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.
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
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
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.
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.
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.
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.
Item 2.
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:
Item 3.
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.
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.
PART II -------
Item 5.
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.
Item 6.
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.
(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
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.
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.
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.
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.
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.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data - -------- --------------------------------------------
CONTROL DEVICES, INC.
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
CONTROL DEVICES, INC. ---------------------
CONSOLIDATED BALANCE SHEETS ---------------------------
(Thousands of dollars, except share and per share amounts)
The accompanying notes are an integral part of these balance sheets.
CONTROL DEVICES, INC. ---------------------
CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
(Thousands of dollars, except share and per share amounts)
The accompanying notes are an integral part of these financial statements.
CONTROL DEVICES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Thousands of dollars)
The accompanying notes are an integral part of these financial statements.
CONTROL DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of dollars)
SUPPLEMENTAL CASH FLOW INFORMATION:
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.
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.
(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:
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.
(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:
(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):
(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.
(5) Inventories: ------------
Classes of inventories as of December 31, 1997 and 1996, are as follows (in thousands):
(6) Property, Plant and Equipment: ------------------------------
Classes of property, plant and equipment as of December 31, 1997 and 1996, are as follows (in thousands):
(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 -
(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
(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.
(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 ====== ====== ======
(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.
(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.
(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.
(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 ====== ======
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting - ------- ------------------------------------------------------------ and Financial Disclosure ------------------------
None.
Part III --------
Item 10.
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.
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.
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.
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.
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).
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).
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
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
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: