AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONTROL DEVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 3625 01-0490335
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
228 NORTHEAST ROAD STANDISH, MAINE 04084 (207) 642-4535
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE D. ATKINSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONTROL DEVICES, INC.
228 NORTHEAST ROAD
STANDISH, MAINE 04084
(207) 642-4535
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
JAMES A. STRAIN, ESQ. F. GEORGE DAVITT, ESQ.
SOMMER & BARNARD, PC TESTA, HURWITZ & THIBEAULT, LLP
4000 BANK ONE TOWER HIGH STREET TOWER
INDIANAPOLIS, INDIANA 46204 125 HIGH STREET
(317) 630-4000 BOSTON, MA 02110
(617) 248-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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Common Shares................... $27,600,000(1) $9,518.00
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(1) Estimated maximum offering price of the securities registered hereby
calculated pursuant to Rule 457(o).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A) MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
Dated August 1, 1996 [LOGO]
2,000,000
CONTROL DEVICES, INC.
COMMON SHARES
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The Common Shares offered hereby are being offered by Control Devices, Inc.
(the "Company").
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Prior to the Offering, there has been no public market for the Common Shares of
the Company. The initial public offering price will be determined by agreement
between the Company and the Underwriters. It is currently estimated that the
initial public offering price will be between $ and $ . See "Underwriting."
Application has been made to include the Common Shares for quotation on the
Nasdaq National Market under the symbol "SNSR".
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SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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PER SHARE $ $ $
TOTAL(3) $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deduction of expenses payable by the Company estimated at $750,000.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to an additional 300,000 Common Shares to cover over-
allotments, if any. If all such shares are purchased, total price to
public, underwriting discounts and commissions and proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
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The Common Shares are being offered by the Underwriters named herein when and
if received and accepted by them subject to their right to reject orders in
whole or in part and subject to certain other conditions. It is expected that
the delivery of the shares will be made in New York, New York on or about ,
1996.
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DEAN WITTER REYNOLDS INC. CLEARY GULL REILAND & MCDEVITT INC.
, 1996
INSIDE FRONT COVER PAGE
Under the heading "Automotive Markets--Control Devices provides a wide range
of circuit breakers and electronic sensors to the Automotive Market," there is
a photograph of a number of the Company's metal based circuit breakers and a
labeled schematic of a generic automobile with the caption "Control Devices
sells circuit breakers and electronic sensors to major automobile OEMs in
North America and Europe. Circuit breakers protect small electric motors from
current and heat overload. Electronic sensors control certain comfort and
safety features such as climate control and headlamp intensity."
Below these are photographs of selected sensors with the caption "Control
Devices' sensors generate electronic signals for climate control systems,
power steering systems and daytime running lamps" and a photograph of chip-on-
board technology with the caption "Control Devices has developed a lower cost
`next generation' sensor utilizing chip-on-board technology."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH
HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................................................... 4
Risk Factors............................................................ 8
Company History......................................................... 13
Use of Proceeds......................................................... 14
Dividend Policy......................................................... 14
Dilution................................................................ 15
Capitalization.......................................................... 16
Unaudited Pro Forma Financial Data...................................... 17
Selected Financial Information.......................................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................................... 21
Business................................................................ 27
Management.............................................................. 39
Certain Transactions.................................................... 44
Principal Shareholders.................................................. 45
Description of Capital Shares........................................... 46
Shares Eligible for Future Sale......................................... 48
Underwriting............................................................ 49
Legal Matters........................................................... 50
Experts................................................................. 50
Additional Information.................................................. 50
Index to Financial Statements........................................... F-1
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UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
The Control Devices logo is a registered trademark of the Company and Maxi
Breaker is a trademark of the Company. This Prospectus also includes
trademarks and tradenames of companies other than the Company. All other
company or product names are trademarks or registered trademarks of their
respective owners.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option to purchase up to 300,000 additional Common
Shares is not exercised and is adjusted to give effect to (i) the exercise of
outstanding warrants to purchase 564,100 Class B Series 1 Common Shares at
$0.01 per share, (ii) the conversion of all 999,996 Class B Series 1 Common
Shares outstanding after such exercise into a like number of Class A Common
Shares, (iii) the reclassification of Class A Common Shares into Common Shares
and the elimination of the designations of Class A Common Shares and Class B
Common Shares and (iv) the conversion of the RDI Convertible Notes (as defined
below) into Common Shares (assuming an initial public offering price of
$ per share). The adjustments discussed above will occur immediately prior
to the closing of this Offering. See "Company History," and "Description of
Capital Shares." Reference herein to the "Company" includes predecessors of the
Company and the Company's consolidated subsidiaries, unless the context
otherwise requires. Prospective investors should carefully consider the
information set forth under the heading "Risk Factors."
THE COMPANY
Control Devices, Inc. ("CDI" or the "Company") designs, manufactures and
markets circuit breakers, electronic sensors and electronic ceramic component
parts used by original equipment manufacturers ("OEMs") in the automotive,
appliance and telecommunications markets. The Company is a leading supplier of
automatically resetting circuit breakers and solar sensors for the automotive
market and of glass enclosed circuit breakers for the appliance market. The
Company has supplied circuit breakers to automotive OEMs for more than 30
years, and in 1991 expanded its offerings to the automotive market by
introducing its initial sensor product, a solar sensor used to automatically
signal adjustments in climate control systems in luxury cars. The Company's
products are sold to the three major North American automotive OEMs, General
Motors Corporation ("GM"), Ford Motor Company ("Ford") and Chrysler Corp.
("Chrysler"), as well as to foreign OEMs such as Mercedes, Peugeot, Volkswagen
and Valeo. Sales to GM, Ford and Chrysler, and their suppliers, in North
America accounted for approximately 45% of net sales in 1995. Other principal
customers include Danfoss, Celwave and Siecor.
In April 1996, the Company acquired all of the outstanding capital stock of
Realisations et Diffusion pour l'Industrie ("RDI"), which is headquartered near
Paris, France. RDI markets, distributes, assembles and packages a full line of
circuit protection devices, including various fuses and circuit breaker
components and assemblies manufactured by other companies. The Company
purchased RDI primarily to enhance its market penetration of the automotive OEM
market in Europe, in part by locating itself closer to European customers.
Management believes that the resulting expansion of its European presence and
improvement of its European distribution network will enhance the Company's
ability to distribute in Europe existing, internally developed and newly
acquired products.
Since 1991, CDI has shipped approximately 4.2 million solar sensor units. To
complement its solar sensor product lines, in July 1995, the Company commenced
shipments of its steering wheel sensor to Ford, and in June 1996 commenced
shipments of its twilight sensor to GM to be used in GM's recently announced
Daytime Running Lamp ("DRL") program. The Company is also in various stages of
development of its rain, window fog and other solar (climate control)/twilight
(headlamp control) sensors for a number of domestic and foreign automotive
OEMs. In late 1995, in an effort to encourage automotive OEMs' use of sensors
in a greater range of vehicle models, the Company sought to lower the cost of
its sensors by incorporating chip-on-board manufacturing technology. With chip-
on-board technology, the Company bonds custom silicon wafers directly onto an
integrated circuit board, to incorporate both the function of numerous discrete
electronic
4
components and a photodiode. This technology significantly reduces the number
of components in the Company's sensor products, thereby lowering the cost of
the sensor as well as providing greater design flexibility through reduced
board size requirements. The Company's chip-on-board technology is currently
employed on the twilight sensor being delivered to GM, and the Company is
redesigning all of its sensor products to incorporate this technology.
On July 29, 1994, the Company acquired substantially all of the assets and
certain liabilities (the "Business") of GTE Control Devices Incorporated and
Dominican Overseas Trading Company, two subsidiaries of GTE Corporation
(collectively referred to herein as "GTE"). For periods prior to July 29, 1994,
the Business is sometimes referred to herein as the "Predecessor Company." The
Company is an Indiana corporation incorporated in June 1994 to purchase the
Business. See "Company History."
The principal executive offices of the Company are located at 228 Northeast
Road, Standish, Maine 04084, and its telephone number is (207) 642-4535.
THE OFFERING
Common Shares being Offered by the
Company............................ 2,000,000 shares
Common Shares to be outstanding
after the Offering................. (1)
Use of Proceeds..................... Repayment of long-term indebtedness
(including accrued interest), redemption
of outstanding preferred shares
(including payment of accrued dividends)
and the balance, if any, for working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol............................. SNSR
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(1) Assumes no exercise of an outstanding option to purchase 200,000 Common
Shares. See "Description of Capital Shares."
5
SUMMARY FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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(1) On July 29, 1994, the Company purchased the Business. See "Company
History." The data prior to July 29, 1994 represent the financial
information of the Predecessor Company, and has been prepared by the
Company. See Note 1 to the Company's Financial Statements.
(2) Combined year ended December 31, 1994 represents the summation of the
statements of income for the seven months ended July 29, 1994 of the
Predecessor Company and the five months ended December 31, 1994 of the
Company. The combined results are presented for comparative purposes only
and do not include adjustments for depreciation and amortization of assets
acquired based on their estimated fair market values at the acquisition
date, interest on acquisition debt and related income tax effect for the
Predecessor Company portion of results of operations.
(3) The Summary Financial Information for the six months ended June 30, 1996
includes RDI's results of operations from April 1, 1996, the date of the
acquisition.
(4) The Predecessor Company incurred an operating loss in the year ended
December 31, 1991, due in part to the GTE corporate allocation charge of
approximately $2,000,000 and higher cost of sales associated with
manufacturing facilities closed in 1991.
(5) For purposes of computing the income tax provision (benefit), an effective
tax rate of 40% was used for the Predecessor Company results of operations
because no income taxes were allocated to the Predecessor Company.
(6) See Note 2 to the Company's Financial Statements. Net income, net income
applicable to common shareholders, and weighted average number of common
shares and equivalents outstanding are not presented for periods prior to
and including July 29, 1994 as the Business did not operate as an
independent entity during such periods.
(7) The pro forma net income per share would have been $ and $ for the
year ended December 31, 1995, and the six month period ended June 30,
1996, respectively, assuming the conversion of the RDI Convertible Notes,
and Common Shares, respectively, had been issued, at a public
offering price of per share, and the proceeds were received and used
to retire the Company's 10% Senior Secured Fixed Rate Notes, plus accrued
interest, the 11% Senior Subordinated Notes, plus accrued interest and
Redeemable Preferred Shares plus accrued dividends.
(8) EBITDA represents operating income (loss) plus depreciation and
amortization.
(9) Research and development as a percentage of net sales for the six months
ended June 30, 1996 includes the financial data for RDI. The percentage
for the six months ended June 30, 1996 without RDI was 8.5%.
(10) After giving effect to (i) the adjustments described above in this
Prospectus Summary and (ii) the sale by the Company of the Common Shares
offered hereby and application of the net proceeds therefrom. See "Use of
Proceeds".
6
SUMMARY PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA(1)(2)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.............. $ 65,621 $ 34,803
Gross profit........... 22,211 12,958
Operating income....... 8,342 4,675
Net income............. 3,460 2,198
Net income applicable
to common
shareholders.......... 3,196 2,066
Net income per
share(3).............. $ 1.25 $ 0.81
Weighted average number
of common shares and
equivalents
outstanding........... 2,564 2,564
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(1) The summary pro forma unaudited consolidated financial data of the
Company for the year ended December 31, 1995 and for the six months
ended June 30, 1996 were prepared as if the acquisition of RDI had
occurred on January 1 of the respective period. The unaudited pro
forma consolidated financial data do not purport to represent what
the results of operations of the Company would actually have been
if the events described in the pro forma unaudited consolidated
statements of income included elsewhere in this Prospectus had in
fact occurred at the beginning of such period, or to project the
results of operations of the Company for any future date or period.
(2) No pro forma consolidated balance sheet as of June 30, 1996 is
presented as the actual financial data for RDI is included in the
actual consolidated balance sheet of the Company as of June 30,
1996.
(3) The pro forma net income per share would have been $ and $ for
the year ended December 31, 1995, and the six month period ended
June 30, 1996, respectively, assuming the conversion of the RDI
Convertible Notes, and Common Shares, respectively, had
been issued, at a public offering price of $ per share, and the
proceeds were received and used to retire the Company's 10% Senior
Secured Fixed Rate Notes plus accrued interest, the 11% Senior
Subordinated Notes plus accrued interest and shares of the
Redeemable Preferred Shares plus accrued dividends.
7
RISK FACTORS
Prospective purchasers should carefully consider the following factors, as
well as the other information contained in this Prospectus, in evaluating an
investment in the Common Shares offered by this Prospectus. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in the following factors.
DEPENDENCE ON AUTOMOTIVE AND APPLIANCE INDUSTRIES
The major markets for the Company's circuit breakers and sensors are the
automotive and, to a lesser extent, appliance industries, which are cyclical
and have historically experienced periodic downturns. The cyclical nature of
these industries is due to general economic conditions beyond the control of
the Company. For example, the level of interest rates, consumer confidence,
patterns of consumer spending and the automobile and appliance replacement
cycles affect the level of automobile and appliance purchases. The Company's
operating results may be adversely affected by future downturns in these
industries. See "Business--Products and Markets."
There is continuing pressure from the major automotive and appliance OEMs to
reduce costs, including costs associated with outside suppliers such as the
Company. In addition, for quality control and pricing reasons, OEMs prefer to
deal with a limited number of preferred suppliers and favor suppliers that can
provide the OEM with a number of different products in sufficient quantities
to meet all of the OEM's needs. The Company believes that its ability to
develop new proprietary products to meet specific customer needs, to control
its own costs and to deliver its products in quantities sufficient to meet the
requirements of OEMs will allow the Company to remain competitive. However,
there can be no assurance that the Company will remain a preferred OEM
supplier or that the Company will be able to improve or maintain its gross
margins on product sales to OEMs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
In the automotive industry, new car model development generally begins three
to five years prior to the marketing of such models to the public.
Consequently, a substantial portion of the Company's sales for the short term
depend on sales of the automobile models in which the Company's products are
currently used. In the long term, a substantial portion of the Company's sales
will also depend on the Company's ability to continue as a supplier of parts
for new automobile models. The inability of the Company to develop new
products to replace products whose life cycles have come to an end could have
a material adverse effect on the Company.
Substantially all of the hourly employees of North American automotive OEMs
are represented by the United Automobile, Aerospace and Agricultural Implement
Workers of America ("UAW") under similar collective bargaining agreements. The
collective bargaining agreements applicable to GM, Ford and Chrysler are
scheduled to expire in September 1996. The failure of GM, Ford or Chrysler to
reach agreement with the UAW relating to the terms of a new collective
bargaining agreement resulting in either a work stoppage or strike at any of
their respective production facilities could have a material adverse effect on
the Company. A 17-day March 1996 work stoppage in two Dayton, Ohio, GM plants
resulted in a loss of revenue because of the lack of demand for products for
GM vehicles. Although the Company took steps to minimize the consequences of
the work stoppage, the Company lost approximately $450,000 in revenue as a
result of the 17-day strike.
The Company's circuit breakers are sold to GM, Ford and Chrysler in North
America. Commencing in 1995, Ford began a program, which continues in 1996, to
replace various circuit breakers in certain of its North American vehicle
models with fuses, which can be used as an alternative to circuit breakers
when an automatically resetting product is determined not to be required. The
Company's net sales in 1995 declined $5.0 million, or 11.3%, as compared to
combined 1994, in part as a result of Ford's decision. Although the
8
Company believes Ford will not expand its program to other applications or
other vehicle models, and believes that neither GM nor Chrysler is considering
a similar decision, the decision by any of the Company's significant
customers, including GM or Ford, to replace circuit breakers with fuses could
have a material adverse effect on the Company's results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHIFT IN BUSINESS FOCUS FROM CIRCUIT BREAKERS TO SENSORS
Historically, the Company has derived over 80% of its total revenue from
sales of its circuit breakers. Because this market is relatively mature and
intensely price competitive, the Company has begun to shift its focus for
growth to its sensor products. In the future, the Company expects to derive an
increasing portion of its total revenue and net income from sales of its
sensor products. Continued growth of the Company's sensor business will depend
upon several factors, including continued demand for these sensors, the
Company's ability to develop new products to meet the changing requirements of
the OEMs, technological changes and competitive pressures. There can be no
assurance that the Company's sensor business will continue to grow. See
"Business--Products and Markets" and "--Business Strategies."
CUSTOMER CONCENTRATION
In 1995, the Company sold approximately 72% of its products to 15 customers.
One of the Company's customers, GM, accounted for approximately 17%, 20% and
12% of net sales in 1994, 1995 and the first six months of 1996, respectively.
These sales were primarily to two divisions of GM, Packard Electric and Delco
Electronics, both of which manufacture electrical systems for automotive
companies, including GM. In addition, in 1995 sales to Danfoss accounted for
approximately 14% of the Company's net sales. Loss of, or the failure to
replace, any significant portion of sales to any significant customer could
have a material adverse effect on the Company. See "Business--Marketing and
Customers."
FLUCTUATION IN QUARTERLY RESULTS
The Company's quarterly results may fluctuate as a result of a variety of
factors, including the timing of orders, declines in net sales caused by
seasonal retooling and shut-downs of OEMs, delays of shipments to customers,
new product introductions by the Company or its competitors, levels of market
acceptance for new products or the hiring of additional staff. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
INDEMNIFICATION PROTECTION
On July 29, 1994, the Company purchased the Business from GTE. In connection
with the acquisition, GTE agreed to retain certain liabilities and indemnify
the Company for damages that may be incurred by the Company as a result of
such retained liabilities, including liabilities relating to certain
environmental matters. GTE retained liability for claims relating to soil and
groundwater contamination from the surface impoundment and the out-of-service
leachfield at the Company's Standish, Maine facility known to exist prior to
the acquisition. Such contamination is currently being remediated at GTE's
expense. Although the Company believes GTE's indemnity is enforceable, if the
Company were unable to enforce such indemnification obligations against GTE,
the Company could become liable for any such retained liability. The inability
to proceed against GTE could have a material adverse effect on the Company.
See "Business--Environmental Matters."
RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING
The Company has a manufacturing plant in San Cristobal, Dominican Republic
at which it manufactures a substantial portion of its circuit breakers and
certain of its sensors. In 1995, such products represented, in the aggregate,
approximately 40% of the Company's net sales. The Company's operations in the
Dominican Republic are subject to risks associated with manufacturing products
internationally, including: political and
9
economic uncertainties; tariff regulations or trade restrictions; currency
controls; unexpected or sudden increases in wage rates or other manufacturing
costs; and exchange rate fluctuations. Any such risk could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company expects to continue to manufacture a substantial
portion of its products in the Dominican Republic. See "Business--
Manufacturing and Supply."
RISKS ASSOCIATED WITH INTERNATIONAL DISTRIBUTION
With the acquisition of RDI, the Company has strengthened its distribution
capability to automotive and appliance OEMs in Europe. As a result of the
acquisition, however, the Company has increased exposure to general economic
conditions in Europe and the cyclical nature of the automotive industry in
Europe. Factors which can affect automobile purchases in Europe, and which
contribute to the industry's cyclicality, include the level of interest rates,
consumer confidence, patterns of consumer spending and the automobile
replacement cycle, all of which are beyond the control of the Company and
which could have a material adverse effect on the Company's financial
condition and results of operations. In addition, RDI generates revenues and
incurs expenses primarily in currencies other than the U.S. dollar. The
Company does not engage in currency hedging transactions. As a result, the
Company has increased financial risk based on fluctuations in currency
exchange rates, which could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and "Business."
TECHNOLOGICAL CHANGE AND INTELLECTUAL PROPERTY
The market for the Company's sensor products is subject to rapid
technological change, new product introductions and enhancements and evolving
industry standards. The Company's ability to remain competitive in this and
other markets will depend in part upon its ability to respond to technological
changes by developing and introducing new systems, and enhancing its present
products, to satisfy customer needs. The Company's success in doing so depends
upon efficient completion of product design and manufacturing, product
performance and effective sales and marketing. Because new product commitments
must be made well in advance of sales, such decisions must anticipate both
future demand and the future technology. There can be no assurance that the
Company will be successful in selecting, developing, manufacturing and
marketing new products or enhancing its existing products. In addition, new
technology or new product introductions by competitors could cause a decline
in sales or market acceptance of the Company's existing products. There can be
no assurance that products or technologies developed by others, or existing
technologies which become commercially viable, will not render the Company's
products non-competitive or obsolete.
While there have been no material challenges to date and the Company
believes that its technology is adequately protected, there can be no
assurance that any of the Company's present or future patents will afford
protection against competitors or survive a validity challenge. Although the
Company believes that its technology and products do not infringe upon the
proprietary rights of others, there can be no assurance that third parties
will not assert infringement claims against the Company or that the Company
will be successful in defending its patent position if challenged.
Additionally, the Company licenses certain patents from third parties under
long-term agreements. If one or more of these patent licenses are
discontinued, there can be no assurance that the Company will be able to
develop future products or obtain alternative sources or, if able, that such
efforts would not result in delays or cost increases that could have a
material adverse effect on the Company's business. See "Management--Key
Consultant."
SOLE OR LIMITED SOURCES OF SUPPLY
Due to its high quality standards, the Company relies on a sole supplier or
a limited group of suppliers for certain key components of its products. The
Company does not have a long-term supply agreement with any of these
suppliers, and operates under purchase orders. The Company's reliance on sole
or a limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required
10
components and reduced control over pricing and timely delivery of components.
Although the timeliness, yield and quality of deliveries to date from the
Company's suppliers have been acceptable, any prolonged inability to obtain
adequate deliveries or any other circumstance that would require the Company
to seek alternative sources of supply could delay the Company's ability to
ship its products, which could damage relationships with current and
prospective customers and could therefore have a material adverse effect on
the Company. See "Business--Manufacturing and Supply."
COMPETITION
The Company has many competitors with respect to its products, and the
automotive parts supply industry in particular is highly competitive. Many of
its competitors in the automotive industry are companies which are larger,
more diversified and have greater financial resources than the Company. In
general, competition in the circuit breaker market is based on price, although
the Company also seeks to compete based on product performance. The automotive
market for circuit breakers is a relatively mature, small market, and the
Company competes principally with Texas Instruments and Otter Controls, Inc.
In the appliance market for circuit breakers, the Company competes principally
with Texas Instruments. The Company also competes in the circuit breaker
market with suppliers of alternative technologies, such as fuses which can be
used as an alternative to circuit breakers. Competition in the sensor market
is primarily based on technology, quality, delivery, reliability, price,
functionality and engineering support. The Company's principal competitors in
this market are Texas Instruments, Eaton, Motorola, Panasonic, Philips and
Nippondenso. In the ceramics market, the Company competes on the basis of
supplying niche products and on service, delivery and product technology. Its
principal competitors in this market are NTK, TDK, Alpha Industries, Murata
and Siemens. While the Company believes that its responsiveness and technology
are competitive advantages across all of its product lines, there can be no
assurance that the Company's products will be able to compete successfully
with the products of its competitors. Increased competition generally, and the
introduction or promotion of competing products specifically, could adversely
affect the Company's revenues and profitability by exerting pricing pressure,
reducing market share and margins and creating other obstacles. In the
European distribution market, the Company competes with similar electronic
component distributors. While the Company believes that its customer service
and distribution capabilities are a competitive advantage in the European
distribution market, there can be no assurance that the Company will be able
to compete successfully with the distribution capabilities of its competitors.
See "Business--Products and Markets" and "--Competition."
DEPENDENCE ON KEY PERSONNEL AND KEY CONSULTANT
The success of the Company's business depends upon the services of its
executive officers and certain other key managers and employees including
Bruce D. Atkinson, the Company's Chief Executive Officer, Jeffrey G. Wood, the
Company's Chief Financial Officer, and Michel Hauser-Kauffmann, General
Manager of RDI. Except for Mr. Hauser-Kauffmann, none of such persons has an
employment agreement with the Company. While the Company is not presently
aware of any intention by any of its key employees to leave the Company, the
failure to retain such persons could materially adversely affect the Company's
business, financial condition and results of operations. See "Management."
The Company also has a six year consulting agreement expiring in April 2001
with Dr. Dennis J. Hegyi, a Professor of Physics at the University of
Michigan. The Company is the exclusive licensee of certain patents and know-
how used in its solar, twilight, rain, window fog and solar position sensors
from Dr. Hegyi. The loss of Dr. Hegyi's services or one or more of the
licenses could have a material adverse effect on the Company. See
"Management--Key Consultant."
CONCENTRATION OF SHARE OWNERSHIP
Upon completion of this Offering, the Company's officers and directors (who
include certain affiliates of Hammond, Kennedy, Whitney & Company, Inc.) will
beneficially own approximately 22% of the outstanding Common Shares. In
addition, institutional investors affiliated with Massachusetts Mutual Life
Insurance
11
Company will own in the aggregate approximately 22% of the outstanding Common
Shares. As a result, these shareholders will continue to be in a position to
significantly affect the outcome of all actions requiring shareholder
approval, including the election of the Board of Directors, thereby affecting
the future direction and management of the Company. See "Principal
Shareholders."
ANTI-TAKEOVER PROVISIONS; EFFECT OF PREFERRED SHARES
The Indiana Business Corporation Law (the "IBCL") contains provisions that
could restrict the acquisition of or a change in control of the Company. The
IBCL limits certain business combinations between the Company and an
"interested" shareholder. These restrictions may discourage a person from
making a tender offer for, or otherwise acquiring outstanding voting
securities of, the Company. See "Description of Capital Shares--Effects of
Indiana Law."
The Board of Directors of the Company is authorized to issue, from time to
time, without any further action on the part of the Company's shareholders, up
to 3,000,000 preferred shares in one or more series, with such relative
rights, powers, preferences, limitations and restrictions as are determined by
the Board of Directors at the time of issuance. The issuance of preferred
shares could be used in certain circumstances to render more difficult or
discourage a merger, tender offer or proxy contest or a removal of incumbent
management. Preferred shares may be issued with voting and conversion rights
that could adversely affect the voting power and other rights of the holders
of Common Shares. See "Description of Capital Shares."
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding Common Shares and 200,000 Common Shares
issuable upon the exercise of an outstanding option will become eligible for
future sale in the public market at prescribed times pursuant to Rule 144 and
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act") or pursuant to registration rights. Sales of such Common Shares in the
public market could adversely affect the market price of the Common Shares.
See "Shares Eligible for Future Sale."
DILUTION
The price per share for this Offering is expected to be substantially higher
than the book value per Common Share of the Company. Purchasers in this
Offering will incur immediate and substantial dilution in the net tangible
book value of their Common Shares. See "Dilution."
NO PRIOR PUBLIC MARKET FOR COMMON SHARES; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined by negotiations
between the Company and the Underwriters. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
There can be no assurance that an active trading market will develop after
this Offering or, if developed, that such a market will be sustained. The
market price for Common Shares may be significantly affected by such factors
as news announcements or changes in general economic, industry or market
conditions.
12
COMPANY HISTORY
The Company is an Indiana corporation organized by Hammond, Kennedy, Whitney
& Company, Inc. ("HKW"), a New York private capital firm, to purchase the
circuit breaker, electronic sensor and electronic ceramic component parts
business (the "Business") of GTE. The Company purchased the Business on July
29, 1994.
The circuit breaker business acquired by the Company was started by Sylvania
Electrical Products ("Sylvania") in 1956 when Sylvania obtained a patent to
produce an automatically resetting circuit breaker. Sylvania developed and
operated the business until 1959, when GTE acquired all of Sylvania's assets
and business. GTE expanded the circuit breaker business and added the
electronic sensor and electronic ceramic component parts product lines. GTE
also used the resources of the Business to establish a start-up
telecommunications division in 1983, to develop and market protection and
interface devices for use in the wired telecommunications industry (the
"Telecommunications Division").
In 1991, GTE announced its decision to divest all of its non-core
businesses, which included all of the businesses acquired from Sylvania. Bruce
D. Atkinson, President and Chief Executive Officer of the Company, served as
the General Manager of the Business and the Telecommunications Division which
had combined annual revenues in excess of $80,000,000 in 1992. In September
1993, Siecor Corporation purchased the assets and business of the
Telecommunications Division. In July 1994, the Company purchased the Business
for a total purchase price of $17,900,000 plus the assumption of certain
liabilities. The Company paid $16,400,000 in cash and delivered its Junior
Subordinated Promissory Note in the principal amount of $1,500,000 (the
"Seller Note"), which was repaid in full in March 1996. See "Certain
Transactions".
In April 1996, the Company acquired all of the issued and outstanding
capital stock of RDI for a total purchase price of $8,964,000. The Company
paid $6,964,000 in cash, delivered $1,108,000 aggregate principal amount of
its 8.0% Subordinated Promissory Notes (the "RDI Notes"), and delivered
$892,000 aggregate principal amount of its 6.5% Automatically Converting
Subordinated Promissory Notes (the "RDI Convertible Notes"). See "Certain
Transactions."
13
USE OF PROCEEDS
The net proceeds from the sale of Common Shares offered hereby at an assumed
public offering price of $ per share are estimated to be $ ($ if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and the estimated offering expenses
payable by the Company.
The Company intends to use a portion of the net proceeds from this Offering
to (i) repay outstanding long-term indebtedness consisting of $10.0 million of
10% Senior Secured Fixed Rate Notes due July 31, 2004 (the "Senior Notes")
plus accrued interest thereon and $4.5 million of 11% Senior Subordinated
Notes due July 31, 2004 (the "Subordinated Notes") plus accrued interest
thereon; and (ii) redeem 580 of the outstanding 11% Cumulative Preferred
Shares (the "Redeemable Preferred Shares") at $1,000 stated value per share
plus accrued dividends. The proceeds of the Senior Notes, the Subordinated
Notes and the Redeemable Preferred Shares were used to purchase the Business.
See "Company History," "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Senior Notes,
Subordinated Notes and 580 Redeemable Preferred Shares are held by
Massachusetts Mutual Life Insurance Company and certain of its affiliates
("MassMutual"). See "Principal Shareholders." The Company is required to
redeem the Redeemable Preferred Shares held by MassMutual upon repayment of
the Senior Notes and Subordinated Notes.
The total amount necessary to repay the Senior Notes and Subordinated Notes
(plus accrued interest) and to redeem 580 Redeemable Preferred Shares (plus
accrued dividends) is approximately $15.5 million as of September 30, 1996
(the "MassMutual Amount"). To the extent net proceeds from this Offering
exceed the MassMutual Amount, the Company intends to use such proceeds to
redeem all remaining 1,820 Redeemable Preferred Shares plus accrued dividends
for a total of approximately $2.3 million. If the net proceeds are not
sufficient to redeem all of the Redeemable Preferred Shares, the Company
intends to use a portion of its cash on hand or borrowings under its line of
credit for such purpose. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Excess proceeds from this Offering, if any, will be used for general
corporate purposes, including working capital, funding internal growth and
possible future acquisitions. The Company currently has no specific agreements
or understanding with respect to any acquisitions.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid dividends on the Common Shares. The
Company currently anticipates that all future earnings will be retained by the
Company to support its growth strategy and does not anticipate paying any cash
dividends on the Common Shares in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions.
14
DILUTION
The net tangible book value of the Company's Common Shares at June 30, 1996,
was approximately $0.49 per share after giving effect to the adjustments
described in the Prospectus Summary. "Net tangible book value" per share
represents total tangible assets reduced by the amount of total liabilities
and Redeemable Preferred Shares, divided by the number of Common Shares
outstanding. Without taking into account any other changes in the net tangible
book value after June 30, 1996 other than to give effect to the adjustments
described in the Prospectus Summary and the sale by the Company of Common
Shares in this Offering at an assumed initial offering price of $ per share
(the midpoint of the estimated range of the initial public offering price) for
assumed net proceeds to the Company of $ and the application of the net
proceeds therefrom, the pro forma net tangible book value of the Company's
Common Shares on June 30, 1996 would have been $ or $ per share. This
represents an increase in net tangible book value of $ per share to existing
common shareholders and an immediate dilution in net tangible book value of
$ per share to new investors purchasing Common Shares in this Offering. The
following table illustrates this per share dilution:
Assumed initial public offering price per share (1).............. $
Net tangible book value per share before offering.............. $0.49
Increase in net tangible book value per share attributable to
new investors.................................................
-----
Pro forma net tangible book value per share after offering.......
---
Dilution per share to new investors.............................. $
===
- --------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The following table summarizes, as of June 30, 1996, the differences in
total consideration paid and the average price per share paid between the
existing common shareholders and the new investors with respect to the number
of Common Shares purchased from the Company (based upon an assumed initial
offering price of $ per share):
SHARES ISSUED TOTAL CONSIDERATION AVERAGE
----------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ---------- ---------
Existing shareholders.... 2,564,094 % $ 606,000 % $0.24
Holders of RDI
Convertible Notes....... 892,000
New investors (1)........ 2,000,000
--------- ----- ----------- -------- -----
Total................ 100.0% $ 100.0% $
========= ===== =========== ======== =====
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
shares purchased by the new investors would increase to or % of the
outstanding Common Shares.
15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, (i) on an actual basis; (ii) on a pro forma basis to give effect to
the adjustments described in the Prospectus Summary and (iii) as adjusted to
reflect the sale of the Common Shares offered by the Company hereby (at an
assumed initial public offering price of $ per share and after deducting the
estimated offering expenses and underwriting discount) and the application of
the net proceeds therefrom. See "Use of Proceeds." This table should be read
in conjunction with the Financial Statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" appearing elsewhere herein.
JUNE 30, 1996
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- ----------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Debt:
CDI--10% Senior Secured
Fixed Rate Notes......... $10,500 $10,500 $ --
CDI--11% Senior
Subordinated Notes (face
value $4,500)............ 4,364 4,364 --
RDI Convertible Notes..... 892 -- --
RDI Notes................. 1,108 1,108 1,108
RDI--other debt........... 1,812 1,812 1,812
-------------- -------------- -------------
Total debt.............. 18,676 17,784 2,920
-------------- -------------- -------------
Redeemable Preferred Shares,
stated value $1,000 per
share; 2,400 shares issued
and outstanding actual and
pro forma, none issued and
outstanding pro forma as
adjusted................... 2,400 2,400 --
-------------- -------------- -------------
Shareholders' equity:
Common Shares, no par
value; 16,000,000 shares
authorized; none issued
and outstanding actual;
shares issued and
outstanding pro forma;
shares issued and
outstanding pro forma as
adjusted................. -- 1,743
Class A Common Shares, no
par value; 10,000,000
shares authorized;
1,564,098 shares issued
and outstanding actual;
none issued and
outstanding pro forma and
pro forma as adjusted.... 520 -- --
Class B Series 1 Common
Shares, no par value;
4,000,000 shares
authorized; 435,896
shares issued and
outstanding actual; none
issued and outstanding
pro forma and pro forma
as adjusted.............. 145 -- --
Warrants to purchase
564,100 shares of Class B
Series 1 Common Shares at
$0.01 per share actual;
none outstanding pro
forma and pro forma as
adjusted................. 180 -- --
Retained earnings......... 6,651 6,651
Foreign currency
translation adjustment... (222) (222) (222)
-------------- -------------- -------------
Total shareholders'
equity................. 7,274 8,172
-------------- -------------- -------------
Total capitalization.... $28,350 $28,356 $
============== ============== =============
16
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma consolidated statements of income for the year ended
December 31, 1995, and the six months ended June 30, 1996 are based upon the
historical consolidated financial statements of CDI and RDI. The unaudited pro
forma consolidated statements of income have been prepared after giving effect
to pro forma adjustments described in the notes thereto as if the acquisition
of RDI occurred on January 1 of the respective period.
The unaudited pro forma consolidated statements of income do not purport to
represent what the results of operations of the Company would actually have
been if the events described in the notes thereto had in fact occurred at the
beginning of such period, or to project the results of operations of the
Company for any future date or period.
The unaudited pro forma consolidated statements of income should be read in
conjunction with CDI's and RDI's financial statements including the notes
thereto and other financial information included elsewhere in this Prospectus.
No pro forma consolidated balance sheet as of June 30, 1996 is presented as
the actual financial data for RDI is included in the actual consolidated
balance sheet of the Company as of June 30, 1996. See "Index to Financial
Statements".
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CDI RDI PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
Net sales.................. $ 38,881 $30,009 $(3,269) (1) $ 65,621
Cost of sales.............. 25,721 20,909 (3,220) (1)(2) 43,410
--------- ------- ------- ---------
Gross profit............. 13,160 9,100 (49) 22,211
--------- ------- ------- ---------
Selling, general and
administrative expenses... 3,504 7,323 55 (2)(3) 10,882
Research and development... 2,740 247 -- 2,987
--------- ------- ------- ---------
6,244 7,570 55 13,869
--------- ------- ------- ---------
Operating income......... 6,916 1,530 (104) 8,342
Interest expense........... 1,380 579 615 (4) 2,574
--------- ------- ------- ---------
Income before income
taxes................... 5,536 951 (719) 5,768
Income tax
provision(benefit)........ 2,078 438 (208) (5) 2,308
--------- ------- ------- ---------
Net income............... 3,458 513 (511) 3,460
Preferred share dividends.. (264) -- -- (264)
--------- ------- ------- ---------
Net income applicable to
common shareholders..... $ 3,194 $ 513 $ (511) $ 3,196
========= ======= ======= =========
Earnings per share......... $ 1.25 $ 1.25
========= =========
Weighted average number of
common shares and
equivalents outstanding... 2,564,094 2,564,094
========= =========
17
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
RDI
THREE MONTHS
ENDED
MARCH 31, PRO FORMA
ACTUAL (A) 1996(B) ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
Net sales............... $ 28,180 $8,013 $(1,390) (1) $34,803
Cost of sales........... 17,870 5,419 (1,444) (1)(2) 21,845
--------- ------ ------- ---------
Gross profit.......... 10,310 2,594 54 12,958
--------- ------ ------- ---------
Selling, general and
administrative
expenses............... 4,157 2,149 44 (2)(3) 6,350
Research and
development............ 1,880 53 -- 1,933
--------- ------ ------- ---------
6,037 2,202 44 8,283
--------- ------ ------- ---------
Operating income...... 4,273 392 10 4,675
Interest expense........ 828 134 113 (4) 1,075
--------- ------ ------- ---------
Income before income
taxes................ 3,445 258 (103) 3,600
Income tax provision.... 1,322 58 22 (5) 1,402
--------- ------ ------- ---------
Net income............ 2,123 200 (125) 2,198
--------- ------ ------- ---------
Preferred share
dividends.............. (132) -- -- (132)
--------- ------ ------- ---------
Net income applicable
to common
shareholders......... $ 1,991 $ 200 $ (125) $ 2,066
========= ====== ======= =========
Earnings per share...... $ 0.78 $ 0.81
========= =========
Weighted average number
of common shares and
equivalents
outstanding............ 2,564,094 2,564,094
========= =========
(a) Represents the consolidated results for CDI for the six months ended June
30, 1996, including RDI for the period from April 1, 1996 (date of RDI
acquisition) to June 30, 1996.
(b) Represents the results of RDI for the period January 1, 1996 to March 31,
1996 (prior to the acquisition).
- --------
(1) Elimination of intercompany sales and profit of products held in RDI
inventory.
(2) Adjustment for amortization of goodwill related to the acquisition of RDI,
and adjustment for depreciation of property, plant and equipment acquired
based on their estimated fair values.
(3) Adjustment to pension expense under United States generally accepted
accounting principles for RDI.
(4) Adjustments to interest expense:
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(AMOUNTS IN
THOUSANDS)
Interest on short term debt........................... $ 264 $ --
Interest on RDI Notes and RDI Convertible Notes....... 147 37
Elimination of interest expense on Seller Note (repaid
in connection with the acquisition) ................. (150) (38)
Elimination of interest on excess cash balances....... 354 114
----- ----
$ 615 $113
===== ====
(5) Income tax effect of the pro forma adjustments at assumed rate of 40%,
except for the adjustment to goodwill amortization which was not tax
effected.
18
SELECTED FINANCIAL INFORMATION
The selected data for the year ended December 31, 1993, for the seven months
ended July 29, 1994, as of and for the five months ended December 31, 1994,
and as of and for the year ended December 31, 1995, have been derived from the
Company's Financial Statements audited by Arthur Andersen LLP, the Company's
independent public accountants. Their report on the financial statements is
included elsewhere in this Prospectus. The statement of income data for the
years ended December 31, 1991 and 1992, and the balance sheet data as of
December 31, 1991, 1992 and 1993 have been derived from audited financial
statements of the Company not included in this Prospectus. The selected
statement of income data for the six months ended June 30, 1995 and 1996, and
the selected balance sheet data as of June 30, 1996, have been derived from
unaudited interim financial statements of the Company, and reflect, in
management's opinion, all adjustments necessary for a fair presentation of the
financial position and results of operations for these periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for the full year. This data should be read in conjunction with the
Company's Financial Statements and Related Notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included herein.
CONTROL
PREDECESSOR COMPANY(1) DEVICES, INC. COMBINED(2) CONTROL DEVICES, INC.
----------------------------------- ------------- ------------ -----------------------------
SEVEN
MONTHS FIVE MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, JULY 29, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
------------------------- -------- ------------- ------------ ------------ ----------------
1991 1992 1993 1994 1994 1994 1995 1995 1996(3)
------- ------- ------- -------- ------------- ------------ ------------ ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales............... $38,088 $39,747 $39,807 $24,995 $18,847 $43,842 $38,881 $20,713 $28,180
Cost of sales........... 35,694 34,419 30,046 17,676 12,159 29,835 25,721 13,333 17,870
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 2,394 5,328 9,761 7,319 6,688 14,007 13,160 7,380 10,310
Operating expenses:
Selling, general and
administrative......... 5,043 3,593 3,237 1,896 2,413 4,309 3,504 1,972 4,157
Research and
development............ 863 651 2,144 1,598 1,052 2,650 2,740 1,402 1,880
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)(4)............. (3,512) 1,084 4,380 3,825 3,223 7,048 6,916 4,006 4,273
Interest expense........ -- -- -- -- 657 657 1,380 732 828
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (3,512) 1,084 4,380 3,825 2,566 6,391 5,536 3,274 3,445
Income tax provision
(benefit)(5)........... (1,405) 434 1,752 1,530 990 2,520 2,078 1,310 1,322
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $(2,107) $ 650 $ 2,628 $ 2,295 $ 1,576 $ 3,871 $ 3,458 $ 1,964 $ 2,123
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income applicable
to common sharehold-
ers(6)................ $ 1,466 $ 3,761 $ 3,194 $ 1,832 $ 1,991
Net income per
share(6)(7)........... $ 0.57 $ 1.47 $ 1.25 $ 0.71 $ 0.78
Weighted average number
of common shares and
equivalents outstand-
ing(6)................. 2,564 2,564 2,564 2,564 2,564
OTHER DATA:
EBITDA(8).............. $(1,391) $ 2,882 $ 6,114 $ 4,774 $ 3,896 $ 8,670 $ 8,690 $ 4,878 $ 5,260
Research and
development as a
percentage of net
sales(9).............. 2.3% 1.6% 5.4% 6.4% 5.6% 6.0% 7.0% 6.8% 6.7%
19
PREDECESSOR COMPANY CONTROL DEVICES, INC.
----------------------- ------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
----------------------- --------------- --------
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............... $ 4,623 $ 2,665 $ 4,891 $ 9,255 $13,662 $ 8,515
Total assets.................. 23,700 21,226 22,385 26,051 30,141 42,986
Long-term debt, net of current
maturities................... -- -- -- 16,320 15,853 16,743
Redeemable preferred shares... -- -- -- 2,400 2,400 2,400
Shareholders' equity.......... -- -- -- 2,311 5,505 7,274
- --------
(1) On July 29, 1994, the Company purchased the Business. See "Company
History." The data prior to July 29, 1994 represents the financial
information of the Predecessor Company, and has been prepared by the
Company. See Note 1 to the Company's Financial Statements.
(2) Combined year ended December 31, 1994 represents the summation of the
statements of income for the seven months ended July 29, 1994 of the
Predecessor Company and the five months ended December 31, 1994 of the
Company. The combined results are presented for comparative purposes only
and do not include adjustments for depreciation and amortization of assets
acquired based on their estimated fair market values at the acquisition
date, interest on acquisition debt and related income tax effect for the
Predecessor Company portion of results of operations.
(3) The Selected Financial Data presented for the six months ended June 30,
1996 includes RDI's results of operations from April 1, 1996, the date of
the acquisition.
(4) The Predecessor Company incurred operating losses in the year ended
December 31, 1991, due in part to GTE corporate allocation charges of
approximately $2,000,000 and higher cost of sales associated with
manufacturing facilities closed in 1991.
(5) For purposes of computing income tax provision (benefit), an effective tax
rate of 40% was used for the Predecessor Company results of operations
because no income taxes were allocated to the Predecessor Company.
(6) See Note 2 to the Company's Financial Statements. Net income per share,
net income applicable to common shareholders and weighted average number
of Common Shares and equivalents outstanding are not presented for periods
prior to and including July 29, 1994 as the Business was not operated as
an independent entity during such periods.
(7) The pro forma net income per share would have been $ and $ for the
year ended December 31, 1995, and the six month period ended June 30,
1996, respectively, assuming the conversion of the RDI Convertible Notes,
and Common Shares, respectively, had been issued, at a public
offering price of $ per share, and the proceeds were received and used
to retire the Company's Senior Notes plus accrued interest, the
Subordinated Notes plus accrued interest and the Redeemable Preferred
Shares plus accrued dividends.
(8) EBITDA represents operating income (loss) plus depreciation and
amortization.
(9) Research and development as a percentage of net sales for the six months
ended June 30, 1996 includes the financial data for RDI. The percentage
for the six months ended June 30, 1996 without RDI was 8.5%.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Company purchased the Business from GTE on July 29, 1994 for a total
purchase price of $17,900,000 plus the assumption of certain liabilities. The
Company had no operations prior to that date. The Company paid $16,400,000 in
cash and delivered the Seller Note. In March 1996, the Company repaid the
Seller Note and in April 1996, acquired all of the issued and outstanding
capital stock of RDI for a total purchase price of $8,964,000. The Company
paid $6,964,000 in cash, delivered RDI Notes totaling $1,108,000 and delivered
the RDI Convertible Notes totaling $892,000. See "Certain Transactions."
The financial information for the periods prior to July 29, 1994 does not
reflect the impact of the acquisition of the Business or the related financing
and purchase accounting adjustments on the financial position and results of
operations of the Company. The financial statements prior to July 29, 1994,
have been prepared solely by the Company as if the Business was operated as a
separate entity for the periods presented. The Predecessor Company financial
statements do not include an allocation of GTE's assets and liabilities not
specifically identifiable to the Business, including cash and intercompany
debt. Prior to September 28, 1993, the Telecommunications Division shared
certain facilities and functions with the Business. Certain costs and
expenses, including manufacturing overhead and selling, general and
administrative expenses, were prorated by the Company between the Business and
the Telecommunications Division in preparing the Predecessor Company financial
statements. Expenses were allocated by the Company based on actual usage or
other allocation methods which approximate actual usage. Management of the
Company believes that the allocation methods are reasonable. The purchase
method of accounting was used to record assets acquired by the Company. Such
accounting generally results in increased amortization and depreciation
reported in future periods. Accordingly, the financial statements of the
Predecessor Company and the Company are not comparable in all material
respects since the financial statements report on two separate entities.
Since the acquisition of the Business in July 1994, the Company's financial
strategy has been to improve gross profits in its circuit breaker business,
maintain stable selling, general and administrative expenses and expand its
sensor business. The Company's improved gross profits in its circuit breaker
business and stable selling, general and administrative expenses have resulted
in an improved EBITDA from $2.9 million in 1992 to $8.7 million in 1995. This
improvement has enabled the Company to increase its research and development
expenditures, primarily devoted to its sensor products, from $651,000 in 1992
to $2.7 million in 1995. During the same period, the Company's sales of
sensors have grown from $ 3.2 million in 1992 to $5.3 million in 1995 and $4.0
million for the first six months of 1996.
In addition, the Company's financial strategy contemplates making
acquisitions which complement the Company's existing businesses. See
"Business--Business Strategies." The Company's acquisition of RDI in April
1996, which was funded in part with $7.4 million in cash generated from
operations, is intended to enhance the Company's market penetration of the
automotive OEM market in Europe. RDI, which is a European-based distributor of
products of the Company and other manufacturers, historically, due to the
nature of the distribution business, has had lower gross margins and higher
selling, general and administrative expenses (measured as a percentage of net
sales) than the Company. Although the Company's gross profit and operating
income have increased as a result of the RDI acquisition, when expressed as a
percentage of sales, the Company's gross profit and operating income have
decreased due to the lower margins associated with distribution businesses
generally.
RDI generates revenues and incurs expenses primarily in currencies other
than the U.S. dollar. The Company does not engage in currency hedging
transactions. RDI's currency of account is the French franc. RDI's assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the balance sheet date. RDI's results of operations are translated into
U.S. dollars using the average exchange rate prevailing throughout the
applicable period. See Note 2 to Financial Statements.
21
RESULTS OF OPERATIONS
Summary Data
Management's discussion and analysis of the operating results of the Company
are based on amounts in the table set below which were derived from the
Financial Statements appearing elsewhere herein.
The 1994 combined financial information was based on the summation of the
financial information for the seven months ended July 29, 1994 of the
Predecessor Company and the five months ended December 31, 1994 of the
Company. The combined financial information is presented for comparison
purposes only and does not purport to reflect the results of the Company had
they been under common control.
The following table presents selected financial information derived from the
Company's statements of income, expressed as a percentage net sales for the
periods indicated:
PREDECESSOR
COMPANY COMBINED CONTROL DEVICES, INC.
------------ ------------ -------------------------
SIX MONTHS
ENDED
JUNE 30,
------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ ----- ----------
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 24.5 31.9 33.8 35.6 36.6
Selling, general and ad-
ministrative expenses.. 8.1 9.8 9.0 9.5 14.8
Research and develop-
ment................... 5.4 6.0 7.0 6.8 6.7
Operating income........ 11.0 16.1 17.8 19.3 15.2
Net income.............. 6.6 8.8 8.9 9.5 7.5
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales were $28.2 million in the first six months of 1996, an increase of
$7.5 million, or 36.0%, as compared to the first six months of 1995. Net sales
increased primarily as a result of the acquisition of RDI which contributed
$6.6 million to net sales in the first six months of 1996.
Sales of circuit breaker products declined 9.5% to $15.7 million in the
first six months of 1996 from $17.3 million in first six months of 1995,
primarily due to lower European shipments and the switch in 1995 from the use
of circuit breakers to fuses on certain models of Ford vehicles. This decrease
was partially offset by a 72.9% increase in sales of sensor products to $4.0
million in the first six months of 1996 from $2.3 million in the first six
months of 1995, primarily as a result of the Company's shipment of its new
steering sensor. The decrease was also partially offset by an increase of
74.8% in sales of ceramics products to $1.9 million in the first six months of
1996 from $1.1 million in the first six months of 1995, primarily due to
shipments of ceramics to the PCS and cellular equipment manufacturers.
Gross profit in the first six months of 1996 was $10.3 million, an increase
of $2.9 million, or 39.7%, as compared to the same period in 1995. As a
percentage of net sales, gross profit in the first six months of 1996 was
36.6% as compared to 35.6% in the first six months of 1995. The increase in
gross profit, as a percentage of net sales, resulted from improved
productivity due in part to the continuing success of an employee gain sharing
program as well as from improved plant utilization and efficiencies.
Selling, general and administrative expenses in the first six months of 1996
were $4.2 million, an increase of $2.2 million, or 110.8%, as compared to the
first six months of 1995. The increase consisted primarily of RDI expenses
which were $2.0 million. As a percentage of net sales, selling, general and
administrative expenses were 14.8% in the first six months of 1996 as compared
to 9.5% in the first six months of 1995.
22
Excluding RDI, selling, general and administrative expenses as a percentage of
net sales increased to 10.1% in the first six months of 1996 from 9.5% in the
first six months of 1995, primarily as a result of increased expenses for
bonus plans.
Research and development expenses in the first six months of 1996 were $1.9
million, an increase of $0.5 million, or 34.1%, as compared to the first six
months of 1995. The increased research and development expense was primarily a
result of increased staffing and expenses required to develop products for
introduction in the 1997-1999 period. In addition, resources have been added
to develop a chip-on-board manufacturing line to reduce the cost and enhance
market penetration of the Company's sensor products. As a percentage of net
sales, research and development expense was 6.7% in the first six months of
1996, as compared to 6.8% in the first six months of 1995. Due to the
distribution nature of RDI's business, research and development is a minimal
expense for RDI. Excluding RDI, research and development spending increased to
8.5% in the first six months of 1996 from 6.8% in the first six months of
1995.
Operating income in the first six months of 1996 was $4.3 million, an
increase of $0.3 million, or 6.7%, as compared to the first six months of
1995. As a percentage of net sales, operating income was 15.2% in the first
six months of 1996 as compared to 19.3% in the first six months of 1995. The
decrease in operating income as a percentage of net sales resulted primarily
from the acquisition of RDI. RDI is primarily a distributor and, on a
historical basis, has incurred selling, general and administrative expenses
higher, as a percentage of net sales, than the Company. Similarly, as a
distributor, RDI's operating income as a percentage of net sales is typically
lower than that of the Company.
Interest expense was $0.8 million in the first six months of 1996, an
increase of $0.1 million, or 13.1%, as compared to the first six months of
1995. The increased interest expense was primarily the result of lower
interest income due to the use of cash for the acquisition of RDI.
The provision for income tax was $1.3 million in the first six months of
1996 and the first six months of 1995. The effective tax rate was 38.4% in the
first six months of 1996 compared to 40.0% in the first six months of 1995.
Net income was $2.1 million in the first six months of 1996, an increase of
$0.2 million, or 8.1%, as compared to the first six months of 1995. The
increase in net income was a result of the acquisition and the improvement in
operating income partially offset by increased research and development and
interest expense. As a percentage of net sales, net income was 7.5% in the
first six months of 1996 as compared to 9.5% in the first six months of 1995.
1995 COMPARED TO COMBINED 1994
Net sales were $38.9 million in 1995, a decrease of $5.0 million, or 11.3%,
as compared to combined 1994. Net sales decreased primarily as a result of the
weakened economic conditions in North America and Europe, particularly related
to automotive sales. Sales of circuit breaker products decreased 13.6% to
$30.9 million in 1995 from $35.8 million in 1994. The demand for the Company's
automotive circuit breaker products declined as certain models of vehicles
made a model year switch from circuit breakers to fuses. Sales of sensor
products increased 25.5% to $5.3 million in 1995 from $4.2 million in combined
1994 as the Company began shipping sensors to European automakers. Ceramic
sales declined 31.2% to $2.6 million in 1995 from $3.8 million in 1994
primarily due to a decrease in air heater sales.
Gross profit in 1995 was $13.2 million, a decrease of $0.8 million, or 6.0%,
as compared to combined 1994. As a percentage of net sales, gross profit in
1995 was 33.8% as compared to 31.9% in combined 1994. The increase in gross
profit, as a percent of net sales, resulted from increased productivity due in
part to the success of an employee gain sharing program instituted in 1994 as
well as from improved plant utilization.
Selling, general and administrative expenses in 1995 were $3.5 million, a
decrease of $0.8 million, or 18.7%, as compared to combined 1994. The decrease
in administrative expenses was a result of management
23
initiative to contain expenses as a result of the decreased sales volume. As a
percentage of net sales, selling, general and administrative expenses were
9.0% in 1995 as compared to 9.8% in combined 1994.
Research and development expenses in 1995 were $2.7 million, an increase of
$0.1 million, or 3.4%, as compared to combined 1994. The increased research
and development expenses were a result of the Company's continued focus on new
product development in the sensor product line. As a percentage of net sales,
research and development expenses were 7.0% in 1995 as compared to 6.0% in
combined 1994. In 1995, approximately 75% of the research and development
expenses were related to sensor development projects, primarily in the rain
and solar/twilight areas. See "Business--Research and Development."
Operating income in 1995 was $6.9 million, a decrease of $0.1 million, or
1.9%, as compared to combined 1994. The decreased operating income was a
result of the lower sales volume substantially offset by higher gross margins
and reduced selling, general and administrative expenses. As a percentage of
net sales, operating income was 17.8% in 1995 as compared to 16.1% in combined
1994.
Interest expense was $1.4 million in 1995, an increase of $0.7 million from
combined 1994. The Predecessor Company did not receive an allocation of
interest expense from GTE in 1994.
Provision for income tax was $2.1 million in 1995, as compared to $2.5
million in combined 1994. The effective tax rate was 37.5% in 1995 as compared
to a rate of 39.4% in combined 1994.
Net income was $3.5 million in 1995, a decrease of 10.7%, as compared to
$3.9 million in combined 1994. The decrease in net income was primarily
attributable to the additional interest expense in 1995. As a percentage of
net sales, net income was 8.9% in 1995 as compared to 8.8% in combined 1994.
COMBINED 1994 COMPARED TO 1993
Net sales were $43.8 million in combined 1994, an increase of $4.0 million,
or 10.1%, as compared to 1993. Net sales increased primarily as a result of
improved economic conditions in North America and Europe, particularly related
to automotive sales. Sales of circuit breaker products increased 4.6% to $35.8
million in 1994 from $34.2 million in 1993. This increase was primarily due to
the strength of the worldwide automotive market. Sensor sales also increased
26.2% to $4.2 million in 1994 from $3.4 million in 1993 as solar sensors
benefited from improving market conditions and increased market acceptance.
Ceramic sales increased 71.0% to $3.8 million in 1994 from $2.2 million in
1993 in part due to increased sales of air heaters.
Gross profit in combined 1994 was $14.0 million, an increase of $4.2
million, or 43.5%, as compared to 1993. As a percentage of net sales, gross
profit in combined 1994 was 31.9% as compared to 24.5% in 1993. The increase
in gross profit, as a percent of net sales, resulted from improved
productivity due in part to the success of an employee gain sharing program
instituted in 1994 as well as from improved plant utilization and efficiency.
Selling, general and administrative expenses in combined 1994 were $4.3
million, an increase of $1.1 million, or 33.1%, as compared to 1993. The
increase in administrative expenses consisted primarily of corporate expenses
associated with being an independent company in 1994. As a percentage of net
sales, selling, general and administrative expenses were 9.8% in combined 1994
as compared to 8.1% in 1993.
Research and development expenses in combined 1994 were $2.7 million, an
increase of $0.5 million, or 23.6%, as compared to 1993. The increased
research and development expenses were a result of the Company's increased
focus on new product development in the sensor product line. As a percentage
of net sales, research and development expenses were 6.0% in combined 1994 as
compared to 5.4% in 1993.
Operating income in combined 1994 was $7.0 million, an increase of $2.7
million, or 60.9%, as compared to 1993. The increased operating income was a
result of the improvement in gross profit partially offset by higher selling,
general and administrative and research and development expenses. As a
percentage of net sales, operating income was 16.1% in combined 1994 as
compared to 11.0% in 1993.
24
Interest expense was $0.7 million in 1994. The Predecessor Company did not
receive an allocation of interest expense from GTE in 1993.
Provision for income tax was $2.5 million in combined 1994, as compared to
$1.8 million in 1993. The effective tax rate was 39.4% in combined 1994 as
compared to 40.0% in 1993.
Net income was $3.9 million in combined 1994, as compared to $2.6 million in
1993. The increase in net income was a result of the improvement in operating
income partially offset by interest expense and income taxes. As a percentage
of net sales, net income was 8.8% in combined 1994 as compared to 6.6% in
1993.
QUARTERLY RESULTS
The following tables present the Company's operating results for each of the
six quarters for the period ended June 30, 1996, including such amounts
expressed as a percentage of net sales. The information for each of these
quarters is unaudited, but has been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of the Company's
management, reflects all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of such information when read
in conjunction with the Company's consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus. Operating results for any
quarter are not necessarily indicative of results for any future periods.
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............... $10,916 $9,798 $9,063 $9,104 $10,772 $17,408
Cost of sales........... 6,919 6,414 6,132 6,256 6,919 10,951
------- ------ ------ ------ ------- -------
Gross profit........... 3,997 3,384 2,931 2,848 3,853 6,457
Operating expenses:
Selling, general and
administrative
expenses............... 943 1,027 816 718 1,075 3,082
Research and develop-
ment................... 771 632 641 696 959 921
------- ------ ------ ------ ------- -------
Operating income....... 2,283 1,725 1,474 1,434 1,819 2,454
Interest expense........ 368 364 336 312 312 516
------- ------ ------ ------ ------- -------
Income before income
taxes................. 1,915 1,361 1,138 1,122 1,507 1,938
Income tax provision.... 766 544 433 335 580 742
------- ------ ------ ------ ------- -------
Net income............. 1,149 817 705 787 927 1,196
Preferred share divi-
dends.................. 66 66 66 66 66 66
------- ------ ------ ------ ------- -------
Net income applicable
to common
shareholders.......... $ 1,083 $ 751 $ 639 $ 721 $ 861 $ 1,130
======= ====== ====== ====== ======= =======
Earnings per share...... $ 0.42 $ 0.29 $ 0.25 $ 0.28 $ 0.34 $ 0.44
======= ====== ====== ====== ======= =======
Weighted average number
of common shares and
equivalents outstand-
ing.................... 2,564 2,564 2,564 2,564 2,564 2,564
AS A PERCENTAGE OF NET SALES
----------------------------------------------------------------
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 63.4 65.5 67.7 68.7 64.2 62.9
------- ------ ------ ------ ------- -------
Gross profit........... 36.6 34.5 32.3 31.3 35.8 37.1
Operating expenses:
Selling, general and
administrative
expenses............... 8.6 10.4 8.9 7.9 10.0 17.7
Research and develop-
ment................... 7.1 6.5 7.1 7.6 8.9 5.3
------- ------ ------ ------ ------- -------
Operating income....... 20.9 17.6 16.3 15.8 16.9 14.1
Interest expense........ 3.4 3.7 3.7 3.4 2.9 3.0
------- ------ ------ ------ ------- -------
Income before income
taxes................. 17.5 13.9 12.6 12.4 14.0 11.1
Income tax provision.... 7.0 5.6 4.8 3.7 5.4 4.2
------- ------ ------ ------ ------- -------
Net income............. 10.5% 8.3% 7.8% 8.7% 8.6% 6.9%
======= ====== ====== ====== ======= =======
25
SEASONALITY
The Company's performance is dependent primarily on automotive vehicle
production which is seasonal in nature. The Company's revenues tend to be
somewhat lower in the third and fourth quarters as automotive OEMs schedule
plant tooling changeovers, vacations and holiday shutdowns.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation and initial capitalization, the Company has financed its
operations and investments in property, equipment and the RDI acquisition
primarily through cash generated from operations, the issuance of the RDI
Notes and the RDI Convertible Notes and bank borrowings. At June 30, 1996, the
Company had capital expenditure commitments of approximately $1.5 million. The
commitments relate primarily to capital expenditures associated with the
Company's design, development, manufacturing and marketing of sensors.
The Company has an existing $3.0 million line of credit with MassMutual (the
"Existing Line of Credit") under which no amounts are outstanding as of the
date hereof. The Existing Line of Credit is expected to be terminated in
connection with the closing of this Offering.
Cash and cash equivalents totaled $3.7 million at June 30, 1996 compared to
$10.5 million at December 31, 1995. The $6.7 million decrease in cash and cash
equivalents during this period resulted primarily from the Company's payment
of $7.4 million in connection with the RDI acquisition and the repayment of
the $1.5 million Seller Note, offset by $2.2 million generated by the Company.
The Company's cash and cash equivalents increased $5.2 million in 1995 and
$4.4 million in the five month period ending December 31, 1994 as a result of
cash generated from operations.
RDI has various credit facilities available to it totaling $4.5 million with
rates ranging from 0.5% to 1.0% over the Paris Inter-Bank Offered Rate. At
June 30, 1996, RDI had borrowings aggregating $3.8 million under these
facilities.
The Company believes its current cash and cash equivalents, together with
its credit facilities and cash flows from operations, will be sufficient to
meet the Company's cash requirements, including capital expenditures, for at
least the next twelve months.
Following the consummation of the Offering contemplated hereby, the Company
expects to enter into a new line of credit facility to fund strategic
acquisitions and, if needed, for working capital. Based upon discussions with
the anticipated lender, the Company expects that the new facility will provide
for borrowings of up to $15.0 million and have a scheduled maturity on
September 30, 1998. The line of credit is expected to be unsecured and contain
less restrictive covenants and pricing terms more favorable to the Company
than the Existing Line of Credit. To date, no definitive credit agreement has
been executed and no assurance can be given that the new line of credit will
be executed on such terms.
26
BUSINESS
GENERAL OVERVIEW
The Company designs, manufactures and markets circuit breakers, electronic
sensors and electronic ceramic component parts used by OEMs in the automotive,
appliance and telecommunications markets. The Company has supplied circuit
breakers to automotive OEMs for more than 30 years, and in 1991 the Company
expanded its offerings to the automotive market by introducing its initial
sensor product, a solar sensor used for climate control in luxury cars. The
Company believes it is a leading supplier of automatically resetting circuit
breakers and solar sensors for the automotive market and of glass enclosed
circuit breakers for the appliance market. In addition to continued shipments
of its solar sensor, in July 1995, the Company commenced shipping its steering
wheel sensor to Ford, and, in June 1996, commenced shipping its twilight
sensor to GM. The Company is in various stages of development of its rain,
window fog and other solar (climate control)/twilight (headlamp control)
sensors for a number of automotive OEMs. Frost & Sullivan's Sensor Market
Sourcebook, 1995 Edition (the "F&S Sourcebook") estimates that the size of the
North American automotive sensor market will increase from $1.4 billion in
1992 to $2.6 billion in 1998 based in part on increased consumer demand for
safety, performance, convenience and comfort.
In April 1996, the Company acquired RDI primarily to enhance its market
penetration of the automotive OEM market in Europe, in part by locating itself
closer to European customers. The Company's customers include GM, Ford and
Chrysler in North American and Mercedes, Peugeot, Rockwell, Valeo, Opel and
Danfoss in Europe. Sales to GM, Ford and Chrysler and their suppliers in North
America were approximately $17.6 million, or 45.4% of the Company's net sales,
in 1995 and approximately $10.0 million, or 46.2% of net sales excluding RDI,
in the first six months of 1996.
PRODUCTS AND MARKETS
Circuit Protection. The Company manufactures and markets for the automotive
and appliance industries, circuit breakers which protect transformers, battery
chargers, compressors and small motors from heat and current overloads. The
technology utilized in such devices traces back to automatically resetting
circuit breakers developed as an alternative to fuses by Sylvania in 1956. Due
to the resetting feature, Sylvania's circuit breakers provided the same
protection from current overloads as fuses without the need for replacement.
The Company manufactures over 250 types of circuit breakers, including over
150 types of glass enclosed circuit breakers. Through RDI, the Company markets
and distributes in Europe a full line of circuit protection devices, including
various fuses and circuit breaker components and assemblies manufactured by
other companies. The Company's sales of circuit breakers were $30.9 million,
or 79.6% of net sales, in 1995, and $15.7 million, or 72.7% of net sales
excluding RDI, in the first six months of 1996.
Electronic Sensors. The Company's automotive sensors use optical sensing
technologies to recognize external conditions and send an electronic signal to
a central processor which automatically triggers a control response, that in
many cases, had required manual operation. The functions automatically
controlled by the Company's sensors include climate control and headlight
intensity in response to sunlight, power steering assist in response to
driving conditions, wiper control in response to precipitation and defrost
operation in response to window fog. In addition to continued sales of its
existing solar sensors, in July 1995, the Company began shipping its steering
wheel sensor to Ford. The Company's steering wheel sensor replaced a
competitor's product and is currently used in a number of Ford models. In June
1996, the Company commenced shipping its twilight sensor to GM. The Company's
twilight sensor signals the vehicle's headlight system to switch from low
intensity to full intensity in twilight conditions and was developed for use
in GM's DRL program. The Company's sales of sensors were $5.3 million, or
13.7% of net sales in 1995, and $4.0 million, or 18.4% of net sales excluding
RDI, in the first six months of 1996.
In late 1995, in an effort to encourage automotive OEMs to use sensors in a
greater range of vehicle models, the Company sought to lower the cost of its
sensors by incorporating chip-on-board manufacturing
27
technology. The Company's original sensor technology uses discrete electronic
components together with prepackaged photodiodes. With chip-on-board
technology, the Company has designed silicon wafers which incorporate both the
function of the discrete electronic components and the photodiode and also
reduce board size requirements and assembly costs. The Company packages the
wafer directly on a circuit board resulting in savings which will permit the
Company to introduce a new line of lower cost sensors. Currently, the
Company's twilight sensor product, which possesses chip-on-board technology,
is being shipped to GM, and the Company is redesigning the remainder of its
sensor products to incorporate chip-on-board technology.
The Company's rain, window fog, and "next generation" solar (climate
control)/twilight (headlamp control) sensors are in various stages of
development. See "--Research and Development." The Company is continually
working with customers to provide new sensor products which will provide
increased comfort and safety in vehicles. In response to customer requests for
"next generation" functionality, prototypes of these advanced sensor products
have been shipped to GM, Ford, Mercedes, Volvo, Fiat, BMW and VW, as well as
to major tier one suppliers such as Valeo.
Electronic Ceramics. The Company's ceramic products include PTC (Positive
Temperature Coefficient) thermistors and dielectric resonators. PTC
thermistors, which convert electrical current into heat, are used as component
parts in room air heaters and protection devices for switching equipment
critical to the operation of telephone companies' central offices (facilities
that provide the local switching and distribution functions for telephone
companies). Dielectric resonators are used to filter frequencies in wireless
communications equipment. In addition to sales to wireless communications
equipment manufacturers, in the fourth quarter of 1995 the Company began
shipping custom designed dielectric resonators to Personal Communication
Systems ("PCS") equipment manufacturers. The Company's sales of ceramics were
$2.6 million, or 6.7% of net sales, in 1995, and $1.9 million, or 8.9% of net
sales excluding RDI, in the first six months of 1996.
Acquisition of RDI. In April 1996, the Company acquired RDI primarily to
enhance the Company's market penetration of the automotive OEM market in
Europe. In addition, through RDI, the Company distributes a number of
electronic components in Europe such as capacitors, connectors and various
electronic fuses and aftermarket products. These components are supplied to
the automotive, appliance, and telecommunication OEM markets and are sourced
and stocked by RDI. RDI's sales (excluding an amount equal to the Company's
sales to RDI) were $6.6 million for the three months ended June 30, 1996.
28
The Company sells its products primarily to three markets: automotive,
appliance and telecommunications. In 1995, the Company's sales to these markets
were $22.3 million, $14.4 million and $2.2 million, respectively. The following
table generally describes the products currently being sold or being developed
for each of the markets addressed by the Company:
PRODUCT LINES AUTOMOTIVE APPLIANCE TELECOMMUNICATIONS
- ------------------ ----------------------- ----------------------- -------------------
Circuit Breakers Mini Remote Reset Glass Enclosed Circuit --
Mini Positive Make-and- Breakers
Break Metal Control Devices
Maxi Breakers Recessed Lighting
Vehicle Protectors Protection
Thermal Relays
Micro Positive Make-
and- Break
Electronic Sensors Solar Sensor (climate -- --
control)
Steering Wheel Sensor
Twilight Sensor
(headlamp control)
Rain Sensor
Window Fog Sensor
Electronic Ceramic PTC Thermistors for use PTC Thermistors for use Current Limiters
Devices in auxiliary heaters in portable air Dielectric
heaters Resonators
Products Distributed Circuit Protection Devices (including Fuses, Circuit
by RDI Breakers, Components and
Assemblies) and Electronic Components
Automotive Market
The Company believes it is a leading supplier of automatically resetting
circuit breakers and solar sensors to the automotive market and has a growing
presence in the expanding automotive sensor market.
Circuit Protection. The Company produces over 100 types of metal-based
(covered or uncovered) automatically resetting circuit breakers. These products
utilize a bimetal technology which essentially protects electrical circuits and
motors from heat and current overloads. The Company offers a broad line of
automotive circuit breakers which operate in a wide range of ambient
temperatures, thereby enabling customers to choose the protection most
appropriate for the particular application. The Company believes that it is a
leading supplier of circuit breakers to North American automotive OEMs. Typical
applications include protection for wiring harnesses, headlamps and small
motors. An automobile's electric wiring system (harness) delivers electricity
to door locks, cigarette lighters, window lift motors, windshield wiper motors
and power antennae motors. Typically, there is a circuit breaker or fuse for
each of these applications to protect against electrical current overload.
The Company's circuit breakers include automatically resetting circuit
breakers used as protectors for 12-volt DC motors. These products are cycling,
or self-resetting, circuit breakers created for mounting in the motor and are
used to protect motors with currents ranging from 20 amps (such as windshield
wiper motors) to 40 amps (such as power seat motors). Another line of the
Company's automatically resetting circuit breakers are installed in automotive
fuse blocks or wiring harnesses and are used to protect circuits which
occasionally experience momentary overloads (e.g., headlamps, for which fuses
can present a safety hazard) and to minimize the inconvenience of fuse
replacement (e.g., cigarette lighters, which can overload if used for other
applications). The Company's other electromechanical automotive products
include thermal relays, which provide a time delay for automotive courtesy
lights and seat belt warning lights.
29
In Europe, the Company distributes a full line of circuit protection
products through RDI. These products include those manufactured by the Company
and complementary products distributed for other manufacturers.
Electronic Sensors. The Company's sensors use proprietary optical sensing
technologies to recognize external conditions and send an electronic signal to
a central processor which automatically triggers a control response that, in
many cases, had required manual operation. These operations include climate
control and headlight intensity in response to sunlight, power steering assist
in response to driving conditions, wiper control in response to precipitation
and defrost operation in response to window fog. In addition to continued
sales of its existing solar and steering wheel sensors, in June 1996, the
Company commenced shipping its twilight sensor to GM. The Company's twilight
sensor signals the vehicle's headlight system to switch from low intensity to
full intensity in twilight conditions and was developed for use in GM's DRL
program. The F&S Sourcebook estimates that the size of the North American
automotive sensor market will increase from $1.4 billion in 1992 to $2.6
billion in 1998. In 1994 and 1995, the Company devoted approximately 75% of
its research and development expenditures to electronic sensors. See
"Business--Research and Development."
The Company's solar sensor, used for automatic climate control in several
current GM, Mercedes and Peugeot luxury cars, measures the direct solar
heating felt by the automobile's occupants. The Company's solar sensor is
customized for each car model by taking into account the roof line and
placement of windows. The Company believes that its patented lensing
technology enables its solar sensors to measure direct solar heating more
accurately than competitors' products. This technological advantage leads the
Company to believe that its solar sensors have gained wide industry acceptance
as the standard in automatic climate control systems. The Company's solar
sensors can be found on vehicles such as Cadillac, Buick, Oldsmobile, Jeep,
Mercedes, Opel and Peugeot.
In July 1995, the Company began shipments of steering wheel sensors to Ford
for vehicles sold in North America. These sensors optically measure the speed
and direction of the steering column rotation, and send electric signals to
the car's central processor to make adjustments in the stiffness of the power
steering system of the car. The technology used in its steering wheel sensor
has other automotive applications which the Company is pursuing.
Building on a design effort commenced in late 1995, the Company shipped its
first sensor incorporating chip-on-board technology in June 1996. This
technology results in savings which will permit the Company to introduce a new
line of lower cost sensors.
The Company's rain, window fog and "next generation" solar (climate
control)/twilight (headlamp control) sensors are in various stages of
development and will incorporate the Company's chip-on-board manufacturing
technology. The Company's rain sensor measures precipitation on the windshield
and sends a signal to adjust the windshield wiper speed. The window fog sensor
optically detects condensation or frost on front and/or rear windows and sends
a signal to adjust the defroster before such condensation or frost is
detectable by the human eye. By eliminating frost and condensation before it
has a chance to accumulate, the driver's visibility remains unimpaired.
Appliance Market.
The Company believes it is a leading supplier of glass enclosed circuit
breakers for the small motor appliance market. The Company also supplies
ceramic PTC thermistor based heaters to the appliance market and, through RDI,
distributes component parts manufactured by others. The products distributed
by RDI include capacitors, filters and condensers.
Circuit Protection. The Company manufactures a number of different types of
circuit breakers for the appliance market and believes it is one of only two
companies in the world producing glass enclosed circuit breakers. Most of its
revenues in the appliance market are derived from the sale of the Company's
150 types
30
of glass enclosed circuit breakers. The Company's glass enclosed circuit
breakers are generally sold for applications in which quality, cycle life and
dependability are the critical factors. These products prolong motor life by
shutting off motors in the presence of excess ambient heat or current. A key
feature of the glass circuit breakers is the hermetic seal created by the
glass enclosure. This hermetic seal makes it the lowest cost type of circuit
breaker which can be totally immersed in a liquid or gas environment and still
maintain consistent operation. Typical uses include protection of compressor
motors and other small motors where the breaker is required to be mounted
directly inside the motor, such as refrigerator compressor motors, dishwasher
motors and garage door opener motors. Internal mounting in motors places the
circuit breaker in close proximity to the source of heat, allowing for faster
response times under fault conditions than can be delivered by externally
mounted breakers. Internal mounting also eliminates the need for an external
mounting location and associated wiring connectors, and facilitates greater
efficiency in compressor motor design.
The Company also supplies circuit breakers to recessed lighting
manufacturers. These breakers protect the fixture from heat overloads and
cause the light to blink in a fault condition.
Electronic Components. The Company supplies ceramic PTC thermistors for use
in small electric air heaters. The PTC ceramic is designed to maintain a
constant temperature, making them safer than certain other electric air
heating technologies. In addition, RDI distributes electronic components to
the European appliance industry.
Telecommunications Market
The Company manufactures and markets PTC current limiters and dielectric
resonators for applications in the telecommunications market.
PTC Current Limiters. The Company supplies PTC current limiters for use in
modules which prevent current surges from damaging line cards (circuit boards)
in telephone companies' central office switching systems. The Company's
products are sold as a component part in Siecor's central office module
(protection device). The PTC current limiters are being supplied to Siecor
under a five-year exclusive requirements contract entered into in September
1993 for use by GTE on its installed base of 23 million telephone lines.
Dielectric Resonators. The Company supplies a line of dielectric resonators
to OEMs of wireless telecommunications equipment. Dielectric resonators are an
integral part of wireless communication filters, which capture the desired
frequencies and keep the desired frequencies from interfering with others.
These filters are typically placed at transmission sites, where space is at a
premium, and the Company therefore believes that the size of dielectric
resonator based filters, which are smaller than air cavity based filters,
offer a competitive advantage. The markets for theses products include
cellular and PCS wireless applications.
PCS is the term used to describe the wireless telecommunications services
that will be offered by those companies that acquired or will acquire licenses
for a radio spectrum (frequency range 1850-1990 MHz) in the FCC auctions and
are the newest entrants in the wireless telecommunications market. PCS will
initially compete directly with existing cellular telephone, paging and mobile
radio services. PCS will also include features which are not generally offered
by cellular providers, such as: (i) the provision of all services to one
untethered, mobile number; (ii) lower-priced service options; and (iii) in the
near future, medium-speed data transmissions to and from portable computers,
advanced paging services and facsimile services. PCS providers may be the
first to be able to offer mass market wireless local loop applications, in
competition with switched and direct access local telecommunications services.
BUSINESS STRATEGIES
Pursue Selected Growth Opportunities Utilizing Technology. The Company
intends to pursue opportunities to apply new and existing technologies to
develop additional products to fulfill anticipated
31
customer needs. The Company's current emphasis is on electronic optical
sensors for the automotive market. The F&S Sourcebook projects growth in the
electronic sensor market as auto consumers demand improved safety, performance
and comfort. The Company also believes that its proprietary optical sensor
technology gives the Company's sensors an advantage in quality and accuracy of
function over competitors' sensors.
Building on a design effort commenced in late 1995, the Company shipped its
first sensor incorporating chip-on-board technology in June 1996. This
technology results in savings which will permit the Company to introduce a new
line of lower cost sensors. The chip-on-board technology also provides greater
design latitude by miniaturizing the process.
The Company expects to continue to expand its research and development
efforts in electronic sensor technology. In 1994 and 1995, approximately 75%
of the Company's total expenditures for research and development were for its
electronic sensor products. The Company's research and development staff has
grown from approximately 20 employees in July 1994 to approximately 33
employees in June 1996.
Maintain Market Leadership in Automotive Circuit Breakers and Glass Enclosed
Circuit Breakers. The Company is a leading supplier of circuit breakers for
the automotive market and glass enclosed circuit breakers for the small motor
appliance market. The Company believes that its experience and expertise in
these markets, developed over more than thirty years, its strong customer
relationships, and its strategy of continuous improvement in productivity and
cost management, will enable it to maintain its leadership position. In turn,
the Company believes that its leadership position provides a stable base from
which to pursue growth opportunities for its other existing and new products,
especially electronic sensors.
Strategic Acquisitions. The Company is pursuing an acquisition strategy
designed to complement the Company's existing businesses, including
acquisitions of complementary products, expanding its line of electronic
sensors and expanding its distribution base. In April 1996, the Company
acquired RDI primarily to enhance the Company's market penetration of the
automotive OEM market in Europe. RDI expands the Company's presence in Europe
and strengthens its ability to market its electronic sensor and other
products. Management believes that a European based distribution network will
enhance the Company's ability to distribute existing, internally developed and
newly acquired products. The Company currently has no specific agreements or
understandings with respect to any acquisitions.
Operating Efficiency and Cost Management. The Company is dedicated to
continuous improvement of its operations, including cost management. These
improvements have led to an increase in operating profit margins from 2.7% in
1992 to 17.8% in 1995. The Company's current strategy is to develop and
initially manufacture products at its facilities in Maine and, as they mature,
move production offshore to the Company's lower cost facility in the Dominican
Republic. Other cost reduction strategies being pursued by the Company include
efforts to improve manufacturing yields, eliminate non-value added labor and
reduce manufacturing cycle time. The Company has achieved significant success
in pursuing such efforts, in part due to a gain sharing program implemented in
1994. Virtually all Company employees receive incentive compensation based on
operating results or cost improvements.
Focus on Customer Relationships and the Manufacture of Quality Products. The
Company builds on its longstanding customer relationships in the development
of new products and new applications for existing products. These products and
applications are designed either to fulfill an existing customer need or to
meet an expected future market requirement. By working closely with customers
on the initial design and specification of products, management believes the
Company has a competitive advantage. The Company has implemented comprehensive
systems and statistical tools in conjunction with its customers to assure the
production of quality products. The Company's commitment to quality has
resulted in the Company's having received, in addition to other awards, ISO
(International Standards Organization) 9001-1994 registration (the highest
attainable) in June 1995, GM's Mark of Excellence Award (the highest
attainable) and Ford's Q1 quality rating.
32
MARKETING AND CUSTOMERS
The Company markets its products through a direct sales and service force
located in the Company's Dearborn, Michigan sales office, at the Company's
corporate headquarters in Standish, Maine and at RDI's headquarters near
Paris, France. The Company also sells and distributes its products through a
number of independent agents and distributors in Europe and Asia. In Europe,
RDI acts as a technical and value added resource to its customers.
In the automotive market, the Company sells its products primarily to parts
suppliers, including subsidiaries of automotive manufacturers, rather than
directly to the automobile manufacturer. The Company must generally market its
products both to the manufacturer (to insure the design of the automobile
incorporates the Company's product) and to the supplier of the particular
parts in which the Company's products will be incorporated. As is typical in
the automotive and appliance industries, the Company's customers buy products
through the use of purchase orders rather than long-term contracts.
For export sales, see Note 15 of Notes to Financial Statements.
One of the Company's customers, GM, accounted for approximately 17%, 20% and
12% of net sales in 1994, 1995 and the six months ended June 30, 1996,
respectively. These sales were primarily to two divisions of GM, Packard
Electric and Delco Electronics, both of which manufacture electrical systems
for automotive companies, including GM. Net sales to Danfoss were 13.6% in
1995. No other customer accounted for more than 10% of sales in 1994, 1995 and
the six months ended June 30, 1996. See "Risk Factors."
The following table shows the Company's key customers for each of its
product lines:
PRODUCT LINE KEY CUSTOMERS
------------ ---------------------------------------------------------
AUTOMOTIVE APPLIANCE TELECOMMUNICATION
-------------------- ----------------- -----------------
Circuit Protection... GM, Ford, Chrysler, Danfoss --
Rockwell, Valeo
Electronic Sensors... GM, Ford, Mercedes -- --
Electronic Ceramic
Devices............. -- -- Celwave, Siecor
Products Distributed
by RDI.............. Rockwell, Mercedes, -- --
Volkswagen
Danfoss is a manufacturer of compressors for refrigeration and other uses;
Celwave is a manufacturer of microwave communications components; and Siecor
manufactures telecommunications products.
The following table shows the car and truck models, as of June 30, 1996,
which incorporate circuit breakers and sensors manufactured by the Company:
CUSTOMER CIRCUIT BREAKERS SENSORS
- -------- ---------------------------------- ------------------------
GM
Buick........... Century, LeSabre, Park Avenue, LeSabre, Park Avenue,
Regal, Riviera, Roadmaster, Riviera, Roadmaster
Skylark
Cadillac........ DeVille, Eldorado, Fleetwood DeVille, Eldorado,
Brougham, Seville Fleetwood Brougham,
Seville
33
CUSTOMER CIRCUIT BREAKERS SENSORS
- -------- ---------------------------------- ------------------------
Chevrolet....... Astro, Beretta, Blazer, Camaro, Corvette
Caprice, Cargo Van, Cavalier, C/K
Pick-up, Corsica, Corvette,
Lumina, Lumina Van, Monte Carlo,
S-10, Sport Van, Suburban, Tahoe
GMC............. Jimmy, P Model Truck, Safari, --
Sonoma, Suburban, Yukon
Oldsmobile...... Achieva, Aurora, Bravada, Ciera, Aurora, Cutlass, 88, 98,
Cutlass Supreme, 88, 98, Supreme
Silhouette
Pontiac......... Bonneville, Firebird, Grand Am, Bonneville
Grand Prix, Sunfire, Trans Sport
Ford
Ford............ Crown Victoria, Aerostar, Thunderbird, Explorer,
F-Series Truck, Taurus Crown Victoria
Lincoln......... Town Car, Mark VIII, Continental Town Car, Mark VIII
Mercury......... Grand Marquis, Cougar, Villager, Cougar, Grand Marquis
Sable
Chrysler
Chrysler........ Concorde, Cirrus, New Yorker, --
Sebring, Town & Country
Dodge........... Intrepid, Neon, Stratus, Ram Van, --
Dakota, Ram Wagon, Caravan, T-300,
Viper
Eagle........... Vision --
Plymouth........ Breeze, Neon, Voyager --
Jeep............ Cherokee, Grand Cherokee Grand Cherokee
Mercedes.......... -- E-Class, S-Class
Renault........... Laguna, Clio, 19 --
Peugeot........... 306, 106, 405 806, 506
Volkswagen/Audi... Golf, Passat, A6, A8 --
Citroen........... ZX, Xantia, XM Evasion
Opel.............. 2900 Vectra --
Seat.............. Ibiza --
Nissan............ Quest --
Honda............. Odyssey --
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses of $2.1 million, $2.7
million, and $2.7 million in 1993, 1994 and 1995, respectively, and $1.9
million for the six months ended June 30, 1996. The increase from 1993 to 1995
was a result of the Company's focus on new product development in the
electronic sensor
34
product line based on the Company's existing optical sensing technologies. In
1995 and the first six months of 1996, the Company devoted over 7.0% and 8.5%,
respectively, of net sales excluding RDI to research and development. In 1994
and 1995, the Company devoted approximately 75% of its research and
development expenditures to electronic sensors. The Company maintains a
research and development staff at its Standish, Maine facility of 33 employees
as of June 30, 1996, 28 of whom, including 22 engineering professionals, were
devoted to new sensor product development.
In addition to the recently introduced twilight sensor, the Company also has
under development rain and window fog sensors which will control intermittent
windshield wiper and/or defroster functions, and a solar position sensor for
multi-zone automatic climate control. The Company has a six year consulting
agreement expiring in April 2001 with Dr. Dennis J. Hegyi, a Physics Professor
at the University of Michigan, relating to its sensor products. The Company
currently licenses five of Dr. Hegyi's patents for its sensor products. See
"Products and Markets" and "Management--Key Consultant."
The following tables summarize the results of the Company's historical
research and development activities and the focus of its current research and
development activities.
YEAR OF INTRODUCTION PRODUCT APPLICATION CUSTOMERS
- -------------------- --------------------- ------------------------- -------------
1991 Solar Sensor Automatic Climate Control Numerous OEMs
1993 Dielectric Resonator Wireless Telecom-Cellular Celwave
1995 Steering Wheel Sensor Power Steering Assist Ford
1995 Dielectric Resonator Wireless Telecom-PCS Numerous OEMs
1996 Twilight Sensor Daytime Running Lamps GM
DEVELOPMENT STAGE PRODUCTS APPLICATION STATUS
- -------------------------- ---------------------------- -------------------------------------------
Solar Twilight Sensor Combined Climate and OEMs have tested and requested quotes.
Headlamp Control
Rain Sensor Wiper Function and Testing with a North American OEM.
Speed Control
Window Fog Sensor Defrost Control Prototypes provided to European OEMs.
Solar Quadrant Sensor Multi-zone Automatic Climate Prototypes provided to a European OEM.
and Headlamp Control
Electric Vehicle Heaters Automobile Heaters Development funding has been received from
Ford and Chrysler. The Company has started
production tooling for Ford.
PATENTS, LICENSES AND TRADEMARKS
The Company owns 11 patents and has two patents pending. The Company does
not consider any single patent to be material to its business. The Company
typically requires its employees to execute appropriate non-competition and
patent rights agreements.
The Company is licensed to use technology in patents and know-how owned by
Dr. Hegyi, a consultant to the Company. See "Management--Key Consultant."
35
MANUFACTURING AND SUPPLY
The Company manufactures and assembles its products at its plants in
Standish and Caribou, Maine, and San Cristobal, Dominican Republic and has
certain value added operations at its distribution facility in France. The
Company's facility in the Dominican Republic, where the Company has an average
total burdened labor cost of $4.00 per hour, has been audited by
representatives of Chrysler, Valeo and Packard Electric and has been certified
as an approved supplier by all three. The Company manufactures its products
using components purchased from third parties and from parts manufactured by
the Company with various raw materials.
During and after the manufacturing process, products undergo extensive
inspection and testing to insure quality control. The Company's commitment to
quality has resulted in the Company having received, in addition to other
awards, ISO (International Standards Organization) 9001-1994 registration (the
highest attainable) in June 1995, GM's Mark of Excellence Award (the highest
attainable) and Ford's Q1 quality rating. The Company is currently in the
process of qualifying for the QS-9000 certification which it expects to
complete in 1996.
Certain of the Company's components are standard items and are available
from multiple sources. The Company also sources components produced from
custom tools or molds. These custom parts may be single sourced in some
circumstances in order to take advantage of price and quality considerations.
The Company has never had any significant supply interruptions in these
components and it believes it could develop alternative sources of supply if
supply interruptions were to occur.
Backlog consists of firm orders received from customers and distributors
with delivery dates requested by customers at some future date. At June 30,
1996, backlog was approximately $8.3 million versus approximately $4.5 million
at June 30, 1995. This backlog increase is primarily due to the acquisition of
RDI. All of the Company's current backlog is expected to be shipped by year
end.
COMPETITION
The Company has many competitors with respect to all of its products, and
the automotive parts supply industry, in particular, is highly competitive.
Many of its competitors in the automotive industry are companies which are
larger, more diversified and have greater financial resources than the
Company. In general, competition in the circuit breaker market is based on
price, although the Company also seeks to compete based on product
performance. The automotive market for circuit breakers is a relatively
mature, small market and the Company competes principally with Texas
Instruments and Otter Controls Inc. In the appliance market for circuit
breakers, the Company competes principally with Texas Instruments. The Company
also competes in the circuit breaker market with suppliers of alternative
technologies, such as fuses which can be used as an alternative to circuit
breakers. Competition in the sensor market is primarily based on technology,
quality, delivery, reliability, price, functionality and engineering support.
The Company's principal competitors in this market are Texas Instruments,
Eaton, Motorola, Panasonic, Philips and Nippondenso. In the ceramics market,
the Company competes on the basis of supplying niche products and on service,
delivery and product technology. Its principal competitors in this market are
NTK, TDK, Alpha Industries, Murata and Siemens. In the European distribution
market, the Company competes with similar electronic distributors.
PROPERTIES
The Company's facilities are kept in good condition and the capacity of such
facilities is adequate for the Company's needs. The Company expects to renew
leases expiring in December 1996 but believes that, if such leases are not
renewed, alternative space would be available on comparable terms. The
following table sets forth certain information, as of June 30, 1996, relating
to the Company's facilities:
36
APPROXIMATE OWNED/
LOCATION PRINCIPAL ACTIVITIES SQUARE FEET LEASED
- -------- --------------------------------- ----------- --------
Standish, Maine......... Corporate Headquarters; Research 120,000 Owned
and Development; Manufacture of
Electronic Sensors, Glass
Enclosed Circuit Breakers and
Electronic Ceramic Devices
Caribou, Maine.......... Manufacture of Circuit Breakers 33,000 Leased
(Yearly
Renewal)
San Cristobal, Manufacture of Circuit Breakers, 26,000 Leased
Dominican Republic..... Electronic Sensors (Expires
December
1996)
Dearborn, Michigan...... Sales Office 1,320 Leased
(Expires
December
1996)
Villepinte, France...... RDI Headquarters, European 27,500 Owned
Warehouse, Manufacturing and
Distribution.
EMPLOYEES
As of June 30, 1996, the Company had 808 employees, consisting of 207
employees based in Standish, 92 employees based in Caribou, three employees
based in Dearborn, 396 employees based in the Dominican Republic and 110
employees in France. None of the Company's employees are currently represented
by a labor union; RDI's employees enjoy the benefits of a state-mandated
collective bargaining agreement (Convention Collective de la Metallurgie)
which applies to numerous French companies whose business relates to metal
products, including RDI. The Company believes its relations with employees are
good.
ENVIRONMENTAL MATTERS
The Company's owned and leased facilities are subject to numerous
environmental laws and regulations concerning, among other things, emissions
to the air, discharges to surface and ground water, and the generation,
handling, storage, transportation, treatment and disposal of toxic and
hazardous substances. Under various Federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may become liable for the costs of removal or remediation of
hazardous or toxic substances on, under or in such property, typically without
regard to fault.
Pursuant to the terms of an Environmental Agreement dated July 6, 1994, GTE
has retained liability and agreed to indemnify the Company for any and all
liabilities arising under CERCLA and other environmental requirements related
to contamination and cleanup of the Standish facility, treatment, storage and
disposal of hazardous materials transported offsite and remediation required
by the State of Maine Department of Environmental Protection ("MEDEP") or U.S.
Environmental Protection Agency ("EPA") not known to exist or occur prior to
July 29, 1994. GTE's indemnification for these various unknown liabilities
expires on July 29, 1997 and July 29, 1999. GTE has also retained complete
liability for claims relating to soil and groundwater contamination from the
surface impoundment and the out-of-service leachfield at the Company's
Standish, Maine facility known to exist prior to the acquisition. Such
contamination is currently being remediated at GTE's sole expense. GTE's
obligation to remediate such contamination and its indemnification for any
claims relating thereto expire several years after the MEDEP and EPA conclude
remediation has been completed.
37
Except as set forth above, the Company believes that its facilities are in
compliance in all material respects with all applicable United States federal,
state and local environmental laws, ordinances and regulations, as well as
comparable laws and regulations outside the United States. No assurances can
be given, however, that the current environmental condition of the Company's
owned and leased facilities are not other than as currently understood by the
Company, or will not be adversely affected by the condition of properties in
the vicinity of the Company's owned and leased properties, or by the
activities of third parties unrelated to the Company or by former owners or
operators of the Company's owned or leased facilities, or that future laws,
ordinances or regulations will not impose any material environmental liability
on the Company.
LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings other than ordinary
routine litigation incidental to its business. The Company is not involved in
any pending or threatened legal proceedings which the Company believes could
reasonably be expected to have a material effect on the Company's financial
condition, liquidity or results of operations.
38
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and certain key employees of the Company
and their ages as of the date of this Prospectus are as follows:
NAME AGE POSITION
---- --- --------
Ralph R. Whitney, Jr.(1)(2). 61 Chairman of the Board
Bruce D. Atkinson........... 55 Chief Executive Officer, President and
Director
Jeffrey G. Wood............. 40 Vice President, Chief Financial Officer,
Secretary and Treasurer
Michel Hauser-Kauffmann..... 53 General Manager, RDI
Keith J. Coulling........... 38 Engineering Manager--Research and
Development
Richard E. Griffin.......... 53 Plant Manager, Caribou, Maine
Frederick B. Howard, Jr. ... 33 Materials/Marketing Manager
Paul M. Manganelli.......... 51 Quality Assurance/Engineering Manager
Meo J. Poliquin............. 44 Plant Manager, Standish, Maine
Lee A. Prager............... 45 Sales Manager
Jose M. Ricardo............. 32 Plant Manager, Dominican Republic
Charles M. Brennan, III(1).. 54 Director
John D. Cooke(1)(2)......... 55 Director
James O. Futterknecht, Jr. . 49 Director
Alan I. Mossberg(2)......... 64 Director
John M. Ramey............... 43 Director
Glenn Scolnik............... 45 Director
- --------
(1)Member of Audit Committee
(2)Member of the Compensation Committee
Mr. Whitney has been Chairman of the Board of the Company since July 1994,
and was Chief Executive Officer from July 29, 1994 until June 22, 1995. Mr.
Whitney has been a principal of HKW, a New York private capital firm, since
1971. Mr. Whitney is also a director of Excel Industries, Inc. ("Excel"),
Baldwin Technology Company, Inc., Adage, Inc., IFR Systems, Inc., and Selas
Corp. of America.
Mr. Atkinson has been President and a Director of the Company since July
1994, and has been Chief Executive Officer since June 22, 1995. Mr. Atkinson
was General Manager of the Business and the Telecommunications Division from
1978 until September 1993, and was General Manager of the Business from
September 1993 until July 1994.
Mr. Wood has been Vice President, Chief Financial Officer, Secretary and
Treasurer of the Company since July 1994. Mr. Wood was Controller of the
Business and the Telecommunications Division from 1990 to September 1993 and
was Controller of the Business from September 1993 until July 1994. From 1987
to 1990 Mr. Wood was Controller of the Caribbean operations of the special
products division of GTE.
Mr. Coulling has been the Company's New Product Manager since 1994. Mr.
Coulling was an Engineering Supervisor for the Company from 1993 to 1994 and a
Special Project Engineer from 1989 to 1993. He has been with the Company in
various capacities for a total of 14 years.
Mr. Griffin has been Plant Manager at the Caribou manufacturing facility
since 1982. Mr. Griffin was a Manufacturing Supervisor at Standish from 1966
to 1982. Mr. Griffin has been with the Company in various capacities for 33
years.
Mr. Howard has been Materials/Marketing Manager since June 1996. Mr. Howard
was Marketing Manager from 1992 to 1996 and was Marketing Manager
Telecommunications Division from 1991 to 1992. He has been with the Company in
various capacities for seven years.
39
Mr. Manganelli has been the Company's Quality Assurance/Engineering Manager
since February 1994. Mr. Manganelli was an Engineering Supervisor for the
Company from 1985 to 1994 and held various other engineering positions with
the Company from 1975 to 1985.
Mr. Poliquin has been Plant Manager of the Company's Standish, Maine, plant
since 1993. Mr. Poliquin was Operations Manager--Caribbean Operations for the
Company from 1991 to 1993 and was Plant Manager of the Company's Oxford, Maine
feeder plant from 1977 to 1981.
Mr. Prager has been the Company's Sales Manager since October 1993. Mr.
Prager was Manager of Electronic Ceramics from March to October 1993, PTC
Product Manager from 1986 to 1993, Manager of Research and Development from
1983 to 1986 and held engineering positions with the Company from 1980 to
1983.
Mr. Ricardo has been Plant Manager at the Dominican Republic Manufacturing
facility since 1993. Mr. Ricardo was Manufacturing Supervisor from 1988 to
1993. He has been with the Company in various capacities for eight years.
Mr. Brennan has been a Director of the Company since July 1994. Mr. Brennan
has been Chairman of the Board and Chief Executive Officer of MYR Group Inc, a
specialty electrical and telecommunications contractor, since 1989. Mr.
Brennan is also a director of UNR Industries, Inc.
Mr. Cooke has been a Director of the Company since July 1994. Mr. Cooke has
been Senior Vice President-Investments of Prudential Securities, Inc. since
1991. For more than five years prior thereto he was Senior Vice President-
Investments of Thompson McKinnon Securities.
Mr. Futterknecht has been a Director of the Company since October 1995. Mr.
Futterknecht has been Chairman of the Board, President and Chief Executive
Officer of Excel, an Elkhart, Indiana automotive parts supplier, since
September 1995. Mr. Futterknecht was President and Chief Operating Officer of
Excel from 1992 to September 1995, and Executive Vice President of Excel from
1990 to 1992.
Mr. Mossberg has been a Director of the Company since July 1994. Mr.
Mossberg has been Chief Executive Officer and President of O. F. Mossberg &
Sons, Inc. ("O. F. Mossberg"), a North Haven, Connecticut manufacturer of
shotguns, for more than five years.
Mr. Ramey has been a Director of the Company since June 1994. Mr. Ramey has
been a principal of HKW since 1986 and sits on the boards of several private
companies.
Mr. Scolnik has been a Director of the Company since June 1994. Mr. Scolnik
has been a principal of HKW since April 1993. Mr. Scolnik was a member of the
law firm of Sommer & Barnard, PC, Indianapolis, Indiana, for more than five
years prior to April 1993, and was of counsel to such firm from April 1993 to
January 1995. Mr. Scolnik is a director of WavePhore, Inc., a data
broadcasting company, and sits on the boards of several private companies.
All directors hold office until the next annual meeting of shareholders or
until their successors are elected and qualified. Executive officers serve at
the discretion of the Board of Directors. Directors who are not officers are
paid $14,200 per year payable quarterly plus $200 per board meeting attended
and $200 per committee meeting if not held on the date of a board meeting.
Non-employee directors will also be granted options to purchase 1,000 Common
Shares, at the fair market value on the date of grant, annually upon
reelection commencing with the 1997 meeting of shareholders. The options will
expire at the earlier of one year after termination of the director's Board
membership or ten years after the date of grant. Directors who are employees
of the Company receive no fees or options for serving as directors.
40
KEY CONSULTANT
Dr. Dennis J. Hegyi, age 53, has been a key consultant to the Company with
respect to the development of its sensor products, in particular its solar
sensor, since 1989. Dr. Hegyi has been a tenured Professor of Physics at the
University of Michigan in Ann Arbor since 1986. Dr. Hegyi received a B.S. in
Physics from Massachusetts Institute of Technology in 1963 and a Ph.D. in
Physics from Princeton University in 1968.
In April 1995, the Company and Dr. Hegyi entered into a new Consultant's
Agreement, three new license agreements and a new Agreement to Grant License
which were designed to continue, on a long term basis, the relationship
between Dr. Hegyi and the Company started in 1989 when the Company and Dr.
Hegyi entered into a consulting agreement and a solar sensor license agreement
(the "1989 License Agreement"). The new Consultant's Agreement requires the
Company to engage Dr. Hegyi for at least 720 hours of consulting per year,
including design, design modification and marketing assistance services
regarding any current or prospective automotive sensor products. The term of
the new agreement is for six years through March 31, 2001 and requires the
Company to pay Dr. Hegyi $257 per hour (in 1996), plus a cost of living
escalator in each subsequent year. The new agreement replaced a consulting
agreement entered into in 1989 which was restricted to the solar sensor
currently being sold by the Company.
The three new license agreements entered into in April 1995 supplement the
1989 License Agreement regarding the Company's existing solar sensor product.
The three new license agreements are substantially similar to each other and
to the 1989 License Agreement and cover the twilight sensor, the rain and/or
window fog and solar position sensor products also in the development stage at
the Company. The 1989 License Agreement and the new twilight sensor license
agreement each require royalty payments to Dr. Hegyi equal to 5% of the net
selling price of products sold by the Company which are covered by valid
claims in any patent owned by Dr. Hegyi. The royalty rate for the rain and/or
window fog sensor and the solar position sensor is 6% of the net selling price
to the extent the product is covered by a valid claim in a patent owned by Dr.
Hegyi. If any of these products sold by the Company is not covered by a valid
patent claim, but instead utilizes know-how supplied by Dr. Hegyi, the royalty
rate for that product is 5% (6% for rain and/or window fog products and solar
position products) for three years (six years for rain and/or window fog
products and solar position products), 3% for three years, and 1% for three
years. Pursuant to the three new license agreements, the Company has
guaranteed to Dr. Hegyi annual minimum royalty payments, starting at an
aggregate of $15,000 for 1996 and increasing to an aggregate of $260,000 for
2002 and each year thereafter.
The three new license agreements also require the Company to pay Dr. Hegyi
certain cash payments in the event the Company receives a purchase order from
an automotive OEM for a twilight, rain, window fog, or solar position sensor
expected to generate at least $1,000,000 in sales to the Company over the life
of the agreement. The amount of such up front payments are $225,000 for each
of the twilight, rain and window fog sensor products and $125,000 for the
solar position sensor product. The three new license agreements and the 1989
License Agreement grant the Company an exclusive, world-wide license to make,
use, sell, or sublicense the licensed products and require the Company to use
reasonable efforts to commercialize the licensed products.
In April 1995, the Company and Dr. Hegyi also entered into an Agreement to
Grant License which obligates Dr. Hegyi to offer to license to the Company any
new invention of his which involves an automotive component part or any type
of circuit breaker or thermoprotector. This agreement expires in 2001 and any
license required to be granted thereunder must be upon substantially the same
terms as the rain and/or window fog sensor license agreement, except that the
payment on signing the agreement is $15,000, and the royalty rate is 7.5%. Dr.
Hegyi is prohibited from competing with the Company through March 31, 2001,
except with respect to a new invention offered to, but declined by, the
Company for license. In consideration for Dr. Hegyi's obligations in this
agreement, the Company paid him $200,000 and issued him a non-qualified stock
option to purchase up to 200,000 Common Shares exercisable at any time prior
to March 31, 2002. The exercise price per share is the lower of $10.00 or the
offering price per share in this Offering.
41
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Douglas H. Bagin and Messrs. Mossberg and Whitney were members of the
compensation committee of the Board of Directors during the year ended
December 31, 1995. Mr. Atkinson was a member of the compensation committee
until he became Chief Executive Officer of the Company on June 22, 1995. Mr.
Bagin, who became a principal of HKW in 1996, resigned from the Board on July
29, 1996. He had no disagreement with management of the Company or the Board.
Mr. Bagin was an executive officer of Maine Rubber Company ("MRC") during
1995. Mr. Whitney is the Chief Executive Officer and Chairman of the Board of
MRC, and a member of the executive committee of the Board of Directors of MRC,
which performs the functions of a compensation committee.
Since the acquisition of the Business, the Company has paid HKW management
fees of $15,000 per month as compensation for HKW providing managerial and
financial consulting and merger and acquisition advice and assistance. In
1994, 1995, and the first seven months of 1996, such fees totaled $75,000,
$180,000 and $105,000, respectively. Since the acquisition of the Business,
the Company has paid directors' fees, but no salary, to Mr. Whitney. See
"Management."
Mr. Mossberg is an executive officer of O.F. Mossberg. Mr. Whitney is a
director and a member of the compensation committee of the Board of Directors
of O. F. Mossberg.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for the year ended December 31, 1995 to the
Company's executive officers. No executive officer held any options to
purchase Common Shares at December 31, 1995.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------
OTHER ALL
ANNUAL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION COMPENSATION
- --------------------------- -------- --------- ------------ ------------
Ralph R. Whitney, Jr.,
Chairman........................ $ -- $ -- $ -- $15,000(2)
Bruce D. Atkinson,
President and CEO............... 211,647 35,219 1,381(3) 6,660(4)
Jeffrey G. Wood,
Vice President and CFO.......... 145,248 21,011 602(5) 6,587(4)
- --------
(1) Represents bonus for the five months ended December 31, 1994 paid in 1995.
(2) Represents director's fees paid to Mr. Whitney.
(3) Includes value of personal use of a Company leased automobile and Company
paid life insurance.
(4) Represents contributions to a defined contribution plan by the Company.
(5) Includes value of Company paid life insurance.
EMPLOYEE STOCK OPTION PLANS
The Company has reserved 300,000 Common Shares for issuance pursuant to its
1996 Stock Compensation Plan (the "Plan"). The Plan permits the grant of
Incentive Stock Options within the meaning of Section 422 of the Internal
Revenue Code, nonstatutory options and performance units payable in cash or
Common Shares. No options or performance units have been granted to date. The
Plan is administered by the compensation committee of the Board of Directors.
HAUSER-KAUFFMANN EMPLOYMENT AGREEMENT
The terms of Michel Hauser-Kauffmann's employment with RDI are governed by
(i) his written employment agreement dated January 10, 1986, with amendments
dated March 23, 1986 and March 29, 1996 (the "Employment Agreement"), and (ii)
by the provisions of French law and the National Metal Workers' collective
bargaining agreement.
42
The Employment Agreement provides that Mr. Hauser-Kauffmann will receive a
gross annual base salary of FF 975,000 (approximately $195,000 at current
exchange rates), plus an annual bonus payment of up to FF 487,000
(approximately $97,000 at current exchange rates). The amount of bonus payment
will depend on whether Mr. Hauser-Kauffmann satisfies certain performance
objectives set annually by management. In addition to his base salary and
bonus payment, Mr. Hauser-Kauffmann receives the use of a company car, health
insurance and supplemental retirement benefits. The Employment Agreement
provides for a contractual severance payment to Mr. Hauser-Kauffmann if RDI
terminates the Employment Agreement for any reason (other than for
exceptionally serious misconduct--"faute lourde") prior to March 29, 1998. The
amount of the contractual severance payment is equal to two years salary and
bonus.
In addition, Mr. Hauser-Kauffmann benefits from the provisions of French
labor law, and the National Metal Workers' collective bargaining agreement
(Convention Collective de la Metallurgie; the "Collective Bargaining
Agreement"), which applies to numerous French companies whose businesses
relate to metal products, including RDI. Both French labor law and the
Collective Bargaining Agreement provide for a minimum notice period prior to
dismissal of an employee and for the payment of termination indemnities. In
addition to these termination indemnities, French law also provides for the
payment of damages if the dismissal is without "real and serious cause."
In general, if Mr. Hauser-Kauffmann is dismissed before March 29, 1998, he
would receive a severance payment under his Employment Agreement. The
Employment Agreement provides that this severance payment is inclusive of any
damages and termination indemnities that may be due under French law or the
Collective Bargaining Agreement. If Mr. Hauser-Kauffmann is dismissed after
March 29, 1998, damages and termination indemnities would be payable under
French law and the Collective Bargaining Agreement, which would take into
account Mr. Hauser-Kauffmann's age and seniority.
43
CERTAIN TRANSACTIONS
In connection with the purchase of the Business, the Company sold securities
to certain officers and directors in transactions exceeding $60,000, as
follows: 320,690 Common Shares and one Redeemable Preferred Share to Ralph R.
Whitney, Jr. for an aggregate consideration of $110,808; 153,846 Common Shares
and 48 Reedemable Preferred Shares to Bruce D. Atkinson for an aggregate
consideration of $60,000; 20,000 Common Shares and 94 Redeemable Preferred
Shares to Charles M. Brennan III for an aggregate consideration of $100,000;
20,000 Common Shares and 94 Reedemable Preferred Shares to John D. Cooke for
an aggregate consideration of $100,000; and 20,000 Common Shares and 94
Reedemable Preferred Shares to James O. Futterknecht, Jr. for an aggregate
consideration of $100,000. See "Principal Shareholders."
The Company was initially capitalized with an equity investment of
$3,000,000, consisting of $600,000 for an aggregate of 2,000,000 Class A and
Class B Common Shares and $2,400,000 for 2,400 Reedemable Preferred Shares.
The Company financed the acquisition of the Business in part with $15,000,000
from MassMutual and the $1,500,000 Seller Note from GTE. The Company also
obtained a $1,500,000 line of credit from MassMutual, which was subsequently
increased to $3,000,000 in connection with the RDI acquisition. As part of
this financing, the Company sold to MassMutual (i) 435,896 Class B Series 1
Common Shares for an aggregate consideration of $145,000, (ii) 580 Reedemable
Preferred Shares at the stated value of $1,000 per share for a total of
$580,000, and (iii) warrants to purchase 564,100 Class B Series 1 Common
Shares. In connection with the RDI acquisition, the Company paid off the
Seller Note with cash on hand.
MassMutual is expected to exercise such warrants and to convert its Class B
Series 1 Common Shares into Class A Common Shares effective upon the closing
of this Offering. In addition, MassMutual and the other shareholders of the
Company are expected to approve in August 1996, an amendment to the Company's
Articles of Incorporation, to take effect at the closing of this Offering,
reclassifying the Class A Common Shares as Common Shares and eliminating the
designations of Class A Common Shares and Class B Common Shares. See
"Description of Capital Shares."
On April 1, 1995, the Company entered into a Consultant's Agreement and
certain license agreements with Dr. Dennis J. Hegyi, and, in connection
therewith, granted to Dr. Hegyi an option to purchase up to 200,000 Common
Shares. See "Management--Key Consultant" and "Description of Capital Shares--
Options."
The Company pays certain management fees to HKW, of which Messrs. Whitney,
Ramey, Crisman, Scolnik and Bagin are principals. See "Compensation Committee
Interlocks and Insider Participation." Since the acquisition of the Business,
the Company has paid Messrs. Whitney, Ramey, Crisman, Scolnik and Bagin
directors fees. See "Management." Mr. Scolnik, a Director of the Company, also
assists the Company in the management of its legal affairs. During 1994, 1995,
and the first six months of 1996 Mr. Scolnik was paid $16,635, $58,923 and
$23,365, respectively, for such services.
In April 1996, the Company acquired all of the issued and outstanding
capital stock of RDI for a total purchase price of $8,964,000. The Company
paid $6,964,000 in cash, delivered the RDI Notes and delivered the RDI
Convertible Notes. The price was determined in arms length negotiations
between the directors of the Company and the shareholders of RDI, none of whom
were officers of the Company at the time. Mr. Michel Hauser-Kauffman, General
Manager of RDI, received from such consideration in exchange for his shares of
RDI a total of $1,285,515 in cash and $369,200 in aggregate principal amount
of RDI Convertible Notes. Mr. Hauser-Kaufmann's RDI Convertible Notes will
convert automatically upon the closing of this Offering into Common Shares
of the Company assuming an initial offering price of $ per share.
44
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership as of June 30, 1996, of (i) each person known by the Company to
beneficially own 5% or more of the Common Shares, (ii) each current director
of the Company, (iii) each executive officer of the Company and (iv) all
current directors and executive officers as a group. Except as otherwise
indicated, each shareholder has sole voting and investment power with respect
to the shares listed.
PERCENT OWNED
------------------------------
NAME NUMBER OF SHARES (1) BEFORE OFFERING AFTER OFFERING
- ---- -------------------- --------------- --------------
Ralph R. Whitney, Jr. (2).. 320,690(3) 12.1% 6.9%
Bruce D. Atkinson (2)...... 153,846 5.8 3.3
Jeffrey G. Wood (2)........ 102,564 3.9 2.2
Michel Hauser-Kauffman (2). (4)
Charles M. Brennan, III
(2)....................... 20,000 0.8 0.4
John D. Cooke (2).......... 20,000 0.8 0.4
James O. Futterknecht, Jr.
(2)....................... 20,000(5) 0.8 0.4
Alan I. Mossberg (2)....... 10,000(6) 0.4 0.2
John M. Ramey (2).......... 160,345(7) 6.1 3.5
Glenn Scolnik (2).......... 160,345 6.1 3.5
Massachusetts Mutual Life
Insurance Company and
certain affiliates........ 999,996(8) 37.8 21.5
Dennis J. Hegyi (9)........ 200,000(10) 7.6 4.3
Forrest E. Crisman, Jr.
(11)...................... 160,345 6.1 3.5
All directors and executive
officers as a group
(10 persons)..............
- --------
(1) Assumes the adjustments described in the Prospectus Summary.
(2) The address for each shareholder, each of whom is an officer or director
of the Company, is the principal office of the Company.
(3) Includes 80,172 shares owned by Mr. Whitney's wife, as to which Mr.
Whitney disclaims beneficial ownership.
(4) Assumes conversion of Mr. Hauser-Kauffman's RDI Convertible Note in the
aggregate principal amount of $369,200 at an assumed initial public
offering price of $ per share.
(5) Includes 5,000 shares held by a revocable trust of which Mr. Futterknecht
is trustee, 5,000 shares held by a revocable trust of which Mr.
Futterknecht's wife is trustee and 10,000 shares held by two irrevocable
trusts for the benefit of Mr. Futterknecht's children, all of such shares
as to which Mr. Futterknecht disclaims beneficial ownership.
(6) Represents shares owned by Mr. Mossberg's wife, as to which Mr. Mossberg
disclaims beneficial ownership.
(7) Includes 60,000 shares owned by Mr. Ramey's wife, as to which Mr. Ramey
disclaims beneficial ownership.
(8) Assuming the adjustments described in the Prospectus Summary, includes
174,199 shares owned by MassMutual Corporate Investors, 57,999 shares
owned by MassMutual Participation Investors, each of which is a mutual
fund managed by Massachusetts Mutual Life Insurance Company, and 174,199
shares owned by Gerlach & Company for the benefit of certain MassMutual
affiliates. Massachusetts Mutual Life Insurance Company disclaims
beneficial ownership of any shares in which it has no actual pecuniary
interest. The address of each shareholder is Massachusetts Mutual Life
Insurance Company, 1295 State Street, Springfield, Massachusetts 01111.
(9) Dr. Hegyi's address is 1708 Morton Avenue, Ann Arbor, Michigan 48104.
(10) Represents Common Shares issuable upon exercise of an outstanding option.
(11) Mr. Crisman's address is 230 Park Avenue, New York, NY 10169.
45
DESCRIPTION OF CAPITAL SHARES
Following the Offering, the Company will have authorized 16,000,000 Common
Shares and 3,000,000 preferred shares. As of June 30, 1996, 1,999,994 Common
Shares and 2,400 Redeemable Preferred Shares were outstanding. As of June 30,
1996, there were 68 holders of record of Common Shares and 49 holders of
record of Redeemable Preferred Shares.
COMMON SHARES
Holders of Common Shares are entitled to one vote per share. Subject to the
rights of holders of any class having a preference over the Common Shares as
to dividends or upon liquidation, holders of Common Shares are entitled to
such dividends as may be declared by the Company's Board of Directors out of
funds lawfully available therefor. See "Dividend Policy." Subject to the
rights of holders of any class or series of shares having a preference over
the Common Shares upon liquidation, holders of Common Shares are entitled upon
liquidation to receive pro rata the assets available for distribution to
shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is The First National
Bank of Boston.
PREFERRED SHARES
The Company has issued and outstanding 2,400 Redeemable Preferred Shares
with a stated value of $1,000 per share, which it intends to redeem with the
proceeds of this Offering. See "Use of Proceeds." The holders of Redeemable
Preferred Shares are entitled to receive cummulative cash dividends at a rate
of 11% per annum, which dividends are required to be paid annually in an
amount not to exceed 25% of the Company's Excess Cash Flow (as defined in its
Articles of Incorporation). The Redeemable Preferred Shares, which are not
convertible, are required to be redeemed on July 29, 2006 at their stated
value plus accrued but unpaid dividends. In addition, the Company is required
to redeem (i) the Redeemable Preferred Shares to the extent 25% of annual
Excess Cash Flow exceeds accrued but unpaid dividends by more than $24,000 and
(ii) 580 Redeemable Preferred Shares issued to MassMutual, plus accrued but
unpaid dividends upon the repayment of the Senior Notes and Subordinated
Notes.
Except to the extent that any of the Redeemable Preferred Shares are not
redeemed in connection with this Offering, there will be no preferred shares
outstanding after this Offering. The Board of Directors will have the
authority, without further action by the shareholders, to issue additional
preferred shares in one or more series and fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
preferred shares and to fix the number of shares constituting any series and
the designation of such series, without any further vote or action by the
shareholders. The issuance of preferred shares may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders, may discourage bids for the Company's
Common Shares at a premium over the market price of the Common Shares and may
adversely affect the market price of and the voting and other rights of the
holders of Common Shares. The Company has no present plans to issue any
additional preferred shares.
CONVERTIBLE SECURITIES
The Company has issued an option to purchase 200,000 Common Shares at a
price equal to the lower of $10.00 per share or the public offering price per
share in this Offering. Such option expires on March 31, 2002. See
"Management--Key Consultant." Pursuant to the Plan, the Company may issue
options exercisable for 300,000 Common Shares. No options have been granted
under the Plan to date. In addition, as a result of the Company's acquisition
of RDI, there are $892,000 in aggregate principal amount of RDI Convertible
Notes that will automatically convert upon the closing of this Offering into
Common Shares, assuming an initial public offering price of $ per share.
46
EFFECTS OF INDIANA LAW
In the event any person acquires 10% of the voting power of the Company's
Common Shares (an "Interested Shareholder"), then, for a period of five (5)
years after such acquisition, the Indiana Business Corporation Law (the "BCL")
prohibits certain business combinations between the Company and such
Interested Shareholder unless prior to the acquisition of such Common Shares
by the Interested Shareholder, the Board of Directors of the Company approves
of such acquisition of Common Shares or approves of such business combination.
After such five-year period, only the following three types of business
combinations between the Company and such an Interested Shareholder are
permitted: (i) a business combination approved by the Board of Directors of
the Company before acquisition of Common Shares by the Interested Shareholder,
(ii) a business combination approved by holders of a majority of the Common
Shares not owned by the Interested Shareholder, and (iii) a business
combination in which the shareholders receive a price for their Common Shares
at least equal to a formula price based on the highest price per Common Share
paid by the Interested Shareholder.
REGISTRATION RIGHTS
Upon completion of this Offering, certain shareholders (the "Rightsholders")
will be entitled to require the Company to register under the Securities Act
up to a total of 999,996 Common Shares (the "Registrable Shares"), pursuant to
the terms of the Securities Purchase Agreements dated as of July 29, 1994 (the
"Securities Purchase Agreements"). The Securities Purchase Agreements provide
that, subject to certain conditions and limitations, Rightsholders holding at
least 25% of the Registrable Shares may require the Company to prepare and
file a registration statement under the Securities Act with respect to their
Registrable Shares. In connection with this Offering, the Rightsholders are
expected to agree not to exercise such registration rights for 180 days from
the date of this Prospectus. In addition, the Securities Purchase Agreements
provide that in the event the Company proposes to register any of its
securities, each Rightsholder may require the Company to include Registrable
Shares in such registration; however, in any underwritten offering, the
managing underwriter may exclude some or all Registrable Shares for marketing
reasons but solely to the extent such exclusion is applied pro rata to all
persons, other than the Company, participating in such offering. The
Rightsholders are expected to waive such registration rights with respect to
this Offering. The Company is generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions. The Company
is required to indemnify each Rightsholder in connection with any such
registration.
Prior to this Offering, there has been no public market for the Common
Shares of the Company and no prediction can be made as to the effect, if any,
that market sales of shares or the availability of shares for sale will have
on the market price of the Common Shares prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Shares, or the perception
that such sales could occur, could adversely affect prevailing market prices
for the Common Shares and could impair the Company's future ability to obtain
capital through an offering of equity securities.
47
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Shares. Future sales of substantial amounts of Common Shares in the public
market could adversely effect the trading price of the Common Shares.
Upon completion of this Offering, the Company will have outstanding
Common Shares. Of those shares, 2,000,000 Common Shares sold in this Offering
will be freely tradeable in the public market without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company within the meaning of Rule 144. Of the remaining Common Shares,
Common Shares (collectively the "Restricted Shares") are "restricted
securities" within the meaning of Rule 144 and may not be sold in the absence
of registration under the Securities Act except in compliance with the
limitations set forth in Rule 144 or pursuant to an exemption from
registration.
A total of of the Restricted Shares will be eligible for resale in the
public market pursuant to Rule 144 beginning 180 days after the date of this
Prospectus upon expiration of certain lock-up agreements. Of the balance of
the Restricted Shares, shares will be eligible for resale pursuant to Rule
144 beginning 90 days after the date of the Prospectus, and 564,100 shares
will be eligible for resale pursuant to Rule 144 beginning two years after the
closing of this Offering. Also, beginning 180 days after the date of this
Prospectus, upon expiration of a lock-up agreement, an additional 200,000
Common Shares issuable upon exercise of an outstanding option may be resold in
the public market pursuant to Rule 701.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner other than an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the number of Common Shares then outstanding
(approximately shares immediately after this Offering), or (ii) the average
weekly trading volume in the Common Shares during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain provisions relating to the manner
and notice of sale and availability of current public information about the
Company. Under Rule 144(k), a person is entitled to sell shares beneficially
owned by him or her without compliance with the manner of sale, public
information, volume limitation or notice provisions of Rule 144, provided that
such person is not deemed to have been an affiliate of the Company at any time
during the last ninety days preceding a sale, and a period of at least three
years has elapsed since the later of the date the securities were acquired
from the issuer or from an affiliate of the issuer. In general, under Rule
701, persons other than affiliates of an issuer may resell securities in
reliance on Rule 144 without compliance with holding period or volume
limitations.
The Company sold the RDI Convertible Notes pursuant to Regulation S under
the Securities Act. Regulation S applies to sales of securities to non-U.S.
persons in offshore transactions. A total of Common Shares (assuming an
initial public offering price of $ per share) issuable at the closing of the
Offering upon conversion of the RDI Convertible Notes will be eligible for
resale in offshore transactions after the later of (i) the expiration of lock-
up agreements beginning 180 days after the date of this Prospectus or (ii)
April 1, 1997, which is one year after the date of sale of such Notes.
MassMutual has certain registration rights with respect to 999,996 Common
Shares acquired pursuant to the Securities Purchase Agreements. See
"Description of Capital Shares--Registration Rights."
48
UNDERWRITING
The Underwriters named below, for whom Dean Witter Reynolds Inc. and Cleary
Gull Reiland & McDevitt Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of an underwriting agreement (the "Underwriting Agreement"), to purchase from
the Company the number of Common Shares set forth opposite their respective
names below:
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Dean Witter Reynolds Inc....................................
Cleary Gull Reiland & McDevitt Inc..........................
---------
Total..................................................... 2,000,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they must purchase all of the Common Shares offered to
the public, if any such Common Shares are purchased.
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares was determined
through agreement among the Company and the Representatives. Among the factors
considered in making such determination were the prevailing market conditions
and general economic conditions, the market prices of securities and certain
financial and operating information of publicly traded companies which the
Company and the Representatives believed to be comparable to the Company, the
earnings and certain other financial and operating information of the Company
in recent periods, the future prospects of the Company and its industry in
general and other factors deemed relevant.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Common Shares directly to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at the public offering price
less a concession not to exceed $ per share. Such dealers may reallow a
concession not to exceed $ per share in sales to other dealers. After the
initial public offering, the public offering price and concessions and
reallowances to dealers may be changed by the Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option, exercisable within 30
days from the date of this Prospectus, to purchase up to an additional 300,000
Common Shares at the initial public offering price
49
less underwriting discounts and commissions. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the Common Shares to the public. To the
extent that the Underwriters exercise such option, the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment.
The Company, each of its directors and executive officers who own Common
Shares, certain family affiliates of such directors and executive officers,
each person who beneficially owns more than five percent of the Company's
Common Shares and certain other shareholders of the Company have agreed with
the Underwriters that they will not offer, sell or contract to sell, or
otherwise dispose of or enter into any agreement to sell, directly or
indirectly, any securities convertible into, or exchangeable or exercisable
for, Common Shares for a period of 180 days after the date of this Prospectus
without the prior written consent of Dean Witter Reynolds Inc. See "Shares
Eligible for Future Sale."
At the Company's request, the Representatives have reserved up to 90,000
Common Shares for sale at the initial public offering price to the Company's
employees and other persons having certain relationships with the Company. The
number of Common Shares available for sale to the general public will be
reduced to the extent these persons purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters to the
general public on the same terms as the other shares offered hereby.
LEGAL MATTERS
The validity of the issuance of the Common Shares being offered hereby will
be passed upon for the Company by Sommer & Barnard, PC, Indianapolis, Indiana,
counsel for the Company. Certain legal matters will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP and
Barbier Frinault & Associes, independent public accountants, as indicated in
their reports thereto, and are included herein in reliance upon the authority
of said firms as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the Common Shares
offered hereby (the "Registration Statement"). This Prospectus does not
contain all the information set forth in the Registration Statement and in the
exhibits and schedules thereto. For further information about the Company and
the securities offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules thereto. The Registration
Statement, including the exhibits and schedules thereto, may be inspected and
copied at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: New York Regional Office, 75 Park Place, New York, New York,
10007, and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60621-2511. Copies of such material may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549, at prescribed rates.
50
INDEX TO FINANCIAL STATEMENTS
CONTROL DEVICES, INC.
PAGE(S)
-------
DECEMBER 31, 1993, 1994, AND 1995, AND JUNE 30, 1995 AND 1996
Report of Independent Public Accountants........................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995,
and June 30, 1996 (Unaudited).................................. F-3
Consolidated Statements of Income for the Year Ended December
31, 1993, the Seven Months Ended July 29, 1994, the Five Months
Ended December 31, 1994, the Year Ended December 31, 1995 and
the Six Months Ended June 30, 1995 and 1996 (Unaudited)........ F-4
Consolidated Statements of Shareholders' Equity for the Five
Months Ended December 31, 1994, the Year Ended December 31,
1995 and the Six Months Ended June 30, 1996 (Unaudited)........ F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1993, the Seven Months Ended July 29, 1994, the
Five Months Ended December 31, 1994, the Year Ended December
31, 1995 and the Six Months Ended June 30, 1995 and
1996 (Unaudited)............................................... F-6
Notes to Consolidated Financial Statements...................... F-7 to F-19
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE ("RDI")
Report of Independent Public Accountants........................ F-20
Consolidated Balance Sheets as of December 31, 1994 and 1995.... F-21
Consolidated Statements of Income for the Three Years in the
Period Ended December 31, 1995................................. F-22
Consolidated Statements of Changes in Stockholders' Equity for
the Three Years in the Period Ended December 31, 1995.......... F-23
Consolidated Statements of Cash Flows for the Three Years in the
Period Ended December 31, 1995................................. F-24
Notes to Consolidated Financial Statements...................... F-25 to F-33
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CONTROL DEVICES, INC.:
We have audited the accompanying balance sheets of Control Devices, Inc. (an
Indiana corporation) as of December 31, 1994 and 1995, and the related
statements of income, shareholders' equity and cash flows for the five months
ended December 31, 1994 and for the year ended December 31, 1995. We have also
audited the accompanying combined statements of income and cash flows of the
Electromechanical Business of GTE Control Devices Incorporated and Dominican
Overseas Company ("Predecessor Company") for the year ended December 31, 1993
and for the seven months ended July 29, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Control Devices, Inc. as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for five months ended December 31, 1994 and for the year ended December
31, 1995, and of the results of operations and cash flows for the Predecessor
Company for the year ended December 31, 1993 and for the seven months ended
July 29, 1994, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
January 21, 1996 (except for Note 4
as to which the date July 15, 1996)
F-2
CONTROL DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 5,304 $10,459 $ 3,724
Receivables, less allowance for doubtful accounts
of $257, $277 and $484, respectively............ 5,111 4,305 10,482
Inventories...................................... 2,999 3,279 7,158
Other current assets............................. 613 1,001 1,195
------- ------- -------
Total current assets........................... 14,027 19,044 22,559
PROPERTY, PLANT AND EQUIPMENT, net................. 12,024 11,097 13,558
GOODWILL, net...................................... -- -- 6,869
------- ------- -------
$26,051 $30,141 $42,986
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................ $ -- $ 500 $ 1,279
Short-term debt.................................. -- -- 654
Accounts payable................................. 1,520 1,429 5,356
Accrued employee benefits........................ 1,311 1,459 3,140
Accrued expenses................................. 1,941 1,994 3,615
------- ------- -------
Total current liabilities...................... 4,772 5,382 14,044
LONG-TERM DEBT..................................... 16,320 15,853 16,743
OTHER LIABILITIES.................................. 248 1,001 2,525
REDEEMABLE PREFERRED SHARES........................ 2,400 2,400 2,400
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Class A Common Shares, no par value; 10,000,000
authorized and 1,564,098 issued................. 520 520 520
Class B Series 1 Common Shares, no par value;
4,000,000 authorized and 435,896 issued......... 145 145 145
Warrants......................................... 180 180 180
Foreign currency translation adjustment.......... -- -- (222)
Retained earnings................................ 1,466 4,660 6,651
------- ------- -------
Total shareholders' equity..................... 2,311 5,505 7,274
------- ------- -------
$26,051 $30,141 $42,986
======= ======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS
PREDECESSOR COMPANY ENDED JUNE 30,
------------------------- -------------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JULY 29, DECEMBER 31, DECEMBER 31,
1993 1994 1994 1995 1995 1996
------------ ------------ ------------ ------------ --------- ---------
(UNAUDITED)
NET SALES............... $39,807 $24,995 $ 18,847 $ 38,881 $ 20,713 28,180
COST OF SALES........... 30,046 17,676 12,159 25,721 13,333 17,870
------- ------- --------- --------- --------- ---------
Gross profit........... 9,761 7,319 6,688 13,160 7,380 10,310
------- ------- --------- --------- --------- ---------
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 3,237 1,896 2,413 3,504 1,972 4,157
RESEARCH AND
DEVELOPMENT............ 2,144 1,598 1,052 2,740 1,402 1,880
------- ------- --------- --------- --------- ---------
5,381 3,494 3,465 6,244 3,374 6,037
------- ------- --------- --------- --------- ---------
Operating income....... 4,380 3,825 3,223 6,916 4,006 4,273
INTEREST EXPENSE........ -- -- 657 1,380 732 828
------- ------- --------- --------- --------- ---------
Income before income
taxes................. 4,380 3,825 2,566 5,536 3,274 3,445
INCOME TAX PROVISION 1,752 1,530 990 2,078 1,310 1,322
------- ------- --------- --------- --------- ---------
Net income............. $ 2,628 $ 2,295 1,576 3,458 1,964 2,123
======= =======
PREFERRED SHARE
DIVIDENDS REQUIREMENTS. 110 264 132 132
--------- --------- --------- ---------
Net income applicable
to common
shareholders.......... $ 1,466 $ 3,194 $ 1,832 $ 1,991
========= ========= ========= =========
EARNINGS PER SHARE...... $ 0.57 $ 1.25 $ 0.71 $ 0.78
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND
EQUIVALENTS
OUTSTANDING............ 2,564,094 2,564,094 2,564,094 2,564,094
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
FOREIGN
CLASS A CLASS B CURRENCY
COMMON COMMON TRANSLATION RETAINED
SHARES SHARES WARRANTS ADJUSTMENT EARNINGS TOTAL
------- ------- -------- ----------- -------- ------
BALANCE, at July 29, 1994
(Initial
Capitalization)......... $455 $145 $ -- $ -- $ -- $ 600
Value assigned to
warrants and Class A
Common Shares issued to
employees (Notes 7 and
10)..................... 65 -- 180 -- -- 245
Net income for the five
months ended
December 31, 1994....... -- -- -- -- 1,576 1,576
Preferred share
dividends............... -- -- -- -- (110) (110)
---- ---- ----- ----- ------ ------
BALANCE, at December 31,
1994.................... 520 145 180 -- 1,466 2,311
Net income............... -- -- -- -- 3,458 3,458
Preferred share
dividends............... -- -- -- -- (264) (264)
---- ---- ----- ----- ------ ------
BALANCE, at December 31,
1995.................... 520 145 180 -- 4,660 5,505
Net income for the six
months ended June 30,
1996 (unaudited)........ -- -- -- -- 2,123 2,123
Preferred share dividends
(unaudited)............. -- -- -- -- (132) (132)
Foreign currency
translation adjustment
(unaudited)............. -- -- -- (222) -- (222)
---- ---- ----- ----- ------ ------
BALANCE, at June 30, 1996
(unaudited)............. $520 $145 $ 180 $(222) $6,651 $7,274
==== ==== ===== ===== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-5
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
PREDECESSOR COMPANY
---------------------
SEVEN SIX MONTHS
MONTHS FIVE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED JUNE 30,
DECEMBER 31, JULY 29, DECEMBER 31, DECEMBER 31, ----------------
1993 1994 1994 1995 1995 1996
------------ -------- ------------ ------------ ------- -------
(UNAUDITED)
CASH FLOWS FROM
OPERATIONS:
Net income............. $ 2,628 $ 2,295 $ 1,576 $ 3,458 $ 1,964 $ 2,123
Adjustments to
reconcile net income
to cash provided by
operations:
Depreciation and
amortization.......... 1,734 949 673 1,774 872 987
Deferred income taxes.. -- -- (358) 941 595 395
Amortization of debt
discount.............. -- -- -- 33 21 12
Stock compensation
expense............... -- -- 65 -- -- -
Changes in assets and
liabilities:
(Increase) decrease in
receivables.......... (1,260) 1,261 (367) 806 259 (1,507)
(Increase) decrease in
inventories.......... (537) 277 561 (280) (555) (324)
(Increase) decrease in
other current assets. 212 (31) (7) (466) (18) 265
Increase (decrease) in
accounts payable..... 666 (531) 55 (91) (250) (251)
Increase (decrease) in
accrued employee
benefits............. (490) (121) 795 148 247 643
Increase (decrease) in
accrued expenses..... (812) (388) 1,342 (321) (1,348) 616
Increase in other
long-term
liabilities.......... -- -- -- -- -- 18
------- ------- -------- ------- ------- -------
Cash provided by
operations............ 2,141 3,711 4,335 6,002 1,787 2,977
------- ------- -------- ------- ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of the
Business (including
transaction fees and
expenses), net of cash
acquired.............. -- -- (16,929) -- -- (7,232)
Capital expenditures... (1,308) (812) (102) (847) (284) (1,086)
------- ------- -------- ------- ------- -------
Cash used in investing
activities............ (1,308) (812) (17,031) (847) (284) (8,318)
------- ------- -------- ------- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of debt............... -- -- 14,820 -- -- --
Repayment of debt...... -- -- -- -- -- (1,685)
Net change in short-
term debt............. -- -- -- -- -- 293
Proceeds from issuance
of redeemable
preferred shares...... -- -- 2,400 -- -- --
Proceeds from issuance
of common shares...... -- -- 600 -- -- --
Proceeds from issuance
of warrants........... -- -- 180 -- -- --
Net transfers to
Sellers............... (833) (2,899) -- -- -- --
------- ------- -------- ------- ------- -------
Cash provided by (used
in) financing
activities............ (833) (2,899) 18,000 -- -- (1,392)
------- ------- -------- ------- ------- -------
EFFECT OF EXCHANGE RATES
ON CASH................ -- -- -- -- -- (2)
------- ------- -------- ------- ------- -------
Increase (decrease) in
cash and cash
equivalents........... -- -- 5,304 5,155 1,503 (6,735)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. -- -- -- 5,304 5,304 10,459
------- ------- -------- ------- ------- -------
CASH AND CASH
EQUIVALENTS, end of
period................. $ -- $ -- $ 5,304 $10,459 $ 6,807 $ 3,724
======= ======= ======== ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-6
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30,
1995 AND 1996 IS UNAUDITED.)
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Control Devices, Inc. ("CDI"), which was organized on June 10, 1994,
designs, manufactures and markets circuit breakers, electronic sensors and
electronic ceramic component parts used by original equipment manufacturers
("OEMs") in the automotive, appliance and telecommunications markets. On April
1, 1996, CDI purchased Realisations et Diffusion pour l'Industrie ("RDI"),
which distributes these and other products in the Northern European market
from its headquarters near Paris, France. CDI is headquartered in Standish,
Maine and has manufacturing facilities in Standish and Caribou, Maine and San
Cristobal, Dominican Republic. CDI also maintains a sales office in Dearborn,
Michigan. CDI had no significant operations from incorporation through July
29, 1994. The accompanying financial statements include the results of CDI and
RDI from the date of acquisition. The "Company" refers to both CDI and RDI and
its consolidated subsidiaries.
On July 29, 1994, CDI purchased certain assets and liabilities (the
"Business") of GTE Control Devices Incorporated and Dominican Overseas Trading
Company (collectively, the "Seller"), indirect wholly-owned subsidiaries of
GTE Corporation. For periods prior to the acquisition date, the Business is
referred to as the "Predecessor Company". The accompanying financial
statements, including those of the Predecessor Company prior to the
acquisition date have been prepared by CDI management and present the
financial position and results of operations of CDI from the acquisition date
and of the Business for the periods prior to the acquisition date.
Accordingly, the financial information for periods prior to the acquisition
date does not reflect the significant impact of the acquisition, the related
financing and the purchase accounting adjustments on the financial position
and results of operations of CDI.
The Predecessor Company financial statements include all significant
components of the Business and have been prepared solely by CDI as if the
Business were operated as a separate entity for the periods presented. The
Predecessor Company financial statements do not include an allocation of any
assets and liabilities not specifically identified to the Business, including
cash and intercompany debt. Prior to September 28, 1993, the Predecessor
Company also included a telecommunications product division and shared certain
facilities and functions with this division. Certain costs and expenses,
including manufacturing overhead and selling, general and administrative
expenses, were prorated by CDI between the Business and the telecommunications
division in preparing the accompanying Predecessor Company financial
statements. Expenses were allocated based on actual usage or other allocation
methods which approximate actual usage. Management of CDI believes that the
allocation methods are reasonable.
(2) SUMMARY OF ACCOUNTING POLICIES:
Principles of consolidation--
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated.
Basis of accounting--
The Company maintains its books in accordance with generally accepted
accounting principles. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and
F-7
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF ACCOUNTING POLICIES--(CONTINUED):
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.
Foreign currency translation and transactions--
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars using the exchange rate in effect at the balance sheet date.
Results of operations are translated using the average exchange rate
prevailing throughout the period. The effects of exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
included in the foreign currency translation adjustment component of
shareholders' equity, while gains and losses resulting from foreign currency
transactions are included in net income.
Cash and cash equivalents--
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
Trade receivables--
RDI's practice is to sell part of its trade receivables to finance their
business. At June 30, 1996, such sales with limited recourse amounted to
$3,108,000 which have been deducted from trade receivables.
Inventories--
Inventories are stated at the lower of cost or market value. Cost of
inventories is determined by the first-in, first-out ("FIFO") method of
inventory valuation.
Property, plant and equipment--
Depreciation is provided using the straight-line and various accelerated
methods over the estimated useful lives of the related plant and equipment.
Ranges of the estimated useful lives are as follows:
The Company
Machinery and equipment................................... 3 to 15 years
Building and building equipment........................... 40 years
Predecessor Company
Machinery and equipment................................... 3 to 16 years
Building and building equipment........................... 10 to 50 years
Leasehold improvements are amortized over the terms of the respective leases
or the estimated useful lives of the improvements, whichever is less.
Maintenance, repairs and renewals are expensed as incurred; betterments are
capitalized.
Goodwill--
As part of the acquisition of RDI, goodwill was recorded which represented
the difference between the purchase price and the fair value of the
identifiable underlying net assets acquired and is carried as an asset, less
accumulated amortization which is calculated on a straight-line basis over the
estimated useful life of 40 years.
The Company periodically evaluates the periods over which intangible assets
are amortized to determine whether events have occurred which would require
modification to the amortization period. The Company reviews anticipated
future operating results and cash flows on an undiscounted basis in
determining whether there has been an impairment in the value of the excess of
purchase price over net assets acquired.
F-8
CONTROL DEVICES, INC.
NOTES CONSOLIDATED TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF ACCOUNTING POLICIES--(CONTINUED):
Income taxes--
CDI utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using presently enacted tax rates and
regulations.
Retirement benefits--
RDI maintains a defined contribution plan for their employees. The Company
applies SFAS No. 87, "Employer's Accounting for Pensions" to account for
retirement benefits.
Research and development--
Expenditures for Company-sponsored research and new product development are
expensed as incurred.
Environmental expenditures--
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations and that do not contribute to
current or future revenues are expensed.
Revenue recognition--
Revenue is recognized when products are shipped.
Earnings per share--
Earnings per share is based on the weighted average number of common shares
and dilutive common share equivalents outstanding during the period.
Fair value of financial instruments--
The fair values of financial instruments closely approximate their carrying
value. The Company has no involvement with derivative financial instruments.
Interim financial statements--
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments, all of which are of a normal
recurring nature, necessary to present fairly the financial position of the
Company as of June 30, 1996 and the results of their operations and changes in
their cash flows for the six month periods ended June 30, 1995 and 1996.
(3) ACQUISITION OF THE BUSINESS:
On July 29, 1994, CDI purchased the Business for $16.4 million in cash and a
$1.5 million note payable to GTE Control Devices Incorporated (the "Seller
Note"). The cash portion of the purchase price and related transaction fees of
approximately $500,000 were financed through a combination of long-term debt
and common and preferred shares issued to various investors.
F-9
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) ACQUISITION OF THE BUSINESS--(CONTINUED)
The purchase method was used to account for the acquisition. The aggregate
purchase price has been allocated to the assets and liabilities of the
Business based on fair market value.
The net assets acquired after allocating the purchase price are as follows
(in thousands):
Receivables..................................................... $ 4,744
Inventories..................................................... 3,560
Other current assets............................................ 110
Property, plant and equipment................................... 12,213
Other assets.................................................... 382
Accounts payable................................................ (1,465)
Accrued employee benefits....................................... (516)
Accrued expenses................................................ (599)
-------
$18,429
=======
Pursuant to the asset purchase agreement, the Seller retained certain assets
and liabilities including, but not limited to, liabilities for pensions and
post-retirement life and health insurance, certain employee benefits for
active employees and reserves for environmental matters.
The unaudited pro forma results of operations for the years ended December
31, 1993 and 1994, respectively, had the acquisition and initial
capitalization of the Company occurred at the beginning of each of the periods
presented, are provided in the following table. These pro forma results
include adjustments for depreciation and amortization of assets acquired based
on their fair market values at the acquisition date, increased interest on
acquisition debt, elimination of allocated employee benefit and administrative
expenses and the related income tax effect. For purposes of computing income
taxes, an effective tax rate of 40% was used for the Predecessor Company
results of operations. The unaudited pro forma information does not
necessarily represent what the results of operations would have been in such
periods and is not intended to be indicative of future results.
YEAR ENDED
DECEMBER 31,
-----------------
1993 1994
-------- --------
(UNAUDITED-
IN THOUSANDS
EXCEPT PER SHARE)
Net sales............................................... $39,807 $43,842
Net income applicable to common shareholders............ 1,526 3,131
Earnings per share...................................... 0.60 1.22
(4) ACQUISITION OF RDI:
On April 1, 1996, the Company purchased all of the issued and outstanding
stock of RDI for $8,964,000. The Company paid $6,964,000 in cash plus
transaction fees of approximately $400,000 from existing cash on hand,
delivered Subordinated Promissory Notes ("RDI Notes") totaling $1,108,000 and
delivered Automatically Converting Subordinated Promissory Notes ("RDI
Convertible Notes") totaling $892,000.
The purchase method was used to account for the acquisition. The aggregate
purchase price has been allocated to the assets and liabilities of RDI based
on preliminary estimates of fair market value. Any adjustments resulting from
the final purchase price allocation, which could result in changes to the
carrying values of assets and liabilities, including goodwill, are not
expected to be material to the financial statements.
F-10
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ACQUISITION OF RDI--(CONTINUED):
The net assets acquired after allocating the purchase price are as follows
(in thousands):
Cash.............................................................. $ 132
Receivables....................................................... 5,888
Inventories....................................................... 3,642
Other current assets.............................................. 549
Goodwill and other intangible assets.............................. 7,144
Property, plant and equipment..................................... 2,376
Accounts payable.................................................. (5,387)
Accrued expenses.................................................. (3,236)
Debt.............................................................. (1,744)
-------
$ 9,364
=======
The unaudited pro forma results of operations for the six months ended June
30, 1995 and 1996, respectively, had the acquisition of RDI occurred at
January 1, 1995 and January 1, 1996, respectively, are provided in the
following table. These pro forma results include adjustments for depreciation
and amortization of assets acquired based on their estimated fair market
values at the acquisition date, adjustments for additional interest expense on
acquisition debt, adjustments for the decrease in interest expense on the
Seller Note which was repaid in connection with the acquisition of RDI,
adjustments for the elimination of interest income on excess cash balances,
adjustments for the elimination of intercompany sales and profit in inventory,
and the related income tax effect. The unaudited pro forma information does
not necessarily represent what the results of operations would have been in
such periods and is not intended to be indicative of future results.
SIX MONTHS JUNE
30,
-----------------
1995 1996
-------- --------
(UNAUDITED-
IN THOUSANDS
EXCEPT PER SHARE)
Net sales............................................... $ 34,968 $ 34,803
Net income applicable to common shareholders............ 1,987 2,066
Earnings per share...................................... 0.77 0.81
(5) INVENTORIES:
Classes of inventories as of December 31, 1994 and 1995 and June 30, 1996,
are as follows (in thousands):
1994 1995 1996
------ ------ ------
Raw materials and supplies........................... $1,055 $1,174 $1,298
Work-in-process...................................... 703 613 769
Finished goods....................................... 1,241 1,492 5,091
------ ------ ------
$2,999 $3,279 $7,158
====== ====== ======
F-11
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) PROPERTY, PLANT AND EQUIPMENT:
Classes of property, plant and equipment as of December 31, 1994 and 1995,
and June 30, 1996, are as follows (in thousands):
1994 1995 1996
------- ------- -------
Land.............................................. $ 181 $ 181 $ 486
Building.......................................... 1,440 1,440 2,987
Equipment......................................... 10,796 11,513 13,016
Leasehold improvements............................ 248 248 248
------- ------- -------
12,665 13,382 16,737
Accumulated depreciation.......................... (641) (2,285) (3,179)
------- ------- -------
$12,024 $11,097 $13,558
======= ======= =======
(7) DEBT:
Debt consists of the following as of December 31, 1994 and 1995, and June
30, 1996, (in thousands):
1994 1995 1996
------- ------- -------
10% Senior Secured Fixed Rate Notes................. $10,500 $10,500 $10,500
11% Senior Subordinated Notes (face value of
$4,500)............................................ 4,320 4,353 4,364
RDI Notes........................................... -- -- 1,108
RDI Convertible Notes............................... -- -- 892
RDI fixed rate loans................................ -- -- 1,158
RDI short-term debt ................................ -- -- 654
Junior Subordinated Promissory Note (Seller Note)... 1,500 1,500 --
------- ------- -------
$16,320 $16,353 $18,676
======= ======= =======
On July 29, 1994, and as amended on March 29, 1996, CDI entered into
agreements (the "Securities Purchase Agreements") with a group of affiliated
lenders to provide CDI with $15.0 million of term loans and up to $3.0 million
in revolving credit loans (collectively referred to as "Senior Debt"). Loans
available under the revolving credit loan (the "Revolver") will be used from
time to time for working capital and general corporate purposes. The maturity
date of the Revolver is July 29, 1999. Borrowings bear interest at the prime
rate plus 1.5%. A facility fee of 0.5% of the unused commitment under the
Revolver is payable quarterly in arrears. As of, and for the five months ended
December 31, 1994, as of and for the year ended December 31, 1995, and as of
and for the six months ended June 30, 1996, there were no loans outstanding
under the Revolver.
The term loans are comprised of the 10% Senior Secured Fixed Rate Notes and
the 11% Senior Subordinated Notes (collectively the "Senior Notes") both due
July 31, 2004. Interest on the Senior Notes is payable semi-annually on each
January 31 and July 31. The 10% Senior Secured Fixed Rate Notes are payable
beginning July 31, 1996. The 11% Senior Subordinated Notes are payable
beginning July 31, 2000. Optional prepayments without a premium may be made on
the Senior Notes up to an annual maximum of $3,750,000. Upon a change of
control (as defined) or upon an initial public offering of the Company's
common or preferred shares, CDI may also redeem the entire amount of Senior
Notes without a premium. The Senior Debt ranks senior to all other
indebtedness of CDI and is secured by substantially all of the Company's
assets.
F-12
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEBT--(CONTINUED):
Under the Securities Purchase Agreements, warrants to purchase 564,100
shares of Class B Series 1 Common Shares at $.01 per share were issued to the
lenders. The proceeds received upon the issuance of the 11% Senior
Subordinated Notes of $4.5 million were allocated between the notes and the
warrants based on their estimated relative fair values. Accordingly, $180,000,
which represents the amount of the proceeds allocated to the warrants, has
been credited to additional paid-in-capital. The discount is being amortized
over the life of the notes.
In connection with the acquisition of RDI, the Seller Note was repaid
without premium in March 1996. The Seller Note earned interest at 10% payable
quarterly and was due in full on July 29, 1999.
The Securities Purchase Agreements, contains certain restrictive covenants
which include, among other things, a restriction on the payment of dividends
(to no more than 25% of cash flow, as defined), maintenance of a current ratio
of 1.4 and limitation on other indebtedness. The Company was in compliance
with all covenants in 1994 and 1995 and for the six months ended June 30,
1996.
The RDI fixed rate loans bear interest at the weighted average rate of 7.7%
and are secured by certain assets of RDI.
The RDI Notes bear interest at 8% per annum and are due in three equal
annual installments commencing on April 1, 1997. CDI has the right to prepay
the RDI Notes at any time without premium.
The RDI Convertible Notes bear interest at 6.5% per annum and are payable in
full on demand after April 1, 1999. Prior to April 1, 2001, the RDI
Convertible Notes may be prepaid with the consent of the holders. Thereafter,
the RDI Convertible Notes may be prepaid by CDI without premium. Upon the
closing of an initial public offering of CDI's Class A Common Shares, any
remaining principal balance of the RDI Convertible Notes shall be converted
into Class A Common Shares. The conversion price shall be equal to the initial
public offering price per share.
The RDI Notes and RDI Convertible Notes are subordinate to the Senior Debt.
Scheduled principal payment due on debt in the next five years are as
follows (in thousands):
RDI RDI RDI
10% 11% RDI CONVERTIBLE SHORT-TERM FIXED
NOTES NOTES NOTES NOTES DEBT RATE LOANS TOTAL
------ ------ ----- ----------- ---------- ---------- -------
1996.......... $ 500 $ -- $-- $-- $654 $191 $ 1,345
1997.......... 500 -- 369 -- -- 336 1,205
1998.......... 750 -- 369 -- -- 267 1,386
1999.......... 750 -- 370 892 -- 152 2,164
2000.......... 1,000 900 -- -- -- 80 1,980
Thereafter.... 7,000 3,600 -- -- -- 132 10,732
Cash paid for interest for the five month period ended December 31, 1994,
for the year ended December 31, 1995 and for the six months ended June 30,
1995 and 1996 was $65,000, $1,702,500, $851,000 and $854,000, respectively.
F-13
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) OTHER LONG-TERM LIABILITIES:
Other long-term liabilities as of December 31, 1994, 1995 and June 30, 1996,
are as follows (in thousands):
1994 1995 1996
---- ------ ------
Deferred tax liabilities................................. $138 $1,001 $1,258
Accrued redeemable preferred share dividends............. 110 -- --
RDI--Retirement benefits................................. -- -- 812
RDI--Profit sharing...................................... -- -- 455
---- ------ ------
$248 $1,001 $2,525
==== ====== ======
See Note 12 for discussion of RDI retirement benefits and profit sharing.
(9) REDEEMABLE PREFERRED SHARES:
In connection with the acquisition of the Business, CDI issued 2,400 shares
of 11% Cumulative Preferred Shares ("Redeemable Preferred Shares") for $2.4
million. The Redeemable Preferred Shares accrue cumulative dividends at a rate
of 11% per annum and have a liquidation preference value of $2,400,000 plus
accrued and unpaid dividends. The liquidation preference value of the
Redeemable Preferred Shares ($1,000 per share plus accrued dividends) was
$2,510,000, $2,774,000 and $2,906,000 at December 31, 1994 and 1995 and June
30, 1996, respectively. At December 31, 1994 and 1995, and June 30, 1996,
accrued and unpaid dividends were $110,000, $374,000, and $506,000,
respectively, which have been included in accrued expenses, at December 31,
1995, and June 30, 1996 and other long-term liabilities at December 31, 1994.
Dividends are payable after October 1996 assuming that a certain level of cash
flow, as defined, is achieved. The Redeemable Preferred Shares are subject to
redemption at the option of the Company, without a premium, from time to time
with mandatory redemption on July 29, 2006. In addition, 580 Preferred Shares
(aggregating $580,000) issued to the lenders, plus accrued and unpaid
dividends, must be redeemed without a premium if the Senior Notes are prepaid
in full.
(10) SHAREHOLDERS' EQUITY/NET ASSETS:
In connection with the acquisition of the Business, CDI issued 1,564,098
shares of Class A Common Shares and 435,896 shares of Class B Series 1 Common
Shares for an aggregate price of $600,000. The Class A Common Shares are
identical in all respects to the Class B Series 1 Common Shares, except that
the Class B Series 1 Common Shares have limited voting rights. The Class B
Series 1 Common Shares are convertible at any time at the option of the holder
into Class A Common Shares currently on a one-for-one basis, subject to
dilution. No dividends on the Class A Common Shares or the Class B Series 1
Common Shares may be paid until the Seller Note is repaid in full and while
any dividends on the Redeemable Preferred Shares remain unpaid. Accordingly,
no dividends on Common Shares could have been paid as of December 31, 1994 and
1995 and June 30, 1996.
Certain Class A Common Shares were issued to officers of CDI at a price
which was less than the amount paid by other investors. A non-cash charge of
$65,000 was recorded in 1994 as compensation expense for the difference
between the fair value and the purchase price for these shares.
Warrants to purchase 564,100 shares of Class B Series 1 Common Shares for
$.01 per share are outstanding at December 31, 1994. The warrants expire on
July 31, 2004 (see Note 7).
As further discussed in Note 17, in 1995 the Company issued a non-qualified
stock option to purchase 200,000 Class A Common Shares.
In July 1996, the Company reserved, subject to shareholder approval, 300,000
Common Shares for issuance pursuant to its 1996 Stock Compensation Plan (the
"Plan"). The Plan permits the grant of Incentive Stock Options within the
meaning of Section 422 of the Internal Revenue Code, nonstatutory options and
performance units payable in cash or Common Shares. No options or performance
units have been granted to date. The Plan is administered by the compensation
committee of the Board of Directors.
F-14
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) SHAREHOLDERS' EQUITY/NET ASSETS--(CONTINUED):
Net assets--
Changes in Predecessor Company net assets were as follows (in thousands):
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 29,
1993 1994
------------ ------------
Balance, beginning of period.......................... $15,539 $17,334
Net income............................................ 2,628 2,295
Net transfers......................................... (833) (2,899)
------- -------
Balance, end of period................................ $17,334 $16,730
======= =======
(11) INCOME TAXES:
The Predecessor Company operated as a division, and income taxes were not
allocated to it. The accompanying financial statements of the Predecessor
Company reflect an allocated provision for income taxes using an effective tax
rate of 40%, the estimated combined rate for current and deferred state and
federal income taxes. The related current or deferred income taxes payable
would have been transferred to the Seller, if allocated, and are included in
the net assets of the Predecessor Company.
The components of the provision (benefit) for income taxes for the Company
for the five months ended December 31, 1994, for the year ended December 31,
1995 and for the six months ended June 30, 1995 and 1996 are as follows (in
thousands):
DECEMBER 31, JUNE 30,
-------------- -------------
1994 1995 1995 1996
------ ------ ------ ------
Current:
Federal..................................... $1,029 $ 907 $ 572 $ 764
State....................................... 319 230 143 234
------ ------ ------ ------
1,348 1,137 715 998
====== ====== ====== ======
Deferred:
Federal..................................... (277) 729 461 266
State....................................... (81) 212 134 58
------ ------ ------ ------
(358) 941 595 324
------ ------ ------ ------
$ 990 $2,078 $1,310 $1,322
====== ====== ====== ======
A reconciliation of the income tax provision calculated at the federal
income tax statutory rate and the Company's effective income tax rate for the
five months ended December 31, 1994, for the year ended December 31, 1995 and
for the six months ended June 30, 1995 and 1996 is as follows (in thousands):
DECEMBER 31, JUNE 30,
-------------- --------------
1994 1995 1995 1996
------ ------- ------- ------
Tax at statutory rate..................... $ 872 $ 1,882 $ 1,114 $1,171
State income taxes, net of federal bene-
fit...................................... 157 292 183 193
Other, net................................ (39) (96) 13 (42)
----- ------- ------- ------
$ 990 $ 2,078 $ 1,310 $1,322
===== ======= ======= ======
F-15
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) INCOME TAXES--(CONTINUED):
The significant components of deferred income tax asset (liability) at
December 31, 1994 and 1995, and June 30, 1996 are as follows (in thousands):
1994 1995 1996
----- ------- ------
Current:
Inventory reserves.............................. $ 108 $ 112 $ 127
Accrued employee benefits....................... 258 76 439
Other........................................... 130 230 287
----- ------- ------
496 418 853
===== ======= ======
Noncurrent:
Depreciation.................................... (240) (1,012) (1,274)
Other........................................... 102 11 16
----- ------- ------
(138) (1,001) (1,258)
----- ------- ------
$ 358 $ (583) $ (405)
===== ======= ======
The significant components of the deferred income tax provision (benefit)
for the five months ended December 31, 1994, for the year ended December 31,
1995 and for the six months ended June 30, 1995 and 1996 are as follows (in
thousands):
DECEMBER 31, JUNE 30,
-------------- -----------
1994 1995 1995 1996
------ ------ ----- ----
Current:
Inventory reserves......................... $ (108) $ (4) $ (2) $ (3)
Accrued employee benefits.................. (258) 182 115 16
Other...................................... (130) (100) (63) 54
------ ------ ----- ----
(496) 78 50 67
------ ------ ----- ----
Noncurrent:
Depreciation............................... 240 772 487 262
Other...................................... (102) 91 58 (5)
------ ------ ----- ----
138 863 545 257
------ ------ ----- ----
$ (358) $ 941 $ 595 $324
====== ====== ===== ====
Cash paid for income taxes for the five months ended December 31, 1994, for
the year ended December 31, 1995, and for the six months ended June 30, 1995
and 1996 was $1,036,600, $1,946,000, $240,000 and $792,000, respectively.
(12) EMPLOYEE BENEFITS:
Effective as of the acquisition date, CDI established a 401(k) savings plan.
Under the plan, CDI matches employee contributions subject to the discretion
of the board of directors. The expense for the employer contribution for the
five months ended December 31, 1994, for the year ended December 31, 1995 and
for the six months ended June 30, 1995 and 1996 was $137,000, $301,000,
$145,000 and $230,000, respectively.
F-16
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) EMPLOYEE BENEFITS--(CONTINUED):
The Predecessor Company employees participated in Seller-sponsored defined
benefit, postretirement health and life insurance, and savings and investment
plans. The expense (income) for these plans, which was allocated by the seller
to the Predecessor Company (see Note 1), was $182,000 and $94,000, for the
year ended December 31, 1993 and for the seven months ended July 29, 1994,
respectively. Pursuant to the Asset Purchase Agreement, the Seller retained
all obligations under these plans. CDI does not sponsor defined benefit or
postretirement benefit plans. Information with respect to actuarial
valuations, funded status, investment activities and other information
regarding the Predecessor Company's participation in the plans is not
available from the Seller, and, accordingly, is not presented.
RDI (Unaudited)--
RDI maintains a government mandated retirement plan for substantially all of
its employees. These benefits do not vest until retirement. The amount of the
benefits to be paid depends upon, among other things, the seniority and salary
of the employees at retirement date. RDI maintains a government mandated
employee profit plan for all employees. The amount of the benefits are based
upon a formula which includes, among other things, net taxable income. The
liability is generally not payable for a period of five years, and is
internally funded. In addition, RDI maintains an incentive plan for certain of
its key executives. The amount of the benefits are based upon a formula which
includes, among other things, net income. The expense for the above plans for
RDI was $99,000 for the three months ended June 30, 1996.
(13) COMMITMENTS AND CONTINGENCIES:
Operating leases--
The Company leases certain buildings, office space, automobiles and
equipment under noncancellable operating leases expiring at various dates
through May 1999. Rental expense under operating leases amounted to $521,000,
$362,000, $236,000, $446,000, $199,000 and $272,000 for the year ended
December 31, 1993, the seven months ended July 29, 1994, the five months ended
December 31, 1994, the year ended December 31, 1995, and for the six months
ended June 30, 1995 and 1996, respectively.
Future minimum rental payments under leases extending for one year or more
are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1996............................................................. $512
1997............................................................. 315
1998............................................................. 115
1999............................................................. 23
Employment Agreements (Unaudited)--
The Company has entered into employment agreements with two executives at
RDI. The agreements provide that each executive will receive annual
compensation of up to FF 975,000 (approximately $195,000), plus an annual
bonus of up to FF 487,000 (approximately $97,000), which is based upon meeting
certain performance objectives. The agreements provide for a severance payment
if the Company terminates the executive for any reason other than misconduct
prior to March 29, 1998. The amount of the severance payment to each executive
is equal two years' salary and bonus.
Legal proceedings--
The Company has various claims and contingent liabilities arising in the
ordinary conduct of business. In the opinion of management, they are not
expected to have a material adverse effect on the financial position of the
Company.
F-17
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) RELATED PARTY TRANSACTIONS:
CDI--
Hammond, Kennedy, Whitney & Company ("HKW") provides management services to
the Company. Three directors of the Company are principals of HKW and own
shares of the Company's common and preferred shares. The Company pays HKW
monthly management fees of $15,000 and board of directors fees. These fees
amounted to $91,000, $240,000, $120,000 and $120,000 for the five months ended
December 31, 1994, for the year ended December 31, 1995, and for the six
months ended June 30, 1995 and 1996, respectively. In addition, fees paid to
one of the principals of HKW for professional services amounted to $17,000,
$59,000, $29,000 and $25,000, for the five months ended December 31, 1994, for
the year ended December 31, 1995, and for the six months ended June 30, 1995
and 1996, respectively.
Indemnification from Seller--
Pursuant to the terms of an Environmental Agreement dated July 6, 1994, the
Seller has retained liability and agreed to indemnify CDI for any and all
liabilities arising under CERCLA and other environmental requirements related
to contamination and cleanup at acquired facilities, treatment, storage and
disposal of hazardous materials transported offsite and remediation required
by the State of Maine Department of Environmental Protection or U.S.
Environmental Protection Agency existing or occurring prior to the acquisition
date. The Seller has indemnified CDI against claims pursuant to the
aforementioned issues to the extent the amounts exceed $50,000 in the
aggregate. The Seller has liability for claims relating to soil and
groundwater contamination from the surface impoundment and out-of-service
leachfield at the Company's Standish facility known to exist prior to the
acquisition to the extent the liability exceeds $50,000. The indemnifications
provided by the Seller begin to expire three years after the acquisition date,
with certain indemnifications continuing indefinitely.
Predecessor Company--
The Seller allocated expenses to the Predecessor Company for corporate
accounting, legal and administrative support services. Expenses charged
amounted to $179,000 and $128,000 for the year ended December 31, 1993 and for
the seven months ended July 29, 1994, respectively, and are reflected as
selling, general and administrative expenses in the accompanying statements of
income.
(15) CUSTOMER INFORMATION:
CDI sells its products primarily to OEMs on a worldwide basis in the
automotive, appliance and telecommunications industries. RDI distributes its
products primarily to automobile OEMs in the Northern European market. Sales
are concentrated in North America and Europe with the top 15 customers
accounting for approximately 72% of sales in 1995. Export sales were
$9,700,000, $6,992,000, $4,869,000, $11,729,000, $7,184,000 and $13,188,000
for the year ended December 31, 1993, the seven months ended July 29, 1994,
the five months ended December 31, 1994, the year ended December 31, 1995, and
for the six months ended June 30, 1995 and 1996, respectively. For the year
ended December 31, 1993, the seven months ended July 29, 1994, the five months
ended December 31, 1994, the year ended December 31, 1995 and for the six
months ended June 30, 1995 and 1996, two customers accounted for 18%, 24%,
27%, 33%, 32% and 20% of sales, respectively.
(16) SUPPLIER INFORMATION:
The Company relies on a sole supplier or a limited group of suppliers for
certain key components of its products. The Company does not have a long-term
supply agreement with any of these suppliers, and operates under purchase
orders. The Company's reliance on sole or a limited group of suppliers
involves several risks, including a potential inability to obtain an adequate
supply of required components and reduced control over pricing and timely
delivery of components. Although the timeliness, yield and quality of
deliveries to date from the Company's suppliers have been acceptable, any
prolonged inability to obtain adequate deliveries or any other circumstances
that would require the Company to seek alternative sources of supply could
delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and could therefore have
a material adverse effect on the Company's results of operations.
F-18
CONTROL DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) CONSULTING AGREEMENTS:
In April 1995, the Company entered several agreements with an individual to
provide design and marketing consulting services to the Company. The terms of
the agreements also provide for minimum cash royalty and license payments. The
agreements begin to expire in March 2001, and allow for cancellation by either
party in certain circumstances. In connection with these agreements, the
Company paid the individual a one time payment of $200,000 in 1995 and granted
a non-qualified stock options to purchase up to 200,000 Class A Common Shares
at any time until March 31, 2002 at the lesser of $10.00 or the initial public
offering price per share. In addition, royalty payments were approximately
$223,000, $115,000 and $120,000 for the year ended December 31, 1995, and for
the six months ended June 30, 1995 and 1996, respectively.
(18) INTERNATIONAL MANUFACTURING AND DISTRIBUTION:
The Company has international manufacturing facilities located in San
Cristobal, Dominican Republic. Included in the Company's balance sheet at
December 31, 1995, are the net assets of the Company's international
manufacturing operations which totaled approximately $1,686,000. This
operation manufactured, products accounting for approximately 40% of the
Company's gross revenues in 1995.
RDI distributes its products primarily to automotive OEMs in Northern
Europe. The Company's results of operations are therefore subject to European
economic conditions. RDI generates revenues and incurs expenses primarily in
currencies other than the U.S. dollar, and the Company does not engage in
currency hedging transactions. As a result, there is increased financial risk
to the Company based on fluctuations in currency exchange rates. Changes in
exchange rates, therefore, may have a significant effect on the Company's
financial condition and results of operations. At June 30, 1996, the net
assets of RDI, including goodwill, were approximately $9.3 million.
(19) SUPPLEMENTARY BALANCE SHEET INFORMATION:
Accrued expenses consisted of the following as of December 31, 1994 and
1995, and June 30, 1996 (in thousands):
1994 1995 1996
------ ------ ------
Interest................................................ $ 655 $ 652 $ 692
Dividends............................................... -- 374 791
Legal................................................... 214 176 146
Environmental........................................... 255 305 305
Taxes................................................... 306 34 572
Other................................................... 511 453 1,109
------ ------ ------
$1,941 $1,994 $3,615
====== ====== ======
F-19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO REALISATIONS ET DIFFUSION POUR L'INDUSTRIE ("RDI"):
We have audited the accompanying consolidated balance sheets of RDI and its
subsidiaries (the "Company") as of December 31, 1994 and 1995 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of RDI and its subsidiaries as of
December 31, 1994 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with French generally accepted accounting principles.
Accounting practices used by the Company in preparing the accompanying
financial statements conform with generally accepted accounting principles in
France, but do not conform with accounting principles generally accepted in
the United States. A description of these differences and a complete
reconciliation of consolidated net income and stockholders' equity to United
States generally accepted accounting principles is set forth in Note 3.
/s/ Thierry Aymonier
---------------------------------
BARBIER FRINAULT & ASSOCIES
Member of Andersen Worldwide SC
Thierry Aymonier
Paris, France,
May 19, 1996
F-20
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF FRENCH FRANCS)
DECEMBER 31,
-------------
1994 1995
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. 305 380
Receivables ............................................... 30,089 26,930
Inventories ............................................... 14,823 17,221
Deferred tax assets ....................................... 1,049 1,660
Other current assets....................................... 122 296
------ ------
Total current assets..................................... 46,388 46,487
------ ------
GOODWILL AND OTHER INTANGIBLES, net......................... 4,388 4,615
PROPERTY, PLANT AND EQUIPMENT, net ......................... 11,076 13,607
INVESTMENTS AND OTHER ASSETS................................ 722 94
------ ------
Total non-current assets................................. 16,186 18,316
------ ------
62,574 64,803
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ........................................... 7,582 6,355
Trade accounts payable..................................... 18,515 20,810
Accrued employee benefits and tax expenses................. 7,761 8,146
Other accrued expenses..................................... 1,385 1,514
------ ------
Total current liabilities................................ 35,243 36,825
------ ------
DEFERRED TAX LIABILITIES ................................... 342 515
PROVISION FOR LIABILITIES AND ACCRUALS ..................... 2,181 2,786
LONG TERM DEBT.............................................. 8,445 6,753
------ ------
Total long-term liabilities.............................. 10,968 10,054
------ ------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock, 100 nominal value, 70,000 shares authorized,
issued and outstanding in 1995............................ 5,000 7,000
Retained earnings.......................................... 11,363 10,924
------ ------
Total stockholders' equity............................... 16,363 17,924
------ ------
62,574 64,803
====== ======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-21
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF FRENCH FRANCS)
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
NET SALES........................................... 97,662 127,058 149,685
COST OF SALES....................................... (66,483) (82,744) (104,295)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ (26,201) (34,961) (36,526)
RESEARCH AND DEVELOPMENT EXPENSE.................... (1,193) (1,299) (1,231)
------- ------- --------
Operating income................................... 3,785 8,054 7,633
INTEREST EXPENSE, NET (Note 13)..................... (2,160) (2,365) (2,889)
------- ------- --------
Income before income tax........................... 1,625 5,689 4,744
INCOME TAX PROVISION (Note 11)...................... (556) (1,888) (2,183)
------- ------- --------
Net income......................................... 1,069 3,801 2,561
======= ======= ========
The accompanying notes are an integral part of these consolidated statements.
F-22
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS OF FRENCH FRANCS)
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- ------
BALANCE, at January 1, 1993............................. 5,000 8,293 13,293
Dividends paid (FF 18 per share)...................... -- (900) (900)
Net income............................................ -- 1,069 1,069
----- ------ ------
BALANCE, at December 31, 1993........................... 5,000 8,462 13,462
Dividends paid (FF 18 per share)...................... -- (900) (900)
Net income............................................ -- 3,801 3,801
----- ------ ------
BALANCE, at December 31, 1994........................... 5,000 11,363 16,363
Stock issued.......................................... 2,000 (2,000) --
Dividends paid (FF 14 per share)...................... -- (1,000) (1,000)
Net income............................................ -- 2,561 2,561
----- ------ ------
BALANCE, at December 31, 1995........................... 7,000 10,924 17,924
===== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-23
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF FRENCH FRANCS)
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
------- ------ ------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.......................................... 1,069 3,801 2,561
Depreciation and amortization..................... 910 1,352 1,356
Loss on disposal of fixed assets.................. 111 32 65
Decrease (Increase) in inventories................ 451 (1,700) (1,264)
Decrease (Increase) in receivables................ 185 (4,035) 5,687
Decrease (Increase) in other current assets....... (60) (206) (735)
Increase (Decrease) in trade accounts payable..... (960) 1,089 257
Increase (Decrease) in accrued employee benefits
and tax expenses................................. (43) 1,846 (46)
Increase (Decrease) in other accrued expenses..... 357 373 129
Increase (Decrease) in other liabilities.......... 653 633 778
------- ------ ------
Cash provided by operations....................... 2,673 3,185 8,788
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment........... (1,484) (3,457) (3,459)
Sale of property, plant and equipment............... 24 30 284
Acquisition of businesses, net of cash acquired..... (5,880) (2,121) (1,619)
------- ------ ------
Cash used in investing activities................. (7,340) (5,548) (4,794)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend............................................ (900) (900) (1,000)
Increase in long-term debt.......................... 4,520(a) 7,630 930
Decrease in long-term debt.......................... -- (a) (7,788) (2,622)
Net variation in short-term debt.................... 1,165 3,558 (1,227)
------- ------ ------
Cash provided by (used in) financing activities... 4,785 2,500 (3,919)
------- ------ ------
Increase in cash and cash equivalents............. 118 137 75
------- ------ ------
CASH AND CASH EQUIVALENTS, beginning of period........ 50 168 305
------- ------ ------
CASH AND CASH EQUIVALENTS, end of period.............. 168 305 380
======= ====== ======
- --------
(a) The split between increase and decrease in long-term debt was not
available for 1993, and will be presented as a net increase in long-term
debt in 1993.
The accompanying notes are an integral part of these consolidated statements.
F-24
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF FRENCH FRANCS UNLESS OTHERWISE INDICATED)
(1) ACCOUNTING PRINCIPLES AND POLICIES:
The consolidated financial statements of Realisations et Diffusion pour
l'Industrie ("RDI") (the "Company") have been prepared in accordance with the
French law of January 3, 1985 and its Application Decree of February 17, 1986.
Certain reclassifications of items have been made in these consolidated
financial statements in order to conform to a presentation format which is
more understandable to a United States reader.
Basis of consolidation--
The Company's financial statements include the accounts of all subsidiaries
in which RDI holds, directly or indirectly, a controlling interest.
The results from operations of subsidiaries acquired or sold during the year
are consolidated as from or up to their respective dates of acquisition or
disposal.
Goodwill and intangible assets--
On the acquisition of a subsidiary, goodwill representing the difference
between the purchase price and the fair value of the identifiable underlying
net assets acquired is carried as an asset in the balance sheet and amortized
on a straight line basis against income over a period of 40 years.
Other intangible assets include patents, licenses and trademarks and
software, which are amortized over their useful life ranging from 1 to 5
years.
The Company periodically evaluates the periods over which the intangible
assets are amortized to determine whether events have occurred which would
require modification to the amortization period. The Company reviews
anticipated future operating results and cash flows on an undiscounted basis
in determining whether there has been an impairment in the value of the excess
of purchase price over net assets acquired.
Property, plant and equipment--
Property, plant and equipment are shown at historical cost. Depreciation is
provided, except on freehold land, on a straight-line basis over the estimated
useful lives of the assets, as follows:
Buildings.................................................. 40 years
Industrial plant and machinery............................. 5 to 10 years
Other tangible assets...................................... 5 to 10 years
Investments in unconsolidated companies--
Investments in which the Company owns less than 20% are carried at cost
after deducting appropriate allowances for permanent impairment in value.
Inventories--
Inventories, including work in progress, are valued at the lower of cost and
estimated net realizable value. Cost is determined on an average weighted cost
basis. The cost of work in progress and finished goods comprises materials,
labor and attributable manufacturing overheads.
F-25
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) ACCOUNTING PRINCIPLES AND POLICIES--(CONTINUED):
Cash and cash equivalents--
Cash and cash equivalents are made up of cash held in banks and in hand and
short-term investments generally having an original maturity of two months or
less (mainly debt securities, short-term loans and accrued interest).
Retirement benefits--
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
87 "Employer's Accounting for Pensions" to account for retirement benefits
except for the non-recognition of minimum liability adjustments reflecting the
excess of the accumulated benefit obligation over the liability accrued in the
financial statements (refer to Notes 3 and 12).
Deferred tax--
The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS No. 109 "Accounting for Income Taxes" effective January 1,
1993. Under this method, deferred income taxes are determined based on the
difference between the financial statement and the tax bases of assets and
liabilities using presently enacted tax rates and regulations. The cumulative
effect of adopting SFAS No. 109 was not significant.
Research and development--
Expenditures for Company research and new product development are expensed
as incurred.
Revenue recognition--
Sales are recorded upon transfer of ownership of the products which usually
corresponds to the date when products are shipped.
(2) ACQUISITIONS AND SIGNIFICANT EVENTS:
Acquisition (1993)--
In April 1993, the Company acquired Totem representing yearly net sales of
FF 18 million.
Acquisitions and significant events (1994)--
In February 1994, the Company acquired Spetelec (yearly net sales of FF 8
million) and in November 1994, Lucca (yearly net sales of FF 9 million).
As part of a reorganization, the activities and the net assets of Totem and
Spetelec were transferred to RDI on January 1, 1994 for Totem, and October 1,
1994 for Spetelec and the subsidiaries were liquidated.
Acquisition (1995)--
In June 1995, RDI acquired Futurelec which represented yearly net sales of
FF 2 million.
F-26
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) ACQUISITIONS AND SIGNIFICANT EVENTS--(CONTINUED):
The following represents the non-cash impact of the acquisitions noted
above:
1993 1994 1995
------ ------ ------
Fair value of assets acquired...................... 10,546 4,107 3,764
Liabilities assumed................................ (7,471) (3,415) (2,469)
Goodwill........................................... 2,805 1,429 324
------ ------ ------
Cash paid.......................................... (5,880) (2,121) (1,619)
====== ====== ======
(3) SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The accompanying consolidated financial statements have been prepared in
accordance with the accounting policies described in Accounting Principles and
Policies above ("French GAAP") which differ in certain respects from those
applicable in the United States ("US GAAP").
a) Retirement benefits
Under US GAAP, a minimum liability adjustment would have been recognized as
a reduction in shareholders' equity for the difference between the accumulated
benefit obligation and the net accrual at year end.
The minimum liability adjustment amounts to:
1994 1995
----- -----
Minimum liability adjustment................................. 1,317 1,085
Deferred tax effect.......................................... (439) (398)
----- -----
Minimum liability adjustment, net............................ 878 687
===== =====
b) Other differences
Other differences relate to the non-capitalization of capital leases, to the
non-recognition of unrealized exchange gains and to the lack of capitalization
of interest incurred during the construction period of RDI's headquarters.
None of these items in the aggregate or individually have an impact on
shareholders' equity as of December 31, 1995 and 1994 or net income for 1994
and 1995 higher than FF 200 before tax.
Therefore, these items were not included in the reconciliation below between
French and US GAAP.
c) US GAAP reconciliation
The following is a summary of the adjustments to shareholders' equity for
the years ended December 31, 1994 and 1995 which would be required if US GAAP
had been applied instead of French GAAP.
SHAREHOLDERS' EQUITY
AS OF DECEMBER 31,
----------------------
1994 1995
---------- ----------
Amounts per accompanying consolidated financial
statements........................................ 16,363 17,924
Retirement benefits, net........................... (878) (687)
---------- ----------
Approximate amounts under US GAAP.................. 15,485 17,237
========== ==========
F-27
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE
COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES--
(CONTINUED):
There is no significant adjustments to be made to reconcile 1995 and 1994 net
income from French to US GAAP.
(4) GOODWILL AND OTHER INTANGIBLES:
OTHER
GOODWILL INTANGIBLES TOTAL
-------- ----------- -----
Gross book value at January 1, 1994.............. 3,065 390 3,455
Accumulated depreciation at January 1, 1994...... (58) (361) (419)
----- ---- -----
Net book value at January 1, 1994............ 3,007 29 3,036
Additions........................................ 1,429 49 1,478
Amortization provided in 1994.................... (76) (50) (126)
----- ---- -----
Gross book value at December 31, 1994............ 4,494 439 4,933
Accumulated depreciation at December 31, 1994.... (134) (411) (545)
----- ---- -----
Net book value as of December 31, 1994....... 4,360 28 4,388
Additions........................................ 324 93 417
Amortization provided in 1995.................... (91) (99) (190)
----- ---- -----
Gross book value at December 31, 1995............ 4,818 532 5,350
Accumulated depreciation at December 31, 1995.... (225) (510) (735)
----- ---- -----
Net book value at December 31, 1995.......... 4,593 22 4,615
===== ==== =====
Other intangible assets mainly comprise software, patent licenses and
trademarks.
(5) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 1994 and 1995, consists of:
1994 1995
------ ------
Land..................................................... 1,383 1,383
Building................................................. 6,372 10,587
Equipment................................................ 8,665 8,544
Other.................................................... 1,779 --
------ ------
18,199 20,514
Less: Accumulated depreciation........................... (7,123) (6,907)
------ ------
Total................................................ 11,076 13,607
====== ======
(6) INVENTORIES:
1994 1995
------ ------
Raw materials and consumable............................. 1,409 1,194
Work in progress......................................... 117 243
Finished goods........................................... 15,141 16,962
------ ------
16,667 18,399
Less: Valuation allowance................................ (1,844) (1,178)
------ ------
Total................................................ 14,823 17,221
====== ======
F-28
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) TRADE AND OTHER RECEIVABLES:
1994 1995
------ ------
Trade receivables............................................ 30,055 26,451
Other receivables............................................ 916 1,347
------ ------
30,971 27,798
Less: Allowance for doubtful accounts........................ (882) (868)
------ ------
Total.................................................... 30,089 26,930
====== ======
The Company's practice is to sell part of its trade receivables to finance
the business. At December 31, 1995, such sales with limited recourse amounted
to FF 16,708 (1994--FF 7,416) which have been deducted from trade receivables
accordingly. Discounted bills with recourse are disclosed in Note 16.
For cash flow statement purposes, proceeds from these transfers of
receivables have been classified in cash from operating activities.
(8) LONG-TERM DEBT:
1994 1995
----- -----
Employee profit sharing.......................................... 1,486 1,851
Banks loans...................................................... 6,735 4,753
Other............................................................ 224 149
----- -----
Total long-term debt......................................... 8,445 6,753
===== =====
Loan repayment schedule (excluding short-term portion of long-term debt).
1994 1995
----- -----
1996............................................................. 2,384 --
1997............................................................. 2,164 2,118
1998............................................................. 1,475 1,485
1999............................................................. 1,562 1,360
2000............................................................. 413 1,343
2001 and thereafter.............................................. 447 447
----- -----
Total........................................................ 8,445 6,753
===== =====
All long term loans are in French Francs and are secured by certain assets of
the Company.
Analysis of long term debt by interest rate:
1994 1995
----- -----
Fixed rates:
--8% and under................................................... 5,008 3,955
--over 8%........................................................ 1,064 391
Floating rates (*)............................................... 2,373 2,407
----- -----
Total........................................................ 8,445 6,753
===== =====
- --------
(*)Floating rates are principally based on PIBOR.
F-29
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) SHORT-TERM DEBT:
1994 1995
----- -----
Bank overdraft................................................... 3,625 2,135
Current portion of long-term debt................................ 1,996 2,319
Other............................................................ 1,961 1,901
----- -----
Total........................................................ 7,582 6,355
===== =====
(10) COMMON STOCK:
The common stock consists of fully paid shares with a nominal value of FF
100:
1994 1995
---------- ----------
(IN NUMBER OF SHARES)
At January 1st,........................................ 50,000 50,000
Issued................................................. -- 20,000
---------- ----------
At December 31,...................................... 50,000 70,000
========== ==========
The increase in common stock was effected through a stock dividend.
At December 31, 1995 there are no outstanding shares that might be issued.
(11) INCOME TAX:
Provision for income tax basis is as follows:
1993 1994 1995
---- ------ ------
Current:
Domestic............................................. (549) (1,849) (2,621)
Deferred:
Domestic............................................. (7) (39) 438
---- ------ ------
Total.............................................. (556) (1,888) (2,183)
==== ====== ======
The provision for income tax differs from the amount computed by applying the
French statutory income tax rate of 33 1/3% in 1993 and 1994 and 36 2/3% in
1995 because of the effect of the following items:
1993 1994 1995
------ ------ ------
Net income.......................................... 1,069 3,801 2,561
Provision for income tax............................ (556) (1,888) (2,183)
------ ------ ------
Pretax income....................................... 1,625 5,689 4,744
French statutory tax rate........................... 33 1/3% 33 1/3% 36 2/3%
------ ------ ------
Computed income tax at French statutory tax rate.... 542 1,896 1,739
Permanent differences............................... 18 42 (14)
Change in valuation allowance on deferred tax
assets............................................. -- -- 492
Other, net.......................................... (4) (50) (34)
------ ------ ------
Provision for income tax............................ 556 1,888 2,183
====== ====== ======
F-30
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) INCOME TAX--(CONTINUED):
Deferred tax assets (liabilities) consist of the following:
1994 1995
----- -----
Gross deferred tax assets:
Net operating loss carry forwards............................ -- 492
Allowances and accruals not currently deductible for tax
purposes.................................................... 356 648
Retirement benefits.......................................... 693 1,012
----- -----
Gross deferred tax assets.................................... 1,049 2,152
Valuation allowance on deferred tax assets................... -- (492)
----- -----
Deferred tax assets........................................ 1,049 1,660
Gross deferred tax liabilities:
Excess book over tax basis of property, plant and equipment.. 342 515
----- -----
Deferred tax liabilities................................... 342 515
----- -----
Net deferred tax asset................................... 707 1,145
===== =====
Distribution to shareholders of the FF 10,990 retained earnings of the parent
company available for distribution as of December 31, 1995 would trigger a
taxation ("precompte") of a total amount of approximately FF 309 which would be
withheld from the amount distributed.
(12) PROVISIONS FOR LIABILITIES AND ACCRUALS:
1994 1995
----- -----
Retirement benefits.............................................. 2,078 2,762
Other............................................................ 103 24
----- -----
Total.......................................................... 2,181 2,786
===== =====
Movements in provisions are analyzed as follows:
RETIREMENT PURCHASE OTHER
BENEFITS ACCOUNTING PROVISIONS TOTAL
---------- ---------- ---------- ------
At, January 1, 1994................. 1,440 922 176 2,538
Additions........................... 638 -- 103 741
Purchase accounting and other
movements.......................... -- 836 -- 836
Deductions made against expenses
incurred........................... -- (1,758) (176) (1,934)
----- ------ ---- ------
At, December 31, 1994............... 2,078 -- 103 2,181
Additions........................... 684 -- 24 708
Purchase accounting and other
movements.......................... -- 165 -- 165
Deductions made against expenses
incurred........................... -- (165) (103) (268)
----- ------ ---- ------
At, December 31, 1995............... 2,762 -- 24 2,786
===== ====== ==== ======
Retirement indemnities
The Company has applied SFAS No. 87 "Employers' Accounting for Pensions"
except for the non-recognition of a minimum liability as explained in Note 3 as
follows:
F-31
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) PROVISIONS FOR LIABILITIES AND ACCRUALS--(CONTINUED):
The transition obligation has been determined as of January 1, 1993 as
being the difference between the liabilities accounted for under prior
years' accounting policies and the funded status of the plans resulting
from actuarial calculations; this transition obligation as determined at
January 1, 1993, has been reduced to its amortized value as if SFAS No. 87
had been applied from 1989. The amortization period is the average residual
active life of the population covered by the plan (13 years). The remaining
transition obligation is amortized over 6 years;
The plan covered is a retirement lump sum indemnities plan. The actuarial
method used is the projected unit credit method.
The funded status of the retirement benefit plan is as follows:
1993 1994 1995
------ ------ ------
Actuarial present value of benefit obligations:
Vested benefit obligation....................... -- -- --
Non-vested benefit obligation................... (2,987) (3,395) (3,847)
------ ------ ------
Accumulated benefit obligation.................... (2,987) (3,395) (3,847)
Effect of salary increases...................... (139) (158) (179)
------ ------ ------
Projected benefit obligation...................... (3,126) (3,553) (4,026)
Plan assets at fair value....................... -- -- --
------ ------ ------
Projected benefit obligation in excess of plan
assets........................................... (3,126) (3,553) (4,026)
Unrecognized net transition obligation.......... 1,686 1,475 1,264
------ ------ ------
Net pension accrual............................... (1,440) (2,078) (2,762)
====== ====== ======
The net periodic pension cost of the Company's pension plan includes the
following components:
1993 1994 1995
---- ---- ----
Service cost--benefits earned during the year............... 182 195 211
Interest cost on projected benefit obligation............... 204 233 263
Actual return on plan assets................................ -- -- --
Net amortization and deferral............................... 210 210 210
--- --- ---
Net pension cost.......................................... 596 638 684
=== === ===
Average assumptions used in accounting for the Company's plan were:
1993 1994 1995
---- ---- ----
Discount rate............................................ 7.0% 7.0% 7.0%
Rate of increase in compensation levels.................. 3.0% 3.0% 3.0%
Post-retirement benefits
The Company does not have any post-retirement benefit obligation that could
be covered by SFAS No. 106.
Purchase Accounting
These provisions relate only to purchase accounting provisions for Totem,
Spetelec and Lucca acquisitions.
F-32
REALISATIONS ET DIFFUSION POUR L'INDUSTRIE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) INTEREST EXPENSE (NET):
1993 1994 1995
------ ------ ------
Net interest income.................................. 83 76 56
Interest on debt..................................... (2,243) (2,441) (2,945)
------ ------ ------
Total............................................ (2,160) (2,365) (2,889)
====== ====== ======
(14) STAFF COSTS:
1993 1994 1995
------ ------ ------
Wages and salaries including social security and other
related costs........................................ 21,696 28,012 30,066
Average number of employees during the year........... 94 100 116
Number of employees at year end....................... 100 102 114
(15) SUBSEQUENT EVENTS:
RDI was acquired by Control Devices, Inc. on April 1, 1996.
As this transaction constitutes an event subsequent to the December 31, 1995
balance sheet, the consolidated financial statements of RDI for the year
ended December 31, 1995 do not give effect to any adjustments which may
arise from this transaction.
(16) COMMITMENTS AND CONTINGENCIES:
Commitments not otherwise disclosed amounted to:
1994 1995
----- ------
Discounted bills with recourse.................................. 7,416 16,708
Other commitments............................................... 107 551
(17) INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA:
The Company operates mainly on the European market and distributes their
products primarily to automobile original equipment manufacturers.
(18) LIST OF COMPANY ENTITIES AT DECEMBER 31, 1995:
COMPANY PERCENTAGE
COMPANY ENTITIES COUNTRY INTEREST OF CONTROL
---------------- ------- -------- ----------
Lucca France 100% 100%
Futurelec France 100% 100%
F-33
INSIDE BACK COVER PAGE
Under the heading "Appliance Market--Control Devices provides the appliance
market with circuit breakers for many residential and industrial
applications," there is a photograph of a number of the Company's glass
enclosed circuit breakers with the caption "The Company is one of only two
worldwide manufacturers of glass enclosed hermetic circuit breakers for many
residential and commercial applications" and a photograph of a compressor with
the caption "A typical application for the Company's hermetic glass enclosed
circuit breakers is to protect compressor motors used in residential and
commercial refrigeration equipment."
Under the heading "Telecommunications Market--Control Devices designs and
manufactures ceramic products for both wire and wireless applications," there
is a photograph of Dielectric Resonators with the caption "Dielectric
Resonators are an integral part of the rapidly expanding wireless PCS and
cellular communication markets," and a photograph of PTC thermistors and a
protection module with the caption "The Company has an exclusive contract to
supply its PTC thermistors for use in the module that protects GTE's central
office equipment."
CONTROL DEVICES, INC.
[LOGO]
2,000,000
COMMON SHARES
PROSPECTUS
DEAN WITTER REYNOLDS INC.
CLEARY GULL REILAND & MCDEVITT INC.
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the actual or estimated expenses, other than the
underwriting discounts and commissions, payable by the Company in connection
with the issuance and distribution of the Common Shares being registered. All
of the amounts shown are estimates except for the SEC registration fee, the
NASD filing fee and the Nasdaq Application Fee:
Registration Fee................................................. $ 9,518
Printing of Registration Statement and Prospectus................ 130,000
Accounting Fees and Expenses..................................... 300,000
Legal Fees....................................................... 225,000
Transfer Agent Fees and Expenses................................. 5,000
NASD Filing Fees................................................. 3,260
Nasdaq Application Fee........................................... 16,500
Blue Sky Fees and Expenses....................................... 20,000
Miscellaneous.................................................... 40,722
--------
Total........................................................ $750,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 37 of the Indiana Business Corporation Law, as amended (the "Act")
grants to each Indiana corporation broad powers to indemnify directors,
officers, employees or agents against expenses incurred in certain proceedings
if the conduct in question was found to be in good faith and was reasonably
believed to be in the corporation's best interests. This statute provides,
however, that this indemnification should not be deemed exclusive of any other
indemnification rights provided by the articles of incorporation, by-laws,
resolution or other authorization adopted by a majority vote of the voting
shares then issued and outstanding. Section 7.02 of the Code of By-Laws of the
Company reads as follows:
Clause 7.021. Definitions. Terms defined in Chapter 37 of the Indiana
Business Corporation Law (Ind. Code (S)(S) 23-1-37, et seq.) which are used in
this Article 7 shall have the same definitions for purposes of this Article 7
as they have in such chapter of the Indiana Business Corporation Law.
Clause 7.022. Indemnification of Directors and Officers. The Corporation
shall indemnify any individual who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner or trustee of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise whether or not for profit, against liability and expenses,
including attorneys fees, incurred by him in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, and whether formal
or informal, in which he is made or threatened to be made a party by reason of
being or having been in any such capacity, or arising out of his status as
such, except (i) in the case of any action, suit, or proceeding terminated by
judgment, order, or conviction, in relation to matters as to which he is
adjudged to have breached or failed to perform the duties of his office and
the breach or failure to perform constituted willful misconduct or
recklessness; and (ii) in any other situation, in relation to matters as to
which it is found by a majority of a committee composed of all directors not
involved in the matter in controversy (whether or not a quorum) that the
person breached or failed to perform the duties of his office and the breach
or failure to perform constituted willful misconduct or recklessness. The
Corporation may pay for or reimburse reasonable expenses incurred by a
director or officer in defending any action, suit, or proceeding in advance of
the final disposition thereof upon receipt of (i) a written affirmation of the
director's or officer's good faith belief that such director or officer has
met the standard conduct prescribed by Indiana law; and (ii) an undertaking of
the director or officer to repay the amount paid by the Corporation if it is
ultimately determined that the director or officer is not entitled to
indemnification by the Corporation.
II-1
Clause 7.023. Other Employees or Agents of the Corporation. The Corporation
may, in the discretion of the Board of Directors, fully or partially provide
the same rights of indemnification and reimbursement as hereinabove provided
for directors and officers of the Corporation to other individuals who are or
were employees or agents of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
whether or not for profit.
Clause 7.024. Non-exclusive Provision. The indemnification authorized under
Section 7.02 above is in addition to all rights to indemnification granted by
Chapter 37 of the Indiana Business Corporation Law (Ind. Code (S)(S) 23-1-37,
et seq.) and in no way limits the indemnification provisions of such Chapter.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is provided with respect to all sales of
securities by the Company within the past three years which were not
registered under the Securities Act:
On July 29, 1994, the Company: (i) sold 1,564,098 Common Shares for an
aggregate consideration of $455,000 in cash, to 56 persons each of whom was an
accredited investor, including each of the executive officers and directors of
the Company; (ii) sold 435,896 Common Shares to MassMutual for an aggregate
consideration of $145,000 in cash; (iii) granted to MassMutual warrants to
purchase up to 564,100 Common Shares; (iv) sold 2,400 11% Cumulative Preferred
Shares to certain of the purchasers referred to in (i) and (ii) for an
aggregate consideration of $2,400,000 in cash; (v) sold to MassMutual
$10,500,000 in principal amount of 10% Senior Secured Fixed Rate Notes; and
(vi) sold to MassMutual $4,500,000 in principal amount of 11% Senior
Subordinated Notes. All of such transactions were effected in reliance on the
exemption under Rule 506 of Regulation D.
On April 1, 1995, the Company granted to Dr. Dennis J. Hegyi, in connection
with the execution by Dr. Hegyi of a consulting agreement and certain license
agreements, an option to purchase 200,000 Common Shares, in reliance on the
exemption from registration under Section 4(2) of the Securities Act.
On April 1, 1996, the Company sold: (i) $1,108,000 in aggregate principal
amount of the RDI Notes; and (ii) $892,000 in aggregate principal amount of
the RDI Convertible Notes, as part of the consideration for the acquisition
for RDI to seven residents of France, in reliance on Regulation S.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* Form of Underwriting Agreement
3.1 Form of Articles of Incorporation of the Company to be filed at
closing of the offering
3.2* Form of Code of By-laws of the Company to be effective at the closing
of the offering
4.1* Specimen of Common Share certificate
4.2 Article III of the Articles of Incorporation of the Company (included
in Exhibit 3.1)
4.3* The Code of By-laws of the Company (included in Exhibit 3.2)
4.4 Form of (i) Securities Purchase Agreement dated July 29, 1994 entered
into between Control Devices, Inc. and certain investors; and (ii) 10%
Senior Secured Fixed Rate Notes, 11% Senior Subordinated Notes, and
Senior Secured Floating Rate Revolving Credit Notes issued pursuant to
the Securities Purchase Agreement.
II-2
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.5 Agreement to furnish copies of certain long term debt agreements.
5.1* Form of Opinion of Sommer & Barnard, PC
10.1 Environmental Agreement dated July 6, 1994 among Control Devices,
Inc., GTE Products of Connecticut Corporation, GTE Corporation, GTE
Control Devices Incorporated and Dominican Overseas Trading Company
10.2 Lease Assignment, Assumption Agreement and Release dated July 29, 1994
between GTE Control Devices, Incorporated and Control Devices, Inc.
with respect to the Lease dated September 23, 1993 between
Westinghouse Electric Corporation and GTE Control Devices,
Incorporated attached as Exhibit 1 thereto
10.3 Lease Assignment, Assumption Agreement and Release dated July 29, 1994
between GTE Control Devices, Incorporated and Control Devices, Inc.
with respect to the Lease dated December 1, 1993 between John Hancock
Mutual Life Insurance Company and GTE Control Devices Incorporated
attached as Exhibit 1 thereto
10.4 Lease Agreement dated December 30, 1994 between Mecon Mfg. and Control
Devices, Inc.
10.5 1996 Stock Compensation Plan
10.6 Consultant's Agreement dated April 1, 1995 between Control Devices,
Inc. and Dr. Dennis J. Hegyi
10.7 Agreement to Grant License dated April 1, 1995 between Control
Devices, Inc. and Dr. Dennis J. Hegyi
10.8 Option to Purchase 200,000 Class A Common Shares of Control Devices,
Inc. granted to Dr. Dennis J. Hegyi
10.9 Agreement dated April 1, 1995 between Control Devices, Inc. and Dr.
Dennis J. Hegyi
10.10 License Agreement (Rain Sensor and Fog Sensor) dated April 3, 1995,
between Control Devices, Inc. and Dr. Dennis J. Hegyi
10.11 License Agreement (Solar Position Sensor) dated April 3, 1995, between
Control Devices, Inc. and Dr. Dennis J. Hegyi
10.12 License Agreement (Twilight Sensor) dated April 3, 1995, between
Control Devices, Inc. and Dr. Dennis J. Hegyi
10.13 Stock Purchase Agreement dated March 29, 1996, by and among the
Company and each of the shareholders of RDI
10.14 Employment Agreement with Michel Hauser-Kauffmann
23.1* Consent of Sommer & Barnard, PC (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants
23.3 Consent of Barbier Frinault & Associes, Independent Public Accountants
24 Power of Attorney (included on signature page of the Registration
Statement)
27 Financial Data Schedule
- --------
* To be filed by amendment
(b) Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes
thereto.
II-3
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions
described in Item 14, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(3) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(4) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF STANDISH, STATE OF
MAINE, ON THE FIRST DAY OF AUGUST, 1996.
Control Devices, Inc.
By: /s/ Ralph R. Whitney, Jr.
---------------------------------
RALPH R. WHITNEY, JR.
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bruce D. Atkinson and Jeffrey G. Wood, and each
of them, his true and lawful attorney-in-fact and agent with full power of
substitution for him in his name, place and stead, in any and all capacities
to sign any and all amendments (including pre-effective and post-effective
amendments and any registration statement related to this offering that is to
be effective upon filing pursuant to Rule 462(b) under the Act) to this
registration statement, and to file the same with all exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, grants unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as to all intents and
purposes as he might or could do in person, and hereby ratifies and confirms
all that said attorneys-in-fact and agents or their or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE(S) DATE
--------- ------- ----
/s/ Ralph R. Whitney, Jr. Chairman of the August 1, 1996
- ------------------------------------- Board
RALPH R. WHITNEY, JR. Principal Executive
Officer
/s/ Jeffrey G. Wood Vice President, August 1, 1996
- ------------------------------------- Chief Financial
JEFFREY G. WOOD Officer, Secretary
and Treasurer
Principal Financial
and Accounting
Officer
/s/ Bruce D. Atkinson President, Chief August 1, 1996
- ------------------------------------- Executive Officer
BRUCE D. ATKINSON and Director
II-5
SIGNATURE TITLE(S) DATE
/s/ C. M. Brennan Director August 1, 1996
- -------------------------------------
C. M. BRENNAN
/s/ John D. Cooke Director August 1, 1996
- -------------------------------------
JOHN D. COOKE
/s/ James O. Futterknecht, Jr. Director August 1, 1996
- -------------------------------------
JAMES O. FUTTERKNECHT, JR.
/s/ Alan I. Mossberg Director August 1, 1996
- -------------------------------------
ALAN I. MOSSBERG
/s/ John M. Ramey Director August 1, 1996
- -------------------------------------
JOHN M. RAMEY
/s/ Glenn Scolnik Director August 1, 1996
- -------------------------------------
GLENN SCOLNIK
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* Form of Underwriting Agreement
3.1 Form of Articles of Incorporation of the Company to be filed at
closing of the offering
3.2* Form of Code of By-laws of the Company to be effective at the closing
of the offering
4.1* Specimen of Common Share certificate
4.2 Article III of the Articles of Incorporation of the Company (included
in Exhibit 3.1)
4.3* The Code of By-laws of the Company (included in Exhibit 3.2)
4.4 Form of (i) Securities Purchase Agreement dated July 29, 1994 entered
into between Control Devices, Inc. and certain investors; and (ii) 10%
Senior Secured Fixed Rate Notes, 11% Senior Subordinated Notes, and
Senior Secured Floating Rate Revolving Credit Notes issued pursuant to
the Securities Purchase Agreement.
4.5 Agreement to furnish copies of certain long-term debt agreements.
5.1* Form of Opinion of Sommer & Barnard, PC
10.1 Environmental Agreement dated July 6, 1994 among Control Devices,
Inc., GTE Products of Connecticut Corporation, GTE Corporation, GTE
Control Devices Incorporated and Dominican Overseas Trading Company
10.2 Lease Assignment, Assumption Agreement and Release dated July 29, 1994
between GTE Control Devices, Incorporated and Control Devices, Inc.
with respect to the Lease dated September 23, 1993 between
Westinghouse Electric Corporation and GTE Control Devices,
Incorporated attached as Exhibit 1 thereto
10.3 Lease Assignment, Assumption Agreement and Release dated July 29, 1994
between GTE Control Devices, Incorporated and Control Devices, Inc.
with respect to the Lease dated December 1, 1993 between John Hancock
Mutual Life Insurance Company and GTE Control Devices Incorporated
attached as Exhibit 1 thereto
10.4 Lease Agreement dated December 30, 1994 between Mecon Mfg. and Control
Devices, Inc.
10.5 1996 Stock Compensation Plan
10.6 Consultant's Agreement dated April 1, 1995 between Control Devices,
Inc. and Dr. Dennis J. Hegyi
10.7 Agreement to Grant License dated April 1, 1995 between Control
Devices, Inc. and Dr. Dennis J. Hegyi
10.8 Option to Purchase 200,000 Class A Common Shares of Control Devices,
Inc. granted to Dr. Dennis J. Hegyi
10.9 Agreement dated April 1, 1995 between Control Devices, Inc. and Dr.
Dennis J. Hegyi
10.10 License Agreement (Rain Sensor and Fog Sensor) dated April 3, 1995,
between Control Devices, Inc. and Dr. Dennis J. Hegyi
10.11 License Agreement (Solar Position Sensor) dated April 3, 1995, between
Control Devices, Inc. and Dr. Dennis J. Hegyi
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.12 License Agreement (Twilight Sensor) dated April 3, 1995, between
Control Devices, Inc. and Dr. Dennis J. Hegyi
10.13 Stock Purchase Agreement dated March 29, 1996, by and among the
Company and each of the shareholders of RDI
10.14 Employment Agreement with Michel Hauser-Kauffmann
23.1* Consent of Sommer & Barnard, PC (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants
23.3 Consent of Barbier Frinault & Associes, Independent Public Accountants
24 Power of Attorney (included on signature page of the Registration
Statement)
27 Financial Data Schedule
- --------
* To be filed by amendment