<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 1996
REGISTRATION NO. 33-63929
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CODE-ALARM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-2334698
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
950 E. WHITCOMB
MADISON HEIGHTS, MICHIGAN 48071
(810) 583-9620
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
ROBERT V. WAGNER
CODE-ALARM, INC.
950 E. WHITCOMB
MADISON HEIGHTS, MICHIGAN 48071
(810) 583-9620
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
WITH COPIES TO:
<TABLE>
<S> <C>
D. KERRY CRENSHAW, ESQ. DAVID FOLTYN, ESQ.
CLARK, KLEIN & BEAUMONT, P.L.C. HONIGMAN MILLER SCHWARTZ AND COHN
1600 FIRST FEDERAL BUILDING 2290 FIRST NATIONAL BUILDING
DETROIT, MICHIGAN 48226-1962 DETROIT, MICHIGAN 48226
(313) 965-8266 (313) 256-7763
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER DEBENTURE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
% Convertible Subordinated Debentures due
2003.......................................... $11,500,000(1) 100%(2) $11,500,000(1)(2) $3,965.52(3)
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Common Stock, no par value...................... (4) (5) (5) (5)
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</TABLE>
(1) Includes $1,500,000 principal amount of Debentures issuable upon exercise of
the Underwriters' overallotment option.
(2) Plus accrued interest, if any.
(3) Previously paid.
(4) Such indeterminate number of shares as may be issued upon conversion of the
Debentures.
(5) No additional consideration will be received for the Common Stock and
therefore no registration fee is required pursuant to Rule 457(i).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF SECTION
8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE> 2
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-2
<TABLE>
<CAPTION>
FORM S-2 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
- -------------------------------------------------- -------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Front Cover Page of Prospectus; Cross
Reference Sheet; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered............................... Description of Debentures; Description of
Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant............................... Prospectus Summary; Risk Factors;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Changes in
Company's Certifying Accountant;
Business; Description of Capital Stock;
Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Incorporation of Certain Information by
Reference................................ Incorporation of Certain Information by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 19, 1996
PROSPECTUS
$10,000,000
LOGO
% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
------------------------
The Debentures offered hereby are convertible at any time prior to
maturity, unless previously redeemed or repurchased, into shares of Common Stock
of Code-Alarm, Inc. (the "Company") at a conversion price of $ per share,
subject to adjustment in certain events. On December 27, 1995, the last reported
sale price of the Company's Common Stock, as reported on the Nasdaq National
Market under the symbol CODL was $6.50 per share. See "Price Range of Common
Stock." The Company does not intend to list the Debentures on the Nasdaq
National Market or on a securities exchange.
Interest on the Debentures is payable semi-annually on August 1 and
February 1, commencing August 1, 1996, and the Debentures will mature on
February 1, 2003, unless previously redeemed. The Debentures are redeemable at
the option of the Company, at any time in whole or in part, at the redemption
prices set forth herein, plus accrued interest; provided, however, that prior to
February 1, 1999, the Debentures may not be redeemed unless the closing sales
price of the Common Stock equals or exceeds 140% of the then current conversion
price for at least 20 trading days within 30 consecutive trading days ending not
more than ten trading days prior to the date of the notice of redemption. In the
event of a Repurchase Event (as herein defined), each holder of Debentures may
require the Company to repurchase the Debentures, in whole or in part, for cash,
at 101% of the principal amount thereof, plus accrued interest. The Debentures
will be unsecured general obligations of the Company subordinated to all
existing and future Senior Indebtedness (as herein defined). See "Description of
Debentures."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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<S> <C> <C> <C>
Per Debenture............................ % % %
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Total(4)................................. $ $ $
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</TABLE>
(1) Plus accrued interest, if any, from date of issuance.
(2) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(3) Before deducting other expenses of issuance and distribution estimated at
$405,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $1,500,000 in principal amount of the Debentures on the same
terms and conditions to cover over-allotments, if any. If the entire
additional principal amount of the Debentures is purchased, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $11,500,000, $ and $ , respectively. See
"Underwriting."
------------------------
The Debentures are offered severally by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
Debentures will be made against payment therefor on or about ,
1996.
------------------------
RONEY & CO. THE OHIO COMPANY
, 1996.
<PAGE> 4
[PRODUCT PHOTOGRAPHS]
CODE-ALARM SUPPLIES VEHICLE SECURITY SYSTEMS TO AUTOMAKERS AT BOTH THE
DEALERSHIP AND FACTORY-FLOOR LEVEL. THE COMPANY MARKETS ITS PRODUCTS TO GENERAL
MOTORS, CHRYSLER, FORD, MITSUBISHI, SUBARU, AND VOLKSWAGEN IN THE U.S., AS
WELL AS INTERNATIONAL AUTOMAKERS PEUGEOT, RENAULT, VOLKSWAGEN-AUDI GROUP
FRANCE, TOYOTA, NISSAN, FORD OF VENEZUELA AND FORD-MEXICO.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES
OFFERED HEREBY OR THE COMMON STOCK OF THE COMPANY, OR BOTH, AT LEVELS ABOVE
THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
[MAP AND PHOTOGRAPHS]
Code-Alarm is a leading U.S.-based manufacturer of vehicle security systems,
remote keyless entry systems and security sensor products, supplying automakers
and retailers in Europe, South America, Canada and the United States. The
Company's team of 50 engineers and technicians, based in the U.S. and Europe,
is committed to product research and development to improve quality, advance
technology and work toward competitive costs.
<PAGE> 6
[MAP AND PHOTOGRAPHS]
CODE-ALARM FACILITIES
DETROIT, MICHIGAN
World Headquarters, Manufacturing
and Engineering
GEORGETOWN, TEXAS
Manufacturing
HUNTINGTON BEACH, CALIFORNIA
Warehouse, Sales and Marketing
PARIS, FRANCE
Europe Headquarters, Engineering
BIRMINGHAM, ENGLAND
Warehouse, Sales and Marketing
MADRID, SPAIN
Sales and Marketing
BRUSSELS, BELGIUM
Sales and Marketing
CARACAS, VENEZUELA
Warehouse, Sales and Marketing
CODE-ALARM CUSTOMERS
DETROIT, MICHIGAN
GM, Chrysler, Ford, VW and GM Mid-
Size Car Division
IRVINE, CALIFORNIA
Mitsubishi Motor Sales America
CHERRY HILL, NEW JERSEY
Subaru USA
TORONTO, CANADA
GM, Chrysler, Ford, Suzuki Canada
CARACAS, VENEZUELA
Ford South America
PARIS, FRANCE
Peugeot, Citroen, and Renault
NEW ZEALAND
Toyota Production Line
Nissan Production Line
THAILAND
Toyota Dealerships-direct
[CODE ALARM LOGO]
<PAGE> 7
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed by the Company with the
Securities and Exchange Commission (the "Commission") (File No. 0-16441)
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
are hereby incorporated by reference, except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
2. The Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1995, June 30, 1995 and September 30, 1995.
3. The Company's Current Report on Form 8-K filed with the Commission
on July 22, 1995.
4. The Company's First Amendment to its Current Report on Form 8-K/A#1
filed with the Commission on August 25, 1995.
5. The Company's Second Amendment to its Current Report on Form
8-K/A#2 filed with the Commission on September 1, 1995.
Each document filed subsequent to the date of this Prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to the termination of
this Offering shall be deemed to be incorporated by reference in this
Prospectus. Any statement incorporated herein shall be deemed to have been
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which is
or is deemed to be incorporated herein by reference modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION
THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS (NOT INCLUDING
EXHIBITS TO THE INFORMATION THAT IS INCORPORATED BY REFERENCE UNLESS SUCH
EXHIBITS ARE EXPRESSLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS
PROSPECTUS INCORPORATES). REQUESTS SHOULD BE DIRECTED TO ROBERT V. WAGNER, VICE
PRESIDENT OF FINANCE, CODE-ALARM, INC., 950 E. WHITCOMB, MADISON HEIGHTS,
MICHIGAN 48071, TELEPHONE (810) 583-9620.
------------------------
2
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Consolidated Financial
Statements and Notes thereto, appearing elsewhere in or incorporated by
reference into this Prospectus. Except as otherwise noted, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
The Company is a leading U.S.-based manufacturer of vehicle security
systems and is recognized as a technology leader in remote control vehicle
security systems, keyless entry systems and security sensor products. The
Company categorizes sales of its vehicle security systems as pre-delivery and
post-delivery sales. Pre-delivery sales are products sold in the original
equipment manufacturer ("OEM") market, for installation before delivery of a new
vehicle to the purchaser through factory installation by the automaker or as a
dealer-installed option or through contract installers known as "expediters."
Post-delivery sales are products sold for installation on a vehicle already
owned by the customer, generally through retail specialty stores and mass
merchandisers.
The Company's products are marketed and sold in U.S. and Canada primarily
to General Motors, Ford and Chrysler primarily through more than 9,000
automobile dealers pursuant to private label purchase agreements with these
manufacturers; more than 1,200 independent retail specialty stores; automotive
expediters; and mass merchandisers such as Sears and Best Buy. International
companies to whom the Company sells its vehicle security products are Peugeot,
Volkswagen-Audi Group France, Renault, Mitsubishi, Subaru, Toyota and Nissan as
well as to independent retail specialty stores, expediters and mass
merchandisers. In addition, the Company recently began supplying vehicle
security systems to Ford of Venezuela and Ford-Mexico.
The Company sells its vehicle security systems under several brand names
including Code-Alarm(R), Chapman(R) and Anes(R), and sells its products as
private label lines under automakers' brand names, including, for example, Mr.
Goodwrench(TM) in the case of General Motors. The Company offers basic security
systems and accessory products which a customer may use to tailor a security
system to the customer's specific requirements. Products are actively promoted
to dealers and retailers. The Company also provides support services to dealers,
including technical and installation service.
The Company's primary business objective is to expand as a leading
designer, manufacturer and marketer of vehicle security systems, through further
penetration of its existing customer base as well as the addition of new
customers and by expanding its presence in the European market. Key elements of
the Company's business strategy include: (i) focusing on its OEM customers
through distribution to dealers, direct sales to manufacturers for factory floor
installation and strategic alliances with other OEM suppliers; (ii) continuing
its sales to independent retail specialty stores and mass merchandisers; (iii)
expanding its European presence; (iv) enhancing its engineering capabilities;
and (v) shortening its product development and introduction cycles while
maintaining high quality standards.
The Company is a Michigan corporation, its executive offices are located at
950 E. Whitcomb, Madison Heights, Michigan 48071 and its telephone number is
(810) 583-9620.
THE OFFERING
Securities Offered......... $10,000,000 ($11,500,000 if the Underwriters'
over-allotment option is exercised in full)
principal amount of % Convertible Subordinated
Debentures due February 1, 2003 (the "Debentures").
Payments of Interest....... Semi-annually on each August 1 and February 1,
commencing August 1, 1996, with interest accruing
from the date of issuance.
3
<PAGE> 9
Conversion Rights.......... The Debentures are convertible into shares of the
Company's common stock, no par value (the "Common
Stock") at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion
price of $ per share, subject to
adjustment in certain events as described herein.
Accordingly, each $1,000 principal amount of
Debentures is convertible into shares of
Common Stock, subject to adjustment, for an
aggregate of shares, representing
approximately % of the Common Stock on a fully
diluted basis. See "Description of
Debentures -- Conversion of Debentures" and
"Capitalization."
Optional Redemption........ Redeemable at the Company's option, at any time in
whole or in part, at the redemption price set forth
herein, plus accrued interest; provided, however,
that prior to February 1, 1999, the Debentures may
not be redeemed unless the closing sale price of
the Common Stock equals or exceeds 140% of the then
current conversion price for at least 20 trading
days within 30 consecutive trading days ending not
more than ten trading days prior to the date of the
notice of redemption. See "Description of
Debentures -- Optional Redemption."
Repurchase at Option of
Holders upon Certain
Events................... Upon a Repurchase Event (as defined herein), the
Company is required to repurchase, at the option of
the holders, any Debentures delivered to it for
redemption at 101% of the principal amount thereof
plus accrued interest. A Repurchase Event is
generally defined to include: (i) certain
acquisitions of the Company voting stock such that
a person (other than a present holder of 5% or more
of the Company's capital stock) owns more than 50%
of the outstanding Company capital stock; (ii) a
change in the composition of the Board of Directors
such that there is a shift of a majority of its
members; (iii) certain consolidations, mergers or
sales of assets of the Company to a person (other
than a present holder of 5% or more of Company
capital stock) who, as a result, owns more than 50%
of the outstanding Company capital stock; (iv) the
acquisition by the Company of more than 30% of its
outstanding shares of capital stock in any 12-month
period; and (v) certain Company acquisitions and
distributions in respect to its capital stock in
excess of 30% of the values of such stock. See
"Description of Debentures -- Repurchase Event."
Subordination.............. The Debentures will be subordinated to all existing
and future Senior Indebtedness (as defined herein)
of the Company. There is no limitation on the
amount of Senior Indebtedness that may be incurred
by the Company. See "Description of
Debentures -- Subordination of Debentures."
Use of Proceeds............ The net proceeds from the sale of the securities
will be used to reduce bank indebtedness, and for
working capital and general corporate purposes. See
"Use of Proceeds."
Common Stock Outstanding... 2,320,361 shares.
NASDAQ National Market
Symbol................... CODL.
4
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $45,685 $50,110 $73,508 $56,435 $54,825
Gross profit............................... 13,389 19,920 27,622 21,083 19,541
Income (loss) from operations.............. (3,655) 2,366 3,043 2,713 2,072
Litigation expense......................... -- -- 4,386 -- 1,825
Net income (loss).......................... (2,902) 1,536 (1,376)(1) 1,426 (735)(1)
Net income (loss) per common share......... $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32)
Weighted average common shares
outstanding.............................. 2,495 2,445 2,376 2,392 2,320
Ratio of earnings to fixed charges(2)...... -- 5.38x -- 4.57x --
Ratio of earnings to fixed charges(3)...... -- 5.38x 3.55x 4.57x 1.91x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $13,734 $ 14,284
Total assets.......................................................... 42,471 43,471
Current portion of long-term debt..................................... 2,431 1,881
Long-term debt, net of current portion................................ 10,085 11,635
Reserve for litigation(5)............................................. 5,440 5,440
Shareholders' equity.................................................. 10,482 10,482
</TABLE>
- ---------------
(1) Includes patent infringement settlement costs in the amount of $4.4 million
for the year ended December 31, 1994 and $1.8 million for the nine months
ended September 30, 1995.
(2) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose "earnings" consists of earnings before
income taxes and "fixed charges," and "fixed charges" consists of interest
on indebtedness and the portion of rental expense which is deemed to be
representative of the interest component. For the years ended December 31,
1992 and December 31, 1994 and the nine months ended September 30, 1995,
earnings were not sufficient to cover fixed charges by $4.1 million, $2.1
million and $0.8 million, respectively.
(3) Adjusted to reflect ratio of earnings to fixed charges excluding litigation
expense.
(4) Adjusted to give effect to the sale of $10,000,000 principal amount of the
Debentures and the application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(5) See Note 9 of Notes to Consolidated Financial Statements.
5
<PAGE> 11
RISK FACTORS
Prior to purchasing the Debentures offered hereby, prospective investors
should carefully consider, together with the other information contained herein,
each of the following risk factors which could, individually or in the
aggregate, have a material adverse effect on the Company's business and
financial condition, including working capital and results of operations.
Litigation. 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 Company's
pending litigation matters consist of patent infringement claims (brought both
by and against the Company), product warranty litigation and litigation
involving acquisitions. Damages sought against the Company in these pending
proceedings exceed in the aggregate the entire shareholders' equity of the
Company, and an unfavorable result in one or more of these cases or in any
proceeding which might arise in the future could adversely affect the value of
the Debentures and could cause the holders of Debentures to lose their entire
investment. The cost of legal proceedings and settlements of lawsuits involving
the Company was 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 to date. As of December 8, 1995, reserved for but yet unpaid judgments
against the Company amounted to an aggregate of approximately $5.4 million. As
security for this amount, the Company has posted a letter of credit totaling
$5.9 million, including one year's estimated interest on the judgment. See
"Legal Proceedings" and Note 9 of Notes to Consolidated Financial Statements.
History of Net Losses. The Company incurred net losses in fiscal years
1992 and 1994 and the nine month period ended September 30, 1995 in the amounts
of $2.9 million, $1.4 million and $0.7 million, respectively. The Company
believes the net loss in fiscal year 1992 was principally due to a charge for
doubtful accounts receivable, a write-off for certain obsolete and slow moving
inventories and higher engineering and marketing expenditures associated with
the launch of major new vehicle security product lines. The cost of legal
proceedings and settlements of lawsuits involving the Company was a principal
cause of the Company's net loss in 1994 and has had a substantial negative
impact on the Company's profitability during the nine month period ended
September 30, 1995. The Company expects to incur net losses for fiscal year 1995
primarily due to litigation costs, an increase of $1.8 million in the amount of
the reserve for the adverse judgment entered against the Company in the case
Code-Alarm v. Electromotive Technologies Corporation, the national work stoppage
in France and lower than expected retail sales in North America. While the
Company's objective is to reduce future litigation expenses and increase
profitability in its international operations, no assurances can be given that
the Company will be profitable in the future. See "Risk Factors -- Litigation,"
"Risk Factors -- International Operations," "Legal Proceedings" and Note 9 to
Notes to Consolidated Financial Statements.
International Operations. The Company began conducting operations in
continental Europe in 1994 through its acquisition of Europe Auto Equipement,
S.A. ("EAE"). Prior to that time, the Company's European activities were limited
to ownership of a minority interest in Code-Alarm Europe, Ltd. ("Code-Alarm
Europe") which distributed Company products in the United Kingdom. In connection
with the acquisition of EAE, the Company acquired a 100% ownership interest in
Code-Alarm Europe as of January 1, 1994. Its European operations expanded
rapidly, with European net sales for 1994 reaching 23.8% of the Company's total
1994 net sales (28.7% of the Company's total 1994 net sales were attributable to
international sales, excluding U.S. but including European sales), and the
Company intends to continue expanding its international (primarily European)
sales efforts and believes that such international sales will continue to
represent a significant and increasing portion of its total sales. In addition
to the other risks associated with its business (which apply both to the
Company's domestic and international efforts), the Company's international
operations, particularly its expansion into the European market, present a
number of risks to the Company's future, including the following:
- Prior to 1994, when it began conducting its European operations, the
Company had virtually no experience manufacturing, assembling or marketing
its products in any market outside of North America. Accordingly, it is
subject to the normal risks associated with a new business endeavor,
including operating losses, financial reporting, financial controls and
financial forecasting.
6
<PAGE> 12
- The Company currently supplies automobile alarm systems to Peugeot, with
sales in 1994 to Peugeot constituting 28.4% of the Company's European
sales (and 23.6% and 6.8% of its international sales and total sales,
respectively). Peugeot has recently advised the Company that it is in the
process of consolidating its supplier base, and there is no assurance that
Peugeot will continue to purchase automobile alarm systems from the
Company. The loss of Peugeot sales could have a material adverse effect on
the Company's business and financial condition, including working capital
and results of operations.
- The Company supplies its European customers with products manufactured in
its U.S. plants. Most of the Company's European customers operate with low
inventories or on a "just in time" basis; consequently, as product volumes
increase, it will become increasingly difficult and costly to supply these
customers from the Company's U.S. plants. See "Business."
- In order to market its products in Europe, the Company must meet
applicable government-imposed frequency requirements, as well as obtain
insurance industry certifications and approvals of its products. While the
Company has obtained such approvals in some countries, it has not obtained
them in others. In the event these requirements change, there can be no
assurance that the Company will be able to meet such requirements. There
are also various other risks associated with such regulation. See "Risk
Factors -- Regulation." The Company is also subject to certain risks
associated with intellectual property rights. See "Risk
Factors -- Intellectual Property."
Suppliers. The Company's products include a number of high-technology
components that are available 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 may outpace 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 could impair the supply
of components to the Company. 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. See
"Business -- Suppliers."
Competition. All markets in which the Company participates are highly
competitive, and many current or prospective competitors, including several of
the Company's OEM customers, are substantially larger and possess significantly
greater financial, marketing and technical resources than the Company. An
increase in factory-installed security systems purchased by automotive
manufacturers or the introduction of other dealer-installed security systems and
remote keyless entry systems by OEMs or existing and potential competitors could
have a material adverse effect on the Company's business and financial
condition, including working capital and results of operations. See
"Business -- Competition."
Reliance on Major Customers; Cyclical Industries. The Company supplies its
products to a number of automobile companies for installation both during the
manufacturing process and by their respective dealers. Sales to General Motors
Corporation, Ford Motor Company and Peugeot, S.A., including their retail
dealers, accounted for 10.8%, 10.9% and 6.8%, respectively, of the Company's net
sales for the year ended December 31, 1994. The Company receives payment from
General Motors, Ford and Peugeot for goods and services purchased under blanket
purchase orders covering these sales. The loss of any of these contracts could
have a material adverse effect on the Company's business and financial
condition, including working capital and results of operations. Peugeot recently
advised the Company that it is in the process of consolidating its supplier
base, and there is no assurance that Peugeot will continue to purchase
automobile alarm systems from the Company. All of these contracts are terminable
by the OEM companies at their discretion on short notice. The Company believes
the majority of its products are installed in new automobiles within a few
months of
7
<PAGE> 13
purchase. As a result, the Company's sales are highly dependent upon the level
of new automobile sales. Reductions in the sales of new automobiles due to
economic conditions, labor disturbances or other reasons could have a material
adverse effect on the Company's business and financial condition, including
working capital and results of operations. See "Business -- Customers."
Negative Interest Coverage; Leverage; Subordination. The Company's "fixed
charges" (which consist of interest on indebtedness and the portion of rental
expense which is deemed to be representative of the interest component) have
exceeded its earnings before income taxes and fixed charges by $0.9 million,
$4.1 million, $2.1 million and $0.8 million in 1991, 1992, 1994 and the nine
months ended September 30, 1995, respectively (there was no coverage deficiency
in 1990 and 1993). As of September 30, 1995, as adjusted for the issuance of the
Debentures and the application of the estimated net proceeds therefrom, the
Company's total long-term debt and shareholders' equity would have been
approximately $11.6 million (not including the $5.9 million letter of credit for
a litigation appeal bond) and $10.5 million, respectively. The Company expects
to incur, from time to time, additional borrowings or other obligations which
would be Senior Indebtedness, as defined. The debt service requirements of any
such additional indebtedness could make it more difficult for the Company to
make principal and interest payments on the Debentures. The Company's ability to
satisfy its obligations will be dependent upon its future performance, which is
subject to prevailing economic conditions and financial, business and other
factors, including factors beyond the Company's control. There can be no
assurance that the Company's operating cash flow will be sufficient to meet its
debt service requirements or to repay the Debentures at maturity or that the
Company will be able to refinance the Debentures or other indebtedness at
maturity. The current Senior Indebtedness is guaranteed by the Company's
domestic subsidiaries and is secured by substantially all current and future
assets of the Company, including the capital stock of the Company's
subsidiaries. Any additional Senior Indebtedness is likely to require additional
security. The Debentures will be subordinated to all current and future Senior
Indebtedness of the Company. At December 8, 1995, Senior Indebtedness of the
Company was approximately $19.2 million (including a $5.9 million letter of
credit), and will be approximately $10.2 million after giving effect to the
application of the net proceeds of this Offering. There are no restrictions in
the Indenture on the incurrence of additional Senior Indebtedness. By reason of
such subordination, in the event of any insolvency, receivership, liquidation or
other reorganization of the Company, holders of Senior Indebtedness must be paid
in full before the holders of the Debentures may be paid. Accordingly, there may
be insufficient assets remaining after payment of prior claims to pay amounts
due on the Debentures. See "Description of Debentures."
Short Product Life Cycles; Research and Development. The market for the
Company's products is characterized by frequent new product introductions and
rapid product obsolescence. These factors typically result in short product life
cycles. The Company must continually monitor industry trends and develop new
technologies and features to incorporate into its products. Each new product
cycle presents opportunities for current or prospective competitors of the
Company to gain market share. Life cycles of individual products are typically
characterized by steep declines in unit sales, pricing and margins toward the
end of a product's life, the precise timing of which may be difficult to
predict. As new products are planned and introduced, the Company attempts to
monitor closely the inventory of older products and to phase out their
manufacture in an orderly manner. Nevertheless, the Company could experience
unexpected reductions in sales volume and prices of older generation products as
customers anticipate new products. These reductions could give rise to charges
for obsolete or excess inventory. To the extent that the Company is unsuccessful
in managing product transitions, its business and financial condition, including
working capital and results of operations, could be materially and adversely
affected. The Company's expenditures for research and development during fiscal
years 1993 and 1994 were $0.4 million and $0.6 million, respectively. Several of
the Company's current and prospective competitors possess significantly greater
financial and technical resources than the Company. An increase in research and
development expenditures, or the introduction of new technologies which are not
available to the Company in a cost effective manner, by these or other
competitors could have a material adverse effect on the Company's business and
financial condition, including working capital and results of operations. See
"Business -- Business Strategy."
Intellectual Property. Although the Company has sought to protect and
believes it has protected its technologies and products by patent, copyright,
trademark and trade secret laws to the extent that it believes necessary, the
Company's intellectual property rights may be subject to infringement. There can
be no
8
<PAGE> 14
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. Litigation, which could result in substantial costs to and
diversion of resources of the Company, may also be necessary to enforce
intellectual property rights of the Company or to defend the Company against
claimed infringement of the rights of others. The Company is currently engaged
as a defendant in a number of patent infringement suits. The Company is also
seeking damages and injunctive relief against a number of competitors for
allegedly infringing its U.S. patents. See "Legal Proceedings." The Company's
failure or inability to protect its existing intellectual property rights could
have a material adverse effect on the Company's business and financial
condition, including working capital and results of operations. See
"Business -- Trademarks and Patents."
Regulation. The Federal Communications Commission ("FCC") regulates the
assignment of frequencies for manufacture and sale of vehicle security remote
systems and remote keyless entry systems in the U.S. The Company has received
FCC authorization to manufacture and sell the devices it currently sells in the
U.S. In Europe, similar government agencies 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 certain 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 certificates. 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 currently 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 loss of such regulatory approvals and
insurance industry accreditation or failure to obtain these in the future could
have a material adverse effect on the Company's business and financial
condition, including working capital and results of operations. See "Business --
Regulation."
Concentration on One Product Line. The Company's concentration on the
single product line of vehicle security systems increases its vulnerability to
changes in automobile design, procurement practices of OEMs, product
substitution, consumer preferences, insurance underwriting practices and the
historical cyclicality of the motor vehicle market. As a result, a significant
change in any of the foregoing factors could have a material adverse effect on
the Company's business and financial condition, including working capital and
results of operations.
Dependence on Existing Management. Rand W. Mueller has been primarily
responsible for the development of many of the Company's products and markets.
The loss or interruption of the continued full-time services of Mr. Mueller
could have a material adverse effect on the Company. The Company has entered
into an employment agreement with Mr. Mueller which is effective through May 29,
1998, which shall be extended for additional consecutive twelve-month periods
unless terminated by the Company upon 24 months prior written notice.
Shares Eligible for Sale; Demand Registration Rights. As of December 27,
1995, the Company had 2,320,361 shares of Common Stock outstanding of which
730,887 shares, excluding vested options, were beneficially owned by executive
officers and directors of the Company. Subsequent to the Company's acquisition
of EAE and Code-Alarm Europe, the Company offered certain selling shareholders
of EAE and Code-Alarm Europe one-time demand registration rights, at the
Company's expense, exercisable upon 90 days' written notice to the Company at
any time before December 31, 1996, for up to 90,000 shares of the Company's
Common Stock held by them. The offers were made orally, and the Company believes
that it is
9
<PAGE> 15
unclear whether or not they constitute enforceable obligations. If the offers
are enforceable, up to 90,000 shares of Common Stock would be subject to such
registration rights on the terms described above or as may otherwise be
determined. To date, the Company has received no notice requesting such
registration. Sales of substantial amounts of such shares held by directors or
the EAE shareholders in the public market could adversely affect the market
price of the Common Stock and the Company's ability to raise additional capital
at a price favorable to the Company. See "Shares Eligible for Future Sale."
Absence of Financial Covenants. The Indenture does not contain any
financial performance covenants. Consequently, the Company is not required under
the Indenture to meet any financial tests such as those that measure the
Company's working capital, interest coverage, fixed charge coverage or net worth
in order to maintain compliance with the terms of the Indenture. See
"Description of Debentures."
No Assurance of a Public Market. The Company does not intend to list the
Debentures on the Nasdaq National Market or on a securities exchange. No
assurance can be given that an active market for the Debentures will develop or,
if developed, will continue. If no active market develops, it may be difficult
for purchasers to resell their Debentures. The Underwriters have advised the
Company that they intend to make a market for the Debentures although they are
under no obligation to continue to do so and if such market making were to be
discontinued, investors would encounter difficulty effecting purchase or sale
transactions in the absence of alternative market makers.
COMPANY HISTORY
The Company was founded as a Michigan corporation in 1979 under the name
Fluidics Manufacturing Company and began operations in early 1980. In 1986, the
Company changed its name to Code-Alarm, Inc. In October, 1987, the Company
successfully completed its initial public offering of Common Stock. The Company
has experienced growth through a combination of internal growth and
acquisitions. The Company's subsidiaries include Tessco Group, Inc., Chapman
Security Systems, Inc., Anes Security, Inc., Intercept Systems, Inc., Code-Alarm
Europe and EAE.
The Company's acquisitions have also resulted in its growing presence in
Europe. On January 1, 1994, the Company acquired the interest of its joint
venture partner in Code-Alarm Europe, which distributes vehicle security systems
in the United Kingdom. On February 10, 1994, the Company acquired substantially
all of the outstanding capital stock of EAE, a French company having its
principal place of business near Paris, France. EAE markets and distributes
vehicle security products in Europe, primarily in France.
In addition to its vehicle security systems, the Company has a contract
manufacturing operation which concentrates on cables, wire harnesses and printed
circuit board operations and also manufactures and sells, on a limited basis,
certain home security products. Neither contract manufacturing nor home security
has historically been, or is expected to be, material to the Company.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Debentures offered hereby are estimated to be $9.0 million after deducting
underwriting discounts and commissions and estimated offering expenses.
The Company intends to use $9.0 million of the net proceeds to partially
repay the outstanding indebtedness under its bank credit facility (which was
approximately $16.2 million, including security for a $5.9 million letter of
credit for a litigation appeal bond, at December 8, 1995). This indebtedness
bears interest at the prime rate (8.75% at December 8, 1995), or at the
Company's option, at the London Inter-Bank Offered Rate ("LIBOR") plus 1.5% to
2.5% for maturities ranging from one to six months (from 8.063% to 8.375% on
December 8, 1995), and was incurred for working capital purposes. The amounts
due under the bank credit facility mature on May 23, 1997.
10
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
CODL. The following table sets forth for the period indicated the high and low
sales prices for the Common Stock as last reported on the Nasdaq National
Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1993
First Quarter.......................................................... $ 6 $ 4 1/2
Second Quarter......................................................... 9 1/4 5
Third Quarter.......................................................... 13 3/4 7
Fourth Quarter......................................................... 13 1/4 10 1/2
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 (through December 27, 1995)............................. 7 1/4 6 1/2
</TABLE>
On December 27, 1995, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $6.50 per share. As of December 27,
1995, there were approximately 311 shareholders of record of the Company's
Common Stock.
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 future growth.
Furthermore, the Company's bank credit facility agreement prohibits the payment
of dividends.
11
<PAGE> 17
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
at September 30, 1995 and as adjusted to give effect to the receipt by the
Company of $9.0 million of net proceeds from the issuance and sale of the
Debentures offered by the Company hereby and the proposed application of the
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt(1)(3):
Current portion of long-term debt(1)................................... $ 2,431 $ 1,881
======= =======
Reserve for litigation................................................... $ 5,440 $ 5,440
======= =======
Long-term debt, less current maturities:
Bank notes(1)(2)(3).................................................... $10,085 $ 1,635
% Convertible Subordinated Debentures due 2003....................... -- 10,000
------- --------
Total long-term debt........................................... $10,085 $ 11,635
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares authorized, none issued
or outstanding...................................................... -- --
Common stock, no par value; 5,000,000 shares authorized, 2,320,361
shares issued and outstanding(4).................................... 12,210 12,210
Accumulated deficit.................................................... (1,777) (1,777)
Foreign currency translation adjustment................................ 49 49
------- --------
Total shareholders' equity..................................... 10,482 10,482
------- --------
Total capitalization......................................... $20,567 $ 22,117
======= =======
</TABLE>
- ---------------
(1) On May 23, 1995, the Company secured credit of $16.5 million from NBD Bank.
On October 17, 1995, this credit arrangement was amended to temporarily
provide an additional $750,000 under the revolving credit facility,
available until February 29, 1996. The outstanding balance of this loan at
December 8, 1995 was approximately $10.3 million (exclusive of the $5.9
million letter of credit for a litigation appeal bond) and is to be
partially repaid with the net proceeds of this Offering. See "Use of
Proceeds."
(2) The bank line of credit and the bank notes are secured by all of the
Company's assets.
(3) See Note 4 of Notes to Consolidated Financial Statements.
(4) Excludes 261,775 shares issuable upon the exercise of options granted under
the Company's stock option plans and shares, subject to
adjustment, issuable upon conversion of the Debentures.
12
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data for the fiscal years
1990 through 1994 are derived from the Company's audited consolidated financial
statements. The selected consolidated income and balance sheet data as of
September 30, 1995 and 1994 and for the nine months then ended, are derived from
unaudited financial statements but, in the opinion of management, reflect all
adjustments, consisting of normal recurring adjustments, except for an
additional adjustment for the patent infringement settlement of $1.8 million in
1995, necessary for a fair statement of the financial position and results of
operations for such periods and as of such dates. The results of operations for
the nine months ended September 30, 1995 are not necessarily indicative of the
results to be expected for the full year. The Company did not pay any cash or
other dividends in the periods presented below. The information below should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The audited consolidated
financial statements for 1990 and 1991, as well as the balance sheet for
December 31, 1992, and the accountants' reports thereon, are not included
herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1990 1991 1992 1993 1994(1) 1994 1995(1)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................... $44,521 $43,571 $45,685 $50,110 $73,508 $56,435 $54,825
Cost of sales................... 29,805 29,247 32,296 30,190 45,886 35,352 35,284
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 14,716 14,324 13,389 19,920 27,622 21,083 19,541
Engineering..................... 1,149 1,069 1,617 1,688 2,696 1,892 2,317
Sales and marketing............. 7,379 8,187 9,791 9,346 13,955 9,984 8,845
General and administrative...... 5,694 5,632 5,636 6,520 7,928 6,494 6,307
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 14,222 14,888 17,044 17,554 24,579 18,370 17,469
Income (loss) from operations... 494 (564) (3,655) 2,366 3,043 2,713 2,072
Litigation expense.............. -- -- -- -- 4,386 -- 1,825
Other income (expense).......... (128) (308) (421) (222) (743) (513) (1,042)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 366 (872) (4,076) 2,144 (2,086) 2,200 (795)
Income taxes (benefits)......... 155 (250) (1,174) 608 (710) 774 (60)
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 211 $ (622) $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share......................... $ 0.08 $ (0.24) $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32)
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common shares outstanding..... 2,586 2,553 2,495 2,445 2,376 2,392 2,320
Ratio of earnings to fixed
charges(2).................... 1.75x -- -- 5.38x -- 4.57x --
BALANCE SHEET DATA:
Working capital................. $ 8,034 $11,626 $ 9,983 $ 8,164 $12,716 $11,023 $13,734
Total assets.................... 25,265 25,439 25,136 24,134 37,821 34,954 42,471
Long-term obligations........... 151 4,483 5,417 3,867 13,240 6,960 15,525
Shareholders' equity............ 16,670 15,439 12,512 13,280 11,216 14,583 10,482
</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 nine months ended September 30, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Legal Proceedings."
(2) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose "earnings" consist of earnings before income
taxes and "fixed charges," and "fixed charges" consist of interest on
indebtedness and the portion of rental expense which is deemed to be
representative of the interest component. For the years ended December 31,
1991, 1992, 1994 and the nine months ended September 30, 1995, earnings were
not sufficient to cover fixed charges by $0.9 million, $4.1 million, $2.1
million and $0.8 million, respectively.
13
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since its founding in 1979, the Company has evolved into a leading
U.S.-based manufacturer of vehicle security systems. Since 1990, the Company has
realized substantial growth in net sales primarily as a result of internal
growth and acquisitions. The Company's acquisition of Code-Alarm Europe and EAE
in early 1994 has resulted in a significant and growing presence in Europe.
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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -------------
1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales....................... 66.9% 67.1% 70.7% 60.2% 62.4% 62.6% 64.4%
---- ---- ---- ---- ---- ---- ----
Gross profit......................... 33.1% 32.9% 29.3% 39.8% 37.6% 37.4% 35.6%
Engineering.......................... 2.6 2.5 3.5 3.4 3.7 3.4 4.2
Sales and marketing.................. 16.6 18.8 21.4 18.7 19.0 17.7 16.1
General and administration........... 12.8 12.9 12.3 13.0 10.8 11.5 11.5
---- ---- ---- ---- ---- ---- ----
Total operating expenses............. 31.9 34.2 37.3 35.0 33.4 32.6 31.9
---- ---- ---- ---- ---- ---- ----
Income (loss) from operations........ 1.1 (1.3) (8.0) 4.7 4.1 4.8 3.8
Litigation expense................... -- -- -- -- 6.0 -- 3.3
Other income (expense)............... (0.3) (0.7) (0.9) (0.4) (1.0) (0.9) (1.9)
---- ---- ---- ---- ---- ---- ----
Income (loss) before income taxes.... 0.8 (2.0) (8.9) 4.3 (2.8) 3.9 (1.5)
Income taxes (benefits).............. 0.3 (0.6) (2.6) 1.2 (1.0) 1.4 (0.1)
---- ---- ---- ---- ---- ---- ----
Net income (loss).................... 0.5 (1.4) (6.4) 3.1 (1.9) 2.5 (1.3)
===== ===== ===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1994
The Company's consolidated net sales increased $93,000, or less than 1.0%,
for the quarter ended September 30, 1995 as compared to the quarter ended
September 30, 1994. For the nine months ended September 30, 1995, consolidated
net sales decreased $1.6 million, or 2.8%, to $54.8 million as compared to $56.4
million for the nine months ended September 30, 1994. The decrease is
attributable to a decline of $1.6 million, or 7.9%, in the quarter ended June
30, 1995. The nine month results were primarily due to a decrease in sales to
mass merchandisers and independent dealers in the quarter ended June 30, 1995
and were partially offset by increases in OEM and expediter sales in the quarter
ended September 30, 1995. The Company expects sales in the quarter ended
December 31, 1995 to be slightly below sales for the comparable period in 1994,
with higher OEM sales in Europe being offset by a decrease in domestic OEM and
independent dealer sales.
The Company's consolidated gross profit increased $102,000, or 1.5%, for
the quarter ended September 30, 1995, as compared to the quarter ended September
30, 1994. For the nine months ended September 30, 1995, consolidated gross
profit decreased $1.5 million, or 7.3%, to $19.5 million as compared to $21.0
million for the nine months ended September 30, 1994. As a percentage of
consolidated sales, gross profit decreased to 35.6% in the nine months ended
September 30, 1995 from 37.4% in the comparable period of 1994. The decrease was
due to the Company's emphasis on OEM sales in both Europe and the United
14
<PAGE> 20
States primarily due to start up manufacturing problems with the Company's
European products production in the United States in the first two quarters of
1995. The OEM sales have lower profit margins, but are generally characterized
by lower selling costs, than retail sales. The Company expects continued lower
gross profit margin in the remainder of 1995 due to continued emphasis on OEM
sales.
Consolidated operating expenses increased $145,000, or 2.5%, for the
quarter ended September 30, 1995 as compared to the quarter ended September 30,
1994. For the nine months ended September 30, 1995, consolidated operating
expenses decreased $901,000, or 4.9%, to $17.5 million as compared to $18.4
million for the nine months ended September 30, 1994. The decrease in
consolidated operating expense was attributable to decreased sales and marketing
expenses, partially offset by increases in engineering and product development
costs. The Company expects to sustain decreases in marketing and administration
expenses as a result of continued emphasis on OEM sales, but expects engineering
and product development costs to level off for the remainder of the year.
As a result of the foregoing, the Company earned consolidated income from
operations of $996,000 in the quarter ended September 30, 1995 compared to $1.0
million in the quarter ended September 30, 1994. Consolidated income from
operations declined $641,000, or 23.6%, for the nine months ended September 30,
1995, to $2.1 million as compared to $2.7 million for the nine months ended
September 30, 1994.
Interest expense increased $531,000 in the nine months ended September 30,
1995, or 124.9%, to $956,000 as compared to $425,000 for the nine months ended
September 30, 1994. Increases are attributable to higher interest rates and
increased indebtedness associated with European Operations.
Other expenses for the nine months ended September 30, 1995 increased by
$1.8 million, to $1.9 million as compared to $88,000 for the nine months ended
September 30, 1994. The increase was attributable to the accrual in the first
half of the year of an additional $1.8 million for damages, including interest
and costs, related to a patent infringement judgment on in the case of
Code-Alarm v. Electromotive Technologies Corporation.
The Company had an effective domestic income tax rate of 34% on current
operating income. Income taxes on foreign operations were approximately 33%. In
the third quarter of 1995, the Company charged off state and foreign tax refunds
determined to be uncollectable in the amount of $210,000.
As a result of the foregoing, the Company earned consolidated net income of
$430,000 in the quarter ended September 30, 1995 compared to $467,000 in the
quarter ended September 30, 1994. The Company recorded a net loss of $735,000,
or $0.32 per share, for the nine months ended September 30, 1995, compared to
net earnings of $1.4 million, or $0.60 per share, for the nine months ended
September 30, 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.
15
<PAGE> 21
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 2,207.2%, 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 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.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
The Company's consolidated net sales for 1993 increased $4.4 million, or
9.7% to $50.1 million as compared to $45.7 million in 1992. This increase was
primarily due to increases in sales of private label vehicle security products
to General Motors, Ford and Chrysler dealerships. Sales figures were also
affected by a price increase on vehicle security products in the first quarter
of 1993.
The Company's consolidated gross profit for 1993 increased $6.5 million, or
48.8%, to $19.9 million as compared to $13.4 million in 1992. Such increases
were primarily due to cost efficiencies related to increases in volume in the
vehicle security product sales area.
Consolidated operating expenses for 1993 increased $510,000, or 3.0%, to
$17.5 million as compared to $17.0 million in 1992. The relatively small amount
of operating expense increase resulted from the Company completing its efforts
to consolidate its operations by eliminating separate business units and closing
operations of the facility located at 32380 Edward, Madison Heights, Michigan.
Such measures helped to reduce operating expenses during the year by eliminating
duplicate administrative functions. Also in 1993, the Company implemented
several measures to reduce overall operating costs, including cost savings
policies on travel and entertainment costs and sales and marketing projects.
These savings were partially offset by increased costs associated with
litigation expenses. Higher than normal litigation expenses are expected to
continue until cases currently in litigation are completed.
As a result of the foregoing, consolidated income from operations for 1993
increased $6.0 million, or 166.7%, to $2.4 million as compared to a loss from
operations of $3.6 million for 1992.
Interest expense for 1993 decreased $147,000, or 34.5%, to $279,000 as
compared to $426,000 for 1992. Increased cash flow from operations, primarily
due to profits, contributed to a reduction of borrowing during 1993.
The Company's effective income tax rate for the year ended 1993 was
approximately 28.0%. That effective income tax rate differed from the statutory
rate of 34.0% principally as a result of the utilization of an operating loss
carry-forward of approximately $479,000.
16
<PAGE> 22
As a result of the foregoing factors, the Company reported consolidated net
income for the year ended December 31, 1993 of $1.5 million, or $0.63 per share,
as compared to a net loss of $2.9 million, or $1.16 per share, for 1992.
EFFECT OF INFLATION
The Company does not believe that inflation has had a material impact on
its operations over the past three years.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for the past eight quarters (in thousands except for per share data
and as a percentage of net sales):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1993 1994 1994 1994 1994 1995 1995 1995
------------ --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $ 12,577 $17,238 $ 20,534 $18,663 $ 17,073 $17,159 $ 18,910 $18,756
Gross profit........... 5,258 6,639 7,627 6,816 6,540 5,941 6,682 6,918
Operating income....... 702 715 958 1,039 331 92 985 996
Net income (loss)...... 439 439 520 467 (2,802) (1,070) (95) 430
Net income (loss) per
share................ 0.18 0.18 0.22 0.20 (1.18) (0.46) (0.04) 0.19
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........... 41.8 38.5 37.1 36.5 38.3 34.6 35.3 36.9
Operating income....... 5.6 4.2 4.7 5.6 1.9 0.5 5.2 5.3
Net income (loss)...... 3.5 2.6 2.5 2.5 (16.4) (6.2) (0.5) 2.3
</TABLE>
Quarterly earnings per share calculations for the periods indicated are
based on the weighted average number of shares outstanding for the quarter then
ended. Annual earnings per share calculations are based on weighted average
number of shares outstanding for the twelve month period then ended. Due to
fluctuations in the weighted average number of shares outstanding, the sum of
the earnings per share calculations for each quarter will not necessarily equal
the calculated earnings per share for the twelve month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital was $13.7 million at September
30, 1995 compared to $12.7 million at December 31, 1994, $8.2 million at
December 31, 1993 and $10.0 million at December 31, 1992. The current ratio
(current assets divided by current liabilities) as of September 30, 1995 is 1.83
to 1, compared to 1.95 to 1 at December 31, 1994, 2.2 to 1 at December 31, 1993
and 2.4 to 1 at December 31, 1992.
Net cash used in operating activities for the year ended December 31, 1994
and the nine months ended September 30, 1995 was $0.9 million and $0.4 million,
respectively, as compared to net cash provided by operations for the years ended
December 31, 1993 and 1992 of $3.8 million and $1.1 million, respectively. The
decrease in cash from prior years has been primarily due to increases in
accounts receivable and inventories of $3.8 million for the nine months ended
September 30, 1995 and $3.9 million for the year ended December 31, 1994. These
increases are partially offset by an increase of $1.6 million in accounts
payable for the nine months ended September 30, 1995 and increases in the
reserve for litigation of $1.7 million for the nine months ended September 30,
1995 and $3.7 million for the year ended December 31, 1994.
During the first nine months of 1995, the Company concluded a credit
agreement with NBD Bank. Under the terms of this agreement, the Company has
secured a $13.8 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 current $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
17
<PAGE> 23
million under the revolving credit facility, available until February 29, 1996.
This indebtedness bears interest at the prime rate (8.75% at December 8, 1995),
or at the Company's option, at the LIBOR plus 1.5% to 2.5% for maturities
ranging from one to six months (from 8.063% to 8.375% on December 8, 1995). 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. The Company intends to utilize $9.0 million of the
proceeds of the sale of the Debentures to reduce its borrowings under the bank
credit facility, and does not expect to be in violation of the facility's
covenants.
As of December 8, 1995, $0.8 million of the $13.8 million revolving credit
facility was unused and available. Under this revolving line of credit, $5.0
million was borrowed under the LIBOR option available to the Company at interest
rates from 8.3125% to 8.375%.
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 to
date. Litigation is subject to many uncertainties, including the possibility of
adverse settlements or judgments against the Company in pending or future
litigation. Damages sought against the Company in pending proceedings exceed in
the aggregate the entire shareholders' equity of the Company, and an unfavorable
result in one or more of these cases or in any proceeding which might arise in
the future could adversely affect the value of the Debentures and could cause
the holders of Debentures to lose their entire investment. See "Risk Factors --
Litigation" and "Legal Proceedings."
The Company believes that the proceeds of this Offering, as well as
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.
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. All purchases were made below the closing market price on the date
of the purchase.
CHANGES IN COMPANY'S CERTIFYING ACCOUNTANT
Effective July 24, 1995 the Board of Directors of the Company, based on the
recommendation of the Audit Committee, appointed Deloitte & Touche LLP as the
independent accountants of the Company. Deloitte & Touche LLP replaced Coopers &
Lybrand L.L.P. (dismissed July 19, 1995) the Company's previous independent
accountants. The reports of Coopers & Lybrand L.L.P. on the financial statements
of the Company during the past two years was unqualified. During the Company's
two most recent fiscal years and the subsequent interim period from the date of
the last audited financial statement through July 19, 1995, there were no
disagreements with Coopers & Lybrand L.L.P. on any matter of accounting
principles or practices, financial statement disclosure, audit scope or
procedures.
18
<PAGE> 24
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, 1994 and the subsequent interim period, 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. The Company
believes that it has growth opportunities as a niche supplier to U.S. and
international OEM markets and to its existing customer base.
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 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 effectively 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 systems and
sensors. In light of increased consumer demand for systems offered in
top-of-the-line
19
<PAGE> 25
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.
Strategic Alliances -- The Company is exploring opportunities to enter
into strategic relationships with other suppliers to deliver to the OEMs a
product which incorporates the Company's systems or technologies. For
example, the Company has recently entered into development projects with
both Lear Seating Corp. and Gentex Corp. to supply parts to these two
manufacturers for use in their end products sold to OEMs. The Company
believes that the multiplexing systems (which consist 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) now being employed by
automakers offer a particular opportunity for such strategic alliances. See
"Business Strategy-Enhanced Engineering Capability" and "Engineering,
Research and Development."
- 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 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.
20
<PAGE> 26
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.
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.
21
<PAGE> 27
Post-delivery includes those products which are installed on a vehicle already
owned by the customer, generally through retail specialty stores and mass
merchandisers.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, -------------------------------
-------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1994 1995
------------- ------------- ------------- ------------- -------------
NET NET NET NET NET
SALES PCT. SALES PCT. SALES PCT. SALES PCT. SALES PCT.
------- --- ------- --- ------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT FOR PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Pre-delivery(1)........... $19,049 42% $23,391 47% $27,367 37% $20,735 37% $22,926 42%
Post-delivery(2).......... 16,190 35 20,210 40 23,832 32 18,138 32 13,063 24
Europe(3)
Pre-delivery.............. -- -- -- -- 8,031 11 6,877 12 5,909 11
Post-delivery............. -- -- -- -- 9,430 13 6,872 12 9,767 18
Other(4).................... 10,446 23 6,509 13 4,848 7 3,813 7 3,160 5
------- --- ------- --- ------- --- ------- --- ------- ---
Total.............. $45,685 100% $50,110 100% $73,508 100% $56,435 100% $54,825 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</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 Ford, General Motors,
Peugeot, Volkswagen-Audi Group France, Chrysler, Subaru and Renault. Historical
sales by the Company to these customer groups and to other OEMs and expediters
are set forth below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------------------
---------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1994 1995
----------------- ----------------- ----------------- ----------------- -----------------
AS A AS A AS A AS A AS A
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
NET TOTAL NET TOTAL NET TOTAL NET TOTAL NET TOTAL
OEM NET OEM OEM NET OEM OEM NET OEM OEM NET OEM OEM NET OEM
SALES SALES SALES SALES SALES SALES SALES SALES SALES SALES
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT FOR PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ford.................... $ 7,121 37% $ 7,853 34% $ 8,010 23% $ 5,800 21% $ 6,471 22%
General Motors.......... 6,705 35 7,809 33 7,964 22 6,127 22 6,761 23
Peugeot................. -- -- -- -- 5,207 15 4,438 16 5,045 18
Volkswagen.............. -- -- -- -- 3,277 9 2,851 10 896 3
Chrysler................ 1,315 7 2,029 9 2,057 6 1,514 6 2,359 8
Subaru.................. -- -- -- -- -- -- -- -- 443 2
Renault................. -- -- -- -- -- -- -- -- 279 1
Other OEMs.............. 3,908 21 5,700 24 8,883 25 6,882 25 6,581 23
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total OEM
Sales......... $19,049 100% $23,391 100% $35,398 100% $27,612 100% $28,835 100%
======= ======== ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
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, 1994. Sales to Ford, General Motors and
Peugeot accounted for 10.9%, 10.8% and 6.8%, respectively, of the Company's
total net sales for the year ended December 31, 1994. 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
22
<PAGE> 28
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------------
------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1994 1995
-------------- -------------- -------------- -------------- --------------
OEM RETAIL OEM RETAIL OEM RETAIL OEM RETAIL OEM RETAIL
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North America............ 50% 50% 52% 48% 39% 37% 38% 36% 44% 27%
Europe................... --% --% --% --% 11% 13% 13% 13% 11% 18%
</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 3.5%, 3.4% and 3.7% of revenues in 1992, 1993
and 1994, 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 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
23
<PAGE> 29
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. See "Risk Factors -- Short Product Life
Cycles; Research and Development."
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 available 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. 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. See "Risk Factors --
Suppliers."
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
24
<PAGE> 30
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 also offers a "Theft Protection Guarantee" for certain
Code-Alarm(R) and Anes(R) brand products, where the Company will pay the
consumer a specified amount (depending on the product purchased) if the
consumer's vehicle is stolen within one year of purchasing the Company's
product. Claims experienced as to this warranty have been $36,000, $31,000 and
$38,000 in 1992, 1993 and 1994, respectively, and $22,000 for the first nine
months of 1995.
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. See "Risk Factors -- Competition."
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. See "Risk
Factors -- Intellectual Property." Also, see "Legal Proceedings" for a more
complete description of the legal proceedings involving the Company and its
proprietary technology.
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 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
25
<PAGE> 31
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. See "Risk Factors -- Regulation."
EMPLOYEES
As of October 30, 1995, the Company employed approximately 550 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.
26
<PAGE> 32
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, Sohihull
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.
LEGAL PROCEEDINGS
PATENT INFRINGEMENT LITIGATION
In November 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 seeking a declaration that ETC's U.S.
Patent No. 4,585,569 (the " '569 Patent") was invalid or not infringed by the
Company. Subsequently, Directed Electronics ("Directed") acquired an interest in
the '569 Patent and was made a party to the lawsuit. A judgment as to liability
was entered against the Company in 1992 and, after that judgment was sustained
on appeal, a bench trial was held as to damages in 1993, but no final ruling was
made until May 23, 1995, when a judgment was awarded against the Company in the
amount of $5.4 million for infringement ($6.0 million when interest and other
costs are included). The Company is now appealing (1) the inclusion of
unpatented components of the Company's security system in the damage calculation
and (2) the doubling of "actual damages" after November, 1990 based upon a
holding of "willful patent infringement." In the course of preparing the appeal
brief, it was discovered that ETC had failed to timely pay the first maintenance
fee in April, 1990 to maintain the patent-in-suit with the U.S. Patent and
Trademark
27
<PAGE> 33
Office (the "Patent Office"). 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 in the
patent-in-suit, (2) reconsideration of the award of enhanced damages 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
patent-in-suit. This motion was denied without prejudice by the United States
District Court and the Company filed a motion with the Court of Appeals for the
Federal Circuit for remand or dismissal of the appeal based upon lack of
jurisdiction, for consideration by the District Court of the motion. On January
3, 1996, the Company's motion was granted and the case is now back in the
District Court. 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.
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.
On September 19, 1995, the United States Court of Appeals for the Federal
Circuit, in Code-Alarm, Inc. v. The United States International Trade
Commission, affirmed the ITC Administrative Law Judge's holding of invalidity of
United States Patent Number 5,049,867, owned by the Company. The Company does
not believe that this ruling will have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
LITIGATION INVOLVING ACQUISITIONS
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 De Guijarro and their marital conjugalship, in the United
States District Court for the District of Puerto Rico (Case No. 90-2118 (SEC))
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 operates Chapman Security as
its alter ego and, therefore, 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 fraudulent conveyances. The Company
has tendered defense of the complaint to LaSalle National Bank, which is
defending 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, and arguments are scheduled to be heard on this order on or about
January 9, 1996. 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, in which case the purchasers of the Debentures
could lose their entire investment.
Asset Conservation, Inc. filed a third party complaint in the same court 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
28
<PAGE> 34
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.
M. and Mme. Sydney Drahy, from whom the Company purchased shares of its
French subsidiary EAE, filed suit against the Company in the Commercial Court in
Paris, France on August 1, 1995, seeking FF3,160,000 (approximately $645,000)
based on disputed price adjustment provisions in the purchase agreement. The
Company believes that there are offsets to the disputed adjustments under the
purchase agreement, some of which have been acknowledged by the Drahys, and that
no additional amounts are owed the Drahys in respect of the purchase price. A
decision on this case is not expected to be rendered before mid-1996. Mme. Drahy
brought a separate action in the Industrial Court of Paris against EAE, filed
June 20, 1995, seeking damages of FF1,268,800 (approximately $260,000) for
alleged wrongful termination of her employment and breach of an employment
contract. The case is in the early stages of document production and the Company
is unable at this time to assess its exposure, if any, to Mme. Drahy.
PRODUCT WARRANTY LITIGATION
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, 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 warranty emanating from the sale of
these goods to Intercept. The Company denies these allegations and intends to
defend against these charges. The Company has not, as yet, answered the
complaint and the case remains in the early stages of discovery. The exposure,
if any, to the Company cannot be ascertained at this time; however, an adverse
judgment could materially adversely affect the Company's business and financial
condition, including working capital and results of operations.
LITIGATION COMMENCED BY THE COMPANY AGAINST ALLEGED PATENT INFRINGERS
During 1995, the Company brought the following actions seeking to enforce
its patents against alleged infringers. All of these lawsuits are in various
stages of discovery and are subject to various affirmative defenses and
counterclaims. While the Company believes that these actions are meritorious,
the outcomes cannot be predicted at this early stage. It is the Company's policy
to pursue infringers of its patents vigorously in an effort to preclude the
manufacture and sale of infringing inventions or, alternatively, to seek payment
of royalties on the Company's patented inventions manufactured, sold or used by
others.
- Code-Alarm, Inc. v. Magnadyne Corporations, et al, 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.
- Code-Alarm, Inc. v. Sherwood, Inc. et al, filed on July 20, 1995 in
the United States District Court for the Central District of California
sitting in Los Angeles, California.
- Code-Alarm, Inc. v. Clifford Electronics, Inc., filed October 12,
1995 in the United States District Court for the Central District of
California sitting in Los Angeles, California.
- In the matter of Certain Starter Kill Security Systems, filed
October 18, 1995 with the International Trade Commission against Directed
Electronics, Inc. of Vista, California and Nutek Company of Taipei, Taiwan.
In addition to claims of patent infringement, the Company seeks in this
action to halt the importation and sale of the alleged infringing goods
into the United States.
29
<PAGE> 35
MANAGEMENT
The directors and executive officers of the Company and its wholly-owned
subsidiaries are listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Rand W. Mueller(2)....... 46 Director, President and Chairman of the Board
Alan H. Foster........... 69 Director
Kenneth M. Mueller(2).... 73 Director
William S. Pickett....... 75 Director
Marshall J. Mueller(2)... 47 Director
Jack D. Rutherford....... 62 Director
Peter J. Stouffer........ 33 Vice President, Engineering and Director
Robert V. Wagner......... 61 Vice President of Finance, Chief Financial Officer, Secretary
and Treasurer
David L. Etienne......... 36 Principal Accounting Officer
John G. Chupa............ 38 Vice President, General Counsel
Alain Lombard............ 41 Vice President European Operations
John C. Moffat........... 36 Vice President, OEM Development and Marketing
Michael Schroeder........ 33 Vice President, Sales, North America
</TABLE>
- ---------------
(1) Positions within the Company, except as otherwise indicated.
(2) Rand W. Mueller and Marshall J. Mueller are brothers, and Kenneth M.
Mueller is their father.
Rand W. Mueller has been a full-time employee of the Company since January
1985 and has been the President since May 1986.
Alan H. Foster has been a consultant to various government agencies,
corporations and financial institutions for the last five years. He is also an
adjunct professor at the School of Business Administration of the University of
Michigan. Mr. Foster also serves as a director of Production Systems Acquisition
Corp., a New York corporation, a public company created for the purpose of
acquiring operating companies. From 1967 to 1978, Mr. Foster served as Vice
President and Treasurer of American Motors Corporation.
Kenneth M. Mueller is retired. He has served as a consultant to the Company
since August 1987. Mr. Mueller was a consultant to the Ministry of Agriculture
and Food, Government of Ontario, Canada from August 1985 to June 1987. Prior to
1985, he was President of Agribusiness Council, Inc., a not-for-profit
corporation assisting lesser-developed countries in developing profitable
agricultural ventures.
William S. Pickett is retired. He was the President and General Manager of
American Motors (Canada) Inc. prior to his retirement in 1982.
Marshall J. Mueller is a former executive officer of the Company. From May
1980 to January 1990, Mr. Mueller held senior management positions, including
President and Executive Vice President of the Company. Mr. Mueller resigned the
Company in 1990, was reelected to the Company's Board of Directors in May 1991,
and has served continuously since then.
Jack D. Rutherford is Chairman and Chief Executive Officer of ICM
Industries, Inc., a holding company for basic manufacturing companies serving
the automotive, construction equipment and capital goods industries. Prior to
co-founding ICM Industries, Inc. in 1985, Mr. Rutherford was employed by
International Harvester Corporation in senior management capacities, including
Vice Chairman and President and Chief Operating Officer. Prior to that time, Mr.
Rutherford held operations management and manufacturing positions with Ford
Motor Company.
Peter J. Stouffer was appointed Vice President, Engineering in January 1993
and a director of the Company on December 8, 1995. From August 1990 through
December 1992, Mr. Stouffer served as Executive Vice President and General
Manager of the Company's Intercept Systems, Inc. subsidiary from May 1989
through September 1990, served as the Company's Vice President of Engineering.
From
30
<PAGE> 36
December 1986 to May 1989, he was the Company's Manager of Engineering. Prior to
December 1986, he was an engineer at the Pontiac Motor Division of General
Motors Corporation.
Robert V. Wagner joined the company as a Division Controller in January
1993, and was elected Vice President of Finance and Chief Financial Officer,
Secretary and Treasurer in August 1993. Prior to joining the Company, he held a
senior finance position with MLX Corp., was Chief Financial Officer of General
Automotive Corporation, Operations Controller for Volkswagen of America, Chief
Financial Officer of American Sunroof Corp. (ASC), held several senior finance
and treasury positions with American Motors Corporation, and was on the Finance
Staff at several Ford Motor Co. divisions.
David L. Etienne has been the Company's Principal Accounting Officer since
January 1990. He was Assistant Controller of the Company from June 1989 to
January 1990. From August 1986 to June 1989, Mr. Etienne was employed as a
Certified Public Accountant with Laventhol & Horwath. Prior to 1986, he was a
Staff Accountant with Roslund, Prestage & Company.
John G. Chupa joined the Company as General Counsel in November 1993, and
was appointed Vice President in December of 1994. Prior to joining the Company,
he was associated with the law firms of Dykema Gossett and Harness Dickey and
Pierce, specializing in the practice of intellectual property law. From 1985
through 1988, he was a Senior Engineer with the Allen Bradley division of
Rockwell International Corporation. Mr. Chupa is currently completing his
doctorate in electrical engineering.
Alain Lombard joined the Company in January 1994 as Vice President European
Operations and Director General of the EAE subsidiary. Prior to joining the
Company, he was President of Code-Alarm Europe Ltd., and Lombard Imports
Corporation. From 1985 through 1989, Mr. Lombard was a Senior Financial Analyst
with IBM's European Headquarters.
John C. Moffat joined the Company in November 1987 as District Manager of
the OEM Division. Mr. Moffat has since been promoted steadily through the
Company; most recently as Vice President of OEM Development and Marketing in May
1994. Mr. Moffat was the Company's National Sales Manager from December 1990
until May 1994.
Michael Schroeder joined the Company in March 1984 as Engineering
Technician. Mr. Schroeder was promoted to Vice President of North American sales
in March of 1995. From December 1992 to March 1995, Mr. Schroeder was the
Company's National Sales Manager. Prior to December 1992, Mr. Schroeder was the
Company's Director of Sales in the U.K.
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture (the "Indenture") to be
dated as of January , 1996, between the Company and State Street Bank and
Trust Company, as Trustee (the "Trustee"). The Debentures will represent
unsecured general obligations of the Company, subordinate in right of payment to
certain other obligations of the Company as described under "Subordination of
Debentures" and convertible into Common Stock as described under "Conversion of
Debentures." The Debentures will be limited to $10,000,000 aggregate principal
amount ($11,500,000 if the Underwriters' over-allotment option is exercised in
full), will be issued in fully registered form only in denominations of $1,000
or any integral multiple thereof and will mature on February 1, 2003.
The following statements are subject to the detailed provisions of the
Indenture and are qualified in their entirety by reference to the Indenture, a
copy of which is filed as an exhibit to the Registration Statement (as defined)
and is also available for inspection at the office of the Trustee. Whenever
particular provisions of the Indenture are referred to, such provisions are
incorporated by reference as a part of the statements made herein, and the
statements are qualified in their entirety by such reference.
Interest at the annual rate set forth on the cover page hereof is payable
semi-annually on August 1 and February 1, commencing on August 1, 1996, to
holders of record at the close of business on the preceding January 15 and July
15, respectively. Interest on the Debentures offered hereby will accrue from the
date of initial issuance.
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<PAGE> 37
Principal and premium, if any, and interest will be paid and the Debentures
may be presented for conversion, registration of transfer, and exchange, without
service charge, at the corporate trust office of the Trustee in Boston,
Massachusetts. Interest will be paid by checks mailed to holders of record
unless other arrangements are made.
CONVERSION OF DEBENTURES
The holders of Debentures will be entitled at any time prior to the close
of business on February 1, 2003, subject to prior redemption, to convert the
Debentures or portions thereof (which are $1,000 or integral multiples thereof)
into shares of Common Stock of the Company, at the conversion price set forth on
the cover page of this Prospectus, subject to adjustment as described below.
Except as described below, no adjustment will be made on conversion of any
Debenture for interest accrued thereon or for dividends on any shares of Common
Stock issued. If any Debenture not called for redemption is converted between a
record date for the payment of interest and the related interest payment date,
the Debenture must be accompanied by funds equal to the interest payable on such
interest payment date on the principal amount so converted. The Company is not
permitted to issue fractional shares of Common Stock upon conversion of
Debentures and, in lieu thereof, will pay a cash adjustment based upon the
market price of the Common Stock on the last trading day prior to the date of
conversion. In the case of Debentures called for redemption, conversion rights
will expire at the close of business on the redemption date. Persons who may be
deemed to be affiliates of the Company for purposes of the Securities Act of
1933 may be subject, as to any resales of shares of Common Stock acquired on
conversion, to the restrictions of Rule 144 promulgated under the Act.
The conversion price is subject to adjustment under formulas set forth in
the Indenture in certain events, including: the issuance of shares of Common
Stock of the Company as a dividend or distribution on the Common Stock;
subdivisions, combinations, and reclassifications of the Common Stock; the
issuance to all holders of Common Stock of certain rights or warrants entitling
them for a period not exceeding 45 days to subscribe for Common Stock at less
than the then current market price (as defined); and the distribution to all
holders of Common Stock of any securities (other than Common Stock) or evidences
of indebtedness of the Company or of assets (excluding cash dividends or
distributions from retained earnings) or rights or warrants to subscribe for or
purchase any of its securities (excluding those referred to above). No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect;
provided, however, that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. The Company reserves the right to make such reductions in the
conversion price, in addition to those required by the foregoing provisions, as
the Company in its discretion shall determine to be advisable in order that
certain share-related distributions made by the Company to its shareholders
after the date of this Prospectus will not be taxable. Except as stated above,
the conversion price will not be adjusted for the issuance of shares of Common
Stock or any securities convertible into or exchangeable for Common Stock, or
carrying the right to purchase any of the foregoing, in exchange for cash,
property, or services.
In the case of a consolidation, merger or statutory share exchange
involving the Company as a result of which holders of Common Stock will be
entitled to receive stock, securities or other property or assets (including
cash) with respect to or in exchange for shares of Common Stock or in the case
of a sale or conveyance to another corporation of all or substantially all the
property and assets of the Company, the holders of the Debentures then
outstanding will be entitled thereafter to convert such Debentures into the kind
and amount of shares of stock, other securities or other property or assets
which they would have owned or been entitled to receive upon such consolidation,
merger, statutory share exchange, sale or conveyance had such Debentures been
converted into shares of Common Stock immediately prior to such consolidation,
merger, statutory share exchange, sale or conveyance.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the conversion price, the holders of Debentures may,
in certain circumstances, be deemed to have received a distribution subject to
United States income tax as a dividend; the absence of such an adjustment in
certain other circumstances may also result in a taxable dividend to the holders
of Common Stock.
32
<PAGE> 38
OPTIONAL REDEMPTION
The Debentures will be redeemable on at least 45 and not more than 60 days'
notice, at the option of the Company, as a whole or in part, at any time after
issuance, at the following prices (expressed as percentages of the principal
amount), together with accrued interest to the date fixed for redemption:
If redeemed during the 12-month period beginning February 1:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------- ----------
<S> <C>
1996...................... %
1997......................
1998......................
1999......................
<CAPTION>
YEAR PERCENTAGE
-------------------------- ----------
<S> <C>
2000...................... %
2001......................
2002......................
2003......................
</TABLE>
and 100% if redeemed on or after February 1, 2003; provided, however, that the
Debentures may not be redeemed prior to February 1, 1999, unless the last
reported sales price (determined as provided in the Indenture) of the Common
Stock equals or exceeds 140% of the then effective conversion price (as
described above) for at least 20 trading days within a period of 30 consecutive
trading days ending no earlier than ten trading days prior to the date of the
notice of redemption.
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures is subordinate to the prior
payment in full of all Senior Indebtedness (as defined). During the continuance
beyond any applicable grace period of any default in the payment of principal,
interest or lease payments on any Senior Indebtedness, no payment of principal
of, premium, if any, or interest on the Debentures shall be made by the Company.
In addition, upon any distribution of assets of the Company upon any
dissolution, winding up, liquidation or reorganization, the payment of the
principal of, premium, if any, and interest on the Debentures is to be
subordinated to the extent provided in the Indenture in right of payment to the
prior payment in full of all Senior Indebtedness. By reason of such
subordination, in the event of the Company's dissolution, holders of Senior
Indebtedness may receive more, ratably, and holders of the Debentures may
receive less, ratably, than the other creditors of the Company or may receive no
consideration at all. Such subordination will not prevent the occurrence of any
Event of Default under the Indenture.
The term "Senior Indebtedness" is defined to mean the following, whether
outstanding on the date of execution of the Indenture or thereafter created,
incurred, assumed or guaranteed:
(a) Principal of and premium, if any, and interest on all indebtedness
of the Company (including any indebtedness secured by a mortgage or other
lien which is (i) given to secure all or part of the purchase price of
property subject thereof, whether given to the vendor of such property or
to another, or (ii) existing on property at the time of the acquisition
thereof) evidenced by notes, debentures, bonds or other securities and
written obligations of the Company other than the Debentures;
(b) The amount of the Company's liability determined under generally
accepted accounting principles under any lease required to be classified as
a liability on the Company's balance sheet;
(c) Principal of and premium, if any, and interest on indebtedness of
others of the kinds described in either of the preceding clause (a), or, to
the extent set forth in the preceding clause (b), leases of others of the
kind described in the preceding clause (b) assumed by or guaranteed in any
manner by the Company or in effect guaranteed by the Company through an
agreement to purchase, contingent or otherwise; and
(d) Principal of and premium, if any, and interest on renewals,
extensions, or refundings of indebtedness of the kinds described in any of
the preceding clauses (a) or (c) or, to the extent set forth in the
preceding clause (b), renewals or extensions of leases of the kinds
described in either of the preceding clauses (b) or (c); unless, in the
case of any particular indebtedness, lease, renewal, extension, or
refunding, the instrument or lease creating or evidencing the same or the
assumption or guarantee of the
33
<PAGE> 39
same expressly provides that such indebtedness, lease, renewal, extension,
or refunding is not superior in right of payment to the Debentures.
As of December 8, 1995, the Company had approximately $19.2 million of
Senior Indebtedness, including security for a $5.9 million letter of credit for
a litigation appeal bond, (approximately $10.2 million after giving effect to
the application of the net proceeds of this Offering).
The Indenture permits the Trustee to become a creditor of the Company and
does not preclude the Trustee from enforcing its rights as a creditor, including
rights as a holder of Senior Indebtedness.
REPURCHASE EVENT
Upon the occurrence of a Repurchase Event, each holder of Debentures shall
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Debentures pursuant to
the offer described below (the "Repurchase Offer") at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (the "Repurchase Payment"). Within 30 days after
the occurrence of a Repurchase Event, the Company shall mail a notice to each
holder stating among other things: (a) the Repurchase Payment and the purchase
date, which shall not be earlier than 45 days nor later than 60 days from the
date such notice is mailed or such later date as may be necessary for the
Company to comply with the requirements of the 1934 Act (the "Repurchase Date");
(b) that any Debenture not tendered will continue to accrue interest; (c) that,
unless the Company defaults in the payment of the Repurchase Payment, all
Debentures accepted for payment pursuant to the Repurchase Offer shall cease to
accrue interest after the Repurchase Date; and (d) certain other procedures that
a holder must follow to accept a Repurchase Offer or to withdraw such
acceptance. The Company will comply with any applicable requirements of the 1934
Act and other securities laws, and the regulations thereunder, governing the
repurchase of the Debentures in connection with a Repurchase Event and may
modify a Repurchase Offer to effect such compliance. The occurrence of certain
Repurchase Events could result in an event of default under the Company's bank
credit agreement or other credit facilities which may be in place at the time,
which could preclude the Company from making the Repurchase Payment.
A Repurchase Event is generally defined to include (a) the acquisition of
50% or more of the Company's voting stock by a person or group, other than any
current holder of 5% or more of the Company's Common Stock (or a group including
such a holder); (b) a change, over a two-year period, in the composition of the
Company's Board of Directors such that, with limited exceptions, the Board
members at the beginning of the period no longer constitute a majority of the
Board; (c) certain consolidations and mergers involving the Company or sales of
assets of the Company, if the primary effect is that, after the transaction, a
person or group, other than a current holder of 5% or more of the Company's
Common Stock (or group including such a holder), has more than 50% of the
ordinary voting power of the surviving corporation; (d) the acquisition by the
Company of over 30% of the outstanding shares of its capital stock during any
12-month period; and (e) certain (1) distributions in respect of the Company's
capital stock or (2) acquisitions by the Company of its capital stock, if, in
either case, the sum of the (A) ratio of the fair market value of the price paid
in the current distribution or acquisition to the then-fair market value of the
Company's outstanding capital stock plus (B) the similar ratios for all other
distributions or acquisitions, respectively, during the prior 12-month period,
exceeds 30%. For purposes of the Repurchase Event tests, the Company's "voting
stock" means the Common Stock plus any other class or classes of stock which may
be issued and have general voting power in the election of the Company's Board
of Directors. The Company's "capital stock" means any stock which does not have
divided or liquidation priority over other stock of the Company, irrespective of
relative voting powers. Currently, the Company's only "voting stock" and
"capital stock" is its Common Stock.
On the Repurchase Date, the Company will deposit with the Trustee an amount
equal to the Repurchase Payment in respect of all Debentures or portions thereof
that have been tendered. The Trustee shall promptly mail to each holder of
Debentures accepted for payment an amount equal to the Repurchase Price for such
Debentures, and the Trustee shall promptly authenticate and mail to each holder
a new Debenture equal in principal amount to pay unpurchased portion of the
Debentures surrendered.
34
<PAGE> 40
Except as described above with respect to a Repurchase Event, the Indenture
does not contain any other provisions that permit the holders of the Debentures
to require that the Company repurchase or redeem the Debentures in the event of
a takeover or similar transaction. The provisions of the Indenture relating to
the purchase of Debentures upon a Repurchase Event may impede the completion of
a merger, tender offer or other takeover attempt. See "Description of Capital
Stock." Neither the Trustee nor the Company's Board of Directors may relieve the
Company of its obligations to repurchase Debentures.
Any future credit agreements or other agreements relating to Senior
Indebtedness to which the Company becomes a party may prohibit the Company from
purchasing any Debentures or may provide that certain change in control events
with respect to the Company would constitute a default under such agreements. In
the event a Repurchase Event occurs at a time when the Company is prohibited
from purchasing Debentures, the Company could seek the consent of its lenders
for the purchase of Debentures or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Debentures.
In such case, the Company's failure to purchase tendered Debentures would
constitute an Event of Default under the Indenture. In such circumstances, the
subordination provisions in the Indenture would restrict payments to the holders
of Debentures.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as being: default in the
payment of any installment of interest upon any of the Debentures as and when
the same shall become due and payable, and continuance of such default for a
period of 15 days; default in payment of principal or premium, if any, or
interest, if any, on the Debentures when the same becomes due and payable at
maturity, upon redemption or otherwise, whether or not prohibited by the
subordination provisions of the Indenture; default by the Company for 30 days
after notice in the observance or performance of any other covenant in the
Indenture; default under any obligations for money borrowed aggregating
$1,000,000 or more; or certain events involving bankruptcy, insolvency or
reorganization of the Company. The Indenture will provide that the Trustee is
required, within 90 days after the occurrence of a default which is known to the
Trustee and is continuing, to give to the holders of the Debentures notice of
such default; provided that, except in the case of default in the payment of
principal or premium, if any, or interest on any of the Debentures, the Trustee
shall be protected in withholding such notice if it in good faith determines
that the withholding of such notice is in the interest of the holders of the
Debentures.
The Indenture will provide that if any Event of Default shall have occurred
and be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Debentures then outstanding may declare the principal of all the
Debentures to be due and payable immediately, but if the Company shall cure all
defaults (other than the nonpayment of interest and premiums, if any, on and
principal of any Debentures which shall have become due solely by reason of
acceleration) and certain other conditions are met, such declaration may be
annulled and past defaults may be waived by the holders of a majority in
principal amount of the Debentures then outstanding.
The holders of a majority in principal amount of the Debentures then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee subject to
certain limitations specified in the Indenture.
In certain cases, the holders of a majority in principal amount of the
outstanding Debentures may on behalf of the holders of all Debentures waive any
past default or Event of Default except, unless theretofore cured, a default in
the payment of the principal of, premium, if any, or interest on any of the
Debentures (other than the nonpayment interest and premium, if any, on and
principal of any Debentures which shall become due by acceleration) or a default
relating to an obligation of the Company which cannot be modified without the
consent of the holder of each Debenture affected.
35
<PAGE> 41
MERGERS AND SALES OF ASSETS BY THE COMPANY
Subject to the provisions described above under "Repurchase Event," the
Company may consolidate with or merge into any other corporation, or sell or
transfer all or substantially all of its assets to any corporation, provided
that the successor corporation shall be a corporation organized and existing
under the laws of the United States or any State thereof and shall assume all of
the obligations of the Company under the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture will contain provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Debentures at the time outstanding, to modify the
Indenture or any supplemental indenture or the rights of the holders of the
Debentures except that no such modification shall, without the consent of the
holder of each Debenture so affected (i) extend the fixed maturity of any
Debenture, reduce the rate or extend the time of payment of interest thereon,
reduce the principal amount thereof or redemption premium thereon, impair or
affect the right of a holder to institute suit for the payment thereof, change
the currency in which the Debentures are payable or impair the right to convert
the Debentures into shares of Common Stock subject to the terms set forth in the
Indenture, or (ii) reduce the aforesaid percentage of Debentures, the consent of
the holders of which is required for any such modification.
MISCELLANEOUS
No holder of a Debenture may institute any action against the Company under
the Indenture (except actions for payment of overdue principal, premium, if any,
or interest or the conversion of the Debentures) unless the holders of at least
25% of the principal amount of Debentures then outstanding shall have requested
the Trustee to institute such action, and the Trustee shall not have instituted
such action within 60 days of such request.
A director, officer, employee or shareholder, as such, of the Company shall
not have any liability for any obligations of the Company under the Debentures
or the Indenture, or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each holder of Debentures by accepting a
Debenture waives and releases all such liability. The waiver and release are
part of the consideration for the issuance of the Debentures.
Whether or not required by the rules and regulations of the Commission, so
long as any Debentures are outstanding, the Company will furnish holders of
Debentures all quarterly and annual information that would be required to be
furnished to its shareholders.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, the Trustee under the Indenture, may
at times be a depository for funds of, make loans to or perform services for the
Company and its subsidiaries in the normal course of business. The Indenture
does not preclude the Trustee from enforcing its rights as a creditor, including
rights as a holder of Senior Indebtedness.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The capital stock provisions of the Company's Restated Articles of
Incorporation are summarized below.
COMMON STOCK
The Company's Restated Articles of Incorporation authorize 5,000,000 shares
of Common Stock, without par value, of which 2,320,361 shares are expected to be
outstanding upon consummation of the
36
<PAGE> 42
Offering. The existence of authorized but unissued shares of the Common Stock
could discourage unsolicited takeover bids by third parties.
Except as otherwise required by law or by any amendment to the Restated
Articles of Incorporation, each holder of Common Stock shall have one vote for
each share of stock held of record on the books of the Company on all matters
voted upon by the shareholders.
Subject to the preferential dividend rights, if any, applicable to shares
of Preferred Stock and subject to applicable requirements, if any, with respect
to the setting aside of sums for purchase, retirement or sinking funds for
Preferred Stock, the holders of Common Stock shall be entitled to receive, to
the extent permitted by law, such dividends as may be declared from time to time
by the Board of Directors.
In the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the Company, after distribution in full
of the preferential amounts, if any, to be distributed to the holders of shares
of Preferred Stock, holders of Common Stock shall be entitled to receive all of
the remaining assets of the Company of whatever kind available for distribution
to shareholders ratably in proportion to the number of shares of Common Stock
held by them respectively. The Board of Directors may distribute in kind to the
holders of Common Stock such remaining assets of the Company or may sell,
transfer or otherwise dispose of all or any part of such remaining assets to any
other corporation, trust or entity, or any combination thereof, and may sell all
or any part of the consideration so received and distribute any balance thereof
in kind to holders of Common Stock. The merger or consolidation of the Company
into or with any other corporation, or the merger of any other corporation into
it, or any purchase or redemption of shares of stock of the Company of any
class, shall not be deemed to be a dissolution, liquidation or winding up of the
Company for the purposes of this paragraph.
Such numbers of shares of Common Stock as may from time to time be required
for such purposes shall be reserved for issuance (i) upon conversion of any
shares of Preferred Stock or any obligation of the Company convertible into
shares of Common Stock which is at the time outstanding or issuable upon
exercise of any options or warrants at the time outstanding and (ii) upon
exercise of any options, warrants or rights at the time outstanding to purchase
shares of Common Stock.
At December 27, 1995, there were 311 shareholders of the Common Stock of
record.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
Company's shareholders, to issue up to 500,000 shares of the Company's Preferred
Stock in one or more series and to fix the voting powers, rights, preferences,
privileges and restrictions thereof.
The existence of authorized but unissued shares of the Preferred Stock and
the issuance of shares of the Preferred Stock could have the effect of delaying,
deferring or preventing a change in control of the Company. The Board of
Directors, without shareholder approval, could issue shares of the Preferred
Stock with voting and conversion rights which could adversely affect the voting
power of the holders of shares of the Common Stock and could adversely affect
the value of the Debentures. In addition, such shares of the Preferred Stock
could have other rights, including economic rights, senior to shares of the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of shares of the Common Stock and the
Debentures. Currently there are no shares of the Preferred Stock outstanding,
and the Company has no present plan to issue any shares of the Preferred Stock.
SHAREHOLDER AGREEMENT
Certain shareholders of the Company, which include Rand W. Mueller, Kenneth
M. Mueller and Larry Vingelman (the "Principal Shareholders"), entered into a
Shareholder Agreement dated May 29, 1987, as amended (the "Shareholder
Agreement"), pursuant to which such shareholders vote their shares as a unit in
accordance with the desires of a plurality of the shares held by the Principal
Shareholders. The Principal Shareholders have voting control of 29.6% of the
outstanding shares of Common Stock ( percent upon conversion of all of the
Debentures offered herein). Any additional Common Stock acquired by the
Principal
37
<PAGE> 43
Shareholders is subject to the voting provisions of the Shareholder Agreement.
The shares held by the Principal Shareholders are subject to certain rights of
first refusal among the Principal Shareholders prior to a third party sale and
certain options to purchase shares upon the death of any Principal Shareholder.
These rights and options may be waived by shareholders holding more than
two-thirds of the shares subject to the Shareholder Agreement. The Shareholder
Agreement terminates on the earlier of May 28, 1997 or a date selected by
shareholders owning greater than two-thirds of the shares subject to the
Shareholder Agreement.
PROVISIONS AFFECTING BUSINESS COMBINATIONS
Chapters 7A and 7B of the Michigan Business Corporation Act ("MBCA") may
affect attempts to acquire control of the Company. In general, under Chapter 7A,
"business combinations" (defined to include, among other transactions, certain
mergers, dispositions of assets or shares and recapitalizations) between covered
Michigan business corporations or their subsidiaries and an "interested
shareholder" (defined as the direct or indirect beneficial owner of at least 10%
of the voting power of a covered corporation's outstanding shares) can be
consummated only if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the interested shareholder or such shareholder's affiliates,
unless five years have elapsed after the person involved became an "interested
shareholder" and unless certain price and other conditions are satisfied. The
Board of Directors may exempt "business combinations" with a particular
"interested shareholder" by resolution adopted prior to the time the "interested
shareholder" attained that status.
In general, under Chapter 7B of the MBCA, an entity that acquires "Control
Shares" of the Company may vote the Control Shares on any matter only if a
majority of all shares, and of all non-"Interested Shares," of each class of
shares entitled to vote as a class, approve such voting rights. Interested
Shares are shares owned by officers of the Company, employee-directors of the
Company and the entity making the Control Share Acquisition. Control Shares are
shares that, when added to shares already owned by an entity, would give the
entity voting power in the election of directors over any of three thresholds:
one-fifth, one-third and a majority. The effect of the statute is to condition
the acquisition of voting control of a corporation on the approval of a majority
of the pre-existing disinterested shareholders. The Board of Directors has the
option of choosing to amend the Company's Bylaws before a Control Share
Acquisition occurs to provide that Chapter 7B does not apply to the Company.
The Company currently is subject to Chapters 7A and 7B of the MBCA.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe is the transfer agent and registrar for shares of the
Common Stock.
38
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 2,320,361 shares of Common Stock outstanding of which its
executive officers and directors and principal shareholders beneficially own
approximately 730,887 shares. These shares are eligible for sale subject to the
restrictions and volume limitations of Rule 144 under the Securities Act of
1933. Sales of substantial amounts of such shares in the market could adversely
affect the market price of the Common Stock and the Company's ability to raise
additional capital at a price favorable to the Company. See "Risk Factors --
Shares Eligible for Sale; Demand Registration Rights."
UNDERWRITING
Roney & Co. and The Ohio Company (the "Underwriters") have individually
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the principal amounts of Debentures
indicated below opposite their respective names at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such Debentures if any are purchased.
<TABLE>
<CAPTION>
NAME PRINCIPAL AMOUNT
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Roney & Co................................................................... $
The Ohio Company.............................................................
-------------
Total.............................................................. $ 10,000,000
=============
</TABLE>
The Underwriters propose to offer the Debentures to the public initially at
the offering price set forth on the coverage page of this prospectus and to
certain broker-dealers at such offering price less a concession not to exceed
% of the principal amount. The Underwriters may allow, and such broker
dealers may reallow a concession, not to exceed % of the principal amount, on
sales to other broker dealers. The offering price and concessions to broker
dealers may be changed by the Underwriters after the public offering.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days from the date of this Prospectus, to purchase up to an additional
$1,500,000 principal amount of Debentures to cover over-allotments. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the $10,000,000 principal amount of Debentures
offered hereby. If purchased, the Underwriters will sell such additional
Debentures on the same terms on which the $10,000,000 principal amount of
Debentures are being offered.
The Company and all executive officers and directors have agreed that they
will not, without the prior written consent of the Underwriters, sell, transfer,
assign or otherwise dispose of any shares of Common Stock owned by them prior to
the expiration of 120 days from the date of the Underwriting Agreement.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933.
The Underwriting Agreement provides that the Underwriters will be obligated
to purchase all of the Debentures offered hereby if any are purchased.
The offering of Debentures is made for delivery when, as and if accepted by
the Underwriters, subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any offer for the purchase of Debentures in whole or in part.
39
<PAGE> 45
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the 1934 Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy and information statements
and other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: New York Regional Office, 7 World Trade Center, New York, NY 10048;
and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy
and information statements and other information concerning the Company can also
be inspected at the offices of the National Association of Securities Dealers at
1735 K Street, N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C., a registration
statement on Form S-2 (the "Registration Statement") under the Securities Act of
1933 with respect to the Debentures offered hereby. This Prospectus, which is
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Debentures offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained herein concerning the
provisions of any document are not necessarily complete and in each instance
reference is made to the copy of such document filed as an exhibit or schedule
to the Registration Statement, each such statement being qualified in all
respects by reference to such exhibit or schedule.
The Registration Statement, together with its exhibits and schedules, may
be inspected, without charge, at the Commission's principal office at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and also at the following
regional offices of the Commission: 7 World Trade Center, New York, NY 10048;
and Suite 1400 Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained from the
Commission upon the payment of prescribed fees.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Debentures and
Common Stock offered hereby will be passed upon for the Company by Clark, Klein
& Beaumont, P.L.C., Detroit, Michigan, and for the Underwriters by Honigman
Miller Schwartz and Cohn, Detroit, Michigan.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1993 and 1994 and for each of the three fiscal years in the period ended
December 31, 1994 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
40
<PAGE> 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Consolidated Financial Statements of Code-Alarm, Inc. and Subsidiaries:
Report of Independent Public Accountants....................................... F-2
Consolidated Balance Sheet as of December 31, 1993 and 1994 and September 30,
1995 (unaudited)............................................................ F-3
Consolidated Statement of Operations for the Years Ended December 31, 1992,
1993 and 1994 and the Nine Months Ended September 30, 1994 and 1995
(unaudited)................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December
31, 1992, 1993 and 1994 and the Nine Months Ended September 30, 1995
(unaudited)................................................................. F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 1992,
1993 and 1994 and the Nine Months Ended September 30, 1994 and 1995
(unaudited)................................................................. F-6
Notes to Consolidated Financial Statements..................................... F-7 - F-14
Financial Statement Schedule:
II. Valuation and Qualifying Accounts and Reserves............................. F-15
</TABLE>
F-1
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Code-Alarm, Inc.
We have audited the accompanying consolidated balance sheets of Code-Alarm,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Code-Alarm, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Detroit, Michigan
November 1, 1995
F-2
<PAGE> 48
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 227 $ 107 $ 261
Accounts receivable, less allowance for doubtful accounts
(December 31, 1993 and 1994, $554,000 and $383,000,
September 30, 1995, $462,000) (Note 4)...................... 6,468 11,530 13,104
Inventories (Notes 2 and 4)................................... 7,413 12,892 14,812
Refundable income taxes....................................... -- 323 634
Deferred income taxes......................................... 655 494 494
Other......................................................... 388 735 893
------- ------- -------
Total current assets........................................ 15,151 26,081 30,198
Property and equipment, net of accumulated depreciation and
amortization (Notes 3 and 4)................................ 3,355 4,130 4,484
OTHER ASSETS:
Excess of cost over net assets acquired, net.................. 3,164 4,293 4,217
Other intangibles, net........................................ 810 1,272 992
Deferred income taxes......................................... -- 1,029 1,029
Other......................................................... 1,654 1,016 1,551
------- ------- -------
Total other assets.......................................... 5,628 7,610 7,789
------- ------- -------
Total assets................................................ $24,134 $37,821 $42,471
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4).................... $ 105 $ 1,443 $ 2,431
Accounts payable.............................................. 5,251 8,791 11,258
Income tax payable............................................ 39 -- --
Accrued expenses.............................................. 1,592 3,131 2,775
------- ------- -------
Total current liabilities................................... 6,987 13,365 16,464
Long-term debt (Note 4)....................................... 3,568 9,511 10,085
Reserve for litigation (Note 9)............................... -- 3,729 5,440
Deferred income taxes......................................... 299 -- --
------- ------- -------
Total liabilities........................................... 10,854 26,605 31,989
------- ------- -------
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, 1993, 2,395,845 shares,
December 31, 1994, 2,319,961 shares, September 30, 1995,
2,320,361................................................... 12,946 12,209 12,210
Foreign currency translation adjustment....................... -- 49 49
Retained earnings (accumulated deficit)....................... 334 (1,042) (1,777)
------- ------- -------
13,280 11,216 10,482
------- ------- -------
$24,134 $37,821 $42,471
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 49
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (Note 10)............................ $45,685 $50,110 $73,508 $56,435 $54,825
Cost of sales.................................. 32,296 30,190 45,886 35,352 35,284
------- ------- ------- ------- -------
Gross profit................................... 13,389 19,920 27,622 21,083 19,541
------- ------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing............................ 9,791 9,346 13,955 9,984 8,845
Engineering.................................... 1,617 1,688 2,696 1,892 2,317
General and administrative..................... 5,636 6,520 7,928 6,494 6,307
------- ------- ------- ------- -------
17,044 17,554 24,579 18,370 17,469
------- ------- ------- ------- -------
Income (loss) from operations.................. (3,655) 2,366 3,043 2,713 2,072
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense............................... (426) (279) (645) (425) (956)
Litigation expense............................. -- -- (4,386) -- (1,825)
Other, net..................................... 5 57 (98) (88) (86)
------- ------- ------- ------- -------
(421) (222) (5,129) (513) (2,867)
------- ------- ------- ------- -------
Income (loss) before income taxes.............. (4,076) 2,144 (2,086) 2,200 (795)
------- ------- ------- ------- -------
INCOME TAXES (BENEFITS) (NOTE 8):
Current........................................ (925) 791 457 774 (60)
Deferred....................................... (249) (183) (1,167)
------- ------- ------- ------- -------
(1,174) 608 (710) 774 (60)
------- ------- ------- ------- -------
Net income (loss).............................. $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735)
======= ======= ======= ======= =======
Net income (loss) per common share............. $ (1.16) $ 0.63 $ (0.58) $ 0.60 $ (0.32)
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding.................................. 2,495 2,445 2,376 2,392 2,320
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 50
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE RETAINED
COMMON STOCK FOREIGN EARNINGS TOTAL
----------------- TRANSLATION (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT ADJUSTMENT DEFICIT) EQUITY
------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1992.................. 2,500 $13,739 $ $ 1,700 $ 15,439
Purchase and retirement of common stock
from a director......................... (5) (25) (25)
Net loss for the year..................... (2,902) (2,902)
----- ------- ---- -------- --------
Balance, December 31, 1992................ 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
Cumulative 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
Net loss for nine months.................. (735) (735)
Stock issued under stock option plan...... 1 1
----- ------- ---- -------- --------
Balance, September 30, 1995 (unaudited)... 2,320 $12,210 $ 49 $ (1,777) $ 10,482
===== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 51
CODE-ALARM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ---------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $(2,902) $ 1,536 $(1,376) $ 1,426 $ (735)
------- ------- ------- ------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 1,580 1,381 1,615 1,152 1,272
Gain on sale of equipment (70) (6) -- -- --
Provision for losses on accounts receivable.............. 1,085 726 83 436
Changes in assets and liabilities:
Accounts receivable.................................... (146) (882) (131) (863) (1,561)
Inventories............................................ (223) 743 (3,734) (1,837) (2,244)
Refundable income taxes................................ (408) 1,191 (243) (244) (306)
Deferred income taxes.................................. (341) 195 (1,167) -- --
Other assets........................................... (164) (841) 160 (644) (54)
Accounts payable....................................... 2,466 (518) 488 508 1,617
Accrued expenses....................................... 181 295 (291) 285 (542)
Reserve for litigation................................. -- -- 3,729 -- 1,711
------- ------- ------- ------- -------
Total adjustments........................................ 3,960 2,284 509 (1,643) 329
------- ------- ------- ------- -------
Net cash provided by (used in) operating activities...... 1,058 3,820 (867) (217) (406)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment............................ 10 130 -- -- --
Purchases of property and equipment........................ (1,065) (981) (1,177) (1,246) (806)
Purchase of Europe Auto Equipement, net of cash received... -- -- (931) 605 --
Payment for intangible assets.............................. -- (477) (905) (514) (37)
------- ------- ------- ------- -------
Net cash used in investing activities.................... (1,055) (1,328) (3,013) (1,155) (843)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................... 398 -- 4,056 1,077 --
Reduction of long-term debt................................ (111) (141) (592) -- (831)
Proceeds from line of credit............................... 20,117 25,389 46,140 36,015 29,173
Reduction of line of credit................................ (20,329) (27,133) (44,289) (35,758) (26,940)
Purchase and retirement of common stock.................... (25) (776) (1,561) (117) --
Issuance of stock options.................................. -- 8 6 -- 1
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities...... 50 (2,653) 3,760 1,217 1,403
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents....... 53 (161) (120) (155) 154
Cash and cash equivalents, beginning of year............... 335 388 227 227 107
------- ------- ------- ------- -------
Cash and cash equivalents, end of year..................... $ 388 $ 227 $ 107 $ 72 $ 261
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 355 $ 288 $ 581 $ 204 $ 814
======= ======= ======= ======= =======
Income taxes, net........................................ $ (466) $ (887) $ 881 $ 200 $ 150
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CODE-EUROPE,
-----------------------------------
TOTAL LTD. EAE
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES FOR 1994:
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 1992, the Company acquired approximately $1,082,500 in leasehold
improvements and other property in exchange for land, building and improvements
with a net value of approximately $518,500, a mortgage obligation of $450,000
and approximately $114,000 cash.
The Company received a $116,000 equity investment in a corporation during
1992 as proceeds due from the sale of certain equipment and accounts receivable.
During 1994, the Company entered into a $500,501 capital lease obligation
for machinery and equipment.
During 1995, the Company entered into a $565,000 capital lease obligation
for computer equipment, of which $80,000 has been paid. Also, during 1995, the
Company exchanged inventory for a $616,000 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.
F-6
<PAGE> 52
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
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 initial
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
substantially 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 income. 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 flow is 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, 1994. The costs
of all other intangible assets, comprised primarily of covenants-not-to-compete
and 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 $1,100,000,
$1,643,000 and $1,499,000 at December 31, 1993 and 1994 and September 30, 1995,
respectively.
REVENUE RECOGNITION
Revenues are recognized from sales when a product is shipped. The Company
provides an accrual for future product return and warranty costs based upon the
relationship of prior years' sales to costs incurred. Accrued warranty costs
amounted to approximately $400,000, $300,000 and $355,000 at December 31, 1993
and 1994 and September 30, 1995, respectively.
F-7
<PAGE> 53
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Expenditures for the research and development of new and improved products
are charged to operations as incurred and aggregated approximately $342,000,
$358,000 and $572,000 for the years ended December 31, 1992, 1993 and 1994 and
$417,000 and $395,000 for the nine months ended September 30, 1994 and 1995.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
109, deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities.
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 material.
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, gains or losses resulting from foreign currency transactions are
included in the statement of operations.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1993 1994 1995
------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials............................................... $5,138 $ 7,217 $ 6,793
Work in process............................................. 1,083 1,552 173
Finished goods.............................................. 1,192 4,123 7,846
------ ------- ----------
$7,413 $12,892 $14,812
====== ======= ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized by the following major
classifications:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Machinery and equipment...................................... $5,715 $7,704 $ 8,325
Leasehold improvements....................................... 1,303 1,312 1,312
Furniture and fixtures....................................... 500 663 1,267
------ ------ ----------
7,518 9,679 10,904
Less accumulated depreciation.............................. 4,163 5,549 6,420
------ ------ ----------
$3,355 $4,130 $ 4,484
====== ====== ==========
</TABLE>
F-8
<PAGE> 54
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense was approximately $1,313,000, $1,064,000 and
$1,093,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $798,000 and $879,000 for the nine months ended September 30, 1994 and 1995,
respectively.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER
1993 1994 1995
------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit agreement.................................... $3,000 $ 4,851 $ 6,024
Term loans.................................................... -- 3,606 3,225
Working capital facilities.................................... -- 1,445 2,505
Notes payable................................................. 265 185
Mortgage note................................................. 408 383 363
Capital lease obligations..................................... -- 484 399
------ ------- -------
3,673 10,954 12,516
Less current portion..................................... 105 1,443 2,431
------ ------- -------
$3,568 $ 9,511 $10,085
====== ======= =======
</TABLE>
In 1994 the Company had a loan agreement with Comerica Bank. The $7,500,000
revolving credit provision 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 $0.2 million
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 one to one and
three-quarter 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 revolving credit facility for working capital requirements, $1.3 million
secured non-amortizing notes and $2.2 million unsecured in 4 year term notes.
The revolving credit facility expires in May 1997 and bears interest at NBD
Bank's prime rate (8.75% at December 8, 1995) or at the Company's option at
LIBOR plus 1.5% to 2.5% for maturities ranging from one to six months (from
8.063% to 8.375%, respectively, at December 8, 1995). On October 17, 1995, the
credit arrangement was amended to temporarily provide an additional $0.8 million
under the revolving credit facility, available until February 29, 1996. At
September 30, 1995 a standby letter of credit in the amount of $5.9 million has
been issued 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 current
assets and 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 September 30, 1995, the
F-9
<PAGE> 55
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company was in default with certain of the covenants. NBD Bank has agreed to
amend the credit agreement as of September 30, 1995. Such amendment, when
effective, will place the Company in compliance.
A foreign subsidiary of the Company has a credit arrangement with its
commercial bank which includes term loans totaling approximately $2.1 million,
with interest rates ranging from 8% to 11%. Payments are due monthly, with final
payments due in 1996.
The Company has working capital facilities with three French lenders. These
loans bear interest at rates of 8.8 percent to 11.5 percent and require
quarterly principal payments of approximately $125,000 through 1997.
The mortgage note is payable to the City of Georgetown, Texas, in monthly
installments of $4,401, including interest at seven percent per annum, through
January of 2005, and is collateralized by the leasehold improvements.
The following table sets forth aggregate maturities of long-term debt
(excluding capital lease obligations) at September 30, 1995:
<TABLE>
<S> <C>
1995................................................................. $2,699
1996................................................................. 1,350
1997................................................................. 7,999
1998................................................................. 126
1999................................................................. 102
Thereafter........................................................... 240
</TABLE>
Minimum lease payments on capital lease obligations at December 31, 1994
are:
<TABLE>
<S> <C>
1995................................................................... $124
1996................................................................... 124
1997................................................................... 124
1998................................................................... 124
1999................................................................... 97
----
Total minimum lease payments......................................... 593
Less amount representing interest.................................... 109
----
Present value of net minimum lease payments.......................... $484
====
</TABLE>
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>
1995................................................................... $732
1996................................................................... 719
1997................................................................... 444
1998................................................................... 122
1999................................................................... 122
</TABLE>
Rent expense under all operating leases was approximately $682,200,
$637,000 and $769,000 for the years ended December 31, 1992, 1993 and 1994 and
$576,000 and $602,000 for the nine months ended September 30, 1994 and 1995,
respectively.
F-10
<PAGE> 56
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. All purchases 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.
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,
-----------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning.............................................. 141,200 104,550 125,875
Granted......................................................... 10,500 46,000 102,000
Exercised....................................................... (1,000) (6,815) (1,200)
Canceled or terminated.......................................... (46,150) (17,860) (10,300)
------- ------- -------
Balance, ending................................................. 104,550 125,875 216,375
======= ======= =======
</TABLE>
These options and rights were issued at various prices ranging from $4.25
per share to $22.28 per share. At December 31, 1994, 61,175 options were
exercisable at prices ranging from $4.25 to $20.25 per share. In 1994, 1,200
Stock Options and Stock Appreciation Rights were exercised at $4.25 to $5.00 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.
F-11
<PAGE> 57
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the consideration given in the acquisition of EAE, the Company
may pay the sellers up to 2,000,000 French francs ($1 U. S. equals 5.355 French
franc at December 31, 1994) based upon EAE's 1994 sales and satisfaction of
certain other conditions. Any additional payments will be treated as additional
purchase considerations in 1995, increasing intangible assets.
The pro forma results listed below are unaudited and reflect adjustments
assuming the acquisition occurred January 1, 1993:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<S> <C>
Net sales..................................................... $ 60,768
Operating earnings............................................ 2,540
Net earnings.................................................. 1,526
Earnings per share............................................ 0.62
</TABLE>
8. INCOME TAXES
The effective income tax rates differed from the statutory income tax rate
due to the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1992 1993 1994 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statutory rate....................... 34% 34% 34% 34% 34%
Differences resulting from:
Goodwill amortization.............. (1) 1 1 1 (1)
Effect of lower foreign tax
rates........................... -- -- (1) -- --
Effect of net operating loss
carryforwards................... (4) (7) -- -- --
Charge off of state and foreign tax
refunds receivable.............. -- -- -- -- (25)
--- --- --- --- ---
Effective income tax rates........... 29% 28% 34% 35% 8%
=== === === === ===
</TABLE>
Current income tax expense for 1994 includes $73,000 of foreign income
taxes. There were no foreign income taxes for 1993 or 1992.
Deferred tax assets and liabilities as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
1993 1994
---- ------
(IN THOUSANDS)
<S> <C> <C>
Expenses deductible earlier for financial statement
purposes than for tax purposes.......................... $515 $ 324
Litigation loss not deductible for tax purposes........... -- 1,462
Expense included in inventory for tax purposes............ 168 181
---- ------
Total deferred tax assets............................... 683 1,967
---- ------
Net value of fixed assets................................. 188 272
Capitalization of assets expensed for tax purposes........ 139 172
---- ------
Total deferred tax liabilities.......................... 327 444
---- ------
Net deferred tax assets................................. $356 $1,523
==== ======
</TABLE>
The Company does not provide U. S. income taxes on the undistributed
earnings of foreign subsidiaries, as such earnings are intended to be reinvested
in these operations. Accumulated undistributed earnings, net, of
F-12
<PAGE> 58
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the foreign subsidiaries are approximately $121,000, which would have resulted
in federal income taxes of approximately $41,000 at December 31, 1994.
Deferred income tax benefits for 1992, using the deferred method under
Accounting Principles Board Opinion No. 11, resulted from:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Expenses deductible earlier for financial statement purposes
than for tax purposes....................................... $ (49)
Consulting fees............................................... (48)
Deficit of tax over book depreciation......................... (138)
Expenses included in inventory for tax purposes............... (6)
Sale of property, plant and equipment......................... (95)
Deferred tax charges not recognized due to loss
carryforwards............................................... 163
Other, net.................................................... (76)
-------
$ (249)
===========
</TABLE>
9. LITIGATION
The Company is involved in a patent infringement suit involving a shock
sensing device. During 1993, an appeals court found the Company 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 1995, 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.
During 1993, the Company became involved in several legal proceedings
following the Company's decision to aggressively defend its patent rights. The
Company is asserting its patent rights against the defendants in these cases,
and such defendants have made claims against the Company. The outcome of these
cases cannot be reasonably estimated.
The Company, on March 16, 1995, was named as a defendant in an action
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
F-13
<PAGE> 59
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Ford.................................................... 15% 16% 11%
GM...................................................... 16% 16% 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>
GEOGRAPHIC AREAS YEAR ENDED
DECEMBER 31, 1994
-----------------
(IN MILLIONS)
<S> <C>
Net Sales
Domestic.................................................... $55,978
European.................................................... 17,530
-------
Consolidated............................................. $73,508
-------
Operating Income
Domestic.................................................... $ 2,623
European.................................................... 420
-------
Consolidated............................................. $ 3,043
-------
Assets
Domestic.................................................... $29,390
European.................................................... 8,431
-------
Consolidated............................................. $37,821
=======
</TABLE>
Export sales for 1994, 1993 and 1992 were not significant.
11. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
During the fourth quarter of 1992, charges of approximately $1.4 million
(pretax) were recorded relating to the valuation and disposal of obsolete
inventory.
F-14
<PAGE> 60
CODE-ALARM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------------------ ----------- ----------
ADDITIONS
------------------------
CHARGED TO (1)
BALANCE AT CHARGED TO OTHER 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, 1994......... $ 554,000 -- -- $ 171,000 $ 383,000
Year ended December 31, 1993......... 416,000 $ 726,000 -- 588,000 554,000
Year ended December 31, 1992......... 673,000 1,085,000 -- 1,342,000 416,000
</TABLE>
- -------------------------
Note: (1) Write-off uncollectible accounts, net of recoveries
F-15
<PAGE> 61
[PHOTOGRAPHS]
Code-Alarm sells its products through more than 1,200 independent specialty
stores, automotive expeditors, and mass merchandisers such as Sears and Best
Buy. The Company's vehicle security products include Code-Alarm(R), Chapman(R)
and Anes(R) in North America, and Dragon, Jack-Code, Codalarme and Euro-Alarm
in Europe.
<PAGE> 62
- -------------------------------------------------------
- -------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE DEBENTURES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE DEBENTURES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference............................ 2
Prospectus Summary..................... 3
Risk Factors........................... 6
Company History........................ 10
Use of Proceeds........................ 10
Price Range of Common Stock............ 11
Dividend Policy........................ 11
Capitalization......................... 12
Selected Consolidated Financial Data... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Changes in Company's Certifying
Accountant........................... 18
Business............................... 19
Legal Proceedings...................... 27
Management............................. 30
Description of Debentures.............. 31
Description of Capital Stock........... 36
Shares Eligible for Future Sale........ 39
Underwriting........................... 39
Available Information.................. 40
Additional Information................. 40
Legal Matters.......................... 40
Experts................................ 40
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
$10,000,000
LOGO
% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2003
------------------------------
P R O S P E C T U S
-----------------------------
RONEY & CO. THE OHIO COMPANY
, 1996
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses incurred in connection with the offering of the
Common Stock are as follows:
<TABLE>
<S> <C>
SEC registration fees................................................... $ 3,965.52
National Association of Securities Dealers, Inc. filing fee............. 1,650.00
Printing and engraving.................................................. 75,000.00
Legal fees and expenses................................................. 150,000.00
Blue Sky fees and expenses.............................................. 10,000.00
Accounting fees and expenses............................................ 150,000.00
Trustee fees and expenses............................................... 10,000.00
Miscellaneous........................................................... 4,384.48
-----------
Total......................................................... $405,000.00
===========
</TABLE>
Each amount set forth above, except for the SEC registration fee and the
NASD filing fee, is estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Michigan Business Corporation Act. The Registrant is organized under the
MBCA which, in general, empowers Michigan corporations to indemnify a person who
was or is a party or threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative and whether formal or informal other than actions by or in the
right of the corporation, by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, whether for profit or not, against expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholder, and with respect to any criminal action or
proceeding, if the person had no reasonable cause to believe his or her conduct
was unlawful.
The MBCA also empowers Michigan corporations to provide similar indemnity
to such a person for expenses and amounts paid in settlement, actually and
reasonably incurred, in actions or suits by or in the right of the corporation
except in respect of any claim, issue or matter as to which such person has been
found liable to the corporation, unless and only to the extent that a court
determines that, despite the adjudication of the liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity.
The MBCA also empowers Michigan corporations to pay or reimburse the
reasonable expenses incurred by such persons in advance of a final disposition
of the proceeding; provided, among other things, that the person undertake to
repay the amount advanced if it is ultimately determined that he or she did not
meet the necessary standard of conduct.
Articles of Incorporation and Bylaws. The Registrant's Restated Articles
of Incorporation and Restated Bylaws generally provide that directors and
officers will be indemnified to the fullest extent permissible under Michigan
law against all expenses (including amounts paid in settlement) incurred in any
proceeding (whether or not such proceeding was by or in the right of the
Registrant) in which they were a party because of their position as a director
or officer of the Registrant or because they served at the request of the
Registrant as a director, officer, employee or agent of another corporation or
entity. The provisions also provide for the advancement of litigation expenses.
The Registrant has the burden of proof to show such indemnification to be
improper.
II-1
<PAGE> 64
Indemnification Agreements. The Registrant has entered into
indemnification agreements in the form incorporated by reference as Exhibit 10.4
to this Registration Statement, with each of its officers and members of its
Board of Directors. The indemnification agreements contain the same general
provisions as the indemnification provision in the Restated Articles of
Incorporation and Bylaws but establishes a separate contractual basis for such
indemnification and contains an undertaking to repay by the indemnitee any
amounts advanced if it is determined that such advance was improper.
Reference is also made to the Undertaking contained in Item 17 of this
Registration Statement.
ITEM 16. (A) EXHIBITS
<TABLE>
<C> <S>
1 -- Form of Underwriting Agreement between the Company, Roney & Co. and The Ohio Company(1)
4 -- Form of Indenture(1)
5 -- Legal Opinion of Clark, Klein & Beaumont, P.L.C.(1)
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")(1)
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 10-Q")(1)
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")(1)
10.4 -- Indemnification Agreement with Rand W. Mueller, incorporated by reference to Exhibit
10.4 to the Company's Form S-18 ("Form S-18")(1)
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
Kenneth M. Mueller
Jack C. Chilingirian
William S. Pickett
Alan H. Foster
David L. Etienne
Richard Wierzbicki
Peter J. Stouffer
Jack D. Rutherford
Robert V. Wagner
John G. Chupa
Michael P. Schroeder
John C. Moffat
10.6 -- Consulting and Non-Compete Agreement with David L. Skinner, incorporated by reference to
Exhibit 10.6 to 1990 Form 10-K(1)
10.7 -- Non-Compete Agreement with David L. Skinner and Shirley A. Skinner, incorporated by
reference to Exhibit 10.9 to Form S-1(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")(1)
10.9 -- Consulting Agreement with Kenneth M. Mueller, incorporated by reference to Exhibit 10.9
to Form S-18(1)
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(1)
10.11 -- Lease of real property at 300 Industrial Avenue, Georgetown, Texas, incorporated by
reference to Exhibit 10.11 to 9 to the Company's Form 10-K for the year ended December
31, 1991 ("1991 Form 10-K")(1)
</TABLE>
II-2
<PAGE> 65
<TABLE>
<C> <S>
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")(1)
10.14 -- Lease of real property at 16742 Burke Lane, Huntington Beach, California, incorporated
by reference to Exhibit 14 to 1994 Form 10-K(1)
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(1)
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 10.20 to 1994 Form 10-K(1)
10.21 -- Chrysler Corporation contract, incorporated by reference to Exhibit 10.21 to Form S-1 as
amended by amendments to Exhibit 10.21 to 1994 Form 10-K(1)
10.22 -- Purchase Agreement with Mitsubishi Motor Sales of America, Inc., incorporated by
reference to Exhibit 10.22 to 1992 Form 10-K(1)
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(1)
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(1)
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(1)
10.28 -- Commitment Letter from NBD Bank, April 7, 1995, incorporated by reference to Exhibit
10.28 to 1994 Form 10-K, incorporated by reference to Exhibit 10.28 to 1994 Form 10-K,
Loan Agreement with NBD Bank as of May 23, 1995; 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 dated November 1, 1995 to Loan
Agreement with NBD Bank as of May 23, 1995, incorporated by reference to Exhibit 10.28
to the Company's Form 10-Q for the quarter ended September 30, 1995(1)
10.29 -- Purchase Agreement with Subaru of America, Inc., incorporated by reference to Exhibit
10.29 to the Company's Form 10-Q for the quarter ended September 30, 1995(1)
11 -- Statement regarding computation of per share earnings(1)
12 -- Statement re computation of ratios(1)
16 -- Letter re change in certifying accountant, incorporated by reference to Exhibit 16.1 to
Current Report on Form 8-K dated as of July 22, 1995(1)
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Clark, Klein & Beaumont, P.L.C.(2)
24 -- Powers of Attorney(1)
25 -- Statement of Eligibility of Trustee on Form T-1(1)
</TABLE>
- ---------------
(1) Previously filed.
(2) Contained in Exhibit 5.
II-3
<PAGE> 66
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the Securities offered therein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Madison Heights, State of Michigan, on January 18, 1996.
CODE-ALARM, INC.
By: /s/ RAND W. MUELLER
------------------------------------
Rand W. Mueller
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------- ------------------
<S> <C> <C>
/s/ RAND W. MUELLER President (Principal January 18, 1996
- ---------------------------------------- Executive Officer) and
Rand W. Mueller Director
/s/ ROBERT V. WAGNER Secretary, Treasurer, Vice January 18, 1996
- ---------------------------------------- President of Finance
Robert V. Wagner (Principal Financial Officer)
/s/ DAVID L. ETIENNE Principal Accounting Officer January 18, 1996
- ----------------------------------------
David L. Etienne
* Director January 18, 1996
- ----------------------------------------
Marshall J. Mueller
* Director January 18, 1996
- ----------------------------------------
Kenneth M. Mueller
* Director January 18, 1996
- ----------------------------------------
Jack D. Rutherford
* Director January 18, 1996
- ----------------------------------------
William S. Pickett
* Director January 18, 1996
- ----------------------------------------
Alan H. Foster
* Vice President, Engineering January 18, 1996
- ---------------------------------------- and Director
Peter J. Stouffer
*By: /s/ RAND W. MUELLER
- ----------------------------------------
Rand W. Mueller
Attorney-In-Fact
</TABLE>
<PAGE> 68
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
23.1 -- Consent of Deloitte & Touche LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
33-63929 for $10,000,000 Convertible Subordinated Debentures of Code-Alarm, Inc.
on Form S-2 of our report dated November 1, 1995, appearing in the Prospectus,
which is part of this Registration Statement and to the reference to us under
the heading "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule, Schedule
II -- Valuation and Qualifying Accounts and Reserves, of Code-Alarm, Inc. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 18, 1996
