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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission File Number: 016441
CODE - ALARM, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN
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(State or other jurisdiction of
incorporation or organization)
38-2334698
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(I.R.S. Employer
Identification No.)
950 EAST WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 248-583-9620
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of the registrants common stock, without
par value, as of November 17, 1997 is 2,320,861.
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INDEX
Page No.
Part I. - Financial Information --------
Consolidated Condensed Balance Sheets -
As of September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Condensed Statements of Operations (Unaudited) -
Three months ended September 30, 1997 and 1996, and nine months
ended September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. - Other Information 9
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PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CODE-ALARM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
September 30,
1997 December 31,
ASSETS (Unaudited) 1996
- ------ ------------- ------------
Cash and cash equivalents $ 98 $ 45
Accounts receivable (less allowance for 7,130 8,798
doubtful accounts of $515,000 and
$950,000, respectively)
Inventories 5,784 8,734
Refundable income taxes 1,059 1,059
Deferred income taxes 2,040 2,040
Other 269 729
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Total current assets 16,380 21,405
Property and equipment, net of accumulated depreciation 2,698 3,750
Excess of cost over net assets acquired, net 323 1,910
Other intangibles, net 386 651
Other assets 1,128 1,711
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Total assets $ 20,915 $ 29,427
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LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
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Current portion of long-term debt (Note 4) $ 809 $ 9,308
Accounts payable 6,415 9,874
Accrued expenses 2,133 2,358
Income tax payable 22
Reserve for litigation (Note 6) 1,700 5,934
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Total current liabilities 11,057 27,496
Long-term debt (Note 4) 13,363 879
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Total liabilities 24,420 28,375
Shareholders' equity (deficit):
Common stock 12,213 12,213
Foreign currency translation adjustment (260)
(Accumulated deficit) (15,718) (10,901)
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Total shareholders' equity (deficit) (3,505) 1,052
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Total liabilities and shareholders' equity (deficit) $ 20,915 $ 29,427
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See accompanying notes to consolidated condensed financial statements.
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CODE-ALARM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
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1997 1996 1997 1996
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Net sales $12,590 $15,282 $41,004 $47,094
Cost of sales 7,818 9,218 25,381 29,333
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Gross profit 4,772 6,064 15,623 17,761
Operating expenses:
Sales and marketing 1,851 2,695 5,852 7,782
Engineering 348 629 1,194 2,055
General and administrative 1,579 2,313 5,915 6,625
Impairment of goodwill 373
Restructuring charge (Note 1) 2,786 2,786
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6,564 5,637 16,120 16,462
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Income (loss) from operations (1,792) 427 (497) 1,299
Other (income) expense:
Interest expense 440 400 1,152 1,205
Other expense (income) 608 (13) 792 (10)
Litigation expense (Note 6) 2,376 2,376
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3,424 387 4,320 1,195
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Income (loss) before taxes (5,216) 40 (4,817) 104
Income tax (benefit) ( 2) 44
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Net income (loss) $(5,216) $ 42 $(4,817) $ 60
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Net income (loss) per common share $ (2.25) $ 0.02 $ (2.08) $ 0.03
======= ======= ======= =======
Weighted average number of common
shares outstanding 2,321 2,321 2,321 2,321
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See accompanying notes to consolidated condensed financial statements.
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CODE-ALARM, INC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended September 30
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1997 1996
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Cash flows from operating activities $ 2,219 $ 1,303
Cash flows from investing activities:
Capital expenditures (216) (158)
Payments for intangible assets (36)
Cash flows from financing activities:
Reduction of long-term debt (231) (2,507)
Proceeds from line of credit 4,336 1,691
Payment of judgment (6,055)
Proceeds from exercise of stock options 2
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Net change in cash and cash equivalents 53 295
Cash and cash equivalents, beginning of period 45 416
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Cash and cash equivalents, end of period $ 98 $ 711
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine month period for:
Interest expense $ 1,693 $ 608
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Income taxes 25 0
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See accompanying notes to consolidated condensed financial statements.
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CODE-ALARM, INC
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed interim financial statements reflect all
adjustments which in the opinion of management are necessary to fairly state
results for the interim periods presented. All adjustments are of a normal
and recurring nature, except for a restructuring charge of $2.8 million
relating to the closure of the Georgetown, Texas facility, litigation
expense of $2.4 million in connection with a patent infringement suit and
other expenses of $300,000 all incurred in the third quarter of 1997, the
impairment of goodwill of $373,000 in the first quarter of 1997, and
$177,000 charge for the accumulated foreign currency translation in the
second quarter of 1997. Results of operations for the interim periods
presented are not necessarily indicative of results to be expected for the
fiscal year.
The Company is involved in various matters of litigation, including those
more fully described in "Legal Proceedings" in Part II of this Form 10Q. Any
substantial damage amount awarded against the Company in the various matters
of litigation may have a material adverse impact on the Company's financial
condition and results of operations.
2. The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
3. Inventories consist of the following:
September 30, 1997
(Unaudited) December 31, 1996
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Raw materials $ 4,739 $ 5,811
Work in process 257 324
Finished goods 788 2,599
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$ 5,784 $ 8,734
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4. On October 24, 1997, the Company entered into a 3 year credit agreement
with a new senior lender, which is more fully described in "Liquidity and
Capital Resources" in Part I Item 2. of the Form 10Q. As a result of the new
financing agreement, the Company has classified a substantial portion of its
debt as long-term in accordance with the terms of the new credit agreement.
5. On April 30, 1997, the Company's French subsidiary, European Automotive
Equipment, filed a voluntary reorganization proceeding as debtor in
possession under the supervision of the Commercial Court of Bobigny, France.
Effective July 20, 1997, the assets of the entity were purchased out of
bankruptcy by an unaffiliated party. No proceeds from this purchase were
received by the Company.
On July 25, 1997, the Company closed the sale of its United Kingdom
("UK") subsidiary, Code Alarm UK Limited, to its former management.
Proceeds from this sale are to be paid $80,000 in cash, with the balance
over a four year period. The sale was effective April 1, 1997.
The Consolidated Condensed Statements of Operations and Cash Flows
include European results only for the period January 1, 1997 to April 30,
1997. The Consolidated Condensed Balance Sheet at September 30, 1997,
includes in Other Assets a receivable reflecting the amount related to the
sale of the UK subsidiary.
6. On April 18, 1997, the Company agreed to settle and make final payment in
satisfaction of a prior year judgment against the Company. The judgment was
paid from proceeds of a bond secured by a bank letter of credit and
satisfied by additional borrowings of the Company, plus cash from the
Company for accrued interest, totaling approximately $6.1 million. The
amount had been charged to operations and accrued for in prior years.
On July 23, 1997, the Court entered a partial judgement on liability against
the Company that two shock sensor designs infringe upon a third party patent.
On October 21, 1997, the Court entered a Memorandum and Order for a partial
judgement for damages and prejudgement interest, plus attorney fees. For the
quarter ended September 30, 1997, the Company accrued a $1.7 million
reserve for the partial judgement as litigation expense.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The Company's consolidated net sales decreased $6.1 million , or 12.9%, to
$41.0 million for the nine months ended September 30, 1997, as compared to
$47.1 million for the nine months ended September 30, 1996. Sales declined $7
million during the first nine months of 1997 as compared to the same period of
1996, as result of the Company's devestiture of its European operations.
North American sales were up 2.2% during the first nine months of 1997 as
compared to 1996 on the continuing strength in sales to original equipment
manufacturers ("OEM"), which increased 8.2%, and direct sales to international
dealers, which increased 120%. Domestic retail aftermarket and automotive
expediter sales were down from the prior year.
For the nine months ended September 30, 1997, consolidated gross profit
increased to 38.1% as compared to 37.7% for the comparable nine month period
ended September 30, 1996. North American margins continue to benefit from
process improvement efforts and increased productivity, offset by higher
overhead costs.
Consolidated operating expenses for the first nine months of 1997 was
unchanged from the prior year period. Consolidated operating expenses for the
nine month period ended September 30, 1997, and 1996 included $1.8 million and
$4.6 million, respectively, relating to European operations. Operating
expenses for the three month and nine month period ended September 30, 1997
included $2.8 million of restructuring charges relating to the closure of the
Company's Georgetown, Texas manufacturing facility. These charges resulted
primarily from the writedown of assets. Excluding European operations
and restructuring charges, North American operating expenses for the first nine
months of 1997 were down 3% from the prior year period.
As a result of the foregoing, the Company reported a consolidated
operating loss from continuing operations for the nine months ended September
30, 1997, of $497,000, as compared to consolidated operating income of $1.3
million for the nine months ended September 30, 1996. Excluding the impact of
the European operations and restructuring charges on consolidated operating
income, North American operations reported operating income of $3.3 million for
the nine months ended September 30, 1997, as compared to $2.6 million for the
comparable period in 1996.
Interest expense was down slightly for the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996. Interest
expense increased during the third quarter ended September 30, 1997 as
compared to 1996, due to the default rate of interest being charged the Company
under its loan agreement with the Bank. The Company has minimized the impact
of the higher interest rate as it continues to accelerate cash flow from
operating activities used to reduce borrowings and other long-term debt.
The Company incurred in the third quarter of 1997 as other expense an
additional charge of $300,000, and $477,000 for the nine months ended September
30, 1997, relating to its European divestiture. Other expenses for the
quarter ended September 30, 1997, also included $308,000 of bank compliance
costs as part of the Amendment and Forbearance Agreement.
During the third quarter ended September 30, 1997, the Company recorded
$2.4 million as litigation expense, which includes a reserve for $1.7 million
as a result of a Memorandum and Order for a partial judgment issued October 21,
1997, and Company defense costs, both in connection with a patent infringement
claim.
The Company has not provided for an income tax benefit for the three month
and nine month periods ended September 30, 1997, as a result of the pretax loss
for these periods. At this time the Company has not determined that
realization of the related deferred tax asset is more likely than not.
As a result of the foregoing, the Company recorded a net loss of
$4,817,000, or $2.08 per share, compared to net income of $60,000, or $.03 per
share, for the nine months ended September 30, 1996. Excluding the effects of
the restructuring charge and litigation expense, results for the nine months
ended September 30, 1997, was net income of $345,000, or $.15 per share.
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Liquidity and Capital Resources
The Company's consolidated working capital at September 30, 1997, is $5.3
million as compared to a deficit of ($6.1) million at December 31, 1996. The
current ratio (current assets divided by current liabilities) as of September
30, 1997, is 1.48 to 1 compared to .78 to 1 at December 31, 1996. The
improvement in working capital and current ratio as of September 30, 1997, was
due to the refinancing described below as a substantial portion of debt has
been classified as long-term in accordance with the terms of the credit
agreement.
Net cash provided from operating activities for the nine months ended
September 30, 1997, was $2.2 million, which was used to finance capital
expenditures of $216,000 and other obligations.
On June 11, 1997, the Company and the Bank entered into an Amendment and
Forbearance Agreement ("Forbearance Agreement") regarding the Company's
violations of various covenants in the loan agreements. The Forbearance
Agreement set a limit on the amount by which the revolving credit loans to the
Company could exceed the specified percentages of eligible inventory and
receivables, made all advances by the Bank discretionary, and eliminated LIBOR
based loans. As a result of the Company's defaults under the Forbearance
Agreement, the Bank imposed the default rate of interest (13.5%).
On October 24, 1997, the Company entered into a 3 year credit agreement
with a new senior lender, General Electric Capital Corporation ("GECC"),
extending revolving letter of credit and term credit facilities to the Company
of up to $25.5 million for the purpose of (a) refinancing indebtedness of the
Company, (b) provide working capital financing, and (c) provide funds to
satisfy, or letters of credit to secure issuance of a supersedeas or appeal
bond or similar obligation with, an adverse judgment which may be entered
against the Company in patent infringement litigation. As a result, the
Company's previous loan agreement with the Bank has been replaced with this new
credit agreement. Specifically, the new credit agreement provides for a $12
million revolving credit loan, $1.5 million term loan, and a loan up to $3
million to be made upon a final settlement in the patent infringement
litigation against the Company. In addition, the credit agreement provides for
a letter of credit of up to $12 million to secure a bond or similar obligation
issued in the patent infringement litigation against the Company and if drawn
upon or converted, a term loan of up to $12 million to pay or settle the patent
litigation. The revolving credit facility bears interest at prime rate plus
1.5% or LIBOR plus 3.25%. The term loan is payable in twelve (12) equal
quarterly installments and bears interest at prime plus 1.75% or LIBOR plus
3.5%.
The credit agreement is subject to certain covenants requiring minimum
levels of net worth, fixed charge coverage, operating income levels, maximum
capital expenditures, and restrictions on payments of certain dividends, sale
of assets and increased indebtedness. In addition, the credit agreement
requires that mandatory prepayments against outstanding GECC indebtedness be
made with proceeds from the sale of equity or debt securities, sale of assets,
excess operating cash flow and proceeds from litigation involving patents and
intellectual property. Credit availability under the revolving credit loan is
subject to a specified percentage of eligible accounts receivable and
inventory. All assets of the Company and stock of its subsidiaries are pledged
to GECC as security.
On October 27, 1997, the Company entered into an equity private placement
Unit Purchase Agreement with Pegasus Partners, L.P. and Pegasus Related
Partners, L.P. to purchase 55,000 units consisting of preferred stock and
attached warrants, for an aggregate purchase price of $7 million. Dividends
accrue at a rate of 10% per year and are payable, at the option of the Company,
in cash or additional units. In addition, Pegasus may receive additional
warrants in return for guarantying $4 million of the Company's indebtedness to
GECC under the revolving credit facility, and will receive additional warrants
if required to provide the Company with financing for a judgment, appeal bond
or settlement in connection with the patent infringement litigation. Proceeds
from the $7 million equity investment was used to reduce the Company's
outstanding indebtedness.
For a complete discussion of the debt and equity financing see the
Company's Form 8-K filed on November 10, 1997.
The Company's liquidity could be materially adversely impacted if, beyond
the amount of $1.7 million reserved as of September 30, 1997, the damages
awarded against the Company in its trial against Directed Electronics are
substantial. See "Legal Proceedings" in Part II of this Form 10-Q.
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PART II
OTHER INFORMATION
ITEM 1. 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 (the "Court") 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 Court and the Company 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 Plaintiffs, in full satisfaction of
the judgment, without prejudice to the Company's right to proceed to
set aside the judgment on appeal. In April 1997, the Company paid
$6.1 million in satisfaction of the judgment. On June 4, 1997, the
appeal was denied.
In the same proceeding Directed is asserting patent infringement
claims against two of the Company's shock sensor designs. On July 23,
1997, the Court entered a Judgment on liability against the Company
that these two designs infringe the '569 Patent. The Court has
permanently enjoined the Company from the manufacture, use, sale,
offering for sale and importing of these two subsequent designs. The
trial on the issues of willfulness and damages ended on August 27,
1997. On October 21, 1997, the Court entered a Memorandum and Order
for a partial judgment for 1993 compensatory damages and pre-judgment
interest of $1,543,630 plus related attorney fees. The Court has not
issued an order on the remaining issues. The damage amount to be
awarded against the Company could be substantial and could have a
material adverse impact on the Company's financial condition and
results of operations.
No other reportable changes have taken place in regard to the
legal proceedings disclosed in the registrant's report on Form 10-Q
for the quarter ended June 30, 1997.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
quarter ended September 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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.
3.1.1 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Preferred Stock of Code-Alarm, Inc., incorporated by
reference to Exhibit 3.1.1 to the Company's Form 8-K dated
October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
B Preferred Stock of Code-Alarm, Inc., incorporated by
reference to Exhibit 3.1.2 to the Company's Form 8-K dated
October 24, 1997.
3.2.1 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2.1 to the Company's Form 8-K dated October 24,
1997.
11 Shares issuable under employee stock options were
excluded from the computation of weighted average number
of shares outstanding since such shares were either
anti-dilutive or their dilutive effect was not material.
19.1 Form 8-K dated October 24, 1997.
27 Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the quarter
ended September 30, 1997. The Company filed on November 10,
1997, a Current Report on Form 8-K dated October 24, 1997,
containing Items 1 and 5 disclosures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CODE-ALARM, INC.
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(Registrant)
Date: November 19, 1997 /s/ Rand W. Mueller
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Rand W. Mueller
President
Date: November 19, 1997 /s/ Craig S. Camalo
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Craig S. Camalo
Vice President of Finance
(Chief Financial Officer)
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
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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.
3.1.1 Certificate of Designation, Numbers, Powers, Preferences
and Relative, Participating, Optional and Other Rights of
Series A Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.1 to the Company's Form 8-K
dated October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences
and Relative, Participating, Optional and Other Rights of
Series B Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.2 to the Company's Form 8-K
dated October 24, 1997.
3.2.1 Bylaws of the Company, as amended incorporated by reference
to Exhibit 3.2.1 to the Company's Form 8-K dated October 24,
1997.
19.1 Form 8-K dated October 24, 1997.
27 Financial Data Schedule.