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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): September 22, 1997
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Total Control Products, Inc.
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(Exact name of registrant as specified in its charter)
Illinois 333-18539 36-3209178
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File number) Identification No.)
2001 North Janice Avenue
Melrose Park, Illinois 60160
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 345-5500
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Former name or former address, if changed since last report
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Item 5. OTHER EVENTS.
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As of September 22, 1997, Total Control Products, Inc. (the "Registrant")
entered into an agreement in principle (the "Agreement") with Computer
Dynamics, Inc., a South Carolina corporation ("CDI"), pursuant to which the
Registrant agreed to purchase substantially all of the assets of CDI and
certain other related entities, and Kurt Priester ("Priester"), the
President and sole shareholder of CDI, agreed to terminate the right to
receive certain royalty payments from CDI. The consideration to be paid by
the Registrant to CDI and Priester upon entering into the definitive purchase
agreement will consist of a warrant (the "Warrant") to purchase
100,000 shares of common stock, no par value per share, of the Registrant
("Registrant Shares") and approximately $24.5 million, $12.5 million of which
will be paid in cash at closing and the remaining $12.0 million will be paid
in Registrant Shares at closing, where each Registrant Share issued shall be
valued based on an average of the closing price of a Registrant Share
two days prior to the announcement of the signing of the Agreement (which
occurred on September 22, 1997) and two days following the announcement of
the signing of the Agreement (the "Average Price"). The Warrant will be
immediately exercisable for the Average Price and shall remain outstanding
for a period of ten years. A copy of the Agreement is attached hereto as
Exhibit 10.1 and is hereby incorporated by reference.
Additionally, subject to certain adjustments, for five years after the
closing, the Registrant shall pay Priester an annual payment of up to
$3.0 million for each year in which earnings during such year exceed 110% 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 Registrant Shares. Each
Registrant Share shall be valued based on an average of the ask and bid price
at the end of each trading day for the ten day period ending on the last day
of each Earn Out Period.
As of September 22, 1997 the Registrant and Priester entered into an
Escrow Agreement, whereby Registrant placed $250,000 in an escrow account.
Such funds will be paid to Priester in the event the transaction contemplated
by the Agreement does not close on or before November 21, 1997 due to certain
actions of the Registrant.
A copy of the press release of the Registrant, dated September 22, 1997, is
attached as Exhibit 10.2 and is hereby incorporated by reference.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
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(c) Exhibits
10.1 Letter of Intent dated as of September 22, 1997 by and between
Total Control Products, Inc. and Computer Dynamics, Inc.
10.2 Press Release dated September 22, 1997.
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SIGNATURE
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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.
Dated: September 23, 1997 TOTAL CONTROL PRODUCTS, INC.
By: /s/Nic Gihl
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Name: Nic Gihl
Title: President, Chief Executive
Officer and Chairman
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INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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10.1 Letter of Intent dated as of September 22, 1997 by and between Total
Control Products, Inc. and Computer Dynamics, Inc.
10.2 Press Release dated September 22, 1997.
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Exhibit 10.1
September 22, 1997
Computer Dynamics, Inc.
Attn: Kurt Preiester
The following term sheet summarizes the acquisition of certain net assets of
Computer Dynamics, Inc. (CDI) by Total Control Products, Inc. (TCP). This term
sheet is not a binding agreement, but is presented as an outline for the
preparation of a formal purchase agreement.
1. A subsidiary of TCP (Purchaser) shall purchase certain assets that
support Computer Dynamics operating results. Key assumptions:
a. Sustainable yearly earnings before interest and taxes (EBIT) of
$5.3 Million.
b. Compensation for Kurt Priester and rent expenses for the building
are included as an expense item in the EBIT calculation.
c. A minimum of $8 million fair market value of net assets purchased
("Book Value") for the calculation of goodwill.
d. Price does not include real estate assets, which remain with
Seller.
2. Consideration at the date of acquisition.
a. $12.5 million cash;
b. A number of shares of TCP stock that will be valued at
$12 million, using a stock price calculated in accordance with
GAAP (Two days before and after the announcement upon signing of
this term sheet) which is targeted for Monday, September 22, 1997;
c. A warrant for the option to purchase 100,000 shares of TCP stock
for ten years with an exercise at fair market value determined in
the same manner as 2(b) above, with immediate vesting.
2.1 Removed
2.2 Escrow holdback.
Based on the findings of due diligence, TCP requires the placement of
$1.5 million of the up front consideration in the form of TCP stock into
an escrow account for a period of three years to cover any claim at CDI.
2.3 Breakup Fee
TCP agrees to place $250,000 into an escrow account for the purpose of
compensating Kurt Priester if this transaction does not occur within 60
days in the form provided to CDI on the date hereof.
3. Annual Earn Out for Five Years
Based on EBIT growth year over year (EBIT excludes the resultant
goodwill and interest expenses from the transaction), the following
amounts would be paid, which will be payable in 50% cash and 50% stock
of TCP, due 90 days after each earn out period. The number of TCP
shares in any earn out period will be determined using a ten day average
of the bid and ask price at the end of the trading day for the ten day
period prior to the completion of the earn out period.
For EBIT growth year over year of 10% to 25%, the earn out payment for
each year will be $0 to $3 million based on a linear sliding scale for
the excess percentage over 10% divided by 15. FOR EXAMPLE, IN A YEAR
WHERE EBIT PERCENTAGE GROWTH IS 15%, THE EARN OUT FOR THAT PERIOD WOULD
BE $1 MILLION ((15% - 10%)/15 X $3 MILLION) TO BE PAID 50% IN CASH AND
50% IN STOCK.
3.1 If growth exceeds 25% in any year, then the base for the following year
will be set at the 25% growth amount, and the excess will be carried
forward to the following year as an increase in the EBIT amount for that
year in calculating the next year's growth percentage. FOR EXAMPLE,
SUPPOSE YEAR ONE EBIT IS $6,890K, WHICH IS A 30% INCREASE OVER $5.3
MILLION. FOR YEAR TWO, THE BASE EBIT WOULD BE $6,625K, WHICH IS A 25%
INCREASE OVER THE
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PRIOR YEAR, AND THE DIFFERENCE BETWEEN $6,890K OF $265K WOULD BE ADDED
TO THE YEAR TWO EBIT IN CALCULATING THE EBIT GROWTH PERCENTAGE FOR
YEAR TWO.
3.2 If EBIT goes down in any earn out year, then future growth percentages
will be calculated using the maximum EBIT level achieved in any previous
earn out year rather than simply last year's EBIT. FOR EXAMPLE, SUPPOSE
YEAR ONE EBIT IS $6,890K, YEAR TWO IS $6,000K AND YEAR THREE IS $7,500K.
YEAR THREE GROWTH WILL BE CALCULATED AT 8.9% OR (7,500-6,890)/6,890.
ANY EBIT BELOW $5.3 MILLION IN A YEAR WILL BE ADDED TO THE MAXIMUM EBIT
AMOUNT USED TO CALCULATE FUTURE GROWTH. FOR EXAMPLE, SUPPOSE YEAR ONE
EBIT IS $6,890K, YEAR TWO IS $5,000K AND YEAR THREE IS $7,500K. YEAR
THREE GROWTH WILL BE CALCULATED AS 4.3% OR (7,500 - ($6,890 +
300))/(6,890 + 300).
3.3 The impact of operation synergies on the calculation of EBIT for the
earn out is as follows:
3.3.1 Custom computers sold through TCP channel:
Purchaser will sell custom computers through TCP's external channel
(reps and distributors, but not TCP employee sales people) at negotiated
discount/commission. TCP agrees to retain no margin in this business.
3.3.2 Standard, bundled computer products:
If Purchaser can satisfactorily supply to TCP products that replace
existing SKU (stock keeping unit) product configurations, then TCP
agrees to buy these products from Purchaser at a price calculated to be
25% above Purchaser direct costs of sales, which are material costs plus
direct labor only. If Purchaser can supply TCP with new SKU products,
then TCP agrees to buy these products at a price such that TCP and
Purchaser share evenly the contribution margin defined as revenue minus
direct costs which include direct production, sales and marketing and
engineering costs.
3.3.3 Access to purchased materials:
Purchaser and TCP will have access to each other's purchased materials
at cost.
3.3.4 Non-product related cost savings:
All savings due to synergy that are recorded on Purchaser's income
statement are valid contributions to EBIT for the purposes of earn out,
but not savings that are recorded on TCP's income statement.
3.4 Business Policy
There are certain business practices that TCP desires to implement that
will have the effect of adding expense to the Purchaser calculation of
EBIT. The increased expenses are estimated to be in the range of $200k,
subject to implementation. TCP agrees to reduce the initial base EBIT
by the cost of these changes in business practices from the calculation
of EBIT for earn out purposes.
4. Employment.
4.1 If Kurt is terminated for reasons of fraud or criminal misconduct, the
earn out will terminate. If Kurt resigns prior to two years then the
earn out will terminate. "Resignation" is defined as working less than
80 hours in a month. Kurt will have control of his own hours and job
description. Kurt's employment agreement will cover a period of at
least three years. Kurt will sign an asset purchase agreement, a five
year non-compete agreement and an employment agreement that fully
documents these terms.
TCP agrees to pay for health insurance for Kurt and Sue Priester and
their family until Kurt is age 62.5. The quality of the insurance must
be equal to or greater than the coverage currently in force through CDI.
4.2 Kurt will be able to utilize TCP stock options, according to the TCP
1996 Stock Option Plan, for annual compensation of his management team
subject to Total Control board approval. It is assumed that the
management team will be compensated with a base salary in the range of
$80k to $100k, plus an incentive bonus program that tracks future
performance for Purchaser according to the earn out goals. The
incentive bonus will be
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calculated as a percentage of base salary and paid as 50% cash and
50% stock options. The value of stock options will be determined using
the industry standard Black Scholes method, and they will vest over a
period of three years. The number of stock options issued to Purchaser's
employees in this bonus program may not exceed 100,000 in any year,
provided that none of such options will be issued to Priester. In
addition to the annual bonus program, 100,000 options are available for
grant to the management team at an exercise price at the fair market
value on the date of TCP employment.
5. Other Terms
5.1 The copyright royalty streams will be identified in the purchase
agreement as an asset that TCP is purchasing from Kurt.
5.2 If TCP sells the operating assets of Purchaser during the period of the
earn out, then TCP agrees to make a payment of the present value of the
maximum remaining earn out payments in lieu of continuing the earn out.
5.3 The agreement will be subject to discussions with CDI management team,
customer calls, delivery of an audit opinion on the calendar year 1996
CDI results, receipt of a fairness opinion, financing, and bulk sale
notification.
5.4 Formal Announcement
Both parties acknowledge the need to make a public announcement of the
material terms of the agreement upon the signing of this term sheet.
5.5 NASDAQ Limitation
In order to avoid the need for shareholder approval of the agreement,
the agreement will contain a provision stating that the maximum number
of shares to be issued under this agreement is 1.38 million shares. The
agreement will include a provision that TCP will include in the proxy
statement to be issued in connection with the Fiscal Year 1998
shareholders' meeting a request to amend the agreement to allow for the
maximum number of shares to be provided in the document under the earn
out. If shareholder approval is not received to remove the 1.38 million
share limitation, the remaining consideration due under this agreement
will be paid in cash.
5.6 Extension of Non-Disclosure/No Shop Agreement
Be signing this term sheet, both parties agree to extend the
Non-Disclosure/No Shop agreement currently in place to match the period of
the Break up fee escrow agreement covered in 2.3 above.
Agreed and accepted by:
/s/ Nic T. Gihl 9/22/97 /s/ Kurt Priester 9/22/97
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Nicholas Gihl Date Kurt Priester Date
Total Control Products, Inc. Computer Dynamics, Inc.
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Exhibit 10.2
Total Control Products, Inc. Announces Signing of Agreement to Acquire
Computer Dynamics, Inc.
MELROSE PARK, Ill., Sept. 22 /PRNewswire/ -- Total Control Products, Inc.
(Nasdaq:TCPS) today announced it has signed an agreement in principal to
acquire substantially all the assets of Computer Dynamics, Inc. (CDI), a
designer and manufacturer of industrial computers and flat panel monitors
located in Greenville, S.C., and related entities for $12 million of Total
Control stock, $12.5 million in cash, an immediately exercisable warrant for
the purchase of 100,000 shares of Total Control stock at approximately its
current market value and an earn out of up to $3 million per year for
five years based upon year over year growth in earnings before interest and
taxes payable 50% in cash and 50% in Total Control stock. Kurt Priester, the
principal shareholder and current President of CDI, will also enter into a
3- year employment agreement to remain in charge of the CDI operations. Total
Control anticipates closing the transaction in early October 1997. Revenues
of CDI were approximately $15 million in calendar 1996 and $13 million for
the eight-month period ended August 31, 1997.
Nicholas T. Gihl, the Chairman, Chief Executive Officer and President of
Total Control, stated, ``Total Control's acquisition of the assets of
Computer Dynamics represents a strategic investment in the area of industrial
computers and flat panel monitors. Computer Dynamics has been focused on the
OEM segment of the industrial computer market and will continue to have that
area as its focus.
``In addition, Computer Dynamics will be responsible for supplying
industrial computers and flat panel monitors to Total Control's 225
distributor locations out of its facility in South Carolina. This will
supplement and greatly expand Total Control's industrial computer product
line, allowing us to serve our distributors and their customers with a
technologically advanced line of industrial computers and flat panel
monitors.''
Total Control designs, develops and markets products and technology for
the control segment of the industrial automation market. These products range
from closed architecture programmable logic controller operator interfaces to
open architecture control software and systems, and are sold primarily
through an international network of independent distributors with over
225 sales locations.
For further information please call contact.
NOTE: Statements and projections concerning the future financial condition,
results of operations and business of Total Control Products, Inc. and
subsidiaries are ``forward-looking'' statements which are inherently
uncertain. Actual performance and results are subject to many risk factors,
including changing market conditions, the timing of new product introductions
by the Company, its competitors or third parties, the loss of any significant
distributors, currency fluctuations, disruption in the supply of components
for the Company's products, and other factors discussed in the Company's
March 11, 1997 prospectus for its initial public offering.
/Contact: Peter Nicholson, Chief Financial officer at Total Control
Products, Inc., 708-345-5500/
