1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number 016441
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CODE-ALARM, INC.
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2334695
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (248) 583-9620
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Securities registered pursuant to section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10K. [ X ]
Based upon the last sale price of the Registrant's common stock as
reported on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. (the "OTC Bulletin Board") on March 31, 1998, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $2,901,076.
The number of shares outstanding of the Registrant's common stock,
without par value, as of March 31, 1998 was 2,320,861.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's 1998 Proxy Statement are incorporated by
reference in Part III of this Form 10-K.
3
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 (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, 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 Company no longer manufactures these designs. On
February 3, 1998, following the trial on damages and willfulness relating to
these two designs, final judgment was entered in favor of Directed Electronics,
Inc. against the Company in the amount of $10,651,443, plus daily prejudgment
interest of $1,993 from January 20, 1998 until February 2, 1998. On March 5,
1998, the Court approved a Bond For Stay of Execution Pending Disposition of
Rule 59 Motions and Appeal in the amount of $9,341,031, which the Company
posted with the Court. On March 9, 1998, the Court issued its Memorandum
Opinion, which granted, in part, the Company's Motion to Amend or Alter the
Judgment. A final amended judgment of $9,334,946, including prejudgement
interest was entered against the Company on March 23, 1998. The Company is
expected to file an appeal to the United States Court of Appeals for the
Federal Circuit. The Court also granted Directed Electronics its attorneys fees
and costs relating to a portion of the case. The amount of attorneys fees and
costs will be decided at a later date. At some future time, an increase in the
amount of the bond may be required to cover additional interest and attorney's
fees.
4
Directed Electronics, Inc. v. Code-Alarm, Case No. 95-0513 BTM (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 and its President Darrell Issa's infringement of the '775 Patent and
denied the invalidity and non-infringement/unenforceability allegations.
Consolidated with this action were claims for infringement of the '775 patent
and acts of unfair competition brought by the Company against Directed
Electronics, Inc. and Darrell Issa in the case of Code Alarm. Inc. v. Directed
Electronics, Inc., Darrell Issa, and A Class Tint and Alarms filed July 26,
1995 in the United States District Court for the Western District of Texas and
given case number A95CV437JN. The trial in this case ended on April 9, 1998,
with a jury verdict that Directed did not infringe the '775 Patent.
Aureo Rivera Davila and Aureo E. Rivera v. Magna Holding Company et al.,
Case No. 97C1909, filed March 20, 1997, in the U.S. District Court, Northern
District of Illinois, Eastern Division. Plaintiffs seek enforcement against the
Company of a $19.4 million default judgment entered by the court on July 26,
1990, against Chapman Industries Corp. ("Industries") for alleged patent
infringement. With accumulated interest, the amount of the default judgment is
now approximately $30 million. A subsidiary of the Company purchased certain
assets from LaSalle National Bank ("LaSalle") on January 19, 1990, in a private
sale conducted by LaSalle under Section 9-504 of the Illinois Uniform Commercial
Code to dispose of collateral securing a defaulted loan made by LaSalle to
Chapman Products, Inc. ("Products"). Plaintiffs allege that the assets were
acquired by Products from Industries. Plaintiffs claim that the sale of assets
to the subsidiary of the Company was a fraudulent conveyance and that the
Company is a successor in interest to the liability of Industries for the
default judgment. The Company has tendered the defense of this action to LaSalle
pursuant to the indemnification terms contained in its purchase agreement with
LaSalle. LaSalle has agreed to pay for up to 50% of the defense, but has refused
to assume the full defense. The Company, through its counsel, has filed a Motion
to Dismiss, which is under advisement by the court.
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.
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. The Company's insurance carrier has provided
the Company and Rand Mueller, the Company's president, with a legal defense in
this matter. On September 30, 1997, the Court granted summary judgment
dismissing Rand Mueller from the litigation, but denied summary judgment as to
the Company. The case is presently set for trial in June, 1998. The Company
intends to defend this action vigorously.
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.
Meta Systems S.A. v. Europe Auto Equipment S.A. ("EAE"), a dissolved,
wholly owned subsidiary of the Company, was an arbitration proceeding scheduled
to be held in Paris, France on April 30, 1997. Meta was demanding FF 20 million
(approximately $3.5 million) for breach of a distributor agreement by EAE. EAE
sought damages of FF 30 million (approximately $5.3 million) for wrongful
termination of the agreement. No further developments have occurred, the
arbitration was not conducted, and the Company has not received any additional
information on this matter after the dissolution of EAE. If these proceedings
move forward in the future, there can be no assurance that the Company will
prevail or of the amount of damages to which the Company may be subject if it
does not prevail.
Directed Electronics, Inc. v. TSI Security Acquisition Corp., United States
District Court, Southern District of California, Case No. 93-1050 BTM. On March
13, 1997, the Company entered into an agreement with TSI Security Acquisition
Corp. ("TSI") pursuant to which TSI assigned to the Company all of TSI's rights,
title and interest in and to U.S. Patent No. 4,107,543 ("543 patent"). TSI was
a defendant and counterclaimant in Case No. 93-1050 BTM in which TSI alleged
that Directed Electronics, Inc. ("DEI") infringes the '543 patent. As a result
of the assignment agreement between the Company and TSI, the Company became the
defendant and counterclaimant in Case No. 93-1050 BTM pursuant to stipulation
and court order entered on October 7, 1997. On January 7, 1998, the court
entered an order granting DEI's motion for summary judgment, which terminated
this action in favor of DEI. On February 3, 1998, a notice of appeal was filed
on behalf of the Company.
Code-Alarm, Inc. v. Alpine Electronics, Civil Action No. A97CA575JN, was
filed in the United States District Court for the Western District of Texas,
Austin Division, claiming infringement by Alpine Electronics ("Alpine") of the
'775 Patent. Alpine filed its answer on September 30, 1997, raising as
affirmative defenses, noninfringement and invalidity of the '775 Patent. In
January 1998, Alpine settled the case and after deducting legal fees and costs,
the Company received approximately $932,500. This action has been dismissed.
There can be no assurance that the Company will prevail in these suits or
of the amount of damages to which the Company may be subject if it does not
prevail.
5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, notes thereto and supplementary
financial statement schedules with respect to this item are set forth in the
Table of Contents to the Consolidated Financial Statements and Consolidated
Financial Statement Schedules appearing on page F-1 of this report.
6
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 (Deficit).......................... F-5
Statements of Cash Flows ............................................. F-6
Notes to Consolidated Financial Statements............................ F-7 to F-16
Financial Statement Schedule:
Report of Independent Auditors........................................ F-17
II. Valuation and Qualifying Accounts and Reserves................... F-18
F-1
7
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of
Code-Alarm, Inc. and subsidiaries (the"Company"), as of December 31, 1997 and
1996, and the related statements of operations and of cash flows for each of the
three years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Detroit, MI
April 15, 1998
F-2
8
CONSOLIDATED BALANCE SHEETS
CODE-ALARM, INC. AND SUBSIDIARIES
IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash $ 45 $ 36
Accounts receivable, less allowance for doubtful accounts
(December 31, 1996 and 1997, $950 and $1,073 respectively) 8,798 5,615
Inventories (Notes 1 and 2) 8,734 4,291
Refundable income taxes 1,059 950
Deferred income taxes 2,040
Other 729 503
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 21,405 11,395
- ------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation (Notes 1 and 3) 3,750 2,444
Other assets:
Excess of cost over net assets acquired, net (Note 1) 1,910 320
Other intangibles, net 651 424
Other 1,711 1,479
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 29,427 $ 16,062
==============================================================================================================================
Liabilities and shareholders' equity (deficit)
- ------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt (Note 4) $ 9,308 $ 797
Accounts payable 9,874 5,545
Accrued expenses 2,380 2,040
Reserve for litigation (Note 10) 5,934
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 27,496 8,382
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Long-term debt (Note 4) 879 6,574
Reserve for litigation (Note 10) 10,000
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 28,375 24,956
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Commitments and contingencies (Notes 5 and 10)
- ------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock (Note 6) 7,000
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (Note 7):
Preferred stock, noncumulative; no par value;
authorized 500,000 shares; none issued
Additional paid in capital 4,179
Common stock, no par value; authorized 5,000,000 shares;
issued and outstanding December 31, 1996 and 1997, 2,320,861 shares 12,213 12,213
Foreign currency translation adjustment (260)
(Accumulated deficit) (10,901) (32,286)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 1,052 (15,894)
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 29,427 $ 16,062
==============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
9
CONSOLIDATED STATEMENTS OF OPERATIONS
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
Net sales (Note 11) $ 69,188 $ 62,503 $ 53,076
Cost of sales 44,718 43,074 35,473
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Gross profit 24,470 19,429 17,603
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 12,099 10,145 7,739
Engineering 3,351 2,350 1,542
General and administrative 9,008 10,175 8,810
Impairment of goodwill (Note 1) 2,917 1,536
Restructuring charge (Note 9) 773
----------------------------------------------
24,458 25,587 20,400
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 12 (6,158) (2,797)
Other (income) expense:
Interest expense 1,505 1,576 1,434
Litigation expense (Note 10) 1,825 11,403
Other 452 (14) 272
----------------------------------------------
3,782 1,562 13,109
- -------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (3,770) (7,720) (15,906)
Income tax expense (benefit):
Current (443) (761) (868)
Deferred (603) 176 2,040
----------------------------------------------
(1,046) (585) 1,172
- -------------------------------------------------------------------------------------------------------------------------
Net loss (2,724) (7,135) (17,078)
Preferred stock dividends (Note 6) (128)
Intrinsic value of beneficial conversion
feature on redeemable preferred stock
(Note 6) (4,179)
- -------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (2,724) $ (7,135) $ (21,385)
=========================================================================================================================
Loss per share - basic and diluted $ (1.17) $ (3.07) $ (9.21)
=========================================================================================================================
Weighted average shares outstanding 2,320 2,321 2,321
=========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
10
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS)
Cumulative
Additional Foreign Total
Common Stock Paid In Translation (Accumulated Shareholders'
For the years ended December 31, 1995, 1996, and 1997 Shares Amount Capital Adjustment Deficit) Equity (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 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 (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 (7,135) (7,135)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,321 12,213 (260) (10,901) 1,052
- ----------------------------------------------------------------------------------------------------------------------------------
Recognition of intrinsic value of
beneficial conversion feature on
redeemable preferred stock 4,179 (4,179)
-
Preferred stock dividends accrued (128) (128)
Foreign currency translation adjustment 260 260
Net loss (17,078) (17,078)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,321 $ 12,213 4,179 - $ (32,286) $ (15,894)
==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,724) $ (7,135) $ (17,078)
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Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,792 1,309 1,853
Impairment of goodwill 2,917 1,536
Write off of other assets 1,358
Payment of litigation settlement (6,055)
Foreign currency translation effect on cash 260
Changes in assets and liabilities
Accounts receivable 938 1,954 3,183
Inventories (2,657) 6,077 4,443
Refundable income taxes (502) (234) 109
Deferred income taxes (603) 86 2,040
Other assets (1,245) 492 167
Accounts payable 3,617 (2,487) (4,329)
Accrued expenses (1,299) 548 (340)
Reserve for litigation 2,110 95 10,000
- --------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,151 10,757 14,225
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (573) 3,622 (2,853)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (998) (716) (266)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (998) (716) (266)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Debt refinancing and preferred stock issue costs (1,074)
Proceeds from revolving credit agreement 2,021 5,880
Reduction of long-term debt (1,078) (3,072) (8,696)
Net borrowings (paydowns) from the line of credit 936 (207)
Issuance of common stock 1 2
Issuance of redeemable preferred stock 7,000
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,880 (3,277) 3,110
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 309 (371) (9)
Cash and cash equivalents, beginning of year 107 416 45
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 416 $ 45 $ 36
==========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,528 $ 1,576 $ 1,453
==========================================================================================================================
Income taxes $ 200
==========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
12
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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. During 1997
the Company consolidated certain operations to the headquarters location in
Madison Heights, Michigan. This consolidation included closing subsidiary
operations in France, the United Kingdom, and Texas. All costs associated with
these consolidations have been recognized as of December 31, 1997. See further
discussions in the related intangible asset description below and in Note 9,
"Restructuring".
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 a 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
3 to 8 years for machinery and equipment, 5 years for furniture and fixtures,
and leasehold improvements are depreciated over the life of the lease.
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
undiscounted 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. In 1996 and 1997, $2,917,000 and
$1,536,000, respectively, was charged to operations for impairment of Goodwill
associated with acquisitions. The costs of all other intangible assets,
comprised primarily of covenants-not-to-compete, 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, $1,182,000 and $ 1,496,000 at December 31, 1996 and 1997,
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 historical experience. Accrued warranty costs amounted to approximately
$170,000 and $213,000 at December 31, 1996 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS
F-7
13
Expenditures for the research and development of new and improved
products are charged to operations as incurred and aggregated approximately
$558,000, $601,000 and $580,000 for the years ended December 31, 1995, 1996 and
1997 respectively.
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
contingent assets and liabilities at December 31, 1996 and 1997, and revenues
and expenses during the three years in the period ended December 31, 1997. The
actual results could differ from the estimates made in the preparation of the
consolidated financial statements.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share," for the year ended December 31, 1997. SFAS No.
128 replaces the presentation of primary earnings per share ("EPS") and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes potential share dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings but does not include shares issuable
upon conversion of securities that would have an antidilutive effect on earnings
per share. All prior period EPS data have been restated. The adoption of this
new accounting standard did not have a material effect on the Company's
reported EPS amounts.
The diluted loss per share for the years ended December 31, 1997, 1996
and 1995 does not include shares issuable upon exercise or conversion of stock
options or warrants because they would have an antidilutive effect on the loss
per share.
CONCENTRATION 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.
2. INVENTORIES
Inventories consist of the following:
1996 1997
---- ----
(In thousands)
Raw materials.......................................................... $5,811 $3,425
Work in process........................................................ 324 680
Finished goods......................................................... 2,599 186
------ ------
$8,734 $4,291
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications:
1996 1997
---- ----
(In thousands)
Machinery and equipment................................................ $ 8,589 $ 8,325
Leasehold improvements................................................. 1,426 1,180
Furniture and fixtures................................................. 1,543 702
------- -------
11,558 10,207
Less accumulated depreciation................................. 7,808 7,763
------- -------
$ 3,750 $ 2,444
======= =======
F-8
14
Depreciation expense was approximately $1,260,000, $1,037,000 and
$1,572,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1997
---- ----
(In thousands)
Revolving credit facility............................................................... $ 5,580 $5,193
Term loans.............................................................................. 2,570 1,500
Working capital facilities.............................................................. 784
Mortgage note........................................................................... 327 296
Capital lease obligations............................................................... 926 382
-------- ------
10,187 7,371
Less current portion........................................................... (9,308) (797)
-------- ------
$ 879 $6,574
======== ======
On October 24, 1997, the Company entered into a three year credit agreement
with a new senior lender, General Electric Capital Corporation ("GECC"),
extending revolving credit, letter of credit and term loan facilities to the
Company of up to $25.5 million for the purpose of (a) refinancing senior
indebtedness of the Company, (b) providing working capital financing, and (c)
either providing funds to satisfy, or providing letters of credit to secure
issuance of a supersedeas or appeal bond or similar obligation in order to
permit the Company to bond an appeal of, a judgment adverse to the Company in
Detroit Litigation (see Note 10). Specifically, the new credit agreement
provides for a $12 million revolving credit loan, $1.5 million term loan, and a
term loan of up to $3 million to pay a final settlement in the Detroit
Litigation. Provided the $3 million term loan is not outstanding, the credit
agreement provides for a letter of credit of up to $12 million to secure bonding
of an appeal in the Detroit Litigation and, alternatively, a term loan of up to
$12 million to pay or settle the judgment. The revolving credit facility bears
interest at prime rate plus 1.5% or LIBOR plus 3.25%. The $1.5 million term
loan is payable in twelve (12) equal quarterly installments and bears interest
at prime plus 1.75% or LIBOR plus 3.5%. If the $3 million or $12 million term
loans are made, the loans will bear interest at the prime rate plus 2% or LIBOR
plus 3.75%. The fee for letters of credit is 2% per annum, except the fee is 3%
for the letter of credit issued in conjunction with the Detroit Litigation.
The credit agreement is subject to certain covenants requiring minimum
levels of net worth, fixed charge coverage and operating income, 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.
The credit facility is collateralized by substantially all the assets of
the Company and its subsidiaries and by a pledge of the Company's
Series B Preferred Stock. The Company's obligations have been guaranteed by
its subsidiaries. Amounts outstanding at December 31, 1997, consist
of $5,193,000 under the $12 million revolving credit loan and $1,500,000 under
the term loan.
The credit agreement was amended as of March 4, 1998 and
amended as of April 8, 1998, in order to give the Company the right to draw on
the letter of credit facility for the Detroit Litigation judgment, both for the
initial judgment and for any additional judgement amounts, to waive
certain defaults (including those which existed at December 31, 1997), to
correct certain disclosures and to modify certain provisions.
In order to permit the bonding of a judgement of $9,341,031 in the Detroit
Litigation, GECC on March 5, 1998, caused a bank to issue a letter of
credit in that amount under the terms of the credit agreement. The letter of
credit is guaranteed by the holders of the Company's Series A-1 Preferred
Stock.
F-9
15
At December 31, 1996 the Company had a credit agreement with a bank
that consisted of $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
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 was terminated by provisions of the loan agreement. Interest on the
credit facility was at the prime rate plus 1%, or at the Company's option, at
the LIBOR plus 1.5% to 3.5% for maturities ranging from one to six months. The
credit facility was collateralized by substantially all of the assets of the
Company. Furthermore, the Company's obligations under the credit facility were
guaranteed by all of its subsidiaries and were subject to certain covenants.
The bank credit agreement contained covenants which required the Company and
its subsidiaries to maintain a minimum working capital level, a specified
current ratio, a minimum 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 certain of the covenants. The Lender did not agree to
amend the loan agreement in a manner which would place the Company in
compliance with all covenants. As a result, all outstanding borrowings due
the Bank at December 31, 1996, were classified as a current liability.
The mortgage note is payable to the City of Georgetown, Texas, in
monthly installments of $4,401, including interest at 7% through January of
2004, and is collateralized by the leasehold improvements.
The recorded amounts of long-term debt approximate fair value as of
December 31, 1997.
The following table sets forth aggregate maturities of long-term debt
at December 31, 1997 (in thousands):
1998.................................................... $ 797
1999.................................................... 625
2000.................................................... 5,759
F-10
16
2001.................................................... 41
2002.................................................... 44
Thereafter.............................................. 105
------
$7,371
======
5. LEASE COMMITMENTS
LEASES
The Company leases certain property and equipment under various
operating leases through 2002.
Future minimum rental payments required for all noncancelable operating
leases are as follows for the years ending December 31:
(in thousands)
1998............................................ $528
1999............................................ 506
2000............................................ 449
2001............................................ 325
2002............................................ 108
Thereafter...................................... 180
Rent expense under all operating leases was approximately $915,000,
$938,000 and $565,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
6. REDEEMABLE PREFERRED STOCK
On October 27, 1997, the Company sold for $6,999,850 55,000 units
(the "Units") to two related investment funds, each unit containing one
share of Series A-1 Preferred Stock and warrants to purchase approximately 68
shares of the Company's common stock at an exercise price of approximately
$1.88 per share (a total of 3,731,341 shares). The exercise price of the
Attached Warrants must be paid by delivery of Series A Preferred Stock with a
stated value equal to the exercise price. Because the exercise price of
approximately $1.88 per share was below the market value of the Company's
common stock at the date the Units were sold, the Units have a beneficial
conversion feature which has been accounted for in accordance with Emerging
Issues Task Force Topic D-60, Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable Conversion Feature.
Accordingly, $4,179,000 of the proceeds, representing the intrinsic value of
the beneficial conversion feature, has been allocated to the Company's no par
value common stock, and has been recognized as a return to the preferred
shareholders in 1997. Each share of Series A-1 Preferred Stock accrues
dividends at 10% per year ($12.727 per share), payable on April 5 and October
15th. Dividends are payable at the option of the Company either in cash or
additional Units. The Preferred Stock holders have the right to elect two
members of the Board of Directors of the Company, subject to certain
limitations. Certain corporate actions require the approval of the holders of
Series A-1 Preferred Stock. In certain situations, these holders will have
enhanced voting rights. The Series A-1 Preferred Stock holders have a
liquidation preference of $127 per share, plus accrued and unpaid dividends.
The Preferred Stock and attached warrants are redeemable at the option of the
holder at any time after three years and six months from the date of issuance
at a price equal to the current market price per share of Common Stock,
multiplied by the number of shares of Common Stock into which the Attached
Warrants are then exercisable. In the event that the redemption of the Units
would constitute a violation of any provision of any agreement of the Company,
the Company will use its best efforts to register and issue an equivalent
number of shares of Common Stock of the Company to the holder. In addition,
any Common Stock previously issued upon the exercise of such warrants also is
subject to repurchase at the option of the holder at any time after three years
and six months from the date of issuance of the Units, at a price equal to the
current market price per share of Common Stock, subject to similar limitations.
In connection with the GECC credit agreement, the Company sold one share of
its Series B Preferred Stock for $10.00. GECC required the holder to pledge
this stock as security for the Company's obligations under the credit
agreement. The Series B Preferred Stock accrues dividends at the rate of $1.00
per year, payable on December 31. If there is an event of default under the
credit agreement, or the obligations arising under the credit agreement are
accelerated, the Series B Preferred Stock has the right to elect a majority of
the Company's Board of Directors. Upon payment in full of all obligations
arising under the credit agreement, the Company can repurchase the Series B
Preferred Stock for $10.00 plus accrued and unpaid dividends.
7. CAPITAL STOCK
1987 Stock Option Plan
The Company adopted in 1987 a Stock Option Plan ("1987 Plan") for its
key employees and reserved 280,000 shares of common stock for issuance under
the 1987 Plan. The Plan authorizes the Company to issue Incentive Stock Options
and Non-Qualified Stock Options. No non-qualified stock options were issued.
The 1987 Plan has expired.
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% of the fair market
value at the grant date.
F-11
17
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
excercisable for a ten-year period; however, options granted to any employee
holding more than 10 percent of the voting stock of the Company are excercisable
over five years. No Non-Qualified stock options have been granted.
The following table summarizes the activity for the Company's 1987 Stock Option
Plan:
1987 Stock
Option Plan
-------------
Excercise
Shares Subject Price Per
to Option Share
--------------- ---------
Balance, January 1, 1995 . . . . . . . . 216,375 $4.25 to $20.25
Options granted . . . . . . . . . . . . 85,000 $7.00 to $ 8.11
Options excercised . . . . . . . . . . (400) $4.25
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (39,200) $5.00 to $15.25
--------
Balance, December 31, 1995 . . . . . . . 261,775 $4.25 to $20.25
Options granted . . . . . . . . . . . . 195,475 $4.00 to $ 5.50
Options excercised . . . . . . . . . . (500) $4.25
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (252,375) $5.23 to $20.25
--------
Balance, December 31, 1996 . . . . . . . 204,375 $4.00 to $ 5.75
Options granted . . . . . . . . . . . . 30,000 $2.75
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (48,050) $4.25 to $5.00
--------
Balance, December 31, 1997 . . . . . . . 186,325 $2.75 to $5.75
========
Options excercisable at
December 31, 1997 . . . . . . . . . . . 31,109
========
As of December 31, 1997, 186,325 options granted under the 1987 Plan
remain outstanding with a weighted average exercise price of $4.85/share and a
weighted average remaining contractual life of approximately 8 years.
Options granted under the 1987 Plan that are exercisable as of December 31,
1997, have a weighted average excercise price of $4.85 per share.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan adopted by the Company's Board provides for
the issuance of options to purchase 1,317,178 shares of common stock. The
options are non-qualified stock options, exercisable at $1.88 per share and
expire 10 years from the date of grant. The options begin vesting at the rate
of one-third per year beginning on the third anniversary of their grant. These
options are only exercisable if the fair market value of the common stock
reaches or exceeds increasing amounts over time starting with $2.375 in the
first year, after grant, and increasing to $11.50 in the seventh year.
F-12
18
The following table summarizes the activity for the Company's 1997 Stock Option
Plan:
1997 Stock
Option Plan
-------------
Excercise
Shares Subject Price Per
to Option Share
--------------- ---------
Options granted 1997 . . . . . . . 1,317,178 $1.88
Balance, December 31, 1997 . . . . 1,317,178 $1.88
As of December 31, 1997, 1,317,178 options granted under the 1997 Plan
are outstanding with a weighted average exercise price of $1.88/share and a
weighted average remaining contractual life of approximately 10 years. None of
the options issued under the 1997 Plan are currently exercisable.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123") - Accounting for Stock Based
Compensation" which was effective for the Company beginning January 1, 1996.
SFAS 123 encourages compensation cost to be measured based on the fair value of
the equity instruments 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 instrinsic value of the
equity instrument award. Under the provisions of Opinion No. 25, no compensation
expense was recorded by the Company during 1995, 1996, or 1997. If the Company
were to apply the fair value based method of accounting for stock-based
compensation, its effect on the net loss in 1995, 1996, or 1997 would be
insignificant.
The primary assumptions used in the fair value of the options granted include
the following:
Option Pricing Model
The Company uses the Black-Scholes option pricing model to determine
the fair value of options granted.
Dividend Yield
As the Company's stock currently does not include a dividend, dividend
payments were not included in the fair value calculation.
Risk Free Rate
The rate applicable to Zero Coupon Treasury Notes with a duration
similar to options granted was used to determine the risk free rate, which was
approximately 6% at each of the respective grant dates.
Expected Life
The expected life of the options issued during the year was
approximately 5 - 7 1/2 years, based on the provisions of the respective option
Plans.
Expected Volatility
The expected volatility was approximately 60%, based on changes in the
fair market value of the Company's common stock over a period similar to the
expected life of the options.
8. INCOME TAXES
The effective tax rates differ from the statutory income tax rate due
to the following:
1995 1996 1997
---- ---- ----
Statutory rate . . . . . . . . . . . . . . 34 % 34 % 34 %
F-13
19
Differences resulting from:
Valuation allowance . . . . . . . . . . . (37)
Goodwill impairment, amortization
and other nondeductible expenses . . (3) (14) (3)
Effect of foreign tax rates . . . . . . . (1) 1
Effect of nondeductible foreign
losses. . . . . . . . . . . . . . . . (20) (2)
Charge off of state and foreign
tax refunds receivable. . . . . . . . (2)
Reversal of prior period timing
differences . . . . . . . . . . . . . 7
------- ------- -------
Effective income tax rates. . . . . . . . . 28% 8% (8)%
======= ======= =======
Current income tax expense for 1995 includes $46,000 of foreign income
taxes. There were no foreign income taxes for 1996 or 1997.
Deferred tax assets and liabilities as of December 31 consisted of the
following:
1996 1997
---- ----
(In thousands)
AMT Credit Carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . 2,137
Expenses deductible earlier for financial statement purposes
than for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . $ 358 1,233
Litigation loss not deductible for tax purposes . . . . . . . . . . . . . . . 2,017 3,400
Expense included in inventory for tax purposes . . . . . . . . . . . . . . . 153 181
--------- -------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 2,528 7,196
Net value of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . 351 314
Capitalization of assets expensed for tax purposes . . . . . . . . . . . . . 137 58
--------- -------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . 488 372
--------- -------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,040 6,824
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,824)
--------- -------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,040 $ -0-
========= =======
The Company has a net operating loss carryforward of $6,285,000, the majority
of which expires in 2012.
During 1997, the company discontinued operations of its foreign subsidiaries. In
prior years the Company did not provide United States income taxes on the
undistributed earnings of foreign subsidiaries, as such earnings were intended
to be reinvested in those operations.
9. RESTRUCTURING
During 1997, the Company recorded a restructuring charge of $773,000 related to
the consolidation of its Georgetown, Texas facility. Costs accrued during the
period related to termination benefits provided to
F-14
20
employees of the facility, write-off of certain property and equipment and other
costs. Termination benefits accrued and subsequently paid totaled $250,000.
10. LITIGATION
The Company was involved in a patent infringement suit involving a
shock sensing device and 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 April
1997, the Company paid $6.1 million in satisfaction of the judgment. In June,
1997, the Company's appeal of the judgment was denied.
In a similar case relating to a subsequent shock sensing device, the
Court held that the subsequent device infringed the patent and, following a
trial on willfulness and damages, on February 3, 1998, entered a Final
Judgment in the amount of $10,651,443, plus daily prejudgment interest of
$1,993 from January 20, 1998, until February 2, 1998. On March 5, 1998, the
Court approved a Bond for Stay of Execution in the amount of $9,341,031,
which the Company posted with the Court. On March 23, 1998, the Court entered
an Amended Final Judgment in the amount of $9,334,946, including prejudgment
interest. The amount of attorney fees and costs will be decided by the
Court at a later date. The Company has recorded as a reserve for litigation at
December 31, 1997, an amount of $10 million to provide for damages, including
prejudgement interest, and an estimate for attorney fees and costs. The
Company's litigation expense includes the amount of the amended final
judgment interest through December 31, 1997, and legal costs for the Company
and the plaintiff.
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 was providing
for the defense of the Company subject to reservation of rights against the
Company. The amount of the judgment was $19.4 million, which with accumulated
interest had reached approximately $30 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 20, 1997, the case was
refiled by the judgment creditors in Illinois; the bank is providing for up to
50% of the defense of the Company subject to reservation of rights against the
Company. The Company, through its counsel, has filed a Motion to Dismiss,
which is under advisement by the court. 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, and results of operations 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 General Motors Corporation ("GM"), Ford Motor Company ("Ford") and to Suburu
of America, Inc. ("Subaru"), no single customer accounted for more than 10
percent of revenue.
F-15
21
Percent Of Total Sales
----------------------
1995 1996 1997
---- ---- ----
GM........................................................................ 13% 13% 13%
Ford...................................................................... 11% 12% 13%
Subaru.................................................................... 14%
GEOGRAPHIC AREAS Year Ended December 31
(In Thousands)
Net Sales 1995 1996 1997
---- ---- ----
Domestic............................................................... $ 49,952 $ 50,074 $ 50,589
European............................................................... 19,236 12,429 2,487
-----------------------------------------------
Consolidated.................................................... $ 69,188 $ 62,503 $ 53,076
===============================================
Income (loss) from operations
Domestic............................................................... $ (571) $ (482) $ (727)
European............................................................... 583 (5,676) (2,070)
-----------------------------------------------
Consolidated.................................................... $ 12 $ (6,158) $ (2,797)
===============================================
Assets
Domestic............................................................... $ 29,461 $ 24,518 $ 16,062
European............................................................... 12,582 4,909
-----------------------------------------------
Consolidated.................................................... $ 42,043 $ 29,427 $ 16,062
===============================================
Export sales included in domestic operations in 1995, 1996, and 1997, were
$3,080,000, $3,819,000, and $7,650,000, respectively.
12. WARRANTS
In conjunction with the new credit agreement facility (see Note 4),
the Company issued warrants as follows:
Shortfall Warrants
The Company issued to the holders of its redeemable preferred
stock warrants to acquire one million shares of the Company's
common stock in exchange for supplemental guarantees of up to
$4,000,000 the Company's indebtedness. The warrants have an exercise
price of approximately $1.88 per share and expire after seven years.
In the event that the shareholders are fully and unconditionally
released from the guarantee, the Company has the right to repurchase
fixed percentages of the warrants, which percentages decrease over
time. The warrants, and any Common Stock previously issued to the
holder upon exercise of the warrants, are redeemable at the option of
the holder at any time after three years and six months from the date
of issuance. The purchase price is the market price of the Common
Stock for which such Shortfall Warrants are then exercisable, and in
the case of the warrants, less the exercise price of such warrants.
GECC Warrants
The Company issued warrants to the lender under the
new debt facility to acquire up to 131,718 shares of the Company's
common stock. The warrants have an exercise price of approximately
$1.88 per share and expire after seven years. As a consequence of
the antidilution provisions in the warrants and the issuance of the
Litigation Warrants (discussed below), the GECC warrants have been
adjusted to permit the holder to acquire 226,594 shares at an
exercise price of $1.10 per share.
Litigation Warrants
In return for the guaranty of the $9,341,031 letter of credit
issued to a surety which issued the bond to permit an appeal of the
judgment in the Detroit patent infringement litigation, the Company
on March 5, 1998, issued to holders of its Series A Preferred Stock
warrants to acquire 6,230,216 shares of the Company's common stock.
These warrants have an exercise price of approximately $.49 per share
and expire seven years after October 27, 1997.
13. SUBSEQUENT EVENT
On March 5, 1998, the Company posted a bond with the Court in the amount
of $9,341,031, in accordance with the Detroit Litigation judgment rendered on
February 6, 1998. The bond is secured by an irrevocable letter of credit
provided by GECC, guaranteed by Pegasus. The amount of the judgment will be
increased to cover additional interest and certain attorney fees. The Company
anticipates GECC will be asked to issue an additional letter of credit,
which the holders of its redeemable preferred stock will guarantee, up to an
amount not to exceed $12 million in the aggregate for the original and the
additional letters of credit, in exchange for the issuance by the Company of
additional warrants to purchase common stock.
F-16
22
INDEPENDENT AUDITOR'S REPORT ON
FINANCIAL STATEMENT SCHEDULE
Code-Alarm Inc.
We have audited the consolidated financial statements of Code-Alarm
Inc. and subsidiaries as of December 31, 1997 and 1996 and for each of the
three years in period ended December 31, 1997 and have issued our report
thereon dated April 15, 1998; such financial statements and report are included
in this Annual Report on Form 10-K. Our audits included the Financial
Statement Schedule of Code-Alarm, Inc. and subsidiaries for each of the three
years in period ended December 31, 1997 listed in Item 14. This Financial
Statement Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the Financial Statement Schedule
based on our audits. 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 for each of the three years in period ended December 31, 1997.
Deloitte & Touche LLP
Detroit, Michigan
April 15, 1998
F-17
23
CODE-ALARM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
COLUMN B COLUMN C COLUMN D COLUMN E
---------- -------- -------- -----------
ADDITIONS
---------
Charged to
Balance at Charged to Other Balance at
Beginning Cost and Accounts, Deductions, End
of Period Expenses Describe Describe(1) of Period
---------- ---------- --------- ----------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1997 ....... $950,000 861,000 738,000 $1,073,000
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
Note: (1) Write-off uncollectible accounts, net of recoveries
F-18
24
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.
By: /s/ Craig S. Camalo
--------------------
Craig S. Camalo, Vice President
of Finance and Chief Financial Officer
Date: May 6, 1998