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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 September 30, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number O16441
CODE-ALARM, INC.
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2334698
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (810) 583-9620
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of the Registrant's common stock,
without par value, as of October 26, 1995 is 2,320,361.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Notes to condensed consolidated financial statements:
1. These condensed consolidated interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to
fairly state the results for the interim periods presented. Except for
$1.8 million recorded in connection with the ETC litigation in the
first six months of 1995, all adjustments are of a normal and
recurring nature. Results of operations for the interim periods
presented are not necessarily indicative of results to be expected for
the fiscal year.
2. These condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
3. The Company's credit arrangement includes a $13.8 million revolving
credit facility for working capital requirements, $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 October 26, 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 (8.125% and 8.375%, respectively, at
October 26, 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 September 30,
1995, the Company was in violation of certain covenants. The Bank has
agreed to amend the credit agreement as of September 30, 1995. Such
amendment, when effective, will place the Company in compliance.
The Company's foreign subsidiary's credit arrangement with its
commercial bank includes term loans totaling approximately $2.5
million, with interest rates ranging from 8.0% to 11.0%. Payments are
due monthly, with final payments due in 1996.
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CODE-ALARM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN THOUSANDS)
Sept. 30, Dec. 31,
ASSETS 1995 1994
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Cash and cash equivalents $ 261 $ 107
Accounts receivable, net 13,104 11,530
Raw material inventories, net 6,793 7,217
Work-in-process inventories 173 1,552
Finished goods inventories 7,846 4,123
Refundable income taxes 634 323
Other current assets 1,387 1,229
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Total current assets 30,198 26,081
Property and equipment, net 4,484 4,130
Goodwill, net 4,217 4,293
Other intangible assets, net 992 1,272
Other assets, net 2,580 2,045
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$ 42,471 $ 37,821
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term liabilities $ 2,431 $ 1,443
Accounts payable 11,258 8,791
Accrued expenses 2,775 3,131
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Total current liabilities 16,464 13,365
Long-term liabilities, net of current portion 10,085 9,511
Reserve for litigation 5,440 3,729
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Total liabilities 31,989 26,605
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SHAREHOLDERS' EQUITY:
Common stock 12,210 12,209
Foreign currency translation adjustment 49 49
Accumulated deficit (1,777) (1,042)
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Total shareholders' equity 10,482 11,216
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$ 42,471 $ 37,821
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See accompanying notes to condensed consolidated financial statements.
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CODE-ALARM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
1995 1994 1995 1994
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Net sales 18,756 18,663 $54,825 $56,435
Cost of sales 11,838 11,847 35,284 35,352
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Gross profit 6,918 6,816 19,541 21,083
Operating expenses:
Sales and marketing 3,039 3,361 8,845 9,984
Engineering 872 709 2,317 1,892
General and administrative 2,011 1,707 6,307 6,494
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5,922 5,777 17,469 18,370
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Income from operations 996 1,039 2,072 2,713
Interest expense (326) (199) (956) (425)
Litigation expense (1,825)
Other income (expense) (21) (10) (86) (88)
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Income (loss) before income income taxes 649 830 (795) 2,200
Income taxes 219 363 (60) 774
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Net income (loss) $430 $467 $ (735) $1,426
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Net income per common share $0.19 $0.20 $(0.32) $0.60
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Weighted average common shares 2,320 2,389 2,320 2,392
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See accompanying notes to condensed consolidated financial statements.
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CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOW
UNAUDITED
(IN THOUSANDS)
Nine months
Ended Sept 30,
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1995 1994
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Increase (decrease) in cash
and cash equivalents from:
Operating activities $ (406) $ (217)
Investing activities:
Capital expenditures, net (806) (1,246)
Cash received (paid) in acquisition of EAE 605
Other (37) (514)
Financing activities:
Net borrowing on credit facilities 4,761 257
Net borrowing (repayment) on long-term debt (3,359) 1,077
Purchase and retirement of common stock (117)
Issuance of stock options 1
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Net change in cash and cash equivalents 154 (155)
Cash and cash equivalents, beginning 107 227
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Cash and cash equivalents, ending $ 261 $ 72
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 814 $ 204
Cash paid for income taxes $ 150 $ 200
See accompanying notes to condensed consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Code-Alarm's consolidated net sales increased $93,000, or less than
1.0%, for the quarter ended September 30, 1995 as compared to the
quarter ended September 30, 1994. For the nine months ended September 30,
1995, consolidated net sales decreased $1.6 million, or 2.8%, to $54.8 million
as compared to $56.4 million for the nine months ended September 30, 1994. The
decrease is attributable to a decline of $1.6 million, or 7.9%, in the quarter
ended June 30, 1995. The nine month results were primarily due to a decrease
in sales to mass merchandisers and independent dealers in the quarter ended
June 30, 1995 and were partially offset by increases in OEM and expediter sales
in the quarter ended September 30, 1995. The Company expects sales in the
quarter ending December 31, 1995 to be slightly below sales for the
comparable period in 1994, with higher OEM sales in Europe being offset by a
decrease in domestic OEM and independent dealer sales.
The Company's consolidated gross profit increased $102,000 or 1.5%, for
the quarter ended September 30, 1995, as compared to the quarter ended
September 30, 1994. For the nine months ended September 30, 1995, consolidated
gross profit decreased $1.5 million, or 7.3%, to 19.5 million as compared to
$21.0 million for the nine months ended September 30, 1994. As a percentage of
consolidated sales, gross profit decreased to 35.6% in the nine months ended
September 30, 1995 from 37.4% in the comparable period of 1994. The decrease
was due to the Company's emphasis on OEM sales in both Europe and the United
States primarily due to start up manufacturing problems with the Company's
European products production in the United States in the first two quarters of
1995. The OEM sales have lower profit margins, but are generally
characterized by lower selling costs, than retail sales. The Company expects
continued lower gross profit margin in the remainder of 1995 due to continued
emphasis on OEM sales.
Consolidated operating expenses increased $145,000 or 2.5%, for the
quarter ended September 30, 1995 as compared to the quarter ended September 30,
1994. For the nine months ended September 30, 1995, consolidated operating
expenses decreased $901,000, or 4.9%, to $17.5 million as compared to $18.4
million for the nine months ended September 30, 1994. The decrease in
consolidated operating expense was 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 as a result of continued emphasis on OEM sales, but
expects engineering and product development costs to level off for the
remainder of the year.
As a result of the foregoing, the Company earned consolidated income
from operations of $996,000 in the quarter ended September 30, 1995 compared to
$1.0 million in the quarter ended September 30, 1994. Consolidated income from
operations declined $641,000 or 23.6%, for the nine months ended September 30,
1995, to $2.1 million as compared to $2.7 million for the nine months ended
September 30, 1994.
Interest expense increased $531,000 in the nine months ended September 30,
1995, or 124.9%, to $956,000 as compared to $425,000 for the nine months
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ended September 30, 1994. Increases are attributable to higher interest rates
and increased indebtedness associated with European Operations.
Other expenses for the nine months ended September 30, 1995 increased
by $1.8 million, to $1.9 million as compared to $88,000 for the nine months
ended September 30, 1994. The increase was attributable to the accrual in the
first half of the year of an additional $1.8 million for damages, including
interest and costs, related to a patent infringement judgment on the ETC
litigation.
The Company had an effective domestic income tax rate of 34% on current
operating income. Income taxes on foreign operations were approximately 33%.
In the third quarter of 1995, the Company charged off state and foreign tax
refunds determined to be uncollectable in the amount of $210,000.
As a result of the foregoing, the Company earned consolidated net income
of $430,000 in the quarter ended September 30, 1995 compared to $467,000 in
the quarter ended September 30, 1994. The Company recorded a net loss of
$735,000, or $0.32 per share for the nine months ended September 30, 1995,
compared to net earnings of $1.4 million, or $.60 per share, for the nine
months ended September 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital was $13.7 million at September
30, 1995 compared to $12.7 million at December 31, 1994. The current ratio
(current assets divided by current liabilities) as of September 30, 1995 is
1.83 to 1, compared to 1.95 to 1 at December 31, 1994.
Net cash used in operating activities for the first nine months of
1995 was $406,000, including $1.3 million of depreciation and amortization
charged during the nine months ended September 30, 1995. Cash consumed during
the first nine months reflect an increase in inventories and accounts
receivable of approximately $3.5 million. The Company experienced a $3.7
million increase in finished goods inventory in Europe most of which was
attributable to the Company's efforts to meet expected customer requirements.
Lower than anticipated European sales volumes also contributed to this higher
than normal inventory level. This increase was partially offset by an increase
of accounts payable in the amount of $2.5 million.
As of October 26, 1995, $1.4 million of the $13.8 million revolving credit
facility was unused and available. Additionally, $7.0 million and $1.0 million
of amounts outstanding under the revolving line of credit were borrowed under
the LIBOR option available to the Company at interest rates of 8.375% and
8.125%, respectively.
During the first nine months of 1995, the Company concluded a loan
agreement with NBD Bank. Under the terms of the agreement, the Company has
secured a $13.8 million revolving credit facility, $1.3 million in secured
notes and $2.2 million in unsecured notes. The Company has used these
facilities for operating capital and to provide financing for an appeal bond
in the amount of $5.9 million for the patent infringement litigation. The
Company is considering issuance of some form of public debt in the fourth
quarter of 1995 to provide additional capital for its business.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Matter of Certain Starter Kill Security Systems, Inv. No.
337-TA-Docket No. 1883, The International Trade Commission. On October 18,
1995, the Company filed a Complaint with the International Trade Commission
against Directed Electronics, Inc. ("Directed") of Vista, California and the
Nutek Company ("Nutek") of Taipei, Taiwan, alleging the manufacturing goods
infringing United States Patent Number 4,740,775 by Nutek and the importation
and sale of these infringing goods in the United States by Directed. More
particularly, the Complaint seeks to halt the importation and sale of these
infringing goods in the United States. No response, as yet, has been filed by
Directed or Nutek to the Complaint and this matter remains in the early stages
of discovery.
Intercept Security Corporation v. Code-Alarm, Inc. Case No. 95-40239,
United States District Court, Eastern District of Michigan, Southern Division,
filed July 19, 1995. The suit alleges that certain home security products
built and sold by the Company failed to perform in a manner consistent with the
alleged representations of the Company. More particularly, the Complaint
alleges that the Company committed fraud, misrepresentation, and breached an
implied warranty emanating from the sale of these goods to the Plaintiff. The
Company denies these allegations and intends to defend against these charges.
The Company has not, as yet, answered the complaint and the case remains in the
early stages of discovery. The exposure, if any, to the Company cannot be
ascertained at this time; however, an adverse Judgement could materially
adversely affect The Company's Business and Financial condition, including
working capital and results of operations.
Code-Alarm, Inc. v. Electromotive Technologies Corporation, et al. Case
Number 87-cv-74022-DT. The Company has filed an appeal of the District Court's
judgment against Code-Alarm in the amount of $5.5 million in damages. More
particularly, the Company is appealing (1) the inclusion of unpatented
components of Code-Alarm's security system in the damages calculation
("convoyed sales") and (2) the doubling of "actual damages" after November,
1990 based upon a holding of "willful patent infringement." In the course of
preparing the appeal brief, it was discovered that the Plaintiff, ETC, had
failed to timely pay the first maintenance fee in April, 1990 to maintain the
patent-in-suit with the U. S. Patent Office. The Company subsequently filed a
motion with the United States District Court for the Eastern District of
Michigan, Southern Division requesting certification for remand of the case for
consideration of (1) Code-Alarm's intervening rights for the ten month lapse in
the patent-in-suit, (2) reconsideration of the award of enhanced damages and
attorney fees in view of ETC's failure to notify the Company and the Court of
the lapse, and (3) an appeal of the U. S. Patent Office's decision to reinstate
the patent in suit. This motion was denied without prejudice by the United
States District Court and the Company is preparing to file motions with the
Court of Appeals for the Federal Circuit for remand or dismissal of the appeal
based upon lack of jurisdiction for consideration by the District Court of the
motion.
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Code-Alarm, Inc. v. The United States International Trade Commission.
Appeal No. 94-1433, United States Court of Appeals for the Federal
Circuit. On September 19, 1995, the United States Court of Appeals for the
Federal Circuit affirmed the invalidity of United States Patent Number
5,049,867, owned by the Company. The Company is considering a possible appeal
of the ruling to the United States Supreme Court.
M. and Mme. Sydney Drahy, from whom the Company purchased shares of its
French subsidiary Europe Auto Equipement, S.A. ("EAE") filed suit against the
Company in the Commercial Court in Paris, France on August 1, 1995, seeking
FF3,160,000 (approximately $645,000) based on disputed price adjustment
provisions in the purchase agreement. The Company believes that there are
offsets to the disputed adjustments under the purchase agreement, some of which
have been acknowledged by the Drahys, and that no additional amounts are owed
the Drahys in respect of the purchase price. A decision on this case is not
expected to be rendered before mid-1996. Mme. Drahy brought a separate action
in the Industrial Court of Paris against EAE, filed June 20, 1995, seeking
damages of FF1,268,800 (approximately $260,000) for alleged wrongful
termination of her employment and breach of an employment contract. The case
is in the early stages of document production and the Company is unable at this
time to assess its exposure, if any, to Mme. Drahy.
There were no material developments during the quarter ended September 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 and Form
10-Q's for periods ending March 31, 1995 and June 30, 1995 for a description of
material pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits required by Item 601 of Regulation S-K:
(10) Material Contracts:
The following exhibits are being filed with this report:
10.2 Amendment No. 3 to Employment Agreement with Rand W. Mueller.
10.28 First Amendment dated June 30, 1995; Waiver Letter dated
October 3, 1995; Second Amendment dated October 17, 1995;
Letter Agreeing to Amend dated November 1, 1995 to Loan
Agreement with National Bank of Detroit as of May 23, 1995.
10.29 Purchase Agreement with Subaru of America, Inc.
(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.
(27) Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K on July 22, 1995
concerning the change in the Company's certifying accountant. The Company
filed a first amendment on Form 8-KA#1 on August 25, 1995 to the Form 8-K
filed on July 22, 1995. The Company filed a second amendment on Form -KA#2 on
September 1, 1995 to the Form 8-K filed on July 22, 1995.
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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.
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(Registrant)
Date: October 31, 1995 /s/ Robert V. Wagner
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Vice President of Finance
(Chief Financial Officer)
Date: October 31, 1995 /s/ David L. Etienne
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Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
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10.2 Amendment No. 3 to Employment Agreement with Rand W. Mueller.
10.28 First Amendment dated June 30, 1995; Waiver Letter dated
October 3, 1995; Second Amendment dated October 17, 1995;
Letter Agreeing to Amend dated November 1, 1995 to Loan Agreement
with National Bank of Detroit as of May 23, 1995.
10.29 Purchase Agreement with Subaru of America, Inc.
27 Financial Data Schedule