<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
[COMMISSION FILE NUMBER 0-22173]
---------------
TOTAL CONTROL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 36-3209178
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2001 NORTH JANICE AVENUE
MELROSE PARK, ILLINOIS 60160
(Address of principal executive offices) (Zip Code)
(708) 345-5500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON
NOVEMBER 14, 1997: 7,848,504 SHARES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, September 30,
1997 1997
---- ----
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 221,967 $ 1,195,906
Trade receivables, net of allowances of $118,000 and $145,000
at March 31 and September 30, 1997, respectively 7,804,823 7,709,695
Raw materials inventory 2,674,668 2,968,213
Work in process and finished goods inventory 5,309,373 5,892,079
Prepaid and deferred expenses-
Taxes 1,273,696 551,745
Other 281,280 599,057
----------- -----------
Total current assets 17,565,807 18,916,695
----------- -----------
PROPERTY AND EQUIPMENT, net 2,393,137 2,751,573
OTHER ASSETS:
Asset held for sale 5,037,139 -
Goodwill, net 5,118,212 8,595,101
Investment in foreign joint venture 277,243 310,975
Receivables from officers 191,547 2,191,547
Other long-term assets 879,282 1,283,143
----------- -----------
Total other assets 11,503,423 12,380,766
----------- -----------
$31,462,367 $34,049,034
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
2
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TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, September 30,
1997 1997
---- ----
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 129,272 $ 55,272
Notes payable-
Related parties 228,716 132,200
Other 183,577 -
Accounts payable 1,962,762 2,102,922
Accrued expenses-
Income taxes 79,483 1,556,546
Commissions 716,302 824,110
Payroll 735,271 659,420
Other 1,797,938 2,696,116
Deferred revenue 1,110,402 967,811
----------- -----------
Total current liabilities 6,943,723 8,994,397
----------- -----------
LONG-TERM LIABILITIES:
Notes payable to bank 2,215,229 1,228,626
Long-term debt, net of current maturities 47,711 19,520
Other 827,838 594,680
----------- -----------
Total long-term liabilities 3,090,778 1,842,826
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 1,521,289 1,387,390
SHAREHOLDERS' EQUITY:
Common stock, no par value; 22,500,000 shares authorized;
6,916,465 shares issued and outstanding at March 31 and
September 30, 1997, respectively 24,613,624 24,613,624
Class C Exchangeable common stock of subsidiary, no par
value; unlimited shares authorized; 737,112 shares issued
and outstanding at March 31 and September 30, 1997,
respectively 4,641,110 4,641,110
Accumulated deficit (9,295,658) (7,359,239)
Foreign currency translation adjustment (52,499) (71,074)
----------- -----------
Total shareholders' equity 19,906,577 21,824,421
----------- -----------
$31,462,367 $34,049,034
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
3
<PAGE>
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBR 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
NET SALES $ 8,217,763 $12,423,470
COST OF GOODS SOLD 4,633,186 5,255,350
----------- -----------
Gross profit 3,584,577 7,168,120
----------- -----------
OPERATING EXPENSES:
Sales and marketing 1,731,655 2,959,300
Research and development 764,852 1,220,548
General and administrative 833,600 1,080,448
Charge for purchased research and development 4,893,000 -
----------- -----------
Income (loss) from operations (4,638,530) 1,907,824
----------- -----------
OTHER INCOME (EXPENSES):
Interest, net (157,702) (24,410)
Earnings in foreign joint venture 29,899 36,412
Other income, net - 6,680
----------- -----------
Income (loss) before income taxes and
minority interest (4,766,333) 1,926,506
(BENEFIT FROM) PROVISION FOR INCOME TAXES (26,000) 837,000
----------- -----------
Income (loss) before minority interest (4,740,333) 1,089,506
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY 1,835,134 (1,624)
----------- -----------
Net income (loss) (2,905,199) 1,087,882
ACCRETION TO REDEMPTION VALUE OF COMMON STOCK (1,435,935) -
----------- -----------
Net income (loss) available to common
shareholders $(4,341,134) $ 1,087,882
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE AVAILABLE TO
COMMON SHAREHOLDERS $ (0.76) $ 0.14
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 5,694,000 7,878,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
NET SALES $17,294,794 $24,910,858
COST OF GOODS SOLD 9,799,854 10,910,759
----------- -----------
Gross profit 7,494,940 14,000,099
----------- -----------
OPERATING EXPENSES:
Sales and marketing 3,447,426 6,009,795
Research and development 1,459,832 2,478,525
General and administrative 1,686,978 2,322,007
Charge for purchased research and development 4,893,000 -
----------- -----------
Income (loss) from operations (3,992,296) 3,189,772
----------- -----------
OTHER INCOME (EXPENSES):
Interest, net (296,749) (66,240)
Earnings in foreign joint venture 68,907 45,289
Other income (expense), net (3,320) 5,700
----------- -----------
Income (loss) before income taxes and
minority interest (4,223,458) 3,174,521
PROVISION FOR INCOME TAXES 192,000 1,372,000
----------- -----------
Income (loss) before minority interest (4,415,458) 1,802,521
MINORITY INTEREST IN LOSS OF SUBSIDIARY 1,835,134 133,899
----------- -----------
Net income (loss) (2,580,324) 1,936,420
ACCRETION TO REDEMPTION VALUE OF COMMON STOCK (4,898,348) -
----------- -----------
Net income (loss) available to common
shareholders $(7,478,672) $ 1,936,420
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE AVAILABLE TO
COMMON SHAREHOLDERS $ (1.32) $ .25
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 5,660,000 7,848,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period $(2,580,324) $ 1,936,420
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities-
Minority interest in loss of subsidiary (1,835,134) (133,899)
Charge for purchased research and development 4,893,000 -
Depreciation and amortization 292,326 686,810
Earnings in foreign joint venture (68,907) (45,289)
Loss on sale of property and equipment 3,320 -
Changes in operating assets and liabilities-
Trade receivables (200,638) (334,090)
Inventory (2,093,920) (985,081)
Prepaid expenses and other assets 153,601 (279,329)
Accounts payable, accrued expenses and
other liabilities (205,734) 844,103
Deferred revenue 139,055 71,511
----------- -----------
Net cash (used in) provided by
operating activities (1,503,355) 1,761,156
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net and other
acquisition costs (5,725,788) (105,388)
Purchases of property and equipment (270,976) (682,946)
Proceeds from disposal of asset held for sale - 2,147,499
Purchases of other assets - (398,032)
Other 9,663 -
----------- -----------
Net cash (used in) provided by investing
activities (5,987,101) 961,133
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable to bank 750,000 (986,603)
Payments on long-term debt and notes payable (253,134) (382,284)
Proceeds from issuance of debt 3,000,000 -
Proceeds from sale of common stock of subsidiary 4,000,000 -
Payment of offering costs - (379,463)
----------- -----------
Net cash provided by (used in) financing
activities 7,496,866 (1,748,350)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 6,410 973,939
CASH AND CASH EQUIVALENTS, beginning of period 19,058 221,967
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 25,468 $ 1,195,906
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for-
Income taxes $ 201,000 $ 355,000
Interest 132,925 113,631
----------- -----------
----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debentures into 67,873 shares
of common stock $ 50,000 $ -
Issuance of 767,112 shares of Class C Exchangeable
common stock of subsidiary and $2.2 million note
in connection with the business acquired $ 6,850,000 $ -
Note receivable from shareholder in connection with
disposal of asset held for sale (Note 2) $ - $ 2,000,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1
The consolidated financial information herein is unaudited, other than
Consolidated Balance Sheet information as of March 31, 1997, which is derived
from audited financial statements.
In the opinion of the Company, the accompanying interim consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position as of
September 30, 1997, the results of operations for the three and six months ended
September 30, 1997 and 1996 and changes in cash flows for the six months ended
September 30, 1997 and 1996.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes included in the Company's 1997 annual report on Form 10-K
filed with the Securities and Exchange Commission.
The results for the quarter and the six months ended September 30, 1997, are not
necessarily indicative of the results to be expected for the entire year.
NOTE 2
On September 26, 1997, the Company's majority-owned subsidiary, Taylor
Industrial Software, Inc. (Taylor), completed the sale of its TESS software
product line operation (which had previously been classified as "asset held for
sale") to an entity principally owned by Neil R. Taylor ("Mr. Taylor"). Mr.
Taylor, the former principal shareholder of Taylor, is an officer and a member
of the Company's board of directors. The sale price was approximately $4
million.
In connection with the transaction, the Company loaned Mr. Taylor $2 million
(U.S.) pursuant to a promissory note dated September 25, 1997. The note bears
interest at 8% per annum, due annually, and is payable in five equal annual
installments beginning on September 25, 1999 and ending on September 25, 2003.
The note is secured by 250,000 shares of Class C exchangeable common stock of
Taylor currently held by Mr. Taylor. As a result of this transaction, the
carrying value of the goodwill previously recorded by the Company related to the
Taylor acquisition increased by approximately $2.5 million, which will be
amortized over the remaining useful life of the goodwill of six years.
7
<PAGE>
NOTE 3
Under the terms of the Taylor acquisition, the Company may become obligated to
make payments of contingent consideration. The first contingent payment period
ended on September 30, 1997, for which the Company estimates the contingent
consideration to be approximately $1.1 million. The Company has recorded this
estimate of the contingent consideration obligation as additional goodwill at
September 30, 1997 and this goodwill will be amortized over the remaining useful
life of the goodwill of six years.
NOTE 4
Subsequent to September 30, 1997, the Company acquired substantially all of the
assets of Computer Dynamics, Inc., a South Carolina corporation ("CDI"), and
certain other related entities pursuant to the terms of an Asset Purchase
Agreement (the "Agreement") dated October 5, 1997 (collectively, the
"Transaction"). Subject to certain adjustments, the consideration paid by the
Company in connection with the Transaction consisted of approximately $12.5
million in cash, 932,039 shares of common stock of the Company and a warrant
(the "Warrant") to purchase 100,000 shares of common stock of the Company. The
Warrant is immediately exercisable at a price of $12.875 per share and shall
remain outstanding for a period of ten years.
Additionally, subject to certain adjustments, for five years after the closing,
the Company shall pay CDI an annual payment ranging up to $3.0 million for each
year in which earnings of the acquired company during such year exceed 110% to
125% of the base earnings from the previous year (each an "Earn Out Period").
Each such payment shall be made 50% in cash and 50% in common stock of the
Company; provided however, that not more than 347,961 shares may be issued in
connection with the payment of such consideration, and once such number of
shares have been issued, all remaining payments shall be made in cash. Each of
the common shares shall be valued based on their then fair market value at the
end of each Earn Out Period.
Furthermore, the Company entered into a Registration Rights Agreement with CDI
and the former principle shareholder pursuant to which the portion of the shares
of common stock of the Company issued to the former principle shareholder and
CDI in connection with the Transaction or issued pursuant to the Warrant are
subject to certain piggy-back registration rights.
In addition, in connection with the consummation of the Transaction, the Company
entered into an employment agreement with the former principle shareholder.
As part of the Transaction, the Company created two additional wholly-owned
subsidiaries, Computer Dynamics, Inc. and Computer Dynamics Holding Company.
8
<PAGE>
To finance the Transaction, the Company amended its line of credit agreement
with its bank. The amended line of credit agreement allows for borrowings up
to $18.0 million, subject to borrowing base restrictions consistent with the
previous agreement, with interest varying based on certain financial ratios
from LIBOR plus 1.5% to LIBOR plus 2%, payable monthly. Additionally, the
Company entered into a $4.0 million term note with its bank. Interest is
calculated at the bank's prime rate and is payable monthly beginning October
31, 1997. Principal of $250,000 is payable quarterly beginning March 31,
1998, and commencing September 30, 1998, all cash flow in excess of the debt
service coverage, as defined, shall be applied to pay down the outstanding
principal balance on the note. The note is secured by substantially all of
the Company's assets. The amended line of credit agreement, along with the
$1.0 million line of credit agreement with Taylor, expire July 31, 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company designs, develops and markets products and technology for the
control segment of the industrial automation market. The Company's broad range
of products are used to define, monitor and maintain the operation, sequencing
and safety of industrial equipment and machinery on the factory floor. These
products range from closed architecture PLC operator interfaces to open
architecture control software and systems, and are sold primarily through an
international network of independent distributors with approximately 225 sales
locations.
The Company's net sales include revenues from sales of products, software
license fees, software maintenance and services. The Company's principal
product line, QuickPanel and similar products accounted for 67% and 62% of net
sales in the six months ended September 30, 1996 and 1997, respectively.
A key element of the Company's strategy has been to expand the breadth of
products offered through its distributor network in order to maximize operating
leverage. In September 1996, the Company acquired a controlling interest in
Taylor, an Edmonton, Alberta-based developer of PC-control software,
client/server program management software, graphical operator interface software
and PLC configuration and support software. This acquisition expanded the
Company's product line, allowing it to capitalize on the growing trends towards
interoperable technology products, and gave the Company a platform from which to
develop new products incorporating this software technology into the Company's
traditional products.
Results of the Company's operations have fluctuated from quarter to quarter in
the past, and may fluctuate significantly in the future. Such fluctuations may
result from a variety of factors, including the timing of new product
introductions by the Company, its competitors or third parties, the loss of any
of its significant distributors, currency fluctuations, disruption in the supply
of components for the Company's products, changes in product mix or capacity
utilization, the timing of orders from major customers, personnel changes,
production delays or inefficiencies, seasonality and other factors affecting
sales and results of operations. Such quarterly fluctuations in results of
operations may adversely affect the market price of the Company's Common Stock,
no par value (the "Common Stock"). A substantial portion of the Company's sales
for each quarter results from orders received in that quarter. Furthermore, the
Company has often recognized a substantial portion of its sales in the last
month of a quarter, with sales frequently concentrated in the last weeks or days
of a quarter. A substantial portion of the Company's operating expenses are
primarily related to personnel, development of new products, marketing programs
and facilities. The level of spending for such expenses cannot be adjusted
quickly, and is based, in large part, on the Company's expectations of future
revenues. If actual revenue levels are below management's expectations, the
Company's business, financial condition and results of operations may be
materially adversely affected. A part of the Company's business strategy is to
continue its growth through strategic acquisitions. Many business acquisitions,
such as the Company's acquisition of CDI in October 1997 (discussed below), must
be accounted for as a purchase. Most of the
10
<PAGE>
businesses that might become attractive acquisition candidates for the Company
are likely to have significant goodwill and intangible assets, and acquisition
of these businesses, if accounted for as a purchase, would typically result in
substantial goodwill amortization charges to the Company. In addition, such
acquisitions, including the acquisition of CDI, could involve acquisition-
related or restructuring-related charges which could significantly impact the
results of the Company's operations in the quarter of acquisition or any quarter
thereafter. The Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance.
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause results to differ materially from
forward-looking statements which may be deemed to have been made in this Form
10-Q, or which are otherwise made by or on behalf of the Company. Such factors
include, but are not limited to, changing market conditions, the availability
and cost of supply materials for the Company's products, the timely development
and market acceptance of the Company's products, and other risks detailed under
the caption "Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997, or otherwise described herein or
detailed from time to time in the Company's Securities and Exchange Commission
filings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
NET SALES. Net sales increased 51% to $12.4 million for the three month period
ended September 30, 1997 compared to $8.2 million for the three month period
ended September 30, 1996. This increase resulted primarily from the growth in
sales of the Company's graphics-based operator interface products of
approximately $2.1 million. The increase also reflects the net sales of Taylor
for the three months ended September 30, 1997 of $2.1 million.
GROSS PROFIT. Cost of goods sold consists primarily of expenses for components
and subassemblies, subcontracted labor, direct labor and manufacturing overhead.
Gross profit increased 100% to $7.2 million for the three months ended September
30, 1997 from $3.6 million for the three months ended September 30, 1996. Gross
margin increased to 57.7% for the three months ended September 30, 1997 from
43.6% for the three months ended September 30, 1996. Of this increase,
approximately 4 percentage points were attributable to a reduction in the
material cost, primarily in the QuickPanel product line, due to favorable Yen
fluctuations. Additionally, decreases in direct labor and manufacturing
overhead costs as a percentage of sales related to the integration of Cincinnati
Dynacomp Inc.'s ("Cincinnati" - acquired January 1996) operations increased
gross margin by approximately 3 percentage points. Finally, gross margin
increased by 7 percentage points due to the impact of higher gross margin Taylor
software products in the 1997 period.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs, sales commissions paid to the Company's independent sales
representatives, advertising, product literature, trade shows, distributor
promotions and depreciation on equipment used for sales related activities.
Sales and marketing expenses increased 71% to $3.0 million for the three months
ended September 30, 1997 from $1.7 million for the three months ended September
30, 1996. Approximately $200,000 of the increase resulted from increased
commissions due to higher sales volume, and increased advertising and
distributor promotional programs. Approximately $700,000 of the increase
resulted from costs
11
<PAGE>
associated with the operations of Taylor and the remaining increase of
approximately $400,000 was due to increased salary, benefits and related costs
attributable to increased sales support personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily
of personnel costs, engineering supplies, development equipment, depreciation
and overhead costs. Research and development expenses increased 60% to $1.2
million for the three months ended September 30, 1997 from $765,000 for the
three months ended September 30, 1996. The increase resulted primarily from
increased costs related to Taylor of approximately $440,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs related to finance, information systems, and
general management functions, as well as professional fees related to legal,
audit and tax services. General and administrative expenses increased 30% to
$1.1 million for the three months ended September 30, 1997 from $834,000 for the
three months ended September 30, 1996. Approximately $380,000 of the increase
related primarily to additional personnel and facility costs and goodwill
amortization resulting from the three months operating results of Taylor offset
by reductions in salary and facility related costs primarily related to the
integration of the Company's Cincinnati operations.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and
development and other acquisition expenses relating to the acquisition of Taylor
totaled approximately $4.9 million and were charged to expense at the
acquisition date in September 1996. Of this expense, $4.7 million represents
the estimated fair value of Taylor's incomplete research and development
projects as determined by independent appraisal.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net provided
income of $19,000 for the three months ended September 30, 1997 from net expense
of $128,000 for the three months ended September 30, 1996. The decrease
primarily related to a decrease in average debt outstanding as debt was repaid
with a portion of the proceeds from the Company's initial public offering in
March 1997.
PROVISION FOR INCOME TAXES. Provision for income taxes increased to $837,000
for the three months ended September 30, 1997 from $(26,000) for the three
months ended September 30, 1996. The effective tax rate for the three-month
period ended September 30, 1997 was 43% as compared to the effective tax rate of
approximately 39% for the three months ended September 30, 1996, after giving
effect to the impact on taxable income of the charge for purchased research and
development of approximately $4.7 million. This increase was primarily due to
non-deductible goodwill amortization.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. A minority interest representing
Digital Electronic's 39.0% share of the net income or loss of Taylor is recorded
on the Company's statements of operations. The Company's ownership of Taylor
Class A Shares may increase by up to 4.0% based on the amount of contingent
consideration paid by the Company in connection with the acquisition. To the
extent the equity interest of the Company in Taylor increases, the percentage
applied to calculate minority interest will be reduced by a corresponding
amount. The minority interest expense of $1,624 recorded for the three months
ended September 30, 1997 represents the minority interest share of the income
recorded by Taylor compared to the $1.8 million benefit recorded for the three
months ended September 30, 1996, which was primarily attributable to the
minority interest share of the $4.7 million purchased research and development
write-down.
12
<PAGE>
ACCRETION TO REDEMPTION VALUE OF COMMON STOCK. The Company previously issued
redeemable Common Stock and Taylor issued redeemable Taylor Exchangeable shares.
The Company recorded these redeemable shares at their estimated redemption
values at the date of issuance and subsequent changes in such redemption value
in each reporting period were accreted. The redemption rights automatically
terminated upon the closing of the Company's initial public offering and as a
result, the Company is no longer required to record a non-cash charge in its
calculation of earnings per share available to common shareholders in the
future. The accretion to redemption value of Common Stock was $1.4 million for
the three months ended September 30, 1996 and was based on the increase in the
estimated fair market value of the Common Stock from $5.00 per share to $6.06
per share for such period.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
NET SALES. Net sales increased 44% to $24.9 million for the six-month period
ended September 30, 1997 compared to $17.3 million for the six-month period
ended September 30, 1996. This increase resulted primarily from the growth in
sales of the Company's graphics-based operator interface products of
approximately $3.8 million. Additionally, the increase reflects the results
of Taylor for the six months ended September 30, 1997 of approximately $3.8
million.
GROSS PROFIT. Gross profit increased 87% to $14.0 million for the six months
ended September 30, 1997 from $7.5 million for the six months ended September
30, 1996. Gross margin increased to 56.2% for the six months ended September
30, 1997 from 43.3% for the six months ended September 30, 1996. Of this
increase, approximately 4 percentage points were attributable to a reduction in
the material cost, primarily in the QuickPanel product line, due to favorable
Yen fluctuations. Additionally, decreases in direct labor and manufacturing
overhead costs as a percentage of sales related to the integration of
Cincinnati's operations increased gross margin by approximately 2 percentage
points. Finally, gross margin increased by 7 percentage points due to the
impact of higher gross margin Taylor software products in the 1997 period.
SALES AND MARKETING. Sales and marketing expenses increased 74% to $6.0 million
for the six months ended September 30, 1997 from $3.4 million for the six months
ended September 30, 1996. Approximately $465,000 of the increase resulted from
increased commissions due to higher sales volume, and increased advertising and
distributor promotional programs. Approximately $1.6 million of the increase
resulted from costs associated with the operations of Taylor and the remaining
increase was due to increased salary, benefits and related costs attributable to
increased sales support personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 70% to
$2.5 million for the six months ended September 30, 1997 from $1.5 million for
the six months ended September 30, 1996. The increase resulted primarily from
$100,000 in professional fees related to outsourced development efforts and
approximately $900,000 of product development costs related to Taylor.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 38%
to $2.3 million for the six months ended September 30, 1997 from $1.7 million
for the six months ended September 30, 1996. Approximately $740,000 of the
increase related primarily to additional personnel and facility costs and
goodwill amortization resulting from the six months operating results of Taylor,
offset by a
13
<PAGE>
reduction in cost resulting from the integration of Cincinnati's operations into
the Company's consolidated operations.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and
development and other acquisition expenses relating to the acquisition of Taylor
totaled approximately $4.9 million and were charged to expense at the
acquisition date in September 1996. Of this expense, $4.7 million represents
the estimated fair value of Taylor's incomplete research and development
projects as determined by independent appraisal.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net decreased to
$15,000 for the six months ended September 30, 1997 from $231,000 for the six
months ended September 30, 1996. The decrease primarily related to a decrease
in average debt outstanding as debt was repaid with a portion of the proceeds
from the Company's initial public offering in March 1997.
PROVISION FOR INCOME TAXES. Provision for income taxes increased to $1.4
million for the six months ended September 30, 1997 from $192,000 for the six
months ended September 30, 1996. The effective tax rate for the six-month
period ended September 30, 1997 was 43% as compared to the effective tax rate of
approximately 67% for the six months ended September 30, 1996, after giving
effect to the impact on taxable income of the charge for purchased research and
development of approximately $4.7 million. This increase was primarily due to
non-deductible goodwill amortization.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. The minority interest benefit of
$134,000 recorded for the six months ended September 30, 1997 represents the
minority interest share of the loss recorded by Taylor compared to $1.8 million
benefit recorded for the six months ended September 30, 1996, which was
primarily attributable to the minority interest share of the $4.7 million
purchased research and development write-down.
ACCRETION TO REDEMPTION VALUE OF COMMON STOCK. The accretion to redemption
value of Common Stock was $4.9 million for the six months ended September 30,
1996 and was based on the increase in the estimated fair market value of the
Common Stock from $2.33 per share to $6.06 per share for such period.
LIQUIDITY AND CAPITAL RESOURCES
In March 1997, the Company completed an initial public offering of its
Common Stock. Net proceeds of $11.0 million from this offering were used to
repay certain indebtedness, primarily borrowings under the Company's bank lines
of credit and certain acquisition indebtedness.
At September 30, 1997, the Company had bank lines of credit aggregating
$10.0 million. The amount that the Company is entitled to borrow under such
lines of credit is based on 80.0% to 85.0% of eligible trade accounts receivable
and 50.0% of eligible inventory, up to $4.5 million, of its respective
operations. Based on this formula, the Company would have had approximately
$7.2 million and $8.7 million of available borrowings under its line of credit
at March 31 and September 30, 1997, respectively. All funds advanced pursuant
to the lines of credit are secured by substantially all of the assets of the
Company, and such lines of credit expire in July 1999. The interest rate on
borrowings
14
<PAGE>
under the lines of credit is the bank's prime lending rate or LIBOR plus 1.5%,
at the option of the Company or, in the case of $1.0 million of the line of
credit, the bank's prime lending rate.
To finance the acquisition of CDI (discussed below), the Company amended
its line of credit agreement with its bank. The amended line of credit
agreement allows for borrowings up to $18.0 million, subject to borrowing
base restrictions consistent with the previous agreement, with interest
varying based on certain financial ratios from LIBOR plus 1.5% to LIBOR plus
2%, payable monthly. Additionally, the Company entered into $4.0 million
term note with its bank. Interest is calculated at the bank's prime rate and
is payable monthly beginning October 31, 1997. Principal of $250,000 is
payable quarterly beginning March 31, 1998, and commencing September 30,
1998, all cash flow in excess of the debt service coverage, as defined, shall
be applied to pay down the outstanding principal balance on the note. The
note is secured by substantially all of the Company's assets. The amended
line of credit agreement, along with the $1.0 million line of credit
agreement, expires July 31, 1999.
Cash (used in) provided by operating activities was $(1,503,000) for the
six months ended September 30, 1996 and $1,761,000 for the six months ended
September 30, 1997. In 1996 the Company experienced increases in receivables
and inventory as a result of increases in the Company's sales volume, coupled
with decreases in accounts payable and accrued expenses. In 1997 the Company's
cash flow from operations related primarily to increased income for the period
and growth in payables and accruals offset by increases in accounts receivable
and inventory balances during the period.
Net cash (used in) provided by investing activities totaled $(5,987,000)
and $961,000 for the six months ended September 30, 1996 and 1997, respectively.
In 1996, the activities consisted primarily of the purchase of Taylor for cash
and stock. Additional activities consisted primarily of purchases of property
and equipment. In 1997, cash was generated from the sale of the Company's
production scheduling software product line, TESS (discussed below), offset by
purchases of property and equipment and other assets.
Under the terms of the Taylor acquisition, the Company may become obligated
to make payments of contingent consideration. For the first earnout period
ended September 30, 1997 the Company estimates the contingent consideration for
the period to be approximately $1.1 million. It is anticipated that this
obligation will be paid during the quarter ended December 31, 1997. The Company
has recorded this estimate of the contingent consideration obligation as
additional goodwill at September 30, 1997. As a result of the payment of this
contingent consideration, the Company's ownership interest in Taylor will
increase by approximately 0.5% when paid. See the Company's Annual Report on
Form 10-K for an additional discussion of payments of contingent consideration
under the terms of the Cincinnati and Taylor Transactions which the Company may
become obligated to pay.
If the Company were to consummate one or more significant acquisitions in
which the consideration consists of cash, a substantial portion of the Company's
available cash or borrowing availability could be used to consummate the
acquisitions. Additionally, the cost of capital for one or more significant
acquisitions could be higher than the Company's current cost of capital.
Management believes funds generated from operations and borrowings available
under the existing bank credit facilities or replacement facilities will be
sufficient to finance the Company's operations at least through the end of
fiscal 1998. In the event the Company acquires one or more businesses or
products, the
15
<PAGE>
Company's capital requirements could increase substantially, and there can be no
assurance that additional capital will be available on terms acceptable to the
Company, if at all.
On September 26, 1997, Taylor completed the sale of its TESS software
product to an entity principally owned by Mr. Taylor. Mr. Taylor, the former
principal shareholder of Taylor, is an officer and a member of the Company's
board of directors. The sale price was approximately $4 million.
In connection with the transaction, the Company loaned Mr. Taylor $2
million (U.S.) pursuant to a promissory note dated September 25, 1997. The note
bears interest at 8% per annum (due annually) and is payable in five equal
annual installments beginning on September 25, 1999 and ending on September 25,
2003. The note is secured by 250,000 shares of Class C exchangeable common stock
of Taylor currently held by Mr. Taylor.
Subsequent to September 30, 1997, the Company acquired substantially all of
the assets of CDI, and certain other related entities pursuant to the terms of
the Agreement dated October 5, 1997. Subject to certain adjustments, the
consideration paid by the Company in connection with the Transaction consisted
of approximately $12.5 million in cash, 932,039 shares of common stock of the
Company and the Warrant to purchase 100,000 shares of Common Stock. The Warrant
is immediately exercisable at a price of $12.875 per share and shall remain
outstanding for a period of ten years.
Additionally, subject to certain adjustments, for five years after the
closing, the Company shall pay CDI an annual payment ranging up to $3.0 million
on a straight-line basis for each year in which earnings of the acquired company
during such year exceed 110% to 125% of the base earnings for each Earn Out
Period. Each such payment shall be made 50% in cash and 50% in Common Stock;
provided however, that not more than 347,961 shares of Common Stock may be
issued in connection with the payment of such consideration, and once such
number of shares have been issued, all remaining payments shall be made in cash.
Each share of Common Stock shall be valued at the then fair market value of the
Common Stock at the end of each Earn Out Period.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1996, Wesco Distribution Incorporated ("Wesco"), a former distributor of
Cincinnati, initiated litigation against one of its customers, Joslyn
Sterilizer, Inc. ("Joslyn") to collect approximately $50,000 of invoices for
computer software and equipment purchased by the customer, including equipment
supplied by Cincinnati. The customer then filed a counterclaim against Wesco
alleging that the software and equipment contained defects and seeking damages
in the amount of approximately $1.6 million. On February 14, 1997, Wesco
impleaded Tara Products, Inc. ("Tara"), the Company's wholly-owned subsidiary
which is the successor to Cincinnati, seeking indemnification from Tara for
damages suffered by Wesco resulting from any product defects. This suit (the
"Lawsuit") was filed in the New York Supreme Court for Monroe County. On May
23, 1997, the New York Supreme Court for Monroe County dismissed Wesco's third-
party complaint against Tara without prejudice on the grounds that under a
distribution agreement between Wesco and Tara's predecessor, any litigation
between the two companies must be brought in the Court of Common Pleas for
Claremont County, Ohio. Wesco may still seek indemnification from Tara in Ohio.
While the Company has not conducted any formal investigation or taken any
discovery, it believes that Tara would have a meritorious defense to such an
action.
On May 7, 1997, Joslyn filed a complaint against Tara, the Company and Tara's
predecessors, Cincinnati Electrosystems Inc., and Cincinnati Dynacomp, Inc., in
the Supreme Court for Monroe County, New York, alleging substantially the same
facts against those defendants as it did against Wesco in the counterclaim. In
response to Joslyn's complaint, the defendants filed a motion for summary
judgement which was granted in part and denied in part. With respect to such
matters that it was unsuccessful, the Company anticipates filing a response by
December 15, 1997. Again, while this action is in the preliminary stages and no
formal discovery has been initiated, the Company believes that it and the other
defendants have meritorious defenses, and the Company intends to vigorously
defend this action. There can be no assurance, however, that the defendants
will prevail in this action. If the defendants do not prevail, or if they
settle the action, the Company could be required to make payments to Joslyn.
The Company does not, however, believe that any such payments, if required to be
made, would have a material adverse effect on the Company's financial condition
or results of operations.
The Company is not involved in any other material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit 11 - Statement regarding computation of per share earnings
Exhibit 27 - Financial Data Schedule (EDGAR version only)
Exhibit 10.1 - Amended Discount Stock Purchase Plan
(b). Reports on Form 8-K filed for the quarter ended September 30, 1997:
(1) The Company filed a report on Form 8-K for an event dated
August 4, 1997, pursuant to Item 5, reporting the signing of
a letter of intent regarding the sale of the TESS product.
(2) The Company filed a report on Form 8-K for an event dated
September 12, 1997, pursuant to Item 5, regarding the
consummation of a definitive Original Equipment
Manufacturer's Agreement with Digital.
(3) The Company filed a report on Form 8-K for an event dated
September 22, 1997, pursuant to Item 5, reporting the
signing of a letter of intent regarding the purchase of
substantially all of the assets of Computer Dynamics, Inc.
and its related entities.
(4) The Company filed a report on Form 8-K for an event dated
September 25, 1997 pursuant to Item 5, reporting the
execution of a Note by Neil Taylor in favor of the Company
and the sale of the TESS product.
(5) The Company filed a report on Form 8-K for an event dated
October 5, 1997, pursuant to Item 2, reporting the
acquisition of substantially all of the assets of Computer
Dynamics, Inc. and its related entities.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOTAL CONTROL PRODUCTS, INC..
(Registrant)
By: /s/ Nicholas T. Gihl
----------------------------------------
Nicholas T. Gihl
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Peter A. Nicholson
----------------------------------------
Peter A. Nicholson
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: November 14, 1997
19
<PAGE>
Total Control Products, Inc. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ---------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMPUTATION OF NET INCOME (LOSS)
PER SHARE:
Net income (loss) available for
common shareholders. . . . . . . . . $(4,341,134) $1,087,882 $(7,478,672) $1,936,420
Interest on convertible debt, net
of tax benefit . . . . . . . . . . . -(a) - -(a) -
----------- ---------- ----------- ----------
Net income (loss) adjusted for "as
if converted" common stock
equivalents. . . . . . . . . . . . . $(4,341,134) $1,087,882 $(7,478,672) $1,936,420
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Weighted average shares
outstanding, exluding SAB 83
shares issued. . . . . . . . . . . . 4,689,948 7,653,577 4,656,012 7,653,577
Non-SAB 83 option grants
(granted prior to 12/20/95). . . . . -(a) 104,650 -(a) 103,451
Conversion of subordinated
debentures . . . . . . . . . . . . . -(a) - -(a) -
SAB 83 shares. . . . . . . . . . . . . 1,003,591 119,338 1,003,591 90,915
----------- ---------- ----------- ----------
Adjusted weighted average
shares outstanding . . . . . . . . . 5,693,539 7,877,565 5,659,603 7,847,943
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Net income (loss) per share. . . . . . $ (0.76) $ 0.14 $ (1.32) $ 0.25
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
(a) Not considered in earnings per share calculation as effect would be
anti-dilutive.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOTAL
CONTROL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31 AND SEPTEMBER 30, 1997 AND FOR EACH OF THE THREE MONTHS AND SIX MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EXHIBIT 10.1
TOTAL CONTROL PRODUCTS, INC.
1996 DISCOUNT STOCK PURCHASE PLAN
ARTICLE I
ESTABLISHMENT OF EMPLOYEE STOCK PURCHASE PLAN
1.1. Total Control Products, Inc. (the "Company"), an Illinois
corporation, established this 1996 Discount Stock Purchase Plan (the "Plan") to
provide a means for eligible employees to purchase Common Stock of the Company
("Common Stock") through payroll deductions, to give its employees an incentive
to promote the best interests of the Company and to allow them to participate in
the Company's economic progress. The Plan is intended to constitute an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986 (the
"Code"). The provisions of the Plan shall be construed in a manner consistent
with the Code and the Regulations thereunder.
1.2. 250,000 shares of Common Stock are reserved for issuance to and
purchase by Participants under the Plan, subject to adjustment in accordance
with Article VI. The shares of Common Stock subject to the Plan shall be either
shares of authorized but unissued Common Stock or shares of Common Stock
reacquired by the Company. Shares of Common Stock involved in any unexercised
portion of any terminated option may again be subject to options granted under
the Plan.
1.3. The Plan shall become effective on December 15, 1996 (the "Effective
Date"), provided that it is approved within one year of the Effective Date at a
duly-held stockholders' meeting by stockholders of the Company holding a
majority of the Company's voting stock. If the Plan fails to be approved by
shareholders as provided in the previous sentence, the Plan and any actions
taken by the Company pursuant to the Plan will be deemed null and void from the
inception.
ARTICLE II
CERTAIN DEFINITIONS
In addition to those terms defined in Article I, the following terms, when
used herein, have the following meanings:
2.1. "ACCOUNT" means the Employee Stock Purchase Account established for
a Participant under Section 4.3.
<PAGE>
2.2. "BASIC COMPENSATION" means an Employee's regular salary or wages
immediately prior to a Purchase Period divided by the number of Purchase Periods
per year, increased by any deductions or withholdings, but excluding
compensation reductions under any plan described by Sections 125, 401(k) or
408(k) of the Code, non-qualified deferred compensation, overtime, bonuses and
amounts paid in reimbursement for expenses.
2.3. "BOARD" means the Board of Directors of the Company.
2.4. "COMMITTEE" means the Compensation Committee of the Board, which
shall consist of not less than two members who are (and shall remain Committee
members only so long as they continue to be) "disinterested persons" as defined
in Rule 16b-3 under the Securities Exchange Act of 1934.
2.5. "ELIGIBLE EMPLOYEE" means each Employee who, as of the first day of
a Purchase Period:
(i) has been an Employee for two years (or such lesser period
established by the Committee, but in no event less than six months);
(ii) is not, as of the day preceding the first day of the
Purchase Period, deemed for purposes of Section 423(b)(3) of the Code to
own stock possessing 5% or more of the total combined voting power or value
of all classes of stock of the Company;
(iii) is customarily employed for at least 20 hours per week; and
(iv) is customarily employed for at least 5 months per year.
2.6. "EMPLOYEE" means any person employed by the Company, any parent of
the Company or any subsidiary of the Company, as defined by Sections 424(e) or
(f) of the Code.
2.7. "EXERCISE DATE" means the last day of a Purchase Period; provided,
however, that if such date is not a business day, the "Exercise Date" shall mean
the next preceding business day.
2.8. "PARTICIPANT" means an Eligible Employee who is participating In the
Plan under Article IV.
2.9. "PURCHASE PERIOD" means a period of six months or such shorter
period as may be established by the Board. The first Purchase Period shall
begin as of the first March 31 or September 31 after the closing of the
Company's registered public offering and shall be a period of six months. The
last Purchase Period under the Plan shall terminate on or before the date of
termination of the Plan provided in Section 9.3. Upon the retirement of a
Participant, the Purchase Period as to that Participant shall terminate on his
last day on the payroll as an Employee.
2
<PAGE>
2.10. CONSTRUCTION. The masculine gender includes the feminine, the
singular number includes the plural and the plural number includes the singular
unless the context otherwise requires.
ARTICLE III
ADMINISTRATION
3.1. The Plan shall be administered by the Committee, which will have the
authority to make rules and regulations for the administration of the Plan, and
whose interpretation and decisions with respect to the Plan shall be final and
conclusive.
ARTICLE IV
OPTIONS; PARTICIPATION
4.1. (a) Each Eligible Employee shall be granted an option effective on
the first day of each Purchase Period to purchase the number of shares of Common
Stock (subject to adjustment in accordance with Article VI) as is determined by
dividing: (a) an amount equal to 10% of the Employee's present rate of Basic
Compensation projected over the Purchase Period by (b) 85% of the fair market
value of a share of Common Stock on the first day of the Purchase Period.
(b) If, as of the first day of a Purchase Period, any Eligible Employee
who is granted an option under paragraph (a) would be deemed for purposes of
Section 423(b)(3) of the Code to own stock (including the shares he would be
entitled to purchase for that Purchase Period) possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company, the
maximum number of shares which such Eligible Employee shall be entitled to
purchase under the option granted to him under paragraph (a) shall be reduced so
that if he purchased all the shares of Common Stock covered by such option, the
shares of stock of the Company which he is deemed to own under Section 423(b)(3)
of the Code would be one less than that which would give him 5% of the total
combined voting power or value of all classes of stock of the Company.
4.2. An Eligible Employee may elect to become a Participant completing a
"Stock Purchase Agreement" in such form and manner as the Committee provides.
In the Stock Purchase Agreement, the Eligible Employee shall authorize regular
payroll deductions of any full percentage between 1% and 10% of his Basic
Compensation. Options granted to Eligible Employees who fail to authorize
payroll deductions will automatically lapse. If a Participant's payroll
deductions allow him to purchase fewer than the maximum number of shares of
Common Stock to which his option entitles him, the option with respect to the
shares which he does not purchase will lapse as of the last day of the Purchase
Period.
3
<PAGE>
4.3. The Committee will cause an Employee Stock Purchase Account to be
established for each Participant under the Plan. Payroll deductions made under
Section 4.2 will be credited to each Participant's Account.
ARTICLE V
PURCHASE OF SHARES
5.1. The purchase price per share of Common Stock under the Plan as of
any Exercise Date shall be the lesser of: (a) 85% of the fair market value of a
share of Common Stock on the first day of the Purchase Period, or (b) 85% of the
fair market value of a share of Common Stock on the Exercise Date for that
Purchase Period. "Fair market value" on any day shall be the average of the
highest and lowest market price of a share of Common Stock reported by the
National Association of Securities Dealers Automated Quotation System or other
stock exchange, if the Stock is so listed. If no such sale of a share of Common
Stock occurred on the first day or the last day of a Purchase Period, then the
market prices shall be determined with reference to transactions on the next
preceding day on which there was a sale of Common Stock. If the Common Stock is
not traded on a stock exchange, then "Fair Market Value" shall be determined by
the Compensation Committee.
5.2. (a) If as of any Exercise Date there is credited to a Participant's
Account an amount at least equal to the purchase price of a share of Common
Stock for the current Purchase Period, as determined under Section 5.1, the
Participant shall buy and the Company shall sell the largest number of whole
shares of Common Stock which can be purchased under the Participant's option
with the amount in his Account. Alternatively, and at the Company's option, the
Company can sell the full number of shares, including any fractional shares.
The balance remaining in the Participant's Account, if any, shall be carried
forward and credited for use in the next Purchase Period, unless, within 30 days
after the Exercise Date, the Participant requests that the balance be refunded
to him in cash.
(b) No Participant may, in any calendar year, purchase a number of
shares of Common Stock under this Plan which have an aggregate fair market value
(measured as of the first day of the Purchase Period) in excess of $25,000 when
aggregated with all other shares of Common Stock which he may be entitled to
purchase in such year under all other employee stock purchase plans of the
Company and its parent and subsidiary corporations, if any, which meet the
requirements of Section 423(b) of the Code.
5.3. Shares of Common Stock purchased by a Participant shall, for all
purposes, be deemed to have been issued and sold at the close of business on the
Exercise Date. Prior to that date, the Participant shall have no rights or
privileges of a stockholder of the Company with respect to such shares.
4
<PAGE>
ARTICLE VI
ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
6.1. The aggregate number of shares of Common Stock which may be
purchased pursuant to options granted hereunder, the number of shares of Common
Stock covered by each outstanding option, and the purchase price under each such
option shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of Common Stock resulting from a stock split or
other subdivision or consolidation of shares of Common Stock or for the other
capital adjustments or payments of stock dividends or distributions or other
increases or decreases in the outstanding shares of Common Stock affected
without receipt of consideration by the Company.
6.2. Subject to any required action by the Company's stockholders, if the
Company is the surviving corporation in any merger or consolidation, any option
granted hereunder shall cover the securities to which a holder of the number of
shares of Common Stock would have been entitled pursuant to the terms of the
merger or consolidation, but a dissolution or liquidation of the Company or a
merger or consolidation in which the Company is not the surviving entity shall
cause every option outstanding hereunder to terminate.
6.3. The foregoing adjustments shall be determined by the Committee in
its sole discretion. Any such adjustment shall provide for the elimination of
any fractional share which might otherwise become subject to an option.
ARTICLE VII
TERMINATION OF PARTICIPATION
7.1. A Participant may withdraw from the Plan at any time prior to the
Exercise Date of a Purchase Period by filing a notice of withdrawal. Upon a
Participant's withdrawal, payroll deductions under his Stock Purchase Agreement
shall cease and the entire amount credited to his Account shall be refunded to
him. Any Participant who withdraws from the Plan may again become a Participant
at the start of the next Purchase Period in accordance with Article IV.
7.2. (a) Upon a Participant's termination of employment for any reason
other than retirement or death, no payroll deduction may be made from any
compensation due him and the entire balance credited to his Account shall be
automatically refunded.
(b) If a Participant retires from the Company pursuant to its retirement
policy then in effect, no payroll deduction shall be made from any compensation
due him as of the date of his retirement. Such a Participant may, prior to
retirement, however, elect:
5
<PAGE>
(i) to receive the balance of his Account as of the date of his
retirement in a cash refund;
(ii) to purchase, as of the date of his retirement, shares of
Common Stock with the then balance in his Account; or
(iii) to make a contribution to his Account prior to his
retirement date in any amount up to that which, when added to the then
value of his Account, would allow him to buy the maximum number of shares
available under his option for such Purchase Period and to purchase, as of
the date of his retirement, such shares.
(c) Upon the death of a Participant, no payroll deduction shall be made
from any compensation due him at time of death, and the entire balance in the
deceased Participant's Account shall be paid to the Participant's designated
beneficiary, if any, under the Company's group life insurance program, or
otherwise to his estate.
7.3. Payroll deductions shall cease during a period of absence from work
due to a Participant's temporary layoff, authorized leave of absence without pay
or disability for which benefits are payable under the Company's long term
disability plan. If a Participant returns to active service prior to the
Exercise Date for the current Purchase Period, payroll deductions shall be
resumed, and he shall be entitled to elect, within ten days after his return to
active service (but not later than the Exercise Date for the Purchase Period)
(a) to make up the deficiency in his Account by an immediate lump sum cash
payment equal to the aggregate of the amounts that would have been withheld from
him if he had not been absent, (b) to have future deductions uniformly increased
to adjust for such deficiency, or (c) not to make up such deficiency and to
reduce the number of shares to be purchased. A Participant who does not make a
timely election pursuant to this Section shall be deemed to have elected
alternative (c). If the Participant shall not return to active service prior to
the Exercise Date for the current Purchase Period, his share purchase agreement
shall be terminated and the balance in his Account shall be refunded, or, if the
Participant so elects, shall be used to purchase shares of Common Stock under
Article V.
ARTICLE VIII
MISCELLANEOUS
8.1. The right to purchase shares of Common Stock under this Plan is
exercisable only by the Participant during his lifetime and is not transferable
by him. If a Participant attempts to transfer his right to purchase shares
under the Plan, he shall be deemed to have requested withdrawal from the Plan
and the provisions of Section 7.1 hereof shall apply with respect to such
Participant.
8.2. Granting of an option under this Plan shall impose no obligation on
the Eligible Employee to exercise such option.
6
<PAGE>
8.3. Granting of an option under this Plan shall imply no right to
continued employment with the Company, compensation level of position for any
Eligible Employee. Nothing in this Plan shall be deemed the Company's guarantee
or representation with respect to the current or future value of Company Stock.
8.4. Any notice which an Eligible Employee or Participant files pursuant
to this Plan shall be in writing and shall be delivered personally or by mail
addressed to the Compensation Committee, c/o The Company.
8.5. The Company shall not be required to repurchase from any Participant
shares of Common Stock acquired under this Plan.
8.6. Except as provided in federal law, the provisions of the Plan shall
be construed in accordance with the laws of the State of Illinois.
8.7. In connection with the purchase of Company Stock hereunder, each
Participant will execute any stock restriction agreement, voting agreement or
any other agreement designated by the Committee on or before the first day of
the applicable Purchase Period.
ARTICLE IX
AMENDMENT AND TERMINATION
9.1. The Board may, without the consent of the Participants, amend the
Plan at any time, provided that no such action shall adversely affect options
previously granted hereunder, and provided that no such action by the Board,
without approval of the Company's stockholders may: (a) increase the total
number of shares of Common Stock which may be purchased by all Participants,
except as contemplated in Article VI; (b) change the class of Employees eligible
to receive options under the Plan; (c) decrease the purchase price; (d) extend a
Purchase Period; or (e) extend the term of the Plan.
9.2. If on any Exercise Date the aggregate funds which may be used to
purchase shares of Common Stock pursuant to Article V hereof would result in the
purchase of shares in excess of the number of shares of Common Stock then
available for purchase under the Plan, the Committee shall proportionately
reduce the number of shares which would otherwise be purchased by each
Participant on the Exercise Date in order to eliminate such excess, the Plan
shall automatically terminate after such Exercise Date and any remaining balance
credited to the Account of a Participant shall be refunded to him.
9.3. The Plan shall continue in effect through December 14, 2006, unless
terminated prior to that date under Section 9.2. In addition, the Board of
Directors shall have the right to terminate the Plan at any time.
7
<PAGE>
9.4. In the event of the expiration of the Plan or its termination, all
options then outstanding under the Plan shall automatically be cancelled and the
entire amount credited to the Account of each Participant hereunder shall be
refunded to him.
TOTAL CONTROL PRODUCTS, INC.,
an Illinois corporation
8
<PAGE>
TOTAL CONTROL PRODUCTS, INC.
1996 Discount Stock Purchase Plan
AMENDMENT NO. 1
Section 9.1 of the Total Control Products, Inc. 1996 Discount Stock
Purchase Plan (the "Plan") authorizes the Board of Directors of Total Control
Products, Inc., an Illinois corporation, to amend the Plan at any time, subject
to certain limitations. Effective as of the original effective date of the
Plan:
1. Section 4.3 of the Plan shall be replaced with the following:
" 4.3. The Committee will cause an Employee Stock Purchase Account
to be established for each Participant under the Plan. Payroll deductions
made under Section 4.2 will be credited to each Participant's Account."
2. Section 5.2(a) of the Plan shall be replaced with the following:
" 5.2. (a) If as of any Exercise Date there is credited to a
Participant's Account an amount at least equal to the purchase price of a
share of Common Stock for the current Purchase Period, as determined under
Section 5.1, the Participant shall buy and the Company shall sell the
largest number of whole shares of Common Stock which can be purchased under
the Participant's option with the amount in his Account. Alternatively,
and at the Company's option, the Company can sell the full number of
shares, including any fractional shares. The balance remaining in the
Participant's Account, if any, shall be carried forward and credited for
use in the next Purchase Period, unless, within 30 days after the Exercise
Date, the Participant requests that the balance be refunded to him in
cash."
3. Section 5.3 of the Plan shall be replaced with the following:
" 5.3. Shares of Common Stock purchased by a Participant shall, for
all purposes, be deemed to have been issued and sold at the close of
business on the Exercise Date. Prior to that date, the Participant shall
have no rights or privileges of a stockholder of the Company with respect
to such shares."
Except as amended by this document, the provisions of the Plan shall remain in
effect.
<PAGE>
TOTAL CONTROL PRODUCTS, INC.
1996 Discount Stock Purchase Plan
AMENDMENT NO. 2
Section 9.1 of the Total Control Products, Inc. 1996 Discount Stock
Purchase Plan (the "Plan") authorizes the Board of Directors of Total Control
Products, Inc., an Illinois corporation, to amend the Plan at any time, subject
to certain limitations. Effective as of the original effective date of the
Plan:
1. Section 2.2 of the Plan shall be replaced with the following:
"2.2. 'BASIC COMPENSATION' means an Employee's regular salary or
wages immediately prior to the purchase period, divided by the number of
Purchase Periods per year, increased by any deductions or withholdings, but
excluding compensation reductions under any plan described by Sections 125,
401(k) or 408(k) of the Code, non-qualified deferred compensation,
overtime, bonuses (except for sales personnel to the extent the bonus is
determined by the Committee to be the functional equivalent of normal
wages), and amounts paid in reimbursement for expenses."
2. Section 2.9 of the Plan shall be replaced with the following:
"2.9. 'PURCHASE PERIOD' means a period of three months or such
other period as may be established by the Board. The first Purchase Period
shall begin as of April 1, 1997, and shall be a period of eight months.
The second and following Purchase Periods shall begin after November 30,
1997, or such other date as the Committee may determine. The last Purchase
Period under the Plan shall terminate on or before the date of termination
of the Plan provided in Section 9.3. Upon the retirement or termination of
a Participant, the Purchase Period as to that Participant shall terminate
on his last day on the payroll as an Employee."
3. Section 4.2 of the Plan shall be replaced with the following:
"4.2. An Eligible Employee may elect to become a Participant by
completing a "Stock Purchase Agreement" in such form and manner as the
Committee provides. An Employee who first becomes an Eligible Employee
during the Purchase Period may elect to become a Participant for the
remaining portion of the Purchase Period under conditions set forth by the
Committee. In such Stock Purchase Agreement, the Eligible Employee shall
authorize regular payroll deductions of any flat dollar amount or of any
percentage between 1% and 10% of his Basic Compensation. Options granted
to Eligible Employees
<PAGE>
who fail to authorize payroll deductions will automatically lapse. If a
Participant's payroll deductions allow him to purchase fewer than the
maximum number of shares of Common Stock to which his option entitles him,
the option with respect to the shares which he does not purchase will lapse
as of the last day of the Purchase Period."
4. Section 7.1 of the Plan shall be replaced with the following:
"7.1. A Participant may withdraw from the Plan at any time prior to
the Exercise Date of a Purchase Period by filing a notice of withdrawal.
Upon a Participant's withdrawal, payroll deductions under his Stock
Purchase Agreement shall cease and the entire amount credited to his
Account shall be used to purchase stock pursuant to Article V, except that
any remaining balance in the Participant's Account shall be refunded to him
in cash. Any Participant who withdraws from the Plan and remains an
Employee may again become a Participant at the start of the second
following Purchase Period in accordance with Article V."
Except as amended by this document, the provisions of the Plan shall remain in
effect.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOTAL
CONTROL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31 AND SEPTEMBER 30, 1997 AND FOR EACH OF THE SIX MONTHS ENDED SEPTEMBER
30, 1996 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,195,906
<SECURITIES> 0
<RECEIVABLES> 7,854,695
<ALLOWANCES> (145,000)
<INVENTORY> 8,860,292
<CURRENT-ASSETS> 18,916,695
<PP&E> 3,992,351
<DEPRECIATION> (1,240,778)
<TOTAL-ASSETS> 34,049,034
<CURRENT-LIABILITIES> 8,994,397
<BONDS> 19,520
0
0
<COMMON> 24,613,624
<OTHER-SE> (2,789,203)
<TOTAL-LIABILITY-AND-EQUITY> 34,049,034
<SALES> 24,910,858
<TOTAL-REVENUES> 24,910,858
<CGS> 10,910,759
<TOTAL-COSTS> 10,910,759
<OTHER-EXPENSES> 15,251
<LOSS-PROVISION> 30,600
<INTEREST-EXPENSE> 66,240
<INCOME-PRETAX> 3,174,521
<INCOME-TAX> 1,372,000
<INCOME-CONTINUING> 1,936,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,936,420
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
