<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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
COMMISSION FILE NUMBER 016441
CODE-ALARM, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 38-2334695
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (810) 583-9620
---------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
NONE NONE
- -------------------- -------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
<PAGE> 2
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGISTRATION S-K (229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10K. [ X ]
BASED UPON THE LAST SALE PRICE OF THE REGISTRANT'S COMMON STOCK AS
REPORTED ON THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION
("NASDAQ") NATIONAL MARKET SYSTEM ON MARCH 29, 1996 ( AS PUBLISHED IN THE WALL
STREET JOURNAL DATED APRIL 1, 1996), THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT IS $10,151,579.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, WITHOUT
PAR VALUE, AS OF MARCH 29, 1996 IS 2,320,361.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S 1996 PROXY STATEMENT ARE INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K.
<PAGE> 3
PART 1
ITEM 1. BUSINESS.
The Company is a leading designer, manufacturer and marketer of vehicle
security systems including alarm and remote keyless entry systems. During the
fiscal year ended December 31, 1995, the Company's principal business
was the manufacture and sale of vehicle security systems and a limited number
of home security systems. The Company's products are marketed and sold through
automobile dealerships, independent retail specialty stores, automotive
expediters and mass merchandisers.
MARKET DESCRIPTION AND INDUSTRY OVERVIEW
Theft of vehicles and vehicle contents is a widespread problem in the U.S.
and most European countries. According to industry sources, in the United
States, the theft of vehicles and vehicle contents, including repair and
replacement costs, recovery costs, loss of productivity, etc., resulted in
losses of approximately $7.5 billion in 1994 and the car theft rate in Germany,
France and other affluent Western European countries was 13 per 1,000 vehicles,
compared to 8 per 1,000 vehicles in the United States.
Traditionally, vehicle security systems have been sold mainly in the
aftermarket. However, automakers are beginning to offer vehicle security
systems as installed options, either at the factory or at the dealership.
Although most anti-theft devices are not offered as standard equipment on
vehicles, the Company believes that the general trend is toward vehicle
security systems that are either OEM-approved or installed on the assembly
line.
The Company also believes that demand by European consumers for anti-theft
devices is stimulated by rising insurance premiums and incentives offered by
some European insurance companies for using vehicle security systems. These
incentives are typically in the form of lower premiums for suitably equipped
cars and lower claim payouts for those that are not. In certain European
countries, automobiles above a specific monetary value cannot be insured
against theft without an approved anti-theft system installed.
The Company believes that the foregoing factors will continue to increase
both domestic and European demand for vehicle security systems and that it is
in the process of positioning itself to take advantage of these growing global
markets for vehicle security systems.
BUSINESS STRATEGY
Key elements of the Company's business strategy include the following:
- Focus Sales Efforts to OEM customers.
The Company intends to focus its sales and marketing efforts toward the
OEM market primarily through the following:
Auto Brand Distribution to Dealers -- The Company presently markets
its products to more than 9,000 automobile dealers in North America
pursuant to private label purchase agreements with General Motors, Ford
and Chrysler under the automakers' brand names including Mr.
Goodwrench(TM), Ford Remote Systems(TM) and Mopar(TM), respectively, and
it believes that additional growth opportunities are available through
such dealers. The Company expects to pursue these opportunities by
continuing to promote its sales to dealers through personal calls on
dealers by the Company's sales staff, dealer education programs,
seminars, product literature and manuals and on-site promotional items
such as signs. To support such sales efforts, the Company intends to
continue to offer technical support service and toll-free telephone lines
to answer questions and help with problems.
Direct Sales to Manufacturers for Factory Floor Installation -- The
Company believes that there is potential for expanding its sales to OEMs
for such items as remote keyless entry systems, basic alarm
<PAGE> 4
systems and sensors. In light of increased consumer demand for systems
offered in top-of-the-line models, OEMs are increasingly offering such
systems. It is the Company's intent to capture a larger share of this
market, which is currently supplied by more traditional OEM electronic
suppliers such as TRW, Motorola and United Technologies. The Company's
efforts in this regard currently consist of direct sales calls to
automobile manufacturers by the Company's sales personnel and independent
manufacturers representatives, and are focused on obtaining long-term
supply contracts.
- Continue Sales to Post-Delivery Market
Historically, the Company has successfully marketed to independent
retailers and mass merchandisers. Currently, the Company sells to more than
1,200 independent retail specialty stores, automotive expediters, and mass
merchandisers. The Company intends to continue its focus on this market.
- Expand European Presence
The Company believes that it has significant growth opportunities both in
the OEM and retail markets in Europe. Recognizing this, the Company acquired
Europe Auto Equipement (EAE) as of January 1, 1994. The Company is currently
concentrating its European sales efforts in France. Further expansion into
other European markets is complicated by certain factors such as government
approvals and insurance industry accreditation required to sell its products.
In certain European countries, insurance industry certification of a vehicle
security system is a prerequisite to obtaining theft insurance for most motor
vehicles. The Company has received French and Belgian insurance industry
accreditation for its electronic security systems, but to date has been unable
to secure German insurance industry accreditation required to sell its products
in Germany. European insurance industry standards are subject to change without
notice; and, in 1994, significant changes in industry standards required the
development and introduction of new products for 1995. The Company is
currently seeking accreditation in several major European countries in an
effort to take advantage of the growing market for vehicle security systems.
- Enhance Engineering Capability
In order to stay competitive and deliver high quality, consumer-friendly
vehicle security systems, the Company plans to continue to enhance its
engineering and product testing capabilities. The Company believes that
multiplexing systems planned for some top-of-the-line automobiles will allow
more efficient access to a larger number of vehicle operations than present
conventional wire harness electrical systems, and that the presence of these
multiplexing systems will present potential growth opportunities for the
Company over the next decade. The Company believes that it is favorably
positioned to increase its business opportunities for interfacing with
multiplexing systems because of the Company's reputation for technical
innovation, quality, reliability and competitive pricing. See "Engineering,
Research and Development."
- Shorten Product Development and Introduction Cycles
The Company believes that short product development cycles are essential
to its success. Such cycles enable the Company to capitalize upon the higher
margins that are associated with the introduction of new products and positions
the Company to establish itself as a leader in its existing as well as its new
markets. The Company's efforts in this area include simultaneous engineering
which utilizes product teams from the engineering and manufacturing divisions
of the Company whose function is to streamline product development and
introduction cycles.
PRODUCTS
The Company's vehicle security systems utilize low power radio frequency
technology and are operated by remote micro-transmitters. Frequencies and the
manufacture of transmitters and receivers used in the Company's remote systems
are different in European countries than in the U.S. and are regulated
separately in each country in which the Company does business.
<PAGE> 5
The Company's vehicle security systems fall into two broad categories:
alarm systems and remote keyless entry systems.
Alarm Systems -- In general, the Company's alarm systems contain two major
components: an immobilizer circuit and a siren. The immobilizer circuit
prevents the automobile from being started unless the alarm system has been
turned off. Each system automatically resets itself after the siren has been
sounded for a predetermined period. Many of these systems allow the operator to
choose between manually setting the alarm upon leaving the vehicle and having
the alarm automatically set one minute after the keys are removed from the
ignition switch. Various other components, such as hood locks and intrusion
sensors, can generally be added to the alarm system.
Historically, most of the Company's sales have consisted of remote alarm
systems, with a basic unit consisting of a remote micro-transmitter, which can
be attached to the operator's keychain, and a control unit, which is located
inside the automobile. The remote micro-transmitter is used to turn the alarm
system on and off. This basic unit is typically sold as part of a system which
is configured in various ways based upon the customer preferences and
distribution channels.
In addition to remote alarm systems, the Company also produces digital and
passive alarm systems which offer a lower level of protection. Digital
systems, unlike remote systems, do not offer a way to turn the alarm system on
and off from outside the vehicle. Instead, upon entering the vehicle, the
operator has a fixed period of time to turn off the alarm system by entering
the proper numerical sequence on a keypad. Passive alarm systems are much like
digital systems, except that the operator only needs to insert the key in the
ignition switch of the automobile to turn off the alarm.
Remote Keyless Entry Systems -- The Company's remote keyless entry system
enables the operator to use the remote micro-transmitter to lock and unlock the
doors or open the trunk from outside the vehicle without having to use keys, to
turn on the interior light to see if anyone is waiting inside the vehicle and
to set off the siren in the event of a personal emergency.
The Company's vehicle security systems, most of which are now remote
systems, include Code-Alarm(R), Chapman(R) and Anes(R) brands in the U.S. and
Dragon, Jack-Code, Codalarme(R) and Euro-Alarm in Europe.
The Company's products are sold into two categories: pre-delivery and
post-delivery. Pre-delivery includes those products sold in the OEM market for
vehicle installation before delivery of a new vehicle to the purchaser through
installation by the automaker or as a dealer-installed option or by an
automotive expediter. Post-delivery includes those products which are installed
on a vehicle already owned by the customer, generally through retail specialty
stores and mass merchandisers.
<PAGE> 6
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
---- ---- ----
NET NET NET
SALES PCT. SALES PCT. SALES PCT.
--------- --------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
U.S.
Pre-delivery(1) ... $23,391 47% $27,367 37% $31,222 45%
Post-delivery(2) .. 20,210 40 23,832 32 15,754 23
Europe(3)
Pre-delivery ...... -- -- 8,031 11 7,631 11
Post-delivery ..... -- -- 9,430 13 11,605 17
Other(4) ........... 6,509 13 4,848 7 2,976 4
------- --- ------- --- ------- ---
Total ............ $50,110 100% $73,508 100% $69,188 100%
======= === ======= === ======= ===
</TABLE>
_______________
(1) Pre-delivery includes sales to OEMs and expediters.
(2) Post-delivery includes all other vehicle security system sales.
(3) The Company acquired EAE and Code-Alarm Europe on January 1, 1994.
(4) Includes contract manufacturing, home security systems and discontinued
operations, including mechanical security devices.
CUSTOMERS
The Company's primary OEM customers consist of General Motors, Ford,
Peugeot, Chrysler, Volkswagen-Audi Group France, and Subaru. Historical sales
by the Company to these customer groups and to other OEMs and expediters are set
forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
AS A AS A AS A
PERCENT PERCENT PERCENT
NET OF TOTAL NET OF TOTAL NET OF TOTAL
OEM NET OEM OEM NET OEM OEM NET OEM
SALES SALES SALES SALES SALES SALES
--------- --------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT FOR PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
General Motors .. $ 7,809 33% $ 7,964 22% $ 9,047 23%
Ford ............ 7,853 34 8,010 23 7,728 20
Peugeot ......... -- -- 5,207 15 6,249 16
Chrysler ........ 2,029 9 2,057 6 2,766 7
Volkswagen ...... -- -- 3,277 9 1,213 3
Subaru .......... -- -- -- -- 1,179 3
Other OEMs ...... 5,700 24 8,883 25 10,671 28
------- --- ------- --- ------- ---
Total OEM
Sales ........ $23,391 100% $35,398 100% $38,853 100%
======= === ======= === ======= ===
</TABLE>
<PAGE> 7
With the exception of sales to dealers of General Motors and Ford, no
single customer accounted for more than 10% of the Company's total net sales
during the year ended December 31, 1995. Sales to General Motors and Ford
accounted for 13.1% and 11.2%, respectively, of the Company's total net sales
for the year ended December 31, 1995. Pursuant to its agreements with General
Motors and Ford, the Company's direct sales personnel and independent
manufacturer's representatives engaged by the Company call on, and solicit
orders directly from, General Motors and Ford dealers. The Company views
individual dealers as its customers.
The Company historically has placed and expects to continue to place a
strong emphasis on its retail customers. The Company believes that accelerated
growth in the OEM market for vehicle security systems offers the Company an
opportunity to increase future sales and, therefore, its expansion into the OEM
market, as well as its continued presence in the retail market, is important to
the Company's future success. The increase in pre-delivery installation could
have a detrimental effect on the retail market.
The following table shows the percentage of the Company's total net sales
attributable to the OEM and retail market in both Europe and North America for
the periods set forth below. This table does not include all other sales for
the periods set forth below, which include contract manufacturing, home
security systems and discontinued operations and sales to countries outside of
North America and Europe:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
OEM RETAIL OEM RETAIL OEM RETAIL
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
North America .. 52% 48% 39% 37% 47% 24%
Europe ......... -- -- 11% 13% 12% 17%
</TABLE>
MARKETING
Sales of the Company's products to OEMs are made directly by the Company's
sales and marketing personnel located at the Company's Madison Heights,
Michigan headquarters and its European offices located in Paris, Brussels,
Madrid and Birmingham, England. Through these sales and marketing offices, the
Company services its OEM customers. These sales efforts are supported by a
field force of 62 salespersons who call directly on dealers to explain and
promote the ordering of the Company's products through the OEMs.
In promoting sales of vehicle security systems that require professional
installation, the Company emphasizes dealer education programs, sales and
installation seminars, product literature and technical manuals. Educational
and marketing efforts are supplemented by direct mail campaigns, technical
bulletins, advertising support, sales literature, newsletters, product displays
and dealer signs.
To promote quality, customer satisfaction and relationships with dealers
and installers, the Company maintains technical support and consumer support
services and toll-free telephone lines to answer questions and to help solve
problems with installation or operation of the Company's products.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company employs 20 full-time engineers and 31 full-time technicians in
its engineering and research and development programs. This staff is divided
into three main groups responsible for: (a) providing technical and support
services to its customers, (b) improving manufacturing processes, and (c)
developing new products. The Company's expenditures for engineering, research
and development were approximately 3.4%, 3.7% and 4.9% of revenues in 1993,
1994 and 1995, respectively.
The Company conducts a variety of research and product development
projects designed to achieve improvements in vehicle security systems through
the development of new technologies. The Company's products include a number
of innovative circuits and features developed by the Company. Past research
and development efforts have produced consumer installable vehicle security
systems that incorporate many of the features typically
<PAGE> 8
found on more expensive professionally-installed systems, as well as the
circuitry designed to prevent use of devices designed to search signals to
deactivate its alarms.
The technological innovations of the Company's customers presents both
challenges and opportunities for the Company. The Company's products must be
advanced enough to efficiently interface with its customer's vehicles. One new
innovation which has recently been introduced on certain high-end vehicles is
the multiplexing system. The multiplexing system consists of a sophisticated
computer processor located in the vehicle, connected to various electrical
systems of the vehicle by a single wire, which allows simultaneous
communication between multiple vehicle systems. As a result, the vehicle can
accommodate more sophisticated operations and technologically complex
accessories such as security systems. Multiplexing systems allow security
systems more efficient access to a larger number of vehicle operations than do
conventional wire harness electrical systems. The Company believes that the
presence of multiplexing systems present potential growth opportunities for the
Company over the next decade. The Company believes that it is positioned to
increase its business opportunities for connecting its products to the
multiplexing systems because of the Company's reputation for technical
innovation, quality, reliability and competitive pricing.
MANUFACTURING
The Company produces electronic products at facilities located in Madison
Heights, Michigan and Georgetown, Texas. Automated and manual assembly methods
are used to produce circuit boards, which are key components of many of the
Company's products. The Company is expanding the use of automation in its
manufacturing operations. The Company's electronic security systems are
designed around the Company's manufacturing processes, which particularly
emphasize surface mount technology ("SMT"). SMT is the automated manufacturing
process used to place micro electronic components on printed circuit boards
with a high level of accuracy and at high speed. The use of SMT enables the
Company to design and manufacture products that are compact, portable and
reliable and to achieve manufacturing efficiencies that result in lower costs.
The Company believes that it will have a competitive advantage as a result
of its recent development and on-going construction of an on-premises test and
validation laboratory and its lower labor costs for U.S. operations.
While the Company currently does not manufacture its products in Europe,
the Company does assemble some of its final products in Europe. At this time
the Company is considering various alternatives for manufacturing its products
overseas.
The Company attempts to fill its U.S. orders for vehicle security systems
within 48 hours. Current U.S. product backlog, therefore, is not an important
indicator of long-term sales trends. However, since European operations are
currently supplied from U.S. manufacturing plants, additional inventory
requirements necessary to achieve the 48-hour shipment goal have significantly
increased working capital requirements and management attention to order and
production planning.
SUPPLIERS
The Company's products include a number of high-technology components that
are currently sourced from only a few suppliers and, in some cases, a
single supplier. The Company frequently requires large volumes of such
components. If the Company's suppliers are unable to fulfill the Company's
needs for such components, the Company may be unable to fill customer orders
and its business and financial condition, including working capital and results
of operations, may be materially and adversely affected. Since part of the
Company's strategy is to shorten product development and introduction cycles,
occasions may arise in the future where the Company's ability to produce
products outpaces its suppliers' ability to supply components. There can be no
assurance that the Company can continue to obtain adequate supplies or obtain
such supplies at their historical cost levels. The Company has no guaranteed
supply arrangements with any of its sole or limited source suppliers, does not
maintain an extensive inventory of components, and customarily purchases sole
or limited source components pursuant to purchase orders placed in the ordinary
course of business. Moreover, the Company's suppliers may, from time to time,
experience production shortfalls or interruptions which impair the supply of
components to the Company.
<PAGE> 9
There can be no assurance that such shortages will not occur in the future and
adversely affect the Company's business and financial condition, including
working capital, and results of operations.
PRODUCT WARRANTY
The Company provides original purchasers of most vehicle security systems
with a limited warranty. Scorpion(R) brand products have a one-year limited
warranty and Anes(R) brand carries a limited two-year warranty. Dragon,
Jack-Code and Codalarme(R) products sold in Europe have a limited one-year
repair and replacement warranty. Warranties are customarily limited to
replacement of defective parts to the original purchaser. The Company has
several disputes pending with customers who claim that its home security and
Intercept(TM) systems manufactured by the Company were faulty or inoperable.
The Company generally warrants contract manufactured products for 60 days.
The warranty is limited to replacement of defective material or a price
allowance at the Company's option.
COMPETITION
All markets in which the Company participates are highly competitive, and
many current or prospective competitors, including several of the Company's
significant OEM customers, are substantially larger and possess significantly
greater financial, marketing and technical resources than the Company. An
increase in factory-installed vehicle security systems or the introduction of
other dealer-installed security systems and remote keyless entry systems by OEM
customers or existing and potential competitors could have a material adverse
effect on the Company.
There are a number of other well-known companies manufacturing and
distributing electronic components for the automotive after-market which could
become effective competitors should they choose to enter the vehicle security
market. Many of these companies are much larger and better capitalized than
the Company and have established distribution channels. While offshore
producers of competing systems have not captured significant market share,
these companies could also become significant competitors.
Competing manufacturers have developed vehicle recovery systems designed
to locate stolen automobiles. Sales of other companies' automobile recovery
systems could have a material adverse effect on sales of the Company's
products. The Company also faces competition from certain mechanical devices
such as The Club(TM).
TRADEMARKS AND PATENTS
The Company markets its vehicle security systems under several registered
trademarks. The Company also has patents and patent applications pending for
certain of its products and components. The Company considers its trademarks,
patents and patent applications to be valuable, and has defended, and intends
to continue vigorously defending, its patented and proprietary technology from
infringement or misappropriation. There can be no assurance that the Company's
measures to protect its proprietary rights will deter or prevent unauthorized
use of the Company's technology. Furthermore, the laws of certain countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States. The Company has applied for patents on certain
inventions in Europe; however, none of these patents has yet been granted nor
is there any assurance that patents will be granted in the future. In addition,
the Company may, from time to time, become subject to legal claims asserting
that the Company has violated intellectual property rights of third parties.
In the event a third party were to sustain a valid claim against the Company
and in the event any required license were not available on commercially
reasonable terms, the Company's business and financial condition, including
working capital and results of operations, could be materially and adversely
affected.
REGULATION
The FCC regulates the assignment of frequencies for manufacture and sale
of remote vehicle security systems and remote keyless entry systems in the U.S.
The Company has received FCC authorization to manufacture
<PAGE> 10
and sell the devices it currently sells in the U.S. In Europe, similar
government agencies in each country regulate the assignment of frequencies and
the Company has generally been able to meet the applicable frequency
requirements. However, because insurance industry accreditation of vehicle
security systems is, in most European countries, a prerequisite to an
automobile owner's ability to obtain vehicle theft coverage, the Company's
ability to market its products in such countries is dependent upon obtaining
such insurance industry approvals and certifications. The Company has received
French and Belgian insurance industry accreditation to manufacture and sell
electronic security systems. To date, the Company has been unable to secure
German insurance industry accreditation required to sell its products in
Germany. The Company is selling its products in Spain where no insurance
industry certifications are required. European insurance industry
accreditation standards are subject to change without notice; and, in 1994,
significant changes in industry standards required the development and
introduction of new products for 1995.
The Company's U.S. vehicle security systems are also affected by state
insurance laws. The Company is aware of some states that mandate insurance
discounts on comprehensive coverage for policyholders who have installed
certain types of vehicle security systems. The Company is also aware of at
least one state which provides additional discounts for policyholders who have
installed vehicle recovery systems.
The loss of regulatory and insurance industry approvals or failure to
obtain necessary authorizations in the future could have a material adverse
effect on the Company.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 552 full-time
persons. None of the Company's employees are represented by a labor union or
other collective bargaining representative. The Company believes that
relations with its employees are good.
<PAGE> 11
ITEM 2. PROPERTIES.
The following table sets forth certain information concerning the
principal properties leased by the Company:
<TABLE>
<CAPTION>
APPROX. APPROX. LEASE TERM
LOCATION USE SIZE (SQ. FT.) MONTHLY RENT EXPIRES
- -------- --- ------------- ------------ ----------
<S> <C> <C> <C> <C>
950 E. Whitcomb Office and manufacturing 42,000 $18,800 1997
Madison Heights, MI
1000 E. Whitcomb Office and warehouse 20,000 8,300 1997
Madison Heights, MI
16742 Burke Lane Office and warehouse 10,000 4,200 2000
Huntington Beach, CA
300 Industrial Ave. Office and manufacturing 60,000 7,200 2004
Georgetown, TX
32, Rue Delizy Office and manufacturing 20,000 20,800* 1997
93694 Pantin Cedex
Paris, France
Julian Camarillo 29 dl Office and warehouse 4,300 4,900* 1997
28037 Madrid
Spain
Chausee de Moons 1135 Office and warehouse 2,200 1,900* 1998
1070 Brussels
Belgium
21A Monkspath Business Office and warehouse 6,900 4,200* 2020**
Park
Highlands Road, Sohihu ll
B90 4NZ
England
</TABLE>
______________
* Amounts payable under the lease are payable in local currencies and are
subject to fluctuations in the exchange rates.
** Terminable upon 3 months prior written notice by Company.
Management believes that the facilities presently occupied are adequate to
meet the Company's requirements for the foreseeable future. All buildings and
equipment are in good working condition.
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
PATENT INFRINGEMENT LITIGATION
Code Alarm, Inc. v. Electromotive Technology Corporation. Case No.
87-CV-74022-DT. On November of 1987, the Company filed a declaratory judgment
action against Electromotive Technology Corporation ("ETC") in the United States
District Court for the Eastern District of Michigan, Southern Division seeking a
declaration that ETC's U.S. Patent No. 4,585,569 ("the '569 Patent"), describing
and claiming a shock or motion sensor system, was invalid or not infringed by
the Company. Subsequently, Directed Electronics ("Directed"), of Vista,
California, acquired an interest in the '569 Patent and was made a party to the
lawsuit. A judgment as to infringement liability was entered against the
Company in 1993 based upon the Company's manufacture and sale of a shock sensor
device. A bench trial was held on the issue of damages in 1994, but no ruling
was made until June 16, 1995, when a judgment was awarded against the Company in
the amount of $5.4 million for infringement (about $5.9 million when interest
and other costs are included). The Company, after the liability decision was
rendered, filed a notice of appeal of the decision and appealed the decision to
the Court of Appeals for the Federal Circuit. After the notice of appeal was
filed, it was discovered that ETC had failed to timely pay the first maintenance
fee on April, 1990, required to maintain the '569 Patent with the U.S. Patent
and Trademark Office (the "Patent Office"). Thus, the '569 Patent lapsed for a
ten month period of time. The Company subsequently filed a motion with the
United States District Court for the Eastern District of Michigan, Southern
Division requesting certification for remand of the case for consideration of
(1) the Company's intervening rights for the ten month lapse of the '569 Patent,
(2) reconsideration of the award of enhanced damages for willful patent
infringement and attorney fees in view of ETC's failure to notify the Company
and the court of the lapse, and (3) an appeal of the Patent Office's decision to
reinstate the '569 Patent. This motion was held moot following a granting of
the Company's motion to dismiss its appeal of the judgment to the Court of the
Appeals for the Federal Circuit, on January 3, 1996. The Company subsequently
filed a motion with the United States District Court for the Eastern District of
Michigan, to amend and reduce the judgment based upon the late payment of the
maintenance fee and lapse of the '569 Patent. This motion was denied on March
7, 1996. The Company now intends to appeal this decision as well as the
decision as to infringement damages. The Company has posted a letter of credit
in lieu of an appeal bond in the amount of $5.9 million, representing the amount
of the judgment, including interest. Both ETC and Directed are asserting patent
infringement claims against two other shock sensor embodiments, one of which is
the Company's principal shock sensor unit. Trial is scheduled to occur on this
latest infringement matter on or about April 15, 1996. The Company has obtained
various expert opinions concerning its potential infringement in this latest
suit and, based upon these opinions, is of the belief that it will prevail in
this action.
Magnadyne Corporation v. Code Alarm, Inc. Case No. 96-60011. On
January 17, 1996 Magnadyne Corporation filed, in the United States District
Court for the Eastern District of Michigan, Southern Division, a complaint
alleging that the Company infringes upon United States Patent Number 5,285,186
("the '186 Patent"). The Company denied the infringement charges and has filed
counter-claims, on February 6, 1996, for damages arising out of the assertion
of the '186 Patent against the Company. This case remains in the
early stages of discovery.
Code Alarm, Inc. v. The United States International Trade Commission.
Inv. No. 337-TA-355. On September 19, 1995 the United States Court of Appeals
for the Federal Circuit affirmed the ITC Administrative Law Judge's holding of
Invalidity of United States Patent Number 5,049,867, owned by the Company.
Code Alarm, Inc. v. Magnadyne Corporation, Barry Carren,
Do-It-Yourself-Security and James Compton, Civil Action No. 1-95 CV 0054 (CRR)
filed March 21, 1995 in the United States District Court for the District of
Columbia and Transferred on April 6, 1995 to the United States District Court
for the Central District of California sitting in Los Angeles, California. The
Company seeks damages for alleged infringement of United States Patent Number
4,740,775 ("the '775 Patent) owned by the Company. A counterclaim has been
filed alleging invalidity and non-infringement of the '775 Patent and seeking an
injunction, legal fees and costs. This matter is set for trial on July 9, 1996
and remains in the early stages of discovery.
<PAGE> 13
Code Alarm, Inc. v. Sherwood, Inc., Inkel USA and Alfred J. Menozzi, Civil
Action No. 95-4797 AWT filed on July 20, 1995 in the United States District
Court for the Central District of California sitting in Los Angeles, California.
The Company is seeking damages for alleged infringement of United States Patent
Number 4,740,775 owned by the Company. The parties have reached a general
settlement of all claims. Final details of the settlement remain to be
finalized.
Directed Electronics, Inc. v. Code Alarm, Case No. 95-0513S(CGA) is a
declaratory judgment suit filed by Directed Electronics ("Directed") on April
18, 1995 in the United States District Court for the Southern District of
California seeking a declaration that the plaintiff does not infringe upon
United States Patent Number 4,740,775 ("the '775 Patent") and/or that the '775
Patent is invalid and/or unenforceable. The Company has counterclaimed seeking
damages arising from Directed's infringement of the '775 Patent and has denied
the invalidity and non-infringement/unenforceability allegations. Although,
this case remains in the early stages of discovery the Company has obtained an
independent opinion of counsel that Directed is infringing the '775 Patent.
Code Alarm, Inc. v. Directed Electronics, Daryl Issa, and A Class Tint and
Alarm, Case No. A-95-CA-437 (JRN), filed by the Company on July 26, 1995 in the
United States District Court, Western District of Texas, Austin Division,
alleging damages arising from infringement of United States Patent Number
4,740,775. The case against Directed Electronics was transferred to the United
States District Court for the Southern District of California on December 14,
1995. The case against the remaining parties was stayed.
In the matter of Certain Starter Kill Security Systems, Inv. No.
337-TA-379, On November 21, 1995 the United States International Trade
Commission instituted, upon request of the Company, an investigation to
determine whether products allegedly imported by Directed Electronics, Inc. of
Vista, California from the Nutek Company of Taipei, Taiwan infringe United
States Patent Number 4,740,775 owned by the Company. In addition to claims of
patent infringement, the Company sought, in this action, to halt the
importation and sale of the alleged infringing goods into the United States. On
February 26, 1996, pursuant to Commission Rule 210.21, the Company filed a
motion to terminate the investigation. On March 5, 1996, Administrative Law
Judge Luckern issued a Final Initial Determination granting the Company's
motion to terminate the investigation. On March 15, 1996, Directed filed a
petition for review of the final initial determination and on March 22, 1996
both the Company and the ITC filed responses opposing Directed's petition for
review. Resolution of Directed's petition for review is pending.
ACQUISITION-RELATED LITIGATION
Aureo Rivera Davila and Aureo E. Rivera v. Asset Conservation, Inc.,
Gabriel Guijarro Brunet, Iris Nieves DeGuijarro and their marital conjugalship,
Chapman Industries Corporation, Chapman Products, Inc., Chapman Security
Systems, Inc. and Code Alarm, Inc.. Case Number 90-2118 (SEC) United States
District Court for the District of Puerto Rico. On January 19, 1990, Chapman
Security Systems, Inc. ("Chapman Security"), a wholly owned subsidiary of the
Company, purchased certain of the assets of Chapman Products, Inc. ("Chapman
Products") from LaSalle National Bank, in a private sale in accordance with
Section 9-504 of the Illinois Uniform Commercial Code. On August 17, 1990,
Aureo Rivera Davila and Aureo E. Rivera ("Plaintiffs") filed a complaint
against Asset Conservation, Inc. (a distributor of the now defunct Chapman
Industries Corporation ("Chapman Industries"), Gabriel Guijarro Brunet and Iris
Nieves DeGuijarro and their marital conjugalship, alleging infringement of
United States Patent No. 3,548,373 (the "373 Patent"). Plaintiffs
have a default judgment in the amount of about $19.4 million, in addition to
interest, entered by the United States District Court for the Northern District
of Illinois in 1990 against Chapman Industries Corporation for infringement of
the '373 Patent. On March 16, 1995, the Plaintiffs added Chapman Products, the
Company and its subsidiary, Chapman Security, as principal defendants in the
case and are attempting to assert their default judgment against the Company
and Chapman Security on a theory that the Company is the sole owner of Chapman
Security and that the Company is a successor in interest to Chapman Industries.
Plaintiffs also allege that the asset purchases by Chapman Products and then by
Chapman Security were
<PAGE> 14
fraudulent conveyances. The Company has tendered defense of the complaint to
LaSalle National Bank, which is providing for the defense of the fraudulent
conveyance claims as well as certain of the successor liability claims brought
by Plaintiffs under a reservation of rights against the Company and Chapman
Security. This proceeding is in the early stages of discovery and is not
expected to be resolved in the near future. On November 22, 1995, the Court
issued an order to show cause why the case should not be remanded to the United
States District Court for the Northern District of Illinois. Plaintiff's reply
in this matter is due to be filed on or before March 27, 1996 and resolution of
this issue should follow shortly thereafter. The size of this judgment (which,
with interest, is currently estimated to be approximately $28.6 million), is so
large that if it is enforced against the Company and Chapman Security, the
likely award would exceed the Company's shareholders' equity.
Asset Conservation, Inc. filed a third party complaint in the same case on
June 16, 1992 against Chapman Industries, Chapman Products, the Company and
Chapman Security alleging that they have a duty to indemnify Asset Conservation
for all damages sustained by it in the litigation, based upon Asset
Conservation's previous distributor and indemnification agreement with Chapman
Industries, which Asset Conservation claims was assumed by Chapman Products and
Chapman Security. On November 22, 1995 the third party complaint was
dismissed, with prejudice, against all third party defendants, including the
Company. The Plaintiffs are seeking reconsideration of the dismissal of the
third party complaint.
PRODUCT LITIGATION
Intercept Security Corporation v. Code Alarm, Inc. and Rand Mueller.
Case No. 95-40239. On July 19, 1995, Intercept Security Corporation, a
Canadian distributor of the Company's home security systems ("Intercept"),
filed suit in the United States District Court, for the Eastern District of
Michigan, Southern Division, alleging that certain home security products
manufactured and sold by the Company failed to perform in a manner consistent
with the alleged representations of the Company. The complaint alleges that
the Company committed fraud, misrepresentation, and breached an implied and an
express warranty emanating from the sale of these goods to Intercept. On March
27, 1995, Intercept Security Corporation filed an amended complaint adding Rand
Mueller to the suit and making the same allegations against Rand Mueller. The
Company's provider of directors and officers liability insurance coverage has
agreed to provide a defense for Rand Mueller, subject to a reservation of
rights. The case remains in the early stages of discovery and the exposure, if
any, to the Company or to Rand Mueller cannot be ascertained at this time.
OTHER LITIGATION
Parasol Group, Ltd. v. Code Alarm, Inc. Case No. 95-4713-RSWL (Mc). On
December 15, 1994, Parasol Group Filed, in the Superior Court for the County of
Los Angeles, CA, a complaint seeking approximately $200,000 in damages for
consulting services allegedly performed by Parasol's president, Nathan
Sassover. On April 26, 1995, Parasol refiled the action in the United States
District Court for the Central District of California. The Company denied the
allegations and counterclaimed for damages including, without limitation,
damages resulting from Parasol's fraud and misrepresentation. The case is
presently in the early stages of discovery and the Company's liability, if any,
cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has been traded on the NASDAQ Stock Market under the
symbol "CODL" since October 19, 1987 and has been traded on the NASDAQ National
Market since May 17, 1988.
The following table sets forth certain information about the price of the
Common Stock which is based on the high and low sales prices for the Common
Stock, as reported on the NASDAQ National Market:
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
1994
First Quarter ................................ $12 $8 5/8
Second Quarter ............................... 11 7/8 8 3/8
Third Quarter ................................ 12 3/8 8 3/4
Fourth Quarter ............................... 11 5/8 8 1/2
1995
First Quarter ................................ $10 1/4 $7
Second Quarter ............................... 9 3/8 6 3/8
Third Quarter ................................ 7 6 1/2
Fourth Quarter ............................ .. 7 1/4 6 1/8
</TABLE>
On March 29, 1996, the last reported sale price of the Common Stock as
reported on the NASDAQ National Market was $4 3/8 per share. As of March 29,
1996, there were approximately 298 shareholders of record of the Company's
Common Stock.
Under the terms of the credit agreement with its commercial bank, the
Company may not purchase, redeem, retire, or otherwise acquire and shares of
its Capital Stock, or make a commitment to do so, without the bank's prior
written consent. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" and "Note 4 to Financial Statements".
DIVIDEND POLICY
Historically, the Company has not paid any cash or other dividend. The
Company does not expect to pay dividends in the foreseeable future but
currently intends to retain any earnings to finance operations and to support
future growth. Furthermore, the Company's bank credit facility agreement
prohibits the payment of dividends. See "Managements' Discussion and Analysis
of Financial Condition and Results of Operations" and "Note 4 to Financial
Statements".
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial data shown below have been
derived from the Company's audited consolidated financial statements for the
years shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1991 1992 1993 1994(1) 1995 (1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................................... $43,571 $45,685 $50,110 $73,508 $69,188
Cost of sales..................................................... 29,247 32,296 30,190 45,886 44,718
------- ------- ------- ------- -------
Gross profit...................................................... 14,324 13,389 19,920 27,622 24,470
Engineering....................................................... 1,069 1,617 1,688 2,696 3,351
Sales and marketing............................................... 8,187 9,791 9,346 13,955 12,099
General and administrative........................................ 5,632 5,636 6,520 7,928 9,008
------- ------- ------- ------- -------
Total operating expenses.......................................... 14,888 17,044 17,554 24,579 24,458
Income (loss) from operations..................................... (564) (3,655) 2,366 3,043 12
Litigation expense................................................ -- -- -- (4,386) (1,825)
Other Net (expense)............................................... (308) (421) (222) (743) (1,957)
------- ------- ------- ------- -------
Income (loss) before income taxes................................. (872) (4,076) 2,144 (2,086) (3,770)
Income taxes (benefits)........................................... (250) (1,174) 608 (710) (1,046)
------- ------- ------- ------- -------
Net income (loss)................................................. $ (622) $(2,902) $ 1,536 $(1,376) $(2,274)
======= ======= ======= ======= =======
Net income (loss) per common share................................ $ (0.24) $ (1.16) $ 0.63 $ (0.58) $ (1.17)
======= ======= ======= ======= =======
Weighted average number of
common shares outstanding........................................ 2,553 2,495 2,445 2,376 2,320
BALANCE SHEET DATA:
Working capital................................................... $11,626 $9,983 $ 8,164 $12,716 $10,381
Total assets...................................................... 25,439 25,136 24,134 37,821 42,043
Long-term obligations............................................. 4,483 5,417 3,867 13,240 33,545
Shareholders' equity.............................................. 15,439 12,512 13,280 11,216 8,498
</TABLE>
(1) The results of operations includes patent infringement settlement costs
in the amount of $4.4 million for the year ended December 31, 1994 and
$1.82 million for the year ended December 31, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Legal Proceedings."
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company is involved in a patent infringement suit involving a shock
sensing device. The damage portion of the trial was completed in January 1995
and at December 31, 1994, the Company recorded an accrual for damages of
approximately $4.2 million. In June 1995, the Company received information
from the United States District Court that the damages would total $6.0
million. Accordingly, the Company recorded an additional accrual for damages
of $1.8 million in 1995.
The following table sets forth, for the periods indicated, earnings data
as a percentage of net sales of the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1991 1992 1993 1994 1995
-------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................. 67.1% 70.7% 60.2% 62.4% 64.6%
-------- -------- -------- ------ -------
Gross profit .............................. 32.9% 29.3% 39.8% 37.6% 35.4%
Engineering ............................... 2.5 3.5 3.4 3.7 4.9
Sales and marketing ....................... 18.8 21.4 18.7 19.0 17.5
General and administration ................ 12.9 12.3 13.0 10.8 13.0
-------- -------- -------- ------ -------
Total operating expenses .................. 34.2 37.3 35.0 33.4 35.4
-------- -------- -------- ------ -------
Income (loss) from operations ............. (1.3) (8.0) 4.7 4.1 0.0
Litigation expense ........................ -- -- -- (6.0) (2.6)
Other income (expense) .................... (0.7) (0.9) (0.4) (1.0) (2.8)
-------- -------- -------- ------ -------
Income (loss) before income taxes ......... (2.0) (8.9) 4.3 (2.9) (5.4)
Income taxes (benefits) ................... (0.6) (2.6) 1.2 (1.0) (1.5)
-------- -------- -------- ------ -------
Net income (loss) ......................... (1.4) (6.4) 3.1 (1.9) (3.9)
======== ======== ======== ====== =======
</TABLE>
Year ended December 31, 1995 compared to the year ended December 31, 1994
The Company's consolidated net sales decreased $4.3 million or 5.9% to
$69.2 million, for the year ended December 31, 1995 as compared to $73.5 million
for the year end December 31, 1994. The decline is primarily due to the
Company's decision to discontinue sales of Do-It-Yourself, mechanical and
Vehicle Locator security products to mass merchandisers and independent dealers
and to the transportation workers strike in France. The decline is partially
offset by increases in OEM and expediter sales.
For the year ended December 31, 1995, consolidated gross profit decreased
$3.2 million, or 11.4%, to $24.5 million as compared to $27.6 million for the
year ended December 31, 1994. As a percentage of consolidated sales, gross
profit decreased to 35.4% in 1995 from 37.6% in 1994. The decrease was
primarily due to start up manufacturing problems with the Company's European
parts production in the United States and a lower profit margin on sales in
Europe. The Company expects to maintain the current gross profit margin in
1996 due to continued emphasis in OEM sales.
<PAGE> 18
Consolidated operating expenses decreased $121,000, or less than 1% in
1995 as compared to 1994. The decrease in consolidated operating expense was
attributable to decreased sales and marketing expenses, partially offset by
increases in engineering, product development costs and general and
adminstrative costs. The Company expects to sustain decreases in sales and
marketing expenses as a result of continued emphasis on OEM sales, but expects
engineering, product development and general and adminstrative costs to remain
relatively constant as a percentage of sales in 1996.
As a result of the foregoing, the Company had consolidated income from
operations of $12,000 in the year ended December 31, 1995 compared to operating
income of $3.0 million for the 1994 fiscal year.
Interest expense increased $860,000 for the year ended December 31, 1995,
or 133.3%, to $1.5 million as compared to $645,000 for the year ended December
31, 1994. Increases are attributable to higher interest rates and increased
indebtedness associated mainly with the acquisition of European Auto Equipment
and its operations.
Other expenses for the year ended December 31, 1995 decreased $2.2
million to $2.3 million as compared to $4.5 million for the year ended December
31, 1994, exclusive of interest expense as discussed above. The $2.2 million
decrease is primarily attributable to approximately $1.8 million in additional
damages recorded in 1995 from a patent infringement suit as compared to $4.4
million in 1994.
The Company had an effective income tax rate of 28% on current operating
income. Income taxes on foreign operations were approximately 33%. During 1995,
the Company charged off state and foreign tax refunds determined to be
uncollectable in the amount of $130,000.
As a result of the foregoing, the company incurred a net loss of $2.7
million, or $1.17 per share for the year ended December 31, 1995 compared to
a net loss of $1.4 Million, or $0.58 per share for the year ended December
31, 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's consolidated net sales for 1994 increased $23.4 million, or
46.7%, to $73.5 million as compared to $50.1 million in 1993. Excluding the
effect of acquisitions (EAE and the remaining interest in Code-Alarm Europe),
consolidated net sales increased $5.9 million, or 11.8%, in 1994. The
non-acquisition related sales increases resulted primarily from increases in
expediters, retail and General Motors/Ford sales volumes.
The Company's consolidated gross profit for 1994 increased $7.7 million,
or 38.7%, to $27.6 million as compared to $19.9 million in 1993. Excluding the
effect of acquisitions, consolidated gross profit for 1994 increased $1.4
million, or 7.0%. As a percentage of consolidated sales, gross profit
decreased to 37.6% in 1994 from 39.8% in 1993. Such decreases were primarily
due to launch costs associated with the introduction of the Euro Alarm in the
fourth quarter of 1994.
Consolidated operating expenses for 1994 increased $7.0 million, or 39.8%,
to $24.6 million as compared to $17.6 million in 1993. Excluding the effect of
acquisitions, consolidated operating expenses for 1994 increased $1.1 million,
or 6.3%. Increases in consolidated operating expenses are attributable to
acquisitions as well as other sales, marketing and product development efforts.
As a result of the foregoing, consolidated income from operations for 1994
increased $677,000, or 28.6%, to $3.1 million as compared to $2.4 million for
1993. The increase was due to the acquisition of EAE and increased volume
through General Motors and Ford.
Interest expense for 1994 increased $366,000, or 131.6%, to $645,000 as
compared to $279,000 for 1993. The increase was due to increased interest
rates, the acquisition of EAE and debt incurred in connection with the
following items: (i) financing sales increases, (ii) the acquisition of an
important patent and (iii) the Company's decision to repurchase stock held by
two former directors at below market prices as of the date of repurchase.
Other income (expense) for 1994 increased $4.9 million, or 2,210.4%, to an
expense of $5.1 million as compared to an expense of $0.2 million for 1993.
The increase was primarily due to $4.4 million of estimated costs associated
with a judgment to be entered against the Company in the patent infringement
lawsuit, Code-Alarm v. Electromotive Technologies Corporation. The amount
recorded included the Company's estimate at
<PAGE> 19
that time of damages, interest and legal fees to be awarded the Plaintiff, as
well as expenses that the Company had already incurred, and estimated expenses
that might be incurred in an appeal of the judgment.
The Company's effective income tax rate for the year ended 1994 was 34.0%.
As a result of the foregoing, the Company incurred a consolidated net loss
of $1.4 million, or $0.58 per share, for the year ended December 31, 1994,
compared to a net profit of $1.5 million, or $0.63 per share, for the year
ended December 31, 1993. Excluding non-recurring expenses related to
litigation, the Company earned a profit of $1.5 million or $0.64 per share for
the year ended December 31, 1994.
EFFECT OF INFLATION
The Company does not believe that inflation has had a material impact on
its operations over the past three years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital was $10.4 million at December
31, 1995 compared to $12.7 million at December 31, 1994, and $8.2 million at
December 31, 1993. The current ratio (current assets divided by current
liabilities) as of December 31, 1995 is 1.57 to 1, compared to 1.95 to
1 at December 31, 1994, and 2.2 to 1 at December 31, 1993.
Net cash used in operating activities for the year ended December 31, 1995
was $573,000. The decrease in cash from prior years has been primarily due to
increases in inventories, accrued expenses and other assets of $2.7 million,
$1.3 million and $1.2 million, respectively. These increases are partially
offset by an increase of $3.6 million in accounts payable for the year ended
December 31, 1995 and an increase in the reserve for litigation of $2.1 million
for the year ended December 31, 1995.
In May of 1995, the Company concluded a credit agreement with NBD Bank.
Under the terms of this agreement, the Company has secured a $13.0 million
revolving credit facility, $1.3 million in secured notes and $2.2 million in
unsecured notes. The Company has used these facilities for operating capital
and to provide financing for an appeal bond in the amount of $5.9 million for
the patent infringement litigation. The Company's $13.0 million revolving
credit agreement terminates May 23, 1997. On October 17, 1995, the credit
agreement was amended to temporarily provide an additional $0.8 million under
the revolving credit facility, available until February 29, 1996. On March 18,
1996, the agreement was amended to extend the additional $0.8 million to May 31,
1996. This indebtedness bears interest at the prime rate (8.25% as of March 18,
1996), or at the Company's option, at the LIBOR plus 1.5% to 2.5% for maturities
ranging from one to six months (from 7.56% to 7.81% as of March 28, 1996). The
credit facility is collateralized by substantially all of the assets of the
Company and its domestic subsidiaries and the accounts receivable of its
domestic and foreign subsidiaries. Furthermore, the Company's obligations under
the credit facility have been guaranteed by all of its domestic subsidiaries and
are subject to certain covenants including those listed above. The Company's
existing bank credit facility contains covenants which require the Company and
its subsidiaries to maintain a minimum working capital level, a specified
current ratio, a minimum tangible net worth, a minimum ratio of total
liabilities to tangible net worth, a specified fixed charges coverage ratio and
limitations on indebtedness. As of December 31, 1995, the Company was not in
compliance with the loan covenants, as amended. At the request of the Company,
the bank amended the covenants enabling the Company to be in compliance as of
December 31, 1995.
On April 12, 1995, NBD amended the loan agreement to place the Company in
compliance with all covenants of the agreement as of December 31, 1995.
<PAGE> 20
As of March 28, 1996, $ 900,000 of the $13.8 million revolving credit
facility was unused and available. Under this revolving line of credit, $6.0
million was borrowed under the LIBOR option available to the Company at
interest rates from 7.56% to 7.81%.
The Company historically has been involved in a number of legal disputes,
many of which have resulted in litigation, both as plaintiff and as defendant,
including a number of proceedings currently pending. The cost of legal
proceedings and settlements of lawsuits involving the Company has been a
principal cause of the Company's lack of profitability in 1994 and has had a
substantial negative impact on the Company's results of operations in 1995. See
Item 3 "Legal Proceedings".
The Company believes that internally generated funds, together with
available credit facilities, are sufficient to meet expected levels of business
activity and working capital needs of the Company for the foreseeable future.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item may be found under the caption
"Directors, Nominees and Executive Officers" of the Company's 1996 Proxy
Statement and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item may be found under the captions
"Executive Compensation," "Stock Option Plan" and "Directors' compensation" of
the Company's 1996 Proxy Statement and such information is incorporated herein
by reference.
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item may be found under the captions
"Security Ownership of Certain Beneficial Owners and Management' and
"Shareholder Agreement" of the company's 1996 Proxy Statement and such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item may be found under the caption
"Certain Transactions" of the Company's 1996 Proxy Statement and such
information is incorporated hereon by reference.
<PAGE> 22
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The documents filed as a part of this report:
1. Financial Statements:
The consolidated financial statements and notes thereto filed with
this report are listed on page F-1.
2. Financial Statements Schedule:
The financial statement schedule filed with this report is listed
on page F-1.
3. Exhibits:
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, as amended, Registration
No. 33-16991C ("Form S-18").
3.2 Bylaws of the Company, as amended, incorporated by reference
to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1990 ("1990 Form 10-K").
9. Shareholder Agreement, as amended, incorporated by reference
to Exhibit 9 to the Company's Form 10-K for the year ended
December 31, 1989 ("1989 Form 10-K").
10.2 Employment Agreement with Rand W. Mueller, as amended,
incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, as amended, Registration
No. 33-31356 ("Form S-1"), as further amended by Amendment
No. 2 to Employment Agreement incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended September 30, 1992 ("September 1992 Form 10-Q").
<PAGE> 23
10.3 1987 Stock Option Plan, incorporated by reference to Exhibit
10.3 to Form S-18, and amendment thereto, incorporated by
reference to Exhibit 10.3 to the Company's Form 10-K for the
year ending December 31, 1990 ("1990 Form 10-K").
10.4 Indemnification Agreement with Rand W. Mueller, incorporated
by reference to Exhibit 10.4 to Form S-18.
The Company has entered into the same form of agreement with
the following directors and executive officers as of the
dates indicated:
Marshall J. Mueller May 29, 1987
Kenneth M. Mueller May 29, 1987
Jack C. Chilingirian May 29, 1987
William S. Pickett May 29, 1987
Alan H. Foster May 17, 1988
David L. Etienne March 16, 1990
Richard Wierzbicki July 16, 1990
Peter J. Stouffer March 22, 1991
Jack D. Rutherford May 21, 1991
Robert V. Wagner August 3, 1993
John G. Chupa December 9, 1994
Michael P. Schroeder March 24, 1995
John C. Moffat March 24, 1995
Dean Jones March 24, 1995
10.6 Consulting and Non-Compete Agreement with David L. Skinner,
incorporated by reference to Exhibit 10.6 to 1990 Form 10-K.
10.7 Non-Compete Agreement with David L. Skinner and Shirley A.
Skinner, incorporated by reference to Exhibit 10.9 to Form
S-1.
10.8 Mortgage Agreement with Rand W. Mueller, incorporated by
reference to Exhibit 10.8 to the Company's Form 10-K for the
year ending December 31, 1992 ("1992 Form 10-K").
10.9 Consulting Agreement with Kenneth M. Mueller, incorporated by
reference to Exhibit 10.9 to Form S-18.
<PAGE> 24
10.10 Lease of real property at 950 E. Whitcomb, Madison Heights,
Michigan, incorporated by reference to Exhibit 10.10 to 1992
Form 10-K.
10.11 Lease of real property at 300 Industrial Avenue, Georgetown,
Texas, incorporated by reference to Exhibit 10.11 to the
Company's Form 10-K for the year ended December 31, 1991
("1991 Form 10-K").
10.13 Lease of real property at 32, Rue Delizy, Pantin Cedex,
France, incorporated by reference to Exhibit 10.13 to the
Company's Form 10-K for the year ended December 31, 1994
("1994 Form 10-K").
10.14 Lease of real property at 16742 Burke Lane, Huntington Beach,
California, incorporated by reference to Exhibit 14 to 1994
Form 10-K.
10.19 General Motors Corporation contract, incorporated by
reference to Exhibit 10.19 to Form S-1, as amended by
amendments incorporated by reference to Exhibit 10.19 to 1994
Form 10-K.
10.20 Ford Motor Corporation contract, incorporated by reference
to Exhibit 10.20 to Form S-1, as amended by amendments
incorporated by reference to Exhibit 10.21 to 1994 Form 10-K.
10.21 Chrysler corporation contract, incorporated by reference to
Exhibit 10.21 to Form S-1, as amended by amendments
incorporated by reference to Exhibit 10.21 to 1994 Form 10-K.
10.22 Purchase Agreement with Mitsubishi Motor Sales of America,
Inc., incorporated by reference to Exhibit 10.22 to 1992
Form 10-K.
10.23 Development Agreement by and between the City of Georgetown,
Texas and Tessco Group, Inc. concerning redevelopment of
real property at 300 Industrial Avenue, Georgetown, Texas,
incorporated by reference to Exhibit 10.23 to 1991 Form 10-K.
<PAGE> 25
10.27 Amended and Restated Loan Agreement with Comerica Bank as of
March 31, 1991, incorporated by reference to Exhibit 10.27 to
the Company's March 1991 Form 10-Q, as further amended by
First and Second Amendments to Amended and Restated Loan
Agreement with Comerica Bank as of March 31, 1991,
incorporated by reference to Exhibit 10.27 to 1991 Form 10-K,
as further amended by Third Amendment to Amended and Restated
Loan Agreement with Comerica Bank as of March 31, 1991,
incorporated by reference to Exhibit 10.27 to the Company's
September 1992 10-Q, and as further amended by the Fourth
Amendment to Amended and Restated Loan Agreement with
Comerica Bank as of March 31, 1991, incorporated by reference
to Exhibit 10.27 to 1992 Form 10-K.
10.27.3 Ninth Amendment to Amended and Restated Loan Agreement with
Comerica Bank as of March 31, 1991, incorporated by reference
to Exhibit 10.27.3 to 1994 Form 10-K.
10.28 Commitment Letter from NBD Bank, April 7, 1995, incorporated
by reference to Exhibit 10.28 to 1994 Form 10-K; Loan
Agreement with NBD Bank as of May 23, 1995 ("NBD Loan
Agreement"), incorporated by reference to Exhibit 10.28 to
the Company's Form 10-Q for the quarter ended June 30, 1995;
and First Amendment dated June 30, 1995, Waiver Letter dated
October 3, 1995, Second Amendment dated October 17, 1995 and
Letter Agreeing to amend NBD Loan Agreement dated November 1,
1995, incorporated by reference to Exhibit 10.28 to the
Company's Form 10-Q for the quarter ended September 30, 1995
("September 1995 Form 10-Q").
10.28.1* Third and Fourth Amendments to NBD Loan Agreement dated
November 22, 1995 and March 18, 1996, respectively.
10.28.2* Letter from NBD Bank dated April 12, 1996 amending NBD Loan
Agreement.
10.29 Purchase Agreement with Subaru of America, Inc., incorporated
by reference to Exhibit 10.29 to the Company's September 1995
Form 10-Q.
23* Consent of Deloitte & Touche LLP
27* Financial Data Schedule
* Attached as an Exhibit hereto.
<PAGE> 26
(b) There were no Reports on Form 8-K filed during the last quarter of the
fiscal year ended December 31, 1995.
<PAGE> 27
CODE-ALARM, INC. AND SUBSIDIARIES
CONTENTS
PAGES
-----
CONSOLIDATED FINANCIAL STATEMENTS OF CODE-ALARM, INC. AND SUBSIDIARIES:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS ....................................... F-3
STATEMENTS OF OPERATIONS ............................. F-4
STATEMENTS OF SHAREHOLDERS' EQUITY ................... F-5
STATEMENTS OF CASH FLOWS ............................. F-6 TO F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........... F-8 TO F-16
FINANCIAL STATEMENT SCHEDULE:
II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES .. F-17
F-1
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Code-Alarm, Inc.
We have audited the consolidated balance sheets of Code-Alarm, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also included
the financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on the financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Code-Alarm, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
Deloitte & Touche LLP
Detroit, Michigan
April 12, 1996
<PAGE> 29
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
------ ------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalen.......................................................................... $ 107 $ 416
Accounts receivable, less allowance for doubtful accounts
(December 31, 1994 and 1995, $383,000 and $667,000 respectively)................................ 11,530 10,592
Inventories (Notes 2 and 4)...................................................................... 12,892 14,811
Refundable income taxes........................................................................... 323 825
Deferred income taxes............................................................................ 494 560
Other............................................................................................ 735 1,338
------ ------
Total current assets........................................................................ 26,081 28,542
Property and equipment, net of accumulated depreciation and
amortization (Notes 3 and 4).................................................................... 4,130 4,500
OTHER ASSETS:
Excess of cost over net assets acquired, net..................................................... 4,293 4,574
Other intangibles, net........................................................................... 1,272 816
Deferred income taxes............................................................................ 1,029 1,566
Other............................................................................................ 1,016 2,045
----- -----
Total assets................................................................................ 37,821 42,043
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4)....................................................... $ 1,443 $ 3,921
Accounts payable................................................................................. 8,791 12,362
Income tax payable............................................................................... -- 46
Accrued expenses................................................................................. 3,131 1,832
Total current liabilities................................................................... 13,365 18,161
Long-term debt (Note 4).......................................................................... 9,511 9,545
Reserve for litigation (Note 9).................................................................. 3,729 5,839
----- ------
Total liabilities........................................................................... $ 26,605 $ 33,545
-------- --------
Commitments and contingencies (Notes 5, 8 and 9)
Shareholders' equity (Note 6):
Preferred stock, noncumulative; no par value; authorized
500,000 shares; none issued..................................................................... -- ----
Common stock, no par value; authorized 5,000,000 shares;
issued and outstanding December 31, 1994, 2,319,361
shares, December 31, 1995, 2,320,361 shares..................................................... 12,209 12,210
Foreign currency translation adjustment.......................................................... 49 54
(Accumulated deficit)........................................................................... (1,042) (3,766)
------ ------
11,216 8,498
------ ------
$ 37,821 $ 42,043
======= ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE> 30
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------------------------------
<S> <C> <C> <C>
Net sales (Note 10) ........................... $50,110 $73,508 $69,188
Cost of sales ................................. 30,190 45,886 44,718
------- ------- -------
Gross profit .................................. 19,920 27,622 24,470
------- ------- -------
OPERATING EXPENSES:
Sales and marketing ........................... 9,346 13,955 12,099
Engineering ................................... 1,688 2,696 3,351
General and administrative .................... 6,520 7,928 9,008
------- ------- -------
17,554 24,579 24,458
------- ------- -------
Income from operations ........................ 2,366 3,043 12
------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense .............................. (279) (645) (1,505)
Litigation expense ............................ - (4,386) (1,825)
Other, net .................................... 57 (98) (452)
------- ------- -------
(222) (5,129) (3,782)
------- ------- -------
Income (loss) before income taxes ............. 2,144 (2,086) (3,770)
------- ------- -------
INCOME TAXES (BENEFITS) (NOTE 8):
Current ....................................... 791 457 (443)
Deferred ...................................... (183) (1,167) (603)
------- ------- -------
608 (710) (1,046)
------- ------- -------
Net income (loss) ............................. $ 1,536 $(1,376) $(2,724)
======= ======= =======
Net income (loss) per common share ............ $ 0.63 $ (0.58) $ (1.17)
======= ======= =======
Weighted average number of common
shares outstanding ............................ 2,445 2,376 2,320
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 31
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
CUMULATIVE EARNINGS TOTAL
COMMON STOCK FOREIGN (ACCU- SHARE-
--------------------- TRANSLATION MULATED HOLDERS'
SHARES AMOUNT ADJUSTMENT DEFICIT) EQUITY
-------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ...................... $ 2,495 $ 13,714 $(1,202) $12,512
Purchase and retirement of common stock, including
20,000 shares from a former director ............ (100) (776) (776)
Stock issued under stock option plan ............. 1 8 8
Net income for the year .......................... 1,536 1,536
------ ------- ------- -------
Balance, December 31, 1993 ....................... 2,396 12,946 334 13,280
------ ------- ------- -------
Purchase and retirement of common stock from
former directors ................................ (167) (1,561) (1,561)
Stock issued under stock option plan ............. 1 6 6
Stock issued for acquisitions .................... 90 818 818
Foreign currency translation adjustment .......... $49 49
Net loss for the year ............................ (1,376) (1,376)
------ ------- --- ------- -------
Balance, December 31, 1994 ....................... 2,320 12,209 49 (1,042) 11,216
------ ------- --- ------- -------
Stock issued under stock option plan ............. 1 1
Foreign currency translation adjustment .......... 5 5
Net loss for the year............................. (2,724) (2,724)
------ ------- --- ------- -------
Balance, December 31, 1995 .............. 2,320 12,210 $54 $(3,766) $ 8,498
====== ======= === ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 32
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 1,536 $ (1,376) $ (2,724)
-------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization ..................................... 1,381 1,615 1,792
Gain on sale of equipment ......................................... (6)
Provision for losses on accounts receivable ....................... 726 592
Changes in assets and liabilities:
Accounts receivable .............................................. (882) (131) 346
Inventories ...................................................... 743 (3,734) (2,657)
Refundable income taxes .......................................... 1,191 (243) (502)
Deferred income taxes ............................................ 195 (1,167) (603)
Other assets ..................................................... (841) 243 (1,245)
Accounts payable ................................................. (518) 488 3,617
Accrued expenses ................................................. 295 (291) (1,299)
Reserve for litigation ........................................... -- 3,729 2,110
-------- -------- --------
Total adjustments ................................................. 2,284 509 2,151
-------- -------- --------
Net cash provided by (used in) operating activities ............... 3,820 (867) (573)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment .................................... 130
Purchases of property and equipment ................................ (981) (1,177) (998)
Purchase of Europe Auto Equipement, net of
cash received ..................................................... (931)
Payment for intangible assets ...................................... (477) (905)
-------- -------- --------
Net cash used in investing activities ............................. (1,328) (3,013) (998)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ....................................... 4,056 2,021
Reduction of long-term debt ........................................ (141) (592) (1,078)
Proceeds from line of credit ....................................... 25,389 46,140 28,360
Reduction of line of credit ........................................ (27,133) (44,289) (27,424)
Purchase and retirement of common stock ............................ (776) (1,561)
Issuance of stock options .......................................... 8 6 1
-------- -------- --------
Net cash provided by (used in) financing activities ............... (2,653) 3,760 1,880
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............... (161) (120) 309
Cash and cash equivalents, beginning of year ....................... 388 227 107
-------- -------- --------
Cash and cash equivalents, end of year ............................. $ 227 $ 107 $ 416
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .......................................................... $ 288 $ 581 $ 1,528
======== ======== ========
Income taxes, net ................................................. $ (887) $ 881 $ 200
======== ======== ========
</TABLE>
(Continued)
F-6
<PAGE> 33
Code-Alarm, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(IN THOUSANDS)
(Continued)
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES FOR 1994:
<TABLE>
<CAPTION>
CODE - EUROPE
-------------
TOTAL LTD. EAE
------- ------ -------
<S> <C> <C> <C>
Fair value of assets acquired................. $ 8,766 $ 660 $ 8,106
Amounts paid for net assets acquired.......... 2,377 380 1,997
------- ------ -------
Liabilities assumed........................... $ 6,389 $ 280 $ 6,109
======= ====== =======
</TABLE>
During 1994, the Company entered into a $500,501 capital lease obligation
for machinery and equipment.
During 1995, the Company entered into capital lease obligations
of approximately $386,000 for computer equipment and $247,000 for machinery and
other capital equipment. Principal payments on these capital leases in 1995 were
approximately $97,000 and $39,000 respectively. Also, during 1995, the Company
exchanged inventory for a $413,000 note which may be used to reduce the cost of
various goods and services received during the next five years.
The accompanying notes are an integral part of the consolidated financial
statements.
(End)
F-7
<PAGE> 34
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The Company designs, manufactures, imports and markets automobile and home
security systems, keyless entry systems and related products. The Company is
also a contract manufacturer of electronic cable, wire harness and printed
circuit board assemblies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of all
inventories is determined on the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided
using the straight-line and accelerated methods over the estimated useful lives
of the related assets. Upon retirement or disposal of property or equipment,
the cost and accumulated depreciation are removed from the accounts, and any
gain or loss is included in operations. Estimated useful lives are 5 years for
furniture and fixtures and leasehold improvements and 3 to 5 years for
machinery and equipment.
INTANGIBLE ASSETS
The excess of acquisition cost over net assets acquired ("Goodwill") is
amortized on a straight-line basis over 40 years. The Company continually
evaluates the realizability of Goodwill based upon expectations of estimated
future cash flow and operating income. Impairment of Goodwill is recognized as
a charge to operations when the estimated future cash flows are less than the
carrying value of the Goodwill. Based upon its most recent analysis, the
Company believes that no impairment of Goodwill exists at December 31, 1995.
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 $1,643,000 and $ 1,685,000 at December 31, 1994 and December
31, 1995, respectively.
REVENUE RECOGNITION
Revenues are recognized from sales when the product is shipped. The
Company provides an accrual for future product return and warranty costs based
upon the prior years' sales and costs incurred. Accrued warranty costs
amounted to approximately $300,000 and $150,000 at December 31, 1994 and
1995, respectively.
RESEARCH AND DEVELOPMENT COSTS
Expenditures for the research and development of new and improved products
are charged to operations as incurred and aggregated approximately $358,000,
$572,000 and $558,000 for the years ended December 31, 1993, 1994 and 1995
respectively.
F-8
<PAGE> 35
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, 1995 and 1994, and revenues
and expenses during the three years in the period ended December 31, 1995. The
actual results could differ from the estimates made in the preparation of the
consolidated financial statements.
EARNINGS PER COMMON SHARE
Shares issuable under employee stock options were excluded from the
computation of the weighted average number of common shares since they were
either antidilutive or their dilutive effect was not significant.
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of the Company's foreign
operations is the French franc. The translation from the franc to U. S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses, net of
applicable deferred income taxes, resulting from translation are included in
shareholders' equity, and gains or losses resulting from foreign currency
transactions are included in the statement of operations.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ..................................... $ 7,217 $ 7,089
Work in process ................................... 1,552 135
Finished goods..................................... 4,123 7,587
------- -------
$12,892 $14,811
======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized by the following major
classifications:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment............................ $7,704 $ 8,586
Leasehold improvements ............................ 1,312 1,719
Furniture and fixtures ............................ 663 1,004
------ ------
9,679 11,309
Less accumulated depreciation .............. 5,549 6,809
------ ------
$4,130 $ 4,500
====== =======
</TABLE>
Depreciation expense was approximately $1,064,000, $1,093,000 and
$1,260,000 for the years ended December 31, 1993, 1994, and 1995 respectively.
F-9
<PAGE> 36
<TABLE>
<CAPTION>
4. LONG-TERM DEBT 1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit agreement ......................................... $ 4,851 $ 5,787
Term loans.......................................................... 3,606 3,276
Working capital facilities.......................................... 1,445 3,066
Notes payable....................................................... 185
Mortgage note....................................................... 383 356
Capital lease obligations........................................... 484 981
------- -------
10,954 13,466
Less current portion.............................................. 1,443 3,921
------- -------
$ 9,511 $ 9,545
======= =======
</TABLE>
In 1994 the Company had a loan agreement with Comerica Bank. The
$7,500,000 revolving credit portion of the loan agreement was due June 30, 1997
and was collateralized by accounts receivable, inventory and property and
equipment. At the Company's option, the interest rate was at Comerica Bank's
prime rate (8.5% at December 31, 1994) or at fixed interest rates equal to the
London Interbank Offered Rate ("LIBOR") plus 1% to 1.75% (7.75% at December 31,
1994). The Company also agreed to pay a commitment fee equal to three-eighths
of one percent per annum on the difference between $6,000,000 and the
outstanding balance.
This loan agreement was subject to covenants for maintenance of certain
debt and cash flow ratios and minimum levels of current assets and tangible net
worth. At December 31, 1994, the Company was not in compliance with certain
covenants; however, Comerica Bank, at the Company's request, waived the
covenant violations.
Term loans were payable in equal quarterly installments of $200,000
through 1999. At the Company's option, the interest rate was at the Comerica
Bank's prime rate or at fixed interest rates ranging from 1% to 1.75% percent
above LIBOR on a designated portion of the outstanding loan.
In May 1995 the above described loan agreement was replaced with a new
credit arrangement with NBD Bank. The new credit arrangement provides for a
$13 million secured revolving credit facility for working capital requirements,
$1.3 million secured non-amortizing notes and $2.2 million unsecured four
year term notes. The revolving credit facility expires in May 1997 and bears
interest at NBD Bank's prime rate (8.50% at December 31, 1995) or at the
Company's option at LIBOR plus 1.5% to 2.5% for maturities ranging from one to
six months (from 8.187% to 8.429%, respectively, at December 31, 1995). On
October 17, 1995 and March 18, 1996 amendments were added to the original loan
agreement which temporarily provide an additional $750,000 under the revolving
credit facility, until May 31, 1996. At December 31, 1995 a standby letter of
credit in the amount of $5.9 million is outstanding under the revolving credit
facility in conjunction with the appeal of the patent infringement settlement
as discussed in Note 9.
The credit facility is subject to certain covenants and restrictions
concerning certain debt and working capital ratios, minimum levels of tangible
net worth, restrictions on the payment of dividends and purchases of fixed
assets and is collateralized by substantially all the assets of the Company and
its domestic subsidiaries. Total credit available under the arrangement is
subject to a formula of accounts receivable, inventories and appraised value of
property and equipment assets. As of December 31, 1995, the Company was in
default with certain covenants. NBD Bank has amended the credit agreement.
Such amendment will place the Company in compliance with the covenants.
A foreign subsidiary of the Company has credit arrangements with three
commercial banks representing working capital facilities totalling
approximately $3.1 million, with interest rates ranging from 8% to 11.5%.
F-10
<PAGE> 37
The mortgage note is payable to the City of Georgetown, Texas, in monthly
installments of $4,401, including interest at 7% through January of 2005, and
is collateralized by the leasehold improvements.
The recorded amounts of long term debt approximate fair value as of
December 31, 1995.
The following table sets forth aggregate maturities of long-term debt
(excluding capital lease obligations) at December 31, 1995:
<TABLE>
<S> <C>
1996 ..................................................... $ 3,645
1997 ..................................................... 7,741
1998 ..................................................... 603
1999 ..................................................... 328
Thereafter ............................................... 168
-------
$12,485
=======
</TABLE>
Minimum lease payments on capital lease obligations at December 31, 1995
are:
<TABLE>
<S> <C>
1996 ..................................................... $ 347
1997 ..................................................... 347
1998 ..................................................... 347
1999 ..................................................... 111
------
Total minimum lease payments ............................ 1,152
Less amount representing interest ....................... 171
------
Present value of net minimum lease payments $ 981
======
</TABLE>
F-11
<PAGE> 38
5. COMMITMENTS
LEASES
The Company leases certain property and equipment under various operating
leases through 2000.
Future minimum rental payments required for all noncancelable operating
leases are as follows for the years ending December 31:
<TABLE>
<S> <C>
1996 ....................................................... $898
1997 ....................................................... 284
1998 ....................................................... 128
1999 ....................................................... 125
2000 ....................................................... 86
Thereafter ................................................. 418
</TABLE>
Rent expense under all operating leases was approximately $637,000,
$769,000, and $915,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
6. CAPITAL STOCK
STOCK REPURCHASE
The Company has repurchased and retired its common stock held by certain
former directors in conjunction with their resignation from the Board of
Directors. During the year ended December 31, 1993, the Company purchased and
retired 20,000 shares for $140,000. During the year ended December 31, 1994,
the Company purchased and retired 47,904 shares for $503,000 and 119,180 shares
for $1,058,000. No repurchases of such shares were executed in 1995. All
repurchases were made below the closing market price on the date of the
purchase.
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan ("Plan") for its key employees
and reserved 280,000 shares of common stock for issuance under the Plan. The
Plan authorizes the Company to issue Incentive Stock Options and Non-Qualified
Stock Options. The Company may grant such options concurrently with Stock
Appreciation Rights, which entitle the Company to accept surrender of an option
by paying the employee an amount equal to the increase in the price of the
Company's common stock from the option date.
Incentive Stock Options may be issued at a price not less than fair market
value as of the grant date. For any employee holding more than 10 percent of
the voting stock of the Company, the option price is 110 percent of fair market
value at the grant date.
F-12
<PAGE> 39
Non-Qualified Stock Options may be issued at a price not less than 85
percent of fair market value at the grant date. Options are generally
exercisable for a ten-year period; however, options granted to any employee
holding more than 10 percent of the voting stock of the Company are exercisable
over five years. No Non-Qualified Stock Options have been granted.
The following is a summary of Incentive Stock Options, with Stock
Appreciation Rights, granted under the Plan:
<TABLE>
<CAPTION>
NUMBER OF SHARES
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning .............. 104,550 25,875 216,375
Granted ......................... 46,000 102,000 85,000
Exercised ....................... (6,815) (1,200) (400)
Canceled or terminated .......... (17,860) (10,300) (39,200)
------- ------- -------
Balance, ending ................. 125,875 216,375 261,775
======= ======= =======
</TABLE>
These options and rights were issued at various prices ranging from $4.25
per share to $22.28 per share. At December 31, 1995, 77,625 options were
exercisable at prices ranging from $4.25 to $22.28 per share.
7. ACQUISITIONS
Effective January 1, 1994, the Company purchased Europe Auto Equipement,
S.A. ("EAE"), a French based distributor of vehicle security products.
Consideration included $1.6 million and 50,000 shares of the Company's common
stock. Also, effective January 1, 1994, the Company purchased Code-Alarm
Europe, Ltd., a distributor of vehicle security products in the United Kingdom,
for 40,000 shares of the Company's common stock.
These acquisitions were accounted for as purchases, with the results of
their operations included from January 1, 1994. The fair value of assets
acquired, including goodwill, was $8,766,000, and liabilities assumed totaled
$6,389,000. Goodwill of $1,230,000 is being amortized over 40 years on a
straight-line basis.
The pro forma results listed below are unaudited and reflect adjustments
assuming the acquisition occurred January 1, 1993:
1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Net sales ............................................ $60,768
Operating earnings ................................... 2,540
Net earnings ......................................... 1,526
Earnings per share ................................... 0.62
</TABLE>
F-13
<PAGE> 40
8. INCOME TAXES
The effective income tax rates differed from the statutory income tax rate
due to the following:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate ............................... 34% 34% 34%
Differences resulting from:
Goodwill amortization and other
nondeductible expenses..................... 1 1 (3)
Effect of foreign tax rates ........... -- (1) (1)
Effect of net operating loss carryforwards .. (7) -- --
Charge off of state and foreign tax
refunds receivable ......................... -- -- (2)
---- ---- ----
Effective income tax rates ................... 28% 34% 28%
==== ==== ====
</TABLE>
Current income tax expense for 1994 and 1995 includes $73,000 and $46,000
of foreign income taxes respectively. There were no foreign income taxes for
1993.
Deferred tax assets and liabilities as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
-------- -------
<S> <C> <C>
(IN THOUSANDS)
Expenses deductible earlier for financial statement purposes than for tax purposes ...... $ 324 $ 378
Litigation loss not deductible for tax purposes ......................................... 1,462 1,986
Expense included in inventory for tax purposes .......................................... 181 188
------ ------
Total deferred tax assets ............................................................. 1,967 2,552
------ ------
Net value of fixed assets ............................................................... 272 351
Capitalization of assets expensed for tax purposes ...................................... 172 75
------ ------
Total deferred tax liabilities .......................................................... 444 426
------ ------
Net deferred tax assets ................................................................. $1,523 $2,216
====== ======
</TABLE>
The Company does not provide United States income taxes on the
undistributed earnings of foreign subsidiaries, as such earnings are intended
to be reinvested in these operations. Accumulated undistributed earnings of
the foreign subsidiaries are approximately $121,000 and $251,000, which
would have resulted in federal income taxes of approximately $41,000 and
$87,000 at December 31, 1994 and 1995, respectively.
9. LITIGATION
The Company is involved in a patent infringement suit involving a shock
sensing device. During 1993, the Company was found to be in violation of the
patent. The damage portion of the trial was completed in January 1995 and at
December 31, 1994, the Company recorded an accrual for damages, including
interest and costs, of approximately $4.2 million. In June 1995 the Company
received from the United States District Court information that the damages
would total $6.0 million. Accordingly the Company has recorded an additional
accrual for damages of $1.8 million in 1995. The Company believes that any
amount paid will be paid after 1996, or it will be financed with long-term
debt. The Company's reserve for litigation and litigation expense include this
estimate of damages and incidental professional fees and costs.
F-14
<PAGE> 41
The Company is 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
pending since August 1990 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 January 1990. The
amount of the judgment is $19.4 million, which with accumulated interest now
has reached approximately $28.6 million. While the Company believes that it
has meritorious defenses to the claims asserted in this lawsuit, there can be
no assurance that the disposition of this matter will not have a material
adverse effect on the Company's financial position, results of operation and
liquidity. The ultimate outcome of this lawsuit cannot be determined at this
time, and the Company is unable to estimate the range of possible loss, if any.
Various other legal actions and claims are pending or could be asserted
against the Company. Litigation is subject to many uncertainties; the outcome
of individual litigation matters is not predictable with assurance, and it is
reasonably possible that some of these matters may be decided unfavorably to
the Company. It is the opinion of management that the ultimate liability, if
any, with respect to these matters will not materially affect the financial
position, results of operations or liquidity of the Company.
10. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment -- vehicle security
systems. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. With the exception of sales to
dealers of General Motors Corporation ("GM") and Ford Motor Company ("Ford"),
no single customer accounted for more than 10 percent of revenue.
<TABLE>
<CAPTION>
PERCENT OF TOTAL SALES
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
GM ....................................................... 16% 11% 13%
Ford ..................................................... 16% 11% 11%
</TABLE>
With the acquisition of EAE, effective January 1, 1994, the Company
expanded its European distribution. Information about the Company's domestic
and European operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
GEOGRAPHIC AREAS (IN THOUSANDS)
Net Sales 1994 1995
-------- --------
<S> <C> <C>
Domestic............................... $ 55,978 $ 49,952
European............................. 17,530 19,236
-------- --------
Consolidated....................... $ 73,508 $ 69,188
Operating Income/(Loss)
Domestic............................... $ 2,623 $ (571)
European............................. 420 583
-------- --------
Consolidated....................... $ 3,043 $ 12
-------- --------
Assets
Domestic............................... $ 29,390 $ 29,461
European............................. 8,431 12,582
-------- --------
Consolidated....................... $ 37,821 $ 42,043
======== ========
</TABLE>
Export sales for 1993, 1994 and 1995 were not significant.
F-15
<PAGE> 42
11. CONCENTRATIONS OF RISK
The company's products include a number of high-technology components that
are currently sourced from only a few suppliers and, in some cases, a single
supplier. The Company frequently requires large volumes of such components. If
the Company's suppliers are unable to fulfill the Company's needs for such
components, the Company may be unable to fill customer orders and its business
and financial condition, including working capital and results of operations,
may be materially and adversely affected.
F-16
<PAGE> 43
CODE-ALARM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- ---------- ----------
ADDITIONS
----------
CHARGED TO
BALANCE AT CHARGED TO OTHER (1) BALANCE AT
BEGINNING COST AND ACCOUNTS, DEDUCTIONS, END
OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
---------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 ... $383,000 592,000 -- 308,000 $667,000
Year ended December 31, 1994 ... 554,000 -- -- 171,000 383,000
Year ended December 31, 1993 ... 416,000 726,000 -- 588,000 554,000
</TABLE>
Note: (1) Write-off uncollectible accounts, net of recoveries
F-17
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CODE-ALARM, INC.
-----------------
(Registrant)
Date: April 15, 1996 RAND W. MUELLER
- --------------------- ------------------
RAND W. MUELLER
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
RAND W. MUELLER President (Chief April 15, 1996
- ------------------- Executive Officer) -------------------------
RAND W. MUELLER and Director
ROBERT V. WAGNER Vice President of April 15, 1996
- ------------------- Finance (Chief -------------------------
ROBERT V. WAGNER Financial Officer)
Principal
Accounting Officer
April 15, 1996
ALAN H. FOSTER
- ------------------- Director -------------------------
ALAN H. FOSTER
April , 1996
- ------------------- Director -------------------------
KENNETH M. MUELLER
April , 1996
- ------------------- Director -------------------------
MARSHALL J. MUELLER
April , 1996
- ------------------- Director -------------------------
WILLIAM S. PICKETT
April 15, 1996
JACK D. RUTHERFORD
- ------------------- Director -------------------------
JACK D. RUTHERFORD
April 15, 1996
PETER J. STOUFFER
- ------------------- Director -------------------------
PETER J. STOUFFER
<PAGE> 45
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- --------------------------------------------------------------
10.28.1* Third and Fourth Amendments to NBD Loan Agreement dated
November 22, 1995 and March 18, 1996, respectively.
10.28.2* Letter from NBD Bank dated April 12, 1996 amending NBD
Loan Agreement.
23* Consent of Deloitte & Touche LLP
27* Financial Data Schedule.
* attached as an Exhibit hereto.
<PAGE> 1
EXHIBIT 10.28.1
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT, dated as of November 21, 1995
(this "Amendment"), is between CODE-ALARM, INC., a Michigan corporation (the
"Company") and NBD BANK, a Michigan banking corporation (the "Bank").
RECITALS
A. The Company and the Bank have executed a Loan Agreement dated as of May
23, 1995, as amended by a First Amendment to Loan Agreement dated as of June
30, 1995 and a Second Amendment to Loan Agreement dated as of October 17, 1995
(the "Loan Agreement"), to provide for a revolving credit facility and term
loans to the Company.
B. The Company has requested certain amendments to the Credit Agreement
and the Bank is willing to do so strictly in accordance with the terms hereof,
and provided the Loan Agreement is amended on the terms and conditions set
forth herein.
AGREEMENT
Based upon these recitals, the parties agree as follows:
1. Upon satisfaction by the Company of the conditions set forth in
paragraph 4 hereof, the Loan Agreement shall hereby be amended as of the
effective date hereof as follows:
(a) Section 1.1 shall be amended as follows:
(i) The definition of "Borrowing Base" shall be
amended by adding the following language at the end of clause (a)
therein: ", subject to the limitations set forth therein".
(ii) The definition of "Eligible Accounts Receivable"
shall be amended by adding the following language at the end of clause
(g) therein:
, provided, however, credit shall be given for
insured accounts under this clause (g) only to the
extent such account is fully insured after giving
effect to any limitations on the amount of coverage on
any individual account or the aggregate amount of
coverage under the policy.
(iii) The definition of "Tangible Net Worth" shall
be amended by deleting clause (b) (vi) in its entirety and inserting
<PAGE> 2
the following in place thereof: "(vi) deferred taxes to the extent in
excess of $1,600,000 and deferred charges".
(iv) The definition of "Total Liabilities" shall be
amended by adding the following language at the end of such
definition:
provided, however, that "Total Liabilities" shall not include
any amounts owing by the Company in connection with the lease
dated September 21, 1995 between the Company and Celtic Leasing
or the lease dated as of November, 1995 between the Company
and Bankers Leasing its successors and assigns.
(v) A new definition of "Third Amendment
Effective Date" shall be added in appropriate alphabetical order to
read as follows:
"Third Amendment Effective Date" shall mean September 30, 1995.
(b) Section 5.2(d) shall be deleted in its entirety and the
following shall be inserted in place thereof:
(d) Total Liabilities to Tangible Net Worth. Permit or
suffer the Consolidated Total Liabilities of the Company and its
Subsidiaries to Consolidated Tangible Net Worth of the Company
and its Subsidiaries at any time to be greater than (i) during
the period from and including the Effective Date to and
including December 30, 1995, 6.25 to 1.0; (ii) during the period
from and including December 31, 1995 to and including June 29, 1996,
6.0 to 1.0 and (iii) during the period from and including June 30, 1996
to and including December 30, 1996, 5.5 to 1.0, which amount
shall decrease on each December 31 and June 30 thereafter by 0.50.
(c) Section 5.2(l) shall be amended by adding the following
language immediately preceding the reference to "$750,000": "(i) for
the fiscal year ending December 31, 1995, $1,500,000 and (ii) for each fiscal
year thereafter,".
2. From and after the effective date of this Amendment, references
in the Loan Agreement, the Notes, the Security Documents and all other
documents executed pursuant to the Loan Agreement (as each of the foregoing
is amended hereby or pursuant hereto) to the Loan Agreement shall be deemed
to the references to the Loan Agreement as amended hereby.
-2-
<PAGE> 3
3. The Company represents and warrants to the Bank that:
(a) (i) The execution, delivery and performance of this Amendment and
all agreements and documents delivered pursuant hereto by the Company have been
duly authorized by all necessary corporate action and do not and will not
require any consent or approval of its stockholders, violate any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to it or of its
Articles of Incorporation or By-Laws, or result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Company is a party or by which it or its
properties may be bound or affected; (ii) no authorization, consent, approval,
license, exemption of or filing a registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary to the valid execution, delivery or
performance by the Company of this Amendment and all agreements and documents
delivered pursuant hereto; and (iii) this Amendment and all agreements and
documents delivered pursuant hereto by the Company are the legal, valid and
binding obligations of the Company enforceable against it in accordance with
the terms thereof.
(b) After giving effect to the amendments contained herein and effected
pursuant hereto, the representations and warranties contained in Article IV of
the Loan Agreement and the representations and warranties of the Company in the
Security Documents are true and correct on and as of the effective date hereof
with the same force and effect as if made on and as of such effective date.
(c) No default or Event of Default has occurred and is continuing or
will exist under the Loan Agreement as of the effective date hereof.
4. This Amendment shall not become effective until:
(a) This Amendment shall be signed by the Company and the Bank; and
(b) The Company shall have delivered or caused to be delivered to the
Bank such other documents and instruments as the Bank may request in connection
herewith and all documents which have not been delivered as required pursuant
to the Loan Agreement, including without limitation the original stock
certificate and related executed blank stock power for Code Alarm Europe Ltd.
5. The Company hereby agrees that the Security Documents to which it is a
party are each ratified and confirmed and shall remain in full force and
effect, and the Company acknowledges that it has no defense, offset or
counterclaim with respect to any Security Document.
-3-
<PAGE> 4
6. The Company agrees to pay and save the Bank harmless from liability for
the payment of all costs and expenses arising in connection with this
Amendment, including the reasonable fees and expenses in Dickinson, Wright,
Moon, Van Dusen & Freeman, counsel to the Bank, in connection with the
preparation and review of this Amendment and any related documents.
7. The terms used but not defined herein shall have the respective
meanings ascribed thereto in the Loan Agreement. Except as expressly
contemplated hereby, the Loan Agreement, the Notes, the Security Documents and
all other related agreements, certificates, instruments and other documents,
are hereby ratified and confirmed and shall remain in full force and effect and
the Company acknowledges that it has no defense, offset or counterclaim with
respect thereto.
8. This Amendment is a contract made under, and shall be governed by and
construed in accordance with, the law of the State of Michigan applicable to
contracts made and to be performed entirely within such State and without
giving effect to choice of law principles of such State.
9. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one in the same instrument and any of the
parties hereto may execute this Amendment by signing any such counterpart.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
CODE-ALARM, INC.
By: /s/ Robert A. Wagner
-----------------------------
Its: Vice President
NBD BANK
By: /s/ Kathryn M. Ritter
-----------------------------
Its: Vice President
-5-
<PAGE> 6
FOURTH AMENDMENT TO LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AGREEMENT, dated as of March 18, 1996
(this "Amendment"), is between CODE-ALARM, INC., a Michigan corporation (the
"Company") and NBD Bank, a Michigan banking corporation (the "Bank").
RECITALS
A. The Company and the Bank have executed a Loan Agreement dated as
of May 23, 1995, as amended by a First Amendment to Loan Agreement dated as of
June 30, 1995, a Second Amendment to Loan Agreement dated as of October 17,
1995 and a Third Amendment to Loan Agreement dated as of November 21, 1995 (the
"Loan Agreement"), to provide for a revolving credit facility and term loans to
the Company.
B. The Company has requested certain amendments to the Credit
Agreement and the Bank is willing to do so strictly in accordance with the
terms hereof, and provided the Loan Agreement is amended on the terms and
conditions set forth herein.
AGREEMENT
Based upon these recitals, the parties agree as follows:
1. Upon satisfaction by the Company of the conditions set forth in
paragraph 4 hereof, the Loan Agreement shall hereby be amended as of the
effective date hereof as follows:
(a) The first paragraph of the "introduction" shall be amended by
deleting the reference therein to "February 29, 1996" and inserting "May 31,
1996" in place thereof.
(b) Section 1.1 shall be amended as follows:
(i) The definition of "Borrowing Base" shall be amended
to read as follows:
"Borrowing Base" shall mean, as of any date,
the sum of (a) an amount equal to 95% of the value
of Eligible Accounts Receivable owed to the Company
or any Subsidiary and qualifying as "Eligible Accounts
Receivable" pursuant to clause (g) of such definition,
subject to the limitations set forth therein, plus (b)
an amount equal to 80% of the value of Eligible Accounts
Receivable, other than described in clause (a) above,
plus (c) an
<PAGE> 7
amount equal to the lesser of (i) 60% of the value of
Eligible Inventory constituting raw materials of (ii)
$4,700,000, plus (d) an amount equal to 60% of
Eligible Inventory constituting finished goods.
(ii) The definition of "Commitment" shall be
amended by deleting the reference in clause (a) therein to
"February 29, 1996" and inserting "May 31, 1996" in place thereof.
(iii) The definition of "Eligible Accounts
Receivable" shall be amended by deleting the reference in line 2 to
"Europe Auto" and inserting the following in place thereof: ", with
respect to any account qualifying pursuant to clause (g) below, any
Subsidiary" and by substituting all other references to "Europe
Auto" contained in such definition and inserting "such Subsidiary"
in place thereof.
(iv) A new definition of "Fourth Amendment
Effective Date" shall be added in appropriate alphabetical order to
read as follows:
"Fourth Amendment Effective Date" shall mean
March 18, 1996.
(c) Section 5.2(f)(vii) shall be amended to read as follows:
(vii) Subordinated Debt in an aggregate amount
not exceeding $11,500,000 so long as (A) no Default or Event of
Default shall have occurred and be continuing at the time such
Subordinated Debt is issued and the issuance of such Subordinated
Debt would not cause a Default or Event of Default and (B) the
Company shall use proceeds of Subordinated Debt incurred after
the Fourth Amendment Effective Date to prepay outstanding
Revolving Credit Loans and/or Terms Loans, as determined by the
Bank in its sole discretion, by an amount not less than $7,850,000.
2. From and after the effective date of this Amendment,
references in the Loan Agreement, the Notes, the Security Documents and all
other documents executed pursuant to the Loan Agreement (as each of the
foregoing is amended hereby or pursuant hereto) to the Loan Agreement shall be
deemed to be references to the Loan Agreement as amended hereby.
-2-
<PAGE> 8
3. The Company represents and warrants to the Bank that:
(a) (i) The execution, delivery and performance of this Amendment
and all agreements and documents delivered pursuant hereto by the Company have
been duly authorized by all necessary corporate action and do not and will not
require any consent or approval of its stockholders, violate any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to it or of its
Articles of Incorporation or By-Laws, or result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Company is a party or by which it or its
properties may be bound or affected; (ii) no authorization, consent, approval,
license, exemption of or filing a registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary to the valid execution, delivery or
performance by the Company of this Amendment and all agreements and documents
delivered pursuant hereto; and (iii) this Amendment and all agreements and
documents delivered pursuant hereto by the Company are the legal, valid and
binding obligations of the Company enforceable against it in accordance with
the terms thereof.
(b) After giving effect to the amendments contained herein
and effected pursuant hereto, the representations and warranties contained in
Article IV of the Loan Agreement and the representations and warranties of the
Company in the Security Documents are true and correct on and as of the
effective date hereof with the same force and effect as if made on and as of
such effective date.
(c) No Default or Event of Default has occurred and is
continuing or will exist under the Loan Agreement as of the effective date
hereof.
4. This Amendment shall not become effective until:
(a) This Amendment shall be signed by the Company and the
Bank; and
(b) The Company shall have delivered or caused to be
delivered to the Bank such other documents and instruments as the Bank may
request in connection herewith and all documents which have not been delivered
as required pursuant to the Loan Agreement.
5. The Company hereby agrees that the Security Documents to which it is
a party are each ratified and confirmed and shall remain in full force and
effect, and the Company acknowledges that it has no defense, offset or
counterclaim with respect to any Security Document.
6. The Company agrees to pay and save the Bank harmless from liability
for the payment of all costs and expenses arising in connection with this
Amendment, including the reasonable fees and expenses in Dickinson, Wright,
Moon, Van Dusen & Freeman, counsel to
-3-
<PAGE> 9
the Bank, in connection with the preparation and review of this Amendment and
any related documents.
7. The terms used but not defined herein shall have the respective
meanings ascribed thereto in the Loan Agreement. Except as expressly
contemplated hereby, the Loan Agreement, the Notes, the Security Documents and
all other related agreements, certificates, instruments and other documents,
are herby ratified and confirmed and shall remain in full force and effect and
the Company acknowledges that it has no defense, offset or counterclaim with
respect thereto.
8. This Amendment is a contract made under, and shall be governed
by and construed in accordance with, the law of the State of Michigan
applicable to contracts made and to be performed entirely within such State and
without giving effect to choice of law principles of such State.
9. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one in the same instrument and any
of the parties hereto may execute this Amendment by signing any such
counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
CODE-ALARM, INC.
By: Robert A. Wagner
------------------------------------
Its: Vice President
--------------------------------
NBD BANK
By: K. M. Ritter
------------------------------------
Its: Vice President
--------------------------------
-4-
<PAGE> 1
EXHIBIT 10.28.2
[NBD Letterhead]
Kathryn M. Ritter
Vice President
April 12, 1996
Mr. Rand Mueller, Chairman
Code-Alarm, Inc.
950 E. Whitcomb
Madison Heights, MI 48071
Dear Mr. Mueller:
NBD Bank has approved the following changes to the Loan Covenants in the Loan
Agreement dated May 23, 1995 and all amendments, between Code-Alarm, Inc. and
NBD Bank:
<TABLE>
<CAPTION>
Current Requirements Amendment
-------------------- ---------
<S> <C> <C>
1. Tangible Net Worth Not less than $4,400,000 Not less than $2,310,000 at
increasing annually by 50% 12/31/95, increasing annually
of Net Income. by 75% of Net Income, but
As of 12/31/95 $2,348,000. not less than $3,000,000 at 12/31/96.
2. Total Liabilities to Not to exceed 6.00 at 12/31/95 Not to exceed 14.15 at 12/31/95
Tangible Net Worth Not to exceed 5.50 at 6/30/96 Not to exceed 12.00 at 6/30/96
Not to exceed 5.00 at 12/31/96 Not to exceed 9.50 at 12/31/96
As of 12/31/95 14.12.
3. Current Ratio Not less than 1.80. Not less than 1.40.
As of 12/31/95 1.57.
4. Working Capital Not less than $12,200,000 Not less than $9,750,000
As of 12/31/95 $10,380,000
5. Fixed Charge Coverage Not less than 1.0 to 1.0 on a Waived at 12/31/95.
rolling four quarter basis. Not less than 1.0 to 1.0 at the end
As of 12/31/95 0.25 to 1.0 of each separate quarter in 1996,
on a non-cumulative basis.
</TABLE>
Additionally, we are adding a new reporting requirement. Effective March 31,
1996 and each month thereafter, Code-Alarm, Inc. shall provide NBD Bank with
consolidating financial statements including a balance sheet and a profit and
loss statement. The financial statements are due not later than forty-five
days after each reporting period.
Sincerely,
Kathryn M. Ritter
KMR/gs
Subsidiary of First Chicago NBD Corporation
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statement of
Code-Alarm, Inc. and subsidiaries on Form S-8 of our report dated April 12,
1996 appearing in this Annual Report on Form 10-K of Code-Alarm, Inc. and
subsidiaries for the year ended December 31, 1995.
Deloitte & Touche LLP
Deloitte & Touche LLP
Detroit, Michigan
April 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> $416
<SECURITIES> 0
<RECEIVABLES> 11,259
<ALLOWANCES> 667
<INVENTORY> 14,811
<CURRENT-ASSETS> 28,542
<PP&E> 11,309
<DEPRECIATION> 6,809
<TOTAL-ASSETS> 42,043
<CURRENT-LIABILITIES> 18,161
<BONDS> 13,466
0
0
<COMMON> 12,210
<OTHER-SE> (3,712)
<TOTAL-LIABILITY-AND-EQUITY> 42,043
<SALES> 69,188
<TOTAL-REVENUES> 69,188
<CGS> 44,718
<TOTAL-COSTS> 69,176
<OTHER-EXPENSES> 3,782
<LOSS-PROVISION> 667
<INTEREST-EXPENSE> 1,505
<INCOME-PRETAX> 12
<INCOME-TAX> (1,046)
<INCOME-CONTINUING> (3,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,724)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
