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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number 016441
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CODE-ALARM, INC.
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2334695
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 E. WHITCOMB, MADISON HEIGHTS, MICHIGAN 48071
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (248) 583-9620
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Securities registered pursuant to section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
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(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10K. [ X ]
Based upon the last sale price of the Registrant's common stock as
reported on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. (the "OTC Bulletin Board") on March 31, 1998, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $2,901,076.
The number of shares outstanding of the Registrant's common stock,
without par value, as of March 31, 1998 was 2,320,861.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's 1998 Proxy Statement are incorporated by
reference in Part III of this Form 10-K.
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PART 1
ITEM 1. BUSINESS.
Code-Alarm, Inc. is a leading manufacturer of branded and factory-labeled
vehicle security and remote keyless entry devices. The Company is a QS-9000
certified Tier-One supplier to leading automakers and also supplies
factory-label security products to vehicle dealerships around the globe. The
Company also sells vehicle security and remote keyless entry systems bearing the
Code-Alarm(TM) and Chapman(TM) brand names at over 2,000 locations worldwide.
During the fiscal year ended December 31, 1997, the Company's principal business
was the manufacture and sale of vehicle security and remote keyless entry
systems. The Company's products are sold worldwide through a variety of
distribution channels including vehicle dealerships, automotive assembly plants,
ports of entry for foreign produced vehicles, electronics retail chains, mobile
electronics specialty stores, automotive expediters and international
distributors.
MARKET DESCRIPTION AND INDUSTRY OVERVIEW
Theft of vehicles and related parts, accessories and contents is a widespread
problem in the United States and Europe. In recent years, increasing rates of
car theft have also become a cause for concern among automobile owners in South
America and several other regions of the globe including the Middle East and Far
East. In response, consumers, insurers and automakers have increasingly viewed
vehicle anti-theft products as a significant deterrent against car thieves. At
the same time, a growing number of consumers in North America and worldwide have
gained exposure to convenience functions such as remote keyless entry.
In the U.S., nearly 1.4 million vehicles are stolen annually -- about one
every 23 seconds or more than 3,800 each day, according to the FBI Uniform Crime
Reports. The estimated value of stolen vehicles in the U.S. was about $7.5
billion in 1996, the FBI estimates. While about two-thirds of vehicles are
eventually recovered, the vast majority are vandalized, stripped, wrecked or
burned, according to the National Insurance Crime Bureau.
Though the level of vehicle theft in the U.S. has declined in recent years, the
FBI reports that theft of contents from motor vehicles and the value of stolen
parts and accessories has increased. Theft of vehicle contents, coupled with
larcenies related to motor vehicle parts and accessories, represents
approximately $1.3 billion in losses, according to U.S. law enforcement
estimates.
In Europe, about 2 million vehicles are stolen annually, according to surveys by
the European Institute for Crime Prevention and Control. Though the level of
vehicle theft in Western Europe has stabilized in recent years, the number of
vehicles stolen in Eastern and Central Europe has increased. In countries such
as Germany and Hungary, the average cost per vehicle stolen has increased
significantly, despite a decline in the actual number of stolen vehicles. South
American countries such as Venezuela, Argentina and Brazil also continue to
experience increasing rates of vehicle theft, creating new demand for
sophisticated security and safety products.
There are a variety of vehicle anti-theft options available to consumers,
including electronic vehicle security systems such as those sold by the Company,
as well as mechanical locks, immobilizers, and tracking systems. While all forms
of security products offer some degree of protection, experts acknowledge that
items such as mechanical locks, ignition security and tracking devices offer
little defense against theft of parts, accessories and vehicle contents. Nor do
such products offer protection against the growing number of thieves who utilize
tow trucks to tow away stolen vehicles, a growing trend reported during 1997 in
publications such as USA Today and The Detroit News.
Traditionally, vehicle security systems have been sold mainly in the
aftermarket. Sales of aftermarket vehicle security doubled between 1994 and
1997, rising to an estimated $325 million last year, according to the U.S.
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Consumer Electronics Sales & Forecasts (Jan. 1998) published by the Consumer
Electronics Manufacturer's Association (CEMA). Industry research by CEMA
indicates that approximately 28 percent of all U.S. households own a vehicle
alarm.
Though anti-theft devices were not offered historically as standard equipment
on vehicles, there is evidence the trend is moving toward vehicle security
systems that are either OEM-approved or installed on the assembly line.
Automakers have increasingly begun offering alarm systems as a standard feature
on cars. The Big Three automakers (General Motors, Ford, Chrysler) offered
approximately 60 trim lines with alarms as standard features in 1997, a 58
percent increase over the previous year. General Motors led the Big Three with
38 trim lines featuring standard alarm systems, compared with 16 the previous
year. Foreign manufacturers have been even more aggressive, offering alarms as
standard features on 174 trim lines in 1997, a 24 percent increase compared with
the previous year.
The automakers have been less aggressive in offering vehicle security as a
feature on minivans, trucks and sport utility vehicles, though remote keyless
entry is a standard or optional feature on many of these types of vehicles. The
presence of keyless entry provides an enhanced opportunity to sell
factory-labeled security systems at dealerships. Additionally, many dealer lease
programs allow customers to amortize the cost of a factory-labeled alarm system
over the term of the loan payment.
Insurance premium discounts in the U.S. and mandated insurance programs
related to vehicle security in Western Europe provide an additional incentive
for vehicle owners to purchase a security system. In the U.S., eleven
states have mandated discounts of 5 to 35 percent on the comprehensive portion
of insurance policies of cars equipped with alarms. More than 50 insurers
voluntarily offer discounts to vehicle owners with alarms. In several Western
European countries, the purchase and installation of an accredited vehicle
security system is a prerequisite to an automobile owner's ability to acquire
vehicle theft coverage.
Security system sales have also been aided by the increased penetration of
remote keyless entry as a factory-installed feature, as well as heightened
consumer interest in remote starters, which enable the user to start his or her
car by remote control from distances of up to 500 feet. More than one-quarter of
domestic cars include factory installed keyless entry devices, and aftermarket
sales of remote car starters have grown steadily in the past five years.
BUSINESS STRATEGY
The Company differentiates itself from competitors by manufacturing its products
in the U.S. and selling to both the world's leading automakers and the
aftermarket. By comparison, most of the Company's competitors purchase product
built offshore, perform limited assembly in the United States, and sell
exclusively to the aftermarket.
The Company believes its history as a supplier of American-made products to both
OEMs and aftermarket customers provides it with several unique advantages in the
industry. As an OEM supplier, the Company's investments in product testing
equipment, engineering, product development and marketing have afforded it
several opportunities. The Company has been able to gain extensive knowledge of
the automakers' business practices and new model trends by forming direct R&D
and sales links with OEMs. Further, the Company has developed manufacturing,
testing and quality methods that are in line with OEM requirements.
Internationally, distributors market the Company's products as American-made and
possessing OEM-approved quality. The Company's position as a leading aftermarket
security supplier provides it with the opportunity to research and understand
consumer preferences, test-market new product innovations and focus on short
production runs.
The Company has earned numerous awards and certifications in both the
aftermarket and as an OEM supplier, including QS-9000 and ISO-9000, Ford's Q1
Quality Award, General Motors' Target of Excellence, Toyota's C-700 and TSC-710,
Consumers Digest "Best Buy" Awards and Audio-Video Grand Prix Product of the
Year Awards.
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Key elements of the Company's business strategy include the following:
EXPAND SALES EFFORTS TO OEM CUSTOMERS. The Company has been successful in
generating new business from the automakers in the past, and intends to continue
focusing sales and marketing efforts toward the OEM market primarily through the
following:
Auto Brand Distribution to Dealers - The Company presently markets
vehicle security products to more than 9,000 automobile dealers in
the U.S. 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 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 and United Technologies. The Company's efforts in
this regard currently consist of direct sales calls to automobile
manufacturers by Company sales personnel and independent
manufacturers representatives, and are focused on obtaining long-term
supply contracts.
EXPAND SALES TO INTERNATIONAL DISTRIBUTORS. The Company has been successful in
expanding its international sales of its products to aftermarket retailers,
vehicle dealers and OEMs by partnering with distributors in approximately 35
countries around the world. These distributors provide a variety of selling,
assembly and delivery options to OEM and aftermarket customers who, in turn,
sell to end-users. The Company supports these international distributors with a
variety of sales, marketing and R&D resources on a continuous basis. The Company
intends to expand its sales efforts to international distributors by hiring
additional sales representatives and providing additional marketing and R&D
support.
CONSOLIDATION OF OPERATIONS, PRODUCTS. During the past two years, the
Company has moved aggressively to consolidate its operations and product lines
in order to facilitate better management and achieve cost efficiencies. In
April 1997, the Company discontinued its European subsidiary operations and
began serving key customers and market segments in Western Europe primarily
through relationships with third party distributors. The Company's
implementation of cell-based manufacturing and the resulting reduction in
physical space requirements enabled the continued consolidation of operations.
Also in 1997, the Company consolidated all its domestic manufacturing and
distribution operations by relocating its Georgetown, Texas electronics
operations and Huntington Beach, California distribution warehouse to the
Company's Madison Heights, Michigan facilities, and outsourcing certain of its
security related components previously provided by the Georgetown facility. The
Company believes these consolidations will help it achieve better cost control,
higher quality and improved delivery in the future.
During the past two years, the Company has also consolidated its product lines
and brand names in order to focus on its core competencies of designing and
manufacturing electronic vehicle security and remote keyless entry devices.
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In 1996, the Company discontinued sales of mechanical steering wheel locks,
do-it-yourself security products, tracking devices and other non-security mobile
electronics. In 1997, the Company discontinued contract manufacturing of
non-security related items. Additionally, the Company discontinued the use of
several former brand names in order to focus its marketing resources on its two
flagship brands - Code-Alarm(TM) and Chapman(TM) - that are now sold worldwide.
ENHANCE ENGINEERING, CUSTOMER SERVICE CAPABILITIES. 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, QS-9000 accreditation and
competitive pricing. See "Engineering, Research and Development."
In 1997, the Company reorganized several of its customer satisfaction-related
functions including inside sales, customer service, warranty service,
and technical service under a newly appointed Director of Customer
Satisfaction. Additionally, the Company implemented a new structure featuring
engineering program managers who interface with major OEM customers and
customer groups. Engineering program managers will handle an increasing number
of the customer-specific product development and logistical issues separate
from R&D engineering in the future. The personnel in the engineering program
report to the Director of Customer Satisfaction.
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 position 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.
Investments made in testing-and-certification equipment and personnel have also
enabled the Company to verify products in a more rapid and cost-effective
manner.
CONTINUE SALES TO AFTERMARKET. The Company's 19-year history as a supplier of
vehicle security to the aftermarket has enabled it to successfully build a
network of aftermarket retailers and distributors. Historically, the Company has
successfully marketed to independent retailers and mass merchandisers.
Currently, the Company sells to more than 500 independent retail specialty
outlets and automotive expediters, providing products and systems not yet
available from the original equipment manufacturer.
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 impact 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
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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 success with Subaru and Mitsubishi
with these systems demonstrates their strong potential.
The Company's products are sold in two categories: OEM and aftermarket. OEM
includes those products sold for vehicle installation before delivery of a new
vehicle to the purchaser through installation by the automaker or as a
delear-installed option under the automaker's private label brand name.
Aftermarket includes those products which are installed on a vehicle already
owned by the customer, generally through retail specialty stores, or by an
automotive expediter.
Sales from the Company's core U.S. operations of vehichle security and remote
keyless entry devices were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except percentage data)
1995 1996 1997
---- ---- ----
Net Net Net
Sales Pct. Sales Pct. Sales Pct.
<S> <C> <C> <C> <C> <C> <C>
OEM.................. $ 21,394 46% $ 26,212 54% $ 27,638 56%
Aftermarket:
Domestic......... 14,252 31 11,329 23 8,157 16
Foreign.......... 3,080 6 3,819 8 7,650 15
Expediter........ 7,804 17 7,521 15 6,273 13
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Total............. $ 46,530 100% $ 48,881 100% $ 49,718 100%
============= === ============ === ========== ===
</TABLE>
(1) This schedule does not include sales from the Company's discontinued
operations, which consist primarily of foreign subsidiaries, contract
manufacturing, and discontinued non-core product lines, including home
security systems and mechanical security devices. Sales from these
activities totaled $22,658,000, $13,622,000, and $3,358,000 in years
ended December 31, 1995, 1996, and 1997, respectively.
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CUSTOMERS
The Company's primary OEM customers consist of General Motors, Ford, Chrysler,
Subaru, Mitsubishi, and Volkswagen. Historical sales by the Company, from U.S.
operations, to these customer groups are set forth below:
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except percentage data)
1995 1996 1997
---- ---- ----
As a As a As a
Percent Percent Percent
Net of Total Net of Total Net of Total
OEM Net OEM OEM Net OEM OEM Net OEM
Sales Sales Sales Sales Sales Sales
<S> <C> <C> <C> <C> <C> <C>
General Motors....................... $ 9,047 42% $ 8,275 31% $ 7,144 26%
Ford................................. 7,728 36 7,522 29 6,737 24
Chrysler............................. 2,766 13 2,799 11 3,144 11
Subaru............................... 1,179 5 5,278 20 7,876 29
Mitsubishi .......................... 337 2 1,246 5 2,208 8
Volkswagen........................... 337 2 1,092 4 529 2
------- --- ------- --- ------- ---
Total OEM Sales ................... $21,394 100% $26,212 100% $27,638 100%
======= === ======= === ======= ===
</TABLE>
With the exception of sales to General Motors, Ford, and Subaru no
single customer accounted for more than 10% of the Company's total net sales
during the year ended December 31, 1997. Sales to General Motors, Ford and
Subaru accounted for 13.5%, 12.7%, and 14.8%, respectively, of the Company's
total net sales for the year ended December 31, 1997. 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. In this
relationship the Company views individual dealers as its customers.
The Company historically has placed and expects to continue to place a strong
emphasis on its retail customers. The Company believes that accelerated growth
in the OEM market for vehicle security systems offers the Company an
opportunity to increase future sales and, therefore, its expansion into the
OEM market. This expansion into the OEM market, as well as its continued
presence in the retail aftermarket, is important to the Company's future
success. The increase in pre-delivery installation could have a negative
effect on the growth of the retail aftermarket.
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MARKETING
During 1997, sales of the Company's products to OEMs were made directly by the
Company's sales and marketing personnel located at the Company's Madison
Heights, Michigan headquarters. Through these sales and marketing personnel, the
Company services its OEM customers. These sales efforts are supported by a field
force of 23 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 14 full-time engineers and 6 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,
including allocation of other costs, were approximately 4.9%, 5.1% and 5.8% of
revenues in 1995, 1996 and 1997, respectively.
The Company conducts a variety of research and product development projects
designed to achieve improvements in vehicle security and remote keyless entry
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 security products which meet
worldwide insurance and government specifications which have much higher
security requirements. The products include innovations such as:
a. impact sensors that use infrared optical technology
b. encrypted transmitters to withstand attempts to capture the code
electronically
c. separate coded immobilizer units to move high security items such
as starter interrupt and fuel disable away from the main security
module
d. connectors and colorless wiring schemes to thwart attempts to
overcome the system by "hot-wiring"
e. attack-proof housings that can withstand attempts by thieves to
break into the unit.
The technological innovations of the Company's customers present both challenges
and opportunities. The Company's products must be advanced enough to efficiently
interface with its customer's system. This has led the Company to develop a
series of special interconnecting systems that are custom designed to each
vehicle. These systems allow for quick and effective installation for the
Company's systems into a vehicle and must interface with the various electrical
systems of the vehicle. This interface may take the form of sophisticated
multiplex systems, where all communications are performed over a single wire,
discrete connections or a combination of the two technologies. The use of these
custom interconnect systems results in vehicle installations that are faster,
higher quality and less disruptive to the vehicle.
<PAGE> 10
The close relationships of the Company to the vehicle manufacturers has opened
up new opportunities. The Company has a steady stream of requests for quotation
from OEMs due to the Company's excellent supplier ratings, electronic design
expertise and quick production turn-around time. These have led to development
projects in such areas as security lighting, specialized sensors and
specialized harnesses.
MANUFACTURING
The Company produces electronic products at facilities located in Madison
Heights, Michigan. Automated and manual assembly methods are used to produce
circuit boards, key components of many of the Company's products.
The Company received QS-9000 certification at its Madison Heights plant in 1997.
The QS-9000 quality program was jointly developed by General Motors, Ford and
Chrysler in an attempt to increase the quality process of its suppliers and to
unify the industry's quality standards. QS-9000 is based on the international
standard ISO-9000 that is the defacto requirement in Europe.
The Company implemented cell-based manufacturing during 1997. Cell-based
manufacturing groups closely together all of the equipment and people needed to
manufacture a product. This proximity forces products to be built one at a time
and quickly moved to the next operation for further processing. This results in:
a. Significantly reduced work in process
b. Higher quality
c. Shorter lead times
d. Greater flexibility
e. Reduced floor space requirements.
SUPPLIERS
The Company's products include a number of high-technology components that are
currently sourced from only a few suppliers and, in some cases, a single
supplier. The Company frequently requires large volumes of such components. If
the Company's suppliers are unable to fulfill the Company's needs for such
components, the Company may be unable to fill customer orders and its business
and financial condition, including working capital and results of operations,
may be materially and adversely affected. Since part of the Company's strategy
is to shorten product development and introduction cycles, occasions may arise
in the future where the Company's ability to produce products outpaces its
suppliers' ability to supply components. There can be no assurance that the
Company can continue to obtain adequate supplies or obtain such supplies at
their historical cost levels. The Company has no guaranteed supply arrangements
with any of its sole or limited source suppliers, does not maintain an extensive
inventory of components, and customarily purchases sole or limited source
components pursuant to purchase orders placed in the ordinary course of
business. Moreover, the Company's suppliers may, from time to time, experience
production shortfalls or interruptions which impair the supply of components to
the Company. There can be no assurance that such shortages will not occur in the
future and adversely affect the Company's business and financial condition,
including working capital, and results of operations.
PRODUCT WARRANTY
The Company provides original purchasers of most vehicle security systems with
a limited warranty. Warranties for OEM products normally match the new vehicle
warranty period. Warranties are customarily limited to replacement of defective
parts to the original purchaser. The Company has a dispute pending with
customers who claim that the home security and Intercept(TM) systems
manufactured by the Company were faulty or inoperable. See Item 3, "Legal
Proceedings". The Company discontinued manufacturing and distribution of home
security systems in 1996.
<PAGE> 11
COMPETITION
All markets in which the Company participates are highly competitive, and many
current or prospective competitors, including several of the Company's
significant OEM customers, are substantially larger and possess significantly
greater financial, marketing and technical resources than the Company. An
increase in factory-installed vehicle security systems or the introduction of
other dealer-installed security systems and remote keyless entry systems by OEM
customers or existing and potential competitors could have a material adverse
effect on the Company.
There are a number of other well known companies manufacturing and distributing
electronic components for the automotive aftermarket 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
has in the past and may, from time to time, in the future 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 Item 3, "Legal Proceedings".
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 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
<PAGE> 12
certain types of vehicle security systems. The Company is also aware of at least
one state which provides additional discounts for policyholders who have
installed vehicle recovery systems.
The loss of regulatory and insurance industry approvals or failure to obtain
necessary authorizations in the future could have a material adverse effect on
the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 270 full-time
persons. None of the Company's employees are represented by a labor union or
other collective bargaining representative. The Company believes that relations
with its employees are good.
<PAGE> 13
ITEM 2. PROPERTIES.
The following table sets forth certain information concerning the principal
properties leased by the Company:
<TABLE>
<CAPTION>
Approx. Approx. Lease Term
Location Use Size (sq. ft.) Monthly Rent Expires
- -------- --- -------------- ------------ -------
<S> <C> <C> <C> <C>
950 E. Whitcomb Office and manufacturing 42,000 $20,000 2000
Madison Heights, MI
1000 E. Whitcomb Office and warehouse 20,000 8,800 2000
Madison Heights, MI
300 Industrial Ave. Office and manufacturing 60,000 7,200 2004
Georgetown, TX
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
ITEM 3. LEGAL PROCEEDINGS.
Code-Alarm, Inc. v. Electromotive Technology Corporation , Case No.
87-CV-74022-DT. In November of 1987, the Company filed a declaratory judgment
action against Electromotive Technology Corporation ("ETC") in the United States
District Court for the Eastern District of Michigan, Southern Division (the
"Court") seeking a declaration that ETC's U.S. Patent No. 4,585,569 (the "'569
Patent"), describing and claiming a shock or motion sensor system, was invalid
or not infringed by the Company. Subsequently, Directed Electronics
("Directed"), of Vista, California, acquired an interest in the '569 Patent and
was made a party to the lawsuit. A judgment was entered against the Company on
June 16, 1995, and the Company posted a letter of credit as security for an
appeal bond in the amount of approximately $5.9 million, representing the amount
of the judgment, including interest. On April 8, 1997, the Court granted the
Company's motion to pay the bond proceeds and accrued interest to Plaintiffs in
full satisfaction of the judgment, without prejudice to the Company's right to
proceed to set aside the judgment on appeal. In April 1997, the Company paid
$6.1 million in satisfaction of the judgment. On June 4, 1997, the appeal was
denied.
In the same proceeding Directed is asserting patent infringement claims
against two of the Company's shock sensor designs. On July 23, 1997, the Court
entered a Judgment on liability against the Company that these two designs
infringe the '569 Patent. The Court has permanently enjoined the Company from
the manufacture, use, sale, offering for sale and importing of these two
subsequent designs. The Company no longer manufactures these designs. On
February 3, 1998, following the trial on damages and willfulness relating to
these two designs, final judgment was entered in favor of Directed Electronics,
Inc. against the Company in the amount of $10,651,443, plus daily prejudgment
interest of $1,993 from January 20, 1998 until February 2, 1998. On March 5,
1998, the Court approved a Bond For Stay of Execution Pending Disposition of
Rule 59 Motions and Appeal in the amount of $9,341,031, which the Company
posted with the Court. On March 9, 1998, the Court issued its Memorandum
Opinion, which granted, in part, the Company's Motion to Amend or Alter the
Judgment. A final amended judgment of $9,334,946, including prejudgement
interest was entered against the Company on March 23, 1998. The Company is
expected to file an appeal to the United States Court of Appeals for the
Federal Circuit. The Court also granted Directed Electronics its attorneys fees
and costs relating to a portion of the case. The amount of attorneys fees and
costs will be decided at a later date. At some future time, an increase in the
amount of the bond may be required to cover additional interest and attorney's
fees.
<PAGE> 14
Directed Electronics, Inc. v. Code-Alarm, Case No. 95-0513 BTM (CGA),
is a declaratory judgment suit filed by Directed on April 18, 1995 in the
United States District Court for the Southern District of California seeking a
declaration that Directed's products do not infringe United States Patent
Number 4,740,775 (the "'775 Patent") and/or that the '775 Patent is invalid
and/or unenforceable. The Company counterclaimed seeking damages arising from
Directed and its President Darrell Issa's infringement of the '775 Patent and
denied the invalidity and non-infringement/unenforceability allegations.
Consolidated with this action were claims for infringement of the '775 patent
and acts of unfair competition brought by the Company against Directed
Electronics, Inc. and Darrell Issa in the case of Code Alarm. Inc. v. Directed
Electronics, Inc., Darrell Issa, and A Class Tint and Alarms filed July 26,
1995 in the United States District Court for the Western District of Texas and
given case number A95CV437JN. The trial in this case ended on April 9, 1998,
with a jury verdict that Directed did not infringe the '775 Patent.
Aureo Rivera Davila and Aureo E. Rivera v. Magna Holding Company et al.,
Case No. 97C1909, filed March 20, 1997, in the U.S. District Court, Northern
District of Illinois, Eastern Division. Plaintiffs seek enforcement against the
Company of a $19.4 million default judgment entered by the court on July 26,
1990, against Chapman Industries Corp. ("Industries") for alleged patent
infringement. With accumulated interest, the amount of the default judgment is
now approximately $30 million. A subsidiary of the Company purchased certain
assets from LaSalle National Bank ("LaSalle") on January 19, 1990, in a private
sale conducted by LaSalle under Section 9-504 of the Illinois Uniform Commercial
Code to dispose of collateral securing a defaulted loan made by LaSalle to
Chapman Products, Inc. ("Products"). Plaintiffs allege that the assets were
acquired by Products from Industries. Plaintiffs claim that the sale of assets
to the subsidiary of the Company was a fraudulent conveyance and that the
Company is a successor in interest to the liability of Industries for the
default judgment. The Company has tendered the defense of this action to LaSalle
pursuant to the indemnification terms contained in its purchase agreement with
LaSalle. LaSalle has agreed to pay for up to 50% of the defense, but has refused
to assume the full defense. The Company, through its counsel, has filed a Motion
to Dismiss, which is under advisement by the court.
Tadiran Electronic Industries, Inc. v. Code-Alarm, Inc., Civil Action No.
96-CIV-05591 was filed on July 25, 1996, in the United States District Court for
the Southern District of New York claiming damages of approximately $500,000
from an alleged breach of contract by the Company. The Company filed a
counterclaim alleging breach of the same contract by Tadiran.
Intercept Security Corporation ("Intercept") v. Code-Alarm, Inc. and Rand
Mueller, Civil Action No. 95-40239 was filed on July 19, 1995, in the United
States District Court for the Eastern District of Michigan, Southern Division
claiming damages of approximately $2 million from allegedly defective home
security equipment of the Company. The Company's insurance carrier has provided
the Company and Rand Mueller, the Company's president, with a legal defense in
this matter. On September 30, 1997, the Court granted summary judgment
dismissing Rand Mueller from the litigation, but denied summary judgment as to
the Company. The case is presently set for trial in June, 1998. The Company
intends to defend this action vigorously.
Directed Electronics, Inc. v. Code-Alarm, Inc., Rand Mueller and Peter J.
Stouffer, Case No. 96-659 BTM (CGA) was filed on April 5, 1996 in the United
States District Court for the Southern District of California alleging
violations of antitrust laws, unfair competition, malicious prosecution and
interference with prospective economic advantage due to the assertion of various
patents by the Company against Directed. In November of 1996, the court held
that it had no personal jurisdiction over Mr. Stouffer and he was dismissed from
the case.
Meta Systems S.A. v. Europe Auto Equipment S.A. ("EAE"), a dissolved,
wholly owned subsidiary of the Company, was an arbitration proceeding scheduled
to be held in Paris, France on April 30, 1997. Meta was demanding FF 20 million
(approximately $3.5 million) for breach of a distributor agreement by EAE. EAE
sought damages of FF 30 million (approximately $5.3 million) for wrongful
termination of the agreement. No further developments have occurred, the
arbitration was not conducted, and the Company has not received any additional
information on this matter after the dissolution of EAE. If these proceedings
move forward in the future, there can be no assurance that the Company will
prevail or of the amount of damages to which the Company may be subject if it
does not prevail.
Directed Electronics, Inc. v. TSI Security Acquisition Corp., United States
District Court, Southern District of California, Case No. 93-1050 BTM. On March
13, 1997, the Company entered into an agreement with TSI Security Acquisition
Corp. ("TSI") pursuant to which TSI assigned to the Company all of TSI's rights,
title and interest in and to U.S. Patent No. 4,107,543 ("543 patent"). TSI was
a defendant and counterclaimant in Case No. 93-1050 BTM in which TSI alleged
that Directed Electronics, Inc. ("DEI") infringes the '543 patent. As a result
of the assignment agreement between the Company and TSI, the Company became the
defendant and counterclaimant in Case No. 93-1050 BTM pursuant to stipulation
and court order entered on October 7, 1997. On January 7, 1998, the court
entered an order granting DEI's motion for summary judgment, which terminated
this action in favor of DEI. On February 3, 1998, a notice of appeal was filed
on behalf of the Company.
Code-Alarm, Inc. v. Alpine Electronics, Civil Action No. A97CA575JN, was
filed in the United States District Court for the Western District of Texas,
Austin Division, claiming infringement by Alpine Electronics ("Alpine") of the
'775 Patent. Alpine filed its answer on September 30, 1997, raising as
affirmative defenses, noninfringement and invalidity of the '775 Patent. In
January 1998, Alpine settled the case and after deducting legal fees and costs,
the Company received approximately $932,500. This action has been dismissed.
There can be no assurance that the Company will prevail in this suit or of
the amount of damages to which the Company may be subject if it does not
prevail.
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock was traded on the Nasdaq Stock Market under the symbol
"CODL" from October 19, 1987, to May 16, 1988, and was traded on the Nasdaq
National Market from May 17, 1988 until April 24, 1997, at which time the
Common Stock was delisted. Since that date, the Common Stock has been trading
in the OTC Bulletin Board, where it is currently traded under the symbol
"CODL".
The OTC Bulletin Board reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions. The following table sets forth certain information about the
price of the Common Stock which is based on the high and low bid prices for the
Common Stock, as quoted by the OTC Bulletin Board for the last three quarters
of 1997 and the Nasdaq National Market for the first quarter of 1997 and all of
1996:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter........................ $ 3 7/8 $ 2 3/8
Second Quarter....................... 3 1/2 1 1/4
Third Quarter........................ 2 7/18 1 3/4
Fourth Quarter....................... 3 1/4 1 1/8
1996
First Quarter........................ $ 6 1/2 $ 4 1/2
Second Quarter....................... 6 4
Third Quarter........................ 5 1/8 3 1/4
Fourth Quarter ...................... 4 1/2 3 1/4
</TABLE>
On March 31, 1998, the closing price of the Company's Common Stock
as reported on the OTC Bulletin Board was $ 1.25 per share. As of March 31,
1998, there were approximately 241 shareholders of record of the Company's
Common Stock.
Under the terms of the credit agreement with its senior lender,
the Company may not purchase, redeem, retire, or otherwise acquire any shares
of its Common Stock, or make a commitment to do so, without the senior lender's
prior written consent. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" and "Note 4 to Financial Statements".
DIVIDEND POLICY
Historically, the Company has not paid any cash or other dividend on
its common stock. The Company does not expect to pay dividends on its common
stock in the foreseeable future but currently intends to retain any earnings to
finance operations and to support future growth. Furthermore, the Company's
credit agreement prohibits the payment of dividends. The consent
of a majority of the holders of the Company's Series A-1 Preferred Stock is
also required prior to the declaration or payment of dividends on its Common
Stock. If the Company declares and pays a dividend on its Common Stock prior
to the effectiveness of an amendment to the Company's Articles of Incorporation
increasing the authorized shares of Common Stock to 20 million, the Company
must pay the holders of the Attached Warrants, Shortfall Warrants and
Litigation Warrants (discussed below), in cash, a dividend in an amount equal
to the dividend paid per share multiplied by the number of shares of Common
Stock issuable upon exercise of these warrants. A dividend paid on the Common
Stock after that effectiveness will trigger the antidilution provisions of
these warrants. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" and "Note 4 to Financial Statements".
Dividends on the Company's Series A-1 Preferred Stock accrue at a rate
of 10% per annum ($12.727 per share), payable on April 15 and October 15.
These dividends are payable at the option of the Company in cash or in
additional Units (see discussion below).
RECENT SALES OF UNREGISTERED SECURITIES
A. SERIES A-1 PREFERRED STOCK AND ATTACHED WARRANTS
1. (a) Date of Sale: October 27, 1997
(b) Securities Sold: 55,000 Units, each Unit consisting of one
share of Series A-1 Preferred Stock (the
"Series A Preferred") and Warrants to
Purchase 67.84256363(1) shares of Common
Stock (the "Attached Warrants"), thus
55,000 shares of Series A Preferred and
Attached Warrants to purchase 3,731,341
shares of Common Stock were issued
2. Purchasers: Pegasus Partners, L.P. and Pegasus Related Partners, L.P.
(collectively, "Pegasus")
3. Consideration: $6,999,850
4. Exemption from Registration: Section 4(2) of the Securities Act of 1933
5. Terms of Exercise of Warrants:
At any time prior to October 19, 1998, provided an amendment
to the Company's Articles of Incorporation increasing the number of authorized
shares of Common Stock to 20 million becomes effective and provided so-called
Litigation Warrants (discussed below) have not been issued to Pegasus within
the past six months, the Company has the right to repurchase all (but not less
than all) the Series A Preferred outstanding and one-half of the Attached
Warrants, at a price equal to approximately $149.54 less dividends paid in
cash for each share of Series A Preferred and one-half the Attached Warrants
related thereto.
The initial exercise price of the Attached Warrants is
$1.8759559 per share. If the Company exercises its rights to repurchase the
Series A Preferred, the Attached Warrants not repurchased will have a term of
seven years. If the Company has not repurchased the Series A Preferred, the
Attached Warrants have no expiration.
If the Company has not exercised its rights to redeem Series A
Preferred, the exercise price of the Attached Warrants must be paid by delivery
of Series A Preferred with a stated value ($127.27 per share) plus accrued and
unpaid dividends equal to the exercise price. If, however, the Company has
exercised its rights to redeem Series A Preferred, then the exercise price is
payable at the option of the holder in either cash or by a surrender of "in the
money warrants."
The number of shares of Common Stock into which Attached
Warrants are exercisable and the exercise price are subject to adjustment, if a
dividend is payable to the holders of Common Stock in Common Stock, if the
Common Stock is subdivided or combined, or if a dividend is paid on the Common
- -----------------------------
(1) Assuming all dividends on Series A Preferred are paid in cash.
<PAGE> 17
Stock in cash, evidences of indebtedness, securities or rights to acquire
securities. If additional shares of Common Stock or rights to acquire
additional shares of Common Stock or securities convertible into Common Stock,
other than specified permitted issuances, are issued for less than the greater
of the then current exercise price or the then current market price of the
Common Stock, then the exercise price and number of shares into which the
Attached Warrants are exercisable shall be subject to weighted-average
antidilution protection. If, at any time prior to the approval of an amendment
to the Company's Articles of Incorporation authorizing an increase in the
number of authorized shares of Company Common Stock to 20 million, the Company
pays or makes any dividend or distribution on Common Stock which is not
otherwise accounted for by the antidilution provisions of the Attached Warrants
then that dividend or distribution shall also be paid or made to the holders
of the Attached Warrants as if the Attached Warrants had been exercised.
The Company is required to reserve from its authorized but
unissued shares of Common Stock a sufficient number of shares of Common Stock to
permit exercise in full of all Attached Warrants. The Company has reserved
2,267,421 shares of Common Stock for exercise of Attached Warrants and Shortfall
Warrants (discussed below), but the Company needs to authorize additional shares
of Common Stock to permit exercise in full of these warrants. Thus, the
Company's Board of Directors has approved an amendment to the Company's Articles
of Incorporation for presentation at the next stockholders meeting increasing
the number of authorized shares of Common Stock from 5 million to 20 million.
Units are subject to repurchase at the option of the holder at
any time after three years and six months from October 27, 1997 at a price equal
to the current market price per share of Common Stock multiplied by the number
of shares of Common Stock into which the Attached Warrants are then exercisable.
In addition, if the Company has repurchased all Series A Preferred Stock and
one-half the Attached Warrants related thereto, the remaining Attached Warrants
and any Common Stock issued upon exercise of such warrants are subject to
repurchase at the option of the holder at any time after three years and six
months from October 27, 1997, at a price equal to the current market price per
share of Common Stock multiplied by the number of such shares of Common Stock
plus the number of shares of Common Stock into which Attached Warrants are then
exercisable. This price will be higher after the occurrence of significant
corporate events.
B. SHORTFALL WARRANTS
1. (a) Date of Sale: October 27, 1997
(b) Securities Sold: Warrants to purchase up to 1,000,000 shares
of Common Stock ("Shortfall Warrants")
2. Purchasers: Pegasus Partners, L.P. and Pegasus Related Partners,
L.P. (collectively, "Pegasus")
3. Consideration: The Guaranty by Pegasus of up to $4 million of the
indebtedness of the Company to General Electric Capital Corporation ("GECC")
pursuant to a Limited Supplemental Guaranty.
<PAGE> 18
4. Exemption from Registration: Section 4(2) of the Securities Act of 1933
5. Terms of Exercise of Warrants:
The Shortfall Warrants have a term of seven years and an
exercise price of $1.8759559 per share.
If Pegasus is fully and unconditionally released from the
Limited Supplemental Guaranty, the Company has a right to repurchase portions of
the outstanding Shortfall Warrants as follows: within the first six months after
October 27, 1997, 75% of outstanding Shortfall Warrants; within 6 to 9 months
after October 27, 1997, 50% of outstanding Shortfall Warrants; and within 9 to
12 months after October 27, 1997, 25% of outstanding Shortfall Warrants. The
purchase price is $.0001 per share of Common Stock into which the repurchased
warrants are exercisable. No repurchase of Shortfall Warrants may be made within
six months after the issuance of Litigation Warrants (discussed below); however,
to the extent such restriction is in effect, the time to repurchase is extended
to a date thirty days after the restriction lapses. If Shortfall Warrants have
been exercised, then the Company in place of the repurchase of these warrants
shall have the right to repurchase a number of shares of Common Stock equal to
the number of shares of Common Stock into which the Shortfall Warrants which
would have been repurchased were exercised at a purchase price equal to $.0001
per share plus the exercise price.
The exercise price of the Shortfall Warrants is payable in
cash or by surrender of "in the money" warrants. The Shortfall Warrants have the
same antidilution protection as is outlined above with respect to the Attached
Warrants.
At any time after three years and six months following October
27, 1997, each holder of a Shortfall Warrant may demand that Company redeem all
or a portion of the Shortfall Warrants held by that holder. The purchase price
is the market price of the Common Stock for which such Shortfall Warrants are
then exercisable, less the related exercise price.
C. LITIGATION WARRANTS
1. (a) Date of Sale: March 5, 1998
(b) Securities Sold: Securities sold: Warrants to purchase
6,230,216 shares of Common Stock (the
"Litigation Warrants")
2. Purchasers: Pegasus Partners, L.P. and Pegasus Related Partners, L.P.
(collectively, "Pegasus")
3. Consideration: Pegasus and the Company's senior lender, General
Electric Capital Corporation ("GECC") entered into a Limited Litigation Guaranty
dated as of October 24, 1997 (the "Litigation Guaranty") pursuant to which
Pegasus agreed to guarantee up to $12 million of
<PAGE> 19
either the obligations of GECC which bond the lower court judgment in the case
of Code-Alarm, Inc. v. Directed Electronics, Inc., Case No. 87-CV-74022-DT (the
"Detroit Litigation") or the loan of GECC which pays that judgment. In order to
permit bonding of a judgment in the amount of $9,341,031 in the Detroit
Litigation, GECC issued a letter or credit to a surety company in this amount.
In exchange for Pegasus's guaranty of this letter of credit, the Company issued
the Litigation Warrants to Pegasus.
4. Exemption from Registration: Section 4(2) of the Securities Act of 1933
5. Terms of Exercise of Warrants:
The exercise price per share of each Litigation Warrant is
$0.49397. The Litigation Warrants will expire seven years from October 27, 1997.
If the Company repurchases all outstanding shares of Series A
Preferred and Attached Warrants and the Common Stock into which Attached
Warrants have previously been exercised pursuant to the Company's rights of
repurchase (discussed above), then simultaneously therewith the Company, at its
option, has a right to repurchase 95% of the outstanding Litigation Warrants and
95% of the shares of Common Stock into which Litigation Warrants have been
exercised (other than any such shares which have been sold to a person or entity
that is not an associate or an affiliate of the initial holder). The purchase
price is the number of shares of Common Stock into which all of the Litigation
Warrants (whether repurchased or not) are exercisable plus the number of shares
of Common Stock for which Litigation Warrants have been exercised (whether
repurchased or not, but not including shares sold to parties other than
affiliates or associates), multiplied by the current market price of a share of
Common Stock, less the exercise price of Litigation Warrants repurchased.
The exercise price of the Litigation Warrants is payable in
cash or by surrender of "in the money" warrants. The Litigation Warrants have
the same antidilution protection as is outlined above with respect to the
Attached Warrants.
At any time after three years and six months following October
27, 1997, each holder of Litigation Warrants may demand that the Company redeem
all or a portion of the Litigation Warrants held by that holder. The purchase
price is the market price of the Common Stock for which such Litigation Warrants
are then exercisable, less the related exercise price.
D. GECC WARRANTS
1. (a) Date of Sale: October 24, 1997
(b) Securities Sold: Warrants to purchase 131,718 shares of
Common Stock (the "GECC" Warrants)
<PAGE> 20
2. Purchasers: General Electric Capital Corporation ("GECC")
3. Consideration: The senior secured credit facility being provided to the
Company by GECC.
4. Exemption from Registration: Section 4(2) of the Securities Act of 1933
5. Terms of Exercise of Warrants:
The GECC Warrants had an original exercise price of $1.875559.
The antidilution provisions in these warrants caused an increase in the number
of shares into which these Warrants are exercisable to 226,594 and a reduction
in the exercise price to approximately $1.10 as a result of the issuance of the
Litigation Warrants discussed above. The GECC Warrants have a term of seven
years.
E. Series B Preferred Stock
1. Date of Sale: October 24, 1997
2. Purchaser: Craig S. Camalo
3. Consideration: $10.00
4. Exemption From Registration: Section 4(2) of the Securities Act of 1933
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
CODE-ALARM, INC. AND SUBSIDIARIES
The selected historical consolidated financial data shown below have been
derived from the Company's audited consolidated financial statements for the
years shown.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
1993 1994 1995 1996(1) 1997
---- ------- ------- ------- -------
(In thousands, except per share date)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 50,110 $ 73,508 $ 69,188 $ 62,503 $ 53,076
Cost of sales . . . . . . . . . . . . . . . . . . . . 30,190 45,886 44,718 43,074 35,473
-------- -------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . 19,920 27,622 24,470 19,429 17,603
Sales and marketing . . . . . . . . . . . . . . . . . 9,346 13,955 12,099 10,145 7,739
Engineering . . . . . . . . . . . . . . . . . . . . . 1,688 2,696 3,351 2,350 1,542
General and administrative . . . . . . . . . . . . . 6,520 7,928 9,008 10,175 8,766
Impairment of goodwill . . . . . . . . . . . . . . . 2,917 1,580
Restructuring charge . . . . . . . . . . . . . . . . 773
-------- -------- -------- -------- --------
Total operating expenses . . . . . . . . . . . . . . 17,554 24,579 24,458 25,587 20,400
Income (loss) from operations . . . . . . . . . . . . 2,366 3,043 12 (6,158) (2,797)
Litigation expense . . . . . . . . . . . . . . . . . (4,386) (1,825) (11,403)
Interest and other expense . . . . . . . . . . . . . (222) (743) (1,957) (1,562) (1,706)
-------- -------- -------- -------- --------
Income (loss) before income taxes . . . . . . . . . . 2,144 (2,086) (3,770) (7,720) (15,906)
Income taxes (credit) . . . . . . . . . . . . . . . . 608 (710) (1,046) (585) 1,172
======== ======== ======== ======== ========
Net income (loss) . . . . . . . . . . . . . . . . . . $ 1,536 $ (1,376) $ (2,724) $ (7,135) $(17,078)
Preferred stock dividends . . . . . . . . . . . . . . (128)
Intrinsic value of beneficial
conversion feature on redeemable
preferred stock . . . . . . . . . . . . . . . . . . (4,179)
-------- -------- -------- -------- --------
Net income (loss) applicable
to common stock . . . . . . . . . . . . . . . . . . $ 1,536 $ (1,376) $ (2,724) $ (7,135) $(21,385)
======== ======== ======== ======== ========
Net income (loss) per basic common share . . . . . . $ 0.63 $ (0.58) $ (1.17) $ (3.07) $ (9.21)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . 2,445 2,376 2,320 2,321 2,321
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital (deficit) . . . . . . . . . . . . . . $ 8,164 $ 12,716 $ 10,381 $ (6,091) $ 3,013
Total assets. . . . . . . . . . . . . . . . . . . . . 24,134 37,821 42,043 29,427 16,062
Long-term obligations and redeemable
preferred stock . . . . . . . . . . . . . . . . 3,867 13,240 15,384 879 (2) 23,574 (3)
Shareholders' equity (deficit). . . . . . . . . . . . 13,280 11,216 8,498 1,052 (15,894)
</TABLE>
(1) The 1996 results of operations includes a writedown of $3.5 million on
European assets. See discussion in notes 1, 9, and 10 to the Financial
Statements, as well as in "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(2) At December 31, 1996 all of the Company's long-term obligations
relating to senior lender debt and reserve for litigation of
$9.3 million and $5.9 million, respectively, were classified as current
liabilities. See discussion in "Notes 4 and 10 to the Financial
Statements".
(3) Includes reserve for litigation of $10 million and redeemable preferred
stock of $7 million. See discussion in "Notes 6 and 10 to the Financial
Statements".
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year ended December 31, 1996
The Company's consolidated net sales decreased $9.4 million, or 15.1%,
to $53.1 million for the year ended December 31, 1997, as compared to $62.5
million for the year ended December 31, 1996. The decrease was primarily the
result of the Company's divestiture of its European operations effective April
1997. North American sales were comparable with the prior year. Sales to
international dealers continued their strong performance, increasing 120%, due
to increased market penetration in South America, Israel, and Russia, and an
increase in original equipment manufacturers("OEM") sales of almost 5%.
Domestic retail aftermarket and automotive expediter sales were down 24% from
last year, primarily due to increased competition and production constraints in
the last half of the year resulting from the consolidation of domestic
operations.
For the year ended December 31, 1997, consolidated gross profit decreased
$1.8 million, or 9.4%, to $17.6 million as compared to $19.4 million for the
year ended December 31, 1996. Consolidated gross profit increased to
33.2% in 1997 from 31.1% in 1996, due to the effect of the European divestiture
and their corresponding lower profit margins. Gross profit and related margins
for 1997 were unfavorably impacted by $1.4 million and 2.6%, respectively, due
to additional inventory reserves.
Consolidated operating expenses decreased $5.2 million, or 20.3%, in 1997
as compared to 1996. Excluding the effect from the European operations, all
other operating expenses increased slightly. The other operating expenses
include a writedown of intangible assets of $1.2 million and $.8 million of
restructuring charges relating to the closure of the Company's Texas
manufacturing operations. Ongoing operating expenses decreased slightly.
As a result of the above, the Company reported a loss from operations of
$2.8 million for the year ended December 31, 1997, as compared to a loss of $6.2
million for 1996.
Interest expense was down 9% for the year ended December 31, 1997, to $1.4
million, as compared to $1.6 million for the prior year end. The Company's
senior debt refinancing and proceeds from the issuance of preferred equity
used to reduce the Company's outstanding indebtedness contributed to the de-
crease.
For the year ended December 31,1997, the Company recorded $11.4 million as
litigation expense, which includes an amount for contingency reserve made in
response to a judgement issued on February 3, 1998(as amended), and Company
defense costs incurred, both in connection with a patent infringement claim. See
Item 3, "Legal Proceedings" in Part I of this Form 10-K for further discussion.
Income tax expense of $1.2 million for the year ended December 31, 1997,
reflects a valuation allowance against the Company's deferred tax assets. The
Company has determined that any deferred tax benefit, and related asset,
resulting from current and prior year operating losses is not currently
recognizable.
As a result of the foregoing, the Company incurred a net loss of $17.1
million, or $7.41 per share, for the year ended December 31, 1997, as compared
to a net loss of $7.1 million, or $3.07 per share, for the year ended December
31, 1996.
Year ended December 31, 1996 compared to the year ended December 31, 1995
The Company's consolidated net sales decreased $6.7 million, or 9.7%,
to $62.5 million for the year ended December 31, 1996 as compared to $69.2
million for the year ended December 31, 1995. The decline is primarily due to
the Company's
<PAGE> 23
subsidiary operations in France, as the weakness in this market continues. North
American sales remained constant with the prior year, as original equipment
manufacturers ("OEM") sales increased 21%, offset by discontinuance in 1995 of
Do-It-Yourself, mechanical and Vehicle Locator security products to mass
merchandisers and independent dealers and phase-out of the contract
manufacturing business.
For the year ended December 31, 1996, consolidated gross profit
decreased $5.0 million, or 20.6%, to $19.4 million as compared to $24.4 million
for the year ended December 31, 1995. Consolidated gross profit percent
decreased to 31.1% in 1996 from 35.4% in 1995, due to European operations and
year-end reserves for inventory obsolescence. North American margins, however,
improved due to cost reductions, productivity improvements and the elimination
of unprofitable product lines.
Consolidated operating expenses increased $1.1 million, or 4.6%, in
1996 as compared to 1995. The increase in consolidated operating expense was
due primarily to writedown of intangible assets totaling $2.9 million related
to prior Company acquisitions in 1994 and 1990, in Europe and North America,
respectively. (See below for further discussion of European operations.) The
writedown of the intangible assets associated with the North American
subsidiary is the result of the Company's decision to discontinue
Do-It-Yourself, mechanical and Vehicle Locator security products as described
above. Excluding these charges, operating expenses have decreased in both North
America and Europe due to continued emphasis on cost management. The Company
also continued to incur legal fees in asserting its patent rights and as
defendant in patent infringement suits.
In April 1997, the Company announced plans to divest itself of its
European subsidiaries. The impact of this decision caused forth quarter charges
resulting from the writedown of intangible assets of $1.6 million. The Company
recorded additional fourth quarter charges relating to its European subsidiaries
to reflect adjustments to the carrying value of inventory and other assets
totaling $3.5 million.
As a result of the foregoing, the Company had a loss from continuing
operations of $6.2 million for the year ended December 31, 1996, as compared to
operating income of $12,000 for the year 1995.
Interest expense increased 4.7% during the year as compared to 1995.
Although average borrowings outstanding for 1996 declined over the previous
year, higher rates offset this reduction.
Other expenses for the year ended December 31, 1995, exclusive of
interest expense, included $1.8 million attributable to additional damages
recorded from a patent infringement suit.
The Company had an effective income tax rate of 8% on current operating
income. The effective tax rate was affected by nondeductible foreign losses, and
goodwill impairment.
As a result of the foregoing, the Company incurred a net loss of $7.1
million, or $3.07 per share, for the year ended December 31, 1996 compared to a
net loss of $2.7 million, or $1.17 per share, for the year ended December 31,
1995.
EFFECT OF INFLATION
The Company does not believe that inflation has had a material impact
on its operations over the past three years.
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated working capital at December 31, 1997 was
$3 million, as compared to a deficit of $6.1 million at December 31, 1996 and
a surplus of $12.7 million at December 31, 1995. The current ratio (current
assets divided by current liabilities) as of December 31, 1997 is 1.36 to 1,
compared to .78 to 1 at December 31, 1996, and 1.57 to 1 at December 31, 1995.
The changes in working capital and current ratio as of December 31, 1997, were
in large measure due to the refinancing described below and a substantial
portion of debt has been classified as long-term in accordance with the terms
of the credit agreement.
Cash used in operating activities was $2.9 million for the year ended
December 31, 1997, which reflects the payment of a litigation settlement of
$6.1 million. Excluding the litigation settlement, the Company's operating
activities provided cash flow of $3.2 million. This was due in part to the
reduction in receivables and inventory of $3.2 million and $4.4 million,
respectively, and a $1 million income tax refund, offset by the decrease in
trade payables of $4.3 million. Cash provided from operating activities was
used to finance capital expenditures and repay a portion of the Company's
outstanding long term indebtedness. The Company, with the proceeds from its
debt refinancing and preferred stock issuance discussed below, in October
1997, retired all outstanding indebtedness with its prior senior lender.
On October 24, 1997, the Company entered into a 3 year credit agreement
with a new senior lender, General Electric Capital Corporation ("GECC"),
extending revolving credit, letter of credit and term credit facilities to the
Company of up to $25.5 million for the purpose of (a) refinancing senior
indebtedness of the Company, (b) providing working capital financing, and (c)
providing funds to satisfy, or providing letters of credit to secure issuance
of a supersedeas or appeal bond in order to permit the Company to bond an
appeal of, a judgment adverse to the Company in the Detroit Litigation. (See
Item 3, "Legal Proceedings" in Part I of this form 10-K for further
discussion.)
The new credit agreement provides for a $12 million revolving credit
loan, $1.5 million term loan, and a term loan up to $3 million to be made upon
a final settlement in the Detroit Litigation against the Company.
Provided the $3 million term loan is not outstanding, the credit
agreement provides for a letter of credit of up to $12 million to secure
bonding of an appeal and, alternatively, a term loan of up to $12 million to
pay or settle the Detroit Litigation. The revolving credit facility bears
interest at the prime rate plus 1.5% or LIBOR plus 3.25%. The $1.5 million
term loan is payable in twelve (12) equal quarterly installments and bears
interest at prime plus 1.75% or LIBOR plus 3.5%. If the $3 million or $12
million term loans are made, the loans will bear interest at the prime rate
plus 2% or LIBOR plus 3.75%.
The credit agreement is subject to certain covenants requiring minimum
levels of net worth, fixed charge coverage and operating income, maximum
capital expenditures, and restrictions on payments of certain dividends, sale
of assets and increased indebtedness. In addition, the credit agreement
requires that mandatory prepayments against outstanding GECC indebtedness be
made with proceeds from the sale of equity or debt securities, sales of assets,
excess operating cash flow and proceeds from litigation involving patents and
intellectual property. Credit availability under the revolving credit loan is
subject to a specified percentage of eligible accounts receivable and
inventory. The credit facility is collateralized by substantially all the
assets of the Company and its subsidiaries. The Company's obligations
have been guaranteed by its subsidiaries. The credit agreement is also
secured by a pledge of one share of the Company's Series B Preferred Stock. In
the event of a default under the credit agreement, or the indebtedness issued
pursuant to the credit agreement is accelerated, the holder of Series B
Preferred Stock would have the right to elect a majority of the Company's Board
of Directors.
On October 27, 1997, the Company entered into a private equity
placement pursuant to a Unit Purchase Agreement with Pegasus Partners,
L.P. and Pegasus Related Partners, L.P. (collectively "Pegasus") providing for
the purchase of 55,000 units consisting of preferred stock and attached
warrants to purchase common stock, for an aggregate purchase price of
approximately $7 million. Dividends accrue at a rate of 10% per year and are
payable, at the option of the Company, in cash or additional units. In
addition, Pegasus received additional warrants to purchase common stock in
return for guarantying $4 million of the Company's indebtedness to GECC under
the revolving credit facility. Pegasus also agreed to guarantee a loan to
settle or pay a final judgment or secure a letter of credit to bond the appeal
in the Detroit Litigation. Pegasus also agreed that when the loan or letter of
credit was issued, the Company would issue to Pegasus additional warrants to
purchase common stock (see discussion above with respect to the actual issuance
of these warrants).
The credit agreement was amended and restated as of March 4, 1998, and
amended as of April 8, 1998, in order to allow the Company the right to
utilize the letter of credit facility for the Detroit Litigation judgment,
both initial judgment and for any additional judgment amount, to waive certain
defaults (including those that existed at December 31, 1997), to correct
certain disclosures and to modify certain provisions.
On March 5, 1998, the Company posted a bond in the amount of
$9,341,031, in the Detroit Litigation to permit an appeal of the judgment
rendered on February 6, 1998. The bond is secured by an irrevocable letter of
credit provided by GECC, guaranteed by Pegasus. The amount of the judgment will
be increased to cover additional interest and certain attorney fees. When that
occurs, the Company anticipates that GECC will be asked to issue an additional
letter of credit, which Pegasus will guarantee, up to an amount not to exceed
$12 million in the aggregate for the original and the additional letters of
credit, in exchange for the issuance by the Company of additional
warrants to purchase Common Stock.
As of April 7, 1998, $5.7 million of the $12 million revolving credit
facility was outstanding. Under this revolving line of credit, $3.2 million was
borrowed at the LIBOR based interest rate.
<PAGE> 25
Year 2000 Date Conversion
Certain computer systems that have time-sensitive programs may not
properly recognize the year 2000 which could result in major system failures or
miscalculations. The Company has performed an inquiry of its major software
vendors as to the likelihood of such a problem existing in the software
products which the Company utilizes. Based on such inquiry, the Company does
not believe that a year 2000 problem exists within its system or that any such
problem that may arise would have a material impact on the Company's
operations. The Company has not assessed the impact of any year 2000 problem
with outside parties such as vendors or tenants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, notes thereto and supplementary
financial statement schedules with respect to this item are set forth in the
Table of Contents to the Consolidated Financial Statements and Consolidated
Financial Statement Schedules appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item may be found under the captions
"Directors, Nominees and Executive Officers" and "Additional Information" of
the Company's 1998 Proxy Statement and such information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item may be found under the captions
"Executive Compensation," "Summary of the Stock Option Plan" and "Directors'
Compensation" of the Company's 1998 Proxy Statement and such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information with respect to this item may be found under the captions
"Security Ownership of Certain Beneficial Owners and Management and "Shareholder
Agreement" of the Company's 1998 Proxy Statement and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item may be found under the caption
"Certain Transactions" of the Company's 1998 Proxy Statement and such
information is incorporated herein by reference.
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements:
The consolidated financial statements and notes thereto
filed with this report are listed on page F-1.
2. Financial Statements Schedule:
The financial statement schedule filed with this report is
listed on page F-1.
3. Exhibits:
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, as amended,
registration No. 33-16991C ("Form S-18").
3.1.1 Certificate of Designation, Numbers, Powers, Preferences
and Relative Participating, Optional and Other Rights of
Series A Preferred Stock of Code-Alarm, Inc.,
incorporated by reference to Exhibit 3.1.1 to the Company's
Form 8-K dated October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences
and Relative Participating, Optional, and Other Rights of
Series B Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.2 to the Company's Form 8-K
dated October 24, 1997.
3.2.1 Bylaws of the Company, as amended, incorporated by
reference to Exhibit 3.2.1 to the Company's Form 8-K for
dated October 24, 1997.
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").
9.1 Termination of Shareholder Agreement dated February 15,
1997 incorporated by reference to the Company's Form 10K
for the year ended December 31, 1996 ("1996 Form 10-K")
10.1 Credit Agreement dated as of October 24, 1997 (the "Credit
Agreement") among Company, General Electric Capital
Corporation ("GECC"), in its capacity as a "Lender", and
the other financial institutions which may from time
to time become parties to the Credit Agreement
(GECC, in such capacity, and such other financial
institutions being sometimes hereinafter referred to
collectively as the "Lenders" and individually as a
"Lender"), and GECC, in its separate capacity as agent for
the Lenders (the "Agent") with Exhibits and Annexes
attached, incorporated by reference to Exhibit 10.1 to the
Company's Form 8K dated October 24, 1997.
10.1.1 Amendment, Waiver and Consent to Credit Agreement dated
as of March 4, 1998 among Company, General Electric
Capital Corporation ("GECC"), in its capacity as a
"Lender", and the other financial institutions which may
from time to time become parties to the Credit Agreement
(GECC, in such capacity, and such other financial
institutions being sometimes hereinafter referred to
collectively as the "Lenders" and individually as a
"Lender"), and GECC, in its separate capacity as agent for
the Lenders, incorporated by reference to Exhibit 10.73 to
the Company's Form 8-K dated March 4, 1998.
10.1.2 Conformed Copy Incorporating Amendment and Waiver dated
as of March 4, 1998, of Credit Agreement dated as of
October 24, 1997 (the "Credit Agreement") among Company,
General Electric Capital Corporation ("GECC"), in its
capacity as a "Lender", and the other financial
institutions which may from time to time become parties to
the Credit Agreement (GECC, in such capacity, and such
other financial institutions being sometimes hereinafter
referred to collectively as the "Lenders" and individually
as a "Lender"), and GECC, in its separate capacity as agent
for the Lenders, incorporated by reference to Exhibit 10.74
to the Company's Form 8-K dated March 4, 1998.
10.1.3* Amendment No. 2 and Waiver No. 2 to Credit Agreement
dated as of April 8, 1998 by and among Company,
General Electric Capital Corporation ("GECC"), in its
capacity as a "Lender", and the other financial
institutions which may from time to time become parties to
the Credit Agreement (GECC, in such capacity, and such
other financial institutions being sometimes hereinafter
referred to collectively as the "Lenders" and individually
as a "Lender"), and GECC, in its separate capacity as agent
for the Lenders.
10.2 Security Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement), incorporated by reference to Exhibit 10.41 to
the Company's Form 8K dated October 24, 1997.
10.3 Security Agreement dated as of October 24, 1997 executed by
Tessco Group, Inc. ("Tessco"), in favor of the Agent and
the Lenders (Credit Agreement), incorporated by reference
to Exhibit 10.42 to the Company's Form 8K dated October
24, 1997.
10.4 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of Agent and the Lenders (Credit Agreement),
incorporated by reference to Exhibit 10.43 to the
Company's Form 8K dated October 24, 1997.
10.5 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement), incorporated by reference to Exhibit 10.44 to
the Company's Form 8K dated October 24, 1997.
10.6 Pledge Agreement dated as of October 24, 1997 executed by
Craig S. Camalo in favor of the Agent and the Lenders
(Credit Agreement), incorporated by reference to Exhibit
10.45 to the Company's Form 8K dated October 24, 1997.
10.7 Patent Security Agreement dated October 24, 1997
executed by Company in favor of the Agent and the
Lenders (Credit Agreement), incorporated by reference to
Exhibit 10.46 to the Company's Form 8K dated October 24,
1997.
10.8 Contribution Indemnification and Subordination Agreement
dated October 24, 1997 among the Credit Parties
(Credit Agreement), incorporated by reference to Exhibit
10.47 to the Company's Form 8K dated October 24, 1997.
10.9 Litigation L/C and Term Loan C Agreement (the "Litigation
Agreement") dated as of October 24, 1997 among Company,
Agent and other financial institutions which may from
time to time become parties to the Litigation Agreement as
Term Lenders, incorporated by reference to Exhibit 10.48 to
the Company's Form 8K dated October 24, 1997.
10.10 Security Agreement dated October 2, 1997 executed by the
Company in favor of the Agent and the Term Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.49 to the Company's Form 8K dated October 24,
1997.
10.11 Security Agreement dated October 24, 1997 executed by
Tessco in favor of the Agent and the Term Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.50 to the Company's Form 8K dated October 24,
1997.
10.12 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of the Agent and the Term Lenders (Litigation
Agreement), incorporated by reference to Exhibit
10.51 to the Company's Form 8K dated October 24, 1997.
10.13 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Term Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.52 to the Company's Form 8K dated October 24,
1997.
10.14 Pledge Agreement dated as of October 24, 1997 executed by
Craig S. Camalo in favor of the Agent and the Terms Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.53 to the Company's Form 8K dated October 24,
1997.
10.15 Patent Security Agreement dated as of October 24, 1997
executed by Company in favor of the Agent and the Term
Lenders (Litigation Agreement), incorporated by reference
to Exhibit 10.54 to the Company's Form 8K dated October
24, 1997.
10.16 Warrant Purchase Agreement dated as of October 24, 1997
executed by GECC and Company, incorporated by reference to
Exhibit 10.55 to the Company's Form 8K dated October 24,
1997.
10.17 Warrant to Purchase Common Stock of Company issued to
GECC and executed by Company, incorporated by reference to
Exhibit 10.56 to the Company's Form 8K dated October 24,
1997.
10.18 Unit Purchase Agreement dated as of October 27, 1997 among
Company, Pegasus Partners, L.P. ("PP"), Pegasus Related
Partners, L.P. ("PRP"), incorporated by reference to
Exhibit 10.57 to the Company's Form 8K dated October 24,
1997.
10.19 Letter granting PP and PRP the right to purchase
accelerated obligations executed by GECC and acknowledged
by Company, incorporated by reference to Exhibit 10.58 to
the Company's Form 8K dated October 24, 1997.
10.20 Registration Rights Agreement dated as of October 27, 1997
among Company, PP, PRP and GECC, incorporated by reference
to Exhibit 10.59 to the Company's Form 8K dated October
24, 1997.
10.21 Form of Attached Warrant to purchase Common Stock of
Company, incorporated by reference to Exhibit 10.60 to
the Company's Form 8K dated October 24, 1997.
10.22 Form of Shortfall Warrant to purchase Common Stock of
Company, incorporated by reference to Exhibit 10.61 to
the Company's Form 8K dated October 24, 1997.
10.23 Form of Litigation Warrant to purchase Common Stock of
Company, incorporated by reference to Exhibit 10.62 to the
Company's Form 8K dated October 24, 1997.
10.24 Limited Supplemental Guaranty dated as of October 24, 1997
by and among PP, PRP and GECC, incorporated by reference
to Exhibit 10.64 to the Company's Form 8K dated October
24, 1997.
10.25 Limited Litigation Guaranty dated as of October 24, 1997 by
and among PP, PRP and GECC, incorporated by reference to
Exhibit 10.65 to the Company's Form 8K dated October 24,
1997.
10.26 Company's 1997 Stock Option Plan, incorporated by
reference to Exhibit 10.66 to the Company's Form 8K dated
October 24, 1997.
10.27 Letter Agreement dated as of October 27, 1997 among Robyn
L. Mueller Trust, the Kenneth M. Mueller Charitable
Remainder Unitrust, Mr. Rand Mueller, PP, PRP and Company,
incorporated by reference to Exhibit 10.67 to the
Company's Form 8K dated October 24, 1997.
10.28 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"), and 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"); and as further amended by
Amendment No. 4 to Employment Agreement dated May 20, 1997
and Amendment No. 5 to Employment Agreement dated
May 29, 1997, each incorporated by reference to Exhibit
10.68 to the Company's Form 8-K dated October 24, 1997.
10.29 Employment Agreement dated May 20, 1997 between Company and
Craig S. Camalo, incorporated by reference to Exhibit 10.69
to the Company's Form 8K dated October 24, 1997.
10.30 Employment Agreement dated May 20, 1997 between Company and
Peter Stouffer, incorporated by reference to Exhibit 10.70
to the Company's Form 8K dated October 24, 1997.
10.31 Employment Agreement dated May 20, 1997 between Company and
Michael Schroeder, incorporated by reference to Exhibit
10.71 to the Company's Form 8K dated October 24, 1997.
10.32 Letter Agreement dated October 1, 1997 between Company and
Kenneth M. Mueller, incorporated by reference to
Exhibit 10.72 to the Company's Form 8K dated October 24,
1997.
10.33 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 1990
Form 10-K.
10.34 Indemnification Agreement with Rand W. Mueller,
incorporated by reference to Exhibit 10.4 to Form S-18.
The Company has entered into the same form of agreement
with the following directors and executive officers as of
the dates indicated:
Description
-----------
Marshall J. Mueller May 29, 1987
Kenneth M. Mueller May 29, 1987
William S. Pickett May 29, 1987
Alan H. Foster May 17, 1988
Peter J. Stouffer March 22, 1991
Jack D. Rutherford May 21, 1991
Michael P. Schroeder March 24, 1995
Craig S. Camalo April 15, 1996
10.35 Mortgage Agreement with Rand W. Mueller, incorporated by
reference to Exhibit 10.8 to 1992 Form 10-K.
10.36 Lease of real property at 950 E. Whitcomb, Madison
Heights, Michigan, incorporated by reference to Exhibit
10.10 to 1992 Form 10-K.
10.37 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").
10.38 General Motors Corporation contract, incorporated
by reference to Exhibit 10.19 to Form S-1 (1).
10.39 Ford Motor Corporation contract, incorporated by
reference to Exhibit 10.20 to Form S-1 (1).
10.40 Chrysler Corporation contract, incorporated by
reference to Exhibit 10.21 to Form S-1 (1).
10.41 Purchase Agreement with Mitsubishi Motor Sales of
America, Inc., incorporated by reference to Exhibit 10.22
to 1992 Form 10-K (1).
10.42 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.
11.* Statement regarding Computation of Basic and Diluted
Per Share Earnings.
21* List of Subsidiaries.
27* Financial Data Schedule.
(b) A Form 8-K dated October 24, 1997, reporting Items 1(b), 5, and
7(c), was filed by the Company during the quarter ended December
31, 1997.
* Filed with this report.
<PAGE> 28
CODE-ALARM, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
Pages
-----
Consolidated Financial Statements of Code-Alarm, Inc. and Subsidiaries:
<S> <C>
Report of Independent Auditors........................................ F-2
Consolidated Financial Statements:
Balance Sheets ....................................................... F-3
Statements of Operations ............................................. F-4
Statements of Shareholders' Equity (Deficit).......................... F-5
Statements of Cash Flows ............................................. F-6
Notes to Consolidated Financial Statements............................ F-7 to F-16
Financial Statement Schedule:
Report of Independent Auditors........................................ F-17
II. Valuation and Qualifying Accounts and Reserves................... F-18
</TABLE>
F-1
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of
Code-Alarm, Inc. and subsidiaries (the"Company"), as of December 31, 1997 and
1996, and the related statements of operations and of cash flows for each of the
three years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Code-Alarm, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Detroit, MI
April 8, 1998
F-2
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
CODE-ALARM, INC. AND SUBSIDIARIES
IN THOUSANDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash $ 45 $ 36
Accounts receivable, less allowance for doubtful accounts
(December 31, 1996 and 1997, $950 and $1,073 respectively) 8,798 5,615
Inventories (Notes 1 and 2) 8,734 4,291
Refundable income taxes 1,059 950
Deferred income taxes 2,040
Other 729 503
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 21,405 11,395
- ------------------------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation (Notes 1 and 3) 3,750 2,444
Other assets:
Excess of cost over net assets acquired, net (Note 1) 1,910 320
Other intangibles, net 651 424
Other 1,711 1,479
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 29,427 $ 16,062
==============================================================================================================================
Liabilities and shareholders' equity (deficit)
- ------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt (Note 4) $ 9,308 $ 797
Accounts payable 9,874 5,545
Accrued expenses 2,380 2,040
Reserve for litigation (Note 10) 5,934
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 27,496 8,382
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 4) 879 6,574
Reserve for litigation (Note 10) 10,000
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 28,375 24,956
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 10)
- ------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock (Note 6) 7,000
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (Note 7):
Preferred stock, noncumulative; no par value;
authorized 500,000 shares; none issued
Additional paid in capital 4,179
Common stock, no par value; authorized 5,000,000 shares;
issued and outstanding December 31, 1996 and 1997, 2,320,861 shares 12,213 12,213
Foreign currency translation adjustment (260)
(Accumulated deficit) (10,901) (32,286)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 1,052 (15,894)
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 29,427 $ 16,062
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 31
CONSOLIDATED STATEMENTS OF OPERATIONS
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 11) $ 69,188 $ 62,503 $ 53,076
Cost of sales 44,718 43,074 35,473
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 24,470 19,429 17,603
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 12,099 10,145 7,739
Engineering 3,351 2,350 1,542
General and administrative 9,008 10,175 8,810
Impairment of goodwill (Note 1) 2,917 1,536
Restructuring charge (Note 9) 773
----------------------------------------------
24,458 25,587 20,400
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 12 (6,158) (2,797)
Other (income) expense:
Interest expense 1,505 1,576 1,434
Litigation expense (Note 10) 1,825 11,403
Other 452 (14) 272
----------------------------------------------
3,782 1,562 13,109
- -------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (3,770) (7,720) (15,906)
Income tax expense (benefit):
Current (443) (761) (868)
Deferred (603) 176 2,040
----------------------------------------------
(1,046) (585) 1,172
- -------------------------------------------------------------------------------------------------------------------------
Net loss (2,724) (7,135) (17,078)
Preferred stock dividends (Note 6) (128)
Intrinsic value of beneficial conversion
feature on redeemable preferred stock
(Note 6) (4,179)
- -------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (2,724) $ (7,135) $ (21,385)
=========================================================================================================================
Loss per share - basic and diluted $ (1.17) $ (3.07) $ (9.21)
=========================================================================================================================
Weighted average shares outstanding 2,320 2,321 2,321
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 32
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
Additional Foreign Total
Common Stock Paid In Translation (Accumulated Shareholders'
For the years ended December 31, 1995, 1996, and 1997 Shares Amount Capital Adjustment Deficit) Equity (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 2,320 $ 12,209 $ 49 $ (1,042) $ 11,216
Stock issued under stock option plan 1 1
Foreign currency translation adjustment 5 5
Net loss (2,724) (2,724)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 2,320 12,210 54 (3,766) 8,498
- ----------------------------------------------------------------------------------------------------------------------------------
Stock issued under stock option plan 1 3 3
Foreign currency translation adjustment (314) (314)
Net loss (7,135) (7,135)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,321 12,213 (260) (10,901) 1,052
- ----------------------------------------------------------------------------------------------------------------------------------
Recognition of intrinsic value of
beneficial conversion feature on
redeemable preferred stock 4,179 (4,179)
-
Preferred stock dividends accrued (128) (128)
Foreign currency translation adjustment 260 260
Net loss (17,078) (17,078)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,321 $ 12,213 4,179 - $ (32,286) $ (15,894)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
CODE-ALARM, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (2,724) $ (7,135) $ (17,078)
-----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,792 1,309 1,853
Impairment of goodwill 2,917 1,536
Write off of other assets 1,358
Payment of litigation settlement (6,055)
Foreign currency translation effect on cash 260
Changes in assets and liabilities
Accounts receivable 938 1,954 3,183
Inventories (2,657) 6,077 4,443
Refundable income taxes (502) (234) 109
Deferred income taxes (603) 86 2,040
Other assets (1,245) 492 167
Accounts payable 3,617 (2,487) (4,329)
Accrued expenses (1,299) 548 (340)
Reserve for litigation 2,110 95 10,000
- --------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,151 10,757 14,225
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (573) 3,622 (2,853)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (998) (716) (266)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (998) (716) (266)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Debt refinancing and preferred stock issue costs (1,074)
Proceeds from revolving credit agreement 2,021 5,880
Reduction of long-term debt (1,078) (3,072) (8,696)
Net borrowings (paydowns) from the line of credit 936 (207)
Issuance of common stock 1 2
Issuance of redeemable preferred stock 7,000
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,880 (3,277) 3,110
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 309 (371) (9)
Cash and cash equivalents, beginning of year 107 416 45
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 416 $ 45 $ 36
==========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,528 $ 1,576 $ 1,453
==========================================================================================================================
Income taxes $ 200
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 34
CODE-ALARM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The Company designs, manufactures, imports and markets automobile and
home security systems, keyless entry systems and related products. During 1997
the Company consolidated certain operations to the headquarters location in
Madison Heights, Michigan. This consolidation included closing subsidiary
operations in France, the United Kingdom, and Texas. All costs associated with
these consolidations have been recognized as of December 31, 1997. See further
discussions in the related intangible asset description below and in Note 9,
"Restructuring".
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of all
inventories is determined on the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being
provided using the straight-line and accelerated methods over the estimated
useful lives of the related assets. Upon retirement or disposal of property or
equipment, the cost and accumulated depreciation are removed from the accounts,
and any gain or loss is included in operations. Estimated useful lives are
3 to 8 years for machinery and equipment, 5 years for furniture and fixtures,
and leasehold improvements are depreciated over the life of the lease.
INTANGIBLE ASSETS
The excess of acquisition cost over net assets acquired ("Goodwill") is
amortized on a straight-line basis over 40 years. The Company continually
evaluates the realizability of Goodwill based upon expectations of estimated
undiscounted future cash flow and operating income. Impairment of Goodwill is
recognized as a charge to operations when the estimated future cash flows are
less than the carrying value of the Goodwill. In 1996 and 1997, $2,917,000 and
$1,536,000, respectively, was charged to operations for impairment of Goodwill
associated with acquisitions. The costs of all other intangible assets,
comprised primarily of covenants-not-to-compete, patents and trademarks, are
amortized on a straight-line basis over their respective estimated useful lives,
generally five years. Accumulated amortization of intangible assets amounted to
approximately, $1,182,000 and $ 1,496,000 at December 31, 1996 and 1997,
respectively.
REVENUE RECOGNITION
Revenues are recognized from sales when the product is shipped. The
Company provides an accrual for future product return and warranty costs based
upon historical experience. Accrued warranty costs amounted to approximately
$170,000 and $213,000 at December 31, 1996 and 1997, respectively.
RESEARCH AND DEVELOPMENT COSTS
F-7
<PAGE> 35
Expenditures for the research and development of new and improved
products are charged to operations as incurred and aggregated approximately
$558,000, $601,000 and $580,000 for the years ended December 31, 1995, 1996 and
1997 respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
contingent assets and liabilities at December 31, 1996 and 1997, and revenues
and expenses during the three years in the period ended December 31, 1997. The
actual results could differ from the estimates made in the preparation of the
consolidated financial statements.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share," for the year ended December 31, 1997. SFAS No.
128 replaces the presentation of primary earnings per share ("EPS") and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes potential share dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings but does not include shares issuable
upon conversion of securities that would have an antidilutive effect on earnings
per share. All prior period EPS data have been restated. The adoption of this
new accounting standard did not have a material effect on the Company's
reported EPS amounts.
The diluted loss per share for the years ended December 31, 1997, 1996
and 1995 does not include shares issuable upon exercise or conversion of stock
options or warrants because they would have an antidilutive effect on the loss
per share.
CONCENTRATION OF RISK
The company's products include a number of high-technology components
that are currently sourced from only a few suppliers and, in some cases, a
single supplier. The Company frequently requires large volumes of such
components. If the Company's suppliers are unable to fulfill the Company's
needs for such components, the Company may be unable to fill customer orders
and its business and financial condition, including working capital and results
of operations, may be materially and adversely affected.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Raw materials.......................................................... $5,811 $3,425
Work in process........................................................ 324 680
Finished goods......................................................... 2,599 186
------ ------
$8,734 $4,291
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following major classifications:
<TABLE>
<CAPTION>
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Machinery and equipment................................................ $ 8,589 $ 8,325
Leasehold improvements................................................. 1,426 1,180
Furniture and fixtures................................................. 1,543 702
------- -------
11,558 10,207
Less accumulated depreciation................................. 7,808 7,763
------- -------
$ 3,750 $ 2,444
======= =======
</TABLE>
F-8
<PAGE> 36
Depreciation expense was approximately $1,260,000, $1,037,000 and
$1,572,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Revolving credit facility............................................................... $ 5,580 $5,193
Term loans.............................................................................. 2,570 1,500
Working capital facilities.............................................................. 784
Mortgage note........................................................................... 327 296
Capital lease obligations............................................................... 926 382
-------- ------
10,187 7,371
Less current portion........................................................... (9,308) (797)
-------- ------
$ 879 $6,574
======== ======
</TABLE>
On October 24, 1997, the Company entered into a three year credit agreement
with a new senior lender, General Electric Capital Corporation ("GECC"),
extending revolving credit, letter of credit and term loan facilities to the
Company of up to $25.5 million for the purpose of (a) refinancing senior
indebtedness of the Company, (b) providing working capital financing, and (c)
either providing funds to satisfy, or providing letters of credit to secure
issuance of a supersedeas or appeal bond or similar obligation in order to
permit the Company to bond an appeal of, a judgment adverse to the Company in
Detroit Litigation (see Note 10). Specifically, the new credit agreement
provides for a $12 million revolving credit loan, $1.5 million term loan, and a
term loan of up to $3 million to pay a final settlement in the Detroit
Litigation. Provided the $3 million term loan is not outstanding, the credit
agreement provides for a letter of credit of up to $12 million to secure bonding
of an appeal in the Detroit Litigation and, alternatively, a term loan of up to
$12 million to pay or settle the judgment. The revolving credit facility bears
interest at prime rate plus 1.5% or LIBOR plus 3.25%. The $1.5 million term
loan is payable in twelve (12) equal quarterly installments and bears interest
at prime plus 1.75% or LIBOR plus 3.5%. If the $3 million or $12 million term
loans are made, the loans will bear interest at the prime rate plus 2% or LIBOR
plus 3.75%. The fee for letters of credit is 2% per annum, except the fee is 3%
for the letter of credit issued in conjunction with the Detroit Litigation.
The credit agreement is subject to certain covenants requiring minimum
levels of net worth, fixed charge coverage and operating income, maximum
capital expenditures, and restrictions on payments of certain dividends, sale
of assets and increased indebtedness. In addition, the credit agreement
requires that mandatory prepayments against outstanding GECC indebtedness be
made with proceeds from the sale of equity or debt securities, sale of assets,
excess operating cash flow and proceeds from litigation involving patents and
intellectual property. Credit availability under the revolving credit loan is
subject to a specified percentage of eligible accounts receivable and
inventory.
The credit facility is collateralized by substantially all the assets of
the Company and its subsidiaries and by a pledge of the Company's
Series B Preferred Stock. The Company's obligations have been guaranteed by
its subsidiaries. Amounts outstanding at December 31, 1997, consist
of $5,193,000 under the $12 million revolving credit loan and $1,500,000 under
the term loan.
The credit agreement was amended as of March 4, 1998 and
amended as of April 8, 1998, in order to give the Company the right to draw on
the letter of credit facility for the Detroit Litigation judgment, both for the
initial judgment and for any additional judgement amounts, to waive
certain defaults (including those which existed at December 31, 1997), to
correct certain disclosures and to modify certain provisions.
In order to permit the bonding of a judgement of $9,341,031 in the Detroit
Litigation, GECC on March 5, 1998, caused a bank to issue a letter of
credit in that amount under the terms of the credit agreement. The letter of
credit is guaranteed by the holders of the Company's Series A-1 Preferred
Stock.
F-9
<PAGE> 37
At December 31, 1996 the Company had a credit agreement with a bank
that consisted of $14.25 million secured revolving credit facility for
working capital requirements, $1.3 million secured non-amortizing loan due May
23, 1997, and $2.2 million unsecured term loan due May 23, 1999. The Company
used these facilities for operating capital and to provide a standby letter of
credit in the amount of $5.9 million in conjunction with the appeal of the
patent infringement litigation. The Company's $14.25 million revolving credit
agreement was terminated by provisions of the loan agreement. Interest on the
credit facility was at the prime rate plus 1%, or at the Company's option, at
the LIBOR plus 1.5% to 3.5% for maturities ranging from one to six months. The
credit facility was collateralized by substantially all of the assets of the
Company. Furthermore, the Company's obligations under the credit facility were
guaranteed by all of its subsidiaries and were subject to certain covenants.
The bank credit agreement contained covenants which required the Company and
its subsidiaries to maintain a minimum working capital level, a specified
current ratio, a minimum tangible net worth, a specified fixed charges coverage
ratio and limitations on indebtedness. As of December 31, 1996, the Company was
not in compliance with certain of the covenants. The Lender did not agree to
amend the loan agreement in a manner which would place the Company in
compliance with all covenants. As a result, all outstanding borrowings due
the Bank at December 31, 1996, were classified as a current liability.
The mortgage note is payable to the City of Georgetown, Texas, in
monthly installments of $4,401, including interest at 7% through January of
2004, and is collateralized by the leasehold improvements.
The recorded amounts of long-term debt approximate fair value as of
December 31, 1997.
The following table sets forth aggregate maturities of long-term debt
at December 31, 1997 (in thousands):
1998.................................................... $ 797
1999.................................................... 625
2000.................................................... 5,759
F-10
<PAGE> 38
2001.................................................... 41
2002.................................................... 44
Thereafter.............................................. 105
------
$7,371
======
5. LEASE COMMITMENTS
LEASES
The Company leases certain property and equipment under various
operating leases through 2002.
Future minimum rental payments required for all noncancelable operating
leases are as follows for the years ending December 31:
(in thousands)
1998............................................ $528
1999............................................ 506
2000............................................ 449
2001............................................ 325
2002............................................ 108
Thereafter...................................... 180
Rent expense under all operating leases was approximately $915,000,
$938,000 and $565,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
6. REDEEMABLE PREFERRED STOCK
On October 27, 1997, the Company sold for $6,999,850 55,000 units
(the "Units") to two related investment funds, each unit containing one
share of Series A-1 Preferred Stock and warrants to purchase approximately 68
shares of the Company's common stock at an exercise price of approximately
$1.88 per share (a total of 3,731,341 shares). The exercise price of the
Attached Warrants must be paid by delivery of Series A Preferred Stock with a
stated value equal to the exercise price. Because the exercise price of
approximately $1.88 per share was below the market value of the Company's
common stock at the date the Units were sold, the Units have a beneficial
conversion feature which has been accounted for in accordance with Emerging
Issues Task Force Topic D-60, Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable Conversion Feature.
Accordingly, $4,179,000 of the proceeds, representing the intrinsic value of
the beneficial conversion feature, has been allocated to the Company's no par
value common stock, and has been recognized as a return to the preferred
shareholders in 1997. Each share of Series A-1 Preferred Stock accrues
dividends at 10% per year ($12.727 per share), payable on April 5 and October
15th. Dividends are payable at the option of the Company either in cash or
additional Units. The Preferred Stock holders have the right to elect two
members of the Board of Directors of the Company, subject to certain
limitations. Certain corporate actions require the approval of the holders of
Series A-1 Preferred Stock. In certain situations, these holders will have
enhanced voting rights. The Series A-1 Preferred Stock holders have a
liquidation preference of $127 per share, plus accrued and unpaid dividends.
The Preferred Stock and attached warrants are redeemable at the option of the
holder at any time after three years and six months from the date of issuance
at a price equal to the current market price per share of Common Stock,
multiplied by the number of shares of Common Stock into which the Attached
Warrants are then exercisable. In the event that the redemption of the Units
would constitute a violation of any provision of any agreement of the Company,
the Company will use its best efforts to register and issue an equivalent
number of shares of Common Stock of the Company to the holder. In addition,
any Common Stock previously issued upon the exercise of such warrants also is
subject to repurchase at the option of the holder at any time after three years
and six months from the date of issuance of the Units, at a price equal to the
current market price per share of Common Stock, subject to similar limitations.
In connection with the GECC credit agreement, the Company sold one share of
its Series B Preferred Stock for $10.00. GECC required the holder to pledge
this stock as security for the Company's obligations under the credit
agreement. The Series B Preferred Stock accrues dividends at the rate of $1.00
per year, payable on December 31. If there is an event of default under the
credit agreement, or the obligations arising under the credit agreement are
accelerated, the Series B Preferred Stock has the right to elect a majority of
the Company's Board of Directors. Upon payment in full of all obligations
arising under the credit agreement, the Company can repurchase the Series B
Preferred Stock for $10.00 plus accrued and unpaid dividends.
7. CAPITAL STOCK
1987 Stock Option Plan
The Company adopted in 1987 a Stock Option Plan ("1987 Plan") for its
key employees and reserved 280,000 shares of common stock for issuance under
the 1987 Plan. The Plan authorizes the Company to issue Incentive Stock Options
and Non-Qualified Stock Options. No non-qualified stock options were issued.
The 1987 Plan has expired.
Incentive Stock Options may be issued at a price not less than fair
market value as of the grant date. For any employee holding more than 10 percent
of the voting stock of the Company, the option price is 110% of the fair market
value at the grant date.
F-11
<PAGE> 39
Non-Qualified stock options may be issued at a price not less than 85
percent of fair market value at the grant date. Options are generally
excercisable for a ten-year period; however, options granted to any employee
holding more than 10 percent of the voting stock of the Company are excercisable
over five years. No Non-Qualified stock options have been granted.
The following table summarizes the activity for the Company's 1987 Stock Option
Plan:
<TABLE>
<CAPTION>
1987 Stock
Option Plan
-------------
Excercise
Shares Subject Price Per
to Option Share
--------------- ---------
<S> <C> <C>
Balance, January 1, 1995 . . . . . . . . 216,375 $4.25 to $20.25
Options granted . . . . . . . . . . . . 85,000 $7.00 to $ 8.11
Options excercised . . . . . . . . . . (400) $4.25
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (39,200) $5.00 to $15.25
--------
Balance, December 31, 1995 . . . . . . . 261,775 $4.25 to $20.25
Options granted . . . . . . . . . . . . 195,475 $4.00 to $ 5.50
Options excercised . . . . . . . . . . (500) $4.25
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (252,375) $5.23 to $20.25
--------
Balance, December 31, 1996 . . . . . . . 204,375 $4.00 to $ 5.75
Options granted . . . . . . . . . . . . 30,000 $2.75
Options canceled, terminated or
expired . . . . . . . . . . . . . . . . (48,050) $4.25 to $5.00
--------
Balance, December 31, 1997 . . . . . . . 186,325 $2.75 to $5.75
========
Options excercisable at
December 31, 1997 . . . . . . . . . . . 31,109
========
</TABLE>
As of December 31, 1997, 186,325 options granted under the 1987 Plan
remain outstanding with a weighted average exercise price of $4.85/share and a
weighted average remaining contractual life of approximately 8 years.
Options granted under the 1987 Plan that are exercisable as of December 31,
1997, have a weighted average excercise price of $4.85 per share.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan adopted by the Company's Board provides for
the issuance of options to purchase 1,317,178 shares of common stock. The
options are non-qualified stock options, exercisable at $1.88 per share and
expire 10 years from the date of grant. The options begin vesting at the rate
of one-third per year beginning on the third anniversary of their grant. These
options are only exercisable if the fair market value of the common stock
reaches or exceeds increasing amounts over time starting with $2.375 in the
first year, after grant, and increasing to $11.50 in the seventh year.
F-12
<PAGE> 40
The following table summarizes the activity for the Company's 1997 Stock Option
Plan:
<TABLE>
<CAPTION>
1997 Stock
Option Plan
-------------
Excercise
Shares Subject Price Per
to Option Share
--------------- ---------
<S> <C> <C>
Options granted 1997 . . . . . . . 1,317,178 $1.88
Balance, December 31, 1997 . . . . 1,317,178 $1.88
</TABLE>
As of December 31, 1997, 1,317,178 options granted under the 1997 Plan
are outstanding with a weighted average exercise price of $1.88/share and a
weighted average remaining contractual life of approximately 10 years. None of
the options issued under the 1997 Plan are currently exercisable.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123") - Accounting for Stock Based
Compensation" which was effective for the Company beginning January 1, 1996.
SFAS 123 encourages compensation cost to be measured based on the fair value of
the equity instruments awarded. In accordance with this statement the Company
has elected to continue the application of Accounting Principles Board Opinion
No. 25 which recognized compensation cost based on the instrinsic value of the
equity instrument award. Under the provisions of Opinion No. 25, no compensation
expense was recorded by the Company during 1995, 1996, or 1997. If the Company
were to apply the fair value based method of accounting for stock-based
compensation, its effect on the net loss in 1995, 1996, or 1997 would be
insignificant.
The primary assumptions used in the fair value of the options granted include
the following:
Option Pricing Model
The Company uses the Black-Scholes option pricing model to determine
the fair value of options granted.
Dividend Yield
As the Company's stock currently does not include a dividend, dividend
payments were not included in the fair value calculation.
Risk Free Rate
The rate applicable to Zero Coupon Treasury Notes with a duration
similar to options granted was used to determine the risk free rate, which was
approximately 6% at each of the respective grant dates.
Expected Life
The expected life of the options issued during the year was
approximately 5 - 7 1/2 years, based on the provisions of the respective option
Plans.
Expected Volatility
The expected volatility was approximately 60%, based on changes in the
fair market value of the Company's common stock over a period similar to the
expected life of the options.
8. INCOME TAXES
The effective tax rates differ from the statutory income tax rate due
to the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate . . . . . . . . . . . . . . 34 % 34 % 34 %
</TABLE>
F-13
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
Differences resulting from:
Valuation allowance . . . . . . . . . . . (37)
Goodwill impairment, amortization
and other nondeductible expenses . . (3) (14) (3)
Effect of foreign tax rates . . . . . . . (1) 1
Effect of nondeductible foreign
losses. . . . . . . . . . . . . . . . (20) (2)
Charge off of state and foreign
tax refunds receivable. . . . . . . . (2)
Reversal of prior period timing
differences . . . . . . . . . . . . . 7
------- ------- -------
Effective income tax rates. . . . . . . . . 28% 8% (8)%
======= ======= =======
</TABLE>
Current income tax expense for 1995 includes $46,000 of foreign income
taxes. There were no foreign income taxes for 1996 or 1997.
Deferred tax assets and liabilities as of December 31 consisted of the
following:
<TABLE>
1996 1997
---- ----
(In thousands)
<S> <C> <C>
AMT Credit Carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . 2,137
Expenses deductible earlier for financial statement purposes
than for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . $ 358 1,233
Litigation loss not deductible for tax purposes . . . . . . . . . . . . . . . 2,017 3,400
Expense included in inventory for tax purposes . . . . . . . . . . . . . . . 153 181
--------- -------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 2,528 7,196
Net value of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . 351 314
Capitalization of assets expensed for tax purposes . . . . . . . . . . . . . 137 58
--------- -------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . 488 372
--------- -------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,040 6,824
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,824)
--------- -------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,040 $ -0-
========= =======
</TABLE>
The Company has a net operating loss carryforward of $6,285,000, the majority
of which expires in 2012.
During 1997, the company discontinued operations of its foreign subsidiaries. In
prior years the Company did not provide United States income taxes on the
undistributed earnings of foreign subsidiaries, as such earnings were intended
to be reinvested in those operations.
9. RESTRUCTURING
During 1997, the Company recorded a restructuring charge of $773,000 related to
the consolidation of its Georgetown, Texas facility. Costs accrued during the
period related to termination benefits provided to
F-14
<PAGE> 42
employees of the facility, write-off of certain property and equipment and other
costs. Termination benefits accrued and subsequently paid totaled $250,000.
10. LITIGATION
The Company was involved in a patent infringement suit involving a
shock sensing device and during 1993, the Company was found to be in violation
of the patent. The damage portion of the trial was completed in January 1995
and, at December 31, 1994, the Company recorded an accrual for damages,
including interest and costs, of approximately $4.2 million. In June 1995 the
Company received from the United States District Court information that the
damages would total $5.6 million. Accordingly the Company recorded an
additional accrual for damages and interest of $1.8 million in 1995. In April
1997, the Company paid $6.1 million in satisfaction of the judgment. In June,
1997, the Company's appeal of the judgment was denied.
In a similar case relating to a subsequent shock sensing device, the
Court held that the subsequent device infringed the patent and, following a
trial on willfulness and damages, on February 3, 1998, entered a Final
Judgment in the amount of $10,651,443, plus daily prejudgment interest of
$1,993 from January 20, 1998, until February 2, 1998. On March 5, 1998, the
Court approved a Bond for Stay of Execution in the amount of $9,341,031,
which the Company posted with the Court. On March 23, 1998, the Court entered
an Amended Final Judgment in the amount of $9,334,946, including prejudgment
interest. The amount of attorney fees and costs will be decided by the
Court at a later date. The Company has recorded as a reserve for litigation at
December 31, 1997, an amount of $10 million to provide for damages, including
prejudgement interest, and an estimate for attorney fees and costs. The
Company's litigation expense includes the amount of the amended final
judgment interest through December 31, 1997, and legal costs for the Company
and the plaintiff.
The Company became involved in several legal proceedings following the
Company's decision to aggressively defend its patent rights. The Company is
asserting its patent rights against the defendants in these cases, and such
defendants have made claims against the Company. The outcome of these cases
cannot be reasonably estimated.
The Company, on March 16, 1995, was named as a defendant in an action
filed in August 1990 in the United States District Court for Puerto Rico to
enforce a patent infringement default judgment rendered against certain
predecessors in title to assets now owned by the Company which were purchased by
the Company from a bank in Illinois in January 1990. The bank was providing
for the defense of the Company subject to reservation of rights against the
Company. The amount of the judgment was $19.4 million, which with accumulated
interest had reached approximately $30 million. On March 20, 1997, the Puerto
Rico court dismissed the action and held that any action to collect from the
Company and its subsidiary as successors in interest to the judgment debtor
must be raised before the Illinois court. On March 20, 1997, the case was
refiled by the judgment creditors in Illinois; the bank is providing for up to
50% of the defense of the Company subject to reservation of rights against the
Company. The Company, through its counsel, has filed a Motion to Dismiss,
which is under advisement by the court. While the Company believes
that it has meritorious defenses to the claims asserted in this lawsuit, the
ultimate outcome of this lawsuit cannot be determined at this time, and the
Company is unable to estimate the range of possible loss, if any.
Various other legal actions and claims are pending or could be asserted
against the Company. Litigation is subject to many uncertainties; the outcome
of individual litigation matters is not predictable with assurance, and it is
reasonably possible that some of these matters may be decided unfavorably to
the Company. It is the opinion of management that the ultimate liability, if
any, with respect to these matters will not materially affect the financial
position, and results of operations of the Company.
11. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment - vehicle
security systems. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. With the exception of sales
to General Motors Corporation ("GM"), Ford Motor Company ("Ford") and to Suburu
of America, Inc. ("Subaru"), no single customer accounted for more than 10
percent of revenue.
F-15
<PAGE> 43
<TABLE>
<CAPTION>
Percent Of Total Sales
----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
GM........................................................................ 13% 13% 13%
Ford...................................................................... 11% 12% 13%
Subaru.................................................................... 14%
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS Year Ended December 31
(In Thousands)
Net Sales 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Domestic............................................................... $ 49,952 $ 50,074 $ 50,589
European............................................................... 19,236 12,429 2,487
-----------------------------------------------
Consolidated.................................................... $ 69,188 $ 62,503 $ 53,076
===============================================
Income (loss) from operations
Domestic............................................................... $ (571) $ (482) $ (727)
European............................................................... 583 (5,676) (2,070)
-----------------------------------------------
Consolidated.................................................... $ 12 $ (6,158) $ (2,797)
===============================================
Assets
Domestic............................................................... $ 29,461 $ 24,518 $ 16,062
European............................................................... 12,582 4,909
-----------------------------------------------
Consolidated.................................................... $ 42,043 $ 29,427 $ 16,062
===============================================
</TABLE>
Export sales included in domestic operations in 1995, 1996, and 1997, were
$3,080,000, $3,819,000, and $7,650,000, respectively.
12. WARRANTS
In conjunction with the new credit agreement facility (see Note 4),
the Company issued warrants as follows:
Shortfall Warrants
The Company issued to the holders of its redeemable preferred
stock warrants to acquire one million shares of the Company's
common stock in exchange for supplemental guarantees of up to
$4,000,000 the Company's indebtedness. The warrants have an exercise
price of approximately $1.88 per share and expire after seven years.
In the event that the shareholders are fully and unconditionally
released from the guarantee, the Company has the right to repurchase
fixed percentages of the warrants, which percentages decrease over
time. The warrants, and any Common Stock previously issued to the
holder upon exercise of the warrants, are redeemable at the option of
the holder at any time after three years and six months from the date
of issuance. The purchase price is the market price of the Common
Stock for which such Shortfall Warrants are then exercisable, and in
the case of the warrants, less the exercise price of such warrants.
GECC Warrants
The Company issued warrants to the lender under the
new debt facility to acquire up to 131,718 shares of the Company's
common stock. The warrants have an exercise price of approximately
$1.88 per share and expire after seven years. As a consequence of
the antidilution provisions in the warrants and the issuance of the
Litigation Warrants (discussed below), the GECC warrants have been
adjusted to permit the holder to acquire 226,594 shares at an
exercise price of $1.10 per share.
Litigation Warrants
In return for the guaranty of the $9,341,031 letter of credit
issued to a surety which issued the bond to permit an appeal of the
judgment in the Detroit patent infringement litigation, the Company
on March 5, 1998, issued to holders of its Series A Preferred Stock
warrants to acquire 6,230,216 shares of the Company's common stock.
These warrants have an exercise price of approximately $.49 per share
and expire seven years after October 27, 1997.
13. SUBSEQUENT EVENT
On March 5, 1998, the Company posted a bond with the Court in the amount
of $9,341,031, in accordance with the Detroit Litigation judgment rendered on
February 6, 1998. The bond is secured by an irrevocable letter of credit
provided by GECC, guaranteed by Pegasus. The amount of the judgment will be
increased to cover additional interest and certain attorney fees. The Company
anticipates GECC will be asked to issue an additional letter of credit,
which the holders of its redeemable preferred stock will guarantee, up to an
amount not to exceed $12 million in the aggregate for the original and the
additional letters of credit, in exchange for the issuance by the Company of
additional warrants to purchase common stock.
F-16
<PAGE> 44
INDEPENDENT AUDITOR'S REPORT ON
FINANCIAL STATEMENT SCHEDULE
Code-Alarm Inc.
We have audited the consolidated financial statements of Code-Alarm
Inc. and subsidiaries as of December 31, 1997 and 1996 and for each of the
three years in period ended December 31, 1997 and have issued our report
thereon dated April 8, 1998; such financial statements and report are included
in this Annual Report on Form 10-K. Our audits included the Financial
Statement Schedule of Code-Alarm, Inc. and subsidiaries for each of the three
years in period ended December 31, 1997 listed in Item 14. This Financial
Statement Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the Financial Statement Schedule
based on our audits. In our opinion, such Financial Statement Schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein for each of the three years in period ended December 31, 1997.
Deloitte & Touche LLP
Detroit, Michigan
April 15, 1998
F-17
<PAGE> 45
CODE-ALARM, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
---------- -------- -------- -----------
ADDITIONS
---------
Charged to
Balance at Charged to Other Balance at
Beginning Cost and Accounts, Deductions, End
of Period Expenses Describe Describe(1) of Period
---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997 ....... $950,000 861,000 738,000 $1,073,000
Year ended December 31, 1996 ....... 667,000 443,000 160,000 950,000
Year ended December 31, 1995 ....... 383,000 592,000 308,000 667,000
</TABLE>
Note: (1) Write-off uncollectible accounts, net of recoveries
F-18
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CODE-ALARM, INC.
--------------------
(Registrant)
Date: April 8, 1997 /s/ Rand W. Mueller
- ------------------- -------------------
RAND W. MUELLER
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ RAND W. MUELLER President, Chief April 15, 1998
- ----------------------- Executive Officer --------------
RAND W. MUELLER and Director
/s/ CRAIG S. CAMALO Vice President of April 15, 1998
- ----------------------- Finance, Chief --------------
CRAIG S. CAMALO Financial Officer
/s/ PETER J. STOUFFER Director April 15, 1998
- ----------------------- --------------
PETER J. STOUFFER
/s/ RICHARD CION Director April 15, 1998
- ----------------------- --------------
RICHARD CION
/s/ RODNEY S. COHEN Director April 15, 1998
- ----------------------- --------------
RODNEY S. COHEN
/s/ ALAN H. FOSTER Director April 15, 1998
- ----------------------- --------------
ALAN H. FOSTER
/s/ MARSHALL J. MUELLER Director April 15, 1998
- ----------------------- --------------
MARSHALL J. MUELLER
Director
- ----------------------- --------------
KENNETH M. MUELLER
/s/ WILLIAM S. PICKETT Director April 15, 1998
- ----------------------- --------------
WILLIAM S. PICKETT
/s/ JACK D. RUTHERFORD Director April 15, 1998
- ----------------------- --------------
JACK D. RUTHERFORD
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-18, as amended,
registration No. 33-16991C ("Form S-18").
3.1.1 Certificate of Designation, Numbers, Powers, Preferences
and Relative Participating, Optional and Other Rights of
Series A Preferred Stock of Code-Alarm, Inc.,
incorporated by reference to Exhibit 3.1.1 to the Company's
Form 8-K dated October 24, 1997.
3.1.2 Certificate of Designation, Numbers, Powers, Preferences
and Relative Participating, Optional, and Other Rights of
Series B Preferred Stock of Code-Alarm, Inc., incorporated
by reference to Exhibit 3.1.2 to the Company's Form 8-K
dated October 24, 1997.
3.2.1 Bylaws of the Company, as amended, incorporated by
reference to Exhibit 3.2.1 to the Company's Form 8-K for
dated October 24, 1997.
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").
9.1 Termination of Shareholder Agreement dated February 15,
1997 incorporated by reference to the Company's Form 10K
for the year ended December 31, 1996 ("1996 Form 10-K")
10.1 Credit Agreement dated as of October 24, 1997 (the "Credit
Agreement") among Company, General Electric Capital
Corporation ("GECC"), in its capacity as a "Lender", and the
other financial institutions which may from time to time
become parties to the Credit Agreement (GECC, in such
capacity, and such other financial institutions being
sometimes hereinafter referred to collectively as the
"Lenders" and individually as a "Lender"), and GECC, in its
separate capacity as agent for the Lenders (the "Agent") with
Exhibits and Annexes attached, incorporated by reference to
Exhibit 10.1 to the Company's Form 8K dated October 24, 1997.
10.1.1 Amendment, Waiver and Consent to Credit Agreement dated as of March 4,
1998 among Company, General Electric Capital Corporation ("GECC"),
in its capacity as a "Lender", and the other financial institutions which
may from time to time become parties to the Credit Agreement (GECC, in
such capacity, and such other financial institutions being sometimes
hereinafter referred to collectively as the "Lenders" and individually
as a "Lender"), and GECC, in its separate capacity as agent for the
Lenders, incorporated by reference to Exhibit 10.73 to the Company's
Form 8-K dated March 4, 1998.
10.1.2 Conformed Copy Incorporating Amendment and Waiver dated as of March 4,
1998, of Credit Agreement dated as of October 24, 1997 (the "Credit
Agreement") among Company, General Electric Capital Corporation ("GECC"),
in its capacity as a "Lender", and the other financial institutions which
may from time to time become parties to the Credit Agreement (GECC, in
such capacity, and such other financial institutions being sometimes
hereinafter referred to collectively as the "Lenders" and individually
as a "Lender"), and GECC, in its separate capacity as agent for the Lenders,
incorporated by reference to Exhibit 10.74 to the Company's Form 8-K
dated March 4, 1998.
10.1.3 Amendment No. 2 and Waiver No. 2 to Credit Agreement dated as of April 8,
1998 by and among Company, General Electric Capital Corporation ("GECC"), in
its capacity as a "Lender", and the other financial institutions which
may from time to time become parties to the Credit Agreement (GECC, in such
capacity, and such other financial institutions being sometimes
hereinafter referred to collectively as the "Lenders" and individually as a
"Lender"), and GECC, in its separate capacity as agent for the Lenders.
10.2 Security Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement), incorporated by reference to Exhibit 10.41 to the
Company's Form 8K dated October 24, 1997.
10.3 Security Agreement dated as of October 24, 1997 executed by
Tessco Group, Inc. ("Tessco"), in favor of the Agent and the
Lenders (Credit Agreement), incorporated by reference to
Exhibit 10.42 to the Company's Form 8K dated October 24, 1997.
10.4 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of Agent and the Lenders (Credit Agreement), incorporated by
reference to Exhibit 10.43 to the Company's Form 8K dated
October 24, 1997.
10.5 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement), incorporated by reference to
Exhibit 10.44 to the Company's Form 8K dated October 24, 1997.
10.6 Pledge Agreement dated as of October 24, 1997 executed by Craig S.
Camalo in favor of the Agent and the Lenders (Credit Agreement),
incorporated by reference to Exhibit 10.45 to the Company's Form 8K
dated October 24, 1997.
10.7 Patent Security Agreement dated October 24, 1997 executed by
Company in favor of the Agent and the Lenders (Credit
Agreement), incorporated by reference to Exhibit 10.46 to the
Company's Form 8K dated October 24, 1997.
10.8 Contribution Indemnification and Subordination Agreement dated
October 24, 1997 among the Credit Parties (Credit Agreement),
incorporated by reference to Exhibit 10.47 to the Company's
Form 8K dated October 24, 1997.
10.9 Litigation L/C and Term Loan C Agreement (the "Litigation
Agreement") dated as of October 24, 1997 among Company, Agent
and other financial institutions which may from time to time
become parties to the Litigation Agreement as Term Lenders,
incorporated by reference to Exhibit 10.48 to the Company's
Form 8K dated October 24, 1997.
10.10 Security Agreement dated October 2, 1997 executed by the
Company in favor of the Agent and the Term Lenders (Litigation
Agreement), incorporated by reference to Exhibit 10.49 to the
Company's Form 8K dated October 24, 1997.
10.11 Security Agreement dated October 24, 1997 executed by Tessco
in favor of the Agent and the Term Lenders (Litigation
Agreement), incorporated by reference to Exhibit 10.50 to the
Company's Form 8K dated October 24, 1997.
10.12 Guaranty dated as of October 24, 1997 executed by Tessco in
favor of the Agent and the Term Lenders (Litigation Agreement),
incorporated by reference to Exhibit 10.51 to the Company's
Form 8K dated October 24, 1997.
10.13 Pledge Agreement dated as of October 24, 1997 executed by
Company in favor of the Agent and the Term Lenders (Litigation
Agreement), incorporated by reference to Exhibit 10.52 to the
Company's Form 8K dated October 24, 1997.
10.14 Pledge Agreement dated as of October 24, 1997 executed by
Craig S. Camalo in favor of the Agent and the Terms Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.53 to the Company's Form 8K dated October 24, 1997.
10.15 Patent Security Agreement dated as of October 24, 1997
executed by Company in favor of the Agent and the Term Lenders
(Litigation Agreement), incorporated by reference to
Exhibit 10.54 to the Company's Form 8K dated October 24, 1997.
10.16 Warrant Purchase Agreement dated as of October 24, 1997
executed by GECC and Company, incorporated by reference to
Exhibit 10.55 to the Company's Form 8K dated October 24, 1997.
10.17 Warrant to Purchase Common Stock of Company issued to GECC and
executed by Company, incorporated by reference to
Exhibit 10.56 to the Company's Form 8K dated October 24, 1997.
10.18 Unit Purchase Agreement dated as of October 27, 1997 among
Company, Pegasus Partners, L.P. ("PP"), Pegasus Related
Partners, L.P. ("PRP"), incorporated by reference to
Exhibit 10.57 to the Company's Form 8K dated October 24, 1997.
10.19 Letter granting PP and PRP the right to purchase accelerated
obligations executed by GECC and acknowledged by Company,
incorporated by reference to Exhibit 10.58 to the Company's
Form 8K dated October 24, 1997.
10.20 Registration Rights Agreement dated as of October 27, 1997
among Company, PP, PRP and GECC, incorporated by reference to
Exhibit 10.59 to the Company's Form 8K dated October 24, 1997.
10.21 Form of Attached Warrant to purchase Common Stock of Company,
incorporated by reference to Exhibit 10.60 to the Company's
Form 8K dated October 24, 1997.
10.22 Form of Shortfall Warrant to purchase Common Stock of Company,
incorporated by reference to Exhibit 10.61 to the Company's
Form 8K dated October 24, 1997.
10.23 Form of Litigation Warrant to purchase Common Stock of
Company, incorporated by reference to Exhibit 10.62 to the
Company's Form 8K dated October 24, 1997.
10.24 Limited Supplemental Guaranty dated as of October 24, 1997 by
and among PP, PRP and GECC, incorporated by reference to
Exhibit 10.64 to the Company's Form 8K dated October 24, 1997.
10.25 Limited Litigation Guaranty dated as of October 24, 1997 by
and among PP, PRP and GECC, incorporated by reference to
Exhibit 10.65 to the Company's Form 8K dated October 24, 1997.
10.26 Company's 1997 Stock Option Plan, incorporated by reference to
Exhibit 10.66 to the Company's Form 8K dated October 24, 1997.
10.27 Letter Agreement dated as of October 27, 1997 among Robyn L.
Mueller Trust, the Kenneth M. Mueller Charitable Remainder
Unitrust, Mr. Rand Mueller, PP, PRP and Company, incorporated by
reference to Exhibit 10.67 to the Company's Form 8K dated October
24, 1997.
10.28 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"), and 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"); and as further amended by
Amendment No. 4 to Employment Agreement dated May 20, 1997 and
Amendment No. 5 to Employment Agreement dated May 29, 1997,
each incorporated by reference to Exhibit 10.68 to the Company's
Form 8-K dated October 24, 1997.
10.29 Employment Agreement dated May 20, 1997 between Company and
Craig S. Camalo, incorporated by reference to Exhibit 10.69
to the Company's Form 8K dated October 24, 1997.
10.30 Employment Agreement dated May 20, 1997 between Company and
Peter Stouffer, incorporated by reference to Exhibit 10.70 to
the Company's Form 8K dated October 24, 1997.
10.31 Employment Agreement dated May 20, 1997 between Company and
Michael Schroeder, incorporated by reference to Exhibit 10.71
to the Company's Form 8K dated October 24, 1997.
10.32 Letter Agreement dated October 1, 1997 between Company and
Kenneth M. Mueller, incorporated by reference to
Exhibit 10.72 to the Company's Form 8K dated October 24, 1997.
</TABLE>
E-1
<PAGE> 48
10.33 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 1990
Form 10-K.
10.34 Indemnification Agreement with Rand W. Mueller,
incorporated by reference to Exhibit 10.4 to Form S-18.
The Company has entered into the same form of agreement
with the following directors and executive officers as of
the dates indicated:
Description
-----------
Marshall J. Mueller May 29, 1987
Kenneth M. Mueller May 29, 1987
William S. Pickett May 29, 1987
Alan H. Foster May 17, 1988
Peter J. Stouffer March 22, 1991
Jack D. Rutherford May 21, 1991
Michael P. Schroeder March 24, 1995
Craig S. Camalo April 15, 1996
10.35 Mortgage Agreement with Rand W. Mueller, incorporated by
reference to Exhibit 10.8 to 1992 Form 10-K.
10.36 Lease of real property at 950 E. Whitcomb, Madison
Heights, Michigan, incorporated by reference to Exhibit
10.10 to 1992 Form 10-K.
10.37 Lease of real property at 300 Industrial Avenue,
Georgetown, Texas, incorporated by reference to Exhibit
10.11 to the Company's Form 10-K for the year ended
December 31, 1991 ("1991 Form 10-K").
E-2
<PAGE> 49
10.38 General Motors Corporation contract, incorporated
by reference to Exhibit 10.19 to Form S-1.
10.39 Ford Motor Corporation contract, incorporated by
reference to Exhibit 10.20 to Form S-1.
10.40 Chrysler Corporation contract, incorporated by
reference to Exhibit 10.21 to Form S-1.
10.41 Purchase Agreement with Mitsubishi Motor Sales of
America, Inc., incorporated by reference to Exhibit 10.22
to 1992 Form 10-K.
10.42 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.
11. Statement regarding Computation of Basic and Diluted Per
Share Earnings.
21 List of Subsidiaries.
27 Financial Data Schedule.
E-3
<PAGE> 1
Exhibit 10.1.3
EXECUTION COPY
AMENDMENT NO. 2 AND WAIVER NO. 2
TO
CREDIT AGREEMENT
THIS AMENDMENT NO. 2 AND WAIVER NO. 2 TO CREDIT AGREEMENT ("Agreement")
is being executed and delivered as of April 8, 1998 by and among Code-Alarm,
Inc., a Michigan corporation (the "Borrower"), the other "Credit Parties" from
time to time party to the Credit Agreement referred to below (together with the
Borrower, collectively, the "Credit Parties"), the financial institutions from
time to time party to such Credit Agreement (collectively, the "Lenders", and
each individually, a "Lender"), and General Electric Capital Corporation, as
the "Agent" for the Lenders (the "Agent"). Undefined capitalized terms which
are used herein shall have the meanings ascribed to such terms in the Credit
Agreement.
WITNESSETH:
WHEREAS, the Borrower, the other Credit Parties, the Lenders and the
Agent are parties to that certain Credit Agreement dated as of October 24, 1997,
as heretofore amended (the "Credit Agreement"), pursuant to which the Lenders
have agreed to provide, subject to the terms and conditions contained therein,
certain loans and other financial accommodations to the Borrower;
WHEREAS, the Borrower failed to comply with the Minimum Net Worth
covenant as of December 31, 1997 and during the period after such date through
the effective date of this Agreement, as set forth in paragraph (e) of Annex G
of the Credit Agreement (hereinafter, collectively, the "Existing Default");
WHEREAS, the Borrower has requested that the Lenders, and subject to
the terms and conditions of this Agreement the Lenders are willing to, (i)
waive the Existing Default and (ii) amend the Minimum Net Worth covenant for
the remaining period of the Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the terms
and conditions stated herein and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the Borrower, the Lenders and
the Agent, such parties hereby agree as follows:
1. Amendment. Subject to Paragraph 3 of this Agreement, and effective
as of the date of this Agreement, the Credit Agreement is hereby amended to
delete the figure "$1,700,000" which appears in the definition of "Net Worth" in
Annex A of the Credit Agreement, and to replace such figure with the figure
"$3,850,000".
2. Waiver. Subject to Paragraph 3 of this Agreement and effective as
of the date of this Agreement, each of the Lenders and the Agent hereby waives
the Existing Default.
<PAGE> 2
3. Effectiveness of this Agreement; Conditions Precedent. The
provisions of Paragraphs 1 and 2 shall be deemed to have become effective as of
the date of this Agreement, but such effectiveness shall be expressly
conditioned upon the Agent's receipt on or before April 15, 1998 of each of the
following:
(a) an originally-executed counterpart of this Agreement executed by
a duly authorized officer of the Borrower, each other Credit Party, and each of
the Requisite Lenders; and
(b) originally-executed counterparts to a Reaffirmation of Guaranties
duly executed by the Pegasus Funds substantially in the form attached hereto.
4. Representations and Warranties. (a) The Borrower and each other
Credit Party hereby represents and warrants that this Agreement constitutes the
legal, valid and binding obligation of the Borrower and such other Credit Party
enforceable against the Borrower and each other Credit Party in accordance with
its terms.
(b) The Borrower and each other Credit Party hereby represents and
warrants that its execution and delivery of this Agreement, and its performance
hereafter of the Credit Agreement as modified by this Agreement, have been duly
authorized by all necessary corporate action, do not violate any provision of
its articles of incorporation, bylaws or other charter documents, will not
violate any law, regulation, court order or writ applicable to it, will not
require the approval or consent of any governmental agency, and do not require
the approval or consent of any third party under the terms of any contract or
agreement to which the Borrower, any other Credit Party, Parent or any
Subsidiary of the Borrower or any other Credit Party is bound.
5. Reference to and Effect on Credit Agreement. The Credit Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
Except as is expressly set forth in Paragraph 2 of this Agreement, neither the
execution, delivery nor effectiveness of this Agreement shall operate as a
waiver of any right, power or remedy of the Agent or any Lender of any Default
or Event of Default under the Credit Agreement, all of which the Agent and the
Lenders hereby expressly reserve. The Borrower, each other Credit Party, the
Lenders and the Agent agree and acknowledge that this Agreement constitutes a
"Loan Document" under and as defined in the Credit Agreement.
6. Reaffirmation. Each of the Borrower and the other Credit Parties
hereby (a) ratifies and reaffirms all of its payment and performance
obligations, contingent or otherwise, under each Loan Document to which it is a
party, (b) agrees and acknowledges that such ratification and reaffirmation is
not a condition to the continued effectiveness of such Loan Documents and (c)
agrees that neither such ratification and reaffirmation, nor the Agent's and the
Lenders' solicitation of such ratification and reaffirmation, constitutes a
course of dealing giving rise to any obligation or condition requiring a
ratification or reaffirmation of the Borrower's or the
-2-
<PAGE> 3
other Credit Parties' obligations under the Loan Documents with respect to any
subsequent modifications to the Credit Agreement or other Loan Documents.
7. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws and decisions of the State of Illinois (including
S.H.A. 735 ILCS 105/5-1, et. seq., but without giving effect to any other
conflicts of law provisions).
8. Agent's Expenses. The Borrower hereby agrees to promptly reimburse
the Agent for all of the reasonable out-of-pocket expenses, including, without
limitation, attorneys' and paralegals' fees, it has heretofore or hereafter
incurred or incurs in connection with the preparation, negotiation and execution
of this Agreement.
9. Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original and all of which together shall constitute one
and the same agreement among the parties.
* * * *
-3-
<PAGE> 4
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
CODE-ALARM, INC.
By: /s/ Craig S. Camalo
----------------------------------
Name: Craig S. Camalo
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent and Lender
By: /s/ Catherine L. Midkiff
----------------------------------
Name: Catherine L. Midkiff
----------------------------
Title: Duly Authorized Signatory
---------------------------
TESSCO GROUP, INC.
By: /s/ Craig S. Camalo
----------------------------------
Name: Craig S. Camalo
----------------------------
Title: Secretary
---------------------------
CHAPMAN SECURITY SYSTEMS, INC.
By: /s/ Craig S. Camalo
---------------------------------
Name: Craig S. Camalo
--------------------------
Title: Secretary
--------------------------
-4-
<PAGE> 5
INTERCEPT SYSTEMS, INC.
By: /s/ Craig S. Camalo
-------------------------
Name: Craig S. Camalo
-------------------------
Title: Secretary
-------------------------
ANES, INC.
By: /s/ Craig S. Camalo
-------------------------
Name: Craig S. Camalo
-------------------------
Title: Secretary
-------------------------
-5-
<PAGE> 6
REAFFIRMATION OF GUARANTIES
Reference is hereby made to (i) that certain Limited Supplemental
Guaranty dated as of October 24, 1997 (the "Supplemental Guaranty") among
Pegasus Partners, L.P., a Delaware limited partnership, and Pegasus Related
Partners, L.P., a Delaware limited partnership (collectively, the
"Guarantors"), and General Electric Capital Corporation, a New York
corporation, individually and as agent (the "Agent"), (ii) that certain Limited
Litigation Guaranty dated as of October 24, 1997 (the "Litigation Guaranty")
among Guarantors and the Agent, (iii) that certain Credit Agreement
dated as of October 24, 1997, as heretofore amended (the "Credit Agreement"),
among Code-Alarm, Inc., a Michigan corporation (the "Borrower"), certain
other "Credit Parties" referred to and as defined therein (the "Credit
Parties"), certain "Lenders" from time to time party thereto (the "Lenders"),
and the Agent, and (iv) that certain Amendment No. 2 and Waiver No. 2 to Credit
Agreement of even date herewith (the "Amendment") among the Borrower, the
Credit Parties, the Lenders and the Agent.
Each of the Guarantors hereby (a) acknowledges having received and
reviewed a copy of the Amendment, (b) ratifies and reaffirms all of its payment
and performance obligations, contingent or otherwise, under the Supplemental
Guaranty and the Litigation Guaranty (collectively, the "Guaranties"), (c)
agrees and acknowledges that such ratification and reaffirmation is not a
condition to the continued effectiveness of such Guaranties and (d) agrees
that, without limiting any of the express provisions of the Guaranties, neither
such ratification and reaffirmation, nor the Agent's and the Lenders'
solicitation of such ratification and reaffirmation, constitutes a course of
dealing giving rise to any obligation or condition requiring a ratification or
reaffirmation of the Guarantors' obligations under the Guaranties with respect
to any subsequent modifications to the Credit Agreement or other Loan
Documents.
IN WITNESS WHEREOF, this instrument has been executed and delivered as
of this 8th day of April, 1998.
PEGASUS PARTNERS, L.P. PEGASUS RELATED PARTNERS, L.P.
By: PEGASUS INVESTORS, L.P., By: PEGASUS INVESTORS, L.P.,
as Managing General Partner as Managing General Partner
By: PEGASUS INVESTORS GP, INC., By: PEGASUS INVESTORS GP, INC.,
as General Partner as General Partner
By: /s/ Richard Cion By: /s/ Richard Cion
----------------------------- -----------------------------
Name: Richard Cion Name: Richard Cion
--------------------- ----------------------
Title: Vice President Title: Vice President
--------------------- ----------------------
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF BASIC AND DILUTED PER SHARE EARNINGS
Shares issuable under employee stock options and warrants were
excluded from the computation of the weighted average number of common shares
since they were antidilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OWNED
NAME OF INCORPORATION BY
- ---- ---------------- -----
<S> <C> <C>
Anes, Inc. Michigan Company
Chapman Security Systems, Inc. Michigan Company
Intercept System Michigan Company
Tessco Group, Inc. Michigan Company
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 6688
<ALLOWANCES> 1073
<INVENTORY> 4291
<CURRENT-ASSETS> 11395
<PP&E> 10207
<DEPRECIATION> 7763
<TOTAL-ASSETS> 16062
<CURRENT-LIABILITIES> 8382
<BONDS> 6574
7000
0
<COMMON> 12213
<OTHER-SE> (28107)
<TOTAL-LIABILITY-AND-EQUITY> 16062
<SALES> 53076
<TOTAL-REVENUES> 53076
<CGS> 35473
<TOTAL-COSTS> 35473
<OTHER-EXPENSES> 20400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1434
<INCOME-PRETAX> (15906)
<INCOME-TAX> 1172
<INCOME-CONTINUING> (15906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21385)
<EPS-PRIMARY> (9.21)
<EPS-DILUTED> (9.21)
</TABLE>
