Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Registration Statement (General Form) HTML 1.21M
32: CORRESP ¶ Comment-Response or Other Letter to the SEC HTML 5K
2: EX-2.1 Form of Series C Senior Convertible Preferred HTML 129K
Stock Purchase Agreement
3: EX-2.2 Note Purchase Agreement HTML 172K
4: EX-3.1 Amended and Restated Articles of Incorporation HTML 100K
5: EX-3.2 Amendment to Amended and Restated Articles of HTML 14K
Incorporation
6: EX-3.3 Form of Amended and Restated Articles of HTML 23K
Incorporation
7: EX-3.4 Amended and Restated Bylaws HTML 119K
8: EX-3.5 Form of Amended and Restated Bylaws HTML 113K
9: EX-4.1 Amended and Restated Investors' Rights Agreement HTML 144K
10: EX-4.2 Amended and Restated First Offer and Co-Sale HTML 102K
Agreement
11: EX-4.3 Form of Warrant to Purchase Common Stock HTML 33K
12: EX-4.4 Form of Warrant to Purchase Common Stock HTML 31K
13: EX-4.5 Credit and Security Agreement HTML 311K
14: EX-4.6 Convertible Subordinated Promissory Note in Favor HTML 85K
of Ge Capital Equity Investments, Inc.
15: EX-4.7 Convertible Subordinated Promissory Note in Favor HTML 86K
of Clean Technology Fund Ii, L.P.
16: EX-4.8 Convertible Subordinated Promissory Note in Favor HTML 84K
of Capvest Venture Fund, Lp
17: EX-4.9 Convertible Subordinated Promissory Note in Favor HTML 84K
of Technology Transformation Venture
Fund, Lp
18: EX-10.1 Employment Agreement - Bruce Wadman HTML 29K
24: EX-10.10 Form of Stock Option Agreement HTML 32K
25: EX-10.11 Form of Stock Option Agreement HTML 50K
26: EX-10.12 Form of Promissory Note and Collateral Pledge HTML 23K
Agreement
27: EX-10.13 Patent and Trademark Security Agreement - Great HTML 57K
Lakes Energy Technologies, LLC
28: EX-10.14 Patent and Trademark Security Agreement - Great HTML 40K
Lakes Energy Technologies, LLC
19: EX-10.2 Employment Agreement - Neal Verfuerth HTML 52K
20: EX-10.5 Employment Agreement - John Scribante HTML 21K
21: EX-10.6 2003 Stock Option Plan, as Amended HTML 63K
22: EX-10.7 Form of Stock Option Agreement HTML 27K
23: EX-10.9 2004 Stock and Incentive Awards Plan HTML 88K
29: EX-21.1 Subsidiaries HTML 11K
30: EX-23.1 Consent of Grant Thornton LLP HTML 12K
31: EX-23.3 Consent of Wipfli LLP HTML 12K
As filed with the Securities and Exchange Commission
on August 20, 2007
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
Orion Energy Systems, Inc.
(Exact name of registrant as specified in its charter)
C:
C:C:
Wisconsin
(State or other jurisdiction of
incorporation or organization)
39-1847269
(I.R.S. Employer
Identification No.)
3646
(Primary Standard Industrial
Classification Code Number)
C:
1204 Pilgrim Road Plymouth, WI53073
(920) 892-9340
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Neal R. Verfuerth
President and Chief Executive Officer
Orion Energy Systems, Inc.
1204 Pilgrim Road Plymouth, WI53073
Tel: (920) 892-9340 Fax: (920) 892-4274 (Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Steven R. Barth, Esq.
Carl R. Kugler, Esq.
Foley & Lardner LLP
777 East Wisconsin Avenue Milwaukee, Wisconsin53202
Tel: (414) 271-2400
Fax: (414) 297-4900
Daniel J. Waibel
Chief Financial Officer and Treasurer
Eric von Estorff, Esq.
Vice President, General Counsel
and Secretary
Orion Energy Systems, Inc.
1204 Pilgrim Road Plymouth, Wisconsin53073
Tel: (920) 892-9340
Fax: (920) 892-4274
Kirk A. Davenport II, Esq.
Latham & Watkins LLP
885 Third Avenue New YorkNY10022-4834
Tel: (212) 906-1200
Fax: (212) 751-4864
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
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. o
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. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) of 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. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) of 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. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Proposed Maximum
Amount of
Securities to be Registered
Aggregate Offering Price (1)
Registration Fee (1)
Common Stock, no par value
$100,000,000
$3,070
(1)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act. Includes shares of common stock issuable upon exercise of the
underwriters’ over-allotment option.
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 filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and we are not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
Subject
to Completion, Dated , 2007
Shares
Common Stock
Orion
Energy Systems, Inc. is selling shares of common stock and the selling
shareholders identified in this prospectus are selling an additional shares. We will not receive
any of the proceeds from the sale of the shares by the selling shareholders. We have
granted the underwriters a 30-day option to purchase up to an additional shares from us to
cover over-allotments, if any.
This is an initial public offering of our common stock. We currently expect the initial
public offering price to be between $ and $ per share. We intend to apply to
list our common stock on the Nasdaq Global Market under the symbol “OESX.”
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 10.
Per Share
Total
Public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to us
$
$
Proceeds,
before expenses, to the selling shareholders
$
$
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
You should rely only on the information contained in this document or to which we have
referred you. We have not authorized anyone to provide you with information that is different.
This document may only be used where it is legal to sell these securities. The information in this
document may only be accurate as of the date of this document.
Dealer Prospectus Delivery Obligation
Until ,
(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 dealer’s obligation
to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments
or subscriptions.
This prospectus includes market and industry data and industry forecasts that we obtained from publicly
available sources, including information from governmental agencies such as the United States
Energy Information Administration, the United States Department of Energy and the United States
Environmental Protection Agency, and industry publications and
surveys from a variety of sources,
including the American Council for an Energy Efficient Economy, the National Electric Reliability
Council, the Electric Power Research Institute and the International Energy Agency. Certain market and industry data included in this
prospectus are also based on our own internal estimates and assumptions. Unless otherwise noted,
statements based on the above-mentioned third party data and internal analysis, estimates or assumptions are as
of the date of this prospectus.
Although we
believe the industry and market data and forecasts included in this prospectus are reliable as
of the date of this prospectus, we have not independently verified such data and such data could
prove inaccurate. Industry and market data may be incorrect because of the method by which sources
obtained their data and because information cannot always be verified with certainty due to the
limits on the availability and reliability of raw data, the voluntary nature of the data gathering
process and other limitations and uncertainties. In addition, we do not know all of the assumptions
regarding the size of our market, future energy demands and pricing, general economic conditions or
growth that were used in preparing the forecasts from sources cited herein.
This summary highlights information about our company and the offering contained elsewhere in
this prospectus and is qualified in its entirety by the more detailed information and financial
statements included elsewhere in this prospectus. You should read this entire prospectus
carefully, including “Risk Factors” and our financial statements and related notes included
elsewhere in this prospectus before making an investment decision. In this prospectus, unless
otherwise specified or the context otherwise requires, the terms
“Orion,”“we,”“us,”“our,”“our company,” or “ours,” refer
to Orion Energy Systems, Inc. and its consolidated subsidiaries.
Our Business
We
design, manufacture and implement energy management systems consisting
primarily of high-performance, energy efficient lighting systems,
controls and related services. Our energy management systems deliver energy savings and
efficiency gains to our commercial and industrial customers without
compromising their quantity or quality of light. The core of our energy
management system is our high intensity fluorescent, or HIF, lighting
system that we
estimate cuts our customers’ lighting-related electricity costs by approximately 50%, while increasing
their quantity of light by approximately 50% and improving lighting
quality, when replacing high intensity discharge, or HID, fixtures.
We have
sold and installed our high-performance HIF lighting systems in over 1,800 facilities across North
America, representing over 451 million square feet of commercial
and industrial building space, including for 73 Fortune 500 companies,
such as General Electric Co., Kraft Foods Inc., Newell Rubbermaid
Inc., OfficeMax, Inc., SYSCO Corp., and Toyota Motor Corp.
Our
energy management system is comprised of: our HIF lighting system; our
InteLite intelligent lighting controls; our Apollo Light Pipe, which
collects and
focuses daylight and consumes no electricity; and integrated
energy management services. We believe that the implementation of our
complete energy management system enables our customers to further
reduce electricity costs, while permanently
reducing base and peak load electricity demand.
Our annual revenue has increased from $12.4 million in fiscal 2004 to $48.2 million in fiscal
2007. For the three months ended June 30, 2007, we recognized revenue of $16.7 million, compared
to $9.7 million for the three months ended June 30, 2006. We estimate that the use of our
HIF fixtures has resulted in cumulative
electricity cost savings for our customers
of approximately $224 million and has reduced base
and peak load electricity demand by approximately 243 megawatts, or
MW, through June 30, 2007. We estimate that this reduced
electricity consumption has reduced associated indirect carbon
dioxide emissions by approximately 2.8 million tons over the same period.
For a description of the assumptions behind our calculations of
customer kilowatt demand reduction, customer kilowatt hours and
electricity costs saved and reductions in indirect carbon dioxide emissions
associated with our products used throughout this prospectus, see
notes (6) through (11) under “— Summary Historical
Consolidated and Pro Forma Financial Data and Other Information.”
Our Market Opportunity
Our
market opportunity is created by growing electricity capacity
shortages, underinvestment in transmission and distribution, or
T&D, infrastructure,
high electricity costs and the high financial and environmental costs associated with
adding generation capacity and upgrading the T&D infrastructure.
According to the Department of Energy, or DOE, lighting accounts for 22% of electric power consumption in the United
States, with commercial and industrial lighting accounting for 65% of
that amount. Based on this information, we estimate that
the United States commercial and industrial sectors spent
approximately $42 billion on electricity for lighting in 2005.
Commercial and industrial facilities in the United States
employ a variety of lighting technologies, including HID, traditional fluorescent and incandescent lighting fixtures. Our HIF
lighting systems typically replace HID fixtures, which
operate inefficiently due to higher wattages and operating
temperatures. The Energy Information Administration, or EIA,
estimates that as of 2003 there were 455,000 buildings in the United
States representing 20.6 billion square feet that utilized HID
fixtures.
50/50
Value Proposition. We estimate our HIF lighting systems generally reduce
lighting-related electricity costs by approximately 50% compared to HID
fixtures, while
increasing the quantity of light by approximately 50% and improving lighting quality.
Rapid
Payback Period. In most retrofit projects where we replace HID fixtures, our
customers typically realize a two to three
year payback period on our HIF lighting systems without considering
utility incentives or government subsidies.
Comprehensive
Energy Management Systems. In addition to our HIF lighting systems, our
energy management system includes our InteLite intelligent lighting
controls and our Apollo Light Pipe, which collects and focuses
daylight without consuming electricity. We
believe that implementation of our complete energy management system
enables our customers to realize
even further reduced electricity costs while permanently reducing
base and peak load electricity demand.
Easy Installation, Implementation and Maintenance. Our HIF fixtures are designed with a
lightweight construction and modular architecture that allows for fast and easy installation,
facilitates maintenance and allows for easy integration of other components of our energy
management system.
Base
and Peak Load Relief for Utilities. Our energy management systems
can substantially
reduce electricity demand during peak and
off-peak periods, which can
reduce the need for utilities to invest in additional capacity,
reduce the impact of peak demand periods on the electrical grid,
and better enable utilities to provide
reliable electric power to their customers.
Environmental
Benefits. By permanently reducing electricity consumption, we
estimate that the use of our HIF fixtures has reduced indirect carbon dioxide emissions by 2.8 million tons through June 30, 2007.
Our Competitive Strengths
Compelling Value Proposition.
We believe
our ability to deliver improved lighting quality while reducing
electricity costs
differentiates our value proposition from other demand management
solutions which require end
users to alter the time, manner or duration of their electricity use to achieve cost savings.
Large
and Growing Customer Base. We have installed our products in over
1,800 commercial and industrial facilities across
North America. As of
June 30, 2007, we have completed or are in the process of
completing retrofits in over 400 facilities
for our 73 Fortune 500 customers, which we believe is a significant
endorsement of our value proposition.
Systematized Sales Process. We primarily sell directly to our end user customers
using a systematized multi-step sales process that
focuses on our value proposition. We have also developed relationships with numerous electrical contractors, who often
have significant influence over the choice of
lighting solutions that their customers adopt.
Innovative
Technology. We have developed a portfolio of 16 U.S.
patents primarily covering elements of our HIF lighting systems and nine
patents pending primarily covering elements of our InteLite controls and our Apollo Light Pipe.
Strong,
Experienced Leadership Team. Our senior executive management team of seven individuals has
a combined 40 years of experience with our company and a combined 77
years of experience in the lighting and energy management industries.
Efficient,
Scalable Manufacturing Process. We have made significant investments in
production efficiencies, automated processes and modern production
equipment to increase our production
capacity, reduce our
cost of revenue, better control production quality and
allow us to respond timely to customer needs.
Leverage
Existing Customer Base. We are expanding our customer relationships from
single-site facility implementations of our HIF lighting systems to comprehensive enterprise-wide
roll-outs of our complete energy management systems for our
existing customers.
Target Additional Customers. We
are expanding our customer base by executing our systematized sales
process, increasing our direct sales force, expanding our marketing
efforts and developing relationships with electrical
contractors, value-added resellers and their customers.
Provide
Load Relief to Utilities and Grid Operators. As we increase our
market penetration, we believe our systems will, in the aggregate, have a significant impact on reducing base
and peak load electricity demand. We therefore intend to market our
energy management systems directly to utilities and grid operators as a lower-cost, permanent
alternative to capacity expansion to help them provide reliable
electric power to their customers in a cost-effective and
environmentally-friendly manner.
Continue
to Improve Operational Efficiencies. We are focused on
continually improving the efficiency of our operations by reducing
our costs of materials, components, manufacturing and installation,
as well as gaining additional leverage from our systematized
multi-step sales process, in
order to enhance the profitability of our business and allow us to continue
to deliver our compelling value proposition.
Develop
New Sources of Revenue. In addition to our recently introduced
InteLite and Apollo Light Pipe products, we are continuing to develop new
energy management products and services that can be utilized in connection with our current
energy management systems.
Recent
Developments
On
August 3, 2007, we issued $10.6 million of 6% convertible subordinated notes (which we refer to as the Convertible Notes), to an
indirect affiliate of GE Energy Financial Services, Inc. (which we refer to as GEEFS), Clean Technology Fund II, LP (which
we refer to as Clean Technology) and affiliates of Capvest Venture Fund, LP (which we refer to as
Capvest). The Convertible Notes will convert automatically upon closing of this offering into
2,360,802 shares of our common stock. Subject to certain exceptions
and extensions,
the holders of the Convertible Notes have agreed
not to sell any of their common stock received upon conversion of the Convertible Notes in this
offering or for 180 days after the date of this prospectus, although Clean Technology and Capvest
may sell certain of their previously acquired shares in this
offering. See “Description of Capital Stock,”“Principal and Selling
Shareholders” and “Underwriting.”
Risk Factors
The
following risks, as well as the other risks described in “Risk Factors,” should be
carefully considered before purchasing any of our shares in this offering:
•
we have a limited operating history, have previously incurred net operating losses,
and only recently achieved profitability;
•
some of our competitors are larger, have long-standing customer relationships at
existing commercial and industrial facilities, and have greater resources than we have;
•
we are dependent on the skills, experience and efforts of our senior management;
•
our success depends on market acceptance of our energy
management products and services;
•
our component parts and raw materials are subject to price fluctuations, potential
shortages and interruptions of supply;
we are dependent upon our intellectual property, and our inability to protect our
intellectual property or enforce our rights could negatively affect our business and
results of operations;
•
if the price of electricity decreases, there may be less
demand for our energy management products and services;
•
we may fail to maintain adequate internal control over
financial reporting; and
•
our common stock has never traded publicly, and the market price of our common stock
may fluctuate significantly.
Our Corporate Information
We were incorporated as a Wisconsin corporation in April 1996. Our headquarters are located
at 1204 Pilgrim Road, Plymouth, Wisconsin53073, and our telephone number is (920) 892-9340. Our
approximately 266,000 square foot manufacturing facility is located in Manitowoc, Wisconsin. Our
website is www.oriones.com. Information on, or accessible through, this website is not a part of,
and is not incorporated into, this prospectus.
shares ( shares if the
underwriters’ over-allotment option
is exercised in full)
Common stock offered by the selling
shareholders
shares
Common stock to be outstanding after
the offering
shares ( shares if the
underwriters’ over-allotment option
is exercised in full)
Use of proceeds
We estimate that the net proceeds to
us from this offering will be
approximately $ million (or $ million if the underwriters’
over-allotment option is exercised
in full), assuming an initial public
offering price of $ per share,
the midpoint of the range
set forth on the cover page of this
prospectus. We intend to use these
proceeds for working capital and
general corporate purposes,
including to fund increased sales
and marketing expenses, as well as
for potential future acquisitions.
We will not
receive any proceeds from the sale
of shares by the selling
shareholders. See “Use of
Proceeds.”
Dividend policy
We currently do not intend to pay
any cash dividends on our common
stock.
Directed share program
The underwriters intend to reserve up to
shares for
sale at the initial public offering price to employees, officers, directors
and certain other persons
associated with us who have
expressed an interest in purchasing
our common stock in this offering.
See “Underwriting.”
Risk factors
You should carefully read and
consider the information set forth
under “Risk Factors,” together with
all of the other information set
forth in this prospectus, before
deciding to invest in shares of our
common stock.
Listing and trading symbol
We intend to apply to list our
common stock on the Nasdaq Global
Market under the symbol “OESX.”
The
number of shares of our common stock that will be outstanding after this offering
includes 12,219,969 shares of common stock outstanding as of
June 30, 2007. Unless
otherwise indicated, all information in this prospectus, including
the number of shares that will be outstanding after this offering and
other share – related information:
•
reflects the automatic conversion upon closing of this offering of all of our
outstanding shares of Series B preferred stock on a one-for-one basis into 2,989,830 shares
of common stock;
•
reflects the automatic conversion upon closing of this offering of all of our
outstanding shares of Series C preferred stock on a one-for-one basis into 1,818,182 shares
of common stock;
•
reflects the automatic conversion upon closing of this offering of the
Convertible Notes into 2,360,802 shares of common stock;
•
excludes 954,390 shares of common stock issuable upon the exercise of warrants outstanding as of June 30,2007 with a weighted average exercise price of $2.24 per share;
•
excludes 4,712,077 shares of common stock issuable upon the exercise
of options outstanding as of June 30, 2007 with a
weighted average exercise price of $1.57
per share;
•
excludes 646,700 shares of common stock reserved for future
issuance as of
June 30, 2007 under our stock option plans;
•
assumes an initial public offering price of $ per share, the
midpoint of the range set forth on the
cover page of this prospectus; and
•
assumes no exercise of the underwriters’ option to purchase from us up to
additional shares to cover over-allotments.
Summary Historical Consolidated and Pro Forma
Financial Data and Other Information
The following tables set forth our summary historical
consolidated and pro
forma financial data and other information for the periods indicated. We
prepared the summary historical consolidated financial data using our
consolidated financial statements for each of the periods presented. The
summary historical consolidated financial data for each fiscal year in
the three-year period ended March 31, 2007 were derived from our audited
consolidated financial statements appearing elsewhere in this prospectus, and the summary
consolidated historical financial data for the three months ended June 30, 2006 and
June 30, 2007 were derived from our unaudited consolidated financial statements appearing
elsewhere in this prospectus. The unaudited consolidated financial statements include all
adjustments which, in our opinion, are necessary for a fair presentation of our
financial position and results of operations for these periods. You should
read this financial data in conjunction with our audited and unaudited
consolidated financial statements and related notes included elsewhere in this prospectus. See “Selected Historical
Consolidated Financial Data” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” The summary historical consolidated financial data are
not necessarily indicative of future results.
The summary unaudited pro forma and pro forma
as adjusted financial data are presented for
informational purposes only and do not represent what our financial condition would
have been had the transactions described actually occurred on the dates indicated.
Indirect carbon dioxide emission reductions from
customers’ energy savings (tons)
(10)
2,842
Square
footage retrofitted (11)
451,802
(1)
Cost of revenue includes stock-based compensation expense
recognized under SFAS 123(R) of $24,000 and $21,000 for fiscal 2007
and our fiscal 2008 first quarter, respectively. Operating expenses
include stock-based compensation expense recognized under
SFAS 123(R)
of $339,000 and $125,000 for fiscal 2007 and our fiscal 2008 first
quarter, respectively. See note (1) under “Selected Historical
Consolidated Financial Data” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates – Stock-Based
Compensation.”
(2)
For fiscal 2007 and our fiscal 2008 first quarter, represents the
impact attributable to the accretion of accumulated dividends on our Series C preferred
stock,
plus accumulated dividends on our Series A preferred stock prior to
its conversion into common stock on March 31, 2007. The Series C preferred
stock will convert automatically into common stock on a one-for-one basis
upon the closing of this offering and our obligation to pay accumulated
dividends will be extinguished. For fiscal 2005 and 2006, represents
accumulated dividends on our Series A preferred
stock prior to its conversion into common stock. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Revenue and Expense Components – Accretion
of Preferred Stock and Preferred Stock Dividends.”
(3)
Represents the
estimatedfair market value of the premium paid to holders of
Series A preferred stock upon induced conversion. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Revenue and Expense Components –
Conversion of Preferred Stock.”
(4)
Gives effect to (i) the issuance of the Convertible
Notes and the application of the gross proceeds therefrom to cash and cash equivalents and (ii) the repayment of
approximately $2.1 million in aggregate principal amount of
shareholder notes with $0.8 million in cash and 306,932 shares
of common stock, as if each of these transactions had occurred on
June 30, 2007. See “Related Party Transactions” and “Executive Compensation — Compensation
Discussion and Analysis — Long-Term Equity Compensation.”
(5)
Gives effect to the pro forma adjustments described in note
(4) and (i) the automatic conversion of the
Convertible Notes into 2,360,802 shares of our common stock; (ii) the automatic conversion of 4,808,012 shares of our outstanding preferred stock into common
stock on a one-for-one basis; and (iii) the receipt of estimated net proceeds of $ million from our sale of shares of common
stock in
this offering at an assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover page of
this prospectus), less estimated underwriting discounts and commissions and estimated offering expenses payable by us, as if each of these transactions had occurred on June 30, 2007.
(6)
“HIF lighting systems” includes all HIF units sold
under the brand name “Compact Modular” and its predecessor,
“Illuminator.”
(7)
A substantial majority of our HIF lighting systems, which generally operate at approximately 224 watts per six-lamp fixture, are installed in replacement of HID fixtures, which generally operate at approximately 465 watts per fixture in commercial
and industrial applications.
We calculate that each six-lamp HIF lighting system we install in replacement
of an HID fixture generally reduces electricity consumption by
approximately 241 watts (the difference between 465 watts
and 224 watts). In retrofit
projects where we replace fixtures other than HID fixtures,
or where we replace fixtures with products other than our HIF
lighting systems, we generally
achieve similar wattage reductions (based on an analysis of the
operating wattages of each of our fixtures compared to the
operating wattage of the fixtures they typically replace). We
calculate the amount of kilowatt demand reduction by
multiplying (i) 0.241 kilowatts per six-lamp equivalent unit we install by
(ii) the number of units we have installed in the period presented,
including products other than our HIF
lighting systems (or a total of approximately 1.1 million units).
(8)
We calculate the number of kilowatt hours saved on a cumulative basis by assuming the reduction of 0.241 kilowatts of electricity consumption per six-lamp equivalent unit we install and assuming that each such unit has averaged 7,500 annual
operating hours since its installation.
(9)
We calculate our customers’ electricity costs saved by multiplying the cumulative total customer kilowatt hours saved indicated in the table by $0.077 per kilowatt hour. The national average rate for 2005, which is the
most current full year for which this information is available, was $0.0814 per kilowatt hour according to the United States Energy Information
Administration.
(10)
We calculate this figure by multiplying (i) the
estimated amount of carbon dioxide emissions that result from the
generation of one kilowatt hour of electricity (determined using the
Emissions and Generation Resource Integration Database, or EGrid,
prepared by the United States Environmental Protection Agency), by
(ii) the number of customer kilowatt hours saved as indicated in
the table.
(11)
Based on 1.1 million total units sold, which contain a
total of approximately 6.0 million lamps. Each lamp illuminates
approximately 75 square feet. The majority of
our installed fixtures contain six lamps and typically illuminate approximately 450 square feet.
An investment in our common stock involves a high degree of risk. You should carefully read
and consider each of the risks and uncertainties described below together with the other
information contained in this prospectus, including our financial statements and the notes thereto
and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before
deciding to invest in shares of our common stock. If any of these
events actually occurs, then our
business, financial condition, results of operations, and future growth prospects may suffer. As a
result, the market price of our common stock could decline, and you may lose all or part of your
investment.
Risks Relating to Our Business
We have a limited operating history, have previously incurred net losses, and only
recently achieved profitability that we may not be able to sustain.
We began operating in April 1996 and first achieved a full fiscal year of profitability in fiscal
2003. However, we incurred net losses attributable to common
shareholders of $2.3 million and $1.6 million in fiscal 2005 and 2006,
respectively, before achieving net income attributable to common
shareholders of $0.6 million in fiscal 2007. As of June 30, 2007, our
accumulated deficit was $3.1 million. As a result of our limited operating history, we have
limited financial data that can be used to evaluate our business,
strategies, performance,
prospects, revenue or profitability potential or an investment in our common stock. Any evaluation of our business and our prospects must be
considered in light of our limited operating history and the risks and uncertainties encountered by
companies at our stage of development and in our market.
Initially,
our net losses were principally
driven by start-up costs, the costs of
developing our technology and research and development costs. More recently, our net losses have been
principally driven by increased sales and marketing and general and administrative expenses, as well as inefficiencies due to excess manufacturing capacity in fiscal 2005
and 2006. We expect to incur increased general and administrative,
sales and marketing, and
research and development expenses in the near term. These increased operating costs may cause us
to recognize reduced net income or incur net losses, and there can be no
assurance that we will be able to increase our revenue, sustain our
revenue growth rate,
expand our customer base or remain profitable. Furthermore, increased
cost of revenue, warranty claims, stock-based
compensation costs or interest expense on our outstanding debt and on any debt that we incur in
the future could contribute to reduced net income or net losses. As a result, even if we
significantly increase our revenue, we may incur reduced net income or net losses in the future.
We
operate in a highly competitive industry and if we are unable to compete successfully our
revenue and profitability will be adversely affected.
We face strong competition primarily from
manufacturers and distributors of energy management products and
services, as well as from
electrical contractors. We compete primarily on the basis of customer relationships, price, quality, energy efficiency, customer service and
marketing support. Our products are in direct competition primarily with high intensity discharge,
or HID, technology, as well as other HIF products and older fluorescent technology in the
lighting systems retrofit market.
Many of our competitors are better capitalized than we are, have strong existing customer
relationships, greater name recognition, and more extensive engineering, manufacturing, sales and
marketing capabilities. Competitors could focus their substantial resources on developing a
competing business model or energy management products or services that may be
potentially more attractive to customers than our products or services. In addition, we may face
competition from other products or technologies that reduce demand for electricity.
Our competitors may also offer energy management products and
services at reduced prices in order to improve their competitive positions. Any of these
competitive factors could make it more difficult for us to attract
and retain customers, require us
to lower our prices in order to remain competitive, and reduce our revenue and profitability, any of which
could have a material adverse effect on our results of operations and financial condition.
Our success is largely dependent upon the skills, experience and efforts of our senior management,
and the loss of their services could have a material adverse effect on our ability to expand our
business or to maintain profitable operations.
Our continued success depends upon the continued availability, contributions, skills, experience
and effort of our senior management. We are particularly dependent on the services of Neal R.
Verfuerth, our president, chief executive officer and principal founder. Mr. Verfuerth has
major responsibilities with respect to sales, engineering, product development and
executive administration. We do not have a formal succession plan in place for Mr. Verfuerth. Our
employment agreement with Mr. Verfuerth does not guarantee his services for a specified period of
time. All of the employment agreements with our senior management team may be terminated by the
employee at any time and without notice. While all such agreements include noncompetition and
confidentiality covenants, there can be no assurance that such provisions will be enforceable or
adequately protect us. The loss of the services of any of these persons might impede our
operations or the achievement of our strategic and financial objectives, and we may not be able to
attract and retain individuals with the same or similar level of experience or expertise. Additionally, while
we have key man insurance on the lives of Mr. Verfuerth and other members of our senior management
team, such insurance may not adequately compensate us for the loss of these individuals. The loss
or interruption of the service of members of our senior management, particularly Mr. Verfuerth, or
our inability to attract or retain other qualified personnel could have a material adverse effect
on our ability to expand our business, implement our strategy or maintain
profitable operations.
The success of our business depends on the market acceptance of our energy management products and
services.
Our future success depends on commercial acceptance of our energy management products and services. If we are unable to convince
current and potential customers of the advantages of our HIF lighting systems and energy management
products and services, then our ability to sell our HIF lighting systems and energy management
products and services will be limited. In addition, because the
market for energy management products and
services is rapidly evolving, we may not be able to accurately assess the size of the
market, and we may have limited insight into trends that may emerge and affect our business. If
the market for our HIF lighting systems and energy management products and services does not
continue to develop, or if the market does not accept our products, then our ability to grow our
business could be limited and we may not be able to increase or maintain our revenue or
profitability.
Sales of our products and services are dependent upon our customers’ capital budgets.
We derive
a substantial majority of our revenue from sales of HIF lighting
systems to customers who may experience constraints in their capital
spending due to other competing uses for capital or other factors. Our HIF lighting systems are typically purchased as capital assets and therefore are subject to
review as part of a customer’s capital budgeting process. Customers may decline or defer purchases
of our products and our related services as a result of many factors, including mergers and acquisitions, regulatory
decisions, rising interest rates, lower electricity costs, the
availability of lower cost or other alternative products or
solutions or general economic downturns. We have experienced, and may in the future experience,
variability in our operating results, on both an annual and a quarterly basis, as a result of these
factors.
Our products use components and raw materials that may be subject to price fluctuations, shortages
or interruptions of supply.
We may be vulnerable to price increases for components or
raw materials that we require for our
products, including aluminum, ballasts, power supplies and lamps. In
particular, our cost of aluminum can be
subject to commodity price fluctuation. Further, suppliers’ inventories of certain components that
our products require may be limited and are subject to acquisition by others. We may purchase quantities of these items that are in excess of our estimated near-term requirements. As a result, we may need to devote additional working
capital to support a large amount of component and raw material inventory that may not be
used over a reasonable period to produce saleable products, and we may be required to increase our
excess and obsolete inventory reserves to provide for these excess
quantities, particularly if demand for our products does not meet our expectations. Also, any shortages or interruptions in supply of our
components or raw materials could disrupt our operations. If any of
these events occurs, our results of operations and financial
condition could be materially adversely affected.
We depend on a limited number of key suppliers.
We depend
on certain key suppliers for the raw materials and key components that we
require for our
current products, including sheet, coiled and specialty reflective
aluminum, power supplies, ballasts and lamps.
In particular, we buy most of our specialty reflective aluminum from a single supplier and we
also purchase most of our ballast and lamp components from a single supplier. Purchases of components
from our current primary ballast and lamp supplier constituted 14% and 26% of
our cost of revenue in fiscal 2006 and fiscal 2007, respectively. If these components become unavailable, or our relationships with
suppliers become strained, particularly as relates to our primary
suppliers, our results of operations and financial condition could be materially adversely affected.
We experienced component quality problems related to certain suppliers in the past, and our current
suppliers may not deliver satisfactory components in the future.
In fiscal 2003 through fiscal 2005, we experienced higher than normal failure rates with certain
components purchased from two suppliers. These quality issues led to
an
increase in warranty claims from our customers and we recorded warranty
expenses of approximately $0.1 million and $0.7 million in
fiscal 2005 and 2006, respectively. We may experience quality problems with suppliers in the future, which could
decrease our gross margin and profitability, lengthen our sales cycles, adversely affect our
customer relations and future sales prospects and subject our
business to negative publicity. Additionally, we sometimes satisfy
warranty claims even if they are not covered by our general warranty
policy as a customer accommodation. If we were to experience
quality problems with the ballasts or lamps purchased from our primary ballast and lamp supplier,
these adverse consequences could be magnified, and our results of
operations and financial condition could be materially
adversely affected.
We
depend upon a limited number of customers in any given period to
generate a substantial portion of our revenue.
We
do not have long-term contracts with our customers, and our dependence on individual key customers can vary from period to period as a result of the
significant size of some of our retrofit and multi-facility roll-out projects. Our top 10
customers accounted for approximately 39%, 27%, and 35%, respectively, of our revenue in fiscal
2007, 2006 and 2005, and 55% and 42%, respectively, of our fiscal 2008 and 2007 first quarter
revenue. No single customer accounted for more than 9% of our revenue in any of such fiscal years,
although one customer accounted for approximately 20% of our fiscal 2008 first quarter revenue. We
expect large retrofit and roll-out projects to become a greater component of our revenue in the
near term. As a result, we may experience more customer concentration in any given future period. The loss of, or
substantial reduction in sales to, any of our significant customers could have a material adverse
effect on our results of operations in any given future period.
Product
liability claims could adversely affect our business, results of
operations and financial condition.
We face exposure to product liability claims in the event that our energy management products fail
to perform as expected or cause bodily injury or property damage. Since the majority of our
products use electricity, it is possible that our products could result in injury, whether by
product malfunctions, defects, improper installation or other causes.
Particularly because our products often incorporate new technologies or
designs, we cannot predict whether or not product liability claims will be brought against us in
the future or result in negative publicity about our business or
adversely affect our customer relations. Moreover, we may not have adequate
resources in the event of a successful claim against us. A successful product
liability claim against us that is not covered by insurance or is in excess of our available
insurance limits could require us to make significant payments of damages and could materially
adversely affect our results of operations and financial condition.
We depend on our ability to develop new products and services.
The market for our products and services is characterized by rapid market and technological
changes, uncertain product life cycles, changes in customer demands and evolving government,
industry and utility standards and regulations. As a result, our future success will depend, in
part, on our ability to continue to design and manufacture new products and services. We may not be
able to successfully develop and market new products or services that keep pace
with technological or industry changes, satisfy changes in customer demands or comply with present
or emerging government and industry regulations and technology standards.
We may pursue acquisitions and investments in new product lines, businesses or technologies that
involve numerous risks, which could disrupt our business or adversely
affect our financial condition and
results of operations.
In the future, we may make acquisitions of, or investments in, new product lines, businesses or
technologies to expand our current capabilities. We have limited experience in making such
acquisitions or investments. Acquisitions present a number of potential risks and challenges that
could disrupt our business operations, increase our operating costs
or capital expenditure requirements and reduce the value of the
acquired product line, business or technology. For example, if we identify an acquisition
candidate, we may not be able to successfully negotiate or finance the acquisition on favorable
terms. The process of negotiating acquisitions and integrating acquired products, services,
technologies, personnel, or businesses might result in significant
transaction costs, operating difficulties or unexpected expenditures, and
might require significant management attention that would otherwise be available for ongoing
development of our business. If we
are successful in consummating an acquisition, we may not be able to integrate the acquired product
line, business or technology into our existing business and products, and we may not achieve the
anticipated benefits of any acquisition. Furthermore, potential acquisitions and investments may
divert our management’s attention, require considerable cash outlays and require substantial
additional expenses that could harm our existing operations and adversely affect our financial
condition and results of operations. To complete future acquisitions, we may issue equity
securities, incur debt, assume contingent liabilities or incur amortization expenses and write-downs
of acquired assets, which could dilute the interests of our shareholders or adversely affect our
profitability.
Our inability to protect our intellectual property, or our involvement in damaging and disruptive
intellectual property litigation, could adversely affect our
business, results of operations and financial condition or
result in the loss of use of the product or service.
We attempt to protect our intellectual property rights through a combination of patent, trademark,
copyright and trade secret laws, as well as third-party nondisclosure and assignment agreements.
Our failure to obtain or maintain adequate protection of our intellectual property rights for any
reason could have a material adverse effect on our business, results of operations and financial
condition.
We own United States patents and patent applications for some of our products, systems, business
methods and technologies. We offer no assurance about the degree of protection which existing or
future patents may afford us. Likewise, we offer no assurance that our patent applications will
result in issued patents, that our patents will be upheld if challenged, that competitors will not
develop similar or superior business methods or products outside the protection of our patents,
that competitors will not infringe our patents, or that we will have adequate resources to enforce
our patents. Because some patent applications are maintained in secrecy for a period of time, we
could adopt a technology without knowledge of a pending patent application, and such technology
could infringe a third party patent.
We also rely on unpatented proprietary technology. It is possible that others will independently
develop the same or similar technology or otherwise learn of our unpatented technology. To protect
our trade secrets and other proprietary information, we generally require employees, consultants, advisors
and collaborators to enter into confidentiality agreements. We cannot assure you that these
agreements will provide meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. If we are unable to maintain the proprietary
nature of our technologies, our business could be materially adversely affected.
We rely on our trademarks, trade names, and brand names to distinguish our company and our products
and services from our competitors.
Some of
our trademarks may conflict with trademarks of other companies. Failure to obtain trademark registrations could
limit our ability to protect our trademarks and impede our sales and marketing efforts. Further,
we cannot assure you that competitors will not infringe our trademarks, or that we will have
adequate resources to enforce our trademarks.
In
addition, third parties may bring infringement and other claims that could be
time-consuming and expensive to defend. In addition, parties making infringement and
other claims may be able to obtain injunctive or other equitable relief that could effectively
block our ability to provide our products, services or business methods and could cause us to pay
substantial damages. In the event of a successful claim of infringement, we may need to obtain one
or more licenses from third parties, which may not be available at a reasonable cost, or at all.
It is possible that our intellectual property rights may not be valid or that we may infringe
existing or future proprietary rights of others. Any successful infringement claims could subject
us to significant liabilities, require us to seek licenses on unfavorable terms, prevent us from
manufacturing or selling products, services and business methods and require us to redesign or, in
the case of trademark claims, rebrand our company or products, any of which could have a material
adverse effect on our business, financial condition or results of operations.
Some of the intellectual property we use in our business is owned by our chief executive officer.
Companies that develop technology generally require employees involved in research and development
efforts to execute agreements acknowledging that the company owns the intellectual property
developed by such employee within the scope of his or her employment and, if necessary, also
assigning to the company such intellectual property. We generally enter into these types of agreements with
all of our employees, except our president and chief executive
officer, Neal R. Verfuerth. Under Mr.
Verfuerth’s employment agreement, all intellectual property (which includes all writings, documents,
inventions, ideas, techniques, research, processes, procedures, designs, products, and marketing
and business plans and all know-how, data and rights relating to such items, whether or not
copyrightable or patentable) that Mr. Verfuerth makes, conceives, discovers or develops at any time
during the term of his employment is the property of Mr. Verfuerth. For a further discussion of Mr. Verfuerth’s employment agreement, see “Executive Compensation — Compensation Discussion and Analysis — Retirement and Other Benefits.”
We have the option to acquire
any such intellectual property work product from Mr. Verfuerth.
To date, we have acquired all
rights, title and interest in and to all patents and patent
applications (and the patents that may issue therefrom) on which
Mr. Verfuerth is named as one of the inventors, but have not
exercised our option with respect to any other intellectual property
that is subject to his employment agreement.
If
Mr. Verfuerth leaves our company, we would not own, or have the
right to acquire, any of the intellectual property created
by him unless we had previously exercised our option to acquire such
intellectual property. The ownership, use and enforcement of
such intellectual property may be necessary for, or desirable in the
continued operation of, our
business. If Mr. Verfuerth leaves our company, we may not be able to obtain sufficient rights to
own, use or enforce such intellectual property, and if we are able to obtain such rights, we may be
required to accept unfavorable terms. Even if we are able to obtain rights in such intellectual
property, we could be required to pay substantial fees, and we may not be able to prevent our
competitors from using such intellectual property. If we are unable to obtain sufficient rights in
such intellectual property, we may have to cease offering certain products or otherwise have to
change our business processes or strategies. Any of these events could have a material
adverse effect on our results of operations or financial condition.
If the price of electricity decreases, there may be less demand for our products and services.
Demand for
our products and services is highly dependent on the continued high cost of electricity. Increased
competition in wholesale and retail electricity markets has resulted in greater price competition
in those markets. If the price of electricity decreases, either regionally or nationally, then
there may be less demand for our products and services, which could impact our
ability to grow our business or increase or maintain our revenue or
profitability and our results of operations could be materially
adversely affected.
We
may face additional competition if government subsidies and utility incentives for renewable energy
increase or if such sources of energy are mandated.
Several
states have adopted a variety of government subsidies and utility incentives to allow renewable
energy sources, such as biofuels, wind and solar energy, to compete with currently less
expensive conventional sources of energy, such as fossil fuels.
We may face additional competition from providers of renewable energy sources if
government subsidies and utility incentives for those sources of energy increase or if such sources of
energy are mandated. Additionally, the availability of subsidies and other incentives from utilities
or government agencies to install alternative renewable energy sources may negatively impact our
customers’ desire to purchase our products and services, or may be utilized by our existing or new
competitors to develop a competing business model or products or services that may be potentially
more attractive to customers than ours, any of which could have a material
adverse effect on our results of operations or financial condition.
If our information technology systems fail, or if we experience an interruption in their operation,
then our business, financial condition and results of operations
could be materially adversely affected.
The efficient operation of our business is dependent on our information technology systems. We
rely on those systems generally to manage the day-to-day operation of our business, manage
relationships with our customers, maintain our research and development data and maintain our
financial and accounting records. The failure of our information technology systems, our inability
to successfully maintain and enhance our information technology systems, or any compromise of the
integrity or security of the data we generate from our information
technology systems, could adversely affect
our results of operations, disrupt our business and product development and make us unable, or
severely limit our ability, to respond to customer demands. In addition, our information
technology systems are vulnerable to damage or interruption from:
•
earthquake, fire, flood and other natural disasters;
computer systems, Internet, telecommunications or data network failure.
Any interruption of our information technology systems could result in decreased revenue, increased
expenses, increased capital expenditures, customer dissatisfaction and potential lawsuits, any of
which could have a material adverse effect on our results of operations or financial condition.
We own and operate an industrial property that we purchased in 2004 and, if any environmental
contamination is discovered, we could be responsible for remediation of the property.
We own our manufacturing and distribution facility
located at an industrial site. We purchased this property from an adjacent aluminum rolling mill and cookware
manufacturing facility in 2004. As part of the transaction to purchase this facility, we agreed to
hold the seller harmless from most claims for environmental remediation or contamination.
Accordingly, if environmental contamination is discovered at our facility and we are required to
remediate the property, our recourse against the prior owners may be limited. Any such potential
remediation could be costly and could adversely affect our results of operations or financial
condition.
The cost of compliance with environmental laws
and regulations and any related environmental liabilities
could adversely affect our results of operations or financial
condition.
Our operations are subject to federal, state, and local laws and regulations governing, among other
things, emissions to air, discharge to water, the remediation of contaminated properties and the
generation, handling, storage, transportation, treatment and disposal of, and exposure to, waste
and other materials, as well as laws and regulations relating to occupational health and safety.
These laws and regulations frequently change, and the violation of these laws or regulations can lead to substantial
fines, penalties and other liabilities. The operation of our
manufacturing facility entails risks in
these areas and there can be no assurance that we will not incur material costs or liabilities in
the future which could adversely affect our results of operations or financial
condition.
Our retrofitting process frequently involves responsibility for the removal and disposal of
components containing hazardous materials.
When we retrofit a customer’s facility, we typically assume
responsibility for removing and disposing of its existing lighting fixtures. Certain components of these fixtures
typically contain trace amounts of mercury and other hazardous materials. Older components may
also contain trace amounts of polychlorinated biphenyls, or PCBs. We
currently rely on contractors to remove the components containing
such hazardous materials at the customer job site. The contractors
then arrange for the disposal of such components at a licensed
disposal facility. Failure by such contractors to remove or dispose of the components
containing these hazardous materials in a safe, effective and lawful manner could give rise
to liability for us, or could expose our workers or other persons to these hazardous materials, which could
result in claims against us.
If we are unable to manage our anticipated revenue growth effectively, our operations,
profitability and liquidity could be adversely affected.
We intend to undertake a number of
strategies in an effort to grow our revenue. If we are successful,
our revenue growth may place significant strain on our limited
resources. To properly manage any future
revenue growth, we must continue to improve our management, operational, administrative,
accounting and financial reporting systems and expand, train and manage our employee base, which
may
involve significant expenditures and increased operating costs. Due
to our limited resources and experience,
we may not be able to effectively manage the expansion of our operations or recruit and adequately
train additional qualified personnel. If we are unable to manage our anticipated revenue growth
effectively, the quality of our customer care may suffer, we may experience customer
dissatisfaction, reduced future revenue or increased warranty claims, and our expenses could
substantially and disproportionately increase. Any of these circumstances could adversely affect
our results of operations.
If we are unable to obtain additional capital as needed in the future, our ability to grow our
revenue could be limited and we may be unable to pursue our current and future business strategies.
Our future capital requirements will depend on many factors, including the rate of our revenue growth, our
introduction of new products and services and enhancements to existing products and services, and
our expansion of sales, marketing and product development activities. In addition, we may consider
acquisitions of product lines, businesses or technologies in an attempt to grow our business, which
could require significant capital and could increase our capital expenditures related to future
operation of the acquired business or technology.
We may not be able to obtain additional financing on terms favorable to us, if at all, and, as a result, we may be unable to expand our business or continue to pursue our current and
future business strategies. Additionally, if we raise
funds through debt financing, we may become subject to additional
covenant restrictions and incur increased
interest expense and principal payments. If we raise additional funds
through further issuances of equity or securities convertible into equity, our existing
shareholders could suffer significant dilution, and any new securities we issue could have
rights, preferences and privileges superior to those of holders of our common stock.
We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the
expectations of market analysts or investors, the market price of our common stock could decline
substantially, and we could become subject to securities litigation.
Our quarterly revenue and operating results have fluctuated in the past and will likely vary from
quarter to quarter in the future. You should not rely upon the results of one quarter as an
indication of our future performance. Our revenue and operating results may fall below the
expectations of market analysts or investors in some future quarter or quarters. Our failure to
meet these expectations could cause the market price of our common stock to decline substantially.
If the price of our common stock is volatile or falls significantly below our initial public
offering price, we may be the target of securities litigation. If we become involved in this type
of litigation, regardless of the outcome, we could incur substantial legal costs, management’s
attention could be diverted from the operation of our business, and our reputation could be
damaged, which could adversely affect our business, results of operations or financial condition.
Our ability to use our net operating loss carryforwards may be subject to limitation.
As of March 31, 2007, we had aggregate federal and state net operating loss carryforwards of approximately
$5.1 million. Generally, a change of more than 50% in the ownership of a company’s stock, by
value, over a three-year period constitutes an ownership change for federal income
tax purposes. An ownership change may limit a company’s ability to use its net operating loss
carryforwards attributable to the period prior to such change. Past issuances and transfers of our
stock may have been sufficient to qualify as an ownership change for this
purpose. As a result, if we continue to
earn taxable income, our ability to use our net operating loss carryforwards attributable to the
period prior to any such ownership change to offset taxable income may be or become subject to
limitations, which could potentially result in increased future tax liability for us.
Risks Relating to this Offering and Our Common Stock
Because there is no existing market for our common stock, our initial public offering price may not
be indicative of the market price of our common stock after this offering, which may decrease
significantly.
There is currently no public market for our common stock, and an active trading market may not
develop or be sustained after this offering. Our initial public offering price has been determined
through negotiation between us and the underwriters and may not be indicative of the market price
for our common stock after this offering. We cannot predict the extent to which investor interest
in our company will lead to the development of an active trading market on the Nasdaq Global Market
or otherwise. The lack of an active market may reduce the value of your shares and impair your
ability to sell your shares at the time or price at which you wish to sell them. An inactive
market may also impair our ability to raise capital by selling our common stock and may impair our ability to acquire or invest in other companies, products or
technologies by using our common stock as consideration.
The market price of our common stock could fluctuate significantly as a result of a number of
factors, including:
•
fluctuations in our financial performance;
•
economic and stock market conditions generally and specifically as they may impact
us, participants in our industry or comparable companies;
•
changes in financial estimates and recommendations by securities analysts following
our common stock or comparable companies;
•
earnings and other announcements by, and changes in market evaluations of, us,
participants in our industry or comparable companies;
•
changes in business or regulatory conditions affecting us, participants in our industry
or comparable companies;
•
changes in accounting standards, policies, guidance, interpretations or principles;
•
announcements or implementation by our competitors or us of acquisitions,
technological innovations or new products, or other strategic actions by our
competitors; or
•
trading volume of our common stock or the sale of stock by
our management team, directors or principal shareholders.
Purchasers of our common stock will experience immediate and substantial dilution.
Purchasers of our common stock in this offering will experience immediate and substantial
dilution. Investors purchasing common stock in this offering will contribute approximately %
of the total amount invested by shareholders since our
inception, but will only own approximately % of the shares of common stock outstanding upon the
closing of this offering. In addition, following this offering, we will have a significant number
of outstanding warrants and options to purchase our common stock having exercise prices
significantly below the initial public offering price of our common stock. See “Shares Eligible
for Future Sale.” You will incur further dilution to the extent outstanding warrants or options to
purchase common stock are exercised.
In addition, we expect that our amended and restated articles of incorporation that will be in
effect upon closing of this offering will allow us to issue significant numbers of additional
shares, including “blank check” preferred stock. Upon the
closing of this offering, we will also have the authority to issue a
substantial number of additional shares of our common stock under our
existing compensation plans. Issuance of such
additional shares could result in further dilution to purchasers of our common stock in
this offering and cause the market price of our common stock to decline. See “Dilution.”
The market price of our common stock could be adversely affected by future sales of our common
stock in the public market.
Sales of a substantial number of shares of our common stock in the public market following this
offering, or the perception that such sales might occur, could cause
a decline in the market price of our
common stock or could impair our ability to obtain capital through a subsequent offering of our
equity securities or securities convertible into equity securities. Under our amended and restated
articles of incorporation that will be in effect upon closing of this offering, we are authorized
to issue up to 200 million shares of common stock, of which shares of common stock will
be outstanding upon the closing of this offering. Of these shares, the shares of common stock sold
in this offering will be freely transferable without restriction or further registration under the
Securities Act of 1933, or the Securities Act, by persons other than
our “affiliates,” as that term is defined in Rule 144 under the
Securities Act. In addition, shares of common stock will become freely tradable
after the termination of the 180-day lock-up agreements described below, including
shares of common stock that may be acquired upon the exercise of outstanding options and warrants.
shares of common stock, as well as shares of common stock
that may be acquired upon the exercise of outstanding options and warrants, are not subject to the
lock-up agreements and are currently freely tradable. See “Shares Eligible for Future Sale.”
We, our executive officers, directors and shareholders representing approximately % of our
fully-diluted common stock (including shares issuable upon conversion of our preferred stock and
the Convertible Notes and upon exercise of outstanding warrants and stock options) have entered
into lock-up agreements described under the caption
“Underwriting,” pursuant to which we and they have
agreed, subject to certain exceptions and extensions, not to offer,
sell, issue, contract to sell, pledge
or otherwise dispose of, directly or indirectly, any shares of our
common stock, any securities
convertible into or exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of ownership of our common
stock or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to
enter into any such transaction, swap, hedge or other arrangement for a period of 180 days from the
date of this prospectus or, subject to certain exceptions and
extensions, to make any demand or exercise any
registration rights during such period with respect to such shares. However, after the lock-up
period expires, or if the lock-up restrictions are waived by Thomas Weisel Partners LLC, such
persons will be able to sell their shares and exercise registration rights to cause them to be
registered. We cannot predict the size of future issuances of our common stock or the effect, if
any, that future sales and issuances of shares of our common stock, or the perception of such sales
or issuances, would have on the market price of our common stock. See “Shares Eligible for Future
Sale.” After the lock-up period expires, or if the lock-up restrictions are waived by Thomas
Weisel Partners LLC, certain of our shareholders will be able to cause us to register common stock
that they own under the Securities Act pursuant to registration rights that are described in
“Description of our Capital Stock — Registration
Rights.”
We also intend to register all shares of common stock relating to
awards that we have granted or may
grant under our outstanding equity incentive compensation plans as in
effect on the date of this prospectus. See “Shares Eligible for
Future Sale”.
Our failure to maintain adequate internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our
annual or interim consolidated financial statements in the future
could result in inaccurate financial reporting, sanctions or
securities litigation, or could otherwise harm our business.
As a public company, we will be required to comply with the standards adopted by the Public Company
Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, or Sarbanes-Oxley, regarding internal control over financial reporting. We are not currently in
compliance with the requirements of Section 404, and the process of becoming compliant with Section
404 may divert internal resources and will take a significant amount of time and effort to
complete. We may experience higher than anticipated operating expenses, as well as increased
independent auditor fees during the implementation of these changes and thereafter. We are
required to be compliant under Section 404 by the end of fiscal 2009, and at that time our
management will be required to deliver a report that assesses the effectiveness of our internal
control over financial reporting, and we will be required to deliver an attestation report of our
auditors on our management’s assessment of our internal
controls. Completing documentation of our internal control system and financial processes, remediation
of control deficiencies and management testing of internal controls
will require substantial effort by us. We cannot assure you that we
will be able to complete the required management assessment by our
reporting deadline. Failure to implement these changes timely, effectively or efficiently, could harm our operations,
financial reporting or financial results and could result in our being unable to obtain an
unqualified report on internal controls from our independent auditors.
In connection with the audit of our fiscal 2007 consolidated financial statements, our independent
registered public accounting firm identified certain significant deficiencies in our internal
control over financial reporting. These identified significant deficiencies included (i) our lack
of segregation of certain key duties; (ii) our policies, procedures, documentation and reporting of
our equity transactions; (iii) our lack of certain documented accounting policies and procedures to
clearly communicate the standards of how transactions should be recorded or handled; (iv) our
controls in the area of information technology, especially regarding change control and restricted
access; (v) our lack of a formal disaster recovery plan; (vi) our need for enhanced restrictions on
user access to certain of our software programs; (vii) the necessity for us to implement an
enhanced project tracking/deferred revenue accounting system to recognize the complexities of our
business processes and, ultimately, the recognition of revenue and deferred revenue; (viii) our
lack of a process for determining whether a lease should be accounted for as a capital or operating
lease; (ix) our need for a formalized action plan to understand all of our existing tax liabilities
(and opportunities) and properly account for them; and (x) our need for improved financial
statement closing and reporting processes. A number of these significant deficiencies identified
in connection with the audit of our fiscal 2007 consolidated financial statements were previously
identified as material weaknesses or significant deficiencies in connection with the audit of our
fiscal 2006 and 2005 consolidated financial statements. We may not be able to remediate these
significant deficiencies in a timely manner, which may subject us to sanctions or investigation by
regulatory authorities, including the Securities and Exchange
Commission, or SEC, or the Nasdaq Global Market, and cause investors to lose
confidence in our financial information, which in turn could cause the market price of our common
stock to significantly decrease. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Internal Control over Financial Reporting.”
In addition, in connection with preparing the registration statement of which this prospectus
is a part, we identified certain errors in our prior year consolidated financial statements. These
errors related to accounting for the induced conversion of our Series A preferred stock in fiscal
2005 and fiscal 2007 and for the exercise of a stock option through the issuance of a full recourse
promissory note in fiscal 2006 that we subsequently determined was issued at a below market interest rate. These errors resulted in
the restatement of our previously issued fiscal 2006 and 2007 consolidated financial statements.
If we are unable to maintain effective control over financial reporting, such conclusion would be
disclosed in our Annual Report on Form 10-K for the year ending March 31, 2009. In the future, we
may identify material weaknesses and significant deficiencies which we may not be able to remediate in a timely
manner. If we fail to maintain effective internal control over financial reporting in accordance
with Section 404, we will not be able to conclude that we have and maintain effective internal
control over financial reporting or our independent registered accounting firm may not be able to
issue an unqualified report on the effectiveness of our internal control over financial reporting.
As a result, our ability to report our financial results on a timely and accurate basis may be
adversely affected, we may be subject to sanctions or investigation by regulatory authorities,
including the SEC or the Nasdaq Global Market, and investors may lose confidence in our financial
information, which in turn could cause the market price of our common stock to significantly
decrease. We may also be required to restate our financial statements from prior periods.
We may pursue opportunities for future institutional investment, which could result in additional
dilution to investors in this offering.
We may conduct discussions and negotiations with one or more institutional investors to invest in
our company. Institutional investors may purchase different classes of securities and negotiate
terms that differ from those provided to individual investors, such as favorable dividend,
conversion and/or redemption rights, the right to attend board meetings or to receive additional
information, favorable share prices, or anti-dilution clauses. We may decide to issue preferred
stock or convertible debt or other securities to institutional investors and the terms of an institutional
investment may be different from, or more favorable than, those provided in this offering. Any
such investment made on more favorable pricing terms could initially result in additional dilution
to investors in this offering. See
“Dilution.”
We have no plans to pay dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not anticipate paying any
cash dividends on our common stock in the foreseeable future. We currently intend to retain future
earnings, if any, to finance our operations. Our future dividend policy is within the discretion of
our board of directors and will depend upon various factors, including our business, financial
condition, results of operations, capital requirements, investment opportunities and credit
agreement restrictions. Further, after closing of
this offering, the terms of our current revolving
credit facility and our bank term loan and mortgage preclude us, and the terms of agreements
covering any future indebtedness may preclude us, from paying dividends.
Anti-takeover provisions included in the Wisconsin Business Corporation Law and provisions in our
amended and restated articles of incorporation or bylaws could delay or prevent a change of control of our company,
which could adversely impact the value of our common stock and may prevent or frustrate attempts by
our shareholders to replace or remove our current board of directors or management.
A change of control of our company may be discouraged, delayed or prevented by Sections 180.1140 to
180.1144 of the Wisconsin Business Corporation Law. These provisions generally restrict a broad
range of business combinations between a Wisconsin corporation and a shareholder owning 15% or more
of our outstanding voting stock. These and other provisions in our amended and restated articles
of incorporation that will be in effect upon closing of this offering, including our staggered
board of directors and our ability to issue “blank check” preferred stock, as well as the
provisions of our amended and restated bylaws and Wisconsin law, could make it more difficult for
shareholders or potential acquirors to obtain control of our board of directors or initiate actions
that are opposed by the then-current board of directors, including to delay or impede a merger,
tender offer or proxy contest involving our company. See “Description of Capital Stock.” In
addition, our employment arrangements that will be in effect upon
closing of this offering with senior management provide for severance payments and
accelerated vesting of benefits, including accelerated vesting of stock and options, upon a change
of control. This offering will not constitute a change of control under such agreements. These
provisions may discourage or prevent a change of control.
Our management will have broad
discretion in allocating the net proceeds of this offering.
We expect to use the net proceeds from
this offering for working capital and general corporate
purposes, including for potential future acquisitions. Consequently, our management will have
broad discretion in allocating the net proceeds of this offering. See “Use of Proceeds.” You may
not agree with such uses and our use of the proceeds from this offering may not yield a significant
return or any return at all for our shareholders. The failure by our management to apply these
funds effectively could have a material adverse effect on our business, results of operations or
financial condition.
The requirements of being a public
company, including compliance with the reporting requirements of
the Securities Exchange Act of 1934 and the Nasdaq Global Market, will require greater resources,
increase our costs and distract our management, and we may be unable to comply with these
requirements in a timely or cost-effective manner.
As a public company with equity securities
expected to be listed on the Nasdaq Global Market, we
will need to comply with statutes and regulations of the SEC, including the reporting requirements
of the Securities Exchange Act of 1934, or Exchange Act, and requirements of the Nasdaq Global
Market, with which we were not required to comply prior to the
closing of this offering. Complying with these
statutes, regulations and requirements will occupy a significant amount of the time of our board of
directors and management and will substantially increase our costs
and expenses. Our management team has no experience managing a public
company. We also expect to
incur substantial additional annual costs as a result of becoming a public company due to the
anticipated increased legal, accounting, compliance and related costs. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Components of Revenue
and Expenses – Operating Expenses.”
Also, as a public company we will need to:
•
institute a comprehensive compliance function;
•
prepare and distribute periodic and current public reports in compliance with our
obligations under the federal securities laws;
•
establish new internal policies, such as those relating to
internal controls over financial reporting, disclosure controls and
procedures and insider trading;
•
maintain appropriate committees of our board of directors;
•
prepare public reports of our audit and finance committee and our compensation committee;
•
involve and retain to a greater degree outside counsel and accountants in the above
activities; and
•
establish and maintain an investor relations function, including the provision of
certain information on our website.
These factors could make it more
difficult for us to attract and retain qualified members of our
board of directors, particularly to serve on our audit and finance committee and our compensation
committee.
Insiders will continue to have substantial control over us after this offering, which could delay
or prevent a change of corporate control or result in the entrenchment of management and/or the
board of directors.
After this offering, our directors, executive officers and principal shareholders, together with
their affiliates and related persons, will beneficially own, in the aggregate, approximately % of
our outstanding common stock. As a result, these shareholders,
if acting together, will have substantial influence over the outcome of matters submitted to our
shareholders for approval, including the election and removal of directors and any merger,
consolidation, or sale of all or substantially all of our assets. In addition, these persons, if
acting together, will have the ability to substantially influence the management and affairs of our
company. Accordingly, this concentration of ownership may harm the market price of our common stock
by, among other things:
•
delaying, deferring, or preventing a change of control, even at a per share
price that is in excess of the then current price of our common stock;
•
impeding a merger, consolidation, takeover, or other business combination
involving us, even at a per share price that is in excess of the then current price of our common stock; or
•
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, even at a per share price that is in excess of
the then current price of our common stock.
In addition, Wisconsin corporate law limits the protection afforded minority shareholders, and we
have not enacted provisions that may be beneficial to minority shareholders, such as cumulative
voting, preemptive rights or majority voting for directors.
This prospectus includes forward-looking statements that are based on our beliefs and
assumptions and on information currently available to us. The forward-looking statements are
contained principally in the sections entitled “Prospectus Summary,”“Risk Factors,”“Use of
Proceeds,”“Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and “Business.” When used in this prospectus, the words “anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“potential,”“predict,”“project,”“should,”“will,”“would,” and similar expressions identify forward-looking statements. Although we believe that our
plans, intentions, and expectations reflected in any forward-looking statements are reasonable,
these plans, intentions, or expectations are based on assumptions, are subject to risks and
uncertainties and may not be achieved. These statements are based on assumptions made by us based
on our experience and perception of historical trends, current conditions, expected future
developments and other factors that we believe are appropriate in the circumstances. Such
statements are subject to a number of risks and uncertainties, many of which are beyond our
control. Our actual results, performance or achievements could differ materially from those
contemplated, expressed, or implied, by the forward-looking statements contained in this
prospectus. Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this prospectus, including under the heading “Risk
Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our beliefs and assumptions only as of the
date of this prospectus. All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements set forth in this
prospectus. These forward-looking statements include, among other things, statements relating to:
•
our estimates regarding our future revenue, cost of revenue, gross margin,
expenses, capital requirements, liquidity and borrowing capacity and our needs for additional financing;
•
our estimates of market sizes and anticipated uses of and benefits from our
products and services;
•
our ability to market and achieve market acceptance for our products and services;
•
our anticipated use of the net proceeds of this offering and of our Convertible
Notes placement;
•
our business strategy and our underlying assumptions about
trends in our industry and about market data, including the relative demand for
and cost of energy;
•
our ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of others; and
•
management’s goals, expectations and objectives and other similar expressions
concerning matters that are not historical facts.
Actual events, results and outcomes may differ materially from our expectations due to a
variety of factors. Although it is not possible to identify all of these factors, they include,
among others, the following:
•
our limited operating history;
•
our ability to compete in a highly competitive market;
•
our ability to respond successfully to market competition;
the market acceptance of our products and services;
•
our dependence on our customers’ capital budgets to generate
sales of our products and services;
•
price fluctuations, shortages or interruptions of component
supplies and raw
materials used to manufacture our products;
•
loss of one or more key customers;
•
delivery of satisfactory components by our current suppliers;
•
loss of one or more key suppliers;
•
warranty and product liability claims;
•
our ability to develop new products and services;
•
the success of potential acquisitions or investments in new
product lines;
•
our ability to protect our intellectual property or to respond to any
intellectual property litigation brought by others;
•
exercising our option to acquire intellectual property
rights owned by our chief executive officer;
•
reduction in the price of electricity;
•
the cost to comply with, and the effects of, any current and
future government regulations, laws and policies;
•
increased competition from government subsidiaries and
utility incentive programs;
•
the failure of our information technology systems;
•
the discovery of environmental contamination at our
manufacturing facility or the expenses and responsibility associated
with disposal of hazardous materials;
•
our ability to effectively manage our anticipated growth;
•
our ability to obtain additional capital;
•
fluctuations in our quarterly results;
•
our ability to use our net operating losses;
•
the costs associated with being a public company and our ability to comply with
the internal control and financial reporting obligations of the SEC
and Sarbanes-Oxley; and
•
other factors discussed in more detail under “Risk Factors.”
You
are urged to carefully consider these factors and the other factors described under “Risk Factors”
when evaluating any forward-looking statements and you should not place undue
reliance on these forward-looking statements.
Except
as required by applicable law, we assume no obligation to update any forward-looking
statements publicly or to update the reasons why actual results could differ materially from those
anticipated in any forward-looking statements, even if new information becomes available in the
future.
We
estimate that the net proceeds to us from this offering, assuming an initial public offering price of $ per share (the
midpoint of the range set forth on the cover page of this
prospectus), will be approximately $ million ($ million if the
underwriters’ over-allotment option is exercised in full), after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us. We will not receive any
proceeds from the sale of shares by the selling shareholders.
A 10% change in the number of shares of common stock sold by us in this offering would result
in a change in our net proceeds of $ million, assuming an initial public
offering price of $ per share (the midpoint of the range
set forth on the cover page of this prospectus). A $1.00 increase (decrease) in the assumed
initial public offering price of $ per share would increase (decrease) the net proceeds
to us from this offering by $ million, after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us (assuming the number of shares
offered by us, as set forth on the cover page of this prospectus, remains the same).
We intend to use the net proceeds
for working capital and general corporate purposes, including to fund increased sales and marketing
expenses, as well as for potential future acquisitions. As of the date of this prospectus, we have
not entered into any agreements, understandings or commitments with respect to any acquisitions.
We will have broad discretion in the way that we use the net proceeds of this offering. The
amounts that we actually spend for the purposes described above may vary significantly and will
depend, in part, on the timing and amount of our future revenue, our
future expenses and any potential acquisitions that we may pursue. Pending the
final application of the net proceeds of this offering as described above, we intend to invest the net
proceeds of this offering in short-term, interest-bearing,
investment-grade securities. See “Risk Factors – Risks
Related to Our Business — Our
management team will have broad discretion in allocating the net
proceeds of this offering.”
DIVIDEND POLICY
We have never paid or declared cash dividends on our common stock. We currently intend to
retain all available funds and any future earnings to fund the development and expansion of our
business. Any future determination to pay dividends will be at the discretion of our board of
directors and will depend upon various factors, including our results of operations, financial
condition, capital requirements, investment opportunities, and other factors that our board of
directors deems relevant. After the closing of this offering, the terms of our current revolving credit
facility and our bank term loan and mortgage preclude us, and the terms of any agreements
governing any future indebtedness may preclude us, from paying dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources — Indebtedness.”
The following table sets forth our cash and cash equivalents and capitalization as of June 30,2007:
•
on an actual basis;
•
on a pro forma basis to give effect to (i) the issuance of the Convertible Notes
and the application of the gross proceeds therefrom to cash and cash equivalents and
(ii) the repayment of approximately $2.1 million in aggregate principal amount of
shareholder notes with $0.8 million in cash and 306,932 shares
of common stock (see
“Related Party Transactions” and “Executive Compensation — Compensation Discussion and Analysis — Long-Term Equity
Compensation”); and
•
on a pro forma as adjusted basis to give effect to the pro
forma adjustments above, as well as (i) the automatic conversion
of the Convertible Notes into 2,360,802 shares of
our common stock; (ii) the automatic conversion of 4,808,012 shares of our
outstanding preferred stock into common stock on a one-for-one basis; and (iii) the receipt of estimated net proceeds of $
million from our sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share (the midpoint of
the range set forth on the cover of this
prospectus), less the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
A 10% change in the number of shares of common stock sold by us in this offering would result
in a change in our net proceeds of $ million, assuming an initial public
offering price of $ per share (the midpoint of the range
set forth on the cover page of this prospectus), which would result in an equal change to each of
cash and cash equivalents, total temporary equity and shareholders’ equity and total
capitalization. A $1.00 increase (decrease) in the initial public offering price would change each
of the cash and cash equivalents, total temporary equity and shareholders’ equity, and total
capitalization line items by approximately $ million, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable by us (assuming the
number of shares offered by us, as set forth on the cover page of this prospectus, remains the
same).
You should read this table in conjunction with “Use of Proceeds,”“Selected Historical Consolidated
Financial Data,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and the notes
thereto included elsewhere in this prospectus.
(In
thousands, except share and per share data, unaudited)
Cash and cash equivalents
$
696
$
12,046
$
Long-term debt, less current maturities
$
9,998
$
9,998
$
Convertible notes
—
10,600
Temporary equity:
Series C convertible redeemable preferred stock
($0.01 par value 1,818,182 shares
issued and outstanding, actual and pro forma; no
shares issued and outstanding, pro forma as
adjusted)
5,028
5,028
Shareholders’ equity:
Series B
convertible preferred stock ($0.01 par value 2,989,830 shares issued and outstanding,
actual and pro forma; no shares issued and
outstanding, pro forma as adjusted)
5,959
5,959
Common stock (no par value 80,000,000
shares authorized and 12,219,969 shares
outstanding, actual; 80,000,000 shares authorized
and 11,913,037 shares outstanding, pro forma;
200,000,000 shares authorized and shares
outstanding, pro forma as adjusted)
—
—
Additional paid-in capital
9,993
9,993
Treasury stock
(361
)
(1,739
)
Shareholder notes receivable
(2,128
)
—
Accumulated deficit
(3,090
)
(3,090
)
Total temporary equity and shareholders’ equity
15,401
16,151
Total capitalization
$
25,399
$
36,749
$
The shares outstanding data in the preceding table excludes as of June 30, 2007:
•
954,390 shares of common stock issuable upon the exercise of outstanding warrants with a
weighted average exercise price of $2.24 per share;
•
4,712,077 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.57
per share; and
•
646,700 shares of common stock reserved for future issuance under our stock option plans.
If you invest in our common stock, your economic interest will be diluted to the extent of the
difference between the initial public offering price per share of our common stock and the net
tangible book value per share of our common stock immediately after the closing of this offering.
Dilution results from the fact that the initial public offering price
per share of the common stock is
substantially in excess of the book value per share attributable to our existing shareholders for
our presently outstanding stock.
As
of June 30, 2007, our net tangible book value would have been approximately
$15.8 million, or
approximately $0.83 per share of common stock, on a pro forma basis after giving effect to
(i) the issuance of the Convertible Notes and the automatic
conversion of the Convertible Notes into
2,360,802 shares of our common stock; (ii) the repayment of approximately
$2.1 million in aggregate principal amount of shareholder notes with $0.8 million in cash and of
306,932 shares of common stock (see “Related Party
Transactions” and “Executive Compensation —
Compensation Discussion and Analysis — Long-Term Equity Compensation”); and (iii) the automatic conversion of 4,808,012 shares of our
outstanding preferred stock into common stock on a one-for-one basis. Net tangible book value per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of our shares of common stock outstanding.
Our pro forma as adjusted net tangible book value as of June 30, 2007 would have been
approximately $ million, or $ per share, after giving effect to (i) the pro
forma adjustments described above and (ii) the receipt of estimated net proceeds of $
million from our sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share
(the midpoint of the range set forth on the cover page of this prospectus), less the estimated underwriting discounts
and commissions and estimated offering expenses payable by us. This represents an immediate
increase in pro forma as adjusted net tangible book value of $ per share to our
existing shareholders and an immediate dilution of $ per share to new investors
purchasing common stock in this offering.
The following table illustrates this dilution to new investors on a per share basis:
Assumed initial public offering price per share
$
Pro forma net tangible book value as of June 30, 2007
$
0.83
Increase in pro forma net tangible book value per share
attributable to new investors in this offering
$
Pro forma as adjusted net tangible book value after this offering
$
Dilution per share to new investors
$
A 10% change in the number of shares of common stock sold by us in this offering would result
in dilution per share to new investors of $ , assuming an initial public
offering price of $ per share (the midpoint of the range
set forth on the cover page of this prospectus). A $1.00 increase (decrease) in the initial public
offering price would increase (decrease) dilution per share to new investors by approximately $
, after deducting estimated underwriting discounts and commissions and estimated offering
expenses payable by us (assuming the number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same).
The following table summarizes, as of June 30, 2007, the differences between the number of
shares of common stock owned by existing shareholders and to be owned by new public investors, the
aggregate cash consideration paid to us and the average price per share paid by our existing
shareholders and to be paid by new public investors purchasing shares of common stock in this
offering at an
estimated initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus). All information in
the row titled “Existing shareholders” in the following table is presented on a pro forma basis
assuming (i) the conversion of 4,808,012 shares of our outstanding preferred stock into common
stock on a one-for-one basis; (ii) the conversion of the Convertible Notes into 2,360,802 shares of
our common stock; and (iii) the repayment of certain shareholder
notes with 306,932 shares of
common stock (see “Related Party Transactions” and “Executive Compensation — Compensation Discussion and Analysis — Long-Term Equity
Compensation”).
Shares Purchased(1)
Total Consideration
Average Price
Number
Percent
Amount
Percent
Per
Share
Existing shareholders
%
%
$
New public investors
%
%
$
Total
100
%
$
100
%
(1)
The number of shares for existing shareholders includes shares being
sold by the selling shareholders in this offering. The number of shares disclosed for the new
public investors does not include the shares being purchased by the new public investors from the
selling shareholders in this offering.
The discussion and tables above assume no exercise of the 4,712,077 options to purchase shares of common stock at a weighted average exercise price of
$1.57 outstanding
as of June 30, 2007, or the 954,390 warrants to purchase common stock at a
weighted average exercise price of $2.24 outstanding as of June 30, 2007, all of which are “in-the-money” compared to the mid-point
of the range set forth on the cover page of this
prospectus. To the extent any of these options or warrants outstanding as of June 30, 2007 is
exercised, there will be further dilution to new public investors. If all of our options and
warrants outstanding as of June 30, 2007 are exercised, you will experience additional dilution of
$ per share.
If the underwriters exercise their over-allotment option in full, the number of shares of
common stock held by new public investors will increase to approximately shares, or
approximately % of the total number of shares of our common stock to be outstanding upon the
closing of this offering, our existing shareholders would own approximately % of the total
number of shares of our common stock to be outstanding upon the closing this offering, the pro
forma as adjusted net tangible book value per share of common stock would be approximately $
and the dilution in pro forma as adjusted net tangible book value per share of common stock to new
public investors would be $ .
The
following tables set forth our selected historical consolidated
financial data for the periods indicated. We prepared the selected
historical consolidated financial data using our
consolidated financial statements for each of the periods presented.
The selected historical consolidated financial data for each year in
the three-year period ended March 31, 2007 were derived from our
audited historical consolidated financial statements appearing
elsewhere in this prospectus, the selected historical consolidated
financial data for each year in the two-year period ended
March 31, 2004 were derived from our
historical consolidated financial statements not appearing in this
prospectus, and the selected historical consolidated financial data
for the three months ended June 30, 2006 and June 30, 2007
were derived from our
unaudited historical consolidated financial statements appearing elsewhere in this
prospectus. The unaudited historical consolidated financial statements include all adjustments, which, in our opinion, are necessary for a fair presentation of our financial
position and results of operations for these periods. You should read
this selected historical financial data in conjunction with our audited and unaudited
historical consolidated financial statements and related notes, “Prospectus
Summary — Summary Historical Consolidated and Pro Forma
Financial Data and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in
this prospectus. The selected historical consolidated financial data
are not necessarily indicative of future results.
For fiscal 2007 and our fiscal 2008 first quarter, represents the impact
attributable to the accretion of accumulated dividends on our
Series C preferred stock, plus accumulated dividends on our Series A
preferred stock prior to its conversion into common stock on
March 31, 2007. The Series C preferred stock will
convert automatically into common stock on a one-for-one basis upon the closing of this
offering and our obligation to pay accumulated dividends will be
extinguished. For fiscal 2005 and 2006, represents accumulated
dividends on our Series A preferred
stock prior to its conversion into common stock. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Revenue and
Expense Components – Accretion of
Preferred Stock and Preferred Stock Dividends.”
(3)
Represents the estimatedfair market value of the premium paid to
holders of Series A preferred stock upon induced conversion.
See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Revenue and
Expense Components – Conversion of
Preferred Stock.”
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial statements and the notes
thereto included elsewhere in this prospectus. This discussion contains forward-looking statements
that are based on our current expectations, estimates and projections about our business and
operations. 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 may
differ materially from those currently anticipated and expressed in such forward-looking statements
as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere
in this prospectus. You should read “Risk Factors” and “Cautionary Note Regarding Forward-Looking
Statements.”
Overview
We
design, manufacture and implement energy management systems
consisting primarily of high-performance, energy-efficient lighting
systems, controls and related services.
We currently generate the substantial majority of our revenue from sales of high intensity
fluorescent, or HIF, lighting systems and related services to commercial and industrial customers.
We typically sell our HIF lighting systems in replacement of our customers’ existing high intensity
discharge, or HID, fixtures. We call this replacement process a “retrofit.” We frequently
engage our customer’s existing electrical contractor to provide installation and project management
services. We also sell our HIF lighting systems on a wholesale basis, principally to electrical
contractors and value-added resellers to sell to their own customer bases.
We
have sold and installed more than 850,000 of our HIF lighting systems in over 1,800 facilities from
December 1, 2001 through June 30, 2007. We have sold our products to 73 Fortune 500
companies, many of which have installed our HIF lighting systems in multiple facilities.
Our top customers by revenue in fiscal 2007 included General Electric
Co., Kraft Foods Inc., Newell
Rubbermaid Inc., OfficeMax, Inc., SYSCO Corp. and Toyota Motors Corp.
Our fiscal year ends on March 31. We call our fiscal years ended March 31, 2005, 2006 and
2007, “fiscal 2005,”“fiscal 2006” and “fiscal 2007,” respectively. We call our current fiscal
year, which will end on March 31, 2008, “fiscal 2008.” Our fiscal
first quarter ends on June 30, our fiscal second quarter ends on September 30, our fiscal third
quarter ends on December 31 and our fiscal fourth quarter ends on March 31.
Revenue and Expense Components
Revenue.
We sell our energy management products and services directly to commercial and industrial
customers, and indirectly to end users through wholesale sales to electrical contractors and
value-added resellers. We currently generate the substantial majority
of our revenue from sales of HIF lighting systems and related services to commercial and industrial customers.
We
recognize revenue on product only sales at the time of shipment. For
projects consisting of multiple elements of revenue, such as a combination of product sales and
services, we separate the project into separate units of accounting based on their relative fair
values for revenue recognition purposes. Additionally, the deferral of revenue on a delivered
element may be required if such revenue is contingent upon the delivery of the remaining
undelivered elements. We recognize revenue at the time of product
shipment on product sales and
on services completed prior to product shipment. We recognize revenue
associated with services provided after product shipment, based on
their fair
value, when the services are completed and once acceptance has been
received. When other significant obligations or acceptance terms
remain after products are delivered, revenue is recognized only after
such obligations are fulfilled or acceptance by the customer has
occurred. We also
offer our products under a sales program where we finance our
customer’s purchase. The contractual future cash flows and
residual rights to the related equipment are then sold without
recourse to a third
party finance company. We recognize revenue for the net present value of the future payments from
the finance company upon completion of the project. See “— Critical Accounting Policies and
Estimates.”
Our dependence on individual key customers can vary from period to period as a result of the
significant size of some of our retrofit and multi-facility roll-out projects. Our top 10
customers accounted for approximately 35%, 27%, and 39%, respectively, of our revenue in fiscal
2005, 2006 and 2007, and 42% and 55%, respectively, of our fiscal 2007 and 2008 first quarter
revenue. No single customer accounted for more than 9% of our revenue in any of such fiscal
years, although one customer accounted for approximately 20% of our fiscal 2008 first quarter
revenue. As large retrofit and roll-out projects become a greater component of our revenue, we may
experience more customer concentration in given periods. The loss of, or substantial reduction in
sales volume to, any of our significant customers could have a material adverse effect on our
revenue in any given period and may result in significant quarterly revenue variations.
Our level of revenue for any given period is dependent upon a number of factors, including (i)
the demand for our products and systems; (ii) the number and timing of large retrofit and
multi-facility retrofit, or “roll-out,” projects; (iii) the level of our wholesale sales; (iv) our
ability to realize revenue from our services and our shared savings sales program; (v) our
execution of our sales process; (vi) the selling price of our products and services; (vii) changes
in capital investment levels by our customers and prospects; and (viii) customer sales cycles. As
a result, our revenue may be subject to quarterly variations and our revenue for any particular
fiscal quarter may not be indicative of future results. See “— Quarterly Results of
Operations.” We expect our revenue to increase in
fiscal 2008 primarily as we solicit new customers, expand our joint lead generation and sales
initiative with electrical contractors and value-added resellers, expand our sales force and sales locations, roll-out our
products and services to multiple customer locations and attempt to expand implementation of all
aspects of our energy management system for existing national customers.
Cost of Revenue. Our cost of revenue consists of costs for: (i) raw materials, including sheet, coiled and
specialty reflective aluminum; (ii) electrical components, including ballasts, power supplies and
lamps; (iii) wages and related personnel expenses, including stock-based compensation charges, for
our fabricating assembly, logistics and project installation service organizations; (iv)
manufacturing facilities, including depreciation on our manufacturing facilities and equipment,
taxes, insurance and utilities; (v) warranty expenses; (vi) installation and integration; and (vii)
shipping and handling. Our cost of aluminum can be subject to commodity price fluctuations, which
we attempt to mitigate with forward fixed-price, minimum quantity purchase commitments with our
suppliers. We also purchase many of our electrical components through forward purchase contracts.
We buy most of our specialty reflective aluminum from a single supplier, and most of our ballast
and lamp components from a single supplier, although we believe we
could obtain sufficient quantities of these raw materials
and components on a price and quality competitive basis from other suppliers if
necessary. Purchases from our current primary supplier of ballast and lamp
components constituted 14% of our cost of revenue in fiscal 2006 and
26% in fiscal 2007. Our production labor force is non-union
and, as a result, our production labor costs have been relatively stable. We anticipate adding
additional production personnel to support our anticipated increase
in sales volumes, although we are
attempting to achieve efficiencies in our cost of revenue by
implementing more highly systematized
production processes. We are also expanding our network of qualified
installers to realize efficiencies in the installation process.
Gross
Margin. Our gross profit has been and will continue to be, affected by the relative levels of our
revenue and our cost of revenue, and as a result, our gross profit may be subject to quarterly
variation. Our gross profit as a percentage of revenue, or gross margin, is affected by a number
of factors, including: (i) our mix of large retrofit and multi-facility roll-out projects with
national accounts; (ii) the level of our wholesale sales; (iii) our realization rate on our
billable services; (iv) our project pricing; (v) our level of warranty claims; (vi) our level of
utilization of our manufacturing facilities and related absorption of our manufacturing overhead
costs; (vii) our level of efficiencies in our manufacturing operations; and (viii) our level of
efficiencies from our subcontracted installation service providers. As a result, our gross margin
may be subject to quarterly variation.
Operating Expenses. Our operating expenses consist of: (i) general and administrative expenses; (ii) sales and
marketing expenses; and (iii) research and development expenses. Personnel related costs are our
largest operating expense and we expect these costs to increase on an absolute dollar basis in
fiscal 2008 as a result of our planned expansion of our sales force, as well as contemplated
additions to our personnel infrastructure, as we attempt to generate and support additional revenue
growth.
Our general and administrative expenses consist primarily of costs for: (i) salaries and
related personnel expenses, including stock-based compensation charges, related to our executive,
finance, human resource, information technology and operations organizations; (ii) occupancy
expenses; (iii) professional services fees; (iv) technology related costs and amortization; and (v)
corporate-related travel.
Our sales and marketing expenses consist primarily of costs for: (i)
salaries and related personnel expenses, including stock-based compensation charges, related to our
sales and marketing organization; (ii) internal and external sales commissions and bonuses; (iii)
travel, lodging and other out-of-pocket expenses associated with our selling efforts; (iv)
marketing programs; (v) pre-sales costs; and (vi) other related overhead.
Our research and
development expenses consist primarily of costs for: (i) salaries and related personnel expenses,
including stock-based compensation charges, related to our engineering organization; (ii) payments
to consultants; (iii) the design and development of new energy management products and enhancements
to our existing energy management system; (iv) quality assurance and testing; and (v) other related overhead. We
expense research and development costs as incurred.
In addition to expected increased
administrative personnel costs, we expect to incur increased general and administrative expenses in
connection with becoming a public company, including increased accounting, audit, legal and
support services and Sarbanes-Oxley compliance fees and expenses. We also expect our sales and
marketing expenses to substantially increase in the near term as we further increase the number of
our sales people and sales locations and market our products, brands and trade names,
including our planned expanded advertising and promotional campaign. Additionally, we
expense all pre-sale costs incurred in connection with our sales process prior to obtaining a
purchase order. These pre-sale costs may reduce our net income in a given period prior to
recognizing any corresponding revenue. We also intend to continue to invest in our research and
development of new and enhanced energy management products and services.
In fiscal 2007, we began recognizing compensation expense for the fair value of our stock
option awards granted over their related vesting period using the modified prospective method of
adoption under the provisions of the Statement of Financial
Accounting Standards
No. 123(R),
Share-Based Payment. Prior to fiscal 2007, we accounted for our stock option awards under the
intrinsic value method under the provisions of Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and we did not recognize the fair value
expense of our stock option awards in our statements of operations, although we did report our pro
forma stock option award fair value expense in the footnotes to our financial statements. We
recognized $0.4 million of stock-based compensation
expense in
fiscal 2007 and $0.1 million in our fiscal 2008 first quarter. As a result of
prior option grants, including option grants in fiscal 2008 through the date of this prospectus, we
expect to recognize a total of $3.9 million of stock-based compensation over a weighted average
period of three years, including $1.0 million in fiscal 2008.
These charges have been, and will continue to be, allocated to cost of revenue, general and administrative expenses, sales and marketing expenses and
research and development expenses based on the departments in which the personnel receiving such
awards have primary responsibility. A substantial majority of these charges have been, and likely
will continue to be, allocated to general and administrative expenses and sales and marketing
expenses. See “— Critical Accounting Policies — Stock-Based Compensation” and the notes to our
financial statements included elsewhere in this prospectus.
Interest
Expense. Our interest expense is comprised primarily of interest expense on outstanding borrowings
under our revolving credit facility and our other long-term debt obligations described under
“— Liquidity and Capital Resources — Indebtedness” below,
including the amortization of previously
incurred financing costs. Our interest expense also has historically included guarantee fees
previously paid to our chief executive officer in connection with his guarantees of various of our
debt obligations. These guarantees have been released. We amortize deferred financing costs to
interest expense over the life of the related debt instrument,
ranging from six to fifteen years.
Dividend
and Interest Income. Our dividend income consists of dividends paid on preferred shares that we acquired in July
2006. The terms of these preferred shares provide for annual dividend payments to us of $0.1
million. We also report interest income earned on our cash and cash equivalents. We expect our
interest income to increase in fiscal 2008 as a result of our investment of the net proceeds from
our recent placement of convertible subordinated notes and from this offering in short-term,
interest-bearing, investment-grade securities until final application
of such net proceeds.
Income
Taxes. As of March 31, 2007, we had net operating loss carryforwards of approximately $5.1 million
for both federal and state tax purposes. Included in the
$5.1 million loss carryforward were $3.0
million of compensation expenses that were associated with the exercise of nonqualified stock
options. The benefit from our net operating losses created from these compensation expenses has
not been recognized and will be accounted for in our shareholders’ equity as a credit to
additional paid-in capital as the deduction reduces our income taxes payable. We also had federal
and state credit carryforwards of approximately $0.3 million and
$0.4 million, respectively, as of
March 31, 2007. These federal and state net operating losses and credit carryforwards are
available, subject to the discussion in the following paragraph, to offset future taxable income
and, if not utilized, will begin to expire in varying amounts between 2016 and 2027. Our income
before income tax in fiscal 2007 was $1.2 million. If we maintain this level of income before
income tax in future fiscal years, we would expect to utilize our federal net operating loss
carryforwards in less than six fiscal years, or over a shorter period if our income before income
tax increases further. State net operating loss carryforwards would
be utilized over approximately 10 fiscal years or a shorter period if
our income before income taxes increases further.
Generally, a change of more than 50% in the ownership of a company’s stock, by value, over a
three-year period constitutes an ownership change for federal income tax purposes.
An ownership change may limit a company’s ability to use its net operating loss carryforwards
attributable to the period prior to such change. Past issuances and transfers of our stock may have been sufficient to qualify as an ownership change for this purpose. As a result, if we continue to earn taxable income, our
ability to use our net operating loss
carryforwards attributable to the period prior to any such ownership change to offset taxable
income may be or become subject to limitations, which could potentially result in increased future
tax liability for us.
A valuation allowance against our deferred tax assets as of June 30, 2007 has not been
provided because we believe that it is more likely than not that our deferred tax assets will be
fully realized. The factors included in this assessment were: (i) our recognition of income
before taxes of $1.2 million in each of our fiscal 2008 first quarter and fiscal 2007; (ii) our
anticipated fiscal 2008 revenue growth due to our backlog of orders as of June 30, 2007; and (iii)
our previous profitability in fiscal 2003 and 2004 that preceded our
planned efforts in fiscal 2005 and
2006 to increase our manufacturing capacity and sales and marketing efforts to increase our
revenue.
Our effective tax rate of 19.5% in fiscal 2007 was favorably impacted by federal research and
development tax credits, as well as state income tax credits from jobs creation. These benefits
were partially offset by the impact of state income taxes. We do not expect to generate state
credits in fiscal 2008 and our federal research credits will decline, resulting in our effective
tax rate increasing in fiscal 2008 to the federal statutory rate plus state income taxes.
Accretion
of Preferred Stock and Preferred Stock Dividends. Our accretion of
redeemable preferred stock and preferred stock dividends consists of
accumulated unpaid dividends on our Series A and Series C preferred stock during the periods that
such shares remain outstanding. The terms of our Series C preferred stock provide for a 6% per
annum cumulative dividend unless we complete a qualified initial public offering or sale. As a
result, the carrying amount of our Series C preferred stock has been increased each
period to reflect the accretion of accumulated unpaid dividends. The obligation
to pay these accumulated unpaid dividends will be
extinguished upon conversion of the Series C preferred stock because this offering will constitute
a qualified initial public offering under the terms of our Series C preferred stock. The Series C
preferred stock will automatically convert into common stock upon closing of this offering, and the
carrying amount of our Series C preferred stock, along with accumulated unpaid dividends, will be credited to
additional paid-in capital at that time. Our Series A preferred stock was issued beginning in
fiscal 2000 and provided for a 12% per annum cumulative
dividend. Our Series A preferred stock was converted into shares of our common
stock in fiscal 2005 and fiscal 2007 as described under “—
Conversion of Preferred Stock.”
Conversion
of Preferred Stock. In fiscal 2005, we offered our holders of then outstanding Series A preferred stock the
opportunity to convert each of their Series A preferred shares, together with the accumulated
unpaid dividends thereon and their other rights and preferences related thereto, into three shares
of our common stock. Since the Series A preferred shareholders had the existing right to convert
each of their Series A preferred shares into two shares of common stock, we determined that the
increase in the conversion ratio from two to three shares of common stock was an inducement offer.
As a result, we accounted for the value of the change in this conversion ratio as an increase to
additional paid-in capital and a charge to our accumulated deficit at the time of conversion. In
fiscal 2005, 648,010 outstanding Series A preferred shares were converted
into shares of our common stock. The remaining 20,000 outstanding Series A preferred shares were
converted into shares of our common stock on March 31, 2007.
The premium amount recorded for the inducement,
calculated using the number of additional common shares offered multiplied by the estimated fair
market value of our common stock at the time of conversion, was $1.0 million for fiscal 2005 and
$83,000 for fiscal 2007.
The following table sets forth the line items of our consolidated statements of operations on
an absolute dollar basis and as a relative percentage of our revenue for each applicable period,
together with the relative percentage change in such line item between applicable comparable
periods set forth below:
Fiscal
Year Ended March 31,
Three
Months Ended June 30,
(unaudited)
(dollars
in thousands)
2005
2006
2007
2006
2007
% of
% of
% of
% of
% of
Amount
Revenue
Amount
Revenue
% Change
Amount
Revenue
% Change
Amount
Revenue
Amount
Revenue
% Change
Revenue
$
21,783
100.0
%
$
33,280
100.0
%
52.8
%
$
48,183
100.0
%
44.8
%
$
9,680
100.0
%
$
16,721
100.0
%
72.7
%
Cost of revenue
14,043
64.5
%
22,524
67.7
%
60.4
%
32,487
67.4
%
44.2
%
6,255
64.6
%
11,118
66.5
%
77.7
%
Gross profit
7,740
35.5
%
10,756
32.3
%
39.0
%
15,696
32.6
%
45.9
%
3,425
35.4
%
5,603
33.5
%
63.6
%
General and
administrative
expenses
3,461
15.9
%
4,875
14.6
%
40.9
%
6,162
12.8
%
26.4
%
1,269
13.1
%
1,571
9.4
%
23.8
%
Sales and marketing
expenses
5,416
24.9
%
5,991
18.0
%
10.6
%
6,459
13.4
%
7.8
%
1,518
15.7
%
2,111
12.6
%
39.1
%
Research and
development
expenses
213
1.0
%
1,171
3.5
%
449.8
%
1,078
2.2
%
(7.9
%)
211
2.2
%
437
2.6
%
107.1
%
Income (loss) from
operations
(1,350
)
(6.2
%)
(1,281
)
(3.8
%)
5.1
%
1,997
4.1
%
NM
427
4.4
%
1,484
8.9
%
247.5
%
Interest expense
570
2.6
%
1,051
3.2
%
84.4
%
1,044
2.2
%
0.7
%
253
2.6
%
295
1.8
%
16.6
%
Dividend and
interest income
3
0.0
%
5
0.0
%
66.7
%
201
0.4
%
NM
1
0.0
%
40
0.2
%
NM
Income (loss) before
income taxes and cumulative effect of change in accounting principle
(1,917
)
(8.8
%)
(2,327
)
(7.0
%)
(21.4
%)
1,154
2.4
%
NM
175
1.8
%
1,229
7.4
%
602.3
%
Income tax expense
(benefit)
(702
)
(3.2
%)
(762
)
(2.3
%)
8.5
%
225
0.5
%
NM
34
0.4
%
481
2.9
%
Net income (loss)
before cumulative change in
accounting
principle
(1,215
)
(5.6
%)
(1,565
)
(4.7
%)
(28.8
%)
929
1.9
%
NM
141
1.5
%
748
4.5
%
430.5
%
Cumulative effect
of change in
accounting
principle, net of tax
(57
)
(0.3
%)
—
0.0
%
100.0
%
—
0.0
%
NM
—
0.0
%
—
0.0
%
—
Net income (loss)
(1,272
)
(5.8
%)
(1,565
)
(4.7
%)
(23.0
%)
929
1.9
%
NM
141
1.5
%
748
4.5
%
430.5
%
Accretion of
redeemable
preferred stock and
preferred stock
dividends
(104
)
(0.5
%)
(3
)
(0.0
%)
97.1
%
(201
)
(0.4
%)
NM
(1
)
(0.0
%)
(75
)
(0.4
%)
NM
Conversion of
preferred stock
(972
)
(4.5
%)
—
0.0
%
100.0
%
(83
)
(0.2
%)
100
%
—
0.0
%
—
0.0
%
0.0
%
Net income (loss)
attributable to
common shareholders
Revenue. Our revenue increased for our fiscal 2008 first quarter from our fiscal 2007 first quarter
primarily as a result of increased sales of our HIF lighting systems and related
services. As of June 30, 2007, we had a backlog of firm
purchase orders of approximately $11.3 million,
compared to approximately $10.1 million as of March 31, 2007. We
generally expect this level of firm purchase
order backlog to be converted into revenue within the following
quarter. A
comparison of backlog from period to period is not necessarily meaningful and may not be indicative
of actual revenue recognized in future periods.
Cost of
Revenue. Our cost of revenue increased for our fiscal 2008 first quarter compared to our fiscal 2007
first quarter principally because of our higher sales volumes, as well as increased production
personnel costs as we increased the number of our production employees to support our sales growth.
Gross
Margin. Our gross profit increased for our fiscal 2008 first quarter from our fiscal 2007 first
quarter as a result of our increased revenue. Our gross margin decreased for our fiscal 2008 first
quarter from our fiscal 2007 first quarter, although it was higher
than our full year fiscal
2007 gross margin. We experienced a higher than normal gross margin in our fiscal 2007 first
quarter due to several large projects completed at higher margins in that quarter as compared to
our historical patterns. Our fiscal 2008 first quarter gross margin was negatively impacted by a
significant number of national customer projects that included more favorable pricing terms for
these customers.
Operating
Expenses
General
and Administrative. Our general and administrative expenses increased for our fiscal 2008 first quarter from our
fiscal 2007 first quarter on an absolute dollar basis principally as a result of: (i) increased
travel expenses and compensation costs related to hiring additional employees in our accounting and
administration departments; (ii) additional legal expenses; and (iii) increased consulting costs
for technology, audit and tax support. We also incurred increased stock-based compensation
expenses. As a percentage of revenue, our general and administrative expenses decreased as our
revenue growth exceeded growth in our general and administrative expenses.
Sales
and Marketing. Our sales and marketing expenses increased for our fiscal 2008 first quarter compared to our
fiscal 2007 first quarter on an absolute dollar basis primarily as a result of increased employee
compensation and commission expenses resulting from our hiring additional sales personnel and our
payment of higher sales commissions in conjunction with our increased sales volume. Travel
expenses increased in support of generating our revenue growth. Our marketing costs increased as a
result of our efforts to increase our brand awareness and participation in national trade shows.
We also incurred increased stock-based compensation expenses. As a percentage of revenue, our
sales and marketing expenses decreased as a result of our revenue growth and improved efficiencies
from better executing our sales process.
Research
and Development. Our research and development expenses increased for our fiscal 2008 first quarter from our
fiscal 2007 first quarter on an absolute dollar basis as a result of increased engineering and
consulting expenses and from pursuing regulatory and legislative initiatives in support of our
energy management products and services. As a percentage of revenue, research and development
expenses decreased as our revenue growth exceeded growth in our research and development expenses.
Interest Expense. Our interest expense was substantially the same for our fiscal 2008 first quarter as for our
fiscal 2007 first quarter.
Dividend
and Interest Income. Dividend and interest income increased for our fiscal 2008 first quarter from our fiscal 2007
first quarter. We did not recognize dividend income in our fiscal 2007 first quarter because we
did not complete our preferred stock investment until our fiscal 2007 second quarter.
Income
Taxes. Our income tax expense increased for our fiscal 2008 first quarter compared to our fiscal 2007
first quarter due to our increased profitability and because of our utilization in our fiscal 2007 first quarter of state job
tax and federal research credits. Our effective income tax rate for our fiscal 2008 first quarter
was 39.1% compared to 19.4% for our fiscal 2007 first quarter.
Accretion
of Preferred Stock and Preferred Stock Dividends.
We recognized accretion of accumulated unpaid dividends on our Series C redeemable preferred stock during our fiscal
2008 first quarter. We did not accrete Series C dividends in our fiscal 2007 first quarter because
we did not complete our Series C preferred stock placement until the second quarter of fiscal 2007.
Revenue. Our fiscal 2007 revenue increased from our fiscal 2006 revenue primarily as a result of
increased sales of our HIF lighting systems and related services, including a
substantial increase in our retrofit project sales to multiple location large commercial and
industrial end users as we began to recognize the benefits of our sales process.
Cost
of Revenue. Our fiscal 2007 cost of revenue increased from fiscal 2006 primarily due to our higher sales
volume.
Gross
Margin. Our gross profit increased in fiscal 2007 from fiscal 2006 as a result of our increased
revenue. Our fiscal 2007 gross margin was positively impacted by an improved mix of higher margin
retrofit projects and improved project pricing, especially as a result of our increased billing
realization on our services. Additionally, in fiscal 2007, our gross margin benefited from our
improved leveraging of our manufacturing facility and related fixed operating costs and implementing
manufacturing process improvements.
Operating
Expenses
General
and Administrative. Our general and administrative expenses increased in fiscal 2007 from fiscal 2006 on an
absolute dollar basis primarily due to increased compensation and travel expenses related to hiring
additional employees and initiating technology improvement consulting projects. Our fiscal 2007
general and administrative costs included a $0.2 million non-cash charge for stock-based
compensation expenses as a result of our April 1, 2006 adoption of SFAS 123(R). As a percentage of
revenue, our general and
administrative expenses decreased as our revenue growth exceeded growth in our general and
administrative expenses.
Sales
and Marketing. Our sales and marketing expenses increased in fiscal 2007 compared to fiscal 2006 on an
absolute dollar basis as a result of increased marketing costs associated with our advertising and
promotional campaigns. These increased marketing costs were partially offset by decreased employee
compensation and commission expenses resulting from the streamlining of our internal sales force.
Our fiscal 2007 sales and marketing expenses included a $0.2 million non-cash charge for
stock-based compensation expenses as a result of our adoption of SFAS 123(R). As a percentage of
revenue, our sales and marketing expenses decreased in fiscal 2007 compared to fiscal 2006 as a
result of our increased revenue and improved efficiencies from better execution of our sales
process.
Research
and Development. Our research and development expenses in fiscal 2007 decreased from fiscal 2006 on an absolute
dollar basis primarily due to the termination of a consulting agreement with a third party
developer. As a percentage of revenue, our research and development expenses decreased as a result
of our decreased expenses and increased revenue.
Interest
Expense. Our interest expense in fiscal 2007 was comparable to fiscal 2006 due to our retirement of
long-term debt obligations, offset by increased revolving credit facility borrowings.
Dividend
and Interest Income. We began receiving dividend income in fiscal 2007 related to our July 2006 preferred stock
investment. We did not receive dividend income prior to fiscal 2007 and our interest income in
2007 was not material.
Income
Taxes. As a result of our profitability in fiscal 2007 compared to our net loss in fiscal 2006, we
recognized an income tax expense in fiscal 2007 compared to an income tax benefit in fiscal 2006.
Our effective tax rate was 19.5% in fiscal 2007 compared to a negative 32.7% in fiscal 2006. Our
effective tax rate in fiscal 2007 was favorably impacted by federal research and development tax
credits, as well as state income tax credits from jobs creation. These benefits were partially
offset by the impact of state income taxes.
Accretion
of Preferred Stock and Preferred Stock Dividends. We recognized the accretion of accumulated unpaid dividends on our Series C redeemable preferred stock in
fiscal 2007 from our issuance date in the second quarter of fiscal 2007. We did not recognize
accretion on our Series C preferred stock prior to fiscal 2007. We recognized a nominal amount of
accumulated unpaid dividends on our remaining 20,000 outstanding shares of Series A preferred stock
in both fiscal 2007 and 2006.
Conversion
of Preferred Stock. In fiscal 2007, we
recognized the estimated fair market value of the premium paid to
holders of Series A preferred shares upon the induced conversion
into shares of our common
Revenue. Our revenue increased in fiscal 2006 from fiscal 2005 principally because of an increase in
our sales to direct end user customers, which constituted the substantial majority of
our revenue in each fiscal year. We also recognized significant increases in our wholesale sales.
Cost of Revenue. Our cost of revenue increased in fiscal 2006 from fiscal 2005 primarily as a result of our
increased revenue.
Gross Margin. Our gross profit increased in fiscal 2006 from fiscal 2005 as a result of our increased
revenue. Our gross margin for fiscal 2006 decreased from fiscal 2005 primarily due to our
increased volume of large multiple facility retrofit projects for national customers that included
lower billing realization for our services. Our fiscal 2006 gross margin was also negatively
impacted by a full fiscal year of recognizing facility costs relating to our manufacturing facility that we purchased in early fiscal 2005. In fiscal 2006, we also
incurred $0.7 million of warranty charges, which further
negatively impacted our fiscal 2006 gross margin.
Operating
Expenses
General and Administrative. Our general and administrative expenses increased in fiscal 2006 compared to fiscal 2005 on an
absolute dollar basis primarily as the result of a significant increase in compensation expense
related to our hiring additional employees. We also recognized (i) $0.5 million of additional
compensation expense in fiscal 2006 in connection with a director’s exercise of stock options
through the issuance of a recourse promissory note with a below market interest rate and (ii) $0.2
million of expense in fiscal 2006 in connection with the loss on the sale of an asset. As a
percentage of revenue, our general and administrative expenses decreased in fiscal 2006 compared to
fiscal 2005 because our revenue growth exceeded the growth in our general and administrative
expenses.
Sales and Marketing. Our sales and marketing expenses increased in fiscal 2006 compared to fiscal 2005 on an
absolute dollar basis because of an increase in our employee compensation and commission expenses
due to additions to our sales force. As a percentage of revenue, our sales and marketing expenses
decreased in fiscal 2006 compared to fiscal 2005, reflecting our increased revenue and the
leveraging of our sales force over a significantly greater revenue base.
Research and Development. Our research and development expenses for fiscal 2006 increased compared to fiscal 2005 on an
absolute dollar basis, primarily due to additional employee costs for product design and
engineering, consulting costs incurred to research new markets and product testing. As a
percentage of revenue, our
research and development expenses decreased in fiscal 2006 compared to fiscal 2005 as our
revenue growth exceeded the growth in our research and development expenses.
Interest
Expense. Our interest expense increased in fiscal 2006 from
fiscal 2005 due to increased borrowings under our revolving credit facility.
Income
Taxes. We recognized an income tax benefit in both fiscal 2006 and 2005 as a result of our loss
before income tax in each fiscal year.
Accretion
of Preferred Stock Dividends. Our accretion of accumulated unpaid dividends on our Series A preferred stock decreased
significantly in fiscal 2006 from fiscal 2005 as a result of the induced conversion in fiscal 2005
of a substantial majority of our then outstanding Series A preferred stock into shares of our
common stock.
Conversion
of Preferred Stock. No Series A
preferred shares were converted into common shares in fiscal 2006. In fiscal 2005, we recognized $1.0 million in the estimated fair market value of the premium paid to holders of Series A preferred shares upon
the induced conversion
into shares of our common stock.
The following tables present our unaudited quarterly results of operations for the last nine
fiscal quarters in the period ended June 30, 2007 (i) on an absolute dollar basis (in thousands)
and (ii) as a percentage of revenue for the applicable fiscal quarter. You should read the
following tables in conjunction with our consolidated financial statements and related notes
contained elsewhere in this prospectus. In our opinion, the unaudited financial information
presented below has been prepared on the same basis as our audited consolidated financial
statements, and includes all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our operating results for the fiscal quarters
presented. Operating results for any fiscal quarter are not necessarily indicative of the results
for any future fiscal quarters or for a full fiscal year.
Our revenue can fluctuate
from quarter to quarter depending on the purchasing decisions
of our customers and our overall level of sales activity. Historically, our customers have tended
to increase their purchases near the beginning or end of their
capital budget cycles, which tend to correspond to the beginning or
end of the calendar year. As a result, we have in the past
experienced lower relative revenue in our fiscal first and second quarters and higher relative
revenue in our fiscal third and fourth quarters. These seasonal fluctuations have been largely
offset by our customers’ decisions to initiate multiple facility roll-outs. We expect that there
may be future variations in our quarterly revenue depending on our level of national account
roll-out projects and wholesale sales. Our results for any particular fiscal quarter may not be
indicative of results for other fiscal quarters or an entire fiscal year.
We experienced a higher than normal gross margin in our fiscal 2007 first quarter due to
several large projects completed at higher margins in that quarter as compared to our historical
patterns. In our fiscal 2006 third quarter, we experienced higher than normal (i) interest expense
due to transaction costs associated with our restructuring certain long-term debt obligations as
part of obtaining our revolving credit facility and (ii) general and administrative
expenses resulting from the $0.5 million of compensation expense recognized from our director’s
exercise of a stock option with a below market interest rate promissory note.
Liquidity and Capital Resources
Overview
We
have historically funded our
operations and capital expenditures primarily through issuances of an
aggregate of $5.4 million common stock, an aggregate of
$10.8 million of preferred stock and borrowings under our revolving credit facility and the
other debt instruments and obligations described under
“— Indebtedness” below. We applied the net proceeds from
these offerings and borrowings to fund (i) our operations and capital
expenditures as well as our product development and research capabilities;
(ii) the purchase of our manufacturing facility and related
investments in equipment and personnel; and (iii) expenses
relating to the development of our management, sales and marketing
teams.
On August 3, 2007,
we completed a placement of $10.6 million of 6% convertible subordinated
notes with an indirect affiliate of GEEFS, Clean Technology and
affiliates of Capvest. We intend to use the net proceeds of
this placement to (i) finance our growing need for additional working capital to support
our anticipated revenue growth; (ii) further expand our national customer account relationships, sales and marketing force and
production and distribution capabilities; and (iii) enhance our liquidity and reduce our
dependency on obtaining additional debt financing.
We intend
to use the net proceeds of this offering for working capital and general
corporate purposes, including to fund increased sales and marketing
expenses, as well as for potential future acquisitions. As of the date of this
prospectus, we have no current agreement, commitment or understanding regarding any specific
acquisition. Pending
the final application of the net
proceeds of our convertible note placement and this offering, we intend to invest these net
proceeds in short-term, interest-bearing, investment-grade securities. See “Use of Proceeds.”
Cash Flows
The following table summarizes our cash flows for our fiscal 2005, fiscal 2006 and fiscal 2007
and for our fiscal 2007 and 2008 first quarters:
Cash
Flows Related to Operating Activities. Cash provided from operating
activities was $1.8 million for our fiscal 2008 first quarter
compared to cash used of $0.8 million for our fiscal 2007 first
quarter. The $2.6 million change
was primarily due to increased net income and a $1.2 million
change in net working capital. The net working
capital change was due to increased payables related to increased inventory purchases to support
our revenue growth and our increased use of installation service vendors.
Cash used in operating activities was $6.2 million, $3.4 million, and $0.9 million for fiscal
2007, fiscal 2006 and fiscal 2005, respectively. The $2.8 million increase in cash used in
operating activities in fiscal 2007 compared to fiscal 2006 resulted primarily from an increase in
our net working capital of $5.9 million to support our revenue
and order backlog growth, partially offset by our change from a net
loss of $1.6 million in fiscal 2006 to net income of
$0.9 million in fiscal 2007. Cash used
in our operating activities for fiscal 2006 increased $2.5 million compared to fiscal 2005. This
increase was due to an increase of $3.3 million in our net
working capital to fund increased
inventory levels required to support our revenue growth.
Cash
Flows Related to Investing Activities. Cash used in investing activities was $0.7 million for our fiscal 2008 first quarter compared
to $0.2 million for our fiscal 2007 first quarter. This increase was due to purchases of
processing equipment for capacity and cost improvement measures and the continued development of
our intellectual property.
Cash used in investing activities was $1.0 million, $0.2 million, and $5.9 million for fiscal
2007, fiscal 2006 and fiscal 2005, respectively. Our principal cash investments were for purchases
of real property and processing equipment, improvements to our facility and continued development
of our intellectual property. In fiscal 2007, we invested $1.1 million to improve our facility
infrastructure, purchase technology assets, and purchase operating equipment and tooling as a
result of our production design changes, offset by proceeds of $0.3 million from an asset sale. In
fiscal 2006, we invested $0.9 million to increase our
manufacturing capacity, offset by proceeds
of $0.7 million from an asset sale. In fiscal 2005, we invested $5.8 million to acquire our
manufacturing facility and purchase new equipment to increase our manufacturing and
distribution capacities and to transition from outsourcing our manufactured components to
internally manufacturing these components.
Cash
Flows Related to Financing Activities. Cash
used in financing activities was $0.7 million for our fiscal 2008 first quarter compared
to cash provided by financing activities of $0.2 million for our fiscal 2007 first quarter. This
change was due
to $0.7 million of payments on our long-term debt and revolving credit facility,
offset by $0.4 million in net proceeds from common stock option and warrant exercises.
Cash
flows provided by financing activities in fiscal 2007 were
$6.4 million, primarily consisting of:
(i) the sale of our Series C preferred stock, resulting in net proceeds of $4.8 million; (ii) the
exercise of common stock options, resulting in net proceeds of $0.8 million; (iii) the sale of our
Series B preferred stock, resulting in net proceeds of $0.4 million; (iv) borrowings under our
revolving credit agreement, resulting in net proceeds of $1.2 million; and (v) the impact of
deferred taxes on our stock-based compensation, resulting in a tax benefit of $0.4 million. These
cash flows were partially offset by $1.2 million of long-term debt repayments.
Cash flows provided by financing activities in fiscal 2006 were $4.2 million, primarily consisting of:
(i) the sale of our Series B preferred stock, resulting in
net proceeds of $1.5 million; (ii) borrowings under our
revolving credit facility, resulting in proceeds of $4.9 million, net of
financing costs of $0.1 million to secure our revolving credit facility; (iii) the exercise of
common stock options and collection of shareholder notes, resulting in net proceeds of $0.2
million; and (iv) debt proceeds used to finance capital assets, resulting in net proceeds of $0.1
million. These cash flows were partially offset by $2.5 million of long-term debt repayments.
Cash flows provided by financing activities in fiscal 2005 were $7.1 million, primarily consisting of:
(i) the sale of our Series B preferred stock, resulting in net proceeds of $3.9 million; (ii) debt
proceeds used for the acquisition of our manufacturing facility and equipment and to
retire prior long-term debt, resulting in net proceeds of $10.1 million; and (iii) the exercise of
common stock options and collection of shareholder notes, resulting in net proceeds of $0.1
million. These cash flows were partially offset by payments to retire long-term
debt of $5.9 million and
$0.3 million to repurchase treasury shares.
Working Capital
Our net working capital as of June 30, 2007 was $14.3 million, consisting of $26.5 million in
current assets and $12.1 million in current liabilities. Our net working capital as of June 30,2006 was $7.5 million, consisting of $15.3 million in current assets and $7.8 million in current
liabilities. We expect to continue to increase our inventories of raw materials and components to
support our anticipated increase in sales volumes and to reduce our
risk of unexpected raw material or component shortages or supply
interruptions. We attempt to maintain a two
month supply of on-hand inventory of purchased components and raw
materials to meet anticipated demand. We also expect that our
accounts receivable and payables will continue to increase as a result of our anticipated revenue
growth and increased inventory levels. We had available borrowing capacity under our revolving
credit facility of $5.8 million as of June 30, 2007, based upon our revolving credit facility
borrowing base formula described below. The net proceeds of our recent convertible note placement
will help support our ongoing working capital needs, as will the net proceeds from this offering.
Pending final application, these net proceeds will be invested in short-term, interest-bearing,
investment-grade securities. See “Use of Proceeds.”
We believe that our existing cash and cash equivalents, our anticipated cash flows from
operating activities, our borrowing capacity under our revolving credit facility and the net
proceeds from our recent convertible subordinated note placement and this offering will be
sufficient to meet our anticipated cash needs for at least the near term. Our future working
capital requirements will depend on many factors, including the rate of our anticipated revenue
growth, our introduction of new products and
services and enhancements to our existing energy
management system, the timing and extent of our planned expansion of our sales force and other
administrative and production personnel, the timing and extent of our planned advertising and
promotional campaign, and our research and development activities. To the extent that our cash and
cash equivalents, cash flows from operating activities and net proceeds from our recent convertible
subordinated note placement and this offering are insufficient to fund our future activities, we
may need to raise additional funds through additional
public or private
equity or debt financings. We also may need to raise additional funds in the event we decide to
acquire product lines, businesses or technologies. In the event
additional funding is required, we may not be able to obtain the
financing on terms acceptable to us, or at all.
Indebtedness
On December 22, 2005, we entered into a credit and security agreement, as amended, with Wells
Fargo Bank, N.A. to provide us with up to $25.0 million of financing to fund our working capital
requirements. Availability under this revolving credit facility is
subject to a borrowing base that is calculated as a percentage of eligible accounts receivable and
eligible inventory, less certain collateral or business valuation reserves and reserves for certain
other credit exposures. As of June 30, 2007, there were $5.6 million of borrowings outstanding
under our revolving credit facility, and our borrowing availability
was $5.8 million. This revolving credit facility matures in December 2008. Borrowings under this
revolving credit facility bear interest at prime plus 1.0% per annum, plus annual fees and minimum
monthly interest costs, if applicable. Borrowings
under this revolving credit facility are secured by a first priority security interest in our
accounts receivable, inventory and intangible assets. Our revolving credit facility contains
customary financial and restrictive covenants, including minimum net worth requirements; minimum
net income requirements; restrictions on capital expenditures; and restrictions on our ability to
incur indebtedness, create liens, guaranty obligations, make loans or advances, invest or acquire
interests in other persons or companies, pay dividends or make other shareholder distributions. We
were in compliance with all covenants under our revolving credit facility as of June 30, 2007.
In addition to our revolving credit facility, we also have other existing long-term
indebtedness and obligations under various debt instruments and capital lease obligations,
including pursuant to a bank term note, a bank first mortgage, a debenture to a community
development organization, a federal block grant loan, a city industrial revolving loan and various
capital leases and equipment purchase notes. As of June 30, 2007, the total amount of principal
outstanding on these various obligations was $5.1 million. These obligations have varying maturity
dates between 2010 and 2024 and bear interest at annual rates of between 2.0% and 16.2%. The
weighted average annual interest rate of such obligations as of June 30, 2007 was 8.1%. Based on
interest rates in effect as of June 30, 2007, we expect that our total debt service payments on
such obligations for fiscal 2008, including scheduled principal, lease and interest payments, will
approximate $1.0 million. All of these obligations are subject to security
interests on our assets. Several of these obligations have covenants, such as customary financial
and restrictive covenants, including maintenance of a minimum debt service coverage ratio; a
minimum current ratio; minimum net worth requirements; limitations on executive compensation and
advances; limits on capital expenditures; limits on distributions; and
restrictions on our ability to make loans, advances, extensions of credit, investments, capital
contributions, incur additional indebtedness, create liens, guaranty obligations, merge or
consolidate or undergo a change in control. As of June 30, 2007, we were in compliance with all
such covenants, as amended.
On
August 3, 2007, we completed a placement of $10.6 million of 6% convertible
subordinated notes with an indirect affiliate of GEEFS,
Clean Technology and affiliates of Capvest. Interest on these notes until they are repaid or converted into our
common stock is payable quarterly in arrears at the annual rate of 6%. The convertible notes mature in August 2012. See “Description of
Capital Stock” for a detailed description of the terms of our
Convertible Notes and our common stock.
We expect to incur approximately $3.0 million in capital expenditures during the final three
fiscal quarters of fiscal 2008 to add production equipment to increase our production capacity, as
well as to further develop our internal capacity to perform certain processes previously performed
by our suppliers. We expect to finance these capital expenditures primarily through equipment
secured loans and leases, to the extent needed, and by using our available capacity under our
revolving credit facility.
Contractual Obligations
Information regarding our known contractual obligations of the types described below as of
March 31, 2007 is set forth in the following table:
Does not include any payment amounts under our 6% convertible subordinated
notes issued on August 3, 2007, which notes will convert automatically upon the closing
of this offering into shares of our common stock. See
“Description of Capital Stock.”
(2)
Debt and capital leases includes fixed contractual interest
payments by period of $554,000 (less than 1 year); $667,000
(1-3 years); $346,000 (3-5) years); and $324,000 (more
than 5 years).
(3)
Reflects non-cancellable purchase commitments for certain inventory items and
capital expenditure commitments entered into in order to secure better pricing and
ensure materials on hand.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Internal Control Over Financial Reporting
In connection
with the audit of our fiscal 2006 and 2005 consolidated financial statements,
our independent registered public accounting firm identified certain significant deficiencies and
material weaknesses in our internal control over financial reporting. In connection with the audit
of our fiscal 2007 consolidated financial statements, our independent registered public accounting
firm identified certain significant deficiencies in our internal control over financial reporting. A significant deficiency is a
control deficiency, or combination of control deficiencies, that adversely affects a company’s
ability to initiate, authorize, record, process or report financial data reliably in accordance
with generally accepted accounting principles such that there is more than a remote likelihood that
a misstatement of the company’s financial statements that is more than inconsequential will not be
prevented or detected by the company’s internal control. A material weakness is a control
deficiency, or a combination of control deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be prevented or
detected.
The following significant deficiencies were identified in connection with the audit of our
fiscal 2007 consolidated financial statements: (i) our lack of segregation of certain key duties;
(ii) our policies, procedures, documentation and reporting of our equity transactions; (iii) our
lack of certain documented accounting policies and procedures to clearly communicate the standards
of how transactions should be recorded or handled; (iv) our controls in the area of information
technology, especially regarding change control and restricted access; (v) our lack of a formal
disaster recovery plan; (vi) our need for enhanced restrictions on user access to certain of our
software programs; (vii) the necessity for us to implement an enhanced project tracking/deferred
revenue accounting system to recognize the complexities of our business processes and, ultimately,
the recognition of revenue and deferred revenue; (viii) our lack of a process for determining
whether a lease should be accounted for as a capital or operating lease; (ix) our need for a
formalized action plan to understand all of our existing tax liabilities (and opportunities) and
properly account for them; and (x) our need for improved financial statement closing and reporting
processes.
A number of these significant deficiencies identified in connection with the audit of our
fiscal 2007 consolidated financial statements were previously identified as material weaknesses or
significant deficiencies in connection with the audit of our fiscal 2006 and 2005 consolidated
financial statements, including numbers (i), (ii), (v), (vii), (x) in
the foregoing paragraph.
In connection with the filing of the registration statement of which this prospectus is a
part, we identified certain errors in our prior year consolidated financial statements. These
errors related to accounting for the induced conversion of our Series A preferred stock in fiscal
2005 and fiscal 2007 and for a director’s exercise of a stock option through the issuance of a full
recourse promissory note in fiscal 2006 that we subsequently determined was issued at a below
market interest rate. These errors resulted in the restatement of our previously issued fiscal
2006 and 2007 consolidated financial statements. Specifically, prior to fiscal 2006, we offered
our Series A preferred shareholders the opportunity to exchange each share of their Series A
preferred stock for three shares of our common stock instead of the two shares of our common stock
to which they were otherwise entitled. We had previously reported this transaction as a
reclassification to paid-in capital for the historical carrying value of the Series A preferred
stock at the time of conversion. We subsequently determined that we had incorrectly applied
accounting principles generally accepted in the United States to these conversions because, under
the guidance provided in Statement of Financial Accounting Standards No. 84, Induced Conversions of
Convertible Debt (SFAS 84), the fair value of the inducement offer should have been accounted for
as an increase to common stock and a charge to accumulated deficit at the time of conversion. We
determined the fair values of the inducement offers in fiscal 2005
and fiscal 2007 to be $972,000 and $83,000, respectively. Additionally, in November 2005, we received a full recourse below
market interest rate promissory note in connection with a director’s exercise of a stock option.
We had previously reported this transaction as an event that did not result in additional
stock-based compensation. We subsequently determined that we had incorrectly applied accounting
principles generally accepted in the United States to this transaction because, under EITF 00-23,
Issues Related to the Accounting for Stock Compensation Under APB
Opinion No. 25 and FASB
Interpretation No. 44 (EITF 00-23), the exercise of the option through payment with a below market
interest rate full recourse promissory note was effectively a repricing of the option and resulted
in the recognition of a variable accounting adjustment for the award on the date the note was
issued and the option was exercised, in the amount of the intrinsic value difference between the
then current fair value of our common stock and the exercise price of the option. This adjustment
resulted in an increase of $0.5 million to operating expenses in fiscal 2006. Since a material
weakness had already been identified with respect to our accounting for equity transactions, no
further material weakness was identified by our independent registered public accounting firm in
connection with these corrections.
To improve our internal control over our financial reporting process and remediate and correct
the significant deficiencies identified in connection with our fiscal 2007 audit, we have hired a
director of business risk who has experience with the requirements of Section 404
of Sarbanes-Oxley and we are in the process of hiring an internal audit manager. In order
to comply with Section 404, we have already started to review our processes and implement new
systems and controls to help us remediate the significant deficiencies noted above. In particular,
we have begun performing system process evaluation and testing of our internal controls over
financial reporting to better allow our management and auditors to assess the effectiveness of our
internal controls over financial reporting so
that our independent auditors can deliver a report to
us addressing these assessments. We are not required to be compliant under Section 404
of Sarbanes-Oxley until the audit of our fiscal 2009 consolidated financial statements.
See “Risk Factors – Risks Relating to the Offering – Our failure to maintain adequate internal control over financial reporting in accordance with
Section 404 of Sarbanes-Oxley or to prevent or detect material misstatements in our
annual or interim consolidated financial statements in the future could result in inaccurate financial reporting, sanctions or securities litigation or otherwise harm our business.”
We may
in the future identify further material weaknesses in our control over financial
reporting. Accordingly, material weaknesses may exist when we report on the effectiveness of our
internal control over financing reporting for purposes of our attestation required by reporting
requirements under the Exchange Act or Section 404 of Sarbanes-Oxley
after this offering. The existence of one or more material weaknesses precludes a conclusion
that we maintain effective internal control over financial reporting. Such conclusion would be
required to be disclosed in our future Annual Reports on Form 10-K and may impact the accuracy and
timing of our financial reporting and the reliability of our internal
control over financial reporting.
Inflation
Our
results have operations have not been, and we do not expect them to
be, materially affected by inflation.
Quantitative and Qualitative Disclosure About Market Risk
Market risk
is the risk of loss related to changes in market prices, including interest rates,
foreign exchange rates and commodity pricing that may adversely impact our
consolidated financial position, results of operations or cash flows.
Foreign
Exchange Risk. We face minimal exposure to adverse movements in foreign currency exchange rates. Our foreign
currency losses for all reporting periods have been nominal.
Interest
Rate Risk. As of June 30, 2007, $6.7 million of our $10.7 million of outstanding debt was at floating
interest rates. An increase of 1.0% in the prime rate would result in an increase in our interest
expense of approximately $67,000 per year.
Commodity
Price Risk. We are exposed to certain commodity price risks associated with our purchases of raw
materials, most significantly our aluminum. We attempt to mitigate commodity price fluctuation for
our aluminum through six- to 12-month forward fixed-price, minimum quantity purchase commitments.
Critical Accounting Policies and Estimates
The discussion
and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our consolidated financial
statements requires us to make certain estimates and judgments that affect our reported assets,
liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities.
We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition,
inventory valuation, the collectibility of receivables, stock-based compensation and income taxes.
We base our estimates on historical experience and on various assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates. A summary of
our critical accounting policies is set forth below.
Revenue
Recognition. We recognize revenue when the following criteria have been met: there is persuasive evidence
of an arrangement; delivery has occurred and title has passed to the customer; the price is fixed
and determinable and no further obligation exists; and collectibility is reasonably assured. The
majority of
our revenue is recognized when products are shipped to a customer or when services are
completed and acceptance provisions, if any, have been met. In certain of our contracts, we provide multiple
deliverables. We record the revenue associated with each element of these arrangements based on
its fair value, which is generally the price charged for the element when sold on a standalone
basis. Since we contract with vendors for
installation services to our customers, we determine the fair value of our installation services
based on negotiated pricing with such vendors. Additionally, we offer
a sales program under which we finance the customer’s purchase.
Our contracts under this sales program are typically one year in duration and, at the completion of the initial one-year
term, provide for (i) four automatic one-year renewals at agreed upon pricing; (ii) an early buyout
for cash; or (iii) the return of the equipment at the customer’s expense. Upon completion of the
installation, we sell the future lease cash flows and residual rights to the equipment on a
non-recourse basis to an unrelated third party finance company in exchange for cash and future
payments. We recognize revenue based on the net present value of the future payments from the
third party finance company upon completion of the project.
Deferred revenue or deferred costs are recorded for project sales consisting of multiple
elements, where the criteria for revenue recognition have not been met. The majority of our
deferred revenue relates to prepaid services to be provided at determined future dates. As of June30, 2006 and 2007, our deferred revenue was $0.1 million and $0.2 million, respectively. In the
event that a customer project contains multiple elements that are not sold on a standalone basis,
we defer all related revenue and costs until the project is complete. Deferred costs on product are
recorded as a current asset as project completions occur within
a few months. As of June 30, 2006
and 2007, our deferred costs were $0.4 million and $0.3 million, respectively.
Inventories.
Inventories are stated at the lower of cost or market value and include raw materials, work in
process and finished goods. Items are removed from inventory using the first-in, first-out method.
Work in process inventories are comprised of raw materials that have been converted into components
for final assembly. Inventory amounts include the cost to manufacture the item, such as the cost of
raw materials and related freight, labor and other applied overhead costs. We review our inventory
for obsolescence and marketability. If the estimated market value, which is based upon assumptions
about future demand and market conditions, falls below cost, then the inventory value is reduced to
its market value. Our inventory obsolescence reserves were $0.4 million, $0.4 million and $0.5
million at March 31, 2006, March 31, 2007 and June 30, 2007, respectively.
Allowance
for Doubtful Accounts. We perform ongoing evaluations of our customers and continuously monitor collections and
payments and estimate an allowance for doubtful accounts based upon the aging of the underlying
receivables, our historical experience with write-offs and specific customer collection issues that
we have identified. While such credit losses have historically been within our expectations, and we
believe appropriate reserves have been established, we may not adequately predict future credit
losses. If the financial condition of our customers were to deteriorate and result in an impairment
of their ability to make payments, additional allowances might be required which would result in
additional general and administrative expense in the period such determination is made. Our
allowance for doubtful accounts
Stock-Based
Compensation. We have historically issued stock options to our employees, executive officers and directors.
Prior to April 1, 2006, we accounted for these option grants under the recognition and measurement
principles of Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and applied the disclosure provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an
Amendment of Financial Accounting Standards Board, or FASB, Statement No. 123. This accounting
treatment resulted in a pro forma stock option expense that was reported in the footnotes to our
consolidated financial statements for those years.
For options granted prior to April 1, 2006, we recorded stock-based compensation expense,
typically associated with options granted to employees, executive officers or directors, based upon
the difference, if any, between the estimated fair market value of common stock underlying the
options on the date of grant and the option exercise price. For
purposes of establishing the exercise price of options granted prior
to April 1, 2006 our compensation committee and board of
directors used (i) known independent
third-party sales of our common stock and (ii) the per share prices at which we issued shares of our
common and preferred stock to third-party investors. In fiscal 2006, in accordance with APB No. 25, we
recognized $33,000 of stock-based compensation expense, excluding the $0.5 million compensation
charge associated with a director’s exercise of a stock option with a full recourse below market
interest rate promissory note. In fiscal 2005, no stock-based
compensation expense was recognized.
Effective
April 1, 2006, we adopted the provisions of SFAS No. 123(R), Share-Based Payment,
which requires us to expense the estimated fair value of employee stock options and similar awards
based on the fair value of the award on the date of grant. We adopted
SFAS 123(R) using the modified
prospective method. Under this transition method, compensation cost recognized for fiscal 2007
included the current period’s cost for all stock options granted prior to, but not yet vested as
of, April 1, 2006. This cost was based on the grant-date fair value estimated in accordance with
the original provisions of SFAS 123. The cost for all stock options granted subsequent to March31, 2006 represented the grant date fair value that was estimated in accordance with the provisions
of SFAS 123(R). Results for prior periods have not been restated.
Compensation cost for options granted after March 31, 2006 has
been and will be recognized in earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period.
Both
prior to and following our April 1, 2006 adoption of SFAS 123(R), the fair value of each
option for financial reporting purposes was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants:
The
Black-Scholes option-pricing model requires the use of certain assumptions, including fair
value, expected term, risk-free interest rate, expected volatility,
expected dividends, and
expected forfeiture rate to calculate the fair value of stock-based payment awards.
We estimated the expected term of our stock options based on the vesting term of our options
and expected exercise behavior.
Our risk-free interest rate was based on the implied yield available on United States treasury
zero-coupon issues as of the option grant date with a remaining term approximately equal to the
expected life of the option.
In fiscal 2005 and 2006, we estimated volatility based upon an internal computation analyzing
historical volatility based on our share transaction data and share valuations established by our
compensation committee and board of directors, which we believe collectively provided us with a
reasonable basis for estimating volatility. In fiscal 2007, we determined volatility based on an
analysis of a peer group of public companies. We intend to continue to consistently use the same
methodology and
group of publicly traded peer companies as we used in fiscal 2007 to determine
volatility in the future until sufficient information regarding the volatility of our share price
becomes available or the selected companies are no longer suitable for this purpose.
We have not
paid dividends in the past and we do not expect to declare dividends in the
future, resulting in a dividend yield of 0%.
Our estimated
pre-vesting forfeiture rate was based on our historical experience and the
composition of our option plan participants, among other factors, and reduces our compensation
expense recognized. If our actual forfeitures differ from our estimates, adjustments to our
compensation expense may be required in future periods.
The following
table sets forth our stock option grants made since April 1, 2006 through the date of this prospectus:
Financial
Number of shares
reporting
underlying options
Exercise price per
Fair market value
intrinsic value
Date of grant
granted
share(1)
per share(2)
per share(3)
April 2006
40,000
$
2.25 – 2.50
$
2.20
$
—
May 2006
40,000
2.50
2.20
—
June 2006
150,000
2.50
2.20
—
July 2006
27,000
2.50
2.20
—
August 2006
5,000
2.50
2.20
—
September 2006
2,000
2.75
2.20
—
October 2006
2,000
2.75
2.20
—
November 2006
35,000
2.75
2.20
—
December 2006
920,000
2.20
2.20
—
March 2007
436,500
2.20
4.15
1.95
April 2007
50,000
2.20
4.15
1.95
July 2007
429,432
4.49
4.49
—
(1)
The exercise price per share was at least equal to the fair market
value of our common stock on each applicable stock option grant date as determined by our
compensation committee and board of directors on the basis described in the paragraphs
below. For option grants made between April 2006 and November 2006,
the per share exercise price was established principally based on
the per share issuance price of our then recent preferred stock
placements to third-party investors and, in our opinion, such per
share exercise prices were above the then current fair market value
of our common stock.
(2)
The fair market value per share was determined by our compensation
committee and board of directors on each applicable stock option grant date on the basis
described in the paragraphs below. However, for option grants in March and April 2007, fair
market value per share was reassessed subsequent to the grant dates for financial statement reporting purposes as
described in the paragraphs below.
(3)
The financial reporting intrinsic value per share is the difference
between the subsequently reassessed fair value per share for financial statement reporting purposes as
described in the paragraphs below and the fair market value exercise price per share as
established on each applicable stock grant date by our compensation committee and board of
directors on the basis described in the paragraphs below.
For options
granted between April 2006 and November 2006, our compensation committee and board
of directors established the exercise price of such stock options
principally
based on
the per share issuance price of our then recent preferred stock
placements to third-party investors and, in our opinion, such per
share exercise prices were above the then current fair market value of
our common stock otherwise reflected in independent third party sales
of our common stock.
We
engaged Wipfli LLP, an independent third party valuation firm, or
Wipfli to perform an independent valuation analysis of the fair market value of our
common stock as of November 30, 2006. Wipfli’s report
assessed the fair market value of our common
stock at $2.20 per share as of such date. Wipfli’s analysis was prepared in accordance with the
methodology prescribed by the AICPA Practice Aid Valuation of Privately-Held Company Equity
Securities Issued as Compensation, or the AICPA Practice Aid and
calculated its final valuation using the Probability Weighted
Expected Return Method. The Wipfli report took into account
our issuance in July and September 2006 of a total of 1.8 million shares of our Series C preferred
stock at a price of $2.75 per share. Wipfli recognized that the Series C preferred stock provided
for certain rights and preferences not otherwise available to shareholders of our common stock,
including a 6% cumulative dividend, a senior liquidation preference to our Series B preferred stock
and common stock, a conversion right on a share-for-share basis into common stock at the holders’
option or upon certain qualified events, and a redemption right if certain liquidity events were
not achieved within five years. Wipfli’s assessment noted that recent transactions had taken place
involving the sale of common and preferred stock among our shareholders, as well as our issuances
of new shares, at prices between $2.00 and $3.00 per share. The report took into account that our sales had increased significantly over the past
four years, but that our profitability had decreased significantly in fiscal 2005 and 2006,
resulting in net losses in both fiscal years. However, the report noted that we had shown an
increase in profitability for the 12 months prior to November 30, 2006. Wipfli noted that we had
experienced difficulty obtaining our revolving credit facility in fiscal 2006, but that our
financial situation had improved in fiscal 2007. Wipfli believed that, due to the borrowing base
limitations in our revolving credit facility, we could continue to experience cash flow
difficulties as we continued to grow, depending upon our level of profitability and working capital
needs.
For options granted from December 2006 to the June 18, 2007 release date of Wipfli’s April 30,2007 valuation described below, our compensation committee and board
of directors considered various
sources to establish the fair market value of our common stock for purposes of establishing the
exercise price of such stock options, including: (i) independent third-party sales of our common
stock; (ii) transactions in which we issued shares of our common and preferred stock to third-party
investors; and (iii) Wipfli’s November 30, 2006
independent valuation described above. Our compensation committee and
our board
determined that there were no other significant events that had occurred during this period that
would have given rise to a change in the fair market value of our common stock from these indicia
of fair market value and that the exercise prices of stock options granted during this period were
at least equal to our common stock’s fair market value on each applicable grant date.
We engaged Wipfli to perform another valuation analysis of the fair value of our common
stock as of April 30, 2007. Wipfli’s analysis was prepared in accordance with the methodology
prescribed by the AICPA Practice Aid. Wipfli considered a variety of valuation methodologies and
economic outcomes and calculated its final valuation using the Probability Weighted Expected Return
Method. The Wipfli analysis took into account that, in April 2007, we had signed an arm’s-length
negotiated letter of intent to issue a new series of preferred stock to institutional investors on
terms similar to our Series C preferred stock, contemplating gross proceeds of approximately $9.0
million at a per share price of $4.49.
Wipfli’s analysis stated that the proposed per share price
of the new series of preferred stock reflected liquidation preferences and dividend rights not
otherwise available to our shareholders of common stock. The analysis also noted that transactions
involving the sale of our common stock among shareholders within the prior six months had occurred
at prices between $2.50 and $3.00 per share. Wipfli’s analysis
took into account that we had experienced liquidity and profitability difficulties in fiscal
2005 and 2006, but that we had recovered in fiscal 2007 and that, based on our financial condition
and growth potential, our outlook from a financial perspective was positive. In accordance with the AICPA Practice Aid, Wipfli’s
valuation then gave further recognition to our consideration of a potential initial public
offering, while also considering the economic value of other potential strategic alternatives or
economic outcomes that might occur. In this regard, Wipfli analyzed various preliminary valuation
data received in May 2007 by our board of directors in
connection with our potential initial public offering. Wipfli assessed
our probability of an initial public offering at 50%, our probability of completing a strategic
alternative at 40%, and our probability of our remaining a private company at 10%. Based on such
relative probabilities and (i) preliminary indications of the
potential increase in value of our common stock resulting from a potential initial public offering;
(ii) the potential increase in value of our common stock from
other potential strategic alternatives; (iii)
the value of our common stock resulting from remaining a privately-held company; and (iv) the per
share value implied by the arm’s-length negotiated letter of intent related to our proposed new
series of preferred stock, Wipfli concluded that the fair value of our common stock as of April 30, 2007
was $4.15 per share.
Upon release of the April 30, 2007 Wipfli valuation on June 18, 2007, we determined that it was appropriate to
reassess the fair market value of our stock options granted in March and April 2007 and use the
$4.15 per share fair market value as set forth in Wipfli’s April 30, 2007 valuation solely for
financial statement reporting purposes for such stock option grants. Due to the proximity of
Wipfli’s November 30, 2006 independent valuation to our December 2006 option grants, we believe
that the $2.20 per share exercise price established by our compensation committee and board of
directors for such stock option grants appropriately represented fair market value on the date of
grant for financial reporting purposes. Based on this reassessment for financial statement
reporting purposes, we will recognize additional stock-based compensation expense of $0.8 million
over the three-year weighted-average term of such stock options, including $0.1 million in fiscal
2008.
On July 27, 2007, we granted stock options for 429,432 shares at an exercise price of $4.49
per share. Our compensation committee and board of directors determined that the exercise price of
such stock options was at least equal to the fair market value of our common stock as of such date
primarily based on the $4.49 per share conversion price of our substantially simultaneous
subordinated convertible note placement. Our compensation committee and board of directors based
this determination on the fact that the valuation of our common stock reflected in such conversion
price was the result of significant arm’s-length negotiations with sophisticated institutional
investors, led by an indirect affiliate of GEEFS, and took into account the possibility of our potential near-term initial
public offering. In determining that such exercise price was at least equal to the fair market
value of our common stock on such date, our compensation committee and board of directors also took
into account Wipfli’s April 30, 2007 valuation of our common stock at $4.15 per share, which also
took into account Wipfli’s assessed 50% possibility of our potential initial public offering and
the potential resulting value of our common stock. Our compensation committee and board of
directors determined that there were no other significant events that had
occurred during this
period that would have given rise to a change in the fair market value of our common stock and
that, despite the increasing possibility of a near-term initial public offering, such potential
offering remained contingent upon many variable factors, including: (i) our financial results;
(ii) investor interest in our company; (iii) economic and stock market conditions generally and
specifically
as they may impact us, participants in our industry or comparable companies; (iv) changes in
financial estimates and recommendations by securities analysts following participants in our
industry or comparable companies; (v) earnings and other announcements by, and changes in market
evaluations of, us, participants in our industry or comparable companies; (vi) changes in business
or regulatory conditions affecting us, participants in our industry or comparable companies; and
(vii) announcements or implementation by our competitors or us of acquisitions, technological
innovations or new products.
After the closing of this offering, we will solely use the closing sale price of our common
shares on the Nasdaq Global Market (or other applicable stock exchange on which our shares are then
traded) on the date of grant to establish the exercise price of our stock options, as required by
our 2004 Stock and Incentive Awards Plan.
We
recognized stock-based compensation expense related to the adoption
of SFAS 123(R) of $0.4
million for fiscal 2007 and $0.1 million for our fiscal 2008 first quarter. As of March 31, 2007,
$3.0 million of total stock option compensation cost was expected to be recognized by us over a
weighted average period of three years. We expect to recognize $0.7 million of stock-based
compensation expense in fiscal 2008 based on our stock options outstanding as of March 31, 2007.
This expense will increase further to the extent we have granted, or will grant, additional stock
options in fiscal 2008, as described above. Taking into account our stock options granted during
fiscal 2008 through the date of this prospectus, a total of $3.9 million of stock option
compensation cost is expected to be recognized by us over a weighted average period of three years,
including $1.0 million fiscal 2008.
Common
Stock Warrants. We
issued common stock warrants to placement agents in connection with
our various stock offerings and services rendered in fiscal 2005,
2006 and 2007. The value of warrants recorded as offering costs was
$0.4 million, $30,000 and $18,000 in fiscal 2005, 2006 and
2007, respectively. The value of warrants recorded for services was
$6,000 in fiscal 2006. As of March 31, 2007 and June 30,2007, warrants were outstanding to purchase a total of 1,109,390 and
954,390 shares of our common stock at weighted average exercise
prices of $2.24. These warrants were valued using a Black-Scholes
option pricing model with the following assumptions:
(i) contractual terms of 5 years; (ii) weighted average
risk-free interest rates of 4.32% to 4.62%; (iii) expected
volatility ranging between 39% and 60%; and (iv) dividend
yields of 0%.
Accounting
for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to
determine our income taxes in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax expenses, together with assessing temporary differences resulting
from recognition of items for income tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated balance sheet. We
must then assess the likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, establish a valuation allowance.
To the extent we establish a valuation allowance or increase this allowance in a period, we must
reflect this increase as an expense within the tax provision in our statements of operations.
Our judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities, and any valuation allowance recorded against our net deferred tax assets.
We continue to monitor the realizability of our deferred tax assets and adjust the valuation
allowance accordingly. We have determined that a valuation allowance against our net deferred tax
assets was not necessary as of March 31, 2006 or 2007. In making this determination, we considered
all available positive and negative evidence, including projected future taxable income, tax
planning strategies and recent financial performance.
As of March 31, 2007, our federal and state net operating loss carryforwards were $5.1
million. Included in the $5.1 million loss carryforwards are $3.0 million of federal and $2.7
million of state expenses that are associated with the exercise of non-qualified stock options. The
benefit from the net operating losses created from these expenses will be recorded as a reduction
in taxes payable and an increase in additional paid in capital when the benefits are
realized.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109, or FIN 48, which became effective for us on
April 1, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. The adoption of FIN 48 resulted in an increase of $0.2
million to our accumulated deficit as of April 1, 2007. As of the adoption date, the balance of
gross unrecognized tax benefits was $1.6 million, of which $0.4 million, if recognized, would
affect our effective tax rate. Of this amount, $60,000 and $0.3 million were recorded as current
and deferred tax liabilities, respectively. The remaining amount of unrecognized tax benefits of
$1.2 million relates to net operating loss carryforwards created by the exercise of non-qualified
stock options. The benefit from the net operating losses created from these expenses will be
recorded as a reduction in taxes payable and a credit to additional paid-in capital in the period
in which the benefits are realized. The amount of unrecognized tax benefits did not materially
change as of June 30, 2007. It is expected that the amount of unrecognized tax benefits may change
in the next 12 months; however, quantification of such change cannot be estimated. We recognize
penalties and interest related to unrecognized tax benefits in income tax expense. Interest and
penalties are immaterial as of the date of adoption and are included in unrecognized tax benefits.
Due to the existence of net operating loss carryforwards, all years since 2000 are open for
examination by taxing authorities.
Recent Accounting Pronouncements
SFAS
No. 157, Fair Value Measurements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, or SFAS 157. SFAS 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally accepted accounting
principles more consistent and comparable. SFAS 157 also requires expanded disclosures to provide
information about the extent to which fair value, and the effect of fair value measures on
earnings. SFAS 157 is effective for years beginning after November 15, 2007. We are currently
evaluating the potential effect of SFAS 157 on our financial statements.
SFAS
No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities.
On February 15, 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. Under this
standard, we may elect to report financial instruments and certain other items at fair value on a
contract-by-contract basis with changes in value reported in earnings. This election is
irrevocable. SFAS 159 is effective for years beginning after November 15, 2007. We are currently
evaluating the potential effect of SFAS 159 on our financial
statements.
EITF No.
07-3, Accounting for Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities. In
June 2007, the FASB ratified Emerging Issues Task Force
(“EITF”) Issue No. 07-3, Accounting for Advance Payments
for Goods or Services to Be Used in Future Research and Development
Activities, or EITF 07-3. This requires that nonrefundable advance
payments for future research and development activities be deferred
and capitalized. EITF 07-3 is effective as of the beginning of an
entity’s first fiscal year that begins after December 15,2007. We are currently evaluating the potential effect of
EITF 07-3 on our financial statements.
We
design, manufacture and implement energy management systems consisting
primarily of high-performance, energy efficient lighting systems,
controls and related services. Our energy management systems deliver energy savings and
efficiency gains to our commercial and industrial customers without
compromising their quantity or quality of light. The core of our energy
management system is our HIF lighting
system that we
estimate cut our customers’ lighting-related electricity costs by approximately 50%, while increasing
their quantity of light by approximately 50% and improving lighting
quality when replacing HID fixtures.
Our customers typically
realize a two to three year payback period from electricity cost savings
generated by our HIF lighting
systems without considering utility incentives or government subsidies. We have
sold and installed our HIF fixtures in over 1,800 facilities across North
America, representing over 451 million square feet of commercial
and industrial building space, including for 73 Fortune 500 companies,
such as General Electric Co., Kraft Foods Inc., Newell Rubbermaid
Inc., OfficeMax, Inc., SYSCO Corp., and Toyota Motor Corp.
Our
energy management system is comprised of: our HIF lighting system; our
InteLite intelligent lighting controls; our Apollo Light Pipe, which
collects and
focuses daylight and consumes no electricity; and integrated
energy management services. We believe that the implementation of our
complete energy management system enables our customers to further
reduce electricity costs, while permanently
reducing base and peak load electricity demand. From December 1,2001 through June 30, 2007, we have installed over 850,000 HIF
lighting systems for our commercial and industrial customers. We are
focused on leveraging this installed base to expand our customer
relationships from single-site implementations of our HIF lighting
systems to enterprise-wide roll-outs of our complete energy
management system. We are also expanding our customer base by
executing our systematized, multi-step sales process.
Our annual revenue
has increased from $12.4 million in fiscal 2004 to $48.2 million in fiscal
2007. For the three months ended June 30, 2007, we recognized revenue of $16.7 million, compared
to $9.7 million for the three months ended June 30, 2006. We estimate that the use of our
HIF fixtures has resulted in cumulative
electricity cost savings for our customers
of approximately $224 million and has reduced base
and peak load electricity demand by approximately 243 MW through
June 30, 2007. We estimate that this reduced electricity
consumption has reduced associated indirect carbon
dioxide emissions by approximately 2.8 million tons over the same period.
For a
description of the assumptions behind our calculations of
customer kilowatt demand reduction, customer kilowatt hours and electricity costs saved and reductions in indirect carbon dioxide emissions
associated with our products used throughout this prospectus, see
notes (6) through (11) under “Summary Historical
Consolidated and Pro Forma Financial Data and Other Information.”
Our Industry
As a
company focused on providing energy management systems, our market
opportunity is created by growing electricity capacity shortages, underinvestment
in T&D infrastructure, high electricity costs and the high financial and environmental costs associated with adding
generation capacity and upgrading the T&D infrastructure. The United States electricity market is characterized by rising demand, increasing electricity
costs and power reliability issues due to continued constraints on
generation and T&D capacity. Electricity demand is expected to grow steadily over the coming
decades and significant challenges exist in meeting this increase in
demand. These constraints are causing
governments, utilities and businesses to focus on demand reduction initiatives, including energy
efficiency and other demand-side management solutions.
Growing Demand for Electricity. Demand for electricity in the United States has grown
steadily in recent years and is expected to grow significantly for the foreseeable future.
According to the EIA, $298 billion was spent on electricity
in 2005 in the United States, up from $203 billion in 1994, an increase of 47%. Additionally, the
EIA predicts consumption will increase from 3,821 billion kWh in
2005 to 5,478 billion
kWh in 2030, or approximately 43%. As a result of this rapidly
growing demand, the National Electric Reliability Council, or NERC,
expects capacity margins to drop below minimum target levels in
Texas, New England, the Mid-Atlantic, the Midwest and the Rocky
Mountain area within the next two to three years. We believe that meeting this
increasing domestic
electricity demand will require either an increase in energy supply through capacity expansion, broader adoption of
demand management programs, or a combination of these solutions.
Challenges
to Capacity Expansion. Based on the forecasted growth in
electricity demand, the EIA estimates that the United States will require 292 GW of
new generating capacity between 2006 and 2030 (the equivalent of 584 power plants rated at an
average of 500 MW each). According to data provided by the
International Energy Agency, or IEA, we estimate that new generating capacity and associated T&D
investment will cost approximately $2.2 million per MW.
In
addition to the high financial costs associated with adding power generation capacity, there are
environmental concerns about the effects of emissions from additional power plants, especially
coal-fired power plants. According to the IEA, global
energy-related carbon dioxide emissions in 2030 are expected to exceed 2003 levels by 52%, with
power generation expected to contribute to about half of this increase. Coal-fired plants, which generate
significant emissions of carbon dioxide
and other pollutants, are projected by the EIA to account for 54% of the power
generation capacity expansion expected in the United States between
2006 and 2030. We believe that concerns over emissions may make it increasingly difficult for utilities to add
coal-fired generating capacity. Clean coal energy initiatives
are characterized by an uncertain legislative and regulatory framework and would involve substantial infrastructure cost to
readily commercialize.
Although the EIA expects
clean-burning natural gas-fired plants to account for 36% of total required domestic capacity additions,
natural gas production has recently leveled off, which may make it
difficult to fuel significant
numbers of additional plants, and natural gas prices have approximately doubled in the last decade
according to the EIA. Environmentally-friendly renewable energy alternatives, such as solar and wind, generally require
subsidies and rebates to be cost competitive and do not provide continuous electricity generation.
As a result, we do not believe that renewable energy sources will account for a meaningful
percentage of overall electricity supply growth in the near term. We believe these challenges to
expanding generating capacity will increase the need for energy
efficiency initiatives to meet demand growth.
Underinvestment
in Electricity Transmission and Distribution. According to the DOE, the majority of U.S. transmission lines, transformers and circuit breakers – the
backbone of the U.S. T&D system – is more than 25 years old. The underinvestment in
T&D infrastructure has led to well-documented power reliability issues, such as the August 2003
blackout that affected a number of states in the northeastern United States. To upgrade and
maintain the U.S. T&D system, the Electric Power Research Institute, or EPRI, estimates
that the United States will need to invest over $110 billion, or $5.5 billion per year, by 2025.
This underinvestment is projected to become more pronounced as electricity demand grows. According
to NERC, electricity demand is expected to increase by 19%
between 2006 and 2015, while transmission capacity is expected to increase
by only 7%.
High
Electricity Costs. The price of one kWh of electricity (in nominal dollars,
including the effects of inflation) has reached historic highs, according to the EIA. Rising
electricity prices, coupled with increasing electricity consumption, are resulting in increasing
electricity costs, particularly for businesses. Based on the most recent EIA electricity rate and
consumption data available, we estimate that commercial and industrial electricity expenditures
rose 74% and 21%, respectively, from 1994 to 2005, and rose 9% and
6%, respectively, in comparing monthly expenditures in April
2006 and April 2007. As a result, we believe that
electricity costs are an increasingly significant expense for businesses, particularly those
with large commercial and industrial facilities.
Our Market Opportunity
We believe
that energy efficiency measures represent permanent, cost-effective and
environmentally-friendly alternatives to expanding electricity capacity in order to meet demand
growth. The American Council for an Energy Efficient Economy, or ACEEE, estimates that the United
States can save up to 24% of its estimated electricity usage from 2000 to 2020 by deploying currently available energy
efficiency products and technologies across all sectors, the equivalent of over $70 billion per year in energy
savings.
As a result,
we believe governments, utilities and businesses are increasingly focused on demand reduction
through energy efficiency and demand management programs. For example:
•
Thirty-two states have, through legislation or regulation, ordered utilities to
design and fund programs that promote or deliver energy efficiency.
•
Twelve states have implemented, or are in the process of implementing, Energy
Efficiency Resource Standards, which generally require utilities to allocate funds
to energy efficiency programs to meet near-term savings targets set by state
governments or regulatory authorities. These states include California, Texas,
Colorado, New Jersey and Illinois.
•
In recent years, there has also been an increasing focus on “decoupling,” a regulatory
initiative designed to break the linkage between utility kWh sales and revenues, in
order to remove the disincentives for utilities to promote load reducing
initiatives. Decoupling aims to encourage utilities to actively promote energy
efficiency by allowing utilities to generate revenues and returns on investment
from employing energy management solutions. To date, nearly half of all states
have adopted or are adopting forms of decoupling for gas or electric utilities.
One method
utilities use to reduce demand is the implementation of demand response programs.
Demand response is a method of reducing electricity usage during periods of peak demand in order to
promote grid stability, either by temporarily curtailing end use or by shifting
generation to backup sources, typically at customer facilities. While demand response is an
effective tool for addressing peak demand, these programs typically reduce consumption for only up
to 100 hours per year, based on demand conditions, and
require end users to compromise their consumption patterns, for
example by reducing lighting or air
conditioning.
We believe that given
the costs of adding new capacity and the limited number of hours that
are addressed by current demand response initiatives, there is a significant opportunity for more comprehensive energy
efficiency solutions to permanently reduce electricity demand during
both peak and off-peak periods. We believe such solutions are a
compelling way for businesses, utilities and regulators to meet rising demand in a cost-effective
and environmentally-friendly manner. We also believe that, in order to gain acceptance among end
users, energy efficiency solutions must offer substantial energy savings and return on investment,
without requiring compromises in energy usage patterns.
According to the DOE, lighting accounts for 22% of electric power consumption in the United
States, with commercial and industrial lighting accounting for 65% of
that amount. Based on this information, we estimate that
approximately $42 billion was spent on electricity for lighting in
the United States commercial and industrial sectors in 2005. Commercial and industrial facilities in the United States
employ a variety of lighting technologies, including HID, traditional fluorescents and incandescent lighting fixtures. Our HIF
lighting systems usually replace HID fixtures, which
operate inefficiently and, according to EPRI, only convert
approximately 36% of the energy they consume into visible light. The
EIA estimates that as of 2003 there were 455,000 buildings in the
United States representing 20.6 billion square feet that
utilized HID lighting.
Our Solution
50/50 Value Proposition. We
estimate our HIF lighting systems generally reduce
lighting-related electricity costs by approximately 50% compared to
HID fixtures, while
increasing the quantity of light by approximately 50% and improving lighting quality. From
December 1, 2001 through June 30, 2007, we believe that the
use of our HIF fixtures has saved our customers $224 million in
electricity costs and reduced their energy consumption by 2.9 billion kWh.
Rapid Payback Period. In most retrofit projects where we replace HID fixtures, our
customers typically realize a two to three year payback period on our
HIF lighting systems. These returns are achieved without considering
utility incentives or
government subsidies (although subsidies and incentives are increasingly being made available to
our customers and us in connection with the installation of our
systems).
Comprehensive Energy Management System.
Our comprehensive energy management system enables us to reduce our
customers’ base and peak load electricity consumption. By replacing
existing HID fixtures with our
HIF lighting systems, our customers permanently reduce base load
electricity consumption while
significantly increasing their quantity and quality of light. We can also add intelligence
to the customer’s lighting system through the implementation of our InteLite line of motion control
and ambient light sensors. This gives our customers the ability to control and adjust lighting and
energy use levels for additional cost savings. Finally, we offer a further permanent reduction in
electricity consumption through the installation and integration of our Apollo Light Pipe,
which is a lens-based device that collects and focuses daylight without consuming electricity.
By integrating our Apollo Light Pipe and HIF lighting system with the intelligence of our
InteLite product line, the output and electricity consumption of our
HIF lighting systems can be automatically
adjusted based on the level of natural light being provided by our
Apollo Light Pipe.
Easy Installation, Implementation and Maintenance. Our HIF fixtures are designed with a
lightweight construction and modular plug-and-play architecture that allows for fast and
easy installation, facilitates maintenance and allows for easy integration of other components of
our energy management system. We believe our system’s design
reduces installation time and expense
compared to other lighting solutions, which further improves our
customers’ return on investment. We also believe that our use of
standard components reduces our customers’ ongoing maintenance
costs.
Base and Peak Load Relief for Utilities.
The implementation of our energy management systems can substantially
reduce our customers’ electricity demand during peak and
off-peak periods. Since commercial and industrial lighting represents approximately 14% of total energy usage
in the United States, our systems can substantially reduce the need for
additional base and peak load generation and distribution capacity,
while reducing the impact of peak demand periods on the electrical
grid. We estimate that the HIF fixtures we have installed from December 1, 2001 through June 30,2007 have had the effect of reducing base and peak load demand by approximately 243 MW.
Environmental
Benefits. By permanently reducing electricity consumption, our
energy management systems reduce
associated indirect carbon dioxide emissions that would otherwise
have resulted from generation of this energy. We estimate that one of
our HIF lighting systems, when replacing a standard HID
fixture, displaces 0.241 kW of electricity, which, based on
information provided by the EPA, reduces
a customer’s indirect carbon dioxide emissions by approximately
1.8 tons per year.
Based on these figures, we estimate that the use of our HIF fixtures has reduced indirect carbon dioxide emissions by
2.8 million tons through June 30, 2007.
Our Competitive Strengths
Compelling Value Proposition.
By permanently reducing lighting-related
electricity usage, our systems enable our commercial and industrial customers to achieve
significant cost savings, without compromising the quantity or quality of light in their
facilities. As a result, our energy management systems offer our customers a rapid return on their
investment, without relying on government subsidies or utility incentives. We believe
our ability to deliver improved lighting quality while reducing
electricity costs
differentiates our value proposition from other demand management
solutions which require end
users to alter the time, manner or duration of their electricity use to achieve cost savings.
Large and Growing Customer Base. We have developed a large and growing national customer
base, and have installed our products in over 1,800 commercial
and industrial facilities across North America. As of
June 30, 2007, we have completed or are in the process of
completing retrofits in over 400 facilities
for our 73 Fortune 500 customers. We believe that the
willingness of our blue-chip customers to install our products across multiple facilities
represents a significant endorsement of our value proposition, which
in turn helps us sell our energy management systems to new customers.
Systematized Sales Process. We have invested substantial resources in the development of our innovative
sales process. We primarily sell directly to our end user customers
using a systematized multi-step sales process that
focuses on our value proposition and provides our sales force with
specific, identified tasks that govern their interactions with our customers from the point of lead
generation through delivery of our products and services. In
addition, we have developed relationships with numerous electrical contractors, who often
have significant influence over the choice of
lighting solutions that their customers adopt.
Innovative
Technology. We have developed a portfolio of 16 U.S.
patents primarily covering various elements of our HIF fixtures. We also have nine patents pending that primarily cover various
elements of our InteLite controls and our Apollo Light Pipe and
certain business methods. To complement our innovative
energy management products, we have introduced integrated energy management
services to provide our customers with a turnkey solution. We believe
that our demonstrated ability to innovate provides us with significant competitive advantages.
Strong, Experienced Leadership Team. We have a strong and experienced senior management team
led by our president and chief executive officer, Neal R. Verfuerth, who was the principal founder
of our company in 1996 and invented many of the products that form our energy
management system. Our senior executive management team of seven individuals has
a combined 40 years of experience with our company and a combined 77
years of experience in the lighting and energy management industries.
Efficient,
Scalable Manufacturing Process. We have made significant investments in our
manufacturing facility since fiscal 2005, including investments in
production efficiencies, automated processes and modern production equipment. These investments have substantially increased our production
capacity, which we expect will enable us to support substantially increased demand from our current
level. In addition, these investments, combined with our modular
product design and use of standard components, enable us to reduce our
cost of revenue, while better controlling production quality and
allowing us to be responsive to customer needs on a timely basis.
Our Growth Strategies
Leverage
Existing Customer Base. We are expanding our relationships with our existing
customers by transitioning from single-site facility implementations to comprehensive enterprise-wide
roll-outs of our HIF lighting systems. For
the quarter ended as of June 30, 2007, we had completed or were in the
process of completing retrofits at over 100 facilities
for our top five customers by revenue for that quarter. We also intend to
leverage our large installed base of HIF lighting systems to implement all
aspects of our energy management system for our
existing customers.
Target Additional Customers. We
are expanding our base of commercial and industrial
customers by executing our systematized sales process and by
increasing our direct sales force. We focus our sales efforts in
geographic locations where we already have existing customer sites.
We plan to increase the visibility of our brand name and raise awareness of our value
proposition by expanding our marketing efforts. In addition, we are
implementing a sales and marketing program to leverage existing and develop new relationships with electrical
contractors and their customers.
Provide Load Relief to Utilities and Grid Operators. Because
commercial and industrial lighting
represents a significant percentage of overall electricity usage, we
believe that as we increase our
market penetration, our systems will, in the aggregate, have a significant impact on reducing base
and peak load electricity demand. We estimate our HIF lighting
systems can generally eliminate demand at
a cost of approximately $1.0 million per MW when used in replacement of typical HID fixtures, as
compared to the IEA’s estimate of approximately $2.2 million per MW of capacity for new generation
and T&D assets. We intend to market our
energy management systems directly to utilities and grid operators as a lower-cost, permanent
alternative to capacity expansion. We believe that utilities and grid
operators may increasingly view our systems as a way to
help them meet their requirements to provide reliable electric power to their customers in a
cost-effective and environmentally-friendly manner. In addition, we believe that potential
regulatory decoupling initiatives could increase the amount of incentives that
utilities and grid operators will be willing to pay us or our customers for the installation of our
systems.
Continue
to Improve Operational Efficiencies. We are focused on
continually improving the efficiency of our operations to increase
the profitability of our business. In our manufacturing operations,
we pursue opportunities to reduce our materials, component and
manufacturing costs through product engineering, manufacturing
process improvements, research and development on alternative
materials and components, volume purchasing and investments in
manufacturing equipment and automation. We also seek to reduce our
installation costs by training our authorized installers to perform
retrofits more efficiently, and by aligning with regional installers
to achieve volume discounts. We have also undertaken initiatives to
achieve operating expense efficiencies by more effectively executing
our systematized multi-step sales process and focusing on geographically-concentrated
sales efforts. We believe that realizing these
efficiencies will enhance our profitability and allow us to continue
to deliver our compelling value proposition.
Develop
New Sources of Revenue. We recently introduced our InteLite
and Apollo Light Pipe products to complement our core HIF lighting systems. We are continuing to develop new
energy management products and services that can be utilized in connection with our current
products, including intelligent HVAC integration controls, direct solar solutions,
comprehensive lighting management software and controls and
additional consulting services. We are also
exploring opportunities to monetize emissions offsets based on our
customers’ electricity savings
from implementation of our energy management systems, and executed our first sale of indirect
carbon dioxide emissions offset credits in fiscal 2007.
Products and Services
We
provide a variety of products and services that
together comprise our energy management system. The core of our
energy management system is our HIF lighting system, which we
primarily sell under the Compact Modular brand name. We offer our
customers the option to build on our core HIF lighting system by
adding our InteLite controls and Apollo Light Pipe. Together with
these products, we offer our customers a variety of integrated energy management
services such as system design, project management and
installation. We refer to the combination of these products and
services as our energy management system.
Products
The following is a description of our primary products:
The Compact Modular. Our primary product category is our line of high-performance HIF
lighting systems, the Compact Modular, which includes a variety of
fixture configurations to meet customer specifications. The Compact Modular generally operates at 224 watts per six-lamp
fixture, compared to approximately 465 watts for the HID fixtures
that it typically replaces. This wattage difference is the primary
reason our HIF lighting systems are able to reduce electricity consumption by
approximately 50% compared to HID fixtures. Our Compact Modular has a thermally
efficient design that allows it to operate at significantly lower temperatures than
HID fixtures and most other legacy lighting fixtures typically found in commercial and industrial
facilities. Because of the lower operating temperatures of our
fixtures, our ballasts and lamps operate more efficiently, allowing more electricity to be converted to light rather than
to heat or vibration, while allowing these components to last longer
before needing replacement. In addition, the heat reduction provided
by installing our HIF lighting systems reduces the electricity
consumption required to cool our customers' facilities, which further
reduces their electricity costs. The EPRI estimates that commercial buildings use 5% to 10% of their electricity consumption for
cooling required to offset the heat generated by lighting fixtures.
In
addition, our patented optically-efficient reflector increases light quantity by efficiently harvesting and focusing emitted light. We and some of our customers have conducted
tests that generally show that our Compact Modular product line can increase light quantity in
footcandles by approximately 50% when replacing HID fixtures.
Further, we believe, based on customer data, that our Compact Modular
products provide a
greater quantity of light per watt than competing HIF fixtures.
The Compact Modular product line also includes our modular power pack, which
enables us to customize our customers' lighting systems to help
achieve their specified lighting and energy savings goals. Our modular power pack integrates
easily into a wide variety of electrical configurations at our customers’ facilities, allowing for
faster and less expensive installation compared to lighting systems that require customized
electrical connections. In addition, our HIF lighting systems are
lightweight, which further reduces installation and maintenance costs.
InteLite
Motion Control and Ambient Light Sensors. Our InteLite
products include motion control and ambient
light sensors which can be programmed to turn individual fixtures on
and off based on user-defined parameters
regarding motion and/or light levels in a given area. Our InteLite products can be added to our HIF
lighting systems at or after installation on a “plug and play” basis by coupling the sensors directly
to the modular power pack. Because of their modular design, our InteLite products can be added to
our energy management system easily and at lower cost when compared to lighting systems that
require similar controls to be included at original installation or retrofitted.
Apollo
Light Pipe. Our Apollo Light Pipe is a lens-based
device that collects and focuses daylight, bringing natural light
indoors without consuming electricity. Our Apollo Light
Pipe is designed and manufactured to maximize light collection
during times of low sun angles, such as those that occur during early morning and late afternoon.
The Apollo Light Pipe produces maximum lighting “power”
in peak summer months and during peak daylight hours, when
electricity is most expensive. By integrating our Apollo Light Pipe
with our HIF lighting systems and InteLite controls, the output and
associated electricity consumption of our HIF lighting systems can be automatically adjusted based on the level
of natural light being provided by our Apollo Light Pipe to offer further energy savings for our
customers.
Wireless Controls. We are currently in the final stages of testing our wireless control
devices. These devices will allow our customers to
remotely communicate with and give commands to individual light
fixtures through web-based software, and will allow the customer to
configure and easily change the control parameters of each individual
sensor based on a variety of inputs and conditions. We expect to
begin selling these products in fiscal 2008.
Other
Products. We also
offer our customers a variety of other HIF fixtures to address their
lighting and energy management needs, including fixtures designed
for agribusinesses and private label resale.
Services
We are expanding the scope of our fee-based
lighting-relating energy management services. We provide our
customers with, and derive revenue from, energy management services,
such as:
•
comprehensive site assessment, which includes a review of the
current lighting requirements and energy usage at the customer’s
facility;
•
site field verification, where we perform a test
implementation of our energy management system at a customer’s
facility upon request;
•
utility incentive and government
subsidy management, where we
assist our customers in identifying, applying for and obtaining
available utility incentives or government
subsidies;
•
engineering design, which involves designing a customized system to
suit our customer’s facility lighting and energy management
needs, and providing the customer with a written analysis of the potential
energy savings and lighting and environmental benefits associated with
the designed system;
•
project management, which involves our working with the
electrical contractor in overseeing and managing all phases of
implementation from delivery through installation;
•
installation services, which we provide through our national
network of qualified installers; and
•
recycling in connection with our retrofit
installations, where we remove, dispose of and recycle our customer’s
legacy lighting fixtures.
In
addition, we have begun to place more emphasis on offering our products under a
shared savings type sales program, under which our customer’s purchase
of our energy management systems may be financed by paying us a
specified amount over time based on a predetermined measure of the reduction in
their electricity consumption resulting from the use of our
products.
Our
warranty policy generally provides for a limited one-year
warranty on our products. Ballasts, lamps and other electrical
components are excluded
from our standard warranty since they are covered by a
separate warranty offered by the original equipment manufacturer. We
coordinate and process customer warranty inquiries and claims,
including inquiries and claims relating to ballast and lamp
components, through our customer service department. Additionally, we
sometimes satisfy our warranty claims even if they are not covered
by our warranty policy as a customer accommodation.
We
are also expanding our offering of other energy management services that
we believe will represent additional sources of revenue for us in the future. Those services
primarily include review and management of electricity bills, as well as management and control of
power quality and remote monitoring and control of our installed systems.
Our Customers
We
primarily target commercial and industrial end users who have
warehousing and manufacturing facilities. As of June30, 2007, we have installed our products in 1,800 commercial and
industrial facilities across
North America, including for 73 Fortune 500 companies. We have completed or are in
the process of completing installations at over 400 facilities for
these Fortune 500 customers. Our diversified customer base
includes:
American Standard International Inc.
Gap, Inc.
OfficeMax, Inc.
SYSCO Corp.
Avery Dennison Corporation
General Electric Co.
Pepsi Americas Inc.
Textron, Inc.
Big Lots Inc.
Kraft Foods Inc.
Sealed Air Corp.
Toyota Motor Corp.
Blyth Inc.
Newell Rubbermaid Inc.
Sherwin-Williams Co.
United Stationers Inc.
Ecolab, Inc.
Sales and Marketing
We
primarily sell our products directly to commercial and industrial customers using a systematized multi-step process that focuses on our value
proposition and provides our sales force with specific, identified
tasks that govern their interactions with our customers from the point
of lead generation through delivery of our products and services. We
intend to significantly expand our sales force in fiscal 2008.
We also sell our
products and services indirectly to our customers through their electrical contractors or
distributors, or to electrical contractors and distributors who buy our products and resell them to
end users as part of an installed project. Even in cases where we sell through these indirect
channels, we strive to have our own relationship with the end user customer.
We also
sell our products on a wholesale basis to electrical contractors and
value-added resellers. We often train our value-added resellers to
implement our systematized sales process to more effectively resell
our products to their customers. We attempt to leverage the customer
relationships of these electrical contractors and value-added
resellers to further
extend the geographic scope of our selling efforts.
We are implementing a joint marketing initiative with
electrical contractors designed to generate additional sales. We believe
these relationships will allow us to increase penetration into the lighting retrofit market because
electrical contractors often have significant influence over their customers’ lighting product
selections.
We
have historically focused our marketing efforts on traditional
direct advertising, as well as developing brand awareness through customer education and active
participation in trade organizations and energy management seminars.
We intend to launch an expanded advertising and marketing campaign to
increase the visibility of our brand name and raise awareness of our
value proposition.
Competition
The market for energy management products and services is fragmented. We face strong
competition primarily from manufacturers and distributors of energy
management products and services as well as
electrical contractors. We compete primarily on the basis of customer relationships, price, quality, energy efficiency, customer
service and marketing support.
There
are a number of lighting fixture manufacturers that sell HIF products that compete with our
Compact Modular product line. Some of these manufacturers also sell HID
products that compete with our HIF lighting systems, including Cooper Industries, Ltd., Ruud Lighting,
Inc. and Acuity Brands, Inc. These companies generally have large, diverse product lines.
Many of these competitors are better capitalized than we are, have
strong existing customer relationships, greater name recognition, and more extensive engineering
and marketing capabilities. We also
compete for sales of our HIF lighting systems with manufacturers and suppliers of older fluorescent
technology in the retrofit market.
Many of our competitors market their manufactured lighting and other products primarily to
distributors who resell their products for use in new commercial, residential, and industrial
construction. These distributors, such as Graybar Electric Company, Gexpro (GE Supply) and W.W.
Grainger, Inc., generally have large customer bases and wide distribution networks and supply to
electrical contractors.
We also face competition from companies who provide energy management services. Some of these
competitors, such as Johnson Controls, Inc. and Honeywell International, provide basic systems and
controls designed to further energy efficiency. Other competitors provide demand response systems
that compete with our energy management systems, such as Comverge, Inc. and EnerNOC, Inc.
Intellectual Property
We
have been issued 16 United States patents, and have applied for nine additional United
States patents. The patented and patent pending technologies include the following:
•
Portions of our core HIF lighting technology (including our optically efficient
reflector and some of our thermally efficient fixture I-frame
constructions) are patented.
Our light pipe technology and its
manufacturing methods are patent pending.
•
Our wireless lighting control system is patent pending.
•
The technology and methodology of our shared savings
programis patent pending.
We believe that our patent portfolio
as a whole is material to our business. We also believe that our
patents covering certain component parts of our Compact Modular,
including our thermally efficient I-frame and our optically efficient reflector,
are material to our business, and that the loss of these patents
could significantly and adversely affect our business, operating
results and prospects. See “Risk Factors — Risks Related to
Our Business — Our inability to protect our intellectual property, or our involvement in damaging and disruptive
intellectual property litigation, could negatively affect our
business and results of operations and financial condition or
result in the loss of use of the product or service.”
Manufacturing
and Distribution
We
own an approximately 266,000 square foot manufacturing and
distribution facility located in
Manitowoc, Wisconsin. Since fiscal 2005, we have made significant investments in new equipment
and in the development of our workforce to expand our internal production
capabilities and increase production capacity. As a result of
these investments, we are generally able to manufacture and assemble our products internally.
We supplement our in-house production with outsourcing contracts as required to meet short-term
production needs. We believe we have sufficient production capacity to support a substantial
expansion of our business.
We
generally maintain a 60-day supply of raw material and purchased
component inventory. We manufacture products to order
and are typically able to ship most orders within 30 days of our
receipt of a purchase order. We contract with transportation
companies to ship
our products and we manage all aspects of distribution logistics.
We generally ship our products directly to the end user.
Research
and Development
Our
research and development efforts are centered on developing new
products and technologies, enhancing existing products, and improving
operational and manufacturing efficiencies. Most recently we have
focused our research and developments efforts on the development and
testing of our InteLite controls and Apollo Light Pipe, and we are
currently finalizing testing on our wireless control products and
software. We are also in the process of developing intelligent HVAC
integration controls, direct solar solutions and comprehensive
lighting management software. Our research and development
expenditures were $1.1 million during fiscal 2007 and
$0.4 million during our fiscal 2008 first quarter.
Regulation
Our operations are subject to federal, state, and local laws and regulations governing, among
other things, emissions to air, discharge to water, the remediation of contaminated properties and
the generation, handling, storage transportation, treatment, and disposal of, and exposure to,
waste and other materials, as well as laws and regulations relating to occupational health and
safety. We believe that our business, operations, and facilities are being operated in compliance
in all material respects with applicable environmental and health and
safety laws and regulations.
State, county or municipal statutes often require that a licensed electrician be present and
supervise each retrofit project. Further, all installations of electrical fixtures are subject to
compliance with electrical codes in virtually all jurisdictions in the United States. In cases
where we engage independent contractors to perform our retrofit projects, we believe that
compliance with these laws and regulations is the responsibility of the applicable contractor.
Employees
As of June 30, 2007, we had approximately 180 full-time employees. Our employees are not
represented by any labor union, and we have never experienced a work stoppage
or strike. We consider our relations with our employees to be good.
Properties
We
own our approximately 266,000 square foot manufacturing and distribution facility in Manitowoc, Wisconsin. We own our
approximately 23,000 square foot corporate headquarters in Plymouth, Wisconsin. This facility houses our executive
and corporate services offices, sales and implementation team, custom fabrication facilities and
warehouse space.
Legal
Proceedings
From
time to time, we are subject to various claims and legal proceedings
arising in the ordinary course of our business. We are not currently
subject to any material litigation.
The following biographies describe the business experience of our executive officers and
directors:
Neal R. Verfuerthhas been our president and a director since 1998, and our chief executive
officer since 2005. He co-founded our company in 1996 and served until 1998 as our vice president.
From 1993 to 1996, he was employed as director of sales/marketing and product development of
Lights of America, Inc., a manufacturer and distributor of compact fluorescent lighting technology.
Prior to that time, Mr. Verfuerth served as president of Energy 2000/Virtus Corp., a solar heating
and energy efficient lighting business. Mr. Verfuerth has
invented many of our products,
principally our Compact Modular energy efficient lighting system, and other related energy
control technologies used by our company. He is married to our vice president of operations,
Patricia A. Verfuerth.
Daniel J. Waibelhas been our chief financial officer and treasurer since 2001. Mr. Waibel
has over 19 years of financial management experience, and is a certified public accountant and a
certified management accountant. From 1998 to 2001, he was employed by Radius Capital Partners,
LLC, a venture capital and business formation firm, as a principal and chief financial officer.
From 1994 through 1998, Mr. Waibel was chief financial officer of Ryko Corporation, an independent
recording music label. From 1992 to 1994, Mr. Waibel was controller and general manager of
Chippewa Springs, Ltd., a premium beverage company. From 1990 to 1992, Mr. Waibel was director of
internal audit for Musicland Stores Corporation, a music retailer. Mr. Waibel was employed by
Arthur Andersen, LLP from 1982 to 1990 as an audit manager.
Michael J. Pottshas been our executive vice president since 2003 and has served as a director
since 2001. Mr. Potts joined our company as our vice president – technical services in 2001. From
1988 through 2001, Mr. Potts was employed by Kohler Co., one of the world’s largest manufacturers
of plumbing products. From 1990 through 1999 he held the position of supervising engineer – energy
in Kohler’s
energy and utilities department. In 2000, Mr. Potts assumed the position of supervisor –
energy management group of Kohler’s entire corporate energy portfolio, as well as the position of
general manager of its natural gas subsidiary. Mr. Potts is licensed as a professional engineer in
Wisconsin.
Eric von Estorff has been our vice president, general counsel and secretary since 2003. From
1997 to 2003, Mr. von Estorff was employed as corporate counsel and corporate secretary of
Quad/Graphics, Inc. one of the United States’ largest commercial printing companies, where he
concentrated in the areas of acquisitions and strategic combinations, complex contracts and
business transactions, finance and lending agreements, real estate and litigation management.
Prior to his employment at Quad/Graphics, Inc., Mr. von Estorff was associated with a Milwaukee,
Wisconsin-based law firm from 1994 to 1997.
Patricia A. Verfuerth has been our vice president of operations since 1997 and served as
corporate secretary of our company from 1998 through mid-2003. Ms. Verfuerth was employed by
Lights of America, Inc., a manufacturer and distributor of compact fluorescent lighting technology,
from 1991 to 1997. At Lights of America, Inc., Ms. Verfuerth was responsible for recruiting and
training of staff and as liaison to investor-owned utilities for their residential demand side
management initiatives. From 1989 to 1992, she was operations manager for Energy 2000/Virtus Corp,
a solar heating and energy efficient lighting business. She is married to our president and chief
executive officer, Neal R. Verfuerth.
John H. Scribante has been our senior vice president of business development since 2007. Mr.
Scribante served as our vice president of sales from 2004 until 2007. Prior to joining our
company, Mr. Scribante co-founded and served as chief executive officer of Xe Energy, LLC, a
distribution company that specialized in marketing energy reduction technologies, from 2003 to
2004. From 1996 to 2003, he co-founded and served as president of Innovize, LLC, a company that
provided outsourcing services to mid-market manufacturing companies.
Erik G. Birkerts has been our vice president of strategic initiatives since March 2007. Mr.
Birkerts founded and served as president of The Prairie Partners Group LLC, a business strategy
consulting firm that worked with Fortune 500 and middle-market companies to create sales
strategies, from 2000 through February 2007. Mr. Birkerts
was the general manager of strategic
development for Network Commerce, a technology company, from 1999 to
2000. From 1997 to 1999, he
was a management consultant with Frank Lynn & Associates, a marketing consulting firm. Mr.
Birkerts also worked as a bank examiner with the Federal Reserve Bank of New York from 1989 to
1994.
Thomas A. Quadraccihas served as chairman of our board since 2006. Mr. Quadracci was
executive chairman of Quad/Graphics, Inc., one of the United States’ largest commercial printing
companies that he co-founded in 1971, until January 1, 2007, where he also served at various
times as executive vice president, president and chief executive officer, and chairman and chief
executive officer. Mr. Quadracci also founded and served as President of Quad/Tech, Inc., a
manufacturer and marketer of industrial controls, until 2002.
Diana Propper de Callejonhas served as a director since January 2007. Since 2003, Ms.
Propper de Callejon has been a general partner of Expansion Capital Partners, LLC, a venture
capital firm focused on investing in clean technologies. Prior to joining Expansion Capital
Partners, LLC, Ms. Propper de Callejon co-founded and was managing director of EA Capital, a
financial services firm focused on clean technologies. Ms. Propper de Callejon is currently
the managing member of Expansion Capital Partners II – General
Partner, LLC, the general partner of
Expansion Capital Partners II, LP, the general partner of Clean Technology Fund II, LP, which is
one of our principal shareholders. See “Principal and Selling Shareholders.” She is also a
director and member of the compensation committee of Tiger Optics, LLC, an optical sensors company
that is a portfolio company of Clean Technology Fund II, LP.
James R. Kackleyhas served as a director since 2005. Mr. Kackley practiced as a public
accountant for Arthur Andersen, LLP from 1963 to 1999. From 1974 to 1999, he was an audit partner
for the firm. In addition,
in 1998 and 1999, he served as chief financial officer for Andersen Worldwide. From June 1999 to May 2002, Mr. Kackley served
as an adjunct professor at the Kellstadt School of Management at DePaul University. Mr. Kackley
serves as a director, a member of the executive committee and the audit committee chairman of
Herman Miller, Inc., as a director and a member of the nominating and governance committee and the
audit committee of Ryerson, Inc., and as a director and member of the management resources and
compensation committee and audit committee of PepsiAmericas, Inc.
Eckhart G. Grohmannhas served as a director since 2004. Mr. Grohmann is president and
chairman of Aluminum Casting & Engineering Co., Inc., an aluminum foundry company with over 300
employees. Mr. Grohmann is currently serving as a director of the Wisconsin Cast Metals
Association and previously served as the Wisconsin president and national director of the American
Foundrymen’s Society. Mr. Grohmann has also served as a regent of the Milwaukee School of
Engineering since 1990.
Patrick J. Trotterhas served as a director since 1996. From 1998 to 2006, Mr. Trotter served
as chairman of our board of directors. From our inception to 1998, he was president of our
company. Mr. Trotter is currently president of Health Solutions, Ltd, a national health care
consulting company. He has over 30 years of senior leadership experience in the American health
care system and holds a masters degree in health care administration. Mr. Trotter is a fellow in
the American College of Healthcare Executives.
Our executive officers are elected by, and serve at the discretion of, our board of directors.
Board of Directors
Our board of directors immediately following closing of this offering will consist of seven
members divided into three classes, with each class holding office for staggered three-year terms.
Upon expiration of the term of a class of directors, directors of that class will be elected for
three-year terms at the annual meeting of shareholders in the year in which their term expires.
Following the closing of this offering, the terms of office of the Class I directors, consisting
of Ms. Propper de Callejon and Messrs. Quadracci and Potts, will expire upon our 2008 annual
meeting of shareholders. The terms of office of the Class II directors, consisting of Messrs.
Trotter and Grohmann, will expire upon our 2009 annual meeting of shareholders. The terms of
office of the Class III directors, consisting of Messrs. Kackley and Verfuerth, will expire upon our
2010 annual meeting of shareholders.
Our amended and restated bylaws immediately following closing of this offering will provide
that any vacancies in our board of directors and newly-created directorships may be filled for
their remaining terms only by our remaining board of directors and the authorized number of
directors may be changed only by our board of directors.
Ms. Propper de Callejon and Messrs. Quadracci, Trotter, Kackley and Grohmann are independent
directors under the independence standards applicable to us under Nasdaq Global Market rules.
Board Committees
Our board of directors has established an audit and finance committee, a compensation
committee and a nominating and corporate governance committee. Our board may establish other
committees from time to time to facilitate our corporate governance.
Our audit and finance committee is comprised of Messrs. Kackley, Trotter and Grohmann. Mr.
Kackley chairs the audit and finance committee and is an audit committee financial expert, as
defined under SEC rules implementing Section 407 of Sarbanes-Oxley. The principal
responsibilities and functions of our audit and finance committee are to (i) oversee the
reliability of our financial reporting, the effectiveness of our internal control over financial
reporting, and the independence of our internal and external auditors and audit functions and (ii)
oversee the capital structure of our company and assist our board of directors in assuring that
appropriate capital is available for operations and strategic initiatives. In carrying out its
accounting and financial reporting oversight responsibilities and functions, our audit and finance
committee, among other things, oversees and interacts with our independent auditors regarding the
auditors’ engagement and/or dismissal, duties, compensation, qualifications and performance; reviews and discusses with our
independent auditors the scope of audits and our accounting principles, policies and practices; reviews and discusses our
audited annual financial statements with our independent auditors and management; and reviews and
approves or ratifies (if appropriate) related party transactions. Our
audit and finance committee also is directly responsible for the
appointment, compensation, retention and oversight of our independent
auditors. Our audit and finance committee
meets the requirements for independence under the current Nasdaq Global Market and SEC rules, as
Messrs. Kackley, Trotter and Grohmann are independent directors for such purposes.
Our compensation committee is comprised of Ms. Propper de Callejon and Messrs. Quadracci,
Trotter and Grohmann, with Mr. Quadracci acting as the chair.
The principal functions of our
compensation committee include (i) administering our incentive compensation plans; (ii)
establishing performance criteria for, and evaluating the performance of, our executive officers;
(iii) annually setting salary and other compensation for our executive officers; and (iv) annually
reviewing the compensation paid to our non-employee directors. Our compensation committee meets
the requirements for independence under the current Nasdaq Global Market and SEC rules, as Ms.
Propper de Callejon and Messrs. Quadracci, Trotter and Grohmann are independent directors for such
purposes.
Our nominating and corporate governance committee is comprised of Messrs. Grohmann, Kackley
and Quadracci, with Mr. Grohmann acting as the chair. The
principal functions of our nominating
and corporate governance committee are, among other things, to (i) establish and communicate to
shareholders a method of recommending potential director nominees for the committee’s
consideration; (ii) develop criteria for selection of director nominees, (iii) identify and
recommend persons to be selected by our board of directors as nominees for election as directors;
(iv) plan for continuity on our board of directors; (v) recommend action to our board of directors
upon any vacancies on the board; and (vi) consider and recommend to our board other actions
relating to our board of directors, its members and its committees. Our nominating and corporate
governance committee meets the requirements for independence under the current Nasdaq Global Market
and SEC rules, as Messrs. Grohmann, Kackley and Quadracci are independent directors for such
purposes.
This compensation discussion and analysis describes the material elements of compensation
awarded to, earned by, or paid to each of our named executive officers, whom we refer to as our
“NEOs,” during fiscal 2007 and describes our policies and decisions made with respect to the
information contained in the following tables, related footnotes and narrative for fiscal 2007. We
also describe actions regarding compensation taken before or after fiscal 2007 when it enhances the
understanding of our executive compensation program, particularly with respect to our executive and
director compensation programs that will be effective upon the closing of this offering.
Overview of Our Executive Compensation Philosophy and Design
We believe that a skilled, experienced and dedicated senior management team is essential to
the future success of our company and to building shareholder value. We have sought to establish
competitive compensation programs that enable us to attract and retain executive officers with
these qualities. The other objectives of our compensation programs for our executive officers are
the following:
•
to motivate our executive officers to achieve strong financial performance,
particularly sales, profitability growth and increased shareholder value;
•
to provide stability during our development stage; and
•
to align the interests of our executive officers with the interests of our shareholders.
In light of these objectives, we have sought to reward our NEOs for achieving performance
goals, creating value for our shareholders, and loyalty to our company. We also seek to reward
initiative, innovation and creation of new products, technologies, business methods and
applications since we believe our continued success depends in part on our ability to continue to
create new competitive products and services.
Setting Executive Compensation
Our board of directors, our compensation committee and our chief executive officer each play a
role in setting the compensation of our NEOs. Our board of directors appoints the members of our
compensation committee and delegates to the compensation committee the direct responsibility for
overseeing the design and administration of our executive compensation program. Our compensation
committee currently is comprised of Ms. Propper de Callejon and Messrs. Quadracci, Trotter and
Grohmann, each of whom is an “outside director” for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended, or IRC, and a “non-employee director” for purposes of Rule 16b-3 under
the Exchange Act.
During
fiscal 2007, our compensation committee generally was directly involved in setting compensation for our
chief executive officer and in determining and approving equity awards for all of our NEOs. In the
past, our compensation committee also negotiated our employment agreement with our chief executive
officer and president. Historically, our chief executive officer set base salaries and performance
targets for our executive officers, other than himself, and negotiated employment agreements with
certain of our executive officers. For fiscal 2008 and future years, our compensation committee
will have primary responsibility for, among other things, determining our compensation philosophy,
evaluating the performance of our executive officers, setting the compensation and other benefits
of our executive officers, and administering our incentive compensation plans. Our chief
executive officer will make recommendations to our compensation committee regarding the
compensation of other executive officers, including his wife, who is our vice
president of operations, and may attend meetings of our compensation committee at which our
compensation committee considers the compensation of other executives.
For fiscal 2007, we did not engage in a formal benchmarking process for our compensation
programs for NEOs. We based compensation levels in part on informal market surveys and relied on
the collective experience of the members of our compensation committee and our chief executive
officer, their business judgment and our experiences in recruiting and retaining executives. In
anticipation of our becoming a public company and to develop our executive compensation program
that will take effect upon the closing of this offering, our compensation committee has engaged
Towers Perrin, a nationally-recognized compensation consulting firm, to provide recommendations and
advice on our executive and director compensation programs to benchmark our NEOs’ and
directors’ compensation to provide advice on
change-of-control severance provisions, and
to provide advice regarding initial public offering bonuses for our NEOs. Our compensation committee expects to consider this
guidance prior to the closing of this offering. In addition to the advice of Towers Perrin, our compensation committee
plans to consider publicly available compensation data from national and regional companies of
similar size and growth potential in the lighting and energy
management industries.
Changes
to Executive Compensation in Connection with Our Initial Public
Offering
In fiscal 2008, in connection with, and subject to the closing of, this offering, we are
implementing several changes to our compensation programs and policies, with the goal of
establishing compensation programs and policies appropriate for a public company. The changes
include the following:
•
We propose to enter into new, standardized employment agreements with our NEOs.
The agreements will outline the executive’s position, base salary and incentive and
benefit plan participation during a specified term. The agreements will automatically renew unless either party gives written
notice in advance of the expiration of the term. The agreements also will provide for
employment protections and severance benefits in the event of certain terminations, and
for enhanced protections and benefits following a change of control. Our compensation
committee’s goals in putting these agreements in place are to secure and retain our
executive officers and to ensure stability and structure during our development stage,
particularly as a new public company. These employment agreements would replace the
existing employment agreements we have with certain of our NEOs.
•
We have amended and restated our 2004 Equity Incentive Plan, which will be
renamed the Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan. Among
other things, the amendment and restatement does the following:
•
Increases the shares available under the plan from 1.0 million to 3.5
million shares;
•
Replaces the authority of our chief executive officer to make grants of
awards with the ability of our board of directors to delegate to another
committee of the board, including a committee comprised solely of our chief
executive officer, the ability to make grants of awards, subject to various
restrictions and limitations on such delegated authority;
•
Expands the list of performance goals that may be used for IRC Section 162(m) awards;
Permits the grant of annual and long-term cash bonus awards
for IRC Section 162(m) purposes;
•
Includes a provision requiring that awards be adjusted in certain
circumstances, such as in the event of a stock split, to avoid potential
adverse accounting consequences;
•
Imposes a 10-year limit on the term of a stock option;
•
Permits cashless exercises of stock options through a broker-dealer;
•
Adds restricted stock units as a form of award available under the plan;
•
Caps the amount of an award that may vest or be paid upon a change of
control to the extent needed to preserve our deduction under the IRC “excess parachute payment” rules;
•
Permits awards to be assumed under the plan in the event we acquire
another entity;
•
Prohibits the repricing or backdating of stock options and stock
appreciation rights; and
•
Expands the list of plan provisions that may be amended only with
shareholder approval.
•
We have revised and amended our compensation committee charter to reflect our
compliance with current rules and guidelines of the Nasdaq Global Market, the
Exchange Act, and Sarbanes Oxley.
•
We are considering a management cash bonus program connected to the closing of
this offering and the post-offering price performance of our common stock.
Elements
of Compensation
Our current compensation
program for our NEOs consists of the following elements:
•
Base salary;
•
Short-term incentive cash bonus compensation and other cash bonus compensation;
•
Long-term equity incentive compensation; and
•
Retirement and other benefits.
Base Salary
We
pay our NEOs a base salary to compensate them for services rendered and to provide them with
a steady source of income for living expenses throughout the year. We set the base salaries of our
NEOs initially through an arm’s-length negotiation with each individual executive during the hiring
process, and based upon the individual’s level of responsibility and our assessment of the
individual’s experience, skills and knowledge. Our chief executive officer and our compensation
committee review the base salaries of our NEOs (other than our chief executive officer) for
potential increases once per year. Our chief executive officer recommends changes in base
salaries, and our compensation committee accepts, modifies or rejects our chief executive officer’s
recommendation, based upon various factors, including the individual NEO’s experience, level of
responsibility, skills, knowledge, base salary in prior years, contributions to our company in
prior years and compensation received through elements other than base salary. Pursuant to the
terms of our chief executive officer’s employment agreement, his base salary is subject to a
guaranteed increase of 8% each year, so the compensation committee did not review his base salary
for potential increases along with the other NEOs. Under the terms of our proposed new employment
agreement with our chief executive officer, the compensation committee may increase our chief
executive officer’s base salary from time to time in its
discretion, and there is no guaranteed annual increase in his salary. We generally pay lower base
salaries than what we believe our competitors may pay for similar positions, based on our informal
review of publicly available data, and offer what we believe to be comparatively higher levels of
short-term and long-term incentive compensation in order to better link pay with performance.
In fiscal 2007, we increased the base salary of Mr. Scribante from $135,000 to $150,000 in
recognition of his increasing responsibilities, experience, knowledge and skill, and in light of
his past and expected future contributions to our company. In fiscal 2007, we also increased Mr.
Verfuerth’s base salary by 8%, from $250,000 to $270,000 and, effective at the beginning of fiscal
2008, we increased Mr. Verfuerth’s base salary from $270,000 to $291,600, in each case pursuant to
the terms of his existing employment agreement. In fiscal 2008, we increased the base salaries of
Ms. Verfuerth and Messrs. Waibel and Potts by $15,000 each, to $165,000, in view of the length of
time since their base salaries had last been adjusted and in light of their increasing
responsibilities.
Short-Term Cash Bonus Incentive Compensation and Other Cash Bonus Compensation
In fiscal 2007, we provided certain of our NEOs with performance-based cash incentive bonus
opportunities to provide them with competitive compensation packages and to reward achievement of
our performance objectives. We also granted discretionary cash bonuses to other NEOs to reward
them for high levels of individual performance during fiscal 2007. The NEOs who participated in
performance-based cash incentive bonus opportunities in fiscal 2007 were Messrs. Verfuerth,
Scribante and Wadman, and the NEOs who received discretionary cash bonuses were Ms. Verfuerth and
Messrs. Waibel and Potts.
We provided Mr. Verfuerth’s bonus opportunity pursuant to his employment agreement, and
established the performance measures and targets applicable to the bonus opportunity at the time we
entered into his agreement in fiscal 2006. Under his agreement, Mr. Verfuerth’s bonus opportunity
for fiscal 2007 was tied to achievement of the following company-wide financial performance
targets, which were calculated in accordance with GAAP, to the
extent applicable, and with the related bonus payments based on a percentage of his base salary for
fiscal 2007: (i) a revenue target of $70 million, which corresponded to a potential bonus payment
of 35% of base salary; (ii) an EBITDA target of $12 million, which corresponded to a potential
bonus payment of 35% of base salary; (iii) a capital raising target of $20 million, which
corresponded to a potential bonus payment of 15% of base salary; and (iv) a share price target of
$10 per share, which corresponded to a potential bonus payment of 15% of base salary.
Our compensation committee based Mr. Verfuerth’s target performance levels on our business
plan, setting the targets at what it considered a “stretch” level at the time of grant. Our
compensation committee viewed achievement of 75% of the designated targets as more likely to be
achieved than target performance. Our compensation committee selected the four performance metrics
described above as appropriate measures of key elements of our company’s financial performance that
were consistent with
the overall goals and objectives of our executive compensation program. The committee
allocated Mr. Verfuerth’s bonus potential among the metrics seeking to balance metrics relating to
growth and profitability in order to reflect the relative importance of each metric to what the
committee considered the desired performance of our company consistent with our executive
compensation philosophy.
If we had achieved target performance for all of the measures, Mr. Verfuerth would have been
eligible to receive a cash bonus equal to 100% of his base salary for fiscal 2007. Our
compensation committee viewed a target payout of 100% of base salary as appropriate for Mr.
Verfuerth as part of a competitive compensation package and in light of his skills, experience,
past performance and expected contributions to our company in the future. Mr. Verfuerth’s
employment agreement also specified that our board had discretion to award a bonus ranging from 0%
to 60% of the amount due for target performance related to any measure for which we achieved
performance equal to 75% or more of the specified target.
Any short-term incentive compensation earned by Mr. Verfuerth could, under the terms of his
existing employment agreement, be paid in cash, equity or a combination of the two, as determined
by our board in consultation with Mr. Verfuerth. We did not achieve 75% or more of any of the
specified performance targets in fiscal 2007, so Mr. Verfuerth did not receive a bonus payment for
fiscal 2007.
Mr. Scribante’s existing employment agreement provided for a bonus of up to 100% of his base
salary if our company achieved $70 million in revenue for fiscal 2007. The agreement also
specified that our board had discretion to award a bonus, ranging from 0% to 60% of Mr. Scribante’s
base salary, if we achieved performance equal to 75% or more of the revenue target. We set Mr.
Scribante’s target payout at 100% of his base salary to provide competitive compensation and in
view of the importance of his position to our growth strategies. We did not achieve 75% or more of
the revenue target for fiscal 2007. However, in view of Mr. Scribante’s significant contributions
in fiscal 2007 to our company, including his development of substantial national account
opportunities, and his importance to our continued success, based on the recommendation of our
chief executive officer, our compensation committee authorized a discretionary cash bonus of
$50,000 to be paid to Mr. Scribante.
Our compensation committee also awarded discretionary cash bonuses of $20,000 each to Ms.
Verfuerth and Messrs. Waibel and Potts in light of their high levels of performance and significant
contributions to our company in fiscal 2007.
Mr. Wadman
was eligible under the terms of his employment agreement for a bonus equal to 30% of his base
salary based on achievement of the same performance targets applicable to Mr. Verfuerth’s bonus
opportunity. Because those targets were not achieved, Mr. Wadman did not receive any bonus payment
for fiscal 2007. Mr. Wadman’s employment with us ended on February 19, 2007. We describe the
terms of his separation agreement below under “— Payments upon Termination or Change of
Control.”
Beginning upon the closing of this offering, and based on the recommendations of Towers
Perrin, we intend to implement a new short-term cash bonus incentive compensation program under our
new 2004 Stock and Incentive Awards Plan that will, in connection with the new employment
agreements we propose to enter into with our NEOs, supersede the existing short-term incentive
compensation arrangements for Messrs. Verfuerth and Scribante. Our compensation committee has not
yet taken action with respect to a short-term cash bonus incentive compensation program for fiscal
2008 pending the recommendations of Towers Perrin.
Our compensation committee is also currently seeking the recommendations of Towers Perrin
relating to the implementation of a management cash bonus program connected to the closing of this
offering and the post-offering price performance of our common stock.
We provide the opportunity for our NEOs to earn long-term equity incentive awards under our
2003 Stock Option Plan and our 2004 Equity Incentive Plan, which will be replaced by our new 2004
Stock and Incentive Awards Plan effective after this offering. Our
employees, officers, directors and consultants are eligible to
participate in these plans. We believe that long-term equity
incentive awards enhance the alignment of the interests of our NEOs and the interests of our
shareholders and provide our NEOs with incentives to remain in our employment. For these reasons,
in fiscal 2007, as in previous years, we provided a significant component of our NEOs’ compensation
through means of long-term equity incentive awards.
We have generally granted long-term equity incentive awards in the form of options to purchase
shares of our common stock, which are initially subject to forfeiture if the executive’s employment
terminates for any reason. The options generally vest and become exercisable ratably over five
years, contingent on the executive’s continued employment. In the past, we have granted both
incentive stock options and non-qualified stock options to our NEOs. We use time-vesting stock
options as our primary source of long-term equity incentive compensation to our NEOs because we
believe that (i) stock options help to align the interests of our NEOs with the interests of our
shareholders by linking their compensation with the increase in value of our common stock over
time, (ii) stock options conserve our cash resources for use in growing our business and (iii)
vesting requirements on stock options and the limited liquidity of our stock provide our NEOs with
incentive to continue their employment with us which, in turn, provides us with greater stability.
Our compensation committee made awards for fiscal 2007 in December 2006, when we granted
time-vesting stock options to Ms. Verfuerth and Messrs. Verfuerth, Waibel and Potts under our 2004
Equity Incentive Plan. For each of our NEOs who received an option award, we based the decision to
grant the option award, and the determination of the amount of the option award, on various
factors, including the responsibilities of the individual executive, the executive’s past
performance and anticipated future contributions, prior option grants (including the vesting
schedule of such prior grants), the executive’s total cash compensation and the desirability of
retaining the executive. Taking these factors into account, our compensation committee initially
determined the number of option shares that it would grant to Mr. Verfuerth and then, working from
this number, determined the proportionately smaller numbers of option shares that it considered
appropriate for grants to our other executives, including our other NEOs. Our compensation
committee granted Mr. Verfuerth an option to purchase 250,000 shares of our common stock, Mr.
Waibel an option to purchase 100,000 shares, Mr. Potts an option to purchase 75,000 shares, and Ms.
Verfuerth an option to purchase 50,000 shares, in each case at an exercise price of $2.20 per
share. Following approval of the grants by our compensation committee, our board of directors
ratified and approved the compensation committee’s actions.
All of the options that we granted to our NEOs in December 2006 are subject to ratable vesting
over five years of continuous employment, measured from the grant date, and have an exercise price
equal to the fair market value of our common stock on the date of grant as determined at the time
of grant by our compensation committee and board of directors. Our compensation committee and
board of directors used various sources to determine the fair market value of our common stock for
purposes of establishing the exercise price of stock options, including (i) independent third-party
sales of our common stock; (ii) transactions in which we issued shares of our common and preferred
stock to third-party investors; and (iii) independent valuations of the fair market value of our
common stock. For the options we granted to our NEOs in December 2006, our compensation committee
and board of directors determined the fair market value or our common stock primarily in reliance
on a November 30, 2006 independent valuation of the fair market value of our common stock performed by
Wipfli LLP, an independent third-party valuation firm that we retained to perform such valuation.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operation –
Critical Accounting Policies and Estimates –Stock-Based Compensation.”
In June 2006, we granted Mr. Scribante an option to purchase 100,000 shares of our common
stock in connection with his entering into his new employment agreement. We granted Mr. Scribante
this option in view of his increasing responsibilities and his past and expected future
contributions to our financial performance. The option is subject to ratable vesting over five
years of continuous employment, measured from March 31, 2006, and has an exercise price of $2.50
per share, the price at which we offered shares in our most recent offering of our Series B
preferred stock at the time of the option grant. We determined the number of options granted to
Mr. Scribante through an arm’s-length negotiation over the terms of his employment agreement and
with a goal of providing compensation commensurate with his responsibilities and position within
our company.
In March 2007, Mr. Verfuerth and Ms. Verfuerth exercised previously granted non-qualified
stock options for 1,000,000 and 750,000 shares of our common stock, respectively, and paid the
exercise price of such options in the form of a promissory note in the principal amount of $812,500
and $565,625, respectively. Under Sarbanes-Oxley, a company may not have loans outstanding to its executive officers at the time it files
its registration statement for an initial public offering with the SEC. As a result, in order to
extinguish these outstanding loans to Mr. Verfuerth and Ms. Verfuerth prior to the filing with the
SEC of the registration statement of which this prospectus is a part, effective on July 27, 2007,
Mr. Verfuerth redeemed 180,958 shares of common stock in satisfaction of the $812,500 outstanding
principal amount under his March 2007 promissory note. He paid the accrued interest on such note
to us in cash on August 2, 2007. Similarly, effective on July 27, 2007, Ms. Verfuerth redeemed
125,974 shares of common stock in satisfaction of the $565,625 outstanding principal amount under
her March 2007 promissory note. She paid the accrued interest on such note to us in cash on August2, 2007. Mr. Verfuerth’s and Ms. Verfuerth’s shares were redeemed using a fair market value of
$4.49 per share, which is the same value as the per share conversion price of the Convertible Notes
issued to an indirect affiliate of GEEFS, Clean Technology and
affiliates of Capvest on August 3, 2007. At the same time in order not to economically penalize Mr. Verfuerth and Ms. Verfuerth in connection
with such share redemptions, our compensation committee granted Mr.
Verfuerth and Ms. Verfuerth a non-qualified stock option to purchase 180,958 and 125,974 shares of
our common stock, respectively. The options have an exercise price of $4.49 per share, a one-year
vesting period and a four-year term. The options granted were designated as non-qualified stock
options instead of incentive stock options in order to provide our company with a tax deduction for
the difference between the fair market value of such shares on the date of option exercise and
their exercise price. The one-year vesting period was determined to be important by our committee
to enhance the retention benefits to our company of granting such options. The four-year exercise
period is shorter than our more typical option exercise period because our compensation committee
decided to carry over the then remaining exercise period that was applicable to the stock options
that were exercised by Mr. Verfuerth and Ms. Verfuerth in March 2007. Our compensation committee
determined that this method of satisfying Mr. Verfuerth’s and Ms. Verfuerth’s outstanding loans was
fair to our company and its shareholders because it (i) allowed us to proceed with this initial
public offering; (ii) was not dilutive to our shareholders; (iii) provided us with additional
retention benefits;
and (iv) provided approximately the same economic consequences to Mr. Verfuerth and Ms. Verfuerth
as originally contemplated, although Mr. Verfuerth and Ms. Verfuerth will recognize certain
originally unintended adverse tax consequences, and we will recognize certain originally unintended
tax benefits, upon their ultimate exercise of the stock options granted.
We made all of the option grants to our NEOs in fiscal 2007 under our 2004 Equity Incentive
Plan. As required by the 2004 Equity Incentive Plan, all options granted in fiscal 2007 to our
NEOs had an exercise price equal to or higher than the fair market value of our common stock on the
date of grant as determined at the time of grant by our compensation committee and our board of
directors. An exercise
price equal to or higher than the fair market value of our common stock on the date of grant
is also required to prevent the options from being classified as “deferred compensation” subject to
the election and payment timing requirements of Section 409A of
the IRC. The
number of shares of our common stock covered by the options granted to each of our NEOs in fiscal
2007 is reflected in the Grants of Plan-Based Awards table below. Except as described above, the
options expire to the extent unexercised on the earliest of the tenth anniversary of the grant
date, a termination of employment for cause, three months following a termination other than for
cause or due to death, retirement or disability and one year following a termination of employment
due to death or disability. See “—Payments upon Termination or
Change of Control” for a description of the terms of the options relating to a change in control of
our company.
Our compensation committee intends to award long-term equity incentives to our executives on
an annual basis, although more frequent awards may be made at the discretion of our compensation
committee on other occasions. Future
awards will be made under our 2004 Stock and Incentive Awards Plan, which we have modified as described
above under “Changes to Executive Compensation in Connection with Our Initial Public Offering” and
which will become effective upon closing of this offering.
Retirement and Other Benefits
Welfare and Retirement Benefits. As part of a competitive compensation package, we sponsor a welfare benefit plan that offers
health, life and disability insurance coverage to participating employees. In addition, to help
our employees prepare for retirement, we sponsor the Orion Energy Systems Ltd 401(k) Plan
and match employee contributions at a rate of 3% of the first $5,000 of an employee’s
contributions. Our NEOs participate in the broad-based welfare plans and the 401(k) Plan on the
same basis as our other employees. We also provide enhanced life and disability insurance
benefits for our NEOs. Under our enhanced life insurance benefit, we pay the full cost of premiums
for life insurance policies for our NEOs. The amounts of the premiums are reflected in the Summary
Compensation Table below. Our enhanced disability insurance benefit includes a higher maximum
benefit level than under our broad-based plan, cost of living adjustments and a portability
feature.
Perquisites
and Other Personal Benefits. We provide perquisites and other personal benefits that we believe are reasonable and
consistent with our overall compensation program to better enable our executives to perform their
duties and to enable us to attract and retain employees for key positions. Under their employment
agreements, we provided Mr. Verfuerth and, until his termination of employment, Mr. Wadman with a
car allowance of $1,000 per month. We also provide Ms. Verfuerth and Messrs. Waibel and Potts with
a car allowance of $1,000 per month, and we provided Mr. Scribante with a similar car allowance for
the first part of fiscal 2007, until we discontinued the allowance with respect to all of our sales
group members in May 2006. Mr. Scribante now participates in a program under which we provide
mileage reimbursement for business travel.
In connection with the formation of our company, we loaned Mr. Verfuerth $47,069 to purchase
common stock. This note bore interest at 1.46% and was payable upon demand. Interest of $19,883
had accrued on the note through June 30, 2007. Mr. Verfuerth paid this note and all accrued
interest in cash on August 2, 2007. In addition, from time to time, we advanced Mr. Verfuerth and
Ms. Verfuerth amounts net of payment of the guarantee fees described below. Pursuant to Mr.
Verfuerth’s existing employment agreement, we forgave $36,667 of these outstanding advances in
fiscal 2007, as reflected in the Summary Compensation Table. The outstanding advances were
$229,307 as of June 30, 2007 and did
not bear interest. Mr. Verfuerth paid the balance outstanding, net of amounts that we forgave
pursuant to his existing employment agreement, in cash on August 2, 2007.
Mr. Verfuerth’s existing employment agreement entitled him to a guarantee fee of 1% of
portions of our indebtedness that he personally guaranteed. Historically, we used this arrangement
to permit us to borrow money at lower interest rates. These
guarantees have been released. In
fiscal 2007, we paid Mr. Verfuerth $77,880 in related guarantee fees, as reflected in the Summary
Compensation Table. Mr. Verfuerth’s existing employment agreement
also entitles him to ownership of any intellectual property work
product he creates during the term of his agreement, but requires him
to disclose to us, and give us the option to acquire, all such work
product. Under his existing employment agreement, the price of such
patented or patent pending work product is subject to negotiation,
but may not exceed $1,500 per
month per item of work product during the period in which we
significantly used or rely upon the item. The existing employment
agreement entitles us to acquire all of Mr. Verfuerth’s
intellectual property work product with respect to which he does not
intend to file a patent for a single flat fee of $1,000. The
agreement also requires Mr. Verfuerth to communicate with us
regarding any of his intellectual property work product that we
acquired and to provide reasonable assistance to us in enforcing our
rights in any such work product.
We provided this arrangement to give Mr. Verfuerth an incentive to create potentially valuable intellectual property for use in our business, to compensate him for any such intellectual property he might create and to ensure that we would have the option to acquire any such intellectual property.
In fiscal 2007, we paid Mr Verfuerth $27,000 in intellectual property
fees for intellectual property work product that we acquired, as
reflected in the Summary Compensation Table.
Severance
and Change of Control Arrangements
Under our proposed new employment agreements with our NEOs, we will provide certain
protections to our NEOs in the event of certain terminations of their employment, including
enhanced protections for certain terminations that may occur after a change of control of our
company after this offering. In general, under the proposed new employment agreements, our NEOs
would become entitled to severance benefits on the occurrence of an involuntary termination without
cause or a voluntary termination with good reason, and these benefits would be enhanced following a
change of control of our company after this offering. Our NEOs would only receive the enhanced
severance benefits following a change in control, however, if their employment terminates without
cause or for good reason. We describe this type of arrangement as subject to a “double trigger.”
Subject to receiving the recommendations and advice of Towers Perrin, under the proposed employment
agreements, all payments, including any double trigger payments, to be made to our NEOs in
connection with a change of control under the employment agreements and any other of our
agreements or plans are proposed to be subject to a potential “cut-back” in the event any such
payments or other benefits become subject to non-deductibility or excise taxes as “excess parachute
payments” under Code Section 280G or 4999. The proposed cut-back provisions would be structured
such that all amounts payable under the employment agreement and other of our agreements or plans
that constitute change of control payments would be cut back to one dollar less than three times
the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a
greater amount by receiving the full amount of the payment and paying the related excise taxes.
Our 2003 Stock Option Plan and our 2004 Equity Incentive Plan also provide potential
protections to our NEOs in the event of certain changes of control. Under these plans, our NEOs’
stock options that are unvested at the time of a change of control may become vested on an
accelerated basis in the event of certain changes of control. This offering will not constitute a
“change in control” under our plans.
We have selected these triggering events to afford our NEOs some protection in the event of a
termination of their employment, particularly after a change of control, that might occur after
the closing of this offering. We believe these types of protections better enable them to focus
their efforts on behalf of our company. We also provide severance benefits in order to obtain from
our NEOs certain concessions that protect our interests, including their agreement to
confidentiality, intellectual property rights waiver, non-solicitation and non-competition
provisions. See below under the heading “Payments upon Termination or Change of Control”
for a description of the specific circumstances that would trigger payment or the provision of
other benefits under these arrangements, as well as a description, explanation and quantification
of the payments and benefits under each circumstance. This offering will not constitute a “change
in control” under the proposed new employment agreements.
In connection with the termination of employment of Messrs. Wadman and Prange in fiscal 2007,
we entered into separation agreements providing for certain payments and other benefits. The terms
of the separation agreements are described below under “Payments upon Termination or
Change of Control.” We agreed to provide these payments and other benefits in order to obtain
certain
protections for our company, including a release of claims and certain restrictive covenants,
and to settle any disputes that might otherwise arise in connection with the termination of
employment.
Other Policies
Policies
On Timing of Option Grants. As a privately-owned company, there has been no public market for our common stock.
Accordingly, in fiscal 2007, we did not have a policy on the timing of option grants appropriate
for a public company. In connection with this offering, our compensation committee and board of
directors adopted such a policy, under which our compensation committee generally will make option
grants effective as of the date two business days after our next quarterly (or year-end) earnings
release following the decision to make the grant, regardless of the timing of the decision. Our
compensation committee has elected to grant and price option awards shortly following our earnings
releases so that options are priced at a point in time when the most important information about
our company then known to management and our board is likely to have been disseminated in the
market.
Our board of directors has also delegated limited authority to our chief executive officer,
acting as a subcommittee of our compensation committee, to grant equity-based awards under our 2004
Stock and Incentive Awards Plan. Our chief executive officer may grant awards covering up to 250,000 shares
of our common stock per year to certain non-executive officers in connection with offers of
employment, promotions and certain other circumstances. Under this delegation of authority, any
options or stock appreciation rights granted by our chief executive officer must have an effective
grant date on the first business day of the month following the event giving rise to the award.
As amended and restated in connection with this offering, our 2004 Stock and Incentive Awards
Plan will not permit awards of stock options or stock appreciation rights with an effective grant
date prior to the date our compensation committee or our chief executive officer takes action to
approve the award.
Tax
and Accounting Considerations. In setting compensation for our NEOs, our compensation committee considers the deductibility
of compensation under the IRC. As a private company, we were able to deduct all
compensation that we paid to our NEOs as long as it was reasonable.
After the closing of this
offering, we will be subject to the provisions of Section 162(m) of
the IRC.
Section 162(m) prohibits us from taking a tax deduction for compensation in excess of $1.0 million
that is paid to our chief executive officer and our NEOs, excluding our chief financial officer,
and that is not considered “performance-based” compensation under Section 162(m). However, certain
transition rules of Section 162(m) permit us to treat as performance-based compensation that is not
subject to the $1.0 million cap (i) the compensation resulting from the exercise of stock options
that we granted prior to this offering; (ii) the compensation payable under bonus arrangements that
were in place prior to this offering; and (iii) compensation resulting from the exercise of stock
options and stock appreciation rights, or the vesting of restricted stock, that we may grant during
the period that begins after the closing of this offering and generally ends on the date of our
annual shareholders meeting that occurs in 2011. Effective upon closing of this offering, our
amended and restated 2004 Stock and Incentive Awards Plan will provide for the grant of
performance-based compensation under Section 162(m). Our compensation committee may, however,
approve compensation that will not meet the requirements of Section 162(m) in order to ensure
competitive levels of total compensation for our executive officers.
Effective April 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards 123(R), Share Based Payment, or “SFAS 123(R),” which requires us to expense the estimated
fair
value of employee stock options and similar awards based on the fair value of the award on the
date of grant. Prior to
fiscal 2007, we accounted for our stock option awards under the intrinsic value method under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees,
and we did not recognize the fair value expense of our stock option awards in our statement of
operations, although we did report our pro forma stock option award fair value expense in the
footnotes to our financial statements. The new method of expensing share-based payments will
result generally in an increase in the near-term expense associated with awards of stock options.
We recognized $0.4 million of stock-based compensation expense in fiscal 2007. As of March 31,2007, we expected to recognize $3.0 million of total unrecognized stock option compensation cost
over a weighted average period of three years. We expect to recognize $0.7 million of stock-based
compensation expense in fiscal 2008 based on our stock options outstanding as of March 31, 2007.
This expense will increase further to the extent we have granted additional stock options in fiscal
2008. Taking into account our stock options granted during fiscal
2008 through the date of this prospectus, a total of
$3.9 million of stock option compensation is expected to be
recognized by us over a weighted average period of three years,
including $1.0 million in fiscal 2008. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies and Estimates – Stock-Based Compensation.” Despite these charges, we continue to believe that stock
options are an effective method of compensation and we anticipate that we will continue to use
stock options as an integral part of our compensation program.
In fiscal 2007, as in past years, we granted incentive stock options to our NEOs under our
2004 Equity Incentive Plan. We have also granted non-qualified stock options under our
equity-based plans. We intend for the incentive stock options that we grant to qualify under
Section 422 of the IRC, which would result in favorable tax treatment to the
recipient of the option if the recipient complies with various restrictions and disposes of the
stock acquired under the option in a so-called “qualifying” disposition. Our company does not
receive an income tax deduction with respect to incentive stock options unless there is a
disqualifying disposition of the stock acquired under the option. Our compensation committee
believes that the favorable tax treatment of incentive stock options to the recipient is a valuable
tool in our efforts to provide competitive compensation to attract and retain excellent employees
for key positions and therefore, despite the potential loss of income tax deductions to our
company, may continue to grant incentive stock options to our executives.
We
maintain certain deferred compensation arrangements for our employees
and non-employee directors that are potentially subject to IRC Section 409A. If such an arrangement is neither
exempt from the application of IRC Section 409A nor complies
with the provisions of IRC Section 409A, then the employee or
non-employee director participant in such arrangement is considered
to have taxable income when the deferred compensation vests, even if
not paid at such time, and such income is subject to an additional
20% income tax. In such event, we are obligated to report such
taxable income to the IRS and, for employees, withhold both regular
income taxes and the 20% additional income tax. If we fail to do so,
we could be liable for the withholding taxes and interest and
penalties thereon. Stock options with an exercise price lower than
the fair market value of our common stock on the date of grant are
not exempt from coverage under IRC Section 409A. We believe that
all of our stock option grants are exempt from coverage under IRC
Section 409A. Our deferred compensation arrangements are
intended to either qualify for an exemption from, or to comply with,
IRC Section 409A.
The following table sets forth for our NEOs: (i) the dollar amount of base salary earned
during fiscal 2007; (ii) the dollar value of bonuses earned during fiscal 2007; (iii) the dollar
value of our SFAS 123(R) expense during fiscal 2007 for all equity-based awards held by our NEOs;
(iv) all other compensation for fiscal 2007; and (v) the dollar value of total compensation for
fiscal 2007.
Represents the amount of expense recognized for financial accounting purposes pursuant to
SFAS 123(R) for fiscal 2007 in our financial statements included elsewhere in this prospectus.
Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related
to service-based vesting conditions.
Includes (i) $77,880 in guarantee fees we paid to Mr. Verfuerth in exchange for his personal
guarantee of certain of our outstanding indebtedness (see “Related Party Transactions”); (ii)
$36,667 in forgiveness of outstanding indebtedness pursuant to Mr. Verfuerth’s existing
employment agreement (see “Related Party Transactions”); (iii) $27,000 in intellectual
property fees we paid to Mr. Verfuerth pursuant to his existing
employment agreement; (iv) an automobile allowance of $12,000; and (v) $3,192 in life insurance premiums and health club membership
dues.
(3)
Includes (i) an automobile allowance of $12,000; (ii) matching contributions under our 401(k)
Plan; and (iii) life insurance premiums.
(4)
Includes (i) an automobile allowance of $1,000; (ii) life insurance premiums; and (iii) reimbursement of health and disability insurance
premiums pursuant to the terms of Mr. Scribante’s employment agreement.
(5)
Includes (i) an automobile allowance of $12,000 and (ii) life insurance premiums.
(6)
Mr. Wadman’s employment with us ended on February 19, 2007. The amounts shown in “All Other
Compensation” include (i) $101,439 of payments and other benefits pursuant to a separation
agreement that we entered into in connection with Mr. Wadman’s termination of employment (see
“Payments upon Termination or Change of Control”); (ii) $11,000 as an automobile
allowance; and (iii) matching contributions under our 401(k) Plan.
(7)
Mr. Prange’s employment with us ended on March 12, 2007. The amounts shown in “All Other
Compensation” consist of payments for services rendered in fiscal years prior to fiscal 2007
that we made to Mr. Prange pursuant to a separation agreement in connection with the
termination of his employment (see “Payments upon Termination or Change of
Control”).
As described above in the Compensation Discussion and Analysis, under our current 2004 Equity
Incentive Plan and employment agreements with certain of our NEOs, we granted stock
options and non-equity incentive awards (i.e., cash bonuses) to our NEOs in fiscal 2007. The
following table sets forth information regarding all such stock options and awards.
Amounts in the three columns below represent possible payments for the cash bonus incentive
compensation awards that we granted with respect to the performance period of fiscal 2007. No
amounts were actually earned under these awards, although we did pay Messrs. Scribante, Potts
and Waibel and Ms. Verfuerth discretionary bonuses of $50,000, $20,000, $20,000 and $20,000,
respectively.
(2)
We granted the stock options listed in this column under our 2004 Equity Incentive Plan in
fiscal 2007. As described under “Compensation Discussion and Analysis – Elements of
Compensation – Long-Term Equity Incentive Compensation” we granted stock options on July 27,2007 to Mr. Verfuerth and Ms. Verfuerth for 180,958 shares and 125,974 shares, respectively,
at an exercise price of $4.49 per share, in connection with their satisfaction of certain
loans from us through their redemption of an equal number of shares of our common stock.
(3)
Represents the grant date fair value of the stock options computed in accordance with SFAS
123(R).
(4)
Represents the maximum discretionary payout of 60% of the target payout for achievement of
75% of target performance with respect to each performance measure under the award.
The exercise price per share was equal to the fair market value of a share of our common
stock on the grant date, as determined by our compensation committee and board of directors.
(6)
The exercise price per share of $2.50 was equal to the price at which we offered shares in
our most recent offering of our Series B preferred stock at the time of the option grant.
Outstanding Equity Awards at Fiscal 2007 Year End
The following table sets out information on outstanding stock option awards held by our NEOs
as of March 31, 2007, including the number of shares underlying both exercisable and unexercisable
portions of each stock option, as well as the exercise price and expiration date of each
outstanding option.
Does not reflect
the July 27, 2007 grant of options to purchase 180,958 and 125,974 shares of our common stock,
respectively, to Mr. Verfuerth and Ms. Verfuerth described above under “Compensation
Discussion and Analysis – Elements of
Compensation — Long-Term Equity Incentive Compensation,” because such stock options were not
outstanding as of March 31, 2007.
(2)
The option will vest with respect to 50,000 shares on December 20 of each of 2007, 2008,
2009, 2010 and 2011, contingent on Mr. Verfuerth’s continued employment through the applicable
vesting date.
(3)
The option will vest with respect to 20,000 shares on December 20 of each of 2007, 2008,
2009, 2010 and 2011, contingent on Mr. Waibel’s continued employment through the applicable
vesting date.
(4)
The option will vest with respect to 20,000 shares on March 31 of each of 2008, 2009, 2010
and 2011, contingent on Mr. Scribante’s continued employment through the applicable vesting
date.
(5)
The option will vest with respect to 50,000 shares on March 31 of each of 2008 and 2009, and
with respect to 25,000 shares on March 31, 2010, contingent on Mr. Scribante’s continued
employment through the applicable vesting date.
(6)
The option will vest with respect to 8,000 shares on March 31 of each of 2008 and 2009,
contingent on Mr. Scribante’s continued employment through the applicable vesting date.
(7)
The option will vest with respect to 15,000 shares on December 20 of each of 2007, 2008,
2009, 2010 and 2011, contingent on Mr. Potts’s continued employment through the applicable
vesting date.
(8)
The option will vest with respect to 10,000 shares on December 20 of each of 2007, 2008,
2009, 2010 and 2011, contingent on Ms. Verfuerth’s continued employment through the applicable
vesting date.
(9)
Subsequent to March 31, 2007, in connection with Mr. Wadman’s termination of employment, we
entered into a separation agreement with Mr. Wadman in which we agreed to amend his option
agreement to permit Mr. Wadman to exercise the option with respect to an additional 20,000
shares during a nine-month period between June 30, 2009 and March 31, 2010, so long as he
complies with his obligations under his separation agreement. The amendment also extends the
exercise period of the option with respect to the original 20,000 shares beyond the normal
expiration date of the option.
(10)
Subsequent to March 31, 2007, in connection with Mr. Prange’s termination of employment, we
entered into a separation agreement with Mr. Prange in which we agreed to amend his existing
option agreement covering 220,222 shares of our common stock, which was exercisable with
respect to 172,222 shares of common stock on the date of termination, to permit Mr. Prange to
exercise the option with respect to the 48,000 shares not otherwise exercisable during a
90-day period following the effective date of his separation agreement. We also agreed to
amend Mr. Prange’s option agreement to permit him to exercise his option with respect to
17,222 shares for a 90-day period commencing on the closing of our initial public offering, and
to exercise his option with respect to the remaining 172,222 shares (less any of the 17,222
shares he acquires following our initial public offering) between March 12, 2009 and June 10,2009, in each case so long as Mr. Prange complies with his obligations under his separation
agreement.
The
following table sets forth information regarding the exercise of stock options that
occurred during fiscal 2007 for each of our NEOs on an aggregated basis.
Represents the difference, if any, between the fair market value on the date of exercise of
the shares purchased as determined by our compensation committee and our board of directors
and the aggregate exercise price paid by the executive.
Payments Upon Termination or Change of Control
Arrangements
in Effect Prior to this Offering
Under Mr. Verfuerth’s employment agreement, in the event of a termination other than for
cause, he would be entitled to a severance payment equal to 150% of his then-current base salary, paid in a
lump sum within 30 days of his termination of employment, and a pro rated bonus, paid in a lump sum
within 90 days after the close of the otherwise applicable bonus period. If Mr. Verfuerth’s
employment had terminated on the last day of fiscal 2007, other than for cause, his employment
agreement would have entitled him to a lump sum severance payment of $405,000.
Mr. Wadman’s employment with us terminated on February 19, 2007. In connection with Mr.
Wadman’s termination of employment, we entered into a separation
agreement, effective July 5, 2007, pursuant to which we
agreed to provide him with six months’ severance pay and COBRA coverage at our expense for six
months. The severance pay was equal to $87,500 in the aggregate, and the value of the COBRA
coverage was approximately $5,435. We also agreed to amend Mr. Wadman’s existing option agreement,
which was exercisable with respect to 20,000 shares of common stock on the date of termination, to
permit Mr. Wadman to exercise the option with respect to an additional 20,000 shares during a
nine-month period between June 30, 2009 and March 31, 2010 so long as he complies with his
obligations under his separation agreement. The amendment also extends the exercise period of the
option with respect to the original 20,000 shares beyond the normal
expiration date of the option.
Based on an assumed initial public offering price of $ per share (the
mid-point of the range set forth on the cover page of this prospectus), we estimate the value of
the amendment to his option to be $ . In exchange for these benefits, Mr. Wadman agreed to
a release of claims and to certain restrictive covenants, including mutual non-disparagement,
confidentiality and customary non-competition and non-solicitation restrictions for a period of 20
months following the effective date of his separation agreement.
The 20-month period will expire on March 5, 2009.
In connection with Mr. Prange’s termination of employment effective March 12, 2007, we entered
into a separation agreement, effective July 18, 2007, pursuant to which we agreed to provide him with approximately $40,306
in allegedly owed back pay and approximately $7,725 in business
expenses. We also agreed to amend
Mr. Prange’s existing option agreement, which was exercisable with respect to 172,222 shares of
common stock on the date of termination, to permit Mr. Prange to exercise the option with respect
to the 48,000 shares not otherwise exercisable under his option during a 90-day period following the effective date
of his separation agreement. We also agreed to amend Mr. Prange’s option agreement to permit him
to exercise his option with respect to 17,222 shares for a 90-day period commencing upon the
closing of our initial public offering, and to exercise his option with respect to the remaining
172,222 shares (less any of the 17,222 shares he acquires following our initial public offering)
between March 12, 2009 and June 10, 2009, in each case so long as Mr. Prange complies with his
obligations under his separation agreement. Based on an assumed initial public offering price of $
per share (the mid-point of the range set forth on the cover
page of this prospectus), we estimate the value of the amendment to his option to be $ . In
exchange for these benefits, Mr. Prange agreed to a release of claims and certain restrictive
covenants, including mutual non-disparagement, confidentiality and
customary non-competition and non-solicitation restrictions for a
period of 24 months following the date of his termination of
employment. The 24-month period will end on March 12, 2009.
New Employment Agreements
Subject to the recommendations of Towers Perrin, our proposed new employment agreements with
our NEOs, which, if adopted, would become effective upon the closing of this offering, will provide
that our NEOs become entitled to certain severance payments and other benefits on a qualifying
employment termination, including certain enhanced protections under such
circumstances occurring after a change in control of our company. If the executive’s employment is
terminated without “cause” or for “good reason” prior to the end of the employment period, the
executive will be entitled to a lump sum severance benefit equal to a multiple (indicated in the
table below) of the sum of his base salary plus the average of the prior three years’ bonuses; a
pro rata bonus for the year of the termination; and COBRA premiums at the active employee rate for
the duration of the executive’s COBRA continuation coverage period.
“Cause” is defined in the new employment agreements as a good faith finding by our board of
directors that the executive has (i) failed, neglected, or refused to perform the lawful employment
duties related to his position or that we assigned to him (other than due to disability);
(ii) committed any willful, intentional, or grossly negligent act having the effect of materially
injuring our interests, business, or reputation; (iii) violated or failed to comply in any material
respect with our published rules, regulations, or policies; (iv) committed an act constituting a
felony or misdemeanor involving moral turpitude, fraud, theft, or dishonesty; (v) misappropriated
or embezzled any of our property (whether or not an act constituting a felony or misdemeanor); or
(vi) breached any material provision of the employment agreement or any other applicable
confidentiality, non-compete, non-solicit, general release, covenant not-to-sue, or other agreement
with us.
“Good reason” is defined in the new employment agreements as the occurrence of any of the
following without the executive’s consent: (i) a material diminution in the executive’s base
salary; (ii) a material diminution in the executive’s authority, duties or responsibilities; (iii)
a material diminution in
the authority, duties or responsibilities of the supervisor to whom the executive is required
to report; (iv) a material diminution in the budget over which the executive retains authority; (v)
a material change in the geographic location at which the executive must perform services; or (vi)
a material breach by us of any provision of the employment agreement.
The severance multiples, employment and renewal terms and restrictive covenants under the
proposed new employment agreements, prior to any change of control occurring after this offering,
are as follows:
Employment
Renewal
Noncompete and
Executive
Severance
Term
Term
Confidentiality
Chief executive officer
2 X Salary +
2 Years
2 Years
Yes
Avg. Bonus
Chief financial officer
1 X Salary +
1 Year
1 Year
Yes
General counsel
Executive vice presidents
Avg. Bonus
Vice presidents
1/2 X Salary +
1 Year
1 Year
Yes
Avg. Bonus
The proposed new employment agreements would also provide enhanced benefits for our NEOs
following a change of control after closing of this offering. Upon a change of control, the
executive’s employment term would automatically be extended for a specified period, which would
vary based upon the executive’s position, as shown in the chart below. Following the change of
control, the executive would be guaranteed the same base salary and a bonus opportunity at least
equal to 100% of the prior year’s target award and with the same general probability of achieving
performance goals as was in effect prior to the change of control. In addition, the executive
would be guaranteed participation in salaried and executive benefit plans that provide benefits, in
the aggregate, at least as great as the benefits being provided prior to the change of control.
The severance provisions would remain the same as in the pre-change of control context as
described above, except that the multiplier used to determine the severance amount and the post
change of control employment term would increase, as is shown in the table below. The table also
indicates the provisions in the proposed employment agreements regarding triggering events and the
treatment of payments under the agreements if the non-deductibility and excise tax provisions of
Code Sections 280G and 4999 were triggered, as discussed below.
A
change of control under the proposed new employment agreements would generally occur when a third
party acquires 20% or more of our outstanding stock, there is a hostile board election, a merger
occurs in which our shareholders cease to own 50% of the equity of the successor, or we are
liquidated or dissolved, or substantially all of our assets are sold, in each case after the
closing of this offering.
The proposed new employment agreements contain a “valley” excise tax provision to address the
issue of Code Sections 280G and 4999 non-deductibility and excise taxes on
“excess parachute payments.” Code Sections 280G and 4999 may affect the deductibility of, and
impose additional excise taxes on, certain payments that are made upon or in connection with a
change of control. The valley provision provides that all amounts payable under the employment
agreement and any other of our agreements or plans that constitute change of control payments will
be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code
Section 280G, unless the executive would retain a greater amount by receiving the full amount of
the payment and personally paying the excise taxes. Under the proposed new employment agreements, we would not be obligated to gross up executives for any excise taxes imposed on excess parachute
payments under Code Section 280G or 4999.
The proposed new employment agreements were not in effect as of March 31, 2007, and the
payments and other benefits, if any, to which our NEOs would have been entitled if a triggering
event had occurred on March 31, 2007 under their existing employment agreements are summarized
above under “— Arrangements in Effect Prior to this Offering.” The following table summarizes the
estimated value of certain payments and other benefits to which our currently-serving NEOs would be
entitled under the proposed new employment agreements upon certain terminations of employment,
assuming, solely for purposes of calculation, that (i) the triggering event or events occurred on
June 30, 2007; (ii) the proposed new employment agreements were then in effect; (iii) in the case
of a change of control, the vesting of all stock options held by our NEOs was accelerated; and (iv)
the value of a share of our common stock as of such change of control
was $ per share (the
mid-point of the range set forth on the cover page of this
prospectus), which impacts the amounts receivable by the NEOs upon
the acceleration of non-vested stock options as a result of the
change of control as set forth below under “Equity Plans”
and therefore affects the amounts set forth in the column below
entitled “After Application of ‘Valley’ Provision”:
The valley provision in the proposed new employment agreements provides that all amounts
payable under the employment agreement and any other of our agreements or plans that
constitute change of control payments will be cut back to one dollar less than three times the
executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain
a greater amount by receiving the full amount of the payment and paying the excise taxes.
Equity Plans
Our equity plans provide for certain benefits in the event of certain changes of control.
Under both our existing 2003 Stock Option Plan and our 2004 Equity
Incentive Plan, and under our amended and
restated 2004 Stock and Incentive Awards Plan, if there is a change of control, our compensation
committee may, among other things, accelerate the exercisability of all outstanding stock options
and/or require that all outstanding options be cashed out. Our 2003 Stock Option Plan defines a
change of control as the occurrence of any of the following:
•
With certain exceptions, any “person” (as such term is used in
sections 13(d) and l4(d) of the Exchange Act), becomes a “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act),
directly or indirectly, of securities representing more than 50%
of the voting power of our then outstanding securities.
•
Our shareholders approve (or, if shareholder approval is not
required, our board approves) an agreement providing for (i) our
merger or consolidation with another entity where our shareholders
immediately prior to the merger or consolidation will not
beneficially own, immediately after the merger or consolidation,
securities of the surviving entity representing more than 50% of
the voting power of the then outstanding securities of the
surviving entity, (ii) the sale or other disposition of all or
substantially all of our assets, or (iii) our liquidation or
dissolution.
•
Any person has commenced a tender offer or exchange offer for 30%
or more of the voting power of our then outstanding shares.
•
Directors are elected such that a majority of the members of our
board shall have been members of our board for less than two
years, unless the election or nomination for election of each new
director who was not a director at the beginning of such two-year
period was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning
of such period.
Following this offering, a change of control under our 2004 Stock and Incentive Awards Plan
would generally occur when a third party acquires 20% or more of our outstanding stock, there is a
hostile board election, a merger occurs in which our shareholders cease to own 50% of the equity of
the successor, or we are liquidated or dissolved or substantially all of our assets are sold.
If a change of control had occurred on March 31, 2007, and our compensation
committee had cashed out all of the stock options then held by our NEOs, whether or not vested, for
a payment equal to the product of (i) the number of shares underlying such options and (ii) the
difference between an assumed initial public offering price of $ per share (the mid-point
of the range set forth on the cover page of this prospectus), and the exercise price per share of
such options, our currently-serving NEOs would have received approximately the following benefits:
The option shares shown in this table for Mr. Verfuerth do not reflect his receipt of the
July 27, 2007 grant of options to purchase 180,958 shares of our common stock at an exercise
price of $4.49 per share, which is described above under “Compensation Discussion and Analysis
– Elements of Compensation – Long-Term Equity Incentive Compensation,” because such stock
options were not outstanding as of March 31, 2007. If the stock options granted to Mr.
Verfuerth on July 27, 2007 were reflected in the table, his total value realized would be
$ .
(2)
The option shares shown in this table for Ms. Verfuerth do not reflect her receipt of the
July 27, 2007 grant of options to purchase 125,974 shares of our common stock at an exercise
price of $4.49 per share, which is described above under “Compensation Discussion and Analysis
– Elements of Compensation – Long-Term Equity Incentive Compensation,” because such stock
options were not outstanding as of March 31, 2007. If the stock options granted to Ms.
Verfuerth on July 27, 2007 were reflected in the table, her total value realized would be
$ .
Director Compensation
We currently compensate our non-employee directors pursuant to our directors compensation
policy, under which we pay each non-employee director a monthly retainer fee of $500, plus an
additional monthly retainer fee of $500 for non-employee directors who also serve as chairman of
our board or a committee (subject to a $1,500 monthly maximum for a director who chairs both our
board and a committee). Our current policy also calls for grants of options to our non-employee
directors representing 5,000 shares of our common stock per year of
service. In early fiscal 2006, in
accordance with this policy, we granted each non-employee director (other than Mr. Kackley) an
option to purchase 20,000 shares of our common stock at an exercise price of $0.75 per share. In
light of his commitment and contributions as chairman of our audit and finance committee, we
granted Mr. Kackley an option to purchase 100,000 shares of our
common stock in early fiscal 2006 at an
exercise price of $0.75 per share. These option grants represented
four years worth of options, and the
options were subject to vesting in four equal installments on March
31 of each of 2006, 2007, 2008 and 2009. We therefore made no option grants in fiscal 2007 to our non-employee directors, other
than to Mr. Kackley, as described below. Since these options
represented four years’ worth of options, the per share exercise price
was determined based on an approximation of the fair market value of
our common stock over the prior four-year period. We recognized $33,000 of
stock-based compensation expense in fiscal 2006 as a result of these
grants.
On December 20, 2006, we granted Mr. Kackley an additional option to purchase 60,000 more
shares of our common stock to compensate him for his significant time commitment and substantial
contributions in his capacity as chairman of our audit and finance committee. The exercise price
per share of the option was $2.20, which was the fair market value of a share of our common stock
on the date of grant as determined by our compensation committee and board of directors based
principally on the November 30, 2006 independent valuation of
the fair market value of our common stock
prepared by Wipfli LLP.
In
October 2006, we paid Messrs. Kackley and Trotter $5,000 each in respect of consulting
services they provided us in fiscal year 2007.
In connection with this offering, our compensation committee retained Towers Perrin to provide
it with recommendations regarding our compensation program for non-employee directors
subsequent to this offering, and is currently considering changes to our non-employee director
compensation policies and programs based on such recommendations. In addition, in
recognition that our director compensation program has not adequately compensated our directors for
their role in and commitment to date, and in consideration of the substantial
additional time commitments and increased liability associated with our becoming a public company,
on July 27, 2007, our board of directors granted options for 10,000 shares each to the non-employee
chairmen of our various committees, Messrs. Kackley, Quadracci and Grohmann, and 5,000 each to our
two other non-employee directors, Ms. Propper de Callejon and Mr. Trotter. Our board of directors
established the exercise price of the options at $4.49 per share based on the $4.49 per share
conversion price of the Convertible Notes issued on August 3, 2007. The options become exercisable
after one year and have a 10-year term.
The following table summarizes the compensation of our non-employee directors for fiscal 2007.
As employee directors, none of Richard J. Olsen, our vice president of technical services and
former director, Mr. Verfuerth nor Mr. Potts received any compensation for their service as
directors, and they are therefore omitted from the
table. Mr. Olsen retired from our board on July 28, 2007 in connection with this offering to
reduce the number of employee directors on our board. We reimbursed
each of our directors, including our employee directors, for
expenses incurred in connection with attendance at meetings of our board and its committees.
Represents the amount of expense recognized for financial accounting purposes pursuant to
SFAS 123(R) for fiscal 2007 as reflected in our financial statements included elsewhere in this
prospectus. Pursuant to SEC rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions.
(2)
The aggregate number of option awards outstanding as of March 31, 2007 for each director was
as follows: Mr. Kackley held options to purchase an aggregate of 114,000 shares of our common
stock at a weighted average exercise price of $1.44 per share; Mr. Grohmann held an option to
purchase 20,000 shares of our common stock at an exercise price of $0.75 per share; and Mr.
Trotter held an option to purchase 20,000 shares of our common stock at an exercise price of
$0.75 per share. The grant date fair value of our special fiscal 2007 option grant to Mr.
Kackley, computed in accordance with SFAS 123(R), was $53,110. We also granted our non-employee
directors additional stock options on July 27, 2007, as follows: Messrs. Kackley, Quadracci
and Grohmann each received an option to purchase 10,000 shares of our common stock, and Ms.
Propper de Callejon and Mr. Trotter each received an option to purchase 5,000 shares of our
common stock. All of the options granted on July 27, 2007 have an exercise price of $4.49 per
share.
(3)
Ms. Propper de Callejon, who is associated with Clean Technology Fund II, LP, one of our
principal shareholders, received no additional compensation in fiscal 2007 for her service as
a director.
The following table sets forth certain information regarding the beneficial ownership of our
common stock and the shares beneficially owned by all principal and selling shareholders as of June 30, 2007, and
as adjusted to reflect the sale of our common stock offered by this prospectus, by:
•
each person (or group of affiliated persons) known to us to be the beneficial
owner of more than 5% of our common stock (assuming the conversion of all of our
preferred stock into 4,808,012 shares of common stock on a one-for-one basis and
the conversion of our Convertible Notes into 2,360,802 shares of
common stock upon closing of this
offering);
•
each of our named executive officers;
•
each of our directors;
•
all of our directors and current and certain former executive
officers as a group; and
•
all selling shareholders.
Beneficial ownership is determined in accordance with the rules of the SEC and includes any
shares over which a person exercises sole or shared voting or investment power. Under these rules,
beneficial ownership also includes any shares as to which the individual or entity has the right to
acquire beneficial ownership of within 60 days of June 30, 2007 through the exercise of any
warrant, stock option or other right. Except as noted by footnote, and subject to community
property laws where applicable, we believe that the shareholders named in the table below have sole
voting and investment power with respect to all shares of common stock shown as beneficially owned
by them.
As of June 30, 2007, there were 12,219,969 shares of common stock and 4,808,012 shares of
Series B and Series C preferred stock outstanding (with
each such share of preferred stock converting automatically into shares of common stock on a one-for-one basis upon closing of this offering).
See “Description of Capital Stock.”
On
August 3, 2007, we issued the Convertible Notes to an indirect
affiliate of GEEFS, Clean Technology and affiliates of Capvest.
The Convertible Notes will convert automatically upon closing of this offering into 2,360,802
shares of our common stock. Neither GEEFS nor any of
its indirect or direct affiliates owned any shares of our
common stock or
securities convertible into shares of our common stock prior to the issuance of the Convertible
Notes. See “Description of Capital Stock.”
The
percentage of beneficial ownership set forth in the table below is
based on (i) prior to this offering, 19,388,783 shares of common
stock outstanding (assuming the conversion of all outstanding shares
of preferred stock and the Convertible Notes); and (ii) after
this offering,
shares of common stock (assuming the
conversion of all outstanding shares of preferred stock and the
Convertible Notes).
All directors and
current and certain former
executive officers as a group
(14 individuals)
9,906,698
48.2
%
Principal shareholders
Clean
Technology Affiliates(13)
2,193,157
11.3
%
GEEFS Indirect
Affiliate (14)
1,781,737
9.2
Richard J. Olsen (15)
1,011,639
5.2
*
Indicates less than 1%.
(1)
Includes (i) 2,534,328 shares of common stock, 75,000 of which have been pledged as
security for a personal loan; (ii) 750,000 shares of common stock held by Mr. Verfuerth’s
wife, Patricia A. Verfuerth; and (iii) 57,665 shares of common stock issuable upon the
exercise of vested and exercisable options held by Mr. Verfuerth’s wife, Patricia A.
Verfuerth. The number does not reflect 250,000 shares of common stock subject to options held
by Mr. Verfuerth on June 30, 2007 that will not become exercisable within 60 days. The number
also does not reflect Mr. Verfuerth’s redemption of 180,958 shares in repayment of the
principal amount of a loan or the offsetting grant of an option to purchase 180,958 shares,
each effective on July 27, 2007. See “Executive Compensation – Compensation Discussion and
Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation.” Additionally,
the number does not reflect Mr. Verfuerth’s gift of 125,974 shares to Ms. Verfuerth in
connection with the repayment of the principal amount of a loan. See
note (5) below.
Does not include 100,000 shares of common stock subject to an option held by Mr. Waibel that
will not become exercisable within 60 days.
(3)
Includes (i) 216,668 shares of common stock and (ii) 590,318 shares of common stock issuable
upon the exercise of vested and exercisable options. The number does not include 75,000
shares of common stock subject to options that will not become exercisable within 60 days.
(4)
Includes (i) 157,110 shares of common stock; (ii) 19,230 shares of common stock issuable upon
the conversion of Series B preferred stock; and (iii) 94,000 shares of common stock issuable
upon the exercise of vested and exercisable options. The number does not include 221,000
shares of common stock subject to an option that will not become exercisable within 60 days.
(5)
Includes (i) 750,000 shares of common stock; (ii) 2,534,328 shares of common stock held by
Ms. Verfuerth’s husband, Neal R. Verfuerth, 75,000 of which have been pledged as security for
a loan; and (iii) 57,665 shares of common stock issuable upon the exercise of vested and
exercisable options. The number does not reflect 50,000 shares of common stock subject to
options held by Ms. Verfuerth on June 30, 2007 that will not become exercisable within 60
days. The number also does not reflect Ms. Verfuerth’s
receipt of 125,974 shares gifted from Mr. Verfuerth. See note (1) above. Additionally, the number does not reflect Ms. Verfuerth’s
redemption of such shares in repayment of the principal amount of a loan, or the offsetting
grant of an option to purchase 125,974 shares, each effective on July 27, 2007. See
“Executive Compensation – Compensation Discussion and
Analysis – Elements of Compensation – Long-Term Equity Incentive Compensation.”
(6)
Excludes an option of 10,000 shares granted on July 27, 2007.
(7)
Includes (i) 1,636,364 shares of common stock issuable upon the conversion of Series C
preferred stock owned by Clean Technology and (ii) 556,793 shares of common stock issuable
upon the conversion of the Convertible Note held by Clean Technology. Ms. Propper de
Callejon is the managing member of Expansion Capital Partners II – General Partner, LLC, which
is the general partner of Expansion Capital Partners II, LP, which is the general partner of
Clean Technology. Ms. Propper de Callejon disclaims beneficial ownership of the shares held
by Clean Technology, except to the extent of her pecuniary interest therein. The address of
Clean Technology is 90 Park Avenue, Suite 1700, New York, NY10016. Excludes an
option of 5,000 shares granted on July 27, 2007.
(8)
Includes (i) 207,000 shares of common stock and (ii) 4,000 shares of common stock issuable
upon the exercise of options that are vested and exercisable or that will become vested and
exercisable in the next 60 days. The number does not include 104,000 shares of common stock
subject to an option held by Mr. Kackley on June 30, 2007 that will not become exercisable
within 60 days. Excludes an option of 10,000 shares granted on July 27, 2007.
(9)
Includes (i) 620,000 shares of common stock; (ii) 480,000 shares of common stock issuable
upon the conversion of Series B preferred stock; (iii) 160,000 shares of common stock issuable
upon the exercise of warrants; and (iv) 10,000 shares of common stock issuable upon the
exercise of vested and exercisable options. The number does not include 10,000 shares of
common stock subject to an option held by Mr. Grohmann on June 30, 2007 that will not become
exercisable within 60 days, or the July 27, 2007 option grant for 10,000 shares.
(10)
Includes (i) 504,790 shares of common stock and (ii) 10,000 shares of common stock issuable
upon the exercise of vested and exercisable options. The number does not include 10,000
shares of
common stock subject to an option held by Mr. Trotter on June 30, 2007 that will not become
exercisable within 60 days. Excludes an option of 5,000 shares granted on July 27, 2007.
(11)
Includes 20,000 shares of common stock issuable upon the exercise of vested and exercisable
options. The number does not include 20,000 shares of common stock subject to an option held
by Mr. Wadman that will not become exercisable within 60 days.
(12)
Includes (i) 6,801 shares of common stock; (ii) 48,000 shares of common stock issuable upon
the exercise of vested and exercisable options; and (iii) 17,222 shares of common stock
subject to an option that will become exercisable during a 90-day period commencing upon the
closing of this offering. The number does not include 155,000 shares of common stock subject
to an option that will not become exercisable within 60 days.
(13)
Includes (i) 1,636,364 shares of common stock issuable upon the conversion of Series C
preferred stock and (ii) 556,793 shares of common stock issuable upon the conversion of the
Convertible Notes. Clean Technology is the name we use for Clean Technology Fund II, LP. The
address of Clean Technology is 90 Park Avenue, Suite 1700, New York, NY10016.
(14)
Includes 1,781,737 shares of common stock issuable upon the
conversion of its Convertible
Note. GEEFS is the name we use for GE Capital Equity Investments,
Inc., an indirect affiliate of
GE Energy Financial Services, Inc. GEEFS’ indirect affiliate, GE
Capital Equity Investments, Inc., is the holder of the Convertible
Note. The address of GEEFS is c/o GE Capital Equity
Investments, Inc., 201 Merritt 7, P.O. Box 5201, Norwalk, Connecticut06851.
(15)
Does not include 50,000 shares of common stock subject to an option held by Mr. Olsen that
will not become exercisable within 60 days. Mr. Olsen is our vice president of technical
services and a former director.
Our
policy is to enter into transactions with related persons on terms that, on the whole, are
no less favorable to us than those available from unaffiliated third parties. In
June 2007, our board of directors adopted written policies and procedures regarding related person
transactions. For purposes of these policies and procedures:
•
a “related person” means any of our directors, executive officers, nominees for
director, holder of 5% or more of our common stock or any of their immediate family
members; and
•
a “related person transaction” generally is a transaction (including any indebtedness or
a guarantee of indebtedness) in which we were or are to be a participant and the amount
involved exceeds $120,000, and in which a related person had or will have a direct or
indirect material interest.
Each of our executive officers, directors or nominees for director is required to disclose to
our audit and finance committee certain information relating to related person transactions for
review, approval or ratification by our audit and finance committee. Any related person
transaction must be disclosed to our full board of directors.
Set forth below are certain transactions that have occurred in our fiscal years 2005, 2006 and
2007, and in our fiscal year 2008 through the date of this prospectus. Based on our experience in
the business sectors in which we participate and the terms of our transactions with unaffiliated
third persons, we believe that all of the transactions set forth
below (i) were on terms and conditions
that were not materially less favorable to us than could have been
obtained from unaffiliated third parties and (ii) complied with the terms of our
new policies and procedures regarding related person transactions.
On August 3, 2007, we issued a $2.5 million Convertible Note to Clean Technology as part of
our $10.6 Convertible Note placement described under
“Description of Capital Stock.”
All material economic terms and conditions of the Convertible Note issued to Clean Technology are
the same as those negotiated with and provided to an indirect
affiliate of GEEFS, and Ms. Propper de Callejon did not
participate in such negotiations. The Convertible Note issued to Clean Technology will convert
automatically upon closing of this offering into 556,793 shares of our common stock.
Ms. Propper de Callejon is the managing member of Expansion Capital Partners II – General
Partner, LLC, the general partner of Expansion Capital Partners II, LP, the general partner of
Clean Technology. Ms. Propper de Callejon is one of our directors and a member of our compensation
committee. Ms. Propper de
Callejon was recused from all of our board of director decisions regarding this transaction.
Clean Technology also is a holder of 1,636,364 shares of our Series C preferred stock, which
will automatically convert into shares of our common stock on a
one-for-one basis upon closing of this offering.
Holders of Series C preferred shares are entitled to certain registration rights with respect to the common
stock issuable upon conversion of those Series C preferred shares according to the terms of an
agreement between us and the Series C holders. See “Description of Capital Stock.”
On
August 3, 2007, we issued an $8.0 million Convertible Note
to an indirect affiliate of GEEFS as part of our $10.6
Convertible Note placement described under “Description of
Capital Stock.” This
Convertible Note will convert automatically upon closing of this offering into
1,781,738 shares of our common stock. GEEFS is an indirect affiliate of General Electric
Co. Neither GEEFS nor any other affiliates of
General Electric Co. owned any interest in our company
prior to the issuance of the
Convertible Note.
During
fiscal 2005, 2006 and 2007, we recognized an aggregate of $9,000,
$1.0 million, and $3.7 million, respectively, in revenue
for products and services we sold to certain operating affiliates of
General Electric Co. In addition, during fiscal 2005, 2006 and 2007,
we purchased an aggregate of $2.5 million, $3.2 million and
$8.4 million, respectively, of component parts from a different
operating affiliate of General Electric Co. GEEFS and the indirect
affiliate of GEEFS that was issued the Convertible Note are
principally financial investment affiliates of General Electric Co.
Neither GEEFS nor the indirect affiliate of GEEFS that was issued the Convertible Note were involved in negotiating the terms or conditions
of our ongoing business relationships with the operating affiliates
of General Electronic Co. with which we conduct business. Similarly,
such operating affiliates of General Electric Co. were not involved
in negotiating the terms and conditions of the Convertible Note. We
do not believe that the investment in us represented by the
Convertible Note issued to the indirect affiliate of GEEFS will
result in any change or modification to the terms and conditions of
our purchases from, or sales to, any operating affiliate of General
Electric Co.
Richard J. Olsen
Richard J. Olsen is our vice president of technical services, a former director and one of our
principal shareholders. We paid Mr. Olsen approximately $157,000 in cash and equity compensation
for his service as our vice president of technical services in fiscal 2007. We did not provide Mr.
Olsen any additional compensation for his service as a director, but reimbursed him for expenses
incurred in connection with his attendance at meetings of our board on the same basis as the rest
of our directors. We also lease, on a month-to-month basis, an aircraft owned by an entity
controlled by Mr. Olsen. In fiscal 2005, 2006 and 2007, we paid that entity $102,191, $106,715 and
$94,225, respectively, for use of the aircraft.
During fiscal 2007, we held a note receivable due from Mr. Olsen in the principal amount of
$375,000, bearing interest at 7.65% per annum. This note was fully repaid on August 2, 2007.
This note was recorded as a shareholder note receivable in our
consolidated financial statements.
During fiscal 2005, 2006 and 2007, we received an aggregate of $209,996, $90,639 and $31,767,
respectively, for products and services we sold to Quad/Graphics, Inc. Thomas A. Quadracci, our
chairman of the board, was the executive chairman of Quad/Graphics,
Inc. until January 1, 2007 and is a
shareholder of Quad/Graphics, Inc.
During fiscal 2006, we received a promissory note from Patrick J. Trotter, one of our
directors, in the principal amount of $375,000 to purchase 400,000 shares of common stock through
his exercise of vested stock options. The note bore interest at 4.23% per annum. During fiscal
2007, Mr. Trotter paid $15,862 in interest on this note by surrendering 7,210 shares of common
stock to us at a value of $2.20 per share. The principal and all
accrued interest on the note were fully repaid in
cash on August 2, 2007. This note was recorded as a shareholder
note receivable in our consolidated financial statements.
We provided certain non-interest bearing advances to Neal R. Verfuerth, our president and
chief executive officer, and/or Patricia Verfuerth, our vice president of operations, during fiscal
2005, 2006 and 2007. The largest aggregate amount of principal advances outstanding at the end of any month during fiscal
2005, 2006 and 2007 was $124,640, $159,912 and $167,690,
respectively. During fiscal 2005, 2006
and 2007, Mr. Verfuerth paid $46,500, $74,604 and $125,880 in principal on these advances,
respectively. All such advances have been fully repaid as of August 2, 2007.
We also held an unsecured note receivable due from Mr. Verfuerth in fiscal 2005, 2006 and 2007
bearing interest at 1.46% per annum. The largest aggregate amount of principal outstanding on this
note during fiscal 2005, 2006 and 2007, including accrued interest, was $63,344, $65,849 and
$66,780, respectively. The note was fully repaid on August 2, 2007. During fiscal 2007, we also
held a note receivable due from Mr. Verfuerth in the aggregate principal amount of $812,500 and a
note receivable due from Ms. Verfuerth in the aggregate
principal amount of $565,625, each bearing
interest at 7.65% per annum. These notes were fully repaid as described under “Executive
Compensation – Compensation Discussion and Analysis – Long-Term Equity Compensation.” These notes
were recorded as shareholder notes receivable in our consolidated financial statements.
As
part of our employment agreement with Mr. Verfuerth, we paid
guarantee fees to Mr. Verfuerth
of $146,069, $109,808 and $77,880 in fiscal 2005, 2006 and 2007, respectively, as consideration for
guaranteeing certain of our notes payable and accounts payable, as described below. These fees
were based on a percentage applied to the monthly outstanding balances or revolving credit
commitments. These guarantees related to the following debt arrangements:
•
In December 2004, we refinanced a mortgage loan agreement with a local bank to
provide a $1.1 million note, as amended, for the purpose of acquiring our manufacturing facility. The note expires in September 2014 and bears
interest a prime plus 2.0% per annum. The note is secured by a first
mortgage on our manufacturing facility and was previously secured by a personal guarantee of Mr. Verfuerth, which was
released effective August 15, 2007. As of March 31, 2007, the remaining note balance
was $1.1 million.
•
In December 2004, we entered into a debenture payable issued by a certified
development company to provide $1.0 million for the purpose of acquiring our manufacturing and warehousing facility. The instrument expires in December 2024 and
carries an effective interest rate, including service fees, of 6.18% per annum. The
note is guaranteed by the United States Small Business Administration 504 program and
is secured by a second mortgage position on our manufacturing facility. Mr.
Verfuerth previously personally guaranteed the note, which guarantee was released effective
August 2, 2007. As of March 31, 2007, the remaining balance on the note was $1.0
million.
•
In March 2005, we entered into a loan and security agreement with the State of
Wisconsin to provide a $0.5 million federal block grant loan to be used for the
purchase of manufacturing equipment. The loan expires in October 2012 and bears
interest at a rate of 2.0% per annum. The loan is secured by a purchase money security
interest and was previously secured by a personal guarantee of Mr. Verfuerth, which was released effective June25, 2007. As of March 31, 2007, the remaining balance on the loan was $0.4 million.
•
In September 2005, we entered into an agreement with the Industrial Development
Corporation of the City of Manitowoc to provide a $0.5 million loan for the purpose of
acquiring manufacturing equipment for our manufacturing facility. The loan expires in
October 2011 and bears interest a fixed rate of 2.925% per annum. The loan is
secured by a
purchase money security interest and was also previously
secured by a personal guarantee of Mr. Verfuerth, which was
released effective July 5, 2007. As of March 31, 2007, the remaining balance on the
loan was $0.4 million.
•
In March 2004, we received a secured note from a local bank to provide a $3.3
million loan for working capital purposes. We pay principal and interest payments of
$24,755 per month on the note, which are payable through the expiration of the note in
February 2014. The note bears interest at a fixed rate of 6.9% per annum. The note is
75% guaranteed by the United States Department of Agriculture Rural Development
Association and was also previously guaranteed by a personal guarantee of Mr. Verfuerth,
which was released effective August 15, 2007. As of March 31, 2007, the remaining
balance on the note was $1.6 million.
In
May 2004, we entered into an agreement with Mr. Verfuerth and Ms. Verfuerth to indemnify
them for all liabilities and expenses they may incur in connection with their guarantees of our
indebtedness, and to pay them a fee in consideration of these guarantees. To secure our
obligations to Mr. Verfuerth and Ms. Verfuerth under this
agreement, in July 2006, we granted them
a security interest in all of our assets and in our real estate located in Plymouth, Wisconsin.
This security interest was junior to the security interests held by our other lenders. The
indemnification agreement and the security agreements were terminated in August 2007, after the
termination of the Verfuerths’ guarantees of our indebtedness.
During fiscal 2006 and 2007, we forgave $36,942 and $36,667, respectively, of indebtedness
owed to us by Mr. Verfuerth as part of his existing employment
agreement. In fiscal 2008, we
forgave $33,667 of indebtedness owed to us under this arrangement. This loan was fully repaid
effective August 2, 2007.
In fiscal 2005, 2006 and 2007, Josh Kurtz and Zach Kurtz, two of our national account
managers, each received $109,661, $113,400 and $127,300, respectively, of compensation from us in their capacities
as employees. Messrs. Kurtz and Kurtz are the sons of Patricia A. Verfuerth and the stepsons of
Neal R. Verfuerth.
Upon closing of this offering and the effectiveness of our amended and restated articles of
incorporation, we will be authorized to issue up to 200 million shares of common stock, no par
value per share, and up to 30 million shares of preferred stock, par value $.01 per share. The
description below summarizes the material terms of our common stock,
preferred stock, and options and warrants to purchase our common stock, the Convertible Notes that will be converted
into our common stock, and provisions of our amended and restated articles of incorporation and amended and
restated bylaws that will be effective upon the closing of this offering. This description is only
a summary. For more detailed information, you should refer to our amended and restated articles of
incorporation and bylaws filed with this registration statement, and to the applicable provisions
of Wisconsin law.
Common Stock
Holders of our common stock are entitled to one vote for each share held on all matters
submitted to a vote of shareholders and do not have cumulative voting rights. Holders of common
stock are entitled to receive proportionately any dividends as may be declared by our board of
directors, subject to any preferential dividend rights of outstanding preferred stock. Upon our
liquidation, dissolution or winding up, the holders of common stock are entitled to receive
proportionately our net assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock
are, and the shares offered by us in this offering will be, when issued and paid for, fully paid
and nonassessable. The rights, preferences and privileges of holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any series of
preferred stock that we may designate and issue in the future.
As
of June 30, 2007, there were 12,219,969 shares of our common
stock outstanding held by approximately 365
shareholders.
Preferred Stock
Effective
immediately upon closing of this offering and the conversion of our 4,808,012 shares
of preferred stock outstanding into shares of common stock, there will be no shares of preferred
stock outstanding. Upon closing of this offering and the effectiveness of our amended and restated
articles of incorporation, our board of directors will be authorized to issue from time to time up
to 30 million shares of preferred stock in one or more series without shareholder approval. Our
board of directors will have the discretion to determine the rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights, redemption privileges
and liquidation preferences, of each series of preferred stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock on the rights of holders of common
stock until our board of directors determines the specific rights associated with that preferred
stock. Although we have no current plans to issue shares of preferred stock, the effects of
issuing preferred stock could include one or more of the following:
•
decreasing the amount of earnings and assets available for distribution to
holders of common stock;
•
restricting dividends on the common stock;
•
diluting the voting power of the common stock;
•
impairing the liquidation rights of the common stock; or
delaying, deferring or preventing changes in our control or management.
As of June 30, 2007, there were outstanding 2,989,830 shares of Series B preferred stock held
by approximately 135 shareholders and 1,818,182 shares of Series C preferred stock held by two
shareholders. No shares of Series A preferred stock were outstanding as of June 30, 2007.
Warrants
As of June 30, 2007, there were outstanding warrants, issued in connection with our offerings
of common stock and Series B preferred stock, to purchase 954,390 shares of our common stock at
exercise prices ranging between $1.50 and $2.60 per share, with a weighted average exercise price
of $2.24 per share. These warrants were held by approximately 130 holders and expire in various
periods from December 31, 2007 through December 31, 2014.
Stock Options
As of June 30, 2007, we had granted options to purchase a total of 4,712,077 shares of common
stock at a weighted average exercise price of $1.57 per share. Of this total, 2,530,777 options
have vested and 2,181,300 remain unvested. As of June 30, 2007, an additional 646,700 shares of
common stock were available for future option grants under our 2003 Stock Option and 2004 Equity
Incentive Plans. Upon the closing of this offering, an additional
2.5 million shares of our common stock will be available for
future option grants under our 2004 Stock and Incentive Awards Plan.
Convertible Notes
On
August 3, 2007, we completed a placement of $10.6 million in aggregate principal amount of Convertible Notes
to an indirect affiliate of GEEFS, Clean Technology and affiliates
of Capvest. The Convertible Notes are subordinated to our current and
future outstanding indebtedness and bear interest at 6% per
annum.
The Convertible Notes contain customary terms and conditions,
including: (i) automatic conversion into 2,360,802 shares
of our common stock upon a qualified initial public offering
resulting in at least $30.0 million of
proceeds to us at an offering price of at least $11.23 per share;
(ii) information and observation rights; (iii) customary restrictions and/or approval rights
with respect to, incurring additional indebtedness, acquiring additional assets,
issuing new securities, paying dividends on or repurchasing our equity securities, selling our assets, merging, or undergoing a change
in control, making material increases in compensation to our management, incurring liens,
making certain investments, entering into transactions with our affiliates, amending our
articles of incorporation or bylaws (except in connection with this offering), commencing or
consenting to bankruptcy events or entering non-core lines of
business; (iv) customary events of default; (v) customary anti-dilution and preemptive rights
protections; (vi) various registration rights with respect to the shares of our common stock
received upon conversion of the notes (see “– Registration Rights”);
and (viii) tag along and first offer rights with respect to sales of any of our
equity securities by certain of our management members (other
than in connection with this offering). These terms and conditions
are each subject to customary exceptions and limitations.
All of
these terms and conditions (other than the registration rights related to the shares of our common
stock received upon conversion), will terminate upon conversion of
the Convertible Notes into common stock. Subject to certain
exceptions and extensions, the holders of the
Convertible Notes have agreed not to offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any of their
shares of our common stock, enter into any transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any economic consequences of
ownership of our common stock
received upon conversion of the Convertible Notes in this offering or
for 180 days after the date of this prospectus, although Clean
Technology and Capvest may sell certain of their previously acquired
shares in this offering. However, if certain individual
members of our management individually sell more than 15% of their
respective fully-diluted beneficially owned shares in
this offering, then the holders of the Convertible Notes may sell any or all of their shares in this offering, subject
to their lock-up agreements with the underwriters and any other limitations imposed by our
underwriters. See
“Principal and Selling Shareholders.”
Registration Rights
Upon closing of this offering, all outstanding shares of our convertible preferred stock will
be automatically converted into shares of our common stock on a one-for-one basis according to our
current articles of incorporation. The shares of our Series C preferred stock, which we call our
Series C shares, will be automatically converted into 1,818,182
shares of our common stock. Holders of Series C shares are entitled to certain registration rights
with respect to common stock issuable upon conversion of those Series C preferred shares according
to the terms of an agreement between us and the Series C holders. Additionally, the holders of our
Convertible Notes will also be entitled to certain registration rights with respect to their shares
of common stock received upon conversion of the Convertible Notes according to the terms of an agreement between us and the holders of the
Convertible Notes. We are generally required to pay all expenses incurred in connection with
registrations effected in connection with the exercise of these registration rights, excluding
underwriting discounts and commissions, and fees and expenses of counsel to the Series C holders in
excess of $50,000 per offering.
The holders of the Convertible Notes may not exercise these registration rights for their
shares of our common stock received upon conversion of the
Convertible Notes in connection with this offering unless certain
members of our management individually determine to
sell more than 15% of their fully-diluted beneficially owned shares in this offering. Based on
discussions with such management members, we do not believe that any of them will sell more than
15% of their full-diluted beneficially owned shares in this offering.
The holders of our Series C preferred stock and the Convertible Notes have entered into
lock-up agreements described under the caption “Underwriting,” pursuant to which they have agreed,
subject to
certain exceptions and extensions, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock,
enter into any transaction which would have the same effect, or enter
into any swap, hedge or other arrangement that transfers, in whole or
in part, any economic consequences of their ownership of our common stock for a period of 180 days from
the date of this prospectus or to exercise registration rights during such period with respect to
such shares, although they may sell certain shares in this
offering.
Demand Rights
At any time beginning six months after the closing date of this offering, subject to specified
limitations, any Series C holder may require that we register all or a portion of their common
shares received upon conversion of their Series C shares for sale under the Securities Act, if the
anticipated gross proceeds from the sale of such shares would be at least $10 million. We may be
required to effect up to two such registrations. Series C holders with these registration rights
who are not part of an initial registration demand are entitled to notice and are entitled to
include their own shares of common stock in such registration.
Also, at any time beginning six months after the closing date of this offering, the holders of
the Convertible Notes may require, subject to specified limitations, that we register all or a
portion of their common shares received upon conversion of the Convertible Notes for sale under the
Securities Act, other than on Form S-3, if the anticipated aggregate gross proceeds from the sale
of such shares would be at least $5 million.
Piggyback Rights
If we propose to register any of our equity securities under the Securities Act, other than in
connection with this offering (if the underwriters make the determination that not all of the
Series C shares to be registered can be included in the offering), the Series C holders are
entitled to notice of such registration and are entitled to include their shares of common stock in
such registration. Under certain circumstances, the underwriters in any future offering may limit
the number of shares sold by selling shareholders in such offering, in which case the Series C
holders will have the first right to participate in such offering as selling shareholders. The
Series C holders have agreed, subject to certain exceptions and
extensions, not to offer, sell, contract to sell or otherwise dispose
of, directly or indirectly, any of their common stock received upon conversion of
their preferred stock or enter into any transaction which would have
the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any economic consequences of
their
ownership of our common stock for 180 days after the date of this
prospectus, although they may sell
certain shares in this offering. See “Principal and Selling
Shareholders.”
At any time beginning six months after the closing of this offering, if we propose to register
any of our equity securities under the Securities Act, the holders of the common shares received
upon conversion of the Convertible Notes are entitled to notice of such registration and are
entitled to include their shares of common stock in such registration. Such holders have agreed
not to exercise this right in connection with this offering and, subject to certain exceptions
and extensions described below, have agreed not to sell any of their common stock received upon conversion of the
Convertible Notes in this offering or for 180 days after the date of this prospectus.
In the event that certain of our management members elect to sell more than 15% of his or her
fully-diluted beneficially owned common stock in this offering, the holders of the Convertible
Notes may sell any or all of their common stock in this offering, subject to any limitations that
may be imposed by the underwriters in this offering. In this case, registration rights of the
holders of the Convertible Notes will be senior to any other selling shareholder, except for Series
C holders and sales of shares by any individual management member in this offering that do not exceed 15% of
his or her fully-diluted beneficial holdings. Based on our discussions with such management
members, we do not currently believe that any such management members will sell more than 15% of
his or her fully-diluted shares beneficially owned of common stock in this offering.
If
we become eligible to file registration statements on Form S-3 (which
cannot occur until at least 12 months after the closing of this
offering), subject to specified
limitations, the Series C holders of not less than 25% of the converted Series C preferred stock,
and the holders of the common shares received upon conversion of the Convertible Notes, can require
us to register all or a portion of the these shares on Form S-3. Shareholders with these
registration rights who are not part of an initial registration demand are entitled to notice and
are entitled to include their shares of common stock in the registration.
Wisconsin law and our amended and restated articles of incorporation and amended and restated
bylaws that will be effective upon closing of this offering contain provisions that could delay or
prevent a change of control of our company or changes in our board of directors that our
shareholders might consider favorable. The following is a summary of these provisions.
Classified board of directors; removal of directors for cause. Our amended and restated
articles of incorporation and amended and restated bylaws that will be effective upon closing of
this offering provide that our board of directors will be divided into three classes, with the term
of office of the first class to expire at the 2008 annual meeting of shareholders, the term of
office of the second class to expire at the 2009 annual meeting of shareholders, and the term of
office of the third class to expire at the 2010 annual meeting of shareholders. At each annual
meeting of shareholders, each director will be elected for a term ending on the date of the third
annual shareholders’ meeting following the annual shareholders’ meeting at which such director was
elected and until his or her successor shall be elected and shall qualify, subject to prior death,
resignation or removal from office. Our amended and restated articles of incorporation also
provide that the affirmative vote of shareholders possessing at least 75% of the voting power of
the then outstanding shares of our capital stock is required to amend, alter, change or repeal, or
to adopt any provision inconsistent with, the relevant sections of the bylaws establishing the
classified board; provided that the board of directors may amend, alter, change or repeal, or adopt
any provision inconsistent with such sections without the vote of the shareholders by resolution
adopted by the affirmative vote of at least two-thirds of the directors then in office plus one
director. Our amended and restated articles of incorporation also provide that the affirmative
vote of shareholders possessing at least 75% of the voting power of the then outstanding shares of
our capital stock is required to amend, alter, change or repeal, or adopt any provision
inconsistent with, the provisions of the amended and restated articles of incorporation concerning
the classified board. The board of directors (or its remaining members, even if less than a
quorum) is also empowered to fill vacancies on the board of directors occurring for any reason for
the remainder of the term of the class of directors in which the vacancy occurred, unless the
vacancy was caused by the action of shareholders (in which event such vacancy will be filled by the
shareholders and may not be filled by the directors).
Members of the board of directors may be removed only for cause at a meeting of the
shareholders called for the purpose of removing the director, and the meeting notice must state
that the purpose, or one of the purposes, of the meeting is removal of the director and must state
the alleged cause upon which the director’s removal would be based.
These provisions are likely to increase the time required for shareholders to change the
composition of our board of directors. For example, in general, at least two annual meetings will
be necessary for shareholders to effect a change in a majority of the members of our board of
directors.
Advance notice provisions for shareholder proposals and shareholder nominations of directors.
Our amended and restated bylaws that will become effective upon closing of this offering provide
that, for nominations to the board of directors or for other business to be properly brought by a
shareholder before a meeting of shareholders, the shareholder must first have given timely notice
of the proposal in writing to our secretary. For an annual meeting, a shareholder’s notice
generally must be delivered on or before December 31 of the year immediately preceding the annual
meeting, unless the date of the annual meeting is on or after May 1 in any year, in which case
notice must be received not later than the close of business on the day which is determined by
adding to December 31 of the year immediately preceding such annual meeting the number of days
starting with May 1 and ending on the date of the annual meeting in such year. Detailed
requirements as to the form of the notice and information required in the notice are specified in
the amended and restated bylaws. If it is determined that business was not properly brought before
a meeting in accordance with our amended and restated bylaws, such business will not be conducted
at the meeting.
Wisconsin Business Corporation Law
We are subject to the provisions of the Wisconsin Business Corporation Law.
Business Combination Statute. Wisconsin law regulates a broad range of business combinations
between a “resident domestic corporation” and an “interested shareholder.”
A business combination is defined to include any of the following transactions:
•
a merger or share exchange;
•
a sale, lease, exchange, mortgage, pledge, transfer or other disposition of
assets equal to 5% or more of the market value of the stock or consolidated assets
of the resident domestic corporation or 10% of its consolidated earning power or
income;
•
the issuance of stock or rights to purchase stock with a market value equal to
5% or more of the outstanding stock of the resident domestic corporation;
certain other transactions involving an interested shareholder.
A “resident domestic corporation” is defined to mean a Wisconsin corporation that has a class of
voting stock that is registered or traded on a national securities exchange or that is registered
under Section 12(g) of the Exchange Act and that, as of the relevant date, satisfies any of the
following:
•
its principal offices are located in Wisconsin;
•
it has significant business operations located in Wisconsin;
•
more than 10% of the holders of record of its shares are residents of Wisconsin; or
•
more than 10% of its shares are held of record by residents of Wisconsin.
Following the closing of this offering, we will be considered a resident domestic corporation
for purposes of these statutory provisions.
An “interested shareholder” is defined to mean a person who beneficially owns, directly or
indirectly, 10% or more of the voting power of the outstanding voting stock of a resident domestic
corporation or who is an affiliate or associate of the resident domestic corporation and
beneficially owned 10% or more of the voting power of its then outstanding voting stock within the
last three years.
Under Wisconsin law, a resident domestic corporation cannot engage in a business combination
with an interested shareholder for a period of three years following the date such person becomes
an interested shareholder, unless the board of directors approved the business combination or the
acquisition of the stock that resulted in the person becoming an interested shareholder before such
acquisition. A resident domestic corporation may engage in a business combination with an
interested shareholder after the three-year period with respect to that shareholder expires only if
one or more of the following conditions is satisfied:
•
the board of directors approved the acquisition of the stock prior to such
shareholder’s acquisition date;
•
the business combination is approved by a majority of the outstanding voting
stock not beneficially owned by the interested shareholder; or
•
the consideration to be received by shareholders meets certain fair price
requirements of the statute with respect to form and amount.
Fair Price Statute. The Wisconsin law also provides that certain mergers, share exchanges or
sales, leases, exchanges or other dispositions of assets in a transaction involving a significant
shareholder and a resident domestic corporation require a supermajority vote of shareholders in
addition to any approval otherwise required, unless shareholders receive a fair price for their
shares that satisfies a statutory formula. A “significant shareholder” for this purpose is defined
as a person or group who beneficially owns, directly or indirectly, 10% or more of the voting stock
of the resident domestic corporation, or is an affiliate of the resident domestic corporation and
beneficially owned, directly or indirectly, 10% or more of the voting stock of the resident
domestic corporation within the last two years. Any such business combination must be approved by
80% of the voting power of the resident domestic corporation’s stock and at least two-thirds of the
voting power of its stock not beneficially owned by the significant shareholder who is party to the
relevant transaction or any of its affiliates or associates, in each case voting together as a
single group, unless the following fair price standards have been met:
•
the aggregate value of the per share consideration is equal to the highest of:
•
the highest price paid for any common shares of the corporation by the
significant shareholder in the transaction in which it became a significant
shareholder or within two years before the date of the business
combination;
•
the market value of the corporation’s shares on the date of commencement
of any tender offer by the significant shareholder, the date on which the
person became a significant shareholder or the date of the first public
announcement of the proposed business combination, whichever is higher; or
•
the highest preferential liquidation or dissolution distribution to
which holders of the shares would be entitled; and
•
either cash, or the form of consideration used by the significant shareholder to
acquire the largest number of shares, is offered.
Limitations of Directors’ Liability and Indemnification
Our amended and restated bylaws, which will become effective upon closing of this offering,
provide that, to the fullest extent permitted or required by Wisconsin law, we will indemnify all
of our directors and officers, any trustee of any of our employee benefit plans, and person who is
serving at our request as a director, officer, employee or agent of another entity, against certain
liabilities and losses incurred in connection with these positions or services. We will indemnify
these parties to the extent the parties are successful in the defense of a proceeding and in
proceedings in which the party is not successful in defense of the proceeding unless, in the latter
case only, it is determined that the party breached or failed to perform his or her duties to us
and this breach or failure constituted:
•
a willful failure to deal fairly with us or our shareholders in connection with
a matter in which the director or officer has a material conflict of interest;
•
a violation of criminal law, unless the director or officer had reasonable cause
to believe his or her conduct was unlawful;
•
a transaction from which the director or officer derived an improper personal profit; or
•
willful misconduct.
Our amended and restated bylaws provide that we are required to indemnify our directors and
executive officers and may indemnify our employees and other agents to the fullest extent required
or permitted by Wisconsin law. Additionally, our amended and restated bylaws require us under
certain circumstances to advance reasonable expenses incurred by a director or officer who is a
party to a proceeding for which indemnification may be available.
Wisconsin law further provides that it is the public policy of the State of Wisconsin to
require or permit indemnification, allowance of expenses and insurance to the extent required or
permitted under Wisconsin law for any liability incurred in connection with a proceeding involving
a federal or state statute, rule or regulation regulating the offer, sale or purchase of
securities.
Under Wisconsin law, a director is not personally liable for breach of any duty resulting
solely from his or her status as a director, unless it is proved that the director’s conduct
constituted conduct described in the bullet points above. In addition, we intend to obtain
directors’ and officers’ liability insurance that will insure against certain liabilities, subject
to applicable restrictions.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Wells Fargo Shareowner Services.
Prior to this offering, there has been no market for our common stock and a significant public
market for our common stock may not develop or be sustained after this offering. Future sales of
substantial amounts of our common stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices of our common stock. Furthermore, since only
a limited number of shares will be available for sale shortly after this offering because of
certain contractual and legal restrictions on resale described below, sales of substantial amounts
of our common stock in the public market after the restrictions lapse could also adversely affect
the market price of our common stock and our ability to raise equity capital in the future. See
“Risk Factors.”
Eligibility of Restricted Shares for Resale in the Public Markets
Upon closing of this offering, we will have outstanding an aggregate of shares of
common stock, assuming no exercise of options or warrants that were outstanding as of June 30, 2007
and that the underwriters do not exercise their over-allotment option. Of these shares, the
shares sold in this offering will be freely transferable without restriction or registration
under the Securities Act, except for any shares purchased by one of our existing “affiliates,” as
that term is defined in Rule 144 under the Securities Act, who may sell only the volume of shares
described below and whose sales would be subject to additional restrictions described below. The
remaining shares of common stock will be held by our existing shareholders and will
be considered “restricted securities” as defined in Rule 144. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 of the Securities Act, as described below.
Taking into account the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, the number of shares of common stock that will be available for sale in the public
market is as follows:
•
shares, which are not subject
to the 180-day lock-up period described under the caption
“Underwriting”, may
be sold immediately upon the date of this prospectus;
•
shares, which are not subject to the 180-day lock-up period described under the caption
“Underwriting”, may
be sold beginning 90 days after the date of this prospectus;
•
additional shares may be sold upon expiration of the 180-day lock-up period
described under the caption
“Underwriting”, of which would be subject to volume,
manner of sale and other limitations under Rule 144; and
•
the remaining shares will be eligible for resale pursuant to Rule 144
upon the expiration of various one-year holding periods during the six months
following the expiration of the 180-day lock-up period.
In addition, the shares underlying options and warrants will become available for resale into
the public markets as described below under “— Stock
Options” and “– Warrants.”
Lock-up Agreements
We, our executive officers, directors and shareholders representing
approximately % of our outstanding common stock have
entered into lock-up agreements with the underwriters described under the caption
“Underwriting.”
In general, under Rule 144 as currently in effect, beginning 90 days after the effective date
of this prospectus, a person, or persons whose shares are aggregated, who owns shares that were
purchased from us or an affiliate of us at least one year previously, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
•
one percent of our then-outstanding shares of common stock, which is expected to
equal approximately shares immediately after this offering; and
•
the average weekly trading volume of our common stock on the Nasdaq Global
Market during the four calendar weeks preceding the filing of a notice of the sale
on Form 144.
Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and
the availability of current public information about us. Rule 144 also provides that our affiliates
that are selling shares of our common stock that are not restricted shares must nonetheless comply
with the same restrictions applicable to restricted shares, other than the holding period
requirement. We are unable to estimate the number of shares that will be sold under Rule 144 since
this will depend on the market price for our common stock, the personal circumstances of the
shareholder and other factors.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701, any of our employees, directors, officers, consultants or advisors
who acquires common stock from us in connection with a compensatory stock or option plan or other
written agreement before the effective date of this offering, to the extent not subject to a
lock-up agreement, is entitled to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the
lock-up agreements described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates, as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirement.
Stock Options
As of June 30, 2007, we had granted options to purchase a total of 4,712,077 shares of common
stock at a weighted average exercise price of $1.57 per share. As of June 30, 2007, an additional
646,700 shares of common stock were available for future option grants under our 2003 Stock Option
and 2004 Equity Incentive Plans. Upon the closing of this offering, an additional 2.5 million
shares of our common stock will be available for future option grants under our 2004 Stock and
Equity Awards Plan.
We intend to file one or more registration statements on Form S-8 under the Securities Act
following closing of this offering to register all shares of our
common stock relating to awards that we have granted or may grant
under our outstanding equity incentive compensation plans as in
effect on the date of this prospectus.
These registration statements are expected to become effective upon filing. Subject to Rule 144
volume limitations applicable to affiliates and restrictions imposed by lock-up agreements, the
amount of shares referenced above, once registered under any registration statements, will be
immediately available for sale in the open market, except to the extent that the shares are subject
to vesting restrictions with us or the lock-up agreements described
described under the caption “Underwriting.”
Warrants
As of June 30, 2007, there were outstanding warrants to purchase 954,390 shares of our common
stock at exercise prices ranging between $1.50 and $2.60 per share, with a weighted average
exercise price of $2.24 per share. These warrants expire in various periods from December 31, 2007
through December 31, 2014. Any purchase of our common shares by affiliates pursuant to the
exercise of warrants will be subject to the one-year holding period under Rule 144, which holding
period will begin on the date of the exercise of any warrant.
MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS OF OUR COMMON STOCK
The following is a general discussion of the material United States federal income and estate
tax considerations applicable to a non-United States holder with respect to such holder’s
acquisition, ownership and disposition of shares of our common stock. This discussion is for
general information only and is not tax advice. Accordingly, all prospective non-United States
holders of our common stock should consult their own tax advisors with respect to the United States
federal, state, local and non-United States tax consequences of the acquisition, ownership and
disposition of our common stock. For purposes of this discussion, a non-United States holder means
a beneficial owner of our common stock who is not for United States federal income tax purposes:
•
an individual who is a citizen or resident of the United States;
•
a corporation, partnership or any other organization taxable as a corporation or
partnership for United States federal income tax purposes, created or organized in
the United States or under the laws of the United States or of any state thereof or
the District of Columbia;
•
an estate, the income of which is included in gross income for United States
federal income tax purposes regardless of its source; or
•
a trust (A) if (i) a United States court is able to exercise primary supervision
over the trust’s administration and (ii) one or more United States persons have the
authority to control all of the trust’s substantial decisions or (B) that has a
valid election in effect under applicable United States Treasury Regulations to be
treated as a United States person.
If a partnership (or any other entity treated as a partnership for United States federal
income tax purposes) holds shares of our common stock, the tax treatment of a partner in such
partnership will generally depend on the status of the partner and the activities of the
partnership. Such a partner and partnership should consult its tax advisor as to its tax
consequences.
This
discussion is based on current provisions of the IRC, existing, proposed and temporary United States Treasury Regulations promulgated
thereunder, current administrative rulings and judicial decisions, in each case as in effect and
available as of the date of this prospectus, all of which are subject to change or to differing
interpretation, possibly with retroactive effect. Any change could alter the tax consequences to
non-United States holders described in this prospectus.
This description addresses only the United States federal income tax considerations of
non-United States holders that are initial purchasers of our common stock pursuant to the offering
and that will hold our common stock as capital assets. This discussion does not address all aspects
of United States federal income and estate taxation that may be relevant to a particular non-United
States holder in light of that non-United States holder’s individual circumstances nor does it
address any aspects of United States state or local or non-United States taxation. This discussion
also does not consider any specific facts or circumstances that may apply to a non-United States
holder and does not address the special tax rules applicable to particular non-United States
holders, such as:
•
insurance companies;
•
real estate investment companies, regulated investment companies or grantor trusts;
corporations that accumulate earnings to avoid United States federal income tax;
•
tax-exempt organizations;
•
financial institutions;
•
brokers or dealers in securities or currencies;
•
partnerships and other pass-through entities;
•
pension plans;
•
holders that own or are deemed to own more than 5% of our common stock;
•
owners that hold our common stock as part of a straddle, hedge, conversion
transaction, synthetic security or other integrated investment;
•
persons that received our common stock as compensation for performance of services;
•
persons that have a functional currency other than the United States dollar; and
•
certain former citizens or residents of the United States.
Moreover, except as set forth below, this description does not address the United States
federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and
disposition of our common stock.
There can be no assurance that the Internal Revenue Service, referred to as the IRS, will not
challenge one or more of the tax consequences described herein or that any such contrary position
would not be sustained by a court, and we have not obtained, nor do we intend to obtain, an opinion
of counsel or ruling from the IRS with respect to the United States federal income or estate tax
consequences to a non-United States holder of the acquisition, ownership, or disposition of our
common stock.
We urge you to consult with your own tax advisor regarding the United States federal, state,
local and non-United States income and other tax considerations of acquiring, holding and disposing
of shares of our common stock.
Distributions on Our Common Stock
We have not declared or paid distributions on our common stock since our inception and do not
intend to pay any distributions on our common stock in the foreseeable future. In the event we do
pay distributions on our common stock, however, these distributions generally will constitute
dividends for United States federal income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under United States federal income tax principles.
If a distribution exceeds our current and accumulated earnings and profits as determined under
United States federal income tax principles, the excess will be treated first as a tax-free return
of your adjusted tax basis in our common stock and thereafter as capital gain.
Generally, but subject to the discussions below under “Status as United States Real Property
Holding Corporation” and “Backup Withholding and Information Reporting,” distributions of cash or
property paid to you generally will be subject to withholding of United States federal income tax
at a 30% rate or such lower rate as may be provided by an applicable United States income tax
treaty. You are
urged to consult your own tax advisor regarding your entitlement to benefits under a relevant
United States income tax treaty. If we determine, at a time reasonably close to the date of payment
of a distribution on our common stock, that the distribution will not constitute a dividend because
we do not anticipate having current or accumulated earnings and profits as determined under United
States federal income tax principles, we intend not to withhold any United States federal income
tax on the distribution as permitted by United States Treasury Regulations.
Except as may be otherwise provided in an applicable United States income tax treaty, if you
conduct a trade or business within the United States, you generally will be taxed at graduated
United States federal income tax rates applicable to United States persons (on a net income basis)
on dividends that are effectively connected with the conduct of such trade or business and such
dividends will not be subject to the withholding described above. If you are a corporation, you may
also be subject to a 30% “branch profits tax” unless you qualify for a lower rate under an
applicable United States income tax treaty.
To claim the benefit of any applicable United States tax treaty or an exemption from
withholding because the income is effectively connected with your conduct of a trade or business in
the United States, you must provide a properly executed IRS Form W-8BEN certifying your
qualification for a reduced rate under an applicable treaty or IRS Form W-8ECI certifying that the
dividends are effectively connected with your conduct of a trade or business within the United
States (or such successor form as the IRS designates), before the distributions are made. These
forms must be periodically updated. You may obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the IRS. You should consult your tax advisors
regarding any applicable tax treaties that may provide for different rules.
Sale, Exchange or Other Taxable Disposition of Our Common Stock
Generally, but subject to the discussions below under “Status as United States Real
Property Holding Corporation” and “Backup Withholding and Information Reporting,” you will not be
subject to United States federal income tax or withholding tax on any gain realized on the sale,
exchange or other taxable disposition of shares of our common stock unless:
•
the gain is effectively connected with your conduct of a trade or
business in the United States (and if an applicable United States
income tax treaty so provides, is also attributable to a permanent
establishment or a fixed base in the United States maintained by
you), in which case you generally (unless an applicable tax treaty
provides otherwise) will be taxed at the graduated United States
federal income tax rates applicable to United States persons and,
if you are a corporation, the additional branch profits tax
described above in “Distributions on Our Common Stock” may apply;
or
•
you are an individual who is present in the United States for 183
days or more in the taxable year of the sale, exchange or
disposition and certain other conditions are met, in which case
you will be subject to a 30% tax on the net gain derived from the
disposition, which may be offset by your United States source
capital losses, if any.
Status as a United States Real Property Holding Corporation
Under certain circumstances, gain recognized on the sale, exchange or other disposition of,
and certain distributions in excess of basis with respect to, our common stock would be subject to
United States federal income tax, notwithstanding your lack of other connections with the United
States, if we are or have been, at any time during the shorter of (i) your holding period of our
common stock or (ii) the five-year period ending on the date of such sale, exchange or other
disposition (or distribution in excess
of basis) a “United States real property holding corporation” for United States federal income tax
purposes, unless our common stock is regularly traded on an established securities market and you
actually or constructively hold no more than 5% of our outstanding common stock. If we are
determined to be a United States real property holding corporation and the foregoing exception does
not apply, then a purchaser must withhold 10% of the proceeds payable to you from your sale or
other taxable disposition of our common stock (unless our common stock is regularly traded on an
established securities market), and you generally will be taxed on the net gain derived from the
disposition at the graduated United States federal income tax rates applicable to United States
persons. Generally, a corporation is a United States real property holding corporation only if the
fair market value of its United States real property interests equals or exceeds 50% of the sum of
the fair market value of its worldwide real property interests plus its other assets used or held
for use in a trade or business. Although there can be no assurance, currently we do not believe
that we are, or have been, a United States real property holding corporation, or that we are likely
to become one in the future. Furthermore, no assurance can be provided that our stock will be
regularly traded on an established securities market for purposes of the rules described above.
United States Federal Estate Tax
Shares of our common stock owned or treated as owned at the time of death by an individual who
is not a citizen or resident of the United States, as specifically defined for United States
federal estate tax purposes, will be considered United States situs assets and will be included in
the individual’s gross estate for United States federal estate tax purposes. Such shares,
therefore, may be subject to United States federal estate tax, unless an applicable estate tax or
other treaty provides otherwise.
Backup Withholding and Information Reporting
We must report annually to the IRS and to each non-United States holder the amount of
dividends on our common stock paid to such holder and the amount of any tax withheld with respect
to those dividends, together with other information. These information reporting requirements apply
even if no withholding was required because the dividends were effectively connected with the
holder’s conduct of a United States trade or business, or withholding was reduced or eliminated by
an applicable tax treaty. This information also may be made available under a specific treaty or
agreement to the tax authorities of the country in which the non-United States holder resides or is
established. Under certain circumstances, the Code imposes a backup withholding obligation
(currently at a rate of 28%) on certain reportable payments. However, backup withholding generally
will not apply to payments of dividends to a non-United States holder of our common stock provided
the non-United States holder furnishes to us or our paying agent the required certification as to
its non-United States status, such as by providing a valid IRS Form W-8BEN or W-8ECI, or otherwise
establishes an exemption.
Payments of the proceeds from a disposition by a non-United States holder of our common stock
made by or through a non-United States office of a broker generally will not be subject to
information reporting or backup withholding. However, information reporting (but not backup
withholding) will apply to those payments if the broker is a United States person, a controlled
foreign corporation for United States federal income tax purposes, a foreign person 50% or more of
whose gross income is effectively connected with a United States trade or business for a specified
three-year period or a foreign partnership if at any time during its tax year (1) one or more of
its partners are United States persons who hold in the aggregate more than 50 percent of the income
or capital interest in such partnership or (2) it is engaged in the conduct of a United States
trade or business, unless the broker has documentary evidence that the beneficial owner is a
non-United States holder or an exemption is otherwise established, provided that the broker does
not have actual knowledge or reason to know that the holder is a United States person or that the
conditions of any other exemption are not, in fact, satisfied.
Payment of the proceeds from a non-United States holder’s disposition of our common stock made
by or through the United States office of a broker may be subject to information reporting. Backup
withholding will apply unless the non-United States holder certifies as to its non-United States
holder status under penalties of perjury, such as by providing a valid IRS Form W-8BEN or W-8ECI,
or otherwise establishes an exemption, provided that the broker does not have actual knowledge or
reason to know that the holder is a United States person or that the conditions of any other
exemption are not, in fact, satisfied. Non-United States holders should consult their tax advisors
on the application of information reporting and backup withholding to them in their particular
circumstances.
Backup withholding tax is not an additional tax. Any amounts withheld under the backup
withholding tax rules from a payment to a non-United States holder can be refunded or credited
against the non-United States holder’s United States federal income tax liability, if any, provided
that the required information is furnished to the IRS in a timely manner.
The above description is not intended to constitute a complete analysis of all tax
consequences relating to acquisition, ownership and disposition of our common stock. You should
consult your own tax advisor concerning the tax consequences of your particular situation.
Subject
to the terms and conditions set forth in the underwriting agreement, each
of the underwriters named below has severally agreed to purchase from
us and the selling shareholders the aggregate number of shares of common stock set forth opposite
its name below:
Number of
Underwriter
Shares
Thomas Weisel Partners LLC
Canaccord Adams Inc.
Pacific Growth Equities, LLC
Total
The underwriting agreement provides that the underwriters are obligated to purchase all the
shares of common stock in the offering if any are purchased, other than those shares covered by the
over-allotment option described below. The underwriting agreement also provides that if an
underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or
the offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional
shares from us at the initial public offering price less the underwriting discounts
and commissions. The option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the public offering
price on the cover page of this prospectus and to selling group members at that price less a
selling concession of $ per share. The underwriters and selling group members may allow a
discount of $ per share on sales to other broker/dealers. After the initial public offering, the
underwriters may change the public offering price and concession and discount to broker/dealers.
The
following table summarizes the compensation to be paid to the
underwriters by us and the selling shareholders
and the proceeds, before expenses, payable to us and the selling
stockholders:
Total
With
Without
Per Share
Over-Allotment
Over-Allotment
Public
offering price
Underwriting
discount
Proceeds,
before expenses, to us
Proceeds,
before expenses, to the selling shareholders
The underwriters have informed us that they do not expect sales to accounts over which
the underwriters have discretionary authority to exceed 5% of the shares of common stock being
offered.
We have agreed that we will not (i) offer, sell, issue contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or
any securities convertible into or exchangeable or exercisable for any shares of
our common stock; (ii) offer, sell, issue, contract to sell, contract to purchase or grant any
option, right or warrant to purchase shares of our common stock or
any securities convertible into or
exchangeable for shares of our common stock; (iii) enter into any swap, hedge or any other
agreement that transfers, in whole or in part, the economic consequences of ownership of shares of
our common stock or any securities convertible or exchangeable into
shares of our common stock;
(iv) establish or increase a put equivalent position or liquidate or decrease a call equivalent
position in shares of our common stock or any securities
convertible or exchangeable into shares of our common stock within the meaning of Section 16
of the Exchange Act or (v) file with the SEC a registration
statement under the Securities Act relating to
shares of our common stock or any securities convertible into or
exchangeable for shares of our common
stock, or publicly disclose the intention to take any such action, in each case, without the prior
written consent of Thomas Weisel Partners LLC, for a period of 180 days after the date of this
prospectus except for issuances pursuant to or the conversion of
convertible securities, options or warrants outstanding on the date
of this prospectus and the filing of a registration statement on
Form S-8 for shares of common stock relating to awards that we have
granted or may
grant under our outstanding equity incentive compensation plans, as
in effect on the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up”
period, we release earnings results or material news or a material event relating to us occurs or
(2) prior to the expiration of the “lock-up” period, we announce that we will release earnings
results during the 16-day period beginning on the last day of the
“lock-up” period, then in each
case the “lock-up” period will be extended until the expiration of the 18-day period
beginning on the date of the release of the earnings results or the occurrence of the material news
or material event, as applicable, unless Thomas Weisel Partners LLC waives, in writing, such extension.
Our officers,
directors and shareholders representing % of our outstanding common
stock have agreed that, subject to certain exceptions,
they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction that would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other securities, in cash or otherwise, or
publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into
any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent
of Thomas Weisel Partners LLC for a period of 180 days after the
date of this prospectus. In addition, our officers, directors and
these shareholders agree that, without the prior written
consent of Thomas Weisel Partners LLC, they will not, during the
period of the lock-up period, make any demand for or exercise any
right with respect to, the registration of our common stock or any
security convertible into or exercisable or exchangeable for our
common stock. However, in
the event that either (1) during the last 17 days of the “lock-up” period, we release earnings
results or material news or a material event relating to us occurs or (2) prior to the expiration
of the “lock-up” period, we announce that we will release earnings results during the 16-day period
beginning on the last day of the “lock-up” period, then in
each case the “lock-up” period will be extended until the expiration of the 18-day period beginning on the date of the
release of the earnings results or the occurrence of the material news or event, as applicable,
unless Thomas Weisel Partners LLC waives, in writing, such an
extension.
Notwithstanding the foregoing, the restrictions described in the paragraph above will not
apply to transfers to a family member or trust, provided the transferee agrees to be bound in
writing by the terms of the lock up agreement prior to such transfer, such transfer shall not
involve a disposition for value and no filing by any party (donor, donee, transferor or transferee)
under the Exchange Act is required or voluntarily made in connection with such transfer (other than
a filing on a Form 5 made after the expiration of the “lock up” period).
The
underwriters have reserved for sale at the initial public offering
price up to shares,
or % of the total number of shares
offered in this prospectus by the company, of the common stock
for employees, directors, customers, vendors and other persons associated with us who have
expressed an interest in purchasing common stock in the offering. The number of shares available
for sale to the general public in the offering will be reduced to the extent these persons purchase
the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to
the general public on the same terms as the other shares.
We and the selling shareholders have agreed to indemnify the underwriters against liabilities
under the Securities Act, or contribute to payments that the underwriters may be required to make
in that respect.
We
intend to apply to list the shares of common stock on the Nasdaq
Global Market under the symbol “OESX.”
In
connection with the offering, the underwriters may engage in stabilizing transactions,
over-allotment transactions, syndicate covering transactions, and penalty bids in accordance with
Regulation M under the Exchange Act.
Stabilizing transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum.
Over-allotment involves sales by the underwriters of shares in excess of the number of shares
the underwriters are obligated to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not greater than the number of
shares that they may purchase in the over-allotment option. In a naked short position, the number
of shares involved is greater than the number of shares in the over-allotment option. The
underwriters may close out any covered short position by either exercising their over-allotment
option and/or purchasing shares in the open market.
Syndicate covering transactions involve purchases of the common stock in the open market after
the distribution has been completed in order to cover syndicate short positions. In determining the
source of shares to close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. If the underwriters sell more
shares than could be covered by the over-allotment option, a naked short position, the position can
only be closed out by buying shares in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect investors who purchase in the
offering.
Penalty bids permit the representatives to reclaim a selling concession from a syndicate
member when the common stock originally sold by the syndicate member is purchased in a stabilizing
or syndicate covering transaction to cover syndicate short positions.
Stabilization and syndicate covering transactions may cause the price
of the shares to be higher than it would be in the absence of these
transactions. The imposition of a penalty bid might also have an
effect on the price of the shares if it discourages presale of the
shares.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or preventing or retarding a
decline in the market price of the common stock. As a result the price of our common stock may be
higher than the price that might otherwise exist in the open market. These transactions may be
effected on the Nasdaq Global Market or otherwise and, if commenced, may be discontinued at any
time.
Prior to this offering, there has been no public market for our common stock. The initial
public offering price will be determined by negotiations between us
and the underwriters. Among
the factors to be considered in determining the initial public offering price will be our future
prospects and those of our industry in general, our financial operating information in recent
periods, and market prices of securities and financial and operating information of companies
engaged in activities similar to ours. There can be no assurance that the initial public offering
price will correspond to the price at which our common stock will trade in the public market
subsequent to this offering or that an active trading market will develop and continue after this
offering.
In relation to each Member State of the European Economic Area which has implemented the
Prospectus Directive (each, a Relevant Member State), each Underwriter has represented and agreed
that, with effect from and including the date on which the Prospectus Directive is implemented in
that Relevant Member State (the Relevant Implementation Date), it has not made and will not make an
offer of shares to the public in that Relevant Member State prior to the publication of a
prospectus in relation to the shares which has been approved by the competent authority in that
Relevant Member State or, where appropriate, approved in another Relevant Member State and notified
to the competent authority in that Relevant Member State, all in accordance with the Prospectus
Directive, except that it may, with effect from and including the Relevant Implementation Date,
make an offer of shares to the public in that Relevant Member State at any time:
(a)
to legal entities which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate purpose is solely to
invest in securities;
(b)
to any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in
its last annual or consolidated accounts; or
(c)
in any other circumstances which do not require the publication by the Issuer of a
prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of shares to the public” in
relation to any shares in any Relevant Member State means the communication in any form and by any
means of sufficient information on the terms of the offer and the shares to be offered so as to
enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that
Member State by any measure implementing the Prospectus Directive in that Member State and the
expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing
measure in each Relevant Member State.
Each of the underwriters has represented and agreed that:
(a)
it has not made or will not make an offer of shares to the public in the United
Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000
(as amended), or FSMA except to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or regulated, whose corporate
purpose is solely to invest in securities or otherwise in circumstances which do not
require the publication by us of a prospectus pursuant to the Prospectus Rules of the
Financial Services Authority, or FSA;
(b)
it has only communicated or caused to be communicated and will only communicate or
cause to be communicated an invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who have professional experience in
matters relating to investments falling within Article 19(5) of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which
section 21 of FSMA does not apply to us; and
(c)
it has complied with, and will comply with, all applicable provisions of FSMA with
respect to anything done by it in relation to the shares in, from or otherwise involving
the United Kingdom.
The underwriters will not offer or sell any of our shares directly or indirectly in Japan or
to, or for the benefit of any Japanese person or to others, for re-offering or re-sale directly or
indirectly in Japan or to any Japanese person, except in each case pursuant to an exemption from
the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law
of Japan and any other applicable
laws and regulations of Japan. For purposes of this paragraph, “Japanese person” means any
person resident in Japan, including any corporation or other entity organized under the laws of
Japan.
The underwriters and each of their affiliates have not (i) offered or sold, and will not offer
or sell, in Hong Kong, by means of any document, our shares other than (a) to “professional
investors” as defined in the Securities and Futures Ordinance (Cap.571) of Hong Kong and any rules
made under that Ordinance or (b) in other circumstances which do not result in the document being a
“prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not
constitute an offer to the public within the meaning of that Ordinance or (ii) issued or had in its
possession for the purposes of issue, and will not issue or have in its possession for the purposes
of issue, whether in Hong Kong or elsewhere any advertisement, invitation or document relating to
our shares which is directed at, or the contents of which are likely to be accessed or read by, the
public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other
than with respect to our shares which are or are intended to be disposed of only to persons outside
Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance
any rules made under that Ordinance. The contents of this document have not been reviewed by any
regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If
you are in any doubt about any of the contents of this document, you should obtain independent
professional advice.
This prospectus or any other offering material relating to our shares has not been and will
not be registered as a prospectus with the Monetary Authority of Singapore, and the shares will be
offered in Singapore pursuant to exemptions under Section 274 and Section 275 of the Securities and
Futures Act, Chapter 289 of Singapore, or the Securities and Futures Act. Accordingly our shares
may not be offered or sold, or be the subject of an invitation for subscription or purchase, nor
may this prospectus or any other offering material relating to our shares be circulated or
distributed, whether directly or indirectly, to the public or any member of the public in Singapore
other than (a) to an institutional investor or other person specified in Section 274 of the
Securities and Futures Act, (b) to a sophisticated investor, and in accordance with the conditions
specified in Section 275 of the Securities and Futures Act or (c) otherwise pursuant to, and in
accordance with the conditions of, any other applicable provision of the Securities and Futures
Act.
In the ordinary course, the underwriters and their affiliates may in the
future provide investment banking, commercial banking, investment management, or other financial
services to us and our affiliates for which services they may receive
compensation in the future.
The validity of the issuance of the common stock offered by us in this offering will be passed
upon for us by the law firm of Foley & Lardner LLP. Certain legal matters in connection with this
offering will be passed upon for the underwriters by the law firm of Latham & Watkins LLP, New
York, New York.
EXPERTS
Grant Thornton LLP, independent registered public accounting firm, has audited our financial
statements as of March 31, 2006 and 2007 and for each of the three years in the period ended March31, 2007 appearing in this prospectus and the related registration statement, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance on such report given on the
authority of such firm as experts in accounting and auditing.
Wipfli
LLP, acted as an independent third party evaluator and provided a
valuation of the fair value of our common stock as of April 30, 2007 and as of
November 30, 2006, in each case in connection with the board of directors
determination of stock value for financial reporting of stock option grants.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to our common stock offered hereby. This prospectus, which forms part of the
registration statement, does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. This prospectus omits
information contained in the registration statement as permitted by the rules and regulations of
the SEC. For further information about us and our common stock, we refer you to the registration
statement and the exhibits and schedules to the registration statement filed as part of the
registration statement. Statements contained in this prospectus as to the contents of any contract
or other document filed as an exhibit are qualified in all respects by reference to the actual text
of the exhibit. You may read and copy the registration statement, including the exhibits and
schedules to the registration statement, at the SEC’s Public Reference Room at 100 F. Street, N.E.,
Room 1580, Washington, D.C. 20549. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site at www.sec.gov, from which you can electronically access the registration statement, including
the exhibits and schedules to the registration statement.
Upon
the closing of this offering, we will become subject to the informational and
reporting requirements of the Exchange Act and we intend to file
periodic reports and other information with the SEC. After the
closing of this offering, our future SEC
filings will be available to you on our website at
www.oriones.com. Information on, or accessible through, our website
is not a part of, and is not incorporated into, this prospectus.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders Orion Energy Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion Energy Systems, Inc. and
Subsidiaries (the Company) as of March 31, 2006 and 2007, and the related consolidated statements
of operations, temporary equity and shareholders’ equity, and cash flows for each of the three
years in the period ended March 31, 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of March 31, 2006 and
2007, and the consolidated results of their operations and their consolidated cash flows for each
of the three years in the period ended March 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note A, effective April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment.
Accounts receivable, net of allowances of $38, $89 and $83 (unaudited)
6,051
11,197
13,172
Inventories
6,167
9,496
10,672
Deferred tax assets
419
345
458
Prepaid expenses and other current assets
745
1,296
1,457
Total current assets
14,471
22,619
26,455
Property and equipment, net
8,106
7,588
7,946
Patents and licenses, net
194
243
316
Investment
—
794
794
Deferred tax assets
1,607
1,907
1,354
Other long-term assets
360
432
854
Total assets
$
24,738
$
33,583
$
37,719
Liabilities, Temporary Equity and Shareholders’ Equity
Accounts payable
$
4,767
$
5,607
$
8,116
Accrued expenses
1,889
2,196
3,326
Current maturities of long-term debt
859
736
707
Total current liabilities
7,515
8,539
12,149
Long-term debt, less current maturities
10,492
10,603
9,998
Other long-term liabilities
109
133
171
Total liabilities
18,116
19,275
22,318
Commitments and contingencies (See Note E)
Temporary equity:
Series C convertible redeemable preferred stock,
$0.01 par value: zero shares
issued and outstanding at March 31, 2006 and 1,818,182 at
March 31, 2007 and June 30, 2007 (unaudited)
—
4,953
5,028
Shareholders’ equity:
Preferred
stock, $0.01 par value: Shares authorized including Series C convertible
redeemable preferred stock: 20,000,000 at March 31, 2006 and 2007 and June 30, 2007 (unaudited)
Series A convertible preferred stock, $0.01 par value: 20,000 shares issued and
outstanding at March 31, 2006 and none at March 31, 2007 and June 30, 2007
(unaudited)
116
—
—
Series B
convertible preferred stock, $0.01 par value: 2,847,400, 2,989,830 and 2,989,830 shares
issued and outstanding at March 31, 2006 and 2007 and June 30, 2007 (unaudited)
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company includes Orion Energy Systems, Inc., a Wisconsin corporation, and all consolidated
subsidiaries. The Company is a developer, manufacturer and seller of lighting and energy
management systems. The corporate offices are located in Plymouth, Wisconsin and manufacturing
and operations facilities are located in Plymouth and Manitowoc, Wisconsin.
Principles of Consolidation
The consolidated financial statements include the accounts of Orion Energy Systems, Inc. and its
wholly-owned subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
Unaudited financial information
The accompanying consolidated balance sheet as of June 30, 2007, the consolidated
statements of operations and cash flows for the three months ended June 30, 2006 and 2007 and
the consolidated statements of temporary equity and shareholders’ equity for the three months
ended June 30, 2007 are unaudited and the Company’s independent registered public accounting
firm has not expressed an opinion on the statements for these periods. The unaudited
consolidated financial statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to state fairly the Company’s consolidated financial position
as of June 30, 2007 and consolidated results of operations and cash flows for the three months
ended June 30, 2006 and 2007. The financial data and other information disclosed in these notes
to the consolidated financial statements as of and related to the three months ended June 30,2006 and 2007 are unaudited. The results for the three months ended June 30, 2007 are not
necessarily indicative of the results to be expected for the year ending March 31, 2008 or for
any other interim period or for any future year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and reported amounts
of revenues and expenses during that reporting period. Areas that require the use of significant
management estimates include revenue recognition, inventory obsolescence and bad debt reserves,
accruals for warranty expenses, income taxes and certain equity transactions. Accordingly,
actual results could differ from those estimates.
Cash
and cash equivalents
The Company considers all highly liquid, short-term investments with original maturities of
three months or less to be cash equivalents.
Fair value of financial instruments
The
carrying amounts of the Company’s financial instruments, which
include cash and cash equivalents, accounts receivable, and accounts payable, approximate their respective fair values
due to the relatively short-term nature of these instruments. Based upon interest rates
currently available to the Company for debt with similar terms, the carrying value of the
Company’s long-term debt is also approximately equal to its fair value.
Accounts receivable
The majority of the Company’s accounts receivable are due from companies in the commercial,
industrial and agricultural industries, and wholesalers. Credit is extended based on an
evaluation of a customer’s financial condition. Generally, collateral is not required for end
users; however, the payment of certain trade accounts
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable from wholesalers is secured by irrevocable standby letters of credit. Accounts
receivable are due within 30-60 days. Accounts receivable are stated at the amount the Company
expects to collect from outstanding balances. The Company provides for probable uncollectible
amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on
its assessment of the current status of individual accounts. Balances that are still
outstanding after the Company has used reasonable collection efforts are written off through a
charge to the allowance for doubtful accounts and a credit to accounts receivable.
Included in accounts receivable are amounts due from a
third party finance company to which the Company has sold, without recourse, the future cash
flows from lease arrangements entered into with customers. Such receivables are recorded at the present value of the future cash flows discounted
at 12.49%. As of March 31, 2007, the following amounts were due from the third party finance
company in future periods (in thousands):
At June 30, 2007 (unaudited), net contract receivables amounted to $249,000, $194,000 of
which is due in the next 12 months.
Inventories
Inventories consist of raw materials and components, such as ballasts, metal sheet and coil
stock and molded parts; work in process inventories, such as frames and reflectors; and finished
goods, including completed fixtures or systems and accessories, such as lamps, meters and power
supplies. All inventories are stated at the lower of cost or market value; with cost determined
using the first-in, first-out (FIFO) method. The Company reduces the carrying value of its
inventories for differences between the cost and estimated net realizable value, taking into
consideration usage in the preceding 12 months, expected demand, and other information
indicating obsolescence. The Company records as a charge to cost of revenue the amount required
to reduce the carrying value of inventory to net realizable value. As of March 31, 2006 and
2007, and June 30, 2007 (unaudited), the Company had inventory obsolescence reserves of
$355,000, $448,000 and $526,000.
Costs associated with the procurement and warehousing of inventories, such as inbound
freight charges and purchasing and receiving costs, are also included in cost of revenue.
Inventories were comprised of the following (in thousands):
Prepaid expenses and other current assets consist primarily of prepaid insurance premiums,
advance payments to contractors and miscellaneous receivables. The balance at March 31, 2007
also included a $450,000 secured note with 5% interest due from a
third party. The note was paid in
full in May 2007.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions and improvements are
capitalized, while replacements, maintenance and repairs which do not improve or extend the
lives of the respective assets are expensed as incurred. Properties sold, or otherwise
disposed of, are removed from the property accounts, with gains or losses on disposal credited
or charged to income from operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company periodically reviews the carrying
values of property and equipment for impairment when events or changes in circumstances indicate
that the assets may be impaired. The estimated future undiscounted cash flows expected to
result from the use of the assets and their eventual disposition are compared to the assets’
carrying amount to determine if a write down to market value is required. No writedowns were
recorded in fiscal 2005, 2006, 2007 or the three months ended June 30, 2006 and 2007
(unaudited).
Property and equipment were comprised of the following (in thousands):
Depreciation is provided over the estimated useful lives of the respective assets, using
the straight-line method. Depreciable lives by asset category are as follows:
Land improvements
10 – 15 years
Buildings
10 – 39 years
Furniture, fixtures and office equipment
3 – 10 years
Plant equipment
3 – 10 years
No interest has been capitalized for construction in progress, as it was not material for any of
the periods presented.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patents and Licenses
Patents and licenses are being amortized on a straight-line basis over 15-17 years. The Company
capitalized
$40,000, $56,000 and $81,000 of costs associated with obtaining patents and licenses in fiscal
2005, 2006 and
2007. An additional $78,000 was capitalized in the three months ended June 30, 2007 (unaudited).
Amortization expense recorded to cost of revenue for fiscal 2005, 2006 and 2007 was $9,000,
$14,000 and $19,000. The costs and accumulated amortization for patents and licenses was
$246,000 and $52,000 as of March 31, 2006; $314,000 and $71,000 as of March 31, 2007; and
$392,000 and $76,000 as of June 30, 2007 (unaudited). The average remaining useful life of the
patents and licenses as of March 31, 2007 was approximately 15 years. As of March 31, 2007,
amortization expense of the patents and licenses for each of the fiscal years ending 2008
through 2012 is estimated to be $20,000, with $143,000 remaining after 2012.
The Company’s management periodically reviews the carrying value of patents and licenses for
impairment. As a result of this review, the Company wrote off an immaterial amount in fiscal
2007.
Investment
The investment consists of 77,000 shares of preferred stock of a manufacturer of specialty
aluminum products which was acquired in July 2006 by exchanging products with a fair value
of $794,000. The terms of the preferred stock contain protective covenants regarding capital
structure changes and also certain provisions to require the redemption of the stock at a
defined liquidation value. The terms of the stock also require a dividend payment of 12% on the
liquidation value or $139,000 annually. The investment is being accounted for under the cost
method of accounting. The Company does not have the ability to exert significant influence over
the entity.
The Company’s management periodically reviews the carrying value of the investment for
impairment. No impairment was required at March 31, 2007 or June 30, 2007 (unaudited).
Other Long-Term Assets
Other
long-term assets includes deferred financing costs related to debt
issuances and the Company's contemplated initial
public offering, amounts due
from shareholders unrelated to stock transactions (see Note B) and other miscellaneous items.
Deferred
financing costs related to debt issuances are amortized to interest expense over the life of the related debt
issue (6 to 15 years). In fiscal 2005, 2006 and 2007, the Company capitalized $91,000, $94,000
and zero of deferred financing costs. In the three months ended June 30, 2007 (unaudited), the
Company deferred $53,000 of costs related to its convertible debt issuance that closed in August
2007 (see Note H). Interest expense related to the amortization of deferred financing for fiscal
2005, 2006 and 2007 was $11,000, $62,000, and $45,000. For the three months ended June 30, 2006
and 2007 (unaudited), the amortization was $9,000.
The balance at
June 30, 2007 included $426,000 of deferred equity issuance
costs incurred in connection with the Company's contemplated initial
public offering.
Accrued Expenses
Accrued expenses include warranty accruals, accrued wages, accrued vacations, sales tax payable,
income tax payable and other various unpaid expenses.
During fiscal 2006, the Company experienced performance issues on select inventory items and
entered into a settlement agreement with the supplier under which the Company was forgiven
certain payables outstanding and received a cash rebate of $432,000 in exchange for an
additional purchase obligation of $962,000 of inventory. The cash rebate was received and
included in other current liabilities at March 31, 2006 as the purchase obligation remained
outstanding. As of March 31, 2007, the Company had satisfied its purchase obligation and the
rebate was reclassified to inventory and is being amortized to cost
of revenue as the purchased product is used.
The Company generally offers a limited warranty of one year on its products in addition to
those standard warranties offered by major original equipment component manufacturers. The
manufacturers’ warranties cover
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lamps and ballasts, which are significant components in the Company’s products. In fiscal 2005 and 2006, the
Company experienced significant warranty problems with new ballast and lamp components
manufactured by a third party supplier. The Company charged back costs against accounts payable
due the supplier as partial reimbursement for replacement material and labor costs incurred to
correct certain product failures at its customers’ facilities. The Company also provided a
general reserve for warranty costs as of March 31, 2006 and 2007 and June 30, 2007 (unaudited).
Changes in the Company’s warranty accrual were as follows (in thousands):
The Company recognizes revenue in accordance with Staff Accounting Bulletin, (SAB) No. 104,
Revenue Recognition, and Emerging Issues Task Force Issue (EITF) No. 00-21, Revenue Arrangements
with Multiple Deliverables. Based upon SAB 104, revenue is recognized when the following four
criteria are met:
•
persuasive evidence of an arrangement exists;
•
delivery has occurred and title has passed to the customer;
•
the sales price is fixed and determinable and no further obligation exists; and
•
collectibility is reasonably assured.
These four criteria are met for the Company’s product sales upon delivery of the product and
title passing to the customer. At that time, the
Company provides for estimated costs that may be incurred for product warranties and sales
returns. Revenue associated with installation services is recognized when services are complete
and acceptance provisions, if any, have been met. Services other than installation, that are
completed prior to delivery of the product, are recognized upon shipment. When other
significant obligations or acceptance terms remain after products are delivered, revenue is
recognized only after such obligations are fulfilled or acceptance by the customer has occurred.
The Company determines the fair value of installation services using vendor-specific objective
evidence (VSOE). The Companycontracts with third-party vendors for the installation services
provided to customers and, therefore, determines VSOE based upon negotiated pricing with such
third-party vendors.
Under the deferral provisions of EITF 00-21, the Company deferred the recognition of product and installation revenue and recorded deferred costs in excess of deferred revenue of
$484,000 and $298,000 as of March 31, 2006 and 2007 and $313,000 as of June 30, 2007
(unaudited). In addition, the Company has recorded deferred revenue for future obligations of
$109,000 and $133,000 as of March 31, 2006 and 2007, and $171,000 as of June 30, 2007
(unaudited).
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A sales program is offered to customers where their purchase is financed by the Company. The
contracts are one year in duration and at the completion of the initial one year term, provide
for automatic annual renewals of generally up to four years at agreed pricing, an early buyout
for cash or for the return of the equipment at the customer’s expense. Upon completion of the
installation, the future lease cash flows and residual rights to the related equipment are then
sold by the Company, without recourse, to an unrelated third party finance company in exchange
for cash and future payments
In accordance with EITF 01-8, Determining whether an Arrangement Contains a Lease, SFAS 13,
Accounting for Leases and SFAS 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities — a Replacement of FASB Statement No. 125, revenue is
recognized for the net present value of the future payments from the third party finance company
upon completion of the project. Sales under this program amounted to 7.4%, 4.5% and 1.5% of
revenue for fiscal 2005, 2006 and 2007 and 2.0% and .6% of revenue for the three months ended
June 30, 2006 and 2007 (unaudited).
Shipping and Handling Costs
In accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, the Company
records costs incurred in connection with shipping and handling of products as cost of revenue.
Amounts billed to customers in connection with these costs are included in revenue and were not
material for any periods presented in the accompanying consolidated financial statements.
Advertising
Advertising costs of $233,000, $233,000 and $272,000 for fiscal 2005, 2006, 2007 and $51,000 and
$142,000 for the three months ended June 30, 2006 and 2007 (unaudited) were charged to
operations as incurred.
Research and Development
The Company expenses research and development costs as incurred.
Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes.
SFAS 109 requires recognition of deferred tax assets and liabilities for the future tax
consequences of temporary differences between financial reporting and
income tax basis of assets
and liabilities, and are measured using the enacted tax rates and laws expected to be in effect
when the differences will reverse. Deferred income taxes also arise from the future benefits of
net operating loss carryforwards. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Based upon historical and current year earnings, expected reversal of deferred tax assets and projections for
future taxable income over the periods in which the deferred tax assets are deductible and
carryforwards are available, management believes it is more likely than not that the Company
will realize the benefits of these assets. The factors included in
this assessment were (i) the Company’s recognition of
income before taxes of $1.2 million for the three months ended
June 30, 2007 and fiscal 2007: (ii) the anticipated fiscal 2008 revenue growth due to the backlog of orders as of June 30, 2007
and (iii) previous profitability in fiscal 2003 and 2004 that
preceded the Company’s planned efforts in fiscal 2005 and 2006
to increase manufacturing capacity and sales and marketing effort to
increase revenue. Accordingly, a deferred tax asset valuation
allowance has not been recorded.
Deferred tax benefits have not been recognized for income tax effects resulting from the
exercise of non-qualified stock options. These benefits will be recognized in the period in
which the benefits are realized as a reduction in taxes payable. These future benefits will be reported
as a reduction in income taxes payable and an increase in additional paid-in capital. Realized
tax benefits from the exercise of stock options were $435,000 and $33,000 for the year ended March 31, 2007 and three months ended June30, 2007 (unaudited).
Stock Option Plans
Effective
April 1, 2006, the Company adopted the provisions of SFAS
123(R), Share-Based Payment, for its stock option plans. The Company previously accounted for these plans under the
recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25),
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Accounting Standards Board’s (FASB) Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25,
and disclosure requirements established by SFAS 123, Accounting
for Stock-Based Compensation as amended by SFAS 148Accounting for Stock-Based Compensation — Transition and
Disclosure.
The Company adopted SFAS 123(R) using the modified prospective method. Under this transition
method, compensation cost recognized for the year ended March 31, 2007 includes the current
period’s cost for all stock options granted prior to, but not yet vested as of April 1, 2006.
This cost was based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123. The cost for all share-based awards granted subsequent to March 31,2006, represents the grant-date fair value that was estimated in accordance with the provisions
of SFAS 123(R). Results for prior periods have not been restated. Compensation cost for options
will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the
requisite service period.
As a
result of the adoption of SFAS 123(R), the Company’s financial
results were lower than under our previous accounting method for
share-based compensation by the following amounts:
Income (loss) before income tax and cumulative effect
of change in accounting principle
$
363
Net income
292
Net income (loss) attributable to common shareholders
292
Basic net income (loss) per common share attributable to common shareholders
.03
Diluted net
income (loss) per common share attributable to common shareholders
.02
Prior to
the adoption of SFAS 123(R), the Company presented all tax benefits
resulting from the exercise of stock options as operating cash flows
in the consolidated statements of cash flows. SFAS 123(R) requires
that cash flows from the exercise of stock options resulting from tax
benefits in excess of recognized cumulative compensation costs
(excess tax benefits) be classified as financing cash flows. For fiscal
year ended 2007, $435,000 of such excess tax benefits was classified as financing cash flows. For the
three months ended June 30, 2007, this amount was $33,000
(unaudited).
The Company has used the Black-Scholes option-pricing model both prior to and following the
adoption of SFAS 123(R). In fiscal 2005 and 2006, the Company determined volatility based on an
analysis of the Company’s common stock sales among shareholders. Beginning in fiscal 2007, the Company determined
volatility based on an analysis of a peer group of public companies
which was determined to be more reflective of the expected future
volatility. The risk-free interest rate is
the rate available as of the option date on zero-coupon U.S. Government issues with a remaining
term equal to the expected term of the option. The expected term is based upon the vesting term
of the Company’s options and expected exercise behavior. The Company has not paid dividends in the past and
does not plan to pay any dividends in the foreseeable future. The Company estimates its
forfeiture rate of unvested stock awards based on historical experience. For fiscal 2007, the
forfeiture rate was 6%.
The fair value of each option grant in fiscal 2005, 2006 and 2007 and for the three months ended
June 30, 2007 was determined using the assumptions in the following table:
The Company engaged Wipfli, LLP, an unrelated third-party appraisal firm, to perform a
contemporaneous valuation analysis of the Company’s common stock as of April 30, 2007. That
analysis, prepared in accordance with the methodology prescribed by the AICPA Practice Aid
Valuation of Privately-Held-Company Equity Securities Issued as Compensation, estimated the fair
market value of the Company’s common stock at $4.15 per share. Wipfli, LLP considered a variety
of valuation methodologies and economic outcomes and calculated its final valuation using the
Probability Weighted Expected Return Method. In accordance with the AICPA Practice Aid, the
valuation gave recognition to the Company’s consideration of an initial public offering; while
also considering the economic value of other strategic alternatives or economic outcomes that
might occur.
That same valuation firm also prepared a valuation report as of November 2006 that valued the
Company’s common stock at $2.20 per share. That valuation was
considered appropriate by the Board of Directors, in
addition to considering other relevant valuation factors, for
determining the exercise price of option grants made from December 2006 to April 2007. For
option grants in fiscal 2007 prior to December 2006, the Board of Directors determined the exercise price of
option grants based upon estimates of fair value. Upon completion of the November 2006 valuation
report, for financial reporting purposes, the Company determined that it was appropriate to use the $2.20 per share value
as the fair value within the Black-Scholes option pricing model for
all fiscal 2007 grants prior to December 2006.
Upon completion of the April 30, 2007 valuation by Wipfli, LLP, the Company determined that
it was appropriate to use the $4.15 per common share value in its Black-Scholes option pricing
model for financial reporting purposes for the March and April 2007 stock option grants. Due to
the proximity of the November 2006 valuation to the December grants, the Company believes the
$2.20 per common share value used as the exercise price approximates fair value for financial
reporting purposes.
The
exercise price and fair value of stock option grants in fiscal 2005 and
2006 was based upon known independent third-party sales of common
stock and the per share prices at which we issued shares of our common
and preferred stock to third-party investors.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income (Loss) per Common Share
Basic net income per common share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for the period and does
not consider common stock equivalents. In accordance with EITF D-42, The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,
the $972,000 and $83,000 excess in fiscal 2005 and fiscal 2007 of (1) fair value of the
consideration transferred to the holders of the convertible preferred stock over (2) the fair
value of securities issuable pursuant to the original conversion terms was subtracted from net
income (loss) to arrive at net income (loss) available to common shareholders in the calculation
of earnings per share. Diluted net income per common share reflects the dilution that would
occur if preferred stock were converted, warrants and employee stock options were exercised, and shares issued per exercise of stock options for which the exercise price was paid by a
non-recourse loan from the Company were outstanding. In the computation of diluted net income
per common share, the Company uses the “if converted” method for preferred stock and restricted
stock, and the “treasury stock” method for outstanding options and warrants.
The effect of net income (loss) per common share is calculated based upon the following shares:
Three months ended June 30,
Fiscal year ended March 31,
(unaudited)
2005
2006
2007
2006
2007
Weighted average common shares outstanding
6,470,413
8,524,012
9,080,461
8,998,944
9,950,486
Weighted average effect of preferred
stock, restricted stock and assumed
conversion of stock option and warrants
—
—
7,352,186
6,073,716
8,137,465
Weighted average common share and common
share equivalents outstanding
6,470,413
8,524,012
16,432,647
15,072,660
18,087,951
For fiscal 2005 and 2006, the Company did not adjust for the conversion or exercise affect
of preferred stock, restricted stock or common share equivalents or the issuance of shares
exercised with non-recourse loans, as the impact would be anti-dilutive due to the Company’s
losses.
The following table indicates the number of potentially dilutive securities as of each period:
June 30,
March 31,
(unaudited)
2005
2006
2007
2006
2007
Series A preferred
20,000
20,000
—
20,000
—
Series B preferred
2,234,400
2,847,400
2,989,830
2,989,830
2,989,830
Series C redeemable preferred
—
—
1,818,182
—
1,818,182
Common stock subject to
non-recourse shareholder notes receivable
—
—
2,150,000
—
2,150,000
Common stock options
6,412,108
6,394,730
4,714,547
6,605,550
4,712,077
Common stock warrants
1,064,314
1,098,574
1,109,390
1,097,908
954,390
Total
9,730,822
10,360,704
12,781,949
10,713,288
12,624,479
Concentration of Credit Risk and Other Risks and Uncertainties
The
Company’s cash is deposited with one major financial institution. At
times, deposits in this institution exceed the amount of insurance provided on such deposits.
The Company has not experienced any losses in such accounts and believes that it is not exposed
to any significant risk on these balances.
The Company currently depends on one supplier for a number of components necessary for its
products, including ballasts and lamps. If the supply of these components were to be disrupted
or terminated, or if this supplier were unable to supply the quantities of components required, the Company may have
short-term difficulty in locating alternative suppliers at required
volumes. Purchases from this supplier accounted for 18%, 14% and 26%
of cost of revenue in fiscal 2005, 2006 and 2007.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2005, 2006 and 2007, there were no customers who individually accounted for greater
than 10% of revenue. For the three months ended June 30, 2007 (unaudited), one customer
accounted for 20% of revenue.
No customers accounted for more than 10% of the accounts receivable balance as of March 31,2006. Two customers, individually, accounted for 11% of the accounts receivable balance as of
March 31, 2007. One customer accounted for 23% of accounts receivable as of June 30, 2007 (unaudited).
Segment Information
The Company has determined that it operates in only one segment in accordance with SFAS 131,
Disclosures about Segments of an Enterprise and Related Information, as it does not disaggregate
profit and loss information on a segment basis for internal management reporting purposes to its
chief operating decision maker.
The Company’s revenue and long-lived assets outside the United States are insignificant.
Adoption of FIN 48 (unaudited)
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109, (FIN 48), which became effective for
the Company on April 1, 2007. FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of
FIN 48 resulted in an increase of the Company’s accumulated deficit of $210,000 at June 30, 2007
(unaudited). As of the adoption date, the balance of gross unrecognized tax benefits was $1.6
million, $370,000 of which would impact our effective tax rate if recognized. Of this amount,
$60,000 and $310,000 were recorded as current and deferred tax liabilities. The remaining
amount of unrecognized tax benefits of $1.2 million relates to net operating loss carryforwards
deductions created by the exercise of non-qualified stock options. The benefit from the net
operating losses created from these expenses will be recorded as a reduction in taxes payable
and a credit to additional paid-in capital in the period in which the benefits are realized.
The amount of the unrecognized tax benefits did not materially change as of June 30, 2007. It
is expected that the amount of unrecognized tax benefits may change in the next 12 months;
however, quantification of such change cannot be estimated. The Company recognizes penalties
and interest related to uncertain tax liabilities in income tax expense. Penalties and interest
are immaterial as of the date of adoption and are included in unrecognized tax benefits. Due to
the existence of net operating loss and credit carryforwards, all years since 2000 are open to
examination by tax authorities.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurement. SFAS 157 provides a common
definition of fair value and establishes a framework to make the measurement of fair value in
FAAP more consistent and comparable. SFAS 157 also requires expanded disclosures about the extent to which fair value measures impact
earnings. SFAS 157 is effective for years beginning after November 15, 2007. The Company is
currently evaluating the potential effect of SFAS 157 on its financial statements.
On February 15, 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. Under this standard, the Company may elect to report financial
instruments and certain other items at fair value on a contract-by-contract basis with changes
in value reported in earnings. This election would be irrevocable. SFAS 159 is effective for
years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS
159 will have on its financial statements.
In June 2006, the FASB ratified EITF Issue No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross
versus Net Presentation), which allows companies to adopt a policy of presenting taxes in the
income statement on either a gross or net basis. Taxes within the scope of this EITF would
include taxes that are imposed on a revenue transaction between a seller and
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a customer. If such taxes are significant, the accounting policy should be disclosed as well as
the amount of taxes included in the financial statements if presented on a gross basis. EITF
06-3 is effective for interim and annual reporting periods beginning after December 15, 2006.
The adoption of EITF Issue 06-3 had no impact on the Company’s financial statements as the
Company’s revenue has historically been, and will continue to be, presented net of sales
taxes.
In
June 2007, the FASB ratified Emerging Issues Task Force
(“EITF”) Issue No. 07-3, Accounting for Advance
Payments for Goods or Services to Be Used in Future Research and
Development Activities, or EITF 07-3. This requires that
nonrefundable advance payments for future research and development
activities be deferred and capitalized. EITF 07-3 is effective
as of the beginning of an entity’s first fiscal year that begins
after December 15, 2007. The company is assessing the impact
of EITF 07-3 and has not determined whether it will have a
material impact on its results of operations or financial position.
NOTE B — RELATED PARTY TRANSACTIONS
As of March 31, 2006 and 2007, the Company had non-interest bearing advances of $55,000 and
$157,000, respectively, to a shareholder, and also held an unsecured, 1.46% note receivable due
from the same shareholder in the amounts of $66,000 and $67,000, including interest receivable.
These advances and this note were repaid subsequent to June 30, 2007. During 2006 and 2007, the
Company forgave $37,000 and $37,000, of shareholder advances as part of a contractual employment
relationship. The amount forgiven for the three months ending June 30, 2007 (unaudited) was $9,000.
The Company incurred fees of $146,000, $110,000 and $78,000, which were paid to a shareholder as
consideration for guaranteeing notes payable and certain accounts payable during 2005, 2006 and
2007. These fees were based on a percentage applied to the monthly outstanding balances or
revolving credit commitments. These guarantees were released subsequent to June 30, 2007.
The Company leases, on
a month-to-month basis, an aircraft owned by an entity controlled by an
officer and shareholder. Amounts paid during fiscal 2005, 2006 and 2007 were $94,000, $107,000
and $102,000. Amounts paid for the three months ended June 30, 2006 and 2007 (unaudited) were
$37,000 and $16,000.
The Company held a recourse
note receivable in the amount of $375,000 at March 31, 2006
and 2007 and held various non-recourse note receivables in the amount of $1,753,125 at March 31,2007. These notes were entered into in connection with the exercise
of stock option grants by certain
directors and or officers of the Company. These notes were repaid
subsequent to June 30, 2007.
During
fiscal 2005, 2006 and 2007, the Company recorded revenue of
$209,996, $90,639 and $31,767 for products and services sold to a
entity for which the Company’s Chairman of the Board was the
executive chairman.
The Company’s $25 million revolving credit agreement has an interest rate of prime plus 1%
(effective rate of 9.25% at March 31, 2007), plus annual fees and minimum monthly interest
costs. Borrowings under this
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement are collateralized by accounts receivable and inventory. Borrowings are limited to a
percentage of
eligible trade accounts receivables and inventories. As of March 31, 2007, remaining
availability under the formula borrowing base computation was approximately $4.6 million. The
credit agreement contains certain restrictive covenants, principally for minimum net worth, net
income and limits on capital expenditures. In addition, the agreement precludes the payment of
dividends on our common stock. The Company was in compliance with these covenants, as amended,
as of March 31, 2007 and June 30, 2007 (unaudited). The credit agreement expires December 23,2008 at which time all unpaid amounts owed under the agreement are due.
Term Note
The Company’s term note requires principal and interest payments of $25,000 per month payable
through February 2014 at an interest rate of 6.9%. Amounts outstanding under the note are
secured by a first security interest and first mortgage in certain long-term assets and a
secondary interest in inventory and accounts receivable and a secondary general business security
agreement on all assets. In addition, the agreement precludes the payment of dividends on our
common stock. Amounts outstanding under the note are 75% guaranteed by the United States
Department of Agriculture Rural Development Association and a personal guarantee of a
shareholder, which was released subsequent to June 30, 2007.
First Mortgage Note Payable
The Company’s first mortgage has an interest rate of prime plus 2% (effective rate of 10.25% at
March 31, 2007) and requires monthly payments of principal and interest of $10,000 through
September 2014. The mortgage is secured by a first mortgage on the Company’s manufacturing
facility and a personal guarantee of a shareholder which was released subsequent to June 30, 2007. The mortgage includes certain prepayment
penalties and various restrictive covenants, with which the Company was in compliance as of
March 31, 2007.
Debenture Payable
The Company’s debenture payable was issued by Certified Development Company at an effective
interest rate of 6.18%. The balance is payable in monthly principal and interest payments of
$8,000 through December 2024 and is guaranteed by United States Small Business Administration
504 program. The amount due is collateralized by a second mortgage on manufacturing facility and
personal guarantee of a shareholder, which was released subsequent to June 30, 2007.
Lease Obligations
The Company’s capital lease obligations have been recorded at rates of 6.5% to 16.2%. The
leases are payable in installments through February 2010 and are collateralized by related
equipment
Other Long-term Debt
Other long-term debt consists of block grants and equipment loans from local governments.
Interest rates range from 2% to 2.9%. The amounts due are collateralized by purchase money
security interests in plant equipment and a personal guarantee of a shareholder, which was
released subsequent to June 30, 2007. Repayment of up to $250,000 may be forgiven beginning in
2010 if the Company is able to create certain types and numbers of jobs within the lending
localities.
As of March 31, 2007, aggregate maturities of long-term debt, excluding the line of credit, were
as follows (in thousands):
The Company’s provision for income taxes differs from applying the statutory U.S. federal
income tax rate of 34% due primarily to nondeductible stock based compensation expenses, state
development zone tax credits granted, research and development credits and the effect of state
income taxes. For the three months ended June 30, 2006 and 2007 (unaudited) the effective
income tax rate was 19% and 39%.
The net deferred tax assets reported in the accompanying consolidated financial statements
include the following components (in thousands):
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2007, the Company had net operating loss carryforwards of approximately
$5.1 million for both federal and state. Included in the $5.1 million loss carryforwards are
carryforward deductions of $3.0 million of expenses that are associated with the exercise of
non-qualified stock options that have not yet been recognized by the Company in its financial
statements. The benefit from the net operating losses created from these expenses will be
recorded as a reduction in taxes payable and a credit to additional paid-in capital in the
period in which the benefits are realized. The Company also has federal and state tax credit
carryforwards of approximately $296,000 and $406,000 as of March 31, 2007. Both the net
operating losses and tax credit carryforwards expire between 2016 and 2027.
A valuation allowance against deferred tax assets has not been provided as management
believes that it is more likely than not that the deferred tax assets
will be fully realized. The factors included in this assessment were
(i) the Company’s recognition of income before taxes of
$1.2 million in the three months ended June 30, 2007
and fiscal 2007: (ii) the anticipated fiscal 2008 revenue growth due to the backlog of orders as of June 30, 2007
and (iii) previous profitability in fiscal 2003 and 2004 that
preceded the Company’s planned efforts in fiscal 2005 and 2006
to increase manufacturing capacity and sales and marketing effort to increase revenue.
NOTE E — COMMITMENTS AND CONTINGENCIES
The Company leases vehicles and equipment under operating leases. Rent expense under operating
leases was $62,000, $107,000 and $413,000 for fiscal 2005, 2006 and 2007; and $31,000 and
$245,000 for the three months ended June 30, 2006 and 2007 (unaudited). Total annual
commitments under non-cancelable operating leases with terms in
excess of one year at March 31, 2007 are as
follows (in thousands):
2008
$
853
2009
211
2010
201
2011
159
2012
79
In addition, the Company enters into non-cancellable purchase commitments for certain inventory
items and capital expenditure commitments in order to secure better pricing and ensure materials
on hand. As of March 31, 2007, the Company had entered into $3.0 million of purchase commitments
related to fiscal 2008.
The Company sponsors a tax deferred retirement savings plan that permits eligible employees to
contribute varying percentages of their compensation up to the limit allowed by the Internal
Revenue Service. This plan also provides for discretionary Company contributions. In fiscal
2007, the Company made matching contributions totaling approximately $7,000. No contributions
were made in fiscal 2005 and 2006.
NOTE F — TEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY
Stock Split
On March 23, 2006, the Company declared a 2 for 1 stock split to shareholders of record as of
April 1, 2006. All share and per share amounts have been restated to reflect the stock split.
Series C Redeemable Preferred Stock
In August and September 2006, the Company sold an aggregate 1,818,182 shares of Series C
redeemable preferred stock to institutional investors for total proceeds of approximately $4.8
million, net of offering costs of $245,000. As of March 31, 2007, 2,000,000 shares of authorized
preferred stock had been reserved for Series C. The terms of the Series C preferred stock
provide for:
•
senior rank to other classes and series of stock with respect to the
payment of dividends and proceeds upon liquidation
•
entitlement to receive cumulative dividends accruing at a non compounded
annual rate of 6% upon the occurrence of certain events (accumulated dividends through
March 31, 2007 and June 30, 2007 (unaudited) were $198,000 and $273,000)
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
liquidation preference equal to the purchase price plus any
accumulated dividends
•
conversion into common stock at a one-to-one ratio upon certain qualifying
exit events resulting in net proceeds to the Company of at least $30 million (upon
conversion in a qualifying event, all rights related to accrued and unpaid dividends
would be extinguished)
•
weighted average dilution protection for any issuance of stock or other
equity instruments (other than for stock options granted under existing stock plans) at
a price per share less than the Series C purchase price of $2.75
•
proportional adjustment of the number of shares of common stock into which
one share of Series C preferred stock may be converted in the event of stock splits,
stock dividends reclassifications and similar events
•
a redemption feature at the option of the holder, including accumulated
dividends, if certain liquidity events are not achieved within five years from issuance
•
right to vote with common stock on all matters submitted to a vote of
shareholders
Due to the nature of the redemption feature and other provisions, the Company has classified the
Series C redeemable preferred stock as temporary equity.
Series B Preferred Stock
From October 2004 through June 2006, the Company completed various private placements of Series
B preferred stock for net proceeds in fiscal 2005, 2006 and 2007 of $3.5 million, $1.4 million
and $400,000. Proceeds were net of direct offering costs of $398,000 and $81,000 and zero in fiscal 2005, 2006 and 2007. The Series B placements consisted
of one share of Series B preferred stock and, in certain placements, a warrant to purchase
one-third share of common stock for $2.30 per share expiring at various dates through January
2010. The terms of the Series B preferred stock provide for:
•
a liquidation preference equal to the purchase price of the Series B shares
•
automatic conversion to common stock at a one-to-one ratio upon registration of the
common stock under a 1933 Act registration
•
no dividend preference
•
right to vote with common stock on all matters submitted to a vote of shareholders
For the Series B transactions where common stock warrants were issued, the value of the warrants
issued to the placement agent was recorded as additional paid-in capital.
Series A Preferred Stock
In
December 2004, the Company offered its Series A 12%
preferred shareholders the opportunity
to exchange each share of their Series A preferred stock for three shares of the Company’s common stock. The Series A preferred stock carried a liquidation preference over the common stock
and a cumulative 12% dividend and, prior to the December conversion offer, a conversion
entitling each share of the Series A preferred stock the right to convert into two shares of
common stock feature. Under the guidance provided in SFAS 84, Induced Conversions of Convertible
Debt, the Company determined that the increase in conversion ratio from 2 to 3 was an inducement
offer and accounted for the change in conversion ratio as an increase to paid-in capital and a
charge to accumulated deficit. Furthermore, the historical carrying value of the Series A preferred was
reclassified to paid-in capital at the time of conversion.
As of March 31, 2005, all but 20,000 shares of Series A preferred stock had been converted.
The remaining 20,000 shares were converted in March 2007. The amount assigned to the
inducement, calculated using the number of additional common shares offered multiplied by the
estimated fair market value of common stock at the time of conversion, was $972,000 for fiscal
2005 and $83,000 for fiscal 2007.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Treasury Stock
Effective June 30, 2004, the Company entered into a lawsuit settlement agreement and stock
redemption note payable to a former independent sales representative and shareholder. The
settlement of $500,000 consisted of a $450,000 four-year note payable bearing interest at 5.84%
and $50,000 cash. As part of the settlement, the shareholder agreed to redeem to treasury 61,864
shares of common stock and 64,000 shares of Series A preferred
stock, relinquishing all rights
to the Series A 12% cumulative dividend preference and Series A liquidation preference. The shares were pledged to secure repayment of the stock note payable. Such note was repaid in March
2007, including accrued interest at 6%, and the pledged shares were
retired.
The $500,000 cost of the settlement was allocated $345,000 to treasury stock and $155,000 to
commission expense based on the fair value of the shares acquired as part of the settlement.
Shareholder receivables
In fiscal 2006, the Company issued to a director a note receivable with recourse, totaling
$375,000, to purchase 400,000 shares of common stock by exercise of fully vested non-qualified
stock options. The note matures in November 2012 or earlier upon notice from the Company and
bears interest at 4.23% payable annually in cash or stock.
The interest rate was deemed to be a below market rate on issuance and in accordance with EITF
00-23, Issues related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB
Interpretation No. 44, the Company recorded additional compensation expense of $525,000 in fiscal
2006. This amount represents the appreciation of the fair value of the Company’s stock from the
time of the option grant through the issuance of the recourse note.
In fiscal 2007, the Company issued $1,753,000 of notes receivable to officers to purchase
2,150,000 shares of common stock by exercise of fully vested non-qualified stock options. The
notes mature in March 2012 or earlier upon notice from the Company and bear interest at 7.65%
payable annually in cash or stock. As the notes are repaid, and interest collected, interest
received will be credited to compensation expense. For accounting purposes, the notes are
considered non-recourse and therefore, the options are not deemed exercised until the note is
paid. Accordingly, the common stock is not considered issued for accounting purposes until the
Company has received payment of the notes.
All notes receivable that had been issued to directors and officers of the Company were repaid
in full either in cash or by tendering shares subsequent to June 30, 2007.
NOTE G — STOCK OPTIONS AND WARRANTS
The
Company grants stock options under its 2003 Stock Option and 2004
Equity Incentive Plans (the Plans).
Under the terms of the Plans, the Company has reserved 9,000,000 shares for issuance to key
employees, consultants and directors. The options generally vest and become exercisable ratably
over five years although longer vesting periods have been used in certain circumstances. The
options are contingent on the employees’ continued employment and are subject to forfeiture if
employment terminates for any reason. In the past, we have granted both incentive stock options
and non-qualified stock options. The Plans also provide to certain
employees accelerated vesting in the event of certain changes of
control of the Company.
As
a result of the adoption of SFAS 123(R) in fiscal 2007, the following amounts of stock-based
compensation were recorded (in thousands):
The Company granted options to purchase 1,657,500 shares of common stock during fiscal 2007
and 50,000 shares of common stock during the three months ended June 30, 2007 (unaudited),
summarized as follows:
Number of
Fair value
options
granted
Exercise price
estimate per share
Intrinsic value
April 2006
40,000
$
2.25- 2.50
$
2.20
$
—
May 2006
40,000
2.50
2.20
—
June 2006
150,000
2.50
2.20
—
July 2006
27,000
2.50
2.20
—
August 2006
5,000
2.50
2.20
—
September 2006
2,000
2.75
2.20
—
October 2006
2,000
2.75
2.20
—
November 2006
35,000
2.75
2.20
—
December 2006
920,000
2.20
2.20
—
March 2007
436,500
2.20
4.15
851,000
April 2007 (unaudited)
50,000
2.20
4.15
98,000
The following table
summarizes information with respect to outstanding stock options:
The
aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying stock options and the fair value of
the Company’s common stock at March 31, 2007.
Unrecognized compensation cost related to non-vested common stock-based compensation as of
March 31, 2007 is as follows (in thousands):
Fiscal 2008
$
684
Fiscal 2009
678
Fiscal 2010
576
Fiscal 2011
504
Thereafter
547
$
2,989
Remaining
weighted average expected term
3.01
yrs
As of June 30, 2007 (unaudited), compensation cost related to non-vested common stock-based
compensation amounted to $3.0 million over a remaining weighted
average expected term just under 3 years.
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has issued warrants to placement agents in connection with various stock offerings and
services rendered. The warrants grant the holder the option to purchase common stock at specified
prices for a specified period of time. Warrants issued in fiscal 2005, 2006 and 2007 were treated
as offering costs and valued at $400,000, $30,000, and $18,000. Fiscal 2006 also included warrants
valued at $6,000 that were expensed. These warrants were valued using the following assumptions:
ORION ENERGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H — SUBSEQUENT EVENTS
In August 2007, the Company issued $10.6 million of convertible subordinated notes, bearing
interest at 6% per annum, to an indirect affiliate of GE Energy Financial Services Inc., Clean
Energy Technology Fund II, LP and affiliates of Capvest Venture Fund, LP. The subordinated notes
(which we refer to as Convertible Notes) are convertible automatically into 2,360,802 shares of
common stock if the Company completes a qualified public offering.
In July and August 2007, all director and shareholder notes and advances, along with accrued
interest, were settled, either in cash or with shares. Total principal payments were $985,800
and shares tendered totaled 306,932. Concurrent with the above transaction, the Company issued
306,932 non-qualifying stock options with a fair value exercise price of $4.49. In accordance
with SFAS 123(R) the Company will recognize stock-based compensation expense of $224,000 in
fiscal 2008 and $127,000 in fiscal 2009.
Item 13. Other Expenses of Issuance and Distribution.
The following is a list of estimated expenses in connection with the issuance and distribution
of the securities being registered, with the exception of underwriting discounts and commissions:
SEC registration fee
$
3,070
NASD filing fee
10,550
Nasdaq
Global Market listing fee
*
Printing costs
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
*
Miscellaneous
*
Total
$
*
*
To be completed by amendment
All of the above expenses except the SEC registration fee and NASD filing fee are estimates.
All of the above expenses will be borne by us.
Item 14. Indemnification of Directors and Officers.
Our amended and restated bylaws, which will become effective upon closing of this offering,
provide that, to the fullest extent permitted or required by Wisconsin law, we will indemnify all
of our directors and officers, any trustee of any of our employee benefit plans, and person who is
serving at our request as a director, officer, employee or agent of another entity, against certain
liabilities and losses incurred in connection with these positions or services. We will indemnify
these parties to the extent the parties are successful in the defense of a proceeding and in
proceedings in which the party is not successful in defense of the proceeding unless, in the latter
case only, it is determined that the party breached or failed to perform his or her duties to us
and this breach or failure constituted:
•
a willful failure to deal fairly with us or our shareholders in connection with
a matter in which the director or officer has a material conflict of interest;
•
a violation of criminal law, unless the director or officer had reasonable cause
to believe his or her conduct was unlawful;
•
a transaction from which the director or officer derived an improper personal profit; or
•
willful misconduct.
Our amended and restated bylaws provide that we are required to indemnify our directors and
executive officers and may indemnify our employees and other agents to the fullest extent required
or permitted by Wisconsin law. Additionally, our amended and restated bylaws require us under
certain circumstances to advance reasonable expenses incurred by a director or officer who is a
party to a proceeding for which indemnification may be available.
Wisconsin law further provides that it is the public policy of the State of Wisconsin to
require or permit indemnification, allowance of expenses and insurance to the extent required or
permitted under
Wisconsin law for any liability incurred in connection with a proceeding involving a federal
or state statute, rule or regulation regulating the offer, sale or purchase of securities.
Under Wisconsin law, a director is not personally liable for breach of any duty resulting
solely from his or her status as a director, unless it is proved that the director’s conduct
constituted conduct described in the bullet points above. In addition, we intend to obtain
directors’ and officers’ liability insurance that will insure against certain liabilities, subject
to applicable restrictions.
The Underwriting Agreementfiled herewith as Exhibit 1.1 provides for indemnification of our
directors, certain officers and controlling persons by the underwriters against certain civil
liabilities, including liabilities under the Securities Act.
In addition, we intend to obtain directors’ and officers’ liability insurance that will insure
against certain liabilities, including liabilities under the Securities Act, subject to applicable
restrictions.
Item 15. Recent Sales of Unregistered Securities.
From January 1, 2004 through the date of this registration statement, we sold or granted the
following securities that were not registered under the Securities Act. The following share
numbers give effect to a 2-for-1 split of our common stock and preferred stock that was effected on
April 1, 2006.
(a) Stock, Warrants and Convertible Subordinated Notes.
1. Between January 1, 2004 and February 2, 2005, we issued an aggregate of 2,234,400 shares
of Series B preferred stock and warrants to purchase an aggregate of 746,802 shares of our common
stock to certain Wisconsin residents. The aggregate consideration received by us was $4,968,000.
In connection with the placement of these securities, we issued warrants to purchase 221,480 shares
of our common stock to a placement agent in payment for its services.
2. Between May 26, 2005 and September 30, 2005, we issued an aggregate of 376,000 shares of
Series B preferred stock to certain Wisconsin residents who were accredited investors. The
aggregate consideration received by us was $940,000. In connection with the placement of these
securities, we issued warrants to purchase 31,200 shares of our
common stock to a placement agent in
payment for its services.
3. Between
January 10, 2006 and July 31, 2006, we issued an aggregate of 379,430 shares of
Series B preferred stock to our existing shareholders. The aggregate consideration received by us
was $960,498. In connection with the placement of these securities, we issued warrants to purchase
6,060 shares of our common stock to a placement agent in payment for
its services.
4. Between July 31, 2006 and September 28, 2006, we issued an aggregate of 1,818,182 shares
of Series C preferred stock to Clean Technology Fund II, LP and Capvest Venture Fund, LP. The
aggregate consideration received by us was $5,000,000.
5. In 2006, we issued warrants to purchase an aggregate of 8,000 shares of our common stock
to a consultant in consideration for services.
6. On March 1, 2007, we issued warrants to purchase an aggregate of 19,580 shares of our
common stock to a consultant in consideration for services.
7. On August 3, 2007, we issued $10.6 million of convertible subordinated notes, bearing
interest at 6% per annum, to an indirect affiliate of GE Energy
Financial Services, Inc., Clean Technology
Fund II, LP and affiliates of Capvest Venture Fund, LP. The subordinated notes will convert
automatically upon closing of this
offering into 2,360,802 shares of our common stock if the initial public offering price is at
least $11.23 per share.
We believe that the offers and sales of the securities referenced in (1) and (2), above, were
exempt from registration under the Securities Act by virtue of Section 3(a)(11) of the Securities
Act and Rule 147 promulgated thereunder. We were resident and doing business in Wisconsin at the
time of the offering, and the offering was made only to Wisconsin residents.
We believe that the offer and sale of the securities referenced in (3), (4), (5), (6) and (7)
above were exempt from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder as transactions not involving any public
offering. All of the purchasers of unregistered securities for which we relied on Section 4(2)
and/or Regulation D represented that they were accredited investors as defined under the Securities
Act, except for up to 35 non-accredited investors. The purchasers in each case represented that
they intended to acquire the securities for investment only and not with a view to the distribution
thereof and that they either received adequate information about the registrant or had access,
through employment or other relationships, to such information; appropriate legends were affixed to
the stock certificates issued in such transactions; and offers and sales of these securities were
made without general solicitation or advertising.
(b) Options.
1. In 2004, we granted to our directors and employees options to purchase an aggregate of
737,000 shares of our common stock at an exercise price of $2.25 per share. We received no
consideration from these individuals in connection with the issuance of such options. As of June30, 2007, we had issued a total of 75,000 shares of common stock upon the exercise of such options.
2. In 2005, we granted to our directors and employees options to purchase an aggregate of
627,000 shares of our common stock at exercise prices ranging from $0.75 to $2.25 per
share. We received no consideration from these individuals in connection with the issuance of such
options. As of June 30, 2007, we had issued a total of 40,000 shares of common stock upon the
exercise of such options.
3. In 2006, we granted to our directors and employees options to purchase an aggregate of
1,211,000 shares of our common stock at exercise prices ranging from $2.20 to $2.75 per share. We
received no consideration from these individuals in connection with the issuance of such options.
As of June 30, 2007, we had issued a total of 12,000 shares of common stock upon the exercise of
such options.
4. On March 1, 2007, we granted to certain of our employees options to purchase an aggregate
of 361,500 shares of our common stock at an exercise price of $2.20 per share. We received no
consideration from these individuals in connection with the issuance of such options.
5. On March 5, 2007, we granted to certain of our employees options to purchase an aggregate
of 75,000 shares of our common stock at an exercise price of $2.20 per share. We received no
consideration from these individuals in connection with the issuance of such options.
6. On April 1, 2007, we granted to certain of our employees options to purchase an aggregate
of 20,000 shares of our common stock at an exercise price of $2.20 per share. We received no
consideration from these individuals in connection with the issuance of such options.
7. On April 2, 2007, we granted to certain of our employees options to purchase an aggregate
of 30,000 shares of our common stock at an exercise price of $2.20 per share. We received no
consideration from these individuals in connection with the issuance of such options.
8. On July 27, 2007, we granted to certain of our employees options to purchase an aggregate
of 389,432 shares of our common stock at an exercise price of $4.49 per share. We received no
consideration from these individuals in connection with the issuance of such options.
9. On July 27, 2007, we granted to certain of our non-employee directors options to purchase
an aggregate of 40,000 shares of our common stock at an exercise price of $4.49 per share. We
received no consideration from these individuals in connection with the issuance of such options.
We believe that the offer and sale of the above-referenced securities were exempt from
registration under the Securities Act by virtue of Section 4(2) and Rule 701 of the Securities Act
as securities issued pursuant to written compensatory plans or arrangements.
(c) There were no underwritten offerings employed in connection with any of the transactions
set forth in Item 15(a) or (b).
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed (except where otherwise
indicated) as part of this Registration Statement.
(b) Financial Statement Schedules.
All other schedules are omitted since the required information is not present, or is not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements and notes thereto.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused
this registration statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Plymouth, State of Wisconsin , on August 20, 2007.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities indicated on
August 20, 2007. Each person
whose signature appears below constitutes and appoints Neal R. Verfuerth and Daniel J. Waibel, and
each of them individually, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective amendments) to this
registration statement, and any additional registration statement to be filed pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Form of Amended and Restated Articles of Incorporation of Orion Energy
Systems, Inc. to be effective upon closing of this offering.
3.4
Amended and Restated Bylaws of Orion Energy Systems, Inc.
3.5
Form of Amended and Restated Bylaws of Orion Energy Systems, Inc. to be
effective upon closing of this offering.
4.1
Amended and Restated Investors’ Rights Agreement by and among Orion Energy
Systems, Inc. and the signatories thereto, dated August 3, 2007.
4.2
Amended and Restated First Offer and Co-Sale Agreement among Orion Energy
Systems, Inc. and the signatories thereto, dated August 3, 2007.
4.3
Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc.
4.4
Form of Warrant to purchase Common Stock of Orion Energy Systems, Inc.
4.5
Credit and Security Agreement by
and between Orion Energy Systems, Inc.,
Great Lakes Energy Technologies, LLC and Wells Fargo Bank, National
Association, acting through its Wells Fargo Business Credit Operating
Division, dated December 22, 2005, as amended January 26, 2006, June 30,2006, March 29, 2007 and July 27, 2007.
4.6
Convertible Subordinated Promissory Note in favor of GE Capital Equity
Investments, Inc. dated August 3, 2007.
4.7
Convertible Subordinated Promissory Note in favor of Clean Technology Fund
II, L.P. dated August 3, 2007.
4.8
Convertible Subordinated Promissory Note in favor of Capvest Venture Fund,
LP, dated August 3, 2007.
4.9
Convertible Subordinated Promissory Note in favor of Technology
Transformation Venture Fund, LP, dated August 3, 2007.
Employment Agreement by and between Bruce Wadman and Orion Energy Systems,
Inc. dated October 1, 2005.
10.2
Employment Agreement by and between Neal Verfuerth and Orion Energy
Systems, Inc. dated April 1, 2005.
10.3
Separation Agreement by and between Orion Energy Systems, Inc. and Bruce
Wadman, effective July 5, 2007.*
10.4
Separation Agreement by and between Orion Energy Systems, Inc. and James
Prange, effective July 18, 2007.*
10.5
Employment Agreement by and between
John Scribante and Orion Energy Systems, Inc. dated June 2, 2006.
10.6
Orion Energy Systems, Inc. 2003 Stock Option Plan, as amended.
10.7
Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2003
Stock Option Plan.
10.8
Amendment to Stock Option Agreement between Bruce Wadman and Orion Energy
Systems, Inc. dated February 19, 2007.*
10.9
Orion Energy Systems, Inc. 2004 Stock and Incentive Awards Plan.
10.10
Form of Stock Option Agreement
under the Orion Energy Systems, Inc. 2004 Equity Incentive Plan.
10.11
Form of Stock Option Agreement under the Orion Energy Systems, Inc. 2004
Stock and Incentive Awards Plan.
10.12
Form of Promissory Note and Collateral Pledge Agreement in favor of Orion
Energy Systems, Inc. in connection with option exercises (all such notes
were paid in full in July and August 2007).
10.13
Patent and Trademark Security Agreement by and between Orion Energy
Systems, Inc. and Wells Fargo Bank, National Association, Acting Through
its Wells Fargo Business Credit Operating Division, dated December 22,2005.
10.14
Patent and Trademark Security Agreement by and between Great Lakes Energy
Technologies, LLC and Wells Fargo Bank, National Association, Acting
Through its Wells Fargo Business Credit Operating Division, dated December22, 2005.