NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
Note
1. Overview and Basis of Presentation
Overview
Stamford
Industrial Group, Inc.
(“Stamford
Industrial Group” or the
“Company”
which
may be referred to as “we”, “us” or “our”
)
was
initially established in 1996 under the name “Net Perceptions, Inc.”, as a
provider of marketing software solutions. In 2003, as a result of continuing
losses and the decline of its software business, the Company began exploring
various strategic alternatives, including sale or liquidation, and ceased the
marketing and development of its marketing solutions software business in 2004.
On April 21, 2004, the Company announced an investment into the Company by
Olden
Acquisition LLC (“Olden”), an affiliate of Kanders & Company, Inc., an
entity owned and controlled by the Company’s Non-Executive Chairman, Warren B.
Kanders, for the purpose of initiating a strategy to redeploy the Company’s
assets and use its cash, cash equivalent assets and marketable securities to
enhance stockholder value. As part of this strategy, on October 3, 2006, the
Company, acquired the assets of CRC Acquisition Co. LLC (“CRC”), a manufacturer
of steel counterweights doing business as Concord Steel (“Concord”). With this
initial acquisition, management is now focused on building a diversified global
industrial manufacturing group through both organic and acquisition growth
initiatives that are expected to complement and diversify existing business
lines. The Company's acquisition program is focused on building a diversified
industrial growth company providing engineered products and solutions for global
niche markets. The Company seeks acquisitions with transactions valued up to
$150 million and having an EBITDA range of $5-$25 million. Because the Company
had no operations at the time of the Concord acquisition, the Concord business
is considered to be a predecessor company (“Predecessor”) for accounting
purposes. Accordingly, relevant financial information regarding the Predecessor
has been presented (see Note 13 for a more detailed explanation of the
acquisition).
Concord
is a leading independent manufacturer of steel counterweights and structural
weldments. Concord sells its products primarily in the United States to original
equipment manufacturers (“OEM”) of certain construction and industrial related
equipment that employ counterweights which are used to provide stability through
counterweight leverage in the operation of equipment used to hoist heavy loads,
such as elevators and cranes. The counterweight market Concord targets is
primarily comprised of OEMs within the (i) commercial and industrial
construction equipment industry that manufactures aerial work platforms,
telehandlers, scissor lifts, cranes, and a variety of other construction related
equipment and vehicles; and (ii) the elevator industry, that incorporates
counterweights as part of the overall elevator operating mechanism to balance
the weight of the elevator cab and load.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of Stamford Industrial
Group as of and for the three months and nine months ended September 30, 2007
and 2006, have been prepared in accordance with generally accepted accounting
principles in the United States of America and instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information in notes required by generally accepted accounting principles in
the
United States of America for complete financial statements. In the opinion
of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the unaudited consolidated financial statements
have
been included. The results of the three and nine months ended September 30,
2007
are not necessarily indicative of the results to be obtained for the year ending
December 31, 2007. These interim financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2006, filed with the Securities and Exchange
Commission on April 2, 2007.
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All inter-company accounts and transactions have
been
eliminated. Certain prior period balances have been reclassified to conform
to
current period presentation.
Critical
Accounting Policies
The
Company’s discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, investments, intangible assets,
restructuring liabilities, contingencies and litigation. The Company bases
its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions.
The
Company believes the following critical accounting policies affect significant
judgments and estimates used in the preparation of its consolidated financial
statements. Events occurring subsequent to the preparation of the consolidated
financial statements may cause the Company to re-evaluate these
policies.
Use
of estimates.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts therein.
Management’s estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Estimates
inherent in the preparation of the accompanying Consolidated Financial
Statements include the carrying value of long-lived assets, valuation allowances
for receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements, and potential liabilities related
to tax filings in the ordinary course of business.
Management’s
estimates and assumptions are evaluated on an on-going basis. Due to the
inherent uncertainty involved in making estimates, actual results may differ
from those estimates.
Revenue
Recognition.
The
Company’s revenue recognition policy requires the recognition of sales when
there is evidence of a sales agreement, the delivery of goods has occurred,
the
sales price is fixed or determinable and the collectibility of revenue is
reasonably assured. The Company generally records sales upon shipment of product
to customers and transfer of title under standard commercial terms.
When
the Company estimates that a contract with one of its customers will result
in a
loss, it will accrue the entire loss as soon as it is probable and estimable.
Allowance
for doubtful accounts.
The
Company
maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances will be required.
Litigation.
The
Company has not recorded an estimated liability related to the pending class
action lawsuit in which it was named. For a discussion of this matter, see
Note
11. Due to the uncertainties related to both the likelihood and the amount
of
any potential loss, no estimate was made of the liability that could result
from
an unfavorable outcome. As additional information becomes available, the Company
will assess the potential liability and make or revise its estimate(s)
accordingly, which could materially impact its results of operations and
financial position.
Income
taxes.
Deferred
income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their income tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The recognition of a valuation allowance for
deferred taxes requires management to make estimates about the Company’s future
profitability. The estimates associated with the valuation of deferred taxes
are
considered critical due to the amount of deferred taxes recorded on the
consolidated balance sheet and the judgment required in determining the
Company’s future profitability. Deferred tax assets were $8.1 million at
September 30, 2007 and December 31, 2006, respectively.
Derivatives
and hedging activities.
The
Company recognizes all derivatives on the balance sheet as either an asset
or
liability measured at fair value. Changes in the derivative’s fair value are
recognized currently in income 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 statement of income
and requires the Company to formally document, designate and assess
effectiveness of transactions that receive hedge accounting. Derivatives that
are not hedges are adjusted to fair value through income. If the derivative
qualifies as a hedge, depending on the nature of the hedge, changes in the
fair
value of derivatives are either offset against the change in fair value of
hedged assets, liabilities, or firm commitments through earnings, or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings.
During
the three and nine months ended September 30, 2007, there have been no
significant changes to the Company’s critical accounting policies and estimates
as disclosed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006, other than derivatives and hedging activities.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair Value Measurements, (“FAS 157”) and No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, (“FAS 159”). These Standards define
fair value, establishes a framework for measuring fair value under generally
accepted accounting principles and expands disclosures about fair value
measurement. FAS 157 and FAS 159 are effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of FAS 157 and FAS 159 are not expected to
have
a material impact on the Company’s financial position, results of operations and
cash flows.
Note
2. Inventories
Inventories,
net of inventory reserves at September 30, 2007 and December 31, 2006 are as
follows:
|
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
81
|
|
$
|
89
|
|
|
Work-in-process
|
|
|
958
|
|
|
613
|
|
|
Raw
materials
|
|
|
14,828
|
|
|
13,392
|
|
|
|
|
$
|
15,867
|
|
$
|
14,094
|
|
Note
3
.
Property, Plant and Equipment
Property,
plant and equipment, net as of September 30, 2007 and December 31, 2006 are
as
follows:
|
|
|
|
|
|
|
|
Land
|
|
$
|
350
|
|
$
|
350
|
|
|
Building
and improvements
|
|
|
1,245
|
|
|
883
|
|
|
Machinery
and equipment
|
|
|
4,208
|
|
|
1,514
|
|
|
Office
equipment
|
|
|
405
|
|
|
196
|
|
|
Transportation
equipment
|
|
|
547
|
|
|
364
|
|
|
Construction
in progress
|
|
|
1,908
|
|
|
537
|
|
|
|
|
|
8,663
|
|
|
3,844
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(361
|
)
|
|
(71
|
)
|
|
Property,
plant and equipment, net
|
|
$
|
8,302
|
|
$
|
3,773
|
|
Note
4. Intangible assets
Intangible
assets are amortized over their expected useful lives which are between 3 and
12
years using the straight-line method.
Intangible
assets, net of amortization at September 30, 2007 and December 31, 2006 are
as
follows:
|
|
|
September
30, 2007
|
|
|
|
|
Gross
|
|
Other
Adjustments
(1)
|
|
Accumulated
Amortization
|
|
Net
|
|
Life
|
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
12,399
|
|
$
|
(27
|
)
|
$
|
(1,035
|
)
|
$
|
11,337
|
|
|
12
yrs
|
|
|
Non-compete
agreements
|
|
|
37
|
|
|
—
|
|
|
(12
|
)
|
|
25
|
|
|
3
yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name
|
|
|
9,397
|
|
|
(188
|
)
|
|
—
|
|
|
9,209
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
$
|
21,833
|
|
$
|
(215
|
)
|
$
|
(1,047
|
)
|
$
|
20,571
|
|
|
|
|
(1)
The
acquisition of Concord resulted in certain tax deductible intangibles, a portion
or all of which are not being amortized for book purposes. The intangible assets
were reduced by $0.2 million as the result of the tax benefit generated for
tax
purposes during the nine months ended September 30, 2007.
|
|
|
December
31, 2006
|
|
|
|
|
|
|
Gross
|
|
Other
Adjustments
|
|
Accumulated
Amortization
|
|
Net
|
|
Life
|
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
12,399
|
|
$
|
—
|
|
$
|
(258
|
)
|
$
|
12,141
|
|
|
12
yrs
|
|
|
Non-compete
agreements
|
|
|
37
|
|
|
—
|
|
|
(3
|
)
|
|
34
|
|
|
3
yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name
|
|
|
9,397
|
|
|
—
|
|
|
—
|
|
|
9,397
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
$
|
21,833
|
|
$
|
—
|
|
$
|
(261
|
)
|
$
|
21,572
|
|
|
|
|
Note
5. Accrued expenses and other liabilities
Accrued
expenses and other liabilities of the Company as of September 30, 2007 and
December 31, 2006
are
as follows
:
|
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation, benefits and
commissions
|
|
$
|
836
|
|
$
|
706
|
|
|
Accrued
interest payable
|
|
|
880
|
|
|
840
|
|
|
Accrued
professional services
|
|
|
342
|
|
|
25
|
|
|
Accrued
insurance
|
|
|
61
|
|
|
216
|
|
|
Accrued
property taxes
|
|
|
63
|
|
|
41
|
|
|
Accrued
other liabilities
|
|
|
1,028
|
|
|
1,377
|
|
|
|
|
$
|
3,210
|
|
$
|
3,205
|
|
Note
6. Long-term Debt and Notes Payable
In
connection with the Company’s acquisition of Concord, Concord
entered
into a senior secured credit facility (the “Credit Agreement”) with LaSalle Bank
National Association, as administrative agent (the “Agent”) and the lenders
party thereto.
The
Credit Agreement established a commitment to Concord to provide up to $40.0
million in the aggregate of loans and other financial accommodations consisting
of (i) a five-year senior secured term loan in an aggregate principal amount
of
$28.0 million (ii) a five-year senior secured revolving credit facility in
the
aggregate principal amount of $10.0 million (the “Revolving Facility”) and (iii)
a five-year senior secured capital expenditure facility in the aggregate
principal amount of $2.0 million. The Revolving Facility is further subject
to a
borrowing base consisting of up to 85% of eligible accounts receivable and
up to
55% of eligible inventory. The Revolving Facility includes a sublimit of up
to
an aggregate amount of $5.0 million in letters of credit and a sublimit of
up to
an aggregate amount of $2.5 million in swing line loans. The capital expenditure
facility permits the Company to draw funds for the purchase of machinery and
equipment during the 6-month period ending March 3, 2007, and then converts
into
a 4.5-year term loan. Immediately following the closing of the Concord
acquisition, the Company drew down approximately $31.3 million and had
additional availability under the Revolving Facility of approximately $6.7
million.
There
were no amounts drawn under the capital expenditure facility at the time of
closing of the credit facility nor were there any amounts drawn down prior
to
March 3, 2007.
The
capital expenditure facility expired on March 3, 2007.
At
September 30, 2007 and December 31, 2006, the outstanding balance from the
revolving credit facility amounted to $6.8 million and $3.3 million,
respectively. At September 30, 2007, the Company had $1.6 million available
in
additional borrowings net of $1.6 million in outstanding letters of credit.
The
balance under the term loan at September 30, 2007 and December 31, 2006 was
$25.0 million and $28.0 million, respectively. At September 30, 2007, the
Company had $4.0 million classified as current and $21.0 million classified
as
long-term
.
During the period ended September 30, 2007, the Company was in compliance with
all covenants under the credit facility.
Borrowings
under the Credit Agreement will bear interest, at the Company’s election, at
either (i) a rate equal to
London
Interbank Offer Rate (“LIBOR”)
,
plus an applicable margin ranging from 1.25% to 2.5%, depending on certain
conditions, or (ii) an alternate base rate which will be the greater of (a)
the
Federal Funds rate plus 0.5% or (b) the prime rate publicly announced by the
Agent as its prime rate, plus, in both cases, an applicable margin ranging
from
0% to 1.0%, depending on certain conditions. At September 30, 2007 and December
31, 2006, respectively, the applicable interest rate for the outstanding
borrowings under the Credit Agreement was 7.23% and 7.87%,
respectively.
The
Credit Agreement is guaranteed by the Company and its direct and indirect
subsidiaries and is secured by, among other things, (a) (i) all of the equity
interests of Concord’s subsidiaries and (ii) a pledge of all of the issued and
outstanding shares of stock of Concord held by Stamford Industrial Group and
(b)
a first priority perfected security interest on substantially all the assets
of
the Company and its direct and indirect subsidiaries pursuant to a guaranty
and
collateral agreement dated October 3, 2006 and delivered in connection with
the
Credit Agreement (the “Guaranty Agreement”). In addition, the Agent, for the
benefit of the lenders, has a mortgage on all owned real estate of the Company
and its direct and indirect subsidiaries, as well as deposit account control
agreements with respect to funds on deposit in bank accounts of the Company
and
its direct and indirect subsidiaries.
The
Company is exposed to interest rate volatility with regard to existing issuances
of variable rate debt. Primary exposure includes movements in the U.S. prime
rate and LIBOR. The Company uses interest rate swaps to reduce interest rate
volatility. On January 2, 2007, the Company entered into an interest rate
protection agreement that has approximately $14 million of interest rate swaps
fixing interest rates between 5.0% and 5.8%.
On
April 21, 2004, the Company closed on an investment into the Company by
Olden
for
the purpose of initiating a strategy to redeploy the Company’s assets and use
the Company’s cash, cash equivalent assets and marketable securities to enhance
stockholder value. The Company issued and sold to Olden a 2% ten-year
Convertible Subordinated Note, which is convertible after one year
(or
earlier upon a call by the Company and in certain other circumstances)
at
a conversion price of $0.45 per share of Company common stock into approximately
19.9% of the outstanding common equity of the Company as of the closing date.
Proceeds to the Company from this transaction totaled approximately $2.5 million
before transaction costs of $0.3 million. The transaction costs are being
amortized over ten years, the term of the debt. Interest on the note accrues
semi-annually on the last day of June and December in each year and is payable,
together with the principal sum of the note, on the maturity date of the note.
The note matures on April 21, 2014 unless accelerated earlier as provided by
the
note. The convertible subordinated note was deemed to include a beneficial
conversion feature. At the date of issue, the Company allocated $0.1 million
to
the beneficial conversion feature and amortized the beneficial conversion
feature over one year (the period after which the note is convertible). As
of
December 31, 2005, zero remained to be amortized of the note discount due to
the
beneficial conversion feature. Also in connection with this transaction, the
Company entered into a Registration Rights Agreement, which requires the
Company, upon request of the purchaser of the note or its assignee, to register
under the Securities Act of 1933, as amended, the resale of the shares of common
stock into which the note is convertible. In connection with this transaction,
the Board of Directors adopted an amendment to the Company’s Rights Agreement
such that the transaction would not trigger the rights thereunder. As of
September 30, 2007 and December 31, 2006, respectively, the outstanding balance
on the note payable amounted to $2.5 million and is classified as long-term
debt. The Company believes it has the financial ability to make all payments
on
this note.
Note
7. Per Share Data
Basic
earnings per share is computed using net income and the weighted average number
of common shares outstanding. Diluted earnings per share reflects the weighted
average number of common shares outstanding plus any potentially dilutive shares
outstanding during the period. Potentially dilutive
shares
consist of shares issuable upon the exercise of stock options, convertible
notes
and restricted stock awards. Shares used in the diluted net income per share
for
the three and nine months ended September 30, 2007, exclude the impact of 250
potential common shares issuable upon the exercise of stock options,
which
were anti-dilutive
.
Shares
used in the diluted net income (loss) per share for the three and nine months
ended September 30, 2006, exclude the impact of 57 and 28, respectively, of
potential common shares issuable upon the exercise of stock options, 5,628
potential common shares from the conversion of the convertible note and 151
and
141, respectively, of common shares from restricted stock awards,
which
were anti-dilutive
.
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Basic
income (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
611
|
|
$
|
(7,621
|
)
|
$
|
2,673
|
|
$
|
(7,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic
|
|
|
41,717
|
|
|
29,908
|
|
|
41,690
|
|
|
29,320
|
|
|
Basic
net income (loss) per share
|
|
$
|
0.01
|
|
$
|
(0.25
|
)
|
$
|
0.06
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
611
|
|
$
|
(7,621
|
)
|
$
|
2,673
|
|
$
|
(7,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic
|
|
|
41,717
|
|
|
29,908
|
|
|
41,690
|
|
|
29,320
|
|
|
Effect
of dilutive stock options
|
|
|
1,277
|
|
|
—
|
|
|
1,039
|
|
|
—
|
|
|
Effect
of restricted stock awards
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
Effect
of convertible note
|
|
|
5,628
|
|
|
—
|
|
|
5,628
|
|
|
—
|
|
|
Effect
of stock fee
|
|
|
204
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
Weighted
average common shares - diluted
|
|
|
48,826
|
|
|
29,908
|
|
|
48,578
|
|
|
29,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$
|
0.01
|
|
$
|
(0.25
|
)
|
$
|
0.06
|
|
$
|
(0.26
|
)
|
Note
8. Income Taxes
For
federal income tax purposes, the Company has available net operating loss
carry-forwards of approximately $122.1 million and research and development
credit carry-forwards of $0.2 million at September 30, 2007. The net operating
loss and research and development credit carry-forwards expire in 2011 through
2026, if not previously utilized. The utilization of these carry-forwards may
be
subject to limitations based on past and future changes in ownership of the
Company pursuant to Internal Revenue Code Section 382. The recognition of a
valuation allowance for deferred taxes requires management to make estimates
about the Company’s future profitability. Deferred tax assets are reduced by
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The estimates associated with the valuation of deferred taxes are considered
critical due to the amount of deferred taxes recorded on the consolidated
balance sheet and the judgment required in determining the Company’s future
profitability. In 2006, the Company reduced $8.1 million of valuation allowance
as a reduction of goodwill and intangible assets acquired from the Concord
acquisition, based on the expectation that these deferred tax assets are more
likely than not to be realized. Deferred tax assets were $8.1 million at
September 30, 2007 and December 31, 2006, respectively, net of a valuation
allowance of $34.6 million and $34.9 million, respectively.
Because
the majority of the Company’s deferred tax asset consists of net operating loss
carryforwards for federal tax purposes, the key to the Company’s ability to
realize the deferred tax asset will be to generate sufficient income in future
years to utilize the loss carryforwards prior to expiration.
The
Company has an effective tax rate of 35% and 19% for the three and nine months
ended September 30, 2007, respectively, which consists of a federal alternative
minimum tax and state tax. There is no current or deferred federal income tax
provision due to the availability of net operating loss carry-forwards and
the
maintenance of a deferred tax valuation allowance at consistent levels. The
change in the Company’s effective tax rate is due to Concord’s taxable income
within its respectable states.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” on January 1, 2007. Upon the adoption of FIN 48,
the Company commenced a review of all open tax years in all jurisdictions.
The
Company does not believe it has included any “uncertain tax positions” in its
federal income tax return or any of the state income tax returns it is currently
filing, and has no significant unrecognized tax benefits recorded. The Company
has made an evaluation of the potential impact of additional state taxes being
assessed by jurisdictions in which the Company does not currently consider
itself liable. The Company does not anticipate that such additional taxes,
if
any, would result in a material change to its financial position.
Note
9. Employee Benefit Plan
The
Company sponsors a 401(k) Plan (the "Plan"), covering substantially all
employees of the Company. Under this Plan, eligible employees who elect to
participate in the Plan may contribute between 2% and 20% of eligible
compensation (as defined herein) to the Plan. For the three and nine months
ended September 30, 2007, the Company made matching contributions of
approximately $52 thousand and $106 thousand, respectively.
For
the
three and nine months ended September 30, 2006, the Company made matching
contributions of approximately $20 thousand and $69 thousand,
respectively.
Note
10. Stockholders’ equity
In
2006,
the Company adopted SFAS No. 123R,
Share-Based Payment
(“SFAS
123R”),
which requires all companies to measure compensation costs
for all share-based payments (including employee stock options) at fair value
and recognize such costs in the statement of operations. The Company estimates
the fair value of share-based payments using the Black-Scholes model for stock
options and the market price of the Company’s common stock for restricted stock
awards. Total share based compensation expense for the three and nine months
ended September 30, 2007, was $0.6 million and $2.0 million, respectively,
including restricted stock award based compensation expense for the three and
nine months ended September 30, 2007, of $0.1 million and $0.3 million,
respectively. Total share based compensation expense for both the three and
nine
months ended September 30, 2006 was $7.6 million, including restricted stock
award based compensation expense for the three and nine months ended September
30, 2006, of $21 thousand and $62 thousand, respectively.
On
June
21, 2007 the Company’s, stockholders approved the Company’s 2007 Stock Incentive
Plan (the “2007 Stock Incentive Plan”). Under the 2007 Stock Incentive Plan,
10,000,000 shares of the Company’s common stock will be initially reserved for
issuance and available for awards, subject to an automatic annual increase
equal
to 4% of the total number of shares of the Company’s common stock outstanding at
the beginning of each fiscal year (the “Annual Share Increase”). Awards under
the 2007 Stock Incentive Plan may include non-qualified stock options, incentive
stock options, stock appreciation rights, restricted shares of common stock,
restricted units and performance awards. Awards under the 2007 Stock Incentive
Plan may be granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any subsidiary of the Company. In
any
calendar year, no participant may receive awards under the 2007 Stock Incentive
Plan for more than 2,500,000 shares of the Company’s common stock. Additionally,
no more than 2,500,000 of the total shares of common stock available for
issuance under the 2007 Stock Incentive Plan may be granted in the form of
restricted shares, restricted units or performance awards, subject to an
automatic annual increase, beginning with January in year 2008 and continuing
through January in year 2017, equal to 75% of the total number of shares of
the
Company’s common stock increased pursuant to the Annual Share Increase. The 2007
Stock Incentive Plan will have a term of ten years expiring on June 21, 2017.
As
of September 30, 2007 no awards have been issued under this plan.
On
June
21, 2007, the Company’s stockholders approved the Company’s 2007 Annual
Incentive Plan (the “2007 Annual Incentive Plan”). The 2007 Annual Incentive
Plan will enable the Company to award certain executive officers of the Company
or any subsidiary of the Company, with “performance-based compensation” under
Section 162(m) of the Internal Revenue Code of 1986, as amended, which will
enable the Company to deduct such compensation from its taxable income. As
of
September 30, 2007, no awards have been issued under this plan.
In
April
2000, the Company’s Board of Directors adopted the 2000 Stock Plan (the “2000
Plan”), which provides for the issuance of non-qualified stock options to
employees who are not officers. The options allow the holder to purchase shares
of the Company’s common stock at fair market value on the date of the grant.
Stock options granted under the 2000 Plan typically vest over three years and
generally expire ten years from the date of grant. As a result of shareholder
approval of the 2007 Stock Incentive Plan, the Company's 2000 Plan has been
frozen and will remain in effect only to the extent of awards outstanding under
the plan as of June 21, 2007.
In
February 1999, the Company’s Board of Directors adopted the 1999 Equity
Incentive Plan (the “1999 Plan”), which provides for the issuance of both
incentive and non-qualified stock options. The options allow the holder to
purchase shares of the Company’s common stock at fair market value on the date
of the grant. For options granted to holders of more than 10% of the outstanding
common stock, the option price at the date of the grant must be at least equal
to 110% of the fair market value of the stock. Stock options granted under
the
1999 Plan typically vest when performance conditions are met or over three
years
and generally expire ten years from the date of grant. As a result of
shareholder approval of the 2007 Stock Incentive Plan, the Company's 1999 Plan
has been frozen and will remain in effect only to the extent of awards
outstanding under the plan as of June 21, 2007.
A
summary
of option activity under the Plans as of September 30, 2007, and changes during
the period then ended is presented below:
|
Options
|
|
Shares
(000)
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual Term (years)
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
1,591
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(84
|
)
|
$
|
0.57
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(129
|
)
|
$
|
1.49
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,441
|
|
$
|
0.81
|
|
|
5.2
|
|
$
|
1,760
|
|
|
Vested
or expected to vest at September 30, 2007
|
|
|
1,441
|
|
$
|
0.81
|
|
|
5.2
|
|
$
|
1,760
|
|
|
Exercisable
at September 30, 2007
|
|
|
326
|
|
$
|
0.65
|
|
|
6.8
|
|
$
|
435
|
|
A
summary
of the activity under the performance plans as of September 30, 2007, and
changes during the period then ended is presented below:
|
Performance
Options
|
|
Shares
(000)
|
|
Weighted
Average Exercise Price
|
|
Remaining
Contractual Term (years)
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
1,371
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
Granted
|
|
|
62
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(62
|
)
|
$
|
2.33
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,371
|
|
$
|
0.81
|
|
|
6.06
|
|
$
|
1,669
|
|
|
Vested
or expected to vest at September 30, 2007
|
|
|
1,371
|
|
$
|
0.81
|
|
|
6.06
|
|
$
|
1,669
|
|
|
Exercisable
at September 30, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
Note
11. Commitments and Contingencies
Contingencies
Except
as
set forth below, t
he
Company
is not a
party to nor are any of its properties subject to any pending legal,
administrative or judicial proceedings other than routine litigation incidental
to our business.
Public
Offering Securities Litigation
On
November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
the Company; FleetBoston Robertson Stephens, Inc., the lead underwriter of
the
Company’s April 1999 initial public offering; several other underwriters who
participated in the initial public offering; Steven J. Snyder, the Company’s
then president and chief executive officer; and Thomas M. Donnelly, the
Company’s then chief financial officer. The lawsuit was filed in the United
States District Court for the Southern District of New York and was assigned
to
the pretrial coordinating judge for substantially similar lawsuits involving
more than 300 other issuers. An amended class action complaint, captioned
In
re
Net Perceptions, Inc. Initial Public Offering Securities
Litigation,
01
Civ.
9675 (SAS), was filed on April 22, 2002, expanding the basis for the action
to
include allegations relating to the Company’s March 2000 follow-on public
offering in addition to those relating to its initial public offering. The
action against the Company was thereafter coordinated with the other
substantially similar class actions as
In
re
Initial Public Offering Securities Litigation
,
21 MC
(SAS) (the “Coordinated Class Actions”).
The
amended complaint generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the underwriter
defendants in connection with the Company’s initial public offering and
follow-on public offering. The amended complaint alleges specifically that
the
underwriter defendants, with the Company’s direct participation and agreement
and without disclosure thereof, conspired to and did raise and increase their
underwriters’ compensation and the market prices of the Company’s common stock
following its initial public offering and in its follow-on public offering
by
requiring their customers, in exchange for receiving allocations of shares
of
the Company’s common stock sold in its initial public offering, to pay excessive
commissions on transactions in other securities, to purchase additional shares
of the Company’s common stock in the initial public offering aftermarket at
pre-determined prices above the initial public offering price, and to purchase
shares of the Company’s common stock in its follow-on public offering. The
amended complaint seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired the Company’s common
stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
prejudice, in return for their agreement to toll any statute of limitations
applicable to those claims; and those claims have been dismissed without
prejudice.
On
August
31, 2005, the Court gave preliminary approval to a settlement reached by the
plaintiffs and issuer defendants in the Coordinated Class Actions. On December
5, 2006, the United States Court of Appeals for the Second Circuit overturned
the District Court's certification of the class of plaintiffs who are pursuing
the claims that would be settled in the settlement against the underwriter
defendants. Plaintiffs filed a Petition for Rehearing with the Second Circuit
on
January 5, 2007 in response to the Second Circuit's decision. On April 6, 2007,
the Second Circuit denied plaintiffs' Petition for Rehearing but clarified
that
the plaintiffs may seek to certify a more limited class in the District Court.
On June 25, 2007, the District Court signed an Order terminating the
settlement.
Note
12. Related Party Transactions
The
Company occupied through September 30, 2007 space made available to it at no
cost by Kanders & Company, Inc., an entity owned and controlled by the
Company's Non-Executive Chairman, Warren B. Kanders. On October 2, 2007, the
Company relocated its Corporate Headquarters to the 21
st
floor of
Landmark Square and has begun paying rent on its lease agreement.
On
September 22, 2006, the Company entered into an Equity Compensation Agreement
(the “Compensation Agreement”) with Kanders & Company, Inc. (“Kanders &
Company”), the sole stockholder of which is Warren B. Kanders, who was then the
Company’s Executive Chairman of the Board of Directors, for prior strategic,
consulting, investment banking and advisory services to the Company in
connection with Company’s asset redeployment strategy. As compensation for such
past services, the Company agreed to issue to Kanders & Company 8,274,000
shares of its common stock. Kanders & Company will receive no cash payment
for its services pursuant to the Compensation Agreement. Pursuant to the terms
and conditions of the Compensation Agreement, the Company granted “demand” and
“piggyback” registration rights to Kanders & Company with respect to the
shares of common stock that are issuable under the Compensation Agreement.
The
aggregate value of the awards was $7.4 million, which was based upon the closing
price of the Company’s common stock of $0.89 on September 22, 2006, the date of
the grant. The Company recorded compensation expense of $7.4 million relating
to
the grant of stock during the third quarter of the year ended December 31,
2006.
On
September 22, 2006, the Company entered into a five-year consulting agreement
(the “Consulting Agreement”) with Kanders & Company, which became effective
as of the closing of the Concord acquisition (as described in Note 13) on
October 3, 2006. In addition, effective with the closing of the Concord
acquisition, Mr. Kanders resigned as Executive Chairman of the Company’s Board
of Directors upon being nominated and elected to the position of Non-Executive
Chairman of the Board of Directors. The Consulting Agreement provides that
Kanders & Company will render investment banking and financial advisory
services to the Company on a non-exclusive basis, including strategic planning,
assisting in the development and structuring of corporate debt and equity
financings, introductions to sources of capital, guidance and advice as to
(i)
potential targets for mergers and acquisitions, joint ventures, and strategic
alliances, including facilitating the negotiations in connection with such
transactions, (ii) capital and operational restructuring, and
(iii) shareholder relations.
The
Consulting Agreement provides for Kanders & Company to receive a fee equal
of (i) $0.5 million in cash per year during the term of the Consulting
Agreement, payable monthly, and (ii) 1% of the amount by which the Company’s
revenues as reported in the Company’s Form 10-K, or if no such report is filed
by the Company, as reflected in the Company’s audited financial statements for
the applicable fiscal year, exceeds $60.0 million, payable in shares of common
stock of the Company (the “Stock Fee”) valued at the weighted average price of
the Company’s Common Stock for the applicable fiscal year. Upon a
“change-in-control” (as defined in the Consulting Agreement), Kanders &
Company will be entitled to a one-time lump sum cash payment equal to three
times the average amount Kanders & Company received during each of the two
fiscal years preceding such “change-in-control,” subject to certain limitations
as set forth in the Consulting Agreement. Upon the death or permanent disability
of Mr. Kanders, the Company has agreed to make a one-time lump sum cash payment
to Kanders & Company equal to that amount Kanders & Company would be
entitled to receive upon a “change-in-control”. Upon payment of the amounts due
to Kanders & Company either upon the occurrence of a “change-in-control”, or
upon the death or permanent disability of Mr. Kanders, the Consulting Agreement
will terminate. For the three and nine months ended September 30, 2007, the
Company recorded consulting fees of $0.2 million and $0.8 million, respectively,
related to the consulting agreement. As of September 30, 2007 and December
31,
2006, the accrued balance due to Kanders & Company under this agreement
amounted to $0.5 million and $0.1million, respectively.
For
the
three months ended September 30, 2007 and 2006, the Company reimbursed Clarus
Corporation (“Clarus”) an aggregate of $18 thousand and $13 thousand,
respectively; and for the nine months ended September 30, 2007 and 2006, the
Company reimbursed Clarus $101 thousand and $19 thousand, respectively, for
telecommunication, professional and general office expenses which Clarus
incurred on behalf of the Company. Warren B. Kanders, our Non-Executive
Chairman, also serves as the Executive Chairman of Clarus.
On
April 21, 2004, the Company closed on an investment into the Company by Olden
for the purpose of initiating a strategy to redeploy the Company’s assets and
use the Company’s cash, cash equivalent assets and marketable securities to
enhance stockholder value. The Company issued and sold to Olden a 2% ten-year
Convertible Subordinated Note, which is convertible after one year
(or
earlier upon a call by the Company and in certain other circumstances)
at
a conversion price of $0.45 per share of Company common stock into approximately
19.9% of the outstanding common equity of the Company as of the closing date.
Proceeds to the Company from this transaction totaled approximately $2.5 million
before transaction costs of $0.3 million. The transaction costs are being
amortized over ten years, the term of the debt. Interest on the note accrues
semi-annually on the last day of June and December in each year and is payable,
together with the principal sum of the note, on the maturity date of the note.
The note matures on April 21, 2014 unless accelerated earlier as provided by
the
note. The convertible subordinated note was deemed to include a beneficial
conversion feature. At the date of issue, the Company allocated $0.1 million
to
the beneficial conversion feature and amortized the beneficial conversion
feature over one year (the period after which the note is convertible). As
of
December 31, 2006, zero remains to be amortized of the note discount due to
the
beneficial conversion feature. Also in connection with this transaction, the
Company entered into a Registration Rights Agreement, which requires the
Company, upon request of the purchaser of the note or its assignee, to register
under the Securities Act of 1933, as amended, the resale of the shares of common
stock into which the note is convertible. In connection with this transaction,
the board of directors adopted an amendment to the Company’s Rights Agreement
such that the transaction would not trigger the rights thereunder. As of
September 30, 2007 and December 31, 2006, respectively, the outstanding balance
on the note payable amounted to $2.5 million and is classified as long-term
debt. The Company believes it has the financial ability to make all payments
on
this note.
Note
13. Acquisition
On
October 3, 2006, the Company acquired the assets of CRC, a manufacturer of
steel
counterweights doing business as Concord Steel. Concord is one of the nation’s
leading independent manufacturers of steel counterweights that are incorporated
into a variety of industrial equipment including aerial work platforms, cranes,
elevators and material handling equipment. Because the Company had no operations
at the time of the Concord acquisition, the Concord business is considered
to be
the Predecessor for accounting purposes. Accordingly, relevant financial
information regarding the Predecessor has been presented.
The
acquisition was accounted for under the purchase method of accounting with
assets acquired and liabilities assumed recorded at their estimated fair values.
Accordingly, the results of operations of Concord are included in the Company’s
statement of operations since the date of acquisition. Goodwill was generated
to
the extent that the purchase price consideration exceeded the fair value of
net
assets acquired.
The
total
purchase price of the acquisition was $45.3 million, including transaction
costs
of approximately $3 million. In addition, CRC invested $3.0 million of their
proceeds from the sale of CRC to purchase 3,529,412 unregistered shares of
the
common stock of the Company at the closing price per share of $0.85. Such shares
are subject to a six-month lock-up agreement and a registration rights agreement
containing customary “demand” and “piggyback” registration rights. In addition,
pursuant to the purchase agreement, a final working capital adjustment of $0.5
million was returned to the Company as the opening balance sheet working capital
was reconciled with CRC.
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