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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 March 31, 1998.
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
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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 May 14, 1998 is 2,320,861.
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INDEX
Page No.
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Part I. - Financial Information
Consolidated Condensed Balance Sheets -
As of March 31, 1998 (Unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations (Unaudited) -
Three months ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Three months ended March 31, 1998 and 1997 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 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CODE-ALARM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
March 31,
1998 December 31,
ASSETS (Unaudited) 1997
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Cash and cash equivalents $ 40 $ 36
Accounts receivable, less allowance for doubtful accounts
(December 31, 1997 and March 31, 1998, $1,073 and $1,493, respectively) 7,595 5,615
Inventories 3,661 4,291
Refundable income taxes 950 950
Other 456 503
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Total current assets 12,702 11,395
Property and equipment, net of accumulated depreciation 2,422 2,444
Excess of cost over net assets acquired, net 313 320
Other intangibles, net 367 424
Other 1,427 1,479
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Total assets $ 17,231 $ 16,062
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt $ 797 $ 797
Accounts payable 5,934 5,545
Accrued expenses 2,752 2,040
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Total current liabilities 9,483 8,382
Long-term debt 6,052 6,574
Reserve for litigation 10,000 10,000
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Total liabilities 25,535 24,956
Redeemable preferred stock 7,000 7,000
Shareholders' equity (deficit):
Common stock 12,213 12,213
Additional paid in capital 4,179 4,179
(Accumulated deficit) (31,696) (32,286)
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Total shareholders' equity (deficit) (15,304) (15,894)
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Total liabilities and shareholders' equity (deficit) $ 17,231 $ 16,062
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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 March 31
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1998 1997
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Net sales $ 13,826 $ 15,775
Cost of sales 8,816 9,743
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Gross profit 5,010 6,032
Operating expenses:
Sales and marketing 1,836 2,244
Engineering 396 426
General and administrative 1,496 2,532
Impairment of goodwill 373
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3,728 5,575
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Income from operations 1,282 457
Other expense:
Interest expense 438 336
Other - net 79 8
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517 344
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Income before income taxes 765 113
Income taxes
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Net income 765 113
Preferred stock dividends 175
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Net income applicable to common stock $ 590 $ 113
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Basic earnings per share $ 0.25 $ 0.05
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Weighted average common shares outstanding 2,321 2,321
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Diluted earnings per share $ 0.17 $ 0.05
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Weighted average common and dilutive shares outstanding 3,492 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)
Three Months Ended March 31
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1998 1997
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Cash flows from operating activities $ 777 $ 845
Cash flows from investing activities:
Capital expenditures (251) (105)
Cash flows from financing activities:
Reduction of long-term debt (476) (440)
Net paydowns on the line of credit (46) (180)
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Net increase in cash and cash equivalents 4 120
Cash and cash equivalents, beginning of period 36 45
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Cash and cash equivalents, end of period $ 40 $ 165
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Supplemental disclosures of cash flow information:
Cash paid during the three month period for:
Interest $ 256 $ 76
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Income taxes $ 25
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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 the impairment of goodwill of
$373,000 in the first quarter of 1997 relating to the European divestiture.
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 these suits
may have a material adverse impact on the Company's financial condition
and results of operations.
On January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income". During the
periods presented, the Company had no elements of comprehensive income.
Accordingly, a Statement of Comprehensive Income has not been provided as
comprehensive income equals net income for all periods presented.
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:
March 31, 1998
(Unaudited) December 31, 1997
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Raw materials $ 3,191 $ 3,425
Work in process 385 680
Finished goods 85 186
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$ 3,661 $ 4,291
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4. On March 5, 1998, the Company posted a bond with the Court in the amount
of $9.34 million to permit an appeal of a judgment against the Company
rendered February 3, 1998. The bond is secured by an irrevocable letter
of credit provided by the Company's senior lender, General Electric
Capital Corporation ("GECC"), guaranteed by the holders of the Company's
Series A-1 Preferred Stock. The amount of the judgment will be increased
to cover additional interest and certain attorney fees and costs. The
Company anticipates GECC will be asked to issue an additional letter of
credit, which the holders of its Series A-1 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.
5. The Company issued on March 5, 1998, to the holders of its Series A-1
Preferred Stock, warrants to acquire 6,230,216 shares of the Company's
Common Stock, in return for the letter of credit guarantee noted
above in Note 4. The warrants have an exercise price of approximately
$.49 per share and expire in seven years. The closing share price of the
Company's stock on March 5, 1998 was $1.44 per share.
The Company is currently determining the potential financial impact of the
guarantee on its financial statements, and as of March 31, 1998, no
amount has been recorded with respect to this guarantee. Any amount
required to be recorded may have an impact on future earnings.
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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 $1.9 million, or 12.4%, to
$13.8 million for the three months ended March 31, 1998, as compared to
$15.8 million for the three months ended March 31, 1997. Net sales for the
period ended March 31, 1997, included sales of $2.5 million from
discontinued European operations. Sales from U.S. operations increased
almost 4% during the three month period ended March 31, 1998 versus the
prior year period, due to the continuing strength in sales to original
equipment manufacturers ("OEM"), which increased 12.4%, and direct sales
to international dealers, which increased 28.4%. Domestic retail
aftermarket sales were down 20% from the prior year, while expediter sales
remained largely unchanged.
For the three months ended March 31, 1998, consolidated gross profit
percentage was 36.2% as compared to 38.2% for the comparable three month
period ended March 31, 1997. The gross profit for the quarter ended March
31, 1998, was adversely affected by the transition of our consolidation of
U.S. operations, and the impact it had on our production processes.
The transition should be completed by the end of this second quarter.
Consolidated operating expenses for the first three months of 1998
decreased $1.8 million, or 33.1%, to $3.7 million as compared to $5.6
million for the first three months of 1997. This decrease was primarily
due to the European divestiture and cost savings from the consolidation of
U.S. operations.
As a result of the foregoing, the Company's consolidated operating income
for the three months ended March 31, 1998, was $1.3 million, or 9.3% of
sales, as compared to $457,000 or 2.9% of sales, for the comparable period
in 1997.
Interest expense was up 30.4% for the three months ended March 31, 1998, as
compared to the three month period ended March 31, 1997. The increase was
primarily due to the cost associated with the senior debt refinancing in
October 1997. Other expense for 1998 included income from a settlement in a
patent infringement claim of $1 million, which was offset by expenses
incurred in defending the patent.
The Company has not recorded any income tax expense for the three month
periods ended March 31, 1998 and 1997, due to deferred tax benefits
generated from prior year operating loss carryforwards.
As a result of the foregoing, the Company reported net income before
preferred stock dividends for the three months ended March 31, 1998, of
$765,000, compared to net income of $113,000 for the three months ended
March 31, 1997. Net income after preferred stock dividends was $590,000, or
$.25 basic earnings per share, versus $113,000, or $.05 basic earnings per
share. Diluted earnings per share was $.17 versus $.05.
Liquidity and Capital Resources
The Company's consolidated working capital at March 31, 1998 was $3.2
million as compared to $3 million at December 31, 1997. The current ratio
(current assets divided by current liabilities) as of March 31, 1998, is
1.34 to 1 compared to 1.36 to 1 at December 31, 1997.
Net cash provided from operating activities for the three months ended
March 31, 1998, was $777,000, which was used to finance capital
expenditures of $251,000, and to reduce long-term indebtedness.
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The Company amended and restated its credit agreement with GECC as of March
4, 1998, and further amended the agreement as of April 8, 1998, in order
to allow the Company the right to utilize the letter of credit facility
for the Detroit Litigation judgment, both initial judgment and for any
additional judgment amount, to waive certain defaults (including those
that existed at December 31, 1997), to correct certain disclosures and to
modify certain provisions. The credit agreement was amended subsequently
on April 20, 1998 to provide for the adoption of a certain stock option
plan, to correct certain disclosures and to modify certain provisions.
On March 5, 1998, the Company posted a bond in the amount of $9,341,031, in
the Detroit Litigation to permit an appeal of the judgment rendered on
February 3, 1998. The bond is secured by an irrevocable letter of credit
provided by GECC, guaranteed by the holders of the Company's Series A-1
Preferred Stock. The amount of the judgment will be increased to cover
additional interest and certain attorney fees and costs. When that occurs,
the Company anticipates that GECC will be asked to issue an additional
letter of credit, which the holders of its Series A-1 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.
As of May 13, 1998, $6.2 million of the $12 million revolving credit
facility was outstanding. Under this revolving line of credit, $5.5 million
was borrowed at LIBOR based interest rate.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Code-Alarm, Inc. v. Directed Electronics Inc., Case No. 87-CV-74022-DT,
United States District Court, Eastern District of Michigan. Directed
Electronics Inc. ("Directed") asserted 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
Directed's U.S. Patent No. 4,585,569 (the "'569 Patent"). The Company no
longer manufactures these designs. On February 3, 1998, following the trial of
damages and willfulness relating to these two designs, final judgment was
entered in favor of Directed 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
prejudgment interest, was entered against the Company on March 23, 1998. 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 and
costs. The Company filed a notice of appeal to the United States Court of
Appeals for the Federal Circuit on April 22, 1998, and Directed filed a notice
of cross-appeal on May 4, 1998. The Company also filed a motion to stay the
appeals pending re-examination of the '569 Patent by the United States Patent
and Trademark Office, which motion is pending.
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 Darrel 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 judgment that Directed did not infringe the '775 Patent. The Company is
filing post-judgment motions. Any appeal will not be filed until after the
post-judgment motions are decided.
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. In April 1998,
the Company and Tadiran settled the case, and the Company will pay $120,000 to
Tadiran in monthly installments of various amounts through September 1998.
Estate of Randal Vaughn Emmert, et al v. Aetna Life Insurance and
Annuity Company and Code-Alarm, Inc., Case No. 98CI-05064, was filed on April
3, 1998, in the Texas District Court, 224th Judicial District, Bexar County,
Texas, alleging damages of $120,000, plus interest, attorney fees, exemplary
damages and treble damages, resulting from life insurance coverage claims that
include breach of warranty, breach of contract, negligence, misrepresentation,
and breaches of the Texas Insurance Code and the Texas Consumer Protection Act.
The Company has filed an answer and a petition to remove the case to the United
States District Court for the Western District of Texas, San Antonio Division,
case number SA98-CA0413HG. The Company intends to vigorously defend this case.
There can be no
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assurance that the Company will prevail in this case or of the amount of damages
to which the Company may be subject if it does not prevail.
No other reportable changes have taken place in regard to the legal
proceedings disclosed in the registrant's report on Form 10-K for the fiscal
year ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
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10.1.2 Conformed Copy Incorporating Amendment and Waiver dated
as of March 4, 1998, of Credit Agreement dated as of
October 24, 1997 (the "Credit Agreement") among Company,
General Electric Capital Corporation ("GECC"), in its
capacity as a "Lender", and the other financial
institutions which may from time to time become parties
to the Credit Agreement (GECC, in such capacity, and
such other financial institutions being sometimes
hereinafter referred to collectively as the "Lenders"
and individually as a "Lender"), and GECC, in its
separate capacity as agent for the Lenders, incorporated
by reference to Exhibit 10.74 to the Company's Form 8-K
dated March 4, 1998.
10.1.3 Amendment No. 2 and Waiver No. 2 to Credit Agreement
dated as of April 8, 1998 by and among Company, General
Electric Capital Corporation ("GECC"), in its capacity
as a "Lender", and the other financial institutions
which may from time to time become parties to the Credit
Agreement (GECC, in such capacity, and such other
financial institutions being sometimes hereinafter
referred to collectively as the "Lenders" and
individually as a "Lender"), and GECC, in its separate
capacity as agent for the Lenders, incorporated by
reference to Exhibit 10.1.3 to the Company's Form 10-K
dated April 15, 1998.
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11 Statement regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) During the quarter ended March 31, 1998, the Company filed a Current
Report on Form 8-K dated February 3, 1998, containing Item 5
disclosures. Also, during the quarter ended March 31, 1998, the
Company filed a Current Report on Form 8-K dated March 4, 1998,
containing Items 1, 5, and 7 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: May 15, 1998 /s/ Rand W. Mueller
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Rand W. Mueller
President
Date: May 15, 1998 /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
10.1.2 Conformed Copy Incorporating Amendment and Waiver dated
as of March 4, 1998, of Credit Agreement dated as of
October 24, 1997 (the "Credit Agreement") among Company,
General Electric Capital Corporation ("GECC"), in its
capacity as a "Lender", and the other financial
institutions which may from time to time become parties
to the Credit Agreement (GECC, in such capacity, and
such other financial institutions being sometimes
hereinafter referred to collectively as the "Lenders"
and individually as a "Lender"), and GECC, in its
separate capacity as agent for the Lenders, incorporated
by reference to Exhibit 10.74 to the Company's Form 8-K
dated March 4, 1998.
10.1.3 Amendment No. 2 and Waiver No. 2 to Credit Agreement
dated as of April 8, 1998 by and among Company, General
Electric Capital Corporation ("GECC"), in its capacity
as a "Lender", and the other financial institutions
which may from time to time become parties to the Credit
Agreement (GECC, in such capacity, and such other
financial institutions being sometimes hereinafter
referred to collectively as the "Lenders" and
individually as a "Lender"), and GECC, in its separate
capacity as agent for the Lenders, incorporated by
reference to Exhibit 10.1.3 to the Company's Form 10-K
dated April 15, 1998.
11 Statement regarding Computation of Per Share Earnings.
27 Financial Data Schedule.