Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Technical Consumer Products, Inc. S-1 92 463K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws 3 11K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws 15 48K
7: EX-10.10 Material Contract 14 39K
8: EX-10.11 Material Contract 9 32K
9: EX-10.12 Material Contract 10 39K
10: EX-10.13 Material Contract 11 38K
11: EX-10.14 Material Contract 11 37K
12: EX-10.15 Exhibig 10.15 4 16K
4: EX-10.7 Material Contract 8 39K
5: EX-10.8 Material Contract 12 44K
6: EX-10.9 Material Contract 2± 9K
13: EX-16.1 Letter re: Change in Certifying Accountant 2 13K
14: EX-23.1 Consent of Experts or Counsel 1 6K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 2001
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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TECHNICAL CONSUMER PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 3641 31-1799461
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
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300 LENA DRIVE
AURORA, OHIO 44202
TELEPHONE: (330) 995-6111
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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MATTHEW G. LYON
VICE PRESIDENT -- FINANCE
AND OPERATIONS AND TREASURER
300 LENA DRIVE
AURORA, OHIO 44202
TELEPHONE: (330) 995-6111
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
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CHRISTOPHER M. KELLY, ESQ. JOHN J. JENKINS, ESQ.
JONES, DAY, REAVIS & POGUE CALFEE, HALTER & GRISWOLD LLP
NORTH POINT 1400 MCDONALD INVESTMENT CENTER
901 LAKESIDE AVENUE 800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114 CLEVELAND, OHIO 44114
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
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, 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $0.001 par value per
share $48,300,000 $12,075
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT THAT IS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 2001
Shares
TCP Logo
Common Stock
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Technical Consumer Products, Inc. is offering shares of its
common stock. Prior to this offering, there has been no public market for our
common stock. The initial public offering price of our common stock is expected
to be between $ and $ per share. We will apply to
have our common stock approved for quotation on The Nasdaq National Market under
the symbol "TCPS."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
7.
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PER SHARE TOTAL
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Public offering price........................... $ $
Underwriting discounts and commissions.......... $ $
Proceeds to us (before expenses)................ $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Technical Consumer Products, Inc. has granted the underwriters a 30-day
option to purchase up to an additional shares of common stock to cover
over-allotments.
We expect to deliver the shares of common stock on or about
, 2001.
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McDonald Investments Inc. FAC/Equities
THE DATE OF THIS PROSPECTUS IS , 2001.
ARTWORK DESCRIPTIONS
INSIDE FRONT COVER
The inside front cover is entitled "Lighting the Way to Energy Efficiency"
and contains photographs of the following TCP products: a TCP SpringLamp, flood
light, GoodLamp, Circline lamp and a capsule shaped lamp superimposed over an
artist's rendition of an electronic circuit board. TCP's logo appears on the
bottom right corner of the photograph.
GATEFOLD
The inside front cover includes a gatefold with a photograph of a two piece
SpringLamp set consisting of a ballast and a lamp. Surrounding the photograph of
the SpringLamp are the following narrative descriptions: "Complete assortment of
accessories," "Instant-on ballast technology," "Innovative 2-piece modular
version," "100% tested," "Unconditional warranty" and "SpringLamp." On the
bottom left corner of the photograph is the ENERGY STAR Program logo followed by
the phrase "TCP is a partner in the ENERGY STAR Program." Visible on the ballast
is certain text printed directly on to the ballast including a stamp evidencing
that the ballast is listed by Underwriters Laboratories, the ballast's FCC
identification number and the name "TCP."
INSIDE BACK COVER
The inside back cover is divided into four equally sized quadrants centered
around TCP's logo.
The upper left quadrant is entitled "SpringLamp" and includes photographs
of a SpringLamp, a SpringLamp enclosed in a round globe cover and a capsule
shaped cover and a SpringLamp partially inserted into an aluminum reflector.
Visible on the photograph of the ballast is certain text printed directly on to
the ballast including a stamp evidencing that the ballast is listed by
Underwriters Laboratories, the ballast's FCC identification number and the name
"TCP." These photographs are superimposed over a picture of a table lamp.
The upper right quadrant is entitled "Deco Mini Series & GoodLamps" and
includes photographs of a GoodLamp adjacent to a GoodLamp enclosed in a torpedo
shaped cover from TCP's Deco Mini Series as well as a photograph of the various
shapes and sizes of TCP's Deco Mini Series lamps. These photographs are
superimposed over a picture of the brightly illuminated interior of a room and a
hallway.
The lower left quadrant is entitled "Circline Lamps" and includes
photographs of a circline lamp as well as a circline lamp attached to TCP's lamp
holder arm bracket that is bent 45 degrees from the plane of the bulb. These
photographs are superimposed over a photograph of a table lamp with a
transparent lamp shade through which the circline lamp attached to the bent arm
holder bracket is visible.
The lower right quadrant is entitled "LED Lighting" and includes a
photograph of a light emitting diode lamp superimposed over a photograph of an
exit sign.
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY...................... 3
RISK FACTORS............................ 7
FORWARD-LOOKING STATEMENTS.............. 15
USE OF PROCEEDS......................... 16
DIVIDEND POLICY......................... 16
S CORPORATION STATUS.................... 17
CAPITALIZATION.......................... 18
DILUTION................................ 19
SELECTED FINANCIAL DATA................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 21
BUSINESS................................ 28
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MANAGEMENT.............................. 43
RELATED PARTY TRANSACTIONS.............. 48
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................. 51
PRINCIPAL STOCKHOLDERS.................. 53
DESCRIPTION OF CAPITAL STOCK............ 54
SHARES ELIGIBLE FOR FUTURE SALE......... 60
UNDERWRITING............................ 62
LEGAL MATTERS........................... 65
EXPERTS................................. 65
WHERE YOU CAN FIND MORE INFORMATION..... 65
INDEX TO FINANCIAL STATEMENTS........... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING
AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS.
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our common stock. You should read
the entire prospectus carefully, including the risk factors and our financial
statements and related notes to understand this offering fully. In this
prospectus, unless the context indicates otherwise, "TCP," "we," "us" and "our"
refer to Technical Consumer Products, Inc.
OUR BUSINESS
We design, develop and market high-quality, energy efficient lighting
products and accessories. Our wide variety of compact fluorescent products and
accessories offer the aesthetic features and application flexibility found in
traditional incandescent lighting while providing energy cost savings and
significantly longer product life. We believe that we offer the industry's most
comprehensive selection of compact fluorescent lighting products and accessories
including SpringLamp, the first compact fluorescent product with a twisted tube
design, and the United States market's first fully-dimmable product.
We have provided energy efficient lighting products and components to
original equipment manufacturers since 1986 and continue to sell our products to
original equipment manufacturers like General Electric Corp. and the Osram
Sylvania division of Siemens A.G. In 1997, we began marketing our products under
the TCP brand name to commercial and industrial customers, with sales in this
market increasing to $16.2 million for the first six months of fiscal 2001 from
$4.8 million in fiscal 1997 and $17.3 million in fiscal 2000. Our major
commercial and industrial customers include distributors like Graybar Electric
Company, Inc. and Rexel, Inc. who sell our products to a wide range of customers
including those in the hospitality, restaurant and entertainment, property
management and construction industries. We entered the residential consumer
market in June 2000 and now sell our compact fluorescent products and
accessories to consumers primarily through The Home Depot under its "Commercial
Electric" label as well as through K-mart and other retailers under the TCP
brand name. Our sales to retailers increased to $15.1 million for the first six
months of fiscal 2001 from $5.0 million in fiscal 2000. Our net sales were $31.3
million for the first six months of fiscal 2001 compared to $8.9 million for the
first six months of fiscal 2000.
We use our technological expertise to develop and commercialize innovative
new products. Most of our research and development activity has been funded
through licensing and royalty arrangements as well as through our suppliers and
customers as we work with them to develop or customize products to meet their
needs. We have built an extensive portfolio of lighting products based on
compact fluorescent technology and anticipate that we will continue to add new
products and product enhancements. We are a partner in the United States
government's ENERGY STAR Program and offer a variety of products that meet or
exceed the program's stringent criteria for long-life, energy savings, start
time, color and brightness.
Almost all of our products are made in Shanghai, China by companies
controlled by Ellis Yan, our Chairman, Chief Executive Officer and majority
stockholder. Mr. Yan's brother manages the operations of these companies, which
operate ISO 9002 certified facilities and have developed significant expertise
in making high-quality compact fluorescent lighting products. These companies
will be prohibited from selling competitive products to others under the
manufacturing and supply agreement that we will enter into prior to the
completion of this offering. We believe that the unique collaboration with our
suppliers made possible by Mr. Yan's ownership and the involvement of his family
enhances our ability to assure consistent high quality products and enables us
to quickly respond to customers' specialized product needs.
OUR MARKET OPPORTUNITY
According to industry sources, United States consumers spent $226.5 billion
on electricity in 2000. The Department of Energy estimates that the annual
domestic cost of electricity for lighting is more than $37 billion and that
households could cut lighting costs by 30% to 60% by using energy efficient
lighting products. According to the Environmental Protection Agency, or EPA,
compact fluorescents last up to 10 times longer than incandescents, use 75% less
energy and produce 90% less heat.
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Energy efficient lighting has gained wide acceptance among commercial and
industrial customers. By using compact fluorescent products, these customers can
realize substantial savings in energy costs associated with lighting and air
conditioning. The longer operating lives of compact fluorescent products also
contribute to lower maintenance costs. Retail sales of all compact fluorescent
lamps represented only about .005% of the 2.2 billion light bulbs sold in the
United States from July 1999 through June 2000. We believe that the
significantly higher prices charged for, and lack of knowledge of the benefits
of, compact fluorescent lamps have contributed to the slower adoption in the
retail market and, thus, lower sales relative to commercial and industrial
customers. However, we believe that the improved quality, increasing variety of
applications and declining prices of new compact fluorescent products, along
with recent volatility in electricity prices, growing concerns about electricity
supply and government and utility sponsored incentive programs for energy
efficient lighting are making compact fluorescent lighting products more popular
with residential consumers.
NEW PRODUCT DEVELOPMENT
We will continue to work with our customers to improve and extend existing
product lines to provide compact fluorescent alternatives for virtually all
incandescent applications. Our new product development efforts focus on three
areas:
- Commercial grade ballasts. Ballasts convert electrical current into the
form required to operate fluorescent lamps. We are developing commercial
grade electronic ballasts for linear fluorescent tubes that incorporate
more energy efficient designs at a lower cost.
- Customized light fixtures. In order to capitalize on our strong position
in compact fluorescents, we have entered the lighting fixture market,
providing a number of customized light fixtures that incorporate energy
efficient lighting.
- Light emitting diode, or LED, lighting products. Our LED product
development efforts will focus on incorporating emerging LED technology
into a full range of lighting products. Over the long term, we expect LED
lighting products to become an energy efficient lighting alternative to
compact fluorescent lamps.
OUR STRATEGY
Our strategy is to become the market leader in the development and
commercialization of energy efficient lighting technologies. There are five key
elements to our business strategy:
- develop and commercialize innovative new products and energy management
solutions;
- further penetrate the commercial and industrial market;
- expand and diversify our retail presence into mass merchants and
supermarkets;
- increase consumer acceptance of energy efficient lighting products; and
- form strategic partnerships and/or acquire complementary businesses and
technologies.
OUR HISTORY
We began operations in 1986, were incorporated in Ohio in February 1993 and
reincorporated in Delaware in October 2001. Our principal executive offices are
located at 300 Lena Drive, Aurora, Ohio 44202. Our telephone number is (330)
995-6111. Our web site is www.springlamp.com. The information on our web site is
not a part of this prospectus.
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SpringLamp(R) is a registered trademark of Technical Consumer Products,
Inc. Technabright(TM) is a trademark of Technical Consumer Products, Inc. Other
trademarks used in this prospectus are the property of their respective owners.
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THE OFFERING
COMMON STOCK OFFERED BY TCP... shares
COMMON STOCK TO BE OUTSTANDING
AFTER THIS OFFERING......... shares
USE OF PROCEEDS............... We intend to use the net proceeds from the
offering to repay certain indebtedness, expand
our warehouse facilities, make distributions to
our existing stockholders in connection with
revocation of our S corporation status, and to
fund working capital and general corporate
purposes, including research and development
and potential acquisitions of complementary
businesses and technologies. See "Use of
Proceeds."
PROPOSED NASDAQ NATIONAL
MARKET SYMBOL............... TCPS
The number of shares of our common stock to be outstanding after the
offering is based on shares outstanding as of , 2001 and does not
include shares that may be issued under our stock option plan.
Except where we state otherwise, you should assume the following when analyzing
information contained in this prospectus:
- a 56,000-for-1 stock split of our common stock will be completed prior to
the completion of this offering; and
- the underwriters will not exercise their option to purchase additional
shares in this offering.
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SUMMARY FINANCIAL DATA
The tables below set forth summary financial data for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 and for the six months ended June
30, 2000 and 2001.
- We are an S corporation for income tax purposes, and, as a consequence,
we paid no federal or state income tax. The pro forma per share amounts
set forth below reflect a pro forma tax provision per share as if we had
been a C corporation during such periods.
- Adjusted pro forma net income per share data set forth below assumes that
we were a C corporation during the periods and gives effect to the
reduction in interest expense associated with the approximately $
million of debt that we expect to repay with the proceeds of the
offering, net of the related tax effect. This calculation is based on the
11.2 million shares outstanding as of June 30, 2001 plus the
shares required to be sold to retire our debt.
- The pro forma as adjusted balance sheet data set forth below gives effect
to (1) an assumed S corporation distribution of approximately
$ to our current stockholders and (2) to the offering and the
application of the net proceeds.
The data presented below should be read in conjunction with the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and with the financial statements and related notes
included elsewhere in this prospectus.
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FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
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1996 1997 1998 1999 2000 2000 2001
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total net sales......................... $3,704 $4,793 $8,900 $15,651 $22,278 $8,904 $31,277
Cost of goods sold...................... 3,347 3,921 6,694 11,551 16,968 6,594 24,621
Gross profit............................ 357 872 2,206 4,100 5,310 2,310 6,656
Selling, general and administrative
expenses.............................. 593 787 1,569 3,128 4,424 2,365 3,282
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Income (loss) from operations........... (236) 85 637 972 886 (55) 3,374
Other income............................ -- -- -- 58 46 28 28
Interest expense........................ 151 241 315 232 461 207 275
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Net income (loss)....................... $ (387) $ (156) $ 322 $ 798 $ 471 $ (234) $ 3,127
Net income (loss) per share --
basic and diluted..................... $(0.03) $(0.01) $ 0.03 $ 0.07 $ 0.04 $(0.02) $ 0.28
Pro forma net income (loss) per share --
basic and diluted..................... $(0.02) $(0.01) $ 0.02 $ 0.04 $ 0.02 $(0.01) $ 0.17
Weighted average shares outstanding --
basic and diluted..................... 11,200 11,200 11,200 11,200 11,200 11,200 11,200
OTHER DATA:
Adjusted pro forma net income per
share -- basic and diluted............
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AS OF JUNE 30, 2001
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PRO FORMA
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
BALANCE SHEET DATA:
Cash........................................................ $ 180
Accounts receivable......................................... 6,964
Inventories................................................. 7,171
Total assets................................................ 18,053
Long-term liabilities....................................... 7,784
Total stockholders' equity.................................. 2,060
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our common stock. If any of the
following risks actually occurs, we may not be able to conduct our business as
currently planned, and our financial condition and operating results could be
seriously harmed. In that case, the market price of our common stock could
decline, and you could lose all or part of your investment. See "Forward-Looking
Statements."
RISKS RELATED TO OUR BUSINESS
WE HAVE ONLY RECENTLY BECOME PROFITABLE, AND WE MAY NOT BE ABLE TO MAINTAIN
PROFITABILITY.
Although we began operations in 1986 and were incorporated in 1993, we did
not become profitable until 1998. We anticipate incurring increased operating
expenses, and, as a result, we will need to generate higher revenues to remain
profitable. We may be unable to generate higher revenues, or, even if we are
able to do so, we cannot be certain that we will be able to maintain
profitability.
OUR RAPID REVENUE GROWTH HAS BEEN DUE IN PART TO OUR RECENT ENTRY INTO THE
RESIDENTIAL CONSUMER MARKET, AND, AS A RESULT, IT MAY BE DIFFICULT TO EVALUATE
OUR BUSINESS AND PROSPECTS.
In June 2000, we began selling our products in the residential consumer
market through national retailers, primarily The Home Depot, which has accounted
for much of our rapid revenue growth. Because we have a short operating history
in the residential consumer market, you may have limited information about us
with which to evaluate our business, strategies, performance and prospects or an
investment in our common stock.
WE DEPEND ON A LIMITED NUMBER OF LARGE CUSTOMERS FOR A SIGNIFICANT PORTION OF
OUR NET SALES, AND, THEREFORE, SIGNIFICANT DECLINES IN THE LEVEL OF PURCHASES
BY, OR OUR INABILITY TO COLLECT ACCOUNTS RECEIVABLE FROM, ONE OR MORE OF THESE
CUSTOMERS COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS.
We depend on a limited number of large customers for a significant portion
of our net sales. In 1998 and 1999, two customers accounted for approximately
30% and 22% of our net sales. The Home Depot accounted for approximately 46% of
our net sales for the six months ended June 30, 2001 and approximately 22% of
our net sales for 2000. We typically sell on a purchase order basis, and our
customers could discontinue carrying our products at any time. The loss of any
one of our large customers or a reduction in their orders could result in lower
than expected sales and cause our stock price to decline. Additionally, although
we have not to date experienced any failure to collect accounts receivable from
our large customers, an adverse change in the financial condition of any of
these customers could make it difficult for us to collect our accounts
receivable from these customers at all or on a timely basis, which could harm
our business and results of operations.
THE FAILURE OF RESIDENTIAL CONSUMERS TO REALIZE THE BENEFITS OF COMPACT
FLUORESCENT LIGHTING MAY PREVENT US FROM INCREASING OUR SALES.
Most lamps sold in the residential consumer market are incandescent.
Although compact fluorescent lighting is more energy efficient than incandescent
lighting, the sales price of a compact fluorescent lamp is significantly higher
than a comparable incandescent lamp. If residential consumers fail to recognize
the long-term cost benefits associated with compact fluorescent lighting and
choose light bulbs solely on the basis of the sales price, we may be unable to
increase our sales. Additionally, because of the higher initial price per bulb,
any economic downturns or recessions might cause consumers of compact
fluorescent lighting products to purchase incandescent lighting products.
Actual and perceived performance problems with compact fluorescent lighting
products may adversely affect consumers' acceptance of our products. For
instance, voltage fluctuations can shorten the life of a non-dimmable compact
fluorescent ballast, including the ballasts in our non-dimmable products.
Compact
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fluorescent lamps sold by certain other suppliers are not illuminated, or
"burned-in," prior to sale and may require a "break-in" period before they reach
their optimal light output, and some compact fluorescent lamps may interfere
with the operation of other electrical appliances like televisions. If consumers
experience any of these problems, they may develop a negative perception of all
compact fluorescent lighting products, including our products, which may prevent
us from increasing our sales.
IF ELECTRICITY PRICES DECREASE, DEMAND FOR OUR PRODUCTS MAY SUFFER.
The cost savings that result from using our products are directly related
to the retail price of electricity. In the past several years, electricity
prices have increased in many areas of the United States. Recently, prices of
electricity have stabilized and even declined in some markets. If electricity
prices decline or remain relatively low, demand for our products may suffer.
IF LARGE, DIVERSIFIED LIGHTING COMPANIES DECIDE TO INCREASE THEIR PRESENCE IN
THE COMPACT FLUORESCENT LIGHTING INDUSTRY, WE MAY BE UNABLE TO COMPETE
EFFECTIVELY.
General Electric Corp., Philips Electronics N.V. and the Osram Sylvania
division of Siemens A.G. are our principal competitors. These larger companies
have significantly greater resources then we do, and, if any one of them decides
to increase its presence in our markets, we may be unable to compete effectively
with such competitor. These companies are much larger than us and have a number
of significant advantages over us, including:
- greater financial, technical, marketing and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
and
- larger customer bases.
Increased competition with these companies could prevent the institution of
price increases or could require price reductions or increased spending on
research and development and marketing and sales, which could adversely affect
our results of operations.
OUR ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS, WHO ARE ALSO OUR COMPETITORS,
MAY EXPAND THEIR OWN PRODUCTION CAPABILITIES OR USE OF ALTERNATIVE SOURCES OF
SUPPLY, WHICH COULD CAUSE A DECLINE IN OUR SALES AND AN INCREASE IN THE AMOUNT
OF COMPETITION THAT WE FACE.
Our competitors in the compact fluorescent lighting industry include some
customers for whom we supply products. Our original equipment manufacturer
customers may expand their own production capabilities or use of alternative
sources of supply and stop buying from us. This would not only cause our sales
to decline but would also increase the amount of competition that we face.
WE DEPEND ON ELLIS YAN, AND THE LOSS OF HIS SERVICES MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND PROSPECTS, AS WELL AS OUR RELATIONSHIP WITH
OUR PRINCIPAL SUPPLIERS.
We depend a great deal on our Chairman and Chief Executive Officer, Ellis
Yan. Mr. Yan owns a majority of our shares and is also the majority owner of
Shanghai Zhenxin Electronic Engineering Co. Ltd. and Shanghai Jensing Electron
Electrical Equipment Co. Ltd., which manufacture almost all of our products.
These Chinese companies, which were formed by a joint venture between Mr. Yan
and an entity indirectly controlled by a local township in Shanghai, China,
share the same facilities, assets and personnel and essentially operate as the
same entity but are legally distinct in order to enjoy certain tax benefits in
China. We caution you not to evaluate our arrangements with our suppliers solely
on the basis of the rights that will be provided to us under our manufacturing
and supply agreement. Both of these companies operate under the direction of Mr.
Yan's brother and other members of his immediate family residing in China, and
it is those relationships that have allowed us to develop an effective
collaboration with our suppliers. We think the manufacturing capabilities and
ability to respond quickly to customer requests that our relationship with our
Chinese suppliers has provided to us is critical to our success. If Mr. Yan left
our company, our relationship
8
with our principal suppliers would be adversely affected. We do not have an
employment agreement with Mr. Yan, and he is under no obligation to work for us
for any specified period.
OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, WHO IS ALSO OUR MAJORITY STOCKHOLDER,
IS THE MAJORITY OWNER OF OUR PRINCIPAL SUPPLIERS, WHICH WILL SUBJECT US TO
CONFLICTS OF INTEREST.
So long as Mr. Yan continues to control us and our principal suppliers, we
will be subject to conflicts of interest when dealing with these suppliers, and
Mr. Yan may influence certain decisions on behalf of our principal suppliers
that may be disadvantageous to us.
WE RELY PRIMARILY ON TWO RELATED SUPPLIERS TO MANUFACTURE AND SUPPLY OUR
PRODUCTS, AND, AS A RESULT, ANY INTERRUPTION OR DELAY IN THAT SUPPLY COULD
IMPAIR OUR ABILITY TO MEET CUSTOMER DEMAND.
We have elected not to use other suppliers and rely on our Chinese
suppliers to make almost all of our products. As a result, any significant
accidents, labor disputes, fires, severe weather, floods or other difficulties
encountered by our principal suppliers could result in product defects,
production delays, cost overruns or the inability to fulfill orders on a timely
basis. Any interruption or delay in the supply of our products from our current
principal suppliers or our inability to obtain our products from alternate
sources at acceptable quality and price levels and within a reasonable amount of
time would substantially impair our ability to meet scheduled product deliveries
to our customers and could cause our customers to cancel orders, both of which
could have a material adverse effect on our business and results of operations.
IF TAX BENEFITS AVAILABLE TO OUR SUPPLIERS ARE REDUCED OR REPEALED, THE COST OF
MANUFACTURING OUR PRODUCTS COULD INCREASE.
Because Ellis Yan owns at least a majority interest in our principal
suppliers, they enjoy tax benefits in China that are generally available to
foreign investment enterprises. However, these tax benefits may be reduced or
repealed at any time. Any such reduction or repeal could cause our principal
suppliers to increase the price at which they provide products to us, which may
have a material adverse effect on our business and results of operations.
CHINA'S LEGAL SYSTEM AND APPLICATION OF LAWS MAY PROHIBIT THE ENFORCEABILITY OF
OUR MANUFACTURING AND SUPPLY AND TECHNOLOGY LICENSE AGREEMENTS.
China has a civil law legal system. Decided court cases do not have a
binding legal effect on future decisions. Since the late 1970's, many new laws
and regulations covering general economic matters have been promulgated in
China. Despite this activity to develop the legal system, China's system of laws
is not yet complete, and, in the event we are unable to enforce our contractual
arbitration rights, it may be difficult to enforce our other contractual rights
in China, including those set forth in the manufacturing and supply and
technology license agreements that we will enter into with our suppliers. Even
where adequate law exists in China, enforcement of contracts based on existing
law may be uncertain and sporadic, and it may be difficult to obtain swift and
equitable enforcement. Additionally, there is no international treaty governing,
nor is there an acknowledgement of recognition regarding, enforcement of
judgments or jurisdiction between the United States and China. Our two principal
suppliers are joint venture companies incorporated in China with limited
liability. All of their supervisors and executive officers reside within China,
and all the assets of the suppliers and such persons are located in China.
Therefore, due to the lack of United States' jurisdiction in China, we may not
be able to bring legal actions or enforce judgments against our current
principal suppliers or any future suppliers located in China. In the event of a
dispute with our principal suppliers, we could be precluded from relief,
including damages and equitable remedies, which could have a material adverse
effect on our business and operations.
9
OBTAINING OUR PRODUCTS SOLELY FROM FOREIGN SUPPLIERS EXPOSES US TO INCREASED
RISKS INHERENT IN FOREIGN MANUFACTURING.
Almost all of our products are manufactured in China by two related
suppliers. Because of this, we are subject to numerous risks inherent in foreign
manufacturing that could materially impact our business and results of
operations, including the following:
- economic or political instability;
- fluctuations in currency exchange rates;
- transportation delays and interruptions;
- restrictive actions by foreign governments;
- difficulty in protecting our intellectual property;
- the laws and policies of the United States adversely affecting the
importation of goods (including duties, quotas and taxes); and
- trade and foreign tax laws.
In particular, our Chinese suppliers may be adversely affected by changes
in the laws and regulations of China, such as those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property and
other matters. These changes could interrupt our suppliers' business, which
could interrupt the manufacturing of our products and delay delivery of our
product to our customers, or increase our suppliers' costs, which could cause
our suppliers to increase the price at which they provide products to us.
CHANGES IN CHINA'S ECONOMIC POLICIES COULD HARM OUR PRINCIPAL SUPPLIERS, WHICH
COULD INCREASE THE MANUFACTURING COSTS OF OUR PRODUCTS.
In the past, the economy of China has been a planned economy subject to
governmental plans and quotas. Since the late 1970's, China's government has
been reforming its economic and political systems, including encouraging private
economic activity and greater economic decentralization. Reforms of this kind
have resulted in significant growth and social change. China's policies for
economic reforms may not be consistent or effective, and our principal suppliers
may be adversely affected by changes in the political, economic or social
conditions in China. As a result of such changes, our suppliers may increase the
price at which they provide products to us.
CHINA CURRENTLY HAS PERMANENT NORMAL TRADE RELATIONS STATUS, BUT, IF ITS STATUS
CHANGES, OUR COST OF IMPORTING PRODUCTS COULD SIGNIFICANTLY INCREASE.
During 2000, China was granted permanent normal trade relations, or PNTR,
with the United States, pursuant to which the United States imposes the lowest
applicable tariffs on Chinese exports to the United States. However, this status
was conditioned on China's admission to the World Trade Organization, which is
expected to occur as early as November 2001. During recent months, political
relations between the United States and China have become increasingly strained,
particularly by the mid-air collision between a United States surveillance
aircraft and Chinese military plane in April 2001 and the United States' sale of
arms to Taiwan. Future controversies may arise that again threaten the status
quo, and we cannot be certain that the United States will not revoke or refuse
to extend China's "PNTR" status. To the extent China ceases to have "PNTR"
status or its exports become subject to political retaliation by the United
States government, the cost of importing our products from China could increase
significantly. We could also be subject to the imposition of retaliatory tariffs
or other import restrictions such as quotas as a result of any trade dispute
between China and the United States. These increased tariffs or other
restrictions could also significantly increase the cost of importing our
products. Any of these actions would impair our ability to supply products in a
cost-effective manner.
10
IF WE FAIL TO MANAGE OUR GROWTH, OUR SALES AND EARNINGS COULD BE HURT.
Over the past few years, we have experienced rapid growth, which has
strained our physical and personnel resources. Our business strategy is to
continue to expand our operations, which will further strain our management,
operational and financial resources. If we make mistakes in deploying our
financial or operational resources or fail to hire the additional qualified
personnel necessary to support higher levels of business, our sales and earnings
could be hurt.
WE DEPEND ON RETAILERS AND DISTRIBUTORS FOR A SIGNIFICANT PORTION OF OUR SALES,
AND OUR SALES AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY THEIR
ACTIONS.
Retailers and distributors compete in a volatile industry that is subject
to rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies. We may not be able to increase or sustain our amount of retail shelf
space or promotional resources or offer retailers price discounts, and, as a
result, our sales and results of operations may be adversely affected.
Additionally, any economic downturns or recessions could force retailers to
negotiate better terms of sale, which we may be unable to accept. Retailers may
give higher priority to products other than ours, thus reducing their efforts to
sell our products.
INCENTIVES OFFERED BY UTILITY COMPANIES TO CONSUMERS FOR PURCHASING ENERGY
EFFICIENT LIGHTING PRODUCTS MAY BE DECREASED OR DISCONTINUED, WHICH COULD
REDUCE OUR SALES.
Some utility companies have implemented programs in which consumers are
given incentives to purchase energy efficient lighting products. These
incentives come in a variety of different forms, such as coupons that lower the
price of the product or rebates that are either sent to the purchaser or
credited toward the purchaser's utility bill. Currently, our products qualify
for a number of such programs. However, if these programs are decreased or
discontinued by these utility companies or if our products no longer qualify for
such programs, our sales could be reduced.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY, MAKING FINANCIAL
FORECASTING DIFFICULT AND MAKING OUR STOCK PRICE VOLATILE.
Our quarterly results of operations are difficult to predict and may
fluctuate significantly from quarter to quarter. In some quarters, our operating
results may fall below the expectations of public market analysts and investors,
which could cause the price of our stock to decline. Our quarterly operating
results are difficult to forecast for many reasons, some of which are outside
our control, such as:
- the level of product, price and retailer competition;
- size and timing of product orders and shipments, particularly by
significant customers such as The Home Depot;
- changes in our overall product mix;
- timing of incentives offered by utility companies;
- our ability to develop new products and product enhancements;
- electricity prices;
- economic conditions in general;
- capacity and supply constraints or difficulties; and
- timing of marketing programs and those of our competitors.
As a result, you should not rely on historical results as an indication of our
future performance.
11
OUR FAILURE TO ACCURATELY FORECAST SALES COULD CAUSE US TO INCUR ADDITIONAL
COSTS, HAVE EXCESS INVENTORIES OR HAVE INSUFFICIENT QUANTITIES OF OUR PRODUCTS,
ANY OF WHICH COULD HARM OUR RESULTS OF OPERATIONS.
We use rolling forecasts based on anticipated product orders to determine
our product requirements from our principal suppliers. It is very important that
we accurately predict the demand for our products. If we overestimate our
product requirements, we may have excess inventory, which would increase our
costs. If we underestimate our product requirements, we may have inadequate
inventory, which could interrupt the supply of our products and delay delivery
of our products to our customers. Accordingly, if our sales do not meet our
expectations, our results of operations are likely to be negatively and
disproportionately affected, which may make our stock price fall dramatically.
Any of these occurrences could harm our results of operations.
THE COMPACT FLUORESCENT LIGHTING INDUSTRY IS RAPIDLY EVOLVING, AND, IF WE DO
NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT BE ABLE
TO MEET THE NEEDS OF OUR CUSTOMERS, AND OUR SALES MAY DECLINE.
Our success depends on introducing distinctive new products that anticipate
industry trends and changing consumer demands. If we do not introduce new
products, misinterpret consumer preferences or fail to respond to changes in the
consumer lighting industry, consumer demand for our products could suffer. In
addition, our competitors may introduce superior designs or products,
undermining our image and our products' desirability. Any of these events could
cause our sales to decline.
OUR MANAGEMENT HAS NO EXPERIENCE OPERATING A PUBLIC COMPANY.
No member of our current management team has ever operated a public
company. The members of our management team must develop the skills and
knowledge required to operate effectively as a public company. We cannot assure
you that they will be able to do so. If they are not successful in developing
these skills or if we do not attract and retain individuals who have significant
experience operating a public company, we may not be able to implement our
business plan, and our business could be materially and adversely affected.
THERE ARE FEW INTELLECTUAL PROPERTY BARRIERS TO ENTERING THE COMPACT
FLUORESCENT LIGHTING INDUSTRY, WHICH COULD INCREASE OUR COMPETITION.
Although we utilize patents and trade secrets to protect the confidential
and proprietary information used in the design and manufacture of our lighting
products, much of the knowledge and technology used in fluorescent lighting is
publicly available. Therefore, we could face additional competition in the
compact fluorescent lighting industry, and our results of operations may suffer.
TECHNOLOGICAL ADVANCES IN THE ENERGY EFFICIENT LIGHTING INDUSTRY COULD RENDER
OUR TECHNOLOGY OBSOLETE.
The energy efficient lighting industry recently has been subject to rapid
technological change. Currently, we focus on the production of compact
fluorescent lighting products and accessories, but our success will depend on
our ability to adapt and respond to technological change. If new technologies
and products emerge and we are unable to keep pace, our existing products could
become obsolete, and our sales may suffer.
WE DEPEND ON INDEPENDENT SALES AGENCIES FOR A SIGNIFICANT PORTION OF OUR SALES,
AND ANY LOSS OF SALES AGENCIES MAY REDUCE SALES.
We sell a significant portion of our products through independent, third
party sales agencies. We generally do not have long-term arrangements with these
sales agencies. Any sales agency may stop selling our products and begin selling
those of a competitor. The loss of one or more significant sales agencies
without successfully replacing them would reduce our sales and may damage
customer relationships.
12
WE MAY EXPERIENCE DIFFICULTY ASSIMILATING THE OPERATIONS OR PERSONNEL OF
COMPANIES THAT WE ACQUIRE, WHICH COULD THREATEN THE BENEFITS WE SEEK TO ACHIEVE
THROUGH ACQUISITIONS AND OUR FUTURE GROWTH.
Although acquisitions of complementary businesses and technologies are part
of our growth strategy, we do not have any acquisition experience. We may not be
able to successfully complete any acquisitions, including our proposed
acquisitions of enerSave data systems, Inc., a company that designs and develops
energy management systems, and JRS Technology, Inc., a company that designs and
develops commercial grade electronic ballasts. In addition, if we acquire these
companies or if we make any other strategic acquisitions, we could have
difficulty assimilating or retaining the acquired companies' personnel or
integrating their operations or services into our organization, which could
disrupt our ongoing business, distract our management and employees and reduce
or eliminate the financial or strategic benefits that we sought to achieve
through the acquisition and threaten our future growth. Moreover, we may need to
raise additional funds through public or private debt or equity financings to
acquire any businesses, which may result in dilution for stockholders and the
incurrence of indebtedness.
RECENT TERRORIST ATTACKS ON THE UNITED STATES MAY NEGATIVELY AFFECT OUR
BUSINESS.
On September 11, 2001, the United States was attacked by terrorists using
hijacked commercial airplanes. While it is too early to predict what effects
these events will eventually have on our business, it is likely that there will
be a decline in travel due to, among other things, the public's fears regarding
additional acts of terrorism. This decline in travel will likely have a negative
effect on the hospitality industry. Therefore, our sales to hotels may suffer
and our business may be negatively affected if the hospitality industry reduces
planned expenditures like replacing traditional incandescent lighting with
energy efficient compact fluorescent lamps.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. An active public trading market for our common stock may not
develop or, if it develops, may not be maintained after this offering, and the
market price could fall below the initial public offering price. As a result,
you could lose all or part of your investment. We and the representatives of the
underwriters will negotiate to determine the initial public offering price. The
initial public offering price may not be related to the price at which the
common stock will trade following this offering.
OUR DIRECTORS AND EXECUTIVE OFFICERS, WHO ARE ALSO OUR PRINCIPAL STOCKHOLDERS,
WILL HAVE SUBSTANTIAL CONTROL OVER OUR AFFAIRS AND MAY MAKE DECISIONS THAT NOT
ALL STOCKHOLDERS SUPPORT.
Following this offering, certain of our directors and executive officers,
who are also our principal stockholders, will beneficially own approximately
% of our outstanding common stock. These stockholders acting together will
have the ability to control most matters requiring approval by our stockholders.
These matters include the election and removal of directors, controlling the
management and affairs of the company and the approval of any merger,
consolidation or sale of all or substantially all of our assets. In addition,
they may dictate the management of our business and affairs. This concentration
of ownership could have the effect of delaying, deferring or preventing a change
in control or impeding a merger or consolidation, takeover or other business
combination of which you might otherwise approve.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT
DIFFICULT FOR OUR STOCKHOLDERS TO REPLACE OR REMOVE CURRENT MANAGEMENT AND
COULD DETER OR DELAY THIRD PARTIES FROM ACQUIRING US, WHICH MAY ADVERSELY
AFFECT THE MARKETABILITY AND MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws and in the
Delaware corporate law may make it difficult for stockholders to change the
composition of the board of directors in any one year and thus may make it
difficult to change the composition of management. In addition, the same
provisions may make it
13
difficult and expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our management and board of
directors. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so. These anti-takeover provisions
could substantially impede the ability of public stockholders to benefit from a
change in control or change our management and board of directors and may
adversely affect the marketability and market price of our common stock.
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS OFFERING, WHICH
WE MAY NOT USE EFFECTIVELY.
We expect to use approximately $11.0 million of the net proceeds of this
offering to repay indebtedness and approximately $2.0 million of the net
proceeds to expand our warehouse facilities. We also intend to use a portion of
the proceeds to make distributions of substantially all of our undistributed S
corporation earnings to our existing stockholders in connection with revocation
of our S corporation status. As of June 30, 2001, we had approximately $2.1
million in undistributed S corporation earnings. The actual amount of the
distribution will depend on the amount of our income prior to completion of the
offering. Our management has broad discretion over the allocation of the balance
of the net proceeds and may use the proceeds in ways with which you and other
stockholders may disagree. In addition, our management may not be able to invest
the balance of the net proceeds effectively until they are put to use.
YOU WILL SUFFER SUBSTANTIAL DILUTION OF $ PER SHARE IN THE NET
TANGIBLE BOOK VALUE OF THE COMMON STOCK YOU PURCHASE.
The initial public offering price of our common stock will be substantially
higher than the book value per share of our common stock. Based on an assumed
initial public offering price of $ per share, if you purchase
shares of common stock in this offering, you will suffer immediate and
substantial dilution of $ per share in the net tangible book value
of the common stock.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK FOLLOWING THIS
OFFERING, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.
Sales of shares of our common stock in the public market following this
offering or the perception that these sales may occur could cause the market
price of our common stock to decline. After this offering, we will have
shares of common stock outstanding. The number of shares of common
stock available for sale in the public market is limited by restrictions under
federal securities law and under lock-up agreements that all of our directors,
executive officers and stockholders have entered into with the underwriters and
with us. Those lock-up agreements restrict these people from selling, pledging
or otherwise disposing of their shares for a period of 180 days after the date
of this prospectus without the prior written consent of McDonald Investments
Inc. However, McDonald Investments Inc. may, in its sole discretion, release all
or any portion of the common stock from the restrictions of the lock-up
agreements. These sales might make it difficult or impossible for us to sell
additional securities when we need to raise capital. All of the shares sold in
this offering will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by our
affiliates as defined in Rule 144 of the Securities Act. The remaining
10,640,000 shares outstanding after this offering will be available for sale
into the public market at various times after the expiration of the initial
180-day lock-up period.
In addition, under a registration rights agreement that we will enter into
prior to completion of this offering, all of our current stockholders will have
"demand" and "piggyback" registration rights in connection with future offerings
of our common stock. "Demand" rights enable the holders to demand that their
shares be registered and may require us to file a registration statement under
the Securities Act at our expense. "Piggyback" rights require us to provide
notice to the relevant holders of our stock if we propose to register any of our
securities under the Securities Act and grant such holders the right to include
their shares in our registration statement. All of our current stockholders have
agreed not to exercise their registration rights without the consent of McDonald
Investments Inc. prior to 180 days following the date of this prospectus.
14
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We have attempted to
identify forward-looking statements by using such words as "anticipates,"
"believes," "can," "continue," "could," "estimates," "expects," "intends,"
"may," "plans," "potential," "should" or "will" or other similar expressions.
These forward-looking statements, which are subject to risks and uncertainties,
and assumptions about us, may include, among other things, projections of our
future financial performance, our anticipated growth strategies and anticipated
trends in our business. These statements are only predictions based on our
current expectations and projections about future events. Because these
forward-looking statements involve risks and uncertainties, you should be aware
that there are important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by these
forward-looking statements, including those factors outlined under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, level of
activity, performance or achievement. Further, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
disclaim any obligation to update any of the forward-looking statements after
the date of this prospectus or to conform these statements to actual results.
You should not place undue reliance on forward-looking statements contained in
this prospectus.
15
USE OF PROCEEDS
We estimate that our net proceeds from our sale of the shares of
common stock we are offering will be approximately $ , or
approximately $ if the underwriters' over-allotment option is
exercised in full, assuming an initial public offering price of $
per share and after deducting estimated underwriting discounts and commissions
and the estimated offering expenses payable by us.
We presently intend to use a portion of the proceeds of this offering for
the following purposes:
- approximately $11.0 million to repay indebtedness, including
approximately $8.5 million outstanding under our credit facility,
approximately $931,000 owed to our principal suppliers, approximately
$500,000 outstanding under our State of Ohio 166 Program loan and
approximately $1.0 million that we anticipate borrowing under our credit
facility to acquire substantially all of the assets of two companies
described below; and
- approximately $2.0 million to expand our warehouse facilities.
We will also use a portion of the net proceeds for distributions to our
current stockholders of substantially all of our undistributed S corporation
earnings for tax purposes through the date of revocation of our S corporation
status. As of June 30, 2001, the amount of these undistributed S corporation
earnings was $2.1 million. The actual amount of the distribution will depend on
the amount of our income prior to completion of the offering.
We borrowed the money that we will repay with a portion of the net proceeds
from this offering under a revolving credit facility that we obtained on August
10, 2001. Under our credit facility, we may choose an interest rate of either
the prime rate as announced by the lender or 3% above the prevailing London
Interbank Offer Rate (LIBOR). As of September 30, 2001, we had $8.5 million of
prime rate borrowings bearing interest at 6.0%. We borrowed under our credit
facility primarily to provide working capital to support our operations as well
as to refinance our prior line of credit and repay a mortgage note. The credit
facility terminates on July 31, 2003.
We are in negotiations to acquire substantially all of the assets of
enerSave data systems, Inc. and JRS Technology, Inc., each for a purchase price
of $500,000. EnerSave data systems designs and develops energy management
systems and JRS Technology designs and develops commercial grade electronic
ballasts. We anticipate that we will close these acquisitions by the end of
October 2001 and that we will fund these acquisitions with borrowings under our
credit facility.
We intend to use the remainder of the net proceeds of this offering for
working capital and general corporate purposes. Accordingly, we will retain
broad discretion in the allocation of the net proceeds of this offering.
Additionally, we may use a portion of the net proceeds to pursue other possible
acquisitions of businesses, technologies or products complementary to our
business. Other than the acquisition of enerSave data systems and JRS
Technology, we currently have no commitments or agreements to make any
acquisitions, and we cannot assure you that we will make any acquisitions in the
future. Pending our use of the net proceeds, we intend to invest the net
proceeds in short-term, interest-bearing investment-grade or government
securities.
DIVIDEND POLICY
We currently intend to retain any future earnings to support the
development and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future other than the dividends we intend to pay as
discussed below under "S Corporation Status." Our payment of any future
dividends will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
cash needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. Under our existing credit facility, we may not pay any
dividends or make any distributions other than distributions payable solely in
our capital stock or distribution to enable our stockholders to pay their tax
liability resulting from our S corporation status. In addition, the terms of any
16
future credit agreement may prevent us from paying any dividends or making any
distributions or payments with respect to our capital stock.
S CORPORATION STATUS
Since our incorporation in 1993, we have been treated for federal and state
income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code and comparable state laws. As a result, our earnings have been
taxed for federal and state income tax purposes directly to our stockholders
rather than to us. In connection with this offering, we will convert from an S
corporation to be taxed as a C corporation. As a result of the revocation of our
S corporation status, we will record a net deferred tax asset and corresponding
income tax benefit effective upon the revocation date. The amount of the
deferred tax asset would have been approximately $108,000 if the revocation date
had been June 30, 2001. The actual amount will be determined after giving effect
to our operating results through the revocation date.
We expect to distribute a portion of the net proceeds of this offering to
our current S corporation stockholders, representing substantially all of our
undistributed S corporation earnings for tax purposes through the date of
revocation of S corporation status. As of June 30, 2001, the amount of these
undistributed S corporation earnings was $2.1 million. The actual amount of the
distribution of S corporation earnings will depend on the amount of our income
prior to completion of the offering.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001:
- on an actual basis; and
- on a pro forma as adjusted basis to reflect our sale of shares
of common stock at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and the
estimated offering expenses payable by us, the payment of approximately
$ of previously undistributed S corporation earnings and the
repayment of approximately $ of long-term debt.
You should read this table together with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
[Enlarge/Download Table]
JUNE 30, 2001
(UNAUDITED)
---------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Long-term debt.............................................. $ 5,948 $
Notes payable affiliates.................................... 931
Other long-term liability................................... 973
Stockholders' equity:
Preferred stock, $0.001 par value; no shares authorized,
issued and outstanding, actual; and 5,000,000 shares
authorized, no shares issued and outstanding, as
adjusted............................................... --
Common stock, $0.001 par value; 11,200,000 shares
authorized, issued and outstanding, actual; and
30,000,000 shares authorized, shares
issued and outstanding, as adjusted.................... --
Additional paid-in capital................................ 1
Treasury stock subscription............................... (57)
Retained earnings......................................... 2,116
Total stockholders' equity............................. 2,060
-------- --------
Total capitalization................................... $ 9,912 $
======== ========
The information regarding the number of shares of common stock to be
outstanding after this offering is based on the number of shares outstanding as
of June 30, 2001 and does not include 2,016,000 shares that may be issued under
our stock option plan.
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DILUTION
Our net tangible book value as of June 30, 2001 was approximately
$2,060,000, or $0.18 per share of common stock. Net tangible book value per
share is determined by dividing the amount of our total tangible assets less our
total liabilities by the number of shares of common stock outstanding.
After giving effect to our sale of shares of common stock at
an assumed initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our adjusted net tangible book value as of June 30, 2001 would
have been $ million, or $ per share. This amount
represents an immediate increase in net tangible book value to our existing
stockholders of $ per share and an immediate dilution to new
investors of $ per share. The following table illustrates this per
share dilution:
[Download Table]
Assumed initial public offering price per share............. $
Net tangible book value per share at June 30, 2001........ $0.18
Increase per share attributable to new investors..........
As adjusted net tangible book value per share after this
offering..................................................
Dilution per share to new investors......................... $
======
If the underwriters' over-allotment option is exercised in full, our as
adjusted net tangible book value at June 30, 2001 would have been approximately
$ per share, representing an immediate increase in net tangible
book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share to
new investors.
The following table summarizes, on a pro forma basis, as of June 30, 2001
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid by our existing stockholders and
by new investors. The table assumes that the initial public offering price will
be $ per share.
[Enlarge/Download Table]
AVERAGE
PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
-------------------- -------------------- ---------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- -------- ---------
Existing stockholders....................... 11,200,000 % $200 % $.00002
New investors...............................
---------- ------- ---- ------- -------
Total..................................... % $ %
========== ======= ==== ======= =======
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SELECTED FINANCIAL DATA
The following table presents our selected financial data. The selected
statement of operations data, except for the pro forma information, for each of
the three years in the period ended December 31, 2000 and the balance sheet data
for the years ended December 31, 1999 and 2000 are derived from the audited
financial statements and related notes that appear elsewhere in this document.
The balance sheet data as of December 31, 1998 has been derived from audited
financial statements and notes that are not included in this document. The
selected financial data presented below for the years ended December 31, 1996
and 1997 and for the six months ended June 30, 2000 and June 30, 2001 are
derived from our unaudited financial information, which include, in the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information for the periods and dates
presented. Results of operations for the six months ended June 30, 2001 are not
necessarily indicative of results for the year ending December 31, 2001.
- We are an S corporation for income tax purposes, and, as a consequence,
we paid no federal or state income tax. The pro forma per share amounts
set forth below reflect a pro forma tax provision per share as if we had
been a C corporation during such periods.
- Adjusted pro forma net income per share data set forth below assumes that
we were a C corporation during the periods and gives effect to the
reduction in interest expense associated with the approximately $
million of debt that we expect to repay with the proceeds of the
offering, net of the related tax effect. This calculation is based on the
11.2 million shares outstanding as of June 30, 2001 plus the
shares required to be sold to retire our debt.
The data presented below should be read in conjunction with the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and with the financial statements and related notes
included elsewhere in this prospectus.
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FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total net sales..................... $ 3,704 $ 4,793 $ 8,900 $15,651 $22,278 $ 8,904 $31,277
Cost of goods sold.................. 3,347 3,921 6,694 11,551 16,968 6,594 24,621
Gross profit........................ 357 872 2,206 4,100 5,310 2,310 6,656
Selling, general and administrative
expenses.......................... 593 787 1,569 3,128 4,424 2,365 3,282
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....... (236) 85 637 972 886 (55) 3,374
Other income........................ -- -- -- 58 46 28 28
Interest expense.................... 151 241 315 232 461 207 275
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $ (387) $ (156) $ 322 $ 798 $ 471 $ (234) $ 3,127
Net income (loss) per share --
basic and diluted................. $ (0.03) $ (0.01) $ 0.03 $ 0.07 $ 0.04 $ (0.02) $ 0.28
Pro forma net income (loss) per
share -- basic and diluted........ $ (0.02) $ (0.01) $ 0.02 $ 0.04 $ 0.02 $ (0.01) $ 0.17
Weighted average shares
outstanding -- basic and
diluted........................... 11,200 11,200 11,200 11,200 11,200 11,200 11,200
OTHER DATA:
Adjusted pro forma net income per
share -- basic and diluted........
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AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------ --------------
1996 1997 1998 1999 2000 2001
----- ------- ------ ------ ------ --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash.......................................... $ 2 $ 17 $ 161 $ 91 $ 30 $ 180
Accounts receivable........................... 172 504 1,425 2,880 3,421 6,964
Inventories................................... 408 352 820 2,761 3,594 7,171
Total assets.................................. 630 916 2,681 6,052 9,066 18,053
Total current liabilities..................... 1570 2012 2,524 3,166 3,501 8,209
Long-term liabilities......................... -- -- 931 2,967 5,612 7,784
Total stockholders' (deficit) equity.......... (940) (1,096) (774) (81) (47) 2,060
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this prospectus should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual results could
differ materially from those anticipated in the forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed in "Risk Factors," as well as those discussed elsewhere. See "Risk
Factors" and "Forward-Looking Statements."
OVERVIEW
We design, develop and market high-quality, energy efficient lighting
products. Since 1986, we have provided energy efficient lighting products and
components to original equipment manufacturers. In 1997, we began marketing our
products under our own name to hotels and other customers in the commercial and
industrial market, and, in June 2000, we entered the residential consumer
market. Since entering the residential consumer market, our sales to this market
have increased to $15.1 million for the six months ended June 30, 2001,
representing 48% of our net sales. Our net sales have grown to $31.3 million for
the six months ended June 30, 2001 from $3.7 million in 1996.
We purchase almost all of our products from our suppliers in Shanghai,
China. Our product costs include the actual cost charged by our Chinese
suppliers plus inbound freight, duty, warehouse labor and overhead charges,
product testing, packaging material and outbound freight.
Since entering the residential consumer market in June 2000, most of our
sales to retailers have been made through a direct import program. Under this
program, the customer accepts delivery of our products at our suppliers'
manufacturing facilities in China, and we have the right to draw upon a letter
of credit provided by the customer at that time. Purchasing on a direct basis
allows the customer to pay a lower unit price, which reduces our gross profit.
We have experienced declining gross margins since we entered the residential
consumer market, both as a result of our participation in the direct import
program and as a result of the lower margin generally associated with sales to
retailers. To date, we have been able to offset these lower gross margins in
part by reducing our selling, general and administrative expenses as a
percentage of net sales. We cannot assure you that we will be able to continue
to control these costs to such an extent. Because retailers often face
significant pricing pressures, we anticipate that the expansion of our business
with retailers will result in pricing pressures and lower gross margins. In
addition to expanding our retail presence, we also intend to focus on further
penetrating the commercial and industrial market, where historically our gross
margins have been higher. Our gross profit in future periods will depend on the
overall mix of our business and will also be affected by the volume of sales
made through direct import programs.
Selling through a direct import program allows us to avoid costs associated
with importing and holding inventory and has resulted in lower levels of
selling, general and administrative expenses than we would incur if all of our
products were sold through warehouse sales. In addition, the use of letters of
credit to support customer purchases enhances our liquidity, since we are able
to obtain payment for our products immediately upon delivery.
Historically, we have not incurred significant research and development
expenses because we have been able to fund most of our research and development
through licensing and royalty arrangements as well as through our suppliers and
customers as we work with them to develop or customize products to meet their
needs. We anticipate continuing to fund our research and development in this
manner, although our research and development expense may increase if necessary
to enable us to continue to design and develop new products. Our selling,
general and administrative expenses include salaries, commissions, advertising
and promotional expenses and travel and entertainment expenses. An important
part of our business strategy is to increase customer acceptance of energy
efficient lighting products, expand and diversify our retail presence and
further penetrate the commercial and industrial market. As a result, we
anticipate incurring additional
21
selling, general and administration expenses to execute our business strategy.
We also anticipate selling, general and administrative expenses to increase as a
result of becoming a public reporting company. Although we believe that our
sales will increase if we successfully execute our business strategy, our sales
may not increase at all or increase sufficiently to offset these additional
expenses.
Our net sales are primarily generated from our sales of energy efficient
lighting products and accessories. From time to time we have also been paid
commissions as a sales agent for certain product sales made by our Chinese
suppliers at our direction that were shipped directly to customers in Asia.
Additionally, we have generated other income primarily in connection with
certain advisory services that we have provided our Chinese suppliers. We sell
our products on a purchase order basis, usually shipping products within 60 days
of receipt of the purchase order. Our revenue recognition policy is to recognize
revenues when products are shipped or when products are received by the
customer's shipping agent, at which time title transfers to the customer. Our
return policy is to replace, repair or issue credit for products under warranty.
We warrant our products for a minimum of one year. Returns received during the
current period are expensed as received, and a provision is recorded for future
returns based on current shipments.
RESULTS OF OPERATIONS
The following table sets forth our income statement data expressed as a
percentage of total net sales for the periods indicated:
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SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1998 1999 2000 2000 2001
------ ------ ------ ------ -----
Total net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 75.2 73.8 76.2 74.1 78.7
----- ----- ----- ------ -----
Gross profit......................................... 24.8 26.2 23.8 25.9 21.3
Selling, general and administrative expenses......... 17.6 20.0 19.8 26.5 10.5
Income (loss) from operations........................ 7.2 6.2 4.0 (0.6) 10.8
Other income......................................... -- 0.4 0.2 0.3 0.1
Interest expense..................................... 3.6 1.5 2.1 2.3 0.9
----- ----- ----- ------ -----
Net income (loss).................................... 3.6% 5.1% 2.1% (2.6)% 10.0%
===== ===== ===== ====== =====
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
NET SALES. Net sales increased $22.4 million, or 251.7%, to $31.3 million
for the six months ended June 30, 2001 from $8.9 million for the same period in
2000. Net sales increased significantly in both the commercial and industrial
and the residential consumer markets as a result of higher demand for our
products. The six months ended June 30, 2001 included sales of $14.3 million, or
45.7% of our total sales, to The Home Depot, our largest customer, compared to
sales of $1.3 million, or 14.6% of our total sales, for the same period in 2000.
This increase was primarily due to the fact that we began selling to this
customer in June 2000. Sales to our residential consumer market customers,
excluding The Home Depot, increased $800,000 for the six months ended June 30,
2001 from no sales for the same period in 2000 due to the fact that we did not
begin selling our products to residential consumer customers other than our
largest customer until February 2001. Sales to our commercial and industrial
customers increased $8.6 million, or 113.2%, to $16.2 million for the six months
ended June 30, 2001 from $7.6 million for the same period in 2000.
GROSS PROFIT. Gross profit increased $4.4 million, or 191.3%, to $6.7
million for the six months ended June 30, 2001 from $2.3 million for the same
period in 2000. Gross margin decreased to 21.3% for the six months ended June
30, 2001 from 25.9% for the same period in 2000. This decrease was primarily due
to the fact that we began selling in the residential consumer market, where we
typically realize a lower gross margin on sales than in the commercial and
industrial market.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $917,000, or 38.2%, to $3.3 million for the
six months ended June 30, 2001 from $2.4 million for the same period in 2000. As
a percentage of net sales, selling, general and administrative expenses
decreased to 10.5% for the six months ended June 30, 2001 from 26.5% for the
same period in year 2000. The dollar increase was due primarily to an increase
in wages associated with additional employees hired and an increase of sales
commissions as a result of the significant increase in sales. The percentage
decrease was due primarily to our increased direct import program sales.
INTEREST EXPENSE. Interest expense increased $68,000, or 32.9%, to
$275,000 for the six months ended June 30, 2001 from $207,000 for the same
period in 2000. The increase was due to slightly higher borrowing levels for the
six months ended June 30, 2001 compared to the same period in 2000.
NET INCOME. Net income for the six months ended June 30, 2001 increased
$3.3 million to $3.1 million from a loss of $234,000 for the same period in
2000. The increase was due primarily to the significant increase in our sales, a
higher portion of which were direct import program sales, which resulted in
lower levels of selling, general and administrative expenses than we would have
recognized if all of our products were sold through warehouse sales.
PRO FORMA INCOME TAX EXPENSE. We have operated as an S corporation and
have not been subject to federal or state corporate-level income tax in any of
the periods presented. On a pro forma basis, giving effect to the revocation of
our S corporation status, our income tax expense for the six months ended June
30, 2001 was $1.2 million, which represents an effective tax rate of 39.4%. On a
pro forma basis, we would have recognized an income tax benefit of approximately
$87,000 for the six months ended June 30, 2000. Differences between the
statutory rate and our effective tax rate resulted from the non-deductibility of
certain expenses for income tax purposes.
Fiscal Year Ended December 31, 2000 compared to Fiscal Year Ended December 31,
1999
NET SALES. Net sales increased $6.6 million, or 42.0%, to $22.3 million
for fiscal 2000 from $15.7 million for fiscal 1999. Net sales increased
significantly in both the commercial and industrial and the residential markets
as a result of higher demand for our products. In the second quarter of fiscal
2000, we began to sell our products to The Home Depot, which became our largest
customer and accounted for sales of $5.0 million, or 22.4% of our total sales in
fiscal 2000. Sales to our commercial and industrial customers increased $1.6
million, or 10.2%, to $17.3 million for fiscal 2000 from $15.7 million for
fiscal 1999.
GROSS PROFIT. Gross profit increased $1.2 million, or 29.3%, to $5.3
million for fiscal 2000 from $4.1 million for fiscal 1999. Gross margin
decreased to 23.8% for fiscal 2000 from 26.2% for fiscal 1999. This decrease was
primarily due to the fact that we began selling in the residential consumer
market, where we typically realize a lower gross margin than in the commercial
and industrial market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.3 million, or 41.9%, to $4.4 million for
fiscal 2000 from $3.1 million for fiscal 1999. As a percentage of net sales,
selling, general and administrative expenses decreased to 19.8% for fiscal 2000
compared to 20.0% for fiscal 1999. The dollar increase was due primarily to
increased wages associated with new employees and increased advertising, travel
and legal expenses we incurred in connection with our initiatives to expand our
sales and increase our customer base and market presence.
INTEREST EXPENSE. Interest expense increased $229,000, or 98.7%, to
$461,000 for fiscal 2000 from $232,000 for fiscal 1999. The increase in interest
expense was due largely to higher borrowing levels in fiscal 2000 under an
increased line of credit. In fiscal 2000, we increased our line of credit 200%
over the fiscal 1999 lending levels to enable us to continue to fund our growth.
NET INCOME. Net income for fiscal 2000 decreased $327,000, or 41%, to
$471,000 from $798,000 for fiscal 1999. The decrease was due primarily to our
lower gross profit, as well as our increased interest expense.
23
PRO FORMA INCOME TAX EXPENSE. On a pro forma basis, giving effect to the
revocation of our S corporation status, our income tax expense for fiscal 2000
was $194,000, which represents an effective tax rate of 41.1%. Our pro forma
income tax expense for fiscal 1999 was $324,000, which represents an effective
tax rate of 40.6%. Differences between the statutory rate and our effective tax
rate resulted from the non-deductibility of certain expenses for income tax
purposes.
Fiscal Year Ended December 31, 1999 compared to Fiscal Year Ended December 31,
1998
NET SALES. Net sales increased $6.8 million, or 76.4%, to $15.7 million
for fiscal 1999 from $8.9 million for fiscal 1998. Net sales, which at this time
were generated entirely from sales in the commercial and industrial market,
increased significantly as a result of increased penetration of this market and
the continued introduction of new products. In 1999, we started doing business
with large commercial and electrical distributors in the lighting industry,
which accounted for a majority of the net sales increases.
GROSS PROFIT. Gross profit increased by $1.9 million, or 86.4%, to $4.1
million for fiscal 1999 from $2.2 million for fiscal 1998. Gross margin
increased to 26.2% for fiscal 1999 from 24.8% for fiscal 1998. This increase was
due primarily to the increase in sales to new customers and new product sales,
both of which were at a slightly higher margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.5 million, or 93.8%, to $3.1 million for
fiscal 1999 from $1.6 for fiscal 1998. As a percentage of net sales, selling,
general and administrative expenses increased to 20.0% for fiscal 1999 from
17.6% for fiscal 1998. The percentage and dollar increases were primarily due to
increased wages associated with new employees, increased commissions and
royalties resulting from sales growth and increased advertising and travel
expenses we incurred in connection with new product introduction and promotion
and our initiatives to expand our sales and increase our customer base and
market presence.
INTEREST EXPENSE. Interest expense decreased to $232,000, or 26.3%, for
fiscal 1999 from $315,000 for fiscal 1998. This decrease was due to the fact
that we obtained a line of credit in January 1999 and terminated our secured
borrowing arrangement under which we obtained financing by borrowing against our
accounts receivable from one of our officers. Interest expense in 1999 decreased
primarily because the interest payable under our line of credit was considerably
less than the financing costs of our accounts receivable secured borrowing in
1998.
NET INCOME. Net income for fiscal 1999 increased $476,000, or 147.8%, to
$798,000 from $322,000 for fiscal 1998. The increase was due primarily to the
increased net product sales, increased gross profit and decreased interest
expense.
PRO FORMA INCOME TAX EXPENSE. On a pro forma basis, giving effect to the
revocation of our S corporation status, our income tax expense for fiscal 1999
was $324,000, which represents an effective tax rate of 40.6%. Our pro forma
income tax expense for fiscal 1998 was $133,000, which represents an effective
tax rate of 41.3%. Differences between the statutory rate and our effective tax
rate resulted from the non-deductibility of certain expenses for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
During the periods presented, we financed our operations primarily through
available cash and from borrowings. Prior to our obtaining a $2.0 million
revolving line of credit in January 1999, we financed our operations primarily
through borrowings from a related party because we were unable to obtain
conventional bank financing at the time. See "Related Party
Transactions -- Secured Borrowing" and "-- Letter of Credit."
We had working capital of $6.2 million at June 30, 2001 compared with $3.6
million at December 31, 2000. Cash provided by operating activities was $652,000
for the six months ended June 30, 2001, and cash used in operating activities
was $831,000 for fiscal 2000 and $1.2 million for fiscal 1999. The cash provided
and used in operating activities resulted from the increase in operating income
offset by changes in working capital items. The most significant working capital
changes are attributable to increases in accounts receivable,
24
inventory and accounts payable. Each of these working capital items increased as
the result of our growth for all periods presented. If we continue to grow our
business, we anticipate that our working capital requirements will increase to,
among other things, maintain sufficient inventory to meet anticipated demand.
Historically, our payment terms have required our customers to pay within
30 days. However, since entering into the residential consumer market, we have
extended the payment terms for certain of our retail customers from time to
time. To date, the impact of these extended payment terms on our working capital
requirements have been offset, in part, by our direct import sales where our
customers pay us upon delivering our product to the retailer's shipping agent.
Cash used in financing activities was $67,000 for the six months ended June
30, 2001, and cash provided in financing activities was $1.2 million for fiscal
2000 and $1.4 million for fiscal 1999. This financing was obtained through
conventional bank financing.
In August 2001, we obtained a $15.0 million revolving credit facility under
which we can borrow amounts based on up to 85% of our eligible accounts
receivables and 55% of our eligible inventory. We borrowed under our credit
facility primarily to provide working capital to support our operations as well
as to refinance our prior line of credit and repay a mortgage note. We may
choose an interest rate of either the prime rate as announced by the lender or
3% above the prevailing London Interbank Offer Rate (LIBOR). We are required to
pay a quarterly commitment fee of .125% for the unused portion of this facility
and are subject to certain restrictive covenants that, among other things, limit
our ability to incur additional indebtedness and require us to maintain
specified financial ratios. We are also able to issue up to $500,000 in letters
of credit under this credit facility, which reduces the availability under the
revolving credit facility. The credit facility terminates on July 31, 2003.
Borrowings under our credit facility are secured by substantially all of our
assets and a $1.0 million personal guarantee by Ellis Yan, our Chairman and
Chief Executive Officer. In 2001, we obtained waivers for certain non-financial
covenant violations. We anticipate remaining in compliance with these covenants
in 2001. As of September 30, 2001, $8.5 million was outstanding under this
facility. We intend to use a portion of the net proceeds from this offering to
repay the borrowings under this facility. In addition, we currently are in
negotiations with our lender regarding a new revolving credit facility that we
would enter into after the closing of this offering that would, among other
things, not be guaranteed, secured or contain numerous restrictive covenants.
We are in negotiations to acquire substantially all of the assets of
enerSave data systems, Inc. and JRS Technology, Inc., each for a purchase price
of $500,000. EnerSave data systems designs and develops energy management
systems and JRS Technology designs and develops commercial grade electronic
ballasts. We anticipate that we will close these acquisitions by the end of
October 2001 and that we will fund these acquisitions with borrowings under our
credit facility.
We have made distributions to our stockholders in order to allow them to
pay taxes on our income and to provide a return on their investment. We
distributed $105,000 in fiscal 1999, $437,000 in fiscal 2000, and $963,000
during the first six months of fiscal 2001 to our stockholders. We will revoke
our S corporation status in connection with this offering. We intend to
distribute substantially all of our undistributed S corporation earnings for tax
purposes through the date of revocation of S corporation status to our current
stockholders. As of June 30, 2001, the amount of these undistributed S
corporation earnings was approximately $2.1 million. The actual amount of the
distribution of S corporation earnings to our current stockholders will depend
on the amount of our income prior to completion of the offering. We anticipate
paying this distribution with a portion of the proceeds of this offering.
Our capital expenditures have historically related primarily to our
facilities. During fiscal 2000, we financed the purchase of our current office
and warehouse facilities located in Aurora, Ohio with a 10-year $900,000
commercial mortgage from a bank and $500,000 through the State of Ohio 166
Program loan. In August 2001, we paid off the entire balance of the bank
mortgage with proceeds from our new $15.0 million credit facility. The State of
Ohio 166 Program Loan is a 15-year loan that bears interest at 5.25% and is
secured by our facilities. It is guaranteed by Ellis Yan and contains certain
restrictive covenants similar to the credit facility. In 2000, we obtained
waivers for certain financial ratio covenant violations, and, in 2001, we
obtained waivers for certain non-financial covenant violations. As of September
30, 2001, approximately
25
$480,000 was outstanding under our State of Ohio 166 Program loan. We intend to
use a portion of the net proceeds from this offering to repay the borrowings
under this loan.
Through the end of 2002, we expect to spend approximately $2.0 million on
capital expenditures, primarily to fund the expansion of our warehouse
facilities.
Based on current and anticipated levels of operations, our management
believes that cash on hand and cash flow from operations and proceeds from this
offering, together with amounts available for borrowing under our credit
facility, will be sufficient to continue to meet our current and anticipated
cash operating requirements, including working capital needs, capital
expenditures and scheduled interest and principal payments for the next 24
months. Our ability to meet our current and anticipated operating requirements
will depend upon our future performance, which, in turn, will be subject to
general economic conditions and financial, business and other factors, including
factors beyond our control.
EFFECTS OF INFLATION
We do not believe that inflation has had a material impact on our results
of operations in recent years. However, we cannot predict what effect inflation
may have on our results of operations in the future.
BACKLOG
We ship products to customers only after receipt of a specific purchase
order. Because we typically ship orders within 60 days, we do not believe that
our backlog at any particular date is a meaningful indicator of our future
performance. We have not experienced significant order cancellations or delivery
rescheduling.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities," which is required to be
adopted in fiscal year 2001. Because we do not use derivatives, the adoption of
this statement did not have a significant effect on our earnings or financial
position.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
provides guidance on revenue recognition. We have adopted this guidance in our
financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," to improve the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
be accounted for under a single method, the purchase method. Use of the
pooling-of-interests method is no longer permitted. SFAS 141 also establishes
criteria for separate recognition of intangible assets acquired in a purchase
business combination. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. We will implement this new standard in accounting
for our future acquisitions.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. We are in the process of
determining the effects of this Statement on our business.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes Financial Accounting
Standards Board SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of Accounting Principles Board Opinion
26
No. 30, "Reporting the Results of Operations." This Statement also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. We are in the process of determining the effects of this
Statement on our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk is related to our investment portfolio
and our borrowings. Fixed rate investments and borrowings may have their fair
market value adversely impacted from changes in interest rates. Floating rate
borrowings will lead to additional interest expense if interest rates increase.
As of September 30, 2001, we had approximately $480,000 outstanding under our
State of Ohio 166 Program loan, which bears interest at a fixed rate of 5.25%.
As of September 30, 2001, we also had approximately $8.5 million outstanding
under our credit facility bearing interest tied to the prime rate. Therefore, we
are subject to exposure to interest rate risk for borrowings under our credit
facility based on fluctuations in the prime rate. If interest rates were to
increase 50 basis points (0.5%) from the September 30, 2001 rates and assuming
no changes in outstanding debt levels from the September 30, 2001 levels, we
would realize an increase in our annual interest expense of approximately
$42,500.
Due in part to these factors, our future investment income may fall short
of expectations, and our interest expense may be above our expectations due to
changes in interest rates. Further, we may suffer losses in investment principal
if we are forced to sell securities that have declined in market value due to
changes in interest rates. We have no derivative financial interests or
derivative commodity instruments in our cash or cash equivalents. We invest our
excess cash in debt instruments of the United States government and its
agencies.
We pay for products purchased from our Chinese suppliers in United States
currency. Because China does not have a floating currency with a value that
fluctuates based on market forces, we do not experience foreign currency
exchange risk. However, because China's currency does not float like other
foreign currencies, in periods when foreign currency values are generally
declining, we do not benefit from a strong dollar.
27
BUSINESS
OVERVIEW
We design, develop and market high-quality, energy efficient lighting
products and accessories. Our wide variety of compact fluorescent products and
accessories offer the aesthetic features and application flexibility found in
traditional incandescent lighting while providing energy cost savings and
significantly longer product life. We believe that we offer the industry's most
comprehensive selection of compact fluorescent lighting products and accessories
including SpringLamp, the first compact fluorescent product with a twisted tube
design, and the United States market's first fully-dimmable product.
We have provided energy efficient lighting products and components to
original equipment manufacturers since 1986 and continue to sell our products to
original equipment manufacturers like General Electric Corp. and the Osram
Sylvania division of Siemens A.G. In 1997, we began marketing our products under
the TCP brand name to commercial and industrial customers, with sales in this
market increasing to $16.2 million for the first six months of fiscal 2001 from
$4.8 million in fiscal 1997 and $17.3 million in fiscal 2000. Our major
commercial and industrial customers include distributors like Graybar Electric
Company, Inc. and Rexel, Inc. who sell our products to a wide range of customers
including those in the hospitality, restaurant and entertainment, property
management and construction industries. We entered the residential consumer
market in June 2000 and now sell our compact fluorescent products and
accessories to consumers primarily through The Home Depot under its "Commercial
Electric" label as well as through K-mart and other retailers under the TCP
brand name. Our sales to retailers increased to $15.1 million for the first six
months of fiscal 2001 from $5.0 million in fiscal 2000. Our total net sales were
$31.3 million for the first six months of fiscal 2001 compared to $8.9 million
for the first six months of fiscal 2000.
We use our technological expertise to develop and commercialize innovative
new products. Most of our research and development activity has been funded
through licensing and royalty arrangements as well as through our suppliers and
our customers as we work with them to develop or customize products to meet
their needs. We have built an extensive portfolio of lighting products based on
compact fluorescent technology and anticipate that we will continue to add new
products and product enhancements. We are a partner in the United States
government's ENERGY STAR Program and offer a variety of products that meet or
exceed the program's stringent criteria for long-life, energy savings, start
time, color and brightness. The ENERGY STAR Program is a voluntary partnership
with retailers, manufacturers and utilities that establishes guidelines and
specifications for energy efficient products, organizes and promotes energy
efficient product programs and expands consumer awareness of energy efficient
products.
INDUSTRY BACKGROUND
The Electric Power Industry
According to industry sources, United States consumers spent $226.5 billion
on electricity in 2000. The Department of Energy estimates that the annual
domestic cost of electricity for lighting is more than $37 billion and that
households could cut lighting costs by 30% to 60% by using energy efficient
lighting products.
To reduce energy consumption and costs, many governmental authorities have
established economic incentives to reward enterprises and individuals who lower
their energy use. Several state public utilities commissions require utilities
to implement programs that will promote energy conservation. For example,
certain utility companies in the northeastern United States have formed the
Northeast Energy Efficiency Partnership, offering rebates for each compact
fluorescent lamp purchased. Additionally, the Bonneville Power Administration, a
federal utility wholesaler, provides customers through their local utilities
approximately 12 million $6.00 coupons redeemable at more than 300 participating
retailers for compact fluorescent lamps with the ENERGY STAR label. California
has also enacted legislation that appropriates funds to implement programs to
reduce energy consumption and costs, including allocating funds to encourage
replacement of low-efficiency lighting. Federal and state governments have also
become more active in promoting energy conservation. For instance, the United
States Department of Energy and the EPA established the ENERGY
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STAR Program to reduce the national rate of greenhouse gas emissions and
consumer energy consumption and costs. Also, the state of Minnesota has exempted
ENERGY STAR rated lighting products from its current 6.5% sales tax.
While electricity demand continues to grow, the rate of new electricity
supply additions has slowed. Due to the uncertainty surrounding the deregulation
of the energy industry, many power companies delayed plans for new generating
plants. Additionally, increasing environmental concerns have resulted in
restrictions on the use of current plants and impacted the construction of new
generating facilities. Also, the United States' current electricity transmission
grid has remained largely unchanged since its inception and has become
increasingly inefficient. We believe that because of the disparity between the
supply and demand of electricity and the recent volatility in electricity
prices, together with the existing inefficiency of the electricity distribution
system, the demand for energy efficient products, including lighting products,
has and will continue to increase.
Lighting Industry
The lighting industry has two major consumer markets, the commercial and
industrial market and the residential market. The global lighting industry
consists of many firms, ranging from large, multinational, multi-product, public
companies to small, single-product, private firms. The industry includes three
dominant firms, General Electric Corp., Philips Electronics N.V. and the Osram
Sylvania division of Siemens A.G. While these three companies are active in all
of the major sections of the lighting industry, concentration levels vary by
sector and region. The lamp market is highly concentrated whereas the fixture
market is highly fragmented. The ballast market is concentrated and consists of
several large companies. In addition, smaller companies have created niches in
certain product markets like the compact fluorescent lighting market, which
require unique competencies, technologies and market products.
The domestic lighting market recorded retail lamp sales of approximately
$1.8 billion in 2000. Overall lamp sales are affected by a variety of factors,
including general economic conditions, energy costs and availability,
governmental programs and regulations, new construction and renovation activity
and infrastructure expenditures. Of the approximately 2.2 billion light bulbs
sold at retail from July 1999 through June 2000, approximately .005% are compact
fluorescent. Due to the growing demand for energy efficient lighting systems,
certain lamp product markets, like the compact fluorescent lamp market, are
experiencing rapid growth. The domestic lighting market recorded fixture sales
of approximately $9.2 billion in 2000. Overall fixture sales are affected by
such factors as energy costs and availability and general economic conditions,
especially commercial and industrial construction. The domestic ballast market
recorded manufacturer's sales of approximately $1.0 billion in 2000. Ballast
sales are impacted by the growing demand for energy efficient lighting systems
together with requirements for improved light output, increased lamp life and
consistent light color output.
Lighting Markets
Energy efficient lighting has gained wide acceptance among commercial and
industrial customers. In addition to direct savings in energy costs, customers
with significant lighting needs can also reduce air conditioning expenses by
replacing hotter incandescent lamps with cooler compact fluorescents. The
substantially longer operating life of a compact fluorescent lamp also allows
commercial and industrial customers to reduce maintenance costs associated with
replacing lamps. Commercial and industrial customers of our lighting products
include customers in the following markets:
- Hospitality. By providing a broad range of lighting products from floor
and table lamp retrofits, ceiling fixtures, lighting options for wall
sconces, hallway lighting, lobby and common area lighting, and ballroom
and conference room lighting using our energy saving compact fluorescent
lighting, as well as exit sign fixtures, we are able to service
substantially all of the lighting needs of hotels. As a result, we are a
corporate approved supplier of several national hotel chains to whom we
sell our lighting products through distributors like Graybar Electric
Company, Inc. and Rexel, Inc.
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- Restaurant and entertainment. The restaurant and entertainment industry
historically has not used compact fluorescent lighting in their
facilities due to the unavailability of dimming features and the lack of
lighting color options. Our compact fluorescent products' dimming feature
and wide array of color options enables restaurant and entertainment
industry users to create a variety of moods and atmospheres. In addition,
our SpringLamp and various reflector options fit into most recess
lighting cans, and our small Deco Mini Series products offer lighting in
small table lamps, sconces and other types of floor and wall lighting.
Our shatter resistant compact fluorescent lighting products can be used
where food is prepared or served, and our outdoor compact fluorescent
lighting products can be used in outdoor patio, walkway and parking lot
lighting for these establishments.
- Property management (commercial buildings). Certain office buildings,
factories, hospitals, airports, retail stores and government buildings
have a variety of lighting needs that we are able to service. For
example, we have recently developed a compact fluorescent track lighting
system that is designed for use in retail stores for product displays and
general lighting needs.
- Construction. Building codes often require increased use of energy
efficient lighting with longer life, better light output and less heat
output. We offer a wide variety of compact fluorescent lighting products
and accessories that comply with these building codes and can be utilized
in a variety of the construction industry's lighting application needs.
- Agriculture. In addition to the traditional lighting needs in the
agriculture industry, certain segments of the agriculture industry have
specialized lighting needs that we can satisfy with our comprehensive
selection of compact fluorescent products and accessories and our ability
to customize our products to a customer's unique requirements.
Retail sales of all compact fluorescent lamps represented approximately
.005% of the 2.2 billion light bulbs sold in the United States from July 1999
through June 2000. We believe that the significantly higher prices charged for,
and lack of knowledge of the benefits of, compact fluorescent lamps have
contributed to the slower adoption in the retail market and, thus, lower sales
relative to commercial and industrial customers. However, we believe compact
fluorescent lighting products are becoming more popular with residential
consumers for the following reasons:
- recent volatility of electricity prices;
- consumer awareness of the need to conserve electricity, fueled in part by
news reports of energy shortages and rolling black-outs;
- improved compact fluorescent lamp performance comparable to incandescent
lamps;
- a growing number of applications for compact fluorescent lamps, which can
now be used in many of the same sockets as an incandescent lamp;
- more competitive compact fluorescent product prices; and
- government and utility sponsored programs offering rebates and other
incentives to encourage retail residential consumers to convert to
compact fluorescent lighting.
Lighting Technology
Various lighting technologies are currently used in the commercial and
industrial market and the residential consumer market. Common types of lighting
technology used today are incandescent, fluorescent and light emitting diode, or
LED.
Incandescent. Incandescent lighting is the oldest electric lighting
technology and remains the most widely used. Incandescent light is produced when
a wire or filament is heated by the flow of electric current through the wire or
filament. Incandescent lamps offer the advantage of a low sales price, good
color rendition (the qualitative measure of how accurately a light source allows
an object's actual color to be viewed), versatility and the ability to deliver
substantial amounts of light to a focused area. However, incandescent lamps have
the shortest life, averaging 750 to 2,000 hours, and are the least energy
efficient,
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averaging 15 to 30 lumens (the measure of the quantity of light emitted from a
light source) per watt, of any lighting technology. In addition, approximately
90% of the energy emitted by an incandescent lamp is heat.
Fluorescent. Fluorescent lamps were first introduced in 1938 and have
become the standard interior light source for office buildings, retail stores
and certain industrial applications. Fluorescent lamps produce visible light
when the discharge from an electrically excited low pressure mercury vapor
interacts with a phosphorous powder coating on the inside surface of the lamp.
Current fluorescent lamp technology offers instant light, illuminating as
quickly as incandescent lamps, good color rendition, improved life and
efficiency as compared to incandescent lamps, averaging 10,000 to 20,000 hours
of life with 80 to 90 lumens per watt, and moderate initial cost. Unlike
incandescent lamps, fluorescent lamps require a ballast to convert electrical
current to the optimal voltage, current and waveform to start and operate the
lamp. Ballasts generally come in two forms, magnetic and electronic ballasts,
with magnetic ballasts for use in the commercial and industrial new construction
and renovation market to be prohibited by the federal government in 2005. There
are two common types of fluorescent lamps in use today, tube fluorescents and
compact fluorescents.
Tube Fluorescent. Tube fluorescent lamps are much larger than
incandescent lamps, making it difficult to deliver substantial amounts of light
to a focused area. Tube fluorescent lamps are available in a variety of lengths,
the most common of which are four-foot lamps and eight-foot lamps. Tube
fluorescent lamps are often used for ambient lighting in large areas because
they create less direct glare than incandescent lamps.
Compact Fluorescent. Compact fluorescent lamps combine the efficiency
of fluorescent lighting with the convenience and light quality of incandescent
lamps. When introduced approximately 20 years ago, compact fluorescent lamps
were bulky, heavy and too big for many incandescent fixtures. However, newer
models have a significantly smaller bulb than when first introduced and can be
used in many of the same socket applications as incandescent lamps. In addition,
although compact fluorescent lamps have light outputs equivalent to incandescent
lamps ranging from 15 to 125 watts, according to the EPA, compact fluorescent
lamps last up to 10 times longer than incandescent lamps, use approximately 75%
less energy and produce up to 90% less heat. Even though the sales price of
compact fluorescent lamps is higher than standard incandescent lamps, with
incandescent lamps costing an industry average of $0.44 per bulb and compact
fluorescent lamps costing an industry average of $11.32 per bulb, this initial
cost is more than offset by energy savings and longer life. For example,
assuming an average electricity rate of 10 cents per kilowatt-hour, the
following table illustrates the electricity cost saving associated with using
one of our compact fluorescent lamps compared to an incandescent lamp.
[Enlarge/Download Table]
TCP COMPACT
INCANDESCENT LAMP FLUORESCENT LAMP
----------------- ----------------
Initial cost of bulb...................................... $0.44 $8.99
Light output.............................................. 1190-1220 lumens 1200 lumens
Watts used................................................ 75 watts 20 watts
Life of bulb(1)........................................... 750 hours 10,000 hours
Cost of electricity(2).................................... $75.00 $20.00
Total cost................................................ $80.72(3) $28.99
Total savings........................................... $51.73
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(1) Because repeatedly switching a light on and off reduces the life of the
bulb, this example assumes that the lights are left on for several hours per
day.
(2) Represents the amount of electricity used over a period of 10,000 hours.
(3) Includes $5.28 that a consumer will eventually pay for the approximately 12
additional incandescent bulbs needed for 10,000 hours of life. The
calculations do not include the maintenance cost of replacing an
incandescent lamp bulb 12 times in order to obtain 10,000 hours of operating
life.
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In addition to direct savings in energy costs, customers with significant
lighting needs can also reduce air conditioning expenses by replacing hotter
incandescent lamps with cooler compact fluorescents. The substantially longer
operating life of a compact fluorescent lamp also allows commercial and
industrial customers to reduce maintenance costs associated with replacing
lamps.
Light Emitting Diodes. Light emitting diodes, or LEDs, are special diodes
that emit light when connected in a circuit. Because LEDs currently emit low
light levels and use very little energy, LED products are ideal when
illumination must be continuously maintained, such as in emergency exit signs,
outdoor billboards and signs and traffic lights. LEDs last 80,000 to 100,000
hours while incandescent lamps have a useful life of 750 to 2,000 hours.
Replacing exit light bulbs is a labor-intensive job, particularly in large
buildings. Therefore, the longer a lamp lasts, the greater the savings in
maintenance costs. Low wattage combined with long life and lower maintenance
costs offer substantial cost savings.
OUR COMPETITIVE STRENGTHS
Diversity of products. We believe that we offer the industry's most
comprehensive selection of compact fluorescent lighting products and
accessories, with over 1,000 different energy efficient lighting products and
accessories ranging from our SpringLamp compact fluorescent lamps to our energy
efficient ballasts. With our extensive compact fluorescent product line, we
believe that we are able to source most of a customer's lighting needs with
energy efficient lighting. Because our compact fluorescent lamps last up to 10
times longer on average than traditional incandescent lamps, using approximately
75% less energy to produce the same illumination as incandescent lamps and
emitting up to 90% less heat than incandescent lamps, our compact fluorescent
lamps provide an affordable energy savings solution.
Operational flexibility and product customization. We offer our customers
the ability to design and create a lighting product that meets their unique
requirements. We believe that the unique nature of our supplier relationship
provides us with the flexibility to quickly design products and alter production
schedules that enable us to efficiently respond to the specialized product and
production needs of our customers. For example, an entertainment industry
customer wanted to create a particular atmosphere using a light color that, at
that time, the industry did not offer. We designed a lamp to meet the customer's
need and then worked with our principal suppliers to implement the engineering
and production changes necessary to manufacture the lamp. Within 30 days of the
customer's request, we delivered the desired lighting product.
Ability to develop new and innovative products. Our product development
group works together with other engineers that we engage to develop new
technologies, enabling us to quickly and efficiently design and develop new and
innovative lighting products that meet changing market needs. In developing new
energy efficient product designs, we focus on improving existing products with
more innovative engineering, better designs, smaller sizes and improved light
and color output. For example, we consider such elements of a lamp's performance
as light color temperature, color rendering index (which indicates what
percentage of the white light spectrum is being generated), the size of a bulb
to ensure proper fit into the lighting fixture and appearance to ensure, when
necessary, that the compact fluorescent lamp bulb looks similar to the
incandescent lamp bulb being replaced. As a result of our design and development
efforts, our product line has grown from only approximately 20 energy efficient
lighting products and accessories in 1997 to over 1,000 energy efficient
lighting products and accessories today.
Low cost, high quality manufacturing operations. Almost all of our
lighting products are manufactured in Shanghai, China by two companies that
combined have over 15 years of experience in manufacturing compact fluorescent
lighting products and accessories. These companies are controlled by Ellis Yan,
our Chairman, Chief Executive Officer and majority stockholder. Additionally,
Mr. Yan's brother manages the operations of both of these companies as their
president. Unlike many of our competitors that import lighting products from
unaffiliated suppliers, we believe that the unique collaboration with our
suppliers made possible by Mr. Yan's ownership and the involvement of his family
enhances our ability to assure consistent product quality while maintaining low
production costs and enables us to quickly respond to customers' specialized
product needs. Manufacturing our products in ISO 9002 certified facilities using
stringent quality controls, our suppliers have invested in sophisticated
manufacturing equipment in order to automate the manufacturing
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process to produce consistently high quality products. Many of our products are
produced using manual labor, which requires our suppliers to pay close attention
to the manufacturing process in order to assure product quality. We work
collaboratively with our suppliers to refine their manufacturing processes and
develop the quality controls necessary to make our products efficiently and with
consistently high quality. In addition, we sell to some of the world's largest
companies, all of which have demanding quality standards. These customers
inspect our suppliers' operations on a regular basis to assure proper production
and quality procedures.
Ability to capitalize on our established industry position. We believe that
we are able to effectively commercialize new lighting products by:
- building on our strong relationships with electrical, commercial and
retail distributors;
- using the industry knowledge and marketing expertise of our staff;
- capitalizing on the brand recognition and reputation of our existing
products; and
- promoting new products through our catalogs, informational seminars and
trade shows.
OUR STRATEGY
Our strategy is to become the market leader in the development and
commercialization of energy efficient lighting technologies. There are five key
elements to our business strategy:
Develop and commercialize innovative new products and energy management
solutions. We will continue to work with our customers to improve and extend
existing product lines to provide compact fluorescent alternatives for virtually
all incandescent applications. We will also continue to develop and
commercialize new products that can satisfy all of our customers' lighting
needs, focusing our research and development on three areas:
- developing commercial grade electronic ballasts for linear fluorescent
tubes that incorporate more energy efficient designs at a lower cost;
- developing customized light fixtures that incorporate energy efficient
lighting; and
- incorporating emerging LED technology into a full range of lighting
products, which, over the long term, we expect to become an energy
efficient lighting alternative to compact fluorescent lamps.
We also have established relationships with energy savings companies, or
ESCOs, that work with property owners to implement strategies to reduce energy
consumption and utility costs. We believe that these relationships, together
with our experience in developing and marketing energy efficient lighting
products, provide us with an opportunity to expand our product offerings to
include energy management solutions. We intend to develop software, sensors and
other products that will allow customers to monitor and adjust a building's
lighting to allow for more efficient management of energy use. For example, by
the end of October 2001, we anticipate acquiring enerSave data systems, Inc., a
company that designs and develops energy management software and hardware that
enables customers to monitor and adjust a building's lighting and HVAC systems.
In addition, by the end of October 2001, we anticipate acquiring JRS Technology,
Inc., a company that designs and develops traditional commercial grade
electronic ballasts as well as electronic ballasts that are designed to be
monitored and controlled by energy management technology like that developed by
enerSave data systems.
Further penetrate the commercial and industrial market. We believe that
significant opportunity remains to increase sales of our compact fluorescent
lighting products and accessories by expanding our sales through distribution
channels where our products have an established history. We also believe that we
can further penetrate the commercial and industrial market by distributing our
products through a more diverse group of distributors that sell lighting
products to a broader spectrum of businesses in the commercial and industrial
market, like customers in the agriculture and construction markets. In addition,
we will continue to develop such new products as customized lighting fixtures
and more energy efficient commercial grade ballasts to distribute to the
commercial and industrial market.
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Expand and diversify our retail presence into mass merchants and
supermarkets. We believe that significant opportunity exists to increase sales
of our compact fluorescent lighting products and accessories by adding new
products, expanding the presence of compact fluorescents at our existing retail
distribution channels and distributing our products through a more diverse group
of retailers. For example, according to industry sources, during the 12 months
ending April 1999 compact fluorescent lamp bulbs occupied only 4% to 7% of
retail light bulb shelf space. In addition, although it is estimated that during
this same period supermarket chains accounted for 31% and such mass merchants as
Wal-Mart and K-Mart accounted for 30% of incandescent lamp retail sales,
supermarket chains accounted for only 0.9%, and mass merchants accounted for
only 11.7%, of compact fluorescent lamp bulb sales. Accordingly, we will
continue to try to expand the shelf space dedicated to our products in our
existing retail distribution channels while seeking to expand our presence in
mass merchant stores and supermarkets where retail lamp sales have historically
been the highest.
Increase consumer acceptance of energy efficient lighting products. There
are significant long-term cost benefits associated with using compact
fluorescent lamps in lieu of incandescent lamps, including:
- less energy consumption -- compact fluorescent lamps use approximately
75% less energy necessary to operate an incandescent lamp with comparable
light output;
- comparable lighting quality -- due to advances in technology, compact
fluorescent lamps can often be used in the same lighting fixtures as
traditional incandescent lamps while providing comparable light output,
color and color rendition;
- longer operating lives -- compact fluorescent lamps last up to 10 times
longer than incandescent lamps, reducing maintenance costs incurred to
replace light bulbs; and
- lower heat output -- compact fluorescent lamps generate up to 90% less
heat than incandescent lamps, reducing associated energy costs like air
conditioning.
By educating customers of these benefits through training seminars,
literature, informative product packaging and participation in the ENERGY STAR
Program and utility company sponsored energy saving and education programs, we
believe that we can shift customer preferences from initial price to product
value, thereby increasing the demand for our energy efficient lighting products.
Form strategic partnerships and/or acquire complementary businesses and
technologies. We will focus on forming strategic partnerships and/or acquiring
businesses and technologies that can enhance our product development
capabilities. We intend to form strategic partnerships and/or make acquisitions
that will enable us to expand our product lines and provide more comprehensive
energy efficient lighting solutions. For example, to expand our offerings of
ballasts and energy management solutions, by the end of October 2001, we
anticipate acquiring enerSave data systems, Inc. and JRS Technology, Inc.
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OUR PRODUCT OFFERINGS
[Enlarge/Download Table]
RESIDENTIAL
COMMERCIAL AND INDUSTRIAL MARKET MARKET
COMPACT FLUORESCENT LIGHT EMITTING CFLS AND
LIGHTING (CFL) FIXTURES/ACCESSORIES DIODE (LED) FIXTURES/ACCESSORIES
PRODUCT - SpringLamps - Ceiling fixtures - Exit signs - SpringLamps
- Circlines - Table lamps/torchieres - Exit sign retrofit kits - Circlines
- GoodLamps - Outdoor fixtures - Indicator lighting - GoodLamps
- Deco Mini Series - Globes/covers - Sign lighting - Deco Mini Series
- Replaceable ballasts - Weatherproof coating - Flood lights
- Replacement lamps - Recessed can fixtures - Replacement lamps
- Unifloods - Reflectors - Ceiling fixtures
- Locking devices - Table lamps/torchieres
- Socket extensions - Outdoor fixtures
- Shatter resistant coating
SALES - Commercial and industrial distributors - Home centers
CHANNEL - Electrical distributors - Mass merchants
- Lighting distributors - Supermarkets
- Maintenance supply distributors - Drug stores
- Catalog distributors - Consumer catalogs
- Government procurement agencies - Hardware stores
- Club stores
By offering over 1,000 different energy efficient products and accessories,
we are able to source most of a customer's lighting needs with energy efficient
lighting. We design, develop and market high-quality, energy efficient lighting
products using compact fluorescent lamps and light emitting diodes. We
distribute a broad range of compact fluorescent lamps, the electronic and
magnetic ballasts needed to illuminate linear and compact fluorescent lamps and
compact fluorescent lamp lighting fixtures, as well as many component parts and
accessories. We also sell LED fixtures and retrofit lamps using LED technology.
Compact Fluorescent Lighting Products
SpringLamp. Our SpringLamp is compact and lightweight and is available
with and without dimming capabilities. When introduced in 1997, the SpringLamp's
twisted tube design made it compatible with a variety of incandescent fixtures
while also providing maximum light output and light distribution closest to
incandescent lamps. Because it simply screws into an existing light socket, the
SpringLamp does not require retrofit rewiring or new or unique fixture
configurations. As a percentage of our total net sales, sales of our SpringLamp
products accounted for 42% in 1998, 40% in 1999, 57% in 2000 and 68% in the six
months ended June 30, 2001.
The SpringLamp was the first commercially available compact fluorescent
lamp product to be dimmable using a standard incandescent dimmer. The dimming
capability of a SpringLamp is a particularly important feature in areas that
experience frequent voltage fluctuations, which can shorten the lives of
non-dimmable ballasts. Dimmable compact fluorescent lamps are able to respond to
voltage fluctuations as if the dimmer is being adjusted, unlike conventional
compact fluorescent lamps that do not. We believe that the United States State
Department purchasing agents approved the SpringLamp for use in embassies around
the world partly because of this important feature.
The SpringLamp is available in 7 watts to 32 watts, which are equivalent to
incandescent lamps ranging from 25 watts to 125 watts. Originally the SpringLamp
and its ballast was a one-piece integral unit. To enable customers to realize
the savings resulting from a ballast's longer operating life, we now offer the
SpringLamp in two piece sets consisting of a ballast and a lamp, each of which
can be separately replaced. We also offer replacement lamps for our SpringLamps
and our other compact fluorescent lamp products. Several new and innovative
products and accessories based on SpringLamp technology are now available,
including our Mini Springs, which are miniature versions of our SpringLamp that
fit in smaller lighting fixtures, like wall sconces
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and accent lights. The SpringLamp line is available in a wide assortment of
colors and includes a number of accessories, including the following:
- a Uniflood lamp, offering a SpringLamp enclosed in a flood light
reflector;
- various shapes and sizes of globes and other covers;
- a weatherproof, shatter resistant coating;
- a recessed can retrofit kit that allows easy conversion from an
incandescent downlight;
- polished aluminum reflectors;
- anti-theft locking devices;
- permanent discs to prevent incandescent lamps from being put back into
the sockets; and
- multiple socket extensions and options.
Circline family. Traditional circline technology has been around for many
years and is used extensively in the hospitality industry, commercial buildings,
residential apartment buildings and retail outlets. We offer Circline ballasts
with traditional wide diameter lamp tubes with 20, 22 and 30 watt outputs, as
well as new, smaller diameter tubes that come in 18, 27, 32, 40, 55 and 65 watt
outputs, providing more light from a smaller lamp. We offer these products with
a patented lamp holder arm bracket that is bent 45 degrees from the plane of the
bulb. This bent arm bracket improves light presentation and eliminates hot spots
on lampshades. As a percentage of our net sales, Circline products accounted for
19% in 1998, 17% in 1999 and 2000 and 8% in the six months ended June 30, 2001.
GoodLamp. Our GoodLamp, with its three U-shaped compact fluorescent lamp
tubes, is our version of the industry's traditional compact fluorescent lamp
product. The GoodLamp is available in 3 watts to 44 watts, which are equivalent
to incandescent lamps ranging from 15 watts to 200 watts. The GoodLamp is
available with three-way lighting features and, together with its ballast, can
either be purchased as a one-piece integral unit or as a two-piece set
consisting of a ballast and a lamp, each of which can be separately replaced.
Deco Mini Series. Our Deco Mini Series compact fluorescent lighting
products convert many of the incandescent lamp shapes that residential consumers
are accustomed to into energy efficient compact fluorescent lighting products.
We offer these compact fluorescents in a variety of shapes, colors and light
outputs, including A-bulbs, torpedoes, globes and flood lights.
Compact fluorescent lamp torchieres. The bulbs in halogen torchieres (a
type of floor lamp lighting fixture) generate bright light and burn at
temperatures of up to 1000 degrees Fahrenheit. We are one of the first companies
to develop compact fluorescent lamp torchiere technology, for which we have a
patent pending. Burning at only about 110 degrees Fahrenheit, our torchieres use
approximately 80% less electricity than halogens. We believe that this compact
fluorescent lighting technology will eventually replace halogen torchieres.
Lighting fixtures. We offer a family of compact fluorescent ceiling
fixtures for use in hospitality, residential and light commercial applications
in a variety of designs, shapes and sizes with multiple light output and power
factors. For outdoor use, we offer a number of lighting fixtures for
illuminating outdoor living areas that are suitable for operation in wet
locations. We also offer traditional table and floor lamp fixtures that
incorporate our replaceable ballasts and that operate with either a replaceable
circline or SpringLamp compact fluorescent lamp.
Ballasts. We offer traditional electronic and magnetic ballasts primarily
to original equipment manufacturers. We also offer ballasts that are designed to
operate each line of our compact fluorescent lamps as well as ballasts designed
with our customers for their specific uses, including manufacturers of lamps,
office furniture and agriculture industry light fixtures. Ballasts for compact
fluorescent lamps last far longer than the lamps themselves. Fluorescent lamps
last 20,000 hours or less while the ballasts driving the lamps last between
30,000 to 50,000 hours. When combined in a single unit, both have to be replaced
even though
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the lamp is the first to fail. To address this problem, we introduced a ballast
system that accepts replacement lamps, providing additional cost savings to the
consumer. We have also developed a replaceable ballast, which allows a customer
to replace ballasts without having to turn off the power or do any rewiring or
fixture maintenance.
LED Products
The primary non-compact fluorescent product category that we currently sell
is our LED exit sign group. LEDs are special diodes that emit light when
connected in a circuit. Because LEDs currently emit low light levels and use
very little energy, LED products are ideal when low light level illumination
must be continuously maintained, like in emergency exit signs, outdoor
billboards and signs and traffic lights. We offer several exit sign fixtures as
well as LED retrofit lamps for existing exit signs.
OUR PRODUCT DEVELOPMENT
We believe that we offer the industry's most comprehensive selection of
compact fluorescent lighting products and accessories, with a catalog offering
over 1,000 energy efficient products and accessories. We will continue to work
with our customers to improve and extend existing product lines to provide
compact fluorescent alternatives for virtually all incandescent applications. We
will also continue to develop and commercialize new products that incorporate
industry trends and satisfy changing consumer requirements. We are currently
focusing our research and development on the following three areas:
- Commercial grade ballasts. We are currently developing commercial grade
electronic ballasts for linear fluorescent tubes that incorporate new
energy efficient designs. We anticipate that these new ballasts will be
significantly less expensive than, and able to replace certain of, our
competitors' ballasts. We believe the demand for these energy efficient
electronic ballasts will increase as commercial and industrial customers
continue to look for ways to cut energy costs and because magnetic
ballasts for use in the commercial and industrial new construction and
renovation market will be prohibited by the federal government in 2005.
Our initial commercial grade ballast product is in a proto-type stage,
and we anticipate introducing certain of our new commercial grade
electronic ballasts to the commercial and industrial market early next
year.
- Fixtures. Our compact fluorescent lamps are designed to operate in
traditional incandescent lamp fixtures. In order to capitalize on our
strong position in compact fluorescent lamps, we have entered the
lighting fixture market, providing a number of customized light fixtures
that incorporate energy efficient lighting including table lamps,
torchieres, ceiling fixtures and recessed can fixtures.
- LED lighting. LED lighting is currently expensive and has a limited
number of practical lighting applications. However, because LED lighting
uses about 95% less energy than an incandescent lamp, and lasts much
longer and has many fewer component parts than compact fluorescent lamps,
as LEDs are developed to emit more light, we expect LED lighting products
to become an energy efficient lighting alternative to compact fluorescent
lamps. Our LED product development efforts will focus on incorporating
this emerging LED technology into a full range of lighting products. We
are in the early development stages of LED lighting products, like
indicator and sign lights, and we have a limited number of
customer-specific LED light bulb products that are currently being tested
at factories and subway systems and in billboard signs at various
locations in the United States.
Historically, most of our research and development activities have been
conducted through licensing and royalty arrangements as well as through our
suppliers and customers as we work with them to develop or customize products to
meet their needs. Our product development group consists of engineers, technical
support personnel and product marketing managers that continue to effectively
develop and commercialize innovative new products. We will retain additional
qualified engineers and other personnel for our product development group in
connection with our proposed enerSave data systems, Inc. and JRS Technology,
Inc. acquisitions.
37
OUR MANUFACTURING OPERATIONS
Generally. Almost all of our products are manufactured in Shanghai, China
by Shanghai Zhenxin Electronic Engineering Co., Ltd. and Shanghai Jensing
Electron Electrical Equipment Co., Ltd., both of which are Chinese companies
formed by a joint venture between Ellis Yan, our Chairman, Chief Executive
Officer and majority stockholder, and an entity indirectly controlled by a local
township in Shanghai, China. Mr. Yan owns 95% of Shanghai Zhenxin and 70% of
Shanghai Jensing, which share the same facilities, assets and personnel and
essentially operate as the same entity but are legally distinct in order to
enjoy certain tax benefits in China. Additionally, as president, Mr. Yan's
brother manages the operations of both of these companies. Under the direct
supervision of Mr. Yan's brother, these companies operate ISO 9002 certified
facilities that have invested in sophisticated machinery and have developed
significant expertise in making high-quality compact fluorescent lighting
products. Unlike many of our competitors that import lighting products from
unaffiliated suppliers, we believe that the unique collaboration with our
suppliers made possible by Mr. Yan's ownership and the involvement of his family
enhances our ability to assure consistent product quality and enables us to
quickly respond to customers' specialized product needs.
Manufacturing and supply agreement. Prior to completion of this offering,
we will enter into an exclusive manufacturing and supply agreement with these
suppliers. We are subject to conflicts of interests when dealing with our
suppliers that arise out of Mr. Yan's majority ownership of us and our
suppliers. As a result, our audit committee, an independent committee of our
board, must approve all amendments to our manufacturing and supply agreement.
Our manufacturing and supply agreement will require our suppliers to manufacture
products to our specification at a formula price based on their material and
labor cost and an agreed-upon overhead and profit margin. Under this agreement
we will provide our suppliers with product specifications and will obtain
Underwriters Laboratories and any comparable testing or governmental approvals
and certifications required by the country in which the product will be sold.
Our suppliers will agree not to sell competitive products to others, as well as
to maintain ISO 9002 certified facilities and trained personnel to supply our
products. If for any reason they cannot meet our product requirements or
delivery schedule, the agreement will provide that we can purchase products
manufactured by others, but any additional cost we incur is for our suppliers'
account, which does not relieve them of their obligation to manufacture solely
for us. Additionally, we can, if we consider it necessary, take our tooling to
another manufacturer. We are generally responsible for warranty or claims by our
customers, but, if returns or warranty problems in any shipment exceed 2% of
that shipment, we can return that shipment for a full refund.
Technology license agreement. We will also enter into a technology license
agreement with our suppliers under which we will license to them our
intellectual property and other technology to enable them to manufacture
products under the manufacturing and supply agreement. Under the terms of this
agreement, our suppliers will not be permitted to disclose, and must protect,
any proprietary or other confidential information that we provide them. In
addition, this agreement will provide that any technology that is developed
under the manufacturing and supply agreement will be jointly owned by us and our
suppliers. Under the laws of China, the Chinese government must approve any
license agreement involving the licensing of intellectual property or other
technology within China. As a result, we will submit the licensing agreement
with our suppliers to the Chinese government for its approval, which approval we
anticipate receiving prior to completion of this offering.
Quality control. To maintain the consistently high quality of our lighting
products, our principal suppliers employ sophisticated equipment and endeavor to
use the highest quality component parts available in their manufacturing
operations. Manufacturing our products using stringent quality controls, our
suppliers have invested in sophisticated production equipment in order to
automate the manufacturing process to produce consistently high-quality
products. Many of our products are produced using manual labor, which requires
our suppliers to pay close attention to the manufacturing process in order to
assure product quality. We work collaboratively with our suppliers to refine
their manufacturing processes and develop the quality controls necessary to make
our products efficiently and with consistently high quality. For example, we
approve all of the component material sources used in the manufacturing process.
All of the incoming component materials are then inspected and sample tested
prior to being used in production. In addition,
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throughout the manufacturing process, our products are subjected to a number of
stringent quality tests, including extensive testing and "burning-in" each
compact fluorescent lamp for two hours to ensure proper functioning.
LIGHTING CUSTOMERS AND OUR PRODUCT DISTRIBUTION CHANNELS
Commercial and industrial customers. During 2000, approximately 78% of our
net sales, and for the six months ended June 30, 2001, approximately 52% of our
net sales, were generated through sales to the commercial and industrial market.
Commercial and industrial businesses typically have large numbers of lights on
for extended periods of time and are therefore particularly conscious of energy
costs and the cost savings associated with energy efficient lighting products.
These savings are not limited to the significantly lower energy requirements of
compact fluorescent lamps. In addition to direct savings in energy costs,
customers with significant lighting needs can also reduce air conditioning
expenses by replacing hotter incandescent lamps with cooler compact
fluorescents. The substantially longer operating life of a compact fluorescent
lamp also allows commercial and industrial customers to reduce maintenance costs
associated with replacing lamps.
Residential consumers. During 2000, approximately 22% and, for the six
months ended June 30, 2001, approximately 48%, of our net sales were generated
from the sale of lighting products to retailers, where residential consumers
typically buy their lighting products. Retail sales of all compact fluorescent
lamps represented approximately .005% of the 2.2 billion light bulbs sold in the
United States from July 1999 through June 2000. We believe that the
significantly higher prices charged for, and lack of knowledge of the benefits
of, compact fluorescent lamps have contributed to the slower adoption in the
retail market and, thus, lower sales relative to commercial and industrial
customers. However, we believe that the improved quality, increasing variety of
applications and declining prices of new compact fluorescent products, along
with recent volatility in electricity prices, growing concerns about electricity
supply and government and utility sponsored incentive programs for energy
efficient lighting, are making compact fluorescent lighting products more
popular with residential customers.
Distribution. We market and distribute our lighting products throughout
North America, with limited sales in various other parts of the world. We
typically sell our lighting products through distribution channels like
electrical and industrial distributors, home centers, mass merchants,
supermarkets, drug stores, retailers and original equipment manufacturers.
During 2000, approximately 22% of our net sales were generated from sales to The
Home Depot. During the six months ended June 30, 2001, approximately 46% of our
net sales were generated from sales to The Home Depot.
We sell our lighting products to the commercial and industrial market
primarily through electrical and industrial distributors. We also sell our
lighting products to the commercial and industrial market through our
relationships with certain of the energy savings companies that work with
commercial and industrial customers to help them develop strategies to reduce
energy costs associated with electrical, gas, water and other energy uses. We
sell our products to the federal government primarily through the Federal
Defense and Supply Center based in Philadelphia, which acts as our distributor
to all federal government customers. We sell our products to state and local
governments through the appropriate commercial distributor or other government
procurement agency. We also sell our lighting products to the commercial and
industrial market through lighting distributors, maintenance supply distributors
and catalog distributors.
We entered the residential consumer market in June 2000 and currently sell
our compact fluorescent lighting products and accessories to residential
consumers primarily through The Home Depot under its private label "Commercial
Electric." We also sell our compact fluorescent lighting products and
accessories under the TCP name to residential consumers through other retail
distribution channels, including mass merchants like K-Mart, supermarkets and
drug stores like Albertson's and Rite Aid, direct mail order catalogs and a
variety of other regional distributors.
We also distribute our products through sales to General Electric Corp. and
the Osram Sylvania division of Siemens A.G., two of the three largest lighting
manufacturers. Because these manufacturers have historically not concentrated on
the compact fluorescent lighting market, they typically do not manufacture the
39
ballasts necessary to operate the lamps. As a result, we sell ballasts and
certain compact fluorescent lamps to these lighting manufacturers. We also have
recently begun to sell our lighting products to companies that manufacture
lighting fixtures like table lamps, floor lamps, and ceiling and wall lamps.
SALES AND MARKETING
We sell our products through a sales and marketing organization consisting
of nine full-time employees, including three regional sales managers and over 40
independent sales agencies. Our independent sales agencies are divided by
concentration, focusing on either the commercial and industrial market or the
residential consumer market. Our independent sales agencies are paid on a
commission basis tied to the growth of our customer base and increases in
purchases made by our existing customers.
We use a variety of strategies in marketing our lighting products. For
example, we:
- use promotional pricing, particularly when introducing new lighting
products;
- support our distributors' advertisements and promotional campaigns
through cooperative funding arrangements;
- conduct training and educational classes for our distributors and
consumers, educating them on the breadth of our product offerings, the
operation of our products and the benefits of using energy efficient
lighting products;
- promote media coverage and articles on the benefits of compact
fluorescent lighting;
- participate in national and regional trade associations and trade shows;
- advertise in selected industry journals;
- distribute new product introductions, promotional programs and
engineering developments directly to over 12,000 of our existing and
potential customers;
- hold sales meetings and training programs for our sales and marketing
associates;
- provide our distributors and customers with an extensive product catalog;
and
- publish marketing literature targeted at specific customer groups, like
the hospitality market and retail customers, that advertise our product
offerings and the benefits of using compact fluorescent lighting.
We also participate in programs offered by a number of utility companies
throughout the United States designed to reduce energy consumption and costs.
For example, certain utility companies offer rebates to those customers who
purchase our energy efficient lighting products, distribute product catalogs
that include our energy efficient lighting products and hold torchiere turn-in
events, where customers receive at a reduced cost one of our energy efficient,
safer torchieres. With 18 fixtures and 80 lamps qualified under the ENERGY STAR
Program, we also direct our marketing efforts at promoting our ENERGY STAR
rating and are able to participate in a number of programs offered by utility
programs that require ENERGY STAR specifications for eligibility. We believe
that most of our products meet or exceed the requirements for ENERGY STAR
certification. However, ENERGY STAR certification is an expensive process, and
we have typically sought certification only for those products that we
anticipate selling in the residential consumer market. To date, ENERGY STAR
certification has been less important in the commercial and industrial market
than the residential consumer market where we believe there is a greater
expectation of ENERGY STAR certification.
COMPETITION
Our compact fluorescent lighting products compete with other types of
lighting technology and with compact fluorescent lighting products produced by
other manufacturers. Although market awareness and use of compact fluorescent
lighting technology continues to grow, older technologies, principally
incandescent applications, dominate the market. Our compact fluorescent lighting
products compete based on such elements as price, the quality and color of light
output, energy efficiency, life and functionality, especially the ability of
40
a lamp's bulb to fit into a particular fixture. Our ability to compete
effectively will depend in part on our ability to:
- continue to develop innovative new products that meet changing customer
demands and enable us to source all of a customer's lighting needs;
- maintain and continue to improve our stringent product quality and
manufacturing standards;
- maintain our operational flexibility to quickly and efficiently respond
to changing customer demands; and
- increase consumer acceptance of energy efficient lighting products.
Further, we expect that competition will increase as other established and
emerging companies enter our market and as new products and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of market share. This could materially and adversely affect our
business, financial condition and results of operations.
General Electric Corp., Philips Electronics N.V. and the Osram Sylvania
division of Siemens A.G. are our principal competitors in the compact
fluorescent lighting market. These companies are also the major producers of
traditional lighting products. We also compete with a number of smaller
companies in the compact fluorescent lighting market. We believe our technical
and engineering expertise in the production of compact fluorescents, together
with our more extensive product lines and our product quality, give us a
competitive advantage. Unlike many of our competitors that import lighting
products from unaffiliated suppliers, we believe that the unique collaboration
with our suppliers made possible by Mr. Yan's ownership and the involvement of
his family enhances our ability to assure consistent product quality and enables
us to quickly respond to customers' specialized product needs. However, certain
of these competitors are significantly larger than us and may have a number of
significant advantages over us, including:
- greater financial, technical, marketing and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
and
- larger customer bases.
INTELLECTUAL PROPERTY
Although we believe that much of the knowledge and technology used in
fluorescent lighting is in the public domain, to the extent available, we rely
on a combination of patent, trade secret, copyright and trademark laws and
confidentiality and non-disclosure agreements with employees and third parties
to establish and protect certain aspects of our products, including our
proprietary manufacturing processes. For example, we have eight patents and
seven patent applications pending with the United States Patent and Trademark
Office. We also have United States trademark registration on the mark
SpringLamp. We also claim common law protections for the mark Technabright, for
which we have a pending United States trademark application. These measures may
not be sufficient to protect our proprietary rights, and we cannot be certain
that third parties will not misappropriate our technology and use it for their
own benefit. Our competitors could adopt marks similar to ours, or try to
prevent us from using our marks, consequently impeding our ability to build
brand identity and possibly leading to customer confusion. Misappropriation of
our trade secrets or other intellectual property rights could require us to
increase significantly the resources that we devote to our efforts to protect
our proprietary rights. In addition, an adverse determination in litigation
could subject us to the loss of our rights to a particular trade secret,
trademark or patent, require us to grant licenses to third parties on terms that
may not be favorable to us or prevent us from manufacturing, selling or using
certain aspects of our products. Also, most of these protections do not preclude
our competitors from independently developing products with functionality or
features substantially equivalent or superior to our products.
REGULATION
Our products are listed with or certified by Underwriters Laboratories when
safety or performance specifications exist. Underwriters Laboratories is an
independent, not-for-profit corporation engaged in the
41
testing of products for compliance with certain public safety standards. Certain
of our products sold in the United States are also subject to the Fair Packaging
and Labeling Act and certain other applicable rules and regulations of the
Federal Trade Commission with respect to the content of advertising and trade
practices. All of our products are subject to United States country of origin
laws under which we are required to place on each of the products that we sell
the name of the country where the product was manufactured. Additionally,
because the ballasts that we sell emit low level radio frequencies, the Federal
Communications Commission, or FCC, must determine that any new ballast designs
comply with certain radio frequency emission standards.
LITIGATION
We are not a party to any material legal proceedings.
EMPLOYEES
As of September 30, 2001, we had 60 full-time employees. None of our
employees are parties to a collective bargaining agreement, and we believe our
relationships with our employees are good.
FACILITIES
We currently own a 40,000 square foot facility located in Aurora, Ohio,
which is subject to a mortgage of approximately $500,000 as of September 30,
2001. This facility houses our corporate offices, as well as warehouse and
assembly and distribution space. To facilitate our anticipated future growth, we
are in the process of expanding our Aurora facility by 60,000 square feet to
100,000 square feet, which expansion we anticipate will be completed during the
first half of 2002. From time to time we also utilize public warehousing space
in Seattle, Washington, Chicago, Illinois and Los Angeles, California primarily
as distribution facilities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages and positions as of
October 17, 2001 are as follows:
[Download Table]
NAME AGE POSITION
---- --- --------
Ellis Yan 47 President, Chief Executive Officer and
Chairman of the Board of Directors
Matthew G. Lyon 41 Vice President -- Finance and Operations,
Treasurer and Director
James R. Coleman 38 Vice President -- Sales and Marketing and
Director
Benjamin G. Ammons(1)(2) 66 Director
Jack Kahl(1) 61 Director
R. Louis Schneeberger(1)(2) 47 Director
Boake A. Sells(2) 64 Director
---------------
(1) Member of the compensation committee.
(2) Member of the audit review committee.
Ellis Yan founded our company in 1986 and has acted as our Chairman of the
board of directors and as our President and Chief Executive Officer since we
were incorporated in February 1993. Mr. Yan serves as a member of the board of
directors of our primary suppliers, Shanghai Zhenxin Electronic Engineering Co.,
Ltd. and Shanghai Jensing Electron Electrical Equipment Co., Ltd.
Matthew G. Lyon has been a director since January 2000 and has served as
our Vice President -- Finance and Operations and Treasurer since our
incorporation in February 1993. Until August 2001, while employed by us, Mr.
Lyon also operated a tax and accounting practice on a part-time basis. Prior to
joining us in 1993, Mr. Lyon consulted on an independent basis for Mr. Yan. Mr.
Lyon is a certified public accountant and worked for KPMG Peat Marwick from
September 1990 to September 1991 and Grant Thornton LLP from May 1982 to
September 1990.
James R. Coleman has been a director since January 2000 and has served as
our Vice President--Sales and Marketing since January 1997. From January 1995
until January 1997, Mr. Coleman served as the Vice President--Marketing of
Custer Products Limited, an automotive/auxiliary lighting company. Before
joining Custer Products, in 1993 Mr. Coleman founded Lite-it, Inc., a lighting
company, where he served as its President and Chief Executive Officer until
Lite-it was acquired by Custer Products in 1995. From December 1984 to April
1993, Mr. Coleman served in various capacities with Waxman Industries, Inc., a
supplier of hardware products, including most recently as Production Manager.
Benjamin G. Ammons has been a director since February 2001. Mr. Ammons is
currently retired. Prior to his retirement, Mr. Ammons served in various
capacities with Firestone Tire & Rubber Company from April 1982 to July 1992,
including most recently Corporate Senior Vice President from June 1985 to July
1992, President of the Diversified Products Group from June 1985 to June 1991,
and Executive Vice President of World Tire Marketing and Sales from April 1982
to June 1985. Before joining Firestone, Mr. Ammons was the Executive Vice
President of Carlisle Tire & Rubber from December 1976 to April 1982 and held
several positions with B.F. Goodrich from September 1961 to December 1976,
including Corporate Director of Business Planing and Development. Mr. Ammons
chairs the board of directors or advisory boards of a number of private
companies.
Jack Kahl has been a director since October 2001. Mr. Kahl is currently the
President and Chief Executive Officer of Jack Kahl & Associates, LLC, a
consulting firm, and the President and Chief Executive Officer of Duck
Investments, LLC, an asset management company. Before founding Duck Investments
and
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Jack Kahl & Associates in December 2000, Mr. Kahl served as President and Chief
Executive Officer of Manco, Inc., a marketer and distributor of innovative
consumer products that Mr. Kahl founded in 1971, until October 2000. In addition
to a number of other board memberships for privately held companies, Mr. Kahl is
currently a member of the board of directors of American Greetings Corporation,
Royal Appliance Mfg. Co. and Acorn Products, Inc., all of which are public
companies.
R. Louis Schneeberger has been a director since October 2001. Mr.
Schneeberger has been the Executive Vice President and Chief Financial Officer
for Cardinal Commerce Corporation, an early-stage development company involved
in the authentication of internet-based transactions, since December 2000. From
March 2000 until December 2000, Mr. Schneeberger served as Chief Financial
Officer of Complient Corporation, a developer of internet-based regulatory and
other compliance software. Prior to March 2000, Mr. Schneeberger served for 13
years as Chief Financial Officer and as a Director of Olympic Steel, Inc., a
steel service center. Mr. Schneeberger is Chairman of the Board of Directors of
Royal Appliance Mfg. Co. Mr. Schneeberger also serves as a Trustee of the
Achievement Centers for Children and serves on the Business Advisory Council for
Kent State University and Enterprise Development Inc., an affiliate of Case
Western Reserve University.
Boake A. Sells has been a director since October 2001. Mr. Sells is
currently retired. Prior to his retirement, Mr. Sells served as the Chairman and
Chief Executive Officer for Revco D.S., Inc., a retail drugstore company, from
September 1987 until June 1992. Prior to joining Revco, from June 1983 to
September 1987, Mr. Sells served in a number of capacities at Dayton Hudson
Corporation, a diversified national retailer. From 1969 to 1983, Mr. Sells held
various positions at Cole National Corporation, a provider of vision care
products and services, managed vision care programs and personalized gifts,
where he rose to the position of President and Chief Operating Officer. Mr.
Sells is a director of numerous public and private companies, including Harrah's
Entertainment, Inc. and NCS Healthcare, Inc.
COMPOSITION OF THE BOARD OF DIRECTORS
Following this offering, our board of directors will be divided into three
staggered classes, each of whose members will serve a three-year term as
follows:
Class I directors will be R. Louis Schneeberger and James R. Coleman;
Class II directors will be Benjamin G. Ammons, Matthew G. Lyon and Boake A.
Sells; and
Class III directors will be Ellis Yan and Jack Kahl.
At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The terms of the directors will expire upon the
election and qualification of successor directors at the Annual Meeting of
Stockholders to be held during calendar years 2002 for Class I directors, 2003
for Class II directors and 2004 for Class III directors.
Each officer serves at the discretion of the board of directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has standing audit review, compensation and
executive committees. The audit review committee consists of Messrs. Ammons,
Schneeberger and Sells and will meet at least four times a year. The audit
review committee oversees the engagement of our independent public accountants,
reviews the annual financial statements and the scope of the annual audits,
considers matters relating to accounting policy and internal controls and
approves all amendments to our manufacturing and supply agreement that we will
enter into with our principal suppliers. The National Association of Securities
Dealers, Inc. recently adopted new Nasdaq Stock Market Marketplace Rules with
respect to audit committee charter, structure and membership requirements. We
intend to comply with these rules prior to our listing on The Nasdaq National
Market. The compensation committee consists of Messrs. Ammons, Kahl and
Schneeberger. The compensation committee reviews, approves and makes
recommendations to our board of directors concerning
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our compensation practices, policies and procedures for our executive officers,
including the Chief Executive Officer. The compensation committee's duties
include the administration of our stock plan.
DIRECTOR COMPENSATION
Each current non-employee director will receive an option to purchase
10,000 shares of our common stock after completion of this offering, and any
additional non-employee director will receive an option to purchase 10,000
shares of common stock when such director becomes a member of our board. In lieu
of an option to purchase 10,000 shares of our common stock and as consideration
for the significant assistance that he has provided us as a director to date,
immediately upon completion of this offering we intend to grant Mr. Ammons an
option under our 2001 Stock Option Plan to purchase 294,000 shares of our common
stock with an exercise price equal to the initial public offering price of our
common stock. This option will be exercisable in full beginning six months
following the date of grant. Additionally, each non-employee director annually
will receive either (1) $24,000, (2) an option to purchase a number of shares of
our common stock equal to the value of $24,000 divided by the fair market value
of one share of our common stock on the date of grant or (3) a combination of
the foregoing. In addition, we reimburse each non-employee director for travel
and other related out-of-pocket expenses incurred in attending meetings of the
board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Ammons, Kahl and Sells. Historically, however, decisions with respect to
the compensation of our executive officers were made by Mr. Yan. See "Related
Party Transactions" for information concerning transactions between us and Mr.
Yan. No interlocking relationship presently exists between any member of our
board of directors or our compensation committee and any member of the board of
directors or compensation committee of any other company.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation we
paid to our chief executive officer and our other executive officers whose total
annual compensation exceeded $100,000 during the year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS COMPENSATION COMPENSATION
------------------------------ ---- -------- ------ ------------ ------------
Ellis Yan................................ 2000 $255,000 $5,000 $100,851(1) $34,395(2)
President and Chief Executive Officer
Matthew G. Lyon.......................... 2000 144,000 -- -- 32,400(3)
Vice President -- Finance and
Operations and Treasurer
James R. Coleman......................... 2000 115,500 30,000 -- 21,963(4)
Vice President -- Sales and Marketing
---------------
(1) Includes (a) $43,596 for personal entertainment and related expenses,
including meals, lodging and travel expenses, and (b) $48,088 of personal
tax payments paid by us on behalf of Mr. Yan for the 1999 tax year.
(2) Includes (a) $30,000 of premiums paid by us pursuant to a split dollar,
whole life insurance policy, and (b) $4,395 of matching contributions made
by us under our 401(k) plan.
(3) Includes (a) $30,000 of premiums paid by us pursuant to a split dollar,
whole life insurance policy, and (b) $2,400 of matching contributions made
by us under our 401(k) plan.
(4) Includes (a) $20,000 of premiums paid by us on a whole life insurance policy
in connection with a deferred compensation arrangement, and (b) $1,963 of
matching contributions made by us under our 401(k) plan.
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The 2001 base salary for each of Messrs. Yan, Lyon and Coleman is $240,000,
$144,000 and $120,000. Both Messrs. Lyon and Coleman participate in a
discretionary bonus program pursuant to which they each received a $50,000 bonus
in each of the first three quarters of 2001. Messrs. Lyon and Coleman also are
eligible for bonuses under this program for the fourth quarter of 2001. Upon
completion of this offering, we will no longer compensate any of our officers
for personal expenses.
OPTION GRANTS IN FISCAL YEAR 2000/2000 FISCAL YEAR-END OPTION VALUES
In October 2001, we adopted our 2001 Stock Option Plan. We have never
granted any options to purchase common stock.
EMPLOYEE BENEFIT PLANS
401(k) Plan
We have a tax-qualified employee savings and retirement plan, also known as
a 401(k) plan, that covers all of our eligible employees. Under the 401(k) plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 12% of their annual compensation or the statutorily prescribed annual
limit, which was $10,500 in 2001, and have the amount of the reduction
contributed to the 401(k) plan. The trustee of the 401(k) plan, at the direction
of each participant, invests the assets of the 401(k) plan in designated
investment options. We may make matching contributions to the 401(k) plan in
amounts equal to 50% of each employee's contribution, not to exceed 6% of such
employees annual compensation. We made matching contributions of approximately
$22,000 in 2000. The 401(k) plan is intended to qualify under Section 401 of the
Internal Revenue Code, so that contributions to the 401(k) plan and income
earned on the 401(k) plan contributions are not taxable until withdrawn, and so
that any contributions we make will be deductible when made.
2001 Stock Option Plan
In October 2001, we adopted our 2001 Stock Option Plan. The 2001 Stock
Option Plan provides for the grant of incentive stock options and nonqualified
stock options. The board may also authorize the payment of dividend equivalents
on awards granted under the plan.
Options. Incentive stock options will have an exercise price of 100% or
more of the market value of our common stock on the date of grant. Nonqualified
stock options may have an exercise price of more or less than 100% of the market
value of our common stock on the date of grant.
Shares Reserved. We have reserved a total of 2,016,000 shares of our
common stock for issuance under the 2001 Stock Option Plan.
Eligibility. Our officers, employees, non-employee directors, consultants
and other independent contractors may be selected by the board to receive
benefits under the plan. The board may provide for special terms for awards to
participants who are foreign nationals or who are employed by us outside the
United States as the board may deem necessary or appropriate to accommodate
differences in local law, tax policy or custom.
Adjustments. The number of shares covered by outstanding awards, certain
other provisions contained in outstanding awards, the number of shares reserved
for issuance under the plan and the other share limits contained in the plan are
subject to adjustment in certain situations as provided in the plan.
Administration and Amendments. Our board, or a committee or subcommittee
thereof, administers and interprets the plan. The plan may be amended by the
committee so long as any amendment that must be approved by our stockholders in
order to comply with applicable law or the rules of any securities exchange on
which shares of common stock are traded or quoted is not effective until the
approval has been obtained.
Plan Benefits. As of October 17, 2001, we had not granted any options
under the plan. Immediately upon completion of this offering, we intend to grant
Mr. Ammons an option to purchase 294,000 shares of our common stock and Mr.
Coleman an option to purchase 1,064,000 shares of our common stock with an
46
exercise price equal to the fair market value of our common stock on the date of
grant. Following the grant of these options, there will be 658,000 shares of our
common stock remaining that can be issued under our 2001 Stock Option Plan.
LIABILITY LIMITATIONS AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law expressly permits a
corporation to provide that its directors will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions that are not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
These express limitations do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable
remedies, including injunctive relief or rescission.
The provisions of Delaware law that relate to indemnification expressly
state that the rights provided by the statute are not exclusive and are in
addition to any rights provided in a certificate of incorporation, bylaws,
agreement or otherwise. Our certificate of incorporation provides that we will
indemnify our directors and officers, to the maximum extent permitted by law and
that we may indemnify other employees and agents. Our certificate of
incorporation also permits us to secure insurance on behalf of any officer,
director, employee or agent for any liability arising out of actions in his or
her capacity as an officer, director, employee or agent. We have obtained an
insurance policy that insures our directors and officers against losses, above a
deductible amount, from specified types of claims. Finally, we have entered into
agreements with each of our directors and executive officers that, among other
things, require us to indemnify them and advance expenses to them relating to
indemnification suits to the fullest extent permitted by law. We believe that
these provisions, policies and agreements will help us attract and retain
qualified persons.
The limited liability and indemnification provisions in our certificate of
incorporation, bylaws and indemnification agreements may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary
duties and may reduce the likelihood of derivative litigation against our
directors and officers, even though a derivative action, if successful, might
otherwise benefit us and our stockholders. A stockholder's investment in us may
be adversely affected to the extent we pay the costs of settlement or damage
awards against our directors and officers under these indemnification
provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, employees and agents under our
certificate of incorporation or indemnification agreements we have been advised
that in the opinion of the SEC this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
47
RELATED PARTY TRANSACTIONS
SALES OF COMMON STOCK
In January 2000, we sold 2.8 million shares of common stock to Ellis Yan,
our President, Chief Executive Officer and Chairman of the board of directors
for $50.00, 1.68 million shares of common stock to Matthew G. Lyon, our Vice
President -- Finance and Operations, Treasurer and a member of our board of
directors for $30.00 and 560,000 shares of common stock to James R. Coleman, our
Vice President -- Sales and Marketing and a member of our board of directors for
$10.00. At the time of these sales, Mr. Yan was our sole stockholder.
In January 2000, we issued 560,000 shares of common stock to Andrzej Bobel
as consideration for a license fee owed to Mr. Bobel's company under a license
agreement that we entered into with him and his company in March 2000. For a
discussion of this license agreement, see " -- License Agreements" below.
STOCK REPURCHASE FROM FORMER STOCKHOLDER
In April 2001, we entered into a stock buy back agreement with Andrzej
Bobel pursuant to which we agreed to repurchase all 560,000 shares of our common
stock owned by Mr. Bobel for $500.00. Effective September 30, 2001, we amended
and restated this stock buy back agreement and repurchased all 560,000 shares of
our common stock held by Andrzej Bobel. Under the terms of the amended and
restated stock buy back agreement, we repurchased Mr. Bobel's shares in exchange
for $500.00 and the conversion of an exclusive license that we were granted by
Mr. Bobel and his company into a non-exclusive license. For a discussion of this
license agreement, see "-- License Agreements" below.
DISTRIBUTIONS TO STOCKHOLDERS
Since our incorporation in 1993, we have been treated for federal and state
income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code of 1986 and comparable state tax laws. As a result, our earnings
are taxed and will be taxed until the revocation of our S corporation status,
with certain exceptions, directly to our existing stockholders rather than to
us, leaving these stockholders responsible for paying income taxes on these
earnings. We have historically paid distributions to our existing stockholders
to enable them to pay their income tax liabilities as a result of our status as
an S corporation and, from time to time, to distribute previously undistributed
S corporation earnings and profits. We made S corporation distributions to our
existing stockholders of approximately $105,000 during 1999, $437,000 during
2000 and $963,000 in the six months ended June 30, 2001. We did not make any
distributions in 1998. We will revoke our S corporation status in connection
with this offering. We intend to distribute substantially all of our S
corporation earnings for tax purposes through the date of revocation of S
corporation status to our current stockholders. As of June 30, 2001, the amount
of these undistributed S corporation earnings was $2.1 million. The actual
amount of the distribution of S corporation earnings to our current stockholders
will depend on the amount of our income prior to completion of the offering. We
anticipate paying this distribution with a portion of the proceeds of this
offering.
TAX INDEMNIFICATION AGREEMENT
In connection with this offering and the revocation of our S corporation
tax status, we will enter into a tax indemnification agreement with our existing
stockholders. Although we believe that we have met the requirements for an S
corporation, the agreement provides for, among other things, the existing
stockholders to indemnify us for any federal and state income taxes, including
interest and penalties, incurred by us if for any reason we are deemed to be a C
corporation during any period in which we reported our taxable income as an S
corporation. The tax indemnification obligation of each of our existing
stockholders is limited to the aggregate amount of all distributions made to
such stockholder by us to pay taxes since the first day of our first tax year in
which we are deemed to have been a C corporation.
The agreement also provides for payment by our existing stockholders to us
and by us to our existing stockholders to adjust for any increases or decreases
in tax liability arising from a tax audit that affects our
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tax liability and results in a corresponding adjustment to the tax liability of
our existing stockholders. The amount of such payment cannot exceed that amount
of refund received by us or our existing stockholders attributable to the
adjustment in tax liability.
GUARANTEES
During 2000, to finance the price we paid to purchase our Aurora, Ohio
facility, we obtained a commercial mortgage from a bank in the amount of
$900,000 and $500,000 through the State of Ohio Program loan, both of which were
guaranteed by Mr. Yan. In addition, in January 1999 we entered into a Loan and
Security Agreement under which we were extended a $2.0 million line of credit
that was subsequently increased to $3.0 million and was guaranteed by Mr. Yan.
In February 2000, this line of credit was refinanced with a $3.5 million line of
credit that was subsequently increased to $4.0 million in November 2000 and to
$5.0 million in February 2001, which was also guaranteed by Mr. Yan. In August
2001, our line of credit was refinanced with a $15.0 million line of credit,
$1.0 million of which is guaranteed by Mr. Yan.
ACCOUNTING, TAX AND FINANCIAL CONSULTING SERVICES
From time to time, Mr. Lyon has provided certain accounting, tax and
financial consulting services to us outside of his capacity as one of our
employees. As consideration for these services, we paid Mr. Lyon an aggregate of
approximately $90,000 in 1998, $30,000 in 1999, $49,000 in 2000 and $30,000 for
the six months ended June 30, 2001. In the future, we do not intend to retain
Mr. Lyon to perform these services outside of his capacity as one of our
employees.
SECURED BORROWING
Prior to our obtaining a $2.0 million revolving line of credit in January
1999, we financed our operations primarily through borrowings from Mr. Lyon or
Mr. Lyon's affiliates because we were unable to obtain conventional bank
financing at the time. During 1998 and 1999, we obtained financing through Mr.
Lyon that was secured by our accounts receivable. We incurred financing costs
under this arrangement of approximately $308,000 in 1998 and $36,000 in 1999. We
repaid Mr. Lyon in full in January 1999.
LETTER OF CREDIT
At times during 1999 and 2000 when we did not have further borrowing
capacity under our line of credit, we acquired approximately $697,000 and
$277,000 of inventory through a letter of credit arrangement funded by Mr. Lyon.
As consideration for this letter of credit arrangement, we paid Mr. Lyon
approximately $73,000 in 1999 and $29,000 in 2000.
FACILITIES LEASE
Prior to purchasing our Aurora, Ohio facility in January 2000, we leased
warehouse and office space from a corporation that was 25% owned by Mr. Lyon and
25% owned by each of Mr. Lyon's spouse, brother and sister-in-law. We paid
approximately $51,000 in 1998, $83,000 in 1999 and $35,000 in 2000 in lease
payments to this corporation. In addition, in 2000, we surrendered a $50,000
rent deposit to this corporation as settlement for the termination of the lease
agreement.
BUILDING PURCHASE/SALE
In June 1999, we purchased a building from Mr. Lyon's affiliated
corporation for $125,000, which price was based on arm's length negotiations.
This affiliated corporation purchased the building in December 1997 for
approximately $110,000. In January 2000, we sold this building to an unrelated
party, with net proceeds from the sale totaling approximately $102,000.
49
SHANGHAI ZHENXIN AND SHANGHAI JENSING
Currently, almost all of our lighting products are manufactured by Shanghai
Zhenxin Electronic Engineering Co., Ltd. and Shanghai Jensing Electron
Electrical Equipment Co., Ltd. located in Shanghai China. Both Shanghai Zhenxin
and Shanghai Jensing are Chinese companies formed by a joint venture between Mr.
Yan and an entity indirectly controlled by a local township in Shanghai, China.
Mr. Yan owns 95% of Shanghai Zhenxin and 70% of Shanghai Jensing, which share
the same facilities, assets and personnel and essentially operate as the same
entity but are legally distinct in order to enjoy certain tax benefits in China.
Additionally, Mr. Yan's brother, Solomon Yan, manages the operations of both of
these companies as their president.
We purchased lighting products from both Shanghai Zhenxin and Shanghai
Jensing in amounts of approximately $5,246,000 for 1998, $9,580,000 for 1999,
$15,190,000 for 2000 and $26,199,000 for the six months ended June 30, 2001.
Effective December 31, 1998, we refinanced $931,328 of our trade accounts
payable to Shanghai Zhenxin and Shanghai Jensing outstanding at December 31,
1998 with a promissory note to Shanghai Zhenxin in the amount of $164,571 and a
promissory note to Shanghai Jensing in the amount of $766,757. Both notes are
due on January 9, 2009 and bear interest at 6% per annum. The interest due on
the note to Shanghai Zhenxin was approximately $10,000 for 1999 and 2000, and
approximately $5,000 for the six months ended June 30, 2001. We anticipate
paying these notes off with a portion of the proceeds of this offering. The
interest due on the note to Shanghai Jensing was $46,000 for 1999 and 2000 and
$23,000 for the six months ended June 30, 2001. The interest due on these notes
was offset against certain fees that we charge to these companies for management
and advisory services that we provided related to expansion, quality control,
production, component sourcing, accounting, freight and logistics. We intend to
continue to provide these services to Shanghai Zhenxin and Shanghai Jensing
pursuant to the manufacturing and supply agreement that we will enter into prior
to the completion of this offering.
During 1998, 1999 and 2001, we entered into an arrangement with Shanghai
Zhenxin and Shanghai Jensing pursuant to which we acted as a commissioned sales
agent for certain products sales made at our direction that were directly
shipped to customers by Shanghai Zhenxin and Shanghai Jensing. We earned
approximately $218,000 in 1998, $237,000 in 1999 and $229,000 for the six months
ended June 30, 2001 in commissions from these companies under this arrangement.
We will formally enter into a manufacturing and supply agreement and a
technology license agreement with Shanghai Zhenxin and Shanghai Jensing prior to
the completion of this offering. See "Business -- Our Manufacturing
Operations -- Manufacturing and supply agreement" and " -- Technology license
agreement."
LICENSE AGREEMENTS
We are a party to four related license agreements with Practical
Innovations, Inc. and Mr. Bobel, the president of Practical Innovations,
pursuant to which we were granted licenses to use Practical Innovations'
electronic ballast technology in exchange for a license fee and minimum monthly
royalty payments.
We entered into the first of these agreements in June 1996, at which time
Mr. Bobel was not one of our stockholders, and were granted a non-exclusive
license to manufacture products incorporating certain of Practical Innovations'
electronic ballast technology. We paid aggregate monthly royalty payments to
Practical Innovations under this agreement of approximately $235,000 in 1998 and
$333,000 in 1999.
In March 2000, we entered into the second agreement, which incorporated the
terms of the first agreement. Under the terms of this second agreement, we were
granted both a non-exclusive license and an exclusive license to manufacture,
use and sell products incorporating certain of Practical Innovations' electronic
ballast technology, and the scope of these licenses was expanded to include
additional electronic ballast technology. The 560,000 shares of our common
stock, which when issued represented 5% of our outstanding common stock, that we
issued to Mr. Bobel in January 2000 was deemed the consideration for
50
the license fee due for these licenses. We paid aggregate monthly royalty
payments to Practical Innovations under this Agreement of approximately $426,000
in 2000.
In May 2001, we entered into the third agreement, which incorporated the
terms of both the first and second agreements. Under the terms of this
agreement, our exclusive license was converted into a non-exclusive license, and
we agreed to satisfy all of our obligations under each of the prior agreements
by making a $2.0 million non-refundable payment payable over five years. We paid
approximately $75,000 in royalty payments to Practical Innovations in 2001 prior
to entering into this third agreement. As of June 30, 2001, we had paid
Practical Innovations $325,000 under this third license agreement.
In September 2001, we entered into the fourth agreement, which amended and
restated the terms of the first three agreements. Under the terms of this
amended and restated agreement, we agreed to satisfy all of our remaining
obligations under each of the prior license agreements by making a $2,160,000
non-refundable payment to Practical Innovations payable over 54 months. We also
agreed to pay $200,000 to Practical Innovations on October 10, 2001 as
consideration for releasing us and our principal suppliers from any liabilities
arising on or prior to September 30, 2001 under agreements that we and/or our
suppliers are a party to with Mr. Bobel and/or Practical Innovations as well as
in exchange for terminating certain agreements that either we or our principal
suppliers were a party to with Mr. Bobel and/or Practical Innovations. We paid
approximately $650,000 under the third license agreement prior to entering into
this final agreement.
OPTION AGREEMENT
As consideration for the significant assistance that Mr. Coleman has
provided us as an officer and Mr. Coleman's agreement to release us from any
obligation that we may be deemed to have had to grant Mr. Coleman options in the
past, we have agreed to grant Mr. Coleman, immediately upon completion of this
offering, an option to purchase 1,064,000 shares of our common stock under our
2001 Stock Option Plan. This option will have an exercise price equal to the
initial public offering price of our common stock and will be immediately
exercisable in full beginning six months following the date of grant.
REGISTRATION RIGHTS AGREEMENT
Prior to completion of this offering, we will grant rights to Messrs. Yan,
Lyon and Coleman, which will require us to register their shares under the
Securities Act and to include their shares in future registration statements
that we file for our own benefit or other stockholders under the Securities Act.
See "Description of Capital Stock -- Registration Rights."
DELAWARE INDEMNIFICATION AGREEMENTS
Prior to completion of this offering, we will enter into indemnification
agreements with each of our directors and executive officers. Such
indemnification agreements will require us to indemnify our directors and
executive officers to the fullest extent permitted by Delaware law. See
"Management -- Liability Limitations and Indemnification."
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PREVIOUS INDEPENDENT ACCOUNTANTS
In July 2001, we dismissed Grant Thornton LLP as our independent public
accountants.
Except as described below, the reports of Grant Thornton on our financial
statements for the fiscal years ended December 31, 1999 and December 31, 2000
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
For the fiscal years ended December 31, 1999 and December 31, 2000, Grant
Thornton rendered reports dated January 26, 2000 and January 26, 2001,
respectively, which stated that Grant Thornton did not observe
51
our physical inventory taken as of December 31, 1998 since that date was prior
to their initial engagement as our auditors, and our records did not permit
adequate retroactive tests to those inventory quantities. Accordingly, Grant
Thornton noted in their report that the scope of their work was not sufficient
to enable them to express, and that they did not express, an opinion on our
statements of earnings and accumulated deficit, and cash flows for the year
ended December 31, 1999.
The dismissal of Grant Thornton was recommended and approved by our board
of directors.
In connection with the audits of our financial statements for the fiscal
years ended December 31, 1999 and December 31, 2000 and the subsequent period of
January 1, 2001 through the date of their dismissal, there were no disagreements
with Grant Thornton on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Grant Thornton, would have
caused Grant Thornton to make reference to the subject matter of the
disagreement(s) in connection with its report on the financial statements for
each such year.
NEWLY ENGAGED INDEPENDENT ACCOUNTANTS
On August 9, 2001, we engaged PricewaterhouseCoopers LLP as our new
independent accountants. Through August 8, 2001, neither we nor anyone on our
behalf consulted PricewaterhouseCoopers LLP regarding:
- the application of accounting principles to any transaction, either
completed or proposed; or
- the type of audit opinion that might be rendered on our financial
statements.
52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding
the beneficial ownership of our common stock as of October 17, 2001 and as
adjusted to reflect to the sale of the shares of common stock in this offering
assuming an initial public offering price of $ per share for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- each of our executive officers named in the summary compensation table;
and
- all of our directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. We believe that each stockholder named in
the table has sole voting and investment power for the shares shown as
beneficially owned by them. Percentage of ownership after the offering is based
on shares of common stock outstanding after completion of this
offering assuming an initial public offering price of $ per share.
This table assumes no exercise of the underwriters' over-allotment option. The
mailing address for each stockholder is c/o Technical Consumer Products, Inc.,
300 Lena Drive, Aurora, Ohio 44202.
[Enlarge/Download Table]
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
---- ------------ -------- --------
Ellis Yan................................................... 8,400,000 78.9%
Matthew G. Lyon............................................. 1,680,000 15.8
James R. Coleman............................................ 560,000 5.3
Benjamin G. Ammons.......................................... -- --
Jack Kahl................................................... -- --
R. Louis Schneeberger....................................... -- --
Boake A. Sells.............................................. -- --
All executive officers and directors as a group (seven
persons).................................................. 10,640,000 100.0%
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DESCRIPTION OF CAPITAL STOCK
Prior to the completion of this offering and after receiving stockholder
approval, we will amend our certificate of incorporation to increase to
30,000,000 the number of authorized shares of common stock, $0.001 par value per
share, and authorize the issuance of 5,000,000 shares of undesignated preferred
stock, $0.001 par value per share, the rights and preferences of which may be
established from time to time by our board of directors. Immediately after the
filing of our amended and restated certificate of incorporation, we will also
effect a 56,000-for-one forward stock split in the form of a stock dividend on
all of our issued and outstanding common stock. Upon completion of this
offering, there will be shares of common stock outstanding and no
serial preferred shares issued and outstanding.
COMMON STOCK
As of October 17, 2001, without giving effect to the forward stock split
discussed above, our authorized capital stock consisted of 500 shares of common
stock, of which 190 shares were outstanding. These shares were held of record by
three stockholders.
Following the completion of this offering, each outstanding share of our
common stock will be entitled to one vote on all matters submitted to a vote of
stockholders. Pursuant to our certificate of incorporation, holders of our
common stock will not have the right to cumulative voting; therefore, the
holders of a majority of the shares voting for the election of our board of
directors will be able to elect all the directors standing for election, if they
so choose. Subject to any superior rights of any holders of preferred stock,
each outstanding share of our common stock will be entitled to such dividends as
may be declared from time to time by our board of directors out of legally
available funds. See "Dividend Policy." In the event of our liquidation,
dissolution or winding up, holders of common stock will be entitled to their
proportionate share of any assets remaining after payment of liabilities and any
amounts due to the holders of preferred stock. Holders of our common stock have
no preemptive rights and no right to convert or exchange their common stock into
any other securities. No redemption or sinking fund provisions will apply to our
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and non-assessable.
PREFERRED STOCK
Following the completion of this offering, our board of directors will be
authorized, without stockholder approval, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon the convertible preferred
stock, including voting rights, dividend rights, conversion rights, terms of
redemption, liquidation preference, sinking fund terms and the number of shares
constituting any series or the designation of a series. Our board of directors
can issue preferred stock with voting and conversion rights that could adversely
affect the voting power of the holders of common stock, without stockholder
approval. The issuance of convertible preferred stock could have the effect of
delaying, deferring or preventing a change in control of TCP. We have no present
plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
Prior to the completion of this offering, we will grant the current holders
of our common stock "demand," "piggyback" and S-3 registration rights pursuant
to a registration rights agreement with those investors. These rights are
summarized below.
After the completion of this offering, holders of 10,640,000 shares of
common stock or their permitted transferees will be entitled to unlimited
"piggyback" registration rights. These rights entitle the holders to notice of
the registration and to include, at our expense, their shares of common stock in
many of our registrations of our common stock. We and our underwriters can
reduce the number of shares of common stock to be included by holders of
piggyback rights in view of market conditions.
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On the date 180 days after completion of this offering, the holders of
10,640,000 shares of common stock or their permitted transferees will be
entitled to "demand" rights to register all or a portion of these shares under
the Securities Act if the reasonably anticipated aggregate price to the public
of these shares (net of underwriting commissions) would exceed $5.0 million. We
will be obligated to undertake two of these demand registrations for these
stockholders.
If, at any time, we are eligible to register our securities on a Form S-3
under the Securities Act, holders of 10,640,000 shares of our common stock will
be able to demand that we file such registration statement if the reasonably
anticipated price to the public (net of underwriting commissions) for those
shares would exceed $2.0 million.
If our stockholders with registration rights cause a large number of
securities to be registered and sold in the public market, those sales could
cause the market price of our common stock to fall. If we are to initiate a
registration and include registrable securities because of the exercise of
registration rights, the inclusion of registrable securities could adversely
affect our ability to raise capital.
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws contain several provisions that
may make it more difficult to acquire us by means of a tender offer, open market
purchase, proxy fight or otherwise.
These provisions of the certificate of incorporation and the bylaws are
designed to encourage persons seeking to acquire control of us to negotiate with
our board. We believe that, as a general rule, our interests and the interests
of our stockholders would be served best if any change in control results from
negotiations with our board based upon careful consideration of the proposed
terms, such as the price to be paid to stockholders, the form of consideration
to be paid and the anticipated tax effects of the transaction.
The certificate of incorporation and bylaw provisions could, however, have
the effect of discouraging a prospective acquiror from making a tender offer for
our shares or otherwise attempting to obtain control of us. To the extent that
these provisions discourage takeover attempts, they could deprive stockholders
of opportunities to realize takeover premiums for their shares. Moreover, these
provisions could discourage accumulations of large blocks of common stock, thus
depriving stockholders of any advantages which large accumulations of stock
might provide.
Set forth below is a summary of the relevant provisions of our certificate
of incorporation and bylaws and certain applicable sections of the General
Corporation Law of the State of Delaware. This summary does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of our certificate of incorporation, bylaws and sections
of the General Corporation Law of the State of Delaware. Copies of our
certificate of incorporation and bylaws are filed as exhibits to the
registration statement of which this prospectus is a part.
BUSINESS COMBINATIONS
We are governed by Section 203 of the General Corporation Law of the State
of Delaware. Section 203, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the time that such stockholder
became an interested stockholder, unless:
- prior to such time, the board of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding specified shares; or
- at or subsequent to such time, the business combination is approved by
the board and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3%
of the outstanding voting stock that is not owned by the interested
stockholder.
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The application of Section 203 may limit the ability of stockholders to
approve a transaction that they may deem to be in their best interests.
In general, Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of the corporation to or with
the interested stockholder;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any person
that is:
- the owner of 15% or more of the outstanding voting stock of the
corporation; or
- an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time
within three years immediately prior to the relevant date; or
- an affiliate or associate of either of the above.
Under specific circumstances, Section 203 makes it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section, effective twelve months after adoption.
Our certificate of incorporation and bylaws do not exclude us from the
restrictions imposed under Section 203. We anticipate that the provisions of
Section 203 may encourage companies interested in acquiring us to negotiate in
advance with our board of directors since the stockholder approval requirement
would be avoided if a majority of the directors then in office approve either
the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder.
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation provides for our board to be divided into
three classes of directors, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of our board will be elected each year.
See "Management -- Composition of the Board of Directors." Under Section 141 of
the General Corporation Law of Delaware, directors serving on a classified board
can only be removed for cause unless otherwise provided in the certificate of
incorporation. Our certificate of incorporation does not contain this provision
of Section 141, and, therefore, the members of our board of directors can only
be removed for cause. The provision for our classified board may be amended,
altered or repealed only upon the affirmative vote of the holders of at least
80% of our outstanding voting stock.
The provision for a classified board could prevent a party that acquires
control of a majority of the outstanding voting stock from obtaining control of
our board until the second annual meeting of stockholders following the date the
acquiror obtains the controlling stock interest. The classified board provision
could have the effect of discouraging a potential acquiror from making a tender
offer for our shares or otherwise attempting to obtain control of us and could
increase the likelihood that our incumbent directors will retain their
positions.
We believe that a classified board will help to assure the continuity and
stability of our board and our business strategies and policies as determined by
our board, because a majority of the directors at any given
56
time will have prior experience on our board. The classified board provision
should also help to ensure that our board, if confronted with an unsolicited
proposal from a third party that has acquired a block of our voting stock will
have sufficient time to review the proposal and appropriate alternatives and to
seek the best available result for all stockholders.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
Our certificate of incorporation and bylaws provide that the number of
directors shall be not fewer than five nor more than nine and shall be set by
resolution adopted by the affirmative vote of (1) a majority of the total number
of directors that we would have if there were no vacancies on our board or (2)
the holders of at least 80% of our outstanding voting stock. This provision
regarding the size of our board may not be amended, altered, changed or repealed
in any respect without the affirmative vote of at least 80% of our outstanding
voting stock.
Pursuant to our certificate of incorporation, each director will serve
until his or her successor is duly elected and qualified, unless he or she
resigns, dies, becomes disqualified or is removed. Our certificate of
incorporation also provides that, subject to the rights of the holders of any
series of preferred stock, directors may be removed, but only for cause by the
affirmative vote of the holders of at least 80% of our voting stock.
Our certificate of incorporation further provides that generally, vacancies
or newly created directorships in our board may only be filled by a resolution
approved by a majority of the remaining directors then in office, even though
less than a quorum of our board, and any director so chosen will hold office
until the next election of the class for which such director was chosen.
STOCKHOLDER ACTION; SPECIAL MEETINGS
Our certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. Our certificate of incorporation, and
our bylaws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called by the chairman of our board, our
president or at the request of a majority of our board. Stockholders are not
permitted to call a special meeting or to require our board to call a special
meeting.
STOCKHOLDER PROPOSALS
At an annual meeting of stockholders, only business that is properly
brought before the meeting will be conducted or considered. To be properly
brought before an annual meeting of stockholders, business must be specified in
the notice of the meeting (or any supplement to that notice), brought before the
meeting by the presiding officer or by or at the direction of the majority of
the total number of directors that our board would have if there were no
vacancies, or properly requested by a stockholder to be brought before the
meeting.
For business to be properly requested by a stockholder to be brought before
an annual meeting, the stockholder must (1) be a stockholder of record at the
time of the giving of the notice for the meeting, (2) be entitled to vote at the
meeting and (3) have given timely written notice of the business to our
secretary. To be timely, a stockholder's notice must be delivered to or mailed
and received at our principal executive offices not less than 60 nor more than
90 calendar days prior to the first anniversary date on which we first mailed
our proxy materials for the preceding year's annual meeting of stockholders;
provided, however, that if the date of the annual meeting is advanced more than
30 calendar days prior to or delayed by more than 30 calendar days after the
anniversary of the preceding year's annual meeting, notice by the stockholder to
be timely must be so delivered not later than the close of business on the later
of the 90th calendar day prior to such annual meeting or the 10th calendar day
following the day on which public announcement of the date of such meeting is
first made. A stockholder's notice must set forth, as to each matter the
stockholder proposes to bring before the meeting, (1) a description in
reasonable detail of the business proposed to be brought before the meeting, (2)
the name and address of the stockholder proposing such business and of the
beneficial owner, if any, on whose behalf the proposal is made, (3) the class
and number of shares that are owned of
57
record and beneficially by the stockholder proposing the business and by the
beneficial owner, if any, on whose behalf the proposal is made, (4) any
arrangements among such stockholder and beneficial owner and any material
interest of such stockholder or beneficial owner in such business and (5)
whether either such stockholder or beneficial owner intends to deliver a proxy
statement and forms of proxy to holders of at least the percentage of shares of
our voting stock required to approve such proposal.
Similarly, at a special meeting of stockholders, only such business as is
properly brought before the meeting will be conducted or considered. To be
properly brought before a special meeting, business must be (1) specified in the
notice of the meeting (or any supplement to that notice) given by or at the
direction of the chairman of our board, our president or a majority of the total
number of directors that our board would have if there were no vacancies or, (2)
otherwise brought before the meeting by the presiding officer or by or at the
direction of the majority of the total number of directors that our board would
have if there were no vacancies. In addition, a stockholder must also comply
with all applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to matters requested by a stockholder to be
brought before an annual meeting or special meeting.
NOMINATION OF CANDIDATES FOR ELECTION TO OUR BOARD
Under our bylaws, only persons that are properly nominated will be eligible
for election to be members of our board. To be properly nominated, a director
candidate must be nominated at an annual meeting of the stockholders by or at
the direction of our board or properly nominated by a stockholder. To be
properly nominated by a stockholder, such stockholder must have delivered a
proxy statement and form of proxy to the holders of at least the percentage of
shares of our voting stock required to approve such nomination and included in
such materials a timely and proper notice in proper written form to our
secretary.
To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 60 nor more than 90
calendar days prior to the first anniversary of the date on which we first
mailed our proxy materials for the preceding year's annual meeting of
stockholders. If, however, the date of the annual meeting is advanced more than
30 calendar days prior to or delayed by more than 30 calendar days after the
anniversary of the preceding year's annual meeting, notice by the stockholder to
be timely must be so delivered not later than the later of the 90th calendar day
prior to such annual meeting or the tenth calendar day following the day on
which public announcement of the date of such meeting is first made.
To be in proper written form, such stockholder's notice must include: (1)
the name and address of the stockholder giving the notice and of the beneficial
owner, if any, on whose behalf the nomination is made; (2) a representation that
the stockholder giving the notice is a holder of record of shares of our voting
stock entitled to vote at such annual meeting and intends to appear in person or
by proxy at the annual meeting to nominate the person or persons specified in
the notice; (3) the class and number of shares of stock owned beneficially and
of record by the stockholder giving the notice and by the beneficial owner, if
any, on whose behalf the nomination in made; (4) a description of all
arrangements or understandings between or among any of (A) the stockholder
giving the notice, (B) the beneficial owner on whose behalf the notice is given,
(C) each nominee, and (D) any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by the
stockholder giving the notice as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC had the nominee been
nominated, or intended to be nominated, by our board; (6) the signed consent of
each nominee to serve as a director or our board if so elected and (7) whether
such stockholder or beneficial owner intends to deliver a proxy statement and
form of proxy to holders of at least the percentage of shares of our voting
stock required to elect such nominee or nominees. In addition, a stockholder
must also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to matters relating to nomination
of candidates for directors.
58
AMENDMENT OF BYLAWS
Except for certain provisions indicated above, our bylaws may be amended,
altered or repealed by the affirmative vote of the holders of a majority of our
voting stock or by the affirmative vote of a majority of our board. Certain
provisions that require the affirmative vote of the holders of 80% of our voting
stock may make it more difficult to change the bylaws for the purpose of gaining
control over us.
TRANSFER AGENT AND REGISTRAR
We have appointed National City Bank as the transfer agent and registrar
for our capital stock.
LISTING
We will apply to have our common stock listed for quotation on The Nasdaq
National Market under the symbol "TCPS."
59
SHARES ELIGIBLE FOR FUTURE SALE
No public market for our common stock existed before this offering. Future
sales of substantial amounts of our common stock in the public market or the
perception that those sales may incur could cause the market price of our common
stock to decline. A large number of our shares of common stock outstanding will
not be available for sale shortly after this offering because of contractual and
legal restrictions on resale as described below. Sales of substantial amounts of
our common stock in the public market after these restrictions lapse could
depress our prevailing market price and make it difficult or impossible for us
to sell additional securities when we need to raise capital.
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option. All of the shares sold in this offering, other than those
sold to our affiliates, will be freely tradable without restriction or further
registration under the Securities Act. The remaining 10,640,000 shares of common
stock held by existing stockholders are restricted securities. Subject to the
restrictions on transfer contained in the lock-up agreements described in
"Underwriting," restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under the
Securities Act.
As a result of the contractual lock-up restriction described below and the
rules under the Securities Act, the restricted shares will be available for sale
in the public market as follows:
[Enlarge/Download Table]
NUMBER OF
SHARES ELIGIBLE
RELEVANT DATES FOR FUTURE SALE COMMENT
-------------- --------------- --------------------------------------
On the effective date................. 0 Shares not locked up and saleable
under Rule 144(k)
90 days following the effective
date................................ 0 Shares not locked up and saleable
under Rule 144
180 days following the effective
date................................ 10,640,000 Lock-up released: shares held by
affiliates not saleable under Rule
144(k) but otherwise saleable in
compliance with Rule 144
LOCK-UP AGREEMENTS
All of our executive officers and directors, and all of our current
stockholders, have agreed not to transfer or dispose of, directly or indirectly,
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for shares of our common stock, for a period of 180 days after
the date of this prospectus. Transfers or dispositions can be made sooner with
the prior written consent of McDonald Investments Inc.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the shares of common stock then outstanding, which will equal
shares immediately after this offering; or
- the average weekly trading volume of the common stock on The Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 must comply with manner of sale provisions and notice
requirements, and information about us must be publicly available.
60
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, 144(k) shares may be sold immediately upon the completion of this
offering. All of our common stock outstanding prior to this offering is held by
affiliates and therefore cannot be sold pursuant to Rule 144(k) after complying
with the applicable 180-day lock-up agreement.
REGISTRATION RIGHTS
On the date 180 days after the completion of this offering, the holders of
10,640,000 shares of our common stock will have rights to require us to register
their shares under the Securities Act. Upon the effectiveness of a registration
statement covering these shares, the shares would become freely tradable. See
"Description of Capital Stock -- Registration Rights."
STOCK OPTIONS
Upon the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering the shares of common
stock to be issued pursuant to options granted under our 2001 Stock Option Plan.
Based on the number of shares reserved for issuance under our 2001 Stock Option
Plan, the registration statement would cover approximately 2,016,000 shares. The
registration statement will become effective upon filing. Accordingly, shares
registered under the registration statement on Form S-8 will be available for
sale in the open market immediately thereafter, after complying with Rule 144
volume limitations applicable to affiliates and with applicable 180-day lock-up
agreements.
61
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
by and among us and McDonald Investments Inc. and FAC/Equities, a division of
First Albany Corporation, as representatives for the underwriters named in the
agreement, we have agreed to sell to each underwriter, and each underwriter has
severally agreed to purchase from us, the number of shares of common stock set
forth opposite its name in the table below.
[Download Table]
UNDERWRITER NUMBER OF SHARES
----------- ----------------
McDonald Investments Inc....................................
FAC/Equities, a division of First Albany Corporation........
--------
Total.......................................................
========
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares offered hereby are subject to certain
conditions precedent and that the underwriters will purchase all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover of this prospectus and to dealers
at a price that represents a concession not in excess of $ per share under
the public offering price. The underwriters may allow, and these dealers may
re-allow, a discount of not more than $ per share to other dealers. After
the initial public offering, representatives of the underwriters may change the
offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the shares of common stock offered by this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of these additional shares of common stock as
the number of shares to be purchased by it in the above table bears to the total
number of shares offered by this prospectus. We will be obligated, pursuant to
the option, to sell these additional shares of common stock to the underwriters
to the extent the option is exercised. If any additional shares of common stock
are purchased, the underwriters will offer the additional shares on the same
terms as those on which the shares are being offered.
The underwriting discounts and commissions per share are equal to the
public offering price per share less the amount paid by the underwriters to us
per share. The underwriting discounts and commissions are % of the initial
public offering price. We have agreed to pay the underwriters the following
discounts
62
and commissions, assuming either no exercise or full exercise by the
underwriters of the underwriters' over-allotment option:
[Enlarge/Download Table]
TOTAL FEES
---------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
Underwriting discounts and commissions
paid by us.............................. $ $ $
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and all of our stockholders, have
agreed not to directly or indirectly sell, offer to sell, contract to sell,
grant any option for the sale, transfer, distribute or otherwise dispose of by
any means, shares of our common stock or other securities convertible into
shares of our common stock or shares of common stock issuable upon exercise of
options, warrants, subscription or other rights held by these persons prior to
180 days after the effective date of the registration statement of which this
prospectus is a part without the prior written consent of McDonald Investments
Inc. This consent may be given at any time without public notice. Our officers,
directors and stockholders may, however, make gifts of our securities to people
or entities who agree to be bound by the restrictions described above. We have
entered into a similar agreement with the representatives of the underwriters,
except that without such consent we may grant options pursuant to our 2001 Stock
Option Plan and shares of common stock upon exercise of such options. There are
no agreements between the representatives and any of our stockholders or
affiliates releasing them from these lock-up agreements prior to the expiration
of the 180-day period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of shares of our common stock, the
underwriters may engage in transactions that stabilize, maintain, or otherwise
affect the market price of our common stock. Specifically, the underwriters may
over-allot shares of our common stock in connection with this offering, thus
creating a short sales position in our common stock for their own account. A
short sales position results when an underwriter sells more shares than that
underwriter is committed to purchase. A short sales position may involve either
"covered" short sales or "naked" short sales. Covered short sales are sales made
for an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering described above. The underwriters may
close out any covered short position by either exercising their over-allotment
option or purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters will have to close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering.
Accordingly, to cover these short sales positions or to stabilize the
market price of our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise.
Additionally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales or to stabilize the market price of our common
stock may have the effect of raising or
63
maintaining the market price of our common stock or preventing or mitigating a
decline in the market price of our common stock. As a result, the price of our
common stock may be higher than the price that might otherwise exist in the open
market. The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our common stock being sold
in this offering for our vendors, employees, family members of employees,
customers and other third parties. The number of shares available for the sale
to the general public will be reduced to the extent these reserved shares are
purchased. Any reserved shares not purchased by these persons will be offered by
the underwriters to the general public on the same basis as the other shares in
this offering.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:
- the information presented in this prospectus and otherwise available to
the underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We cannot be sure that the initial public offering price will correspond to
the price at which our common stock will trade in the public market following
this offering or that an active trading market for our common stock will develop
and continue after this offering.
The underwriters may, from time to time, engage in transactions with and
perform services for us in the ordinary course of their business.
64
LEGAL MATTERS
Jones, Day, Reavis & Pogue will pass upon the validity of the issuance of
the shares being sold in this offering. Certain matters will be passed upon for
the underwriters by Calfee, Halter & Griswold LLP, Cleveland, Ohio.
EXPERTS
The financial statements as of December 31, 1999 and 2000 and for each of
the three years in the period ended December 31, 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock we are offering. This prospectus contains all information about TCP
and our common stock that would be material to an investor. The registration
statement includes exhibits and schedules to which you should refer for
additional information about us.
You may inspect a copy of the registration statement and the exhibits and
schedules to the registration statement without charge at the offices of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain copies of all or any part of the registration statement from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549
upon the payment of the prescribed fees. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains a web site at www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants like us that
file electronically with the SEC. You can also inspect our registration
statement on this web site.
After we have filed this registration statement, we will file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information on file
at the public reference rooms. You can also request copies of these documents,
for a copying fee, by writing to the SEC, or you can review these documents on
the SEC's web site, as described above.
We intend to send our stockholders annual reports containing audited
financial statements and to make available quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
65
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheets at December 31, 1999, 2000 and June 30, 2001
(Unaudited)............................................... F-3
Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000 and for the Six Months Ended June 30,
2000 and 2001 (Unaudited)................................. F-4
Statements of Stockholders' (Deficit) Equity for the Years
Ended December 31, 1998, 1999 and 2000 and for the Six
Months Ended June 30, 2001 (Unaudited).................... F-5
Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000 and for the Six Months Ended June 30,
2000 and 2001 (Unaudited)................................. F-6
Notes to the Financial Statements........................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors
Technical Consumer Products, Inc.
The stock split described in Note 9 to the financial statements has not been
consummated at October 16, 2001. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' (deficit) equity and cash flows present fairly,
in all material respects, the financial position of Technical Consumer
Products, Inc. as of December 31, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion."
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
October 16, 2001
F-2
TECHNICAL CONSUMER PRODUCTS, INC.
BALANCE SHEETS
(IN THOUSANDS)
[Enlarge/Download Table]
DECEMBER 31, JUNE 30,
--------------- JUNE 30, 2001
1999 2000 2001 PRO FORMA
------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash................................................ $ 91 $ 30 $ 180 $ 180
Accounts receivable, less allowance for doubtful
accounts of $27, $49 and $105, respectively...... 2,880 3,421 6,964 6,964
Inventories......................................... 2,761 3,594 7,171 7,171
Prepaid expenses.................................... 10 67 132 132
------ ------ ------- -------
Total current assets............................. 5,742 7,112 14,447 14,447
Property and equipment -- at cost:
Land................................................ -- 186 186 186
Building and building improvements.................. 152 1,540 1,540 1,540
Equipment........................................... 165 303 332 332
------ ------ ------- -------
317 2,029 2,058 2,058
Less accumulated depreciation....................... 57 155 179 179
------ ------ ------- -------
260 1,874 1,879 1,879
License agreement, net of amortization of $82 at June
30, 2001............................................ -- -- 1,601 1,601
Cash surrender value of officer's life insurance...... -- 80 126 126
Deposits.............................................. 50 -- -- --
------ ------ ------- -------
Total assets..................................... $6,052 $9,066 $18,053 $18,053
====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt................ $ -- $ 63 $ 68 $ 68
Accounts payable.................................... 408 599 1,342 1,342
Accounts payable affiliates......................... 2,576 2,276 5,661 5,661
Accrued stockholder distributions................... -- 308 -- 2,116
Accrued liabilities................................. 182 255 1,138 1,138
------ ------ ------- -------
Total current liabilities........................ 3,166 3,501 8,209 10,325
Long-term debt........................................ 2,036 4,681 5,880 5,880
Notes payable affiliates.............................. 931 931 931 931
Other long-term liability............................. -- -- 973 973
Commitments and contingencies......................... -- -- -- --
Stockholders' (deficit) equity:
Common stock, no par value; 5,600, 11,200 and 11,200
shares authorized, issued and outstanding at
December 31, 1999 and 2000 and June 30, 2001,
respectively..................................... -- -- -- --
Additional paid-in capital.......................... 1 1 1 1
Treasury stock subscription......................... -- -- (57) (57)
Accumulated (deficit) earnings...................... (82) (48) 2,116 --
------ ------ ------- -------
Total stockholders' (deficit) equity............. (81) (47) 2,060 (56)
------ ------ ------- -------
Total liabilities and stockholders' (deficit)
equity......................................... $6,052 $9,066 $18,053 $18,053
====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
F-3
TECHNICAL CONSUMER PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- -------------------
1998 1999 2000 2000 2001
-------- --------- --------- -------- --------
(UNAUDITED)
Net product sales............................. $8,682 $15,414 $22,278 $ 8,904 $31,048
Commission income -- related parties.......... 218 237 -- -- 229
------ ------- ------- ------- -------
Total net sales............................. 8,900 15,651 22,278 8,904 31,277
Cost of goods sold -- related parties......... 5,511 9,588 14,866 5,863 22,826
Cost of goods sold -- other................... 1,183 1,963 2,102 731 1,795
------ ------- ------- ------- -------
Total cost of goods sold.................... 6,694 11,551 16,968 6,594 24,621
------ ------- ------- ------- -------
Gross profit.................................. 2,206 4,100 5,310 2,310 6,656
Selling, general and administrative
expenses.................................... 1,569 3,128 4,424 2,365 3,282
------ ------- ------- ------- -------
Income (loss) from operations................. 637 972 886 (55) 3,374
Other income.................................. -- 58 46 28 28
Interest expense -- related parties........... (315) (92) (56) (28) (48)
Interest expense -- banks..................... -- (140) (405) (179) (227)
------ ------- ------- ------- -------
Net income (loss)............................. $ 322 $ 798 $ 471 $ (234) $ 3,127
====== ======= ======= ======= =======
Weighted average shares outstanding -- basic
and diluted................................. 11,200 11,200 11,200 11,200 11,200
Net income (loss) per share -- basic and
diluted..................................... $ 0.03 $ 0.07 $ 0.04 $ (0.02) $ 0.28
Unaudited pro forma income (loss) data:
Net income (loss) as reported............... $ 322 $ 798 $ 471 $ (234) $ 3,127
Pro forma income taxes...................... (133) (324) (194) 87 (1,233)
------ ------- ------- ------- -------
Pro forma net income (loss)................. $ 189 $ 474 $ 277 $ (147) $ 1,894
====== ======= ======= ======= =======
Pro forma net income (loss) per
share -- basic and diluted (based on
11,200 shares outstanding)............... $ 0.02 $ 0.04 $ 0.02 $ (0.01) $ 0.17
The accompanying notes are an integral part of these financial statements.
F-4
TECHNICAL CONSUMER PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL TREASURY ACCUMULATED
-------------- PAID-IN STOCK (DEFICIT)
SHARES VALUE CAPITAL SUBSCRIPTION EARNINGS TOTAL
------ ----- ---------- ------------ ----------- -------
Balance at January 1, 1998........ 5,600 $-- $ 1 $ -- $(1,097) $(1,096)
Net income...................... -- -- -- -- 322 322
------ -- --- ---- ------- -------
Balance at December 31, 1998...... 5,600 -- 1 -- (775) (774)
S corporation distributions
($.019 per share)............ -- -- -- -- (105) (105)
Net income...................... -- -- -- -- 798 798
------ -- --- ---- ------- -------
Balance at December 31, 1999...... 5,600 -- 1 -- (82) (81)
Issuance of common stock........ 5,600 -- -- -- -- --
S corporation distributions
($.039 per share)............ -- -- -- -- (437) (437)
Net income...................... -- -- -- -- 471 471
------ -- --- ---- ------- -------
Balance at December 31, 2000...... 11,200 -- 1 -- (48) (47)
Treasury stock subscription..... -- -- -- (57) -- (57)
S corporation distributions
($.086 per share)............ -- -- -- -- (963) (963)
Net income...................... -- -- -- -- 3,127 3,127
------ -- --- ---- ------- -------
Balance at June 30, 2001
(unaudited)..................... 11,200 $-- $ 1 $(57) $ 2,116 $ 2,060
====== == === ==== ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
TECHNICAL CONSUMER PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- -------------------
1998 1999 2000 2000 2001
------ ------- ------ -------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................. $ 322 $ 798 $ 471 $ (234) $ 3,127
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation of property and equipment..... 13 161 106 48 63
Loss on disposal of property and
equipment................................ -- -- 9 9 16
Provision for bad debt expense............. 38 21 43 18 54
Amortization of license agreement.......... -- -- -- -- 82
Change in operating assets and liabilities:
Accounts receivable...................... (959) (1,476) (584) 271 (3,597)
Inventories.............................. (468) (1,941) (833) 545 (3,577)
Prepaid expenses......................... (9) (1) (57) (9) (65)
Deposits................................. (86) 62 50 50 --
Accounts payable......................... (132) 155 191 215 743
Accounts payable affiliates.............. 1,139 962 (300) (1,575) 3,385
Accrued liabilities...................... 72 23 73 (45) 421
------ ------- ------ ------- -------
Net cash flows from operating activities...... (70) (1,236) (831) (707) 652
Cash flows from investing activities:
Change in cash surrender value of life
insurance.................................. -- -- (80) (60) (46)
Cash payments for license agreement........... -- -- -- -- (305)
Purchases of property and equipment........... (150) (267) (431) (383) (132)
Proceeds from the sale of property and
equipment.................................. -- -- 102 102 48
------ ------- ------ ------- -------
Net cash flows from investing activities...... (150) (267) (409) (341) (435)
Cash flows from financing activities:
Repayment of principal on notes payable....... -- -- (53) (27) (79)
Net borrowings under line of credit
agreements................................. -- 2,036 1,361 1,103 1,283
Net proceeds (repayments) from secured
borrowings................................. 364 (498) -- -- --
Cash distributions to stockholders............ -- (105) (129) (43) (1,271)
------ ------- ------ ------- -------
Net cash flows from financing activities...... 364 1,433 1,179 1,033 (67)
------ ------- ------ ------- -------
Net increase (decrease) in cash................. 144 (70) (61) (15) 150
Cash at beginning of year....................... 17 161 91 91 30
------ ------- ------ ------- -------
Cash at end of year............................. $ 161 $ 91 $ 30 $ 76 $ 180
====== ======= ====== ======= =======
Supplemental cash flow information:
Cash paid during the year for interest........ $ 315 $ 213 $ 442 $ 190 $ 264
The accompanying notes are an integral part of these financial statements.
F-6
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Technical Consumer Products, Inc. (the "Company" or "TCP") designs, develops
and markets high-quality, energy efficient lighting products and accessories
to the commercial and industrial market and the residential consumer market
throughout North America. The Company's product line consists of a broad
range of compact fluorescent lamps, the electronic and magnetic ballasts
needed to illuminate linear and compact fluorescent lamps, compact
fluorescent lamp lighting fixtures and many compact fluorescent component
parts and accessories. A related party in China manufactures substantially
all of the Company's products (see Note 2).
The Company operates as a single reportable segment. The internal financial
statements do not provide any further segregation of the operating results
of the Company below net sales. The same management group is responsible for
the entire operations of the Company. The Company has no international
operations or any significant international sales.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results may
differ from those estimates.
INVENTORIES
Inventories, which are comprised principally of finished goods, are stated
at the lower of cost or market, with cost determined using the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Additions and improvements to
property and equipment that materially increase productive capacity or
extend the life of an asset are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. Upon retirement or other disposition of
such assets, the related costs and accumulated depreciation are removed from
the respective accounts and any resulting gain or loss is included in
income. During 1999, the Company decided to relocate its corporate
headquarters. As a result of the move, the remaining net book value of
leasehold improvements associated with the former corporate headquarters was
amortized on an accelerated basis from the date the decision was made to
move through the actual date of the move. Due to this event, accelerated
amortization expense for leasehold improvements of approximately $113,000
was recorded in 1999.
The provision for depreciation of property and equipment is generally
computed using accelerated methods at rates designed to amortize the cost of
assets over the useful lives, which range from 5 years for equipment, 15
years for building improvements and 39 years for the building. The Company
performs reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
LICENSE AGREEMENT
The license agreement was recorded at its net present value and is being
amortized on the straight-line basis over 5 years beginning April 2001 (see
Note 6).
F-7
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
The Company's revenue recognition policy is to recognize revenues when
products are shipped or for certain customers, when products are received by
the customer's shipping agent, at which time title transfers to the
customer. The Company's return policy is to replace, repair or issue credit
for product under warranty.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expenses were
approximately $153,000, $232,000 and $344,000 for the years ended December
1998, 1999 and 2000, respectively, and approximately $184,000 and $133,000
for the six months ended June 30, 2000 and 2001, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs totalled approximately $99,000 for the six-month period
ended June 30, 2001. Prior to fiscal year 2001, research and development
costs were funded through licensing and royalty agreements as well as
through our suppliers and customers.
INCOME TAXES
The Company, with the consent of its stockholders, has elected to be treated
as an S corporation under the Internal Revenue Code. In lieu of corporate
federal and state taxes, the stockholders of an S corporation are taxed
individually on their share of the Company's taxable income. For purposes of
these financial statements, pro forma income taxes were provided as if the
Company was a C corporation (which it will convert to concurrent with the
securities offerings) for the entire period of these financial statements
(see Note 8).
STATEMENTS OF CASH FLOWS -- NON-CASH INVESTING AND FINANCING ACTIVITIES
On January 12, 2000, the Company acquired land and a building for a new
operating facility for approximately $1,756,000, of which $356,000 was paid
in cash and $1,400,000 was financed with external loans (see Note 3). The
Company also declared stockholder distributions of $308,000 for fiscal 2000
that were unpaid and included in accrued liabilities at December 31, 2000.
Additionally, as further described in Note 2, effective December 31, 1998,
the Company refinanced certain accounts payable from two affiliates into
loans payable with these affiliates. Also, as further described in Note 6,
in April 2001, the Company committed to a license agreement and to the
purchase of certain shares of common stock for which the net present value
of approximately $1,740,000 was recorded as a liability at April 1, 2001.
EARNINGS PER COMMON SHARE
Basic earnings per share is based on the weighted effect of all common
shares issued and outstanding and is calculated by dividing net income by
the weighted average shares outstanding during the period. For all of the
fiscal years presented in these financial statements there were no
potentially dilutive common shares; therefore, basic earnings per share
equals diluted earnings per share. In accordance with issued Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share," the
5,600,000 shares of common stock issued to management and an outside party
in fiscal 2000 for nominal consideration (see Note 4) were considered to be
outstanding for all the periods presented in these financial statements in
computing basic and diluted earnings per share.
F-8
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company's
customers are not concentrated in any specific geographic region or industry
but, at times, may be significant by individual customer (see Note 5). The
Company reviews a customer's credit history before extending credit. The
Company establishes an allowance for possible losses based upon factors
surrounding the credit risk of specific customers, historical trends and
other information. Collateral is generally not required against trade
accounts receivable. Losses from credit sales have been consistent within
the allowance provided.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the accompanying financial statements at cost, which
approximates fair value because of the short-term maturity of these
instruments. The Company's revolving line of credit agreement and the Bank
Note are carried at amounts that approximate fair value due to the variable
interest rates associated with these instruments (see Note 3). Other
long-term liability approximates fair value since the rate used to record
the present value of this liability approximates the borrowing rates
available to the Company at June 30, 2001. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, the fair value of the State Note (see Note 3) was
approximately $385,000 and $421,000 at December 31, 2000 and June 30, 2001,
respectively compared to the recorded value of approximately $497,000 and
$487,000, respectively. Additionally, the fair value of the Notes payable
affiliates using the same methodology was approximately $751,000, $791,000
and $854,000 at December 31, 1999, 2000 and June 30, 2001, respectively,
compared to the recorded value of $931,328 at each date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 138,
"Accounting for Certain Hedging Activities" was issued in June 2000 to amend
the accounting and reporting of derivative and hedging instruments. SFAS No.
133 requires all derivatives to be measured at fair value and recognized as
either assets or liabilities on the balance sheet with changes in fair
values recognized immediately in net income (loss) to the extent the
derivatives are not effective as hedges. Because the Company does not
presently use derivatives or engage in hedging activities, the adoption of
these standards did not have any effect on the Company's financial position,
results of operations, or cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," to improve the transparency of the accounting and
reporting for business combinations by requiring that all business
combinations be accounted for under a single method, the purchase method.
Use of the pooling-of-interests method is no longer permitted. SFAS 141 also
establishes criteria for separate recognition of intangible assets acquired
in a purchase business combination. SFAS 141 is effective for all business
combinations initiated after June 30, 2001. The Company will implement this
new standard in accounting for its future acquisitions.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS 143 is effective for financial
statements issued for fiscal years
F-9
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
beginning after June 15, 2002. The Company is in the process of determining
the effects of this Statement on its business.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes Financial
Accounting Standards Board SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations." This Statement also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control
is likely to be temporary. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company is in the process of
determining the effects of this Statement on its business.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements for the six months ended June 30,
2000 and 2001 include, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of the Company for the interim periods
presented. The results of operations for the six months ended June 30, 2001
are not necessarily indicative of results for the year ending December 31,
2001.
2. RELATED PARTY TRANSACTIONS
GENERAL: The Company believes that all of the related party transactions
described in this Note were conducted at arm's length and that these
financial statements include all costs associated with the operations of the
Company on a stand alone basis.
INVENTORY/MANUFACTURING AND SUPPLY AGREEMENT: Substantially all of the
Company's products are manufactured by and purchased from two affiliated
companies located in China, Shanghai Zhen Xin Electronic Engineering Co.,
Ltd. and Shanghai Jensing Electron Electrical Equipment Co., Ltd. The
Chairman, Chief Executive Officer and majority stockholder of TCP owns the
majority of the stock of these Chinese companies; the minority portion is
owned by an entity indirectly controlled by the Chinese government.
Additionally, the brother of the Chairman and Chief Executive Officer of TCP
operates these Chinese companies, which share the same facilities, assets
and personnel and essentially operate as the same entity but are legally
distinct in order to enjoy certain tax benefits in China.
Purchases of inventory from these affiliates amounted to approximately
$5,246,000, $9,580,000 and $15,190,000 for the years ended December 31,
1998, 1999 and 2000, respectively, and $6,029,000 and $26,199,000 for the
six months ended June 30, 2000 and 2001, respectively. Amounts owed to these
affiliates are reflected as "Accounts payable affiliates" in the
accompanying balance sheets and are settled in the ordinary course of
business. Additionally, TCP provided these affiliates various management and
advisory services related to expansion, quality control, production,
component sourcing, accounting, freight and logistics. Fees charged by TCP
for these services approximated $56,000 in both 1999 and 2000 and $28,000
for the six months ended June 30, 2000 and 2001, and are included within
non-operating income in the statements of operations. These fees were offset
against the interest expense on the Notes Payable Affiliates described
below.
Prior to August 2001, the aforementioned transactions and services were
provided through informal, unwritten agreements. Prior to the completion of
the initial public offering, TCP and these affiliated entities will enter
into a formal exclusive manufacturing and supply agreement for a period of
10 years.
F-10
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In accordance with the terms of this planned agreement, these affiliated
entities are prohibited from selling competitive products to others.
NOTES PAYABLE AFFILIATES: Effective December 31, 1998, the Company
refinanced $931,328 of its accounts payable affiliates into two long-term
notes as follows: $766,757 note payable to Shanghai Jensing and $164,571
note payable to Shanghai Zhen Xin. Both notes are due on January 9, 2009 and
bear interest at 6% per annum. Interest expense on these notes was
approximately $56,000 in both 1999 and 2000 and $28,000 for the six months
ended June 30, 2000 and 2001. These notes are subordinated to all of the
debt described in Note 3.
COMMISSION INCOME: At various times the Company entered into arrangements
with the Chinese affiliates whereby the Company acted as a commissioned
sales agent for certain product sales made at TCP's direction that were
directly shipped to customers by the affiliates. Total commissions earned
from the affiliates amounted to approximately $218,000 and $237,000 for the
years ended December 31, 1998 and 1999, respectively, and $229,000 for the
six months ended June 30, 2001.
LICENSE AGREEMENT: As further described in Note 6, the Company and its
Chinese affiliates have a license agreement with a now former stockholder of
the Company.
SECURED BORROWING ARRANGEMENT: Prior to obtaining a line of credit
agreement in January 1999, the Company obtained financing by borrowing
against its accounts receivable with an officer of the Company. Financing
costs incurred by the Company under this arrangement totalled approximately
$308,000 and $36,000 in 1998 and 1999, respectively, and are included within
interest expense in the statements of operations. The Company paid related
secured borrowings in full in January 1999.
LETTERS OF CREDIT: During 1999 and 2000, the Company acquired approximately
$697,000 and $277,000, respectively, of inventory through letter of credit
agreements funded by an officer of the Company. Fees paid by the Company to
this related party for these transactions totalled approximately $73,000 and
$29,000 for the years ended December 31, 1999 and 2000, respectively, and
$29,000 for the six months ended June 30, 2000.
LEASED FACILITY: Prior to purchasing its new facility on January 12, 2000,
the Company leased its warehouse and office space from an entity controlled
by an officer of the Company. Rent expense under this related party lease
was approximately $51,000, $83,000 and $35,000 for the years ended December
31, 1998, 1999, and 2000, respectively, and $35,000 for the six months ended
June 30, 2000. In fiscal 2000, the Company surrendered a $50,000 rent
deposit to this related party as a settlement for the early termination of
the lease agreement.
BUILDING PURCHASE/SALE: In fiscal 1999, the Company purchased a building
from an entity controlled by an officer of the Company for $125,000. In
December 1999, the Company decided to sell this building to an unrelated
party. Net proceeds from the sale totalling approximately $102,000 were
received in January 2000.
ACCOUNTING, TAX AND FINANCIAL CONSULTING SERVICES: At various times, an
officer of the Company provided certain accounting, tax and financial
consulting services to the Company outside of his capacity as an employee
and was paid approximately $90,000, $30,000 and $49,000 for these services
for the years ended December 31, 1998, 1999 and 2000, respectively, and
$10,000 and $30,000 for the six months ended June 30, 2000 and 2001,
respectively.
F-11
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
Long-term debt, excluding the notes payable affiliates, consists of the
following:
[Download Table]
DECEMBER 31,
--------------- JUNE 30,
1999 2000 2001
------ ------ --------
(IN THOUSANDS)
Line of credit agreement........................ $2,036 $3,397 $4,680
Bank Note....................................... -- 850 781
State Note...................................... -- 497 487
------ ------ ------
2,036 4,744 5,948
Less amounts due within one year................ -- 63 68
------ ------ ------
Total long-term debt............................ $2,036 $4,681 $5,880
====== ====== ======
In January 1999, the Company entered into line of credit agreement with a
bank that made available borrowings up to $2,000,000, due on demand. In
September 1999, this agreement was amended to allow borrowings up to
$3,000,000. Borrowings under this agreement, which were limited based on a
certain percentage of accounts receivable and inventory, were collateralized
by substantially all of the Company's assets and guaranteed by the Company's
Chairman and Chief Executive Officer. Interest on outstanding borrowings was
due monthly at 2.5% above the bank's prime rate (11% at December 31, 1999).
This agreement contained certain restrictive covenants which, among other
things, limited additional indebtedness and required the Company to maintain
specified financial ratios. As further described below, subsequent to
December 31, 1999, the Company refinanced this agreement with a long-term
obligation; therefore, this obligation was classified as long-term at
December 31, 1999.
On February 1, 2000, the Company refinanced the above line of credit
agreement with a $3,500,000 line of credit agreement with a different bank
that was to expire in February 2003. This agreement was amended in November
2000 to increase borrowings to $4,000,000 and again in February 2001 to
increase borrowings to $5,000,000. Borrowings under this agreement were
limited based on certain percentages of eligible accounts receivable and
inventory. Based on the borrowing base formula, there was no limitation at
December 31, 2000 or June 30, 2001. Borrowings under this agreement were
collateralized by substantially all of the Company's assets and guaranteed
by the Company's Chairman and Chief Executive Officer. Interest under this
agreement was payable monthly at .75% above the bank's prime lending rate
(10.25% at December 31, 2000 and 7.75% at June 30, 2001). Additionally, this
agreement contained certain restrictive covenants that, among other things,
limited additional indebtedness and required the Company to maintain
specified financial ratios. In fiscal 2000 the Company obtained waivers for
the violation of certain financial ratio covenant violations.
In August 2001, the above described line of credit was refinanced with a
$15,000,000 revolving credit facility from a different bank, subject to a
similar borrowing base formula. Borrowings under this credit facility, which
expires in July 2003, bear interest at the Company's option of the bank's
prime rate or LIBOR plus 3% and are collateralized by substantially all of
the Company's assets. The Company is required to pay a quarterly commitment
fee of .125% for the unused portion of this facility. Additionally,
$1,000,000 of the borrowings under the credit facility is guaranteed by the
Company's Chairman and Chief Executive Officer. This new credit facility
also contains certain restrictive covenants that, among other things, limit
additional indebtedness and requires the Company to maintain specified
financial ratios. The Company has the ability to issue up to $500,000 in
letters of credit under the credit facility, which reduces the availability
on the revolving credit facility.
In January 2000, the Company obtained a $900,000 commercial mortgage from a
bank ("Bank Note") and a $500,000 loan through the State of Ohio 166 Program
("State Note"), both of which were used to acquire a warehouse and office
facility located in Aurora, Ohio for $1,750,000. The Bank Note is
F-12
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
payable in 119 monthly principal payments of $3,750 through March 2010, plus
interest at the bank's prime rate (9.5% at December 31, 2000 and 7.0% at
June 30, 2001), with a balloon payment of $453,750 due in March 2010. The
State Note is payable in 180 monthly payments of $4,015, which includes
interest at a rate of 5.25%, through December 2015. Both notes are
collateralized by the new facility. Additionally, the Bank Note is
cross-collateralized by the remaining assets of the Company with the line of
credit agreement. Both notes are guaranteed by the Company's Chairman and
Chief Executive Officer and contain certain restrictive covenants similar to
the line of credit agreement. In fiscal 2000 the Company obtained waivers
for the violation of certain financial ratio covenant violations.
In August 2001, the Company paid off the entire balance of the Bank Note
with proceeds from the new credit facility previously discussed.
The following is a summary of aggregate maturities of long-term debt at
December 31, 2000 (excluding the notes payable affiliates that are due in
2009 and the impacts of the refinancing activities described above) for each
of the next five years:
[Download Table]
(IN THOUSANDS)
2001........................................................ $ 63
2002........................................................ 69
2003........................................................ 3,467
2004........................................................ 71
2005........................................................ 73
Thereafter.................................................. 1,001
------
$4,744
======
4. STOCKHOLDERS' EQUITY
Prior to January 2000, the Company's Chairman and Chief Executive Officer
owned 100% of the common stock of the Company. In January 2000, the Company
issued 2,240,000 shares of common stock to certain officers of the Company
and an additional 2,800,000 shares to the Chairman and Chief Executive
Officer. Additionally, as further described in Note 6, in January 2000, the
Company issued 560,000 shares to an individual as consideration for the
modification of the terms of an existing license agreement, all of which the
Company agreed to purchase back effective September 30, 2001. No
compensation expense was recognized for these transactions based on the
results of an independent valuation performed by an entity hired by the
Company.
5. MAJOR CUSTOMERS / SIGNIFICANT SUPPLIERS
For the year ended December 31, 1998, customers A and B accounted for
approximately $1,816,000 and $921,000, or 20.4% and 10.3%, of net sales,
respectively. For the year ended December 31, 1999, customers A and C
accounted for approximately $1,724,000 and $1,686,000, or 11.0% and 10.8%,
of net sales, respectively. For the year ended December 31, 2000, customer D
accounted for approximately $4,965,000 or 22.3% of net sales. For the six
months ended June 30, 2000 and 2001, customer D accounted for approximately
$1,253,000 and $14,351,000, or 14.1% and 45.9%, of net sales, respectively.
As further described in Note 2, substantially all of the Company's products
are manufactured by and purchased from two related parties located in China.
Although management believes that there are alternative sources that can
manufacture and supply the Company's products, they believe that only the
unique nature of this affiliated relationship can provide TCP with the
ability to monitor and control the entire manufacturing process of their
products to ensure consistently high quality products and enable the Company
to respond to the specialized product needs of TCP's customers. As a result,
any significant accidents, labor disputes, fires, severe weather, floods or
other difficulties encountered by these affiliated
F-13
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
suppliers could result in product defects, production delays, cost overruns
or the inability to fulfill customer orders on a timely basis, all of which
could have a material adverse effect on the Company's business and results
of operations.
6. COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENT: In 1996, TCP and its affiliates in China entered into a
license agreement with an entity that granted the Company and its affiliates
a non-exclusive license to manufacture and sell certain products
incorporating the technology of this entity. Royalty payments are due by TCP
based on the number of units sold by TCP. This agreement also required the
Company's affiliates in China to use certain component parts produced by the
counterparty of this agreement. In March 2000, the Company entered into an
amended agreement with this entity, which incorporated the terms of the
first agreement and also granted the Company an exclusive license to sell
certain products incorporating the technology of this entity. Additionally,
the terms of the agreement were modified requiring minimum royalties of
$20,000 per month. As consideration for the modification of the terms of the
agreement the Company issued the sole stockholder of the counterparty of
this license agreement 5% of the common stock of TCP, or 560,000 shares. No
compensation expense was recognized for the issuance of these shares based
on the results of an independent valuation performed by an entity hired by
the Company. These agreements are for an indefinite period of time and are
cancellable by the Company at any time provided that the Company refrains
from using, selling or marketing certain products as defined in the
agreements. Approximately $235,000, $333,000 and $426,000 was incurred for
royalty expense under this agreement for the years ended December 31, 1998,
1999 and 2000, respectively, and $197,000 and $157,000 for the six months
ended June 30, 2000 and 2001, respectively.
In April 2001, the Company entered into the third amendment to this
agreement with the above entity, which incorporated the terms of both the
first and second agreements. Under the terms of the third agreement, the
Company's exclusive license was converted into a non-exclusive license and
the Company and the entity agreed to a $2,000,000 settlement for all future
royalties that would have been due under these agreements. This agreement is
also for an indefinite period of time and is cancellable by the Company at
any time provided that the Company refrains from using, selling or marketing
certain products as defined in the agreements. Additionally, the Company's
Chinese affiliates are no longer required to purchase certain component
parts from this entity. The settlement amount is non-refundable and due and
payable as follows: $108,334 for each month beginning April 2001 for 6
months and $25,000 each month thereafter until the balance is paid in full
(March 2006). Additionally, concurrent with this agreement and subject to a
September 2001 modification, the Company entered into a stock buy back
agreement to buy 560,000 shares of common stock held by the president of
this entity on September 30, 2001 for $500 and the conversion of the
Company's exclusive license into a non-exclusive license. For purposes of
these financial statements, the present value of the amounts to be paid for
the license agreement and the stock buy back agreement were allocated as
follows: $1,683,000 to the license agreement, which is being amortized over
five years beginning April 2001, and $57,000 to the stock buy back
agreement, which will be treated as treasury stock on September 30, 2001,
the effective date of the stock buy back. The amount allocated to the stock
buy back was based on an independent valuation. The present value was
calculated based on the borrowing rates currently available to the Company
for bank loans at the time of the agreement (7.75%). The present value of
the remaining obligation under this agreement at June 30, 2001 is
approximately $1,435,000, of which $973,000 is reflected as "Other long-
term obligations" in the accompanying balance sheets with the remainder
included within accrued expenses.
Effective September 30, 2001, the Company entered into a fourth agreement
with the above entity that modified certain terms of the first three
agreements and increased the settlement discussed above from
F-14
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$2,000,000 to $3,010,000. Additionally, the monthly payments were increased
from $25,000 to $40,000. The effects of this modification have not been
reflected in these financial statements.
LEASE COMMITMENTS: The Company leases certain office equipment under
non-cancellable operating leases. Future minimum rental payments under these
non-cancellable leases at December 31, 2000 are approximately $3,000 each
year for fiscal years 2001 through 2004. Total rental expense was
approximately $81,000, $87,000 and $41,000 for the years ended December 31,
1998, 1999, and 2000 respectively, and $41,000 and $2,000 for the six months
ended June 30, 2000 and 2001, respectively. Such amounts include the related
party portion disclosed in Note 2.
Future payments due under the license agreement (before the September 30,
2001 modification) and the leases described above at June 30, 2001 are as
follows:
[Download Table]
LICENSE LEASE
AGREEMENT AGREEMENTS
--------- ----------
(IN THOUSANDS)
2001 (for the six months ended December 31)......... $ 352 $ 2
2002................................................ 224 3
2003................................................ 242 3
2004................................................ 261 3
2005................................................ 282 --
Thereafter.......................................... 74 --
------ ---
Total future payments............................. $1,435 $11
====== ===
FACILITY EXPANSION: In September 2001, the Company entered into a contract
for approximately $1.0 million to expand the facility purchased in January
2000 by 60,000 square feet. The Company expects this expansion to be
completed in early 2002.
LEGAL MATTERS: In the normal course of its operations, the Company is party
to certain legal actions which, based on internal review and advice of its
legal counsel, management believes will not have a material adverse effect
on the financial condition, results of operations or cash flows of the
Company.
7. EMPLOYEE BENEFIT PLAN
In fiscal year 2000, the Company adopted a tax-qualified 401(k) savings plan
for all eligible employees. The plan allows eligible employees to contribute
up to 12% of their pre-tax earnings up to the statutory limit prescribed by
the Internal Revenue Service. The Company matches 50% of participant
contributions made to the Plan up to 6% of the participant's compensation.
Company matching contributions were approximately $22,000 for the year ended
December 31, 2000, and approximately $9,900 and $10,500 for the six months
ended June 30, 2000 and 2001.
8. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA INCOME TAXES: For the periods presented in these financial
statements, TCP operated as an S corporation, and, therefore the individual
stockholders were liable for federal and state income taxes, and not the
Company. Cash distributions were regularly made by TCP in part to help fund
the stockholders' tax liabilities. Accordingly, net income as presented in
these financial statements does not include a provision for federal or state
income taxes.
Assuming completion of the proposed initial public offering, TCP will revoke
the S corporation status with stockholder consent and therefore will be
subject to corporate federal and state income taxes as a C corporation.
Accordingly, for informational purposes, the statements of operations
include a pro forma adjustment for income taxes that would have been
recorded if TCP had been a C corporation during the
F-15
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
periods presented in these financial statements calculated in accordance
with SFAS No. 109, "Accounting for Income Taxes."
Deferred income taxes arise from temporary differences in the recognition of
income and expense for tax purposes. Pro forma deferred income taxes were
computed using the liability method and reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax
purposes as if the Company was a C corporation for all periods presented
based on the statutory rates in effect for those periods. Components of the
Company's pro forma deferred tax assets and liabilities are as follows:
[Download Table]
DECEMBER 31,
------------- JUNE 30,
1999 2000 2001
----- ----- --------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable.............................. $-- $19 $ 55
Inventory........................................ -- -- 60
Other............................................ 9 -- --
-- --- ----
Total deferred tax assets..................... 9 19 115
-- --- ----
Deferred tax liabilities:
Property and equipment basis difference.......... -- (7) (7)
-- --- ----
Net deferred tax asset............................. $9 $12 $108
== === ====
Deferred taxes have not been reflected in the financial statements because
TCP is not responsible for these income taxes until the revocation of the S
corporation status. Upon such revocation, a net deferred income tax benefit
will be reflected in the balance sheet with a corresponding credit to income
tax provision. The approximate amount of this net deferred benefit is
$108,000 at June 30, 2001.
Significant components of the pro forma provision for income taxes are as
follows:
[Download Table]
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ ---------------
1998 1999 2000 2000 2001
---- ---- ---- ----- -------
(IN THOUSANDS)
Current provision:
Federal..................................... $ -- $ 65 $172 $ -- $1,159
State....................................... -- 10 25 -- 170
---- ---- ---- ---- ------
-- 75 197 -- 1,329
Deferred provision (benefit).................. 133 249 (3) (87) (96)
---- ---- ---- ---- ------
Total income tax provision (benefit).......... $133 $324 $194 $(87) $1,233
==== ==== ==== ==== ======
Pro forma net operating loss carryforwards outstanding at December 31, 1998
totaling approximately $662,000 were fully utilized in fiscal 1999.
F-16
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The differences between pro forma income taxes at the statutory U.S. federal
income tax rate of 34% and those reported in the statements of operations
are as follows:
[Enlarge/Download Table]
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- ---------------
1998 1999 2000 2000 2001
---- ---- ---- ------ -----
Income tax at U.S. federal statutory tax
rate........................................ 34.0% 34.0% 34.0% (34.0)% 34.0%
State income tax, net of federal tax
effect................................... 5.0 5.0 5.0 (5.0) 5.0
Non-deductible expenses..................... 2.3 1.6 2.1 1.8 0.4
---- ---- ---- ----- ----
Effective tax rate............................ 41.3% 40.6% 41.1% (37.2)% 39.4%
==== ==== ==== ===== ====
TAX INDEMNIFICATION AGREEMENT: Assuming completion of the proposed initial
public offering, TCP intends to revoke its S corporation status. In
connection with the proposed offering and the revocation of the S
corporation tax status, the Company intends on entering into a tax
indemnification agreement with its existing stockholders. Although the
Company believes that it has met the requirements for an S corporation, the
agreement provides for, among other things, that the existing stockholders
indemnify the Company for any federal and state income taxes, including
interest and penalties, incurred by the Company if for any reason the
Company is deemed to be a C corporation during any period in which it
reported taxable income as an S corporation. The tax indemnification
obligation of each of the existing stockholders is limited to the aggregate
amount of all distributions made to such stockholders by the Company to pay
taxes since the first day of the first tax year in which the Company is
deemed to have been a C corporation. The agreement also provides for payment
by the existing stockholders to the Company and by the Company to its
existing stockholders to adjust for any increases or decreases in tax
liability arising from a tax audit that affects the Company's tax liability
and results in a corresponding adjustment to the tax liability of the
Company's existing stockholders. The amount of such payment cannot exceed
that amount of refund received by the Company or its existing stockholders
attributable to the adjustment in tax liability.
UNDISTRIBUTED EARNINGS OF S CORPORATION: The Company intends to distribute
to its current stockholders substantially all of its undistributed S
corporation earnings for tax purposes through the date of revocation of S
corporation status. As of June 30, 2001, the amount of these undistributed S
corporation earnings was approximately $2,116,000. The June 30, 2001 pro
forma balance sheet included in these financial statements reflects an
accrual for this planned distribution along with a corresponding reduction
to retained earnings. The actual amount of the final S corporation
distributions will include the undistributed earnings of the Company from
January 1, 2001 through the date of revocation of S corporation status,
which is anticipated to occur immediately prior to completion of the initial
public offering. To the extent that undistributed earnings exceed the final
S corporation distribution, the excess amount will be reflected as
additional paid-in capital at the date of revocation of S corporation
status.
PRO FORMA EARNINGS PER COMMON SHARE: The pro forma earnings per share
presented in the statements of operations include pro forma tax provision as
if the Company had been a C corporation during the periods presented in
these financial statements.
9. SUBSEQUENT EVENTS (UNAUDITED)
PREFERRED STOCK: Assuming the completion of the proposed initial public
offering of the Company's stock, the Board of Directors will be authorized,
without stockholder approval, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges
and restrictions granted to or imposed upon the preferred stock, including
voting rights, dividend rights, conversion rights, terms of redemption,
liquidation preference, sinking fund terms and the number of shares
constituting any series or the designation of a series.
F-17
TECHNICAL CONSUMER PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PLAN: In October 2001, the Company adopted a stock option plan
that provides for the grant of incentive and nonqualified stock options for
up to 2,016,000 shares of common stock.
In October 2001, assuming the successful completion of the initial public
offering, the Company has agreed to grant an option to purchase 1,064,000
shares of common stock to an executive and an option to purchase 294,000
shares of common stock to a director under this stock option plan. These
options will have an exercise price equal to the initial public offering
price and will be exercisable in full beginning six months following the
date of grant.
CERTIFICATE OF INCORPORATION: Assuming the completion of the proposed
initial public offering, the Company will convert to a C corporation and the
Company's certificate of incorporation and bylaws will contain several
provisions that may make it difficult to acquire the Company by means of a
tender offer, open market purchase, proxy fight or otherwise. These
provisions are designed to encourage persons seeking to acquire control of
the Company to negotiate with the Company's board of directors.
STOCK SPLIT: In October 2001, the Board of Directors declared a common stock
split to be effected in the form of a stock dividend of 56,000 shares of
common stock for every one share of common stock outstanding on the later of
(a) the date that the Company amends its certificate of incorporation to
increase its authorized capital stock as contemplated by the proposed
initial public offering registration statement and (b) the effectiveness of
such registration statement. All references in the financial statements to
number of shares and per share amounts have been retroactively adjusted to
reflect this stock split.
F-18
[TPC Logo]
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the registration fee, the NASD
filing fee and the Nasdaq filing fee) of the fees and expenses payable by us in
connection with the sale of common stock being registered.
[Download Table]
Registration fee............................................ $12,075
NASD filing fee............................................. 5,330
Nasdaq National Market Listing Application Fee.............. 87,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 55,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Directors and officers liability insurance premiums......... *
Transfer agent and registrar fees........................... 20,000
Miscellaneous............................................... *
-------
Total.................................................. $ *
=======
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
Pursuant to the authority conferred by Section 102 of the Delaware General
Corporation Law, our certificate of incorporation contains a provision providing
that none of our directors shall be personally liable to us or our stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transactions from which the director derived an improper personal
benefit.
Our certificate of incorporation also provides that if Delaware law is
amended to further eliminate or limit the liability of directors, then the
liability of our directors shall be eliminated or limited, without further
stockholder action, to the fullest extent permissible under Delaware law as so
amended.
INDEMNIFICATION AND INSURANCE
Section 145 of the Delaware General Corporation Law contains provisions
permitting (and, in some situations, requiring) Delaware corporations such as us
to provide indemnification to their officers and directors for losses and
litigation expense incurred in connection with, among other things, their
service to the corporation in those capacities. Our certificate of incorporation
contains provisions requiring us to indemnify and hold harmless our directors,
officers and employees to the fullest extent permitted or required by law. Among
other things, these provisions provide that we are required to indemnify any
person who was or is a party or is threatened to be made a party to or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") by reason of the fact that the
indemnitee is or was acting in an official capacity as our director, officer,
employee or agent, or is or was serving at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including service with respect to any employee benefit plan)
against all expense, liability and loss, including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and
II-1
amounts paid in settlement) reasonably incurred or suffered by the indemnitee in
connection with such proceeding to the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may be amended (but, in the case
of any amendment, only to the extent that the amendment permits us to provide
broader indemnification rights than law permitted us to provide prior to the
amendment). These provisions also provide for the advance payment of fees and
expenses incurred by the indemnitee in defense of any such proceeding, subject
to reimbursement by the indemnitee if it is ultimately determined that the
indemnitee is not entitled to be indemnified by us. We have entered into
agreements with our directors, executive officers and certain other key
employees providing contractually for indemnification consistent with our
certificate of incorporation and bylaws.
Our certificate of incorporation also permit us to secure insurance on our
behalf and on behalf of any officer, director, employee or agent for any
liability arising out of actions in his or her capacity as an officer, director,
employee or agent, regardless of whether the bylaws would permit
indemnification. We have obtained an insurance policy that insures our directors
and officers against losses, above a deductible amount, from specified types of
claims.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, TCP has issued and sold the following
securities, which numbers reflect the 56,000-for-1 stock split that will occur
immediately prior to the completion of this offering:
In January 2000, we sold:
- 2,800,000 shares of common stock to Ellis Yan, our President, Chief
Executive Officer and Chairman of the Board of Directors, for $50.00;
- 1,680,000 shares of common stock to Matthew G. Lyon, our Vice
President--Finance and Operations, Treasurer and a member of our board of
directors, for $30.00; and
- 560,000 shares of common stock to James R. Coleman, our Vice
President--Sales and Marketing , for $10.00.
In January 2000, we issued 560,000 shares of common stock to Andrzej Bobel.
These shares were deemed the consideration for an initial license fee owed to
Mr. Bobel's company under a license agreement that we entered into with Mr.
Bobel's company in March 2000.
The issuances of the securities described above were deemed to be exempt
from registration under Section 5 of the Securities Act in reliance upon Section
4(2) of the Securities Act. All recipients of securities had adequate access,
through their relationships with TCP, to information about TCP. No underwriters
were involved in the foregoing issuances of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
[Download Table]
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
3.3* Form of Amended and Restated Certificate of Incorporation
3.4* Form of Amended and Restated Bylaws
4.1* Specimen certificate for shares of common stock
4.2* Stock Restriction and Registration Rights Agreement by and
among Technical Consumer Products, Inc. and Ellis Yan,
Matthew G. Lyon and James R. Coleman
5.1* Opinion of Jones, Day, Reavis & Pogue
II-2
[Download Table]
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.1* Manufacturing and Supply Agreement by and among Technical
Consumer Products, Inc. and Shanghai Zhenxin Electronic
Engineering Co. Ltd. and Shanghai Jensing Electron
Electrical Equipment Co. Ltd.
10.2* Technology License Agreement by and among Technical Consumer
Products, Inc. and Shanghai Zhenxin Electronic Engineering
Co., Ltd. and Shanghai Jensing Electronic Electrical
Equipment Co., Ltd.
10.3* 2001 Stock Option Plan
10.4* Option Agreement, dated as of , 2001, by and
between James R. Coleman and Technical Consumer Products,
Inc.
10.5* Form of Directors and Officers Indemnification Agreement
10.6* Tax Indemnification Agreement by and among Technical
Consumer Products, Inc. and Ellis Yan, Matthew G. Lyon,
James R. Coleman, and Andrzej Bobel
10.7 Amended and Restated Stock Buy Back Agreement, dated as of
September 30, 2001, by and among Technical Consumer
Products, Inc., Andrzej Bobel and Practical Innovations,
Inc.
10.8 License Agreement, dated as of June 18, 1996, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.9 Amendment to License Agreement, dated as of November 13,
1998 and effective as of January 1, 1999, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.10 License Agreement, dated as of March 1, 2000, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.11 License Agreement, dated as of May 23, 2001, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.12 Amended and Restated License Agreement, dated as of
September 30, 2001, by and among Technical Consumer
Products, Inc. and Andrzej Bobel and Practical Innovations,
Inc.
10.13 Split Dollar Agreement, dated as of March 6, 2000, by and
between Technical Consumer Products, Inc. and Ellis Yan
10.14 Split Dollar Agreement, dated as of March 6, 2000, by and
between Technical Consumer Products, Inc. and Matthew Lyon
10.15 Deferred Compensation Agreement, dated as of March 6, 2000,
by and between Technical Consumer Products, Inc. and James
R. Coleman
16.1 Letter of Grant Thornton LLP, dated October 17, 2001, to the
Securities and Exchange Commission
23.1 Independent Auditor's Consent of PricewaterhouseCoopers LLP
23.2* Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
24.1 Power of Attorney (included in page II-5)
---------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-3
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Technical
Consumer Products, Inc. has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Aurora, State of Ohio, on October 17, 2001.
[Download Table]
TECHNICAL CONSUMER PRODUCTS, INC
By: /s/ ELLIS YAN
------------------------------------------
Ellis Yan
President and Chief Executive Officer
We, the undersigned directors and/or officers of Technical Consumer
Products, Inc. (the "Company"), hereby severally constitute and appoint Ellis
Yan, Matthew G. Lyon and Christopher M. Kelly, and each of them individually,
with full powers of substitution and resubstitution, our true and lawful
attorneys, with full powers to them and each of them to sign for us, in our
names and in the capacities indicated below, the Registration Statement on Form
S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective amendments),
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, in connection with the registration under the Securities
Act of 1933, of equity securities of the Company, and to file or cause to be
filed the same, with all exhibits thereto and other documents in connection
therewith, and the Securities and Exchange Commission, granting unto said
attorneys, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as each of them might or could do in
person, and hereby ratifying and confirming all that said attorneys, and each of
them, or their substitute or substitutes, shall do or cause to be done by virtue
of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ELLIS YAN President, Chief Executive Officer and October 17, 2001
------------------------------------------ Chairman of the Board of Directors
Ellis Yan (Principal Executive Officer)
/s/ MATTHEW G. LYON Vice President -- Finance & Operations, October 17, 2001
------------------------------------------ Treasurer and Director (Principal
Matthew G. Lyon Financial and Accounting Officer)
/s/ JAMES R. COLEMAN Director October 17, 2001
------------------------------------------
James R. Coleman
/s/ BENJAMIN G. AMMONS Director October 17, 2001
------------------------------------------
Benjamin G. Ammons
/s/ JACK KAHL Director October 17, 2001
------------------------------------------
Jack Kahl
/s/ R. LOUIS SCHNEEBERGER Director October 17, 2001
------------------------------------------
R. Louis Schneeberger
/s/ BOAKE A. SELLS Director October 17, 2001
------------------------------------------
Boake A. Sells
II-5
EXHIBIT INDEX
[Download Table]
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation
3.2 Bylaws
3.3* Form of Amended and Restated Certificate of Incorporation
3.4* Form of Amended and Restated Bylaws
4.1* Specimen certificate for shares of common stock
4.2* Stock Restriction and Registration Rights Agreement by and
among Technical Consumer Products, Inc. and Ellis Yan,
Matthew G. Lyon and James R. Coleman
5.1* Opinion of Jones, Day, Reavis & Pogue
10.1* Manufacturing and Supply Agreement by and among Technical
Consumer Products, Inc. and Shanghai Zhenxin Electronic
Engineering Co. Ltd. and Shanghai Jensing Electron
Electrical Equipment Co. Ltd.
10.2* Technology License Agreement by and among Technical Consumer
Products, Inc. and Shanghai Zhenxin Electronic Engineering
Co., Ltd. and Shanghai Jensing Electronic Electrical
Equipment Co., Ltd.
10.3* 2001 Stock Option Plan
10.4* Option Agreement, dated as of , 2001, by and
between James R. Coleman and Technical Consumer Products,
Inc.
10.5* Form of Directors and Officers Indemnification Agreement
10.6* Tax Indemnification Agreement by and among Technical
Consumer Products, Inc. and Ellis Yan, Matthew G. Lyon,
James R. Coleman, and Andrzej Bobel
10.7 Amended and Restated Stock Buy Back Agreement, dated as of
September 30, 2001, by and among Technical Consumer
Products, Inc., Andrzej Bobel and Practical Innovations,
Inc.
10.8 License Agreement, dated as of June 18, 1996, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.9 Amendment to License Agreement, dated as of November 13,
1998 and effective as of January 1, 1999, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.10 License Agreement, dated as of March 1, 2000, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.11 License Agreement, dated as of May 23, 2001, by and between
Technical Consumer Products, Inc. and Practical Innovations,
Inc.
10.12 Amended and Restated License Agreement, dated as of
September 30, 2001, by and among Technical Consumer
Products, Inc. and Andrzej Bobel and Practical Innovations,
Inc.
10.13 Split Dollar Agreement, dated as of March 6, 2000, by and
between Technical Consumer Products, Inc. and Ellis Yan
10.14 Split Dollar Agreement, dated as of March 6, 2000, by and
between Technical Consumer Products, Inc. and Matthew Lyon
10.15 Deferred Compensation Agreement, dated as of March 6, 2000,
by and between Technical Consumer Products, Inc. and James
R. Coleman
16.1 Letter of Grant Thornton LLP, dated October 17, 2001, to the
Securities and Exchange Commission
23.1 Independent Auditor's Consent of PricewaterhouseCoopers LLP
23.2* Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
24.1 Power of Attorney (included in page II-5)
---------------
* To be filed by amendment
II-6
Dates Referenced Herein
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