | | 1,577 | |
Exercise of stock options and warrants for cash and notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 483,378 | | | | 445 | | | | — | | | | (375 | ) | | | — | | | | 70 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 558 | | | | — | | | | — | | | | — | | | | 558 | |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 35 | | | | — | | | | 35 | |
Issuance of common stock and warrants for services | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 24,000 | | | | 60 | | | | — | | | | — | | | | — | | | | 60 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,565 | ) | | | (1,565 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2006 | | | — | | | $ | — | | | | 20,000 | | | $ | 116 | | | | 2.847,400 | | | $ | 5,591 | | | | 8,920,900 | | | $ | 5,859 | | | $ | (345 | ) | | $ | (398 | ) | | $ | (4,201 | ) | | $ | 6,622 | |
|
Issuance of stock and warrants | | | 1,818,182 | | | | 4,755 | | | | — | | | | — | | | | 142,430 | | | | 368 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 368 | |
Exercise of stock options and warrants for cash and notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,064,809 | | | | 2,582 | | | | — | | | | (1,753 | ) | | | — | | | | 829 | |
Conversion to common stock | | | — | | | | — | | | | (20,000 | ) | | | (116 | ) | | | — | | | | — | | | | 60,000 | | | | 199 | | | | — | | | | — | | | | (83 | ) | | | — | |
Tax benefit from exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 435 | | | | — | | | | — | | | | — | | | | 435 | |
Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,210 | ) | | | — | | | | (16 | ) | | | — | | | | — | | | | (16 | ) |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 363 | | | | — | | | | — | | | | — | | | | 363 | |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23 | | | | — | | | | 23 | |
Accretion of redeemable preferred stock | | | — | | | | 198 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (198 | ) | | | (198 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 929 | | | | 929 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2007 | | | 1,818,182 | | | $ | 4,953 | | | | — | | | $ | — | | | | 2,989,830 | | | $ | 5,959 | | | | 12,038,499 | | | $ | 9,438 | | | $ | (361 | ) | | $ | (2,128 | ) | | $ | (3,553 | ) | | $ | 9,355 | |
|
Exercise of stock options and warrants for cash and notes (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 181,470 | | | | 376 | | | | — | | | | — | | | | — | | | | 376 | |
Tax benefit from exercise of stock options (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 33 | | | | — | | | | — | | | | — | | | | 33 | |
Stock-based compensation (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 146 | | | | — | | | | — | | | | — | | | | 146 | |
Accretion of preferred stock (unaudited) | | | — | | | | 75 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (75 | ) | | | (75 | ) |
Changes in shareholder notes receivable (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Adoption of FIN 48 (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (210 | ) | | | (210 | ) |
Net income (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 748 | | | | 748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2007 (unaudited) | | | 1,818,182 | | | $ | 5,028 | | | | — | | | $ | — | | | | 2,989,830 | | | $ | 5,959 | | | | 12,219,969 | | | $ | 9,993 | | | $ | (361 | ) | | $ | (2,128 | ) | | $ | (3,090 | ) | | $ | 10,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated statements.
F-5
F-4
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSTEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Three months ended | |
| | | | | | | | | | | | | | June 30, | |
| | Fiscal year ended March 31, | | | (unaudited) | |
| | 2005 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,272 | ) | | $ | (1,565 | ) | | $ | 929 | | | $ | 141 | | | $ | 748 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 539 | | | | 941 | | | | 1,063 | | | | 247 | | | | 270 | |
Stock-based compensation expense | | | — | | | | 618 | | | | 363 | | | | 58 | | | | 146 | |
Deferred income tax benefit | | | (740 | ) | | | (922 | ) | | | (213 | ) | | | 28 | | | | 440 | |
Loss on write-off of patents and licenses | | | — | | | | — | | | | 13 | | | | — | | | | — | |
Loss on sale of assets | | | — | | | | 224 | | | | 268 | | | | 4 | | | | — | |
Other | | | — | | | | 37 | | | | 8 | | | | — | | | | 10 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (305 | ) | | | (2,757 | ) | | | (5,161 | ) | | | (27 | ) | | | (2,372 | ) |
Inventories | | | (3,472 | ) | | | 491 | | | | (4,555 | ) | | | (2,223 | ) | | | (1,176 | ) |
Prepaid expenses and other current assets | | | 9 | | | | (300 | ) | | | (524 | ) | | | (9 | ) | | | 315 | |
Accounts payable | | | 3,338 | | | | (584 | ) | | | 840 | | | | 1,233 | | | | 2,509 | |
Accrued expenses | | | 1,040 | | | | 416 | | | | 735 | | | | (207 | ) | | | 932 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (863 | ) | | | (3,401 | ) | | | (6,234 | ) | | | (755 | ) | | | 1,822 | |
| | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (5,764 | ) | | | (871 | ) | | | (1,012 | ) | | | (169 | ) | | | (614 | ) |
Additions to patents and licenses | | | (40 | ) | | | (56 | ) | | | (81 | ) | | | (14 | ) | | | (78 | ) |
Proceeds from disposal of equipment | | | — | | | | 735 | | | | 263 | | | | — | | | | — | |
Net decrease (increase) in amount due from shareholder | | | (84 | ) | | | 30 | | | | (139 | ) | | | (26 | ) | | | (14 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (5,888 | ) | | | (162 | ) | | | (969 | ) | | | (209 | ) | | | (706 | ) |
| | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Purchase of treasury stock | | | (345 | ) | | | — | | | | — | | | | — | | | | — | |
Proceeds from issuance of long-term debt | | | 10,099 | | | | 134 | | | | 40 | | | | 40 | | | | — | |
Payment of long-term debt | | | (5,840 | ) | | | (2,416 | ) | | | (1,263 | ) | | | (198 | ) | | | (175 | ) |
Net activity in revolving line of credit | | | (636 | ) | | | 4,853 | | | | 1,211 | | | | 201 | | | | (460 | ) |
Excess benefit for deferred taxes on stock-based compensation | | | — | | | | — | | | | 435 | | | | 6 | | | | 33 | |
Proceeds from (additions to) shareholder notes receivable, net | | | 5 | | | | 35 | | | | 23 | | | | (17 | ) | | | — | |
Deferred finance and offering costs | | | (91 | ) | | | (94 | ) | | | — | | | | — | | | | (479 | ) |
Proceeds from issuance of preferred stock, net | | | 3,857 | | | | 1,454 | | | | 5,123 | | | | 134 | | | | — | |
Proceeds from issuance of common stock | | | 88 | | | | 193 | | | | 830 | | | | 15 | | | | 376 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 7,137 | | | | 4,159 | | | | 6,399 | | | | 181 | | | | (705 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 386 | | | | 596 | | | | (804 | ) | | | (783 | ) | | | 411 | |
Cash and cash equivalents at beginning of period | | | 107 | | | | 493 | | | | 1,089 | | | | 1,089 | | | | 285 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 493 | | | $ | 1,089 | | | $ | 285 | | | $ | 306 | | | $ | 696 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 492 | | | $ | 1,003 | | | $ | 927 | | | $ | 231 | | | $ | 267 | |
Cash paid for income taxes | | | — | | | | — | | | | 17 | | | | — | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | | | | | |
Capital leases entered into for purchase of equipment | | $ | — | | | $ | 81 | | | $ | 40 | | | $ | 40 | | | $ | — | |
Notes receivable issued to shareholders | | | 63 | | | | 375 | | | | 1,753 | | | | — | | | | — | |
Long-term investment in affiliate acquired through sale of inventory | | | — | | | | — | | | | 794 | | | | 307 | | | | — | |
Preferred stock dividends | | | 104 | | | | 3 | | | | 201 | | | | 1 | | | | 75 | |
thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Temporary Equity | | | Preferred Stock | | | Common Stock | | | | | | | | | | | | | |
| | Series C Redeemable
| | | | | | | | | | | | | | | | | | Additional
| | | | | | Shareholder
| | | | | | Total
| |
| | Preferred Stock | | | Series A | | | Series B | | | | | | Paid-in
| | | Treasury
| | | Notes
| | | Accumulated
| | | Shareholders’
| |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Capital | | | Shares | | | Receivable | | | Deficit | | | Equity | |
|
Balance, March 31, 2004 | | | — | | | $ | — | | | | 732,010 | | | $ | 1,007 | | | | 392,000 | | | $ | 710 | | | | 6,355,776 | | | $ | 2,229 | | | $ | — | | | $ | — | | | $ | (392 | ) | | $ | 3,554 | |
Issuance of stock | | | — | | | | — | | | | — | | | | — | | | | 1,842,400 | | | | 3,457 | | | | 119,802 | | | | 551 | | | | — | | | | (63 | ) | | | — | | | | 3,945 | |
Conversion of Series A shares to common stock | | | — | | | | — | | | | (648,010 | ) | | | (891 | ) | | | — | | | | — | | | | 1,944,030 | | | | 1,863 | | | | — | | | | — | | | | (972 | ) | | | — | |
Purchase of stock for treasury | | | — | | | | — | | | | (64,000 | ) | | | — | | | | — | | | | — | | | | (61,864 | ) | | | — | | | | (345 | ) | | | — | | | | — | | | | (345 | ) |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,272 | ) | | | (1,272 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2005 | | | — | | | $ | — | | | | 20,000 | | | $ | 116 | | | | 2,234,400 | | | $ | 4,167 | | | | 8,357,744 | | | $ | 4,643 | | | $ | (345 | ) | | $ | (58 | ) | | $ | (2,636 | ) | | $ | 5,887 | |
Issuance of stock and warrants | | | — | | | | — | | | | — | | | | — | | | | 613,000 | | | | 1,424 | | | | 55,778 | | | | 153 | | | | — | | | | — | | | | — | | | | 1,577 | |
Exercise of stock options and warrants for cash and notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 483,378 | | | | 445 | | | | — | | | | (375 | ) | | | — | | | | 70 | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 558 | | | | — | | | | — | | | | — | | | | 558 | |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 35 | | | | — | | | | 35 | |
Issuance of common stock and warrants for services | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 24,000 | | | | 60 | | | | — | | | | — | | | | — | | | | 60 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,565 | ) | | | (1,565 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2006 | | | — | | | $ | — | | | | 20,000 | | | $ | 116 | | | | 2,847,400 | | | $ | 5,591 | | | | 8,920,900 | | | $ | 5,859 | | | $ | (345 | ) | | $ | (398 | ) | | $ | (4,201 | ) | | $ | 6,622 | |
Issuance of stock and warrants | | | 1,818,182 | | | | 4,755 | | | | — | | | | — | | | | 142,430 | | | | 368 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 368 | |
Exercise of stock options and warrants for cash and notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,064,809 | | | | 2,582 | | | | — | | | | (1,753 | ) | | | — | | | | 829 | |
Conversion to common stock | | | — | | | | — | | | | (20,000 | ) | | | (116 | ) | | | — | | | | — | | | | 60,000 | | | | 199 | | | | — | | | | — | | | | (83 | ) | | | — | |
Tax benefit from exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 435 | | | | — | | | | — | | | | — | | | | 435 | |
Treasury stock purchase | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,210 | ) | | | — | | | | (16 | ) | | | — | | | | — | | | | (16 | ) |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 363 | | | | — | | | | — | | | | — | | | | 363 | |
Changes in shareholder notes receivable | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23 | | | | — | | | | 23 | |
Accretion of redeemable preferred stock | | | — | | | | 198 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (198 | ) | | | (198 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 929 | | | | 929 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2007 | | | 1,818,182 | | | $ | 4,953 | | | | — | | | $ | — | | | | 2,989,830 | | | $ | 5,959 | | | | 12,038,499 | | | $ | 9,438 | | | $ | (361 | ) | | $ | (2,128 | ) | | $ | (3,553 | ) | | $ | 9,355 | |
Exercise of stock options and warrants for cash and notes (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 749,138 | | | | 1,299 | | | | — | | | | — | | | | — | | | | 1,299 | |
Tax benefit from exercise of stock options (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 922 | | | | — | | | | — | | | | — | | | | 922 | |
Stock-based compensation (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 550 | | | | — | | | | — | | | | — | | | | 550 | |
Accretion of preferred stock (unaudited) | | | — | | | | 150 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (150 | ) | | | (150 | ) |
Changes in shareholder notes receivable (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (306,932 | ) | | | — | | | | (1,378 | ) | | | 2,128 | | | | — | | | | 750 | |
Adoption of FIN 48 (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (210 | ) | | | (210 | ) |
Net income (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,801 | | | | 1,801 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2007 (unaudited) | | | 1,818,182 | | | $ | 5,103 | | | | — | | | $ | — | | | | 2,989,830 | | | $ | 5,959 | | | | 12,480,705 | | | $ | 12,209 | | | $ | (1,739 | ) | | $ | — | | | $ | (2,112 | ) | | $ | 14,317 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated statementsstatements.
F-5
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | | | Six Months Ended
| |
| | Fiscal Year Ended March 31, | | | September 30, | |
| | 2005 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | |
| | | | | | | | | | | (Unaudited) | |
|
Operating activities | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,272 | ) | | $ | (1,565 | ) | | $ | 929 | | | $ | 5 | | | $ | 1,801 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 539 | | | | 941 | | | | 1,063 | | | | 527 | | | | 547 | |
Stock-based compensation expense | | | — | | | | 618 | | | | 363 | | | | 123 | | | | 550 | |
Deferred income tax benefit | | | (740 | ) | | | (922 | ) | | | (213 | ) | | | 1 | | | | 290 | |
Loss on write-off of patents and licenses | | | — | | | | — | | | | 13 | | | | — | | | | — | |
Loss on sale of assets | | | — | | | | 224 | | | | 268 | | | | 123 | | | | 1 | |
Other | | | — | | | | 37 | | | | 8 | | | | 4 | | | | 36 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (305 | ) | | | (2,757 | ) | | | (5,161 | ) | | | (701 | ) | | | (2,345 | ) |
Inventories | | | (3,472 | ) | | | 491 | | | | (4,555 | ) | | | (4,022 | ) | | | (6,182 | ) |
Prepaid expenses and other current assets | | | 9 | | | | (300 | ) | | | (524 | ) | | | 77 | | | | (1,844 | ) |
Accounts payable | | | 3,338 | | | | (584 | ) | | | 840 | | | | (17 | ) | | | 7,571 | |
Accrued expenses | | | 1,040 | | | | 416 | | | | 735 | | | | (69 | ) | | | 1,444 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (863 | ) | | | (3,401 | ) | | | (6,234 | ) | | | (3,949 | ) | | | 1,869 | |
Investing activities | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (5,764 | ) | | | (871 | ) | | | (1,012 | ) | | | (459 | ) | | | (1,008 | ) |
Purchase of short-term investments | | | —— | | | | — | | | | — | | | | — | | | | (3,900 | ) |
Additions to patents and licenses | | | (40 | ) | | | (56 | ) | | | (81 | ) | | | (29 | ) | | | (123 | ) |
Proceeds from disposal of equipment | | | — | | | | 735 | | | | 263 | | | | 263 | | | | — | |
Net decrease (increase) in amount due from shareholder | | | (84 | ) | | | 30 | | | | (139 | ) | | | (93 | ) | | | 187 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (5,888 | ) | | | (162 | ) | | | (969 | ) | | | (318 | ) | | | (4,844 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | |
Purchase of treasury stock | | | (345 | ) | | | — | | | | — | | | | — | | | | — | |
Proceeds from issuance of long-term debt | | | 10,099 | | | | 134 | | | | 40 | | | | 40 | | | | 10,666 | |
Payment of long-term debt | | | (5,840 | ) | | | (2,416 | ) | | | (1,263 | ) | | | (692 | ) | | | (356 | ) |
Net activity in revolving line of credit | | | (636 | ) | | | 4,853 | | | | 1,211 | | | | (804 | ) | | | (1,342 | ) |
Excess benefit for deferred taxes on stock-based compensation | | | — | | | | — | | | | 435 | | | | 13 | | | | 922 | |
Proceeds from shareholder notes receivable, net | | | 5 | | | | 35 | | | | 23 | | | | 23 | | | | 750 | |
Deferred financing and offering costs | | | (91 | ) | | | (94 | ) | | | — | | | | — | | | | (2,385 | ) |
Proceeds from issuance of preferred stock, net | | | 3,857 | | | | 1,454 | | | | 5,123 | | | | 5,149 | | | | — | |
Proceeds from issuance of common stock | | | 88 | | | | 193 | | | | 830 | | | | 31 | | | | 1,299 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 7,137 | | | | 4,159 | | | | 6,399 | | | | 3,760 | | | | 9,554 | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 386 | | | | 596 | | | | (804 | ) | | | (507 | ) | | | 6,579 | |
Cash and cash equivalents at beginning of period | | | 107 | | | | 493 | | | | 1,089 | | | | 1,089 | | | | 285 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 493 | | | $ | 1,089 | | | $ | 285 | | | $ | 582 | | | $ | 6,864 | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 492 | | | $ | 1,003 | | | $ | 927 | | | $ | 459 | | | $ | 561 | |
Cash paid for income taxes | | | — | | | | — | | | | 17 | | | | — | | | | 10 | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | | | | | | | |
Capital leases entered into for purchase of equipment | | $ | — | | | $ | 81 | | | $ | 40 | | | $ | 40 | | | $ | — | |
Notes receivable issued to shareholders | | | 63 | | | | 375 | | | | 1,753 | | | | — | | | | — | |
Long-term investment in affiliate acquired through sale of inventory | | | — | | | | — | | | | 794 | | | | 794 | | | | — | |
Shares surrendered for payment of stock note receivable | | | — | | | | — | | | | — | | | | — | | | | 1,378 | |
Preferred stock accretion | | | 104 | | | | 3 | | | | 201 | | | | 46 | | | | 150 | |
The accompanying notes are an integral part of these consolidated statements.
F-6
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
NOTE A — | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated subsidiaries. The Company is a developer, manufacturer and seller of lighting and energy management systems. The corporate offices are located in Plymouth, Wisconsin and manufacturing and operations facilities are located in Plymouth and Manitowoc, Wisconsin.
Principles of Consolidation
The consolidated financial statements include the accounts of Orion Energy Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Unaudited financial information
The accompanying consolidated balance sheet as of JuneSeptember 30, 2007, the consolidated statements of operations and cash flows for the threesix months ended JuneSeptember 30, 2006 and 2007 and the consolidated statements of temporary equity and shareholders’ equity for the threesix months ended JuneSeptember 30, 2007 are unaudited and the Company’s independent registered public accounting firm has not expressed an opinion on the statements for these periods. The unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s consolidated financial position as of JuneSeptember 30, 2007 and consolidated results of operations and cash flows for the threesix months ended JuneSeptember 30, 2006 and 2007. The financial data and other information disclosed in these notes to the consolidated financial statements as of and related to the threesix months ended JuneSeptember 30, 2006 and 2007 are unaudited. The results for the threesix months ended JuneSeptember 30, 2007 are not necessarily indicative of the results to be expected for the year ending March 31, 2008 or for any other interim period or for any future year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make 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 and reported amounts of revenues and expenses during that reporting period. Areas that require the use of significant management estimates include revenue recognition, inventory obsolescence and bad debt reserves, accruals for warranty expenses, income taxes and certain equity transactions. Accordingly, actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid, short-term investments with original maturities of three months or less to be cash equivalents.
Short-term investments
The Company’s short-term investments, which consist of government agency bonds with maturities ranging from 91 to 125 days when acquired, are reported at fair value with any net unrealized gains and losses reported as a component of accumulated other comprehensive income in shareholders’ equity. At the time of sale, any realized appreciation or depreciation, calculated by the specific identification method, will be recognized in non-operating results. The Company has classified all marketable securities as short-term since it has the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. During the six months ended September 30, 2007, there were no sales of the Company’s short-term investments. As of September 30, 2007 (unaudited), no unrealized gains or losses were recorded as the marketable securities’ fair value approximated their cost.
F-7
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable, and accounts payable, approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is also approximately equal to its fair value.
Accounts receivable
The majority of the Company’s accounts receivable are due from companies in the commercial, industrial and agricultural industries, and wholesalers. Credit is extended based on an evaluation of a customer’s financial condition. Generally, collateral is not required for end users; however, the payment of certain trade accounts
F-7
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable from wholesalers is secured by irrevocable standby letters of credit. Accounts receivable are due within30-60 days. Accounts receivable are stated at the amount the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.
Included in accounts receivable are amounts due from a third party finance company to which the Company has sold, without recourse, the future cash flows from lease arrangements entered into with customers. Such receivables are recorded at the present value of the future cash flows discounted at 12.49%. As of March 31, 2007, the following amounts were due from the third party finance company in future periods (in thousands):
| | | | |
2008 | | $ | 190 | |
2009 | | | 123 | |
| | | | |
Total gross receivable | | | 313 | |
Less: amount representing interest | | | (23 | ) |
| | | | |
Net contracts receivable | | $ | 290 | |
| | | | |
At JuneSeptember 30, 2007 (unaudited), net contract receivables amounted to $249,000, $194,000$231,000, $186,000 of which is due in the next 12 months.
Inventories
Inventories consist of raw materials and components, such as ballasts, metal sheet and coil stock and molded parts; work in process inventories, such as frames and reflectors; and finished goods, including completed fixtures or systems and accessories, such as lamps, meters and power supplies. All inventories are stated at the lower of cost or market value; with cost determined using thefirst-in, first-out (FIFO) method. The Company reduces the carrying value of its inventories for differences between the cost and estimated net realizable value, taking into consideration usage in the preceding 12 months, expected demand, and other information indicating obsolescence. The Company records as a charge to cost of revenue the amount required to reduce the carrying value of inventory to net realizable value. As of March 31, 2006 and 2007, and JuneSeptember 30, 2007 (unaudited), the Company had inventory obsolescence reserves of $355,000, $448,000 and $526,000.$642,000.
Costs associated with the procurement and warehousing of inventories, such as inbound freight charges and purchasing and receiving costs, are also included in cost of revenue.
F-8
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories were comprised of the following (in thousands):
| | | | | | | | | | | | | |
| | | March 31,
| | March 31,
| | September 30,
| |
| | | | | | | | | | | | | | 2006 | | 2007 | | 2007 | |
| | March 31, | | March 31, | | June 30, 2007 | | | | | | | (Unaudited) | |
| | 2006 | | 2007 | | (unaudited) | |
Raw materials and components | | $ | 1,762 | | $ | 5,496 | | $ | 5,983 | | | $ | 1,762 | | | $ | 5,496 | | | $ | 8,285 | |
Work in process | | 386 | | 358 | | 495 | | | | 386 | | | | 358 | | | | 510 | |
Finished goods | | 4,019 | | 3,642 | | 4,194 | | | | 4,019 | | | | 3,642 | | | | 6,883 | |
| | | | | | | | | | | | | | |
| | $ | 6,167 | | $ | 9,496 | | $ | 10,672 | | | $ | 6,167 | | | $ | 9,496 | | | $ | 15,678 | |
| | | | | | | | | | | | | | |
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of prepaid insurance premiums, advance payments to contractors, payments on construction of an asset to be sold to a finance company and leased back, and miscellaneous receivables. The balance at March 31, 2007 also included a $450,000 secured note with 5% interest due from a third party. The note was paid in full in May 2007.
F-8
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed as incurred. Properties sold, or otherwise disposed of, are removed from the property accounts, with gains or losses on disposal credited or charged to income from operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No.144,No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically reviews the carrying values of property and equipment for impairment when events or changes in circumstances indicate that the assets may be impaired. The estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition are compared to the assets’ carrying amount to determine if a write down to market value is required. No writedowns were recorded in fiscal 2005, 2006, 2007 or the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited).
Property and equipment were comprised of the following (in thousands):
| | | | | | | | | | | | | |
| | | March 31, | | September 30,
| |
| | | | | | | | | | | | | | 2006 | | 2007 | | 2007 | |
| | March 31, | | June 30, 2007 | | | | | | | (Unaudited) | |
| | 2006 | | 2007 | | (unaudited) | |
Land and land improvements | | $ | 557 | | $ | 557 | | $ | 560 | | | $ | 557 | | | $ | 557 | | | $ | 560 | |
Buildings | | 4,240 | | 4,423 | | 4,449 | | | | 4,240 | | | | 4,423 | | | | 4,533 | |
Furniture, fixtures and office equipment | | 1,298 | | 1,441 | | 1,492 | | | | 1,298 | | | | 1,441 | | | | 1,596 | |
Plant equipment | | 3,923 | | 3,747 | | 3,790 | | | | 3,923 | | | | 3,747 | | | | 3,952 | |
Construction in progress | | 141 | | 130 | | 625 | | | | 141 | | | | 130 | | | | 649 | |
| | | | | | | | | | | | | | |
| | 10,159 | | 10,298 | | 10,916 | | | | 10,159 | | | | 10,298 | | | | 11,290 | |
| | |
Less: accumulated depreciation and amortization | | 2,053 | | 2,710 | | 2,970 | | | | 2,053 | | | | 2,710 | | | | 3,206 | |
| | | | | | | | |
| | | | | | | | |
Net property and equipment | | $ | 8,106 | | $ | 7,588 | | $ | 7,946 | | | $ | 8,106 | | | $ | 7,588 | | | $ | 8,084 | |
| | | | | | | | | | | | | | |
Equipment included above under capital leases were as follows (in thousands):
| | | | | | | | | | | | | |
| | | March 31, | | September 30,
| |
| | | | | | | | | | | | | | 2006 | | 2007 | | 2007 | |
| | March 31, | | June 30, 2007 | | | | | | | (Unaudited) | |
| | 2006 | | 2007 | | (unaudited) | |
Equipment | | $ | 1,498 | | $ | 1,451 | | $ | 1,206 | | | $ | 1,498 | | | $ | 1,451 | | | $ | 1,206 | |
Less: accumulated amortization | | 328 | | 531 | | 328 | | | | 328 | | | | 531 | | | | 364 | |
| | | | | | | | | | | | | | |
Net Equipment | | $ | 1,170 | | $ | 920 | | $ | 878 | | |
Net equipment | | | $ | 1,170 | | | $ | 920 | | | $ | 842 | |
| | | | | | | | | | | | | | |
F-9
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation is provided over the estimated useful lives of the respective assets, using the straight-line method. Depreciable lives by asset category are as follows:
| | | | |
Land improvements | | | 10 – 15 years | |
Buildings | | | 10 – 39 years | |
Furniture, fixtures and office equipment | | | 3 – 10 years | |
Plant equipment | | | 3 – 10 years | |
No interest has been capitalized for construction in progress, as it was not material for any of the periods presented.
F-9
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patents and Licenses
Patents and licenses are being amortized on a straight-line basis over15-17 years. The Company capitalized $40,000, $56,000 and $81,000 of costs associated with obtaining patents and licenses in fiscal 2005, 2006 and 2007. An additional $78,000$123,000 was capitalized in the threesix months ended JuneSeptember 30, 2007 (unaudited). Amortization expense recorded to cost of revenue for fiscal 2005, 2006 and 2007 was $9,000, $14,000 and $19,000. The costs and accumulated amortization for patents and licenses was $246,000 and $52,000 as of March 31, 2006; $314,000 and $71,000 as of March 31, 2007; and $392,000$437,000 and $76,000$83,000 as of JuneSeptember 30, 2007 (unaudited). The average remaining useful life of the patents and licenses as of March 31,September 30, 2007 was approximately 1516 years. As of March 31,September 30, 2007, amortization expense of the patents and licenses for each of the fiscal years ending 2008 through 2012 is estimated to be $20,000,$23,000, with $143,000$221,000 remaining after 2012.
The Company’s management periodically reviews the carrying value of patents and licenses for impairment. As a result of this review, the Company wrote off an immaterial amount in fiscal 2007.
Investment
The investment consists of 77,000 shares of preferred stock of a manufacturer of specialty aluminum products which was acquired in July 2006 by exchanging products with a fair value of $794,000. The terms of the preferred stock contain protective covenants regarding capital structure changes and also certain provisions to require the redemption of the stock at a defined liquidation value. The terms of the stock also require a dividend payment of 12% on the liquidation value or $139,000 annually. The investment is being accounted for under the cost method of accounting. The Company does not have the ability to exert significant influence over the entity.
The Company’s management periodically reviews the carrying value of the investment for impairment. No impairment was required at March 31, 2007 or JuneSeptember 30, 2007 (unaudited).
Other Long-Term Assets
Other long-term assets includes deferred financing costs related to debt issuances and the Company'sCompany’s contemplated initial public offering, amounts due from shareholders unrelated to stock transactions (see Note B) and other miscellaneous items.
Deferred financing costs related to debt issuances are amortized to interest expense over the life of the related debt issue (6 to 15 years). In fiscal 2005, 2006 and 2007, the Company capitalized $91,000, $94,000 and zero of deferred financing costs. In the threesix months ended JuneSeptember 30, 2007 (unaudited), the Company deferred $53,000$213,000 of costs related to its issuance of convertible debt issuancenotes that closed in August 2007 (see Note H)D). Interest expense related to the amortization of deferred financing for fiscal 2005, 2006 and 2007 was $11,000, $62,000, and $45,000. For the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited), the amortization was $9,000.$19,000 and $26,000 respectively.
The balance at JuneSeptember 30, 2007 (unaudited) included $426,000$2,173,000 of deferred equity issuance costs incurred in connection with the Company'sCompany’s contemplated initial public offering.
F-10
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Expenses
Accrued expenses include warranty accruals, accrued wages, accrued vacations, sales tax payable, income tax payable and other various unpaid expenses.
Accrued subcontractor fees amounted to $255,000, $548,000 and $770,000 as of March 31, 2006, 2007 and September 30, 2007 (unaudited). During fiscal 2006, the Company experienced performance issues on select inventory items and entered into a settlement agreement with the supplier under which the Company was forgiven certain payables outstanding and received a cash rebate of $432,000 in exchange for an additional purchase obligation of $962,000 of inventory. The cash rebate was received and included in other current liabilities at March 31, 2006 as the purchase obligation remained outstanding. As of March 31, 2007, the Company had satisfied its purchase obligation and the rebate was reclassified to inventory and is being amortized to cost of revenue as the purchased product is used.
The Company generally offers a limited warranty of one year on its products in addition to those standard warranties offered by major original equipment component manufacturers. The manufacturers’ warranties cover
F-10
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lamps and ballasts, which are significant components in the Company’s products. In fiscal 2005 and 2006, the Company experienced significant warranty problems with new ballast and lamp components manufactured by a third party supplier. The Company charged back costs against accounts payable due the supplier as partial reimbursement for replacement material and labor costs incurred to correct certain product failures at its customers’ facilities. The Company also provided a general reserve for warranty costs as of March 31, 2006 and 2007 and JuneSeptember 30, 2007 (unaudited).
Changes in the Company’s warranty accrual were as follows (in thousands):
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | March 31, | | September 30,
| |
| | June 30, | | | 2006 | | 2007 | | 2007 | |
| | March 31, | | 2007 | | | | | | | (Unaudited) | |
| | 2006 | | 2007 | | (unaudited) | |
Beginning of period | | $ | 250 | | $ | 332 | | $ | 45 | | | $ | 250 | | | $ | 332 | | | $ | 45 | |
Credit from supplier | | 412 | | — | | — | | | | 412 | | | | — | | | | — | |
Provision to cost of revenue | | 745 | | 249 | | 170 | | | | 745 | | | | 249 | | | | 231 | |
Charges | | | (1,075 | ) | | | (536 | ) | | | (38 | ) | | | (1,075 | ) | | | (536 | ) | | | (89 | ) |
| | | | | | | | | | | | | | |
End of period | | $ | 332 | | $ | 45 | | $ | 177 | | | $ | 332 | | | $ | 45 | | | $ | 187 | |
| | | | | | | | | | | | | | |
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin, (SAB) No. 104,Revenue Recognition, and Emerging Issues Task Force Issue (EITF) No. 00-21,Revenue Arrangements with Multiple Deliverables. Based upon SAB 104, revenue is recognized when the following four criteria are met:
• | | |
| • | persuasive evidence of an arrangement exists; |
|
• | • | delivery has occurred and title has passed to the customer; |
|
• | • | the sales price is fixed and determinable and no further obligation exists; and |
|
• | • | collectibility is reasonably assured. |
These four criteria are met for the Company’s product salesonly revenue upon delivery of the product and title passing to the customer. At that time, the Company provides for estimated costs that may be incurred for product warranties and sales returns.
For sales contracts consisting of multiple elements of revenue, such as a combination of product sales and services, the Company determines revenue by allocating the total contract revenue to each element based on the relative fair values in accordance with Emerging Issues Task Force (EITF)No. 00-21,Revenue associated with installation services is recognized when services are complete and acceptance provisions, if any, have been met. Arrangements With Multiple Deliverables.
Services other than installation and recycling that are completed prior to delivery of the product are recognized upon shipment. When other significant obligations or acceptance terms remain after productsshipment and are delivered,included in product revenue as evidence of fair value does not exist.
F-11
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These services include comprehensive site assessment, site field verification, utility incentive and government subsidy management, engineering design, and project management.
Service revenue includes revenue earned from installation, which includes recycling services. Service revenue is recognized only after such obligationswhen services are fulfilled orcomplete and customer acceptance by the customer has occurred.
The Company determines the fair value of installation services using vendor-specific objective evidence (VSOE).been received. The Company contracts with third-party vendors for the installation services provided to customers and, therefore, determines VSOEfair value based upon negotiated pricing with such third-party vendors. Recycling services provided in connection with installation entail disposal of the customer’s legacy lighting fixtures.
Under the deferral provisions
Costs of EITF 00-21, the Companyproducts delivered, and services performed, that are subject to additional performance obligations or customer acceptance are deferred the recognition of product and installation revenue and recorded in Other Current Assets on the Balance Sheet. These deferred costs in excess of deferredare expensed at the time the related revenue ofis recognized. Deferred costs amounted to $484,000 and $298,000 as of March 31, 2006 and 2007 and $313,000$707,000 as of JuneSeptember 30, 2007 (unaudited). In addition, the Company has recorded deferred
Deferred revenue for future obligations of $109,000 and $133,000 as of March 31, 2006 and 2007, and $171,000$183,000 as of JuneSeptember 30, 2007 (unaudited). is included in Other Long-Term Liabilities on the Balance Sheet and represents revenue deferred related to an obligation to provide replacement lamps on certain sales. The fair value of lamps is readily determinable based upon pricing from third-party vendors. Deferred revenue is recognized when the replacement lamps are delivered, which occurs in excess of a year after the original contract.
F-11
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A salessales-type financing program is offered to customers where their purchase is financed by the Company. The contracts are one year in duration and at the completion of the initial one year term, provide for automatic annual renewals of generally up to four years at agreed pricing, an early buyout for cash or for the return of the equipment at the customer’s expense. Upon completion of the installation, the future lease cash flows and residual rights to the related equipment are then sold by the Company, without recourse, to an unrelated third party finance company in exchange for cash and future paymentspayments.
In accordance withEITF 01-8,Determining whether an Arrangement Contains a Lease, SFAS 13,Accounting for Leasesand SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of FASB Statement No. 125, revenue is recognized for the net present value of the future payments from the third party finance company upon completion of the project. The Company’s contract terms with the third party finance company provide for a non-recourse sale of the customer’s installment contract, with the finance company providing 70% of funding at contract origination, 15% in year two and 15% in year three. Sales under this program amounted to 7.4%, 4.5% and 1.5% of revenue for fiscal 2005, 2006 and 2007 and 2.0%3.1% and .6%0.4% of revenue for the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited).
Shipping and Handling Costs
In accordance withEITF 00-10,Accounting for Shipping and Handling Fees and Costs, the Company records costs incurred in connection with shipping and handling of products as cost of revenue. Amounts billed to customers in connection with these costs are included in revenue and were not material for any periods presented in the accompanying consolidated financial statements.
Advertising
Advertising costs of $233,000, $233,000 and $272,000 for fiscal 2005, 2006, 2007 and $51,000 and $142,000$232,000 for the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited) were charged to operations as incurred.
Research and Development
The Company expenses research and development costs as incurred.
F-12
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with SFAS 109,Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax assets and liabilities for the future tax consequences of temporary differences between financial reporting and income tax basis of assets and liabilities, and are measured using the enacted tax rates and laws expected to be in effect when the differences will reverse. Deferred income taxes also arise from the future benefits of net operating loss carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Based upon historical and current year earnings, expected reversal of deferred tax assets and projections for future taxable income over the periods in which the deferred tax assets are deductible and carryforwards are available, management believes it is more likely than not that the Company will realize the benefits of these assets. The factors included in this assessment were (i) the Company’s recognition of income before taxes of $1.2 million for the three months ended June 30, 2007 and fiscal 2007: (ii) the anticipated fiscal 2008 revenue growth due to the backlog of orders as of June 30, 2007 and (iii) previous profitability in fiscal 2003 and 2004 that preceded the Company’s planned efforts in fiscal 2005 and 2006 to increase manufacturing capacity and sales and marketing effort to increase revenue. Accordingly, a deferred tax asset valuation allowance has not been recorded.
Deferred tax benefits have not been recognized for income tax effects resulting from the exercise of non-qualified stock options. These benefits will be recognized in the period in which the benefits are realized as a reduction in taxes payable. These future benefits will be reported as a reduction in income taxes payable and an increase in additional paid-in capital. Realized tax benefits from the exercise of stock options were $435,000 and $33,000$922,000 for the year ended March 31, 2007 and threesix months ended JuneSeptember 30, 2007 (unaudited).
Stock Option Plans
Effective April 1, 2006, the Company adopted the provisions of SFAS 123(R),Share-Based Payment, for its stock option plans. The Company previously accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB 25),
F-12
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Accounting Standards Board’s (FASB) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25, and disclosure requirements established by SFAS 123,Accounting for Stock-Based Compensation as amended by SFAS 148Accounting for Stock-Based Compensation — Transition and Disclosure.
The Company adopted SFAS 123(R) using the modified prospective method. Under this transition method, compensation cost recognized for the year ended March 31, 2007 includes the current period’s cost for all stock options granted prior to, but not yet vested as of April 1, 2006. This cost was based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123. The cost for all share-based awards granted subsequent to March 31, 2006, represents the grant-date fair value that was estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated. Compensation cost for options will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period.
As a result of the adoption of SFAS 123(R), the Company’s financial results were lower than under our previous accounting method for share-based compensation by the following amounts:amounts (in thousands except per share amounts):
| | | | | | | | |
| | | Fiscal Year
| |
| | Fiscal year | | Ended March 31, 2007 | |
| | ended March 31, 2007 |
Income (loss) before income tax and cumulative effect of change in accounting principle | | $ | 363 | | | $ | 363 | |
Net income | | 292 | | | | 292 | |
Net income (loss) attributable to common shareholders | | 292 | | | | 292 | |
Basic net income (loss) per common share attributable to common shareholders | | .03 | | | | 0.03 | |
Diluted net income (loss) per common share attributable to common shareholders | | .02 | | | | 0.02 | |
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation costs (excess tax benefits) be classified as financing cash flows. For fiscal year ended 2007, $435,000 of such excess tax benefits was classified as financing cash flows. For the threesix months ended JuneSeptember 30, 2007, this amount was $33,000$922,000 (unaudited).
F-13
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has used the Black-Scholes option-pricing model both prior to and following the adoption of SFAS 123(R). In fiscal 2005 and 2006, the Company determined volatility based on an analysis of the Company’s common stock sales among shareholders. Beginning in fiscal 2007, the Company determined volatility based on an analysis of a peer group of public companies which was determined to be more reflective of the expected future volatility. The risk-free interest rate is the rate available as of the option date on zero-coupon U.S. Government issues with a remaining term equal to the expected term of the option. The expected term is based upon the vesting term of the Company’s options and expected exercise behavior. The Company has not paid dividends in the past and does not plan to pay any dividends in the foreseeable future. The Company estimates its forfeiture rate of unvested stock awards based on historical experience. For fiscal 2007, the forfeiture rate was 6%.
The fair value of each option grant in fiscal 2005, 2006 and 2007 and for the threesix months ended JuneSeptember 30, 2007 (unaudited) was determined using the assumptions in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fiscal Year Ended March 31, | | September 30,
| |
| | Fiscal year ended March | | June 30, 2007 | | | 2005 | | 2006 | | 2007 | | 2007 | |
| | 2005 | | 2006 | | 2007 | | (unaudited) | | | | | | | | | (Unaudited) | |
Expected term | | 6 years | | 6 years | | 6.6 years | | 7.6 years | | |
| |
Weighted average expected term | | | | 6 years | | | | 6 years | | | | 6.6 years | | | | 2.4 years | |
Risk-free interest rate | | | 4.32 | % | | | 4.35 | % | | | 4.62 | % | | 4.58% | | | 4.32 | % | | | 4.35 | % | | | 4.62 | % | | | 4.74 | % |
Expected volatility | | | 39 | % | | | 50 | % | | | 60 | % | | | 60 | % | | | 39 | % | | | 50 | % | | | 60 | % | | | 60 | % |
Expected forfeiture rate | | | N/A | | | | N/A | | | | 6 | % | | | 6 | % | | | N/A | | | | N/A | | | | 6 | % | | | 6 | % |
Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
The Company engaged Wipfli, LLP, an unrelated third-party appraisal firm, to perform a contemporaneous valuation analysis of the Company’s common stock as of April 30, 2007. That analysis, prepared in accordance with the methodology prescribed by the AICPA Practice AidValuation of Privately-Held-Company Equity Securities Issued as Compensation, estimated the fair market value of the Company’s common stock at $4.15 per share. Wipfli, LLP considered a variety of valuation methodologies and economic outcomes and calculated its final valuation using the Probability Weighted Expected Return Method. In accordance with the AICPA Practice Aid, the valuation gave recognition to the Company’s consideration of an initial public offering; while also considering the economic value of other strategic alternatives or economic outcomes that might occur.
That same valuation firm also prepared a valuation report as of November 2006 that valued the Company’s common stock at $2.20 per share. That valuation was considered appropriate by the Board of Directors, in addition to considering other relevant valuation factors, for determining the exercise price of option grants made from December 2006 to April 2007. For option grants in fiscal 2007 prior to December 2006, the Board of Directors determined the exercise price of option grants based upon estimates of fair value. Upon completion of the November 2006 valuation report, for financial reporting purposes, the Company determined that it was appropriate to use the $2.20 per share value as the fair value within the Black-Scholes option pricing model for all fiscal 2007 grants prior to December 2006.
Upon completion of the April 30, 2007 valuation by Wipfli, LLP, the Company determined that it was appropriate to use the $4.15 per common share value in its Black-Scholes option pricing model for financial reporting purposes for the March and April 2007 stock option grants. Due to the proximity of the November 2006 valuation to the December grants, the Company believes the $2.20 per common share value used as the exercise price approximates fair value for financial reporting purposes.
On July 27, 2007, the Company granted stock options for 429,432 shares at an exercise price of $4.49 per share. The compensation committee and board of directors determined that the exercise price of such stock options was at least equal to the fair market value of the Company’s common stock as of such date primarily based on the $4.49 per share conversion price of the substantially simultaneous subordinated convertible note placement.
The exercise price and fair value of stock option grants in fiscal 2005 and 2006 was based upon known independent third-party sales of common stock and the per share prices at which we issued shares of our common and preferred stock to third-party investors.
F-13
F-14
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income available(loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period and does not consider common stock equivalents. In accordance with EITF D-42,The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock, the $972,000 and $83,000 excess in fiscal 2005 and fiscal 2007 of (1) fair value of the consideration transferred to the holders of the convertible preferred stock over (2) the fair value of securities issuable pursuant to the original conversion terms was subtracted from net income (loss) to arrive at net income (loss) availableattributable to common shareholders in the calculation of earnings per share.
In addition, all series of the Company’s preferred stock participate in all undistributed earnings with the common stock. The Company allocated earnings to the common shareholders and participating preferred shareholders under the two-class method as required byEITF 03-6,Participating Securities and the Two-Class Method under FASB Statement No. 128. The two-class method is an earnings allocation method under which basic net income per share is calculated for the Company’s common stock and participating preferred stock considering both accrued preferred stock dividends and participation rights in undistributed earnings as if all such earnings had been distributed during the year. Since the Company’s participating preferred stock was not contractually required to share in the Company’s losses, in applying the two-class method to compute basic net income per common share, no allocation was made to the preferred stock if a net loss existed or if an undistributed net loss resulted from reducing net income by the accrued preferred stock dividends.
Diluted net income per common share reflects the dilution that would occur if preferred stock were converted, warrants and employee stock options were exercised, and shares issued per exercise of stock options for which the exercise price was paid by a non-recourse loan from the Company were outstanding. In the computation of diluted net income per common share, the Company uses the “if converted” method for preferred stock and restricted stock, and the “treasury stock” method for outstanding options and warrants.
In addition, in computing the dilutive effect of the convertible notes, the numerator is adjusted to add back the after-tax amount of interest recognized in the period. The effect of net income (loss) per common share is calculated based upon the following shares:shares (in thousands except share amounts):
| | | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended June 30, | |
| | Fiscal year ended March 31, | | | (unaudited) | |
| | 2005 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | |
Weighted average common shares outstanding | | | 6,470,413 | | | | 8,524,012 | | | | 9,080,461 | | | | 8,998,944 | | | | 9,950,486 | |
Weighted average effect of preferred stock, restricted stock and assumed conversion of stock option and warrants | | | — | | | | — | | | | 7,352,186 | | | | 6,073,716 | | | | 8,137,465 | |
| | | | | | | | | | | | | | | |
Weighted average common share and common share equivalents outstanding | | | 6,470,413 | | | | 8,524,012 | | | | 16,432,647 | | | | 15,072,660 | | | | 18,087,951 | |
| | | | | | | | | | | | | | | |
F-15
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended
| | | Six Months Ended
| |
| | March 31, | | | September 30, | |
| | 2005 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | |
| | | | | | | | | | | (Unaudited) | |
|
Numerator: | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,272 | ) | | $ | (1,565 | ) | | $ | 929 | | | $ | 5 | | | $ | 1,801 | |
Accretion of redeemable preferred stock and preferred stock dividends | | | (104 | ) | | | (3 | ) | | | (201 | ) | | | (46 | ) | | | (150 | ) |
Conversion of preferred stock | | | (972 | ) | | | — | | | | (83 | ) | | | — | | | | — | |
Participation rights of preferred stock in undistributed earnings | | | — | | | | — | | | | (205 | ) | | | — | | | | (511 | ) |
| | | | | | | | | | | | | | | | | | | | |
Numerator for basic net income (loss) per common share | | | (2,348 | ) | | | (1,568 | ) | | | 440 | | | | (41 | ) | | | 1,140 | |
Adjustment for interest, net of income tax effect | | | — | | | | — | | | | — | | | | — | | | | 59 | |
Preferred stock dividends and participation rights of preferred stock | | | — | | | | — | | | | 406 | | | | 46 | | | | 661 | |
| | | | | | | | | | | | | | | | | | | | |
Numerator for diluted net income per common share | | $ | (2,348 | ) | | $ | (1,568 | ) | | $ | 846 | | | $ | 5 | | | $ | 1,860 | |
| | | | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 6,470,413 | | | | 8,524,012 | | | | 9,080,461 | | | | 9,002,919 | | | | 10,711,695 | |
Weighted-average effect of preferred stock, restricted stock, convertible notes and assumed conversion of stock options and warrants | | | — | | | | — | | | | 7,352,186 | | | | 6,662,801 | | | | 9,070,513 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares and common share equivalents outstanding | | | 6,470,413 | | | | 8,524,012 | | | | 16,432,647 | | | | 15,665,720 | | | | 19,782,208 | |
| | | | | | | | | | | | | | | | | | | | |
For fiscal 2005 and 2006, the Company did not adjust for the conversion or exercise affect of preferred stock, restricted stock or common share equivalents or the issuance of shares exercised with non-recourse loans, as the impact would be anti-dilutive due to the Company’s losses.
The following table indicates the number of potentially dilutive securities as of each period:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | March 31, | | September 30, | |
| | | | June 30, | | | 2005 | | 2006 | | 2007 | | 2006 | | 2007 | |
| | March 31, | | (unaudited) | | | | | | | | | (Unaudited) | |
| | 2005 | | 2006 | | 2007 | | 2006 | | 2007 | |
Series A preferred | | 20,000 | | 20,000 | | — | | 20,000 | | — | | | | 20,000 | | | | 20,000 | | | | — | | | | 20,000 | | | | — | |
Series B preferred | | 2,234,400 | | 2,847,400 | | 2,989,830 | | 2,989,830 | | 2,989,830 | | | | 2,234,400 | | | | 2,847,400 | | | | 2,989,830 | | | | 2,989,830 | | | | 2,989,830 | |
Series C redeemable preferred | | — | | — | | 1,818,182 | | — | | 1,818,182 | | | | — | | | | — | | | | 1,818,182 | | | | — | | | | 1,818,182 | |
Convertible notes | | | | — | | | | — | | | | — | | | | — | | | | 2,360,802 | |
Common stock subject to non-recourse shareholder notes receivable | | — | | — | | 2,150,000 | | — | | 2,150,000 | | | | — | | | | — | | | | 2,150,000 | | | | — | | | | — | |
Common stock options | | 6,412,108 | | 6,394,730 | | 4,714,547 | | 6,605,550 | | 4,712,077 | | | | 6,412,108 | | | | 6,394,730 | | | | 4,714,547 | | | | 6,608,532 | | | | 4,742,909 | |
Common stock warrants | | 1,064,314 | | 1,098,574 | | 1,109,390 | | 1,097,908 | | 954,390 | | | | 1,064,314 | | | | 1,098,574 | | | | 1,109,390 | | | | 1,096,908 | | | | 778,322 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | 9,730,822 | | 10,360,704 | | 12,781,949 | | 10,713,288 | | 12,624,479 | | | | 9,730,822 | | | | 10,360,704 | | | | 12,781,949 | | | | 10,715,270 | | | | 12,690,045 | |
| | | | | | | | | | | | | | | | | | | | | | |
F-16
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk and Other Risks and Uncertainties
The Company’s cash is deposited with one major financial institution. At times, deposits in this institution exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances.
The Company currently depends on one supplier for a number of components necessary for its products, including ballasts and lamps. If the supply of these components were to be disrupted or terminated, or if this supplier were unable to supply the quantities of components required, the Company may have short-term difficulty in locating alternative suppliers at required volumes. Purchases from this supplier accounted for 18%, 14% and 26% of cost of revenue in fiscal 2005, 2006 and 2007.
F-14
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2005, 2006 and 2007, there were no customers who individually accounted for greater than 10% of revenue. For the threesix months ended JuneSeptember 30, 2007 (unaudited), one customer accounted for 20% of revenue.
No customers accounted for more than 10% of the accounts receivable balance as of March 31, 2006. Two customers, individually, each accounted for 11% of the accounts receivable balance as of March 31, 2007. One customer accounted for 23%18% of accounts receivable as of JuneSeptember 30, 2007 (unaudited).
Segment Information
The Company has determined that it operates in only one segment in accordance with SFAS 131,Disclosures about Segments of an Enterprise and Related Information, as it does not disaggregate profit and loss information on a segment basis for internal management reporting purposes to its chief operating decision maker.
The Company’s revenue and long-lived assets outside the United States are insignificant.
Adoption of FIN 48 (unaudited)
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes –— an Interpretation of FASB Statement No. 109, (FIN 48), which became effective for the Company on April 1, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of FIN 48 resulted in an increase of the Company’s accumulated deficit of $210,000 at June 30,April 1, 2007 (unaudited). As of the adoption date, the balance of gross unrecognized tax benefits was $1.6 million, $370,000 of which would impact our effective tax rate if recognized. Of this amount, $60,000 and $310,000 were recorded as current and deferred tax liabilities. The remaining amount of unrecognized tax benefits of $1.2 million relates to net operating loss carryforwards deductions created by the exercise of non-qualified stock options. The benefit from the net operating losses created from these expenses will be recorded as a reduction in taxes payable and a credit to additional paid-in capital in the period in which the benefits are realized. The Company first recognizes tax benefits from current period stock option expenses against current period income. The remaining current period income is offset by net operating losses under the tax law ordering approach. Under this approach, the Company will utilize the net operating losses from stock option expenses last. For the six months ended September 30, 2007, the amount of the unrecognized tax benefits did not materially change asdecreased by $450,000 to $1.2 million due to the utilization of June 30, 2007.unrecognized tax benefits from stock option expenses. It is expected that the amount of unrecognized tax benefits may change in the next 12 months; however, quantificationmonths if the Company generates sufficient taxable income to realize some or all of suchthe $750,000 unrecognized tax benefits for stock option expenses. The remaining $400,000 of gross unrecognized tax benefits is comprised of $300,000 for expenses that may not be deductible for Federal income tax purposes and $100,000 for potential State income tax liabilities. The Company does not expect any of
F-17
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these amounts to change cannot be estimated.in the next twelve months as none of the issues is currently under examination, the statutes of limitations do not expire within the period, and the Company is not aware of any pending legislation. The Company recognizes penalties and interest related to uncertain tax liabilities in income tax expense. Penalties and interest are immaterial as of the date of adoption and are included in unrecognized tax benefits. Due to the existence of net operating loss and credit carryforwards, all years since 2000 are open to examination by tax authorities.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157,Fair Value Measurement. SFAS 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value in FAAP more consistent and comparable. SFAS 157 also requires expanded disclosures about the extent to which fair value measures impact earnings. SFAS 157 is effective for years beginning after November 15, 2007. The Company is currently evaluating the potential effect of SFAS 157 on its financial statements.
On February 15, 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities.Liabilities. Under this standard, the Company may elect to report financial instruments and certain other items at fair value on acontract-by-contract basis with changes in value reported in earnings. This election would be irrevocable. SFAS 159 is effective for years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 will have on its financial statements.
In June 2006, the FASB ratified EITF IssueNo. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and
F-15
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis.EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITFIssue 06-3 had no impact on the Company’s financial statements as the Company’s revenue has historically been, and will continue to be, presented net of sales taxes.
In June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.07-3,Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, orEITF 07-3. This requires that nonrefundable advance payments for future research and development activities be deferred and capitalized.EITF 07-3 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2007. The company is assessing the impact ofEITF 07-3 and has not determined whether it will have a material impact on its results of operations or financial position.
NOTE B — RELATED PARTY TRANSACTIONSReclassifications
Certain reclassifications have been made to the 2005 and 2006 financial statements to conform to the 2007 presentation. These reclassifications do not affect the net earnings as previously reported.
| |
NOTE B — | RELATED PARTY TRANSACTIONS |
As of March 31, 2006 and 2007, the Company had non-interest bearing advances of $55,000 and $157,000, respectively, to a shareholder, and also held an unsecured, 1.46% note receivable due from the same shareholder in the amounts of $66,000 and $67,000, including interest receivable. These advances and this note were repaid subsequent to June 30, 2007. During 2006 and 2007, the Company forgave $37,000 and $37,000, of shareholder advances as part of a contractual employment relationship. The amount forgiven for the threesix months ending Juneended September 30, 2007 (unaudited) was $9,000.$37,000.
The Company incurred fees of $146,000, $110,000 and $78,000, which were paid to a shareholder as consideration for guaranteeing notes payable and certain accounts payable during 2005, 2006 and 2007.
F-18
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These fees were based on a percentage applied to the monthly outstanding balances or revolving credit commitments. These guarantees were released subsequent to June 30,March 31, 2007.
The Company leases, on amonth-to-month basis, an aircraft owned by an entity controlled by an officer and shareholder. Amounts paid during fiscal 2005, 2006 and 2007 were $94,000, $107,000 and $102,000. Amounts paid for the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited) were $37,000$39,000 and $16,000.
The Company held a recourse note receivable in the amount of $375,000 at March 31, 2006 and 2007 and held various non-recourse note receivablesnotes receivable in the amount of $1,753,125$1.8 million at March 31, 2007. These notes were entered into in connection with the exercise of stock option grants by certain directors and or officers of the Company. These notes were repaid subsequent to June 30,March 31, 2007.
During fiscal 2005, 2006 and 2007, the Company recorded revenue of $209,996, $90,639$210,000, $91,000 and $31,767$32,000 for products and services sold to a entity for which the Company’s Chairman of the Board was the executive chairman.
NOTE C — LONG-TERM DEBT
Long-term debt as of March 31, 2006 and 2007 and JuneSeptember 30, 2007 (unaudited) consisted of the following (in thousands):
| | | | | | | | | | | | | |
| | | March 31, | | September 30,
| |
| | | | | | | | | | | | | | 2006 | | 2007 | | 2007 | |
| | March 31, | | June 30, | | | | | | | (Unaudited) | |
| | 2006 | | 2007 | | 2007 (unaudited) | |
Revolving credit agreement | | $ | 4,853 | | $ | 6,064 | | $ | 5,604 | | | $ | 4,853 | | | $ | 6,064 | | | $ | 4,722 | |
Term note | | 1,807 | | 1,629 | | 1,583 | | | | 1,807 | | | | 1,629 | | | | 1,536 | |
First mortgage note payable | | 1,073 | | 1,062 | | 1,059 | | | | 1,073 | | | | 1,062 | | | | 1,057 | |
Debenture payable | | 989 | | 956 | | 948 | | | | 989 | | | | 956 | | | | 939 | |
Lease obligations | | 1,150 | | 850 | | 771 | | | | 1,150 | | | | 850 | | | | 686 | |
Other long-term debt | | 1,212 | | 778 | | 740 | | | | 1,212 | | | | 778 | | | | 701 | |
Stock note payable to former shareholder | | 267 | | — | | — | | | | 267 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total long-term debt | | 11,351 | | 11,339 | | 10,705 | | | | 11,351 | | | | 11,339 | | | | 9,641 | |
Less current maturities | | | (859 | ) | | | (736 | ) | | | (707 | ) | | | (859 | ) | | | (736 | ) | | | (708 | ) |
| | | | | | | | | | | | | | |
Long-term debt, less current maturities | | $ | 10,492 | | $ | 10,603 | | $ | 9,998 | | | $ | 10,492 | | | $ | 10,603 | | | $ | 8,933 | |
| | | | | | | | | | | | | | |
Revolving Credit Agreement
The Company’s $25 million revolving credit agreement has an interest rate of prime plus 1% (effective rate of 9.25% at March 31, 2007), plus annual fees and minimum monthly interest costs. Borrowings under this
F-16
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement are collateralized by accounts receivable and inventory. Borrowings are limited to a percentage of eligible trade accounts receivables and inventories. As of March 31, 2007, remaining availability under the formula borrowing base computation was approximately $4.6 million. The credit agreement contains certain restrictive covenants, principally for minimum net worth, net income and limits on capital expenditures. In addition, the agreement precludes the payment of dividends on our common stock. The Company was in compliance with these covenants, as amended, as of March 31, 2007 and JuneSeptember 30, 2007 (unaudited). The credit agreement expires December 23, 2008 at which time all unpaid amounts owed under the agreement are due.
Term Note
The Company’s term note requires principal and interest payments of $25,000 per month payable through February 2014 at an interest rate of 6.9%. Amounts outstanding under the note are secured by a first security interest and first mortgage in certain long-term assets and a secondary interest in inventory and accounts receivable and a secondary general business security agreement on all assets. In addition, the agreement precludes the payment of dividends on our common stock. Amounts outstanding under the note are 75% guaranteed by the United States Department of Agriculture Rural Development
F-19
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Association and a personal guarantee of a shareholder, which was released subsequent to June 30,March 31, 2007.
First Mortgage Note Payable
The Company’s first mortgage has an interest rate of prime plus 2% (effective rate of 10.25%9.75% at March 31,September 30, 2007) and requires monthly payments of principal and interest of $10,000 through September 2014. The mortgage is secured by a first mortgage on the Company’s manufacturing facility and a personal guarantee of a shareholder which was released subsequent to June 30,March 31, 2007. The mortgage includes certain prepayment penalties and various restrictive covenants, with which the Company was in compliance as of March 31, 2007.
Debenture Payable
The Company’s debenture payable was issued by Certified Development Company at an effective interest rate of 6.18%. The balance is payable in monthly principal and interest payments of $8,000 through December 2024 and is guaranteed by United States Small Business Administration 504 program. The amount due is collateralized by a second mortgage on manufacturing facility and personal guarantee of a shareholder, which was released subsequent to June 30,March 31, 2007.
Lease Obligations
The Company’s capital lease obligations have been recorded at rates of 6.5% to 16.2%. The leases are payable in installments through February 2010 and are collateralized by related equipmentequipment.
Other Long-term Debt
Other long-term debt consists of block grants and equipment loans from local governments. Interest rates range from 2%2.0% to 2.9%. The amounts due are collateralized by purchase money security interests in plant equipment and a personal guarantee of a shareholder, which was released subsequent to June 30,March 31, 2007. Repayment of up to $250,000 may be forgiven beginning in 2010 if the Company is able to create certain types and numbers of jobs within the lending localities.
As of March 31, 2007, aggregate maturities of long-term debt, excluding the line of credit, were as follows (in thousands):
| | | | |
Fiscal 2008 | | $ | 736 | |
Fiscal 2009 | | | 750 | |
Fiscal 2010 | | | 705 | |
Fiscal 2011 | | | 509 | |
Fiscal 2012 | | | 491 | |
Thereafter | | | 2,084 | |
| | | | |
| | $ | 5,275 | |
| | | | |
NOTE D — CONVERTIBLE NOTES
In August 2007, the Company issued $10.6 million of convertible subordinated notes, maturing in August 2012 and bearing interest at 6% per annum with no scheduled principal payments prior to maturity. The 6% interest accrues at 2.1% payable in cash on a quarterly basis and 3.9% which accretes to the principal balance of the convertible notes on a quarterly basis.
The convertible notes contain terms and conditions, including: (i) automatic conversion into 2,360,802 shares of our common stock upon a qualified public offering, (ii) various registration rights with respect to the shares of our common stock received upon conversion of the notes and (iii) a requirement for the Company to reserve an equal number of shares of its authorized common stock to satisfy the conversion obligation.
F-17
F-20
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
Fiscal 2008 | | $ | 736 | |
Fiscal 2009 | | | 750 | |
Fiscal 2010 | | | 705 | |
Fiscal 2011 | | | 509 | |
Fiscal 2012 | | | 491 | |
Thereafter | | | 2,084 | |
| | | |
| | $ | 5,275 | |
| | | |
NOTE DE — INCOME TAXES
The total provision (benefit) for income taxes consists of the following for the fiscal years ending (in thousands):
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | March 31, | |
| | March 31, | | | | | 2005 | | 2006 | | 2007 | |
| | 2005 | | 2006 | | 2007 | |
Current | | $ | — | | $ | 160 | | $ | 438 | | | $ | — | | | $ | 160 | | | $ | 438 | |
Deferred | | | (740 | ) | | | (922 | ) | | | (213 | ) | | | (740 | ) | | | (922 | ) | | | (213 | ) |
| | | | | | | | | | | | | | |
| | | $ | (740 | ) | | $ | (762 | ) | | $ | 225 | |
| | $ | (740 | ) | | $ | (762 | ) | | $ | 225 | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | 2005 | | 2006 | | 2007 | |
| | 2005 | | 2006 | | 2007 | |
Federal | | | (628 | ) | | $ | (517 | ) | | $ | 295 | | | $ | (628 | ) | | $ | (517 | ) | | $ | 295 | |
State | | | (112 | ) | | | (245 | ) | | | (70 | ) | | | (112 | ) | | | (245 | ) | | | (70 | ) |
| | | | | | | | | | | | | | |
| | | $ | (740 | ) | | $ | (762 | ) | | $ | 225 | |
| | $ | (740 | ) | | $ | (762 | ) | | $ | 225 | | | | | | | | |
| | | | | | | | |
A reconciliation of the statutory federal income tax rate and effective income tax rate is as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | Fiscal Year Ended March 31, | |
| | Fiscal year ended March 31, | | 2005 | | 2006 | | 2007 | |
| | 2005 | | 2006 | | 2007 |
Statutory federal tax rate | | | (34.0 | )% | | | (34.0 | )% | | | 34.0 | % | | | (34.0 | )% | | | (34.0 | )% | | | 34.0 | % |
State taxes, net | | | (5.4 | %) | | | (5.5 | )% | | | 7.9 | % | | | (5.4 | )% | | | (5.5 | )% | | | 7.9 | % |
Stock based compensation expense | | | 0.0 | % | | | 9.6 | % | | | 3.9 | % | | | 0.0 | % | | | 9.6 | % | | | 3.9 | % |
Federal tax credit | | | 0.0 | % | | | (3.2 | )% | | | (13.3 | )% | | | 0.0 | % | | | (3.2 | )% | | | (13.3 | )% |
State tax credit | | | 0.0 | % | | | (5.8 | )% | | | (16.5 | )% | | | 0.0 | % | | | (5.8 | )% | | | (16.5 | )% |
Change in tax contingency reserve | | | 0.0 | % | | | 8.9 | % | | | 0.0 | % | | | 0.0 | % | | | 8.9 | % | | | 0.0 | % |
Other, net | | | 2.6 | % | | | (2.7 | )% | | | 3.5 | % | | | 2.6 | % | | | (2.7 | )% | | | 3.5 | % |
| | | | | | | | | | | | | | |
Effective income tax rate | | | (36.8 | )% | | | (32.7 | )% | | | 19.5 | % | | | (36.8 | )% | | | (32.7 | )% | | | 19.5 | % |
| | | | | | | | | | | | | | |
The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate of 34% due primarily to nondeductible stock based compensation expenses, state development zone tax credits granted, research and development credits and the effect of state income taxes. For the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited) the effective income tax rate was 19% and 39%42%.
The net deferred tax assets reported in the accompanying consolidated financial statements include the following components (in thousands):
| | | | | | | | | |
| | | | | | | | | | March 31, | |
| | March 31, | | | 2006 | | 2007 | |
| | 2006 | | 2007 | |
Federal and state operating loss carryforwards | | $ | 1,346 | | $ | 857 | | | $ | 1,346 | | | $ | 857 | |
Tax credit carryforwards | | 292 | | 702 | | | | 292 | | | | 702 | |
Inventory | | 162 | | 192 | | | | 162 | | | | 192 | |
Fixed assets | | | (24 | ) | | 252 | | | | (24 | ) | | | 252 | |
Accruals and reserves | | 181 | | 149 | | | | 181 | | �� | | 149 | |
Other | | 176 | | 258 | | | | 176 | | | | 258 | |
| | | | | | | | | | |
Total deferred tax assets | | 2,133 | | 2,410 | | | | 2,133 | | | | 2,410 | |
Deferred tax liabilities | | | (107 | ) | | | (158 | ) | | | (107 | ) | | | (158 | ) |
| | | | | | | | | | |
Net deferred tax assets | | $ | 2,026 | | $ | 2,252 | | | $ | 2,026 | | | $ | 2,252 | |
| | | | | | | | | | |
F-18
F-21
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2007, the Company had net operating loss carryforwards of approximately $5.1 million for both federal and state. Included in the $5.1 million loss carryforwards are carryforward deductions of $3.0 million of expenses that are associated with the exercise of non-qualified stock options that have not yet been recognized by the Company in its financial statements. The benefit from the net operating losses created from these expenses will be recorded as a reduction in taxes payable and a credit to additional paid-in capital in the period in which the benefits are realized. The Company also has federal and state tax credit carryforwards of approximately $296,000 and $406,000 as of March 31, 2007. Both the net operating losses and tax credit carryforwards expire between 2016 and 2027. The Company believes that past issuances and transfers of our stock caused an ownership change in fiscal 2007 that may affect the timing of the use of its net operating loss carryforwards, but the Company does not believe the ownership change affects the use of the full amount of the net operating loss carryforwards. As a result, the Company’s ability to use its net operating loss carryforwards attributable to the period prior to such ownership change to offset taxable income will be subject to limitations in a particular year, which could potentially result in increased future tax liability for the Company.
A valuation allowance against deferred tax assets has not been provided as management believes that it is more likely than not that the deferred tax assetsCompany will be fully realized.realize the benefits of these assets. The factors included in this assessment were (i) the Company’s recognition of income before taxes of $1.2$3.1 million infor the threesix months ended JuneSeptember 30, 2007 and fiscal 2007:2007; (ii) the anticipated fiscal 2008 revenue growth due to the backlog of orders as of JuneSeptember 30, 2007 and (iii) previous profitability in fiscal 2003 and 2004 that preceded the Company’s planned efforts in fiscal 2005 and 2006 to increase manufacturing capacity and sales and marketing effortefforts to increase revenue. Accordingly, a deferred tax asset valuation allowance has not been recorded.
NOTE E — COMMITMENTS AND CONTINGENCIES
| |
NOTE F — | COMMITMENTS AND CONTINGENCIES |
The Company leases vehicles and equipment under operating leases. Rent expense under operating leases was $62,000, $107,000 and $413,000 for fiscal 2005, 2006 and 2007; and $31,000$67,000 and $245,000$443,000 for the threesix months ended JuneSeptember 30, 2006 and 2007 (unaudited). Total annual commitments under non-cancelable operating leases with terms in excess of one year at March 31, 2007 are as follows (in thousands):
| | | | |
2008 | | $ | 853 | |
2009 | | | 211 | |
2010 | | | 201 | |
2011 | | | 159 | |
2012 | | | 79 | |
In addition, the Company enters into non-cancellable purchase commitments for certain inventory items and capital expenditure commitments in order to secure better pricing and ensure materials on hand. As of March 31, 2007, the Company had entered into $3.0 million of purchase commitments related to fiscal 2008.
The Company sponsors a tax deferred retirement savings plan that permits eligible employees to contribute varying percentages of their compensation up to the limit allowed by the Internal Revenue Service. This plan also provides for discretionary Company contributions. In fiscal 2007, the Company made matching contributions totaling approximately $7,000. No contributions were made in fiscal 2005 and 2006.
NOTE F —
| |
NOTE G — | TEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY |
Stock Split
Stock Split
On March 23, 2006, the Company declared a 2 for 1 stock split to shareholders of record as of April 1, 2006. All share and per share amounts have been restated to reflect the stock split.
F-22
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C Redeemable Preferred Stock
In August and September 2006, the Company sold an aggregate 1,818,182 shares of Series C redeemable preferred stock to institutional investors for total proceeds of approximately $4.8 million, net of offering costs of $245,000. As of March 31, 2007, 2,000,000 shares of authorized preferred stock had been reserved for Series C. The terms of the Series C preferred stock provide for:
| | |
| • | | senior rank to other classes and series of stock with respect to the payment of dividends and proceeds upon liquidation |
|
| • | | entitlement to receive cumulative dividends accruing at a non compounded annual rate of 6% upon the occurrence of certain events (accumulated dividends through March 31, 2007 and JuneSeptember 30, 2007 (unaudited) were $198,000 and $273,000)$348,000) |
F-19
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| • | | liquidation preference equal to the purchase price plus any accumulated dividends |
|
| • | | conversion into common stock at aone-to-one ratio upon certain qualifying exit events resulting in net proceeds to the Company of at least $30 million (upon conversion in a qualifying event, all rights related to accrued and unpaid dividends would be extinguished) |
|
| • | | weighted average dilution protection for any issuance of stock or other equity instruments (other than for stock options granted under existing stock plans) at a price per share less than the Series C purchase price of $2.75 |
|
| • | | proportional adjustment of the number of shares of common stock into which one share of Series C preferred stock may be converted in the event of stock splits, stock dividends reclassifications and similar events |
|
| • | | a redemption feature at the option of the holder, including accumulated dividends, if certain liquidity events are not achieved within five years from issuance |
|
| • | | right to vote with common stock on all matters submitted to a vote of shareholders |
Due to the nature of the redemption feature and other provisions, the Company has classified the Series C redeemable preferred stock as temporary equity. The carrying value is being accreted to its redemption value over a period of five years at a non-compounded rate of 6%.
Series B Preferred Stock
From October 2004 through June 2006, the Company completed various private placements of Series B preferred stock for net proceeds in fiscal 2005, 2006 and 2007 of $3.5 million, $1.4 million and $400,000. Proceeds were net of direct offering costs of $398,000 and $81,000 and zero in fiscal 2005, 2006 and 2007. The Series B placements consisted of one share of Series B preferred stock and, in certain placements, a warrant to purchase one-third share of common stock for $2.30 per share expiring at various dates through January 2010. The terms of the Series B preferred stock provide for:
| | |
| • | | a liquidation preference equal to the purchase price of the Series B shares |
|
| • | | automatic conversion to common stock at aone-to-one ratio upon registration of the common stock under a 1933 Act registration |
|
| • | | no dividend preference |
|
| • | | right to vote with common stock on all matters submitted to a vote of shareholders |
For the Series B transactions where common stock warrants were issued, the value of the warrants issued to the placement agent was recorded as additional paid-in capital.
F-23
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series A Preferred Stock
In December 2004, the Company offered its Series A 12% preferred shareholders the opportunity to exchange each share of their Series A preferred stock for three shares of the Company’s common stock. The Series A preferred stock carried a liquidation preference over the common stock and a cumulative 12% dividend and, prior to the December conversion offer, a conversion entitling each share of the Series A preferred stock the right to convert into two shares of common stock feature. Under the guidance provided in SFAS 84,Induced Conversions of Convertible Debt, the Company determined that the increase in conversion ratio from 2 to 3 was an inducement offer and accounted for the change in conversion ratio as an increase to paid-in capital and a charge to accumulated deficit. Furthermore, the historical carrying value of the Series A preferred was reclassified to paid-in capital at the time of conversion.
As of March 31, 2005, all but 20,000 shares of Series A preferred stock had been converted. The remaining 20,000 shares were converted in March 2007. The amount assigned to the inducement, calculated using the number of additional common shares offered multiplied by the estimated fair market value of common stock at the time of conversion, was $972,000 for fiscal 2005 and $83,000 for fiscal 2007.
F-20
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTreasury Stock
Treasury Stock
Effective June 30, 2004, the Company entered into a lawsuit settlement agreement and stock redemption note payable to a former independent sales representative and shareholder. The settlement of $500,000 consisted of a $450,000 four-year note payable bearing interest at 5.84% and $50,000 cash. As part of the settlement, the shareholder agreed to redeem to treasury 61,864 shares of common stock and 64,000 shares of Series A preferred stock, relinquishing all rights to the Series A 12% cumulative dividend preference and Series A liquidation preference. The shares were pledged to secure repayment of the stock note payable. Such note was repaid in March 2007, including accrued interest at 6%, and the pledged shares were retired.
The $500,000 cost of the settlement was allocated $345,000 to treasury stock and $155,000 to commission expense based on the fair value of the shares acquired as part of the settlement.
Shareholder receivables
In fiscal 2006, the Company issued to a director a note receivable with recourse, totaling $375,000, to purchase 400,000 shares of common stock by exercise of fully vested non-qualified stock options. The note matures in November 2012 or earlier upon notice from the Company and bears interest at 4.23% payable annually in cash or stock.
The interest rate was deemed to be a below market rate on issuance and in accordance withEITF 00-23,Issues related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, the Company recorded additional compensation expense of $525,000 in fiscal 2006. This amount represents the appreciation of the fair value of the Company’s stock from the time of the option grant through the issuance of the recourse note.
In fiscal 2007, the Company issued $1,753,000 of notes receivable to officers to purchase 2,150,000 shares of common stock by exercise of fully vested non-qualified stock options. The notes mature in March 2012 or earlier upon notice from the Company and bear interest at 7.65% payable annually in cash or stock. As the notes are repaid, and interest collected, interest received will be credited to compensation expense. For accounting purposes, the notes are considered non-recourse and therefore, the options are not deemed exercised until the note is paid. Accordingly, the common stock is not considered issued for accounting purposes until the Company has received payment of the notes.
All notes receivable that had been issued to directors and officers of the Company were repaid in full either in cash or by tendering shares subsequent to June 30,March 31, 2007.
F-24
NOTE G — STOCK OPTIONSORION ENERGY SYSTEMS, INC. AND WARRANTSSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July and August 2007, all director and shareholder notes and advances, along with accrued interest, were settled, either in cash or with shares. Total principal payments were $985,800 and shares tendered totaled 306,932. Concurrent with the above transaction, the Company issued 306,932 non-qualifying stock options with a fair value exercise price of $4.49. In accordance with SFAS 123(R) the Company will recognize stock-based compensation expense with respect to such grants of $224,000 in fiscal 2008 and $127,000 in fiscal 2009.
| |
NOTE H — | STOCK OPTIONS AND WARRANTS |
The Company grants stock options under its 2003 Stock Option and 2004 Equity Incentive Plans (the Plans). Under the terms of the Plans, the Company has reserved 9,000,000 shares for issuance to key employees, consultants and directors. The options generally vest and become exercisable ratably over five years although longer vesting periods have been used in certain circumstances. The options are contingent on the employees’ continued employment and are subject to forfeiture if employment terminates for any reason. In the past, we have granted both incentive stock options and non-qualified stock options. The Plans also provide to certain employees accelerated vesting in the event of certain changes of control of the Company.
As a result of the adoption of SFAS 123(R) in fiscal 2007, the following amounts of stock-based compensation were recorded (in thousands):
F-21
| | | | | | | | | | | | |
| | Fiscal Year Ended
| | | Six Months Ended September 30, | |
| | March 31, 2007 | | | 2006 | | | 2007 | |
| | | | | (unaudited) | |
|
Cost of product revenue | | $ | 24 | | | $ | 6 | | | $ | 44 | |
General and administrative | | | 154 | | | | 58 | | | | 380 | |
Sales and marketing | | | 153 | | | | 50 | | | | 110 | |
Research and development | | | 32 | | | | 9 | | | | 16 | |
| | | | | | | | | | | | |
| | $ | 363 | | | $ | 123 | | | $ | 550 | |
| | | | | | | | | | | | |
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | |
| | | | | | Three months ended June 30, | |
| | Fiscal year ended | | | (unaudited) | |
| | March 31, 2007 | | | 2006 | | | 2007 | |
Cost of revenue | | $ | 24 | | | $ | 3 | | | $ | 21 | |
General and administrative | | | 154 | | | | 29 | | | | 65 | |
Sales and marketing | | | 153 | | | | 21 | | | | 52 | |
Research and development | | | 32 | | | | 5 | | | | 8 | |
| | | | | | | | | |
| | $ | 363 | | | $ | 58 | | | $ | 146 | |
| | | | | | | | | |
In fiscal 2005 and 2006, in accordance with APB No. 25, the Company recognized stock-based compensation of none and $558,000.
The number of shares available for grant under the plans were as follows:
| | | | |
Available at March 31, 2004 | | | 1,077,200 | |
Amendment to plan | | | 2,000,000 | |
Granted | | | (599,000 | ) |
Forfeited | | | 27,000 | |
| | | | |
Available at March 31, 2005 | | | 2,505,200 | |
Granted | | | (735,000 | ) |
Forfeited | | | 278,000 | |
| | | | |
Available at March 31, 2006 | | | 2,048,200 | |
Granted | | | (1,657,500 | ) |
Forfeited | | | 280,000 | |
| | | | |
Available at March 31, 2007 | | | 670,700 | |
Granted (unaudited) | | | (50,000479,432 | ) |
Forfeited (unaudited) | | | 26,00033,000 | |
| | | | |
Available at JuneSeptember 30, 2007 (unaudited) | | | 646,700224,268 | |
| | | | |
F-25
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companyoptions granted options to purchase 1,657,500 shares of common stock during fiscal 2007 and 50,000 shares of common stock during the threesix months ended JuneSeptember 30, 2007 (unaudited), are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Number of
| | | | Fair Value
| | | |
| | Number of | | | | Fair value | | | | Options Granted | | Exercise Price | | Estimate Per Share | | Intrinsic Value | |
| | options granted | | Exercise price | | estimate per share | | Intrinsic value |
April 2006 | | 40,000 | | $ | 2.25- 2.50 | | $ | 2.20 | | $ | — | | | | 40,000 | | | $ | 2.25-2.50 | | | $ | 2.20 | | | $ | — | |
May 2006 | | 40,000 | | 2.50 | | 2.20 | | — | | | | 40,000 | | | | 2.50 | | | | 2.20 | | | | — | |
June 2006 | | 150,000 | | 2.50 | | 2.20 | | — | | | | 150,000 | | | | 2.50 | | | | 2.20 | | | | — | |
July 2006 | | 27,000 | | 2.50 | | 2.20 | | — | | | | 27,000 | | | | 2.50 | | | | 2.20 | | | | — | |
August 2006 | | 5,000 | | 2.50 | | 2.20 | | — | | | | 5,000 | | | | 2.50 | | | | 2.20 | | | | — | |
September 2006 | | 2,000 | | 2.75 | | 2.20 | | — | | | | 2,000 | | | | 2.75 | | | | 2.20 | | | | — | |
October 2006 | | 2,000 | | 2.75 | | 2.20 | | — | | | | 2,000 | | | | 2.75 | | | | 2.20 | | | | — | |
November 2006 | | 35,000 | | 2.75 | | 2.20 | | — | | | | 35,000 | | | | 2.75 | | | | 2.20 | | | | — | |
December 2006 | | 920,000 | | 2.20 | | 2.20 | | — | | | | 920,000 | | | | 2.20 | | | | 2.20 | | | | — | |
March 2007 | | 436,500 | | 2.20 | | 4.15 | | 851,000 | | | | 436,500 | | | | 2.20 | | | | 4.15 | | | | 851,000 | |
April 2007 (unaudited) | | 50,000 | | 2.20 | | 4.15 | | 98,000 | | | | 50,000 | | | | 2.20 | | | | 4.15 | | | | 98,000 | |
July 2007 (unaudited) | | | | 429,432 | | | | 4.49 | | | | 4.49 | | | | — | |
The following table summarizes information with respect to outstanding stock options:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | March 31,
| | | | | | March 31,
| | | | | | March 31,
| | | | | | September 30,
| | | | | | September 30,
| |
| | | | | 2005 | | | | | | 2006 | | | | | | 2007 | | | | | | 2006 | | | | | | 2007 | |
| | | | | Weighted
| | | | | | Weighted
| | | | | | Weighted
| | | | | | Weighted
| | | | | | Weighted
| |
| | | | | Average
| | | | | | Average
| | | | | | Average
| | | | | | Average
| | | | | | Average
| |
| | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| |
| | Options | | | Price | | | Options | | | Price | | | Options | | | Price | | | Options | | | Price | | | Options | | | Price | |
| | | | | | | | | | | | | | | | | | | | | | | (Unaudited) | | | | | | (Unaudited) | |
|
Outstanding, beginning of period | | | 5,922,800 | | | $ | .89 | | | | 6,412,108 | | | $ | 1.02 | | | | 6,394,730 | | | $ | 1.06 | | | | 6,394,730 | | | $ | 1.06 | | | | 4,714,547 | | | $ | 1.56 | |
Granted | | | 599,000 | | | | 2.24 | | | | 735,000 | | | | 1.87 | | | | 1,657,500 | | | | 2.26 | | | | 264,000 | | | | 2.50 | | | | 479,432 | | | | 4.39 | |
Exercised | | | (82,692 | ) | | | .82 | | | | (474,378 | ) | | | .91 | | | | (3,057,683 | ) | | | .84 | | | | (42,198 | ) | | | 0.69 | | | | (418,070 | ) | | | 1.33 | |
Forfeited | | | (27,000 | ) | | | 1.16 | | | | (278,000 | ) | | | 2.09 | | | | (280,000 | ) | | | 2.25 | | | | (8,000 | ) | | | 2.25 | | | | (33,000 | ) | | | 2.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding, end of period | | | 6,412,108 | | | $ | 1.02 | | | | 6,394,730 | | | $ | 1.06 | | | | 4,714,547 | | | $ | 1.56 | | | | 6,608,532 | | | $ | 1.12 | | | | 4,742,909 | | | $ | 1.85 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted | | $ | 0.48 | | | | | | | $ | 1.54 | | | | | | | $ | 1.35 | | | | | | | $ | 1.27 | | | | | | | $ | 3.20 | | | | | |
F-22
F-26
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | March 31, 2005 | | | | | | | March 31, 2006 | | | | | | | March 31, 2007 | | | | | | | June 30, 2006 | | | | | | | June 30, 2007 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (unaudited) | | | | | | | (unaudited) | |
| | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | |
| | | | | | average | | | | | | | average | | | | | | | average | | | | | | | average | | | | | | | average | |
| | | | | | exercise | | | | | | | exercise | | | | | | | exercise | | | | | | | exercise | | | | | | | exercise | |
| | Options | | | price | | | Options | | | price | | | Options | | | price | | | Options | | | price | | | Options | | | price | |
Outstanding, beginning of period | | | 5,922,800 | | | $ | .89 | | | | 6,412,108 | | | $ | 1.02 | | | | 6,394,730 | | | $ | 1.06 | | | | 6,394,730 | | | $ | 1.06 | | | | 4,714,547 | | | $ | 1.56 | |
Granted | | | 599,000 | | | | 2.24 | | | | 735,000 | | | | 1.87 | | | | 1,657,500 | | | | 2.26 | | | | 230,000 | | | | 2.50 | | | | 50,000 | | | | 2.20 | |
Exercised | | | (82,692 | ) | | | .82 | | | | (474,378 | ) | | | .91 | | | | (3,057,683 | ) | | | .84 | | | | (19,180 | ) | | | 0.69 | | | | (26,470 | ) | | | 1.03 | |
Forfeited | | | (27,000 | ) | | | 1.16 | | | | (278,000 | ) | | | 2.09 | | | | (280,000 | ) | | | 2.25 | | | | — | | | | — | | | | (26,000 | ) | | | 2.11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding, end of period | | | 6,412,108 | | | $ | 1.02 | | | | 6,394,730 | | | $ | 1.06 | | | | 4,714,547 | | | $ | 1.56 | | | | 6,605,550 | | | $ | 1.10 | | | | 4,712,077 | | | $ | 1.57 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted | | $ | 0.48 | | | | | | | $ | 1.54 | | | | | | | $ | 1.35 | | | | | | | $ | 1.27 | | | | | | | $ | 3.27 | | | | | |
The following table summarizes the range of exercise prices on outstanding stock options at March 31, 2007 and JuneSeptember 30, 2007 (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2007 | | | June 30, 2007 (unaudited) | |
| | | | | | Weighted | | | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | | | | |
| | | | | | average | | | Weighted | | | | | | | | Weighted | | | | | | | average | | | Weighted | | | | | | | | Weighted | |
| | | | | | remaining | | | average | | | | | | | | average | | | | | | | remaining | | | average | | | | | | | | average | |
| | | | | | contractual life | | | exercise | | | | | | | | exercise | | | | | | | contractual life | | | exercise | | | | | | | | exercise | |
Price | | Outstanding | | | (years) | | | price | | | Vested | | | | price | | | Outstanding | | | (years) | | | price | | | | Vested | | | price | |
$ .69 | | | 1,260,627 | | | | 4.1 | | | $ | .69 | | | | 1,260,627 | | | | $ | .69 | | | | 1,240,157 | | | | 3.9 | | | $ | 0.69 | | | | | 1,240,157 | | | $ | .069 | |
.75 - .94 | | | 657,420 | | | | 4.7 | | | | .91 | | | | 571,420 | | | | | .93 | | | | 657,420 | | | | 4.5 | | | | 0.91 | | | | | 575,420 | | | | 0.93 | |
1.24 - 1.50 | | | 512,000 | | | | 6.4 | | | | 1.45 | | | | 352,800 | | | | | 1.45 | | | | 508,000 | | | | 6.1 | | | | 1.45 | | | | | 351,200 | | | | 1.45 | |
2.20 - 2.25 | | | 1,993,500 | | | | 9.1 | | | | 2.22 | | | | 308,800 | | | | | 2.25 | | | | 2,015,500 | | | | 8.8 | | | | 2.22 | | | | | 306,800 | | | | 2.25 | |
2.50 - 2.75 | | | 291,000 | | | | 9.3 | | | | 2.53 | | | | 73,866 | | | | | 2.57 | | | | 291,000 | | | | 9.0 | | | | 2.53 | | | | | 57,200 | | | | 2.51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 4,714,547 | | | | 6.8 | | | $ | 1.56 | | | | 2,567,513 | | | | $ | 1.09 | | | | 4,712,077 | | | | 6.6 | | | $ | 1.57 | | | | | 2,530,777 | | | $ | 1.08 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Aggregate Intrinsic Value | | $ | 12,207,000 | | | | | | | | | | | $ | 7,861,100 | | | | | | | | $ | 12,169,000 | | | | | | | | | | | | $ | 7,772,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2007 | | | September 30, 2007 | |
| | | | | Weighted
| | | | | | | | | | | | | | | Weighted
| | | | | | | | | | |
| | | | | Average
| | | | | | | | | | | | | | | Average
| | | | | | | | | | |
| | | | | Remaining
| | | Weighted
| | | | | | Weighted
| | | | | | Remaining
| | | Weighted
| | | | | | Weighted
| |
| | | | | Contractual
| | | Average
| | | | | | Average
| | | | | | Contractual
| | | Average
| | | | | | Average
| |
| | | | | Life
| | | Exercise
| | | | | | Exercise
| | | | | | Life
| | | Exercise
| | | | | | Exercise
| |
Price | | Outstanding | | | (Years) | | | Price | | | Vested | | | Price | | | Outstanding | | | (Years) | | | Price | | | Vested | | | Price | |
| | | | | | | | | | | | | | | | | (Unaudited) | |
|
$0.69 | | | 1,260,627 | | | | 4.1 | | | $ | 0.69 | | | | 1,260,627 | | | $ | 0.69 | | | | 1,066,557 | | | | 3.6 | | | $ | 0.69 | | | | 1,066,557 | | | $ | 0.69 | |
0.75 – 0.94 | | | 657,420 | | | | 4.7 | | | | 0.91 | | | | 571,420 | | | | 0.93 | | | | 647,420 | | | | 4.2 | | | | 0.91 | | | | 567,420 | | | | 0.93 | |
1.24 – 1.50 | | | 512,000 | | | | 6.4 | | | | 1.45 | | | | 352,800 | | | | 1.45 | | | | 456,000 | | | | 5.7 | | | | 1.48 | | | | 294,400 | | | | 1.50 | |
2.20 – 2.25 | | | 1,993,500 | | | | 9.1 | | | | 2.22 | | | | 308,800 | | | | 2.25 | | | | 1,862,500 | | | | 8.7 | | | | 2.21 | | | | 176,801 | | | | 2.25 | |
2.50 – 2.75 | | | 291,000 | | | | 9.3 | | | | 2.53 | | | | 73,866 | | | | 2.57 | | | | 281,000 | | | | 8.7 | | | | 2.53 | | | | 47,200 | | | | 2.51 | |
4.49 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 429,432 | | | | 9.8 | | | | 4.49 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 4,714,547 | | | | 6.8 | | | $ | 1.56 | | | | 2,567,513 | | | $ | 1.09 | | | | 4,742,909 | | | | 6.8 | | | $ | 1.85 | | | | 2,152,378 | | | $ | 1.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Aggregate Intrinsic Value | | $ | 12,207,000 | | | | | | | | | | | $ | 7,861,100 | | | | | | | $ | 10,927,000 | | | | | | | | | | | $ | 6,714,000 | | | | | |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock at March 31, 2007.
A summary of the status of the Company’s outstanding non-vested stock options as of March 31, 2007 and JuneSeptember 30, 2007 (unaudited), is as follows:
| | | | |
Non-vested at March 31, 2006 | | | 1,334,200 | |
Granted | | | 1,657,500 | |
Vested | | | (579,266 | ) |
Forfeited | | | (265,400 | ) |
| | | | |
Non-vested at March 31, 2007 | | | 2,147,034 | |
Granted (unaudited) | | | 50,000479,432 | |
Vested (unaudited) | | | (5,33418,535 | ) |
Forfeited (unaudited) | | | (10,40017,400 | ) |
| | | | |
Non-vested at JuneSeptember 30, 2007 (unaudited) | | | 2,181,3002,590,531 | |
| | | | |
Unrecognized compensation cost related to non-vested common stock-based compensation as of March 31, 2007 is as follows (in thousands):
| | | | | | | | |
Fiscal 2008 | | $ | 684 | | | $ | 684 | |
Fiscal 2009 | | 678 | | | | 678 | |
Fiscal 2010 | | 576 | | | | 576 | |
Fiscal 2011 | | 504 | | | | 504 | |
Thereafter | | 547 | | | | 547 | |
| | | | | | |
| | $ | 2,989 | | | $ | 2,989 | |
Remaining weighted average expected term | | 3.01 | yrs | | | 3.01 yrs | |
As of JuneSeptember 30, 2007, (unaudited),future compensation costcosts to be recognized related to non-vested common stock-based compensation amountedamount to $3.0$3.5 million over a remaining weighted average expected term just under 3of approximately 4 years.
F-23
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has issued warrants to placement agents in connection with various stock offerings and services rendered. The warrants grant the holder the option to purchase common stock at specified prices for a specified period of time. Warrants issued in fiscal 2005, 2006 and 2007 were treated as
F-27
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
offering costs and valued at $400,000, $30,000, and $18,000. Fiscal 2006 also included warrants valued at $6,000 that were expensed. These warrants were valued using the following assumptions:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | March 31, | |
| | March 31, | | | | 2005 | | 2006 | | 2007 | |
| | 2005 | | 2006 | | 2007 |
Dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
Weighted average risk-free interest rate | | | 4.32 | % | | | 4.35 | % | | | 4.62 | % | | | 4.32 | % | | | 4.35 | % | | | 4.62 | % |
Weighted average contractual term | | 5 years | | 5 years | | 5 years | | | 5 years | | | | 5 years | | | | 5 years | |
Expected volatility | | | 39 | % | | | 50 | % | | | 60 | % | | | 39 | % | | | 50 | % | | | 60 | % |
Outstanding warrants are comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31,
| | | | March 31,
| | | | March 31,
| | | | September 30,
| | | | September 30,
| |
| | March 31, 2005 | | March 31, 2006 | | March 31, 2007 | | June 30, 2006 | | June 30, 2007 | | | | | 2005 | | | | 2006 | | | | 2007 | | | | 2006 | | | | 2007 | |
| | (unaudited) | | (unaudited) | | | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | Weighted
| |
| | Weighted | | Weighted | | Weighted | | Weighted | | Weighted | | | | | Average
| | | | Average
| | | | Average
| | | | Average
| | | | Average
| |
| | average | | average | | average | | average | | average | | | | | Exercise
| | | | Exercise
| | | | Exercise
| | | | Exercise
| | | | Exercise
| |
| | exercise | | exercise | | exercise | | exercise | | exercise | | | Warrants | | Price | | Warrants | | Price | | Warrants | | Price | | Warrants | | Price | | Warrants | | Price | |
| | price | | price | | price | | price | | price | | | | | | | | | | | | | | | | | (Unaudited) | | | | (Unaudited) | |
| | Warrants | | Warrants | | Warrants | | Warrants | | Warrants | |
Outstanding, beginning of period | | 239,766 | | $ | 1.98 | | 1,064,314 | | $ | 2.22 | | 1,098,574 | | $ | 2.24 | | 1,098,574 | | $ | 2.24 | | 1,109,390 | | $ | 2.24 | | | | 239,766 | | | $ | 1.98 | | | | 1,064,314 | | | $ | 2.22 | | | | 1,098,574 | | | $ | 2.24 | | | | 1,098,574 | | | $ | 2.24 | | | | 1,109,390 | | | $ | 2.24 | |
Issued | | 824,548 | | 2.29 | | 45,260 | | 2.47 | | 19,580 | | 2.41 | | — | | — | | — | | — | | | | 824,548 | | | | 2.29 | | | | 45,260 | | | | 2.47 | | | | 19,580 | | | | 2.41 | | | | — | | | | — | | | | — | | | | — | |
Exercised | | — | | — | | | (9,000 | ) | | 1.50 | | | (7,966 | ) | | 1.80 | | | (666 | ) | | 2.30 | | | (155,000 | ) | | 2.25 | | | | — | | | | — | | | | (9,000 | ) | | | 1.50 | | | | (7,966 | ) | | | 1.80 | | | | (1,666 | ) | | | 1.82 | | | | (331,068 | ) | | | 2.25 | |
Cancelled | | — | | — | | | (2,000 | ) | | 1.50 | | | (798 | ) | | 1.50 | | — | | — | | — | | — | | | | — | | | | — | | | | (2,000 | ) | | | 1.50 | | | | (798 | ) | | | 1.50 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Outstanding, end of period | | 1,064,314 | | $ | 2.22 | | 1,098,574 | | $ | 2.24 | | 1,109,390 | | $ | 2.24 | | 1,097,908 | | $ | 2.24 | | 954,390 | | $ | 2.24 | | | | 1,064,314 | | | $ | 2.22 | | | | 1,098,574 | | | $ | 2.24 | | | | 1,109,390 | | | $ | 2.24 | | | | 1,096,908 | | | $ | 2.24 | | | | 778,322 | | | $ | 2.24 | |
| | | | | | | | | | | | | | | | | | | | | | |
A summary of outstanding warrants follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2007 | | | | | March 31,
| | September 30,
| | | |
Exercise price | | March 31, 2007 | | (unaudited) | | Expiration | | |
Exercise Price | | | 2007 | | 2007 | | Expiration | |
| | | | | (Unaudited) | | | |
| |
$1.50 | | 79,236 | | 79,236 | | Fiscal 2012 | | | 79,236 | | | | 67,836 | | | | Fiscal 2012 | |
$2.25 | | 221,480 | | 66,480 | | Fiscal 2014 | | | 221,480 | | | | 66,480 | | | | Fiscal 2014 | |
$2.30 | | 763,914 | | 763,914 | | Fiscal 2010 | | | 763,914 | | | | 599,246 | | | | Fiscal 2010 | |
| | | | |
$2.50 | | 37,260 | | 37,260 | | Fiscal 2011 | | | 37,260 | | | | 37,260 | | | | Fiscal 2011 | |
$2.60 | | 7,500 | | 7,500 | | Fiscal 2012 | | | 7,500 | | | | 7,500 | | | | Fiscal 2012 | |
| | | | | | | | | | |
Total | | 1,109,390 | | 954,390 | | | | 1,109,390 | | | | 778,322 | | | | | |
| | | | | | | | | | |
F-24
F-28
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS![(GRAPHICS)](https://capedge.com/proxy/S-1A/0000950137-07-017934/n17612a4n1761211.gif)
NOTE H — SUBSEQUENT EVENTS
In August 2007, the Company issued $10.6 million of convertible subordinated notes, bearing interest at 6% per annum, to an indirect affiliate of GE Energy Financial Services Inc., Clean Energy Technology Fund II, LP and affiliates of Capvest Venture Fund, LP. The subordinated notes (which we refer to as Convertible Notes) are convertible automatically into 2,360,802 shares of common stock if the Company completes a qualified public offering.
In July and August 2007, all director and shareholder notes and advances, along with accrued interest, were settled, either in cash or with shares. Total principal payments were $985,800 and shares tendered totaled 306,932. Concurrent with the above transaction, the Company issued 306,932 non-qualifying stock options with a fair value exercise price of $4.49. In accordance with SFAS 123(R) the Company will recognize stock-based compensation expense of $224,000 in fiscal 2008 and $127,000 in fiscal 2009.
F-25
Shares
Common Stock
Thomas Weisel Partners LLC
Canaccord Adams
Pacific Growth Equities, LLC
RADICAL IDEAS... ENERGY. SMARTER. |
PART II7,692,308 Shares
Common Stock
Thomas Weisel Partners LLC
Canaccord Adams
Pacific Growth Equities, LLC
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
| |
Item 13. | Other Expenses of Issuance and Distribution. |
The following is a list of estimated expenses in connection with the issuance and distribution of the securities being registered, with the exception of underwriting discounts and commissions:
| | | | |
SEC registration fee | | $ | 3,070 | |
NASD filing fee | | | 10,550 | |
Nasdaq Global Market listing fee | | | * | |
Printing costs | | | * | |
Legal fees and expenses | | | * | |
Accounting fees and expenses | | | * | |
Blue sky fees and expenses | | | * | |
Miscellaneous | | | * | |
| | | |
Total | | $ | * | |
| | | |
| | | | |
SEC registration fee | | $ | 3,803 | |
NASD filing fee | | | 12,935 | |
Nasdaq Global Market listing fee | | | 125,000 | |
Printing costs | | | 300,000 | |
Legal fees and expenses | | | 2,250,000 | |
Accounting fees and expenses | | | 700,000 | |
Blue sky fees and expenses | | | 15,000 | |
D&O insurance premium | | | 240,000 | |
Miscellaneous | | | 353,262 | |
| | | | |
Total | | $ | 4,000,000 | |
| | |
* | | To be completed by amendment |
All of the above expenses except the SEC registration fee and NASD filing fee are estimates. All of the above expenses will be borne by us.
Item 14. Indemnification of Directors and Officers.
| |
Item 14. | Indemnification of Directors and Officers. |
Our amended and restated bylaws, which will become effective upon closing of this offering, provide that, to the fullest extent permitted or required by Wisconsin law, we will indemnify all of our directors and officers, any trustee of any of our employee benefit plans, and person who is serving at our request as a director, officer, employee or agent of another entity, against certain liabilities and losses incurred in connection with these positions or services. We will indemnify these parties to the extent the parties are successful in the defense of a proceeding and in proceedings in which the party is not successful in defense of the proceeding unless, in the latter case only, it is determined that the party breached or failed to perform his or her duties to us and this breach or failure constituted:
| | |
| • | | a willful failure to deal fairly with us or our shareholders in connection with a matter in which the director or officer has a material conflict of interest; |
|
| • | | a violation of criminal law, unless the director or officer had reasonable cause to believe his or her conduct was unlawful; |
|
| • | | a transaction from which the director or officer derived an improper personal profit; or |
|
| • | | willful misconduct. |
Our amended and restated bylaws provide that we are required to indemnify our directors and executive officers and may indemnify our employees and other agents to the fullest extent required or permitted by Wisconsin law. Additionally, our amended and restated bylaws require us under certain circumstances to advance reasonable expenses incurred by a director or officer who is a party to a proceeding for which indemnification may be available.
Wisconsin law further provides that it is the public policy of the State of Wisconsin to require or permit indemnification, allowance of expenses and insurance to the extent required or permitted under
II-1
Wisconsin law for any liability incurred in connection with a proceeding involving a federal or state statute, rule or regulation regulating the offer, sale or purchase of securities.
Under Wisconsin law, a director is not personally liable for breach of any duty resulting solely from his or her status as a director, unless it is proved that the director’s conduct constituted conduct described in the bullet points above. In addition, we intend to obtain directors’ and officers’ liability insurance that will insure against certain liabilities, subject to applicable restrictions.
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The Underwriting Agreement filed herewith as Exhibit 1.1 provides for indemnification of our directors, certain officers and controlling persons by the underwriters against certain civil liabilities, including liabilities under the Securities Act.
In addition, we intend to obtain directors’ and officers’ liability insurance that will insure against certain liabilities, including liabilities under the Securities Act, subject to applicable restrictions.
Item 15. Recent Sales of Unregistered Securities.
| |
Item 15. | Recent Sales of Unregistered Securities. |
From January 1, 2004 through the date of this registration statement, we sold or granted the following securities that were not registered under the Securities Act. The following share numbers give effect to a2-for-1 split of our common stock and preferred stock that was effected on April 1, 2006.
(a) Stock, Warrants and Convertible Subordinated Notes.
1. Between January 1, 2004 and February 2, 2005, we issued an aggregate of 2,234,400 shares of Series B preferred stock and warrants to purchase an aggregate of 746,802 shares of our common stock to certain Wisconsin residents. The aggregate consideration received by us was $4,968,000. In connection with the placement of these securities, we issued warrants to purchase 221,480 shares of our common stock to a placement agent in payment for its services.
2. Between May 26, 2005 and September 30, 2005, we issued an aggregate of 376,000 shares of Series B preferred stock to certain Wisconsin residents who were accredited investors. The aggregate consideration received by us was $940,000. In connection with the placement of these securities, we issued warrants to purchase 31,200 shares of our common stock to a placement agent in payment for its services.
3. Between January 10, 2006 and July 31, 2006, we issued an aggregate of 379,430 shares of Series B preferred stock to our existing shareholders. The aggregate consideration received by us was $960,498. In connection with the placement of these securities, we issued warrants to purchase 6,060 shares of our common stock to a placement agent in payment for its services.
4. Between July 31, 2006 and September 28, 2006, we issued an aggregate of 1,818,182 shares of Series C preferred stock to Clean Technology Fund II, LP and Capvest Venture Fund, LP. The aggregate consideration received by us was $5,000,000.
5. In 2006, we issued warrants to purchase an aggregate of 8,000 shares of our common stock to a consultant in consideration for services.
6. On March 1, 2007, we issued warrants to purchase an aggregate of 19,580 shares of our common stock to a consultant in consideration for services.
7. On August 3, 2007, we issued $10.6 million of convertible subordinated notes, bearing interest at 6% per annum, to an indirect affiliate of GE Energy Financial Services, Inc., Clean Technology Fund II, LP and affiliates of Capvest Venture Fund, LP. The subordinated notes will convert automatically upon closing of this
II-2
offering into 2,360,802 shares of our common stock if the initial public offering price is at least $11.23 per share.
We believe that the offers and sales of the securities referenced in (1) and (2), above, were exempt from registration under the Securities Act by virtue of Section 3(a)(11) of the Securities Act and Rule 147 promulgated thereunder. We were resident and doing business in Wisconsin at the time of the offering, and the offering was made only to Wisconsin residents.
We believe that the offer and sale of the securities referenced in (3), (4), (5), (6) and (7) above were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Actand/or Regulation D promulgated thereunder as transactions not involving any public offering. All of the purchasers of unregistered securities for which we relied on Section 4(2)and/or Regulation D represented that they were accredited investors as defined under the Securities Act, except for up to 35 non-accredited investors. The purchasers in each case represented that they intended to acquire the securities for investment only and not with a view to the distribution thereof and that they either received adequate information about the registrant or had access, through employment or other relationships, to such information; appropriate legends were affixed to the stock certificates issued in
II-2
such transactions; and offers and sales of these securities were made without general solicitation or advertising.
(b) Options.
1. In 2004, we granted to our directors and employees options to purchase an aggregate of 737,000 shares of our common stock at an exercise price of $2.25 per share. We received no consideration from these individuals in connection with the issuance of such options. As of June 30,October 31, 2007, we had issued a total of 75,000209,000 shares of common stock upon the exercise of such options.
2. In 2005, we granted to our directors and employees options to purchase an aggregate of 627,000 shares of our common stock at exercise prices ranging from $0.75 to $2.25 per share. We received no consideration from these individuals in connection with the issuance of such options. As of June 30,October 31, 2007, we had issued a total of 40,000110,000 shares of common stock upon the exercise of such options.
3. In 2006, we granted to our directors and employees options to purchase an aggregate of 1,211,000 shares of our common stock at exercise prices ranging from $2.20 to $2.75 per share. We received no consideration from these individuals in connection with the issuance of such options. As of June 30,October 31, 2007, we had issued a total of 12,00028,000 shares of common stock upon the exercise of such options.
4. On March 1, 2007, we granted to certain of our employees options to purchase an aggregate of 361,500 shares of our common stock at an exercise price of $2.20 per share. We received no consideration from these individuals in connection with the issuance of such options.
5. On March 5, 2007, we granted to certain of our employees options to purchase an aggregate of 75,000 shares of our common stock at an exercise price of $2.20 per share. We received no consideration from these individuals in connection with the issuance of such options.
6. On April 1, 2007, we granted to certain of our employees options to purchase an aggregate of 20,000 shares of our common stock at an exercise price of $2.20 per share. We received no consideration from these individuals in connection with the issuance of such options.
7. On April 2, 2007, we granted to certain of our employees options to purchase an aggregate of 30,000 shares of our common stock at an exercise price of $2.20 per share. We received no consideration from these individuals in connection with the issuance of such options.
II-3
8. On July 27, 2007, we granted to certain of our employees options to purchase an aggregate of 389,432 shares of our common stock at an exercise price of $4.49 per share. We received no consideration from these individuals in connection with the issuance of such options.
9. On July 27, 2007, we granted to certain of our non-employee directors options to purchase an aggregate of 40,000 shares of our common stock at an exercise price of $4.49 per share. We received no consideration from these individuals in connection with the issuance of such options.
We believe that the offer and sale of the above-referenced securities were exempt from registration under the Securities Act by virtue of Section 4(2) and Rule 701 of the Securities Act as securities issued pursuant to written compensatory plans or arrangements.
(c) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a) or (b).
Item 16. Exhibits and Financial Statement Schedules.
| |
Item 16. | Exhibits and Financial Statement Schedules. |
(a)Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed (except where otherwise indicated) as part of this Registration Statement.
II-3
(b)Financial Statement Schedules.Schedules.
All other schedules are omitted since the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant 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.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, 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 Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
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(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
II-4
(ii) any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plymouth, State of Wisconsin, , on August 20,November 28, 2007.
ORION ENERGY SYSTEMS, INC.
| | | | |
| ORION ENERGY SYSTEMS, INC.
| |
| By: | /s/ Neal R. Verfuerth | |
| | Neal R. Verfuerth | |
| | President and Chief Executive Officer | |
|
Neal R. Verfuerth
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities indicated on August 20,November 28, 2007. Each person whose signature appears below constitutes and appoints Neal R. Verfuerth and Daniel J. Waibel, and each of them individually, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and any additional registration statement to be filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
| | | | |
Signature | | Title |
|
| | |
Signature | | Title |
|
/s/ Neal R. Verfuerth Neal R. Verfuerth | | President and Chief Executive Officer and Director (Principal Executive Officer) |
�� | | |
/s/ Daniel J. Waibel Daniel J. Waibel | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
| | |
/s/ Thomas A. Quadracci*
Thomas A. Quadracci | | Chairman of the Board |
| | |
/s/ Michael J. Potts*
Michael J. Potts | | Director and Executive Vice President |
| | |
/s/ Diana Propper de CallejonDiana Propper de Callejon | | Director |
| | |
/s/ James R. Kackley*
James R. KackleyDiana Propper de Callejon | | Director |
| | |
/s/ Eckhart G. Grohmann*
Eckhart G. GrohmannJames R. Kackley | | Director |
| | |
/s/ Patrick J. Trotter*
Patrick J. TrotterEckhart G. Grohmann | | Director |
S-1
EXHIBIT INDEX
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Number | | Exhibit Title |
1.1 | | Form of Underwriting Agreement.* |
| | |
2.1* Patrick J. Trotter | | Form of Series C Senior Convertible Preferred Stock Purchase Agreement by and among Orion Energy Systems, Inc. and the signatories thereto.Director |
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2.2 | | Note Purchase Agreement between Orion Energy Systems, Inc. and the signatories thereto dated August 3, 2007. |
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3.1*By: | | Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc. |
/s/ Neal R. Verfuerth Neal R. Verfuerth Attorney-in-fact | | |
3.2 | | Amendment to Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc. |
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3.3 | | Form of Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc. to be effective upon closing of this offering. |
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3.4 | | Amended and Restated Bylaws of Orion Energy Systems, Inc. |
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3.5 | | Form of Amended and Restated Bylaws of Orion Energy Systems, Inc. to be effective upon closing of this offering. |
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4.1 | | Amended and Restated Investors’ Rights Agreement by and among Orion Energy Systems, Inc. and the signatories thereto, dated August 3, 2007. |
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4.2 | | Amended and Restated First Offer and Co-Sale Agreement among Orion Energy Systems, Inc. and the signatories thereto, dated August 3, 2007. |
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4.3 | | Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc. |
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4.4 | | Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc. |
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4.5 | | Credit and Security Agreement by and between Orion Energy Systems, Inc., Great Lakes Energy Technologies, LLC and Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit Operating Division, dated December 22, 2005, as amended January 26, 2006, June 30, 2006, March 29, 2007 and July 27, 2007. |
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4.6 | | Convertible Subordinated Promissory Note in favor of GE Capital Equity Investments, Inc. dated August 3, 2007. |
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4.7 | | Convertible Subordinated Promissory Note in favor of Clean Technology Fund II, L.P. dated August 3, 2007. |
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4.8 | | Convertible Subordinated Promissory Note in favor of Capvest Venture Fund, LP, dated August 3, 2007. |
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4.9 | | Convertible Subordinated Promissory Note in favor of Technology Transformation Venture Fund, LP, dated August 3, 2007. |
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5.1 | | Opinion of Foley & Lardner LLP.* |
S-1
EXHIBIT INDEX
| | | | |
Number | | Exhibit Title |
|
| 1 | .1 | | Form of Underwriting Agreement. |
| 2 | .1 | | Form of Series C Senior Convertible Preferred Stock Purchase Agreement, including exhibits, by and among Orion Energy Systems, Inc. and the signatories thereto.** |
| 3 | .1 | | Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc.** |
| 3 | .2 | | Amendment to Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc.** |
| 3 | .3 | | Form of Amended and Restated Articles of Incorporation of Orion Energy Systems, Inc. to be effective upon closing of this offering.** |
| 3 | .4 | | Amended and Restated Bylaws of Orion Energy Systems, Inc.** |
| 3 | .5 | | Form of Amended and Restated Bylaws of Orion Energy Systems, Inc. to be effective upon closing of this offering.** |
| 4 | .1 | | Amended and Restated Investors’ Rights Agreement by and among Orion Energy Systems, Inc. and the signatories thereto, dated August 3, 2007.** |
| 4 | .2 | | Amended and Restated First Offer and Co-Sale Agreement among Orion Energy Systems, Inc. and the signatories thereto, dated August 3, 2007.** |
| 4 | .3 | | Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc.** |
| 4 | .4 | | Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc.** |
| 4 | .5 | | Credit and Security Agreement by and between Orion Energy Systems, Inc., Great Lakes Energy Technologies, LLC and Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit Operating Division, dated December 22, 2005, as amended January 26, 2006, June 30, 2006, March 29, 2007 and July 27, 2007.** |
| 4 | .6 | | Convertible Subordinated Promissory Note in favor of GE Capital Equity Investments, Inc. dated August 3, 2007.** |
| 4 | .7 | | Convertible Subordinated Promissory Note in favor of Clean Technology Fund II, L.P. dated August 3, 2007.** |
| 4 | .8 | | Convertible Subordinated Promissory Note in favor of Capvest Venture Fund, LP, dated August 3, 2007.** |
| 4 | .9 | | Convertible Subordinated Promissory Note in favor of Technology Transformation Venture Fund, LP, dated August 3, 2007.** |
| 4 | .10 | | Note Purchase Agreement, including exhibits, between Orion Energy Systems, Inc. and the signatories thereto dated August 3, 2007.** |
| 5 | .1 | | Opinion of Foley & Lardner LLP. |
| 10 | .1 | | Employment Agreement by and between Bruce Wadman and Orion Energy Systems, Inc. dated October 1, 2005.** |
| 10 | .2 | | Employment Agreement by and between Neal Verfuerth and Orion Energy Systems, Inc. dated April 1, 2005.** |
| 10 | .3 | | Separation Agreement by and between Orion Energy Systems, Inc. and Bruce Wadman, effective July 5, 2007.** |
| 10 | .4 | | Separation Agreement by and between Orion Energy Systems, Inc. and James Prange, effective July 18, 2007.** |
| 10 | .5 | | Employment Agreement by and between John Scribante and Orion Energy Systems, Inc. dated June 2, 2006.** |
| 10 | .6 | | Orion Energy Systems, Inc. 2003 Stock Option Plan, as amended.** |
| 10 | .7 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2003 Stock Option Plan.** |
| 10 | .8 | | Amendment to Stock Option Agreement between Bruce Wadman and Orion Energy Systems, Inc. dated February 19, 2007.** |
| 10 | .9 | | Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan.** |
| 10 | .10 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Equity Incentive Plan.** |
| 10 | .11 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan.** |
| 10 | .12 | | Form of Promissory Note and Collateral Pledge Agreement in favor of Orion Energy Systems, Inc. in connection with option exercises (all such notes were paid in full in July and August 2007).** |
E-1
| | |
Number | | Exhibit Title |
10.1 | | Employment Agreement by and between Bruce Wadman and Orion Energy Systems, Inc. dated October 1, 2005. |
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10.2 | | Employment Agreement by and between Neal Verfuerth and Orion Energy Systems, Inc. dated April 1, 2005. |
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10.3 | | Separation Agreement by and between Orion Energy Systems, Inc. and Bruce Wadman, effective July 5, 2007.* |
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10.4 | | Separation Agreement by and between Orion Energy Systems, Inc. and James Prange, effective July 18, 2007.* |
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10.5 | | Employment Agreement by and between John Scribante and Orion Energy Systems, Inc. dated June 2, 2006. |
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10.6 | | Orion Energy Systems, Inc. 2003 Stock Option Plan, as amended. |
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10.7 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2003 Stock Option Plan. |
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10.8 | | Amendment to Stock Option Agreement between Bruce Wadman and Orion Energy Systems, Inc. dated February 19, 2007.* |
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10.9 | | Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan. |
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10.10 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Equity Incentive Plan. |
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10.11 | | Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan. |
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10.12 | | Form of Promissory Note and Collateral Pledge Agreement in favor of Orion Energy Systems, Inc. in connection with option exercises (all such notes were paid in full in July and August 2007). |
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10.13 | | Patent and Trademark Security Agreement by and between Orion Energy Systems, Inc. and Wells Fargo Bank, National Association, Acting Through its Wells Fargo Business Credit Operating Division, dated December 22, 2005. |
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10.14 | | Patent and Trademark Security Agreement by and between Great Lakes Energy Technologies, LLC and Wells Fargo Bank, National Association, Acting Through its Wells Fargo Business Credit Operating Division, dated December 22, 2005. |
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21.1 | | Subsidiaries of Orion Energy Systems, Inc. |
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23.1 | | Consent of Grant Thornton LLP. |
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23.2 | | Consent of Foley & Lardner LLP (contained in Exhibit 5.1 hereto).* |
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23.3 | | Consent of Wipfli LLP. |
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24.1 | | Power of Attorney (contained on signature page hereto). |
| | | | |
Number | | Exhibit Title |
|
| 10 | .13 | | Patent and Trademark Security Agreement by and between Orion Energy Systems, Inc. and Wells Fargo Bank, National Association, Acting Through its Wells Fargo Business Credit Operating Division, dated December 22, 2005.** |
| 10 | .14 | | Patent and Trademark Security Agreement by and between Great Lakes Energy Technologies, LLC and Wells Fargo Bank, National Association, Acting Through its Wells Fargo Business Credit Operating Division, dated December 22, 2005.** |
| 10 | .15 | | Summary of Non-Employee Director Compensation, to be effective upon closing of this offering.** |
| 10 | .16 | | Form of Proposed Employment Agreement by and between Neal Verfuerth and Orion Energy Systems, Inc. |
| 10 | .17 | | Form of Proposed Employment Agreement by and between each of Daniel Waibel, Michael Potts, John Scribante, Patricia Verfuerth, Eric Von Estorff and Erik Birkerts and Orion Energy Systems, Inc.** |
| 21 | .1 | | Subsidiaries of Orion Energy Systems, Inc.** |
| 23 | .1 | | Consent of Grant Thornton LLP. |
| 23 | .2 | | Consent of Foley & Lardner LLP (contained in Exhibit 5.1 hereto). |
| 23 | .3 | | Consent of Wipfli LLP. |
| 24 | .1 | | Power of Attorney (contained on signature page hereto).** |
| | |
** | | To bePreviously filed by amendment |
E-2