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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14
OF THE SECURITIES EXCHANGE ACT OF 1934
AMENDMENT NO. 2
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/x/ Preliminary Proxy Statement
/ / Confidential, for the use of the Commission
only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-12
EDISON CONTROL CORPORATION
________________________________________
(Name of Registrant As Specified In Its Charter)
______________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.01 per share, of Edison Control Corporation
(2) Aggregate number of securities to which transaction applies: Up to
474,950 shares of Edison Control Corporation Common Stock and options
to purchase up to 27,334 shares of Common Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): The
transaction valuation was based upon the sum of (i) the product of
474,950 shares of Edison Control Corporation Common Stock at a per
share price of $7.00 and (ii) the termination of options to purchase
27,334 shares of Common Stock at an aggregate cost of $96,836.
(4) Proposed maximum aggregate value of transaction: $3,421,486
(5) Total fee paid: $685
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing party: N/A
(4) Date filed: N/A
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PRELIMINARY COPY
Edison Control Corporation
777 Maritime Drive
P.O. Box 308
Port Washington, WI 53074-0308
____________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD [ ], 2003
____________________
We will hold a special meeting of shareholders of Edison Control
Corporation on _________, 2003, at _ _.m., local time, on the 40th floor of the
offices of Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, for the purpose of voting on a proposal to take our company private
through the adoption of an amendment to our certificate of incorporation
providing for:
o a one-for-66,666 reverse stock split of our common stock; and
o a cash payment equal to $7.00 per pre-split share of common stock to
all shareholders left with less than one share following the reverse
stock split.
Our Board of Directors has fixed the close of business on _____________,
2003 as the record date for the determination of shareholders entitled to notice
of, and to vote at, the special meeting and any adjournments or postponements of
the special meeting.
The accompanying proxy statement forms a part of this notice. We urge you
to read it carefully.
By Order of the Board of Directors,
-----------------------------------
Gregory L. Skaar
Chief Financial Officer
Port Washington, Wisconsin
_____________, 2003
Your vote is important. Whether or not you intend to be present at the special
meeting, please complete the enclosed proxy card and sign, date and return it in
the postage-paid return envelope provided.
PRELIMINARY PROXY STATEMENT
Edison Control Corporation
777 Maritime Drive
P.O. Box 308
Port Washington, WI 53074-0308
____________________
Fellow Shareholder:
We would like to invite you to attend a special meeting of shareholders of
Edison Control Corporation, to be held on _________, 2003, at _ _.m., local
time, on the 40th floor of the offices of Foley & Lardner, 777 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202.
At the special meeting, we will ask you to vote on a proposal to take our
company private through the adoption of an amendment to our certificate of
incorporation providing for (i) a one-for-66,666 reverse stock split of our
common stock and (ii) a cash payment equal to $7.00 per pre-split share of
common stock to all shareholders left with less than one share following the
reverse stock split. We have set forth the text of the proposed amendment in
Exhibit B to this proxy statement.
If the reverse stock split is approved and, as a result, you are left with
less than one share of our common stock, then you will be entitled to receive
$7.00 per pre-split share in cash, without interest, for your shares of common
stock. This price represents a 16.7% premium over our stock's closing bid price
per share of $6.00 on March 3, 2003, the last trading day before the initial
proposal to undertake the reverse stock split was submitted to us by our
majority shareholder and Chairman of the Board, William B. Finneran, and our
Chief Executive Officer and a director, Alan J. Kastelic. No consideration will
be paid for shares or share equivalents owned by Messrs. Finneran or Kastelic in
the reverse stock split. We believe that the effect of the reverse stock split
will be to reduce the number of our shareholders to two: Messrs. Finneran and
Kastelic. However, any shareholder owning at least 66,666 shares in a single
account at the effective time of the reverse stock split will also remain a
shareholder of the company as a private company.
The total cash consideration we expect to pay in connection with the
proposed reverse stock split will be approximately $3.4 million, excluding
transaction costs.
Since Messrs. Finneran and Kastelic made the reverse stock split proposal
and because they are both directors and officers of our company, our Board of
Directors formed a special committee of independent directors to evaluate the
reverse stock split proposal, conduct negotiations with Messrs. Finneran and
Kastelic, and recommend approval or disapproval and the ultimate terms of any
approved proposal to our full Board. Based on the unanimous recommendation of
the special committee, our Board of Directors has unanimously (with Messrs.
Finneran and Kastelic abstaining due to their interests in the transaction)
approved the reverse stock split proposal and directed that it be submitted to a
vote of our shareholders. Our Board of Directors and its special committee
believe that the terms of the reverse stock split proposal are fair to, and in
the best interests of, our shareholders, and recommend that our shareholders
vote "FOR" the proposal.
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This transaction has not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission. Neither the Securities
and Exchange Commission nor any state securities commission has passed upon the
fairness or merits of this transaction or upon the accuracy or adequacy of the
information contained in this document. Any representation to the contrary is a
criminal offense.
i
Your vote is very important. Under New Jersey law, the reverse stock split
proposal is subject to obtaining the approval of a majority of the votes cast by
the holders of our outstanding shares entitled to vote at our special meeting.
In addition, while not required by New Jersey law, our Board of Directors, upon
the recommendation of its special committee, has further conditioned approval of
the reverse stock split proposal upon the requirement that a majority of all
outstanding shares held by unaffiliated shareholders not be voted against the
reverse stock split (we call this the "reverse majority of the minority"
shareholder approval condition).
Our Board of Directors has fixed the close of business on [ ], 2003 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the special meeting and any adjournments or postponements of the
special meeting. Only shareholders of record at the close of business on [ ],
2003 are entitled to notice of, and to vote at, the special meeting. As of the
record date, we had 1,638,595 outstanding shares of common stock, of which
Messrs. Finneran and Kastelic beneficially owned a total of 1,163,645
outstanding shares, or 71.0%. Messrs. Finneran and Kastelic intend to vote all
of their shares in favor of the reverse stock split proposal, thereby ensuring
that the reverse stock split proposal will be approved by the requisite
shareholder vote under New Jersey law. Nevertheless, your vote is still
important because approval of the reverse stock split is subject to satisfaction
of the reverse majority of the minority shareholder approval condition.
Please complete and sign the enclosed proxy card and return it as soon as
possible in the enclosed postage paid envelope. This will ensure that your
shares are represented at the special meeting.
Sincerely,
-----------------------------------
Gregory L. Skaar
Chief Financial Officer
This proxy statement and form of proxy are first being mailed to
shareholders on or about ______________, 2003.
ii
TABLE OF CONTENTS
SUMMARY TERM SHEET.................................................................................3
INFORMATION ABOUT THE REVERSE STOCK SPLIT..........................................................6
SPECIAL FACTORS...................................................................................12
Purpose of and Reasons for the Reverse Stock Split...........................................12
Alternatives to the Reverse Stock Split......................................................13
Effects of the Reverse Stock Split...........................................................15
Advantages of the Reverse Stock Split........................................................15
Disadvantages of the Reverse Stock Split.....................................................18
Material U.S. Federal Income Tax Consequences of the Reverse Stock Split.....................19
Plans or Proposals After the Reverse Stock Split.............................................20
Recommendations of the Special Committee and Our Board of Directors..........................21
Position of the Special Committee and Our Board of Directors as to the Fairness of
the Reverse Stock Split ...................................................................21
Messrs. Finneran and Kastelic's Position as to the Fairness of the Reverse Stock Split.......26
Opinion of Schroeder & Co....................................................................27
Background of the Reverse Stock Split Proposal...............................................32
Price Range of Common Stock and Dividends; Related Shareholder Matters.......................48
Plans of the Company in the Event the Reverse Stock Split Proposal is Not Approved...........49
Exchange of Certificates and Payment of Fractional Shares....................................49
Fees and Expenses of the Reverse Stock Split.................................................49
Source and Amount of Funds...................................................................50
Interests of Directors and Executive Officers in the Reverse Stock Split.....................50
Indemnification and Insurance................................................................51
THE SPECIAL MEETING...............................................................................53
Date, Time and Place of the Special Meeting..................................................53
Proposal to be Considered at the Special Meeting.............................................53
Record Date..................................................................................53
Voting Rights; Vote Required for Approval....................................................53
Voting and Revocation of Proxies.............................................................54
Solicitation of Proxies......................................................................55
OTHER MATTERS.....................................................................................56
Security Ownership of Specified Beneficial Owners and Management.............................56
Transactions in Capital Stock by Certain Persons.............................................56
Other Transactions...........................................................................57
Section 16(a) Beneficial Ownership Reporting Compliance......................................57
Future Shareholder Proposals.................................................................57
Independent Auditors.........................................................................57
Where You Can Find More Information..........................................................58
1
CONSOLIDATED FINANCIAL STATEMENTS................................................................F-1
EXHIBIT A: Going Private Proposal of Messrs. Finneran and Kastelic...............................A-1
EXHIBIT B: Certificate of Amendment of the Certificate of Incorporation of Edison
Control Corporation..................................................................B-1
EXHIBIT C: Written Opinion of Schroeder & Co.....................................................C-1
EXHIBIT D: Term Sheet Regarding Financing - LaSalle National Bank Association....................D-1
EXHIBIT E: Fiscal 2002 Going Private Pro Forma Balance Sheet Analysis............................E-1
EXHIBIT F: Form of Proxy Card ...................................................................F-1
EXHIBIT G: Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................G-1
EXHIBIT H: Quantitative and Qualitative Disclosures About Market Risk ...........................H-1
2
SUMMARY TERM SHEET
This summary term sheet highlights important information in this proxy
statement, but does not contain all of the information that is important to you.
To better understand the reverse stock split proposal, you should carefully read
this entire proxy statement, including our financial statements and exhibits.
o THE REVERSE STOCK SPLIT. You are being asked to approve and adopt a
one-for-66,666 reverse stock split which would result in our company
going private. Going private means that we will terminate the
registration of our common stock under the Securities Exchange Act of
1934, as amended (which we refer to as the "Exchange Act") and we will
no longer have to file reports with the Securities and Exchange
Commission ("SEC") and our common stock will no longer be listed or
traded on the OTC Bulletin Board (or any other public market). The
reverse stock split was proposed by William B. Finneran, our majority
shareholder and Chairman of the Board, and Alan J. Kastelic, our Chief
Executive Officer and a director. In conjunction with the reverse
stock split, we intend to enter into individual option cancellation
agreements with all holders of company stock options, excluding Mr.
Kastelic. See "Special Factors - Background of the Reverse Stock Split
Proposal," "Special Factors - Effects of the Reverse Stock Split;
Plans or Proposals After the Reverse Stock Split" and "Special Factors
- Interests of Directors and Executive Officers in the Reverse Stock
Split."
o REASONS FOR THE REVERSE STOCK SPLIT. Messrs. Finneran and Kastelic
proposed the reverse stock split primarily to allow us to realize the
substantial tangible and intangible cost savings and confidentiality
benefits of being a privately held company through a transaction in
which our unaffiliated shareholders will realize liquidity for their
minority shareholdings at a fair price, generally be eligible to
receive capital gains tax treatment for their proceeds, avoid paying
brokerage commissions and fees and avoid incurring the significant
"bid-ask" discount otherwise incurred in selling our shares.
Additionally, a reverse stock split transaction resulting in
de-registration of our common stock under the Exchange Act will allow
management to focus additional time and effort on effectively managing
our business and operations without the administrative burdens of SEC
and related compliance. See "Special Factors - Purpose of and Reasons
for the Reverse Stock Split Proposal," "Special Factors - Advantages
of the Reverse Stock Split" and "Special Factors - Material U.S.
Federal Income Tax Consequences of the Reverse Stock Split to Our
Shareholders."
o CONSIDERATION. If you own at least 66,666 shares of our common stock
in a single account at the effective time of the reverse stock split,
you will remain a shareholder of the company as a private company and
will not receive a cash payment. If you do not own at least 66,666
shares of our common stock in a single account at the effective time
of the reverse stock split, you will receive $7.00 per pre-split share
in cash, without interest, for your shares of common stock and you
will no longer be a shareholder of the company. You will not need to
pay any brokerage commissions or fees, other transaction fees or the
"bid-ask" discount that would apply if you sold your shares on the
open market (although you will have to pay tax on your gain, if any).
See "Special Factors - Material U.S. Federal Income Tax Consequences
of the Reverse Stock Split to Our Shareholders" and "Special Factors -
Exchange of Certificates and Payment of Fractional Shares."
o REQUIRED VOTES. New Jersey law requires the approval of a majority of
the votes cast by the holders of our outstanding shares entitled to
vote at our special meeting. Because Messrs. Finneran and Kastelic
together own approximately 71% of our common stock and intend to vote
in favor of the reverse stock split proposal, we are assured of
obtaining the requisite shareholder vote under New Jersey law. In
addition, our Board of Directors has conditioned approval of the
reverse stock split upon the requirement that a majority of all
outstanding shares held by unaffiliated shareholders not be voted
against the transaction. We refer to this condition as a "reverse
majority of the minority" shareholder approval condition. This is
unlike a typical
3
"majority of the minority" condition which would require the approval
of a majority of the unaffiliated shareholders voting at the special
meeting. See "The Special Meeting - Voting Rights; Vote Required for
Approval."
o RECOMMENDATION OF THE BOARD OF DIRECTORS. Our Board of Directors, by
the unanimous vote of all directors other than Messrs. Finneran and
Kastelic (who abstained from the vote due to their interests in the
transaction), determined that the reverse stock split proposal is fair
to, and in the best interests of, our unaffiliated shareholders, and
approved the reverse stock split proposal. Accordingly, our Board of
Directors recommends that you vote "FOR" the reverse stock split
proposal. See "Special Factors - Position of the Special Committee and
Our Board of Directors as to the Fairness of the Reverse Stock Split."
o COMPOSITION AND INTERESTS OF THE SPECIAL COMMITTEE. Since Messrs.
Finneran and Kastelic made the reverse stock split proposal and
because they are both directors and officers of our company, our Board
of Directors formed a special committee composed of its independent
directors, Mr. William C. Scott and Robert L. Cooney, to evaluate the
proposal and negotiate with Messrs. Finneran and Kastelic. Messrs.
Scott and Cooney each received $10,000 as compensation for their
service on the special committee. Additionally, Mr. Scott holds an
option to purchase 25,000 shares of our common stock at $3.50 per
share and will therefore receive a cash payment of $87,500 (before
applicable taxes) in consideration of termination of his option
pursuant to an individual option cancellation agreement. Mr. Cooney
holds 17,500 shares of our common stock and will therefore receive a
cash payment of $122,500 (before applicable taxes) as a result of
cashing out shares in the reverse stock split. See "Special Factors -
Interests of Directors and Executive Officers in the Reverse Stock
Split."
o RECOMMENDATION OF THE SPECIAL COMMITTEE. The Board of Directors made
its recommendation to shareholders that they vote FOR the reverse
stock split proposal after the special committee determined that the
reverse stock split proposal is fair to, and in the best interests of,
our unaffiliated shareholders, and recommended to our Board of
Directors that it (i) approve the reverse stock split proposal; (ii)
submit the reverse stock split proposal to a vote of our shareholders,
with adoption of the proposal conditioned on receipt of the necessary
shareholder approval required under New Jersey law, as well as the
requirement that a majority of all outstanding shares held by our
unaffiliated shareholders not be voted against the reverse stock split
proposal; and (iii) recommend that our shareholders vote to adopt the
reverse stock split proposal. See "Special Factors - Position of the
Special Committee and Our Board of Directors as to the Fairness of the
Reverse Stock Split."
o OPINION OF FINANCIAL ADVISOR. The special committee gave considerable
weight to the opinion of Schroeder & Co., the special committee's
financial advisor, in connection with its evaluation and negotiation
of the reverse stock split proposal. Schroeder & Co. delivered its
written opinion to the special committee dated April 1, 2003, to the
effect that, as of that date, the price of $7.00 is fair, from a
financial point of view, to our unaffiliated shareholders. The full
text of this opinion is attached as Exhibit C to this proxy statement.
We urge you to read Schroeder & Co.'s opinion in its entirety for a
description of the procedures followed and factors considered in
connection with the delivery of its opinion. See "Special Factors -
Opinion of Schroeder & Co."
o CONTINUING SHAREHOLDERS. Messrs. Finneran and Kastelic will remain as
shareholders of the company following the reverse stock split. In
addition, any shareholder owning at least 66,666 shares of our common
stock in a single account at the effective time of the reverse stock
split will also remain a shareholder of the company as a private
company. See "Special Factors - Effects of the Reverse Stock Split."
4
o TAX CONSEQUENCES. The receipt of $7.00 on a pre-split basis in cash
for each share of our common stock that you own pursuant to the
reverse stock split will be a taxable transaction to you. For U.S.
federal income tax purposes, you generally will realize capital gain
or loss as a result of the reverse stock split measured by the
difference, if any, between the $7.00 per pre-split share price and
your adjusted pre-split tax basis in each share that is cashed out. If
your holding period for such shares is more than 12 months by the
effective date of the reverse stock split, then such gain or loss will
be long-term capital gain or loss. See "Special Factors - Material
U.S. Federal Income Tax Consequences of the Reverse Stock Split to Our
Shareholders."
o THE SPECIAL MEETING. Our special meeting will be held on the 40th
floor of the offices of Foley & Lardner, 777 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, on __________, 2003 at _, local time. See
"The Special Meeting - Date, Time and Place of the Special Meeting."
o ELIGIBILITY TO VOTE. Holders of our common stock at the close of
business on ___________, 2003, the record date for the special
meeting, may vote at the special meeting in person or by proxy. On
that date, there were 1,638,595 outstanding shares of our common
stock. Messrs. Finneran and Kastelic beneficially own 1,163,645
outstanding shares of our common stock, or 71%. Each share of common
stock that you owned on the record date entitles you to cast one vote
at our special meeting. See "The Special Meeting - Record Date."
o VOTING PROCEDURES. In order to cast a vote with respect to the reverse
stock split proposal, or change a proxy that you have already sent to
us, you must follow the procedures described in this proxy statement
under "The Special Meeting - Voting and Revocation of Proxies." If you
do not own your stock directly in your name, but instead hold your
shares through a nominee, such as a bank or a broker, you should
contact your bank, broker or nominee to obtain directions on how to
instruct that person to vote your shares. See "The Special Meeting -
Voting Rights; Vote Required for Approval."
o APPRAISAL OR DISSENTERS' RIGHTS. No appraisal or dissenters' rights
are available to you under New Jersey law in connection with the
reverse stock split. You may have other rights or actions under
federal or state laws. Challenges to corporate actions in general may
be related to fiduciary responsibilities of corporate officers and
directors and to the fairness of corporate transactions. See "The
Special Meeting - Voting Rights; Vote Required for Approval."
o PLANS OF THE COMPANY IN THE EVENT THE REVERSE STOCK SPLIT IS NOT
APPROVED. If the reverse stock split proposal is not approved, we
nonetheless intend to delist our common stock from trading on the OTC
Bulletin Board and deregister our common stock under the Exchange Act.
We will be able to do this, even if we do not effect the reverse stock
split, because we currently have less than 300 shareholders of record.
This action will allow us to take advantage of the benefits of being a
privately held company, discussed in detail under "Special Factors -
Advantages of the Reverse Stock Split." The disadvantage of delisting
and deregistering without also undertaking a reverse stock split is
that shareholders will not have an opportunity to realize liquidity
for their shareholdings pursuant to the reverse stock split. See
"Special Factors - Plans of the Company in the Event the Reverse Stock
Split Proposal is Not Approved."
5
ADDITIONAL INFORMATION ABOUT THE REVERSE STOCK SPLIT
The following questions and answers briefly address some commonly asked
questions about the reverse stock split proposal that are not addressed in the
summary term sheet. They may not include all the information that is important
to you. We urge you to read carefully this entire proxy statement, including our
financial statements and exhibits.
Q: What is the total cost of the reverse stock split to the company?
A: We estimate that we will pay up to approximately $3.4 million to cash out
up to 474,950 pre-split shares and stock options to purchase 27,334
pre-split shares. This total amount will be smaller if one or more
unaffiliated shareholders consolidates their shareholdings or acquires
additional shares of our common stock such that they own at least 66,666
shares in a single account at the effective time of the reverse stock split
and thereby elect to remain a shareholder of our company as a private
company. In addition, we anticipate incurring approximately $500,000 in
advisory and other fees and costs in connection with the reverse stock
split.
See "Special Factors - Fees and Expenses of the Reverse Stock Split."
Q: What are some of the advantages of the reverse stock split?
A: The special committee and our Board of Directors believe that the reverse
stock split will have, among others, the following advantages:
o we will be able to provide liquidity for our unaffiliated shareholders
where liquidity has been lacking in the market, and do so at a fair
price through a transaction in which our unaffiliated shareholders
will generally be eligible to receive capital gains tax treatment for
their proceeds, avoid paying brokerage commissions and fees, and avoid
incurring the significant "bid-ask" discount otherwise incurred in
selling our shares;
o we will terminate the registration of our common stock under the
Exchange Act, which will eliminate the significant tangible and
intangible costs of our being a public company (with the tangible
costs estimated at approximately $150,000 annually for us, and
increasing);
o we will be able to eliminate the obligation to publicly disclose
sensitive, competitive business information and other information to
our competitive business advantage; and
o our management will be able to better focus on our business's
long-term goals and objectives rather than our short-term objectives
intended to satisfy market expectations.
See "Special Factors - Advantages of the Reverse Stock Split."
Q: What are some of the disadvantages of the reverse stock split?
A: The special committee and our Board of Directors believe that the reverse
stock split will have, among others, the following disadvantages:
o after the reverse stock split, our current shareholders, other than
Messrs. Finneran and Kastelic (and any unaffiliated shareholders who
elect to consolidate their shares or acquire additional shares such
that they own at least 66,666 shares in a single account at
6
the effective time of the reverse stock split), will not have an
opportunity to liquidate their shares at a time and for a price of
their choosing; instead, they will be cashed out and will no longer be
a shareholder of our company and will not have the opportunity to
participate in or benefit from any future potential appreciation in
our company's value;
o the elimination of our stock's trading market may result in our
company having less flexibility in attracting and retaining executives
since equity-based incentives (such as stock options) tend not to be
as valuable in a private company;
o we will be less likely to be able to use our shares to acquire other
companies;
o it will be more difficult for us to access the public equity markets;
and
o there may be a potential loss of prestige from no longer being a
public company.
See "Special Factors - Disadvantages of the Reverse Stock Split."
Q: What are some of the factors supporting the special committee's
determination to recommend approval of the reverse stock split?
A: The special committee based its determination to recommend approval of the
reverse stock split proposal on several factors. Importantly, the special
committee considered the relative advantages and disadvantages discussed
above and under "Special Factors - Advantages of the Reverse Stock Split"
and "Special Factors - Disadvantages of the Reverse Stock Split." The
special committee also considered numerous other factors, including:
o the financial presentations and analyses of management and Schroeder &
Co., the special committee's financial advisor, regarding the reverse
stock split proposal, and the special committee's discussions and
conclusions about the fairness of the proposed per pre-split share
price to be paid to our unaffiliated shareholders;
o the opinion of Schroeder & Co. that the price of $7.00 is fair, from a
financial point of view, to our unaffiliated shareholders;
o the "reverse majority of the minority" shareholder approval condition
and its impact on helping ensure the procedural fairness of the
transaction to our unaffiliated shareholders;
o that the terms and conditions of the reverse stock split proposal were
determined through arm's-length negotiations between Messrs. Finneran
and Kastelic and the special committee, which consisted solely of
independent and disinterested directors;
o that, with an average daily trading volume of only approximately 269
shares over the 12 month period from April 2002 through March 2003,
our stock's bid prices would have been valid for only a very small
number of shares before decreasing measurably;
o the willingness of our current directors, other than Messrs. Finneran
and Kastelic, to receive the $7.00 per pre-split share price for their
shares and share equivalents, representing their belief that the $7.00
per pre-split share price is fair to them; and
o our repurchases of 1,000,239 shares and share equivalents (or
approximately 38% of our total outstanding shares, assuming all
repurchased stock options had been exercised)
7
between November 2001 and January 2003 at a price of $7.00 per share
(including our repurchase of 360,277 shares and share equivalents from
current or former directors and officers).
See "Special Factors - Position of the Special Committee and Our Board of
Directors as to the Fairness of the Reverse Stock Split."
Q: What are the interests of directors and executive officers in the reverse
stock split?
A: In considering the recommendation of our Board of Directors and its special
committee to approve the reverse stock split proposal, you should be aware
that, as a result of the reverse stock split, we believe that Messrs.
Finneran and Kastelic will likely increase their beneficial ownership of
our common stock from approximately 71% to 100%. Also, prior to the reverse
stock split, all outstanding stock options (except for stock options held
by Mr. Kastelic) will be cancelled by entering into individual option
cancellation agreements with each optionee. One of our directors holds a
stock option to purchase 25,000 of our shares and two additional employees
together hold options to purchase a total of 2,334 of our shares. We will
thus repurchase a total of 27,334 options to purchase shares of our common
stock at a weighted average exercise price of $3.46 per share. The option
holders will receive cash payments in connection with the reverse stock
split in exchange for their stock options based on $7.00 per share (less
the exercise price of the stock options). These payments are based on the
same price our other unaffiliated shareholders will receive in the
transaction. Also, after the reverse stock split, we will continue
indemnification arrangements and directors' and officers' liability
insurance for our present and former directors and officers.
See "Special Factors - Interests of Directors and Executive Officers in the
Reverse Stock Split."
Q: Could you tell me about the company and about Messrs. Finneran and
Kastelic?
A: OUR COMPANY. We are a New Jersey corporation incorporated in 1986. We
conduct our business through three divisions. Construction Forms, our
principal operating unit, designs, manufactures and distributes concrete
pumping systems and accessories. CF Ultra Tech is engaged in the
manufacturing and marketing of abrasion resistant pumping systems. Abrasion
resistant pumping systems are used extensively in mining, pulp and paper
mills, wastewater treatment plants and coal-fired electric utility plants,
as well as in concrete pumping applications. South Houston Hose Company, a
division of Construction Forms, is engaged in the distribution of
industrial hose and fittings. The address and telephone number of our
principal executive offices is 777 Maritime Drive, Port Washington,
Wisconsin 53704-0308, (262) 268-6800.
WILLIAM B. FINNERAN. Mr. Finneran is our Chairman of the Board and has been
a director of our company since 1991. Mr. Finneran beneficially owns
1,096,978 of our outstanding shares, or approximately 67%, of our
outstanding common stock. He also owns a warrant to purchase 500,000 of our
shares at an exercise price of $1.60 per share. Mr. Finneran is a Managing
Director of Wachovia Securities, an investment banking firm. Prior to
joining Wachovia in 1999, Mr. Finneran was a Managing Director at CIBC
Oppenheimer Corp., an investment-banking firm, and had been employed with
Oppenheimer since 1972. Mr. Finneran is a Director of National Planning
Association, a non-profit advisory board. He serves on the Board of
Villanova University and is a former board member of Covenant House and
Operation Smile, non-profit charitable institutions. Mr. Finneran also
currently serves on the Executive Committee of the New York Archdiocesan
Patrons Program. The address and telephone number for Mr. Finneran is 777
Maritime Drive, Port Washington, Wisconsin 53704-0308, (262) 268-6800.
8
ALAN J. KASTELIC. Mr. Kastelic was appointed our President and Chief
Executive Officer in June 1998 and President and Chief Executive Officer of
Construction Forms in June 1996 when we acquired Construction Forms. Mr.
Kastelic beneficially owns 66,667 of our outstanding shares, or
approximately 4%, of our outstanding common stock. He also owns an option
to purchase 97,222 of our shares at an exercise price of $3.00 per share.
Mr. Kastelic had previously been Executive Vice President and Chief
Operating Officer of Construction Forms which he joined in 1977. Prior to
joining Construction Forms, Mr. Kastelic was Manufacturing Manager at
Badger Dynamics and Chief Cost Accountant, Material Control Manager and
Manager of Manufacturing at the PCM division of Koehring Corporation. The
address and telephone number for Mr. Kastelic is 777 Maritime Drive, Port
Washington, Wisconsin 53704-0308, (262) 268-6800.
Q: At what prices has the company's stock traded recently?
A: Our common stock is traded on the OTC Bulletin Board under the symbol
"EDCO." Prior to April 17, 2001, our common stock was traded on The Nasdaq
National Market, also under the symbol "EDCO." We have set forth below our
high and low bid price information for the periods indicated, as reported
by the OTC Bulletin Board (and, for the first quarter of fiscal year 2001,
The Nasdaq National Market). The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent
actual transactions:
Fiscal Quarter Ended High Low
-------------------- ----- -----
Fiscal Year 2001
April 30, 2001 $5.38 $3.88
July 31, 2001 $5.00 $3.30
October 31, 2001 $4.50 $3.60
January 31, 2002 $8.85 $4.50
Fiscal Year 2002
April 30, 2002 $6.50 $6.10
July 31, 2002 $6.52 $6.30
October 31, 2002 $6.75 $6.40
January 31, 2003 $6.50 $5.00
Fiscal Year 2003
April 30, 2003 $6.85 $5.00
For the second quarter of fiscal year 2003 through June 19, 2003, the high
and low closing bid price for our common stock has been $6.86 and $6.85,
respectively.
During the time periods set forth above, we have not paid any cash
dividends to our shareholders. On March 3, 2003, the last trading day
before the reverse stock split proposal was submitted to us, our stock's
closing bid price per share was $6.00. On March 11, 2003, the last trading
day prior to the initial announcement of the reverse stock split proposal,
our stock's closing bid price per share was $6.50. On [ ], the last trading
day prior to the date of this proxy statement, our stock's closing bid
price per share was $[ ]. Shareholders should obtain current market price
quotations for our common stock in connection with voting their shares.
See "Special Factors - Price Range of Common Stock and Dividends; Related
Shareholder Matters."
9
Q: What is the company's financial position?
A: The following table contains selected financial data (i) as of January 31,
2003 and 2002 and for the three years ended January 31, 2003, derived from
our audited consolidated financial statements, which are included herein;
(ii) as of January 31, 2001, 2000 and 1999 and for the two years ended
January 31, 2000, derived from our audited consolidated financial
statements, which are not included herein; and (iii) as of April 30, 2003
and for the three month periods ended April 30, 2003 and 2002, derived from
our unaudited consolidated financial statements, which are included herein.
The data should be read in conjunction with our audited consolidated
financial statements, related notes and other financial information
included elsewhere herein.
See "Consolidated Financial Statements."
10
Three Months Period
Ended April 30, Year Ended January 31,
------------------------- ------------------------------------------------------------------------
2003 (1) 2002 (2) 2003 (1) 2002 (2) 2001 (3) 2000 (3) 1999 (3)
----------- ----------- ------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Statements of Income
- --------------------
Net sales $7,176,743 $6,855,369 $27,390,816 $27,452,550 $26,070,682 $24,920,820 $23,508,748
Cost of goods sold $4,455,790 $4,424,547 $17,799,952 $17,275,311 $16,390,713 $15,480,828 $14,767,401
Gross profit $2,720,953 $2,430,822 $ 9,590,864 $10,177,239 $ 9,679,969 $ 9,439,992 $ 8,741,347
Selling, engineering and
administrative expenses $2,003,247 $1,483,089 $ 7,481,837 $ 5,130,143 $ 4,723,293 $ 4,463,236 $ 4,237,917
Operating income $ 717,706 $ 947,733 $ 2,109,027 $ 4,778,797 $ 4,632,343 $ 4,562,866 $ 4,158,698
Other non-operating
gains/(losses) $ 71,953 $ (2,350) $ (27,086) $ (104,172) $ (330,825) $ 460,989 $ (113,118)
Interest expense $ 37,517 $ 44,239 $ 200,382 $ 207,637 $ 533,780 $ 791,840 $ 955,818
Income from continuing
operations $ 461,586 $ 577,814 $ 1,141,559 $ 2,718,308 $ 2,308,255 $ 2,265,849 $ 1,284,873
Loss from discontinued
operations $ -- $ -- $ -- $ -- $ (92,698) $ (108,977) $ (82,543)
Loss from sale of
discontinued operations $ -- $ -- $ -- $ -- $ (12,379) $ -- $ --
Net income $ 461,586 $ 577,814 $ 1,141,559 $ 2,718,308 $ 2,203,178 $ 2,156,872 $ 1,202,330
Per Share Information
- ---------------------
Income from continuing
operations - basic $ 0.28 $ 0.32 $ 0.66 $ 1.20 $ 0.98 $ 0.97 $ 0.55
Income from continuing
operations - diluted $ 0.22 $ 0.25 $ 0.52 $ 1.01 $ 0.80 $ 0.78 $ 0.45
Tangible book value at
period end - diluted (4) $ 6.01 $ 4.98 $ 5.41 $ 4.08 $ 4.18 $ 3.39 $ 2.60
Other Data
- ----------
Capital expenditures $ 44,281 $ 245,040 $ 569,977 $ 233,602 $ 478,872 $ 675,245 $ 3,082,725
Depreciation and amortization $ 234,137 $ 251,217 $ 890,013 $ 1,153,508 $ 1,128,042 $ 1,520,301 $ 2,068,360
Goodwill amortization $ -- $ -- $ -- $ 225,801 $ 232,258 $ 232,258 $ 232,258
Year Ended January 31,
-----------------------------------------------------------------------
At April 30, 2003 2003 (1) 2002 (2) 2001 (3) 2000 (3) 1999 (3)
----------------- ------------ ------------ ------------ ------------ ------------
(Unaudited)
Working capital (current assets
less current liabilities) $10,421,304 $ 9,938,694 $ 8,921,197 $ 9,035,361 $ 8,821,365 $12,730,093
Property, plant and equipment
- net $ 6,274,746 $ 6,464,602 $ 6,790,839 $ 7,359,953 $ 7,968,785 $ 8,187,899
Goodwill $ 8,130,000 $ 8,130,000 $ 8,130,000 $ 8,225,801 $ 8,458,059 $ 8,690,318
Total assets $28,114,251 $27,832,183 $28,358,194 $29,182,233 $30,630,664 $34,902,997
Long-term debt, including
current maturities $ 5,108,265 $ 5,260,703 $ 5,520,217 $ 5,579,358 $ 8,963,142 $14,741,601
Shareholders' equity $20,562,687 $20,117,495 $19,151,333 $20,333,315 $18,303,188 $16,183,272
Weighted average shares
outstanding, assuming dilution 2,067,109 2,217,035 2,700,435 2,896,599 2,907,251 2,883,133
Common shares outstanding(5) 1,638,595 1,638,595 1,805,470 2,351,308 2,351,308 2,346,933
______________________________________________
(1) We incurred stock compensation costs of approximately $960,000 and severance expense of approximately $420,000 related to
former officers in fiscal year 2002.
(2) On November 1, 2001, we purchased the remaining 50% of the outstanding common stock of South Houston Hose Company, Inc. for
cash and assumption of debt totaling $800,000. The acquisition was accounted for as a purchase transaction with the purchase
price allocated to the fair value of specific assets acquired and liabilities assumed. Accordingly, the results of operations
of South Houston Hose Company have been included since the date of acquisition.
(3) On September 29, 2000, we sold certain assets and the business of our Gilco division. The results of operations of our Gilco
division have been presented as discontinued operations. Accordingly, previously reported statements of income information
have been restated to reflect this presentation.
(4) Tangible book value per share - diluted is calculated as Shareholders' equity less goodwill, divided by weighted average
shares outstanding assuming dilution.
(5) Net of treasury stock of 751,628 at January 31, 2003 and 559,753 at January 31, 2002 (we did not have any treasury stock
prior to fiscal year 2001).
11
SPECIAL FACTORS
Purpose of and Reasons for the Reverse Stock Split
Throughout our time as a public company, we have continuously explored
potential alternatives to increase our shareholder value and attract investor
and analyst interest. However, as discussed in greater detail in "Special
Factors - Background of the Reverse Stock Split Proposal," we have been
generally unsuccessful in this endeavor. In light of our inability to provide
increased value to our shareholders as a public company, and particularly as a
result of the increased tangible and intangible costs associated with being a
public company manifested principally by the July 2002 passage of the
Sarbanes-Oxley Act of 2002, our Board of Directors discussed potentially
undertaking a going private transaction at its June 20, 2002 meeting. These
discussions were informative and educational in nature. Our Board again began
exploring the possibility of pursuing a going private transaction in December
2002. On December 3, 2002, our Board of Directors held a meeting, attended by
our outside legal counsel, to discuss and analyze numerous aspects of a
potential going private transaction. While no going private transaction was
proposed, our Board generally concurred that a going private transaction might
be a desirable strategic alternative to consider further, provided one could be
proposed and effected at a price and on terms fair to our unaffiliated
shareholders.
From December 3, 2002 through February 2003, Messrs. Finneran and Kastelic
considered the various issues raised and discussed at the December 3, 2002 Board
meeting. They conducted further analyses in an effort to determine whether a
going private transaction could be structured and negotiated on acceptable
terms. Additionally, Messrs. Finneran and Kastelic considered the potential
alternative transaction structures and how to most effectively pursue a going
private transaction so that transaction costs would not significantly reduce the
amount of funds otherwise available to pay to our unaffiliated shareholders.
Based on their various consultations and analyses, described in more detail
under the caption "Special Factors - Background of the Reverse Stock Split
Proposal," Messrs. Finneran and Kastelic concluded that, in their view, it would
be in the best interests of our company and our unaffiliated shareholders to
propose a going private transaction in the form of a reverse stock split. Other
alternative going private transaction structures were considered, but were not
pursued primarily because:
o most alternative structures (such as an affiliate merger or issuer
self-tender offer) would be more costly and take more time to
consummate; and
o privately negotiated repurchases were unlikely to result in Messrs.
Finneran and Kastelic (or a small number of shareholders) owning 100%
of our company after the transaction.
See "Special Factors - Alternatives to the Reverse Stock Split" for a more
detailed description of the reasons for our Board's decision to pursue a reverse
stock split instead of an alternative transaction structure.
As a result, on March 4, 2003, Messrs. Finneran and Kastelic delivered a
letter to our Board of Directors in which they proposed that we undertake a
going private transaction in the form of a reverse stock split in which
shareholders holding less than one share after the reverse stock split would be
entitled to receive a cash payment equal to $6.50 per pre-split share. As a
result of the proposed transaction, it was expected that Messrs. Finneran and
Kastelic would likely increase their beneficial ownership of our common stock
from approximately 71% to 100%. The original letter delivered to our Board of
Directors is included as Exhibit A to this proxy statement.
Messrs. Finneran and Kastelic considered the following to be reasons for
submitting their reverse stock split proposal:
12
o the significant tangible and intangible costs of our being a public
company are not justified because we have not been able to realize
many of the benefits that publicly traded companies sometimes realize.
(For example, by virtue of a company having its common stock listed on
an exchange or quoted on an automated quotation system, a liquid
trading market often develops for that stock. As a result, those
companies are sometimes able to attract research analyst coverage,
market attention and institutional shareholder investment. However,
our average daily trading volume over the 12 month period from April
2002 through March 2003 was only approximately 269 shares; the
difference (or spread) between our stock's bid price and its ask price
restricts trading in our stock because it averaged about $0.93 per
share over the 12 month period from April 2002 through March 2003 (or
about 15% of our stock's average closing bid price over that period);
and we have not accessed the public markets to raise equity capital.);
o our stock's small public float, extremely limited trading volume,
significant "bid-ask" trading price spread and delisting from The
Nasdaq Stock Market have further limited the ability of our
shareholders to sell their shares without also reducing our trading
price, as well as our ability to use our stock as acquisition currency
or to successfully attract and retain employees; and
o we have been generally unsuccessful in increasing shareholder value
through more traditional means (for example, we have tried to achieve
revenue and earnings growth and increase our shareholder value by
pursuing potential acquisitions of competitors, customers and vendors;
we divested our unprofitable Gilco division in September 2000; and we
undertook an unsuccessful process of soliciting preliminary
indications of interest for a sale of all or a part of the company in
the second quarter of 1999 and again in the first quarter of 2000).
In addition, Messrs. Finneran and Kastelic considered the advantages of a
reverse stock split, discussed below under "Special Factors - Advantages of the
Reverse Stock Split," to be important reasons for proposing the transaction.
Alternatives to the Reverse Stock Split
Since Messrs. Finneran and Kastelic made the reverse stock split proposal
and because they are both directors and officers of our company, our Board of
Directors formed a special committee of independent directors to evaluate the
proposal and negotiate with Messrs. Finneran and Kastelic. In the course of
evaluating the fairness of the reverse stock split proposal, the special
committee considered and discussed various alternatives to the reverse stock
split that may have the effect of increasing shareholder value. The special
committee analyzed various alternatives to determine whether such alternatives
(i) were likely to result in greater long-term value to our shareholders than
the proposed reverse stock split and (ii) would achieve the same result desired
by Messrs. Finneran and Kastelic in submitting their proposal - to increase
shareholder value by providing unaffiliated shareholders with certain liquidity
and to take our company private.
Merger. The special committee considered a merger between us and a newly
created company controlled by Messrs. Finneran and Kastelic. The special
committee considered that such a transaction would achieve the desired outcome
as well as the proposed reverse stock split. However, the special committee
ultimately rejected this alternative because the legal and other transaction
costs associated with a merger would be substantially greater than the costs to
implement the reverse stock split. An increase in transaction costs would reduce
the amount of funds otherwise available to pay to our
13
unaffiliated shareholders. In addition, a merger is a more complicated process
involving additional time, additional legal counsel and potentially other
professional advisors.
Issuer Tender Offer. The special committee considered undertaking an
"issuer tender offer," or an offer to repurchase shares of our outstanding
common stock. The special committee ultimately rejected an issuer tender offer,
primarily because holders of small numbers of shares may be unlikely to make the
effort to tender their shares in view of the nominal value of their holdings.
Thus, a tender offer would likely require a second-step merger (and additional
transaction costs) in order for us to become a private company with only two (or
a small number of) shareholders. Finally, even in the absence of a second-step
merger, the legal and other transaction costs to implement an issuer tender
offer would be substantially greater than the costs to implement a reverse stock
split.
Reinstitution of our Share Repurchase Program. The special committee also
considered reinstituting our share repurchase program that we terminated in
December 2002. The special committee considered and discussed whether allowing
shareholders to selectively sell their shares back to us would increase
shareholder value. Based in part on our experiences with the share repurchase
program, the special committee ultimately concluded that it would not increase
shareholder value primarily because it would tend to preserve the status quo and
would not result in our becoming a private company with only two (or a small
number of) shareholders.
Reverse Stock Split Structured to Retain More than Two Shareholders. The
special committee also considered a reverse stock split ratio which would have
left us with more than two shareholders. However, the special committee
determined that such a proposal would be less beneficial to our remaining
shareholders because they would be left with an even more limited market in
which to sell their shares and would essentially need to rely on our paying
dividends (which has never occurred in the past), or undertaking a liquidity
event such as a merger or sale of assets in order to realize liquidity for their
shares. Of course, an interested unaffiliated shareholder can consolidate his or
her shares or acquire additional shares of our common stock such that the
shareholder owns at least 66,666 shares in a single account at the effective
time of the reverse stock split, thereby electing to remain a shareholder of our
company as a private company.
Declare a Special Cash Dividend. The special committee considered whether
declaring a special cash dividend would result in increasing value for our
shareholders. The committee concluded that the disadvantages of a special cash
dividend outweighed the potential advantages, primarily because a dividend would
be taxed as ordinary income to our shareholders without a corresponding tax
benefit to us. In addition, a dividend may have negative impacts on
existing/future debt covenants, and would not result in our realizing the
advantages of going private.
Sale to a Third Party. In connection with its review of the reverse stock
split proposal and potential alternatives, the special committee did not
consider the possibility of seeking potential strategic or financial acquirors
because Messrs. Finneran and Kastelic, who together own approximately 71% of our
outstanding shares, stated that they were unwilling to consider selling their
shares to an outside third party.
Continuing As a Public Company. The special committee considered taking no
action at this time and continuing to operate our business in accordance with
past practice. However, for the reasons discussed above (including the
significant illiquidity of our shares, the significant and increasing tangible
and intangible costs of compliance with the Exchange Act and the competitive
disadvantages associated with having to disclose proprietary and financial
information), the special committee concluded that continuing to run the
business as a public company would not maximize long-term shareholder value when
compared to other alternatives.
14
Continuing As a Private Company. The special committee considered delisting
our stock from the OTC Bulletin Board and deregistering under the Exchange Act
without first effecting a reverse stock split. However, the special committee
concluded that it might be less beneficial to our shareholders to delist and
deregister without first providing unaffiliated shareholders with an opportunity
to receive liquidity for their shares through a transaction in which they will
generally be eligible to receive capital gains tax treatment for their proceeds,
avoid paying brokerage commissions or fees, and avoid incurring the significant
"bid-ask" discount otherwise incurred in selling our shares.
Effects of the Reverse Stock Split
At the effective time of the reverse stock split, our certificate of
incorporation will be amended so that every 66,666 shares of our common stock
outstanding immediately prior to the effective time of the reverse stock split
will become one share of common stock. Fractional shares will not be issued to
shareholders left with less than one share of stock as a result of the reverse
stock split. Instead, those shareholders will be entitled to receive the cash
consideration of $7.00 per pre-split share. In addition, all outstanding stock
options (except for stock options held by Mr. Kastelic) will be canceled by
entering into individual option cancellation agreements with each optionee prior
to the reverse stock split. For information regarding the tax consequences of
these effects, see the below captioned section "Special Factors - Material U.S.
Federal Income Tax Consequences of the Reverse Stock Split."
Following the reverse stock split, we will terminate the registration of
our common stock under the Exchange Act. This means that, among other things:
o we will no longer be required to file periodic reports (such as 10-Qs
and 10-Ks) with the SEC;
o our officers and directors will no longer have to report transactions
in our stock under the provisions of Section 16 of the Exchange Act;
and
o we will no longer be required to file a proxy or information statement
with the SEC in connection with shareholders' meetings and our common
stock will no longer be listed or traded on the OTC Bulletin Board (or
any other public market).
As a result of the reverse stock split, we believe that Messrs. Finneran
and Kastelic will become our sole remaining shareholders, and will be the sole
beneficiaries of our future earnings and growth, if any. Similarly, Messrs.
Finneran and Kastelic will also bear the risk of any losses generated by our
operations and any decrease in our value after the reverse stock split. However,
any shareholders owning at least 66,666 shares in a single account at the
effective time of the reverse stock split will remain a shareholder of our
company as a private company.
The company, our affiliated shareholders and our unaffiliated shareholders
will all realize advantages and disadvantages by undertaking a reverse stock
split at the present time. See the below captioned sections "Special Factors -
Advantages of the Reverse Stock Split" and "Special Factors - Disadvantages of
the Reverse Stock Split" for a discussion of these effects.
Advantages of the Reverse Stock Split
The special committee and our Board of Directors believe there are numerous
benefits to our unaffiliated shareholders, Messrs. Finneran and Kastelic and our
company associated with the reverse stock split.
15
Advantages of the Reverse Stock Split to Our Unaffiliated Shareholders
Liquidity. Although our common stock is listed on the OTC Bulletin Board,
the trading market for our shares has been extremely limited over the past
several years. Over the 12 month period from April 2002 through March 2003, the
average daily trading volume of our common stock was only approximately 269
shares, with an average daily trading volume of 76 shares in March 2003.
Additionally, our delisting from The Nasdaq National Market and the lack of any
research analyst coverage of our company contribute to a significant lack of
liquidity for our shares. This extremely limited volume contributes to a
significant difference between our stock's "bid" price and "ask" price on most
trading days, which averaged approximately $0.93 per share over the 12 month
period from April 2002 through March 2003 (or about 15% of our stock's average
closing bid price over that period). Additionally, many of our shareholders hold
small amounts of shares and thus could incur disproportionately large brokerage
commissions and fees on a sale of their holdings. Also, because of our extremely
limited trading volume, purchases and sales of even small amounts of our stock
can have a significant impact on our reported sales prices that may not
correspond to the actual value of our shares. The special committee and our
Board of Directors believe that the reverse stock split will benefit our
shareholders by allowing them to liquidate their holdings in a transaction at a
fair price in which they will generally be eligible to receive capital gains tax
treatment for their proceeds, will avoid paying brokerage commissions or fees,
and will avoid incurring the significant "bid-ask" discount otherwise incurred
in selling our stock.
Advantages of the Reverse Stock Split to Messrs. Finneran and Kastelic and
Our Company
Cost Savings. The special committee and our Board of Directors believe that
termination of registration under the Exchange Act will result in substantial
legal, accounting and other significant tangible and intangible cost savings
associated with:
o the preparation and filing of periodic and current reports under the
Exchange Act;
o the review of quarterly financial information by our independent
auditors;
o our maintenance of a transfer agent for our common stock;
o the preparation and filing of periodic reports by management and
others under Section 16 and Section 13 of the Exchange Act related to
share ownership and transactions in our stock;
o the preparation, filing and mailing of annual reports, annual proxy
materials for election of directors and periodic proxy materials for
other significant corporate events or transactions requiring a
shareholder vote under New Jersey law;
o compliance with other laws and regulations related to having a class
of securities registered under the Exchange Act, including among
others regulations regarding the composition of audit committees,
Regulation FD, the Sarbanes-Oxley Act of 2002, and the upcoming
conversion of the OTC Bulletin Board to the Bulletin Board Exchange
(commonly referred to as the "BBX");
o directors' and officers' insurance premiums (which are typically
higher for public companies);
o the distribution of press releases regarding material events; and
16
o investor relations activities.
Based on our experience in prior years, our direct tangible costs of our
being a public company are estimated at approximately $150,000 annually. We
expect the actual cost savings of being a private company to be greater than
simply eliminating the estimated historical costs because, importantly, we will
avoid the costs of compliance with the Sarbanes-Oxley Act of 2002, which was
passed in July 2002 and which has not yet been fully implemented through
adoption of SEC rules. The Sarbanes-Oxley Act has already increased our cost of
compliance with the Exchange Act, and such costs would only increase as further
rules are adopted in the future. Additionally, we will avoid the costs
associated with application and continued listing of our common stock on the
soon-to-be-created BBX.
Confidentiality. As a company subject to the disclosure requirements of the
Exchange Act, we have certain obligations to publicly disclose material
information about our operations and other significant corporate events.
Following the reverse stock split, we will no longer be subject to those
requirements, and will be able to maintain important operational and other
information in relative confidence. Of course, disclosure to shareholders of
certain information may still be required in connection with undertaking
significant corporate transactions, and limited state law provisions regarding
disclosure of information to shareholders upon request will still apply to us.
Nevertheless, the significant reduction in the number of shareholders and
elimination of the necessity to comply with the disclosure requirements of the
Exchange Act will result in our essentially being able to retain all important
operational and other business information in confidence.
Management Focus. Our management devotes substantial time and effort each
quarter to the preparation of financial statements and the gathering and
summarizing of information required to be disclosed in periodic reports filed
with the SEC. In addition, our management continuously monitors SEC and
legislative developments impacting public companies to ensure our continued
compliance with applicable law, as well as continued compliance by our officers,
directors and significant shareholders. A reverse stock split transaction that
results in de-registration under the Exchange Act will allow management to focus
additional time and effort on effectively managing our business and operations
without the administrative burdens of SEC and related compliance.
In addition, analysts and the public markets place pressure on companies to
manage the business to achieve short-term objectives such as quarterly per share
earnings. Often, companies are "encouraged" to make certain decisions for the
benefit of short-term earnings that may not be in the best interests of
sustained long-term growth. Even though we do not enjoy any research analyst
following, our stock price performance can be seen by customers, suppliers and
competitors as an indicator of the health of our business. As a result, our
business must be managed with an understanding of how operating decisions will
affect the price of the stock. Following the reverse stock split, management
would be better able to run the business with the shareholders' long-term
interests in mind since it would no longer have to meet public expectations of
stock price performance.
Finally, the absence of public shareholder constituents will allow
management more flexibility in the operation of the business since we will no
longer need to be concerned about public reaction or perception (apart from, of
course, the reactions and perceptions of our customers, vendors and industry
participants in general). This should allow management to react more quickly to
specific market or customer conditions.
17
Disadvantages of the Reverse Stock Split
While the special committee and our Board of Directors believe the reverse
stock split is fair to our unaffiliated shareholders, they recognized that such
a transaction may have certain detrimental effects both to our unaffiliated
shareholders and to Messrs. Finneran and Kastelic.
Disadvantages of the Reverse Stock Split to Our Unaffiliated Shareholders
No Participation in Potential Future Appreciation. Our shareholders who are
cashed out in the reverse stock split will no longer own any equity interest in
us and will have no opportunity to participate in or benefit from any potential
future appreciation in our value. In addition, those shareholders will not have
an opportunity to liquidate their shares at a time and for a price of their
choosing.
Reduced Liquidity. Shareholders owning at least 66,666 shares in a single
account at the effective time of the reverse stock split will remain a
shareholder of our company as a private company. Because we will terminate the
registration of our common stock under the Exchange Act and our common stock
will no longer be listed or traded on the OTC Bulletin Board (or any other
public market), our common stock essentially will be illiquid following the
reverse stock split.
Disadvantages of the Reverse Stock Split to Messrs. Finneran and Kastelic
and Our Company
Reduced Management Incentive. The lack of liquidity provided by a ready
market may result in fewer opportunities to utilize equity based incentive
compensation tools to recruit and retain top executive talent. Stock options and
other equity based incentives are typically less attractive if they cannot be
turned into cash quickly and easily once earned. The special committee and our
Board of Directors believed that this is unlikely to have any such adverse
impact on us, since stock options and other equity based incentives have not
been a significant part of our executives' compensation packages in the past.
Less Attractive Acquisition Currency. Stock that is registered under the
Exchange Act and actively traded on an exchange or quotation system is generally
a more attractive acquisition currency than unregistered stock, since the
purchaser of the publicly traded security has constant access to important
information about the company and can access the markets to sell the stock and
can easily determine the value of the stock (i.e., the price to be received upon
sale). That is, to a certain extent, stock of a publicly traded company with
significant liquidity is nearly as good as cash (except for transaction costs
associated with sale and with more risk). A purchaser of illiquid securities of
a private company must depend for liquidity either on negotiated buy-out or
buy-back arrangements, or a liquidity event by the company that is generally
outside of its control. The special committee and our Board of Directors
recognized that this may not be a significant disadvantage, however, because (i)
the relative illiquidity of our shares makes our stock less attractive than most
publicly traded securities with significant trading volume and (ii) we have not
historically utilized stock in acquisitions.
18
Reduced Equity Capital Raising Opportunities. One of the primary reasons
many companies "go public" in the first place is to be able to more easily and
efficiently access the public capital markets to raise cash. Similar
opportunities are generally less available (without significant expense) to
companies who do not wish to have a class of securities registered under the
Exchange Act. Following the reverse stock split, since we will no longer be
registered under the Exchange Act and public information regarding us will no
longer be readily accessible, it will likely be more costly and time consuming
for us to raise equity capital from public sources. Again, the special committee
and our Board of Directors concluded that this may be of little significance to
us since we have not attempted to access the public capital markets for
financing purposes since we initially became a public company.
Loss of Prestige. Public companies are often viewed by shareholders,
employees, investors, customers, vendors and others as more established,
reliable and prestigious than privately held companies. In addition, public
companies are typically followed by analysts who publish reports on their
operations and prospects, and garner more press and media coverage than
companies whose securities are not available for purchase by the investing
public. Companies who lose status as a public company may risk losing prestige
in the eyes of the public, the investment community and key constituencies.
However, the special committee and our Board of Directors felt that this was not
a significant factor in considering whether to undertake a going private
transaction. Our shareholder base includes numerous people familiar with the
concrete pumping industry who know our products, our history and our reputation.
The special committee and our Board of Directors believed that a going private
transaction would not likely alter the perception of our company in their eyes,
or in the eyes of our employees, suppliers and customers who are aware of our
unique position in the industry and relatively large North American market
share.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
THE FOLLOWING DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE REVERSE STOCK SPLIT TO UNAFFILIATED SHAREHOLDERS IS BASED ON THE INTERNAL
REVENUE CODE (THE "CODE"), APPLICABLE TREASURY REGULATIONS PROMULGATED UNDER THE
CODE, JUDICIAL AUTHORITY AND CURRENT ADMINISTRATIVE RULINGS AND PRACTICES, ALL
AS IN EFFECT ON THE DATE OF THIS PROXY STATEMENT. CHANGES TO THE LAWS COULD
ALTER THE TAX CONSEQUENCES DESCRIBED BELOW, POSSIBLY WITH RETROACTIVE EFFECT.
THIS SUMMARY ASSUMES THAT YOU HOLD YOUR SHARES AS A "CAPITAL ASSET," AS DEFINED
IN THE CODE (I.E., GENERALLY, PROPERTY HELD FOR INVESTMENT). THIS DISCUSSION
DOES NOT ADDRESS ANY LOCAL, STATE, FOREIGN OR MINIMUM INCOME OR OTHER TAX
CONSEQUENCES. IN ADDITION, THIS SUMMARY DOES NOT ADDRESS THE TAX CONSEQUENCES TO
HOLDERS THAT ARE SUBJECT TO SPECIAL TAX RULES, INCLUDING WITHOUT LIMITATION
BANKS, INSURANCE COMPANIES, REGULATED INVESTMENT COMPANIES, PERSONAL HOLDING
COMPANIES, FOREIGN ENTITIES, NONRESIDENT ALIEN INDIVIDUALS, BROKER-DEALERS,
TRADERS, TAX-EXEMPT ENTITIES AND PERSONS WHO HOLD OUR COMMON STOCK AS A POSITION
IN A HEDGING TRANSACTION, "STRADDLE," "CONVERSION TRANSACTION" OR OTHER RISK
REDUCTION TRANSACTION. WE URGE SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE PARTICULAR CONSEQUENCES TO THEM.
If you receive cash in lieu of fractional shares as a result of the reverse
stock split, you will recognize capital gain or loss for United States federal
income tax purposes equal to the difference, if any, between the amount of cash
received and your adjusted tax basis in the shares of our common stock
surrendered. Gain or loss will be determined separately for each block of shares
(i.e., shares acquired at the same cost in a single transaction) surrendered for
cash pursuant to the reverse stock split. Such gain or loss will be long-term
capital gain or loss provided that your holding period for such shares is more
than 12 months by the effective date of the reverse stock split. Long-term
capital gains of individuals are eligible for reduced rates of taxation. There
are limitations on the deductibility of capital losses.
19
Under the U.S. federal backup withholding tax rules, unless an exemption
applies, the paying agent will be required to withhold, and will withhold, 30%
of all cash payments to which you are entitled pursuant to the reverse stock
split, unless you provide a tax identification number (social security number,
in the case of an individual, or employer identification number, in the case of
other shareholders), certify that such number is correct and otherwise comply
with such backup withholding tax rules. You should complete and sign the
Substitute Form W-9 included as part of the letter of transmittal to be returned
to the paying agent, in order to provide the information and certification
necessary to avoid backup withholding tax, unless an exemption applies and is
established in a manner satisfactory to the paying agent.
If you own at least 66,666 shares in a single account at the effective time
of the reverse stock split, thereby electing to remain a shareholder of the
company as a private company, your aggregate tax basis in shares received
pursuant to the reverse stock split will be the same as your aggregate tax basis
in your current shares exchanged therefore. Your holding period for shares
received pursuant to the reverse stock split will include the holding period of
the shares that you held prior to the reverse stock split exchanged therefore,
provided that you held such common stock as a capital asset immediately prior to
the exchange. You will not recognize gain or loss on any shares exchanged in
this manner.
Cash consideration received by persons in exchange for the cancellation of
outstanding stock options will generally be recognized as ordinary income for
United States federal income tax purposes.
Neither Messrs. Finneran or Kastelic nor our company will recognize any
gain or loss as a result of the reverse stock split.
Plans or Proposals After the Reverse Stock Split
After completion of the reverse stock split, we will terminate the
registration of our common stock under the Exchange Act and our common stock
will no longer be listed or traded on the OTC Bulletin Board (or any other
public market). Additionally, we may eliminate or reduce directors' fees and
substantially reduce or eliminate our directors and officers' liability
insurance coverage.
Messrs. Finneran and Kastelic expect that, following completion of the
reverse stock split, our business operations will be conducted substantially as
they are currently being conducted. They have no other current plans or
proposals or negotiations which relate to or would result in an extraordinary
corporate transaction involving our corporate structure, business or management,
such as a merger, reorganization, liquidation, relocation of any operations, or
sale or transfer of a material amount of assets. Nevertheless, Messrs. Finneran
and Kastelic may initiate from time to time reviews of us and our assets,
corporate structure, capitalization, operations, properties, management and
personnel to determine what changes, if any, would be desirable following the
reverse stock split in order to best organize our activities. Messrs. Finneran
and Kastelic reserve the right to make any changes that they deem necessary or
appropriate in light of their review or in light of future developments. For the
purpose of ensuring that Mr. Kastelic remains with our company on a long-term
basis following the going private transaction, we understand that Mr. Finneran
has held informal and preliminary discussions with Mr. Kastelic regarding a
long-term employment agreement for Mr. Kastelic in the future. However, no
substantive terms have been discussed or negotiated.
In addition, we may also consider material changes in our present dividend
policy, indebtedness, capitalization and management and employee incentive plans
and may consider pursuing acquisition opportunities.
20
We have no current plans, and Messrs. Finneran and Kastelic have no current
plans, that would require us to issue additional shares of stock, although we
reserve the right to do so at anytime at such prices and on such terms as our
Board determines to be in the best interests of us and our shareholders.
Recommendations of the Special Committee and Our Board of Directors
The special committee unanimously determined that the reverse stock split
is fair to, and in the best interests of, our unaffiliated shareholders, and
unanimously recommended to our Board of Directors that our Board of Directors
should:
o approve the reverse stock split proposal;
o submit the reverse stock split proposal to a vote of our shareholders,
with adoption of the proposal conditioned on receipt of the necessary
shareholder approval vote required under New Jersey law, as well as
the requirement that a majority of all outstanding shares held by our
unaffiliated shareholders not be voted against the reverse stock split
proposal; and
o recommend that our shareholders vote to adopt the reverse stock split
proposal.
Based on the unanimous recommendation of the special committee, by a
unanimous vote of our full Board of Directors (other than Messrs. Finneran and
Kastelic, who abstained from the vote due to their interests in the
transaction), our Board of Directors:
o approved the reverse stock split proposal;
o submitted the reverse stock split proposal to a vote of our
shareholders, with adoption of the proposal conditioned on receipt of
the necessary shareholder approval vote required under New Jersey law,
as well as the requirement that a majority of all outstanding shares
held by our unaffiliated shareholders not be voted against the reverse
stock split proposal; and
o recommended that our shareholders vote to adopt the reverse stock
split proposal.
Position of the Special Committee and Our Board of Directors as to the Fairness
of the Reverse Stock Split
The special committee and Board of Directors believe that the reverse stock
split proposal is fair to, and in the best interests of, our unaffiliated
shareholders. In determining the fairness of the reverse stock split, the
special committee considered a number of factors prior to unanimously
recommending the approval of the reverse stock split proposal. The special
committee discussed those factors in detail with our Board of Directors, and our
Board of Directors (other than Messrs. Finneran and Kastelic, who abstained from
the vote due to their interests in the transaction), adopted the analysis of its
special committee in approving the reverse stock split proposal. In particular,
the special committee and our Board of Directors considered the advantages and
disadvantages of a going private transaction discussed under the headings
"Special Factors - Advantages of the Reverse Stock Split" and "Special Factors -
Disadvantages of the Reverse Stock Split," and decided that the advantages
outweighed the disadvantages.
21
Substantive Fairness of the Reverse Stock Split
In considering whether the per pre-split share price payable is
substantively fair from a financial point of view to our unaffiliated
shareholders, the special committee considered, and our Board reviewed, the
historical financial information provided by Mr. Skaar and the various analyses
provided by Mr. Schroeder of Schroeder & Co. (Mr. Skaar is our Chief Financial
Officer and currently holds 7,000 shares of our stock. He will therefore receive
a cash payment of $49,000 (before applicable taxes) for his current
shareholdings as a result of the reverse stock split.) You can read more about
Schroeder & Co.'s analyses under "Special Factors -- Opinion of Schroeder & Co."
In particular, the special committee considered and gave the most weight to the
following valuation approaches:
o Enterprise value. The special committee gave the most weight to the
analyses of our enterprise value. Enterprise value is a measure of
what the market believes our ongoing operations are worth. The special
committee reviewed and assessed our enterprise value based on our
earnings before interest, taxes, depreciation and amortization (called
"EBITDA") for fiscal year 2002 and also our average EBITDA for fiscal
year 2000 through fiscal year 2002. Our EBITDA numbers were based on
information contained in our public filings and provided by Mr. Skaar.
The special committee gave the most weight to the results from our
most recently completed fiscal year and secondarily to our average
results over the previous three fiscal years. It applied various
multiples to EBITDA, ranging from four times EBITDA to eight times
EBITDA. The special committee also considered the appropriateness of
various discounts based primarily on its market knowledge and advice
from Mr. Schroeder, and concluded that discounts of between 25% and
50% could reasonably be applied to the interests of our unaffiliated
shareholders. The special committee based its determinations regarding
fairness from an enterprise valuation perspective on the application
of what it perceived to be the lowest appropriate discount, or 25%.
Based on analyses performed by Mr. Schroeder and described in more
detail under "Special Factors -- Opinion of Schroeder & Co," a
multiple of five times EBITDA and application of a 25% discount
indicated a value of approximately $6.05 per share based on our fiscal
year 2002 EBITDA and $7.67 based on an average of our last three
fiscal years' EBITDA. A multiple of four times EBITDA and application
of a 25% discount indicated a potential value of approximately $4.68
per share based on our fiscal year 2002 EBITDA and $5.48 based on an
average of our last three fiscal years' EBITDA. Based on market data
provided by Mr. Schroeder (in particular, data demonstrating a general
downward trend in EBITDA multiples in acquisition transactions over
the past five years, from approximately 9.4 times EBITDA in 1997 to
approximately 5.7 times EBITDA in 2002, for transactions smaller than
$100 million), as well as the special committee's own extensive
professional acquisition and valuation experience and discussions with
its advisors, the committee concluded that an appropriate
pre-discounted EBITDA multiple was somewhere between four and five
times our fiscal year 2002 EBITDA. An EBITDA multiple of four to five
times our fiscal year 2002 EBITDA, with the application of a 25%
discount, indicated a potential per share price of $4.68 - $6.08.
Subsequent to our Board's approval of the reverse stock split
proposal, our management discovered that an inadvertent error had been
made with respect to calculation of our enterprise value previously
provided to the special committee. Specifically, Mr. Skaar informed
the special committee that the non-recurring compensation expense
should have been $1,381,444 instead of $1,241,444. This error
increased the per share pre-discount enterprise value for fiscal year
2002, as well as the average per share pre-discount
22
enterprise value for the three year period ending in fiscal year 2002.
Based on these revised numbers, a multiple of five times EBITDA and
application of a 25% discount indicates a potential value of
approximately $6.29 based on our fiscal year 2002 EBITDA and $7.75
based on an average of our last three fiscal years' EBITDA. A multiple
of four times EBITDA and application of a 25% discount indicates a
potential value of approximately $4.85 based on our fiscal year 2002
EBITDA and $6.02 based on an average of our last three fiscal years'
EBITDA. The special committee was informed of the error and concluded
that the modified numbers in no way impacted its views regarding the
fairness of the transaction.
o Discounted cash flow. Discounted cash flow is a method of evaluating
an investment in our company by estimating our future cash flows and
taking into consideration the time value of money. In other words,
discounted cash flow is what someone is willing to pay today in order
to receive our anticipated cash flow in future years, terminal value
and cost of capital. The special committee analyzed our discounted
cash flow value, utilizing the projections provided by Mr. Skaar and
analyses performed by Mr. Schroeder, which you can read more about
under "Special Factors -- Opinion of Schroeder & Co." By applying the
same 25% discount to a multiple of five times EBITDA, a discounted
cash flow analysis indicated a potential per share price of
approximately $7.55. However, the special committee did not give as
much weight to the discounted cash flow analysis, primarily because
forecasts of potential cash flows for five years or more are very
uncertain. Additionally, it felt the relative arbitrariness of
discount rates resulted in such a method being less reliable than an
EBITDA analysis.
o Historical and current market prices. The special committee also
compared the proposed transaction price to various bid prices of our
common stock over the past 12 and 24 months, as well as our stock's
bid prices prior to receipt of the reverse stock split proposal on
March 4, 2003, prior to the first public announcement of the reverse
stock split proposal on March 12, 2003, and prior to Board approval of
the reverse stock split on April 1, 2003. Our stock's bid price is the
highest price that a buyer will pay at any given time to purchase a
specified number of shares of our stock.
Specifically, the special committee reviewed our stock's high bid
price for each month in the period from April 2002 to March 2003 and
our stock's closing bid price on the last day of each month during the
period, and determined the average high bid price and closing bid
price for that period was $6.61 and $6.21, respectively. It considered
that the $7.00 transaction price represents a premium of 6.0% and
12.7% over our stock's average high bid price and closing bid price
for the related periods, respectively.
The special committee also reviewed our stock's high bid price for
each month in the period from April 2001 to March 2002 and our stock's
closing bid price on the last day of each month during the same
period, and determined the average high bid price and closing bid
price for that period was $5.44 and $5.06, respectively. It considered
that the $7.00 transaction price represents a premium of 28.8% and
38.3% over our stock's average high bid price and closing bid price
for the related periods, respectively.
The special committee also considered that the $7.00 transaction price
represents (i) a 16.7% premium over our stock's closing bid price on
March 3, 2003 of $6.00 per share; (ii) a 7.7% premium over our stock's
closing bid price on March 11, 2003 of $6.50 per share; and (iii) a
14.8% premium over our stock's closing bid price on April 1, 2003 of
$6.10 per share.
23
Furthermore, the special committee considered that, with an average
daily trading volume of only approximately 269 shares over the past 12
months, the representative bid prices would have been valid for only a
modest number of shares before decreasing measurably.
o Recent stock repurchases. The special committee considered our
repurchases of 1,000,239 shares and share equivalents (or
approximately 38% of our total outstanding shares, assuming all
repurchased stock options had been exercised) between November 2001
and January 2003 at a price of $7.00 per share (including our
repurchase of 360,277 shares from current or former directors and
officers). See "Other Matters - Transactions in Capital Stock by
Certain Persons." The special committee believed that (i) the
significant number of shares repurchased, including repurchases of a
total of 111,666 shares and stock options to acquire 248,611 shares
from former directors or executives, evidenced that $7.00 per share is
a fair price in a transaction without brokerage fees or commissions or
incurring the significant "bid-ask" spread in our stock and (ii) in
the absence of the share repurchase plan and a significant majority
shareholder, the trading prices of our common stock would have likely
been much lower.
The special committee also considered, but did not factor into its
assessment of a fair per pre-split transaction price to our unaffiliated
shareholders, the following valuation approaches:
o Liquidation value. Liquidation value is the value of our individual
assets, valued as if we cannot continue as a going-concern and must
sell all of our assets. Mr. Skaar provided the special committee with
an analysis of our liquidation value that was based on assumptions
regarding realizable values of our assets. The liquidation value
analysis indicated a per share price of approximately $1.90 as of
January 31, 2003. The special committee did not believe that the
liquidation value of our assets was representative of a fair price for
our unaffiliated shareholders' shares because (i) given the nature of
our business, any liquidation would significantly impair the value of
our assets and (ii) Messrs. Finneran and Kastelic expressed their
desire for our business to operate as a going concern and, given our
financial position and relatively stable results of operations, it
seemed unlikely that a liquidation of our company would occur other
than voluntarily in the foreseeable future. In addition, the special
committee disregarded the liquidation analysis because the results
showed a per share price significantly lower than the other analyses
undertaken.
o Net book value and net tangible book value per share. Book value per
share is calculated as the assets of our company minus the liabilities
of our company, divided by our total outstanding shares. Net tangible
book value per share is calculated as our shareholders' equity less
goodwill, divided by weighted average shares outstanding assuming
dilution. Mr. Skaar provided the special committee with information
regarding our preliminary net book value per share and preliminary net
tangible book value per share as of January 31, 2003, which on a
fully-diluted basis were $9.41 and $5.82, respectively. The special
committee did not consider net book value or net tangible book value
to be meaningful in assessing the fairness of the proposed transaction
price primarily because net book value and net tangible book value are
accounting methodologies based on historical cost and do not
adequately reflect either current economic conditions and events or a
company's current or expected results of operations.
o Market examples analysis. Schroeder & Co. provided the special
committee with certain historical information regarding the trading
prices for the capital stock of certain
24
companies in our industry, expressed in terms of multiples of
operating measures such as earnings. Data reviewed by the committee
suggested that the other companies had an average price/earnings ratio
of 13.14 as of March 31, 2003, which would indicate a transaction
price of $8.67 per share. The special committee did not place emphasis
on this comparative information, primarily because the other companies
were generally much larger than us, had much larger public floats and
outstanding shares (with average shares outstanding of 32,600,000),
had much higher average daily trading volume (approximately 144,438
shares traded per day), and generally did not experience the
significant bid/ask trading spread experienced with respect to the
trading of our common stock. You can read more about Schroeder & Co.'s
market examples analysis under "Special Factors -- Opinion of
Schroeder & Co."
In addition, the special committee and Board of Directors considered the
following factors:
o the opinion of Schroeder & Co., a copy of which is attached to this
proxy statement as Exhibit C, that, as of the date of the opinion, the
price of $7.00 is fair, from a financial point of view, to our
unaffiliated shareholders;
o that, with an average daily trading volume of only approximately 269
shares over the 12 month period from April 2002 through March 2003,
our stock's bid prices would have been valid for only a very small
number of shares before decreasing measurably;
o that appropriate valuation discounts for cashing out a minority
interest in our company are between 25% and 50% of enterprise value;
o the willingness of our current directors, other than Messrs. Finneran
and Kastelic, to receive the $7.00 per pre-split share price for their
shares and share equivalents, representing their belief in the
fairness of a $7.00 per pre-split share price to them;
o the availability of financing on acceptable terms sufficient to fund
the costs of the reverse stock split;
o our inability to enter into a strategic sale transaction in 1999 and
2000 and our current inability to initiate interest in the minority
shares by a potential third party bidder due to Messrs. Finneran and
Kastelic's expressed unwillingness to consider any alternative
transaction in which they would sell their shares to an outside third
party; and
o although the special committee did not seek indications of interest
from outside third parties, it considered that no potential interested
acquirors contacted management or the special committee following the
March 12, 2003 announcement of our receipt of the reverse stock split
proposal expressing interest in offering a higher price for the shares
owned by our unaffiliated shareholders.
The special committee placed the greatest weight on the Schroeder & Co.
opinion and on its analysis of our enterprise value, primarily based on
historical EBITDA and appropriate valuation discounts, and did not assign any
particular weight to any of the other factors.
25
Procedural Fairness of the Reverse Stock Split Proposal
The special committee and our Board of Directors also assessed whether the
reverse stock split proposal was procedurally fair to our unaffiliated
shareholders. The special committee and Board of Directors considered the
following factors:
o while not required by the New Jersey Business Corporation Act or
certificate of incorporation or bylaws, shareholder approval of the
reverse stock split is conditioned upon the satisfaction of the
reverse majority of the minority shareholder approval condition;
o that the reverse majority of the minority shareholder approval
condition better reflects the true will of our unaffiliated
shareholders because shareholders are more likely to exercise their
right to vote on a proposal that they believe to be against their
interests than they are to vote on a proposal that they believe to be
in their interests;
o that although the special committee did not retain an unaffiliated
representative to act solely on behalf of our unaffiliated
shareholders, the interests of unaffiliated shareholders would be
protected by our use of an independent financial advisor and would be
adequately represented in the decision-making process through the
establishment of a special committee consisting of independent
directors;
o that the terms and conditions of the reverse stock split proposal were
determined through arm's-length negotiations between Messrs. Finneran
and Kastelic and the special committee, which consisted solely of
independent and disinterested directors; and
o that the special committee unanimously recommended to our Board of
Directors that it approve the reverse stock split proposal and
recommend that our shareholders vote to adopt the proposal.
The special committee did not assign any particular weight to any of these
factors.
Messrs. Finneran and Kastelic's Position as to the Fairness of the Reverse Stock
Split
The rules of the Securities and Exchange Commission require Mr. Finneran
and Mr. Kastelic to each individually express his belief as to the fairness of
the reverse stock split to our unaffiliated shareholders. Mr. Finneran and Mr.
Kastelic each have independently conducted the required fairness analysis. Each
of Mr. Finneran and Mr. Kastelic has separately concluded that the reverse stock
split proposal is both substantively and procedurally fair to, and in the best
interests of, our unaffiliated shareholders. Each of Mr. Finneran and Kastelic
base his belief regarding the substantive and procedural fairness of the reverse
stock split on the same factors discussed above attributable to the similar
belief of the special committee and our Board of Directors. See "Special Factors
- - Position of the Special Committee and Our Board of Directors as to the
Fairness of the Reverse Stock Split." Each of Mr. Finneran and Mr. Kastelic have
adopted the analysis and findings of the special committee and our Board of
Directors in this regard.
In their capacities as directors, Messrs. Finneran and Kastelic abstained
from voting on the approval of the reverse stock split proposal due to their
interests in the transaction. Their beliefs as to the fairness of the reverse
stock split contained herein do not constitute a recommendation to any
shareholder as to how that shareholder should vote on the reverse stock split.
26
Opinion of Schroeder & Co.
On March 12, 2003, the special committee engaged Schroeder & Co. to provide
financial assistance and advice with respect to Messrs. Finneran and Kastelic's
reverse stock split proposal and to render a written opinion as to the fairness
of the transaction price ultimately negotiated by the special committee, from a
financial point of view, to our unaffiliated shareholders. We paid Schroeder &
Co. a fee of $25,000 for its services, $10,000 of which was paid upon engagement
and the remainder of which was paid upon initial delivery of its opinion. Other
than with respect to this engagement, Schroeder & Co. has never provided any
other investment banking or financial advisory services to our affiliates or us.
Schroeder & Co. is a private investment bank that evaluates businesses and
their securities in connection with mergers and acquisitions, negotiates
underwritings, provides services in connection with private placements and
conducts valuations for estate, corporate and other purposes. Mr. Schroeder is
the President of Schroeder & Co. and former Executive Vice President of the
financial services holding company whose principal subsidiary was First of
Michigan Corporation, a securities broker/dealer. The special committee selected
Schroeder & Co. as its financial advisor based primarily on the experience of
Schroeder & Co. in the valuation of businesses and their securities (and in
particular, its knowledge of and experience with small public companies such as
ours), previous positive experiences of the members of the special committee
with Schroeder & Co., and the reasonable fee proposed.
The special committee did not impose any limitations on the scope of
Schroeder & Co.'s investigation or the procedures followed by Schroeder & Co. in
rendering its opinion.
On April 1, 2003, Schroeder & Co. rendered its oral opinion (subsequently
confirmed in a writing dated April 1, 2003 which does not differ from
its oral opinion) to the special committee to the effect that, as of that date,
the price of $7.00 is fair, from a financial point of view, to our unaffiliated
shareholders.
Schroeder & Co. did not recommend the amount of consideration to be paid in
the reverse stock split; rather, the amount was determined by arm's-length
negotiations between the special committee and Messrs. Finneran and Kastelic.
The full text of Schroeder & Co.'s written opinion, dated April 1, 2003, is
attached as Exhibit C to this proxy statement. You should read that opinion for
a discussion of the procedures followed and factors considered in connection
with the delivery of Schroeder & Co.'s opinion. The following is a summary of
that opinion and the methodology that Schroeder & Co. used to render its
fairness opinion.
Schroeder & Co.'s advisory services and opinion were provided for the
information and assistance of the special committee in connection with its
consideration of the reverse stock split proposal. Schroeder & Co.'s opinion is
not intended to be and does not constitute a recommendation to any shareholder
as to how such shareholder should vote with respect to the reverse stock split.
Schroeder & Co. was not requested to opine as to, and its opinion does not
address, the special committee or Board of Directors' underlying business
decision to proceed with the reverse stock split.
In arriving at its opinion and in performing its related financial
analyses, Schroeder & Co. reviewed, among other things:
o our certificate of amendment;
27
o the proposal letter, dated March 4, 2003, submitted to our Board of
Directors by Messrs. Finneran and Kastelic;
o our annual reports to shareholders and annual reports on Form 10-K for
the past five fiscal years and the preliminary financial results for
the fiscal year ended January 31, 2003;
o our quarterly reports on Form 10-Q for the quarters ended April 30,
2002, July 31, 2002 and October 31, 2002;
o other communications and information provided by us, including
background company and industry information as well as our proxy
statements for the past five fiscal years;
o market price data for us and selected other companies for the past ten
years; and
o financial analyses and forecasts prepared by our management, as
described in "Special Factors - Position of the Special Committee and
Our Board of Directors as to the Fairness of the Reverse Stock Split."
Schroeder & Co. held discussions with certain senior officers and other
representatives and advisors concerning our businesses, opportunities, and
prospects. Schroeder & Co. examined certain publicly available business and
financial information relating to the industries in which we operate. Schroeder
& Co. reviewed the financial terms of the reverse stock split proposal to our
unaffiliated shareholders in relation to, among other things, current and
historical market prices, trading volumes and bid/ask spread of our common
stock; historical and projected earnings and other operating data; and our
historical and projected capitalization and financial condition. In addition,
Schroeder & Co. compared certain financial and stock market information related
to us with similar information for certain other companies the securities of
which are publicly traded; reviewed the financial terms of certain recent
business combinations; and performed such other studies and analyses as it
considered appropriate.
In arriving at its opinion, Schroeder & Co. assumed and relied upon the
accuracy and completeness of the financial and other information used by
Schroeder & Co. without assuming any responsibility for independent verification
of that information, and further relied upon assurances of our management that
they were not aware of any facts or circumstances that would make that
information inaccurate or misleading. With respect to our financial projections,
we advised Schroeder & Co. that the financial projections were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of our management as to the future financial performance. Accordingly,
Schroeder & Co. assumed that we would perform substantially in accordance with
those projections.
In connection with rendering its opinion, Schroeder & Co. performed certain
financial, comparative and other analyses as described below. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and therefore, is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Schroeder & Co. considered the results of all of its analyses and did not
attribute any particular weight to any analysis or factor considered by it.
Accordingly, Schroeder & Co. believes that its analyses must be considered as a
whole and that considering any portion of those analyses and factors, without
considering all analyses and factors as a whole, could create a misleading or
incomplete view of the process underlying its opinion.
In its analyses, Schroeder & Co. made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond our
28
control. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth in the estimates. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
The following is a summary of the material financial analyses used by
Schroeder & Co. in connection with providing its opinion to the special
committee.
EBITDA Based Enterprise Value Analyses. Schroeder & Co. conducted an
analysis of our enterprise value based on our earnings before interest, taxes,
depreciation and amortization (called "EBITDA") for fiscal year 2002 and also
our average EBITDA for fiscal year 2000 through fiscal year 2002, based on
information contained in our public filings and provided by our management.
In arriving at EBITDA for fiscal year 2002, Schroeder & Co. began with our
fiscal year 2002 earnings before taxes of $1,881,559 and added to that number
depreciation and amortization of $890,013, interest expense of $200,382 and
$1,241,444 in non-recurring charges related to the repurchase of certain shares
and share equivalents in fiscal year 2002 from departing or former executives,
to arrive at EBITDA for fiscal year 2002 of $4,213,398. Schroeder & Co. then
applied multiples of 4.0x and 5.0x and subtracted net debt as of January 31,
2003 to arrive at various estimates of enterprise value. Schroeder & Co. then
applied various discounts ranging from 25% to 45% to reflect the fact that
minority shares do not have the ability to transfer control of our company to an
acquiror and that minority shares lack the voting power to affect the decision
to transfer control to a third party. In arriving at average EBITDA for fiscal
years 2000 through 2002, Schroeder & Co. undertook the same analysis described
above, except that there were no non-recurring compensation charges in any year
other than fiscal year 2002. The results of the enterprise value analysis
performed by Schroeder & Co. are presented below:
Enterprise Value (in thousands except per share data)
Fiscal 2002 Fiscal 2000 - 2002 Average
------------------- --------------------------
EBITDA $ 4,213 $ 4,213 $ 5,191 $ 5,191
Multiple 4.0x 5.0x 4.0x 5.0x
------- ------- ------- -------
Enterprise Value $16,852 $21,065 $20,764 $25,955
Less Net Debt $ 2,802 $ 2,802 $ 2,802 $ 2,802
------- ------- ------- -------
Enterprise Equity Value $14,050 $18,263 $17,962 $23,153
Diluted Shares Outstanding 2,263 2,263 2,263 2,263
Value per Share $ 6.21 $ 8.07 $ 7.94 $ 10.23
======= ======= ======= =======
After 25% Discount $ 4.66 $ 6.05 $ 5.96 $ 7.67
======= ======= ======= =======
After 35% Discount $ 4.04 $ 5.25 $ 5.16 $ 6.65
======= ======= ======= =======
After 45% Discount $ 3.42 $ 4.44 $ 4.37 $ 5.63
======= ======= ======= =======
Subsequent to performing its analyses, Schroeder & Co. was informed by
management that management had made an error in the non-recurring compensation
expense figures it provided to Schroeder & Co. for fiscal 2002 that Schroeder &
Co. used in performing its analyses. Specifically, management informed Schroeder
& Co. that the non-recurring compensation expense should have been
29
$1,381,444 instead of $1,241,444. This error increased the per share
pre-discount enterprise value for fiscal 2002, as well as the average per share
pre-discount enterprise value for the three year period ending in fiscal 2002.
However, Schroeder & Co. did not believe the error was material, and the error
did not impact Schroeder & Co.'s belief as to the fairness of the $7.00 price,
from a financial point of view, to the unaffiliated shareholders in the reverse
stock split. The results of the enterprise value analysis based on the revised
EBITDA numbers would be as follows:
Enterprise Value (in thousands except per share data)
Fiscal Years
Fiscal Year 2002 2000 - 2002 Average
------------------- -------------------
EBITDA $ 4,353 $ 4,353 $ 5,238 $ 5,238
Multiple 4.0x 5.0x 4.0x 5.0x
------- ------- ------- -------
Enterprise Value $17,412 $21,765 $20,952 $26,190
Less Net Debt $ 2,802 $ 2,802 $ 2,802 $ 2,802
------- ------- ------- -------
Enterprise Equity Value $14,610 $18,963 $18,150 $23,388
Diluted Shares Outstanding 2,263 2,263 2,263 2,263
Value per Share $ 6.46 $ 8.38 $ 8.02 $ 10.33
======= ======= ======= =======
After 25% Discount $ 4.85 $ 6.29 $ 6.02 $ 7.76
======= ======= ======= =======
After 35% Discount $ 4.20 $ 5.45 $ 5.21 $ 6.72
======= ======= ======= =======
After 45% Discount $ 3.55 $ 4.61 $ 4.41 $ 5.69
======= ======= ======= =======
Discounted Cash Flow Analysis. Schroeder & Co. also performed a discounted
cash flow analysis utilizing projections provided by our management. The
projections assumed, among other things, an operating profit improvement from
13.7% in fiscal year 2003 to 16.1% in fiscal year 2007 and an increase in net
sales of 5.1% for fiscal year 2003, decreasing to 1% in fiscal year 2007. Our
projected operating profit improvement is largely a result of estimated annual
tangible cost savings of $150,000 for fiscal years 2004 and beyond associated
with going private. The results of the discounted cash flow analysis performed
by Schroeder & Co. are presented below:
Discounted Cash Flow (in thousands except per share data)
Fiscal Year Ending January 31
2004 2005 2006 2007 2008 Terminal Period
------ ------ ------ ------ ------ ---------------
Projected Cash Flow $2,019 $2,638 $2,686 $2,731 $2,776 $5,935 (EBITDA)
Discount Factor* 0.9449 0.8437 0.7533 0.6726 0.6005 0.5362
Discounted Cash Flow $1,908 $2,226 $2,023 $1,837 $1,667 $3,182 (EBITDA)
30
EBITDA Terminal Value Multiple
4.0x EBITDA 5.0x EBITDA
----------- -----------
Sum of Discounted Cash Flow $ 9,661 $ 9,661
Terminal Value $12,728 $15,912
Fair Market Value: Invested Capital $22,389 $25,573
Less Net Debt $ 2,802 $ 2,802
Fair Market Value: Equity $19,587 $22,771
Diluted Shares Outstanding 2,263 2,263
Per Share $ 8.66 $ 10.06
======= =======
After 25% Discount $ 6.50 $ 7.55
======= =======
After 35% Discount $ 5.63 $ 6.54
======= =======
After 45% Discount $ 4.76 $ 5.53
======= =======
* The discount factor of 12.0% represents our company's estimated weighted
average cost of capital.
Market Examples Analysis. Schroeder & Co. reviewed and compared the
price/earnings multiples of our company and other selected companies in the
pumps and related products, fabricated piping systems, and tubular products
industries and of manufacturers of equipment for the construction,
infrastructure and mining industries. The price/earnings ("P/E") ratio is equal
to a stock's market capitalization divided by its after-tax earnings.
Market Examples Analysis
Shares
Current Average Outstanding
Company Price P/E Ratio Daily Volume (000's)
- ------- ------- --------- ------------ ----------------
Ampco-Pittsburgh $12.97 24.5 5,100 9,632
Gorman Rupp $19.90 19.0 4,700 8,541
IDEX Corp. $29.20 17.5 213,700 32,510
Thomas Industries $24.65 12.30 33,000 17,130
Shaw Corp. $10.10 4.5 596,300 37,730
Webco Industries $3.10 10.3 4,400 7,082
Maverick Tube Corp. $18.71 233.9 402,606 40,940
Northwest Pipe Co. $12.05 8.8 10,100 6,549
31
Columbus McKinnon $1.60 Deficit 43,500 14,900
earnings
Terex Corp. $12.62 Deficit 270,400 47,400
earnings
Astec Industries $5.75 Deficit 75,000 19,680
earnings
Oshkosh Truck $61.69 17.2 107,200 17,060
EDCO 6.10 9.2 N/A 1,639
(Float: 450,450)
While not particularly comparable to our company's concrete pumping
equipment manufacturing and distribution activities, selected companies were
somewhat similar to our company either in product lines or in the industries
which they serve. At March 31, 2003, the mean P/E ratio for the group, after
elimination of the companies with deficit earnings, was 14.25; average daily
trading volume was 132,850 shares and mean shares outstanding were 20,550,000
shares. These statistics compare to our company's 1,638,595 shares outstanding,
less than 500,000 shares float and negligible daily trading volumes of only
approximately 269 shares over the 12 month period from April 2002 through March
2003.
Our company's insubstantial market capitalization, minimal float, and
non-existent research coverage has resulted in a sporadic, unreliable trading
market in our stock which lacks liquidity. Our stock also produces an above
average spread between the bid and ask quotes on the OTC Bulletin Board of about
$0.93 per share over the 12 month period from April 2002 through March 2003 (or
about 15% of our stock's average closing bid price over that period), further
contributing to its illiquidity. Additionally, with an average daily trading
volume of only approximately 269 shares for the same 12 month period, our
shareholders are able to sell only a very small number of shares before causing
our stock price to decrease measurably. These characteristics would result in a
lower P/E ratio for our company than that enjoyed by the selected comparable
companies' approximately 14 P/E ratio. A range of P/E ratios for our company of
6 to 9 would have resulted in market prices of $3.96 and $5.94 on earnings per
share of $.66 for the fiscal year ended January 31, 2003 and market prices of
$7.16 and $10.80 on earnings per share of $1.20 for the fiscal year ended
January 31, 2002. Actual market bid prices were $5.00 to $6.75 in fiscal year
2002 and $3.30 to $8.85 in fiscal year 2001. Market prices were supported during
part of this time by substantial company share and share equivalent repurchases
at $7.00 per share from November 2001 to January 2003.
Background of the Reverse Stock Split Proposal
We operate in an industry in which success is closely tied to the general
health of the industrial economy as well as the construction industry. Our
industry is characterized by fragmented competition and a relationship-driven
customer base that is generally loyal to its existing suppliers and vendors.
Over the years, these factors have often made it difficult for us to increase
the market penetration of our products or achieve substantial revenue or
earnings growth. Additionally, we have not been able to realize many of the
benefits that publicly traded companies sometimes realize. For example, by
virtue of a company having its common stock listed on an exchange or quoted on
an automated quotation system, a liquid trading market often develops for that
stock. As a result, those companies are sometimes able to attract research
analyst coverage, market attention and institutional shareholder investment. We
anticipated that being a public company would help us achieve a liquid trading
market for our stock and attract that coverage and attention. However, our
average daily trading volume over the 12 month period from April 2002 through
March 2003 was only approximately 269 shares, and the
32
difference (or spread) between our stock's bid price and its ask price averaged
about $0.93 per share over the 12 month period from April 2002 through March
2003 (or about 15% of our stock's average closing bid price over that period).
Our trading volume is further limited by the fact that approximately 71% of our
issued and outstanding shares are owned by Messrs. Finneran and Kastelic, and
are not traded in the public market. As a result of this extremely limited
trading volume and high bid-ask spread, the ability of our shareholders to sell
their shares is more limited than the ability of shareholders of many other
publicly traded companies to sell their shares (which, among other things,
impairs our ability to use stock options or other equity-based incentives to
successfully attract and retain key employees). Also, we have been unable to
attract research analyst coverage or significant institutional shareholders,
which we attribute in part to our small public float, limited trading volume and
delisting from The Nasdaq Stock Market.
In addition, we anticipated that having publicly traded common stock would
increase our ability to access the public capital markets in a cost efficient
manner, and would make our common stock an attractive currency for potential
acquisition targets because it would have a readily ascertainable value and be
able to be sold in a liquid market. However, we have never accessed the equity
capital markets and, in part because of our small public float and limited
liquidity, have not used our common stock as consideration in any acquisitions.
In light of these factors, we have continuously explored potential
alternatives to increase our shareholder value and attract investor and analyst
interest. For example, we have from time to time attempted to achieve revenue
and earnings growth and increased shareholder value by pursuing potential
acquisitions of competitors, customers and vendors. While we explored numerous
potential acquisitions over the past several years, we were unable to
successfully complete a significant acquisition, due at least in part to our
inability to utilize our stock as an attractive acquisition currency. Also, in
an effort to focus on our margins, we divested our unprofitable Gilco division
in September 2000. Additionally, to potentially provide equity capital and
expertise to effect strategic acquisitions in our industry and increase our
shareholder value, we undertook a coordinated process of soliciting preliminary
indications of interest on a selective basis from qualified strategic and
financial parties for a sale of all or a part of the company in the second
quarter of 1999 and again in the first quarter of 2000. While we received some
preliminary oral indications of general interest in acquiring shares from a few
select parties, neither we nor our Board of Directors received any offer to
acquire the company, with one exception. In early 2000, we proceeded relatively
far down the path of negotiating documentation, which contained various
conditions and contingencies, to sell the entire company. However, the
interested party was unable to obtain its own board's approval of the
transaction. Additionally, this transaction can be differentiated from Messrs.
Finneran and Kastelic's reverse stock split proposal in three ways: (i) the
proposal occurred three years ago when the market and relative valuations for
selling companies were much stronger, the credit markets were not as stringent,
stock market valuations were generally much higher, the economy and construction
industry were at or near their peak, and our stock price and prospects were
generally higher and brighter; (ii) the proposal was to acquire our entire
company and included a substantial control premium relating to Mr. Finneran's
shares; and (iii) the proposal was from a strategic party that envisioned
realizing substantial cost savings and synergies from an acquisition of our
company. In addition to this proposal, although not an offer, Mr. Finneran also
received an unsolicited indication of interest to acquire all of our outstanding
shares in March 2001 from a private equity firm that we contacted in 1998. While
Mr. Finneran held preliminary discussions with the private equity firm, no
acceptable offer was ever proposed to Mr. Finneran.
In addition to exploring potential business combinations, our Board of
Directors from time to time considered other significant corporate transactions
intended to increase our shareholder value. From November 2001 to January 2003,
we repurchased 1,000,239 shares and share equivalents of our common stock at
$7.00 per share, including 360,277 shares and share equivalents from current or
former directors and officers. These repurchases, however, further limited the
liquidity of our stock's
33
trading market. Additionally, at its meeting on June 20, 2002, our Board of
Directors discussed potentially undertaking a going private transaction and also
considered some of the alternative transactions discussed below under "Special
Factors - Alternatives to the Reverse Stock Split." These discussions were
informative and educational in nature. No going private transaction proposal was
discussed or put forward and no indication was given by Messrs. Finneran and
Kastelic that a going private transaction proposal was forthcoming.
In light of the foregoing circumstances, and particularly as a result of
the increased tangible and intangible costs associated with being a public
company manifested principally by the July 2002 passage of the Sarbanes-Oxley
Act of 2002, we again began exploring the possibility of pursuing a going
private transaction in December 2002.
On December 3, 2002, our Board of Directors held a meeting, attended by our
outside legal counsel, Foley & Lardner, to discuss and analyze numerous aspects
of a potential going private transaction. Prior to the meeting, our outside
legal counsel distributed memoranda discussing such items as the estimated
transactional costs of a potential going private transaction, alternative
methods to effect a going private transaction, the potential advantages and
disadvantages of going private, applicable fiduciary duties of our Board or
special committee if we were to undertake a going private transaction, as well
as an example proxy statement from a recent going private transaction. Our Board
discussed, among other things,
o the relative advantages and disadvantages to our company and our
shareholders of undertaking a potential going private transaction;
o various alternative going private transaction structures, such as a
reverse stock split; a merger with, or a tender offer by, a
corporation controlled by Messrs. Finneran and Kastelic; and a
self-tender offer by us;
o how to most effectively pursue a potential going private transaction
of the size contemplated so that transaction costs would not
significantly reduce the amount of funds otherwise available to pay to
our unaffiliated shareholders;
o various potential methods of determining a fair per share price to be
paid to unaffiliated shareholders in a going private transaction, as
well as associated issues such as the advisability of retaining a
financial advisor and the appropriateness of the application of
valuation discounts for minority interest and lack of marketability;
o the fiduciary and legal obligations of our directors in a potential
going private transaction; in particular, the fiduciary and legal
obligations of Messrs. Finneran and Kastelic associated with an
interested party transaction, including that the transaction must be
"fair," both in terms of procedure as well as price, to our
unaffiliated shareholders;
o the desirability of appointing an independent special committee of our
Board to consider the merits of any proposed going-private transaction
compared to other strategic alternatives, and to consider, negotiate
and ultimately determine the price to be paid to our unaffiliated
shareholders for their shares or to turn down the proposal; and
o the requirements regarding preparation and filing of proxy materials
and a Schedule 13E-3, as well as submitting such a proposal to a
shareholder vote.
34
While no going private transaction was proposed, our Board generally
concurred that a going private transaction might be a desirable strategic
alternative to consider further, provided one could be proposed and effected at
a price and on terms fair to our unaffiliated shareholders.
From December 3, 2002 through February 2003, Messrs. Finneran and Kastelic
considered the various issues raised and discussed at the December 3, 2002 Board
meeting. They conducted further analyses in an effort to determine whether a
going private transaction could be structured and negotiated on acceptable
terms. In particular, Messrs. Finneran and Kastelic considered how to best
determine a fair price to offer to our unaffiliated shareholders. In this
context, they analyzed, among other things, our financial history and prospects,
our 52-week stock price trading range, our recent significant stock repurchases
(including our recent repurchases from current and former directors and
officers), and our net tangible per share book value. They also considered the
various other aspects of a potential going private proposal that were discussed
at the December 3, 2002 meeting. In particular, Messrs. Finneran and Kastelic
considered the potential alternative transaction structures and how to most
effectively pursue a going private transaction so that transaction costs would
not significantly reduce the amount of funds otherwise available to pay to our
unaffiliated shareholders. Messrs. Finneran and Kastelic determined that if they
proposed a reverse stock split, they would propose a split ratio of 1:66,666.
This split ratio would accommodate Mr. Kastelic, who owns 66,667 outstanding
shares of our common stock, or 4%. In the context of alternative transaction
structures, Messrs. Finneran and Kastelic particularly considered proposing a
reverse stock split at a ratio smaller than 1:66,666, such that more than two
shareholders would remain after the transaction. However, they determined that
such a proposal might be less beneficial to the remaining shareholders because
such shareholders might be left with an even more limited market in which to
sell their shares and would essentially need to rely on our paying dividends
(which has never occurred in the past), or undertaking a liquidity event (such
as a merger or sale of assets) in order to realize liquidity for their shares.
On the other hand, Messrs. Finneran and Kastelic believed that the reverse split
ratio should still be set at a level that would allow one or more interested
unaffiliated shareholders to consolidate their existing shares or acquire
additional shares so that they would own at least 66,666 shares of our common
stock in a single account at the effective time of the reverse stock split. This
would allow such interested shareholders to elect to remain shareholders of our
company as a private company.
During February 2003, in advance and in anticipation of receiving a
potential going private proposal from Messrs. Finneran and Kastelic, the
independent directors of our Board held various informal confidential
discussions with our company's legal counsel to receive advice on the
appropriate steps to consider and evaluate any potential going private proposal
which might be forthcoming. Counsel advised that our Board should hold a meeting
as soon as possible after receiving any proposal letter to understand and
discuss the proposal and consider constituting a special committee of
independent directors to evaluate and negotiate the proposal. Counsel also
advised that the special committee should promptly convene a meeting to
consider, evaluate and discuss the proposal. Counsel also advised that, at the
same meeting, the special committee should begin the process of retaining
advisors, including its own legal counsel and, potentially, a qualified,
independent investment banking firm or financial advisor, to assist the
committee in its analysis of the proposal and determination of a fair price to
be paid to our unaffiliated shareholders, and to ultimately render a fairness
opinion with respect to such price.
During this time, the independent directors of our Board requested and
reviewed introductory materials from three financial advisors, including
Schroeder & Co. These introductory materials addressed the advisors' respective
experiences in the investment banking and financial services industries, as well
as experience with providing advice in connection with going private
transactions in general and going private transactions involving majority
shareholders in particular. At the request of our independent directors, we
provided Schroeder & Co. with certain historical financial information, business
and industry information and other materials. Schroeder & Co. then began
conducting initial
35
financial due diligence of our company and preparing preliminary analyses of
potential ranges of fair value for our shares of common stock in a non-change of
control transaction. As part of this process, Frederick J. Schroeder of
Schroeder & Co. met with our Chief Financial Officer, Gregory L. Skaar, on two
separate occasions to discuss our historical financial results and condition and
other information and to ask various questions about our operations and
financial results. Mr. Kastelic was present during limited portions of these
meetings. In addition, Mr. Schroeder met with our Vice-President of Sales and
Vice-President of Marketing during the course of these due diligence visits.
Based on their various consultations and analyses conducted from December
2002 through February 2003, Messrs. Finneran and Kastelic concluded that, in
their view, it would be in the best interests of our company and our
unaffiliated shareholders to propose a going private transaction in the form of
a reverse stock split. Other alternative going private transaction structures
were considered, but were not pursued primarily because:
o most alternative structures (such as an affiliate merger or issuer
self-tender offer) would be more costly and take more time to
consummate; and
o privately negotiated repurchases were unlikely to result in Messrs.
Finneran and Kastelic (or a small number of shareholders) owning 100%
of our company after the transaction.
As a result, on March 4, 2003, Messrs. Finneran and Kastelic delivered a
letter to our Board of Directors in which they proposed that we undertake a
going private transaction in the form of a reverse stock split in which
shareholders holding less than one share after the reverse stock split would be
entitled to receive a cash payment equal to $6.50 per pre-split share. As a
result of the proposed transaction, it was expected that Messrs. Finneran and
Kastelic would likely increase their beneficial ownership of our common stock
from approximately 71% to 100%. The original letter delivered to our Board of
Directors is included as Exhibit A to this proxy statement. As part of this
original proposal, Mr. Finneran intended to structure his shareholdings so that
up to 185,100 of his shares would be cashed out by operation of the reverse
stock split. Since that time, however, for personal tax reasons, Mr. Finneran
decided not to cash out any of his shares as part of the reverse stock split.
Additionally, as part of their original proposal, Messrs. Finneran and Kastelic
said they were not interested in, and were unwilling to consider, any
transaction in which they would sell their shares to an outside third party.
Finally, Messrs. Finneran and Kastelic suggested in their proposal that our
Board structure the reverse stock split proposal to require the approval of a
majority of shares held by our unaffiliated shareholders that are voted at our
special meeting. We refer to this condition as the "majority of the minority"
shareholder approval condition. This is in contrast to the shareholder approval
condition ultimately approved by the Board, which requires that a majority of
all outstanding shares held by our unaffiliated shareholders not be voted
against the reverse stock split proposal. We refer to this condition as the
"reverse majority of the minority" shareholder approval condition.
Our Board of Directors, along with Mr. Skaar, Mr. Schroeder of Schroeder &
Co., and representatives of our legal counsel, Foley & Lardner, met on March 12,
2003 to discuss the reverse stock split proposal submitted by Messrs. Finneran
and Kastelic. In advance of the meeting, our Board of Directors was provided
with extensive background materials prepared by our legal counsel that included
a summary of Messrs. Finneran and Kastelic's proposal letter, example Schedule
13E-3s and proxy statements, and memoranda regarding (i) a compilation of
selected data from 50 recent going private transactions; (ii) typical financial
metrics used by companies to determine the fairness of proposed going private
transaction prices; (iii) the makeup of our shareholder base; (iv) the fiduciary
duties of our Board; (v) the relative advantages and disadvantages of
undertaking a going private transaction; (vi) various alternatives to consider
for increasing shareholder value; (vii) the federal and state statutes
applicable to going private transactions; (viii) alternatives to, and
protections offered by, a majority of the minority
36
shareholder approval condition; and (ix) a discussion of confidentiality and
insider trading laws. Our Board also received our preliminary results of
operation for fiscal year 2002.
At the March 12 meeting, Messrs. Finneran and Kastelic described the
material terms of their proposal, including the proposed form of the
transaction, the proposed per share price to be paid to our unaffiliated
shareholders, the proposed treatment of stock options in the transaction,
financing arrangements to fund the proposed transaction, the proposed reverse
split ratio, and the desirability of certain procedural protections for our
unaffiliated shareholders (including appointing a special committee of
independent directors and structuring the transaction so that its approval would
be contingent upon a majority of the minority shareholder approval condition).
Messrs. Finneran and Kastelic stated that they were not interested in, and were
unwilling to consider, any alternative transaction in which they would sell
their shares to an outside third party. Our Board of Directors discussed the
nature of going private transactions generally and their effects on shareholders
and other relevant constituencies. Legal counsel highlighted various advantages
and disadvantages of a going private transaction. See "Special Factors -
Advantages of the Reverse Stock Split" and "Special Factors - Disadvantages of
the Reverse Stock Split" for a discussion of the advantages and disadvantages of
the going private transaction discussed by our Board of Directors at this
meeting. Legal counsel also provided our Board with a brief overview of the
potential costs associated with purchasing outstanding stock options and cashing
out shareholders left with less than one share as a result of the reverse stock
split at $6.50 per pre-split share, including the potential transaction costs
associated with the reverse stock split proposal such as legal, financial
advisory and accounting fees, filing fees and printing and mailing expenses.
In order to avoid the appearance of any potential conflict of interest,
Messrs. Finneran and Kastelic stressed the importance that our Board form a
special committee of independent directors to consider, evaluate and negotiate
the reverse stock split proposal. Our Board of Directors, with the assistance of
our legal counsel, discussed the advantages and disadvantages of designating a
special committee of disinterested directors, as well as the scope of such a
committee's roles and responsibilities, its proper functions and authority, and
the fiduciary duties of the directors serving on a special committee. Messrs.
Finneran and Kastelic then recused themselves from the meeting and our legal
counsel inquired of our outside directors, William C. Scott and Robert L.
Cooney, who are not employees of our company and who are otherwise independent
of Messrs. Finneran and Kastelic, whether they understood the role and functions
of the special committee in this context. Counsel further inquired into whether
Messrs. Scott and Cooney felt their prior service on the Board and longstanding
relationship with Mr. Finneran would impede or prevent their functioning solely
as disinterested directors and complying with their fiduciary duties to our
unaffiliated shareholders in evaluating and negotiating the reverse stock split
proposal. A discussion was held regarding the nature of independence and their
fiduciary duties and obligations in this context, and Messrs. Scott and Cooney
concluded that they would be able to actively represent the best interests of
our unaffiliated shareholders and serve without conflict of interest on a
special committee constituted to evaluate and negotiate the reverse stock split
proposal submitted by Messrs. Finneran and Kastelic. Messrs. Finneran and
Kastelic then rejoined the meeting, and after discussion, the Board voted to
form a special committee composed of Messrs. Scott and Cooney. Our Board further
authorized its special committee to:
o do any and all things deemed by it to be necessary or advisable in
order to evaluate the reverse stock split proposal including, without
limitation, selecting and retaining professional advisors and, if
determined appropriate, obtaining a fairness opinion with respect to
the price to be paid to our unaffiliated shareholders in the
transaction, at our expense;
o conduct negotiations with Messrs. Finneran and Kastelic; and
37
o recommend approval or disapproval of the reverse stock split proposal
and ultimate terms thereof to our full Board of Directors.
Mr. Scott was appointed as chairman of the special committee. Our Board
also resolved that it would not recommend approval of the reverse stock split
proposal to our shareholders unless it first received the special committee's
favorable recommendation of the proposal (under the terms ultimately negotiated
by the special committee).
Our Board did not authorize the special committee to solicit indications of
interest from third parties in a potential sale of our company because Messrs.
Finneran and Kastelic, who together beneficially own 71% of our outstanding
shares, reiterated that they were not interested in, and were unwilling to
consider, any alternative transaction in which they would sell their shares to
an outside third party. Additionally, our Board did not authorize its special
committee to retain an unaffiliated representative to act solely on behalf of
our unaffiliated shareholders because our Board concluded that there was
sufficient representation of unaffiliated shareholders in the decision-making
process with the establishment of a special committee consisting of independent
directors.
In view of the broad authority and significant additional responsibilities
of the special committee, our Board also determined that each member of the
special committee would receive $10,000 for his services, together with
reimbursement of expenses, related to the special committee's activities. Our
Board also authorized us to enter into indemnity agreements with the members of
the special committee under which terms we agreed to indemnify Messrs. Scott and
Cooney for any expenses, liabilities and losses relating to their service as
members of the special committee and/or our Board of Directors which may be
incurred by them in connection with the reverse stock split proposal. These
indemnity agreements are in addition to the indemnity otherwise available to the
special committee members.
The special committee held its first meeting immediately following the
March 12, 2003 meeting of our Board of Directors. In addition to the special
committee members, also in attendance were Mr. Skaar, Mr. Schroeder of Schroeder
& Co., and representatives of our legal counsel, Foley & Lardner. The special
committee first deliberated retaining Foley & Lardner as its legal counsel. The
special committee was advised that it was not necessary to retain counsel
separate from the company's counsel, particularly given the structure of the
proposed transaction. Among other factors, the special committee took into
account that it was desirable to retain a legal advisor who was sophisticated in
this type of transaction and capable of acting on an independent basis without
undue influence from our management or directors who may have an interest in the
reverse stock split proposal. The special committee also discussed that it would
likely be more time consuming and expensive to engage other counsel who did not
possess this background or familiarity. The special committee received
assurances from representatives of Foley & Lardner that the firm could represent
the best interests of the special committee without conflict of interest with,
or undue influence from, Messrs. Finneran and Kastelic. The special committee
concluded that the advantages of retaining Foley & Lardner as its counsel
outweighed the potential, which the special committee viewed as very remote
given the ethical and professional obligations of Foley & Lardner, that a
conflict of interest would result in Foley & Lardner providing the special
committee with legal advice that was not in the best interest of us and our
unaffiliated shareholders. The special committee thereupon appointed Foley &
Lardner as its legal counsel.
The special committee next reviewed background materials provided by three
financial advisors, including Schroeder & Co. The special committee compared the
fee proposals of the three financial advisors. Schroeder & Co.'s fee proposal
was $25,000, while the remaining two financial advisors had submitted fee
proposals of $50,000 - $75,000 and a minimum of $150,000. The special committee
appointed Schroeder & Co. as its financial advisor based on Schroeder & Co.'s
experience in
38
the valuation of businesses and their securities (and in particular, its
knowledge of, and experience with, small public companies such as ours),
previous positive experiences of the members of the special committee with
Schroeder & Co. and the reasonable fee proposed. In addition to providing
financial assistance and advice to the special committee, Schroeder & Co. was
engaged to provide an opinion, if it could, as to the fairness, from a financial
point of view, of the per share transaction price to be paid to our unaffiliated
shareholders that was ultimately negotiated by the special committee.
At this initial meeting, the special committee discussed with its legal
counsel the committee's goals, responsibilities, obligations, expectations and
necessary functions. Legal counsel particularly stressed that the committee
needed to act on a fully informed and independent basis. Similarly, counsel
stressed that the committee needed to take the lead in pursuing and negotiating
the transaction to advance the best interests of our unaffiliated shareholders
pursuant to its delegation of authority from our Board of Directors. Counsel
then described and discussed with the special committee its fiduciary duties in
connection with evaluating and negotiating the reverse stock split proposal,
including its duties of care and loyalty. Counsel also discussed the law
surrounding effective use of special committees in the context of interested
party transactions. A memorandum describing the special committee's
responsibilities and obligations was distributed to and discussed by the
committee.
The special committee next turned to a discussion of the details of the
reverse stock split proposal submitted by Messrs. Finneran and Kastelic. In
particular, the special committee considered, based in part on the previously
described materials provided in advance by counsel:
o whether the material non-price related terms of the reverse stock
split proposal were similar to those seen in recent comparable going
private transactions;
o whether the expected benefits of a going private transaction, and
those cited by Messrs. Finneran and Kastelic in their proposal letter,
were likely to be realized by our company; and
o the advantages and disadvantages of conditioning approval of any
proposal on also obtaining "reverse majority of the minority"
shareholder approval.
The special committee discussed at length some of the expected benefits to
be realized from a going private transaction, including, among other things, the
significant tangible and intangible cost savings to our company (with the
tangible cost savings estimated by Mr. Skaar to be approximately $150,000 per
year, and increasing). The special committee also considered that we would be
able to provide liquidity for our unaffiliated shareholders where liquidity has
been lacking in the market, and do so at a fair price through a transaction in
which our shareholders will generally be eligible to receive capital gains tax
treatment for their proceeds, avoid paying brokerage commissions or fees, and
avoid incurring the significant "bid-ask" spread otherwise incurred in selling
our shares.
Mr. Schroeder then discussed with the special committee his preliminary
financial analysis of the terms of the reverse stock split proposal. Mr.
Schroeder provided his overview of the methods and financial metrics he expected
to use in rendering his opinion as to the fairness of the ultimate per share
price to our unaffiliated shareholders. While emphasizing that his review was
preliminary at this point, Mr. Schroeder outlined for the special committee the
business and financial information relating to our company and our industry that
he had reviewed to date in connection with his analysis. Mr. Schroeder provided
and discussed preliminary analyses based primarily on our financial statements
and conversations with senior management, including Mr. Skaar. Included in Mr.
Schroeder's preliminary analyses were preliminary estimates of our enterprise
value, discounted cash flow and net tangible book value. The special committee
discussed these valuation measures with Mr. Schroeder and discussed our
39
preliminary results of operation for fiscal year 2002. Mr. Schroeder further
indicated that, given the existence of a significant majority shareholder (Mr.
Finneran) who is unwilling to sell his shares, as well as a very illiquid
trading market, a fair transaction price to our unaffiliated shareholders should
not reflect any control premium and it should reflect the application of
appropriate valuation discounts for minority interest and lack of marketability.
Upon request from the special committee, Mr. Schroeder orally provided the
committee with a general range of valuation discounts applicable to similar
transactions, indicating that valuation discount ranges of 25% to 50% are
common, and that valuation discounts in excess of such levels might be
applicable to us. In addition, Mr. Schroeder discussed with the special
committee typical industry "multiples" of earnings before interest, taxes,
depreciation and amortization (commonly referred to as "EBITDA"), applicable to
change in control transactions and what those multiples may suggest as a
starting point (prior to applying appropriate valuation discounts) to evaluate
the fairness of the proposed $6.50 transaction price. The special committee then
requested additional financial information from Mr. Skaar and additional
financial analyses from Schroeder & Co. in advance of its next meeting.
Specifically, the special committee requested that Mr. Skaar produce information
regarding our current fiscal year budget, five-year projected financial results
and three-year historical earnings and EBITDA results. Mr. Schroeder was asked
to provide additional information regarding industry EBITDA multiples for change
in control transactions and recent certain industry change in control
transactions.
Finally, the special committee again discussed alternative methods of
increasing shareholder value and whether any of those alternatives should be
pursued in lieu of the reverse stock split proposal. Specifically, the special
committee reviewed and discussed the relative merits of:
o other forms of going private transactions, including a reverse stock
split at a different ratio;
o reinstituting our share repurchase program;
o declaring a special cash dividend payable to all of our shareholders;
and
o declining the reverse stock split proposal and continuing to operate
our business, either as a public company or as a private company.
The special committee noted that our company had already attempted several
of these alternatives without success, and that our full Board of Directors had
considered these alternatives at length at its December 3, 2002 meeting. The
special committee again confirmed that, in its view, a going private transaction
under the circumstances might be in our company's and our shareholders best
interests, provided that such a transaction could be negotiated at a price and
on terms fair to our unaffiliated shareholders. The special committee did not
consider a potential sale of our company as an alternative because Messrs.
Finneran and Kastelic, who together beneficially own 71% of our outstanding
shares, had specifically told our Board of Directors that they were not
interested in, and were unwilling to consider, any alternative transaction in
which they would sell their shares to an outside third party. However, the
special committee was interested in entertaining alternative proposals that did
not involve a change of control. To that end, the special committee required us
to issue a press release on March 12, 2003 announcing receipt of the reverse
stock split proposal from Messrs. Finneran and Kastelic as a way of encouraging
the submission of alternative transactions by third parties for our unaffiliated
shareholders' shares. Similarly, the special committee did not consider
providing Messrs. Finneran and Kastelic with any type of transaction protection
measures, such as a break-up fee, lockup option or nonsolicitation agreement.
40
The special committee then met again on March 18, 2003. In addition to the
special committee members, also in attendance were Mr. Skaar, Mr. Schroeder of
Schroeder & Co., and representatives of Foley & Lardner. In advance of this
meeting, Mr. Skaar distributed to the special committee certain financial
information, including additional information about our fiscal year 2002
results, our fiscal year 2003 budget and detailed analysis of our results of
operations (including our EBITDA) and financial condition (including our net
book value and tangible net book value), and a five-year forecast including
forecasted debt balances. Mr. Skaar also distributed to the committee a copy of
a proposed term sheet from LaSalle National Bank Association ("LaSalle"), our
lender, regarding its proposed financing terms providing us with additional debt
to fund the purchase of fractional shares in the going private transaction.
The special committee discussed our fiscal year 2003 budget and five-year
forecast, noting that our expected results of operations were consistent with
our historical experience and that no significant changes or improvements were
anticipated that would call into question an analysis of value based on our
historical results. The committee discussed at length the various calculations
and analyses provided by Messrs. Skaar and Schroeder. In particular, the special
committee discussed both the EBITDA multiples and the valuation discounts
applied by Schroeder & Co. in its analysis. Mr. Schroeder advised that, because
of our historically low revenue and earnings growth rates, lack of significant
growth prospects, existence of a significant majority shareholder, generally
weak economic and industry conditions, relatively small size, and the prevailing
poor market climate for acquisition transactions, valuation multiples to be used
as a starting point to evaluate this transaction should be at the lowest end of
the potential range of multiples and that the valuation discount which should be
applied should be at the highest end of the range of discounts typically seen in
similar transactions. The special committee requested that Mr. Schroeder provide
the committee with additional data prior to its next meeting with respect to
multiples and valuation discount ranges, and also requested that Mr. Schroeder
provide a comparative analysis of valuations of companies comparable to ours.
The special committee then reviewed the proposed financing term sheet from
LaSalle. The special committee generally concluded that the terms proposed by
LaSalle were appropriate for the level of funding being considered, but
instructed Mr. Skaar and Foley & Lardner to discuss certain proposed
modifications and enhancements with LaSalle. The committee also requested that
Mr. Skaar provide, in advance of its next meeting, a pro forma analysis of our
preliminary fiscal year 2002 financial results giving effect to the assumption
of the additional debt to fund the reverse stock split proposal.
The special committee then asked Foley & Lardner to explain and discuss the
proposed "majority of the minority" shareholder approval condition contained in
the proposal letter of Messrs. Finneran and Kastelic. This condition would
require that the majority of shares of our common stock held by unaffiliated
shareholders that are voted at our special meeting be voted in favor of the
reverse stock split proposal. The special committee discussed in detail the
applicability, advantages and disadvantages of such a condition, in addition to
the shareholder vote required by New Jersey law. The special committee was
advised that such a majority of the minority shareholder approval condition was
not legally necessary and that Messrs. Finneran and Kastelic could have
structured their reverse stock split proposal in such a way so as not to require
any shareholder vote whatsoever. The special committee then directed Foley &
Lardner to provide, in advance of its next meeting, alternatives to the
"majority of the minority" shareholder approval condition.
The next special committee meeting was held on March 24, 2003. In addition
to the special committee members, also in attendance were Mr. Skaar, Mr.
Schroeder of Schroeder & Co., and representatives of Foley & Lardner. In advance
of this meeting, Mr. Skaar distributed a revised proposed financing term sheet
from LaSalle and a pro forma analysis of our results for fiscal year 2002 that
assumed a going private transaction had been effected during fiscal year 2002. A
copy of the pro forma
41
analysis is included as Exhibit E to this proxy statement. The pro forma
analysis gave effect to the additional debt to be incurred in connection with
financing such a transaction. In addition, legal counsel distributed a
memorandum in advance of the meeting discussing alternative methods of
structuring a majority of the minority shareholder approval condition.
The special committee discussed the revised terms of the LaSalle proposal
and analyzed the pro forma analysis provided by Mr. Skaar. The special committee
concluded that we would be able to support the additional debt out of our cash
flow from operations.
Mr. Schroeder then orally presented a detailed analysis of historical
multiples of EBITDA and other financial measurements that applied to various
mid-market acquisition transactions over the past five years. The special
committee discussed the analysis, which supported its earlier conclusions to the
effect that such multiples have generally been decreasing in recent years. The
committee also discussed the fact that (i) our company is much smaller than most
mid-market companies; (ii) the multiple ranges in the acquisition transaction
analyses included primarily "strategic" transactions in which the buyer expected
to achieve synergies (as opposed to a financial transaction such as a going
private transaction); (iii) acquisition transaction multiples are typically
influenced by the growth history and prospects of the target company; and (iv)
the acquisition transaction multiples in the analysis generally included control
premiums because they reflected the sale of a controlling interest. Based on
such analysis and Mr. Schroeder's advice, the special committee concluded that
acquisition valuation multiples for our company would likely fall at the lowest
end of the range discussed. In addition, the special committee again noted our
repurchases of 1,000,239 shares and share equivalents (or approximately 38% of
our total outstanding shares, assuming all repurchased stock options had been
exercised) between November 2001 and January 2003 at a price of $7.00 per share.
The special committee was also cognizant that such repurchases included the
repurchase of 360,277 shares and share equivalents from current or former
directors and officers.
The special committee then again discussed the advantages and disadvantages
of requiring a majority of the minority shareholder approval condition with
respect to the reverse stock split proposal. The special committee noted that,
according to the compilation of public data on 50 recent going private
transactions previously provided to the committee by legal counsel, only a small
percentage of recent going private transactions involving majority shareholders
imposed a similar condition. The special committee discussed its concerns that a
relatively small number of our unaffiliated shareholders who own a relatively
large percentage of our minority shares could obviate the true will of our
unaffiliated shareholders. The special committee nonetheless concluded that, in
view of the potential alternatives, allowing the holders of shares that would be
cashed out in the reverse stock split (including shares to be cashed out by Mr.
Finneran) to have a meaningful vote on the transaction would increase the level
of procedural fairness for our unaffiliated shareholders and, as a result, was a
desirable element in ensuring the overall fairness of the transaction to our
unaffiliated shareholders.
At this meeting, the special committee expressed its belief, based upon the
various analyses reviewed and discussions held, including particularly the
advice and analysis of Messrs. Schroeder and Skaar, that the proposed per share
transaction price is fair to our unaffiliated shareholders. The special
committee also discussed its beliefs that (i) in the absence of the price
support previously provided by our stock repurchase plan and the existence of
our majority shareholder, our stock would have likely historically traded for
far less than $6.50 per share and (ii) with an average daily trading volume of
only approximately 269 shares over the 12 month period from April 2002 through
March 2003, our stock's bid price would have been valid for only a very small
number of shares before decreasing measurably. Nonetheless, the special
committee desired to see the transaction price raised to at least $7.00 per
share, given our recent significant stock repurchases at $7.00 per share, as
well as our purchase of certain stock options from departing and former
executives at an equivalent of $7.00 per share within
42
the past year. As a result, the special committee directed Mr. Scott to contact
Messrs. Finneran and Kastelic to discuss Messrs. Finneran and Kastelic's
willingness to increase the per share transaction price from $6.50 to $7.00.
On March 28, 2003, Mr. Scott met personally with Mr. Finneran to discuss
increasing Messrs. Finneran and Kastelic's proposed per share transaction price.
Mr. Scott informed Mr. Finneran that the special committee had reviewed and
discussed various analyses of the proposed per share transaction price. As a
result, Mr. Scott requested that Messrs. Finneran and Kastelic increase their
proposed per share transaction price to $7.00. In particular, Mr. Scott noted
that:
o the closing ask price for our stock on the OTC Bulletin Board for the
prior week was consistently $7.00; and
o we had recently paid $7.00 per share in our share repurchase plan and
in the purchase of stock options (less the exercise price) from
departing or former directors and officers.
Mr. Scott also informed Mr. Finneran that, in the event a going private
transaction was proposed at a price the special committee considered fair to our
unaffiliated shareholders, the committee would recommend approval contingent
upon a majority of the minority shareholder approval condition. Messrs. Finneran
and Scott debated at length the fairness of a transaction at $6.50 per share and
at $7.00 per share. Ultimately, Mr. Finneran agreed to raise the proposed per
share transaction price to $7.00, but stated that he would withdraw his reverse
stock split proposal if an agreement could not be reached at $7.00 per pre-split
share.
Mr. Finneran then discussed Mr. Scott's proposal with Mr. Kastelic. Mr.
Kastelic informed Mr. Finneran that he would also be willing to increase the per
share transaction price to $7.00, but that he would similarly withdraw his
participation in the reverse stock split proposal if an agreement could not be
reached at $7.00 per pre-split share.
Upon learning that Messrs. Finneran and Kastelic had increased their offer
to $7.00 per pre-split share, Mr. Scott informed Mr. Finneran that he would
discuss the revised per share transaction price with the special committee. Mr.
Scott then contacted Mr. Schroeder and informed him of his conversations with
Mr. Finneran. Mr. Schroeder advised that he believed his firm would be able to
opine that the $7.00 per pre-split share price is fair, from a financial point
of view, to our unaffiliated shareholders. Mr. Scott then requested that
Schroeder & Co. be prepared to deliver its opinion as to the fairness, from a
financial point of view, to our unaffiliated shareholders of a per pre-split
share price of $7.00 in the reverse stock split transaction at the next
scheduled special committee meeting on April 1, 2003.
The special committee met again on April 1, 2003. In addition to the
special committee members, also in attendance were Mr. Skaar, Mr. Schroeder of
Schroeder & Co., and representatives of Foley & Lardner. In advance of the
meeting, Mr. Schroeder distributed various valuation analyses documenting data
discussed orally at the March 24, 2003 special committee meeting, including
middle-market median acquisition multiples, debt to equity leverage multiples, a
discounted cash flow analysis and a market examples analysis. In addition, legal
counsel distributed a memorandum showing the pre and post-split ownership
structure of our company (assuming that no unaffiliated shareholders choose to
consolidate their shares or acquire additional shares such that they own at
least 66,666 shares in a single account at the effective time of the reverse
stock split and elect to remain shareholders of the company as a private
company).
43
Mr. Scott informed the special committee and its advisors of his
conversations with Messrs. Finneran and Kastelic. The special committee then
discussed the revised cost estimate to complete the reverse stock split based on
the $0.50 per pre-split share price increase. The special committee reviewed and
discussed again its bases for believing that the transaction, at $7.00 per
pre-split share, is fair to our unaffiliated shareholders.
Mr. Skaar then presented the results of his liquidation analysis based on
assumptions regarding realizable values of our assets. The liquidation value
analysis indicated a per share price of approximately $1.90 as of January 31,
2003. The special committee discussed our low liquidation value and the
intention of Messrs. Finneran and Kastelic to maintain the company as a going
concern. In light of these factors, the special committee concluded that
liquidation value should not be relevant to its determination of whether the
transaction price is fair to our unaffiliated shareholders.
Legal counsel then presented certain historical bid price information
relating to our common stock. Counsel stated that our stock's average closing
bid price for the past 20 days was $6.27. Additionally, counsel reported that
the average of the high bid prices for our stock in each month over the past 12
months and the 12 months prior thereto was $6.61 and $5.44, respectively, while
the average of the closing bid prices for our stock on the last day of each
month over the past 12 months and the 12 months prior thereto was $6.21 and
$5.06, respectively. The special committee noted that the $7.00 per pre-split
share transaction price represented an 11.6% premium over our stock's average
price for the past 20 days, a 6.0% and 28.8% premium over the average of our
stock's high bid prices on a monthly basis, respectively, and a 12.7% and 38.3%
premium over the average of our stock's closing bid price on the last day of
each month, respectively.
The special committee next noted that it had not received any firm
inquiries or offers for our company or our unaffiliated shareholders' shares
following our March 12 press release announcing receipt of the reverse stock
split proposal at $6.50 per share. The special committee concluded that this
helped to indicate that third party buyers did not value us or our unaffiliated
shareholders' shares at or above $6.50 per share, thus further evidencing the
substantive fairness of a $7.00 per pre-split share cash price to our
unaffiliated shareholders.
Schroeder & Co. then delivered to the special committee its oral opinion to
the effect that the price of $7.00 is fair, from a financial point of view, to
our unaffiliated shareholders. The full text of Schroeder & Co.'s written
opinion, dated April 1, 2003, which does not differ from its oral opinion, is
attached as Exhibit C to this proxy statement. The special committee unanimously
resolved to recommend the reverse stock split proposal to our Board at a
transaction price of $7.00 per pre-split share conditioned upon, in addition to
the shareholder vote required by New Jersey law, the affirmative vote of a
majority of shares of common stock voting on the reverse stock split proposal at
our special meeting that would be cashed out in the reverse stock split
(including the shares to be cashed out by Mr. Finneran).
Immediately following the conclusion of the special committee meeting on
April 1, 2003, a meeting of our full Board of Directors was convened. In
addition to our Board members, also in attendance were Mr. Skaar, Mr. Schroeder
of Schroeder & Co. and representatives of Foley & Lardner. Mr. Scott reported
the special committee's recommendation. Our Board of Directors then approved the
proposal, with Messrs. Finneran and Kastelic abstaining due to their interests
in the transaction.
Our Board then discussed its plans if the reverse stock split proposal was
not approved by our unaffiliated shareholders. After reiterating the many
advantages of being a private company that had been considered by the special
committee, our Board concluded that, even if the reverse stock split proposal
was not approved by our unaffiliated shareholders, it would still be in the best
interests of our
44
company and our shareholders to delist from the OTC Bulletin Board and
deregister under the Exchange Act.
On April 2, 2003, we issued a press release announcing Board approval of
the reverse stock split proposal at $7.00 per pre-split share submitted by
Messrs. Finneran and Kastelic, subject to the majority of the minority
shareholder approval condition at a special meeting of our shareholders.
Also on April 2, 2003, Mr. Finneran decided not to cash out any of his
shares in the reverse stock split as a result of personal tax considerations.
Because of the extent of Mr. Finneran's shareholdings, the partial cashing out
of a small percentage of his shares in the reverse stock split risked being
treated as dividend income and taxed at ordinary income tax rates instead of at
capital gains rates.
On April 3, 2003, we received two letters on behalf of two of our
unaffiliated shareholders. In the first letter, the unaffiliated shareholders
stated that they believed the reverse stock split proposal was procedurally and
substantively unfair to our unaffiliated shareholders. In particular, they
stated that (i) the special committee did not serve as a truly effective and
independent advocate for our unaffiliated shareholders; (ii) our regular legal
counsel should not have been retained by the special committee; and (iii) they
believe we had previously rejected offers in excess of $7.00 per share. The
unaffiliated shareholders requested that negotiations be reopened and that an
independent representative of our unaffiliated shareholders be appointed.
Furthermore, they requested that the majority of the minority shareholder
approval condition be modified so as not to include any of Mr. Finneran's shares
in the shareholder vote. The unaffiliated shareholders stated that, if the
special committee did not address their concerns, they would consider all
available alternatives, including proposing an alternative transaction to our
Board. The second letter contained a request to examine our shareholder records.
In light of Mr. Finneran's decision not to cash out any of his shares and
the letters received from the two unaffiliated shareholders, the special
committee held a meeting on April 9, 2003. In addition to the special committee
members, also in attendance were Mr. Skaar and representatives of Foley &
Lardner. In advance of this meeting, Foley & Lardner distributed memoranda
discussing the effects of Mr. Finneran's decision not to cash out any shares in
the reverse stock split and the letters received from the unaffiliated
shareholders.
At its April 9 meeting, the special committee reconsidered the majority of
the minority shareholder approval condition, particularly in light of Mr.
Finneran's decision not to cash out any of shares in the reverse stock split.
The special committee discussed the fact that, because smaller shareholders may
have less incentive to exercise their right to vote than larger shareholders, a
small number of large, unaffiliated shareholders could defeat the reverse stock
split proposal, even if most of our unaffiliated shareholders were in favor of
the proposal. The special committee noted that, in its experience, shareholders
are more likely to exercise their right to vote on a proposal that they believe
to be against their interests than they are to vote on a proposal that they
believe to be in their interests. After a lengthy discussion, the special
committee concluded that the true will of our unaffiliated shareholders would be
better reflected if approval of the reverse stock split proposal was conditioned
upon the requirement that a majority of all outstanding shares held by
unaffiliated shareholders not be voted against the reverse stock split proposal.
The special committee also discussed the possibility of reopening
negotiations, but concluded that it did not have a basis for doing so because
circumstances had not changed since the time that the reverse stock split
proposal was approved. Although the unaffiliated shareholders had stated that
they might consider submitting an alternative transaction proposal, no such
proposal has yet been made. The special committee noted that Messrs. Finneran
and Kastelic had informed the committee that they would withdraw their reverse
stock split proposal if the committee did not accept their proposal at $7.00
45
per pre-split share. The special committee was therefore faced with two choices:
(i) submit the reverse stock split proposal to a vote of our shareholders, with
approval expressly conditioned upon a reverse majority of the minority
shareholder vote or (ii) reopen negotiations regarding the going private
transaction with the knowledge that Messrs. Finneran and Kastelic would withdraw
their reverse stock split proposal. Reopening negotiations therefore would
likely result in our unaffiliated shareholders losing the opportunity to realize
$7.00 per share in cash without even an opportunity to vote on the proposal.
Based on the advice of counsel, the special committee determined that such a
result was not in the best interests of the our shareholders when no substantive
basis upon which to reopen negotiations was given and no alternative proposal
was even available to consider. Counsel informed the special committee that,
given that determination and based on New Jersey law, reopening negotiations
could result in a breach of the directors' fiduciary duties to the Company's
unaffiliated shareholders if such action resulted in Messrs. Finneran and
Kastelic withdrawing their reverse stock split proposal. As a result, the
special committee declined to reopen negotiations.
The special committee then unanimously resolved to recommend the modified
reverse stock split proposal to our Board at a transaction price of $7.00 per
pre-split share, but not including the cashing out of Mr. Finneran's 185,100
shares. The special committee further recommended that, in addition to the
affirmative majority shareholder vote required by New Jersey law, completion of
the reverse stock split should be further conditioned upon a majority of all
outstanding shares held by unaffiliated shareholders not being voted against the
reverse stock split proposal. None of Mr. Finneran's shares would be counted in
this vote.
Immediately following the conclusion of the special committee meeting, a
meeting of our full Board of Directors was convened. In addition to our Board
members, also in attendance were Mr. Skaar and representatives of Foley &
Lardner. Mr. Scott reported the special committee's recommendation. Our Board of
Directors then approved the modified reverse stock split proposal in the form
recommended by its special committee, with Messrs. Finneran and Kastelic
abstaining due to their interests in the transaction.
On April 9, 2003, we issued a press release announcing (i) Mr. Finneran's
decision not to cash out any of his shares in the reverse stock split for
personal tax reasons and (ii) the requirement that, in order for the reverse
stock split proposal to be approved, in addition to the shareholder vote
required by New Jersey law, a majority of all outstanding shares held by
unaffiliated shareholders could not be voted against the proposal.
On April 8 and April 10, 2003, our legal counsel sent response letters on
behalf of the special committee and our company to the two unaffiliated
shareholders. Counsel's first letter requested proof that the unaffiliated
shareholders are in fact shareholders of our company. Counsel's second letter
began by explaining that the reverse split ratio was purposefully set at a level
that, if other shareholders desired to consolidate their share ownership
accounts or acquire additional shares of our stock so that their share ownership
equaled or exceeded 66,666 shares in a single account, then such shareholders
could elect to remain shareholders of the company as a private company. Because
one of the unaffiliated shareholders claimed to own more than 66,666 shares,
this particularly applied to him. Counsel's response letter then discussed the
extensive process that the special committee had undertaken prior to its
decision to approve the reverse stock split proposal as previously described in
this proxy statement. The letter also referenced the fairness opinion of
Schroeder & Co. that the price of $7.00 is fair, from a financial point of view,
to our unaffiliated shareholders. Counsel next addressed the concern of the
unaffiliated shareholders that the special committee had retained our company's
regular legal counsel. Counsel explained that the special committee had
discussed at length whether to retain our company's legal counsel and had
concluded that it would likely be more expensive and time-consuming to hire
legal counsel that was not familiar with us, our history, our financial results
and condition, and the transaction.
46
Counsel stated that the special committee viewed as very remote the chance that
a conflict of interest would result in Foley & Lardner providing the committee
with legal advice that was not in the best interests of us and our minority
shareholders. Counsel also assured the unaffiliated shareholders that Foley &
Lardner had fully complied with its legal and professional obligations to the
special committee. Counsel next addressed the unaffiliated shareholders'
contention that we had previously rejected offers in excess of $7.00 per share.
Counsel explained that, although Mr. Finneran has from time to time received
some very preliminary oral indications of general interest in acquiring his
shares from a few select parties, neither we nor our Board have received any
firm offers to acquire the company, with one exception. Counsel stated that we
had proceeding relatively far down the path of negotiating documentation to sell
the entire company. However, counsel stated, the interested party was unable to
obtain its own board's approval. Furthermore, counsel gave three reasons that
differentiated that transaction from the reverse stock split proposal: (i) the
proposal occurred three years ago when the market and relative valuations for
selling companies were much stronger, the credit markets were not as stringent,
stock market valuations were generally much higher, the economy and construction
industry were at or near their peak, and our stock price and prospects were
generally higher and brighter; (ii) the proposal was to acquire our entire
company and included a substantial control premium relating to Mr. Finneran's
shares; and (iii) the proposal was from a strategic party that envisioned
realizing substantial cost savings and synergies from an acquisition of our
company. Counsel also addressed the unaffiliated shareholders' concern than Mr.
Finneran's vote with respect to a portion of his shareholdings would be counted
in the majority of the minority shareholder approval condition. Counsel
explained that New Jersey law requires only the approval of a majority of the
votes cast by holders of outstanding shares entitled to vote at our special
meeting and that all other voting standards or requirements are wholly
discretionary within the business judgment of our Board and its special
committee. Counsel then informed the unaffiliated shareholder that the majority
of the minority shareholder approval condition had been modified to provide that
the reverse stock split proposal would be approved unless a majority of all
outstanding shares held by unaffiliated shareholders vote against the proposal
(which does not include the vote of any shares held by Mr. Finneran). Counsel
then addressed the unaffiliated shareholders' request to re-open negotiations
with Messrs. Finneran and Kastelic. Counsel stated that the special committee
had been advised that any attempt to re-open negotiations may result in Messrs.
Finneran and Kastelic withdrawing their reverse stock split proposal to the
detriment of our unaffiliated shareholders and may therefore constitute a breach
of the special committee's fiduciary obligations. Finally, counsel invited the
unaffiliated shareholders to propose an alternative transaction for shares held
by our unaffiliated shareholders that would provide a higher price to our
unaffiliated shareholders. Counsel reiterated that Messrs. Finneran and
Kastelic, who together beneficially own 71% of our outstanding shares, were not
interested in, and were unwilling, to consider any alternative transaction in
which they sold their shares to an outside third party.
On April 25, 2003, our legal counsel sent a copy of the fairness opinion
issued by Schroeder & Co. to the unaffiliated shareholders.
On May 1, 2003, we received a letter evidencing the beneficial ownership of
one of the unaffiliated shareholders and a second request to examine our
shareholder records. The record of share ownership, however, contained proof of
beneficial ownership of 44% fewer shares than the unaffiliated shareholder
claimed to own in his original letter dated April 3, 2003.
On May 7, 2003, our legal counsel sent a response letter to the
unaffiliated shareholder on behalf of the special committee and our company. On
behalf of our company, our legal counsel denied the unaffiliated shareholder's
request to examine our shareholder records on the basis that (i) we believe that
the unaffiliated shareholder's request is for an improper purpose and (ii) we do
not believe that the unaffiliated shareholder qualifies under New Jersey law to
examine our shareholder records. First, our legal counsel explained our belief
that the unaffiliated shareholder has requested to examine our shareholder
records for the improper purpose of benefiting himself at the expense of the
company and the
47
rest of our unaffiliated shareholders. Second, our legal counsel explained that
the unaffiliated shareholder does not qualify under New Jersey law to examine
our shareholder records because he has not proven that he is either (i) a
shareholder of record; or (ii) a holder of at least 5% of our outstanding stock.
Although the unaffiliated shareholder claimed to own more than 5% of our
outstanding common stock in his original letter dated April 3, 2003, he only
provided proof of beneficial ownership of approximately 3% of our outstanding
common stock. Additionally, the unaffiliated shareholder has not filed a
Schedule 13D with the SEC indicating that he is directly or indirectly the
beneficial owner of five percent or more of our common stock.
No further communication has occurred and no litigation by these
shareholders has been commenced against us or any of our affiliates at the
present time.
Price Range of Common Stock and Dividends; Related Shareholder Matters
Our common stock is traded on the OTC Bulletin Board under the symbol
"EDCO." Prior to April 17, 2001, our common stock was traded on The Nasdaq
National Market, also under the symbol "EDCO." We have set forth below our high
and low bid price information for the periods indicated, as reported by the OTC
Bulletin Board (and, for the first quarter of fiscal year 2001, The Nasdaq
National Market). The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions:
Fiscal Quarter Ended High Low
-------------------- ----- -----
Fiscal Year 2001
April 30, 2001 $5.38 $3.88
July 31, 2001 $5.00 $3.30
October 31, 2001 $4.50 $3.60
January 31, 2002 $8.85 $4.50
Fiscal Year 2002
April 30, 2002 $6.50 $6.10
July 31, 2002 $6.52 $6.30
October 31, 2002 $6.75 $6.40
January 31, 2003 $6.50 $5.00
Fiscal Year 2003
April 30, 2003 $6.85 $5.00
For the second quarter of fiscal year 2003 through June 19, 2003, the high
and low closing bid price for our common stock has been $6.86 and $6.85,
respectively.
During the time periods set forth above, we have not paid cash dividends to
our shareholders. On March 3, 2003, the last trading day before the reverse
stock split proposal was submitted to us, our stock's closing bid price per
share was $6.00. On March 11, 2003, the last trading day prior to the initial
announcement of the reverse stock split proposal, our stock's closing bid price
per share was $6.50. On [ ], the last trading day prior to the date of this
proxy statement, our stock's closing bid price per share was $[ ]. Shareholders
should obtain current market price quotations for our common stock in connection
with voting their shares.
As of the record date, we had 1,638,595 outstanding shares of common stock,
of which Messrs. Finneran and Kastelic beneficially owned a total of 1,163,645
outstanding shares, or 71.0%.
48
Plans of the Company in the Event the Reverse Stock Split Proposal is Not
Approved
If the reverse stock split proposal submitted by Messrs. Finneran and
Kastelic is not approved by our unaffiliated shareholders, our Board of
Directors nonetheless intends to delist our common stock from trading on the OTC
Bulletin Board and deregister our common stock under the Exchange Act. Our Board
will be able to do this, even if we do not effect the reverse stock split,
because we currently have less than 300 shareholders of record. This action will
allow us to take advantage of the benefits of being a privately held company,
discussed in detail under "Special Factors - Advantages of the Reverse Stock
Split." The disadvantages of delisting and deregistering without also
undertaking a reverse stock split is that minority shareholders will not have an
opportunity to realize liquidity for their minority shareholdings.
Exchange of Certificates and Payment of Fractional Shares
Within approximately five business days after the effective date of the
reverse stock split, our exchange agent, American Stock Transfer and Trust
Company, will send to each holder of an outstanding certificate previously
representing shares of our common stock instructions for the surrender of those
certificates to the exchange agent. The instructions will include a letter of
transmittal that holders of certificates will need to complete and return to the
exchange agent along with their certificates. When the exchange agent receives a
certificate and a duly executed letter of transmittal, it will deliver cash for
fractional shares to the person in whose name the certificate was issued within
approximately five business days.
For your fractional shares of common stock of less than one share after the
reverse stock split, we will pay you an amount determined by multiplying the
fraction of a share of common stock that you hold after the reverse stock split
by $466,662 (which equals $7.00 multiplied by the reverse stock split ratio of
66,666). For example, if you owned 100 shares of our common stock before the
reverse stock split, then after the reverse stock split you would own the
equivalent of 0.0015 shares (100 divided by 66,666). We would pay you an amount
equal to the product of 0.0015 times $466,662, or $700, which is equivalent to
paying you $7.00 for each pre-split share that you owned.
When we determine who owns our shares as of the effective date of the
reverse stock split, we will only consider shares to be held by the person in
whose name those shares are registered in our stock records, regardless of who
may beneficially own those shares. No service charges, brokerage commissions or
transfer taxes will be payable by any holder of any certificate which prior to
the reverse stock split represented shares of our common stock.
Fees and Expenses of the Reverse Stock Split
We will pay all fees and expenses related to our actions in effecting the
reverse stock split, including the preparation, printing and mailing of this
proxy statement and all filing and other fees paid to the SEC. We estimate that
we will pay approximately $3.4 million to cash out up to 474,950 pre-split
shares and repurchase stock options to purchase up to 27,334 shares at a
weighted average exercise price of $3.46. This total amount will be smaller if
one or more unaffiliated shareholders consolidates their shareholdings or
acquires additional shares of our common stock such that they own at least
66,666 shares in a single account at the effective time of the reverse stock
split, thereby electing to remain a shareholder of our company as a private
company. We also estimate the total fees and expenses in connection with the
reverse stock split will be about $500,000. This amount consists of the
following estimated fees and expenses:
49
Filing Fees...................... $ 685
Legal Fees....................... $ 415,000
Accounting Fees.................. $ 25,000
Fairness Opinion................. $ 25,000
Special Committee Fees........... $ 20,000
Printing......................... $ 5,000
Mailing.......................... $ 5,000
Miscellaneous.................... $ 4,315
Total Expenses............ $ 500,000
Source and Amount of Funds
We estimate that the total amount of funds required to complete our
purchase of fractional shares held by shareholders who hold less than one share
as a result of the reverse stock split, make cash payments for terminated stock
options and pay related fees and expenses is approximately $3.9 million. Our
wholly-owned subsidiary, Construction Forms (which we call "ConForms"), has
received a letter dated March 24, 2003, from LaSalle pursuant to which LaSalle
agreed to (i) extend the term of ConForms' existing secured revolving credit
facility to April 30, 2005 and modify certain terms of the facility and (ii)
extend to ConForms a $5 million, 5-year secured term loan, subject to certain
terms and conditions. The commitment is conditioned upon completion of
satisfactory amendments to our existing loan documentation.
We will guarantee all borrowings under the term loan and revolving credit
facility, which will be secured by a first perfected general security interest
in all of ConForms' assets. Interest on borrowings will be payable at either a
prime or LIBOR rate set forth in the pricing grid accompanying the letter, at
ConForms' option. ConForms will be required to pay a quarterly usage fee on the
average unused amount under the credit facility. The associated credit agreement
will contain various coverage ratios and financial covenants. We have attached a
copy of the letter from LaSalle as Exhibit D to this proxy statement.
We intend to repay borrowings from cash from operations.
Interests of Directors and Executive Officers in the Reverse Stock Split
Certain of our directors and executive officers have various interests in
the reverse stock split described in this section that are in addition to, or
different from, the interests of our unaffiliated shareholders generally. You
should keep this in mind when considering the recommendation of our Board of
Directors for the adoption of the reverse stock split.
First, it is anticipated that Messrs. Finneran and Kastelic will be our
only remaining shareholders following the reverse stock split. All shareholders
left with less than one share as a result of the reverse stock split will
receive the $7.00 per pre-split share price for their shares. As a result, our
shareholders other than Messrs. Finneran and Kastelic (and any shareholders who
elect to consolidate their shares or acquire additional shares such that they
own at least 66,666 shares in a single account at the effective time of the
reverse stock split), will not have the opportunity to liquidate their shares at
a time and for a price of their choosing; instead, they will be cashed out and
will no longer own equity interests in us and will have no opportunity to
participate in or benefit from any potential future appreciation in our value
after we go private.
Our executive officers and directors currently hold 1,188,145 outstanding
shares, broken down as follows:
50
o Mr. Cooney, 17,500 shares;
o Mr. Finneran, 1,096,978 shares;
o Mr. Kastelic, 66,667 shares; and
o Mr. Skaar, 7,000 shares.
Mr. Cooney will receive a cash payment of $122,500 (before applicable
taxes) as a result of cashing out shares in the reverse stock split. This
payment is in addition to the $10,000 fee Mr. Cooney received in consideration
of his service on the special committee. Mr. Skaar will receive a cash payment
of $49,000 (before applicable taxes) as a result of cashing out shares in the
reverse stock split. Neither Mr. Finneran's nor Mr. Kastelic's shares will be
cashed out in the reverse stock split.
In addition, there are outstanding stock options to acquire 124,556 shares
of our common stock at a weighted average exercise price of $3.10. Prior to the
reverse stock split, all outstanding stock options (except for stock options
held by Mr. Kastelic) will be canceled by entering into individual option
cancellation agreements with each optionee at a weighted average exercise price
of $3.46. In consideration for that cancellation, the holders of the stock
options will have the right to receive a cash payment equal to the excess, if
any, of the $7.00 per pre-reverse split share over the per share exercise price
of the stock options, multiplied by the number of shares subject to those stock
options, reduced by applicable withholding taxes.
Our directors and officers stock options to purchase 122,222 shares, broken
down as follows (including exercise prices):
o Mr. Kastelic, 97,222 shares at $3.00 per share; and
o Mr. Scott, 25,000 shares at $3.50 per share.
In addition, two of our employees own options to purchase a total of 2,334
shares at $3.00 per share. Finally, Mr. Finneran holds an immediately
exercisable warrant to purchase 500,000 shares of common stock at $1.60 per
share.
As a result, Mr. Scott will receive a cash payment of $87,500 (before
applicable taxes) in consideration of termination of his outstanding stock
options. This payment is in addition to the $10,000 fee Mr. Scott received in
consideration of his service on the special committee.
Mr. Kastelic will not receive a cash payment for his outstanding stock
options, as they will remain outstanding after the reverse stock split with
appropriate adjustments to the number of shares and exercise price giving effect
to the reverse stock split ratio per the terms of his stock option agreement.
Mr. Finneran will likewise not receive a cash payment for his outstanding
warrant, which will likewise remain outstanding after the reverse stock split,
subject to similar appropriate adjustments.
Indemnification and Insurance
We are required to indemnify, defend and hold harmless, to the full extent
permitted by law, all current officers and directors against all losses, claims,
damages, costs, expenses or liabilities or in connection with any claim, action,
suit, proceeding or investigation arising out of the fact that the person is an
officer or director of our company (or out of any action taken by any such
person on behalf
51
of us), pertaining to any matter existing or occurring on or prior to the
effective time of the reverse stock split, whether asserted or claimed prior to,
or on or after, the effective time of the reverse stock split.
On March 18, 2003, we entered into indemnity agreements with each member of
the special committee. Pursuant to the indemnity agreements, we agreed to
indemnify Messrs. Scott and Cooney for any expenses, liabilities and losses that
they may incur relating to their service as members of the special committee
and/or our Board of Directors in connection with the transaction. These
indemnity agreements are in addition to the indemnity available to Messrs. Scott
and Cooney pursuant to New Jersey law and our certificate of incorporation and
bylaws.
52
THE SPECIAL MEETING
This proxy statement is furnished in connection with the solicitation of
proxies by our Board of Directors in connection with a special meeting of our
shareholders.
Date, Time and Place of the Special Meeting
Our special meeting is scheduled to be held as follows:
DATE:_____________, 2003
TIME:_____________
PLACE: 40th Floor, Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202
Proposal to be Considered at the Special Meeting
At our special meeting, you will be asked to consider and vote upon on a
proposal to take our company private through the adoption of an amendment to our
certificate of incorporation providing for
o a one-for-66,666 reverse stock split of our common stock; and
o a cash payment of $7.00 per pre-split share of common stock to all
shareholders left with less than one share following the reverse stock
split.
Record Date
Our Board of Directors has fixed the close of business on __________, 2003
as the record date for our special meeting and only holders of common stock on
the record date are entitled to notice of and to vote at our special meeting. On
that date, there were approximately 26 holders of record of our common stock,
and 1,638,595 outstanding shares of common stock. On the record date, Messrs.
Finneran and Kastelic beneficially owned 1,163,645 of our outstanding shares of
our common stock, representing approximately 71% of our total voting power.
Voting Rights; Vote Required for Approval
Each share of our common stock entitles its holder to one vote on the
reverse stock split proposal. In order to have a quorum at our special meeting,
a majority of all outstanding shares of common stock as of the record date must
be present, in person or by proxy. Messrs. Finneran and Kastelic have indicated
that all of the shares beneficially owned by them will be represented in person
or by proxy at the meeting. Accordingly, a quorum at the meeting is assured.
Under New Jersey law, the reverse stock split proposal is subject to
obtaining the approval of a majority of the votes cast by the holders of
outstanding shares of our common stock entitled to vote at our special meeting.
Messrs. Finneran and Kastelic intend to vote all of the shares of common stock
beneficially owned by them in favor of the reverse stock split proposal, thereby
ensuring that the reverse stock proposal will be approved by the requisite
shareholder vote under New Jersey law. We also expect our other directors and
executive officers to vote their shares in favor of the reverse stock split
proposal.
53
In addition to the requirements of New Jersey law, our Board of Directors,
upon the recommendation of its special committee, has further conditioned
approval of the reverse stock split proposal upon the requirement that a
majority of all outstanding shares held by unaffiliated shareholders not be
voted against the proposal. This is unlike a typical "majority of the minority"
condition which would require the approval of a majority of the unaffiliated
shareholders voting at the special meeting. The special committee recommended
the reverse majority of the minority shareholder approval condition because it
believed, based on its experience, that shareholders are more likely to exercise
their right to vote on a proposal that they believe to be against their
interests than they are to vote on a proposal that they believe to be in their
interests. The special committee concluded, therefore, that the true will of the
unaffiliated shareholders would be better reflected by conditioning approval of
the reverse stock split proposal upon the requirement that a majority of all
outstanding shares held by unaffiliated shareholders not be voted against the
reverse stock split proposal.
Under New Jersey law, you do not have the right to demand the appraised
value of your shares nor do you have any other dissenters' rights if you vote
against the proposed transaction. You may have other rights or actions under
federal or state laws in connection with the reverse stock split if you can
demonstrate that you have been injured by the reverse stock split. Such
challenges to corporate actions in general may be related to fiduciary
responsibilities of corporate officers and directors and to the fairness of
corporate transactions. For example, although we do not believe there is a basis
for such a claim, shareholders could, if they deemed such to be applicable,
institute appropriate legal action against the company and our Board, and claim
that the reverse stock split was unfair to the unaffiliated shareholders, and/or
claim that there was no justifiable or reasonable business purpose for the
reverse stock split.
If you hold your shares in an account with a broker or bank, then you must
instruct the broker or bank on how to vote your shares. If an executed proxy
card returned by a broker or bank holding shares indicates that the broker or
bank does not have discretionary authority to vote on the adoption of the
reverse stock split proposal, then the shares will be considered present at the
meeting for purposes of determining the presence of a quorum, but will not be
voted on the proposal to adopt the reverse stock split proposal. This is called
a broker non-vote. Your broker or bank will vote your shares only if you provide
instructions on how to vote by following the instructions provided to you by
your broker or bank.
Abstentions, failures to vote and broker non-votes will have the same
effect as a vote against the adoption of the reverse stock split proposal for
purposes of determining whether the proposal receives the vote required by New
Jersey law for adoption. However, abstentions, failures to vote and broker
non-votes will have the effect of being a vote in favor of the reverse stock
proposal for purposes of the reverse majority of the minority shareholder
approval condition since the reverse majority of the minority shareholder
approval condition requires that a majority of all outstanding shares held by
unaffiliated shareholders not be voted against the proposal.
Each of our directors and executive officers has indicated that he intends
to vote his own shares in favor of adoption of the reverse stock split proposal.
If Messrs. Finneran and Kastelic and each of our directors and officers vote as
we expect, 72.5% of our outstanding shares will have voted for adoption of the
reverse stock split proposal.
Voting and Revocation of Proxies
After carefully reading and considering the information contained in this
proxy statement, you should complete, date and sign your proxy card and mail it
in the enclosed return envelope as soon as possible so that your shares are
represented at our special meeting, even if you plan to attend our meeting
54
in person. Unless you specify to the contrary, all of your shares represented by
valid proxies will be voted "FOR" the adoption of the reverse stock split
proposal.
Proxies received at any time before our special meeting, and not revoked or
superseded before being voted, will be voted at our special meeting. Where a
specification is indicated by the proxy, it will be voted in accordance with the
specification. Where no specification is indicated, the proxy will be voted
"FOR" the proposal to adopt the reverse stock split. No business will be brought
before our special meeting other than that described in this proxy statement.
Until your proxy is exercised at our special meeting, you can revoke your
proxy and change your vote in any of the following ways:
o by delivering written notification of revocation to our Secretary at
our executive offices at 777 Maritime Drive, P.O. Box 308, Port
Washington, Wisconsin 53074-0308;
o by delivering a proxy of a later date;
o by attending our special meeting and voting in person. Your attendance
at the meeting will not, by itself, revoke your proxy; you must vote
in person at the meeting; or
o if you have instructed a broker to vote your shares, by following the
directions received from your broker to change those instructions.
Votes will be tabulated by our transfer agent, American Stock Transfer and
Trust Company.
If you have any more questions about the reverse stock split or how to
submit your proxy, or if you need additional copies of this proxy statement or
the enclosed proxy card or voting instructions, you should contact Gregory
Skaar, 777 Maritime Drive, P.O. Box 308, Port Washington, Wisconsin 53074-0308,
(262) 268-6800.
Solicitation of Proxies
We will bear the expenses in connection with the solicitation of proxies.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of common stock held of record by such persons, and we may
reimburse them for their reasonable transaction and clerical expenses.
Solicitation of proxies will be made principally by mail. Proxies may also be
solicited in person, or by telephone, facsimile, telegram or other means of
communication, by our officers and regular employees. These people will receive
no additional compensation for these services, but will be reimbursed for any
transaction expenses incurred by them in connection with these services.
55
OTHER MATTERS
Security Ownership of Specified Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of our shares as of April 1, 2003 by (i) those that we know to be
beneficial owners of more than 5% of our common stock; (ii) each of our
executive officers and directors; and (iii) all executive officers and directors
as a group. The address for each of the shareholders listed below is c/o Edison
Control Corporation, 777 Maritime Drive, P.O. Box 308, Port Washington,
Wisconsin 53074-0308.
Name of Beneficial Owner Number of Shares Owned Percent of Class
- ------------------------ ---------------------- ----------------
Robert L. Cooney 17,500 1.1%
William B. Finneran 1,596,978(1)(4) 74.7%
Alan J. Kastelic 163,889(2) 9.4%
William C. Scott 25,000(3) 1.5%
Gregory L. Skaar 7,000 0.4%
Executive Officers and 1,810,367(1)(2)(3)(4) 80.1%
Directors as a Group
(1) Based on information set forth in the indicated party's Schedule 13D or 13G
as filed with the SEC.
(2) Includes a currently exercisable stock option to purchase 97,222 shares.
(3) Includes a currently exercisable stock option to purchase 25,000 shares.
(4) Includes a currently exercisable warrant to purchase 500,000 shares.
Transactions in Capital Stock by Certain Persons
The table below sets forth information, by fiscal quarters, regarding
purchases by us of our common stock over the past five fiscal quarters (we did
not purchase any shares of our common stock during fiscal year 2001 except
during the fourth quarter as set forth below). On November 7, 2001, our Board of
Directors authorized the repurchase of up to 750,000 shares of our common stock.
We terminated that share repurchase plan on December 4, 2002, after having
purchased a total of 718,295 shares.
Number of Shares Repurchase Share Price
---------------- ----------------------
Fourth Quarter 2002 99,744 $7.00
Third Quarter 2002 255,898 $7.00
Second Quarter 2002 48,500 $7.00
First Quarter 2002 36,344 $7.00
Fourth Quarter 2001 559,753 $7.00
Included in the shares shown in the table above are (i) 33,000 shares we
repurchased from John Delucca, one of our former directors, on December 6, 2001;
(ii) 25,000 shares pursuant to stock options we repurchased from Robert Cooney,
one of our directors, on May 29, 2002; and (iii) 20,000 shares we repurchased
from Norman Eig, one of our former directors, on May 31, 2002. In addition to
shares repurchased under the share repurchase program, and also included in the
table above,
56
are (i) the repurchase of a total of 33,333 shares and stock options to purchase
48,611 shares from Jay Hanamann, our former Chief Financial Officer, on December
30, 2002 and January 2, 2003, respectively, and (ii) the repurchase of stock
options to acquire 200,000 shares from Mary McCormack, our former Chief
Executive Officer, on August 20, 2002. All repurchases were completed at a per
share price or price equivalent of $7.00 per share.
Except for the purchases referred to above, neither Messrs. Finneran and
Kastelic, nor any of our other directors or executive officers, have purchased
any shares of our common stock during the past two years, and there have been no
transactions in our common stock during the past 60 days by us, any of our
directors or executive officers or Messrs. Finneran or Kastelic.
Other Transactions
Mr. Finneran is not a full time employee of ours; however, he has devoted
considerable time to portfolio management, the search for potential acquisitions
and consideration of our current business operations. For those services, we
paid Mr. Finneran $112,000 in both fiscal year 2002 and fiscal year 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and
directors to file reports concerning their ownership in our stock with the SEC
and us. Based solely upon the information provided to us by individual directors
and officers, we believe that all filings required pursuant to Section 16(a) of
the Exchange Act, relating to us, have been timely made.
Future Shareholder Proposals
Our annual meeting of shareholders is normally held in June of each year.
In light of the reverse stock split proposal, we postponed indefinitely our next
annual meeting of shareholders. If the reverse stock split proposal is not
approved at our special meeting, then we may hold our annual meeting of
shareholders soon thereafter. Proposals of shareholders intended to be presented
at, and included in our proxy materials for, the next annual meeting pursuant to
Rule 14a-8 under the Exchange Act must have been received by us no later than
December 31, 2002. For proposals outside of Rule 14a-8, notices were required to
be received by March 16, 2003. Notices received after that date will be
considered untimely, and, should our Board of Directors choose to present such
proposals anyway, the persons named in proxies solicited by our Board of
Directors for that meeting would be able to exercise discretionary voting power
with respect to those proposals.
Independent Auditors
Our consolidated financial statements' as of January 31, 2003 and 2002 and
for the three years ended January 31, 2003 included (beginning at page F-1) in
this proxy statement, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report included herein (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," effective February 1, 2002).
A representative of Deloitte & Touche is expected to be present at our
special meeting. Such representative will have the opportunity to make a
statement if he or she desires to do so and is expected to be available to
respond to any appropriate questions.
57
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You can read and copy
any reports, statements or other information that we file at the Public
Reference Section of the SEC located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further
information on the public reference rooms. Our filings with the Securities and
Exchange Commission are also available to the public at the Securities and
Exchange Commission's website at http://www.sec.gov.
We have filed a transaction statement on Schedule 13E-3 with the Securities
and Exchange Commission with respect to the reverse stock split proposal. As
permitted by the Securities and Exchange Commission, this proxy statement omits
certain information contained in the transaction statement on Schedule 13E-3.
The transaction statement on Schedule 13E-3, including any amendments and
exhibits filed or incorporated by reference as a part of it, is available for
inspection or copying as set forth above.
We have not made any provision in connection with this transaction to grant
unaffiliated security holders access to our corporate files or to obtain counsel
or appraisal service at our expense.
This proxy statement does not constitute the solicitation of a proxy in any
jurisdiction to or from any person to whom or from whom it is unlawful to make a
proxy solicitation in that jurisdiction. You should rely only on the information
contained in this proxy statement to vote your shares at our special meeting. We
have not authorized anyone to provide you with information that is different
from what is contained in this proxy statement. This proxy statement is dated
__________ ___ , 2003. You should not assume that the information contained in
this proxy statement is accurate as of any date other than that date, and the
mailing of this proxy statement to you does not create any implication to the
contrary.
58
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
Page
----
Unaudited Interim Financial Statements
Condensed Consolidated Balance Sheets, April 30, 2003 and
January 31, 2003 F-2
Condensed Consolidated Statements of Income and Comprehensive
Income, Three Months Ended April 30, 2003 and 2002 F-4
Condensed Consolidated Statements of Cash Flows, Three Months
Ended April 30, 2003 and 2002 F-5
Notes to Condensed Consolidated Financial Statements, Three
Months Ended April 30, 2003 and 2002 F-7
Audited Financial Statements
Independent Auditors' Report F-10
Consolidated Balance Sheets, January 31, 2003 and 2002 F-11
Consolidated Statements of Income and Comprehensive Income,
Years Ended January 31, 2003, 2002 and 2001 F-13
Consolidated Statements of Shareholders' Equity, Years Ended
January 31, 2003, 2002 and 2001 F-14
Consolidated Statements of Cash Flows, Years Ended
January 31, 2003, 2002 and 2001 F-15
Notes to Consolidated Financial Statements, Years Ended
January 31, 2003, 2002 and 2001 F-17
F-1
EDISON CONTROL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2003 and January 31, 2003
(Unaudited)
April 30, January 31,
2003 2003
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 396,263 $ 586,520
Trading securities 35,411 37,475
Accounts receivable, net 5,298,808 4,249,057
Inventories, net 6,750,741 7,122,512
Prepaid expenses and other assets 283,282 297,017
Deferred income taxes 260,000 260,000
----------- -----------
Total current assets 13,024,505 12,552,581
Deferred income taxes 685,000 685,000
Property, plant and equipment, net 6,274,746 6,464,602
Goodwill 8,130,000 8,130,000
----------- -----------
TOTAL ASSETS $28,114,251 $27,832,183
=========== ===========
(Continued)
See Accompanying Notes.
F-2
EDISON CONTROL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2003 and January 31, 2003
(Unaudited)
(Continued)
April 30, January 31,
2003 2003
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,029,279 $ 1,001,981
Accrued compensation 669,917 962,812
Taxes other than income taxes 44,695 16,325
Other accrued expenses 491,181 438,822
Income taxes payable 208,227 34,045
Current maturities on long-term debt 159,902 159,902
------------ ------------
Total current liabilities 2,603,201 2,613,887
Long-term debt, less current maturities 4,948,363 5,100,801
------------ ------------
Total Liabilities 7,551,564 7,714,688
Shareholders' Equity:
Preferred stock, $.01 par value: 1,000,000
shares authorized, none issued
Common stock, $.01 par value: 20,000,000
shares authorized, 2,390,223 shares issued 23,902 23,902
Additional paid-in capital 11,363,219 11,363,219
Retained earnings 14,442,326 13,980,740
Accumulated other comprehensive (loss) income (5,364) 11,030
------------ ------------
25,824,083 25,378,891
Less treasury stock at cost:
751,628 shares (5,261,396) (5,261,396)
------------ ------------
Total Shareholders' Equity 20,562,687 20,117,495
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,114,251 $ 27,832,183
============ ============
See Accompanying Notes.
F-3
EDISON CONTROL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED APRIL 30, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
NET SALES $ 7,176,743 $ 6,855,369
COST OF GOODS SOLD 4,455,790 4,424,547
----------- -----------
GROSS PROFIT 2,720,953 2,430,822
OTHER OPERATING EXPENSES:
Selling, engineering and
administrative expenses 2,003,247 1,483,089
----------- -----------
Total other operating expenses 2,003,247 1,483,089
----------- -----------
OPERATING INCOME 717,706 947,733
OTHER EXPENSE (INCOME):
Interest expense 37,517 44,239
Unrealized losses on trading securities 2,064 5,797
Miscellaneous income (74,017) (3,447)
----------- -----------
Total other (income) expense (34,436) 46,589
----------- -----------
INCOME BEFORE INCOME TAXES 752,142 901,144
PROVISION FOR INCOME TAXES 290,556 323,330
----------- -----------
NET INCOME 461,586 577,814
OTHER COMPREHENSIVE (LOSS) INCOME -
Foreign currency translation adjustment (16,394) 85,859
----------- -----------
COMPREHENSIVE INCOME $ 445,192 $ 663,673
=========== ===========
NET INCOME PER SHARE:
Net income per share - basic $ 0.28 $ 0.32
Net income per share - diluted $ 0.22 $ 0.25
See Accompanying Notes.
F-4
EDISON CONTROL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income $ 461,586 $ 577,814
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 234,137 251,217
Provision for doubtful accounts 72,677 128,828
Unrealized loss on trading securities 2,064 5,797
Changes in assets and liabilities:
Accounts receivable (1,122,428) (532,768)
Inventories 371,771 142,810
Prepaid expenses and other assets 13,735 44,056
Trade accounts payable 27,298 (201,464)
Accrued compensation (292,895) (698,920)
Taxes other than income taxes 28,370 (2,490)
Other accrued expenses 52,359 47,208
Deferred income taxes 0 (5,000)
Income taxes payable 174,182 278,962
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,856 36,050
----------- -----------
INVESTING ACTIVITIES:
Additions to plant and equipment (44,281) (245,040)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (44,281) (245,040)
----------- -----------
(Continued)
See Accompanying Notes.
F-5
EDISON CONTROL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 2003 AND 2002
(Unaudited)
(Continued)
2003 2002
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ 0 $ 900,000
Purchases of treasury stock 0 (254,408)
Payments on long-term debt (152,438) (652,343)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (152,438) (6,751)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16,394) 85,859
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (190,257) (129,882)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 586,520 472,352
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 396,263 $ 342,470
========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income taxes $ 116,374 $ 64,007
Cash paid during the period for interest 33,056 33,928
See Accompanying Notes.
F-6
EDISON CONTROL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ending April 30, 2003 are not necessarily indicative of the results that may be
expected for other interim periods or for the fiscal year ended January 31,
2004. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
January 31, 2003.
Note 2 - Nature of Business
Principles of Consolidation - The consolidated financial statements include the
accounts of Edison Control Corporation ("Edison") and subsidiaries, both of
which subsidiaries are wholly owned by Edison (collectively, the "Company"). All
material intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations - The Company is currently comprised of the following
operations. Construction Forms ("ConForms") is a leading manufacturer and
distributor of systems of pipes, couplings, hoses and other equipment used for
the pumping of concrete. ConForms manufactures a wide variety of finished
products which are used to create appropriate configurations of systems for
various concrete pumps. Ultra Tech manufactures abrasion resistant piping
systems for use in industries such as mining, pulp and paper, power and waste
treatment. South Houston Hose ("SHH") is a distributor of industrial hose and
fittings.
Trading Securities - Debt and equity securities purchased and held principally
for the purpose of sale in the near term are classified as "trading securities"
and reported at fair value with unrealized gains and losses included in
earnings. The cost of individual securities sold is based on the first-in,
first-out method.
Translation of Foreign Currencies - Assets and liabilities of foreign operations
are translated into United States dollars at current exchange rates. Income and
expense accounts are translated into United States dollars at average rates for
the periods and capital accounts have been translated using historical rates.
The resulting translation adjustments are recorded as other comprehensive income
or loss.
New Accounting Standards - In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation and also amends the disclosure provisions of SFAS No. 123. The
Company adopted only the disclosure portion of SFAS No. 148. Thus, such
statement will not have an impact on the Company's consolidated financial
statements. There was no stock based compensation expense included in net income
for the three months ended April 30, 2003 or 2002, respectively. There would
have been no stock based compensation expense determined under the fair value
based method for the three months ended April 30, 2003 or 2002.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires that a guarantor must
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation that it has undertaken in issuing a guarantee. FIN No. 45 also
addresses the disclosure requirements that a guarantor must include in its
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after
F-7
December 31, 2002. FIN No. 45 also requires disclosure regarding the Company's
product warranty liability (see Note 5). Adoption of FIN No. 45 did not have an
impact on the Company's consolidated financial statements.
Net Income Per Share - Reconciliation of the numerator and denominator of the
basic and diluted per share computations for the three months ended April 30,
2003 and 2002 are summarized as follows:
2003 2002
---------- ----------
Basic:
Net income (numerator) $ 461,586 $ 577,814
Weighted average shares outstanding (denominator) 1,638,595 1,786,064
Net income per share - basic $0.28 $0.32
Diluted:
Net income (numerator) $ 461,586 $ 577,814
Weighted average shares outstanding 1,638,595 1,786,064
Effect of dilutive securities:
Stock options 57,803 136,727
Stock warrants 370,711 374,549
---------- ----------
Weighted average shares outstanding (denominator) 2,067,109 2,297,340
Net income per share - diluted $0.22 $0.25
Note 3 - Segment Information
The Company's operating segments are organized based on the nature of products
and services provided. A description of the nature of the segments' operations
and their accounting policies is contained in Note 2. Segment information for
the three months ended April 30, 2003 and 2002 follows:
2003 2002
---------------------------- ----------------------------
Operating Operating
Net Sales Income (Loss) Net Sales Income (Loss)
------------ ------------- ------------ -------------
ConForms $ 5,810,388 $ 1,214,060 $ 5,281,535 $ 1,020,382
Ultra Tech 795,869 137,262 927,466 27,147
SHH 570,486 (26,544) 646,368
Edison (607,072) 1,701 (101,497)
------------ ------------- ------------ -------------
Total $ 7,176,743 $ 717,706 $ 6,855,369 $ 947,733
Note 4 - Inventories
Inventories consisted of the following:
April 30, 2003 January 31, 2003
-------------- ----------------
Raw Materials $ 3,493,826 $ 3,639,169
Work-in-process 1,239,462 1,391,795
Finished Goods 2,147,453 2,206,548
----------- -----------
6,880,741 7,237,512
Less-reserve to reduce
carrying value to LIFO cost (130,000) (115,000)
----------- -----------
Net inventories $ 6,750,741 $ 7,122,512
F-8
Note 5 - Warranty Accrual
The Company provides warranties for specific product lines and accrues for
estimated future warranty cost in the period in which the sale is recorded. The
Company calculates its reserve requirements based on historic warranty loss
experience that is periodically adjusted for recent actual experience. The
following is an analysis of the Company's product warranty reserve for the three
months ended April 30, 2003 and 2002:
Three Months Ended April 30,
2003 2002
---------- ----------
Warranty Reserve:
Beginning of year balance $ 65,000 $ 120,000
Additions 27,000 30,000
Usage (6,337) (10,071)
-------- --------
End of Period Balance $ 85,663 $139,929
======== ========
Note 6 - Going Private Transaction
On April 1, 2003, the Company filed a Form 8-K disclosing that its Board of
Directors approved a proposal from its majority shareholder and Chairman of the
Board and its Chief Executive Officer to engage in a going-private transaction.
Such transaction is to be structured as a one-for-66,666 reverse stock split in
which shareholders owning less than one share as a result of the reverse stock
split will receive cash in an amount equal to $7.00 per pre-split share in lieu
of receiving fractional shares. The Chairman and Chief Executive Officer
together currently beneficially own 71% of the Company's common shares. In
conjunction with the reverse stock split, the Company intends to enter into
individual option cancellation agreements with each person holding options to
acquire the Company's common stock (with the exception of the Chief Executive
Officer, whose options will remain outstanding). It is anticipated that as a
result of these transactions, the Chairman and Chief Executive Officer will
remain as the only two shareholders of the Company. The terms and conditions of
the reverse stock split and the cash consideration to be received by the
Company's minority shareholders were unanimously approved by the Board of
Directors (with the Chairman and Chief Executive Officer abstaining), based on
the recommendation of a Special Committee composed entirely of disinterested
directors.
The estimated total cost to cash-out fractional shares and options to acquire
shares is expected to be approximately $3.5 million, excluding transaction
costs. To fund the transaction, the Company has received a commitment, subject
to customary limitations, for a $5 million five-year term loan secured by assets
of the Company.
F-9
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Edison Control Corporation:
We have audited the accompanying consolidated balance sheets of Edison
Control Corporation and subsidiaries (the "Corporation") as of January 31, 2003
and 2002, and the related consolidated statements of income and comprehensive
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 2003. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Edison Control Corporation and
subsidiaries as of January 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
February 1, 2002, the Corporation adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets".
Deloitte & Touche LLP
Milwaukee, Wisconsin
April 1, 2003
F-10
EDISON CONTROL CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2003 AND 2002
- --------------------------------------------------------------------------------------------------------
ASSETS (Note 7) 2003 2002
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 586,520 $ 472,352
Trading securities (Note 1) 37,475 60,698
Accounts receivable, less allowance for doubtful accounts of
$264,000 and $218,000, respectively (Notes 1 and 10) 4,249,057 4,660,141
Inventories (Notes 1, 3 and 10) 7,122,512 7,250,891
Prepaid expenses and other current assets 297,017 223,273
Deferred income taxes (Note 6) 260,000 200,000
------------ -----------
Total current assets 12,552,581 12,867,355
DEFERRED INCOME TAXES (Note 6) 685,000 570,000
PROPERTY, PLANT AND EQUIPMENT (Note 1):
Cost:
Land 302,902 302,902
Buildings and improvements 3,710,491 3,669,118
Machinery and equipment 7,292,214 6,758,735
Construction in progress 28,673 24,140
------------ ------------
11,334,280 10,754,895
Less - accumulated depreciation (4,869,678) (3,964,056)
------------ ------------
6,464,602 6,790,839
GOODWILL (Note 1) 8,130,000 8,130,000
------------ ------------
TOTAL $ 27,832,183 $ 28,358,194
============ ============
F-11
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
CURRENT LIABILITIES:
Trade accounts payable $ 1,001,981 $ 1,286,190
Accrued compensation 962,812 1,186,972
Taxes other than income taxes 16,325 69,639
Other accrued expenses (Note 5) 438,822 398,739
Income taxes payable (Note 6) 34,045 78,352
Deferred compensation (Note 9) 666,752
Current maturities on long-term debt (Note 7) 159,902 259,514
------------ ------------
Total current liabilities 2,613,887 3,946,158
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 7) 5,100,801 5,260,703
------------ ------------
Total liabilities 7,714,688 9,206,861
SHAREHOLDERS' EQUITY (Note 9):
Preferred Stock, $.01 par value; 1,000,000 shares authorized,
none issued
Common Stock, $.01 par value; 20,000,000 shares authorized,
2,390,223 and 2,365,223 shares issued, respectively 23,902 23,652
Additional paid-in capital 11,363,219 10,444,217
Retained earnings 13,980,740 12,839,181
Accumulated other comprehensive income (loss) 11,030 (237,446)
------------ ------------
25,378,891 23,069,604
Less treasury stock at cost, 751,628 and
559,753 shares, respectively (Note 1) (5,261,396) (3,918,271)
------------ ------------
Total shareholders' equity 20,117,495 19,151,333
------------ ------------
TOTAL $ 27,832,183 $ 28,358,194
============ ============
See notes to consolidated financial statements.
F-12
EDISON CONTROL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JANUARY 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------------------------------------
Year Ended January 31,
--------------------------------------------------
2003 2002 2001
NET SALES (Note 1) $ 27,390,816 $ 27,452,550 $ 26,070,682
COST OF GOODS SOLD (Note 1) 17,799,952 17,275,311 16,390,713
------------ ------------ ------------
GROSS PROFIT 9,590,864 10,177,239 9,679,969
OTHER OPERATIING EXPENSES:
Selling, engineering and administrative expenses 7,481,837 5,130,143 4,723,293
Loss on sale of assets, net 88,537
Amortization (Note 1) 268,299 235,796
------------ ------------ ------------
Total other operating expenses 7,481,837 5,398,442 5,047,626
------------ ------------ ------------
OPERATING INCOME 2,109,027 4,778,797 4,632,343
OTHER EXPENSE (INCOME):
Interest expense 200,382 207,637 533,780
Realized losses (gains) on trading securities (Note 1) 169,919 (57,911)
Unrealized losses (gains) on trading securities (Note 1) 25,002 (46,346) 438,811
Interest and miscellaneous income 2,084 (19,401) (50,075)
Equity in earnings of affiliate (Notes 2 and 4) (71,320) (40,517)
------------ ------------ ------------
Total other expense 227,468 240,489 824,088
------------ ------------ ------------
INCOME FROM CONTINIUING OPERATIONS
BEFORE INCOME TAXES 1,881,559 4,538,308 3,808,255
PROVISION FOR INCOME TAXES (Note 6) 740,000 1,820,000 1,500,000
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,141,559 2,718,308 2,308,255
DISCONTINUED OPERATIONS (Note 2):
Loss from operations of discontinued Gilco division
net of income tax credit of $60,000 (92,698)
Loss on disposal of Gilco division, net of income tax
credit of $7,000 (12,379)
------------ ------------ ------------
NET INCOME 1,141,559 2,718,308 2,203,178
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustments (Note 1) 248,476 (81,507) (173,051)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 1,390,035 $ 2,636,801 $ 2,030,127
============ ============ ============
INCOME (LOSS) PER SHARE (Note 1):
BASIC:
Income from continuing operations $ 0.66 $ 1.20 $ 0.98
Loss from discontinued operations (0.04)
------------ ------------ ------------
NET INCOME $ 0.66 $ 1.20 $ 0.94
============ ============ ============
DILUTED:
Income from continuing operations $ 0.52 $ 1.01 $ 0.80
Loss from discontinued operations (0.04)
------------ ------------ ------------
NET INCOME $ 0.52 $ 1.01 $ 0.76
============ ============ ============
See notes to consolidated financial statements.
F-13
EDISON CONTROL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2003, 2002 and 2001
Accumulated
Common Stock Additional Other
-------------------------- Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Income (Loss) Stock Total
------------------------------------------------------------------------------------------------
BALANCES, JANUARY 31, 2000 2,351,308 $ 23,513 $10,344,868 $ 7,917,695 $ 17,112 $ $18,303,188
Foreign currency
translation adjustment (173,051) (173,051)
Net income 2,203,178 2,203,178
--------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, JANUARY 31, 2001 2,351,308 23,513 10,344,868 10,120,873 (155,939) 20,333,315
Foreign currency
translation adjustment (81,507) (81,507)
Stock options
exercised, net of
shares exchanged and
tax effect of
$(17,600) 13,915 139 99,349 99,488
Stock purchases (3,918,271) (3,918,271)
Net income 2,718,308 2,718,308
--------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, JANUARY 31, 2002 2,365,223 $ 23,652 $10,444,217 $12,839,181 $ (237,446) $(3,918,271) $19,151,333
Foreign currency
translation adjustment 248,476 248,476
Reclassification of
Deferred Compensation 666,752 666,752
Stock options exercised 25,000 250 87,250 87,250
Stock options extended 165,000 165,000
Stock purchases (1,343,125) (1,343,125)
Net income 1,141,559 1,141,559
--------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, JANUARY 31, 2003 2,390,223 $ 23,902 $11,363,219 $13,980,740 $ 11,030 $(5,261,396) $20,117,495
========= =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-14
EDISON CONTROL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2003, 2002 and 2001
- ----------------------------------------------------------------------------------------------------
Year Ended January 31,
-----------------------------------------
2003 2002 2001
OPERATING ACTIVITIES:
Net income $ 1,141,559 $ 2,718,308 $ 2,203,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 890,013 885,209 892,246
Amortization 268,299 235,796
Provision for doubtful accounts 129,213 109,693 50,306
Noncash compensation expense on stock options 165,000
Realized loss (gain) on trading securities sales 169,919 (57,911)
Unrealized loss (gain) on trading securities 25,002 (46,346) 438,811
Purchases of trading securities (1,779) (80,783)
Proceeds from the sales of trading securities 236,526 684,736
Loss on sale of assets 20,160 36,015 115,749
Loss on sale of Gilco division 19,379
Equity in earnings of affiliate (71,320) (40,517)
Changes in assets and liabilities, net of effect of
business acquisition and disposition:
Accounts receivable 320,540 (153,397) (793,126)
Receivable from affiliate 49,285 (75,051)
Inventories 290,030 45,050 (81,059)
Prepaid expenses and other current assets (71,825) 107,243 (68,968)
Prepaid pension 25,193
Trade accounts payable (295,758) 78,939 71,157
Accrued compensation (226,083) 178,215 194,534
Taxes other than income taxes (41,721) 10,481 (1,037)
Other accrued expenses 26,522 (52,891) (200,951)
Income taxes payable (45,711) 56,725 (211,499)
Deferred income taxes (175,000) 5,000 (80,000)
----------- ---------- -----------
Net cash provided by operating activities 2,150,162 4,630,953 3,240,183
----------- ---------- -----------
INVESTING ACTIVITIES:
Additions to plant and equipment (569,977) (233,602) (478,872)
Maturity of certificate of deposit 95,000
Payments received on notes receivable 164,155
Proceeds from purchase of South Houston Hose,
net of cash acquired 21,714
Proceeds from sale of Gilco division 400,000
Advances to affiliate (55,905) (6,294)
Proceeds from sale of assets 26,608 23,199
----------- ---------- -----------
Net cash (used in) provided by investing activities (569,977) 17,970 (61,967)
----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,200,000 4,000,000 3,200,000
Payments on long-term debt (3,459,514) (4,559,141) (6,583,784)
Purchase of treasury stock (1,343,125) (3,918,271)
Stock options exercised 87,500 30,000
----------- ---------- -----------
Net cash used in financing activities (1,515,139) (4,447,412) (3,383,784)
----------- ---------- -----------
(Continued)
F-15
EDISON CONTROL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2003, 2002 and 2001
Year Ended January 31,
--------------------------------------------------
2003 2002 2001
--------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH $ 49,122 $ (34,496) $ (28,681)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 114,168 167,015 (234,249)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 472,352 305,337 539,586
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 586,520 $ 472,352 $ 305,337
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 209,556 $ 218,619 $ 539,290
Income taxes, net of refunds $ 974,791 $ 1,714,741 $ 1,726,327
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Note payable for purchase of South Houston Hose $ 500,000
Note receivable from sale of Gilco division Acquisition: $ 164,155
Fair value of assets acquired, net of cash $ 1,528,646
Liabilities assumed (898,217)
Equity investment at date of acquisition (652,143)
--------------
Net cash (received) $ (21,714)
==============
See notes to consolidated financial statements.
F-16
EDISON CONTROL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of Edison Control Corporation ("Edison") and subsidiaries, all
of which are wholly owned (collectively, the "Company"). All material
intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations - The Company is currently comprised of the following
operations. Construction Forms ("ConForms") is a leading manufacturer and
distributor of systems of pipes, couplings and hoses and other equipment
used for the pumping of concrete. ConForms manufactures a wide variety of
finished products which are used to create appropriate configurations of
systems for various concrete pumps. Ultra Tech manufactures abrasion
resistant piping systems for use in industries such as mining, pulp and
paper, power and waste treatment. South Houston Hose is a distributor of
concrete pumping systems and accessories and industrial hose and fittings.
The Company's principal market is in North America with limited sales
activity in Europe, South America, the Middle East and Asia.
Cash Equivalents - The Company considers all temporary investments with
maturities of three months or less when acquired to be cash equivalents.
Trading Securities - Debt and equity securities purchased and held
principally for the purpose of selling them in the near term are classified
as "trading securities" and reported at fair value with unrealized gains
and losses included in income. The cost of securities sold is based on the
first-in, first-out method.
Accounts Receivable - Accounts receivable are stated net of an allowance
for doubtful accounts.
Inventories - Inventories are stated at the lower of cost (principally
last-in, first-out method) or market.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Expenditures for major renewals and improvements are capitalized,
while maintenance and repairs, which do not significantly improve the
related asset or extend its useful life, are charged to expense as
incurred. For financial reporting purposes, plant and equipment are
depreciated primarily by the straight-line method over the estimated useful
lives of the assets. Estimated useful lives of buildings and improvements
range from 7 to 40 years and of machinery and equipment from 2 to 12 years.
Depreciation claimed for income tax purposes is computed by accelerated
methods.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets of acquired companies and was
previously amortized on a straight-line basis over 40 years. The Company
assesses the carrying value of goodwill at each balance sheet date. All
goodwill is attributed to ConForms.
Long-Lived Assets - Consistent with Statement of Financial Accounting
Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposals of
Long-Lived Assets, and for Long-Lived Assets to be Disposed of". The
Company assesses the impairment of long-lived assets based on the
comparison of the estimated future non-discounted cash flows anticipated to
be generated during the remaining amortization period of the long-lived
assets to the net carrying value of long-lived assets. The
F-17
Company recognizes diminution in value of long-lived assets, if any, on
a current basis based on the excess of carrying amounts over fair value.
Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments - Management believes the carrying
value of investments is a reasonable estimate of their fair value as their
carrying value represents market value. The carrying value of the Company's
long-term debt approximates fair value due to its variable interest rates.
All other financial instruments are considered to approximate fair value
due to their short-term nature.
Translation of Foreign Currencies - Assets and liabilities of foreign
operations are translated into United States dollars at current exchange
rates. Income and expense accounts are translated into United States
dollars at average exchange rates for the periods and capital accounts have
been translated using historical rates. The resulting translation
adjustments are recorded as accumulated other comprehensive income (loss).
Foreign currency translation gains or losses are the only components of
other comprehensive income for all years presented.
Revenue Recognition - The Company recognizes revenue, net of expected
returns, upon shipment of products, which is when title passes to the
customer, the price is fixed, the customer is obligated to pay and the
Company has no remaining obligations.
Research and Development - Amounts expended for research and development
for the years ended January 31, 2003, 2002 and 2001 totaled approximately
$214,000, $207,000 and $215,000, respectively, and are expensed as
incurred.
Advertising Costs - Amounts expended for advertising for the years ended
January 31, 2003, 2002 and 2001 totaled approximately $117,000, $93,000,
and $63,000, respectively, and are expensed as incurred.
Stock Compensation Expense - The Company records stock compensation expense
in accordance with Accounting Principals Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees".
Treasury Stock - The Company uses the cost method to account for treasury
stock.
Shipping and Handling Costs - Amounts billed to a customer in a sale
transaction related to shipping costs are reported as net sales and the
related costs incurred for shipping are reported as costs of goods sold.
Derivatives and Financial Instruments - In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended, was adopted on February
1, 2001. The adoption of this statement had no impact on the consolidated
financial statements.
F-18
New Accounting Standards - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
requires that all such transactions be accounted for by the purchase
method. In addition SFAS No. 141 requires that intangible assets be
recognized as assets apart from goodwill and that they meet specific
criteria in the Standard. This standard is applicable to all business
combinations initiated after June 30, 2001 and accordingly, the Company
adopted this standard with the acquisition of South Houston Hose Company,
Inc. ("South Houston Hose") and for all future business combinations. SFAS
No. 142 is effective for the Company beginning February 1, 2002, and
applies to goodwill and other intangible assets recognized in the Company's
consolidated balance sheet as of that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Accordingly,
the Company discontinued amortization of goodwill effective February 1,
2002. All goodwill is attributed to ConForms. The Company completed the
transitional impairment test during the quarter ended July 31, 2002 and
determined that no impairment of goodwill exists. A reconciliation of
previously reported net income and net income per share to the amounts
adjusted for the exclusion of goodwill amortization follows:
January 31,
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
Reported net income $ 1,141,559 $ 2,718,308 $ 2,203,178
Add goodwill amortization - 225,801 232,258
----------- ----------- -----------
Adjusted net income $ 1,141,559 $ 2,944,109 $ 2,435,436
=========== =========== ===========
Net income per share-Basic:
Reported net income $ 0.66 $ 1.20 $ 0.94
Add goodwill amortization - 0.10 0.10
----------- ----------- -----------
Adjusted net income $ 0.66 $ 1.30 $ 1.04
=========== =========== ===========
Net income per share-Diluted:
Reported net income $ 0.52 $ 1.01 $ 0.76
Add goodwill amortization - 0.08 0.08
----------- ----------- -----------
Adjusted net income $ 0.52 $ 1.09 $ 0.84
=========== =========== ===========
In June 2002, FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force ("EITF")
provided in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The scope of SFAS
No. 146 also includes (i) costs related to terminating a contract that is
not a capital lease and (ii) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 with early
adoption allowed. Adoption of SFAS No. 146 is not expected to have an
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition to the fair
value method of accounting for stock-based employee compensation and also
amends the disclosure provisions of SFAS No. 123. The Company will adopt
only the disclosure portion of SFAS No. 148. Thus, such statement will not
have an impact on the Company's consolidated financial statements.
F-19
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
requires that a guarantor must recognize, at the inception of a guarantee,
a liability for the fair value of the obligation that it has undertaken in
issuing a guarantee. FIN No. 45 also addresses the disclosure requirements
that a guarantor must include in its financial statements ending after
December 15, 2002. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. FIN No. 45 also requires
disclosure regarding the Company's product warranty liability (see Note
11). Adoption of FIN No. 45 is not expected to have an impact on the
Company's consolidated financial statements.
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities"
(an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements") in January 2003, which becomes effective for the
Company on August 1, 2003. FIN No. 46 provides consolidation guidance for
certain variable interest entities ("VIE") in which equity investors of the
VIE do not have the characteristics of a controlling interest or do not
have sufficient equity at risk for the VIE to finance its activities
independently. FIN No. 46 requires each enterprise involved with a VIE to
determine whether it provides financial support to the VIE through a
variable interest. Variable interests may arise from financial instruments,
service contracts, minority ownership interests or other arrangements. If
an entity holds a majority of the variable interests, or a significant
variable interest that is considerably more than any other party's variable
interest, that entity would be the primary beneficiary and would be
required to include the assets, liabilities and results of operations of
the VIE in its consolidated financial statements. Adoption of FIN No. 46 is
not expected to have an impact on the Company's consolidated financial
statements.
Income From Continuing Operations Per Share - Reconciliation of the
numerator and denominator of the basic and diluted per share computations
are summarized as follows:
Year Ended January 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Basic:
Income from continuing operations (numerator) $ 1,141,559 $ 2,718,308 $ 2,308,225
Weighted average shares outstanding (denominator) 1,726,691 2,270,019 2,351,308
Income from continuing operations per share - basic $ 0.66 $ 1.20 $ 0.98
Diluted:
Income from continuing operations (numerator) $ 1,141,559 $ 2,718,308 $ 2,308,255
Weighted average shares outstanding 1,726,691 2,270,019 2,351,308
Effect of dilutive securities:
Stock options 113,098 91,360 160,691
Stock warrants 377,246 339,056 384,600
----------- ----------- -----------
Weighted average shares outstanding (denominator) 2,217,035 2,700,435 2,896,599
Income from continuing operations per share - diluted $ 0.52 $ 1.01 $ 0.80
2. ACQUISITIONS AND DISPOSITIONS
On November 1, 2001 the Company purchased the remaining 50% of the
outstanding common stock of South Houston Hose from the seller for
$800,000, which consisted of a cash payment of $300,000 and a note payable
in the principal amount of $500,000. Prior to November 1, 2001, the Company
owned 50% of the outstanding common stock of South Houston Hose and
accounted for the investment by the equity method. South Houston Hose is a
distributor of concrete pumping systems and accessories and industrial hose
and fittings. The acquisition was accounted for as a purchase transaction
with the purchase price allocated to the fair value of specific assets
acquired and liabilities assumed. Accordingly, the results of operations
have been included since the date of acquisition. The purchase price was
allocated as follows:
F-20
Cash on hand $ 321,714
Receivables 392,187
Inventory 787,021
Other assets 69,915
Property, plant and equipment 149,523
Goodwill 130,000
Liabilities assumed (398,217)
Less existing investment in South Houston Hose (652,143)
-----------
$ 800,000
===========
The following unaudited pro-forma results of operations give effect to the
acquisition as if it had occurred at the beginning of the fiscal year for
each of the periods presented:
Year Ended January 31,
----------------------------
2002 2001
Net sales $29,584,049 $28,321,683
Net income 2,809,738 2,249,474
Net income per share, diluted $ 1.04 $ 0.78
The unaudited pro-forma information is not necessarily indicative of either
results of operations that would have occurred had the purchase been made
at the beginning of each fiscal year or of future results of operations of
the combined companies.
In September 2000, the Company sold the inventory, tooling and intangible
assets of its Gilco division to a third party for $400,000 cash and a
non-interest bearing note receivable for $164,155, which was paid in the
first quarter of fiscal 2001. Gilco had supplied portable concrete and
mortar/plaster mixers to various customers. The sale resulted in a loss of
$12,379, net of income tax benefit.
The results of operations of the Gilco division have been presented as
discontinued operations. Accordingly, previously reported statements of
income and comprehensive income information have been restated to reflect
this presentation. Net sales of the Gilco division for the year ended
January 31, 2001 were $1,272,461.
3. INVENTORIES
Inventories consisted of the following:
F-21
January 31,
--------------------------
2003 2002
----------- -----------
Raw materials $ 3,639,169 $ 3,713,552
Work-in-process 1,391,795 1,412,263
Finished goods 2,206,548 2,148,076
----------- -----------
7,237,512 7,273,891
Less - reserve to reduce
carrying value to LIFO cost (115,000) (23,000)
----------- -----------
Net inventories $ 7,122,512 $ 7,250,891
=========== ===========
4. INVESTMENT IN AND ADVANCES TO AFFILIATE
Prior to its November 1, 2001 acquisition, the Company owned 50% of the
outstanding common stock of South Houston Hose, and accounted for the
investment by the equity method (see note 2). The Company had sales of
approximately $852,000 and $878,000 to the affiliate for the nine months
ended October 31, 2001, and the year ended January 31, 2001, respectively.
Summary unaudited financial information for this affiliate as of October
31, 2001 and January 31, 2001 and for the nine-month period and year then
ended is as follows:
October 31, January 31,
2001 2001
----------- -----------
Current assets $ 1,570,834 $ 1,477,106
Noncurrent assets 73,732 81,733
Current liabilities 368,217 425,959
Shareholders' equity 1,276,349 1,132,880
Net sales 2,983,107 3,129,211
Net income 143,469 82,139
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
January 31,
-----------------------
2003 2002
--------- ---------
Group insurance benefits $ 140,000 $ 130,000
Warranty (Note 11) 65,000 120,000
Legal and professional 169,985 56,235
Interest 11,359 20,533
Selling commissions and rebates 25,946 34,484
Other 26,532 37,487
--------- ---------
Total $ 438,822 $ 398,739
========= =========
F-22
6. INCOME TAXES
Deferred income taxes are provided on temporary differences relating to
reporting expenses in different periods for financial statement and income
tax purposes and differences in bases of assets and liabilities. Such
differences relate primarily to unrealized gain (losses) on investments,
depreciation expense, inventory costs, bad debt expense, warranty costs,
insurance and compensation.
The provision for income taxes from continuing operations is as follows:
Year Ended January 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
Currently payable:
Federal $ 785,000 $ 1,510,000 $ 1,360,000
State 130,000 275,000 220,000
----------- ------------ ------------
915,000 1,785,000 1,580,000
Deferred (credit):
Federal (155,000) 35,000 (70,000)
State (20,000) (10,000)
----------- ------------ ------------
(175,000) 35,000 (80,000)
----------- ------------ ------------
Total $ 740,000 $ 1,820,000 $ 1,500,000
=========== ============ ============
Temporary differences, which gave rise to the deferred tax assets
(liabilities), included the following items at January 31, 2003 and 2002:
2003 2002
----------- -----------
Deferred tax assets:
Compensation and other employee benefits $ 168,000 $ 264,000
Unrealized losses 350,000 339,000
Deferred financing 1,053,000 1,150,000
Other items 27,000 48,000
Bad debt reserve 210,000 192,000
Vacation pay 83,000 72,000
----------- -----------
1,891,000 2,065,000
----------- -----------
Deferred tax liabilities:
Inventory items (544,000) (677,000)
Other items (165,000) (388,000)
Fixed assets (237,000) (230,000)
----------- -----------
(946,000) (1,295,000)
----------- -----------
Net deferred tax asset $ 945,000 $ 770,000
=========== ===========
F-23
The reconciliation of income tax computed at the U.S. federal statutory
rates to income tax expense is:
Year Ended January 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 3.8 4.0 4.0
Goodwill amortization - 1.7 2.1
Other, net 1.5 0.4 (0.7)
---- ---- ----
Effective tax rate 39.3% 40.1% 39.4%
7. LONG-TERM DEBT
Long-term debt consisted of the following at January 31, 2003 and 2002:
2003 2002
----------- -----------
Industrial revenue bonds $ 2,200,000 $ 2,350,000
Revolving loan fund term loan 60,703 70,217
Bank revolving credit loan 3,000,000 2,600,000
Note payable 500,000
----------- -----------
Total debt 5,260,703 5,520,217
Less current portion (159,902) (259,514)
----------- -----------
Total long-term debt $ 5,100,801 $ 5,260,703
=========== ===========
The Industrial Revenue Bonds ("IRB") were issued to finance construction of
a new production facility in Port Washington, Wisconsin. A total of
$3,000,000 was issued for the facility and is due in annual principal
installments of $150,000 from February 2003 through February 2005, and
$175,000 from February 2006 through February 2015. Interest is based on a
weekly floating rate determined by the market for IRB loans. The interest
rate at January 31, 2003 was 1.45%.
The Revolving Loan Fund (RLF) term loan was a loan issued by the City of
Port Washington to finance the purchase of real estate for the construction
of an addition at the Company's Port Washington facility. A total of
$100,000 was issued for the facility and is due in monthly installments of
$1,012 through September 4, 2008 with interest at 4.0%.
The amended master credit agreement, which expires April 30, 2004, allows
for revolving credit borrowings not to exceed $6,000,000. Borrowings, which
are based on qualified accounts receivable and inventory, bear interest at
either the prime rate or the LIBOR rate plus 1.50% at the Company's
election. The interest rate at January 31, 2003 was 2.8525%. The Company
had $3,000,000 available under the agreement at January 31, 2003.
The terms under the amended master credit agreement, among other
provisions, require the Company to maintain a minimum current ratio,
tangible net worth, and debt service ratio, and restricts the Company to a
maximum funded debt to EBITDA (as defined) ratio. The tangible net worth
requirement at January 31, 2003 was $10,476,263. The Company was not in
compliance with certain non-financial covenants for fiscal 2002, but has
obtained waivers for such non-compliance. The
F-24
Company was in compliance with all financial covenants at and for the year
ended January 31, 2003. Substantially all of the Company's assets are
collateralized under the above debt agreement. The LIBOR spread may be
reduced or increased annually based on the achievement of a certain "funded
debt to EBITDA" ratio.
The note payable was issued to finance the purchase of the remaining 50% of
South Houston Hose on November 1, 2001. The balance was paid in full during
the year ended January 31, 2003.
Annual principal payments for the next five years on long-term debt are as
follows:
Year Ending RLF Revolving
January 31, IRB Term Loan Credit Loan Total
2004 $ 150,000 $ 9,902 $ $ 159,902
2005 150,000 10,305 3,000,000 3,160,305
2006 150,000 10,724 160,724
2007 175,000 11,162 186,162
2008 175,000 11,616 186,616
Thereafter 1,400,000 6,994 1,406,994
----------- ------- ----------- ----------
$ 2,200,000 $60,703 $ 3,000,000 $5,260,703
=========== ======= =========== ==========
8. EMPLOYEE RETIREMENT PLANS
The Company has a retirement savings and thrift plan (401(k) plan) covering
substantially all of its employees. Under the 401(k) plan, the Company
contributes amounts based on employee contributions. Amounts charged to
income related to the 401(k) plan for the years ended January 31, 2003,
2002 and 2001 were $151,599, $104,015 and $98,088, respectively.
The Company had a noncontributory defined benefit pension plan (the "Plan")
covering substantially all full-time employees. The Plan provided for
benefits based on years of service and compensation. In December 2000, the
Company amended the Plan. The amendment specifically ceased accrual of
benefits as of December 31, 2000 and terminated the Plan effective February
28, 2001. In February 2001, the Board of Directors authorized the
allocation of excess plan assets to the participants. In December 2001, all
plan assets were distributed to the participants. Net periodic pension
expense was $25,193, including a curtailment gain of $127,063 for the year
ended January 31, 2001.
9. EMPLOYEE STOCK OPTION PLANS
In February 1995, the Board of Directors authorized and on October 17,
1995, the shareholders approved a grant to the Company's former President
and Chief Executive Officer of a ten-year option to purchase up to 200,000
shares of common stock pursuant to the Company's 1986 Option Plan at an
exercise price of $4.00 per share. In May 1997, a five-year non-qualified
option for 25,000 shares was granted to a member of the Board of Directors
at an exercise price of $3.50 per share. In October 1997, a five-year
non-qualified option for 25,000 shares was granted to a member of the Board
of Directors at an exercise price of $3.50 per share. All of these options
are fully vested.
In May 2002, the Company repurchased 25,000 common shares for $7.00 each
pursuant to a stock option exercise by a member of the Board of Directors
for the options granted in May 1997. As a result, the Company recorded
compensation expense of $87,500 during the quarter ended July 31, 2002.
F-25
In August 2002 the Company paid the equivalent of $7.00 per share (less the
exercise price of the options) to the former President in return for the
cancellation of options to purchase 200,000 shares. As a result, $600,000
of compensation expense was recorded during the quarter ended October 31,
2003.
In October 2002, the Company extended the term of the option agreement
granted to a member of the Board of Directors from five years to seven
years. As a result of this extension, the Company recorded compensation
expense of $77,500 during the quarter ended October 31, 2002.
In connection with the issuance of certain subordinated debt in 1996, the
principal shareholder of the Company provided collateral to a bank to
support a guaranty of repayment by the Company of the principal and
interest on the loan. The arrangement was made to reduce the cost of
borrowed funds from that which would have been otherwise obtainable by the
Company from unaffiliated "mezzanine" lenders. In consideration of his
providing such collateral, the Company issued a ten-year warrant to
purchase 500,000 shares of Common Stock exercisable at a price of $1.60 per
share. At the time the transaction was negotiated, Common Stock was quoted
at approximately $4.00 per share. On the date the ConForms acquisition was
consummated, which was the grant date, the closing sale price for the
Common Stock in the over-the-counter market was $7.50 per share. The
difference between the warrant price and the fair market value at the grant
date was amortized over the three-year term of the subordinated debt.
In connection with the ConForms acquisition on June 21, 1996, the Company
granted ten-year nonqualified options to purchase an aggregate of 167,611
shares of Common Stock exercisable at $3.00 per share to key personnel.
Such options vested fully on the first anniversary of the closing of the
acquisition. On the date of the grant of the options, the closing sale
price for the Common Stock was $7.50 per share. The difference between the
option price and the fair market value at the time of option grant was
amortized over the option's one-year vesting period and was recorded as
deferred compensation. These amounts were reclassified to additional
paid-in capital at January 31, 2003. On February 15, 2001, 19,444 of these
options were exercised.
In January 2003 the Company paid the equivalent of $7.00 per share (less
the exercise price of the options) to the Company's' former Chief Financial
Officer, in return for the cancellation of options to purchase 48,611
shares. As a result, $194,444 of compensation expense was recorded during
the quarter ended January 31, 2003.
In January 1999, the Board of Directors authorized and on June 8, 1999, the
shareholders approved the Edison Control Corporation 1999 Equity Incentive
Plan (the "Plan"). The Plan provides that up to a total of 200,000 shares
of Common Stock will be available for the granting of stock options, stock
appreciation rights, restricted stock or performance shares. No awards were
granted under this Plan as of January 31, 2003.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but continues to apply APB
Opinion No. 25 and related interpretations in accounting for all of its
plans. Expense was $959,444, $0, and $0 for fiscal years ended 2002, 2001
and 2000, respectively. If the Company had elected to recognize costs for
the options/warrants issued after December 15, 1994 in accordance with SFAS
No. 123, net income and net income per share would have changed to the pro
forma amounts as follows:
F-26
Year Ended January 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Net income, reported $1,141,559 $2,718,308 $2,203,178
Add: APB No. 25 expense (net of tax) 575,666 - -
Less: APB No. 123 expense (net of tax) 15,000 - -
------------------------------------
Net income, pro forma $1,702,225 $2,718,308 $2,203,178
====================================
EPS - basic
reported 0.66 1.20 0.94
pro forma 0.99 1.20 0.94
EPS - diluted
reported 0.52 1.01 0.76
pro forma 0.77 1.01 0.76
Stock option/warrant activity is summarized as follows:
Weighted Weighted
Year Ended Average Year Ended Average
January 31, 2003 Exercise Price January 31, 2002 Exercise Price
---------------- -------------- ---------------- --------------
Options/warrant outstanding,
beginning of year 898,167 $ 2.47 917,611 $ 2.48
Options/warrant exercised (25,000) 3.50 (19,444) 3.00
Options/warrant terminated (248,611) 3.80 - -
------------ ---------- ------------- ----------
Options/warrant outstanding,
end of year 624,556 $ 1.90 898,167 $ 2.47
============ ========== ============= ==========
Options/warrant exercisable,
end of year 624,556 $ 1.90 898,167 $ 2.47
============ ========== ============= ==========
Price range per share $1.60 - $3.5 $1.60 - $4.00
============ =============
F-27
Year Ended Weighted Average
January 31, 2001 Exercise Price
---------------- ----------------
Options/warrant outstanding,
beginning of year 917,611 $ 2.48
Options/warrant exercised - -
Options/warrant expired - -
------------- ----------
Options/warrant outstanding, end
of year 917,611 $ 2.48
============= ==========
Options/warrant exercisable, end
of year 917,611 $ 2.48
============= ==========
Price range per share $1.60 - $4.00
=============
The weighted average remaining contractual life of stock options and
warrants outstanding at January 31, 2003 is 3.4 years.
No options or warrants were granted during the years ended January 31,
2003, 2002 and 2001.
10. VALUATION ACCOUNTS
Activity related to valuation accounts for the years ended January 31,
2003, 2002 and 2001 is as follows:
Additions Deductions for
charged to bad debts
Balance, (deductions written off or Balance,
Beginning from) costs inventory End of
Valuation Accounts of Year and expenses disposed of Year
------------------ --------- ------------ --------------- ---------
Allowance for doubtful
accounts: 01/31/03 $ 218,000 $ 129,213 $ (83,213) $ 264,000
01/31/02 169,000 109,693 (60,693) 218,000
01/31/01 227,000 50,306 (108,306) 169,000
Excess and obsolete 01/31/03 $ 353,000 $ 270,816 $ (28,816) $ 595,000
inventory reserve: 01/31/02 312,000 43,457 (2,457) 353,000
01/31/01 608,000 (67,617) (228,383) 312,000
The allowance for doubtful accounts is determined by specific analysis of
all accounts over sixty days past due and the application of a historical
percentage to the remaining receivable balance. The excess and obsolete
inventory reserve is determined by specific analysis of all inventory items
with quantities in excess of eighteen-months supply and items that become
obsolete because of product design changes.
11. COMMITMENTS AND CONTINGENCIES
The Company has various warehouse and auto leases expiring at various dates
through July 2010. Future minimum lease payments required under these
non-cancelable operating lease agreements are approximately as follows:
F-28
Year Ending
January 31,
2004 $ 196,000
2005 144,000
2006 130,000
2007 110,000
2008 66,000
Thereafter 130,000
---------
Total $ 776,000
=========
Total rent expense for the years ended January 31, 2003, 2002 and 2001 was
approximately $235,000, $180,000 and $203,000, respectively.
The Company provides warranties for specific product lines and accrues for
estimated future warranty cost in the period in which the sale is recorded.
The Company calculates its reserve requirements based on historic warranty
loss experience that is periodically adjusted for recent actual experience.
Year Ended January 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Warranty Reserve:
Beginning of Year Balance $120,000 $ 165,000 $ 173,000
Additions 35,547 73,444 70,197
Usage (90,547) (118,444) (78,197)
-------- --------- ---------
End of Year Balance $ 65,000 $ 120,000 $ 165,000
======== ========= =========
The following is an analysis of the Company's product warranty reserve for
the years ended January 31, 2003, 2002 and 2001:
The Company is involved in various legal proceedings, which have arisen in
the normal course of business. Reserves are recorded when the occurrence of
loss is probable and can be reasonably estimated. In the opinion of
management, the resolution of these contingencies will not have a
materially adverse effect on the Company's consolidated financial
statements.
12. RELATED PARTY TRANSACTIONS
The Company had a note payable to an employee at January 31, 2002, which
was used to finance the purchase of the remaining 50% of South Houston Hose
on November 1, 2001. The balance was paid in full during the year ended
January 31, 2003. The Company recognized interest expense of $14,583 and
$8,750 for the years ended January 31, 2003 and 2002, respectively.
13. FOREIGN OPERATIONS
Foreign operations are based on the location of the Company's facilities.
Foreign operations information for the year ended January 31, 2003 follows:
F-29
United United
States Kingdom Malaysia Total
------------ ----------- --------- ------------
Net sales to unaffiliated customers $ 25,163,237 $ 1,584,007 $ 643,572 $ 27,390,816
Operating income 2,060,008 31,569 17,450 2,109,027
Identifiable assets 25,573,271 1,551,903 707,009 27,832,183
Depreciation and amortization 842,721 34,207 13,085 890,013
Capital expenditures 552,214 12,901 4,862 569,977
Foreign operations information for the year ended January 31, 2002 follows:
United United
States Kingdom Malaysia Total
------------ ----------- --------- ------------
Net sales to unaffiliated customers $ 25,383,157 $ 1,491,270 $ 578,123 $ 27,452,550
Operating income 4,734,458 26,975 17,364 4,778,797
Identifiable assets 26,138,456 1,459,948 759,790 28,358,194
Depreciation and amortization 1,100,737 36,453 16,318 1,153,508
Capital expenditures 229,524 - 4,078 233,602
Foreign operations information for the year ended January 31, 2001 follows:
United United
States Kingdom Malaysia Total
------------ ----------- --------- ------------
Net sales to unaffiliated customers $ 23,806,287 $ 1,492,030 $ 772,365 $ 26,070,682
Operating income (loss) 4,687,752 (90,516) 35,107 4,632,343
Identifiable assets 27,046,303 1,396,069 739,861 29,182,233
Depreciation and amortization 1,059,863 52,448 15,731 1,128,042
Capital expenditures 450,762 25,298 2,812 478,872
14. SEGMENT INFORMATION
The Company's operating segments are organized based on the nature of
products and services provided. A description of the nature of the
segment's operations and their accounting policies are contained in Note 1.
Segment information follows:
South Edison
Houston Hose Holding
ConForms Ultra Tech (2) Company Total
----------- ---------- ------------ ---------- -----------
Year ended January 31, 2003
- ---------------------------
Net sales to unaffiliated customers $21,225,901 $3,723,332 $2,441,583 $- $27,390,816
Operating income (loss) (1) 3,854,958 413,041 (221,058) (1,937,914) 2,109,027
Identifiable assets 21,984,116 4,588,655 1,027,233 232,179 27,832,183
Goodwill, net 8,130,000 - - - 8,130,000
Depreciation and amortization 600,065 271,948 18,000 - 890,013
Capital expenditures 211,985 346,331 11,661 - 569,977
F-30
Year ended January 31, 2002
- ---------------------------
Net sales to unaffiliated customers $22,448,550 $4,457,806 $546,194 $ - $27,452,550
Operating income (loss) (1) 4,687,957 550,406 (50,250) (409,316) 4,778,797
Identifiable assets 22,875,033 4,080,110 1,207,581 195,470 28,358,194
Goodwill, net 8,130,000 - - - 8,130,000
Depreciation and amortization 781,752 357,506 14,250 - 1,153,508
Capital expenditures 199,579 13,774 20,249 - 233,602
Year ended January 31, 2001
- ---------------------------
Net sales to unaffiliated customers $22,753,684 $3,316,998 $ - $ - $26,070,682
Operating income (loss) (1) 4,896,239 305,564 - (569,460) 4,632,343
Identifiable assets 22,629,681 5,156,883 - 1,395,669 29,182,233
Goodwill, net 8,225,801 - - - 8,225,801
Depreciation and amortization 773,971 322,731 - 31,340 1,128,042
Capital expenditures 469,038 9,834 - - 478,872
(1) ConForms segment includes goodwill amortization expense of $0, $225,801 and
$232,258 for the years ended January 31, 2003, 2002 and 2001, respectively.
(2) On November 1, 2001 the Company purchased the remaining 50% of South
Houston Hose (Note 2). Effective February 1, 2003, the Company segregated
the Industrial Hose component of South Houston Hose and began reporting the
operating results as a separate reportable segment. Accordingly, the
operating results of South Houston Hose for the 3 month period ended
January 31, 2002 was reclassified out of the ConForms segment to reflect
this change.
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Quarterly financial information for the year ended January 31, 2003
follows:
1st 2nd 3rd 4th
Quarter Quarter (1) Quarter (1) Quarter (1) Total
------- ----------- ----------- ----------- -----
Net sales $6,855,369 $7,277,594 $7,289,910 $5,967,943 $27,390,816
Gross profit 2,430,822 2,616,973 2,549,674 1,993,395 9,590,864
Net income 577,814 516,574 105,468 (58,297) 1,141,559
Net income per share - diluted 0.25 0.23 0.05 (0.01) 0.52
(1) Stock compensation and severance expense of $87,500, $877,500 and
$415,000 was recorded in the 2nd, 3rd and 4th quarters, respectively.
Quarterly financial information for the year ended January 31, 2002
follows:
1st 2nd 3rd 4th
Quarter (1) Quarter (1) Quarter (1) Quarter (1)(2) Total
----------- ----------- ----------- -------------- -----
Net sales $6,693,359 $7,097,924 $6,882,955 $ 6,778,312 $27,452,550
Gross profit 2,632,299 2,527,392 2,611,392 2,406,156 10,177,239
Net income 697,653 719,520 823,946 477,189 2,718,308
Net income per share - diluted 0.25 0.26 0.30 0.20 1.01
F-31
(1) Fiscal 2001 includes goodwill amortization of $58,064, $58,064,
$58,064 and $51,609 in the 1st, 2nd, 3rd and 4th quarters,
respectively. All goodwill expense was attributed to the ConForms
division.
(2) Results include the acquisition of South Houston Hose on November 1,
2001 (see note 2).
16. SUBSEQUENT EVENT
On April 1, 2003, the Company filed a Form 8-K disclosing that its Board of
Directors approved a proposal from its majority shareholder and Chairman of
the Board and its Chief Executive Officer to acquire all shares of the
Company not currently owned by them in a going-private transaction. Such
transaction is to be structured as a one-for-66,666 reverse stock split in
which shareholders owning less than one share as a result of the reverse
stock split will receive cash in an amount equal to $7.00 per pre-split
share in lieu of receiving fractional shares. The Chairman and Chief
Executive Officer together currently beneficially own 71% of the Company's
common shares. In conjunction with the reverse stock split, the Company
intends to enter into individual option cancellation agreements with each
person holding options to acquire the Company's common stock (with the
exception of the Chief Executive Officer, whose options will remain
outstanding). It is anticipated that as a result of these transactions, the
Chairman and Chief Executive Officer will remain as the only two
shareholders of the Company. The terms and conditions of the reverse stock
split and the cash consideration to be received by the Company's minority
shareholders were unanimously approved by the Board of Directors (with the
Chairman and Chief Executive Officer abstaining), based on the
recommendation of a Special Committee composed entirely of disinterested
directors.
The estimated total cost to cash-out fractional shares and options to
acquire shares is expected to be approximately $3.5 million, excluding
transaction costs. To fund the transaction, the Company has received a
commitment, subject to customary limitations, for a $5 million five-year
term loan secured by assets of the Company.
F-32
EXHIBIT A
Going Private Proposal of Messrs. Finneran and Kastelic
March 4, 2003
Edison Control Corporation
Board of Directors
777 Maritime Drive
Port Washington, WI 53074-0308
Gentlemen:
As you know, Edison Control Corporation purchased Construction Forms, Inc.
in 1996 with the goal and intent of growing its business and, as a result,
increasing our stock price and shareholder value. Since that time, we have spent
considerable time and energy focusing on various ways to achieve those goals.
Unfortunately, ConForms operates in an industry in which success is closely tied
to the general health of the industrial economy, and which is characterized by
fragmented competition and a relationship-driven customer base that is generally
loyal to its existing suppliers and vendors. These factors have made it
difficult over the years to increase ConForms' market penetration and achieve
substantial revenue and earnings growth through traditional sales and marketing
methods. Additionally, many of the perceived benefits of EDCO being a public
company have not proven helpful in generating growth or increasing our
shareholder value. For example, we have not accessed the public markets to raise
equity capital; we have been unable to attract analyst coverage, market
attention or institutional shareholder investment; and our share price has not
increased significantly since we originally purchased ConForms. Also, our
stock's small public float, extremely limited trading volume, significant
bid-ask trading price spread and recent delisting from The Nasdaq Stock Market
have further limited our ability to use our stock as acquisition currency,
significantly limited the ability of our shareholders to sell their shares
without also reducing our trading price, and further impaired our ability to use
stock options or equity-based incentives to successfully attract and retain
employees.
In light of our limited growth, relatively poor stock price performance and
trading liquidity restraints, we have continuously explored potential
alternatives to increase shareholder value and attract investor and analyst
interest. For example, given the fragmented nature of the concrete pumping
industry, we tried to achieve revenue growth and increase our shareholder value
by pursuing potential acquisitions of competitors, customers and vendors. While
we explored numerous potential acquisitions over the past several years, we were
unable to successfully complete a significant acquisition, due at least in part
to our inability to utilize our stock as an attractive acquisition currency.
Also, in an effort to focus on expanding our margins, we divested our
unprofitable Gilco division in September 2000. Additionally, to potentially
provide equity capital and expertise to effect strategic acquisitions in the
industry and increase our shareholder value, we undertook a coordinated process
of soliciting preliminary indications of interest on a selective basis from
qualified strategic or financial parties for a sale of all or a part of the
Company beginning in the second quarter of 1999 and again in the first quarter
of 2000. While we received some preliminary oral indications of general interest
from a few select parties, and in one case even proceeded relatively far down
the path of negotiating definitive documentation, we were unable to negotiate or
conclude a transaction on terms that we thought were fair to and in the best
interests of our shareholders.
Despite all of these efforts, we have not been successful in increasing
shareholder value in a meaningful way. We have nevertheless continued to analyze
potential ways in which to provide that value on a going-forward basis, and we
believe the best and most efficient way at this point to accomplish this goal is
for EDCO to undertake a "going private" transaction following which it will no
longer be a publicly traded company. We believe such a transaction will result
in substantial benefits to the Company and its shareholders. Specifically,
unaffiliated shareholders will be able to liquidate their holdings (which could
otherwise be difficult given the limited trading volume of our stock) and
receive a premium price for their shares in a transaction generally taxable at
capital gains rates, while avoiding the large "bid-ask" spread discount
associated with trading our stock and without incurring typical brokerage
commissions or fees. Also, "going private" will allow the Company to terminate
registration of its common stock under the Exchange Act, which will relieve the
Company of the burdens and costs associated with filing reports and otherwise
complying with the requirements of the SEC, the 1934 Act and other laws and
regulations that impact public companies. In particular, by going private EDCO
will avoid the costs and burdens of the pending conversion of the OTCBB into the
BBX and the
A-1
recently enacted Sarbanes-Oxley Act of 2002, which places increased obligations
on public companies related to disclosure and corporate governance. We believe
the Company will save over $150,000 per year if it were no longer required to
file reports with the SEC. Going private will also allow management to focus
increased time and attention on the long-term strategic goals and objectives of
the Company without regard to short-term goals and benchmarks, such as quarterly
earnings per share targets, that publicly traded companies are pressured to
achieve. Finally, the Company will no longer be required to publicly disclose
detailed information regarding its business, operations and results, which
disclosure requirements currently place ConForms at a competitive disadvantage
with its private competitors who are not obligated to do the same.
As a result, we propose that the Company undertake a 1-for-66,666 reverse
stock split in which shareholders left with fractional shares after the reverse
split will receive a cash payment equal to $6.50 per pre-split share (which
represents a 14.0% premium over the average bid price of $5.70 for our common
stock for the 15 days prior to February 26, 2003). The reverse stock split will
effect a "going private" transaction in which we would be the only two remaining
shareholders of the Company. We intend to structure Bill's shareholdings such
that, by operation of the reverse stock split, he will receive the $6.50
pre-split cash price for 185,100 shares that he currently owns (representing
approximately 16.9% of his holdings), while the remaining 1,411,878 of his
shares and share equivalents will remain outstanding and will be reduced
according to the split ratio. Bill's intention to cash out up to 185,100 shares
at the $6.50 pre-split per share price evidences our belief that such price is
fair to EDCO's unaffiliated shareholders.
You should be aware that we considered proposing a "going private"
transaction through alternative methods, such as by way of a merger between the
Company and a newly created company controlled by us, a tender offer by such a
newly created company followed by a merger, or a self-tender offer by the
Company for all of its outstanding shares. However, we decided that a reverse
stock split is the most efficient way to achieve the desired result, since it
can be accomplished on a quicker time frame and with significantly less cost to
the Company, thereby allowing the Company to provide our shareholders with a
higher per share price in the transaction than might otherwise be available in
the often more costly and time consuming alternatives. Additionally, we have
discussed the transaction with the Company's lender, LaSalle National Bank, and
it has indicated its willingness to provide the Company with sufficient
financing on terms reasonably satisfactory to the Company for it to purchase all
of the fractional shares resulting from the reverse split.
We fully expect that the Board will form a special committee of independent
directors to evaluate our proposal. In so doing, it is important for the Board
and the special committee to understand that we are both unwilling to consider
any alternative transaction in which we would sell our shares to an outside
third party.
Of course, we believe the Board and the special committee should evaluate
this proposal in a way that provides assurances of procedural and substantive
fairness to the Company's unaffiliated shareholders. In this regard, and since
we together beneficially own approximately 75.0% of the issued and outstanding
common stock of the Company, we suggest this transaction be approved by not only
both the special committee and the shareholder vote required by state law, but
also by the vote of a majority of the Company's remaining shareholders (other
than the two of us) who vote on the proposal at a special shareholders meeting
called for such purpose.
We are willing to meet with the Board and its special committee at any time
to discuss this proposal.
Sincerely,
/s/ William B. Finneran /s/ Alan J. Kastelic
----------------------- --------------------
William B. Finneran Alan J. Kastelic
A-2
EXHIBIT B
CERTIFICATE OF AMENDMENT
of the
CERTIFICATE OF INCORPORATION
of
EDISON CONTROL CORPORATION
Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3) of
the New Jersey Business Corporation Act, the undersigned corporation adopts the
following Certificate of Amendment ("Amendment") to its Certificate of
Incorporation.
1. The name of the corporation is Edison Control Corporation ("Corporation").
2. Article 3 of the Certificate of Incorporation is hereby amended to include
the following text after the last paragraph thereof:
"(b) Effective as of the close of business on the date of filing this
Amendment to the Certificate of Incorporation (the "Effective Time"), the
filing of this Amendment shall effect a reverse stock split pursuant to
which each 66,666 shares of Common Stock issued and outstanding shall be
combined into one (1) validly issued, fully paid and nonassessable share of
Common Stock. The number of authorized shares and the par value of the
Common Stock shall not be affected by the reverse stock split. The
Corporation shall not issue fractional shares to shareholders holding less
than one (1) share of Common Stock as a result of the reverse stock split.
Rather, all fractional shares held by shareholders holding less than one
(1) share of Common Stock will be converted into the right to receive $7.00
in cash per share on a pre-split basis. The Corporation shall require each
holder of record of issued and outstanding shares of Common Stock who holds
less than one (1) share of Common Stock as a result of the reverse stock
split to surrender for cancellation the certificates representing such
shares and receive $7.00 in cash per share on a pre-split basis."
3. The foregoing amendment to the Corporation's Certificate of Incorporation
was submitted to the Corporation's shareholders by the Board of Directors
of the Corporation and was adopted by the holders of a majority of all
outstanding shares entitled to vote thereon at a special meeting of the
shareholders duly called and held on ___, 2003. The number of shares
entitled to vote was 1,638,595, of which holders of [ ] shares voted for
the Amendment and holders of [ ] shares voted against the Amendment.
Executed on behalf of the Corporation on this __ day of __, 2003.
By: /s/ Alan J. Kastelic
-------------------------------------
Alan J. Kastelic
President and Chief Executive Officer
B-1
EXHIBIT C
WRITTEN OPINION OF SCHROEDER & CO.
April 1, 2003
Special Committee of the Board of Directors
Edison Control Corporation
777 Maritime Drive
Port Washington. WI 53074
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the unaffiliated shareholders of Edison Control Corporation (the
"Company") of the consideration to be received by the unaffiliated shareholders
in the reverse stock split proposal submitted to the Company's Board of
Directors by Messrs. William B. Finneran and Alan J. Kastelic and approved by
the Company's Board of Directors on April 1, 2003 (the "Reverse Stock Split").
Pursuant to the Reverse Stock Split, and subsequent to shareholder approval, the
Company will adopt a Certificate of Amendment to its Certificate of
Incorporation (the "Certificate of Amendment") providing for (a) a
one-for-66,666 reverse stock split of the Company's common stock; and (b) a cash
payment of $7.00 per pre-split share of the Company's common stock for all
fractional interests held by shareholders who hold less than one share as a
result of the reverse stock split.
As part of our investment banking business, we are engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements, and valuations for estate,
corporate and other purposes.
In connection with rendering our opinion, we have, among other things, reviewed
the Certificate of Amendment; the letter submitted to the Company's Board of
Directors on March 4, 2003 by Messrs. Finneran and Kastelic; Annual Reports to
shareholders and Annual Reports on Form 10-K of the Company for the five fiscal
years ended January 31, 2002 and the preliminary financial results for the
fiscal year ended January 31, 2003; certain Quarterly Reports on Form 10-Q of
the Company; certain other communications from the Company; and certain
financial analyses and forecasts prepared by the Company's management. We held
discussions with certain senior officers and other representatives and advisors
of the Company concerning the businesses, opportunities and prospects of the
Company, and attended all meetings of the Special Committee. We examined certain
publicly available business and financial information relating to the industries
in which the Company operates. We reviewed the financial terms of the Reverse
Stock Split to the unaffiliated shareholders in relation to, among other things,
current and historical market prices, trading volumes and bid/ask spread of the
Company's common stock; historical and projected earnings and other operating
data of the Company; and the historical and projected capitalization and
financial condition of the Company. In addition, we have compared certain
financial and stock market information for the Company with similar information
for certain other companies the securities of which are publicly traded;
reviewed the financial terms of certain recent business combinations; and
performed such other studies and analyses as we considered appropriate.
C-1
We have relied upon the accuracy and the completeness of all the financial,
accounting and other information discussed with or reviewed by us and have
assumed such accuracy and completeness for purposes of rendering this opinion.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Special Committee of the Board of Directors of
the Company in connection with its consideration of the Reverse Stock Split and
such opinion does not constitute a recommendation to any shareholder as to how
such shareholder should vote on any matter relating to the Reverse Stock Split.
..
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the price of
$7.00 is fair from a financial point of view to the unaffiliated shareholders of
Edison Control Corporation.
Very truly yours,
/s/ Schroeder & Co.
- -----------------------------
SCHROEDER & CO.
C-2
EXHIBIT D
TERM SHEET REGARDING FINANCING - LASALLE NATIONAL BANK ASSOCIATION
FINANCIAL COMMITMENT
--------------------
Borrower: Construction Forms, Inc. and subsidiaries (the "Company") a
Wisconsin corporation.
Lender: LaSalle Bank National Association (the "Bank").
Documentation: The Facilities will be evidenced by a credit agreement (the
"Credit Agreement"), and other loan documents mutually
satisfactory to the Borrower and the Bank.
CREDIT FACILITIES
-----------------
FACILITY I: Secured Revolving Credit Facility (existing)
- ----------
Amount: $6,000,000.
Purpose: To support working capital and general corporate purposes of
the Company.
Term: Maturity of April 30, 2005.
Amortization: None.
Availability: Continuation of existing requirement of monthly Borrowing
Base submitted by the Company (same advance rates).
Availability to be reduced by $1,000,000 as collateral
support to new Facility II (see below).
Pricing: The Borrower shall have the option of loans at the Prime
Rate or LIBOR Rate (as per existing Pricing Grid):
Unused Fee: The Borrower shall pay a usage fee (per Pricing Grid) on the
average unused amount under the Facility, payable quarterly
in arrears from the closing date until termination of the
facility.
D-1
FACILITY II: Secured Term Loan - NEW
- -----------
Amount: $5,000,000.
Purpose: To finance a Reverse Stock Split on behalf of Edison Control
Corporation.
Term: Five Years. Amortization to be on a Seven-Year basis with
balloon maturity at the end of fifth year.
Rate: The Borrower shall have the option of loans at the Prime
Rate or LIBOR Rate (per Pricing Grid) with 50 basis point
premium at each level above Revolving Credit. Therefore,
expected to be Level II at outset (LIBOR + 250 bp) based
upon projected leverage.
Excess Cash Flow: For the first two years of the facility, an
additional amortization payment shall be required annually,
based upon FYE results equal to 50% of Excess Cash Flow (to
be defined as cash flow, less interest & principal payments,
Sub S tax dividends, capital expenditures, and growth in
working capital).
OTHER TERMS
-----------
Collateral: Credit Facilities to be secured by a first perfected general
security interest in all assets of the Borrower, including
personal property and intangible assets.
Guarantee: Edison Control Corporation to guarantee borrowings of
Construction Forms, Inc.
Representations
and Warranties: The Credit Agreement shall also contain representations and
warranties with respect to the Company; including,
representations and warranties with respect to: corporate
existence and standing; no material litigation,
authorization and validity; taxes; contingent obligations;
subsidiaries; ERISA matters; accuracy of information;
compliance with laws; ownership of property; insurance; and
environmental matters.
Closing Fee: Fee due at closing equal to $25,000.
D-2
COVENANTS
---------
The Credit Agreement will have customary covenants, including but not limited
to:
Financial
Reporting: o Annual certified audited financial statements of the
Company due within 90 days after each fiscal year;
o Monthly certified financial statements of the Company
and Affiliates, together with current Borrowing Base
Certificate, due within 30 days after each of the first
eleven fiscal months;
o Quarterly covenant compliance and no default
certificate signed by the Chief Financial Officer or
CEO and delivered with the financial statements; and
o Limitations on additional indebtedness, dividends
(other than Sub S tax distributions) and stock
repurchases, restrictions on subsidiaries' ability to
pay dividends, capital expenditures, mergers and
acquisitions, asset sales, investments, loans &
advances, guarantees, other liens and changes in
control.
Financial Covenants: The Credit Agreement will continue the same financial
covenants, however, with required levels adjusted to
accommodate Facility II:
o Maximum Senior Leverage Ratio defined as Senior Debt
divided by EBITDA, calculated on a trailing
four-quarter basis:
FYE 1/31/03 2.75 : 1
FYE 1/31/04 2.25 : 1
To Termination
o Minimum Current Ratio at all times: 1.50 : 1
o Fixed Charge Coverage (defined as ratio of EBITDA to
Interest Expense + Current Principal) measured
quarterly for the Company's completed rolling four
quarters:
1.50 : 1
o Minimum Tangible Net Worth defined as Shareholders'
D-3
Equity less Intangible Assets, at all times;
$3,750,000 plus 75% annual net income
o Maximum Capital Expenditures as tested annually:
$1,000,000
Conditions of
Approval:
1. Satisfactory Field Examination of the Company's systems
and procedures by staff of LaSalle Bank; to be
completed post-closing.
2. Completion of satisfactory amended Loan Agreement.
Costs & Expenses: The Company to be responsible for the costs and
expenses incurred by LaSalle and its legal counsel for
the preparation and enforcement of these facilities, in
addition to all out of pocket costs.
Governing Law: State of Wisconsin
Proposal Extended By: Proposal Accepted By:
LaSalle Bank N. A. Construction Forms, Inc.
/s/ James A. Meyer
- ----------------------------- --------------------------------
James A. Meyer By:
Senior Vice President Title:
On:
-----------------------------
D-4
EXHIBIT E
FISCAL 2002 GOING PRIVATE PRO FORMA BALANCE SHEET ANALYSIS
ProForma Going
Private
Unaudited Adjustment ProForma 1/31/03
---------------------------------------------------
ASSETS
- ------
CURRENT ASSETS
Cash $ 401,816 $ -- $ 401,816
Trade Accounts Receivable 4,219,057 -- 4,219,057
Receivables from Affiliates 5,646,724 5,000,000 10,646,724
Inventories 7,199,512 -- 7,199,512
Prepaid Expenses 285,017 -- 285,017
------------------------------------------------
TOTAL CURRENT ASSETS 17,752,126 5,000,000 22,752,126
PROPERTY, PLANT & EQUIPMENT
Land 302,902 -- 302,902
Building and Improvements 3,710,491 -- 3,710,491
Machinery and Equipment 7,292,214 -- 7,292,214
Assets in Progress 28,673 -- 28,673
------------------------------------------------
11,334,280 -- 11,334,280
Less accumulated depreciation 4,869,678 -- 4,869,678
------------------------------------------------
NET FIXED ASSETS 6,464,602 -- 6,464,602
GOODWILL, net 8,130,000 -- 8,130,000
NET INTANGIBLES 8,130,000 -- 8,130,000
------------------------------------------------
TOTAL ASSETS $ 32,346,728 $ 5,000,000 $ 37,346,728
E-1
LIABILITIES & EQUITY
- --------------------
CURRENT LIABILITIES
Trade Accounts Payable $ 1,001,981 $ -- $ 1,001,981
Accrued Compensation 837,807 837,807
Taxes other than Income Taxes 16,325 16,325
Accrued Expenses 361,322 361,322
Income Taxes Payable 449,635 449,635
Deferred Income Taxes 505,000 505,000
Current Maturities on
Long-Term Debt 159,902 700,000 859,902
------------------------------------------------
TOTAL CURRENT LIABILITIES 3,331,972 700,000 4,031,972
LONG-TERM DEBT 5,100,801 4,300,000 9,400,801
DEFERRED INCOME TAXES 580,000 580,000
MINORITY INTEREST 12,902 -- 12,902
STOCKHOLDERS' EQUITY
Common Stock 1 -- 1
Additional Paid-In Capital 9,161,999 -- 9,161,999
Translation Adjustments 11,029 -- 11,029
Retained Earnings (deficit),
beg. of yr. 11,998,103 -- 11,998,103
Current Year Earnings (Loss) 2,149,921 -- 2,149,921
------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 23,321,053 -- 23,321,053
------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 32,346,728 $ 5,000,000 $ 37,346,728
E-2
EXHIBIT F
[Front]
EDISON CONTROL CORPORATION
SPECIAL MEETING OF SHAREHOLDERS - ___, 2003
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gregory L. Skaar, as a proxy with the power to
appoint his substitute, and hereby authorizes him to represent and to vote, as
designated below, all the shares of Common Stock of Edison Control Corporation
held of record by the undersigned on ___, 2003 at the Special of Shareholders to
be held on ___, 2003 and any adjournment or postponement thereof..
1. PROPOSAL TO ADOPT A ONE-FOR-66,666 REVERSE STOCK SPLIT:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In his discretion, upon such other business as may properly come before the
meeting and at any adjournment thereof.
(Continued on reverse side)
[Back]
(Continued from reverse side)
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR Proposal 1 and on such other business as may properly come before the
meeting in accordance with the best judgment of the proxies named herein.
The undersigned hereby acknowledges receipt of the Notice of the Special Meeting
and accompanying Proxy Statement relating to the Company's Special Meeting of
Shareholders.
Dated:_______________________________________, 2003
Signed:___________________________________________
Signature
__________________________________________________
Signature if held jointly
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. When shares
are owned jointly, both should sign. When signing as
attorney, executor, administrator, trustee or guardian,
please give your full title as such. If a corporation,
please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IMMEDIATELY USING THE
ENCLOSED ENVELOPE. -----------
F-1
EXHIBIT G
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis for Three Month
- -----------------------------------------------------
Period Ended April 30, 2003
- ---------------------------
Net sales for the three months ended April 30, 2003 increased $321,374 (4.7%) to
$7,176,743 when compared with the same period of the prior year. ConForms sales
increased by $528,853 compared with the same period of the prior year. This was
partially offset by decreased Ultra Tech and SHH sales of $131,597 and $75,882,
respectively. The ConForms increase was due to a softer concrete pumping
accessories market for the three months of 2002 compared to the current year
combined with a general 3% price increase for the ConForms division. The Ultra
Tech decrease was due to lower project sales during the three months ended April
30, 2003 compared to the same period of the prior year. The decrease in the SHH
sales was due to a decrease in large contract orders for the three months ended
April 30, 2003 compared to the same period of the prior year.
As a percentage of net sales, gross profit margin for the three months ended
April 30, 2003 was 37.9% compared to 35.5% for the same period last year. This
was due largely to a price increase for ConForms combined with lower margins for
Ultra Tech sales for the three months ended April 30, 2002 due to a higher mix
of lower margin project sales. Selling, engineering and administrative expenses
increased by $520,158 or 35.1% for the first three months of 2003 compared with
the same period of the prior year. This is due primarily to legal and
professional fees incurred as part of the Company's pending going-private
transaction.
Interest expense decreased to $37,517 for the three months ended April 30, 2003
compared to $44,239 for the three months ended April 30, 2002 due to slightly
lower debt balances combined with lower interest rates.
Miscellaneous income increased $70,570 from the prior year due largely to a
settlement of $72,847 received by the Company in the first fiscal quarter of
2003 from Cendant Corporation litigation regarding previously recognized trading
securities losses relating to Cendant Corporation.
The Company recorded tax expense of $290,556 for the three months ended April
30, 2003, which represents an estimated effective rate of 38.6% applied to
pre-tax book income. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement reporting purposes and the amounts used for income tax
purposes.
Net income of $461,586, or $0.28 and $0.22 per share, basic and diluted,
respectively, for the first three months of 2003 was a decrease of $116,228
(20.1%), from net income of $577,814, or $0.32 and $0.25 per share, basic and
diluted, for the comparable period last year. The decrease in net income is due
largely to higher selling, engineering and administrative expenses offset by
higher ConForms' sales and higher margins on Ultra Tech sales for the three
month period ended April 30, 2003 compared to the same period from the previous
year.
Liquidity and Capital Resources
- -------------------------------
The Company generated $22,856 in cash from operations during the first three
months of 2003, compared to cash generated from operations of $36,050 for the
same period last year. The Company used $44,281 in cash to acquire capital
equipment and $152,438 in payments of long-term debt. The result was a net
G-1
decrease in cash and cash equivalents of $190,257 for the three months ended
April 30, 2003 compared to a net decrease of $129,882 for the same period of the
prior year.
The Company believes that it can fund proposed capital expenditures and
operational requirements from operations and currently available cash and cash
equivalents, and existing bank credit lines. Proposed capital expenditures for
the fiscal year ending January 31, 2004 are expected to total approximately
$735,000, compared to $569,977 for fiscal 2002.
The estimated total cost to cash-out fractional shares and options to acquire
shares in the aforementioned going private transaction is expected to be
approximately $3.5 million, excluding transaction costs. To fund the
transaction, the Company has received a commitment, subject to customary
limitations, for a $5 million five-year term loan secured by assets of the
Company.
Critical Accounting Policies - The consolidated financial statements and related
notes contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Edison Control Corporation considers the following policies to be the most
critical in understanding the judgments that are involved in the preparation of
the Company's consolidated financial statements and the uncertainties that could
impact the Company's financial position, results of operations and cash flows.
Revenue Recognition - The Company recognizes revenue, net of expected returns,
upon shipment of products, which is when title passes to the customer, the price
is fixed, the customer is obligated to pay and the Company has no remaining
obligations.
Allowance for Doubtful Accounts - The Company's accounts receivable are reported
net of bad debt reserves, which are regularly evaluated by management for
adequacy. The evaluation includes and is not limited to a review of individual
customer accounts that have balances beyond the agreed upon terms of the sale.
Reserve values are assigned to individual accounts based on the Company's recent
payment experience with the customer and knowledge of the customer's
creditworthiness. In addition, a general reserve is established to cover the
exposure presented by the remainder of account balances.
Excess and Obsolete Inventory - The Company's inventories are reported net of
excess and obsolete reserves, which are maintained and evaluated on a regular
basis by management. A reserve for excess inventory is calculated by an analysis
of items with on-hand quantities in excess of historical usage over a reasonable
time frame. Management identifies obsolete inventory on a regular basis and
disposes of the quantities through sale to scrap dealers or commercial waste
haulers. On rare occasions obsolete inventory may remain in the Company's
inventory for a period of time and would be reserved for.
Warranties - The Company warrants its products sold to customers to be free from
defects in material and workmanship. The warranty does not vary based on
customer, product sold or any other factor. The company accrues for future
warranty costs in the period in which the sale is recorded, and the estimated
reserve is adjusted periodically based on recent actual experience.
Management's Discussion and Analysis for Year Ended January 31, 2003
- --------------------------------------------------------------------
Fiscal 2002 versus Fiscal 2001
- ------------------------------
Net sales for the year ended January 31, 2003 ("fiscal 2002") decreased $61,734,
or .2%, to $27,390,816, compared with $27,452,550 for the year ended January 31,
2002 ("fiscal 2001"). The acquisition of South Houston Hose on November 1, 2001
accounted for increased net sales of $1,895,389 for fiscal 2002,
G-2
while ConForms non-U.S. operations accounted for increased sales of $157,736.
Ultra Tech's net sales for fiscal 2002 decreased by $734,474. ConForms U.S. net
sales decreased $1,380,384 for fiscal 2002. The economic slowdown has resulted
in a soft concrete pumping accessories market as end users' business levels have
decreased and other equipment manufacturers have seen a significant decrease in
new equipment sales.
As a percentage of net sales, gross profit margin was 35.0% for fiscal 2002 as
compared to 37.1% in fiscal 2001. The decrease is due largely to lower margins
for Ultra Tech due to a higher mix of lower margin project sales compared to the
same period of the prior year, in addition to the inclusion of South Houston
Hose sales for a full year, which typically have a lower margin than ConForms or
Ultra Tech. Selling, engineering and administrative expenses increased
$2,351,694, or 45.8%, to $7,481,837 in fiscal 2002. The sharp increase is
largely due to approximately $960,000 of compensation expense relating to fiscal
2002 stock option activity, and approximately $420,000 of severance expense
relating to former officers. Approximately $776,000 of additional increase was
due to the November 1, 2001 acquisition of South Houston Hose.
Net sales for the ConForms' segment for fiscal 2002 decreased 5.4% to
$21,225,901 compared with $22,448,550 for fiscal 2001. The decrease is due
largely to the economic slowdown, which has resulted in a soft concrete pumping
accessories market as end users' business levels have decreased and other
equipment manufacturers have seen a significant decrease in new equipment sales.
Operating income decreased $832,999, or 17.8%, to $3,854,958 in fiscal 2002
compared to $4,687,957 in fiscal 2001. The decrease was due largely to a
reduction in gross margin of approximately $700,000 caused largely by lower
sales, partially offset by the absence of goodwill amortization, which was
$225,801 for fiscal 2001.
Net sales for the Ultra Tech segment for fiscal 2002 decreased $734,474, or
16.5%, to $3,723,332 from $4,457,806 in the prior fiscal year. Ultra Tech's
volume will continue to fluctuate based on its ability to attain large project
sales in the industries it serves. As a result of the decrease in sales, which
were slightly offset by lower Ultra Tech Selling, Engineering and Administrative
Costs, operating income decreased $137,365 to $413,041 in fiscal 2001 compared
to $550,406 in fiscal 2001.
Net sales for the South Houston Hose segment for fiscal 2002 increased
$1,895,389, or 347.0%, to $2,441,583 from $546,194 in the prior fiscal year.
Operating loss increased by $170,808 to $221,058 from $50,250 in the prior
fiscal year. The increases were due to the November 1, 2001 acquisition of South
Houston Hose resulting in the inclusion of a full year of income statement
activity in fiscal 2002 vs. 3 months in fiscal 2001 (November 2001, December
2001 and January 2002).
Net income of $1,141,559, or $.66 and $.52 per share, basic and diluted,
respectively, for fiscal 2002 represented a decrease of $1,576,749 (58.0%), from
net income of $2,718,308, or $1.20 and $1.01 per share, basic and diluted,
respectively, for fiscal 2001. The decrease is due largely to compensation
expense of approximately $960,000 and severance expense of $420,000 relating to
former officers in FY2002 combined with gross margin reductions of approximately
$700,000 for ConForms and approximately $300,000 for Ultra Tech due to lower
sales volumes The Company adopted Statement of Financial Accounting Standard No.
142, and ceased the amortization of goodwill, effective February 1, 2002. Under
the new standard, pro forma income per diluted share in the year ended January
31, 2002 would have been $1.09, had goodwill not been amortized. The Company
completed the transitional impairment test during the quarter ended July 31,
2002 and determined that no impairment of goodwill exists.
Interest expense decreased $7,255 or 3.5%, to $200,382 for fiscal 2002 from
$207,637 for fiscal 2001.
G-3
The Company had a trading loss (unrealized) of $25,002 in fiscal 2002 compared
to a net trading loss (realized and unrealized) of $123,573 in fiscal 2001.
Although the Company has no established formal investment policies or practices
for its trading securities portfolio, the Company has from time to time pursued
an aggressive trading strategy, focusing primarily on generating near-term
capital appreciation from its investments in common equity securities.
Securities held in the Company's portfolio at the end of each period are
reported at fair value, with unrealized gains and losses included in earnings
for that period. The Company does not use or buy derivative securities.
The Company recorded tax expense of $740,000 for fiscal 2002, which represented
an estimated annual effective tax rate of 39.3% applied to pre-tax book income
compared to a tax rate of 40.1% for fiscal 2001 . The difference is due largely
to an effective tax rate of 1.7% relating to goodwill for fiscal 2001. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial statement reporting
purposes and the amounts used for income tax purposes.
Fiscal 2001 versus Fiscal 2000
- ------------------------------
Net sales for the year ended January 31, 2002 ("fiscal 2001") increased 5.3% to
$27,452,550 compared with $26,070,682 for the year ended January 31, 2001
("fiscal 2000"). The increase was due largely to an approximate $700,000
increase in Ultra Tech sales to mining customers in fiscal 2001 and the
inclusion of $879,194 of South Houston Hose net sales for the three months ended
January 31, 2002 due to acquisition of the remaining 50% of the common stock of
South Houston Hose on November 1, 2001. These increases were partially offset by
a decrease of approximately $194,000 in ConForms Asia's fiscal 2001 sales.
As a percentage of net sales, gross profit margin was 37.1% for fiscal 2001 as
compared to 37.1% in fiscal 2000. Decreases in material costs of approximately
$180,000 were offset by increases in group and workers compensation insurance
costs of approximately $160,000. Selling, engineering and administrative
expenses increased $406,850, or 8.6%, in fiscal 2001 to $5,130,143. The increase
was partially due to the inclusion of $253,811 of selling, engineering and
administrative expenses for South Houston Hose for the three months ended
January 31, 2002. The remaining increase was due largely to increases in
advertising, trade show and promotional of approximately $65,000, bad debt
expenses of approximately $60,000 and group insurance costs of approximately
$65,000.
Net sales for the ConForms' segment for fiscal 2001 decreased 1.3% to
$22,448,550 compared with $22,753,684 for fiscal 2000. The decrease is due
largely to a decrease of approximately $194,000 in ConForms Asia sales and a
decrease of approximately $445,000 in ConForms U.S. sales. Operating income
decreased $208,282, or 4.3%, to $4,687,957 in fiscal 2001 compared to $4,896,239
in fiscal 2000. The decrease was due largely to increases in advertising, trade
show and promotional expenses of approximately $90,000, bad debt expenses of
approximately $60,000 and group and workers compensation insurance costs of
approximately $210,000.
Net sales for the Ultra Tech segment for fiscal 2001 increased $1,140,808, or
34.4%, to $4,457,806 from $3,316,998 in the prior fiscal year. The increase was
due principally to increases in Ultra Tech sales to mining customers of
approximately $700,000 in fiscal 2001. As a result of the increase in sales,
operating income increased $244,842 to $550,406 in fiscal 2001 compared to
$305,564 in fiscal 2000.
Interest expense decreased $326,143, or 61.1%, to $207,637 for fiscal 2001 from
$533,780 for fiscal 2000. The decrease resulted from a reduction of the
Company's average outstanding debt from the previous year combined with lower
interest rates.
G-4
The Company had a net trading loss (realized and unrealized) of $123,573 in
fiscal 2001 compared to a net trading loss (realized and unrealized) of $380,900
in fiscal 2000. A major reason for the $257,327 change was the decrease in the
average holdings in the Company's portfolio. Securities held in the Company's
portfolio at the end of each period are reported at fair value, with unrealized
gains and losses included in earnings for that period.
The amortization of goodwill and financing costs created a total non-cash charge
of $268,299 for fiscal 2001 compared to $235,796 for fiscal 2000. Goodwill from
the June 1996 acquisition of ConForms was being amortized over a 40-year period
through January 31, 2002.
The Company recorded tax expense of $1,820,000 for fiscal 2001, which
represented an estimated annual effective tax rate of 40.1% applied to pre-tax
book income compared to a tax rate of 39.4% for fiscal 2001. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial statement reporting purposes and
the amounts used for income tax purposes.
Income from continuing operations of $2,718,308, or $1.20 and $1.01 per share,
basic and diluted, respectively, for fiscal 2001 represented an increase of
$410,053 or 17.8% from income from continuing operations of $2,308,255, or $.98
and $.80 per share, basic and diluted, respectively, for fiscal 2000. The
increase was due largely to the reduction of trading securities losses of
$257,327 and the decrease in interest expense of $326,143 from the previous
year.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operating activities was $2,150,162 for fiscal 2002, compared to
$4,630,953 for fiscal 2001. This is due largely to a decrease in net income
combined with a decrease in the change in trade accounts payable, accrued
compensation and deferred income taxes of $295,758, $226,083 and $175,000,
respectively. These decreases were offset by a decrease in the change in
accounts receivable of $320,540.
Net working capital of $9,938,694 at January 31, 2003 increased $1,017,497, or
11.4%, from the fiscal 2001 year-end level of $8,921,197. Current ratio at
January 31, 2003 was 4.8:1 compared to 3.3:1 at January 31, 2002. The
improvement in working capital and current ratio is due primarily to deferred
compensation of $666,752 relating to stock options being reclassified from a
current liability to additional paid-in capital during the quarter ended October
31, 2002.
Cash used in investing activities in fiscal 2002 was $569,977 compared to cash
received from investing activities of $17,970 in fiscal 2001. Capital
expenditures increased to $569,977 in fiscal 2002 from $233,602 in fiscal 2001.
The increase is largely due largely to the upgrade of Ultra Tech's heat-treated
bender to allow for larger diameter bends.
The Company used $1,343,125 to repurchase its common stock during fiscal 2002
compared to $3,918,271 in fiscal 2001. The Company used $259,514 to reduce debt
during the year. The Company's debt to capitalization ratio at January 31, 2003
and 2002 was 20.7% and 22.4%, respectively. The Company maintains various debt
agreements, which are described in more detail in the footnotes to the
consolidated financial statements. Required principal payments in fiscal 2003
are expected to be approximately $160,000.
The Company believes that it can fund proposed capital expenditures and
operational requirements from operations and currently available cash and cash
equivalents and existing bank credit lines. Proposed capital expenditures for
the fiscal year ending January 31, 2004 are expected to total approximately
$735,000 compared to $569,977 for fiscal 2002.
G-5
Contractual Obligations - The terms under the amended master credit agreement,
among other provisions, require the Company to maintain a minimum current ratio,
tangible net worth, and debt service ratio, and restricts the Company to a
maximum funded debt to EBITDA (as defined) ratio. The tangible net worth
requirement at January 31, 2003 was $10,476,253. Substantially all of the
Company's assets are collateralized under the above debt agreement. The LIBOR
spread may be reduced or increased annually based on the achievement of a
certain "funded debt to EBITDA" ratio.
The following table of material debt and lease commitments at January 31, 2003,
summarizes the effect these obligations are expected to have on the Company's
cash flow in future periods set forth below.
Year Ending Debt Operating Total
January 31, Obligations Leases Obligations
----------- ----------- --------- -----------
2004 $ 159,902 $ 196,000 $ 355,902
2005 3,160,305 144,000 3,304,305
2006 160,724 130,000 290,724
2007 186,162 110,000 296,162
2008 186,616 66,000 252,616
Thereafter 1,406,994 130,000 1,536,994
----------- --------- -----------
$ 5,260,703 $ 776,000 $ 6,036,703
=========== ========= ===========
Critical Accounting Policies - The consolidated financial statements and related
notes contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Edison Control Corporation considers the following policies to be the most
critical in understanding the judgments that are involved in the preparation of
the Company's consolidated financial statements and the uncertainties that could
impact the Company's financial position, results of operations and cash flows.
Revenue Recognition - The Company recognizes revenue, net of expected returns,
upon shipment of products, which is when title passes to the customer, the price
is fixed, the customer is obligated to pay and the Company has no remaining
obligations.
Allowance for Doubtful Accounts - The Company's accounts receivable are reported
net of bad debt reserves, which are regularly evaluated by management for
adequacy. The evaluation includes and is not limited to a review of individual
customer accounts that have balances beyond the agreed upon terms of the sale.
Reserve values are assigned to individual accounts based on the Company's recent
payment experience with the customer and knowledge of the customer's
creditworthiness. In addition, a general reserve is established to cover the
exposure presented by the remainder of account balances.
Excess and Obsolete Inventory - The Company's inventories are reported net of
excess and obsolete reserves, which are maintained and evaluated on a regular
basis by management. A reserve for excess inventory is calculated by an analysis
of items with on-hand quantities in excess of historical usage over a reasonable
time frame. Management identifies obsolete inventory on a regular basis and
disposes of the quantities through sale to scrap dealers or commercial waste
haulers. On rare occasions obsolete inventory may remain in the Company's
inventory for a period of time and would be reserved for.
G-6
Warranties - The Company warrants its products sold to customers to be free from
defects in material and workmanship. The warranty does not vary based on
customer, product sold or any other factor. The company accrues for future
warranty costs in the period in which the sale is recorded, and the estimated
reserve is adjusted periodically based on recent actual experience.
New Accounting Standards
- ------------------------
In June 2002 the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to Emerging Issues Task Force ("EITF") EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The scope of SFAS No. 146 also includes (i) costs related to
terminating a contract that is not a capital lease and (ii) termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002 with early
adoption allowed. Adoption of SFAS No. 146 is not expected to have an impact on
the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition to the fair value
method of accounting for stock-based employee compensation and also amends the
disclosure provisions of SFAS No. 123. The Company will adopt only the
disclosure portion of SFAS No. 148. Thus, such statement will not have an impact
on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires that a guarantor must
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation that it has undertaken in issuing a guarantee. FIN No. 45 also
addresses the disclosure requirements that a guarantor must include in its
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. FIN No. 45 also
requires disclosure regarding the Company's product warranty liability (see Note
11). Adoption of FIN No. 45 is not expected to have an impact on the Company's
consolidated financial statements.
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities" (an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements") in January 2003, which becomes effective for the Company on August
1, 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities ("VIE") in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a VIE to determine whether it provides financial
support to the VIE through a variable interest. Variable interests may arise
from financial instruments, service contracts, minority ownership interests or
other arrangements. If an entity holds a majority of the variable interests, or
a significant variable interest that is considerably more than any other party's
variable interest, that entity would be the primary beneficiary and would be
required to include the assets, liabilities and results of operations of the VIE
in its consolidated financial statements. Adoption of FIN No. 46 is not expected
to have an impact on the Company's consolidated financial statements.
G-7
EXHIBIT H
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures for Three Month Period Ended April 30, 2003
- -------------------------------------------------------------------
The Company is exposed to interest rate risk and foreign currency risk. These
risks include changes in U.S interest rates and changes in foreign currency
exchange rates as measured against the U.S. dollar.
Interest Rate Risk
- ------------------
The Company's revolving credit borrowings and variable rate term loans, which
totaled $5,050,000 as of April 30, 2003, are subject to interest rate risk. Most
of the borrowings float at the prime rate or LIBOR plus a certain number of
basis points. Based on the April 30, 2003 balance, an increase of one percent in
the interest rate on the Company's loans would cause interest expense to
increase by approximately $50,050 or $0.02 per diluted share, net of taxes, on
an annual basis. The Company currently does not use derivatives to fix variable
rate interest obligations.
Foreign Currency Risk
- ---------------------
The Company has foreign operations in the United Kingdom and Malaysia. Sales and
purchases are typically denominated in the British pound, Malaysian ringgit,
German mark, Singapore dollar or U.S. dollar, thereby creating exposures to
changes in exchange rates. The changes in exchange rates may positively or
negatively affect the Company's sales, gross margins and retained earnings. The
Company does not enter into foreign exchange contracts but attempts to minimize
currency exposure risk through working capital management. There can be no
assurance that such an approach will be successful, especially in the event of a
significant and sudden decline in the value of a currency.
Market Risk Disclosures for Year Ended January 31, 2003
- -------------------------------------------------------
The Company is exposed to interest rate risk, foreign currency risk and equity
price risk. These risks include changes in U.S interest rates, changes in
foreign currency exchange rates as measured against the U.S. dollar and changes
in the prices of stocks traded on the U.S. markets.
Interest Rate Risk
- ------------------
The Company's revolving credit borrowings and variable rate term loans, which
totaled $5,200,000 as of January 31, 2003, are subject to interest rate risk.
Most of the borrowings float at the prime rate or LIBOR plus a certain number of
basis points. Based on the fiscal 2002 year end balance, an increase of one
percent in the interest rate on the Company's loans would cause an increase in
interest expense of approximately $52,000, or $.02 per diluted share, net of
taxes, on an annual basis. The Company currently does not use derivatives to fix
variable rate interest obligations.
Foreign Currency Risk
- ---------------------
The Company has foreign operations in the United Kingdom and Malaysia. Sales and
purchases are typically denominated in the British pound, Malaysian ringgit,
Singapore dollar, U.S. dollar or the Euro, thereby creating exposures to changes
in exchange rates. The changes in exchange rates may positively or negatively
affect the Company's sales, gross margins and retained earnings. The Company
does not enter into foreign exchange contracts but attempts to minimize currency
exposure risk through working capital management. There can be no assurance that
such an approach will be successful, especially in the event of a significant
and sudden decline in the value of a currency.
H-1