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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 June 30, 1998.
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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 ___________________.
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 August 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 June 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations (Unaudited) -
Three months ended June 30, 1998 and 1997, and six months 4
ended June 30, 1998 and 1997
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Six months ended June 30, 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
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CODE-ALARM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
June 30,
1998 December 31,
ASSETS (Unaudited) 1997
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Cash and cash equivalents $ 52 $ 36
Accounts receivable, less allowance for doubtful accounts
(June 30, 1998 and December 31, 1997, of $1,514 and $1,073, respectively) 5,957 5,615
Inventories 4,417 4,291
Refundable income taxes 950 950
Other 580 503
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Total current assets 11,956 11,395
Property and equipment, net of accumulated depreciation 2,396 2,444
Excess of cost over net assets acquired, net 307 320
Other intangibles, net 218 424
Other 1,338 1,479
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Total assets $ 16,215 $ 16,062
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 5,217 $ 5,545
Accrued expenses 2,169 2,040
Current portion of long-term debt 1,731 797
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Total current liabilities 9,117 8,382
Long-term debt 16,881 6,574
Reserve for litigation 10,000
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Total liabilities 25,998 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) (33,175) (32,286)
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Total shareholders' equity (deficit) (16,783) (15,894)
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Total liabilities and shareholders' equity (deficit) $ 16,215 $ 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 June 30 Six Months Ended June 30
----------------------------- -----------------------------
1998 1997 1998 1997
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Net sales $ 10,581 $ 12,639 $ 24,407 $ 28,414
Cost of sales 7,109 7,820 15,925 17,563
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Gross profit 3,472 4,819 8,482 10,851
Operating expenses:
Sales and marketing 1,640 1,757 3,476 4,001
Engineering 422 420 818 846
General and administrative 1,219 1,371 2,715 3,791
Impairment of goodwill 373
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3,281 3,548 7,009 9,011
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Income from operations 191 1,271 1,473 1,840
Other expense:
Interest expense 475 376 913 712
Other - net 1,020 609 1,099 729
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1,495 985 2,012 1,441
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Income (loss) before income taxes (1,304) 286 (539) 399
Income taxes
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Net income (loss) (1,304) 286 (539) 399
Preferred stock dividends 175 350
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Net income (loss) applicable to common stock $ (1,479) $ 286 $ (889) $ 399
======== ======== ======== ========
Basic earnings (loss) per share $ (0.64) $ 0.12 $ (0.38) $ 0.17
======== ======== ======== ========
Weighted average common
shares outstanding 2,321 2,321 2,321 2,321
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.64) $ 0.12 $ (0.38) $ 0.17
======== ======== ======== ========
Weighted average common and dilutive
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)
Six Months Ended June 30
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1998 1997
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Cash flows from operating activities (Note 4) $(10,448) $ (5,063)
Cash flows from investing activities:
Capital expenditures (449) (155)
Cash flows from financing activities:
Issuance of term note 10,000
Payments on term notes and capitalized lease obligations (706) (136)
Net advances (paydowns) on revolving line of credit 1,947 5,479
Preferred stock dividends paid (328)
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Net increase in cash and cash equivalents 16 125
Cash and cash equivalents, beginning of period 36 45
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Cash and cash equivalents, end of period $ 52 $ 170
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Supplemental disclosures of cash flow information:
Cash paid during the six month period for:
Interest $ 467 $ 1,200
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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 divestiture of the
Company's European operations. Results of operations for the interim
periods presented are not necessarily indicative of results to be
expected for the fiscal year.
The Company has been involved in various matters of litigation, including
those more fully described in "Legal Proceedings" in Part II of this Form
10Q.
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:
June 30, 1998
(Unaudited) December 31, 1997
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Raw materials $3,740 $3,425
Work in process 513 680
Finished goods 164 186
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$4,417 $4,291
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4. In July 1997, the Company was found to infringe upon a patent involving a
shock sensing device, and in March 1998 the Court entered a final amended
judgment for approximately $9.3 million. The Company recorded a reserve at
December 31, 1997, in the amount of $10 million to provide for damages and
other costs. On March 5, 1998, the Company posted a bond with the Court in
the amount of $9.3 million to permit an appeal of the judgment against the
Company. The bond was secured by an irrevocable letter of credit provided
by the Company's senior lender and guaranteed by the holders of the
Company's Series A-1 Preferred Stock.
On June 1, 1998, the Company entered into a comprehensive worldwide
settlement agreement and mutual release with the prevailing party in the
above judgment, whereby each party released any and all pending claims,
counterclaims, third-party claims, appeals and cross-appeals against each
other in exchange for payment of $10 million by the Company. Payment was
made on June 19, 1998, with proceeds from a term loan provided for under
the terms of the Company's credit agreement. The payment is reflected in
the Consolidated Condensed Financial Statement of Cash Flows for the
period ended June 30, 1998 within "Cash flows from operating activities."
The holders of Series A-1 Preferred Stock have guaranteed payment of the
term loan. In return for the above guarantees, the Company issued to
the holders of its Series A-1 Preferred Stock, warrants to acquire
7,026,790 shares of the Company's Common Stock. These warrants have an
average exercise price of $.47 per share and expire in 2004.
The Company is currently determining the potential financial impact of the
guarantees on its financial statements, and as of June 30, 1998, no
amount has been recorded with respect to these guarantees.
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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 $4.0 million , or 14.1%, to
$24.4 million for the six months ended June 30, 1998, as compared to $28.4
million for the six months ended June 30, 1997. Net sales for the period
ended June 30, 1997, included sales of $2.5 million from the Company's
discontinued European operations. Sales from U.S. operations decreased
5.7% during the six month period ended June 30, 1998 versus the prior year
period, as pricing competition affected both the domestic retail
aftermarket and expediter sales, and the economic crisis in the Asian
markets negatively impacted our direct sales to international dealers.
Sales to original equipment manufacturers ("OEM") increased by 3.8% during
the six month period ended June 30, 1998, as compared to the same prior
year period. Sales for the second quarter ended June 30, 1998, were $10.6
million compared to $12.6 million for the comparable period of 1997, a
decrease of 16.3%. In addition to price competition and the weak Asian
markets, second quarter sales were further impacted by the recent General
Motors strike and weakness in the South American market.
For the six months ended June 30, 1998, consolidated gross profit
percentage was 34.8% as compared to 38.2% for the comparable six month
period ended June 30, 1997. The gross profit percentage for the six month
period ended June 30, 1998, was negatively affected by higher warranty
costs in the second quarter and by the impact the consolidation of the
Company's U.S. operations had on the production processes.
Consolidated operating expenses for the first six months of 1998 decreased
$2.0 million, or 22.2%, to $7 million as compared to $9 million for the
first six months of 1997. This decrease was primarily due to the
discontinued European operations and related costs, and the charge for
impairment of goodwill recorded in the first quarter of 1997.
As a result of the foregoing, the Company's consolidated operating income
for six months ended June 30, 1998, was $1.5 million, or 6.0% of sales, as
compared to $1.8 million, or 6.5% of sales, for the comparable period in
1997.
Interest expense was up 28.2% for the six months ended June 30, 1998, as
compared to the six month period ended June 30, 1997. The increase was
primarily due to the cost associated with the senior debt refinancing in
October 1997, and additional borrowings resulting from the $10 million
judgment and settlement relating to the patent infringement claim.
Other expense for 1998 includes a settlement amount of $550,000, and
related defense costs, paid to a distributor of the Company's discontinued
line of home security equipment, and defense costs relating to the patent
infringement claim, offset by $1 million in income received by the Company
from the settlement of patent infringement claims.
The Company has determined that any income tax benefit resulting from
current and prior year operating losses is not currently recognizable for
the six month period ended June 30, 1998.
As a result of the foregoing, the Company recorded a net loss before
preferred stock dividends for the six months ended June 30, 1998, of
$539,000, compared to net income of $399,000 for the six months ended June
30, 1997. Net loss after preferred stock dividends was $889,000, or $.38
basic and diluted loss per share, versus $399,000, or $.17 basic and
diluted earning per share.
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Liquidity and Capital Resources
The Company's consolidated working capital at June 30, 1998 was $2.8
million as compared to $3 million at December 31, 1997. The current ratio
(current assets divided by current liabilities) as of June 30, 1998, is
1.31 to 1 compared to 1.36 to 1 at December 31, 1997.
Cash used in operating activities for the six months ended June 30, 1998,
was $10.4 million, which included payment of the $10 million settlement of
the patent infringement claim, financed by a term loan provided for
under the Company's credit agreement. Additional financing by the Company
was used to finance capital expenditures of $449,000, and short term
working capital needs.
The Company amended and restated its credit agreement with its senior
lender 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 the
initial judgment and for any additional judgment amount, the right
to draw on the letter of credit and utilize an additional term loan, 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 to provide for the adoption
of a certain stock option plan, to request funding for the settlement,
waive certain financial covenant violations and other compliance
requirements, to correct certain disclosures and to modify certain
provisions.
On March 5, 1998, the Company posted a bond with the Court in the amount of
$9.3 million to permit an appeal of the judgment against the Company. The
bond was secured by an irrevocable letter of credit provided by the
Company's senior lender and guaranteed by the holders of the Company's
Series A-1 Preferred Stock. On June 1, 1998, the Company entered into a
comprehensive worldwide settlement agreement and mutual release as it
relates to the above judgment in exchange for payment of $10 million by the
Company. Payment was made on June 19, 1998, with proceeds from a new term
note. Payments on the term loan are to be made quarterly, commencing
October 1, 1998, in the amount of $250,000, with interest at prime rate
plus 2% or LIBOR plus 3.75%. The holders of Series A-1 Preferred Stock have
guaranteed payment of this new term loan. In return for the above
guarantees, the Company issued to the holders of its Series A-1 Preferred
Stock, warrants to acquire 7,026,790 shares of the Company's Common Stock.
These warrants have an average exercise price of $.47 per share and expire
in 2004.
As of August 11, 1998, $7.8 million of the $12 million revolving credit
facility was outstanding. Under this revolving line of credit, $7.5 million
was borrowed at the LIBOR based interest rate.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following cases were settled in the following manner: Code-Alarm,
Inc. v. Directed Electronics Inc., Case No. 87-CV-74022-DT, United States
District Court, Eastern District of Michigan; Code-Alarm, Inc. v. Directed
Electronics, Inc., Case No. A-95-CV-437JN, United States District Court, Western
District of Texas, Austin Division; Directed Electronics, Inc. v. Code-Alarm,
Case No. 95-0513 BTM (CGA), United States District Court for the Southern
District of California; Directed Electronics, Inc. v. Code-Alarm, Inc., Rand
Mueller and Peter J. Stouffer, Case No. 96-659 BTM (CGA), United States District
Court for the Southern District of California; Directed Electronics, Inc. v. TSI
Security Acquisition Corp., United States District Court, Southern District of
California, Case No. 93-1050 BTM, in which Code-Alarm, by assignment, replaced
TSI Security Acquisition Corp. as the defendant and counterclaimant. Code-Alarm,
Inc. and Directed Electronics, Inc. ("Directed") entered into a comprehensive
worldwide settlement agreement and mutual release dated June 1, 1998, whereby
each party released any and all pending claims, counterclaims, third-party
claims, appeals and cross-appeals against the other in exchange for payment of
$10,000,000 to Directed by Code-Alarm. TSI Security Acquisition Corp. is
challenging Code-Alarm's attempt to dismiss Case No. 93-1050 BTM and is seeking
to continue that case in the place of Code-Alarm.
Intercept Security Corporation ("Intercept") v. Code-Alarm, Inc. and
Rand Mueller, Civil Action No. 95-40239, United States District Court for the
Eastern District of Michigan, Southern Division, was also settled pursuant to a
Settlement Agreement and Mutual General Release dated as of May 27, 1998,
whereby each party released any and all pending claims against the other in
exchange for, among other items, payment to Intercept by Code-Alarm of $550,000
in installments of varying amounts through January 1, 2001, and the issuance by
Code-Alarm of a warrant to acquire 100,000 shares of Code-Alarm's Common Stock
at an exercise price of $2.3125 per share until January 2, 2001, unless called
by Code-Alarm at $5 per share prior to such date.
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, or report on Form 10-Q for the quarter ended March
31, 1998, or report on Form 10-Q for the quarter ended June 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting on May 19, 1998. The shareholders
re-elected Kenneth M. Mueller and Marshall J. Mueller to the board of directors,
each receiving at least 1,873,979 votes. Mr. Rand W. Mueller, Mr. Alan H.
Foster, Mr. William Pickett, Mr. Jack D. Rutherford, Mr. Richard Cion, Mr.
Rodney S. Cohen, and Peter J. Stouffer continue their term as directors of the
Company.
The shareholders ratified an amendment to its Articles of Incorporation
that increases the number of authorized shares of common stock to twenty
million. There were 1,835,554 votes for and 84,194 against this matter, with
9,048 abstaining.
The shareholders approved the Code-Alarm, Inc. 1998 Incentive and
Non-Qualified Stock Option Plan. This plan allows for the grant of both
incentive stock options and options that are non-qualified, the total number of
shares of Common Stock for which options may be granted are 300,000. There were
882,740 votes for and 154,176 against this matter, with 5,523 abstaining.
The shareholders ratified the appointment of Deloitte & Touche LLP as
the Company's independant certified public accountants for the year ending
December 31, 1998. There were 1,906,700
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votes for and 14,073 against this matter, with 8,023 abstaining.
ITEM 5. OTHER INFORMATION
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities Exchange Act of
1934. The amendment to Rule 14a-4(c) (1) governs the Company's use of its
discretionary proxy voting authority with respect to a shareholder proposal
which the shareholder has not sought to include in the Company's proxy
statement. The new amendment provides that if a proponent of a proposal fails
to notify the company at least 45 days prior to the month and day of mailing of
the prior year's proxy statement, then the management proxies will be allowed
to use their discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Shareholders, if
the Company is not provided notice of a shareholder proposal, which the
shareholder has not previously sought to include in the Company's proxy
statement, by December 29, 1998, the management proxies will be allowed to use
their discretionary authority as outlined above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
10.1.4 Amendment No. 3 and Waiver No. 3 to Credit Agreement and Other
Loan Documents dated April 20, 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.
10.1.5 Waiver No. 4 to Credit Agreement and Other Loan Documents dated
June 12, 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.
10.1.6 Waiver No. 5 to Credit Agreement dated July 1, 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.
11 Statement regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) During the quarter ended June 30, 1998, the Company filed a
Current Report on Form 8-K dated June 1, 1998, containing Item 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: August 14, 1998 /s/ Rand W. Mueller
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Rand W. Mueller
President
Date: August 14, 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
10.1.4 Amendment No. 3 and Waiver No. 3 to Credit Agreement and Other
Loan Documents dated April 20, 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.
10.1.5 Waiver No. 4 to Credit Agreement and Other Loan Documents
dated June 12, 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
as agent for the Lenders.
10.1.6 Waiver No. 5 to Credit Agreement dated July 1, 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.
11 Statement regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
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