SECURITIES & EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996
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: 0-21345
Control Devices, Inc.
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(Exact name of registrant as specified in charter)
Indiana 01-0490335
- --------------------------------- ------------------------------------
(State or other jurisdiction of ( I.R.S. employer identification No.)
incorporation of organization )
228 Northeast Road Standish, Maine 04084
- ---------------------------------- ------------------
( Address of principal executive offices ) ( Zip code )
The Company's telephone number, including area code: (207) 642-4535
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Shares, no par value Nasdaq National Market
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 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on January 31, 1997 was approximately $48,000,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Shares, no par value:
4,963,249 shares as of January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K
Document Incorporated Part of Form 10-K
- ------------------------------------------------------- -----------------
Proxy Statement for 1997 Annual Meeting of Shareholders Part III
PART 1
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Item 1: Description of Business
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General Development of Business:
-------------------------------
On July 29, 1994, Control Devices, Inc. ("CDI" or the "Company")
acquired substantially all of the assets and certain liabilities (the
"Business") of GTE Control Devices Incorporated and Dominican Overseas Trading
Company, two subsidiaries of GTE Corporation (collectively referred to herein as
"GTE"). For periods prior to July 29, 1994, the Business is sometimes referred
to herein as the "Predecessor Company." The Company is an Indiana corporation
incorporated in June 1994 to purchase the Business.
The Company designs, manufactures and markets circuit breakers,
electronic sensors and electronic ceramic component parts used by original
equipment manufacturers ("OEMs") in the automotive, appliance and
telecommunications markets. The Company has supplied circuit breakers to
automotive OEMs for more than 30 years, and in 1991 expanded its offerings to
the automotive market by introducing its initial sensor product, a solar sensor
used for climate control systems in luxury cars. The Company's products are sold
to the three major North American automotive OEMs, General Motors Corporation
("GM"), Ford Motor Company ("Ford") and Chrysler Corp. ("Chrysler"), as well as
to foreign OEMs such as Mercedes, Peugeot, Volkswagen, and Valeo. Other
principal customers include Danfoss, Celwave and Siecor.
Recent Developments:
-------------------
In April 1996, the Company acquired all of the outstanding capital
stock of Realisations et Diffusion pour l'Industrie ("RDI"), which is
headquartered near Paris, France. RDI markets, distributes, assembles and
packages a full line of circuit protection devices, including various fuses and
circuit breaker components and assemblies manufactured by other companies. The
Company purchased RDI primarily to enhance its market penetration of the
automotive OEM market in Europe, in part by locating itself closer to European
customers. Management believes that the resulting expansion of its European
presence and improvement of its European distribution network will enhance the
Company's ability to distribute in Europe existing, internally developed and
newly acquired products.
The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission, which was declared effective on October 2,
1996. On October 8, 1996, the Company closed on the sale of 2,000,000 Common
Shares in connection with its initial public offering (the "public offering")
and received net proceeds of approximately $15.7 million. On October 15, 1996,
the Company issued 300,000 Common Shares in connection with the exercise of the
underwriter's overallotment option granted in connection with the public
offering and received net proceeds of approximately $2.5 million.
Narrative Description of the Business:
-------------------------------------
Products:
- --------
Circuit Protection. The Company manufactures and markets for the
automotive and appliance industries, circuit breakers which protect
transformers, battery chargers, compressors and small motors from heat and
current overloads. The technology utilized in such devices traces back to
automatically resetting circuit breakers developed as an alternative to fuses by
Sylvania in 1956. Due to the resetting feature, Sylvania's circuit breakers
provided the same protection from current overloads as fuses without the need
for replacement. The Company manufactures over 250 types of circuit breakers,
including over 150 types of glass enclosed circuit breakers. Through RDI, the
Company markets and distributes in Europe a full line of circuit breaker
components and assemblies manufactured by other companies. The Company's sales
of circuit breakers were $31.7 million, or 52.3% of net sales in 1996, and $30.9
million, or 79.6% of net sales in 1995.
2
Electronic Sensors. The Company's automotive sensors use optical sensing
technologies to recognize external conditions and send an electronic signal to a
central processor which automatically triggers a control response, that in many
cases, had required manual operation. The functions automatically controlled by
the Company's sensors include climate control and headlight intensity in
response to sunlight, power steering assist in response to driving conditions,
wiper control in response to precipitation and defrost operation in response to
window fog. The Company's rain, window fog, and "next generation" solar (climate
control)/twilight (headlamp control) sensors are in various stages of
development. The Company's sales of sensors were $8.8 million, or 14.5% of net
sales in 1996, and $5.3 million, or 13.7% of net sales in 1995.
Electronic Ceramics. The Company's ceramic products include PTC (Positive
Temperature Coefficient) thermistors and dielectric resonators. PTC thermistors,
which convert electrical current into heat, are used as component parts in room
air heaters and protection devices for switching equipment critical to the
operation of telephone companies' central offices (facilities that provide the
local switching and distribution functions for telephone companies). Dielectric
resonators are used to filter frequencies in wireless communications equipment.
In addition to sales to wireless communications equipment manufactures, in the
forth quarter of 1995 the Company began shipping custom designed dielectric
resonators to the Personal Communication Systems ("PCS") equipment
manufacturers. The Company's sales of ceramics were $4.5 million, or 7.5% of net
sales in 1996, and $2.6 million, or 6.7% of net sales, in 1995.
RDI. In addition to the Company's products, RDI distributes a number of
electronic components in Europe such as capacitors, connectors, circuit
protection devices produced by other manufactures and various electronic fuses
and aftermarket products. These components are supplied to the automotive,
appliance, and telecommunication OEM markets and are sourced and stocked by RDI.
Sales of RDI were $20.6 million in 1996, including $5.1 million of the Company's
circuit protection and electronic sensor sales discussed in the above sections.
The remaining $15.5 million or 25.7% of net sales in 1996, includes other
products distributed by RDI.
Markets:
- -------
The Company sells its products primarily to three markets: automotive,
appliance and telecommunications.
Automotive Market:
Circuit Protection. The Company produces over 100 types of metal-based
(covered or uncovered) automatically resetting circuit breakers. These products
utilize a bimetal technology which essentially protects electrical circuits and
motors from heat and current overloads. The Company offers a broad line of
automotive circuit breakers which operate in a wide range of ambient
temperatures, thereby enabling customers to choose the protection most
appropriate for the particular application. Typical applications include
protection for wiring harnesses, headlamps and small motors. The Company's
circuit breakers are used as protectors for 12-volt DC motors. These products
are cycling, or self-resetting, circuit breakers created for mounting in the
motor and are used to protect motors with currents of 20 amps (such as
windshield wiper motors) up to 40 amps (such as power seat motors). Another line
of the Company's automatically resetting circuit breakers are installed in
automotive fuse blocks or wiring harnesses and are used to protect circuits
which occasionally experience momentary overloads (e.g., headlamps, for which
fuses can present a safety hazard) and to minimize the inconvenience of fuse
replacement (e.g., cigarette lighters, which can overload if used for other
applications). The Company's other electromechanical automotive products include
thermal relays, which provide a time delay for automotive courtesy lights and
seat belt warning lights.
3
In Europe, the Company distributes a full line of circuit protection
products through RDI. These products include those manufactured by the Company
and complementary products distributed for other manufacturers.
Electronic Sensors. The Company's solar sensor, used for the automatic
climate control system in vehicles, measures the direct solar heating felt by
the automobile's occupants. The Company's solar sensor is customized for each
car model by taking into account the roof line and placement of windows.
In 1995, the Company began shipments of steering wheel sensors. These
sensors optically measure the speed and direction of the steering column
rotation, and send electric signals to the car's central processor to make
adjustments in stiffness of the power steering system of the car. The technology
used in its steering wheel sensor has other automotive applications in which the
Company is pursuing.
The Company's twilight sensor signals the vehicle's headlight system to
switch from low intensity in twilight conditions and was developed for use in
GM's DRL program. The Company began shipments of twilight sensor in 1996.
The Company's rain, window fog and "next generation" solar (climate
control) / twilight (headlamp control) sensors are in various stages of
development. The Company's rain sensor measures precipitation on the windshield
and sends a signal to adjust the windshield wiper speed accordingly. The window
fog sensor optically detects condensation or frost on front and/or rear windows
and sends a signal to adjust the defroster before such condensation or frost is
detectable by the human eye. By eliminating frost and condensation before it has
a chance to accumulate, the driver's visibility remains unimpaired.
Appliance Market:
The Company believes it is a leading supplier of glass enclosed circuit
breakers for the small motor appliance market. The Company also supplies ceramic
PTC thermistor based heaters to the appliance market and, through RDI,
distributes component parts manufactured by other companies. The products
distributed by RDI include capacitors, filters, and condensers.
Circuit Protection. The Company manufactures a number of different types
of circuit breakers for the appliance market. The Company's glass enclosed
circuit breakers are generally sold for applications in which quality, cycle
life and dependability are the critical factors. These products prolong motor
life by shutting off motors in the presence of excess ambient heat or current. A
key feature of the glass circuit breakers is the hermetic seal created by the
glass enclosure. This hermetic seal makes it the lowest cost type of circuit
breaker which can be totally immersed in a liquid or gas environment and still
maintain consistent operation. Typical uses include protection of compressor
motors and other small motors where the breaker is required to be mounted
directly inside the motor, such as refrigerator compressor motors, dishwasher
motors and garage door opener motors. Internal mounting in motors places the
circuit breaker in close proximity to the source of heat, allowing for faster
response times under fault conditions than can be delivered by externally
mounted breakers. Internal mounting also eliminates the need for an external
mounting location and associated wiring connectors, and facilitates greater
efficiency in compressor motor design.
The Company also supplies circuit breakers to recessed lighting
manufacturers. These breakers protect the fixture from heat overloads and cause
the light to blink in a fault condition.
Electronic Components. The Company supplies ceramic PTC thermistors for
use in small electric air heaters. The PTC ceramic is designed to maintain a
constant temperature, making them safer than certain other electric air heating
technologies. In addition, RDI distributes electronic components to the European
appliance industry.
4
Telecommunications Market:
The Company manufactures and markets PTC current limiters and dielectric
resonators for applications in the telecommunications market.
PTC Current Limiters. The Company supplies PTC current limiters for use in
modules which prevent current surges from damaging line cards (circuit boards)
in telephone companies' central office switching systems.
Dielectric Resonators. The Company supplies a line of dielectric
resonators to OEMs of wireless telecommunications equipment. Dielectric
resonators are an integral part of wireless communication filters, which capture
the desired frequencies and keep the desired frequencies from interfering with
others. These filters are typically placed at transmission sites, where space is
at a premium, and the Company therefore believes that the size of dielectric
resonators based filters, which are smaller than larger air cavity based
filters, offer a competitive advantage. The markets for theses products include
cellular and PCS applications.
PCS is the term used to describe the wireless telecommunications
services that will be offered by those companies that acquired or will acquire
licenses for a radio spectrum (frequency range 1850-1990 MHz) in the FCC
auctions and are the newest entrants in the wireless telecommunications market.
PCS will initially compete directly with existing cellular telephone, paging and
mobile radio services. PCS will also include features which are not generally
offered by cellular providers, such as: (i) the provision of all services to one
untethered, mobile number; (ii) lower-priced service options; and (iii) in the
near future, medium-speed data transmissions to and from portable computers,
advanced paging services and facsimile services. PCS providers may be the first
to be able to offer mass market wireless local loop applications, in competition
with switched and direct access local telecommunication services.
Marketing and Customers
The Company markets its products through a direct sales and service force
located in the Company's sales office near Detroit, Michigan, at the Company's
corporate headquarters in Standish, Maine and at RDI's headquarters near Paris,
France. The Company also sells and distributes its products through a number of
independent agents and distributors in Europe and Asia. In Europe, RDI acts as a
technical and value added resource to its customers.
In the automotive market, the Company sells its products primarily to
parts suppliers, including subsidiaries of automotive manufactures, rather than
directly to the automobile manufacturer. The Company must generally market its
products to both the manufacturer (to insure the design of the automobile
incorporates the Company's products) and to the supplier of the particular parts
in which the Company's products will be incorporated. As is typical in the
automotive and appliance industries, the Company's customers buy products
through the use of purchase orders rather than long-term contracts.
One of the Company's customers, GM, accounted for approximately 12%, 20%
and 17% of net sales in 1996, 1995 and 1994, respectively. These sales were
primarily to two divisions of GM, Packard Electric and Delco Electronics, both
of which manufacture electrical systems for automotive companies, including GM.
Net sales to Danfoss were 13.6% in 1995. No other customer accounted for more
than 10% of sales in 1996, 1995 and 1994.
For domestic, foreign, and export sales and activities, see Note 16 to the
Company's Financial Statements.
Research and Development
5
The Company expended $3.8 million, $2.7 million, $2.7 million, and $2.1
million on research and development in 1996, 1995, 1994 and 1993, respectively.
The increase in expenditures from 1993 to 1996 was a result of the Company's
focus on new product development in the electronic sensor product line based on
the Company's existing optical sensing technologies. In 1996 and 1995 the
Company devoted 8.7% and 7.0%, respectively, of net sales excluding RDI, to
research and development. In 1996, 1995, and 1994, the Company devoted
approximately 75% of its research and development expenditures to electronic
sensors. The Company maintains a research and development staff at its Standish,
Maine facility of 41 employees as of December 31, 1996, 36 of whom, including 26
engineering professionals, were devoted to new sensor product development.
The Company also has a six year consulting agreement expiring in April
2001 with Dr. Dennis J. Hegyi, a Physics Professor at the University of
Michigan, relating to its sensor products. The Company currently licenses five
of Dr. Hegyi's patents for its sensor products.
The following tables summarize the results of the Company's historical
research and development activities and the focus of its current research and
development activities.
Year of Introduction Product Application
-------------------- ---------------- ----------------------------
1991 Solar Sensor Automatic Climate Control
1993 Dielectric Resonator Wireless Telecom-Cellular
1995 Steering Wheel Sensor Power Steering Assist
1995 Dielectric Resonator Wireless Telecom-PCS
1996 Twilight Sensor Daylight Running Lamps
Development Stage Products Application Status
- -------------------------- --------------------------- ------------------------------------------
Solar Twilight Sensor Combined Climate and OEMs have tested and requested quotes.
Headlamp Control
Rain Sensor Wiper Function and Speed Control Testing with a North American OEM.
Window Fog Sensor Defrost Control Prototypes provided to European OEMs.
Solar Quadrant Sensor Multi-zone Automatic Climate Prototypes provided to European OEM.
and Headlamp Control
Electric Vehicle Heaters Automobile Heaters Development funding has been received from a North
American OEM.
Patents, Licenses and Trademarks
The Company owns 11 and has two patents pending. The Company does not
consider any single patent to be material to its business. The Company typically
requires its employees to execute appropriate non-competition and patent rights
agreements. The Control Devices logo is a registered trademark of the Company
and Maxi Breaker is a trademark of the Company. The Company is licensed to use
technology in patents and know-how owned by Dr. Dennis J. Hegyi, a consultant to
the Company.
Manufacturing and Supply
The Company manufactures and assembles its products at its plants in
Standish and Caribou, Maine, and San Cristobal, Dominican Republic and has
certain value added operations at its distribution facility in
6
France. The Company's facility in the Dominican Republic has been audited by
representatives of Chrysler, Valeo and Packard Electric and has been certified
as an approved supplier by all three. The Company manufactures its products
using components purchased from third parties and from parts manufactured by the
Company with various raw materials.
During and after the manufacturing process, products undergo extensive
inspection and testing to insure quality control. The Company's commitment to
quality has resulted in the Company having received, in addition to other
awards, ISO (International Standards Organization) 9001-1994 registration (the
highest attainable), QS-9000 certification, General Motors' Mark of Excellence
Award (the highest attainable) and Ford's Q1 quality rating.
Certain of the Company's components are standard items and are available
from multiple sources. The Company also sources components produced from custom
tools or molds. These custom parts may be single sourced in some circumstances
in order to take advantage of price and quality considerations. The Company has
never had any significant supply interruptions in these components and it
believes it could develop alternative sources of supply if supply interruptions
were to occur.
Backlog consists of firm orders received from customers and distributors
with delivery dates requested by customers at some future date. At December 31,
1996, backlog was approximately $8.2 million versus approximately $4.8 million
at December 31, 1995. This backlog increase is primarily due to the acquisition
of RDI.
Competition
The Company has many competitors with respect to all of its products, and
the automotive parts supply industry, in particular, is highly competitive. Many
of its competitors in the automotive industry are companies which are larger,
more diversified and have greater financial resources than the Company. In
general, competition in the circuit breaker market is based on price, although
the Company also seeks to compete based on product performance. The automotive
market for circuit breakers is a relatively mature, small market and the Company
competes primarily with Texas Instruments and Otter Controls, Inc. In the
appliance market for circuit breakers, the Company competes principally with
Texas Instruments. The Company also competes with suppliers of alternative
technologies, such as fuses which can be used as an alternative to circuit
breakers. Competition in the sensor market is primarily based on technology,
quality, delivery, reliability, price, functionality and engineering support.
The Company's principal competitors in this market are Texas Instruments, Eaton,
Motorola, Panasonic, Philips, and Nippondenso. In the ceramics market, the
Company competes on the basis of supplying niche products and on service,
delivery and product technology. Its principal competitors in this market are
NTK, TDK, Alpha Industries, Murata, and Siemens. In the European distribution
market, the Company competes with similar electronic distributors.
Employees
As of December 31, 1996, the Company had 827 employees, consisting of 227
employees based in Standish, 87 employees based in Caribou, three employees
based in the Company's sales office near Detroit Michigan, 402 employees based
in the Dominican Republic, and 108 employees in France. None of the Company's
employees are currently represented by a union; RDI's employees enjoy the
benefits of a state-mandated collective bargaining agreement (Convention
Collective de la Metallurgie ) which applies to numerous French companies whose
business relates to metal products, including RDI. The Company believes its
relations with employees are good.
Environmental Matters
The Company's owned and leased facilities are subject to numerous
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to surface and ground water, and the
7
generation, handling, storage, transportation, treatment and disposal of toxic
and hazardous substances. Under various Federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may become liable for the costs of removal or remediation of
hazardous or toxic substances on, under or in such property, typically without
regard to fault.
Pursuant to the terms of an Environmental Agreement dated July 6, 1994,
GTE has retained liability and agreed to indemnify the Company for any and all
liabilities arising under CERCLA and other environmental requirements related to
contamination and cleanup of the Standish facility, treatment, storage and
disposal of hazardous materials transported offsite and remediation required by
the State of Maine Department of Environmental Protection ("MEDEP") or U.S.
Environmental Protection Agency ("EPA") not known to exist or occur prior to
July 29, 1994. GTE indemnification for these various unknown liabilities expires
on July 29, 1997 and July 29, 1999. GTE has also retained liability for claims
relating to soil and groundwater contamination from the surface impoundment and
the out-of-service leachfield at the Company's Standish, Maine facility known to
exist prior to the acquisition. Such contamination is currently being remediated
at GTE's sole expense. GTE's obligation to remediate such contamination and its
indemnification for any claims relating thereto expire several years after the
MEDEP and EPA conclude remediation has been completed.
Except as set forth above, the Company believes that its facilities are in
compliance in all material respects with all applicable Federal, state and local
environmental laws, ordinances and regulations, as well as comparable laws and
regulations outside the United States. No assurances can be given, however, that
the current environmental condition of the Company's owned and leased facilities
are not other than as currently understood by the Company, or will not be
adversely affected by the condition of properties in the vicinity of the
Company's owned and leased properties, or by the activities of third parties
unrelated to the Company or by former owners or operators of the Company's owned
or leased facilities, or that future laws, ordinances or regulations will not
impose any material environmental liability on the Company.
8
Item 2. Properties
- ------- ----------
The Company's facilities are kept in good condition and the capacity of
such facilities is adequate for the Company's needs. The following table sets
forth certain information, as of December 31, 1996, relating to the Company's
facilities:
Approximate Owned/
Location Principal Activities Square Feet Leased
- ------------------- ---------------------------------- ----------- ------
Standish, Maine Corporate Headquarters; Research and Development; 120,000 Owned
Manufacture of Electronic Sensors, Glass Enclosed
Circuit Breakers, Electronic Ceramic Devices
Caribou, Maine Manufacture of Circuit Breakers 33,000 Leased
(Yearly
renewal)
San Cristobal, Manufacture of Circuit Breakers, 26,000 Leased
Dominican Republic Electronic Sensors (Expires
December
2001)
Southfield, Michigan Sales Office 1,200 Leased
(Expires
December
2002)
Villepinte, France RDI Headquarters, European Warehouse, Manufacturing 27,500 Owned
and Distribution.
Item 3. Legal Proceedings
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The Company is not engaged in any legal proceedings other than ordinary
routine litigation incidental to its business. The Company is not involved in
any pending or threatened legal proceedings which the Company believes could
reasonably be expected to have a material effect on the Company's financial
condition, liquidity or results of operations.
Item 4. Submission of Matter to a Vote of Security Holders
- ------- --------------------------------------------------
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
- ------- -------------------------------------------------------------
Matters
-------
(a) Market Information:
-------------------
The Common Shares of the Company commenced trading on the Nasdaq
National Market under the symbol "SNSR" on October 2, 1996. Prior to October 2,
1996 there was no established trading market for the
9
Company's shares. The following is the range of high and low reported sales
prices for the Common Shares as reported by Nasdaq National Market for each full
quarterly period since trading commenced.
Calendar Year 1996 Sales Price
High Low Closing
---- --- -------
Fourth Quarter 13 9 13
(b) Holders:
--------
As of January 31, 1997 there were approximately 95 record holders of
the Company's Common Shares.
(c) Dividends:
----------
The Company has never declared or paid dividends on its Common
Shares. The payment of any future dividends will be at the discretion of the
Company's Board of Directors, which is reviewed quarterly, and will depend upon,
among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions.
10
Item 6. Selected Financial Data
- ------- -----------------------
The following is a table of selected financial data for the five years
ended December 31, 1996. This data should be read in conjunction with the
Company's Financial Statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included herein.
Control
Control Devices, Inc. Pro Forma(1) Devices, Inc.
---------------------- ------------ -------------
Seven
Five Months Months
Ended Ended
Years Ended December 31, December 31, July 29,
------------------------------------- ------------ --------
1996(3) 1995 1994 1994 1994
------- ------- ------- ------- -------
(Amounts in thousands, except per share data)
Statement of Income Data:
Net sales $60,496 $38,881 $43,842 $18,847 $24,995
Cost of sales 38,929 25,721 29,835 12,159 17,676
------- ------- ------- ------- -------
Gross profit 21,567 13,160 14,007 6,688 7,319
Operating Expenses:
Selling, general and 9,209 3,504 4,304 2,413 1,896
administrative
Research and development 3,848 2,740 2,650 1,052 1,598
------- ------- ------- ------- -------
Operating income 8,510 6,916 7,053 3,223 3,825
Interest expense 1,562 1,380 1,581 657 --
------- ------- ------- ------- -------
Income before income taxes 6,948 5,536 5,472 2,566 3,825
Income tax provision (4) 2,673 2,078 2,153 990 1,530
------- ------- ------- ------- -------
Net income $ 4,275 $ 3,458 $ 3,319 $ 1,576 $ 2,295
======= ======= ======= ======= =======
Net income applicable to common
shareholders(5) 4,066 3,194 3,055 1,466 --
Net income per share(5) $1.29 $1.25 $1.19 $ 0.57 --
Weighted average of common shares
and equivalents outstanding(5) 3,163 2,564 2,564 2,564 --
Predecessor Company(2)
----------------------
Year Ended December 31,
-----------------------
1993 1992
------- -------
Statement of Income Data:
Net sales $39,807 $39,747
Cost of sales 30,046 34,419
------- -------
Gross profit 9,761 5,328
Operating Expenses:
Selling, general and 3,237 3,593
administrative
Research and development 2,144 651
------- -------
Operating income 4,380 1,084
Interest expense -- --
------- -------
Income before income taxes 4,380 1,084
Income tax provision (4) 1,752 434
------- -------
Net income $ 2,628 $ 650
======= =======
Net income applicable to common
shareholders(5) -- --
Net income per share(5) -- --
Weighted average of common shares
and equivalents outstanding(5) -- --
Control Devices, Inc. Predecessor Company(2)
----------------------------------------------- ---------------------------
December 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Balance Sheet Data:
Working capital $10,761 $13,662 $ 9,255 $ 4,891 $ 2,665
Total assets 44,243 30,141 26,051 22,385 21,226
Long-term debt, net of current
maturities 1,320 15,853 16,320 -- --
Redeemable preferred shares -- 2,400 2,400 -- --
Shareholders' equity 28,329 5,505 2,311 -- --
(1) Pro forma year ended December 31, 1994 amounts were prepared as if the
acquisition of the acquired Business and the initial capitalization of the
Company had occurred on January 1, 1994. These pro forma results include
adjustments for depreciation and amortization of assets acquired based on
their fair market values at the acquisition date, increased interest on
acquisition debt, additional preferred share dividends, elimination of
allocated employee benefit and administrative expenses, additional
professional fees and the related income tax effect. The unaudited pro
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forma consolidated financial data do not purport to represent what the
results of operations of the Company would actually have been if the
acquisition and initial capitalization had in fact occurred on January 1,
1994 or to project the results of operations of the Company for any future
date or period. See Note 4 to the Company's Financial Statements.
(2) On July 29, 1994, the Company purchased the Business. The data prior to
July 29, 1994 represents the financial information of the Predecessor
Company, and has been prepared by the Company as if the Business was
operated as a separate entity for the periods presented. The Predecessor
Company financial statements do not include an allocation of GTE's assets
and liabilities not specifically identifiable to the Business, including
cash and intercompany debt. Prior to September 28, 1993, the
Telecommunication Division shared certain facilities and functions with
the business. Certain costs and expenses, including manufacturing overhead
and selling, general and administrative expenses, were prorated by the
Company between the Business and the Telecommunications Division in
preparing the Predecessor Company financial statements. Expenses were
allocated by the Company based on actual usage or other allocation
methods which approximate actual usage. Management of the Company believes
that the allocation methods are reasonable.
(3) The Selected Financial Data presented for the year ended December 31, 1996
includes RDI's results of operations from April 1, 1996, the date of
acquisition.
(4) For purposes of computing income tax provision, an effective tax rate of
40% was used for the Predecessor Company results of operations because no
income taxes were allocated to the Predecessor Company.
(5) See Note 2 to the Company's Financial Statements. Net income per share,
net income applicable to common shareholders and weighted average number
of Common Shares and equivalents outstanding are not presented for periods
prior to and including July 29, 1994 as the Business was not operated as
an independent entity during such periods.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Introduction
The Company purchased the Business from GTE on July 29, 1994 for a total
purchase price of $17,900,000 plus the assumption of certain liabilities. The
Company had no operations prior to that date. The Company paid $16,400,000 in
cash and delivered its Junior Subordinated Promissory Note in the principal
amount of $1,500,000 ( the "Seller Note"), which was repaid in full in March
1996. In April 1996, the Company acquired all of the issued and outstanding
capital stock of RDI for a total purchase price of $8,964,000. The Company paid
$6,964,000 in cash, delivered $1,107,600 aggregate principal amount of its 8.0%
Subordinated Promissory Notes (the "RDI Notes" ), and delivered $892,400
aggregate principal amount of it 6.5% Automatically Converting Subordinated
Promissory Notes ( the "RDI Convertible Notes" ).
The financial information for the periods prior to July 29, 1994 does not
reflect the impact of the acquisition of the Business or the related financing
and purchase accounting adjustments on the financial position and results of
operations of the Company. The financial statements prior to July 29, 1994, have
been prepared solely by the Company as if the Business was operated as a
separate entity for the periods presented. The Predecessor Company financial
statements do not include an allocation of GTE's assets and liabilities not
specifically identifiable to the Business, including cash and intercompany debt.
The purchase method of accounting was used to record assets acquired by the
Company. Such accounting generally results in increased amortization and
depreciation reported in future periods. Accordingly, the financial statements
of the Predecessor Company and the Company are not comparable in all material
respects since the financial statements report on two separate entities.
Since the acquisition of the Business in July 1994, the Company's
financial strategy has been to improve gross profits in its circuit breaker
business, maintain stable selling, general and administrative expenses and
expand its sensor business. The Company has increased its research and
development expenditures, which was primarily devoted to its sensor products,
from $651,000 in 1992 to $3.8 million in 1996. During the same period, the
Company's sales of sensors have grown from $3.2 million in 1992 to $8.3 million
in 1996.
In addition, the Company's financial strategy contemplates making
acquisitions which complement the Company's existing businesses. The Company's
acquisition of RDI in April 1996, which was funded in part with $7.4 million in
cash generated from operations, is intended to enhance the Company's market
penetration of the automotive OEM market in Europe. RDI, which is a
European-based distributor of products of the Company and other manufacturers,
historically, due to the nature of the distribution business, has had lower
operating margins as a result of higher selling, general and administrative
expenses ( measured as a percentage of net sales ) than the Company. Although
the Company's operating income has increased as
12
a result of the RDI acquisition, when expressed as a percentage of sales, the
Company's operating income has decreased due to the lower margins associated
with distribution businesses generally.
RDI generates revenues and incurs expenses primarily in currencies other
than the U.S. dollar. The Company does not engage in currency hedging
transactions. RDI's currency of account is the French franc. RDI's assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the balance sheet date. RDI's results of operations are translated into U.S.
dollars using the average exchange rate prevailing throughout the applicable
period. See Note 2 to the Company's Financial Statements.
In October 1996, the Company closed on the sale of 2,300,000 Common
Shares in connection with its initial public offering and received net proceeds
of approximately $18.2 million.
Results of Operations
Summary Data
Management's discussion and analysis of the operating results of the
Company are based on amounts in the table set below which were derived from the
Financial Statements appearing elsewhere herein.
The 1994 combined financial information was based on the summation of the
financial information for the seven months ended July 29, 1994 of the
Predecessor Company and the five months ended December 31, 1994 of the Company.
The combined financial information is presented for comparison purposes only and
does not purport to reflect the results of the Company had they been under
common control.
The following table presents selected financial information derived from
the Company's statements of income, expressed as a percentage net sales for the
periods indicated.
Control Devices, Inc. Combined
--------------------- ----------
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Gross profit 35.7 33.8 31.9
Selling, general and administrative expenses 15.2 9.0 9.8
Research and development 6.4 7.0 6.0
Operating income 14.1 17.8 16.1
Net income 7.1 8.9 8.8
1996 Compared to 1995
Net sales were $60.5 million in 1996, an increase of $21.6 million,
or 55.6%, as compared to 1995. Net sales increased primarily as a result of the
acquisition of RDI combined with growth in sensors and ceramics. On a
consolidated basis, sales of sensor products increased 64.5% to $8.8 million in
1996 from $5.3 million in 1995, as a result of increased solar and steering
sensor shipments. Ceramic sales increased 73.4% to $4.5 million in 1996 from
$2.6 million in 1995 primarily due to increased dielectric resonator and PCS
sales. Sales of circuit breaker products increased 2.4% to $31.7 million in 1996
from $30.9 million in 1995, as a result of the RDI acquisition. Sales of other
products distributed by RDI contributed $15.5 to net sales in 1996.
13
Gross profit in 1996 was $21.6 million, an increase of $8.4 million,
or 63.9%, as compared to 1995, RDI accounted for $6.2 million of this increase.
As a percentage of net sales, gross profit in 1996 was 35.7% as compared to
33.8% in 1995. The increase in gross profit, as a percent of net sales, resulted
from increased productivity due in part to the success of an employee gain
sharing program instituted in 1994 as well as from improved plant utilization.
Selling, general and administrative expenses in 1996 were $9.2
million, an increase of $5.7 million, or 162.8%, as compared to 1995. The
increase in administrative expenses consisted primarily of RDI expenses which
were $5.1 million. As a distributor, RDI on a historical basis, has incurred
selling, general and administrative expenses higher, as a percentage of net
sales, than the Company. As a percentage of net sales, selling, general and
administrative expenses were 15.2% in 1996 as compared to 9.0% in 1995.
Research and development expenses in 1996 were $3.8 million, an
increase of $1.1 million, or 40.5%, as compared to 1995. The increased research
and development expenses was primarily a result of increased staffing and
expenses required to develop products for introduction in the 1997-1999 period.
In addition, resources have been added to develop a chip-on-board manufacturing
line to reduce the cost and enhance market penetration of the Company's sensor
products. As a percentage of net sales, research and development expenses were
6.4% in 1996 as compared to 7.0% in 1995. Due to the distribution nature of
RDI's business, research and development is a minimal expense for RDI. Excluding
RDI, research and development spending increased to 8.7% in 1996 compared to
7.0% in 1995.
Operating income in 1996 was $8.5 million, an increase of $1.6
million, or 23.0%, as compared to 1995. As a percentage of net sales, operating
income was 14.1% in 1996 as compared to 17.8% in 1995. The decrease in operating
income as a percentage of net sales resulted primarily from the acquisition of
RDI. RDI is primarily a distributor and on a historical basis, has incurred
selling, general and administrative expenses higher, as a percentage of net
sales, than the Company. Similarly, as a distributor, RDI's operating income as
a percentage of net sales is typically lower than that of the Company.
Interest expense was $1.6 million in 1996, an increase of $0.2
million from 1995. The increase was due to the addition of RDI interest expense
and lower interest income due to lower cash balances as a result of the RDI
acquisition.
The provision for income tax was $2.7 million in 1996, as compared to
$2.1 million in 1995. The effective tax rate was 38.5% in 1996 as compared to a
rate of 37.5% in 1995.
Net income was $4.3 million in 1996, a increase of 23.6%, as compared
to $3.5 million in 1995. The increase in net income was a result of the
acquisition of RDI and the improvement in operating income partially offset by
increased research and development expense. As a percentage of net sales, net
income was 7.1% in 1996 as compared to 8.9% in 1995. The decline in net income
as a percentage of net sales was a result of the RDI acquisition, which as a
distributor, has typically lower margins and higher selling, general, and
administrative expense as a percentage of net sales than that of the Company.
1995 Compared to Combined 1994
Net sales were $38.9 million in 1995, a decrease of $5.0 million, or
11.3%, as compared to combined 1994. Net sales decreased primarily as a result
of the weakened economic conditions in North America and Europe, particularly
related to automotive sales. Sales of circuit breaker products decreased 13.6%
to $30.9 million in 1995 from $35.8 million in 1994. Approximately $2.2 million
of the decrease in net sales was attributable to decreased demand for the
Company's automotive circuit breaker products as Ford switched certain models of
vehicles from circuit breakers to fuses. Sales of sensor products increased
25.5% to $5.3 million in 1995 from $4.2 million in combined 1994 as the Company
began shipping sensors to European automakers. Ceramic sales declined 31.2% to
$2.6 million in 1995 from $3.8 million in combined 1994 primarily due to a
decrease in air heater sales.
14
Gross profit in 1995 was $13.2 million, a decrease of $0.8 million,
or 6.0%, as compared to combined 1994. As a percentage of net sales, gross
profit in 1995 was 33.8% as compared to 31.9% in combined 1994. The increase in
gross profit, as a percent of net sales, resulted from increased productivity
due in part to the success of an employee gain sharing program instituted in
1994 as well as from improved plant utilization.
Selling, general and administrative expenses in 1995 were $3.5
million, a decrease of $0.8 million, or 18.7%, as compared to combined 1994. The
decrease in administrative expenses was a result of management initiative to
contain expenses as a result of the decreased sales volume. As a percentage of
net sales, selling, general and administrative expenses were 9.0% in 1995 as
compared to 9.8% in combined 1994.
Research and development expenses in 1995 were $2.7 million, an
increase of $0.1 million, or 3.4%, as compared to combined 1994. The increased
research and development expenses were a result of the Company's continued focus
on new product development in the sensor product line. As a percentage of net
sales, research and development expenses were 7.0% in 1995 as compared to 6.0%
in combined 1994.
Operating income in 1995 was $6.9 million, a decrease of $0.1
million, or 1.9%, as compared to combined 1994. The decreased operating income
was a result of the lower sales volume substantially offset by higher gross
margins and reduced selling, general and administrative expenses. As a
percentage of net sales, operating income was 17.8% in 1995 as compared to 16.1%
in combined 1994.
Interest expense was $1.4 million in 1995, an increase of $0.7
million from combined 1994. The Predecessor Company did not receive an
allocation of interest expense from GTE in 1994.
Provision for income tax was $2.1 million in 1995, as compared to
$2.5 million in combined 1994. The effective tax rate was 37.5% in 1995 as
compared to a rate of 39.4% in combined 1994.
Net income was $3.5 million in 1995, a decrease of 10.7%, as compared
to $3.9 million in combined 1994. The decrease in net income was primarily
attributed to the additional interest expense in 1995. As a percentage of net
sales, net income was 8.9% in 1995 as compared to 8.8% in combined 1994.
Seasonality
The Company's performance is dependent primarily on automotive
vehicle production which is seasonal in nature. The Company's revenues tend to
be somewhat lower in the third and fourth quarters as automotive OEMs schedule
plant tooling changeovers, vacations and holiday shutdowns.
Liquidity and Capital Resources
Since its formation and initial capitalization, the Company has
financed its operations and investments in property, equipment and the RDI
acquisition primarily through cash generated from operations, the issuance of
RDI Notes and RDI Convertible Notes and bank borrowings.
Cash and cash equivalents totaled $6.2 million at December 31, 1996
compared to $10.5 million at December 31, 1995. The decrease in cash and cash
equivalents during this period was primarily due to the acquisition of RDI, the
repayment of the $1.5 million Seller Note, the results of the public offering
which accounted for $18.2 million in net proceeds, of this amount $17.7 million
was used to repay the Senior Notes, Redeemable Preferred Shares and associated
accrued dividends and interest.
RDI has various credit facilities available to them totaling $0.8
million with rates ranging from 0.5% to 1.0% over the Paris Inter-Bank Offered
Rate. At December 31, 1996, RDI had borrowings aggregating $0.5 million under
these facilities.
15
On October 8, 1996, Fleet Bank of Maine ("Fleet Bank") and the
Company entered into an agreement, pursuant to which Fleet Bank has agreed to
provide a $15.0 million revolving line of credit facility to the Company to fund
strategic acquisitions and, if needed, for working capital. The facility has a
maturity date of September 30, 1998. The facility has three interest rate
options consisting of (i) Fleet Bank's prime rate for daily rate borrowings,
(ii) Fleet Bank's cost of funds rate plus 1.5% for borrowings of 30 days or
less, or (iii) the corresponding London Interbank Offering Rate (LIBOR) plus
1.5% for borrowings of 30, 60, 90 or 180 days. The line of credit is unsecured
and contains certain covenants. To date there have been no borrowings under this
line of credit facility.
The Company believes its current cash and cash equivalents, together
with existing credit facilities and cash flows from operations will be
sufficient to meet the Company's cash requirements for at least the next twelve
months.
This Form 10-K contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, cyclicality of automotive and
appliance industries, reliance on OEM's, risk of customer labor interruptions,
and competing technologies.
16
Item 8. Financial Statements and Supplementary Data
- ------- --------------------------------------------
CONTROL DEVICES, INC.
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996 and 1995, the Five Months Ended December 31,
1994 and the Seven Months Ended July 29, 1994 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996 and 1995, and the Five Months Ended
December 31, 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995, the Five Months Ended
December 31, 1994 and for the Seven Months Ended
July 29, 1994 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-22
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the shareholders of Control Devices, Inc.:
We have audited the accompanying consolidated balance sheets of Control Devices,
Inc. (an Indiana corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and the five months ended
December 31, 1994. We have also audited the accompanying combined statements of
income and cash flows of the Electromechanical Business of GTE Control Devices
Incorporated and Dominican Overseas Company ("Predecessor Company") for the
seven months ended July 29, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Control Devices, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
and the five months ended December 31, 1994, and the results of operations and
cash flows of the Predecessor Company for the seven months ended July 29, 1994,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
January 31, 1997
F-2
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands of dollars, except share and per share amounts)
December 31,
------------
1996 1995
------ ------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 6,238 $10,459
Receivables, less allowance for doubtful accounts of
$467 and $277, respectively 9,475 4,305
Inventories 5,943 3,279
Other current assets 1,431 1,001
------- -------
Total current assets 23,087 19,044
PROPERTY, PLANT AND EQUIPMENT, net 13,484 11,097
GOODWILL, net 7,672 -
------- -------
$44,243 $30,141
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 713 $ 500
Short-term debt 482 -
Accounts payable 4,691 1,429
Accrued employee benefits 4,809 1,459
Accrued expenses 1,631 1,994
------- -------
Total current liabilities 12,326 5,382
LONG-TERM DEBT 1,320 15,853
OTHER LIABILITIES 2,268 1,001
REDEEMABLE PREFERRED SHARES - 2,400
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY:
Common Shares, no par value; 16,000,000 authorized 19,917 -
and 4,963,249 issued and outstanding in 1996
Class A Common Shares, no par value; 10,000,000
authorized and 1,564,098 issued and outstanding
in 1995 - 520
Class B Series 1 Common Shares, no par value;
4,000,000 authorized and 435,896 issued and
outstanding in 1995 - 145
Warrants - 180
Foreign currency translation adjustment (314) -
Retained earnings 8,726 4,660
------- -------
Total shareholders' equity 28,329 5,505
------- -------
$44,243 $30,141
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Thousands of dollars, except share and per share amounts)
Predecessor
Company
------------
Five Months Seven Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, July 29,
1996 1995 1994 1994
------------ ------------ ------------ ------------
Net sales $60,496 $38,881 $18,847 $24,995
Cost of sales 38,929 25,721 12,159 17,676
-------- -------- -------- --------
Gross profit 21,567 13,160 6,688 7,319
-------- -------- -------- --------
Selling, general and administrative expenses 9,209 3,504 2,413 1,896
Research and development 3,848 2,740 1,052 1,598
-------- -------- -------- --------
13,057 6,244 3,465 3,494
-------- -------- -------- --------
Operating income 8,510 6,916 3,223 3,825
Interest expense 1,562 1,380 657 -
-------- -------- -------- --------
Income before income taxes 6,948 5,536 2,566 3,825
Income tax provision 2,673 2,078 990 1,530
-------- -------- -------- --------
Net income 4,275 3,458 1,576 $ 2,295
========
Preferred share dividends 209 264 110
-------- -------- --------
Net income applicable to common shareholders $ 4,066 $ 3,194 $ 1,466
======== ======== ========
Earnings per share $1.29 $1.25 $0.57
====== ====== ======
Weighted average number of common shares and equivalents
outstanding 3,162,883 2,564,094 2,564,094
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(Thousands of dollars)
Foreign
Class A Class B Currency
Common Common Common Translation Retained
Shares Shares Shares Warrants Adjustment Earnings Total
------- -------- --------- -------- ---------- -------- -------
BALANCE, at July 29, 1994
(Initial Capitalization) $ - $ 455 $ 145 $ - $ - $ - $ 600
Value assigned to warrants
and Class A Common Shares
issued to employees - 65 - 180 - - 245
Net income for the five
months ended December 31, 1994 - - - - - 1,576 1,576
Preferred share dividends - - - - - (110) (110)
---- ---- ---- ---- ------ ------ ------
BALANCE, at December 31,
1994 - 520 145 180 - 1,466 2,311
Net income - - - - - 3,458 3,458
Preferred share dividends - - - - - (264) (264)
------ ---- ---- ---- ------ ------ ------
BALANCE, at December 31,
1995 - 520 145 180 - 4,660 5,505
RDI Convertible Note
conversion 892 - - - - - 892
Conversion of Class A and
Class B Common Shares
into Common Shares 665 (520) (145) - - - -
Exercise of Outstanding
Warrants 186 - - (180) - - 6
Issuance of Common Shares,
net of offering expenses 18,174 - - - - - 18,174
Foreign currency
translation adjustment - - - - (314) - (314)
Net income - - - - - 4,275 4,275
Preferred share dividends - - - - - (209) (209)
------- -------- -------- -------- ------- ------ -------
BALANCE, at December 31,
1996 $19,917 $ - $ - $ - $ (314) $8,726 $28,329
======= ======== ======== ======== ======= ====== =======
The accompanying notes are an integral part of these consolidated statements.
F-5
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Thousands of dollars)
Predecessor
Company
---------------
Five Months Seven Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, July 29,
1996 1995 1994 1994
------------ ------------ ------------ ----------
CASH FLOWS FROM OPERATIONS:
Net income $ 4,275 $ 3,458 $ 1,576 $ 2,295
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 2,119 1,774 673 949
Deferred income taxes 708 941 (358) -
Amortization of debt discount 147 33 - -
Stock compensation expense - - 65 -
Changes in assets and liabilities:
(Increase) decrease in receivables (606) 806 (367) 1,261
(Increase) decrease in inventories 479 (280) 561 277
(Increase) decrease in other current assets 237 (466) (7) (31)
Increase (decrease) in accounts payable (881) (91) 55 (531)
Increase (decrease) in accrued employee benefits 670 148 795 (121)
Increase (decrease) in accrued expenses (564) (321) 1,342 (388)
Increase in other long-term liabilities (29) - - -
------- -------- -------- -------
Cash provided by operations 6,555 6,002 4,335 3,711
------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (including transaction fees and expenses),
net of cash acquired (7,156) - (16,929) -
Capital expenditures (2,031) (847) (102) (812)
------- -------- -------- -------
Cash used in investing activities (9,187) (847) (17,031) (812)
------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - - 14,820 -
Repayment of debt (16,909) - - -
Repayment of preferred shares (2,400)
Payment of dividends (583)
Net change in short-term debt 126 - - -
Proceeds from issuance of preferred shares - - 2,400 -
Proceeds from issuance of Common Shares and exercise
of warrants, net of offering expenses 18,180 - 600 -
Proceeds from issuance of warrants - - 180 -
Net transfers to Seller - - - (2,899)
------- ------- ------- -------
Cash provided by (used in) financing activities (1,586) - 18,000 (2,899)
------- ------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH (3) - - -
------- ------- ------- -------
Increase (decrease) in cash and cash equivalents (4,221) 5,155 5,304 -
CASH AND CASH EQUIVALENTS, beginning of period 10,459 5,304 - -
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 6,238 $10,459 $ 5,304 $ -
======== ======= ======== ======
F-6
SUPPLEMENTAL DISCLOSURE OF FINANCING AND INVESTING ACTIVITIES:
In April 1996, the Company purchased all of the outstanding stock of RDI
for $8,964,000. CDI paid $6,964,000 in cash plus transaction fees of
$324,000 from existing cash on hand, and delivered debt of $2,000,000. See
Note 5 to the consolidated financial statements.
In October 1996, in connection with the initial public offering, the
Company converted the RDI Convertible Notes as described in Note 8 to the
consolidated financial statements into 99,155 Common Shares.
The accompanying notes are an integral part of these consolidated statements.
F-7
CONTROL DEVICES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Organization and Basis of Presentation:
---------------------------------------
Control Devices, Inc. ("CDI"), which was organized on June 10, 1994,
designs, manufactures and markets circuit breakers, electronic ceramic
components parts and electronic sensors used by original equipment
manufacturers ("OEMs") in the automotive, appliance and telecommunications
markets. On April 1, 1996, CDI purchased Realisations et Diffusion pour
l'Industrie ("RDI"), which distributes these and other products in the
Northern European market from its headquarters near Paris, France. The
accompanying financial statements include the results of CDI and RDI from
the date of acquisition. The "Company" refers to both CDI and RDI
On July 29, 1994, CDI purchased certain assets and liabilities (the
"Business") of GTE Control Devices Incorporated and Dominican Overseas
Trading Company (collectively, the "Seller"), indirect wholly-owned
subsidiaries of GTE Corporation. For the period prior to the acquisition
date, the Business is referred to as the "Predecessor Company". The
accompanying financial statements, including those of the Predecessor
Company prior to the acquisition date have been prepared by CDI management
and present the financial position and results of operations of CDI from
the acquisition date and of the Business for the period prior to the
acquisition date. Accordingly, the financial information for the period
prior to the acquisition date does not reflect the significant impact of
the acquisition, the related financing and the purchase accounting
adjustments on the financial position and results of operations of CDI.
The Predecessor Company financial statements include all significant
components of the Business and have been prepared solely by CDI, as if the
Business was operated as a separate entity for the period presented. The
Predecessor Company financial statements do not include an allocation of
any assets and liabilities not specifically identified to the Business,
including cash and intercompany debt.
(2) Summary of Accounting Policies:
-------------------------------
Principles of consolidation-
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
Use of estimates-
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Foreign currency translation and transactions-
---------------------------------------------
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars using the exchange rate in effect at the balance sheet
date. Results of operations are translated using the average exchange rate
prevailing throughout the period. The effects of exchange rate fluctuations
on translating foreign currency assets and liabilities into U.S. dollars
are included in the foreign currency translation adjustment component
F-8
(2) Summary of Accounting Policies--(Continued):
-------------------------------------------
of shareholders' equity, while gains and losses resulting from foreign
currency transactions are included in net income.
Cash and cash equivalents-
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
Trade receivables-
-----------------
RDI's practice is to sell part of its trade receivables to finance its
business. At December 31, 1996, such sales with recourse amounted to
$2,971,000 which have been deducted from trade receivables. Based on
historical collectibility of trade receivables, RDI's obligations under the
recourse provisions are not material.
Inventories-
-----------
Inventories are stated at the lower of cost or market value. Cost of
inventories is determined by the first-in, first-out ("FIFO") method of
inventory valuation.
Property, plant and equipment-
-----------------------------
Property, plant and equipment is stated at cost and is depreciated using
the straight-line and various accelerated methods over the estimated useful
lives of the related plant and equipment. Ranges of the estimated useful
lives are as follows:
The Company:
Machinery and equipment 3 to 15 years
Building and building equipment 40 years
Predecessor Company:
Machinery and equipment 3 to 16 years
Building and building equipment 10 to 50 years
Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
less. Maintenance, repairs and renewals are charged to expense as
incurred; betterments are capitalized.
Goodwill
--------
As part of the acquisition of RDI, goodwill was recorded which represented
the difference between the purchase price and the fair value of the
identifiable underlying net assets acquired and is carried as an asset,
less accumulated amortization which is calculated on a straight-line basis
over the estimated useful life of 40 years.
The Company periodically evaluates the periods over which intangible assets
are amortized to determine whether events have occurred which would require
modification to the amortization period. The Company reviews anticipated
future operating results and cash flows on an undiscounted basis in
determining whether there has been an impairment in the value of the excess
of purchase price over net assets acquired. An impairment loss would be
measured as the amount by which the carrying amount of the impaired asset
F-9
(2) Summary of Accounting Policies--(Continued):
-------------------------------------------
exceeds the fair value of the asset. That fair value would then become the
asset's new cost basis. Amortization charged to operations amounted to
approximately $145,000 in 1996.
Income taxes-
------------
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using presently enacted tax rates and
regulations.
Research and development-
------------------------
Expenditures for Company-sponsored research and new product development are
expensed as incurred.
Environmental expenditures-
--------------------------
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations and that do not contribute to
current or future revenues are expensed.
Revenue recognition-
-------------------
Revenue is recognized when products are shipped.
Earnings per share-
------------------
Earnings per share is based on the weighted average number of shares of
common shares and dilutive common share equivalents outstanding during the
period. Common equivalent shares are calculated using the treasury stock
method. For the year ended December 31, 1996 the computation included
46,002 Common Shares issuable upon exercise of stock options after the
assumed repurchase of Common Shares with related proceeds. There is no
difference between primary and fully diluted earnings per share.
Fair value of financial instruments-
-----------------------------------
The fair values of financial instruments closely approximate their carrying
values. The Company has no involvement with derivative financial
instruments.
(3) Public Offering and Related Transactions:
----------------------------------------
In contemplation of the public offering described below on August 30, 1996,
the shareholders of the Company approved two amendments to the Company's
Articles of Incorporation. The first amendment reclassified the outstanding
Class A Common Shares and Class B Common Shares as Common Shares and
eliminated the designations of the Class A and Class B Shares immediately
prior to the closing of the public offering. The second amendment
eliminated the 11% Cumulative Preferred Shares ("Redeemable Preferred
Shares") when all the Redeemable Preferred Shares were redeemed in
connection with the public offering.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission, which was declared effective on October 2, 1996.
On October 8, 1996, the Company closed on the sale of 2,000,000 Common
Shares in connection with its initial public offering (the "public
offering") and received net proceeds of approximately $15.7 million. On
October 15, 1996, the Company issued 300,000 Common
F-10
(3) Public Offering and Related Transactions--(Continued):
----------------------------------------------------
Shares in connection with the exercise of the underwriter's overallotment
option granted in connection with the public offering and received net
proceeds of approximately $2.5 million.
The following transactions occurred substantially simultaneously with the
close of the public offering:
a. the exercise of the outstanding warrants described in Note 8 to
purchase 564,100 Class B Series 1 Common Shares at $0.01 per share;
b. the conversion of all 999,996 Class B Series 1 Common Shares
outstanding after the exercise of the warrants into a like number of
Class A Common Shares;
c. the reclassification of the Class A Common Shares into Common Shares
and the elimination of the designations of Class A Common Shares and
Class B Common Shares;
d. the conversion of the RDI Convertible Notes as described in Note 8
into 99,155 Common Shares; and
e. the repayment of the Senior Notes and Redeemable Preferred Shares
described in Notes 8 and 9 with the net proceeds from the public
offering.
The supplemental net income per share would have been $1.06 and $0.94 for
the years ended December 31, 1996 and 1995, respectively, assuming the
conversion of the RDI Convertible Notes (only in 1996), the issuance of
2,146,488 and 2,018,333 Common Shares (without deducting underwriters'
discount or offering expenses) at the public offering price of $9.00 per
share and the application of proceeds thereof to retire the Company's
Senior Notes plus accrued interest and the Redeemable Preferred Shares plus
accrued dividends, as of the beginning of each respective period. The
supplemental net income per share does not include the results of
operations for RDI prior to April 1, 1996.
(4) Acquisition of the Business:
On July 29, 1994, CDI purchased the Business for $16.4 million in cash and
a $1.5 million note payable to GTE Control Devices Incorporated (the
"Seller Note"). The cash portion of the purchase price and related
transaction fees of approximately $500,000 were financed through a
combination of long-term debt and Common and Preferred Shares issued to
various investors.
The purchase method was used to account for the acquisition. The aggregate
purchase price has been allocated to the assets and liabilities of the
Business based on fair market value.
The net assets acquired after allocating the purchase price are as follows
(in thousands):
Receivables $ 4,744
Inventories 3,560
Other current assets 110
Property, plant and equipment 12,213
Other assets 382
Accounts payable (1,465)
Accrued employee benefits (516)
Accrued expenses (599)
-------
$18,429
=======
F-11
(4) Acquisition of the Business--(Continued):
Pursuant to the asset purchase agreement, the Seller retained certain
assets and liabilities including, but not limited to, liabilities for
pensions and post-retirement life and health insurance, certain employee
benefits for active employees and reserves for environmental matters.
The unaudited pro forma results of operations for the year ended
December 31, 1994, had the acquisition and initial capitalization of the
Company occurred at the beginning of the period, are provided in the
following table. These pro forma results include adjustments for
depreciation and amortization of assets acquired based on their fair market
values at the acquisition date, increased interest on acquisition debt,
additional preferred share dividends, elimination of allocated employee
benefit and administrative expenses, additional professional fees, and the
related income tax effect. For purposes of computing income taxes, an
effective tax rate of 40% was used for the Predecessor Company results of
operations. The unaudited pro forma information does not necessarily
represent what the results of operations would have been in such periods
and is not intended to be indicative of future results.
Year Ended
December 31, 1994
--------------------------
(Unaudited - in thousands)
(except per share)
Net sales $43,842
Net income applicable to common shareholders 3,055
Earnings per share $1.19
(5) Acquisition of RDI:
------------------
On April 1, 1996, CDI purchased all of the issued and outstanding stock of
RDI for $8,964,000. CDI paid $6,964,000 in cash plus transaction fees of
approximately $324,000 from existing cash on hand, delivered Subordinated
Promissory Notes ("RDI Notes") totaling $1,107,600 and delivered
Automatically Converting Subordinated Promissory Notes ("RDI Convertible
Notes") totaling $892,400. The Company's Consolidated Statement of Income
for the year ended December 31, 1996 includes the results of operations of
RDI from the date of acquisition.
The purchase method was used to account for the acquisition. The aggregate
purchase price has been allocated to the assets and liabilities of RDI
based on fair market value.
The net assets acquired after allocating the purchase price are as
follows (in thousands):
Cash $ 132
Receivables 5,828
Inventories 3,349
Other current assets 1,187
Goodwill, and other intangibles 8,013
Property, plant and equipment 2,377
Accounts payable (5,387)
Accrued expenses (4,467)
Debt (1,744)
---------
$ 9,288
=========
F-12
(5) Acquisition of RDI-(Continued):
------------------------------
The unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995, respectively, had the acquisition of RDI
occurred at January 1, 1996 and January 1, 1995, respectively, are provided
in the following table. These pro forma results include adjustments for
depreciation and amortization of assets acquired based on their fair market
values at the acquisition date, adjustments for additional interest expense
on acquisition debt, adjustments for the decrease in interest expense on
the Seller Note which was repaid in connection with the acquisition of RDI,
adjustments for the elimination of interest income on excess cash balances,
adjustments for the elimination of intercompany sales and profit in
inventory, and the related income tax effect. The unaudited pro forma
information does not necessarily represent what the results of operations
would have been in such periods and is not intended to be indicative of
future results.
Year Ended
December 31,
1996 1995
------- -------
(Unaudited - in thousands)
(except per share)
Net sales $67,119 $65,621
Net income applicable to common shareholders 4,141 3,196
Earnings per share $1.31 $1.25
(6) Inventories:
-----------
Classes of inventories as of December 31, 1996 and 1995, are as follows (in
thousands):
1996 1995
------ ------
Raw materials and supplies $1,163 $1,174
Work-in-process 941 613
Finished goods 3,839 1,492
------ ------
$5,943 $3,279
====== ======
(7) Property, Plant and Equipment:
------------------------------
Classes of property, plant and equipment as of December 31, 1996 and 1995,
are as follows (in thousands):
1996 1995
------- -------
Land $ 486 $ 181
Building 3,377 1,440
Equipment 15,209 11,513
Leasehold improvements 248 248
------- -------
19,320 13,382
Accumulated depreciation (5,836) (2,285)
------- -------
$13,484 $11,097
======= =======
F-13
(8) Debt:
-----
Debt consists of the following as of December 31, 1996 and 1995, (in
thousands):
1996 1995
-------- ------
10% Senior Secured Fixed Rate Notes $ - $10,500
11% Senior Subordinated Notes (face value of $4,500
at December 31, 1995) - 4,353
RDI Notes 1,108 -
RDI fixed rate loans 925 -
RDI short-term debt 482 -
Junior Subordinated Promissory Note (Seller Note) - 1,500
---------- ----------
Total Debt $ 2,515 $16,353
Less: Current portion of long-term debt 713 500
Short-term debt 482 -
---------- ----------
Total Long-term Debt $ 1,320 $15,853
========== ==========
On July 29, 1994, and as amended on March 29, 1996, CDI entered into an
agreement (the "Securities Purchase Agreement") with a group of affiliated
lenders to provide CDI with $15.0 million of term loans and up to $3.0
million in revolving credit loans. The term loans were comprised of the 10%
Senior Secured Fixed Rate Notes and the 11% Senior Subordinated Notes
(collectively the "Senior Notes"). In connection with the public offering,
the Senior Notes were repaid without premium in October 1996.
Under the Securities Purchase Agreement, warrants to purchase 564,100
shares of Class B Series 1 Common Shares at $.01 per share were issued to
the lenders. The proceeds received upon the issuance of the 11% Senior
Subordinated Notes of $4.5 million were allocated between the notes and the
warrants based on their estimated relative fair values. Accordingly,
$180,000, which represents the amount of the proceeds allocated to the
warrants, has been credited to additional paid-in-capital. The discount was
being amortized over the life of the notes. In October 1996, the remaining
unamortized discount of $130,000 ($80,000, net of income tax effect) was
charged to expense in connection with the repayment of the Senior Notes.
The RDI fixed rate loans bear interest at the weighted average rate of 7.7%
and are secured by certain assets of RDI.
The RDI Notes bear interest at 8% per annum and are due in three equal
annual installments commencing on April 1, 1997. CDI has the right to
prepay the RDI notes at any time without premium.
The RDI Convertible Notes bore interest at 6.5% per annum and were payable
in full on demand after April 1, 1999. In connection with the public
offering, the RDI Convertible Notes were converted into 99,155 Common
Shares in October 1996.
On October 8, 1996, Fleet Bank of Maine ("Fleet Bank") and the Company
entered into an agreement, pursuant to which Fleet Bank has agreed to
provide a $15.0 million revolving line of credit facility to the Company to
fund strategic acquisitions and, if needed, for working capital. The
facility has a maturity date of September 30, 1998. The facility has three
interest rate options consisting of (i) Fleet Bank's prime rate for daily
rate borrowings, (ii) Fleet Bank's cost of funds rate plus 1.5% for
borrowings of 30 days or less, or (iii) the corresponding London Interbank
Offering Rate (LIBOR) plus 1.5% for borrowings of 30, 60, 90 or 180 days.
The line of credit is unsecured and contains certain financial and other
covenants including but not
F-14
(8) Debt--(Continued):
------------------
limited to, minimum tangible net worth, debt to net worth, and minimum cash
flow coverage. The financial covenants are to be met on a quarterly basis.
The Company is in compliance with all covenants as of December 31, 1996 and
believes that the covenants will not restrict its future operations. To
date, there have been no borrowings under this line of credit facility.
RDI has various credit facilities available to it totaling $0.8 million
with rates ranging from 0.5% to 1.0% over the Paris Inter-Bank Offered
Rate. At December 31, 1996, RDI had borrowings aggregating $0.5 million
under these facilities.
Scheduled principal payments due on debt in the next five years are as
follows (in thousands):
RDI RDI
RDI Short-term Fixed
Notes Debt Rate Loans Total
----- ---------- ---------- -----
1997 $369 $482 $344 $1,195
1998 369 -- 264 633
1999 370 -- 151 521
2000 -- -- 79 79
2001 -- -- 87 87
Cash paid for interest for the years ended December 31, 1996 and 1995, and
the five months ended December 31, 1994 was $2,180,000, $1,702,500 and
$65,000, respectively.
(9) Redeemable Preferred Shares:
----------------------------
In connection with the acquisition of the Business, the Company issued
2,400 shares of 11% Cumulative Preferred Shares ("Redeemable Preferred
Shares") for $2.4 million. The Redeemable Preferred Shares accrued
cumulative dividends at a rate of 11% per annum and had a liquidation
preference value of $2.4 million, plus accrued and unpaid dividends. In
connection with the public offering, the Redeemable Preferred Shares plus
accrued dividends were repaid without premium in October 1996. The
liquidation preference value of the Redeemable Preferred Shares ($1,000 per
share plus accrued dividends) was $2,774,000 at December 31, 1995. At
December 31, 1995, accrued and unpaid dividends were $374,000, which have
been included in accrued expenses.
(10) Shareholders' Equity/Net Assets:
--------------------------------
In connection with the acquisition of the Business, the Company issued
1,564,098 shares of Class A Common Shares and 435,896 shares of Class B
Series 1 Common Shares for an aggregate price of $600,000.
Certain Class A Common Shares were issued to officers of CDI at a price
which was less than the amount paid by other investors. A non-cash charge
of $65,000 was recorded in 1994 as compensation expense for the difference
between fair value and exercise price for these shares.
F-15
(10) Shareholders' Equity/Net Assets-(Continued):
--------------------------------------------
Net assets-
----------
Changes in Predecessor Company net assets were as follows (in thousands):
Seven Months
Ended
July 29,
1994
-------
Balance beginning of period $17,334
Net income 2,295
Net transfers (2,899)
-------
Balance at end of period $16,730
=======
(11) Stock Option Plans:
-------------------
The Company has reserved 300,000 Common Shares for issuance pursuant to its
1996 Stock Compensation Plan (the "Plan"). The Plan provides for the
awarding of incentive stock options and director options on Common Shares
from time to time at the discretion of the Company. Options become
exercisable one year after the date of grant and shall be exercised no
later than 10 years from the date of grant. Pursuant to the Plan, on
October 2, 1996 the Company granted options to purchase 150,000 Common
Shares to certain employees and officer, and on October 25, 1996, the
Company granted options to purchase 75,000 Common Shares to certain
officers of the Company. The exercise price per share for options issued on
October 2, 1996 and October 25, 1996 was $9.00 and $10.56, respectively. At
December 31, 1996, no director options have been granted. All options vest
one year after the date of grant and may be exercised subsequent to one
year after the date of grant up to a maximum of approximately 10,000
options per individual per year.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and related interpretations. Accordingly, had compensation cost
for these plans been determined based on the fair value at the grant dates,
the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
Net Income As Reported: $4,066
Pro forma: 3,993
Earnings per share As Reported: $1.29
Pro forma: 1.26
The fair values of the management and officer option grants were estimated
on the date of grant using the Black-Scholes option-pricing model on the
following weighted-average assumptions used for grants in 1996; dividend
yield of 0%, expected volatility of 26%, expected life of 5 years and 10
years, respectively, and risk free interest rates of 6.35% and 6.54%,
respectively.
At December 31, 1996 the Company had 225,000 options outstanding at
exercise prices ranging from $9.00 to $10.56. These options had a weighted-
average exercise price of $9.52, a weighted average fair value of
F-16
(11) Stock Option Plans-(Continued):
--------------------------------
$4.07, and a weighted average remaining contractual life of 9.8 years. No
options are exercisable until October 1997.
(12) Income Taxes:
-------------
The Predecessor Company operated as a division, and income taxes were not
allocated to it. The accompanying financial statements of the Predecessor
Company reflect an allocated provision for income taxes using an effective
tax rate of 40%, the estimated combined rate for current and deferred state
and federal income taxes. The related current or deferred income taxes
payable would have been transferred to the Seller, if allocated, and are
included in the net assets of the Predecessor Company.
The components of the provision (benefit) for income taxes for the Company
for the years ended December 31, 1996 and 1995 and the five months ended
December 31, 1994 are as follows (in thousands):
December 31,
------------------------------
1996 1995 1994
------ ------ ----
Current:
Federal $1,661 $907 $1,029
State 481 230 319
Foreign (177) - -
-------- -------- --------
1,965 1,137 1,348
======== ======= ========
Deferred:
Federal 182 729 (277)
State 52 212 (81)
Foreign 474 - -
-------- -------- --------
708 941 (358)
-------- -------- --------
$2,673 $2,078 $990
======== ======= ========
A reconciliation of the income tax provision calculated at the federal
income tax statutory rate and the Company's effective income tax rate for
the years ended December 31, 1996 and 1995 and for the five months ended
December 31, 1994 is as follows (in thousands):
December 31,
------------------------------
1996 1995 1994
------ ------ ------
Tax at statutory rate $2,362 $1,882 $872
State income taxes, net of federal benefit 350 292 157
Other, net (39) (96) (39)
------ ------ ----
$2,673 $2,078 $990
====== ====== ====
F-17
(12) Income Taxes--(Continued):
-------------------------
The significant components of deferred income tax asset (liability) at
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
------ ------
Current:
Inventory reserves $ 54 $ 112
Accrued employee benefits 628 76
Other 379 230
------ ------
1,061 418
------ ------
Noncurrent:
Depreciation (1,453) (1,012)
Other 40 11
------ ------
(1,413) (1,001)
------ ------
$(352) $(583)
====== ======
Deferred income taxes are not provided on undistributed earnings of the
Company's foreign subsidiary because the earnings are considered
permanently reinvested in such foreign operations. The unrecognized tax
liability on the undistributed foreign earnings is not significant at
December 31, 1996.
Cash paid for income taxes for the years ended December 31, 1996 and 1995,
and the five months ended December 31, 1994 was $2,009,000, $1,946,000 and
$1,036,600, respectively.
(13) Employee Benefits:
-----------------
CDI maintains a 401(k) savings plan for substantially all domestic
employees. Under the plan, CDI matches employee contributions subject to
the discretion of the board of directors. The expense for the employer
contribution for the years ended December 31, 1996 and 1995, for the five
months ended December 31, 1994, was $390,000, $301,000 and $137,000,
respectively.
The Predecessor Company's employees participated in Seller-sponsored
defined benefit, postretirement health and life insurance, and savings and
investment plans. The expense for these plans, which was allocated by the
Seller to the Predecessor Company (see Note 1), was $94,000, for the seven
months ended July 29, 1994. Pursuant to the Asset Purchase Agreement, the
Seller retained all obligations under these plans. CDI does not sponsor
defined benefit or postretirement benefit plans. Information with respect
to actuarial valuations, funded status, investment activities and other
information regarding the Predecessor Company's participation in the plans
is not available from the Seller, and, accordingly, is not presented.
RDI maintains a government mandated retirement plan for substantially all
of its employees. These benefits do not vest until retirement. The amount
of the benefits to be paid depends upon, among other things, the seniority
and salary of the employees at retirement date. Also, RDI maintains a
government mandated employee profit plan for all employees. The amount of
the benefits are based upon a formula which includes, among other things,
net taxable income, The liability is generally not payable for a period of
five years and is internally funded. In addition, RDI maintains an
incentive plan for certain of its key employees. The amount of the benefits
are based upon a formula which includes, among other things, net income.
The expense for the above plans for RDI was $101,000 for the nine months
ended December 31, 1996.
F-18
(14) Commitments and Contingencies:
-----------------------------
Operating Leases-
----------------
The Company leases certain buildings, office space, automobiles and
equipment under noncancellable operating leases expiring at various dates
through May 1999. Rental expense under operating leases amounted to
$531,000, $446,000, $236,000 and $362,000 for the years ended December 31,
1996 and 1995, the five months ended December 31, 1994 and the seven months
ended July 29, 1994, respectively.
Future minimum rental payments under leases extending for one year or more
are as follows (in thousands):
Year ended December 31,
1997 $487
1998 288
1999 191
2000 159
2001 and thereafter 300
Employment Agreements-
---------------------
The Company has entered into employment agreements with two executives at
RDI. The agreements provide that each executive will receive annual
compensation of up to FF 975,000 (approximately $188,000), plus an annual
bonus of up to FF 487,000 (approximately $94,000), which is based upon
meeting certain performance objectives. The agreements provide for a
severance payment if the Company terminates the executive for any reason
other than misconduct prior to March 29, 1998. The amount of the severance
payment to each executive is equal to two years' salary and bonus.
Legal Proceedings-
-----------------
The Company has various claims and contingent liabilities arising in the
ordinary conduct of business. In the opinion of management, they are not
expected to have a material adverse effect on the financial position of the
Company.
(15) Related Party Transactions:
--------------------------
CDI-
---
Hammond, Kennedy, Whitney & Company ("HKW") provides management services to
the Company. Certain directors of the Company are principals of HKW and own
Common Shares of the Company. The Company pays HKW monthly management fees
of $15,000 and board of directors fees. These fees amounted to $246,100,
$240,000 and $91,000, for the years ended December 31, 1996 and 1995, and
for the five months ended December 31, 1994, respectively. In addition,
fees paid to one of the principals of HKW for professional services
amounted to $94,000, $59,000, and $17,000, for the years ended December 31,
1996 and 1995 and the five months ended December 31, 1994, respectively.
Indemnification from Seller-
---------------------------
Pursuant to the terms of an Environmental Agreement dated July 6, 1994, the
Seller has retained liability and agreed to indemnify CDI for any and all
liabilities arising under CERCLA and other environmental requirements
related to contamination and cleanup at acquired facilities, treatment,
storage and disposal of hazardous materials transported offsite and
remediation required by the State of Maine Department of Environmental
Protection or U.S. Environmental Protection Agency existing or occurring
prior to the acquisition date. The Seller has indemnified CDI against
claims pursuant to the aforementioned issues to the
F-19
(15) Related Party Transactions-(Continued):
--------------------------------------
extent the amounts exceed $50,000 in the aggregate. The Seller has
liability for claims relating to soil and groundwater contamination from
the surface impoundment and out-of-service leachfield at the Company's
Standish facility, known to exist prior to the acquisition, to the extent
the liability exceeds $50,000. The indemnifications provided by the Seller
begins to expire three years after the acquisition date, with certain
indemnifications continuing indefinitely. Although the Company believes the
Seller's indemnity is enforceable, if the Company were unable to enforce
such indemnification obligations against the Seller, the Company could
become liable for any such retained liability. The inability to proceed
against the Seller, could have a material adverse effect on the Company's
financial condition and results of operations.
Predecessor Company-
-------------------
The Seller allocated expenses to the Predecessor Company for corporate
accounting, legal and administrative support services. Expenses charged
amounted to $128,000, for the seven months ended July 29, 1994 and are
reflected as selling and general expenses in the accompanying statements of
income.
(16) Customer Information:
--------------------
CDI sells products primarily to OEMs on a worldwide basis primarily in the
automotive, appliance and telecommunications industries. RDI distributes
its products primarily to OEMs in the Northern European market. Sales are
concentrated in North America and Europe with the top 15 customers
accounting for approximately 75% and 72% of sales in 1996 and 1995,
respectively.
The following presents financial information for domestic and foreign
operations for the year ended December 31, 1996. The Company had no foreign
operations prior to the 1996 acquisition of RDI.
Sales:
United States $42,620
Foreign (principally Europe) 20,639
Intersegment Elimination (2,763)
-------
$60,496
=======
Operating Income:
United States $ 7,500
Foreign 1,010
-------
$ 8,510
=======
Identifiable Assets:
United States $26,067
Foreign 18,176
-------
$44,243
=======
For the years ended December 31, 1996 and 1995, and for the five months
ended December 31, 1994, United States export sales (principally to
Europe), were $10,119,000 (excluding intercompany sales of $2,763,000 to
RDI in 1996), $11,540,000, and $4,869,000, respectively. Sales to RDI are
made on substantially the same terms and conditions as those to unrelated
customers.
For the years ended December 31, 1996 and 1995, and for the five months
ended December 31, 1994, one customer accounted for approximately
$4,631,000, $5,270,000, $1,745,000, $1,924,000 of sales, respectively
F-20
(16) Customer Information-(Continued):
--------------------------------
and another customer accounted for $7,075,000, $7,647,000, $3,315,000 of
sales, respectively, during these periods.
(17) Supplier Information:
--------------------
The Company relies on a sole supplier or a limited group of suppliers for
certain key components of its products. The Company does not have a long-
term supply agreement with any of these suppliers, and operates under
purchase orders. The Company's reliance on sole or a limited group of
suppliers involves several risks, including a potential inability to obtain
an adequate supply of required components and reduced control over pricing
and timely delivery of components. Although the timeliness, yield and
quality of deliveries to date from the Company's suppliers have been
acceptable, any prolonged inability to obtain adequate deliveries or any
other circumstances that would require the Company to seek alternative
sources of supply could delay the Company's ability to ship its products,
which could damage relationships with current and prospective customers and
could therefore have a material adverse effect on the Company's results of
operations.
(18) Consulting Agreements:
---------------------
In April 1995, the Company entered several agreements with an individual to
provide design and marketing consulting services to the Company. The terms
of the agreements also provide for minimum cash royalty and license
payments. The agreements begin to expire in March 2001, and allow for
cancellation by either party. In connection with these agreements, the
Company paid the individual a one time payment of $200,000 in 1995 and
granted a non-qualified stock options to purchase up to 200,000 Common
Shares at any time until March 31, 2001 at $9.00 per Common Share. In
addition, royalty payments were approximately $247,000, and $223,000, for
the years ended December 31, 1996 and 1995, respectively.
(19) International Manufacturing and Distribution:
--------------------------------------------
The Company has international manufacturing facilities located in San
Cristobal, Dominican Republic. Included in the Company's balance sheet at
December 31, 1996, are the net assets of the Company's international
manufacturing operations which totaled approximately $1,380,000. This
operation manufactured products accounting for approximately 34% of the
Company's gross revenues in 1996.
RDI distributes its products primarily to automotive OEMs in Northern
Europe. The Company's results of operations are therefore subject to
European economic conditions. RDI generates revenues and incurs expenses
primarily in currencies other than the U.S. dollar. As a result, there is
increased financial risk to the Company based on fluctuations in currency
exchange rates. Changes in exchange rates, therefore, may have a
significant effect on the Company's financial condition and results of
operations. At December 31, 1996, the net assets of RDI, including
goodwill, were approximately $9.4 million.
F-21
(20) Supplementary Balance Sheet Information:
---------------------------------------
Accrued expenses consisted of the following as of December 31, 1996 and
1995 (in thousands):
1996 1995
------- -------
Interest $ 2 $ 652
Dividends - 374
Environmental 305 305
Other 1,324 663
------- -------
$1,631 $1,994
======= =======
Other long-term liabilities as of December 31, 1996 and 1995, are as
follows (in thousands):
1996 1995
------- -------
Deferred tax liabilities $1,413 $1,001
Retirement benefits 535 -
Profit sharing 320 -
------- -------
$2,268 $1,001
======= =======
F-22
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Part III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Incorporated herein by reference to the information under the heading
"Election of Directors" and "Executive Officers" in the Company's Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on April 25, 1997.
Item 11. Executive Compensation
- -------- ----------------------
Incorporated herein by reference to the information under the headings
"Compensation of Directors", "Compensation Committee Interlocks and Insider
Participation", "Summary Compensation Table", "Options" and "Report of the
Compensation Committee on Executive Compensation" in the Company's Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on April 25, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Incorporated herein by reference to the information under the headings
"Principal Shareholders" and "Security Ownership of Management" in the Company's
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held on April 25, 1997.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Incorporated herein by reference to the information under the headings
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's Proxy Statement with respect to the Company's
Annual Meeting of Stockholders scheduled to be held on April 25, 1997.
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this annual report.
(2) Exhibits
--------
2 Not Applicable.
3.1 Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1.2 of Amendment No. 1 to
Registration Statement on Form S-1, Registration Statement
No. 333-09379).
17
3.2 Code of By-Laws of the Company (Incorporated by reference
to Exhibit 3.2 of Amendment No. 1 to Registration Statement
on Form S-1, Registration Statement No. 333-09379).
4.1 Specimen of Common Share certificate (Incorporated by
reference to Exhibit 4.1 of Amendment No. 1 to Registration
Statement on Form S-1, Registration Statement No. 333-
09379).
4.2 Article III of the Articles of Incorporation of the Company
(included in Exhibit 3.1).
4.3 Code of By-laws of the Company (included in Exhibit 3.2).
4.4 Registration Rights provision of the Securities Purchase
Agreement dated July 29, 1994. (Incorporated by reference
to Exhibit 4.5 of Registration Statement on Form S-1,
Registration Statement No. 333-09379).
4.5 Loan Agreement dated October 8, 1996, between the Company
and Fleet Bank of Maine. (Incorporated by reference to
Exhibit 4.8 of Form 10-Q for the quarter ended September
30, 1996, Commission File No. 0-21345).
9 Not Applicable.
10.1 Environmental Agreement dated July 6, 1994 among Control
Devices, Inc., GTE Products of Connecticut Corporation, GTE
Corporation, GTE Control Devices Incorporated and Dominican
Overseas Trading Company (Incorporated by reference to
Exhibit 10.1 of Registration Statement on Form S-1,
Registration Statement No. 333-09379).
10.2 Lease Agreement dated December 30, 1994 between Mecon Mfg.
and Control Devices, Inc. (Incorporated by reference to
Exhibit 10.4 of Registration Statement on Form S-1,
Registration Statement No. 333-09379).
10.3* 1996 Stock Compensation Plan (Incorporated by reference to
Exhibit 10.5.1 of Amendment No. 1 to Registration Statement
and Form S-1, Registration Statement No. 333-09379).
10.4 Consultant's Agreement dated April 1, 1995, between Control
Devices, Inc. and Dr. Dennis J. Hegyi (Incorporated by
reference to Exhibit 10.6 of Registration Statement on Form
S-1, Registration Statement No. 333-09379).
10.5 Agreement to Grant License dated April 1, 1995, between
Control Devices, Inc. and Dr. Dennis J. Hegyi (Incorporated
by reference to Exhibit 10.7 of Registration Statement on
Form S-1, Registration Statement No. 333-09379).
10.6 Option to Purchase 200,000 Class A Common Shares of Control
Devices, Inc. granted to Dr. Dennis J. Hegyi (Incorporated
by reference to Exhibit 10.8 of Registration Statement on
Form S-1, Registration Statement No. 333-09379).
10.7 Agreement dated April 1, 1995, between Control Devices,
Inc. and Dr. Dennis J. Hegyi (Incorporated by reference to
Exhibit 10.9 of Registration Statement on Form S-1,
Registration Statement No. 333-09379).
18
10.8 License Agreement (Rain Sensor and Fog Sensor) dated April
3, 1995, between Control Devices, Inc. and Dr. Dennis J.
Hegyi (Incorporated by reference to Exhibit 10.10 of
Registration Statement on Form S-1, Registration Statement
No. 333-09379).
10.9 License Agreement (Solar Position Sensor) dated April 3,
1995 between Control Devices, Inc. and Dr. Dennis J. Hegyi
(Incorporated by reference to Exhibit 10.11 of Registration
Statement on Form S-1, Registration Statement No. 333-
09379).
10.10 License Agreement (Twilight Sensor) dated April 3, 1995
between Control Devices, Inc. and Dr. Dennis J. Hegyi
(Incorporated by reference to Exhibit 10.12 of Registration
Statement on Form S-1, Registration Statement No. 333-
09379).
10.11 Stock Purchase Agreement dated March 29, 1996, by and among
the Company and each of the shareholders of RDI
(Incorporated by reference to Exhibit 10.13 of Registration
Statement on Form S-1, Registration Statement No. 333-
09379).
10.12* Employment Agreement with Michel Hauser-Kauffmann.
(Incorporated by reference to Exhibit 10.14 of Registration
Statement on Form S-1, Registration Statement No. 333-
09379).
10.13 License Agreement dated November 6, 1989, between GTE
Products Corporation and Dennis J. Hegyi (Incorporated by
reference to Exhibit 10.15 of Amendment No. 1 to
Registration Statement on Form S-1, Registration Statement
No. 333-09379).
10.14 Lease Agreement dated December 28, 1996 between the Company
and Parque Industrial Itabo, S.A.
10.15 Lease dated December 1, 1996 between the Company and
Regency Associates.
11 Statement regarding computation of per share earnings.
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
21.1 Subsidiaries of the Company.
22 Not Applicable.
23 Not Applicable.
24 Not Applicable.
27 Financial Data Schedule.
28 Not Applicable.
99 Not Applicable.
19
* Management Compensation Plans
(b) Reports on Form 8-K
none
Pursuant to the requirements of Section 13 or 15(d) of the Security Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Control Devices, Inc.
Date: By /s/ JEFFREY G. WOOD
--------------------
Jeffrey G. Wood
Vice President, Chief Financial
Officer, Secretary and Treasurer
20
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signatures Title(s) Date
---------- -------- ----
/s/ Bruce D. Atkinson President, Chief Executive Officer and
- ---------------------------------- Director March 14, 1997
Bruce D. Atkinson Principal Executive Officer
/s/ Ralph R. Whitney, Jr. Chairman of the Board March 14, 1997
- ----------------------------------
Ralph R. Whitney, Jr.
/s/ Jeffrey G. Wood Vice President, Chief Financial
- ---------------------------------- Officer, Secretary and Treasurer March 14, 1997
Jeffrey G. Wood Principal Financial Officer and
Principal Accounting Officer
/s/ C.M. Brennan, III Director March 14, 1997
- ----------------------------------
C.M. Brennan, III
/s/ John D. Cooke Director March 14, 1997
- ----------------------------------
John D. Cooke
/s/ James O. Futterknecht, Jr. Director March 14, 1997
- ----------------------------------
James O. Futterknecht, Jr.
/s/ Alan I. Mossberg Director March 14, 1997
- ----------------------------------
Alan I. Mossberg
/s/ John M. Ramey Director March 14, 1997
- ----------------------------------
John M. Ramey
/s/ Glenn Scolnik Director March 14, 1997
- ----------------------------------
Glenn Scolnik
21