<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-21345
Control Devices, Inc.
-----------------------------
(Exact name of registrant as specified in charter)
Indiana 01-0490335
------------- ---------------
(State or other jurisdiction of ( I.R.S. employer identification No. )
incorporation of organization )
228 Northeast Road, Standish, Maine 04084
- ----------------------------------- ---------------
( Address of principal executive offices ) ( Zip code )
The Company's telephone number, including area code: (207) 642-4535
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
Common Shares, no par value Nasdaq National Market
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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 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 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on January 23, 1998 was approximately $71,000,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Shares, no par value:
6,630,496 shares as of January 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K
Document Incorporated Part of Form 10-K
- ------------------------------------------------ -------------------
Proxy Statement for 1998 Annual Meeting of Shareholders Part III
<PAGE>
PART 1
------
Item 1: Description of Business
- ------- -----------------------
General Development of Business:
--------------------------------
On July 29, 1994, Control Devices, Inc. ("CDI" or the "Company") acquired
substantially all of the assets and certain liabilities (the "Business") of
GTE Control Devices Incorporated and Dominican Overseas Trading Company, two
subsidiaries of GTE Corporation (collectively referred to herein as "GTE").
For periods prior to July 29, 1994, the Business is sometimes referred to herein
as the "Predecessor Company." The Company is an Indiana corporation,
incorporated in June 1994 to purchase the Business. Unless the context
otherwise requires "CDI" and "the Company" includes Control Devices, Inc. and
its subsidiaries.
On December 15, 1997, the Company effected a 4-for-3 stock split of its
Common Shares which entitled each shareholder to receive one additional share
for each three outstanding Common Shares held of record as of the close of
business on December 1, 1997. All share and per share amounts have been restated
to give retroactive effect to the stock split.
In April 1996, the Company acquired all of the outstanding capital stock of
Realisations et Diffusion pour l'Industrie ("RDI"), which is headquartered near
Paris, France. RDI markets, distributes, assembles and packages a full line of
circuit protection devices, including various fuses and circuit breaker
components and assemblies manufactured by other companies. The Company
purchased RDI primarily to enhance its market penetration of the automotive
original equipment manufacturer ("OEM") market in Europe, in part by locating
itself closer to European customers. Management believes that the resulting
expansion of its European presence and improvement of its European distribution
network will enhance the Company's ability to distribute in Europe existing,
internally developed and newly acquired products.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission, which was declared effective on October 2, 1996. On
October 8, 1996, the Company closed on the sale of 2,666,666 Common Shares in
connection with its initial public offering (the "public offering") and received
net proceeds of approximately $15.7 million. On October 15, 1996, the Company
issued 400,000 Common Shares in connection with the exercise of the
underwriter's overallotment option granted in connection with the public
offering and received net proceeds of approximately $2.5 million.
The Company designs, manufactures and markets circuit breakers, electronic
sensors and electronic ceramic component parts used by OEMs in the automotive,
appliance and telecommunications markets. The Company has supplied circuit
breakers to automotive OEMs for more than 30 years, and in 1991 expanded its
offerings to the automotive market by introducing its initial sensor product, a
solar sensor used for climate control systems in luxury cars. The Company's
products are sold to the three major North American automotive OEMs, General
Motors Corporation ("GM"), Ford Motor Company ("Ford") and Chrysler Corp.
("Chrysler"), as well as to foreign OEMs such as Mercedes, and Volkswagen. Other
principal customers include Danfoss, Celwave, Bartley Machine, and Siecor.
Recent Developments:
--------------------
Part of the Company's overall growth strategy is to expand globally in
order to meet the demands of its customers. As part of that strategy, the
Company recently completed a reorganization of its foreign operations to
facilitate overseas investments and expansion. The Company anticipates the
effect of this reorganization will be to decrease the tax rate on its foreign
manufacturing operations and subsequently reduce the overall corporate income
tax rate from approximately 38% in 1997 to approximately 25% in 1998 under
current tax laws.
2
<PAGE>
Narrative Description of the Business:
--------------------------------------
Products:
- ----------
Circuit Protection. The Company manufactures and markets for the automotive
and appliance industries, circuit breakers which protect transformers, battery
chargers, compressors and small motors from heat and current overloads. The
technology utilized in such devices traces back to automatically resetting
circuit breakers developed as an alternative to fuses by Sylvania in 1956. Due
to the resetting feature, Sylvania's circuit breakers provided the same
protection from current overloads as fuses without the need for replacement.
The Company manufactures over 250 types of circuit breakers, including over 150
types of glass enclosed circuit breakers. Through RDI, the Company markets and
distributes in Europe a full line of circuit breaker components and assemblies
manufactured by other companies. The Company's sales of circuit breakers were
$32.2 million, or 45.9% of net sales in 1997, $31.7 million, or 52.3% of net
sales in 1996, and $30.9 million, or 79.6% of net sales in 1995.
Electronic Sensors. The Company's automotive sensors use optical sensing
technologies to recognize external conditions and send an electronic signal to a
central processor which automatically triggers a control response, that in many
cases, had required manual operation. The functions automatically controlled by
the Company's sensors include climate control and headlight intensity in
response to sunlight, power steering assist in response to driving conditions,
wiper control in response to precipitation and defrost operation in response to
window fog. The Company's rain, window fog and "next generation" solar (climate
control) / twilight (headlamp control) sensors are in various stages of
development. The Company's sales of sensors were $12.7 million, or 18.1% of net
sales in 1997, $8.8 million, or 14.5% of net sales in 1996, and $5.3 million or
13.7% of net sales in 1995.
Electronic Ceramics. The Company's ceramic products include PTC (Positive
Temperature Coefficient) thermistors and dielectric resonators. PTC thermistors,
which convert electrical current into heat, are used as component parts in room
air heaters and protection devices for switching equipment critical to the
operation of telephone companies' central offices (facilities that provide the
local switching and distribution functions for telephone companies). Dielectric
resonators are used to filter frequencies in wireless communications equipment.
In addition to sales to cellular communications equipment manufactures, the
Company provides custom designed dielectric resonators to the Personal
Communication Systems ("PCS") equipment manufacturers. The Company's sales of
ceramics were $7.0 million, or 10.0% of net sales in 1997, $4.5 million, or 7.5%
of net sales, in 1996, and $2.6 million, or 6.7% of net sales, in 1995.
RDI. In addition to the Company's products, RDI distributes a number of
electronic components in Europe such as capacitors, connectors, circuit
protection devices produced by other manufactures and various electronic fuses
and aftermarket products. These components are supplied to the automotive,
appliance, and telecommunication OEM markets and are sourced and stocked by RDI.
Sales of RDI were $25.3 million in 1997 and $20.6 million in 1996, including
$7.1 million in 1997 and $5.1 million in 1996 of the Company's circuit
protection and electronic sensor sales discussed in the above sections. The
remaining $18.2 million or 26.0% of net sales in 1997, and $15.5 million or
25.7% of net sales in 1996, includes other products distributed by RDI.
Markets:
- --------
The Company sells its products primarily to three markets: automotive,
appliance and telecommunications.
Automotive Market:
Circuit Protection. The Company produces over 100 types of metal-based
(covered or uncovered) automatically resetting circuit breakers. These products
utilize a bimetal technology which essentially
3
<PAGE>
protects electrical circuits and motors from heat and current overloads. The
Company offers a broad line of automotive circuit breakers which operate in a
wide range of ambient temperatures, thereby enabling customers to choose the
protection most appropriate for the particular application. Typical applications
include protection for wiring harnesses, headlamps and small motors. The
Company's circuit breakers are used as protectors for 12-volt DC motors. These
products are cycling, or self-resetting, circuit breakers created for mounting
in the motor and are used to protect motors with currents of 20 amps (such as
windshield wiper motors) up to 40 amps (such as power seat motors). Another line
of the Company's automatically resetting circuit breakers are installed in
automotive fuse blocks or wiring harnesses and are used to protect circuits
which occasionally experience momentary overloads (e.g., headlamps, for which
fuses can present a safety hazard) and to minimize the inconvenience of fuse
replacement (e.g., cigarette lighters, which can overload if used for other
applications).
In Europe, the Company distributes a full line of circuit protection
products through RDI. These products include those manufactured by the Company
and complementary products distributed for other manufacturers.
Electronic Sensors. The Company's solar sensor, used for the automatic
climate control system in vehicles, measures the direct solar heating felt by
the automobile's occupants. The Company's solar sensor is customized for each
car model by taking into account the roof line and placement of windows.
The Company's steering wheel sensor optically measures the speed and
direction of the steering column rotation, and sends an electric signal to the
car's central processor to make adjustments in stiffness of the power steering
system of the car. The technology used in its steering wheel sensor has other
automotive applications in which the Company is pursuing.
The Company's twilight sensor signals the vehicle's headlight system to
switch from low intensity, to high in twilight conditions and was developed for
use in GM's DRL program. The Company began shipments of twilight sensor to GM in
1996, and began shipping a variation of the twilight sensor (Autolamp) to Ford
in 1997.
The Company's rain, window fog and "next generation" solar (climate
control) / twilight (headlamp control) sensors are in various stages of
development. The Company's rain sensor measures precipitation on the windshield
and sends a signal to adjust the windshield wiper speed accordingly. The window
fog sensor optically detects condensation or frost on front and/or rear windows
and sends a signal to adjust the defroster before such condensation or frost is
detectable by the human eye. By eliminating frost and condensation before it has
a chance to accumulate, the driver's visibility remains unimpaired.
Appliance Market:
The Company believes it is a leading supplier of glass enclosed circuit
breakers for the small motor appliance market. The Company also supplies ceramic
PTC thermistor based heaters to the appliance market and, through RDI,
distributes component parts manufactured by other companies. The products
distributed by RDI include capacitors, filters, and condensers.
Circuit Protection. The Company manufactures a number of different types of
circuit breakers for the appliance market. The Company's glass enclosed circuit
breakers are generally sold for applications in which quality, cycle life and
dependability are the critical factors. These products prolong motor life by
shutting off motors in the presence of excess ambient heat or current. A key
feature of the glass circuit breakers is the hermetic seal created by the glass
enclosure. This hermetic seal makes it the lowest cost type of circuit breaker
which can be totally immersed in a liquid or gas environment and still maintain
consistent operation. Typical uses include protection of compressor motors and
other small motors where the breaker is required to be mounted directly inside
the motor, such as refrigerator compressor motors, dishwasher motors and garage
door opener motors. Internal mounting in motors places the circuit breaker in
close proximity to the source of heat, allowing for faster response times under
fault conditions than can be delivered by externally mounted
4
<PAGE>
breakers. Internal mounting also eliminates the need for an external mounting
location and associated wiring connectors, and facilitates greater efficiency in
compressor motor design.
The Company also supplies circuit breakers to recessed lighting
manufacturers. These breakers protect the fixture from heat overloads and cause
the light to blink in a fault condition.
Electronic Components. The Company supplies ceramic PTC thermistors for use
in small electric air heaters. The PTC ceramic is designed to maintain a
constant temperature, making them safer than certain other electric air heating
technologies. In addition, RDI distributes electronic components to the European
appliance industry.
Telecommunications Market:
The Company manufactures and markets PTC current limiters and dielectric
resonators for applications in the telecommunications market.
PTC Current Limiters. The Company supplies PTC current limiters for use in
modules which prevent current surges from damaging line cards (circuit boards)
in telephone companies' central office switching systems.
Dielectric Resonators. The Company supplies a line of dielectric resonators
to OEMs of wireless telecommunications equipment. Dielectric resonators are an
integral part of wireless communication filters, which capture the desired
frequencies and keep the desired frequencies from interfering with others. These
filters are typically placed at transmission sites, where space is at a premium,
and the Company therefore believes that the size of dielectric resonator based
filters, which are smaller than larger air cavity based filters, offer a
competitive advantage. The markets for these products include cellular and PCS
applications.
PCS is the term used to describe the wireless telecommunications services
that will be offered by those companies that acquired or will acquire licenses
for a radio spectrum (frequency range 1850-1990 MHz) in the FCC auctions and are
the newest entrants in the wireless telecommunications market. PCS will
initially compete directly with existing cellular telephone, paging and mobile
radio services. PCS will also include features which are not generally offered
by cellular providers, such as: (i) the provision of all services to one
untethered, mobile number; (ii) lower-priced service options; and (iii) in the
near future, medium-speed data transmissions to and from portable computers,
advanced paging services and facsimile services. PCS providers may be the first
to be able to offer mass market wireless local loop applications, in competition
with switched and direct access local telecommunication services.
Marketing and Customers
The Company markets its products through a direct sales and service force
located in the Company's sales office near Detroit, Michigan, at the Company's
corporate headquarters in Standish, Maine and at RDI's headquarters near Paris,
France. The Company also sells and distributes its products through a number of
independent agents and distributors in Europe and Asia. In Europe, RDI acts as a
technical and value added resource to its customers.
In the automotive market, the Company sells its products primarily to parts
suppliers, including subsidiaries of automotive manufactures, rather than
directly to the automobile manufacturer. The Company must generally market its
products to both the manufacturer (to insure the design of the automobile
incorporates the Company's products) and to the supplier of the particular parts
in which the Company's products will be incorporated. As is typical in the
automotive and appliance industries, the Company's customers buy products
through the use of purchase orders rather than long-term contracts.
5
<PAGE>
One of the Company's customers, GM, accounted for approximately 14%, 10%
and 20% of net sales in 1997, 1996 and 1995, respectively. These sales were
primarily to two divisions of GM, Packard Electric and Delco Electronics, both
of which manufacture electrical systems for automotive companies, including GM.
Net sales to Danfoss were 13.6% in 1995. No other customer accounted for more
than 10% of sales in 1997, 1996 or 1995.
For domestic, foreign, and export sales and activities, see Note 15 to the
Company's Financial Statements.
Research and Development
The Company expended $4.4 million, $3.8 million, and $2.7 million on
research and development in 1997, 1996, and 1995, respectively. The increase in
expenditures from 1995 to 1997 was a result of the Company's focus on new
product development in the electronic sensor product line based on the Company's
existing optical sensing technologies. In 1997, 1996, and 1995, the Company
devoted 8.6%, 8.7%, and 7.0%, respectively, of net sales excluding RDI, to
research and development. In 1997, 1996, and 1995, the Company devoted
approximately 80% of its research and development expenditures to electronic
sensors. The Company maintains a research and development staff at its Standish,
Maine facility of 42 employees as of December 31, 1997, 35 of whom were devoted
to new sensor product development.
The Company also has a six year consulting agreement expiring in April 2001
with Dr. Dennis J. Hegyi, a Physics Professor at the University of Michigan,
relating to its sensor products. The Company currently licenses four of Dr.
Hegyi's patents for its sensor products.
The following tables summarize the results of the Company's historical
research and development activities and the focus of its current research and
development activities.
<TABLE>
<CAPTION>
Year of Introduction Product Application
---------------------- -------------------------- -----------------------
<C> <S> <C>
1991 Solar Sensor Automatic Climate Control
1993 Dielectric Resonator Wireless Telecom-Cellular
1995 Steering Wheel Sensor Power Steering Assist
1995 Dielectric Resonator Wireless Telecom-PCS
1996 Twilight Sensor Daylight Running Lamps
1997 Autolamp Sensor Headlamp On / Off
1997 Solar Sensor for Trucks Automatic Climate Control on Trucks
1997 Electric Vehicle Heaters Automobile Heaters
1997 Mini-Footprint Circuit Breaker Automotive Electrical Distribution Boxes
</TABLE>
<TABLE>
<CAPTION>
Development Stage Products Application Status
- ------------------------------- ---------------------- -------------------
<S> <C> <C>
Solar Twilight Sensor Combined Climate and OEM has designed into future vehicles.
Headlamp Control
Rain Sensor Wiper Function and Speed Testing with a North American OEM.
Control
Window Fog Sensor Defrost Control Prototypes provided to European OEMs.
Solar Quadrant Sensor Multi-zone Automatic Climate OEM has designed into future vehicles.
and Headlamp Control
Oil Quality Sensor Detects Oil Quality Prototypes being developed
</TABLE>
6
<PAGE>
Patents, Licenses and Trademarks
The Company owns 12 patents and has one pending. The Company does not
consider any single patent to be material to its business. The Company typically
requires its employees to execute appropriate non-competition and patent rights
agreements. The Control Devices logo is a registered trademark of the Company as
well as Maxi Breaker, MicroGuard, Auto-Clear, and SolarWatch which are
registered trademarks of the Company. The Company is licensed to use technology
in patents and know-how owned by Dr. Dennis J. Hegyi, a consultant to the
Company.
Manufacturing and Supply
The Company manufactures and assembles its products at its plants in
Standish and Caribou, Maine, and San Cristobal, Dominican Republic and has
certain value added operations at its distribution facility in France. The
Company's facility in the Dominican Republic has been audited by representatives
of Chrysler, Valeo and Packard Electric and has been certified as an approved
supplier by all three. In addition, the Dominican Republic facility has obtained
ISO (International Standards Organization) 9002 and QS-9000, and has been
certified by OEM automotive companies as a sole source supplier for a number of
products. The Company manufactures its products using components purchased from
third parties and from parts manufactured by the Company with various raw
materials.
During and after the manufacturing process, products undergo extensive
inspection and testing at all locations to insure quality control. The Company's
commitment to quality has resulted in the Company having received, in addition
to previously mentioned awards, General Motors' Mark of Excellence Award (the
highest attainable), Ford's Q1 quality rating, and is a finalist for the 1998
PACE Award.
Certain of the Company's components are standard items and are available
from multiple sources. The Company also sources components produced from custom
tools or molds. These custom parts may be single sourced in some circumstances
in order to take advantage of price and quality considerations. The Company has
never had any significant supply interruptions in these components and it
believes it could develop alternative sources of supply if supply interruptions
were to occur.
Backlog consists of firm orders received from customers and distributors
with delivery dates requested by customers at some future date. At December 31,
1997, backlog was approximately $9.0 million versus approximately $8.2 million
at December 31, 1996. All backlog is expected to be filed within the next 12
months.
Competition
The Company has many competitors with respect to all of its products, and
the automotive parts supply industry, in particular, is highly competitive. Many
of its competitors in the automotive industry are companies which are larger,
more diversified and have greater financial resources than the Company. In
general, competition in the circuit breaker market is based on price, although
the Company also seeks to compete based on product performance. The automotive
market for circuit breakers is a relatively mature, small market and the Company
competes primarily with Texas Instruments and Otter Controls, Inc. In the
appliance market for circuit breakers, the Company competes principally with
Texas Instruments. The Company also competes with suppliers of alternative
technologies, such as fuses which can be used as an alternative to circuit
breakers. Competition in the sensor market is primarily based on technology,
quality, delivery, reliability, price, functionality and engineering support.
The Company's principal competitors in this market are Eaton, Motorola, Hella,
Hamamatsu, and Nippondenso. In the ceramics market, the Company competes on the
basis of supplying niche products and on service, delivery and product
technology. Its principal competitors in this market are Kyocera, TDK, Alpha
Industries, Murata, and Siemens. In the European distribution market, the
Company competes with similar electronic distributors.
7
<PAGE>
Employees
As of December 31, 1997, the Company had 818 employees, consisting of 235
employees based in Standish, 85 employees based in Caribou, two employees based
in the Company's sales office near Detroit Michigan, 397 employees based in the
Dominican Republic, and 99 employees in France. None of the Company's employees
are currently represented by a union; RDI's employees enjoy the benefits of a
state-mandated collective bargaining agreement (Convention Collective de la
Metallurgie ) which applies to numerous French companies whose business relates
to metal products, including RDI. The Company believes its relations with
employees are good.
Environmental Matters
The Company's owned and leased facilities are subject to numerous
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to surface and ground water, and the generation, handling,
storage, transportation, treatment and disposal of toxic and hazardous
substances. Under various Federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may become liable for the costs of removal or remediation of hazardous
or toxic substances on, under or in such property, typically without regard to
fault.
Pursuant to the terms of an Environmental Agreement dated July 6, 1994, GTE
has retained liability and agreed to indemnify the Company for any and all
liabilities arising under CERCLA and other environmental requirements related to
contamination and cleanup of the Standish facility, treatment, storage and
disposal of hazardous materials transported offsite and remediation required by
the State of Maine Department of Environmental Protection ("MEDEP") or U.S.
Environmental Protection Agency ("EPA") not known to exist or occur prior to
July 29, 1994. GTE's remaining indemnification for these various unknown
liabilities expires on July 29, 1999. GTE has also retained liability for claims
relating to soil and groundwater contamination from the surface impoundment and
the out-of-service leachfield at the Company's Standish, Maine facility known to
exist prior to the acquisition. Such contamination is currently being remediated
at GTE's sole expense. GTE's obligation to remediate such contamination and its
indemnification for any claims relating there to expire several years after the
MEDEP and EPA conclude remediation has been completed.
Except as set forth above, the Company believes that its facilities are in
compliance in all material respects with all applicable Federal, state and local
environmental laws, ordinances and regulations, as well as comparable laws and
regulations outside the United States. No assurances can be given, however, that
the current environmental condition of the Company's owned and leased facilities
are not other than as currently understood by the Company, or will not be
adversely affected by the condition of properties in the vicinity of the
Company's owned and leased properties, or by the activities of third parties
unrelated to the Company or by former owners or operators of the Company's owned
or leased facilities, or that future laws, ordinances or regulations will not
impose any material environmental liability on the Company.
8
<PAGE>
Item 2. Properties
- ------- ----------
The Company's facilities are kept in good condition and the capacity of
such facilities is adequate for the Company's needs. The following table sets
forth certain information, as of December 31, 1997, relating to the Company's
facilities:
<TABLE>
<CAPTION>
Approximate Owned/
Location Principal Activities Square Feet Leased
- ------------------------- ------------------------------------------- ----------- ---------
<S> <C> <C> <C>
Standish, Maine Corporate Headquarters; Research and 120,000 Owned
Development; Manufacture of Electronic
Sensors, Glass Enclosed Circuit Breakers,
Electronic Ceramic Devices
Caribou, Maine Manufacture of Circuit Breakers 33,000 Leased
(Yearly
renewal)
San Cristobal, Manufacture of Circuit Breakers, 26,000 Leased
Dominican Republic Electronic Sensors (Expires
December
2002)
Southfield, Michigan Sales Office 1,200 Leased
(Expires
December
2001)
Villepinte, France RDI Headquarters, European Warehouse, 27,500 Owned
Manufacturing and Distribution.
</TABLE>
Item 3. Legal Proceedings
- ------- -----------------
The Company is not engaged in any legal proceedings other than ordinary
routine litigation incidental to its business. The Company is not involved in
any pending or threatened legal proceedings which the Company believes could
reasonably be expected to have a material effect on the Company's financial
condition, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1997.
9
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
(a) Market Information:
-------------------
The Common Shares of the Company commenced trading on the Nasdaq National
Market under the symbol "SNSR" on October 2, 1996. Prior to October 2, 1996
there was no established trading market for the Company's shares. The following
is the range of high and low reported sales prices for the Common Shares as
reported by Nasdaq National Market for each full quarterly period since trading
commenced.
Calendar Year 1997 (1) Calendar Year 1996 (1)
High Low Closing High Low Closing
---- --- ------- ---- --- -------
First Quarter 11 3/4 8 5/8 9 3/8 - - -
Second Quarter 9 7/8 8 5/8 9 9/16 - - -
Third Quarter 11 13/16 9 9/16 11 1/4 - - -
Fourth Quarter 17 1/4 12 7/16 16 9 3/4 6 3/4 9 3/4
(1) Retroactively adjusted to reflect the 4 for 3 stock split effective December
15, 1997.
(b) Holders:
--------
As of January 23, 1998, there were approximately 100 record holders of the
Company's Common Shares.
(c) Dividends:
----------
The Company has never declared or paid cash dividends on its Common Shares.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors. It is reviewed quarterly, and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company and general business conditions.
10
<PAGE>
Item 6. Selected Financial Data
- ------- -----------------------
The following is a table of selected financial data for the five years
ended December 31, 1997. This data should be read in conjunction with the
Company's Financial Statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included herein.
<TABLE>
<CAPTION>
Control Devices, Inc.
--------------------------------------------------------------- Predecessor Company(2)
----------------------
Years Ended December 31,
------------------------------------------------- Seven
Five Months Months Year Ended
Ended Ended ----------
Pro Forma(1) December 31, July 29, December 31,
------------ ------------ -------- ------------
1997 1996(3) 1995 1994 1994 1994 1993
------ --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
Statement of Income Data:
Net sales $70,204 $60,496 $38,881 $43,842 $18,847 $24,995 $39,807
Cost of sales 45,279 38,929 25,721 29,835 12,159 17,676 30,046
------- ------- ------- ------- ------- ------- -------
Gross profit 24,925 21,567 13,160 14,007 6,688 7,319 9,761
Operating Expenses:
Selling, general and 10,754 9,209 3,504 4,304 2,413 1,896 3,237
administrative
Research and development 4,422 3,848 2,740 2,650 1,052 1,598 2,144
------- ------- ------- ------- ------- ------- -------
Operating income 9,749 8,510 6,916 7,053 3,223 3,825 4,380
Interest expense 170 1,562 1,380 1,581 657 -- --
------- ------- ------- ------- ------- ------- -------
Income before income taxes 9,579 6,948 5,536 5,472 2,566 3,825 4,380
Income tax provision (4) 3,676 2,673 2,078 2,153 990 1,530 1,752
------- ------- ------- ------- ------- ------- -------
Net income $ 5,903 $ 4,275 $ 3,458 $ 3,319 $ 1,576 $ 2,295 $ 2,628
======= ======= ======= ======= ======= ======= =======
Net income applicable to common
shareholders(5) 5,903 4,066 3,194 3,055 1,466 -- --
Net income per share:(5) (6)
Basic $0.89 $0.97 $0.93 $0.89 $0.43 -- --
Diluted $0.87 $0.96 $0.93 $0.89 $0.43 -- --
Weighted average common shares
and equivalents outstanding:
(5) (6)
Basic 6,620 4,202 3,419 3,419 3,419 -- --
Diluted 6,819 4,217 3,419 3,419 3,419 -- --
<CAPTION>
Predecessor
-----------
Control Devices, Inc. Company(2)
---------------------------------------------------- -----------
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $15,025 $10,761 $13,662 $ 9,255 $ 4,891
Total assets 51,049 44,243 30,141 26,051 22,385
Long-term debt, net of current maturities 640 1,320 15,853 16,320 --
Redeemable preferred shares -- -- 2,400 2,400 --
Shareholders' equity 34,089 28,329 5,505 2,311 --
</TABLE>
(1) Pro forma year ended December 31, 1994 amounts were prepared as if the
acquisition of the acquired Business and the initial capitalization of the
Company had occurred on January 1, 1994. These pro forma results include
adjustments for depreciation and amortization of assets acquired based on
their fair market values at the acquisition date, increased interest on
acquisition debt, additional preferred share dividends, elimination of
allocated employee benefit and administrative expenses, additional
professional fees and the related income tax effect. The unaudited pro forma
consolidated financial data do not purport to represent what the results of
operations of the Company would actually have been if the
11
<PAGE>
acquisition and initial capitalization had in fact occurred on January 1,
1994 or to project the results of operations of the Company for any future
date or period.
(2) On July 29, 1994, the Company purchased the Business. The data prior to July
29, 1994 represents the financial information of the Predecessor Company and
has been prepared by the Company as if the Business was operated as a
separate entity for the periods presented. The Predecessor Company financial
statements do not include an allocation of GTE's assets and liabilities not
specifically identifiable to the Business, including cash and intercompany
debt. Prior to September 28, 1993, the Telecommunication Division shared
certain facilities and functions with the Business. Certain costs and
expenses, including manufacturing overhead and selling, general and
administrative expenses, were prorated by the Company between the Business
and the Telecommunications Division in preparing the Predecessor Company
financial statements. Expenses were allocated by the Company based on actual
usage or other allocation methods which approximate actual usage. Management
of the Company believes that the allocation methods are reasonable.
(3) The Selected Financial Data presented for the year ended December 31, 1996
includes RDI's results of operations from April 1, 1996, the date of
acquisition.
(4) For purposes of computing income tax provision, an effective tax rate of 40%
was used for the Predecessor Company results of operations because no income
taxes were allocated to the Predecessor Company.
(5) See Note 2 to the Company's Financial Statements. Net income per share, net
income applicable to common shareholders and weighted average number of
Common Shares and equivalents outstanding are not presented for periods
prior to and including July 29, 1994 as the Business was not operated as an
independent entity during such periods.
(6) On December 15, 1997, the Company effected a 4-for-3 stock split of its
Common Shares which entitled each shareholder to receive one additional
share for each three outstanding Common Shares held of record as of the
close of business on December 1, 1997. As of December 31, 1997, the Company
had 6,627,561, no par value, Common Shares outstanding. All share and per
share amounts in the accompanying financial statements have been restated to
give retroactive effect to the stock split.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Introduction
The Company purchased the Business from GTE on July 29, 1994 for a total
purchase price of $17,900,000 plus the assumption of certain liabilities. The
Company had no operations prior to that date. In April 1996, the Company
acquired all of the issued and outstanding capital stock of RDI for a total
purchase price of $8,964,000.
In October 1996, the Company closed on the sale of 3,066,666 Common Shares
in connection with its initial public offering and received net proceeds of
approximately $18.2 million, which were used generally to repay debt and redeem
preferred shares.
Since the acquisition of the Business in July 1994, the Company's primary
financial strategy has been to achieve profitable year to year growth through
new product development and acquisitions. The Company has focused its new
product development efforts in the sensor business. The Company has increased
its research and development expenditures, which were primarily devoted to its
sensor products, from $2.7 million in 1994 to $4.4 million in 1997. During the
same period, the Company's sales of sensors have grown from $4.2 million in 1994
to $12.7 million in 1997.
In addition, the Company's financial strategy contemplates making
acquisitions which complement the Company's existing businesses. The Company's
acquisition of RDI in April 1996 enhanced the Company's market penetration of
the automotive OEM market in Europe. RDI, which is an European-based distributor
of products of the Company and other manufacturers, historically, due to the
nature of the distribution business, has had lower operating margins as a result
of higher selling, general and administrative expenses (measured as a
percentage of net sales) than the Company. Although the Company's operating
income has increased as a result of the RDI acquisition, when expressed as a
percentage of sales, the Company's operating income has decreased due to the
lower margins associated with distribution businesses generally.
RDI generates revenues and incurs expenses primarily in currencies other
than the U.S. dollar. The Company does not engage in currency hedging
transactions. RDI's currency of account is the French franc. RDI's assets and
liabilities are translated into U.S. dollars using the exchange rate in effect
at the balance sheet date. RDI's results of operations are translated into U.S.
dollars using the average exchange rate prevailing throughout the applicable
period. See Note 2 to the Company's Financial Statements.
12
<PAGE>
Part of the Company's overall growth strategy is to expand globally in
order to meet the demands of its customers. As part of that strategy, the
Company recently completed a reorganization of its foreign operations to
facilitate overseas investments and expansion. The Company anticipates the
effect of this reorganization will be to decrease the tax rate on its foreign
manufacturing operations and subsequently reduce the overall corporate income
tax rate from approximately 38% in 1997 to approximately 25% in 1998 under
current tax laws.
Results of Operations
Summary Data
Management's discussion and analysis of the operating results of the
Company are based on amounts in the table set below which were derived from the
financial statements appearing elsewhere herein.
The following table presents selected financial information derived from
the Company's statements of income, expressed as a percentage of net sales for
the periods indicated.
Control Devices, Inc.
-----------------------
Years Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Gross profit 35.5 35.7 33.8
Selling, general and administrative expenses 15.3 15.2 9.0
Research and development 6.3 6.4 7.0
Operating income 13.9 14.1 17.8
Net income 8.4 7.1 8.9
1997 Compared to 1996
Net sales were $70.2 million in 1997, an increase of $9.7 million, or
16.0%, as compared to 1996. Net sales increased primarily as a result of the
April 1, 1996 acquisition of RDI combined with growth in sensors and ceramics.
Sensor sales increased 45.3% to $12.7 million in 1997, as a result of increased
twilight and steering sensor shipments. Ceramic sales increased 54.4% to $7.0
million in 1997, primarily due to increased PCS related orders.
Gross profit in 1997 was $24.9 million, an increase of $3.4 million, or
15.6%, as compared to 1996. As a percentage of net sales, gross profit in 1997
was 35.5% as compared to 35.7% in 1996. The decrease in gross profit, as a
percent of net sales, was a result of the additional expense relating to the
introduction of new sensor products. Management believes start-up expenses will
continue to depress gross margins into the first half of 1998 as the Company
incurs expenses associated with new product introductions.
Selling, general and administrative expenses in 1997 were $10.8 million, an
increase of $1.5 million, or 16.8%, as compared to 1996. The increase was
primarily a result of the April 1, 1996 acquisition of RDI. As a distributor,
RDI incurs selling, general and administrative expenses higher, as a percentage
of net sales, than the Company. As a percentage of net sales, selling, general
and administrative expenses were 15.3% in 1997 as compared to 15.2% in 1996.
Research and development expenses in 1997 were $4.4 million, an increase of
$0.6 million, or 14.9%, as compared to 1996. As a percentage of net sales,
research and development expenses were 6.3% in 1997 as compared to 6.4% in 1996.
13
<PAGE>
Operating income in 1997 was $9.7 million, an increase of $1.2 million, or
14.6%, as compared to 1996. As a percentage of net sales, operating income was
13.9% in 1997 as compared to 14.1% in 1996. The increase in operating income was
a result of higher sales volume, partially offset by increased selling, general
and administrative, and research and development expenses.
Interest expense was $0.2 million in 1996, a decrease of $1.4 million as
compared to 1996. The decrease was due to the reduction of debt as a result of
the initial public offering.
The provision for income tax was $3.7 million in 1997, as compared to $2.7
million in 1996. The effective tax rate was 38.4% in 1997 as compared to a rate
of 38.5% in 1996.
Net income was $5.9 million in 1997, an increase of 38.1%, as compared to
$4.3 million in 1996. The increase in net income was primarily a result of the
improvement in operating income due to higher volume and the reduction of
interest expenses. As a percentage of net sales, net income was 8.4% in 1997 as
compared to 7.1% in 1996.
1996 Compared to 1995
Net sales were $60.5 million in 1996, an increase of $21.6 million, or
55.6%, as compared to 1995. Net sales increased primarily as a result of the
acquisition of RDI combined with growth in sensors and ceramics. On a
consolidated basis, sales of sensor products increased 64.5% to $8.8 million in
1996 from $5.3 million in 1995, as a result of increased solar and steering
sensor shipments. Ceramic sales increased 73.4% to $4.5 million in 1996 from
$2.6 million in 1995 primarily due to increased dielectric resonator and PCS
sales. Sales of circuit breaker products increased 2.4% to $31.7 million in 1996
from $30.9 million in 1995, as a result of the RDI acquisition. Sales of other
products distributed by RDI contributed $15.5 million to net sales in 1996.
Gross profit in 1996 was $21.6 million, an increase of $8.4 million, or
63.9%, as compared to 1995, RDI accounted for $6.2 million of this increase. As
a percentage of net sales, gross profit in 1996 was 35.7% as compared to 33.8%
in 1995. The increase in gross profit, as a percent of net sales, resulted from
increased productivity due in part to the success of an employee gain sharing
program instituted in 1994 as well as from improved plant utilization.
Selling, general and administrative expenses in 1996 were $9.2 million, an
increase of $5.7 million, or 162.8%, as compared to 1995. The increase in
administrative expenses consisted primarily of RDI expenses which were $5.1
million. As a distributor, RDI has incurred selling, general and administrative
expenses higher, as a percentage of net sales, than the Company. As a percentage
of net sales, selling, general and administrative expenses were 15.2% in 1996 as
compared to 9.0% in 1995.
Research and development expenses in 1996 were $3.8 million, an increase of
$1.1 million, or 40.5%, as compared to 1995. The increased research and
development expenses were primarily a result of increased staffing and expenses
required to develop products for introduction in the 1997-1999 period. In
addition, resources have been added to develop a chip-on-board manufacturing
line to reduce the cost and enhance market penetration of the Company's sensor
products. As a percentage of net sales, research and development expenses were
6.4% in 1996 as compared to 7.0% in 1995. Due to the distribution nature of
RDI's business, research and development is a minimal expense for RDI. Excluding
RDI, research and development spending increased to 8.7% in 1996 compared to
7.0% in 1995.
Operating income in 1996 was $8.5 million, an increase of $1.6 million, or
23.0%, as compared to 1995. As a percentage of net sales, operating income was
14.1% in 1996 as compared to 17.8% in 1995. The decrease in operating income as
a percentage of net sales resulted primarily from the acquisition of RDI. RDI is
primarily a distributor and on a historical basis, has incurred selling, general
and administrative expenses higher, as a percentage of net sales, than the
Company. Similarly, as a distributor, RDI's operating income as a percentage of
net sales is typically lower than that of the Company.
14
<PAGE>
Interest expense was $1.6 million in 1996, an increase of $0.2 million from
1995. The increase was due to the addition of RDI interest expense and lower
interest income due to lower cash balances as a result of the RDI acquisition.
The provision for income tax was $2.7 million in 1996, as compared to $2.1
million in 1995. The effective tax rate was 38.5% in 1996 as compared to a rate
of 37.5% in 1995.
Net income was $4.3 million in 1996, an increase of 23.6%, as compared to
$3.5 million in 1995. The increase in net income was a result of the acquisition
of RDI and the improvement in operating income partially offset by increased
research and development expense. As a percentage of net sales, net income was
7.1% in 1996 as compared to 8.9% in 1995. The decline in net income as a
percentage of net sales was a result of the RDI acquisition, which as a
distributor, has typically lower margins and higher selling, general, and
administrative expense as a percentage of net sales, than that of the Company.
Seasonality
The Company's performance is dependent primarily on automotive vehicle
production which is seasonal in nature. The Company's revenues tend to be
somewhat lower in the third and fourth quarters as automotive OEMs schedule
plant tooling changeovers, vacations and holiday shutdowns.
Liquidity and Capital Resources
Since its formation and initial capitalization, the Company has financed
its operations and investments in property, equipment and the RDI acquisition
primarily through cash generated from operations.
In October 1996, the Company closed on the sale of 3,066,666 Common Shares
in connection with its initial public offering and received net proceeds of
approximately $18.2 million, which were used generally to repay debt and redeem
preferred shares.
Cash and cash equivalents totaled $10.0 million at December 31, 1997
compared to $6.2 million at December 31, 1996.
RDI has various credit facilities available to them totaling $0.8 million
with rates ranging from 0.5% to 1.0% over the Paris Inter-Bank Offered Rate. At
December 31, 1997 and 1996 RDI had borrowings aggregating $0.3 million and $0.5
million, respectively, under these facilities.
On October 8, 1996, Fleet Bank of Maine ("Fleet Bank") and the Company
entered into an agreement, pursuant to which Fleet Bank has agreed to provide a
$15.0 million revolving line of credit facility to the Company to fund strategic
acquisitions and, if needed, for working capital. The facility has a maturity
date of September 30, 1998. The Company expects to secure a similar agreement
after the maturity date. The facility has three interest rate options available
to the Company. The line of credit is unsecured and contains certain covenants.
To date there have been no borrowings under this line of credit facility.
The Company believes its current cash and cash equivalents, together with
existing credit facilities and cash flows from operations, will be sufficient to
meet the Company's cash requirements for at least the next twelve months.
15
<PAGE>
Effect of FASB Pronouncements:
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" were
released in July 1997 and will be adopted in 1998. The pronouncements will have
no significant impact on the Company's financial statements.
Other:
In 1997, the Company began modifying its existing computer system
programming to process transactions in the year 2000 and beyond. Anticipated
spending for this modification will be expensed as incurred and is not expected
to have a significant impact on the Company's ongoing results of operations.
This Form 10-K contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, changes to U.S. and foreign tax laws
and regulations, the percentage of the Company's profits generated by foreign
operations, cyclicality of automotive and appliance industries, reliance on
OEM's, risk of customer labor interruptions, and competing technologies.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
- -------- --------------------------------------------
CONTROL DEVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997
and 1996, and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and
1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the shareholders of Control Devices, Inc.:
We have audited the accompanying consolidated balance sheets of Control Devices,
Inc. (an Indiana corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Control Devices, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
January 23, 1998
F-2
<PAGE>
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Thousands of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,996 $ 6,238
Receivables, less allowance for doubtful accounts of $468 and $467,
respectively 11,311 9,475
Inventories 6,414 5,943
Other current assets 1,595 1,431
---------- ----------
Total current assets 29,316 23,087
PROPERTY, PLAN AND EQUIPMENT, net 14,262 13,484
GOODWILL, net 7,471 7,672
---------- ----------
$ 51,059 $ 44,243
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 612 $ 713
Short-term debt 320 482
Accounts payable 5,706 4,691
Accrued employee benefits 4,250 4,809
Accrued expenses 3,403 1,631
---------- ----------
Total current liabilities 14,291 12,326
LONG-TERM DEBT 640 1,320
OTHER LIABILITIES 2,029 2,268
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Common Shares, no par value, 16,000,000 authorized; 6,627,561
and 6,617,665 in 1997 and 1996, respectively, issued and
outstanding 20,014 19,917
Foreign currency translation adjustment (554) (314)
Retained earnings 14,629 8,726
---------- ----------
Total shareholders' equity 34,089 28,329
---------- ----------
$ 51,049 $ 44,243
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CONTROL DEVICES, INC.
---------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Thousands of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 70,204 $ 60,495 $ 38,881
Cost of sales 45,279 38,929 25,721
------------ ------------ ------------
Gross profit 24,925 21,566 13,160
Selling, general and administrative expenses 10,754 9,209 3,504
Research and development 4,422 3,847 2,740
------------ ------------ ------------
15,176 13,056 6,244
------------ ------------ ------------
Operating income 9,749 8,510 6,916
Interest expense 170 1,562 1,380
------------ ------------ ------------
Income before income taxes 9,579 6,948 5,536
Income tax provision 3,676 2,673 2,078
------------ ------------ ------------
Net income 5,903 4,275 3,458
Preferred share dividends - 209 264
------------ ------------ ------------
Net income applicable to common
shareholders $ 5,903 $ 4,066 $ 3,194
============ ============ ============
Basic earnings per share $0.89 $0.97 $0.93
Diluted earnings per share $0.87 $0.96 $0.93
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Thousands of dollars)
<TABLE>
<CAPTION>
Foreign
Class A Class B Currency
Common Common Common Translation Retained
Shares Shares Shares Warrants Adjustment Earnings Total
------- ------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - $ 520 $ 145 $ 180 $ - $ 1,466 $ 2,311
Net income - - - - - 3,458 3,458
Preferred share dividends - - - - - (264) (264)
------- ------- ------- ------- -------- -------- --------
Balance at December 31, 1995 - 520 145 180 - 4,660 5,505
Conversion of RDI Convertible
Note 892 - - - - - 892
Conversion of Class A and
Class B Common Shares
into Common Shares 665 (520) (145) - - - -
Exercise of outstanding
warrants 186 - - (180) - - 6
Issuance of Common Shares,
net of offering expenses 18,174 - - - - - 18,174
Foreign currency translation
adjustment - - - - (314) - (314)
Net income - - - - - 4,275 4,275
Preferred share dividends - - - - - (209) (209)
------- ------- ------- ------- -------- -------- --------
Balance at December 31, 1996 19,917 - - - (314) 8,726 28,329
Issuance of Common Shares 97 - - - - - 97
Net income - - - - - 5,903 5,903
Foreign currency translation
adjustment - - - - (240) - (240)
------- ------- ------- ------- -------- -------- --------
Balance at December 31, 1997 $20,014 $ - $ - $ - $ (554) $ 14,629 $ 34,089
======= ======= ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $5,903 $4,275 $3,458
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 2,405 2,119 1,774
Deferred income taxes (178) 708 941
Amortization of debt discount -- 147 33
Changes in assets and liabilities:
(Increase) decrease in receivables (2,455) (606) 806
(Increase) decrease in inventories (812) 479 (280)
(Increase) decrease in other current assets (149) 237 (466)
Increase (decrease) in accounts payable 1,510 (881) (91)
Increase (decrease) in accrued employee benefits (290) 670 148
Increase (decrease) in accrued expenses 1,818 (564) (321)
Increase (decrease) in other long-term liabilities (38) (29) --
--------- --------- ---------
Cash provided by operations 7,714 6,555 6,002
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of RDI (including transaction fees and
expenses), net of cash acquired -- (7,156) --
Capital expenditures (3,266) (2,031) (847)
--------- --------- ---------
Cash used in investing activities (3,266) (9,187) (847)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (670) (16,909) --
Repayment of preferred shares -- (2,400) --
Repayment of dividends -- (583) --
Net change in short-term debt (104) 126 --
Proceeds from issuance of Common Shares and exercise
of warrants, net 97 18,180 --
--------- --------- ---------
Cash used in financing activities (677) (1,586) --
--------- --------- ---------
EFFECT OF EXCHANGE RATES ON CASH (13) (3) --
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,758 (4,221) 5,155
CASH AND CASH EQUIVALENTS, beginning of period 6,238 10,459 5,304
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 9,996 $ 6,238 $ 10,459
========= ========= =========
</TABLE>
F-6
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest $ 272 $2,180 $1,703
Cash paid for income taxes 2,889 2,009 1,946
</TABLE>
SUPPLEMENTAL DISCLOSURE OF FINANCING AND INVESTING ACTIVITIES:
In April 1996, the Company purchased all of the outstanding stock of RDI for
$8,964,000. CDI paid $6,964,000 in cash plus transaction fees of $324,000 from
existing cash on hand, and delivered debt of $2,000,000. See Note 4 to the
consolidated financial statements.
In October 1996, in connection with the initial public offering, the Company
converted the RDI Convertible Notes as described in Note 3 to the consolidated
financial statements into 132,206 Common Shares.
On December 15, 1997, the Company effected a 4-for-3 stock split of its Common
Shares which entitled each shareholder to receive one additional share for each
three outstanding Common Shares held of record as of the close of business on
December 1, 1997. All share and per share amounts in the accompanying financial
statements have been restated to give retroactive effect to the stock split.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CONTROL DEVICES, INC.
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) Organization and Basis of Presentation:
---------------------------------------
Control Devices, Inc. ("CDI"), which was organized on June 10, 1994,
designs, manufactures and markets circuit breakers, electronic ceramic
components parts and electronic sensors used by original equipment
manufacturers ("OEMs") in the automotive, appliance and telecommunications
markets. On July 29, 1994, CDI purchased certain assets and liabilities
(the "Business") of GTE Control Devices Incorporated and Dominican Overseas
Trading Company (collectively, the "Seller"), indirect wholly-owned
subsidiaries of GTE Corporation.
On April 1, 1996, CDI purchased Realisations et Diffusion pour l'Industrie
("RDI"), which distributes CDI's circuit breakers, electronic sensors and
other manufacturers products in the Northern European market from its
headquarters near Paris, France. The accompanying financial statements
include the results of CDI and RDI from the date of acquisition. The
"Company" refers to both CDI and RDI.
(2) Summary of Accounting Policies:
-------------------------------
Principles of consolidation-
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
Use of estimates-
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Foreign currency translation and transactions-
---------------------------------------------
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars using the exchange rate in effect at the balance sheet
date. Results of operations are translated using the average exchange rate
prevailing throughout the period. The effects of exchange rate fluctuations
on translating foreign currency assets and liabilities into U.S. dollars
are included in the foreign currency translation adjustment component of
shareholders' equity, while gains and losses resulting from foreign
currency transactions are included in net income.
Cash and cash equivalents-
-------------------------
Cash and cash equivalents include short-term investments with original
maturities of three years or less.
Trade receivables-
------------------
RDI's practice is to sell part of its trade receivables to finance its
business. At December 31, 1997 and 1996, such sales with recourse amounted
to $2,613,000 and $2,971,000, respectively, which have been deducted from
trade receivables. Based on historical collectibility of trade receivables,
RDI's obligations under the recourse provisions are not material.
F-8
<PAGE>
(2) Summary of Accounting Policies--(Continued):
--------------------------------------------
Inventories-
-----------
Inventories are stated at the lower of cost or market value. Cost of
inventories is determined by the first-in, first-out ("FIFO") method of
inventory valuation.
Property, plant and equipment-
-----------------------------
Property, plant and equipment is stated at cost and is depreciated using
the straight-line and various accelerated methods over the estimated useful
lives of the related plant and equipment. Ranges of the estimated useful
lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment 3 to 15 years
Building and building equipment 40 years
</TABLE>
Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
less. Maintenance, repairs and renewals are charged to expense as incurred;
betterments are capitalized.
Goodwill-
--------
As part of the acquisition of RDI, goodwill was recorded which represented
the difference between the purchase price and the fair value of the
identifiable underlying net assets acquired and is carried as an asset,
less accumulated amortization which is calculated on a straight-line basis
over the estimated useful life of 40 years.
The Company periodically evaluates the periods over which intangible assets
are amortized to determine whether events have occurred which would require
modification to the amortization period. The Company reviews anticipated
future operating results and cash flows on an undiscounted basis in
determining whether there has been an impairment in the value of the excess
of purchase price over net assets acquired. An impairment loss would be
measured as the amount by which the carrying amount of the impaired asset
exceeds the fair value of the asset. That fair value would then become the
asset's new cost basis. Based upon its most recent analysis, the Company
believes that no material impairment exists at December 31, 1997.
Amortization charged to operations amounted to approximately $192,000 and
$145,000, for the years ended December 31, 1997 and 1996, respectively.
Income taxes-
------------
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax
basis of assets and liabilities using presently enacted tax rates and
regulations.
Research and development-
------------------------
Expenditures for Company-sponsored research and new product development are
expensed as incurred.
Environmental expenditures-
--------------------------
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations and that do not contribute to
current or future revenues are expensed.
F-9
<PAGE>
(2) Summary of Accounting Policies--(Continued):
--------------------------------------------
Revenue recognition-
-------------------
Revenue is recognized when products are shipped.
Earnings per share-
------------------
Basic earnings per share were computed by dividing net income available to
common shareholders by the number of weighted average Common Shares
outstanding, (6,619,524, 4,201,843, and 3,418,792 for the years ended
December 31, 1997, 1996, and 1995, respectively). Diluted earnings per
shares were computed by dividing net income available to common
shareholders by the weighted average number of common shares and dilutive
common share equivalents (199,515, 14,773, and 0, for the years ended
December 31, 1997, 1996, and 1995, respectively) outstanding during the
period. Common share equivalents are calculated using the treasury stock
method.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"), and the Company's reported
earnings per share for the years ended December 31, 1996 and 1995 were
restated. The effect of this accounting change on previously reported
earnings per share data was to increase 1996 earnings per share by $0.01
from amounts previously reported. There was no effect on diluted earnings
per share in 1995.
Fair value of financial instruments-
-----------------------------------
The fair values of financial instruments closely approximate their carrying
values. The Company has no involvement with derivative financial
instruments.
Stock Split-
------------
On December 15, 1997, the Company effected a 4-for-3 stock split of its
Common Shares which entitled each shareholder to receive one additional
share for each three outstanding Common Shares held of record as of the
close of business on December 1, 1997. As of December 31, 1997, the Company
had 6,627,561, no par value, Common Shares outstanding. All share and per
share amounts in the accompanying 1997, 1996, and 1995 financial statements
have been restated to give retroactive effect to the stock split.
(3) Public Offering and Related Transactions:
-----------------------------------------
In contemplation of the public offering described below, on August 30,
1996, the shareholders of the Company approved two amendments to the
Company's Articles of Incorporation. The first amendment reclassified the
outstanding Class A Common Shares and Class B Common Shares as Common
Shares and eliminated the designations of the Class A and Class B Shares
immediately prior to the closing of the public offering. The second
amendment eliminated the 11% Cumulative Preferred Shares ("Redeemable
Preferred Shares") when all the Redeemable Preferred Shares were redeemed
in connection with the public offering.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission, which was declared effective on October 2, 1996.
On October 8, 1996, the Company closed on the sale of 2,666,666 Common
Shares in connection with its initial public offering (the "public
offering") and received net proceeds of approximately $15.7 million. On
October 15, 1996, the Company issued 400,000 Common Shares in connection
with the exercise of the underwriters' overallotment option granted in
connection with the public offering and received net proceeds of
approximately $2.5 million.
The following transactions occurred substantially simultaneously with the
close of the public offering:
F-10
<PAGE>
(3) Public Offering and Related Transactions--(Continued):
------------------------------------------------------
a. the exercise of the outstanding warrants to purchase 752,133 Class
B Series 1 Common Shares at $0.01 per share;
b. the conversion of all 1,333,328 Class B Series 1 Common Shares
outstanding after the exercise of the warrants into a like number
of Class A Common Shares;
c. the reclassification of the Class A Common Shares into Common
Shares and the elimination of the designations of Class A Common
Shares and Class B Common Shares;
d. the conversion of the RDI Convertible Notes into 132,206 Common
Shares; and
e. the repayment of debt and Redeemable Preferred Shares with the net
proceeds from the public offering.
The supplemental net income per share would have been $0.80 and $0.71 for
the years ended December 31, 1996 and 1995, respectively, assuming the
conversion of the RDI Convertible Notes (only in 1996), the issuance of
2,861,984 and 2,691,110 Common Shares (without deducting underwriters'
discount or offering expenses) at the public offering price of $6.75 per
share and the application of proceeds thereof to retire the Company's
Senior Notes plus accrued interest and the Redeemable Preferred Shares plus
accrued dividends, as of the beginning of each respective period. The
supplemental net income per share does not include the results of
operations for RDI prior to April 1, 1996.
(4) Acquisition of RDI:
-------------------
On April 1, 1996, CDI purchased all of the issued and outstanding stock of
RDI for $8,964,000. CDI paid $6,964,000 in cash plus transaction fees of
approximately $324,000 from existing cash on hand, delivered Subordinated
Promissory Notes ("RDI Notes") totaling $1,107,600 and delivered
Automatically Converting Subordinated Promissory Notes ("RDI Convertible
Notes") totaling $892,400. The Company's Consolidated Statement of Income
for the year ended December 31, 1996 includes the results of operations of
RDI from the date of acquisition.
The purchase method was used to account for the acquisition. The aggregate
purchase price has been allocated to the assets and liabilities of RDI
based on fair market value.
The net assets acquired after allocating the purchase price are as follows
(in thousands):
<TABLE>
<S> <C>
Cash $ 132
Receivables 5,828
Inventories 3,349
Other current assets 1,187
Goodwill and other intangibles 8,013
Property, plant and equipment 2,377
Accounts payable (5,387)
Accrued expenses (4,467)
Debt (1,744)
-------
$ 9,288
=======
</TABLE>
F-11
<PAGE>
(4) Acquisition of RDI--(Continued):
--------------------------------
The unaudited pro forma results of operations for the years ended December
31, 1996 and 1995, respectively, had the acquisition of RDI occurred at
January 1, 1996 and January 1, 1995, respectively, are provided in the
following table. These pro forma results include adjustments for
depreciation and amortization of assets acquired based on their fair market
values at the acquisition date, adjustments for additional interest expense
on acquisition debt, adjustments for the decrease in interest expense on
the Seller Note which was repaid in connection with the acquisition of RDI,
adjustments for the elimination of interest income on excess cash balances,
adjustments for the elimination of intercompany sales and profit in
inventory, and the related income tax effect. The unaudited pro forma
information does not necessarily represent what the results of operations
would have been in such periods and is not intended to be indicative of
future results.
<TABLE>
<CAPTION>
Year Ended
December 31,
1996 1995
------------ ------------
(Unaudited - in thousands)
(except per share)
<S> <C> <C>
Net sales $67,119 $65,621
Net income applicable to common shareholders 4,141 3,196
Earnings per share $0.98 $0.94
</TABLE>
(5) Inventories:
------------
Classes of inventories as of December 31, 1997 and 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Raw materials and supplies $1,345 $1,163
Work - in - process 1,333 941
Finished goods 3,736 3,839
-------------- --------------
$6,414 $5,943
============== ==============
</TABLE>
(6) Property, Plant and Equipment:
------------------------------
Classes of property, plant and equipment as of December 31, 1997 and 1996,
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land $ 448 $ 486
Buildings 3,404 3,377
Equipment 17,708 15,209
Leasehold improvements 248 248
------- -------
21,808 19,320
Accumulated depreciation (7,547) (5,836)
------- -------
$14,261 $13,484
======= =======
</TABLE>
F-12
<PAGE>
(7) Debt:
-----
Debt consists of the following as of December 31, 1997 and 1996, (in
thousands):
1997 1996
---------- ----------
RDI Notes $ 738 $1,108
RDI fixed rate loans 514 925
RDI short-term debt 320 482
---------- ----------
Total debt $1,572 $2,515
Less: Current portion of long-term debt 612 713
Short-term debt 320 482
---------- ----------
Total long-term debt $ 640 $1,320
========== ==========
The outstanding notes, issued by CDI in connection with the acquisition of
RDI (the "RDI Notes"), bear interest at 8% per annum and are due in three
equal annual installments commencing on April 1, 1997. CDI has the right to
prepay the RDI notes at any time without premium.
The RDI fixed rate loans bear interest at the weighted average rate of 7.7%
and are secured by certain assets of RDI.
On October 8, 1996, Fleet Bank of Maine ("Fleet Bank") and the Company
entered into an agreement, pursuant to which Fleet Bank has agreed to
provide a $15.0 million revolving line of credit facility to the Company to
fund strategic acquisitions and, if needed, for working capital. The
facility has a maturity date of September 30, 1998. The facility has three
interest rate options consisting of (i) Fleet Bank's prime rate for daily
rate borrowings, (ii) Fleet Bank's cost of funds rate plus 1.5% for
borrowings of 30 days or less, or (iii) the corresponding London Interbank
Offering Rate (LIBOR) plus 1.5% for borrowings of 30, 60, 90 or 180 days.
The line of credit is unsecured and contains certain financial and other
covenants including but not limited to, minimum tangible net worth, debt to
net worth, and minimum cash flow coverage. The financial covenants are to
be met on a quarterly basis. The Company is in compliance with all
covenants as of December 31, 1997 and believes that the covenants will not
restrict its future operations. To date, there have been no borrowings
under this line of credit facility.
RDI has various credit facilities available to it totaling $0.8 million
with rates ranging from 0.5% to 1.0% over the Paris Inter-Bank Offered
Rate. At December 31, 1997 and 1996, RDI had borrowings aggregating of $0.3
million, and $0.5 million, respectively under these facilities.
Scheduled principal payments due on debt in the next five years are as
follows (in thousands):
Total
-------
1998 932
1999 501
2000 70
2001 69
2002 -
F-13
<PAGE>
(8) Redeemable Preferred Shares:
----------------------------
In connection with the acquisition of the Business, the Company issued
2,400 shares of 11% Cumulative Preferred Shares ("Redeemable Preferred
Shares") for $2.4 million. The Redeemable Preferred Shares accrued
cumulative dividends at a rate of 11% per annum and had a liquidation
preference value of $2.4 million, plus accrued and unpaid dividends. In
connection with the public offering, the Redeemable Preferred Shares plus
accrued dividends were repaid without premium in October 1996.
(9) Stock Option Plans:
------------------
The Company reserved 400,000 Common Shares for issuance pursuant to its
1996 Stock Compensation Plan and 533,333 Common Shares for issuance
pursuant to its 1997 Stock Compensation Plan (the "Plans"). The 1997 Stock
Compensation Plan will be voted on by the shareholders during the April 24,
1998 shareholders meeting. The Plans provide for the awarding of incentive
stock options, non-statutory options, and director options, to purchase
Common Shares from time to time at the discretion of the Company. In
addition, in April, 1995, the Company issued to a consultant non-qualified
stock options to purchase 266,666 Common Shares at $6.75 through March 31,
2002 (see Note 17).
The following table summarizes stock option plan activity for the years
ended December 31, 1997, 1996, and 1995.
Number
of Shares Option Price
---------- --------------
Outstanding at December 31, 1994 - -
Granted 266,666 $6.75
Exercised - -
-----------------------------
Outstanding at December 31, 1995 266,666 6.75
Granted 299,991 6.75-7.92
Exercised - -
-----------------------------
Outstanding at December 31, 1996 566,657 6.75-7.92
Granted 374,652 9.52-13.50
Exercised (6,666) 6.75
-----------------------------
Outstanding at December 31, 1997 934,643 $6.75-$13.50
=========== ==============
All option share amounts and option price amounts have been restated to
give retroactive effect to the December 15, 1997, 4-for-3 stock split of
the Company's Common Shares.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and related interpretations. Accordingly, had compensation cost
for these plans been determined based on the fair value at the grant dates,
the Company's net income and earnings per share would have been reduced to
the following pro forma amounts
F-14
<PAGE>
(9) Stock Option Plans--(Continued):
--------------------------------
For the year ended
December 31,
1997 1996
---------- ----------
Net Income As Reported: $5,903 $4,066
Pro forma: 5,605 3,993
Earnings per share As Reported:
Basic $ 0.89 $ 0.97
Diluted 0.87 0.96
Pro forma:
Basic $ 0.85 $ 0.95
Diluted 0.82 0.95
The fair values of the management and officer option grants were estimated
on the date of grant using the Black-Scholes option-pricing model on the
following weighted-average assumptions used for grants in 1997 and 1996;
dividend yield of 0%, expected volatility of 29% and 26%, respectively,
expected life of 5 years or 10 years, and risk free interest rates of 6.35%
and 6.07%, respectively.
At December 31, 1997, the Company had 934,643 options outstanding at
exercise prices ranging from $6.75 to $13.50. These options had a weighted-
average exercise price of $9.46, a weighted average fair value of $3.63,
and a weighted average remaining contractual life of 7.4 years.
(10) Employee Stock Purchase Plan:
-----------------------------
A total of 266,666 shares of Common Shares are authorized for issuance
under the Company's Employee Stock Purchase Plan ("Employee Plan"). The
Employee Plan permits eligible employees to purchase Common Shares at the
lower of 85% of the fair market value of the Common Shares at the beginning
or at the end of each three month offering period. Pursuant to such plan,
3,290 Shares were sold to employees during the year ended December 31,
1997.
F-15
<PAGE>
(11) Income Taxes:
-------------
The components of the provision (benefit) for income taxes for the Company
for the years ended December 31, 1997, 1996 and 1995 are as follows (in
thousands):
For the years ended December 31,
--------------------------------
1997 1996 1995
------ ------ ------
Current:
Federal $3,246 $1,661 $ 907
State 360 481 230
Foreign 248 (177) -
----- ----- -----
3,854 1,965 1,137
----- ----- -----
Deferred:
Federal (251) 182 729
State (130) 52 212
Foreign 203 474 -
----- ----- -----
(178) 708 941
----- ----- -----
$3,676 $2,673 $2,078
====== ====== ======
A reconciliation of the income tax provision calculated at the federal
income tax statutory rate and the Company's effective income tax rate for
the years ended December 31, 1997, 1996 and 1995 is as follows (in
thousands):
For the years
ended December 31,
------------------------
1997 1996 1995
------ ------ ------
Tax at statutory rate $3,258 $2,363 $1,882
State income taxes, net of federal benefit 360 350 292
Research and development tax credits (209) (92) (83)
Other, net 267 52 (13)
------ ------ ------
$3,676 $2,673 $2,078
====== ====== ======
F-16
<PAGE>
(11) Income Taxes--(Continued):
--------------------------
The significant components of deferred income tax asset (liability) at
December 31, 1997 and 1996 are as follows (in thousands):
December 31,
1997 1996
-------- --------
Current:
Inventory reserves $ 77 $ 54
Accrued employee benefits 605 628
Other 407 379
------- -------
1,089 1,061
------- -------
Noncurrent:
Depreciation (1,454) (1,453)
Other 137 40
------- -------
(1,317) (1,413)
------- -------
$ (228) $ (352)
======= =======
Deferred income taxes are not provided on undistributed earnings of the
Company's foreign subsidiary because the earnings of $625,000 and $383,000
for the years ended December 31, 1997 and 1996 were considered permanently
reinvested in such foreign operations. The unrecognized tax liability on
the undistributed foreign earnings was not significant as of December 31,
1997 and 1996.
(12) Employee Benefits:
------------------
CDI maintains a 401(k) savings plan for substantially all domestic
employees. Under the plan, CDI matches employee contributions subject to
the discretion of the Board of Directors. The employer contribution expense
for the years ended December 31, 1997, 1996 and 1995, was $446,000,
$390,000, and $301,000, respectively. RDI maintains a government mandated
retirement plan for substantially all of its employees. These benefits do
not vest until retirement. The amount of the benefits to be paid depends
upon, among other things, the seniority and salary of the employees at
retirement date. Also, RDI maintains a government mandated employee profit
plan for all employees. The amount of the benefits are based upon a formula
which includes, among other things, net taxable income. The liability is
generally not payable for a period of five years and is internally funded.
In addition, RDI maintains an incentive plan for certain of its key
employees. The amount of the benefits are based upon a formula which
includes, among other things, net income. The expense for the above plans
for RDI for the year ended December 31, 1997 and 1996 was $28,600, and
$101,000, respectively.
(13) Commitments and Contingencies:
------------------------------
Operating Leases-
----------------
The Company leases certain buildings, office space, automobiles and
equipment under noncancellable operating leases expiring at various dates
through December 2002. Rental expense under operating leases amounted to
$520,000, $531,000, and $446,000, for the years ended December 31, 1997,
1996 and 1995, respectively.
F-17
<PAGE>
(13) Commitments and Contingencies--(Continued):
-------------------------------------------
Future minimum rental payments under leases extending for one year or more
are as follows (in thousands):
Year ended December 31,
1998 $300
1999 211
2000 182
2001 172
2002 and thereafter 146
Employment Agreements-
----------------------
The Company has entered into employment agreements with two executives at
RDI. The agreements provide that each executive will receive annual
compensation of up to FF 975,000 (approximately $164,000), plus an annual
bonus of up to FF 487,000 (approximately $82,000), which is based upon
meeting certain performance objectives. The agreements provide for a
severance payment if the Company terminates the executive for any reason
other than misconduct prior to March 29, 1998. The amount of the severance
payment to each executive is equal to two years' salary and bonus.
Legal Proceedings-
-----------------
The Company has various claims and contingent liabilities arising in the
ordinary conduct of business. In the opinion of management, they are not
expected to have a material adverse effect on the financial position of the
Company.
(14) Related Party Transactions:
---------------------------
CDI-
---
Hammond, Kennedy, Whitney & Company ("HKW") provides management services to
the Company. Certain directors of the Company are principals of HKW and own
Common Shares of the Company. The Company pays HKW monthly management fees
of $15,000 and board of directors fees. These fees amounted to $247,200,
$246,100, and $240,000, for the years ended December 31, 1997, 1996, and
1995, respectively. In addition, fees paid to one of the principals of HKW
for professional services amounted to $36,000, $94,000, and $59,000, for
the years ended December 31, 1997, 1996, and 1995, respectively.
Indemnification from Seller-
---------------------------
Pursuant to the terms of an Environmental Agreement dated July 6, 1994, the
Seller has retained liability and agreed to indemnify CDI for any and all
liabilities arising under CERCLA and other environmental requirements
related to contamination and cleanup at acquired facilities, treatment,
storage and disposal of hazardous materials transported offsite and
remediation required by the State of Maine Department of Environmental
Protection or U.S. Environmental Protection Agency existing or occurring
prior to the acquisition date. The Seller has indemnified CDI against
claims pursuant to the aforementioned issues to the extent the amounts
exceed $50,000 in the aggregate. The Seller has liability for claims
relating to soil and groundwater contamination from the surface impoundment
and out-of-service leachfield at the Company's Standish facility, known to
exist prior to the acquisition, to the extent the liability exceeds
$50,000. The indemnifications provided by the Seller begins to expire three
years after the acquisition date, with certain indemnifications continuing
indefinitely. Although the Company believes the Seller's indemnity is
enforceable, if the Company were unable to enforce such indemnification
obligations against the Seller, the Company could become liable for any
such retained liability. The inability to proceed against the Seller could
have a material adverse effect on the Company's financial condition and
results of operations.
F-18
<PAGE>
(15) Customer Information:
---------------------
CDI sells products primarily to OEMs on a worldwide basis primarily in the
automotive, appliance and telecommunications industries. RDI distributes
its products primarily to OEMs in the Northern European market. Sales are
concentrated in North America and Europe with the top 15 customers
accounting for approximately 50%, 45%, and 72% of sales in 1997, 1996, and
1995 respectively.
The following presents financial information for domestic and foreign
operations for the years ended December 31, 1997 and 1996, (in thousands).
The Company had no foreign operations prior to the 1996 acquisition of RDI.
Sales: 1997 1996
------- -------
United States $49,597 $42,620
Foreign (principally Europe) 25,296 20,639
Intersegment elimination (4,689) (2,763)
------- -------
$70,204 $60,496
======= =======
Operating Income:
United States $ 8,198 $ 7,500
Foreign 1,551 1,010
------- -------
$ 9,749 $ 8,510
======= =======
Identifiable Assets:
United States $33,562 $26,067
Foreign 17,487 18,176
------- -------
$51,049 $44,243
======= =======
For the years ended December 31, 1997, 1996, and 1995, United States export
sales (principally to Europe), were $8,218 ,000 (excluding intercompany
sales of $4,689,000 to RDI ), $8,765,000 (excluding intercompany sales of
$2,763,000 to RDI ), and $11,729 ,000, respectively. Sales to RDI are made
on substantially the same terms and conditions as those to unrelated
customers.
For the years ended December 31, 1997, 1996, and 1995, one customer
accounted for approximately $4,953,400, $4,631,000, and $5,270,000 of
sales, respectively, and another customer accounted for $9,955,700,
$7,075,000, and $7,647,000 of sales, respectively, during these periods.
(16) Supplier Information:
---------------------
The Company relies on a sole supplier or a limited group of suppliers for
certain key components of its products. The Company does not have a long-
term supply agreement with any of these suppliers, and operates under
purchase orders. The Company's reliance on sole or a limited group of
suppliers involves several risks, including a potential inability to obtain
an adequate supply of required components and reduced control over pricing
and timely delivery of components. Although the timeliness, yield and
quality of deliveries to date from the Company's suppliers have been
acceptable, any prolonged inability to obtain adequate deliveries or any
other circumstances that would require the Company to seek alternative
sources of supply could delay the Company's ability to ship its products,
which could damage relationships with current and prospective customers and
could, therefore, have a material adverse effect on the Company's results
of operations.
F-19
<PAGE>
(17) Consulting Agreements:
----------------------
In April 1995, the Company entered several agreements with an individual to
provide design and marketing consulting services to the Company. The terms
of the agreements also provide for minimum cash royalty and license
payments. The agreements begin to expire in March 2001, and allow for
cancellation by either party. In connection with these agreements, the
Company paid the individual a one time payment of $200,000 in 1995 and
granted a non-qualified stock option to purchase up to 266,666 Common
Shares at any time until March 31, 2002 at $6.75 per Common Share. In
addition, royalty payments were approximately $334,000, $247,000, and
$223,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
(18) International Manufacturing and Distribution:
---------------------------------------------
The Company has international manufacturing facilities located in San
Cristobal, Dominican Republic. Included in the Company's balance sheet at
December 31, 1997, and 1996, are the net assets of the Company's
international manufacturing operations which totaled approximately
$726,000, and $1,037,0000, respectively. This operation manufactured
products accounting for approximately 34% and 30% of the Company's gross
revenues in 1997 and 1996, respectively.
RDI distributes its products primarily to automotive OEMs in Northern
Europe. The Company's results of operations are therefore subject to
European economic conditions. RDI generates revenues and incurs expenses
primarily in currencies other than the U.S. dollar. As a result, there is
increased financial risk to the Company based on fluctuations in currency
exchange rates. Changes in exchange rates, therefore, may have a
significant effect on the Company's financial condition and results of
operations. At December 31, 1997 and 1996, the net assets of RDI, including
goodwill, were approximately $9.7 million and $9.4 million.
(19) Supplementary Balance Sheet Information:
----------------------------------------
Other long-term liabilities as of December 31, 1997 and 1996, are as
follows (in thousands):
1997 1996
------ ------
Deferred tax liabilities $1,317 $1,413
Retirement benefits 496 535
Profit sharing 216 320
------ ------
$2,029 $2,268
====== ======
F-20
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- ------------------------------------------------------------
and Financial Disclosure
------------------------
None.
Part III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Incorporated herein by reference to the information under the heading
"Election of Directors" and "Executive Officers" in the Company's Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on April 24, 1998.
Item 11. Executive Compensation
- -------- ----------------------
Incorporated herein by reference to the information under the headings
"Compensation of Directors", "Compensation Committee Interlocks and Insider
Participation", "Compensation of Executive Officers", "Options" and "Report of
the Compensation Committee on Executive Compensation" in the Company's Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on April 24, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Incorporated herein by reference to the information under the headings
"Principal Shareholders" and "Security Ownership of Management" in the Company's
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held on April 24, 1998.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Incorporated herein by reference to the information under the headings
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held on April 24, 1998.
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this annual report.
(2) Exhibits
--------
2 Not Applicable.
3.1 Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1.2 of Amendment No. 1 to Registration
Statement on Form S-1, Registration Statement No. 333-09379).
3.2 Code of By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 of Amendment No. 1 to Registration Statement on
Form S-1, Registration Statement No. 333-09379).
4.1 Specimen of Common Share certificate (Incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to Registration Statement on
Form S-1, Registration Statement No. 333-09379).
17
<PAGE>
4.2 Article III of the Articles of Incorporation of the Company
(included in Exhibit 3.1).
4.3 Code of By-laws of the Company (included in Exhibit 3.2).
4.4 Registration Rights provision of the Securities Purchase
Agreement dated July 29, 1994. (Incorporated by reference to
Exhibit 4.5 of Registration Statement on Form S-1, Registration
Statement No. 333-09379).
4.5 Loan Agreement dated October 8, 1996, between the Company and
Fleet Bank of Maine. (Incorporated by reference to Exhibit 4.8
of Form 10-Q for the quarter ended September 30, 1996,
Commission File No. 0-21345).
9 Not Applicable.
10.1 Environmental Agreement dated July 6, 1994 among Control
Devices, Inc., GTE Products of Connecticut Corporation, GTE
Corporation, GTE Control Devices Incorporated and Dominican
Overseas Trading Company (Incorporated by reference to Exhibit
10.1 of Registration Statement on Form S-1, Registration
Statement No. 333-09379).
10.2 Lease Agreement dated December 30, 1994 between Mecon Mfg. and
Control Devices, Inc. (Incorporated by reference to Exhibit
10.2 of Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21345).
10.3* 1996 Stock Compensation Plan (Incorporated by reference to
Exhibit 10.5.1 of Amendment No. 1 to Registration Statement and
Form S-1, Registration Statement No. 333-09379).
10.4 Consultant's Agreement dated April 1, 1995, between Control
Devices, Inc. and Dr. Dennis J. Hegyi (Incorporated by
reference to Exhibit 10.6 of Registration Statement on Form S-
1, Registration Statement No. 333-09379).
10.5 Agreement to Grant License dated April 1, 1995, between Control
Devices, Inc. and Dr. Dennis J. Hegyi (Incorporated by
reference to Exhibit 10.7 of Registration Statement on Form S-
1, Registration Statement No. 333-09379).
10.6 Option to Purchase 200,000 Class A Common Shares of Control
Devices, Inc. granted to Dr. Dennis J. Hegyi (Incorporated by
reference to Exhibit 10.8 of Registration Statement on Form S-
1, Registration Statement No. 333-09379).
10.7 Agreement dated April 1, 1995, between Control Devices, Inc.
and Dr. Dennis J. Hegyi (Incorporated by reference to Exhibit
10.9 of Registration Statement on Form S-1, Registration
Statement No. 333-09379).
10.8 License Agreement (Rain Sensor and Fog Sensor) dated April 3,
1995, between Control Devices, Inc. and Dr. Dennis J. Hegyi
(Incorporated by reference to Exhibit 10.10 of Registration
Statement on Form S-1, Registration Statement No. 333-09379).
10.9 License Agreement (Solar Position Sensor) dated April 3, 1995
between Control Devices, Inc. and Dr. Dennis J. Hegyi
(Incorporated by reference to Exhibit 10.11 of Registration
Statement on Form S-1, Registration Statement No. 333-09379).
18
<PAGE>
10.10 License Agreement (Twilight Sensor) dated April 3, 1995
between Control Devices, Inc. and Dr. Dennis J. Hegyi
(Incorporated by reference to Exhibit 10.12 of Registration
Statement on Form S-1, Registration Statement No. 333-09379).
10.11 Stock Purchase Agreement dated March 29, 1996, by and among
the Company and each of the shareholders of RDI (Incorporated
by reference to Exhibit 10.13 of Registration Statement on
Form S-1, Registration Statement No. 333-09379).
10.12* Employment Agreement with Michel Hauser-Kauffmann.
(Incorporated by reference to Exhibit 10.14 of Registration
Statement on Form S-1, Registration Statement No. 333-09379).
10.13 License Agreement dated November 6, 1989, between GTE Products
Corporation and Dennis J. Hegyi (Incorporated by reference to
Exhibit 10.15 of Amendment No. 1 to Registration Statement on
Form S-1, Registration Statement No. 333-09379).
10.14 Lease Agreement dated December 28, 1996 between the Company
and Parque Industrial Itabo, S.A. (Incorporated by reference
to Exhibit 10.14 of Amendment No. 1 to Registration Statement
on Form S-1, Registration Statement No. 333-09379).
10.15 Lease dated December 1, 1996 between the Company and Regency
Associates (Incorporated by reference to Exhibit 10.15 of Form
10-K for the year ended December 31, 1996, Commission File No.
0-21345).
10.16* 1997 Stock Compensation Plan
11 Statement regarding computation of per share earnings
12 Not Applicable.
13 Not Applicable.
16 Not Applicable.
18 Not Applicable.
21.1 Subsidiaries of the Company.
22 Not Applicable.
23 Consents of experts and counsel: Consent of Arthur Andersen
LLP.
24 Not Applicable.
27 Financial Data Schedule.
28 Not Applicable.
99 Not Applicable.
* Management Compensation Plans
(b) Reports on Form 8-K
none
19
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Security Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Control Devices, Inc.
Date: By /s/ Jeffrey G. Wood
---------------------------------
Jeffrey G. Wood
Vice President, Chief Financial
Officer, Secretary and Treasurer
20
<PAGE>
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:
<TABLE>
<CAPTION>
Signatures Title(s) Date
---------- -------- ----
<S> <C> <C>
/s/ Bruce D. Atkinson President, Chief Executive Officer
- ----------------------------------- and Director February 13, 1998
Bruce D. Atkinson Principal Executive Officer
/s/ Ralph R. Whitney, Jr. Chairman of the Board February 13, 1998
- -----------------------------------
Ralph R. Whitney, Jr.
/s/ Jeffrey G. Wood Vice President, Chief Financial
- ----------------------------------- Officer, Secretary and Treasurer February 13, 1998
Jeffrey G. Wood Principal Financial Officer and
Principal Accounting Officer
/s/ C. M. Brennan, III Director February 13, 1998
- -----------------------------------
C.M. Brennan, III
/s/ John D. Cooke Director February 13, 1998
- -----------------------------------
John D. Cooke
/s/ Forrest E. Crisman, Jr. Director February 13, 1998
- -----------------------------------
Forrest E. Crisman, Jr.
/s/ James O. Futterknecht, Jr. Director February 13, 1998
- -----------------------------------
James O. Futterknecht, Jr.
/s/ Alan I. Mossberg Director February 13, 1998
- -----------------------------------
Alan I. Mossberg
/s/ Glenn Scolnik Director February 13, 1998
- -----------------------------------
Glenn Scolnik
</TABLE>
21
<PAGE>
Exhibit 10.16
CONTROL DEVICES, INC.
1997 STOCK COMPENSATION PLAN
ARTICLE I
GENERAL
Section 1.1. Purpose. The purpose of the 1997 Stock Compensation Plan
(the "Plan") of Control Devices, Inc. (the "Company") is to enhance the ability
of the Company to attract and retain qualified personnel who, as a result of the
incentive and equity interest created and encouraged by the Plan, will have an
increased stake in the prosperity of the Company and an increased identity of
interest with the Company's shareholders, and will be encouraged thereby to
exert maximum effort towards the successful operation of the Company.
Section 1.2. Definitions. Whenever used herein, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board, which shall
consist of not less than three persons appointed by the Board from among those
Board members who are not employees of the Company or any of its subsidiaries.
(d) "Common Shares" means the Common Shares of the Company or such other
securities into which such Common Shares may be changed pursuant to Section 1.5
hereof.
(e) "Director Options" means options granted to non-employee directors
pursuant to Article IV of the Plan.
(f) "Fair Market Value" means, as to any day (i) the average of the closing
bid and asked price per Common Share on such day as quoted on the Nasdaq market
quotation system or any similar system of automated dissemination of quotations
if the Common Shares are so quoted, or (ii) if the Common Shares are listed or
traded on any national securities exchange, the last sale price of the Common
Shares on such day as officially listed on the exchange, or (iii) if the Common
Shares are not quoted or traded
<PAGE>
as contemplated by (i) or (ii), then Fair Market Value shall mean the price at
which the Common Shares would sell between a willing buyer and willing seller
(neither being under compulsion) having knowledge of all reasonable facts, as
determined in good faith by the Committee.
(g) "Incentive Stock Option" means an incentive stock option within the
meaning of Section 422 of the Code.
(h) "Non-statutory Options" means a stock option which is not an Incentive
Stock Option.
(i) "Participant" means a person selected by the Committee to participate
in the Plan pursuant to Section 1.6 hereof.
Section 1.3. Administration. The Plan shall be administered by the
Committee. Members of the Committee are not eligible to be granted any options
or performance units under the Plan, except Director Options. Subject to the
foregoing and the other terms and provisions of the Plan, the Committee shall
determine the Participants in the Plan and the terms and provisions of each
option or performance unit granted under the Plan, including the number of
shares subject to such options or performance units. The Committee may from
time to time prescribe rules and regulations for the administration of the Plan,
and shall decide any questions arising with respect to options or performance
units granted under the Plan. All decisions, interpretations, determinations or
actions taken by the Committee with regard to such questions shall be final and
binding upon the employees of the Company. The Committee from time to time, and
whenever requested, shall report to the Board on the administration of the Plan
and any action taken in connection therewith.
Section 1.4. Aggregate Number of Common Shares Which May be Issued. The
aggregate number of Common Shares which may be issued as a result of the
exercise of options granted under the Plan or as a result of attainment of
performance goals pursuant to performance units granted under the Plan, is
533,333. In the event any option expires, terminates or is canceled for any
reason prior to exercise, the shares subject to such option shall again become
available for issuance under the Plan.
Section 1.5. Adjustments. If any stock dividend is declared on the Common
Shares, or if the Common Shares are subdivided, consolidated, or changed to
other securities of the Company, or in the event of any like adjustment or
change in the Company's capitalization, then in each such event on the day
following the record date of such event, Common Shares subject to options or
performance units then in effect under the Plan, the Director Options
contemplated by Section 4.1, and Common Shares reserved for issuance under the
Plan with respect to options or performance units which may thereafter be
granted under the Plan shall, if the occurrence of the event
<PAGE>
would have resulted in a change in the number and/or kind of such shares had
they been outstanding, be similarly adjusted in number and/or kind, with the
nature and extent of such adjustments to be determined by treating such shares
as being outstanding at the time of and immediately prior to the occurrence of
the event and the purchase price to be paid for such shares subject to options
then in effect shall be appropriately changed to give effect to any such
adjustment. The adjustments contemplated by this Section 1.5 will apply to any
applicable event with a record date after the date this Plan has been approved
by the Board, regardless of whether or not the Plan has been approved by the
shareholders as of such record date.
Section 1.6. Participants. The Participants in the Plan shall be selected
by the Committee from among the officers and other key employees of the Company
who are full-time employees of the Company or one of its subsidiaries (as
defined in Section 424(f) of the Code). The Committee shall take into account
the duties of the employee, the present and potential contributions of the
employee to the success of the Company, and such other factors that the
Committee, in its discretion, considers to be reasonable and appropriate in
light of the purposes of the Plan.
Section 1.7. Term of Plan. The Plan shall terminate on the earlier of (a)
ten (10) years from the date of adoption of the Plan by the Board or (b) such
earlier date as the Board may determine. Options or performance units
outstanding at the date of termination of the Plan shall remain in effect until
exercised or expired.
Section 1.8. Restrictions on Transferability of Common Shares. The
Committee may impose such restrictions as it may deem advisable on Common Shares
acquired on exercise of an option granted under the Plan or on attainment of
performance goals pursuant to performance units granted under the Plan. In
addition, unless the Common Shares so acquired are registered under the
Securities Act of 1933, the transfer of the Common Shares shall be subject to
the restrictions on transfer imposed under federal and applicable state
securities laws, and certificates representing such Common Shares shall bear a
legend to that effect.
Section 1.9. Restriction on Tandem Options. In no event may the exercise
of an option (whether an Incentive Stock Option or a Non-statutory Option)
granted under the Plan affect the right of a Participant to exercise any other
option granted under the Plan.
Section 1.10. Maximum Number of Common Shares Subject to Options Granted
to an Individual Participant. The maximum number of Common Shares for which
options may be granted to any individual Participant under the Plan during the
term of the Plan is 266,666.
<PAGE>
Section 1.11. Shareholder Approval. This Plan has been approved by the
Board subject to shareholder approval. Options may be granted pursuant to the
Plan subject to shareholder approval; provided however, in the event the
shareholders do not approve this Plan any Option granted pursuant to this Plan
will be void ab initio.
ARTICLE II
INCENTIVE STOCK OPTIONS
Section 2.1. Grant of Options. Subject to the provisions of the Plan, the
Committee may grant Incentive Stock Options to purchase Common Shares to
Participants at any time and from time to time as shall be determined by the
Committee. Subject to the provisions of the Plan, the Committee shall have
complete discretion to determine the number of shares subject to Incentive Stock
Options granted, and the terms and conditions of such Incentive Stock Options.
Section 2.2. Option Agreement. Each Incentive Option shall be evidenced
by an option agreement that shall state that the option is an Incentive Stock
Option, and specify the option price, the terms of the option, the number of
Common Shares subject to the option, and such other provisions as the Committee
shall determine. The provisions of this Plan shall be expressly incorporated in
the terms and provisions of the option agreement. In the event of any
inconsistency between the provisions of the Plan and the other provisions of the
option agreement, the provisions of the Plan shall govern.
Section 2.3. Option Price. The option price per Common Share to be paid
upon the exercise of any Incentive Stock Option, as determined by the Committee,
shall be not less than Fair Market Value at the time the option is granted
provided, however, that with respect to Incentive Stock Options granted to any
Participant, who at the time of grant owns shares possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Participant's employer corporation or its parent or subsidiaries under the
attribution rules set forth in Section 424(d) of the Code (a "10% Owner
Participant") the option price per Common Share shall be at least one hundred
ten percent (110%) of Fair Market Value at the time of grant.
Section 2.4. Term of Option. Unless the terms of an Incentive Stock
Option provide a shorter term, or as hereinafter provided, each Incentive Stock
Option shall be exercisable no later than ten (10) years from the date it is
granted. Any Incentive Stock Option granted to a 10% Owner Participant shall be
exercisable no later than five (5) years from the date it is granted. The
Committee, in its sole discretion, will determine the vesting schedule of each
Incentive Stock Option granted under this Plan; provided, however, that no
Incentive Stock Option may be exercised prior to one year from the date it is
granted. Except as otherwise provided herein, no Incentive Stock Option may
<PAGE>
be exercised unless the Participant is at the time of such exercise in the
employ of the Company or of a subsidiary thereof and shall have been
continuously so employed since the granting of the Participant's option.
Military, sick leave or other bona fide leave of absence not exceeding ninety
(90) days (or longer if the Participant's right to re-employment is guaranteed
by statute or by contract) shall not be considered an interruption of employment
for purposes of the Plan.
Section 2.5. Limitation on Granting of Options. The Committee shall not
grant Incentive Stock Options to a Participant if the aggregate Fair Market
Value (determined at the time the option is granted) with respect to which
Incentive Stock Options are exercisable for the first time by the Participant
during any calendar year (under all option plans of the Participant's employer
corporation and its parent and subsidiary corporations) shall exceed One Hundred
Thousand Dollars ($100,000).
Section 2.6. Termination of Employment. An Incentive Stock Option granted
under the Plan may not be exercised after the date which is one month after the
date the Participant ceases to be employed by the Company or a subsidiary
thereof except as hereinafter provided if such cessation of employment is on
account of death, normal retirement, early retirement, or disability. An
uninterrupted transfer of employment to or between the Company and/or any parent
or subsidiary thereof shall not be considered to be a cessation of employment.
Section 2.7. Retirement and Partial Disability of Participant. In the
event of the normal retirement, early retirement or disability (other than
permanent and total disability within the meaning of Section 22(e)(3) of the
Code) of a Participant, an Incentive Stock Option may be exercised for a period
of three months after cessation of the employment of the Participant, or the
balance of the term of the Incentive Stock Option, whichever is shorter. The
Participant may exercise the Incentive Stock Option for the number of Common
Shares with respect to which the Incentive Stock Option has become exercisable
by its terms and any such additional number of Common Shares subject to the
Incentive Stock Option as the Committee may authorize.
Section 2.8. Death of Participant. In the event of the death of a
Participant while in the employ of the Company or a subsidiary thereof, the
Incentive Stock Options theretofore granted to the Participant shall become
immediately exercisable, whether or not theretofore exercisable, and shall be
exercisable for a period of three months after the date of death or for the
balance of the term of the Incentive Stock Option, whichever is shorter, by the
executor or administrator of the Participant's estate or by such person or
persons as shall have acquired the Participant's rights under the Incentive
Stock Option by will or by the laws of descent and distribution.
Section 2.9. Permanent and Total Disability of Participant. In the event
the Participant becomes permanently and totally disabled (within the meaning of
Section
<PAGE>
22(e)(3) of the Code) while in the employ of the Company or a subsidiary
thereof, the Incentive Stock Options theretofore granted to the Participant
shall become immediately exercisable, whether or not theretofore exercisable,
and shall be exercisable for a period of one year after the Participant's
cessation of employment or for the balance of the term of the Incentive Stock
Option, whichever is shorter.
Section 2.10. Nonassignability. Each Incentive Stock Option shall by its
terms provide that it is not transferable by the Participant other than by will
or the laws of descent and distribution and that it is exercisable during the
Participant's lifetime, only by the Participant or by the Participant's duly
authorized legal representative if the Participant is unable to exercise the
Incentive Stock Option as a result of the Participant's disability, but only if,
and to the extent, permitted by Section 422 of the Code.
ARTICLE III
NON-STATUTORY OPTIONS
Section 3.1. Grant of Options. Subject to the provisions of this Plan,
the Committee may grant Non-statutory Options to purchase Common Shares to
Participants at any time and from time to time as shall be determined by the
Committee. The Committee shall have complete discretion to determine the number
of shares subject to Non-statutory Options granted and the terms and conditions
of such Non-statutory Options.
Section 3.2. Option Agreement. Each Non-statutory Option shall be
evidenced by an option agreement that shall state that the Non-statutory Option
is not an Incentive Stock Option and shall specify the option price of the Non-
Statutory Option, the number of Common Shares subject to the Non-statutory
Option, and such other provisions as the Committee shall determine. The
provisions of this Plan shall be expressly incorporated in the terms and
provisions of the option agreement. In the event of any inconsistency between
the provisions of the Plan and the other provisions of the option agreement, the
provisions of the Plan shall govern.
Section 3.3. Term of Option. No Non-statutory Option may be exercised
prior to one year from the date it is granted. Unless the terms of a Non-
statutory Option provide a shorter term, each Non-statutory Option shall be
exercisable no later than ten (10) years from the date it is granted.
ARTICLE IV
DIRECTOR OPTIONS
<PAGE>
Section 4.1. Grant and Eligibility.
(a) Initial Grant. Director Options for the purchase of 1,333 Common
Shares will be granted to each non-employee director upon first being elected to
the Board. This grant may be awarded to a non-employee director only once.
(b) Subsequent Grants. On the date of the Company's annual meeting in each
year, commencing with the 1998 annual meeting, Director Options for the purchase
of 1,333 Common Shares shall be granted to each non-employee director re-elected
at such meeting, less the number of shares received under any other Plans as a
result of such re-election.
Section 4.2. Director Option Agreement. Each Director Option shall be
evidenced by a Director Option Agreement that shall specify the option price of
the Director Option, the term of the Director Option, the number of Common
Shares subject to the Director Option, and such other provisions as the
Committee shall determine consistent with the terms of the Plan. The provisions
of this Plan shall be expressly incorporated in the terms and provisions of the
Director Option Agreement. In the event of any inconsistency between the
provisions of this Plan and the other provisions of the Director Option
Agreement, the provisions of this Plan shall govern.
Section 4.3. Tax Status. The Director Options shall be Non-statutory
Options and the Director Option Agreement shall so state.
Section 4.4. Option Price. The option price per Common Share to be paid
upon exercise of a Director Option shall be Fair Market Value on the date of
grant of the Director Option.
Section 4.5. Term of Option. Each Director Option shall expire one year
following the termination of the director's Board membership for any reason, but
in no event may any Director Option be exercised after the tenth anniversary of
the date of grant.
Section 4.6. Miscellaneous Provisions. Except as otherwise provided in
this Article IV, Director Options shall be governed by the remaining provisions
of this Plan applicable to Non-statutory Options.
ARTICLE V
PERFORMANCE UNITS
<PAGE>
Section 5.1. Performance Units. Performance units may be granted subject
to such terms and conditions as the Committee in its discretion shall determine.
Performance units may be granted either in the form of cash units, in share
units which are equal in value to one Common Share or a combination thereof.
The Committee shall establish the performance goals to be attained in respect of
the performance units, the various percentages of performance unit value to be
distributed upon attainment, in whole or in part, of the performance goals and
such other performance unit terms, conditions and restrictions as the Committee
shall deem appropriate. As soon as practicable after the termination of the
performance period, the Committee shall determine the payment, if any, which is
due on the performance unit in accordance with the terms thereof. The Committee
shall determine, among other things, whether the payment shall be made in the
form of cash or Common Shares, or a combination thereof.
ARTICLE VI
AMENDMENT AND OTHER PROVISIONS
Section 6.1. Method of Exercise. Exercise of an option granted under the
Plan shall be by the execution by the person entitled at the time to exercise
the option of a written notice of such exercise and delivery thereof to the
Company, which notice shall specify the number of shares being purchased. In
the case of the exercise of an option, such notice shall be accompanied by
payment in full of the option price of the Common Shares. Payment of the option
price with respect to any stock option may be made in cash, in Common Shares
valued at the Fair Market Value on the last trading day preceding the date on
which the option is exercised or in a combination of cash and Common Shares.
Upon receipt of such notice and payment, the Company will promptly issue and
deliver its certificate for the number of Common Shares being purchased pursuant
to exercise of the option. No person, estate or other entity shall have any of
the rights of a shareholder with reference to Common Shares subject to an option
until a certificate or certificates for the shares have been delivered.
Section 6.2. Amendment, Modification and Termination of the Plan. Subject
to Section 4.7 hereof and the last sentence of this Section 6.2, the Board may
at any time terminate, and from time to time may amend or modify the Plan;
provided, however that the approval of the shareholders of the Company shall be
required to amend or modify the Plan to:
(a) materially increase the benefits accruing to Participants under the
Plan;
(b) materially increase the number of Common Shares which may be issued
under the Plan; or
<PAGE>
(c) materially modify the requirements as to eligibility for participation
in the Plan.
No amendment, modification or termination of the Plan shall in any manner
adversely affect the rights of a Participant under any option previously granted
under the Plan, without the consent of the Participant.
Section 6.3. Rights of Employees. Nothing in this Plan limits in any way
the right of the Company or its subsidiaries to terminate any Participant's
employment at any time, nor confers upon any Participant any right to continue
in the employ of the Company or its subsidiaries. No officer or employee shall
have a right to be selected as a Participant.
Section 6.4. Dissolution, Merger and Consolidation. Upon a dissolution or
a liquidation of the Company, each Participant shall have the right to exercise
any unexercised options, whether or not theretofore exercisable, during a period
of thirty (30) days next preceding the date of such dissolution or liquidation.
In the event of a merger or consolidation in which Common Shares may be
exchanged for securities of another publicly held entity, each participant shall
be offered a firm commitment whereby such entity will tender to the Participant
new options in such entity, with terms and conditions, both as to number of
shares and otherwise, which, to the extent permitted by applicable law, will
substantially preserve to the Participant the rights and benefits of the options
outstanding hereunder. With respect to any merger or consolidation in which the
Common Shares are exchanged for (a) cash, (b) securities of an entity that is
not publicly held, or (c) a combination of (a) and (b), options then in effect
shall become immediately exercisable, whether or not theretofore exercisable,
during a period of thirty (30) days next preceding the date of consummation of
the merger or consolidation.
Section 6.5. Tax Withholding. The Company, as appropriate, shall have the
right to deduct from all payments any Federal, state or local taxes required by
law to be withheld with respect to such payments. With respect to withholding
required upon the exercise of Non-statutory Options, or upon payment in Common
Shares with respect to performance units, Participants may elect, subject to the
approval of the Committee, to satisfy the withholding required, in whole or in
part, by having the Company withhold Common Shares having a value equal to the
amount required to be withheld. The value of the shares to be withheld is to be
based on the Fair Market Value on the date that the amount of tax to be withheld
is to be determined. All elections shall be irrevocable and shall be made in
writing, signed by the Participant, and shall satisfy such other requirements as
the Committee shall deem appropriate.
Section 6.6. Requirements of Law. The granting of options or performance
units, and the issuance of Common Shares with respect to an exercise of an
option or
<PAGE>
with respect to a performance unit award, shall be subject to all applicable
laws, rules and regulations, including federal and applicable state securities
laws, and to such approvals by any governmental agencies or national securities
exchanges as may be required.
Section 6.7. Governing Law. The Plan, and all agreements hereunder, shall
be construed in accordance with and governed by the laws of the State of
Indiana.
<PAGE>
CONTROL DEVICES, INC.
CALCULATION OF EARNINGS PER SHARE Exhibit 11
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Year Ended
Primary: December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net income applicable to common shareholders $5,903 $4,066
Weighted average number of Common Shares outstanding: 6,620 4,202
Weighted average number of common shares equivalents options 200 15
----------------- -----------------
Weighted average number of common shares and equivalents options 6,819 4,217
================= =================
Earnings per share - Primary $0.87 $0.96
Fully Diluted:
Net income applicable to common shareholders $5,903 $4,066
Weighted average number of common shares and equivalents options 6,819 4,217
Weighted average number of common shares equivalents options assuming full dilution 320 41
----------------- -----------------
Weighted average number of common shares and equivalents options assuming full dilution 6,939 4,243
================= =================
Earnings per share - Fully diluted $0.85 $0.96
</TABLE>
<TABLE>
<CAPTION>
Five Months Ended
Primary: December 31, 1995
-----------------
<S> <C>
Net income applicable to common shareholders $3,194
Weighted average number of Common Shares outstanding: 3,419
Weighted average number of common shares equivalents options -
-----------------
Weighted average number of common shares and equivalents options 3,419
=================
Earnings per share - Primary $0.93
Fully Diluted:
Net income applicable to common shareholders $3,194
Weighted average number of common shares and equivalents options 3,419
Weighted average number of common shares equivalents options assuming full dilution
-----------------
Weighted average number of common shares and equivalents options assuming full dilution 3,419
=================
Earnings per share - Fully diluted $0.93
</TABLE>
<PAGE>
Exhibit 21.1
Control Devices, Inc.
List of Subsidiaries
<TABLE>
<CAPTION>
Subsidiaries Place of Incorporation
- -------------------------------------------------- -------------------------------
<S> <C>
Realisations et Diffusion pour I'Industrie ("RDI") France
RDI Management Company, Inc. ("RDIM") Indiana
Control Devices FSC, Inc. St. Thomas U.S. Virgin Islands
CDI Netherlands B.V. Netherlands
Control Devices Inc. N.V. Curacao Netherlands Antilles
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports included in this Form 10-K, into the Control Devices,
Inc. previously filed Registration Statements File No. 333-27475 and File
No. 333-31673.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
February 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 9,996 6,238
<SECURITIES> 0 0
<RECEIVABLES> 11,311 9,475
<ALLOWANCES> 468 467
<INVENTORY> 6,414 5,943
<CURRENT-ASSETS> 29,316 23,087
<PP&E> 21,808 19,320
<DEPRECIATION> 7,547 5,836
<TOTAL-ASSETS> 51,049 44,243
<CURRENT-LIABILITIES> 14,291 12,326
<BONDS> 0 0
0 0
0 0
<COMMON> 20,014 19,917
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 51,049 44,243
<SALES> 70,204 60,495
<TOTAL-REVENUES> 70,204 60,495
<CGS> 45,279 38,929
<TOTAL-COSTS> 45,279 38,929
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 170 1,562
<INCOME-PRETAX> 9,579 6,948
<INCOME-TAX> 3,676 2,673
<INCOME-CONTINUING> 5,903 4,275
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,903 4,275
<EPS-PRIMARY> 0.87 0.96
<EPS-DILUTED> 0.85 0.96
</TABLE>
