<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 JUNE 30, 1998
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
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NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON AUGUST 13, 1998:
8,049,780 SHARES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
A S S E T S MARCH 31, JUNE 30,
1998 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,882,735 $ 153,841
Trade receivables, net of allowances of $365,000 and $420,000 at March 31 and June 30,
1998, respectively 11,172,301 12,565,740
Raw materials inventory 5,803,680 9,964,034
Work in process and finished goods inventory 7,716,857 7,437,451
Prepaid and deferred expenses-
Taxes 575,864 581,430
Other 523,264 719,030
------------- -------------
Total current assets 27,674,701 31,421,526
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PROPERTY AND EQUIPMENT, net 3,885,919 4,563,627
OTHER ASSETS:
Goodwill, net 24,134,357 26,279,517
Receivables from officers 2,285,519 2,325,521
Other long-term assets 2,818,843 3,983,541
------------- -------------
Total other assets 29,238,719 32,588,579
------------- -------------
$60,799,339 $68,573,732
------------- -------------
------------- -------------
</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, JUNE 30,
1998 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 48,589 $ 34,628
Accounts payable 3,661,530 4,415,341
Accrued expenses-
Income taxes 2,513,956 1,922,297
Commissions 693,295 590,884
Payroll 1,097,314 1,814,733
Other 2,463,295 2,855,020
Deferred revenue 997,433 894,597
--------------- ---------------
Total current liabilities 11,475,412 12,527,500
--------------- ---------------
LONG-TERM LIABILITIES:
Notes payable to bank 12,988,616 18,611,029
Other 769,119 652,647
--------------- ---------------
Total long-term liabilities 13,757,735 19,263,676
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 1,141,333 1,024,566
SHAREHOLDERS' EQUITY:
Common stock, no par value; 22,500,000 shares authorized; 7,932,185 and 8,049,780
shares issued and outstanding at March 31 and June 30, 1998, respectively 35,053,113 35,167,752
Class C Exchangeable common stock of subsidiary, no par value; unlimited shares
authorized; 737,112 shares issued and outstanding at March 31 and June 30, 1998,
respectively 4,641,110 4,641,110
Accumulated deficit (5,228,678) (4,017,010)
Other (40,686) (33,862)
--------------- ---------------
Total shareholders' equity 34,424,859 35,757,990
--------------- ---------------
$60,799,339 $68,573,732
--------------- ---------------
--------------- ---------------
</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 JUNE 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---------- -------
<S> <C> <C>
NET SALES $12,487,388 $16,926,237
COST OF GOODS SOLD 5,655,409 7,972,872
--------------- ---------------
Gross profit 6,831,979 8,953,365
--------------- ---------------
OPERATING EXPENSES:
Sales and marketing 3,050,495 3,428,564
Research and development 1,257,977 1,573,984
General and administrative 1,101,159 1,300,589
Amortization of goodwill 140,400 556,921
--------------- ---------------
Income from operations 1,281,948 2,093,307
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OTHER INCOME (EXPENSE):
Interest, net (41,830) (224,513)
Earnings in foreign joint venture 8,877 63,086
Other income (expense), net (980) 7,021
--------------- ---------------
Income before income taxes and
minority interest 1,248,015 1,938,901
PROVISION FOR INCOME TAXES 535,000 844,000
--------------- ---------------
Income before minority interest 713,015 1,094,901
MINORITY INTEREST IN LOSS OF SUBSIDIARY 135,523 116,767
--------------- ---------------
Net income $ 848,538 $ 1,211,668
--------------- ---------------
--------------- ---------------
BASIC NET INCOME PER SHARE $ 0.12 $ 0.15
--------------- ---------------
--------------- ---------------
DILUTED NET INCOME PER SHARE $ 0.11 $ 0.14
--------------- ---------------
--------------- ---------------
Weighted average number of common and common
equivalent shares outstanding:
Basic shares 6,916,000 7,989,000
Plus dilutive effect of stock options and
Class C Exchangeable common stock of subsidiary 893,000 891,000
--------------- ---------------
Diluted shares 7,809,000 8,880,000
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 848,538 $ 1,211,668
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Minority interest in loss of subsidiary (135,523) (116,767)
Depreciation and amortization 335,525 894,690
Earnings in foreign joint venture (8,877) (63,086)
Changes in operating assets and liabilities-
Trade receivables 421,110 225,715
Inventory 242,053 (1,764,743)
Prepaid expenses and other assets (348,101) (256,222)
Accounts payable, accrued expenses and other
liabilities 421,956 (1,144,367)
Deferred revenue 62,315 (102,836)
---------- ----------
Net cash provided by (used in) operating
activities 1,838,996 (1,115,948)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net - (5,586,450)
Purchases of property and equipment (371,444) (507,741)
Purchases of other assets - (248,670)
Other (31,900) 6,824
---------- ----------
Net cash used in investing activities (403,344) (6,336,037)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable to bank (265,239) 5,872,413
Payments on long-term debt and notes payable (169,236) (263,961)
Proceeds from sale of common stock - 114,639
Payment of offering costs (300,000) -
---------- ----------
Net cash (used in) provided by financing
activities (734,475) 5,723,091
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 701,177 (1,728,894)
CASH AND CASH EQUIVALENTS, beginning of period 221,967 1,882,735
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 923,144 $ 153,841
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for-
Income taxes $ 14,570 $ 1,414,000
Interest 80,320 265,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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TOTAL CONTROL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,1998
(Unaudited)
NOTE 1
The consolidated financial information herein is unaudited, other than
Consolidated Balance Sheet information as of March 31, 1998, 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
June 30, 1998, the results of operations for the three months ended June 30,
1998 and 1997 and changes in cash flows for the three months ended June 30, 1998
and 1997.
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 1998 annual report on Form 10-K
filed with the Securities and Exchange Commission.
The results for the quarter ended June 30, 1998, are not necessarily indicative
of the results to be expected for the entire year.
NOTE 2
On June 5, 1998, the Company acquired substantially all of the net operating
assets of the Deeco Systems (Deeco) division of Lucas Automation and Control
Engineering, Inc., a designer and manufacturer of flat panel factory automation
products. The consideration paid by the Company in conjunction with the
acquisition consisted of $5.5 million cash funded by the Company's existing line
of credit facility. The Company accounted for this transaction as a purchase and
on a preliminary basis, the excess of purchase price over the fair value of
identified net assets acquired of approximately $2.6 million has been recorded
as goodwill and is being amortized over seventeen years from the date of
acquisition. The final purchase accounting allocations will be determined based
on a final determination of fair value. The final determination of fair value
could differ from the preliminary evaluation used herein.
Additionally, the Company shall pay an earn-out of up to $2 million if certain
financial targets are attained for the twelve month period ending January 31,
1999.
6
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As a result of this transaction, the Company's bank amended the covenants
related to the Company's existing line of credit agreement. The Company was in
compliance with these covenants as of June 30, 1998.
As part of this transaction, the Company created a wholly-owned subsidiary,
Deeco Systems, Inc.
At the date of acquisition, the Company announced its plans to close the Deeco
facility and merge its operations into the operations of CDI, at the Company's
Greenville, South Carolina, facility. All non-sales employees will be relocated
or terminated. The Company expects to exit this activity during fiscal 1999. The
Company expects to incur relocation and severance costs of approximately
$660,000 and facility related costs of approximately $250,000 as the costs to
exit this activity and involuntarily relocate or terminate employees. These
costs were accrued for in other accrued expenses and included as a component of
purchase price and captured as a portion of total goodwill recorded related to
this transaction in accordance with EITF Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination".
NOTE 3
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This statement defines comprehensive income as net income plus
non-owner changes in equity. Comprehensive income for the three months ended
June 30, 1997 and 1998, is as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net income $ 848,538 $1,211,668
Non-owner changes in equity (3,057) 6,824
--------- ----------
Comprehensive income $ 845,481 $1,218,492
--------- ----------
--------- ----------
</TABLE>
NOTE 4
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every
7
<PAGE>
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after March 31, 1998 (and, at the company's election, before April 1,
1998).
The Company has not yet quantified the impacts of adopting Statement 133 on
its financial statements and has not determined the timing of or method of
its adoption of Statement 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
NOTE 5
Subsequent to June 30, 1998, the Company extended its existing line of credit
agreements. As amended, the lines of credit expire July 31, 2000.
8
<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 include closed architecture control and PLC operator interface devices,
industrial computers and flat panel monitors and open architecture control
software and systems, and are sold primarily through an international network of
independent distributors.
The Company's net sales include revenues from sales of products, software
license fees, software maintenance and services. The Company's principal
operator interface product line, QuickPanel, accounted for 63.4% and 42.7% of
net sales for the three months ended June 30, 1997 and 1998, respectively.
A key element of the Company's strategy has been to expand the breadth of its
factory floor automation products offered through its distributor network in
order to provide innovative solutions for automation to end users. In September
1996, the Company acquired a controlling interest in Taylor Industrial Software,
Inc. (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. In October 1997, the Company
acquired substantially all of the net assets of Computer Dynamics, Inc. (CDI), a
South Carolina-based manufacturer of industrial computers. On December 31, 1997,
the Company acquired substantially all of the net assets of SensorPulse Corp.
(SensorPulse), a Massachusetts-based designer and developer of industrial signal
conditioning products and networked input/output (I/O) devices. During the three
months ended June 30, 1998, the Company acquired the net assets of the Deeco
Systems (Deeco) division of Lucas Automation and Control Engineering, Inc., a
designer and manufacturer of flat panel factory automation products. These
acquisitions 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 these new
technologies into the Company's traditional products.
All of these acquisitions (including the Company's acquisition of Cincinnati
Dynacomp, Inc. (Cincinnati) in January 1996) were accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16. In connection
with the Company's acquisitions, the Company recorded approximately $28.5
million of goodwill (which will be increased in the event any future
contingent consideration is paid), which is being amortized on a
straight-line basis over 7 to 17 years.
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
9
<PAGE>
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. 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, the Year 2000 issues discussed
below, 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,
1998, or otherwise described herein or detailed from time to time in the
Company's Securities and Exchange Commission filings.
The Year 2000 or "Y2K" problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations.
As a part of the initial phase of the Company's Year 2000 compliance program,
the Company conducted a comprehensive internal review of its computer systems
and products to identify the systems that could be affected by the Year 2000
problem, including both "information technology" systems (such as software that
processes financial and other information) and non-information technology (such
as micro-processors embedded in the Company's products). The Company is in the
process of completing the final phase of its Year 2000 compliance program, which
involves (1) the implementation of its existing remediation plan to resolve the
Company's internal Year 2000 issues, (2) the identification of any potential
Year 2000 issues with the Company's material vendors and suppliers, and (3) the
testing of potentially effected Company product for Year 2000 compliance and
communication of results to customers.
The Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
operational problems for the Company's internal computer systems as so modified
and converted. However, if such modifications and conversions are not completed
on a timely basis, the Year 2000 problem may have a material adverse impact on
the operations of the Company. In addition, in the event that any of the
Company's significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could
10
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be adversely affected. The Company has yet to make a final determination of
the aggregate amount of costs that will be incurred in connection with making
its systems Year 2000 compliant; however, the Company's management believes
the total cost will not exceed $200,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
NET SALES. Net sales increased 36% to $16.9 million for the three month period
ended June 30, 1998 compared to $12.5 million for the three month period ended
June 30, 1997. This increase resulted primarily from the incremental results
associated with the CDI, SensorPulse and Deeco acquisitions, for the three
months ended June 30, 1998 of approximately $5.4 million, which were offset by a
reduction in sales in the Company's operator interface products.
GROSS PROFIT. Cost of goods sold consists primarily of expenses for components
and subassemblies, subcontracted labor, direct labor and manufacturing overhead.
Gross profit increased 31% to $9.0 million for the three months ended June 30,
1998 from $6.8 million for the three months ended June 30, 1997. Gross margin
decreased to 52.9% for the three months ended June 30, 1998 from 54.7% for the
three months ended June 30, 1997. The decrease in gross margin related to a
shift in sales mix from higher margin graphics-based operator interface products
and software to lower margin industrial computers and signal conditioning
devices resulting in a decrease of gross margin of 2.4%. The shift in sales mix
resulted primarily from the Company's acquisitions during the preceding year.
The impact of the shift in sales mix was partially offset by a reduction in the
material cost of the QuickPanel, due to favorable Yen fluctuations.
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 12% to $3.4 million for the three months
ended June 30, 1998 from $3.1 million for the three months ended June 30, 1997.
Approximately $500,000 of the increase resulted from costs associated with the
operations of the companies acquired during the preceding year. This increase
was partially offset by a reduction in commissions earned by third party sales
representatives and variable direct sales force compensation.
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 25% to $1.6 million
for the three months ended June 30, 1998 from $1.3 million for the three months
ended June 30, 1997. The increase resulted primarily from approximately $416,000
of product development costs related to the companies acquired during the
preceding year, offset by a reduction in third party development costs and
payroll costs of approximately $100,000.
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
11
<PAGE>
expenses increased 18% to $1.3 million for the three months ended June 30,
1998 from $1.1 million for the three months ended June 30, 1997. The increase
resulted primarily from approximately $444,000 in general and administrative
expenses related to the companies acquired during the preceding year. This
increase was offset by a reduction in payroll and related benefits.
AMORTIZATION OF GOODWILL. Amortization of goodwill relates to the Cincinnati,
Taylor, CDI, SensorPulse and Deeco acquisitions, which are being amortized over
seven to seventeen years from the date of acquisition. Amortization expense
increased to $557,000 for the three months ended June 30, 1998 from $140,000 for
the three months ended June 30, 1997 due to an increase in total Taylor goodwill
related to the $1.1 million earnout payment to the former Taylor shareholders in
fiscal 1998 and the approximately $2.5 million increase related to the sale of
the Company's labor scheduling product line in September 1997. The remaining
increase related to the inclusion of CDI, SensorPulse and Deeco for the three
months ended June 30, 1998.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net increased to
$154,000 for the three months ended June 30, 1998 from $34,000 for the three
months ended June 30, 1997. The increase primarily related to an increase in
average debt outstanding as debt was incurred during the preceding year related
to the CDI, SensorPulse and Deeco acquisitions.
PROVISION FOR INCOME TAXES. Provision for income taxes increased to $844,000 for
the three months ended June 30, 1998 from $535,000 for the three months ended
June 30, 1997. The effective tax rate for the three-month period ended June 30,
1998 was 43.5% as compared to the effective tax rate of 42.9% for the three
months ended June 30, 1997. This increase was primarily due to an increase in
non-deductible goodwill amortization related to increases in capitalized
goodwill due to a $1.1 million earnout payment to the former Taylor shareholders
in fiscal 1998 and a $2.5 million increase in goodwill related to the sale of
the Company's labor scheduling product line in September 1997.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. A minority interest representing
Digital Electronic's 38.5% share (39% for the three month period ended June 30,
1997) 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 an additional 2.0% 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 benefit of $136,000 and $117,000 for the three
months ended June 30, 1997 and 1998, respectively, represents the minority
interest share of the loss recorded by Taylor during the 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.
The Company has bank lines of credit aggregating $19.0 million. Prior to
the acquisition of CDI on October 5, 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 $8.0 million, of its
respective operations. Based on this formula, the Company would have had
approximately $8.4 million and $3.2 million of
12
<PAGE>
available borrowings under its line of credit at March 31 and June 30, 1998,
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 under the lines of
credit varies based on certain financial ratios from LIBOR plus 1.5% to LIBOR
plus 2%, or in the case of a $1.0 million line of credit related to Taylor,
the bank's prime lending rate. Subsequent to June 30, 1998, the Company
extended its line of credit agreements. As amended, the lines of credit
expire July 31, 2000.
In connection with the acquisition of CDI, the Company also entered into a
$4.0 million term note with its bank. Interest is calculated at the bank's prime
rate and is payable monthly. Principal of $250,000 is paid quarterly, 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.
Cash provided by (used in) operating activities was $1,839,000 and
$(1,116,000) for the three months ended June 30, 1997 and 1998, respectively.
In 1997 the Company's cash flow from operations related primarily to
increased income for the period and growth in payables and accruals combined
with reductions in accounts receivable and inventory balances during the
period. In 1998, the Company experienced increased income offset by increases
in inventory and prepaid and other expenses and reductions in accounts
payable, accrued expenses and deferred revenue.
Net cash used in investing activities totaled $403,000 and $6,336,000 for
the three months ended June 30, 1997 and 1998, respectively. In 1997, the
activities consisted primarily of purchases of property and equipment. In 1998,
the activities consisted primarily of the purchase of the net assets of Deeco,
amounts paid to third parties for new product development and purchases of
property and equipment.
Net cash (used in) provided by financing activities totaled $(734,000)
and $5,723,000 for the three months ended June 30, 1997 and 1998,
respectively. In 1997, the activities consisted of the payment of costs
related to the Company's initial public offering in March of 1997 and the
repayment of amounts owed under long-term debt obligations and the Company's
lines of credit. In 1998, the activities consisted of borrowings to finance
the Company's acquisition of Deeco and the sale of common stock through the
Company's stock option and employee stock purchase plans, offset by payments
made on debt primarily related to the acquisition of CDI.
See the Company's Annual Report on Form 10-K for a discussion of payments
of contingent consideration under the terms of the Cincinnati, Taylor, CDI,
SensorPulse and Deeco Transactions which the Company may become obligated to
pay.
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 1999. In the event the Company acquires one or more businesses or
products, the 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.
13
<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 has been dissolved, 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 the Company 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 defendant's 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 filed a
response on January 19, 1998. 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
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit 11.1 - Statement regarding computation of per share
earnings
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b). Reports on Form 8-K for the quarter ended June 30, 1998.
(1) The Company filed a report on Form 8-K for an event dated
June 8, 1998, pursuant to Item 2, reporting the
acquisition of substantially all of the assets of the
Deeco Systems division of Lucas Automation and Control
Engineering, Inc.
15
<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: August 13, 1998
16
<PAGE>
Exhibit 11.1
Total Control Products, Inc. and Subsidiaries
Computation of Earnings Per Share
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
COMPUTATION OF NET INCOME PER SHARE: 1997 1998
---- ----
<S> <C> <C>
Net income .................................................... $ 848,538 $1,211,668
---------- ----------
---------- ----------
Weighted average shares outstanding - Basic Shares ............ 6,916,465 7,988,789
Dilutive effect of stock options .............................. 155,490 153,721
Conversion of Class C Exchangeable common stock of subsidiary . 737,112 737,112
---------- ----------
Diluted Shares Outstanding .................................... 7,809,067 8,879,622
---------- ----------
---------- ----------
Basic earnings per share ...................................... $ 0.12 $ 0.15
Diluted earnings per share .................................... $ 0.11 $ 0.14
---------- ----------
---------- ----------
</TABLE>
<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 JUNE 30, 1998 AND FOR EACH OF THE THREE MONTHS ENDED JUNE 30, 1997
AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 153,841
<SECURITIES> 0
<RECEIVABLES> 12,985,740
<ALLOWANCES> (420,000)
<INVENTORY> 17,401,485
<CURRENT-ASSETS> 31,421,526
<PP&E> 6,487,627
<DEPRECIATION> (1,924,000)
<TOTAL-ASSETS> 68,573,732
<CURRENT-LIABILITIES> 12,527,500
<BONDS> 0
0
0
<COMMON> 35,167,752
<OTHER-SE> 590,238
<TOTAL-LIABILITY-AND-EQUITY> 68,573,732
<SALES> 16,926,237
<TOTAL-REVENUES> 16,926,237
<CGS> 7,972,872
<TOTAL-COSTS> 7,972,872
<OTHER-EXPENSES> 6,860,058
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 224,513
<INCOME-PRETAX> 1,938,901
<INCOME-TAX> 844,000
<INCOME-CONTINUING> 1,211,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,211,668
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
