1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 O16441
CODE-ALARM, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2334698
----------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
---------------------------------------------------- --------------------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (810) 583-9620
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of the Registrant's common stock,
without par value, as of August 11, 1995 is 2,320,361.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Notes to condensed consolidated financial statements:
1. These condensed consolidated interim financial statements include
adjustments which in the opinion of management are necessary to fairly
state results for the periods presented. Except for $770 thousand
recorded in connection with the ETC litigation, all adjustments are
normal and recurring. Results of operations for the periods presented
are not necessarily indicative of results to be expected for the fiscal
year.
2. These financial statements include the accounts of the Company and its
wholly-owned subsidiaries after eliminating significant inter-company
accounts and transactions.
3. The Company's credit arrangement includes a $13.0 million revolving
credit facility for working capital requirements, a $1.3 million
secured notes and $2.2 million unsecured notes. The revolving credit
facility has an expiration date of May 23, 1997 and bears interest at
the bank's prime rate (8.75% at August 11, 1995), or at the Company's
option, at the London Inter-bank Offered Rate ("LIBOR") plus 2.5% for
maturities ranging from one to six months (8.4375 and 8.5078,
respectively, at August 11, 1995).
The revolving credit facility is subject to covenants which require
certain debt and cash flow ratios and minimum levels of current assets
and tangible net worth, and is collateralized by substantially all the
assets of the Company and its domestic subsidiaries. Total credit
availability under the arrangement is subject to a formula of accounts
receivable, inventories and net fixed assets. As of June 30, 1995, the
Company was in compliance with the covenants.
The Company's foreign subsidiary's credit arrangement with its
commercial bank includes term loans totaling approximately $2.1
million, with interest rates ranging from 8% to 11%. Payments are due
monthly, with final payments due in 1996.
3
CODE-ALARM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN THOUSANDS)
June 30, Dec. 31,
ASSETS 1995 1994
---------------------
Cash and cash equivalents $ 814 $ 107
Accounts receivable, net 12,927 11,530
Raw material inventories, net 6,409 7,217
Work-in-process inventories 1,343 1,552
Finished goods inventories 4,538 4,123
Refundable income taxes 991 322
Other current assets 1,606 1,229
---------------------
Total current assets 28,628 26,080
Property and equipment, net 4,113 4,130
Goodwill, net 4,355 4,293
Other intangible assets, net 1,047 1,272
Other assets, net 2,074 2,446
---------------------
$40,217 $38,221
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term liabilities $ 1,522 $ 1,443
Accounts payable 8,073 8,791
Accrued expenses 3,046 3,131
---------------------
Total current liabilities 12,641 13,365
Long-term liabilities, net of current portion 11,362 9,511
Reserve for litigation 6,001 4,129
---------------------
Total liabilities 30,004 27,005
---------------------
SHAREHOLDERS' EQUITY:
Common stock 12,210 12,209
Foreign currency translation adjustment 210 49
Accumulated deficit (2,207) (1,042)
---------------------
Total shareholders' equity 10,213 11,216
---------------------
$40,217 $38,221
======== =======
See accompanying notes to consolidated financial statements.
4
CODE-ALARM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ----------------------
1995 1994 1995 1994
------------------- ----------------------
Net sales 18,910 20,534 $36,069 $37,772
Cost of sales 12,228 12,907 23,447 23,505
------------------- ----------------------
Gross profit 6,682 7,627 12,622 14,267
Operating expenses:
Sales and marketing 2,805 3,343 5,806 6,624
Engineering 743 638 1,445 1,182
General and administrative 2,149 2,688 4,294 4,787
------------------- ----------------------
5,697 6,669 11,545 12,593
------------------- ----------------------
Income from operations 985 958 1,077 1,674
Interest expense (331) (140) (630) (226)
Litigation expense (770) (1,825)
Other income (expense) (23) (12) (66) (78)
------------------- ----------------------
Income (loss) before income taxes (139) 806 (1,444) 1,370
Income taxes (44) 286 (279) 411
------------------- ----------------------
Net income (loss) (95) 520 ($1,165) $959
======= ===== ======= =====
Net income per common share ($0.04) $0.22 ($0.50) $0.40
======= ===== ======= =====
Weighted average common shares 2,320 2,389 2,320 2,393
======= ===== ======= =====
See accompanying notes to consolidated financial statements.
5
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOW
UNAUDITED
(IN THOUSANDS)
Six months
Ended June 30,
1995 1994
-----------------------
Increase (decrease) in cash
and cash equivalents from:
Operating activities $248 ($2,202)
Investing activities:
Capital expenditures, net (572) (497)
Cash received (paid) in acquisition of EAE (900) 605
Other - (694)
Financing activities:
Net borrowing (repayment) on credit facilities 2,024 726
Net borrowing (repayment) on long-term debt (94) 2,290
Purchase and retirement of common stock - (503)
Sale of stock options 1 6
Issuance of common stock for purchase
of majority interest in Code Europe - 380
-----------------------
Net change in cash and cash equivalents 707 111
Cash and cash equivalents, beginning 107 227
-----------------------
Cash and cash equivalents, ending $814 $338
===== ====
Supplemental disclosure of cash flow information:
Cash paid for interest $702 $185
Cash paid for income taxes - $581
See accompanying notes to consolidated financial statements.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Consolidated net sales decreased $1.7 million, or 4.5 percent, in the
first six months of 1995 compared to the first six months of 1994. The
majority of this decrease occurred in the second quarter, which experienced a
sales decrease of $1.6 Million or 7.9 percent. Decreases in sales to Mass
Merchandisers and Independent dealers, resulting from one time "line fills" in
the second quarter of 1995, offset increases in OEM, European and Expediter
sales. The Company expects that improved product availability for Europe and
increases in OEM contract sales should cause a modest sales recovery during the
balance of the year.
Consolidated gross profit decreased $1.6 million, or 11.5%, in the
first six months of 1995 compared to the first six months of 1994. During the
second quarter, gross margin decreased $946 thousand, or 12.4%, compared to the
second quarter of 1994. Consolidated gross profit, as a percentage of
consolidated net sales, for the first six months of 1995 was 35.0%, compared to
37.8% for the first six months of 1994. During the first quarter, The Company
experienced manufacturing problems with its European products, and incurred
significant operating inefficiencies. In addition, lower gross margin rates
are a direct result of the Company's efforts to grow its OEM business in the US
and Europe. Typically, OEM sales realize lower gross profits, but also incur
significantly lower selling costs. The Company has implemented margin
improvement programs and expects margin improvements in the last half of 1995.
Consolidated operating expenses decreased $1.1 million, or 8.3%, in the
first six months of 1995 compared to the first six months of 1994. During the
second quarter of 1995, operating expenses decreased $972 thousand or 14.6%,
compared to the second quarter of 1994. Consolidated operating expenses, as a
percentage of consolidated net sales, for the first six months of 1995 were
32.0%, compared to 33.3% for the first six months of 1994; for the second
quarter of 1995, operating expenses were 30.1% compared to 32.5% for the second
quarter of 1994. Decreases in consolidated operating expense is attributable
to decreased sales and marketing expenses, partially offset by increases in
engineering and product development costs. The Company expects to sustain
decreases in marketing and administration expenses, and modest increases in
engineering and development expenses. These trends are a direct result of the
Company's focus on OEM customers and product development efforts.
Consolidated operating income declined $597 thousand, or 35.6%, in the
first six months of 1995 compared to the first six months of 1994. During the
second quarter, operating income improved $26 Thousand, or 2.8% in the second
quarter of 1995 compared to 1994.
Interest expense increased $404 thousand in the first six months of
1995 compared to the first six months of 1994, reflecting higher interest
rates and increased financing costs associated with the acquisition of Europe
Auto Equipement and the buyout of a significant stockholder in the fourth
quarter of 1994.
7
During the second quarter of 1995, the Company recorded $770 thousand
in connection with the ETC litigation. See Item 1 (Legal Proceedings). Based
on comments made by the court, the Company recorded $3.7 million for costs and
damages resulting from this litigation as of December 31, 1994. Using a
written opinion issued by the court, in which the court modified its original
position, the Company recomputed its exposure and recorded $1.1 million of
additional expense in the first quarter. During the second quarter, the court
further modified its written opinion and issued its final judgment in the ETC
matter.
The Company has an effective domestic income tax rate of 34% on current
operating income. Income taxes on foreign operations are approximately 33%.
The Company has reserved one third of the potential deferred tax benefit
resulting from adjusting the ETC judgment against potential income tax
deductibility issues.
The Company recorded a net loss of $95 thousand for the quarter ended
June 30, 1995, or 0.5 percent of net sales, compared to a net profit of $520
thousand or 2.5% of sales in the second quarter of 1994. For the six months
ended June 30, 1995, the Company recorded a net loss of $1.2 million, or 3.2%
of sales, compared to a net profit of $959 thousand, or 2.5% of sales, during
the first half of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital was $16.0 million at June
30, 1995 compared to $12.7 million at December 31, 1994. The current ratio
(current assets divided by current liabilities) as of June 30, 1995 is 2.26 to
1, compared to 2.0 to 1 at December 31, 1994.
Net cash provided by operating activities for the first six months of
1995 was $248 thousand including $423 thousand of depreciation and amortization
charged during the quarter. Cash consumed during the first six months reflects
a decrease in net accounts payable of approximately $700 thousand and increases
in accounts receivable and other assets of $2.4 million, offset by decreases
in inventory and non-cash charges.
As of August 11, 1995, $3,500,000 of the $13,000,000 revolving credit
facility was unused and available. Additionally, $6,500,000 of amounts
outstanding under the revolving line of credit were borrowed under the LIBOR
option cost to the Company of 8.4375 percent.
During the second quarter, the Company concluded a loan agreement with
NBD Bank. Under the terms of the agreement, the Company has secured a
$13,000,000 revolving credit facility, $1,300,000 secured notes and $2,200,000
unsecured notes. The Company has used these facilities for operating capital
and to provide financing for a bond in the ETC matter. The company
contemplates issuing some form of public financing during the third quarter to
partially extinguish this debt and provide additional sources of funding for
the business.
8
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Electromotive Technology Corporation ("ETC") and Directed Electronics
("Directed") v. Code Alarm, Inc., Case Number 87-CV-74022-DT, filed November
5, 1987, in the United States District Court for the Eastern District of
Michigan. The court has ruled on June 16, 1995 that damages associated with
the Company's infringement of United States Patent Number 4,585,569 ("the '569
Patent") total $5.6 million, with interest as of August 11, 1995. The Company
has discontinued making and selling the infringing shock sensors. On July 10,
1995, the Company filed a notice of Appeal with the Court of Appeals of the
Federal Circuit and attained a stay of execution of the infringement judgment,
by posting a supersedeas bond of $5.9 million, backed up by a letter of
credit, which was accepted by the Court. The appeal was docketed on August 7,
1995 by the Court of Appeals for the Federal Circuit and has been given Appeal
Number 95-1442. Discovery is continuing regarding the additional patent
infringement claims made by ETC and Directed Electronics concerning other types
of the Company's shock sensors. Liability, if any, cannot be ascertained at
this time.
There were no material developments during the quarter ended June 30,
1995 in the remaining legal proceedings involving the Company. Reference is
made to the Company's Form 10-K for the year ended December 31, 1994 for a
description of material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on May 16, 1995. The stockholders
reelected Kenneth Mueller and Marshall J. Mueller to the board of directors,
each receiving 1,913,849 votes. Rand W. Mueller, Alan H. Foster, Jack D.
Rutherford and William S. Pickett continued their terms as directors of the
Company after the annual meeting.
The stockholders ratified the reappointment of Coopers & Lybrand,
L.L.P. as the Company's independent certifying accountants for the year ended
December 31, 1995. There were 1,814,380 votes for and 25,435 votes against this
matter, with 120,304 votes abstained.
9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
(10) Material Contracts:
The following exhibit is being filed with this report:
10.28 Loan Agreement with National Bank of Detroit as of May 23,
1995.
(11) Statement regarding computation of per share earnings:
Warrants issued to purchase common stock and shares
issuable under employee stock options were excluded from the
computation of weighted average number of shares outstanding
(reference Part I, Item 1) since such shares were either
anti-dilutive or their dilutive effect was not material.
(b) The Company filed a Report on Form 8-K during the quarter
ended June 30, 1995 concerning the change in Company's certifying
accountant.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CODE-ALARM, INC.
--------------------------
(Registrant)
Date: August 11, 1995 /s/ Robert V. Wagner
--------------------------
Vice President of Finance
(Chief Financial Officer)
Date: August 11, 1995 /s/ David L. Etienne
--------------------------
Principal Accounting Officer
11
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.28 Loan Agreement with National Bank of Detroit as of May 23, 1995.
27.1 Financial Data Schedule