1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE 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 016441
CODE-ALARM, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2334695
- ------------------------------ --------------------------
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
---------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
NONE NONE
- ------------ -------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
2
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
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGISTRATION S-K (229.405 OF THIS CHAPTER) 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 10K. [ X ]
BASED UPON THE LAST SALE PRICE OF THE REGISTRANT'S COMMON STOCK AS
REPORTED ON THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION
("NASDAQ") NATIONAL MARKET SYSTEM ON APRIL 14, 1997 ( AS PUBLISHED IN THE WALL
STREET JOURNAL DATED APRIL 15, 1997), THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT IS $ 4,061,507.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, WITHOUT
PAR VALUE, AS OF APRIL 14, 1997 IS 2,320,861.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S 1997 PROXY STATEMENT ARE INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K.
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PART 1
ITEM 1. BUSINESS.
The Company is a leading designer, manufacturer and marketer of vehicle
security systems including alarm and remote keyless entry systems. During the
fiscal year ended December 31, 1996, the Company's principal business was the
manufacture and sale of vehicle security systems. The Company's products are
marketed and sold through automobile dealerships domestic automotive assembly
plants, ports of entry for foreign produced vehicles, independent retail
specialty stores, automotive expediters and domestic and international
audio-video chain stores.
MARKET DESCRIPTION AND INDUSTRY OVERVIEW
Theft of vehicles and vehicle contents is a widespread problem in the
U.S. and most European countries. Traditionally, vehicle security systems have
been sold mainly in the aftermarket. However, automakers are beginning to
offer vehicle security systems as installed options, either at the factory or
at the dealership. Although most anti-theft devices are not offered as standard
equipment on vehicles, the Company believes that the general trend is toward
vehicle security systems that are either OEM-approved or installed on the
assembly line.
BUSINESS STRATEGY
Key elements of the Company's business strategy include the following:
- Focus Sales Efforts to OEM customers.
The Company intends to focus its sales and marketing efforts toward the OEM
market primarily through the following:
Auto Brand Distribution to Dealers -- The Company presently markets its
products to more than 9,000 automobile dealers in North America pursuant to
private label purchase agreements with General Motors, Ford and Chrysler under
the automakers' brand names including Mr. Goodwrench(TM), Ford Remote
Systems(TM) and Mopar(TM), respectively, and it believes that additional growth
opportunities are available through such dealers. The Company expects to
pursue these opportunities by continuing to promote its sales to dealers
through personal calls on dealers by the Company's sales staff, dealer
education programs, seminars, product literature and manuals and on-site
promotional items such as signs. To support such sales efforts, the Company
intends to continue to offer technical support service and toll-free telephone
lines to answer questions and help with problems.
Direct Sales to Manufacturers for Factory Floor Installation -- The
Company believes that there is potential for expanding its sales to OEMs for
such items as remote keyless entry systems, basic alarm systems and sensors.
In light of increased consumer demand for systems offered in top-of-the-line
models, OEMs are increasingly offering such systems. It is the Company's
intent to capture a larger share of this market, which is currently supplied by
more traditional OEM electronic suppliers such as TRW, Motorola and United
Technologies. The Company's efforts in this regard currently consist of direct
sales calls to automobile manufacturers by the Company's sales personnel and
independent manufacturers representatives, and are focused on obtaining
long-term supply contracts.
- Continue Sales to Post-Delivery Market
Historically, the Company has successfully marketed to independent
retailers and mass merchandisers. Currently, the Company sells to more than
1,200 independent retail specialty outlets, automotive expediters, and mass
merchandisers providing products and systems not yet available from the
original equipment manufacturer. The Company intends to continue its focus on
this market.
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- Divestiture of European Operations
The Company feels that discontinuing existing European operations and serving
key market segments in a changed format would be more efficient. Current
European economic and other conditions make the planned step necessary.
- Enhance Engineering Capability
In order to stay competitive and deliver high quality, consumer-friendly
vehicle security systems, the Company plans to continue to enhance its
engineering and product testing capabilities. The Company believes that
multiplexing systems planned for some top-of-the-line automobiles will allow
more efficient access to a larger number of vehicle operations than present
conventional wire harness electrical systems, and that the presence of these
multiplexing systems will present potential growth opportunities for the
Company over the next decade. The Company believes that it is favorably
positioned to increase its business opportunities for interfacing with
multiplexing systems because of the Company's reputation for technical
innovation, quality, reliability, QS9000 accreditation and competitive pricing.
See "Engineering, Research and Development."
- Shorten Product Development and Introduction Cycles
The Company believes that short product development cycles are essential
to its success. Such cycles enable the Company to capitalize upon the higher
margins that are associated with the introduction of new products and positions
the Company to establish itself as a leader in its existing as well as its new
markets. The Company's efforts in this area include simultaneous engineering
which utilizes product teams from the engineering and manufacturing divisions
of the Company whose function is to streamline product development and
introduction cycles.
PRODUCTS
The Company's vehicle security systems utilize low power radio frequency
technology and are operated by remote micro-transmitters. Frequencies and the
manufacture of transmitters and receivers used in the Company's remote systems
are different in European countries than in the U.S. and are regulated
separately in each country in which the Company does business.
The Company's vehicle security systems fall into two broad categories:
alarm systems and remote keyless entry systems.
Alarm Systems -- In general, the Company's alarm systems contain two major
components: an immobilizer circuit and a siren. The immobilizer circuit
prevents the automobile from being started unless the alarm system has been
turned off. Each system automatically resets itself after the siren has been
sounded for a predetermined period. Many of these systems allow the operator to
choose between manually setting the alarm upon leaving the vehicle and having
the alarm automatically set one minute after the keys are removed from the
ignition switch. Various other components, such as hood locks and intrusion
sensors, can generally be added to the alarm system.
Historically, most of the Company's sales have consisted of remote alarm
systems, with a basic unit consisting of a remote micro-transmitter, which can
be attached to the operator's keychain, and a control unit, which is located
inside the automobile. The remote micro-transmitter is used to turn the alarm
system on and off. This basic unit is typically sold as part of a system which
is configured in various ways based upon the customer preferences and
distribution channels.
In addition to remote alarm systems, the Company also produces digital and
passive alarm systems which offer a lower level of protection. Digital
systems, unlike remote systems, do not offer a way to turn the alarm system on
and off from outside the vehicle. Instead, upon entering the vehicle, the
operator has a fixed period of
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time to turn off the alarm system by entering proper numerical sequence on a
keypad. Passive alarm systems are much like digital systems, except that the
operator only needs to insert the key in the ignition switch of the automobile
to turn off the alarm.
Remote Keyless Entry Systems -- The Company's remote keyless entry system
enables the operator to use the remote micro-transmitter to lock and unlock the
doors or open the trunk from outside the vehicle without having to use keys, to
turn on the interior light to see if anyone is waiting inside the vehicle and
to set off the siren in the event of a personal emergency. The company's
success with Subaru and Mitsubishi with these systems demonstrates their strong
potential.
The Company's vehicle security systems, most of which are now remote
systems, include Code-Alarm(R), Chapman(R) and Anes(R) brands in the U.S. and
Dragon, Jack-Code, Codalarme(R) and Euro-Alarm in Europe.
The Company's products are sold into two categories: pre-delivery and
post-delivery. Pre-delivery includes those products sold in the OEM market for
vehicle installation before delivery of a new vehicle to the purchaser through
installation by the automaker or as a dealer-installed option or by an
automotive expediter. Post-delivery includes those products which are installed
on a vehicle already owned by the customer, generally through retail specialty
stores and mass merchandisers.
FOR THE YEAR ENDED DECEMBER 31
(in thousands, except for percentage data)
-------------------------------
1994 1995 1996
---- ---- -----
NET NET NET
SALES PCT. SALES PCT. SALES PCT.
--------- --------- --------- --------- --------- ----
North America:
Pre-delivery(1) ... $27,367 37% $30,867 45% $35,308 56%
Post-delivery(2) .. 23,832 32 15,754 23 13,574 22
Europe(3):
Pre-delivery ...... 8,031 11 7,977 11 3,857 6
Post-delivery ..... 9,430 13 11,605 17 8,572 14
Other(4) ........... 4,848 7 2,985 4 1,192 2
--------- ------ -------- ------- ---------- ----
Total ............ $73,508 100% $69,188 100% $62,503 100%
========= ====== ======== ======= ========= ====
- ---------------
(1) Pre-delivery includes sales to OEMs and expediters.
(2) Post-delivery includes all other vehicle security system sales.
(3) The Company acquired EAE and Code-Alarm Europe on January 1, 1994.
(4) Includes contract manufacturing, home security systems and discontinued
products including mechanical security devices.
CUSTOMERS
The Company's primary OEM customers consist of Ford, General Motors,
Peugeot, Volkswagen-Audi Group France, Chrysler, Mitsubishi and Subaru.
Historical sales by the Company to these customer groups and to other OEMs and
expediters are set forth below:
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YEAR ENDED DECEMBER 31
(in thousands, except for percentage data)
------------------------------------------------------------
1994 1995 1996
-------------------- --------------------- ---------------
AS A AS A AS A
PERCENT PERCENT PERCENT
NET OF TOTAL NET OF TOTAL NET OF TOTAL
OEM NET OEM OEM NET OEM OEM NET OEM
SALES SALES SALES SALES SALES SALES
--------- --------- --------- ---------- -------- -------
General Motors ............ $ 7,964 22% $ 9,047 23% $ 8,275 21%
Ford ...................... 8,010 23 7,728 20 7,522 19
Peugeot ................... 5,207 15 6,249 16 1,501 4
Chrysler .................. 2,057 6 2,766 7 2,799 7
Volkswagen ................ 3,277 9 1,213 3 1,092 3
Subaru .................... -- -- 1,179 3 5,278 14
Mitsubishi ................ -- -- -- -- 1,246 3
Other OEMs ................ 8,883 25 10,662 28 11,452 29
-------- ----- --------- ---- -------- ---
Total OEM Sales ....... $35,398 100% $38,844 100% $ 39,165 100%
======== ===== ========= ==== ======== ===
With the exception of sales to dealers of General Motors, and Ford, no
single customer accounted for more than 10% of the Company's total net sales
during the year ended December 31, 1996. Sales to General Motors and Ford and
accounted for 13.2% and 12.0%, respectively, of the Company's total net sales
for the year ended December 31, 1996. Pursuant to its agreements with General
Motors and Ford, the Company's direct sales personnel and independent
manufacturer's representatives engaged by the Company call on, and solicit
orders directly from, General Motors and Ford dealers. The Company views
individual dealers as its customers.
The Company historically has placed and expects to continue to place a
strong emphasis on its retail customers. The Company believes that accelerated
growth in the OEM market for vehicle security systems offers the Company an
opportunity to increase future sales and, therefore, its expansion into the OEM
market, as well as its continued presence in the retail market, is important to
the Company's future success. The increase in pre-delivery installation could
have a detrimental effect on the retail market. The Company's plans to
discontinue European operations in 1997 will require the Company to continue
customer service to European OEM's, such as Peugeot and Volkswagen-Audi, in
order to protect this market.
MARKETING
During 1996, sales of the Company's products to OEMs were made directly by
the Company's sales and marketing personnel located at the Company's Madison
Heights, Michigan headquarters and its European offices located in Paris,
Brussels, Madrid and Birmingham, England.
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These sales efforts are supported by a field force of 31 salespersons who call
directly on dealers to explain and promote the ordering of the Company's
products through the OEMs.
In promoting sales of vehicle security systems that require professional
installation, the Company emphasizes dealer education programs, sales and
installation seminars, product literature and technical manuals. Educational
and marketing efforts are supplemented by direct mail campaigns, technical
bulletins, advertising support, sales literature, newsletters, product displays
and dealer signs.
To promote quality, customer satisfaction and relationships with dealers
and installers, the Company maintains technical support and consumer support
services and toll-free telephone lines to answer questions and to help solve
problems with installation or operation of the Company's products.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company employs 18 full-time engineers and 29 full-time technicians in
its engineering and research and development programs. This staff is divided
into three main groups responsible for: (a) providing technical and support
services to its customers, (b) improving manufacturing processes, and (c)
developing new products. The Company's expenditures for engineering, research
and development were approximately 3.7%, 4.9% and 5.1% of revenues in 1994,
1995 and 1996, respectively.
The Company conducts a variety of research and product development
projects designed to achieve improvements in vehicle security systems through
the development of new technologies. The Company's products include a number
of innovative circuits and features developed by the Company. Past research
and development efforts have produced security products which meet worldwide
insurance and government specifications which have much higher security
requirements. The products include innovations such as:
a. encrypted transmitters to withstand attempts to capture the code
electronically
b. separate coded immoblizer units to move high security items such as
starter interrupt and fuel disable away from the main security module
c. connectors and colorless wiring schemes to thwart attempts to overcome
the system by "hot-wiring"
d. attack-proof housings that can withstand attempts by thieves to break
into the unit.
The technological innovations of the Company's customers present both
challenges and opportunities. The Company's products must be advanced enough
to efficiently interface with its customer's system. This has led the Company
to develop a series of special inter-connecting systems that are custom
designed to each vehicle. These systems allow for quick and effective
installation for the Company's systems into a vehicle and must interface with
the various electrical systems of the vehicle. This interface may take the
form of sophisticated multiplex systems, where all communications are performed
over a single wire, discrete connections or a combination of the two
technologies. The use of these custom inter-connect systems results in vehicle
installations that are faster, higher quality and less disruptive to the
vehicle.
The close relationships of the Company to the vehicle manufacturers has
opened up new opportunities. The Company has a steady stream of requests for
quotation from OEM's due to the Company's excellent supplier ratings,
electronic design expertise and quick production turn-around time. These have
led to development projects in such area's as security lighting, specialized
sensors and specialized harnesses.
MANUFACTURING
The Company produces electronic products at facilities located in Madison
Heights, Michigan and Georgetown, Texas. Automated and manual assembly methods
are used to produce circuit boards, key components of many of the Company's
products.
The Company has recently received QS9000 certification at its Georgetown
plant and plans to expand that certification to cover the Madison Heights plant
by the second quarter of 1997. The QS9000 quality program was jointly
developed by GM, Ford and Chrysler in an attempt to increase the quality
process of its suppliers and to unify the industry's quality standards.
QS9000 is based on the international standard ISO9000 that is the defacto
requirement in Europe.
8
The Company has implemented cell based manufacturing processes during
1996. Cell based manufacturing groups closely together all of the equipment
and people needed to manufacture a product. This proximity forces products to
be built one at a time and quickly moved to the next operation for further
processing. This results in:
a. Significantly reduced work in process
b. Higher quality
c. Shorter lead times
d. Greater flexibility
e. Reduced floor space requirements.
SUPPLIERS
The Company's products include a number of high-technology components that
are currently sourced from only a few suppliers and, in some cases, a single
supplier. The Company frequently requires large volumes of such components. If
the Company's suppliers are unable to fulfill the Company's needs for such
components, the Company may be unable to fill customer orders and its business
and financial condition, including working capital and results of operations,
may be materially and adversely affected. Since part of the Company's strategy
is to shorten product development and introduction cycles, occasions may arise
in the future where the Company's ability to produce products outpaces its
suppliers' ability to supply components. There can be no assurance that the
Company can continue to obtain adequate supplies or obtain such supplies at
their historical cost levels. The Company has no guaranteed supply
arrangements with any of its sole or limited source suppliers, does not
maintain an extensive inventory of components, and customarily purchases sole
or limited source components pursuant to purchase orders placed in the ordinary
course of business. Moreover, the Company's suppliers may, from time to time,
experience production shortfalls or interruptions which impair the supply of
components to the Company. There can be no assurance that such shortages will
not occur in the future and adversely affect the Company's business and
financial condition, including working capital, and results of operations.
PRODUCT WARRANTY
The Company provides original purchasers of most vehicle security systems
with a limited warranty. Scorpion(R) brand products have a one-year limited
warranty and Anes(R) brand carries a limited two-year warranty. Dragon,
Jack-Code and Codalarme(R) products sold in Europe have a limited one-year
repair and replacement warranty. Warranties for OEM product normally match the
new vehicle warranty period. Warranties are customarily limited to
replacement of defective parts to the original purchaser. The Company has
several disputes pending with customers who claim that its home security and
Intercept(TM) systems manufactured by the Company were faulty or inoperable.
See Item 3. "Legal Proceedings".
The Company generally warrants contract manufactured products for 60 days.
The warranty is limited to replacement of defective material or a price
allowance at the Company's option.
COMPETITION
All markets in which the Company participates are highly competitive, and
many current or prospective competitors, including several of the Company's
significant OEM customers, are substantially larger and possess significantly
greater financial, marketing and technical resources than the Company. An
increase in factory-installed vehicle security systems or the introduction of
other dealer-installed security systems and remote keyless entry systems by OEM
customers or existing and potential competitors could have a material adverse
effect on the Company.
9
There are a number of other well-known companies manufacturing and
distributing electronic components for the automotive after-market which could
become effective competitors should they choose to enter the vehicle security
market. Many of these companies are much larger and better capitalized than
the Company and have established distribution channels. While offshore
producers of competing systems have not captured significant market share,
these companies could also become significant competitors.
Competing manufacturers have developed vehicle recovery systems designed
to locate stolen automobiles. Sales of other companies' automobile recovery
systems could have a material adverse effect on sales of the Company's
products. The Company also faces competition from certain mechanical devices
such as The Club(TM).
TRADEMARKS AND PATENTS
The Company markets its vehicle security systems under several registered
trademarks. The Company also has patents and patent applications pending for
certain of its products and components. The Company considers its trademarks,
patents and patent applications to be valuable, and has defended, and intends
to continue vigorously defending, its patented and proprietary technology from
infringement or misappropriation. There can be no assurance that the Company's
measures to protect its proprietary rights will deter or prevent unauthorized
use of the Company's technology. Furthermore, the laws of certain countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States. The Company has applied for patents on certain
inventions in Europe; however, none of these patents has yet been granted nor
is there any assurance that patents will be granted in the future. In addition,
the Company may, from time to time, become subject to legal claims asserting
that the Company has violated intellectual property rights of third parties.
In the event a third party were to sustain a valid claim against the Company
and in the event any required license were not available on commercially
reasonable terms, the Company's business and financial condition, including
working capital and results of operations, could be materially and adversely
affected. See item 3. "Legal Proceedings".
REGULATION
The FCC regulates the assignment of frequencies for manufacture and sale
of remote vehicle security systems and remote keyless entry systems in the U.S.
The Company has received FCC authorization to manufacture and sell the devices
it currently sells in the U.S. In Europe, similar government agencies in each
country regulate the assignment of frequencies and the Company has generally
been able to meet the applicable frequency requirements. However, because
insurance industry accreditation of vehicle security systems is, in most
European countries, a prerequisite to an automobile owner's ability to obtain
vehicle theft coverage, the Company's ability to market its products in such
countries is dependent upon obtaining such insurance industry approvals and
certifications. The Company has received French and Belgian insurance industry
accreditation to manufacture and sell electronic security systems. To date,
the Company has been unable to secure German insurance industry accreditation
required to sell its products in Germany. The Company is selling its products
in Spain where no insurance industry certifications are required. European
insurance industry accreditation standards are subject to change without
notice; and, in 1994, significant changes in industry standards required the
development and introduction of new products for 1995.
The Company's U.S. vehicle security systems are also affected by state
insurance laws. The Company is aware of some states that mandate insurance
discounts on comprehensive coverage for policyholders who have installed
certain types of vehicle security systems. The Company is also aware of at
least one state which provides additional discounts for policyholders who have
installed vehicle recovery systems.
The loss of regulatory and insurance industry approvals or failure to
obtain necessary authorizations in the future could have a material adverse
effect on the Company.
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EMPLOYEES
As of December 31, 1996, the Company employed approximately 423 full-time
persons. None of the Company's employees are represented by a labor union or
other collective bargaining representative. The Company believes that
relations with its employees are good.
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ITEM 2. PROPERTIES.
The following table sets forth certain information concerning the
principal properties leased by the Company:
APPROX. APPROX. LEASE TERM
LOCATION USE SIZE (SQ. FT.) MONTHLY RENT EXPIRES
- -------- --- -------------- ------------ ----------
950 E. Whitcomb Office and manufacturing 42,000 $18,800 2000
Madison Heights, MI
1000 E. Whitcomb Office and warehouse 20,000 8,300 2000
Madison Heights, MI
16742 Burke Lane Office and warehouse 10,000 4,200 2000
Huntington Beach, CA
300 Industrial Ave. Office and manufacturing 60,000 7,200 2005
Georgetown, TX
32, Rue Delizy Office and light assembly 20,000 16,400* 1999**
93694 Pantin Cedex
Paris, France
C/Ferrocarril, 14 Office and warehouse 4,300 1,570* 1997
Pol. Ind. Escotet 3-A
28820 Coslada Madrid Spain
Chausee de Moons 1135 Office and warehouse 2,200 1,200* 2000
1070 Brussels
Belgium
21A Monkspath Business Office and warehouse 6,900 4,200* 2020**
Park
Highlands Road, Solihull
B90 4NZ
England
- --------------
* Amounts payable under the lease are payable in local currencies and are
subject to fluctuations in the exchange rates.
** Terminable upon 3 months prior written notice by Company.
Management believes that the facilities presently occupied are adequate to
meet the Company's requirements for the foreseeable future. All buildings and
equipment are in good working condition.
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ITEM 3. LEGAL PROCEEDINGS
Code-Alarm, Inc. v. Electromotive Technology Corporation. Case No.
87-CV-74022-DT. In November of 1987, the Company filed a declaratory judgment
action against Electromotive Technology Corporation ("ETC") in the United States
District Court for the Eastern District of Michigan, Southern Division seeking a
declaration that ETC's U.S. Patent No. 4,585,569 (the "'569 Patent"), describing
and claiming a shock or motion sensor system, was invalid or not infringed by
the Company. Subsequently, Directed Electronics ("Directed"), of Vista,
California, acquired an interest in the '569 Patent and was made a party to the
lawsuit. A judgment was entered against the Company on June 16, 1995 in the
amount of $5.6 million for infringement. The Company appealed the decision to
the Court Appeals for the Federal Circuit and posted a letter of credit as
security for an appeal bond in the amount of approximately $5.9 million,
representing the amount of the judgment, including interest. On April 8, 1997,
the Court granted the Company's motion to pay the bond proceeds and accrued
interest to date to Plaintiffs, in full satisfaction of the judgment, without
prejudice to the Company's right to proceed to set aside the judgment on appeal.
Directed is asserting patent infringement claims against two subsequent
shock sensor designs. The Court has tentatively held that the subsequent
designs infringe the ETC patent and has scheduled a trial for June 30, 1997 on
the issues of willfulness and damages. The Company no longer manufactures these
designs.
Directed Electronics, Inc. v. Code-Alarm, Case No. 95-0513S (CGA) is a
declaratory judgment suit filed by Directed on April 18, 1995 in the United
States District Court for the Southern District of California seeking a
declaration that Directed's products do not infringe United States Patent
Number 4,740,775 (the "'775 Patent") and/or that the '775 Patent is invalid
and/or unenforceable. The Company counterclaimed seeking damages arising from
Directed's infringement of the '775 Patent and denied the invalidity and
non-infringement/unenforceability allegations. The Company has obtained an
opinion from independent patent counsel that Directed is infringing the '775
Patent. On March 5, 1997, the Court denied Directed's motion for summary
judgment and set the case for trial on July 8, 1997.
In the matter of Certain Starter Kill Security Systems, Inv. No.
337-TA-379. On November 21, 1995 the United States International Trade
Commission instituted, upon request of the Company, an investigation to
determine whether products allegedly imported by Directed from the Nutek Company
of Taipei, Taiwan infringe United States Patent Number 4,740,775 owned by the
Company. In addition to claims of patent infringement, the Company sought, in
this action, to halt the importation and sale of the alleged infringing goods
into the United States. On March 5, 1996, the Administrative Law Judge issued a
Final Initial Determination granting the Company's motion to terminate the
investigation and, after overruling objections of Directed, the investigation
was subsequently terminated with prejudice.
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Aureo Rivera Davila and Aureo E. Rivera v. Asset Conservation, Inc.,
Gabriel Guijarro Brunet, Iris Nieves DeGuijarro and their marital conjugalship,
Chapman Industries Corporation, Chapman Products, Inc., Chapman Security
Systems, Inc. and Code-Alarm, Inc. Case Number 90-2118 (SEC) United States
District Court for the District of Puerto Rico. In 1990 the United States
District Court for the Northern District of Illinois entered a default judgment
for $19.4 million against a predecessor in title to certain assets acquired by a
subsidiary of the Company from LaSalle National Bank in a private sale in
accordance with Section 9-504 of the Illinois Uniform Commercial Code. The bank
is providing for the defense of the Company subject to a reservation of rights
against the Company. The judgment creditors subsequently sought to collect
this judgment, plus accrued interest of approximately $10 million, from the
Company and its subsidiary in an action filed August 17, 1990 in the United
States District Court for Puerto Rico. On March 20, 1996 the Puerto Rican court
dismissed the action and held that any action to collect from the Company and
its subsidiary as successors in interest to the judgment debtor must be raised
before the Illinois court. On March 21, 1997 the case was refiled by the
judgment creditors in Illinois; however, the Company has not yet been served
with a Complaint in this action and consequently is unable to determine its
exposure, if any, in the Illinois case. The Company believes that it has
meritorious defenses in this matter
Tadiran Electronic Industries, Inc. v. Code-Alarm, Inc., Civil Action No.
96-CIV-05591 was filed on July 25, 1996 in the United States District Court for
the Southern District of New York claiming damages of approximately $500,000
from an alleged breach of contract by the Company. The Company filed a
counterclaim alleging breach of the same contract by Tadiran. The case is in
the early stages of discovery and liability, if any, cannot be determined at
this time.
Intercept Security Corporation ("Intercept") v. Code-Alarm, Inc. and Rand
Mueller, Civil Action No. 95-40239 was filed on July 19, 1995 in the United
States District Court for the Eastern District of Michigan, Southern Division
claiming damages of approximately $2 million from allegedly defective home
security equipment of the Company. A ruling on summary judgment motions by
both parties is pending. The Company intends to defend this action vigorously.
The Company's insurance carrier has provided Rand Mueller with a legal defense
in this matter.
Directed Electronics, Inc. v. Code-Alarm, Inc., Rand Mueller and Peter J.
Stouffer, Case No. 96-659 BTM (CGA) was filed on April 5, 1996 in the United
States District Court for the Southern District of California alleging
violations of antitrust laws, unfair competition, malicious prosecution and
interference with prospective economic advantage due to the assertion of various
patents by the Company against Directed. In November of 1996, the court held
that it had no personal jurisdiction over Mr. Stouffer and he was dismissed
from the case. The case is in the early stages of discovery and liability, if
any, cannot be determined at this time.
Meta Systems S.A. v. Europe Auto Equipment S.A. ("EAE"), a wholly owned
subsidiary of the Company, is an arbitration proceeding scheduled to be held in
Paris, France on April 30, 1997. Meta is demanding FF 20 million (approximately
$ 3.5 million) for breach of a distributor agreement by EAE. EAE seeks damages
of FF 30 million (approximately $5.3 million) for wrongful termination of the
agreement.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has been traded on the NASDAQ Stock Market under the
symbol "CODL" since October 19, 1987 and has been traded on the NASDAQ National
Market since May 17, 1988.
The following table sets forth certain information about the price of the
Common Stock which is based on the high and low sales prices for the Common
Stock, as reported on the NASDAQ National Market:
HIGH LOW
---- ---
1995
First Quarter ................................ $10 1/4 $7
Second Quarter ............................... 9 3/8 6 3/8
Third Quarter ................................ 7 6 1/2
Fourth Quarter ............................... 7 1/4 6 1/8
1996
First Quarter ................................ $6 1/2 $4 1/2
Second Quarter ............................... 6 4
Third Quarter ................................ 5 1/8 3 1/4
Fourth Quarter ............................ .. 4 1/2 3 1/4
On April 14, 1997, the last reported sale price of the Common Stock as
reported on the NASDAQ National Market was $ 1.75 per share. As of March 31,
1997, there were approximately 298 shareholders of record of the Company's
Common Stock.
Under the terms of the credit agreement with its commercial bank, the
Company may not purchase, redeem, retire, or otherwise acquire any shares of
its Capital Stock, or make a commitment to do so, without the bank's prior
written consent. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations " and "Note 5 to Financial Statements".
DIVIDEND POLICY
Historically, the Company has not paid any cash or other dividend. The
Company does not expect to pay dividends in the foreseeable future but
currently intends to retain any earnings to finance operations and to support
future growth. Furthermore, the Company's bank credit facility agreement
prohibits the payment of dividends. See "Managements' Discussion and Analysis
of Financial Condition and Results of Operations" and "Note 5 to Financial
Statements".
16
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial data shown below have been
derived from the Company's audited consolidated financial statements for the
years shown.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1992 1993 1994(1) 1995(1) 1996
---- ---- ------- ------- ----
(in thousands, except per share and ratio data)
INCOME STATEMENT DATA:
Net sales.................................... $45,685 $ 50,110 $ 73,508 $ 69,188 $ 62,503
Cost of sales................................ 32,296 30,190 45,886 44,718 43,074
-------- -------- -------- -------- --------
Gross profit................................. 13,389 19,920 27,622 24,470 19,429
Sales and marketing.......................... 9,791 9,346 13,955 12,099 10,145
Engineering.................................. 1,617 1,688 2,696 3,351 2,350
General and administrative................... 5,636 6,520 7,928 9,008 10,175
Impairment of goodwill....................... 2,917
-------- -------- -------- -------- --------
Total operating expenses..................... 17,044 17,554 24,579 24,458 25,587
Income (loss) from operations................ (3,655) (2,366) 3,043 12 (6,158)
Litigation expense........................... (4,386) (1,825)
Other expense................................ (421) (222) (743) (1,957) (1,562)
-------- -------- -------- -------- --------
Income (loss) before income taxes............ (4,076) 2,144 (2,086) (3,770) (7,720)
Income taxes (credit)........................ (1,174) 608 (710) (1,046) (585)
-------- -------- -------- -------- --------
Net income (loss)............................ $ (2,902) $ 1,536 $ (1,376) $ (2,274) $ (7,135)
======== ======== ======== ======== ========
Net income (loss) per common share........... $ (1.16) $ 0.63 $ (0.58) $ (1.17) $ (3.07)
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding.................... 2,495 2,445 2,376 2,320 2,321
BALANCE SHEET DATA:
Working capital (deficit).................... $ 9,983 $ 8,164 $ 12,716 $10,381 $ (6,091)
Total assets................................. 25,136 24,134 37,821 42,043 29,427
Long-term obligations........................ 5,417 3,867 13,240 15,384 879
Shareholders' equity ........................ 12,512 13,280 11,216 8,498 1,052
(1) The results of operations includes patent infringement settlement costs in
the amount of $4.4 million for the year ended December 31, 1994 and $1.82
million for the year ended December 31, 1995. The 1996 results of
operations includes a write down of $3.5 million on European assets as well
as $2.9 million of intangible assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Legal
Proceedings."
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to the year ended December 31, 1995
The Company's consolidated net sales decreased $6.7 million, or 9.7%, to
$62.5 million for the year ended December 31, 1996 as compared to $69.2 million
for the year ended December 31, 1995. The decline is primarily due to the
Company's subsidiary operations in France, as the weakness in this market
continues. North American sales remained constant with the prior year, as
original equipment manufacturers ("OEM") sales increased 21%, offset by
discontinuance in 1995 of Do-It-Yourself, mechanical and Vehicle Locator
security products to mass merchandisers and independent dealers and phase-out
of the contract manufacturing business.
For the year ended December 31, 1996, consolidated gross profit decreased
$5.0 million, or 20.6%, to $19.4 million as compared to $24.4 million for the
year ended December 31, 1995. Consolidated gross profit percent decreased to
31.1% in 1996 from 35.4% in 1995, due to European operations and year-end
reserves for inventory obsolescence. North American margins, however, improved
due to cost reductions, productivity improvements and the elimination of
unprofitable product lines.
Consolidated operating expenses increased $1.1 million, or 4.6%, in 1996 as
compared to 1995. The increase in consolidated operating expense was due
primarily to writedown of intangible assets totaling $2.9 million related to
prior Company acquisitions in 1994 and 1990, in Europe and North America.
(See below for further discussion of European operations.) The writedown of
the intangible assets associated with the North American subsidiary is the
result of the Company's decision to discontinue Do-It-Yourself, mechanical and
Vehicle Locator security products as described above. Excluding these charges,
operating expenses have decreased in both North America and Europe due to
continued emphasis on cost management. The Company also continues to incur
legal fees in asserting its patent rights and as defendant in patent
infringement suits.
In April 1997, the Company announced plans to divest itself of its
European subsidiaries. The impact of this decision caused fourth quarter
charges resulting from the writedown of intangible assets of $1.6 million. The
Company recorded additional fourth quarter charges relating to its European
subsidiaries to reflect adjustments to the carrying value of inventory and
other assets totalling $3.5 million.
As a result of the foregoing, the Company had a loss from continuing
operations of $6.2 million for the year ended December 31, 1996, as compared to
operating income of $12,000 for the year 1995.
Interest expense increased 4.7% during the year as compared to 1995.
Although average borrowings outstanding for 1996 declined over the previous
year, higher rates offset this reduction.
Other expenses for the year ended December 31, 1995, exclusive of interest
expense, included $1.8 million attributable to additional damages recorded from
a patent infringement suit.
The Company had an effective income tax rate of 8% on current operating
income. The effective tax rate was affected by nondeductible foreign losses,
and goodwill impairment.
As a result of the foregoing, the Company incurred a net loss of $7.1
million, or $3.07 per share, for the year ended December 31, 1996 compared to a
net loss of $2.7 million, or $1.17 per share, for the year ended December 31,
1995.
Year ended December 31, 1995 compared to the year ended December 31, 1994
The Company's consolidated net sales decreased $4.3 million or 5.9%, for
the year ended December 31, 1995 as compared to the year end December 31, 1994.
The decline is primarily due to the Company's decision to discontinue sales
of Do-It-Yourself, mechanical and Vehicle Locator security products to mass
merchandisers and independent dealers and to a transportation workers strike
in France. The decline is partially offset by increases in OEM and expediter
sales.
For the year ended December 31, 1995, consolidated gross profit decreased
$3.2 million, or 11.6%, to $24.5 million as compared to $27.6 million for the
year ended December 31, 1994. As a percentage of consolidated sales, gross
profit decreased to 35.4% in 1995 from 37.6% in 1994. The decrease was
primarily due to start up manufacturing problems with the Company's European
parts production in the United States and a lower profit margin on sales in
Europe. The Company expects to maintain the current gross profit margin in
1996 due to continued emphasis in OEM sales.
18
Consolidated operating expenses decreased $121,000 or less than 1% in 1995
as compared to 1994. The decrease in consolidated operating expense was
attributable to decreased sales and marketing expenses, partially offset by
increases in engineering, product development costs and general and
administrative costs.
As a result of the foregoing, the Company had consolidated income from
operations of $12,000 in the year ended December 31, 1995 compared to operating
income of $3.0 million for the 1994 fiscal year .
Interest expense increased $860,000 for the year ended December 31, 1995,
or 133.3%, to $1.5 million as compared to $645,000 for the year ended December
31, 1994. Increases are attributable to higher interest rates and increased
indebtedness associated mainly with the acquisition of European Auto Equipment
and its operations.
Other expenses for the year ended December 31, 1995 decreased $2.2
million to $2.3 million as compared to $4.5 million for the year ended December
31, 1994, exclusive of interest expense as discussed above. The decrease is
primarily attributable to a reduction of $2.7 million of legal expenses in 1995.
The Company had an effective income tax rate of 28% on current operating
income. Income taxes on foreign operations were approximately 33%. During 1995,
the Company charged off state and foreign tax refunds in the amount of
$130,000.
As a result of the foregoing, the Company incurred a net loss of $2.7
million, or $1.17 per share for the year ended December 31, 1995, compared to a
net loss of $1.4 million, or $0.58 per share for the year ended December 31,
1994.
19
EFFECT OF INFLATION
The Company does not believe that inflation has had a material impact on
its operations over the past three years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at December 31, 1996 was a
deficit of ($6.1) million, as compared to a surplus of $10.4 million and $12.7
million at December 31, 1995 and 1994 respectively. The current ratio
(current assets divided by current liabilities) as of December 31, 1996 is .78
to 1, compared to 1.57 to 1 at December 31, 1995, and 1.95 to 1 at December 31,
1994.
Net cash provided by operating activities for the year ended December 31,
1996 was $3.6 million. This change was impacted primarily by the reduction in
receivables and inventory of $1.5 million and $6.1 million, respectively, offset
by the decrease in accounts payable of $2.5 million. Cash provided from
operations was used to finance capital expenditures of $700,000 and repayment of
bank borrowings and other long-term debt of $3.3 million.
In June 1996, the Company entered into an amended and restated loan
agreement with NBD Bank ("Bank"). This arrangement provides for a $14.25
million secured revolving credit facility for working capital requirements, $1.3
million secured non-amortizing loan due May 23, 1997, and $2.2 million unsecured
term loan due May 23, 1999. The Company has used these facilities for operating
capital and to provide a standby letter of credit in the amount of $5.9 million
in conjunction with the appeal of the patent infringement litigation. The
Company's $14.25 million revolving credit agreement expires May 1998, unless
earlier terminated by provisions of the loan agreement. This revolving credit
facility bears interest at the prime rate plus 1% (9.50% as of April 11, 1997),
or at the Company's option, at the LIBOR plus 1.5% to 3.5% for maturities
ranging from one to six months (from 9.19% to 9.50% as of April 11, 1997). The
credit facility is collateralized by substantially all of the assets of the
Company. Furthermore, the Company's obligations under the credit facility have
been guaranteed by all of its domestic subsidiaries and are subject to certain
covenants. The Company's existing bank credit facility contains covenants which
require the Company and its subsidiaries to maintain a minimum working capital
level, a specified current ratio, a minimum tangible net worth, a minimum ratio
of total liabilities to tangible net worth, a specified fixed charges coverage
ratio and limitations on indebtedness. As of December 31, 1996, the Company
was not in compliance with the tangible net worth, total liabilities to
tangible net worth, fixed charge coverage ratio, reporting requirements and
limits on indebtedness loan provisions, as amended.
The Company is presently in discussions with the Bank concerning the loan
covenant violations, which continue to exist and which have not been cured. As
of April 14, 1997, the Bank has not agreed to amend the loan agreement in a
manner which would place the Company in compliance with all covenants of the
agreement currently and as of December 31, 1996. As a result, all outstanding
borrowings due the Bank at December 31, 1996, have been classified as a current
liability. If the Company is not successful in its efforts to secure an
amended credit agreement, or if the Company is unable to obtain alternative
financing, the Company's ability to continue operations at its planned level
may be impaired.
As of April 11, 1997, $11.4 million of the $14.25 million revolving credit
facility was borrowed against or had outstanding letters of credit issued.
Under this revolving line of credit, $4.5 million was borrowed under the LIBOR
option.
Refer to Note 2 regarding the basis of presentation of financial
statements.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, notes thereto and supplementary
financial statement schedule with respect to this item are set forth in the
Table of Contents to the Consolidated Financial Statements and Consolidated
Financial Statement Schedule appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item may be found under the caption
"Directors, Nominees and Executive Officers" of the Company's 1997 Proxy
Statement and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item may be found under the captions
"Executive Compensation," "Stock Option Plan" and "Directors' compensation" of
the Company's 1997 Proxy Statement and such information is incorporated herein
by reference.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item may be found under the captions
"Security Ownership of Certain Beneficial Owners and Management and
"Shareholder Agreement" of the company's 1997 Proxy Statement and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item may be found under the caption
"Certain Transactions" of the Company's 1997 Proxy Statement and such
information is incorporated herein by reference.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The documents filed as a part of this report:
1. Consolidated Financial Statements.
2. Consolidated Financial Statement Schedule.
3. Exhibits:
3.1 Restated Articles of Incorporation of the Company, incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-18, as amended, Registration No. 33-16991C
("Form S-18").
3.2 Bylaws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1990 ("1990 Form 10-K").
9. Shareholder Agreement, as amended, incorporated by reference to
Exhibit 9 to the Company's Form 10-K for the year ended December
31, 1989 ("1989 Form 10-K").
9.1* Termination of Shareholder Agreement dated February 15, 1997.
Management Compensation Plans and Arrangements
10.1 Employment Agreement with Rand W. Mueller, as amended,
incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, as amended, Registration No.
33-31356 ("Form S-1"), and as further amended by Amendment No. 2
to Employment Agreement incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the quarter ended September
30, 1992 ("September 1992 10-Q").
10.2 1987 Stock Option Plan, incorporated by reference to Exhibit
10.3 to Form S-18, and amendment thereto, incorporated by
reference to Exhibit 10.3 to 1990 Form 10-K.
10.3 Indemnification Agreement with Rand W. Mueller, incorporated by
reference to Exhibit 10.4 to Form S-18.
The Company has entered into the same form of agreement with the
following directors and executive officers as of the dates
indicated:
Marshall J. Mueller May 29, 1987
Kenneth M. Mueller May 29, 1987
William S. Pickett May 29, 1987
Alan H. Foster May 17, 1988
David L. Etienne March 16, 1990
Peter J. Stouffer March 22, 1991
Jack D. Rutherford May 21, 1991
Robert V. Wagner August 3, 1993
John G. Chupa December 9, 1994
Michael P. Schroeder March 24, 1995
John C. Moffat March 24, 1995
Craig S. Camalo April 15, 1996
10.4 Mortgage Agreement with Rand W. Mueller, incorporated by
reference to Exhibit 10.8 to 1992 Form 10-K.
10.5 Consulting Agreement with Kenneth M. Mueller, incorporated by
reference to Exhibit 10.9 to Form S-18.
Other Material Contracts
10.6 Lease of real property at 950 E. Whitcomb, Madison Heights,
Michigan, incorporated by reference to Exhibit 10.10 to 1992
Form 10-K.
10.7 Lease of real property at 300 Industrial Avenue, Georgetown,
Texas, incorporated by reference to Exhibit 10.11 to 9 to the
Company's Form 10-K for the year ended December 31, 1991 ("1991
Form 10-K").
10.8 Lease of real property at 32, Rue Delizy, Pantin Cedex, France.
10.9 Lease of real property at 16742 Burke Lane, Huntington Beach,
California.
10.10 General Motors Corporation contract, incorporated by reference
to Exhibit 10.19 to Form S-1.
10.11 Ford Motor Corporation contract, incorporated by reference to
Exhibit 10.20 to Form S-1.
10.12 Chrysler Corporation contract, incorporated by reference to
Exhibit 10.21 to Form S-1.
10.13 Purchase Agreement with Mitsubishi Motor Sales of America, Inc.,
incorporated by reference to Exhibit 10.22 to Form 10-K.
10.14 Development Agreement by and between the City of Georgetown,
Texas and Tessco Group, Inc. concerning redevelopment of real
property at 300 Industrial Avenue, Georgetown, Texas,
incorporated by reference to Exhibit 10.23 to 1991 Form 10-K.
10.15 Loan Agreement between the Company and NBD Bank dated June 28,
1996, incorporated by reference to Exhibit 10.29 to the
Company's Form 10-Q for the quarter ended June 30, 1996.
11.* Statement regarding Computation of Per Share Earnings.
21.* List of Subsidiaries.
23.* Consent of Deloitte & Touche, L.L.P.
27.* Financial Data Schedule.
* Filed with this report.
(b) There were no Reports on Form 8-K filed during the last quarter of the
fiscal year ended December 31, 1996.
23
CODE-ALARM, INC. AND SUBSIDIARIES
CONTENTS
PAGES
CONSOLIDATED FINANCIAL STATEMENTS OF CODE-ALARM, INC.
AND SUBSIDIARIES:
REPORT OF INDEPENDENT AUDITORS........................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS ....................................... F-3
STATEMENTS OF OPERATIONS ............................. F-4
STATEMENTS OF SHAREHOLDERS' EQUITY ................... F-5
STATEMENTS OF CASH FLOWS ............................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........... F-7 TO F-16
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES .. F-17
F-1
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Code-Alarm, Inc.
We have audited the consolidated balance sheets of Code-Alarm, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Code-Alarm, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's recurring losses from
operations, decrease in shareholders' equity and noncompliance with its loan
covenants at December 31, 1996 raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 10 to the consolidated financial statements, in
connection with the lawsuit involving a shock sensing device, the plaintiff has
asserted patent infringement claims against two other shock sensor designs
produced by the Company. The court has tentatively held that these designs
infringe the patent and has scheduled a trial.
Deloitte & Touche LLP
Detroit, Michigan
April 14, 1997
F-2
25
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
-----------
1995 1996
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalent.................................................................... $ 416 $ 45
Accounts receivable, less allowance for doubtful accounts
(December 31, 1995 and 1996 $667,000 and $950,000, respectively).......................... 10,592 8,798
Inventories (Notes 1 and 3)................................................................. 14,811 8,734
Refundable income taxes..................................................................... 825 1,059
Deferred income taxes....................................................................... 560 2,040
Other....................................................................................... 1,338 729
-------- --------
Total current assets................................................................... 28,542 21,405
Property and equipment, net of accumulated depreciation and
amortization (Notes 4 and 5)............................................................... 4,500 3,750
OTHER ASSETS:
Excess of cost over net assets acquired, net................................................ 4,574 1,910
Other intangibles, net...................................................................... 816 651
Deferred income taxes....................................................................... 1,566
Other....................................................................................... 2,045 1,711
-------- --------
Total assets........................................................................... $ 42,043 $ 29,427
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5).................................................. $ 3,921 $ 9,308
Accounts Payable........................................................................... 12,362 9,874
Income tax payable.......................................................................... 46 22
Accrued expenses............................................................................ 1,832 2,358
Reserve for litigation (Note 10)............................................................ 5,934
-------- --------
Total current liabilities.............................................................. 18,161 27,496
Long-term debt (Note 5)..................................................................... 9,545 879
Reserve for litigation (Note 10) ........................................................... 5,839
-------- --------
Total liabilities...................................................................... 33,545 28,375
Commitments and contingencies (Notes 5, 6 and 10)
SHAREHOLDERS' EQUITY (Note 7):
Preferred stock, noncumulative; no par value; authorized
500,000 shares; none issued...............................................................
Common stock, no par value; authorized 5,000,000 shares;
issued and outstanding December 31, 1996, 2,320,861 shares
December 31, 1995, 2,320,361 shares....................................................... 12,210 12,213
Foreign currency translation adjustment..................................................... 54 (260)
(Accumulated deficit)....................................................................... (3,766) (10,901)
-------- --------
Total shareholders' equity............................................................. 8,498 1,052
-------- --------
Total liabilities and shareholders' equity............................................. $ 42,043 $ 29,427
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
26
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1994 1995 1996
---- ---- ----
Net sales (Note 11) ................. $73,508 $ 69,188 $ 62,503
Cost of sales ....................... 45,886 44,718 43,074
------- ------- -------
Gross profit ........................ 27,622 24,470 19,429
------- ------- -------
Operating expenses:
Sales and marketing ............... 13,955 12,099 10,145
Engineering ....................... 2,696 3,351 2,350
General and administrative ........ 7,928 9,008 10,175
Impairment of goodwill(Note 1)..... 2,917
------- ------- -------
24,579 24,458 25,587
------- ------- -------
Income(loss)from operations 3,043 12 (6,158)
Other (income) expense:
Interest expense .................. 645 1,505 1,576
Litigation expense (Note 10)....... 4,386 1,825
Other ............................. 98 452 (14)
------- ------- -------
5,129 3,782 1,562
------- ------- -------
Income (loss) before income taxes.... (2,086) (3,770) (7,720)
Income taxes (credit)(Note 9):
Current ........................... 457 (443) (761)
Deferred .......................... (1,167) (603) 176
------- ------- -------
(710) (1,046) (585)
------- ------- -------
Net loss ............................ $(1,376) $(2,724) $(7,135)
======= ======= =======
Net loss per common share ........... $ (0.58) $ (1.17) $( 3.07)
======= ======= =======
Weighted average number of common
shares outstanding ................ 2,376 2,320 2,321
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
27
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CUMULATIVE TOTAL
COMMON STOCK FOREIGN (ACCU- SHARE-
--------------------- TRANSLATION MULATED HOLDERS'
SHARES AMOUNT ADJUSTMENT DEFICIT) EQUITY
-------------------------------------------------------------
Balance, January 1, 1994 ......................... 2,396 $ 12,946 $ 334 $ 13,280
Purchase and retirement of common stock from
former directors ................................ (167) (1,561) (1,561)
Stock issued under stock option plan ............. 1 6 6
Stock issued for acquisitions .................... 90 818 818
Foreign currency translation adjustment .......... $49 49
Net loss for the year ............................ (1,376) (1,376)
-------- --------- ----- -------- --------
Balance, December 31, 1994 ....................... 2,320 12,209 49 (1,042) 11,216
-------- --------- ----- -------- --------
Stock issued under stock option plan ............. 1 1
Foreign currency translation adjustment .......... 5 5
Net loss for the year ............................ (2,724) (2,724)
-------- --------- ----- -------- --------
Balance, December 31, 1995........................ 2,320 12,210 $54 $ (3,766) $ 8,498
-------- --------- ----- -------- --------
Stock issued under stock option plan.............. 1 3 3
Foreign currency translation adjustment........... (314) (314)
Net loss for the year............................. (7,135) (7,135)
-------- --------- ----- -------- --------
Balance, December 31, 1996........................ 2,321 $12,213 $(260) $(10,901) $ 1,052
======== ========= ===== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
28
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ............................................ $(1,376) $(2,724) $(7,135)
------- ------- -------
Adjustments to reconcile net (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ........................ 1,615 1,792 1,309
Impairment of goodwill ............................... 2,917
Provision for losses on accounts receivable .......... 592 443
Changes in assets and liabilities:
Accounts receivable ................................. (131) 346 1,511
Inventories ......................................... (3,734) (2,657) 6,077
Refundable income taxes ............................. (243) (502) (234)
Deferred income taxes ............................... (1,167) (603) 86
Other assets ........................................ 243 (1,245) 492
Accounts payable .................................... 488 3,617 (2,487)
Accrued expenses .................................... (291) (1,299) 548
Reserve for litigation .............................. 3,729 2,110 95
------- ------- ------
Total adjustments .................................... 509 2,151 10,757
------- ------- ------
Net cash provided by (used in) operating activities .. (867) (573) 3,622
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (1,177) (998) (716)
Purchase of Europe Auto Equipment, net of
cash received ........................................ (931)
Payment for intangible assets ......................... (905)
------- ------- ------
Net cash used in investing activities ................ (3,013) (998) (716)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .......................... 4,056 2,021
Reduction of long-term debt ........................... (592) (1,078) (3,072)
Proceeds from line of credit .......................... 46,140 28,360 12,540
Reduction of line of credit ........................... (44,289) (27,424) (12,747)
Purchase and retirement of common stock ............... (1,561)
Issuance of stock 6 1 2
------- ------- -------
Net cash provided by (used in) financing activities ... 3,760 1,880 (3,277)
------- ------- -------
Net increase (decrease) in cash and cash equivalents .. (120) 309 (371)
Cash and cash equivalents, beginning of year .......... 227 107 416
------- ------- -------
Cash and cash equivalents, end of year ................ $ 107 $ 416 $ 45
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................................. $ 581 $ 1,528 $ 1,576
======= ======= =======
Income taxes, net .................................... $ 881 $ 200
======= =======
F-6
29
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
1994:
- -----
CODE - EUROPE
-------------
TOTAL LTD. EAE
----- ---- ---
Fair value of assets acquired............ $ 8,766 $ 660 $ 8,106
Amounts paid for net assets acquired..... 2,377 380 1,997
Liabilities assumed...................... 6,389 280 6,109
Also, during 1994, the Company entered into a capital lease obligation of
approximately $500,000 for machinery and equipment.
1995:
- -----
During 1995, the Company entered into capital lease obligations of
approximately $386,000 for computer equipment and $247,000 for machinery and
other capital equipment. Payments on these capital leases were $97,000 and
$39,000 respectively. Also, during 1995, the Company exchanged inventory for a
$695,000 note which may be used to reduce the cost of various goods and
services received during the next five years.
1996:
- -----
There were no significant noncash activities in 1996.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
30
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The Company designs, manufactures, imports and markets automobile and home
security systems, keyless entry systems and related products. The Company is
also a contract manufacturer of electronic cable, wire harness and printed
circuit board assemblies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of all
inventories is determined on the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided
using the straight-line and accelerated methods over the estimated useful lives
of the related assets. Upon retirement or disposal of property or equipment,
the cost and accumulated depreciation are removed from the accounts, and any
gain or loss is included in operations. Estimated useful lives are 5 years for
furniture and fixtures and leasehold improvements and 3 to 8 years for
machinery and equipment.
INTANGIBLE ASSETS
The excess of acquisition cost over net assets acquired ("Goodwill") is
amortized on a straight-line basis over 40 years. The Company continually
evaluates the realizability of Goodwill based upon expectations of estimated
future cash flow and operating income. Impairment of Goodwill is recognized as
a charge to operations when the estimated future cash flows are less than the
carrying value of the Goodwill. Based upon its most recent analysis, the
Company believes that the unamortized Goodwill applicable to the acquisition of
certain subsidiaries is impaired. Accordingly the Company has recorded a charge
to operations in the amount of $2,917,000 in the fourth quarter of 1996. The
costs of all other intangible assets, comprised primarily of patents and
trademarks, are amortized on a straight-line basis over their respective
estimated useful lives, generally five years. Accumulated amortization of
intangible assets amounted to approximately $1,685,000 and $ 1,182,000 at
December 31, 1995 and 1996, respectively.
REVENUE RECOGNITION
Revenues are recognized from sales when the product is shipped. The
Company provides an accrual for future product return and warranty costs based
upon the prior years' sales and costs incurred. Accrued warranty costs
amounted to approximately $150,000 and $170,000 at December 31, 1995 and 1996,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Expenditures for the research and development of new and improved products
are charged to operations as incurred and aggregated approximately $572,000,
$558,000 and $601,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-8
31
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1995 and 1996,
and revenues and expenses during the three years in the period ended December
31, 1996. The actual results could differ from the estimates made in the
preparation of the consolidated financial statements.
EARNINGS PER COMMON SHARE
Shares issuable under employee stock options were excluded from the
computation of the weighted average number of common shares since they were
antidilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of the Company's foreign
operations is the French franc. The translation from the franc to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses, net of
applicable deferred income taxes, resulting from translation are included in
shareholders' equity, and gains or losses resulting from foreign currency
transactions are included in the statement of operations.
2. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the years ended December 31, 1994,
1995 and 1996, the Company has incurred net losses of $1,376,000, $2,724,000
and $7,135,000, respectively, and shareholders equity has declined to
$1,052,000 at December 31, 1996. These factors, among others, may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts should the Company be
unable to continue as a going concern. As described in Note 5, the company is
not in compliance with several covenants of its credit agreement with NBD Bank
and, because NBD Bank has not agreed to waive these covenants or amend the
credit agreement, the balance outstanding under the credit agreement has been
classified as a current liability at December 31, 1996.
The Company's ability to continue as a going concern is dependent upon
meeting its profitability and cash flow objectives and negotiating an
amendment of its NBD Bank loan agreement, or obtain alternative financing.
Management's plans for 1997 to address the conditions described above include
the following:
- Divest or dispose of its European subsidiaries. The Company is
actively seeking and is currently negotiating with several prospective buyers
for these assets.
- Continue to work with NBD Bank towards an agreement which would
amend the loan agreement and place the Company is compliance with all loan
covenants. This may include seeking alternative credit or refinancing a portion
of current NBD Bank debt.
- Ensure that business plans and objectives are met, which include
improved sales growth and ongoing cost management.
If management is unsuccessful in achieving the plans set forth above, the
Company may determine it is necessary to divest of other assets, or undertake
other actions as appropriate.
3. INVENTORIES
Inventories consist of the following:
1995 1996
---- ----
(in thousands)
Raw materials ...................................... $ 7,089 $ 5,811
Work in process .................................... 135 324
Finished goods...................................... 7,587 2,599
-------- -------
$ 14,811 $ 8,734
======== =======
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized by the following major
classifications:
1995 1996
---- ----
(in thousands)
Machinery and equipment ......................... $ 8,586 $ 8,589
Leasehold improvements .......................... 1,719 1,426
Furniture and fixtures .......................... 1,004 1,543
------- -------
11,309 11,558
Less accumulated depreciation ................... 6,809 7,808
------- -------
$ 4,500 $ 3,750
======= =======
Depreciation expense was approximately $1,093,000, $1,260,000 and
$1,037,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
F-9
32
5. LONG-TERM DEBT 1995 1996
Long-term debt consists of the following: ---- ----
(in thousands)
Revolving credit .................................................................... $ 5,788 $ 5,580
Term loans........................................................................... 3,276 2,570
Working capital facilities-European Subsidiary...................................... 3,066 784
Mortgage note........................................................................ 356 327
Capital lease obligations............................................................ 981 926
-------- --------
13,467 10,187
Less current portion............................................................. (3,922) (9,308)
-------- --------
Long-term debt $ 9,545 $ 879
======== ========
In May 1995 the Company entered into a credit arrangement with NBD
Bank, which credit arrangement provided for a $13 million secured revolving
credit facility for working capital requirements, $1.3 million secured
non-amortizing notes and $2.2 million unsecured four year term notes. In June
1996, the Company entered into an amended and restated credit agreement with
NBD Bank. This new arrangement provides for a $14.25 million secured revolving
credit facility for working capital requirements, $1.3 million secured
non-amortizing loan due May 23, 1997, and $2.2 million unsecured term loan due
May 23, 1999. The Company has used these facilities for operating capital and
to provide a standby letter of credit in the amount of $5.9 million in
conjunction with the appeal of the patent infringement litigation. The
Company's $14.25 million revolving credit agreement expires May 1998, unless
earlier terminated by provisions of the loan agreement. This revolving credit
facility bears interest at the prime rate plus 1% (9.50% as of April 11, 1997),
or at the Company's option, at the LIBOR plus 1.5% to 3.5% for maturities
ranging from one to six months (from 9.19% to 9.50% as of April 11, 1997). The
credit facility is collateralized by substantially all of the assets of the
Company. Furthermore, the Company's obligations under the credit facility have
been guaranteed by all of its domestic subsidiaries and are subject to certain
covenants. The bank credit facility contains covenants which require the
Company and its subsidiaries to maintain a minimum working capital level, a
specified current ratio, a minimum tangible net worth, a minimum ratio of total
liabilities to tangible net worth, a specified fixed charges coverage ratio and
limitations on indebtedness. As of December 31, 1996, the Company was not in
compliance with the tangible net worth, total liabilities to tangible net
worth, fixed charge coverage ratio, reporting requirements and limits on
indebtedness loan provisions, as amended. As of April 14, 1997, NBD Bank has
not agreed to amend the loan agreement in a manner which would place the
Company in compliance with all covenants of the agreement currently and as of
December 31, 1996. As a result, all outstanding borrowings due NBD Bank at
December 31,1996, have been classified as a current liability.
A European subsidiary of the Company has credit arrangements with three
commercial banks which include term loans totalling approximately $0.8 million,
at December 31, 1996, with interest rates ranging from 8% to 11.5%.
F-10
33
The mortgage note is payable to the City of Georgetown, Texas, in monthly
installments of $4,401, including interest at 7% through January of 2005, and
is collateralized by the leasehold improvements.
The recorded amounts of long-term debt approximate fair value as of
December 31, 1996.
The following table sets forth aggregate maturities of long-term debt
(excluding capital lease obligations) at December 31, 1996 (in thousands):
1997 .............................................................. $8,934
1998 .............................................................. 29
1999 .............................................................. 29
2000 .............................................................. 29
2001 .............................................................. 29
Thereafter ........................................................ 211
------
$9,261
======
Minimum lease payments on capital lease obligations at December 31, 1996
are (in thousands):
1997 .............................................................. $ 454
1998 .............................................................. 454
1999 .............................................................. 185
2000 .............................................................. 28
------
Total minimum lease payments...................................... 1,121
Less amount representing interest ................................ 195
------
Present value of net minimum lease payments $ 926
======
F-11
34
6. COMMITMENTS
LEASES
The Company leases certain property and equipment under various operating
leases through 2004.
Future minimum rental payments required for all noncancelable operating
leases are as follows for the years ending December 31 (In Thousands):
1997............................................... $ 960
1998............................................... 816
1999............................................... 747
2000............................................... 729
2001............................................... 723
Thereafter ........................................ 346
Rent expense under all operating leases was approximately $769,000,
$915,000 and $938,000, for the years ended December 31, 1994, 1995 and 1996,
respectively.
7. CAPITAL STOCK
STOCK REPURCHASE
The Company has repurchased and retired its common stock held by certain
former directors in conjunction with their resignation from the Board of
Directors. During the year ended December 31, 1994, the Company purchased and
retired 47,904 shares for $503,000 and 119,180 shares for $1,058,000. No
repurchases of such shares were executed in 1995 or 1996. All repurchases were
made below the closing market price on the date of the purchase.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan ("Plan") for its key employees
and reserved 280,000 shares of common stock for issuance under the Plan. The
Plan authorizes the Company to issue Incentive Stock Options and Non-Qualified
Stock Options. The Company may grant such options concurrently with Stock
Appreciation Rights, which entitle the Company to accept surrender of an option
by paying the employee an amount equal to the increase in the price of the
Company's common stock from the option date.
Incentive Stock Options may be issued at a price not less than fair market
value as of the grant date. For any employee holding more than 10 percent of
the voting stock of the Company, the option price is 110 percent of fair market
value at the grant date.
F-12
35
Non-Qualified Stock Options may be issued at a price not less than 85
percent of fair market value at the grant date. Options are generally
exercisable for a ten-year period; however, options granted to any employee
holding more than 10 percent of the voting stock of the Company are exercisable
over five years. No Non-Qualified Stock Options have been granted.
The following is a summary of Incentive Stock Options, with Stock
Appreciation Rights, granted under the Plan:
NUMBER OF OPTIONS
DECEMBER 31
----------------
1994 1995 1996
---- ---- ----
Balance, beginning ............... 125,875 216,375 261,775
Granted .......................... 102,000 85,000 195,475
Exercised ........................ (1,200) (400) (500)
Canceled, terminated or expired .. (10,300) (39,200) (213,875)
------- ------- -------
Balance, ending .................. 216,375 261,775 242,875
======= ======= =======
At December 31, 1996, options were exercisable at prices ranging
from $4.00 to $6.00 per share. The weighted average exercise price for these
options was $5.15 and the remaining average contractural life was eight years.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" which was
effective for the Company beginning January 1, 1996. Statement No. 123
encourages compensation cost to be measured based on the fair value of the
equity instrument awarded. In accordance with this statement the Company has
elected to continue the application of Accounting Principles Board Opinion No.
25 which recognized compensation cost based on the intrinsic value of the
equity instrument award. Compensation costs associated with Statement No. 123
were not significant for 1995 and 1996.
8. ACQUISITIONS
Effective January 1, 1994, the Company purchased Europe Auto Equipment,
S.A. ("EAE"), a French based distributor of vehicle security products.
Consideration included $1.6 million and 50,000 shares of the Company's common
stock. Also, effective January 1, 1994, the Company purchased Code-Alarm
Europe, Ltd., a distributor of vehicle security products in the United Kingdom,
for 40,000 shares of the Company's common stock. These acquisitions were
accounted for as purchases, with the results of their operations included from
January 1, 1994.
F-13
36
9. INCOME TAXES
The effective income tax rates differed from the statutory income tax rate
due to the following:
1994 1995 1996
---- ---- ----
Statutory rate ................................ 34% 34% 34%
Differences resulting from:
Goodwill impairment, amortization and other
nondeductible expenses ..................... 1 (3) (14)
Effect of foreign tax rates .................. (1) (1) 1
Effect of nondeductible foreign losses ....... (20)
Charge off of state and foreign tax
refunds receivable ......................... (2)
Reversal of prior period timing differences... 7
---- --- ----
Effective income tax rates .................... 34% 28% 8%
==== ==== ====
Current income tax expense for 1994 and 1995 includes $73,000 and $46,000
of foreign income taxes, respectively. There were no foreign income taxes for
1996.
Deferred tax assets and liabilities as of December 31 consisted of the
following:
1995 1996
---- ----
(in thousands)
Expenses deductible earlier for financial statement purposes than for tax purposes ...... $ 378 $ 358
Litigation loss not deductible for tax purposes.......................................... 1,986 2,017
Expense included in inventory for tax purposes........................................... 188 153
------ ------
Total deferred tax assets......................................................... 2,552 2,528
------ ------
Net value of fixed assets................................................................ 351 351
Capitalization of assets expensed for tax purposes....................................... 75 137
------ ------
Total deferred tax liabilities........................................................... 426 488
------ ------
Net deferred tax asset .................................................................. $2,126 $2,040
====== ======
The Company does not provide United States income taxes on the
undistributed earnings of foreign subsidiaries, as such earnings are intended
to be reinvested in these operations. Accumulated undistributed earnings of
the foreign subsidiaries are approximately $121,000 and $251,000, which would
have resulted in federal income taxes of approximately $41,000 and $87,000 at
December 31, 1994 and 1995, respectively.
10. LITIGATION
The Company is involved in a patent infringement suit involving a shock
sensing device. During 1993, the Company was found to be in violation of the
patent. The damage portion of the trial was completed in January 1995 and, at
December 31, 1994, the Company recorded an accrual for damages, including
interest and costs, of approximately $4.2 million. In June 1995 the Company
received from the United States District Court information that the damages
would total $5.6 million. Accordingly the Company recorded an additional
accrual for damages and interest of $1.8 million in 1995. In March 1997, the
Company motioned to pay the judgement creditor the judgement amount including
accrued interest to date, totalling approximately $6.0 million, without
prejudice to the Company's right to proceed to set aside the judgement on
appeal. The order was entered April 1997. The Company's reserve for
litigation includes the amount of the judgement plus interest through
December 31, 1996.
In a similar case relating to a subsequent shock sensing device, the
Court has tentatively held that the subsequent device infringes the patent and
has scheduled a trial on willfulness and damages. The Company is unable to form
an opinion on whether or not the court will issue a final determination on
whether the Company's subsequent designs infringe the patent, and therefore is
unable to predict what damages, if any, the Court may find.
F-14
37
The Company became involved in several legal proceedings following the
Company's decision to aggressively defend its patent rights. The Company is
asserting its patent rights against the defendants in these cases, and such
defendants have made claims against the Company. The outcome of these cases
cannot be reasonably estimated.
The Company, on March 16, 1995, was named as a defendant in an action
filed in August 1990 in the United States District Court for Puerto Rico to
enforce a patent infringement default judgment rendered against certain
predecessors in title to assets now owned by the Company which were purchased
by the Company from a bank in Illinois in January 1990. The bank is providing
for the defense of the Company subject to reservation of rights against the
Company. The amount of the judgment is $19.4 million, which with accumulated
interest now has reached approximately $28.6 million. On March 20, 1997 the
Puerto Rico court dismissed the action and held that any action to collect from
the Company and its subsidiary as successors in interest to the judgment debtor
must be raised before the Illinois court. On March 21, 1997 the case was
refiled by the judgment creditors in Illinois; however, the Compay has not yet
been served with a copy of the Complaint in this action and consequently is
unable to determine its exposure in the Illinois case. While the Company
believes that it has meritorious defenses to the claims asserted in this
lawsuit, the ultimate outcome of this lawsuit cannot be determined at this
time, and the Company is unable to estimate the range of possible loss, if any.
Various other legal actions and claims are pending or could be asserted
against the Company. Litigation is subject to many uncertainties; the outcome
of individual litigation matters is not predictable with assurance, and it is
reasonably possible that some of these matters may be decided unfavorably to
the Company. It is the opinion of management that the ultimate liability, if
any, with respect to these matters will not materially affect the financial
position, results of operations or liquidity of the Company.
11. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment -- vehicle security
systems. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. With the exception of sales to
dealers of General Motors Corporation ("GM") and Ford Motor Company ("Ford"),
no single customer accounted for more than 10 percent of revenue.
PERCENT OF TOTAL SALES
----------------------
1994 1995 1996
---- ---- ----
GM ..................................... 11% 13% 13%
Ford ................................... 11% 11% 12%
With the acquisition of EAE, effective January 1, 1994, the Company
expanded its European distribution. Information about the Company's domestic
and European operations is as follows:
YEAR ENDED DECEMBER 31
-----------------------
GEOGRAPHIC AREAS (in thousands)
1994 1995 1996
Net Sales ---- ---- ----
Domestic............................................ $ 55,978 $ 49,952 $ 50,074
European............................................ 17,530 19,236 12,429
---------- --------- ---------
Consolidated.................................... $ 73,508 $ 69,188 $ 62,503
Operating Income/(Loss)
Domestic............................................ $ 2,623 $ (571) $ (482)
European............................................ 420 583 (5,676)
---------- --------- ---------
Consolidated.................................... $ 3,043 $ 12 $ (6,158)
---------- --------- ---------
Assets
Domestic............................................ $ 29,390 $ 29,461 $ 24,518
European............................................ 8,431 12,582 4,909
---------- --------- ---------
Consolidated.................................... $ 37,821 $ 42,043 $ 29,427
========== ========= =========
Export sales for 1994, 1995 and 1996
were not significant.
F-15
38
12. CONCENTRATIONS OF RISK
The Company's products include a number of high-technology
components that are currently sourced from only a few suppliers and, in some
cases, a single supplier. The Company frequently requires large volumes of
such components. If the Company's suppliers are unable to fulfill the Company's
needs for such components, the Company may be unable to fill customer orders
and its business and financial condition, including working capital and results
of operations, may be materially and adversely affected.
13. FOURTH QUARTER, 1996 ADJUSTMENTS
The Company recorded adjustments to the carrying value of inventory
and other assets of its European subsidiaries totalling $3.5 million in the
fourth quarter of 1996. These adjustments were in addition to those described
in Note 1.
F-16
39
CODE-ALARM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- --------
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER (1) BALANCE AT
BEGINNING COST AND ACCOUNTS, DEDUCTIONS, END
OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
--------- ---------- ---------- ----------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1996 ..................... $667,000 $443,000 $160,000 $ 950,000
Year ended December 31, 1995 ..................... 383,000 592,000 308,000 667,000
Year ended December 31, 1994 ..................... 554,000 171,000 383,000
Note: (1) Write-off uncollectible accounts, net of recoveries
F-17
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ RAND W. MUELLER
Date: April 15, 1997 --------------------
RAND W. MUELLER
President
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.
/s/ RAND W. MUELLER President (Chief April 15, 1997
------------------------ Executive Officer) ------------------
RAND W. MUELLER and Director
/s/ CRAIG S. CAMALO Vice President of April 15, 1997
------------------------ Finance (Chief ------------------
CRAIG S. CAMALO Financial Officer)
/s/ ALAN H. FOSTER Director April 15, 1997
------------------------ ------------------
ALAN H. FOSTER
/s/ KENNETH M. MUELLER Director April 15, 1997
------------------------ ------------------
KENNETH M. MUELLER
Director April 15, 1997
------------------------ ------------------
MARSHALL J. MUELLER
/s/ WILLIAM S. PICKETT Director April 15, 1997
------------------------ ------------------
WILLIAM S. PICKETT
Director April 15, 1997
------------------------ ------------------
JACK D. RUTHERFORD
/s/ PETER J. STOUFFER Director April 15, 1997
------------------------ ------------------
PETER J. STOUFFER
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-18, as
amended, Registration No. 33-16991C ("Form S-18").
3.2 Bylaws of the Company, as amended, incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K
for the year ended December 31, 1990 ("1990 Form
10-K").
9. Shareholder Agreement, as amended, incorporated by
reference to Exhibit 9 to the Company's Form 10-K for
the year ended December 31, 1989 ("1989 Form 10-K").
9.1* Termination of Shareholder Agreement dated February
15, 1997. E-4
10.1 Employment Agreement with Rand W. Mueller, as amended,
incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, as
amended, Registration No. 33-31356 ("Form S-1"), and
as further amended by Amendment No. 2 to Employment
Agreement incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended
September 30, 1992 ("September 1992 10-Q").
10.2 1987 Stock Option Plan, incorporated by reference to
Exhibit 10.3 to Form S-18, and amendment thereto,
incorporated by reference to Exhibit 10.3 to 1990 Form
10-K.
10.3 Indemnification Agreement with Rand W. Mueller,
incorporated by reference to Exhibit 10.4 to Form
S-18.
The Company has entered into the same form of
agreement with the following directors and executive
officers as of the dates indicated:
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42
Marshall J. Mueller May 29, 1987
Kenneth M. Mueller May 29, 1987
William S. Pickett May 29, 1987
Alan H. Foster May 17, 1988
David L. Etienne March 16, 1990
Peter J. Stouffer March 22, 1991
Jack D. Rutherford May 21, 1991
Robert V. Wagner August 3, 1993
John G. Chupa December 9, 1994
Michael P. Schroeder March 24, 1995
John C. Moffat March 24, 1995
Craig S. Camalo April 15, 1996
10.4 Mortgage Agreement with Rand W. Mueller, incorporated
by reference to Exhibit 10.8 to 1992 Form 10-K.
10.5 Consulting Agreement with Kenneth M. Mueller,
incorporated by reference to Exhibit 10.9 to Form
S-18.
10.6 Lease of real property at 950 E. Whitcomb, Madison
Heights, Michigan, incorporated by reference to
Exhibit 10.10 to 1992 Form 10-K.
10.7 Lease of real property at 300 Industrial Avenue,
Georgetown, Texas, incorporated by reference to
Exhibit 10.11 to 9 to the Company's Form 10-K for the
year ended December 31, 1991 ("1991 Form 10-K").
10.8 Lease of real property at 32, Rue Delizy, Pantin
Cedex, France.
10.9 Lease of real property at 16742 Burke Lane, Huntington
Beach, California.
10.10 General Motors Corporation contract, incorporated by
reference to Exhibit 10.19 to Form S-1.
10.11 Ford Motor Corporation contract, incorporated by
reference to Exhibit 10.20 to Form S-1.
10.12 Chrysler Corporation contract, incorporated by
reference to Exhibit 10.21 to Form S-1.
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43
10.13 Purchase Agreement with Mitsubishi Motor Sales of
America, Inc., incorporated by reference to Exhibit
10.22 to Form 10-K.
10.14 Development Agreement by and between the City of
Georgetown, Texas and Tessco Group, Inc. concerning
redevelopment of real property at 300 Industrial
Avenue, Georgetown, Texas, incorporated by reference
to Exhibit 10.23 to 1991 Form 10-K.
10.15 Loan Agreement between the Company and NBD Bank dated
June 28, 1996, incorporated by reference to Exhibit
10.29 to the Company's Form 10-Q for the quarter ended
June 30, 1996.
11.* Statement regarding Computation of Per Share Earnings. E-6
21.* List of Subsidiaries. E-7
23.* Consent of Deloitte & Touche, L.L.P. E-8
27.* Financial Data Schedule. E-9
* Filed with this report.
E-3