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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-9463
ULTRAK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2626358
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1301 WATERS RIDGE DRIVE
LEWISVILLE, TEXAS 75057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 353-6500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy to be filed or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 15, 2002 was $10,702,912. As of that date 1,132
shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 15, 2002 was $10,536,026 As of that date 1,132 shares of
the Registrant's Common Stock were outstanding.
PART I
ITEM 1. BUSINESS
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GENERAL
Ultrak, Inc. (the "Company" or "Ultrak") is one of the leading global
electronic security companies in the world. Ultrak designs, manufactures,
markets, sells and services innovative electronic products and systems for
security and surveillance, industrial video and professional audio markets
worldwide. These products and systems include high-speed domes, monitors,
switchers, quad processors, video management systems, digital and analog
recorders, multiplexers, video transmission systems, access control systems,
cameras, lenses, observation systems, audio equipment and accessories. Brand
names include Ultrak, MaxPro, Exxis, Smart Choice and Phoenix. Customers,
defined as end users of Ultrak products and services, range from single
location, sole proprietor businesses to universities and government facilities.
Sales to the professional security markets are made through the Company's
channel partners.
Ultrak operates sales, distribution and manufacturing locations worldwide.
The Company has sales offices in six U.S. cities as well as offices in Great
Britain, Germany, Italy, Poland, Switzerland, Singapore, Australia and South
Africa. Ultrak also has active representation through Company sales
representatives and systems integrators in China, Canada, Mexico and Brazil.
Customers are supported by nine distribution centers worldwide located in Texas,
Ohio, Great Britain, Germany, Italy, Poland, Switzerland, Australia and South
Africa and manufacturing facilities located in Texas, Ohio and South Africa.
The Company was incorporated in Colorado in 1980 and re-incorporated in
Delaware in December 1995. In 1997, the Company built a 170,000-square foot
warehouse and headquarters facility (the "Headquarters Facility") known as the
Ultrak Worldwide Support Center located in the north Dallas suburb of
Lewisville, Texas.
FOURTH QUARTER 2000 CHARGE
Beginning in August 2000, the Company assembled a new management team. The
management team included a new President, Chief Financial Officer, Senior Vice
Presidents of U.S. Sales, Engineering and International Markets and Vice
Presidents of Worldwide Marketing and General Counsel. The team promptly
implemented several strategic initiatives as part of a Company-wide
restructuring program:
o to reduce personnel costs
o evaluate sales and engineering resources
o emphasize Ultrak-branded product lines
o decentralize European warehousing
o improve inventory management
o develop consistent global marketing strategies
o streamline product development process.
These strategic initiatives resulted in tremendous changes to the Company
and necessitated a significant charge of $42.3 million (the "2000 Special
Charge") in the fourth quarter of 2000. The 2000 Special Charge consisted of
severance for terminated employees in the United States and Europe, inventory
write-offs for non-Ultrak products and returned goods deemed uneconomical to
repair, lease terminations and relocation in Europe, as well as write-downs of
intangible assets, internal use software, software development costs and other
assets.
2
IMPROVEMENTS IN 2001
As a result of the management changes and the new strategic initiatives, the
Company improved margins, reduced operating losses, disposed of non-core
business units, raised additional equity capital and reduced debt levels.
Excluding the effect of the 2000 Special Charge, gross profit improved a
total of 1.4%. The margin increase is due to a more efficient slow-moving
inventory disposition program as well as a more stabilized and streamlined
product development process.
In addition to the margin improvements, operating expenses were $11.4
million less in 2001, excluding the effect of the 2000 Special Charge, which in
2001 included $1.6 million in credits, and the $4.5 million loss recorded on the
sale of the Headquarters Facility in 2001.
Operating losses in 2001 were reduced by $3.5 million from the prior year,
excluding the effect of the 2000 Special Charge and the loss recorded on the
sale of the Headquarters Facility in 2001, despite a decrease in revenue of
almost $40 million. The Company's European operations showed substantial
operating improvements in 2001.
The Belgium facility that previously housed a centralized European warehouse
management and logistics support group was sold in December 2001. All of the
inventory at that location was either scrapped or transferred to other European
subsidiaries by the end of the second quarter of 2001. French operations were
discontinued in 2001 with the sale of the French closed circuit television
("CCTV") inventory and the audio inventory. The sale of that inventory, in
addition to the transfer of the French personnel to the acquiring company,
allowed the Company to avoid $0.5 million in severance costs. Management expects
the sale of the Belgium and French businesses to yield an annual cost savings of
$1.5 million.
In order to streamline manufacturing operations, the Company closed its
manufacturing facility in Australia, but maintains a sales office and service
center in that location. Management expects this closure to generate an annual
cost savings of $1.0 million.
Part of the new strategy created by management was to dispose of non-core
business units. Consequently, the Company sold its Industrial Furnace Camera
business in July 2001 for $2.6 million. Also, in a sale-and-leaseback
transaction, the Headquarters Facility was sold at the end of 2001 for $6.6
million. This lowered the annual financing cost by one-third to $60,000 per
month. The Company retains an option to buy back the Headquarters Facility at
the end of 24 months for $6.9 million. The mortgage on the building was paid
off. The purchase of the Headquarters Facility required that George K. Broady,
the Company's Chairman and CEO, execute a personal guarantee in connection with
the sale-and-leaseback of the Headquarters Facility. As consideration for this
guarantee, the Company's Board of Directors authorized the issuance of common
stock purchase warrants to Mr. Broady. See Note D to the Company's Consolidated
Financial Statements for additional information on this transaction.
In October 2001, the Company received $4.1 million in equity from the
private placement of 2.3 million shares of unregistered common stock.
The Company reduced its line of credit by $20.4 million in 2001. This was
due in part to the $24.0 million of proceeds from the sale of its investment in
Detection Systems, Inc. in January 2001.
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STRATEGIES
The basic strategies that the current management team put in place remain
unchanged. The priorities are in margin improvement, marketing, distribution
channels and international opportunities.
o Improving gross profit margin
The strategies are focused on improving profit margins. New product launches
are oriented toward the higher-margin digital video products, the first
comprehensive digital line-up in the industry. Products are engineered to be
simpler and more modularized, which should improve manufacturing and
distribution efficiency. Aggressive cost cutting measures are being pursued for
both in-house and contract manufacturers. Products mixes are shifted toward
higher-margin cameras and video switches.
o Enhancing marketing and product management
While overall spending has been reduced, the Company is investing more in
marketing and product management. Emphasis is being made to enhance the market
awareness of Ultrak's superior products and services. A more disciplined
approach to product management has been instituted to strategically develop the
Company's product lines. Profit and loss is now being tracked for each product
line to measure profitability and to identify the impact of new marketing
initiatives.
o Expanding distribution channels
Ultrak views the end users of its security solutions as its ultimate
customers and delivers these solutions through its channel partners, primarily
dealers and installers. Management began inviting groups of dealers and
installers to the Company's Headquarters Facility for two days of training and
product demonstration ("Dealers' Days") several times throughout the second half
of 2001. Dealers' Days generated significant enthusiasm among the Company's
channel partners and increased their knowledge of the breadth of Ultrak
offerings. Management sees the building of this awareness, substantiated by the
successive introductions of new products, as a long-term process to expanding
the Company's distribution channels and increasing its revenue opportunities.
o Increasing international opportunities
Management believes that increased focus on international distribution is an
effective use of the Company's resources. Ultrak's international businesses
showed significant operating improvements. Management sees more opportunity in
distribution outside the US. Significant revenue growth in 2001 was accomplished
in Italy, Poland and South Africa. See Note K to the Company's Consolidated
Financial Statements for additional information on sales by country.
4
ACQUISITIONS
The Company did not consummate any acquisitions in 2001 or 2000. As part of
the new strategic initiatives, the priority is to further integrate existing
engineering and product development capabilities, acquired through multiple
transactions prior to 2000, rather than acquiring additional companies. Ultrak
will still consider acquisitions when appropriate opportunities are presented.
Effective March 1, 1999, the Company acquired ABM Data Systems, Inc.
("ABM"), based in Austin, Texas, which develops, sells and services computer
software for the alarm monitoring security industry, government agencies and
proprietary customers and offers support for computer software targeted for the
automated security monitoring markets, for 250,000 shares of Common Stock,
valued at $1.5 million. Effective April 1, 1999, the Company acquired 100% of
the stock of Multi Concepts Systems, SA ("MCS"), a Switzerland based systems
integrator of electronic security systems. Total consideration included an
initial payment of $405,000 in cash and future contingent payments based upon a
percentage of MCS's net income and book value. Effective July 1, 1999, the
Company acquired 100% of the stock of MACH Security Sp.z.o.o ("Mach"), based in
Szczecin, Poland. Total consideration included an initial payment of $275,000 in
cash and future contingent payments based upon a percentage of MACH net income.
DIVESTITURES
On December 31, 2001, the Company`s French subsidiary sold its CCTV
inventory and other intangibles to Bisset Technology Systems ("BTS") for a
nominal amount. BTS assumed the transfer of the Company's French CCTV employees.
No gain or loss was recorded on this sale.
On October 15, 2001, the Company's French subsidiary sold its audio
inventory and other intangibles to Audio Club for $312,000. A loss of $175,000
was recognized on this transaction in 2001.
On July 27, 2001, the Company sold the industrial furnace camera business to
Diamond Power International, Inc. for total cash consideration of $2.6 million.
The assets sold consisted primarily of accounts receivable, inventories, fixed
assets, patents, trademarks and other intangibles. A gain of $1.3 million was
recognized in 2001 on the transaction.
On September 13, 2000, the Company sold certain inventory and assets of
Monitor Dynamics, Inc. to Ameritron, Inc. for two short-term notes totaling
$925,000. These notes were paid in full by October 2001. Ameritron also entered
into an agreement to sublease a portion of Ultrak's Rancho Cucamonga facility.
No gain or loss was recorded on this sale.
On July 1, 2000, the Company sold substantially all of its UK-based
business, Intervision Express Ltd. ("Intervision"), to Norbain SD, Ltd.
("Norbain"), a UK-based distributor of CCTV and access control equipment. The
Company received approximately $2.1 million in cash for inventory and certain
other assets including use of the Intervision trade name. Ultrak retained
accounts receivable and the right to sell Ultrak branded products directly to
systems integrators and installers in Intervision's previous market of the UK
and Ireland. A loss of approximately $840,000 was recognized on the sale.
Ultrak granted Norbain distribution exclusivity for Ultrak's Diamond series
dome product line and its CCTV products in the UK and Ireland. To maintain its
exclusivity, Norbain entered into a distribution and OEM purchase agreement
whereby it must buy at least $6.0 million of Ultrak-branded CCTV products and
dome systems during the term of the agreement ending on December 31, 2002. As of
December 31, 2001, Norbain has purchased $3.2 million pursuant to the terms of
the agreement.
PRODUCTS AND SERVICES
It is the Company's objective to set new standards in quality, performance
and value by providing single-source security solutions to its customers in the
form of integrated systems. An integrated system includes more than one of the
following components controlled from a single device or console: CCTV, networked
video, access control, video management and alarm management. Ultrak
differentiates itself from the competition through its integration support
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services provided by its Integrated Systems Group ("ISG") which provides
application engineering, design, installation, implementation, training and
technical support through its dealer base. The advantages of an integrated
system to the end user are numerous. It improves ease of operation, security,
health/safety and loss prevention, and also reduces maintenance and training
costs. Ultrak's management believes that integrated systems provide customers
maximum functionality at competitive prices. Ultrak's integrated systems are
found in manufacturing facilities, airports, office complexes, government
agencies, hospitals, casinos, retail stores and other organizations.
Ultrak sells the following standard products and services to complete its
integrated systems offering:
o Full line of black-and-white and color cameras
o Nitrogen-pressurized cameras and domes for applications where a dirt-free
environment is critical
o Complete range of lenses
o High speed, remote-controlled domes and housings, including the new
Z-series, a low cost dome family targeted for cost-conscious applications
o Video transmission equipment
o Digital processors (quads and multiplexers), switchers and video
management systems, including patented video management technology
o Time-lapse and digital video recorders
o Black and white and color monitors
o Ruggedized cameras, monitors and recorders for mobile video applications
o Observations systems (monitor, quad process, camera and related
accessories packaged in one box) and accessories
o Access control systems from single door to multi-station applications over
LAN/WAN
o Public address and professional audio equipment
o Alarm management software for central monitoring and proprietary
monitoring stations
o ISG services
Ultrak relies on OEM relationships to satisfy the majority of its standard
products such as cameras, monitors, VCRs and accessories. Most of these products
are engineered to Ultrak specifications and undergo thorough technical
evaluation prior to release. Dome products are engineered and assembled by
Ultrak at its Carroll (Columbus) Ohio facility (the "Ohio Facility"). In 2002,
Ultrak is releasing its new line of low-cost domes, the Z- series, which is
targeted to retail applications.
Ultrak engineers a complete range of access control software from its
facility in Rancho Cucamonga, California (the "California Facility") and the
Headquarters Facility. Ultrak offers solutions covering a single door through
high-security, multiple location networked environments. The Company outsources
hardware manufacturing for access control products. In 2002, the Company will
introduce its next generation of PointGuard that provides multi-workstation
capabilities. The Company will also move forward with its well-known SAFEnet(TM)
application offering additional features, new hardware with flash download and
the new PB2000 processor board.
Video management, marketed under the Maxpro(TM) brand name, is being
repositioned to focus on its Mini-Max line of products, aimed at small to
mid-sized applications. Ultrak will continue with new releases of Phoenix(TM),
its central station and proprietary alarm management solution engineered at its
Austin, Texas facility (the "Austin Facility) focusing on video, accounting and
service package integration.
Through its ISG group, Ultrak also sells system design, integration and
support services through its dealers on an as needed basis. Ultrak anticipates
that these integration and support services will be a growing revenue source for
the Company based on the complexity and changing nature of the Company's
products.
6
MARKETING AND SALES
Ultrak sells through highly focused selling groups organized around its
target markets. These groups include the Professional Security Group ("PSG"),
both U.S. and international and the Diversified Sales Group ("DSG"). Ultrak's
customer-focused structure allows for individual attention to each target
market, quick response to customer needs and early identification of market
requirements. The Company reaches each target market through regional sales
professionals supported by inside sales executives, product catalogs, direct
mail, magazine advertising and industry trade shows.
PROFESSIONAL SECURITY GROUP
PSG is responsible for sales in the commercial channel. Ultrak provides one
point of sales contact to the customer, utilizing regional sales executives who
support sales across all product segments including CCTV, access control, video
management and alarm management. Customers include banks, schools, casinos,
large retail chains and government facilities. These customers include such
prominent names as Wal-Mart, American Express, Cartier, John Deere, Caterpillar
and MBNA. Regional sales executives receive support from product and market
specialists, ISG and inside sales support. ISG also works directly with the
dealer/integrator and/or the end user to define requirements, engineer the
solution and provide project management of installation and implementation when
required.
Ultrak has strong relationships with local, regional and national
dealer/integrators such as Diebold, and with regional and national distributors,
including ADI. In order to increase revenue, the sales effort is spread between
end user, dealers/systems integrators, national accounts and distribution.
Ultrak believes its role is to establish and solidify its relationship with its
channel partners, direct business opportunities to them and provide additional
competitive resources to its distributors enabling them to capture more
business. Team Ultrak and Ultrak Select, Ultrak's key dealer and distributor
programs, are used to reward loyal channel partners with special sales and
marketing incentives.
Ultrak began actively pursuing the international market in 1995. Ultrak sells
its products and systems in a number of countries including Mexico, Brazil,
Great Britain, France, Germany, Denmark, India, China, South Korea, Japan, the
Philippines and Australia. Since the second quarter of 1996, the Company
acquired MAXPRO (Australia), Bisset (France, now divested), VideV (Germany),
Intervision (the United Kingdom, now divested), the Videosys Group (Italy),
Philtech (South Africa), MCS (Switzerland), Mach (Poland) and established a
distribution company in Singapore, which has substantially expanded the
Company's presence internationally. See Note K to the Company's Consolidated
Financial Statements with respect to business segments.
The majority of products are marketed under the Ultrak brand name. PSG
competitors include Pelco, Tyco (including Sensormatic), Philips, Lenel,
GE/Interlogix and others. There are a number of smaller competitors in the
digital video recording market.
7
DIVERSIFIED SALES GROUP
CONSUMER/DO-IT-YOURSELF:
Small businesses and homeowners are installing video observation systems to
replace or supplement conventional alarm systems as the cost of CCTV products
decline. The consumer/do-it-yourself security and surveillance market consists
of end users who purchase security and surveillance systems and install the
systems themselves in their small businesses or homes. Video products sold into
this market are characterized by affordability, aesthetic designs, ease of
installation/maintenance and mobility. The typical product for this market is a
wired or wireless observation system, and consists of a camera, a monitor, a
switcher or quad processor and, optionally, a video recorder. These products are
available in either black and white or color models. Ultrak markets these
products under the Exxis (TM), Focus (TM) and Smart Choice (R)brand names.
Consumer/do-it-yourself CCTV products are sold through Ultrak's call center,
mass merchandisers, warehouse clubs, electronic retail stores and office product
superstores, as well as through retail catalogs. Ultrak's call center also
offers after-market sales and technical support through telephonic interface
with consumers as well as its e-commerce website, SecurityandMore.com.
Competitors in this segment include Lorex, which sells under the Sylvania and
Lorex brand names, Mansoor Electronics, sold under the Home Sentinel brand and
numerous direct importers.
INDUSTRIAL:
This business is divided into Industrial Vision Source ("IVS") and Traffic.
IVS is a distributor of video products used in various production and
manufacturing processes. Manufacturers include Sony, Panasonic, Hitachi, and
JVC. The Company sells to this market through systems integrators who assemble
and sell equipment that incorporates video cameras. Typical applications include
machine vision, computer imaging, robotics, microscopy and high-speed
inspection. The use of industrial video offers more precise assessment than
human visual inspection and can measure image parameters that are imperceptible
to the human eye. These systems are also used to remotely monitor automated
assembly lines to ensure that each process on the assembly line is accurately
and completely performed. Additional industrial applications are emerging as new
equipment is developed and as production automation levels increase.
The industrial vision market is heavily dependent on sales to customers in
the semiconductor industry. There are numerous competitors in this segment
including name brand manufacturers selling direct, importers and other
distributors. The Company uses a combination of its own inside sales force and
outside representatives to sell these products to dealers and OEM accounts.
While most of the sales are made over the telephone, Ultrak representatives also
attend industry trade shows to meet with key customers and vendors. Advertising
and leads provided by the manufacturers supplement the Company's sales efforts
in this area.
Ultrak's Traffic division consists primarily of rugged dome products and
switching equipment, engineered by Ultrak. Sales are made through a dealers and
systems integrators. These products are specific to the traffic-surveillance
market.
BRANDING
Ultrak uses various brand names to minimize market channel conflicts and to
differentiate products by features, applications and price. The Company's
proprietary brand names, many of which are registered trademarks, include Ultrak
(R), Maxpro(TM), Videosys(R), SAFEnet(TM), Pointguard, Exxis(TM), Focus(TM),
Smart Choice(R), Phoenix(TM), Industrial Vision Source(TM),
Securityandmore.com(TM) and ESS(TM). The vast majority of the products sold by
the Company carry Ultrak brand names. The Company also sells brands such as
Panasonic, Mitsubishi, and Sony to complete the product line.
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PRODUCT DESIGN AND DEVELOPMENT
In addition to traditional research and development activities, Ultrak's
engineering and product development staff worldwide works directly with its
customers to design new products and product enhancements, and coordinates with
its contract suppliers to manufacture certain Ultrak branded products. Ultrak's
engineering staff works with its selling and marketing groups to develop new
products and product line extensions, and to promptly respond to customer needs
on a worldwide basis. Consequently, Ultrak believes that it can develop
technologically superior products with customer-desired performance capabilities
that address new applications at lower prices than competitive products. The
Company's products are becoming more software-driven to support the integration
of technologies and functions into its customers' existing networks.
Because of the complex and highly specialized requirements of Ultrak
products and systems, Ultrak's engineers are experienced in a wide range of
disciplines including charged-coupled device ("CCD") technology, analog and
digital signal processing, CCTV management and switching technology, computer
based access control technology, facility management technology and high speed
dome technology. In addition, the Company's international contract manufacturers
employ a number of engineers who are primarily dedicated to research and
development efforts of products sold by Ultrak.
In 1999, the Company introduced its computer-based SAFEnet NT system, the
Windows-NT((R)) version of Ultrak's flagship line of integrated access control
and security systems. SAFEnet NT provides a stable, flexible platform for the
integration of new functions and technologies. At the end of 2000, Ultrak
reintroduced an improved version of PointGuard, its solution to the low to
mid-range access control market, and introduced Eurocorder II, its digital video
recorder.
In the first quarter of 2002, Ultrak released upgrades of SAFEnet NT,
including new hardware, and PointGuard for multi-workstations, expanding its
range of access control solutions for low to high-end applications. Ultrak will
also introduce an expanded line of Z-series domes to cover the entry-level dome
market and ruggedized cameras for applications subject to tampering and
vandalism. Ultrak will continue its focus on digital recording options using a
combination of Ultrak manufactured products and OEM products. Ultrak believes
that the market for digital recording is highly fragmented and will require a
variety of solutions to meet diverse customer demands and requirements.
SUPPLIER RELATIONSHIPS
Contract manufacturers produce the majority of Ultrak-branded products. In
most of its vendor relationships, the Company believes the relationship is as
important to the supplier as it is to the Company. Thus, the Company believes
there is a strong, mutually advantageous basis for the trading relationship to
continue and grow. See Note G to the Company's Consolidated Financial Statements
with regard to Major Customers and Suppliers.
Because of foreign production lead times, the Company normally makes
purchase commitments to its foreign suppliers three to six months in advance of
shipment. Given order lead times, accurate inventory forecasting is critical.
Ultrak's objective in 2002 is to continue reducing the working capital utilized
in its inventories, making it necessary to work closer with its suppliers to
reduce lead times.
The Company's primary contract manufacturer is ISO9001 certified. When goods
are delivered to Ultrak, a random sampling quality assurance procedure is
performed. Selected units are verified for functionality, proper packaging,
labeling and documentation, and variations greater than an agreed upon
percentage are corrected at the vendor's cost. Ultrak offers a limited warranty
on its products. The Company generally warrants that its products will conform
to Ultrak's published specifications and be free from defects in materials and
workmanship at the time of sale up to a specified period of time. Ultrak also
offers extended warranties for sale on its consumer products.
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Substantially all of the Company's purchases from its non-affiliated
contract manufacturers are made in United States Dollars or Euro; most of the
remaining purchases are made in Japanese Yen, Australian Dollars, South African
Rands and British Pounds. In 2001, the Company was adversely impacted by the
strengthening of the U.S. dollar, as its international subsidiaries import
products quoted in U.S. dollars or U.S. dollar-linked currencies.
OPERATIONS
A critical element of the Company's operations is its management information
systems. In early 1997, the Company selected SAP, a leading enterprise software
system, for its domestic information needs. As of February 1998, the Company had
successfully completed the SAP conversion process at the Headquarters Facility.
As of July 2000, the Company successfully completed the SAP conversion process
at its Ohio Facility and at its Austin Facility, effectively linking all North
American sales and manufacturing operations. As previously anticipated, SAP
united Ultrak and all of its domestic subsidiaries with a common inventory,
sales, accounting/financial and database management system. Through laptop
computers, the Ultrak domestic sales team can easily communicate with the host
system from any remote location. The Company selected "Exact", a multi-lingual,
multi-currency and Euro-compliant software for its European information needs.
Most of the Company's European operations are now operational on the "Exact"
software and linked together with a common inventory, sales, accounting and
financial system.
Ultrak's Worldwide Support Center is ISO 9002-1994 registered and transition
to the ISO 9000:2000 will be completed by September 2003. All other Ultrak
facilities are currently working to obtain ISO 9000:2000 registration.
As part of a continuing effort to improve quality, the Company has an
internal audit program. Internal auditors are trained to monitor and evaluate
the quality of Ultrak's products to ensure their reliability. These products
must meet specific requirements and are inspected at least once before they are
released to the customer. The auditors report and correct both nonconformance
and potential nonconformance by using failure rate data analysis to identify
trends. Analysis of these trends helps detect and prevent nonconforming product.
Additionally, product line audit data is analyzed to evaluate the quality of the
production process.
Ultrak believes that one of the keys to its success is its commitment to be
responsive and provide excellent service to its customers. Domestic orders are
entered into the Company's Lewisville, Texas-based SAP computer system by
in-house sales personnel. After the computer system performs an automated check
of the customer's account and credit limit, the order is released for shipment.
Ultrak ships most items within 24 hours of receipt of the order. The Company's
domestic stocking warehouse locations are the Headquarters Facility and the Ohio
Facility. Approximately 90% of all domestic shipments are made from the
Headquarters Facility.
On-time delivery, order accuracy and superior customer service are the key
goals for Ultrak's operations. To further its customer service abilities, the
Company is currently evaluating new manifest software to provide instant e-mail
notification of tracking details for customer shipments. There is also an
increased focus on operational performance by reducing slow-moving inventory and
improving inventory turnover. This will reduce future carrying costs and improve
operating efficiency.
In August 2001, Ultrak implemented salesforce.com, an on-line customer
relationship management (CRM) tool, within the sales, marketing and technical
support organizations. Ultrak uses salesforce.com for sales force automation,
customer service and support and marketing automation. With salesforce.com, the
Company is able to gather customer information in a central data repository for
use in providing accurate sales forecasts, determining vertical market segment
strengths, collecting data on product issues for future development and
assigning return on investment for specific marketing activities. It also
ensures customer transactions are documented, eliminating the concern associated
with losing knowledge when a specific employee is not available to assist a
customer.
Professional in-house repair is also provided through the Headquarters
Facility. A key focus for the service center is to provide reliable and economic
repair in a professional and timely manner. The service center offers
10
standardized pricing for non-warranty repairs and offers 24-hour to 72-hour
repair service to its customers. The Company has also authorized two service
centers in Mexico to perform these repairs. Management is evaluating additional
locations in Canada and South America.
TRAINING
The Company considers continuous training of its customers to be critical in an
increasingly competitive market. In 2001, the Company's training capabilities
were expanded to include formal training certification on the MAX 1000 CCTV
switch product in the Las Vegas office. Multiple training sessions on Ultrak's
products and systems are held throughout the year with salespeople, customers
and field installation technicians attending to learn more about our technology
and products. In 2002, training will be expanded to include on-site training for
end users and systems integrators, and long distance learning computer-based
training programs. Dealers and systems integrators will be required to complete
and maintain certification for key Ultrak products, or to utilize ISG to ensure
customer satisfaction.
BACKLOG
Because purchase orders are subject to cancellation or delay by customers
with limited or no penalty, the Company's backlog is not necessarily indicative
of future revenues or earnings. Since the Company ships most products within 24
hours of receipt of the order, the Company believes that backlog is not a
significant measurement of the Company's financial position.
INTELLECTUAL PROPERTY
As part of its ongoing engineering and development activities, Ultrak seeks
patent protection on inventions covering new products and improvements when
appropriate. Ultrak currently holds a number of United States and foreign
patents and has a number of pending patent applications. Although the Company's
patents have value, the Company believes that the success of its business
depends more on innovation, sales efforts, superior customer service, technical
expertise and knowledge of its personnel and other factors. The Company also
relies upon trade secret protection for its confidential and proprietary
information. Many of the Company's brands are registered trademarks owned by the
Company.
COMPETITION
The Company faces substantial competition in each of its markets.
Significant competitive factors in the Company's markets include price, quality
and product performance, breadth of product line, ease of integration and
customer service and support. Some of the Company's existing and potential
competitors have substantially greater financial, manufacturing, marketing and
other resources than the Company. To compete successfully, the Company must
continue to make substantial investments in its engineering and development,
marketing, sales, customer service and support activities. There can be no
assurance that competitors will not develop products that offer price or
performance features superior to the Company's products.
The Company considers its major competitors to be Tyco (including
Sensormatic), Philips, Panasonic, Pelco, Lenel, GE/Interlogix and Samsung.
11
EMPLOYEES
As of December 31, 2001, the Company had 545 full-time employees employed
worldwide as compared with 568 full-time employees worldwide as of December 31,
2000, at 12 primary locations:
o 212 sales and sales support personnel
o 93 warehouse and manufacturing personnel
o 54 technical and service personnel
o 79 engineering and product development personnel
o 107 administrative and managerial personnel
The Company's future success will depend in large part upon its ability to
attract and retain highly skilled technical, managerial, financial and marketing
personnel, in a market where such people are in demand. No employee is
represented by a union or covered by a collective bargaining agreement and the
Company has not experienced a work stoppage or strike. The Company considers its
employee relations to be good.
ITEM 2. PROPERTIES
----------
The Company moved to the Headquarters Facility in January 1998. The
Headquarters Facility is comprised of approximately 170,000 square feet of
office and warehouse space located on 14 acres of land in Lewisville, Texas.
Prior to the end of 2000, the building was financed through a synthetic lease,
therefore keeping the asset and the liability off the balance sheet. In January
2001, the Company elected to pay down the balance of the financing from $11.5
million to $10 million, effectively acquiring the building and the mortgage
simultaneously. This amount was subsequently paid down to $6.3 million. The
Headquarters Facility was sold in December 2001 for $6.6 million in a sale and
lease back transaction. As part of the sale, the Company will lease the
Headquarters Facility for a term of 30 months beginning in January 2002 at an
annual cost of $720,000. The lease includes an option to purchase the
Headquarters Facility for $6.9 million at the end of 24 months.
The Company owns its 72,000 square foot manufacturing facility in Carroll
(Columbus), Ohio and leases its facility in Rancho Cucamonga, California.
The Company also leases additional office/distribution warehouse space in
Austin, Texas; Las Vegas, Nevada; Warrington (Manchester), Great Britain; San
Vendemiano (Venice), Italy; Dusseldorf, Germany; Crissier (Lausanne),
Switzerland; Szczecin, Poland; Perth, Australia; Johannesburg, South Africa and
Singapore.
The Company established a centralized, European headquarters facility in
Antwerp, Belgium in 1999 to coordinate efforts among its foreign operations.
Customer service under the centralized structure suffered and the cost to
operate this facility proved to be unjustified. In 2001, the Company sold the
Belgium headquarters building and discontinued centralized distribution.
Inventory was transferred to the Company's European offices located in the Great
Britain, Germany, France, Italy, Poland and Switzerland. The Company also
relocated its international administrative and financial functions to the Great
Britain where it currently maintains a sales and operations facility.
The Company considers the above facilities suitable and adequate to meet its
requirements.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company's French subsidiary is currently involved in multiple employee
suits in France. Some of the employees who were dismissed as part of the
restructuring plan implemented in the fourth quarter of 2000 have asserted that
they were wrongfully terminated. Although the Company believes these suits will
be settled on a favorable basis, a $108,000 provision against future legal costs
was recorded in the fourth quarter of 2001.
Ultrak is subject to various other legal proceedings and claims, either
asserted or unasserted, that can arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, Ultrak
does not believe that any of these existing legal matters will have a material
adverse effect on its financial conditions or results of operations.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At a special meeting held on November 30, 2001, the stockholders approved
the exercise by the Company of an option to sell Mr. Niklaus F. Zenger
("Zenger") 293,879 additional shares of Ultrak Common Stock. The Company
previously sold Zenger 2,337,700 shares of Common Stock in a private placement
for $4,441,630.00 in aggregate proceeds. At the special meeting, stockholders
also approved the sale by Mr. George K. Broady ("Broady") of 195,351 shares of
the Company's Series A 12% Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") to Zenger and the grant of voting control of 1,150,000 shares
of the Company's Common Stock owned by Broady to Zenger until June 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET PRICE AND DIVIDENDS
The Company's $.01 par value common stock ("Common Stock") commenced trading
on the NASDAQ Stock Market's NASDAQ National Market ("NASDAQ National Market")
on January 18, 1994, under the symbol "ULTK". Before that time, the Common Stock
was traded in the over-the-counter market. Prices shown do not include
adjustments for retail markups, markdowns or commissions. The following table
sets forth the high and low closing prices on the NASDAQ National Market for the
periods indicated:
HIGH LOW
2001 ---- ---
Fourth quarter $ 2.82$ 1.30
Third quarter 2.52 1.18
Second quarter 3.15 2.19
First quarter 5.88 2.34
2000
Fourth quarter $ 6.50$ 2.81
Third quarter 10.25 5.75
Second quarter 11.88 6.00
First quarter 13.25 6.38
As of March 15, 2002, there were approximately 1,132 holders of record of
the Common Stock.
The Company has never paid cash dividends on the Common Stock. The Company
presently intends to retain future earnings to finance the development and
expansion of its business. The declaration in the future of any cash dividends
on the Common Stock will be at the discretion of the Board of Directors and will
depend upon the earnings, capital requirements and financial position of the
Company, general economic conditions and other pertinent factors.
Dividends in the amount of $117,210 have been paid annually since the
issuance of the Series A Preferred Stock and the Company intends to continue to
pay dividends on outstanding shares of Series A Preferred Stock.
13
ITEM 6. SELECTED FINANCIAL DATA
-------------------------
The following selected consolidated financial data for the Company as of and
for the five fiscal years ended December 31, 2001, have been derived from the
consolidated financial statements of the Company and its subsidiaries, which
have been audited by Grant Thornton LLP, independent certified public
accountants. The selected consolidated financial data includes the effects of
businesses acquired in 1997, 1998 and 1999. This data should be read in
conjunction with the information set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial Statements and related notes which are included elsewhere herein.
Consolidated Financial Statements and related notes for 1997 and 1998 are not
included. See acquisition and divestiture discussions in Item 1. Because of
these transactions, the income statement and balance sheet data presented below
may not be comparable from year to year.
YEARS ENDED DECEMBER 31
(In thousands, except per share data)
-----------------------------------------------------------------------
INCOME STATEMENT DATA: 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Net sales.......................................... $ 161,707 $ 199,998 $ 208,201 $ 196,998 $ 177,837
Cost of sales...................................... 111,809 153,436 140,832 134,692 124,304
--------- --------- --------- --------- ---------
Gross profit....................................... 49,898 46,562 67,369 62,306 53,533
Selling, general and administrative expenses....... 48,027 71,123 56,677 49,554 45,350
Asset impairment................................... 4,466 19,798 -- -- --
Special charges.................................... -- 1,115 3,875 -- 3,122
Depreciation and amortization...................... 5,311 6,482 5,911 4,667 3,971
--------- --------- --------- --------- ---------
Total operating expenses.................... 57,804 98,518 66,463 54,221 52,443
--------- --------- --------- --------- ---------
Operating profit (loss)............................ (7,906) (51,956) 906 8,085 1,090
Other income (expense)............................. 5,542 (9,876) 1,052 461 2,953
--------- ---------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes....................................... (2,364) (61,832) 1,958 8,546 4,043
Incomes tax benefit (expense)...................... 903 4,145 (1,286) (3,589) (1,726)
--------- --------- ---------- ---------- ----------
Income (loss) from continuing operations........... (1,461) (57,687) 672 4,957 2,317
Income (loss) from discontinued operations......... -- -- (107) (1,402) 84
--------- --------- --------- ---------- ---------
Net income (loss)........................... (1,461) (57,687) 565 3,555 2,401
Dividend requirements on preferred stock........... (117) (117) (117) (117) (117)
---------- ---------- ---------- ---------- ----------
Net income (loss) allocable to common stockholders. $ (1,578) $ (57,804) $ 448 $ 3,438 $ 2,284
========== ========== ========= ========= =========
Weighted average shares outstanding - diluted...... 12,183 11,686 12,300 14,776 15,224
Income (loss) per common share from continuing
operations - diluted............................... $ (0.13) $ (4.95) $ .05 $ 0.34 $ 0.15
========== ========== ========= ========= =========
Net income (loss) per common share - diluted....... $ (0.13) $ (4.95) $ .04 $ 0.24 $ 0.15
========== ========== ========= ========= =========
BALANCE SHEET DATA:............................... 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital.................................... $ 28,223 $ 23,650 $ 79,714 $ 90,192 $ 94,064
Total assets....................................... 121,764 143,497 200,350 196,626 185,256
Short-term debt.................................... 15,821 37,380(1) 1,149 -- --
Long-term debt..................................... 6,600 -- 37,000 37,500 --
Stockholders' equity and equity put options........ 78,773 77,248 132,663 140,030 163,198
1 Due to losses in 2000, the line of credit was reclassified from long-term debt
to short-term debt.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
The consolidated financial statements include the accounts of Ultrak and its
consolidated subsidiaries. The Company is further organized in the U.S. into
separate selling divisions - all supported by common administrative functions
such as credit, accounting, payroll, purchasing, legal, warehousing, training
and computer support services. All significant intercompany balances and
transactions among subsidiaries and divisions have been eliminated in
consolidation.
Product sales are recorded when goods are shipped to the customer. Most of
the Company's sales are made to its domestic customers on Net 30 or Net 60 day
credit terms after a credit review has been performed to establish
creditworthiness and to determine an appropriate credit limit. The Company's
international sales are made under varying terms depending upon the
creditworthiness of the customer, and include the use of letters of credit,
payment in advance of shipment or open trade terms.
Cost of sales for most of the Company's products includes the cost of the
product shipped plus freight, customs and other costs associated with delivery
from foreign contract manufacturers or from domestic suppliers. Cost of sales
for products manufactured by Ultrak include material, direct labor and overhead
as well as an allocated portion of indirect overhead.
Selling, general and administrative costs include salaries, commissions and
related benefits, depreciation, telephone, advertising, warranty, printing,
product literature, sales promotion, legal, audit and other professional fees,
supplies, engineering and travel.
The Company's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in the exchange rate between the Company's
subsidiaries' local currencies and the U.S. dollar will affect the conversion of
such subsidiaries' financial results into U.S. dollars for purposes of reporting
the Company's consolidated financial results. Translation adjustments are
reported as a separate component of stockholders' equity
A substantial portion of the Company's purchases and sales are derived from
operations outside the United States. Since the revenues and expenses of the
Company's foreign operations are generally denominated in local currency,
exchange rate fluctuations between local currencies and the U.S. dollar subject
the Company to currency exchange risks with respect to the results of its
foreign operations. Therefore, the Company is subject to these risks to the
extent that it is unable to denominate its purchases or sales in U.S. dollars or
otherwise shift to its customers or suppliers the effects of currency exchange
rate fluctuations. Such fluctuations in exchange rates could have a material
adverse effect on the Company's results of operations. The Company did not have
any foreign exchange forward or currency option contracts outstanding at
December 31, 2001.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto included herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of financial
statements 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. Because of the use of
estimates inherent in the Company's financial statements, actual results could
differ from those estimates.
The Company believes the following critical accounting policies are affected
by significant judgments and estimates used in the preparation of its
consolidated financial statements.
15
Inventory valuation
The Company writes down its inventories for estimated obsolescence, returned
inventory deemed not economical to repair or discontinued product lines to its
estimated net realizable value. The estimate is based upon historical results,
current and expected sales trends, the amount of current inventories on hand and
market conditions. If market conditions become less favorable than those
expected by management, then additional inventory write-downs may be required.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make payments. To estimate this
allowance, the Company analyzes the composition of its accounts receivable,
historical bad debts, customer concentrations, customer creditworthiness and
current economic trends. If the financial condition of the Company's customers
were to deteriorate and result in an impairment of their ability to make
payments, additional allowances may be required.
Goodwill
The Company periodically reviews the carrying value of its goodwill when
events and circumstances warrant such a review. As of December 31, 2001, the
method used by the Company for this review was the estimate of future cash
flows. If the carrying value of the Company's goodwill was considered impaired,
an impairment charge was recorded for the amount by which the carrying value of
the goodwill exceeds its fair value. The Company believes its estimates of
future cash flows and fair value were reasonable; however, changes in the
estimate of such cash flows and fair value could result in future impairment
charges. Effective January 1, 2002, the Company will adopt Statement of
Financial Standards (SFAS) No. 142, Goodwill and Intangible Assets. See section
captioned "New Accounting Pronouncements."
Deferred income taxes
Significant management judgment is required in determining the realization
of net deferred tax assets and the associated valuation allowance. Due to
uncertainties related to the Company's ability to utilize the net deferred tax
asset, a valuation allowance has been recorded at December 31, 2001 against a
significant portion of the net deferred tax asset balance. Based on results of
operations in future periods, the Company may need to adjust the valuation
allowance.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Intangible Assets. SFAS No.
141 is effective for all business combinations completed after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and December 31, 2001.
Major provisions of these statements and their effective dates are as
follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting;
o intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability;
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized;
16
o effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization;
o effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and
o all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting
The Company amortized goodwill and intangible assets acquired prior to July
1, 2001 until December 31, 2001. Beginning January 1, 2002, goodwill
amortization will no longer be recognized. The Company intends to complete a
transitional impairment test of all intangible assets as of March 31, 2002 and a
transitional fair value based impairment test of goodwill as of January 1, 2002
by June 30, 2002. Impairment losses, if any, resulting from the transitional
testing will be recognized as a cumulative effect of a change in accounting
principle.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement is effective for fiscal years beginning after June 15, 2002. The
Company does not believe that the implementation of this standard will have a
material effect on its financial position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement is effective for fiscal years beginning after
December 15, 2001. The Company does not believe that the implementation of this
standard will have a material effect on its financial position, results of
operations or cash flows.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
certain items in the Company's consolidated summary of income for the indicated
periods.
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
------ ------ ------
Net sales....................... 100.0% 100.0% 100.0%
Cost of sales................... 69.1 76.7 67.6
------ ------ ------
Gross profit.................... 30.9 23.3 32.4
------ ------ ------
Selling, general and
administrative expenses......... 29.7 35.6 27.2
Depreciation and amortization... 3.3 3.2 2.8
Asset impairment................ 2.8 9.9 --
Special charges................. -- 0.6 1.9
------ ------ -----
Total operating expenses 35.8 49.3 31.9
------ ------ ------
Operating profit (loss)......... (4.9) (26.0) 0.4
Other income (expense).......... 3.4 (4.9) 0.5
------ ------- ------
Income (loss) from continuing
operations before income taxes.. (1.5) (30.9) 0.9
Income tax benefit (expense).... 0.6 2.1 (0.6)
------ ------ -------
Income (loss) from continuing
operations...................... (0.9) (28.8) 0.3
Discontinued operations,
net of tax effects.............. -- -- (0.1)
------ ------ -------
Net income (loss) .............. (0.9)% (28.8)% 0.2%
====== ====== ======
17
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
For the year ended December 31, 2001, net sales were $161.7 million, a
decrease of $38.3 million (19%) over 2000. This decline is due to the
discontinuation of Exxis sales to Sam's Club (see Note G to the Company's
Consolidated Financial Statements), the sale of the Industrial Furnace Camera
business, the sale of the French CCTV and audio businesses, a world-wide
recession and the translation effect of a strong U.S. dollar.
Cost of sales were $111.8 million for 2001, a decrease of $41.6 million
(27%) over 2000. Gross profit margins increased to 30.9% in 2001 from 23.3% in
2000. Cost of sales for 2000 included $12.4 million in inventory write-offs
taken as part of the 2000 Special Charge. These write-offs included $9.5 million
in inventory related to discontinued product lines and returned inventory deemed
uneconomical to repair. Exclusive of the $12.4 million in inventory write-offs
in 2000, gross profit margins increased from 29.5% to 30.9%. A more favorable
product mix also contributed to the margin increase.
Selling, general and administrative expenses were $48.0 million in 2001, a
decrease of $23.0 million (32%) over 2000. These expenses represented 29.7% of
net sales in 2001, down from 35.6% in 2000. This decrease can be explained as
follows:
o $9.5 million for asset impairment charges taken in the fourth quarter of
2000 as part of the 2000 Special Charge (see Note O to the Company's
Consolidated Financial Statements for additional detail)
o $5.0 million of expense reductions in Belgium during 2001
o $4.2 million of expense reduction in France during 2001
o $2.7 million of worldwide expense reductions during 2001
o $1.6 million of income for recovery of the 2000 Special Charge during
2001
The $1.6 million recovery of the 2000 Special Charge is comprised of the
following items:
o $0.7 million for the favorable settlement of certain liabilities in
Belgium
o $0.2 million for higher than expected proceeds on the sale of the
Belgium facility
o $0.7 million for a change in the estimate of the France restructuring
accrual, primarily related to severance obligations, resulting from the
sale of the French business
As of December 31, 2001, the Company had $0.7 million remaining in restructuring
costs:
o $0.4 million for closure costs in France
o $0.2 million for the severance of one employee in France
o $0.1 million for closure costs in Belgium
An asset impairment charge of $4.5 million, 2.8% of sales, was taken in 2001
as part of the sale and refinance of the Headquarters Facility.
Included in the Company's 2000 results is an asset impairment charge of
$19.8 million, 9.9% of net sales, related write downs of goodwill, software
development costs and the impairment of internal use software. Continuing losses
in France and Germany triggered an impairment review of the long-lived assets in
these entities during the fourth quarter of 2000. The Company analyzed projected
cash flows and concluded that the entire amount of goodwill, totaling $13.1
million for the two entities was impaired. Based on an evaluation of products
under development during the fourth quarter of 2000, $2.0 million in capitalized
software development costs, which related to product designs that were abandoned
and did not correspond with future product objectives, were written off. This
charge also included $2.9 million for the impairment of internal use software.
As a result of the outsourcing of the California and Australia manufacturing
operations in 2000, it was determined that the costs related to those operations
was impaired.
18
Depreciation and amortization expenses were $5.3 million for 2001, a
decrease of $1.2 million (18%) over 2000. These expenses represented 3.3% of net
sales in 2001, up from 3.2% in 2000. The decrease in depreciation and
amortization expense relates to the disposal of fixed assets resulting from the
closure of the Belgian and French operations, goodwill impairments in France and
Germany and the impairment and disposal of internal use software and capitalized
software development costs in the U.S.
There were no special charges in 2001, but $1.1 million of special charges
were taken in 2000. These charges were for the separation of three former
executives from the Company, severance obligations related to the outsourcing of
certain manufacturing operations in California and Australia, and a proxy
solicitation contest with Detection Systems, Inc., a company in which Ultrak
held a 21% ownership stake in 2000.
Other income was $5.5 million in 2001, compared with other expenses of $9.9
million in 2000. The other income in 2001 resulted from the $7.7 million gain on
the sale of the Company's shares of common stock of Detection Systems, Inc., a
$1.3 million gain on the sale of the Industrial Furnace Camera business, offset
primarily by interest expense. The expense in 2000 consisted primarily of
foreign exchange losses, interest expense and a $0.8 million loss on the sale of
Intervision.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
For the year ended December 31, 2000, net sales were $200.0 million, a
decrease of $8.2 million (4%) over 1999. This decrease is primarily due to the
sale of Intervision in July 2000, the scheduled phase-out of the CCTV
distribution business in France, and the declining value of the European
currencies against the U.S. dollar.
Cost of sales were $153.4 million for 2000, an increase of $12.6 million
(9%) over 1999. Gross profit margins decreased to 23.3% in 2000 from 32.4% in
1999. This increase in cost of goods sold was primarily due to the inventory
write-offs of $12.4 million taken as part of the 2000 Special Charge. These
write-offs included $9.5 million in inventory related to discontinued product
lines and returned inventory deemed uneconomical to repair. The write-off also
provided for $2.9 million of disposals related to the closure of the European
distribution center in Belgium, as well as the sale and disposal of the French
CCTV and audio product inventory.
Selling, general and administrative expenses were $71.1 million in 2000, and
increase of $14.4 million (25%) over 2000. Out of the increase, $9.5 million was
due to asset impairment charges taken in the fourth quarter of 2000. These
charges related to the closure of the European distribution center in Belgium
($3.4 million), additional bad debt provisions ($2.4 million), the sale and
disposal of the French CCTV and audio product lines ($2.0 million), severance of
33 employees in the U.S. ($0.6 million) and other write-downs.
Depreciation and amortization expenses were $6.5 million for 2000, an
increase of $0.6 million (10%) over 1999. Depreciation and amortization expenses
for 2000 were 3.2% of net sales, up from 2.8% of net sales in 1999.
Included in the Company's 2000 results is an asset impairment charge of
$19.8 million, 9.9% of net sales, related write downs of goodwill, software
development costs and the impairment of internal use software. Continuing losses
in France and Germany triggered an impairment review of the long-lived assets in
these entities during the fourth quarter of 2000. The Company analyzed projected
cash flows and concluded that the entire amount of goodwill, totaling $13.1
million for the two entities, should be impaired. Based on an evaluation of
products under development during the fourth quarter of 2000, $2.0 million in
capitalized software development costs, which related to product designs that
were abandoned and did not correspond with future product objectives, were
written off. This charge also included $2.9 million for the impairment of
internal use software. As a result of the outsourcing of the California and
Australia manufacturing operations in 2000, it was determined that the costs
related to those operations should be impaired.
Special charge expenses of $1.1 million were taken in 2000. These expenses
relate to the $1.4 million of severance and other charges recorded in the third
quarter of 2000. These charges were for the separation of three former
executives from the Company, severance obligations related to the outsourcing of
certain manufacturing operations in California and Australia, and a proxy
solicitation contest with Detection Systems, Inc., a company of which Ultrak
held a 21% share in 2000. The remaining amount is an adjustment of $0.3 million
for excess reserves as part of the 1999 special charge. This charge consisted of
a $3.9 million of severance obligations of $0.8 million and
consolidation/centralization of European activities of $3.1 million.
19
Other expenses of $9.9 million were recorded in 2000, compared with other
income of $1.1 million in 1999. The other expenses in 2000 included $5.4 million
foreign currency losses, losses on sales of investments and other charges taken
as part of the 2000 Special Charge. The additional increase in other expenses
was attributed to higher interest rates in 2000. The Company also recorded $1.3
million less income on its interest in Detection Systems, Inc. due to lower
earnings reported by that company in 2000, compared to 1999. Additional other
income items in 1999 included $0.7 million gain on the sale of investments and a
$0.4 million gain on foreign currency exchange.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a decline in cash flows from operations in 2001 of
$5.1 million, despite a reduction in the net loss of $56.7 million in 2001. Net
cash provided by investing activities was $25.2 million in 2001, versus $2.9
million of cash used in investing activities in 2000. Although the large
increase in 2001 primarily resulted from the net proceeds on the sale of the
shares of Detection Systems, Inc. and the Industrial Furnace Camera business,
purchases of fixed assets and capitalized software were $2.0 million in 2001,
compared to $5.5 million in capital spending in 2000. This resulted in a $28.1
million increase in the cash provided by investing activities. Net cash used in
financing activities was $22.4 million in 2001, compared to negligible cash
provided by financing activities in 2000. The most significant differences
resulted from $20.4 million of net repayments on the Company's revolving line of
credit and repayments of $11.5 million on the mortgage for Headquarters Facility
in 2001. These repayments were offset by the proceeds of $6.6 million from the
sale of the Headquarters Facility, as well as $4.1 million in proceeds from the
issuance of additional Common Stock.
At December 31, 2001, the Company had $15.0 million outstanding under its
revolving credit facility. The amount outstanding was subsequently reduced to
$12.0 million during the first quarter of 2002. During the first three quarters
of 2001, the interest rate on the credit facility was adjusted to prime plus a
range of 0.0% to 0.75%, depending on the leverage ratio and other conditions,
determined on a quarterly basis. As a result of the disputes with lenders
described below, interest rates have increased since the end of the third
quarter of 2001. The rate was fixed at prime plus 3.25% during the fourth
quarter of 2001. Late in the first quarter of 2002, the rate was subsequently
increased to a flat 12.00%. The Company also pays a monthly fee of 0.375% per
annum based on the average unused borrowing availability under the credit
facility. The credit facility contains certain financial and operational
covenants, including a maximum leverage ratio, a debt service ratio and minimum
net worth amounts. The lenders alleged that the Company violated certain of
these covenants at various times during 2001, but subsequently waived the
alleged defaults.
Subsequent to December 31, 2001, an amendment (the "Eighth Amendment") to
the Company's revolving credit facility was signed at the insistence of the
lenders (see Exhibit 10.51 to this Form 10-K) that increased the interest rate
to 12.00%, reduced the lending commitment from $30 million to $20 million, and
accelerated the termination date of the facility from March 31, 2002 to February
28, 2002. The Eighth Amendment also waived certain alleged defaults by the
Company under the loan covenants and provided for the payment of certain fees,
including fees which the Company believes gave it the right to extend the
termination date of the facility back to March 31, 2002.
Although the Company paid and the lenders accepted all of the fees
prescribed by the Eighth Amendment, the lenders have asserted the Company did
not have the right to extend the termination date of the credit facility.
Consequently, subsequent to February 28, 2002, the lenders have declared the
outstanding balance of the loan to be due, increased the interest rate to
12.00%, refused to advance funds under the credit facility, and reserved the
right to commence foreclosure proceedings if their loan is not repaid in full by
April 30, 2002. Although the Company believes that the actions of the lenders
are unwarranted and in breach of their obligations under the credit facility, it
expects to repay the loan before such actions are implemented.
20
The Company has received a financing commitment from a new lender that,
combined with the tax refund described below, would repay the existing revolving
credit facility and provide sufficient funds for the Company's operations. The
Company and the new lender have approved the terms of the loan documents and the
new credit facility is expected to close on April 19, 2002, with funding to
follow shortly thereafter.
The Company expects to receive during the week of April 16, 2002 a federal
income tax refund of approximately $6.3 million from the Job Creation and Worker
Assistance Act of 2002, signed into law March 9, 2002. This statute allowed the
Company to carry back its 2001 net operating losses to the 1996 and 1997 tax
years, permitting a refund of federal income taxes previously paid for those
years. The act extended the carry back period on net operating losses to five
years from two years for losses arising in tax years ending in 2001 and 2002.
INFLATION
During the years ended December 31, 2001, 2000 and 1999, the cost of
property and equipment, lease expense and salaries and wages increased modestly.
The increases have not had a material impact on the Company's results of
operations during any of the periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The following discussion regarding the Company's market risk includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements. The Company does not use derivative financial instruments for
speculative or trading purposes, but maintains an interest swap agreement to
hedge against future rate increases. The Company is exposed to market risk from
changes in foreign currency exchange rates and interest rates, which could
affect its future results of operations and financial condition. The Company
manages its exposure to these risks through its regular operating and financing
activities.
Foreign exchange
The Company has foreign-based operations, primarily in Western Europe, which
accounted for 24% of 2001 and 2000 net sales. The strengthening of the U.S.
dollar from 2000 to 2001 had a negative impact on sales and gross profit. The
majority of inventory purchases were made in U.S. dollars. This appreciation of
the U.S. dollar against foreign currencies had an adverse impact of
approximately $0.5 million on gross profit in 2001.
The Company issues intercompany loans to its foreign subsidiaries
denominated in U.S. dollars on a long-term basis, exposing the foreign
subsidiaries to the effect of changes in spot exchange rates of their local
currency relative to the U.S. dollar. The Company does not regularly use
forward-exchange contracts to hedge these exposures. Based on the Company's
foreign currency exchange rate exposure for intercompany borrowings of
approximately $14.6 million at December 31, 2001, a 10% adverse change in
currency rates would increase accumulated other comprehensive loss by
approximately $1.5 million.
21
Interest rates
The Company's credit arrangements expose it to fluctuations in interest
rates. At December 31, 2001, the Company had $15.0 million outstanding under its
revolving line of credit, of which $10.0 million provided for interest to be
paid quarterly based on a variable rate and $5.0 million provided for a rate
fixed by an interest rate agreement. Assuming the debt is refinanced in 2002 and
the Company is no longer assessed interest at the default rates, interest rate
changes would result in a change in the amount of interest to be paid each
quarter. Based upon the borrowings and swap agreements at December 31, 2001, a
10% increase in interest rates would adversely affect the Company's financial
position, annual results of operations, or cash flows by approximately $0.1
million. Because the variable rate structure of the debt exposes us to
fluctuation in the interest rates, the Company has an interest swap agreement
that expires in 2004. The agreement provides for a fixed rate of 6.485% on $5.0
million.
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED IN THIS ANNUAL REPORT ON FORM 10-K,
WHICH ARE NOT STATEMENTS OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). FORWARD LOOKING STATEMENTS ARE MADE IN GOOD FAITH BY
ULTRAK, INC. PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE REFORM ACT. FORWARD
LOOKING STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
ULTRAK, INC. TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
THE TIMELY DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF COMPETITIVE
PRODUCTS AND PRICING, FLUCTUATIONS IN OPERATING RESULTS, ABILITY TO INTRODUCE
NEW PRODUCTS, TECHNOLOGICAL CHANGES, RELIANCE ON INTELLECTUAL PROPERTY AND OTHER
RISKS. MOREOVER, THE OBJECTIVES AND INTENTIONS SET FORTH IN THIS FORM 10-K ARE
SUBJECT TO CHANGE DUE TO DOMESTIC, GLOBAL MARKET AND ECONOMIC CONDITIONS BEYOND
THE CONTROL OF ULTRAK, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statements of the Company and its subsidiaries
that are required by this Item 8 are listed in Part IV under Item 14(a) of this
Annual Report on Form 10-K. Such consolidated financial statements are included
herein beginning on page F-1.
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ultrak, Inc.
We have audited the accompanying consolidated balance sheets of Ultrak, Inc. and
Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ultrak, Inc. and
Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Dallas, Texas
March 1, 2002, except for Note D as to which
the date is April 11, 2002
F-1
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands, except share data)
ASSETS 2001 2000
------ ------
CURRENT ASSETS
Cash and cash equivalents $ 3,300 $ 3,751
Investment in Detection Systems, Inc. - 13,909
Trade accounts receivable, less allowance for
doubtful accounts of $2,503 and $5,791 at
December 31, 2001 and 2000, respectively 25,132 32,232
Inventories 26,255 26,371
Advances for inventory purchases 71 521
Prepaid expenses and other current assets 4,043 4,394
Income tax refundable - 892
Deferred income taxes 6,309 6,337
-------- --------
Total current assets 65,110 88,407
PROPERTY, PLANT AND EQUIPMENT, at cost 33,324 26,886
Less accumulated depreciation and amortization (14,529) (11,885)
-------- --------
18,795 15,001
OTHER ASSETS
Goodwill, net of accumulated amortization of $8,124 and
$6,636 at December 31, 2001 and 2000, respectively 36,260 39,375
Other 2,095 714
-------- --------
38,355 40,089
-------- --------
Total assets $122,260 $143,497
======== ========
F-2
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------ ------
CURRENT LIABILITIES
Accounts payable - trade $ 12,776 $ 13,046
Accrued expenses 5,782 6,168
Accrued restructuring costs 650 5,634
Other current liabilities 1,858 2,529
Line of credit 15,012 35,419
Other debt 809 1,961
-------- --------
Total current liabilities 36,887 64,757
FINANCING OBLIGATION 6,600 -
DEFERRED INCOME TAXES - 1,492
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $5 par value, issuable in series; 2,000,000 shares
authorized; Series A, 12% cumulative convertible;
195,351 shares authorized, issued and outstanding 977 977
Common stock, $.01 par value; 20,000,000 shares authorized;
17,494,238 and 15,156,538 shares issued at December 31,
2001 and 2000, respectively 175 152
Additional paid-in capital 162,269 157,914
Accumulated deficit (41,804) (40,226)
Accumulated other comprehensive loss (4,161) (2,886)
Treasury stock, at cost (3,467,650 shares) (38,683) (38,683)
-------- --------
Total stockholders' equity 78,773 77,248
-------- --------
Total liabilities and stockholders' equity $122,260 $143,497
======== ========
The accompanying notes are an integral part of these statements.
F-3
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(in thousands, except share data)
2001 2000 1999
------ ------ ------
Net sales $161,707 $199,998 $208,201
Cost of sales (exclusive of depreciation shown
separately below) 111,809 153,436 140,832
-------- -------- -----
Gross profit 49,898 46,562 67,369
Other operating costs:
Selling, general and administrative 48,027 71,123 56,677
Asset impairment 4,466 19,798 -
Special charges - 1,115 3,875
Depreciation and amortization 5,311 6,482 5,911
-------- -------- -----
57,804 98,518 66,463
-------- -------- -----
Operating profit (loss) (7,906) (51,956) 906
Other income (expense):
Interest expense (3,293) (3,743) (2,965)
Interest income 35 69 176
Gain (loss) on sale of investments 7,727 (637) 670
Gain (loss) on sale of businesses 1,090 (840) -
Foreign exchange gains (losses) (265) (4,637) 377
Equity in income of Detection Systems, Inc. - 554 1,885
Other, net 248 (642) 909
-------- -------- -----
5,542 (9,876) 1,052
-------- -------- -----
Income (loss) before income taxes (2,364) (61,832) 1,958
Income tax benefit (expense) 903 4,145 (1,286)
-------- -------- -----
Income (loss) from continuing operations (1,461) (57,687) 672
Discontinued operations, net of taxes
Loss from operations - - (107)
-------- -------- -----
NET INCOME (LOSS) (1,461) (57,687) 565
Dividend requirements on preferred stock (117) (117) (117)
-------- -------- -----
Net income (loss) allocable to common stockholders $ (1,578) $(57,804) $ 448
======== ======== =====
F-4
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
Years ended December 31,
(in thousands, except per share data)
2001 2000 1999
------ ------ ------
Income (loss) per share:
Continuing operations
Basic $(0.13) $(4.95) $ 0.05
====== ====== ======
Diluted $(0.13) $(4.95) $ 0.05
====== ====== ======
Discontinued operations
Basic $ - $ - $(0.01)
====== ====== ======
Diluted $ - $ - $(0.01)
====== ====== ======
Net income (loss)
Basic $(0.13) $(4.95) $ 0.04
====== ====== ======
Diluted $(0.13) $(4.95) $ 0.04
====== ====== ======
Number of common shares used in computations:
Basic 12,183 11,686 11,645
====== ====== ======
Diluted 12,183 11,686 12,300
====== ====== ======
The accompanying notes are an integral part of these statements.
F-5
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31,
(in thousands, except share data)
Retained Accumulated
Preferred Stock Common Stock Additional earnings other
-------------------- ------------------- paid-in (accumulated) comprehensive
Shares Amount Shares Amount capital deficit) loss
-------- ------ -------- ------- --------- ---------- ------
Balance at January 1, 1999 195,351 $977 14,703,138 $147 $153,333 $17,130 $ (967)
Comprehensive loss
Net income - - - - - - 565 -
Other comprehensive loss
Foreign currency translation
adjustment - - - - - - (2,704)
Unrealized loss on investments
held for sale, net of tax of
$292 - - - - - - (568)
Reclassification adjustment
for losses included in net
income, net of tax effect of
$89 - - - - - - 171
Total
Acquisition of business - - 250,000 2 1,493 - -
Exercise of stock options and warrants - - 28,333 1 68 - -
Stock-based compensation - - - - 250 - -
Treasury stock purchases - - - - - - -
Equity put options expired - - - - 1,564 - -
Preferred stock dividends - - - - - (117) -
------- --- ---------- --- ------- ------ ------
Balance at December 31, 1999 195,351 977 14,981,471 150 156,708 17,578 (4,068)
Treasury stock
----------------
Shares Amount Total
--------- -------- -------
Balance at January 1, 1999 3,013,350 $(32,153) $138,467
Comprehensive loss
Net income - - - 565
Other comprehensive loss
Foreign currency translation
adjustment - - (2,704)
Unrealized loss on investments
held for sale, net of tax of
$292 - - (568)
Reclassification adjustment
for losses included in net
income, net of tax effect of
$89 - - 171
-------
Total (2,536)
-------
Exercise of stock options and warrants - - 1,495
Stock-based compensation - - 69
Treasury stock purchases - - 250
Equity put options expired 454,300 (6,530) (6,530)
Preferred stock dividends - - 1,564
- - (117)
--------- ------- -------
Balance at December 31, 1999 3,467,650 (38,683) 132,662
F-6
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31,
(in thousands, except share data)
Retained Accumulated
Preferred Stock Common Stock Additional earnings other
-------------------- ------------------- paid-in (accumulated) comprehensive -
Shares Amount Shares Amount capital deficit) loss
-------- ------ -------- ------- --------- ---------- ------
Balance at January 1, 2000 195,351 $977 14,981,471 $150 $156,708 $ 17,578 $(4,068)
Comprehensive loss
Net loss - - - - - (57,687) -
Other comprehensive income (loss)
Foreign currency translation
adjustment - - - - - - (3,583)
Reclassification adjustment for
losses included in net loss, net
of tax of $292 - - - - - - 568
Reclassification (Note O) - - - - - - 4,197
Total
Exercise of stock options and warrants - - 175,067 2 918 - -
Stock-based compensation - - - - 25 - -
Tax benefit from employee stock
transactions - - - - 263 - -
Preferred stock dividends - - - - - (117) -
------- --- ---------- --- ------- ------- ------
Balance at December 31, 2000 195,351 977 15,156,538 152 157,914 (40,226) (2,886)
Treasury stock
--------------------
Shares Amount Total
--------- -------- -------
Balance at January 1, 2000 3,467,650 $(38,683) $132,662
Comprehensive loss
Net loss - - (57,687)
Other comprehensive income (loss)
Foreign currency translation
adjustment - - (3,583)
Reclassification adjustment for
losses included in net loss, net
of tax of $292 - - 568
Reclassification (Note O) - - 4,197
------
Total (56,505)
-------
Exercise of stock options and warrants - - 920
Stock-based compensation - - 25
Tax benefit from employee stock
transactions - - 263
Preferred stock dividends - - (117)
--------- ------- ------
Balance at December 31, 2000 3,467,650 (38,683) 77,248
The accompanying notes are an integral part of this statement.
F-7
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31,
(in thousands, except share data)
Retained Accumulated
Preferred Stock Common Stock Additional earnings other
-------------------- ------------------- paid-in (accumulated) comprehensive
Shares Amount Shares Amount capital deficit) loss
-------- ------ -------- ------- --------- ---------- ------
Balance at January 1, 2001 195,351 $977 15,156,538 $152 $157,914 $(40,226) $(2,886)
Comprehensive loss
Net loss - - - - - (1,461) -
Foreign currency translation
adjustment - - - - - - (1,275)
Total
Issuance of common stock, net of
issuance costs of $294 - - 2,337,700 23 4,125 - -
Warrants issued in connection
with building financing - - - - 230 - -
Preferred stock dividends - - - - - (117) -
--- --- ---------- --- -------- ----- ---
Balance at December 31, 2001 195,351 $977 17,494,238 $175 $162,269 $(41,804) $(4,161)
======= === ========== === ======== ======= ======
Treasury stock
-----------------
Shares Amount Total
------- ------- -------
Balance at January 1, 2001 3,467,650 $(38,683) $77,248
Comprehensive loss
Net loss - - (1,461)
Foreign currency translation
adjustment - - (1,275)
------
Total (2,736)
------
Issuance of common stock, net of
issuance costs of $294 - - 4,148
Warrants issued in connection
with building financing - - 230
Preferred stock dividends - - (117)
--------- -------- -------
Balance at December 31, 2001 3,467,650 $(38,683) $78,773
========= ======== =======
The accompanying notes are an integral part of this statement.
F-8
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands)
2001 2000 1999
------ ------ ------
Cash flows from operating activities:
Net income (loss) $ (1,461) $(57,687) $ 565
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Loss from discontinued operations - - 107
Loss on disposal of fixed assets 305 428 -
Loss (gain) on sale of investments (7,727) 637 (670)
Loss (gain) on sale of businesses (1,090) 840 -
Equity in income of Detection Systems, Inc. - (554) (1,885)
Realized foreign currency translation losses - 4,197 -
Depreciation and amortization 5,311 6,482 5,911
Provision for losses on accounts receivable 129 3,556 813
Inventory writedowns 800 12,370 2,178
Deferred income taxes (1,464) (3,015) 676
Asset impairment 4,466 19,798 -
Noncash charges reversed (1,600) - -
Other noncash expenses - 952 288
Mark-to-market interest rate swap 194 - -
Other - (370) -
Noncash changes in operating assets and liabilities
Trade accounts receivable 6,395 5,353 (4,992)
Inventories (2,073) 9,667 (5,460)
Advances for inventory purchases 450 1,422 2,935
Prepaid expenses and other current assets 133 (780) 1,698
Income tax refundable 891 (891) -
Other assets (1,151) 337 1,981
Accounts payable - trade (399) (3,384) 6,975
Accrued restructuring costs (4,355) 3,885 1,749
Accrued expenses and other current liabilities (873) (1,227) (1,237)
----- ------- ------
Net cash provided by (used in) operating
activities (3,119) 2,016 11,632
Cash flows from investing activities:
Proceeds from sale of marketable securities - 563 7,777
Purchases of marketable securities - - (4,458)
Purchases of common stock of Detection Systems, Inc. - (1) (531)
Proceeds from sale of Detection Systems, Inc. common stock 23,176 - -
Purchases of property and equipment (1,203) (4,297) (6,183)
Software development costs (775) (1,235) (1,692)
Proceeds from sale of building 1,515 - -
Proceeds from sale of businesses 2,593 2,100 -
Acquisitions, net of cash acquired (70) - (680)
------ ------ ------
Net cash provided by (used in) investing activities 25,236 (2,870) (5,767)
F-9
ULTRAK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
(in thousands)
2001 2000 1999
------ ------ ------
Cash flows from financing activities:
Proceeds from revolving line of credit $ 9,940 $ 20,000 $ 47,804
Repayments on revolving line of credit (30,347) (21,581) (48,304)
Proceeds from other debt - 1,204 1,149
Repayments on other debt (1,152) (393) -
Repayments on mortgage loan (11,500) - -
Proceeds from financing obligation 6,600 - -
Issuance of common stock 4,148 919 69
Purchase of treasury stock - - (6,530)
Payment of preferred stock dividends (117) (117) (117)
------- ------- --------
Net cash provided by (used in) financing
activities (22,428) 32 (5,929)
------- ------- --------
Net decrease in cash and cash equivalents (311) (822) (64)
Effect of exchange rate changes on cash (140) (185) (1,443)
Cash provided by discontinued operations - - 1,784
Cash and cash equivalents at beginning of the year 3,751 4,758 4,481
------- ------- -------
Cash and cash equivalents at end of the year $ 3,300 $ 3,751 $ 4,758
======= ======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,465 $ 3,534 $ 2,322
======= ======= =======
Income taxes $ 462 $ 288 $ 1,204
===== ===== =======
Supplemental schedule of noncash investing and financing:
Purchase of property financed by mortgage $ 11,500 $ - $ -
======== ==== ====
Issuance of warrants in connection with building financing $ 230 $ - $ -
===== ==== ====
Acquisition of businesses
Assets acquired $ 3,581
Liabilities assumed (1,228)
Common stock issued (1,495)
-------
858
Less cash acquired 178
-------
Net cash paid for acquisitions $ 680
======
The accompanying notes are an integral part of these statements.
F-10
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Ultrak, Inc. (the "Company") is a U.S.-based multinational corporation that
designs, manufactures, markets, sells and services electronic products and
systems for the security and surveillance, industrial and public address
markets worldwide. These products and systems include a broad line of
cameras, lenses, high-speed dome systems, monitors, switchers, quad
processors, time-lapse recorders, multiplexers, video transmission systems,
access control systems, computerized observation and security systems,
public address equipment and accessories.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Marketable Securities
The Company accounts for its marketable securities, all of which are
designated as available for sale, using Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Securities available for sale are reported at fair value, with
unrealized gains and losses, net of tax, excluded from earnings and reported
as a separate component of stockholders' equity. Realized gains and losses
on securities available for sale are reported in income in the year of sale.
Inventories
Inventories are comprised principally of goods held for resale, which are
valued at the lower of cost (first-in, first-out) or market.
Advances for Inventory Purchases
Advances for inventory purchases represent payments in advance for goods
purchased primarily from the Far East. Upon receipt of the goods, advances
are classified as inventories.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.
F-11
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Income (Loss) Per Share
The Company computes basic income (loss) per share based on the weighted
average number of common shares outstanding. Diluted income per share is
computed based on the weighted average number of shares outstanding, plus
the number of additional common shares that would have been outstanding if
dilutive potential common shares had been issued.
Goodwill and Amortization
Goodwill resulting from acquisitions is being amortized using the
straight-line method over periods ranging from twenty to forty years.
Accounting for Impairment of Long-Lived Assets
The Company evaluates long-lived assets and intangibles held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. Impairment is recognized when the
estimated undiscounted cash flows generated by those assets are less than
the carrying amounts of such assets.
Software Development Costs
The Company capitalizes software development costs incurred from the time
technological feasibility of the software is established until the software
is ready for use in its products. Research and development costs related to
software development are expensed as incurred. The capitalized costs relate
to software which will become an integral part of the Company's revenue
producing products and are amortized in relation to expected revenues from
the product up to a maximum of five years. These software development costs
are regularly reviewed for impairment, and a loss is recognized when the net
realizable value by product falls below the unamortized cost.
Internal Use Software
The Company capitalizes certain external direct costs of materials and
services, internal payroll and payroll related costs and other qualifying
costs incurred in connection with developing or obtaining internal software.
These costs are amortized over three to eight years.
Derivative Financial Instruments
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 established accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in
the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
F-12
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
The interest rate swap is a cash flow hedge; however, it is accounted for as
a fair value hedge because the Company had not established its policy for
measuring ineffectiveness. As a result, the derivative hedging instrument is
being accounted for as an asset or liability, with changes in fair value at
each reporting date included in earnings.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. The Company has adopted disclosure-only provisions of
SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation.
Revenue Recognition
Revenue is recognized when a firm sales agreement is in place, delivery has
occurred, the price is fixed and determinable and collectibility is
reasonably assured.
Shipping and Handling Fees
Shipping and handling fees charged to customers are reported as revenue and
all shipping and handling costs incurred are reported as cost of sales.
Foreign Currency Translation
Local currencies are considered the functional currencies for the Company's
operations outside the United States. Assets and liabilities are translated
into U.S. dollars at the rate of exchange in effect at the balance sheet
date. Revenues and expenses are translated into U.S. dollars at average
monthly exchange rates prevailing during the year.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
(Loss)
Comprehensive income (loss) presented in the statement of stockholders'
equity consists of net income (loss), foreign currency translation
adjustments and unrealized gains and losses on investments held for sale. At
December 31, 2001 and 2000, accumulated other comprehensive income (loss)
consists entirely of cumulative translation adjustments for foreign
currency.
Advertising Expense
The Company expenses advertising costs as incurred. Total advertising
expense was approximately $1.8 million, $2.2 million and $1.7 million, for
the years ended December 31, 2001, 2000 and 1999, respectively.
F-13
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Income Taxes
The Company utilizes the asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future. These amounts are based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Intangible Assets.
SFAS No. 141 is effective for all business combinations completed after
June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of this statement apply to
goodwill and other intangible assets acquired between July 1, 2001 and
December 31, 2001.
Major provisions of these statements and their effective dates are as
follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting;
o intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability;
o goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized;
o effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization;
o effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator; and
F-14
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
o all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting
The Company amortized goodwill related and intangible assets acquired prior
to July 1, 2001 until December 31, 2001. Beginning January 1, 2002,
quarterly and annual goodwill amortization will no longer be recognized. The
Company intends to complete a transitional impairment test of all intangible
assets as of March 31, 2002 and a transitional fair value based impairment
test of goodwill as of January 1, 2002 by June 30, 2002. Impairment
losses, if any, resulting from the transitional testing will be recognized
as a cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement is effective for fiscal years beginning after June 15,
2002. The Company does not believe that the implementation of this standard
will have a material effect on its financial position, results of
operations, or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No.
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement is effective for fiscal years
beginning after December 15, 2001. The Company does not believe that the
implementation of this standard will have a material effect on its financial
position, results of operations, or cash flows.
Reclassifications
Certain reclassifications have been made to prior years financial statements
to conform to the 2001 presentation.
NOTE B - BUSINESS COMBINATIONS AND DIVESTITURES
2001 Divestitures:
ULTRAK FRANCE
On December 31, 2001, the Company's French subsidiary sold its CCTV
inventory and other intangibles to Bisset Technology Systems ("BTS") for a
nominal amount.
On October 15, 2001, the Company's French subsidiary sold its BST audio
product inventory and other intangibles to Audio Club for $312,000. A loss
of approximately $175,000 was recorded in connection with the transaction.
F-15
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - BUSINESS COMBINATIONS AND DIVESTITURES - Continued
INDUSTRIAL FURNACE CAMERA BUSINESS
On July 27, 2001, the Company sold its industrial furnace camera business to
Diamond Power International, Inc. for cash consideration of $2.6 million.
The assets sold consist primarily of accounts receivable, inventories, fixed
assets, patents, trademarks and other intangibles. The transaction resulted
in a gain of $1.3 million. The Industrial Furnace Camera business, currently
located in Carroll, Ohio, is a supplier of specialized camera monitoring
equipment used in furnace and related industrial applications.
2000 Divestitures:
INTERVISION EXPRESS, LTD.
On July 1, 2000, the Company sold substantially all assets of its UK-based
business, Intervision Express, Ltd. ("Intervision") to Norbain SD, Ltd.
("Norbain"), a UK-based distributor of CCTV and access control equipment.
The Company received $2.1 million in cash for inventory and certain other
assets, including the use of the Intervision trade name. Ultrak retained the
right to sell Ultrak-branded products directly to systems integrators and
installers in Intervision's previous market in the UK and Ireland. The
Company recognized a loss of $840,000 on the transaction in 2000.
The Company also granted Norbain distribution exclusivity for its
Diamond-series dome product line and its CCTV products in the UK. To
maintain its exclusivity, Norbain must purchase at least $6.0 million of
Ultrak-branded products and dome systems through the end of 2002.
1999 Business Combinations:
ABM DATA SYSTEMS, INC.
Effective March 1, 1999, the Company acquired 100% of the common stock of
ABM Data Systems, Inc. ("ABM"), an Austin, Texas based software developer
for the alarm-monitoring segment of the security industry. Total
consideration was 250,000 shares of registered Ultrak common stock valued at
$1.5 million. ABM develops, sells, and services computer software for the
alarm monitoring security industry, governmental agencies, and proprietary
customers and offers support for computer software targeted for automated
security monitoring markets.
MULTI CONCEPTS SYSTEMS, SA
Effective April 1, 1999, the Company acquired 100% of the stock of Multi
Concepts Systems, SA ("MCS"), a Switzerland based systems integrator of
electronic security systems. Total consideration included an initial payment
of $405,000 in cash and future contingent payments based upon a percentage
of MCS income and book value, as defined. MCS has been the largest European
reseller and integrator of Ultrak's SAFEnet access control system over the
past ten years.
F-16
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - BUSINESS COMBINATIONS AND DIVESTITURES - Continued
MACH SECURITY SP.Z.O.O.
Effective July 1, 1999, the Company acquired 100% of the stock of MACH
Security Sp.z.o.o. ("Mach"), based in Szczecin, Poland. Mach is one of the
largest distributors of CCTV products in Poland. Total consideration
included an initial payment of $275,000 in cash and a future contingent
payment based upon a percentage of Mach income, as defined.
1999 Divestitures:
In March 1999, the Company completed the sale of its 10% interest in a
company in Japan for $1.8 million in cash.
No pro forma disclosures have been made as the transactions described above
are not significant individually or in the aggregate.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows (in
thousands):
December 31,
------------------------
Useful lives 2001 2000
-------------- ------ ------
Machinery and equipment 3 - 7 years $ 10,012 $ 9,123
Furniture and fixtures 3 - 7 years 2,586 2,499
Internal use software 3 - 8 years 6,668 7,443
Software development costs 3 - 5 years 3,005 2,421
Buildings and land 20 - 30 years 11,053 5,400
-------- --------
33,324 26,886
Accumulated depreciation and amortization (14,529) (11,885)
-------- --------
$ 18,795 $ 15,001
======== ========
NOTE D - FINANCING ARRANGEMENTS
Line of Credit
At December 31, 2001 and 2000, the Company had $15.0 million and $35.4
million outstanding, respectively, under a credit facility. During the first
quarter of 2001, the credit facility was reduced from $45 million to $30.0
million. The facility provides for interest payable quarterly at prime plus
a range of 0.00% to 0.75% or LIBOR plus a range of 2.25% to 2.75%, depending
on the leverage ratio, as defined, for the quarter. The credit facility
contains certain restrictive financial and operational covenants and
conditions, including a maximum leverage ratio, a debt service ratio and
minimum net worth amounts. The Company pays a monthly unused fee of .375%
per annum and borrowings are collateralized by substantially all assets of
the Company. At December 31, 2001, the Company was in violation of certain
loan covenants and the interest rate was increased to the base rate plus
3.25%, or 8%.
F-17
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - FINANCING ARRANGEMENTS - Continued
In February 2002, an amendment (the "Eighth Amendment") to the Company's
credit facility was signed at the insistence of the lenders that increased
the interest rate to 12%, reduced the lending commitment from $30 million to
$20 million, and shortened the termination date of the facility from March
31, 2002 to February 28, 2002. The Eighth Amendment also waived certain
alleged defaults by the Company under the loan covenants and provided for
the payment of certain fees, including fees which the Company believes gave
it the right to extend the termination date of the facility back to March
31, 2002.
Although the Company paid and the lenders accepted all of the fees
prescribed by the amendment, the lenders have asserted that the Company did
not have the right to extend the termination date of the credit facility.
Consequently, in March 2002, the lenders have declared the outstanding
balance of the loan to be due, refused to advance funds under the credit
facility, and reserved the right to commence foreclosure if the loan is not
repaid by April 30, 2002. Although the Company believes that the actions of
the lenders are unwarranted and in breach of their obligations under the
credit facility, it expects to repay the loan before such actions are
initiated.
The Company has received a financing commitment from a new lender that,
combined with a tax refund in excess of $6 million to be received by April
16, 2002, will allow the existing revolving credit facility to be repaid and
provide sufficient funds for the Company's operations. The Company and the
new lender have approved the terms of the loan documents and the new credit
facility is expected to close on April 19, 2002, with funding to follow
shortly thereafter.
Financing Obligation
During 1998, the Company's Worldwide Corporate headquarters located in
Lewisville, Texas was built. Through December 31, 2000, the Company leased
its facility under a synthetic lease classified for book purposes as an
operating lease. In January 2001, the Company terminated its lease and
purchased its corporate headquarters facility from the lessor for $11.5
million.
In December 2001, the building and the surrounding 14 acres of land were
sold to Briarwood Capital Corporation for $6.6 million. The Company will
leaseback the building and land at a cost of $60,000 per month for a term of
30 months beginning in January 2002. The lease includes an option to
purchase the building and land for $6.9 million at the end of 24 months.
Accordingly, this transaction has been accounted for as a financing
transaction. The Company has recorded the proceeds from the sale as a
financing obligation, classified the lease payments as interest expense and
continues to carry the land and building on its books and record
depreciation. The difference between the net book value and sales proceeds,
which totals $4,466,000, has been recorded in the accompanying statements of
operations as an asset impairment.
In connection with the financing transaction, the Company granted warrants
to purchase 200,000 shares of the Company's common stock to the Company's
Chairman and Chief Executive Officer. Additionally, the Company granted
warrants to purchase 100,000 shares of the Company's common stock to
Briarwood Capital Corporation. See Note E regarding details of the warrants.
F-18
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - FINANCING ARRANGEMENTS - Continued
Other Debt
The Company has other financing arrangements ($0.4 million) in Belgium which
consist of various term loans collateralized by automobiles and computer
software. These loans have been classified as current liabilities as a
result of management's decision to withdraw from Belgium and their intention
to repay these obligations.
The Company has overdraft facility agreements for certain European
subsidiaries up to $1.8 million. At December 31, 2001, there is $0.4 million
outstanding under these agreements.
Interest Rate Swap
At December 31, 2001, the Company has an interest rate swap to limit the
effect of increases in interest rates. The swap has a notional amount of $5
million and expires February 2004. The effect of this agreement is to limit
the Company's interest rate exposure by fixing the interest rate at 6.485%.
At December 31, 2001, the swap had a fair value of $194,000 and is included
in other current liabilities.
NOTE E - STOCKHOLDERS' EQUITY
Preferred Stock
The Series A preferred stock earns dividends at the rate of 12% per annum,
payable quarterly. All dividends accrue whether or not such dividends have
been declared and whether or not there are profits, surplus, or other funds
of the Company legally available for payment.
The Company may at any time redeem all or any portion of the Series A
Preferred Stock then outstanding at the liquidation value of $5.00 per share
plus unpaid dividends. The holder of the Series A Preferred Stock may
convert any or all of the 195,351 preferred shares into shares of the
Company's common stock at any time at a conversion rate equal to 2.08 shares
of common stock per preferred share or a total of 406,981 shares of common
stock.
On October 23, 2001, George K. Broady, Chairman and CEO of Ultrak, Inc.,
announced that he had contracted to sell all of his Ultrak preferred stock
holdings (195,351 shares of Series A 12% convertible preferred stock). Each
of the preferred shares is entitled to voting rights equal to 16.667 shares
of common stock or a total of voting rights equal to 3,255,915 common
shares. Mr. Broady has also granted the buyer a voting proxy on 1,150,000
shares of Ultrak common stock until June 2002. This transaction was
completed on January 16, 2002.
F-19
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - STOCKHOLDERS' EQUITY - Continued
Warrants
In connection with a personal guarantee given for the building and land
financing (see Note D), the Company's Board of Directors granted warrants to
the Company's Chairman and Chief Executive Officer to purchase 200,000
shares of common stock at an exercise price of $1.64 per share. The market
price of the Company's common stock at the date of grant was $1.43. These
warrants expire three years from the grant date and were valued at $130,000.
In addition, the Company is obligated to reimburse the Chairman for up to
$70,000 of payroll and income taxes related to the warrants. The fair value
of these warrants was estimated using the Black-Scholes option pricing model
with the following assumptions: expected volatility of 84 percent, a
risk-free interest rate of 3.0 percent, no dividend yield and an expected
life of two years.
On December 13, 2001, the Board of Directors granted Briarwood Capital
Corporation (see Note D) warrants to purchase 100,000 shares of common stock
at an exercise price of $1.55 per share. These warrants expire ten years
from the grant date and were valued at $100,000. The fair value of the
warrants was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions: expected volatility of 81
percent, a risk-free interest rate of 4.4 percent, no dividend yield and an
expected life of five years.
On October 19, 2001, in connection with the private placement of common
stock (see below), the Board of Directors granted the placement agent, an
unrelated third party, a warrant to purchase 200,000 shares of common stock
at $1.25 per share. This warrant expires one year from the grant date.
Private Placement of Common Stock
On October 18, 2001, the Company completed a private placement to a foreign
individual of 2,337,700 unregistered shares of Ultrak common stock for net
proceeds of $4.1 million. On October 28, 2001, the Company exercised an
option to sell an additional 293,879 shares of Ultrak common stock to this
party for $1.90 per share, subject to stockholder approval which was
obtained at a special stockholders meeting held on November 30, 2001. This
option transaction has not yet closed.
F-20
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCK-BASED COMPENSATION
Tender Offer
On June 11, 2001, the Company filed a Tender Offer Statement ("TO") to
exchange all options held by option holders who had not received options
after December 9, 2000 (the "Eligible Options") for new options (the "New
Options") to purchase shares of common stock to be granted under the 1988
Plan. The number of shares of common stock subject to the New Options will
be based on the number of shares of common stock subject to the Eligible
Options that are accepted for exchange and cancelled at the exchange ratio
as follows:
Eligible Option Exercise Price New Options to be Issued
Up to $6.62 1 New Option per 1 Eligible Option (1:1)
$6.63 to $8.25 0.75 New Option per 1 Eligible Option (0.75:1)
$8.26 and above 0.50 New Option per 1 Eligible Option (0.5:1)
159,980 stock options were tendered in connection with the exchange. On
January 14, 2002, the Company granted 106,215 New Options at an exercise
price of $1.49 pursuant to the tender offer.
Stock Options
The Company's 1988 Nonqualified Stock Option Plan (the "1988 Plan"), amended
on June 11, 2001, provides for grants of options for up to 2,200,000 shares
and the 1997 Incentive Stock Option Plan (the "1997 Plan") provides for
grants of options for up to 400,000 shares. Shares under the 1997 Plan are
awarded based upon the Company achieving one or more definitive performance
measurements for a fiscal year, including minimum levels of economic value
added, minimum levels of market value added or attainment of the financial
budget. The 1997 Plan is a formula-based plan administered by the
Compensation Committee of the Board of Directors. Option grants under the
1997 Plan are limited to 1% of the outstanding common stock of the Company.
At December 31, 2001 and 2000, 1,041,896 and 289,012 shares were available
for grant under the 1988 Plan and the 1997 Plan.
Option exercise prices are equal to the market price at the date of grant.
Shares under grant generally become exercisable in five equal annual
installments beginning one year after the date of grant, and expire after
ten years. Shares in the 1988 Plan granted since June 1, 2001 are
exercisable in three equal annual installments beginning one year after the
date of grant.
F-21
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCK-BASED COMPENSATION - Continued
If the Company recognized compensation expense under SFAS No. 123, based
upon the fair value at the grant date for options granted under the 1988
Plan and 1997 Plan, the Company's net income (loss) from continuing
operations and income (loss) per share would be reduced (increased) to the
pro forma amounts indicated as follows (in thousands, except per share
data):
Year ended December 31,
-----------------------------------------
2001 2000 1999
------ ------ ----
Net income (loss) from continuing operations:
As reported $(1,461) $(57,687) $672
Pro forma $(2,606) $(59,289) $253
Basic income (loss) per share from continuing operations:
As reported $(0.13) $(4.95) $0.05
Pro forma $(0.22) $(5.07) $0.01
Diluted income (loss) per share from continuing operations:
As reported $(0.13) $(4.95) $0.05
Pro forma $(0.22) $(5.07) $0.01
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 55 to 80 percent; risk-free interest
rates of 4.5 to 6.5 percent; no dividend yield; and expected lives of seven
years.
Information with respect to options outstanding at December 31, 2001 and
changes for the three years then ended is as follows:
2001 2000 1999
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- ------- -------- ------- -------- -------
Outstanding at beginning
of year 1,118,569 $7.31 953,972 $6.56 859,170 $9.94
Granted 620,851 1.89 627,500 8.23 360,500 6.15
Exercised - - (166,065) 5.46 (28,333) 2.43
Forfeited (602,934) 6.72 (296,838) 7.80 (237,365) 18.91
-------- -------- ---------
Outstanding at end of year 1,136,486 $4.72 1,118,569 $7.31 953,972 $6.56
========= ==== ========= ==== ======== ====
Options exercisable at end
of year 200,936 $8.45 344,410 $5.83 490,549 $5.83
======= ==== ======= ==== ======== ====
Weighted average fair value per share of options granted for 2001, 2000 and
1999 was $1.13, $5.71 and $3.89, respectively.
F-22
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - STOCK-BASED COMPENSATION - Continued
Additional information about stock options outstanding at December 31, 2001
is summarized as follows:
Options outstanding Options exercisable
--------------------------------------- -------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
------------------------ ----------- ------ ------- ----------- -------
$0.01 to $1.19 100,000 9.7 years $ 1.18 - $ -
$1.20 to $5.62 525,351 9.7 years 2.06 1,200 5.42
$5.63 to $9.00 291,533 7.0 years 6.32 124,073 6.05
$9.01 to $13.50 183,360 7.9 years 9.28 45,472 9.34
$13.51 to $20.00 36,242 5.1 years 17.10 30,191 17.10
--------- -------
1,136,486 200,936
========= =======
In January 2002, the Company granted 630,915 stock options under the 1988
Plan to employees, including 106,215 stock options pursuant to the tender
offer, at exercise prices ranging from $1.42 to $1.49.
NOTE G - MAJOR CUSTOMERS AND SUPPLIERS
One of the Company's customers accounted for approximately 14% of total
sales during 2001 and 13% of total sales during 2000. Loss of this customer
may have a material adverse effect on operations.
Another major customer, Sam's Club, accounted for approximately 11%, 14%,
and 13% of total sales in 2001, 2000 and 1999, respectively. In October
2001, Sam's Club discontinued carrying a substantial portion of Company's
products.
The Company purchased 17% of its products from one contract manufacturer
during 2001 and in excess of 20% in 2000 and 1999. Although there are a
limited number of manufacturers of the Company's products, management
believes there are suppliers who could provide similar products on
comparable terms. A change in suppliers could cause a delay in and a
possible loss of sales.
NOTE H - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and warehouse space and data processing equipment
under long-term, noncancelable leases.
F-23
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Minimum future rental payments for all long-term, noncancelable operating
leases are presented below (in thousands):
Year ending
December 31,
2002 $1,672
2003 1,007
2004 393
2005 279
2006 266
Thereafter 839
------
$4,456
======
Total rent expense was as follows (in thousands):
2001 $2,866
2000 2,574
1999 2,704
Litigation
The Company is a defendant in various lawsuits arising in the ordinary
course of business. Management is of the opinion that all such matters are
without merit or are of such a kind, or involve such amounts, as would not
have a significant effect on the consolidated financial position, results of
operations or cash flows of the Company if disposed unfavorably.
NOTE I - INCOME TAXES
The provision (benefit) for taxes consists of the following (in thousands):
Year ended December 31,
-----------------------------------------
2001 2000 1999
------ ------ ------
Federal
Current $ 140 $(1,476) $ 597
Deferred (1,338) (4,397) 742
State 41 (464) 82
Foreign 254 2,192 (135)
------- ------- ------
$ (903) $(4,145) $1,286
======= ======= ======
F-24
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INCOME TAXES - Continued
Income (loss) before provision (benefit) from taxes consists of the
following (in thousands):
Year ended December 31,
-----------------------------------------
2001 2000 1999
------ ------ ------
United States $(2,270) $(37,491) $2,330
Foreign (94) (24,341) (372)
------- -------- ------
$(2,364) $(61,832) $1,958
======= ======== ======
The Company's effective income tax rate differed from the U.S. Federal
statutory rate as follows:
Year ended December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
U.S. Federal statutory rate (34.0)% (34.0)% 34.0%
State tax effect 0.5 (0.8) 2.5
Goodwill amortization and impairment 17.5 8.5 20.8
Tax benefit of foreign restructuring (409.9) - -
Other nondeductible expenses 2.8 0.1 3.5
Rate differential for foreign taxes 19.8 4.1 -
Change in valuation allowance, exclusive of
items not affecting income tax expense
(benefit) 362.2 15.2 -
Other, net 2.9 0.2 4.9
---- ---- ----
(38.2)% (6.7)% 65.7%
====== ===== ====
The components of deferred tax assets and liabilities are as follows (in
thousands):
December 31,
------------------------
2001 2000
------ ------
Deferred tax assets:
Inventories $ 742 $ 3,948
Accounts receivable 341 821
Accrued expenses 696 608
Net operating loss carryforwards 17,204 1,346
Foreign deferred tax assets 8,444 8,515
Other, net 1,888 1,539
------ ------
Gross deferred tax assets 29,315 16,777
F-25
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INCOME TAXES - Continued
December 31,
------------------------
2001 2000
------ ------
Deferred tax liabilities:
Property, plant and equipment $ (1,045) $(2,469)
Investment in Detection Systems, Inc. - (1,031)
-------- -------
Gross deferred tax liabilities (1,045) (3,500)
Valuation allowance (21,961) (8,432)
------- -------
Net deferred tax asset $ 6,309 $ 4,845
======= =======
Current deferred tax assets $ 6,309 $ 6,337
Non-current deferred tax liabilities - (1,492)
------- -------
$ 6,309 $ 4,845
======= =======
At December 31, 2001, the Company had Federal, state and foreign net
operating loss carryforwards of approximately $48,400,000, $23,500,000 and
$31,200,000, respectively. Federal net operating loss carryforwards expire
in 2021. The state net operating loss carryforwards expire in 2005 to 2021.
Substantially all foreign net operating loss carryforwards do not expire.
The Company maintains a valuation allowance to adjust the total deferred tax
assets to net realizable value in accordance with SFAS No. 109. In the
fourth quarter of 2001, as a result of certain tax restructuring actions of
its foreign subsidiaries and a reevaluation of the realizability of income
tax benefits from future operations, the Company reduced its deferred tax
valuation allowance by $1,150,000. The Company considered positive evidence
supported by historical levels of taxable income, estimates of future
taxable income, and expiration periods of net operating loss carryforwards,
among other things, in making this evaluation and concluding that it is more
likely than not that the Company will realize the benefit of its net
deferred tax asset. Ultimate realization of the deferred tax asset is
dependent upon, among other factors, the Company's ability to generate
sufficient taxable income within carryforward periods (2005 to 2021) and is
subject to change depending on tax laws in effect in years in which
carryforwards are used.
F-26
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INVESTMENT IN DETECTION SYSTEMS, INC.
In January 2001, the Company tendered its 21% interest in Detection Systems,
Inc. for $24.0 million, which represented a price of $18 per share. The
total gain on sale of this investment was $7.7 million, net of $0.8 million
in commissions to the Company's Chairman and Chief Executive Officer.
The Company accounted for its investment in Detection Systems, Inc. under
the equity method and the Company's share of earnings was included in income
in 2000 and 1999. The difference between the Company's cost and the
underlying equity in Detection Systems, Inc. of approximately $1.6 million
represented goodwill.
NOTE K - SEGMENT DISCLOSURE AND FOREIGN OPERATIONS
The Company has four business segments: United States-Professional Security
Group (US-PSG), Diversified Sales Group (DSG), International-Professional
Security Group (International-PSG), and Supply. The segments are
differentiated by the customers serviced as follows:
US-PSG
This segment consists of sales in the United States to professional
security dealers, distributors, installers and certain large end users of
professional security products.
DSG
This segment sells video and security products to industrial markets and
consumers. This segment includes all sales to Sam's Clubs, which
discontinued carrying the Company's Exxis security products in its stores
when the Ultrak-related commitments to its suppliers were satisfied in
October of 2001.
International-PSG
This segment consists of sales to professional security dealers,
distributors, installers and certain large end users of professional
security products outside the United States.
Supply
This segment sells to the US-PSG and International-PSG segments products
and systems manufactured by the Company's Ohio and California facilities.
The Company's underlying accounting records are maintained on a legal
entity basis for government and public reporting requirements. Segment
disclosures are on a performance basis consistent with internal
management reporting. The Company evaluates performance based on earnings
from continuing operations before income taxes and other income and
expense. The Corporate column includes corporate overhead related items.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (Note A).
F-27
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - SEGMENT DISCLOSURE AND FOREIGN OPERATIONS - Continued
The following tables provide financial data by segment for the years ended
December 31, 2001, 2000 and 1999 (in thousands):
US International
2001 PSG DSG PSG Supply Corporate Total
---- --------- --------- --------- --------- --------- ---------
Total revenue ................................. $ 70,479 $ 47,577 $ 52,649 $ 27,629 $ 1,499 $ 199,833
Intersegment revenue .......................... (402) -- (10,443) (26,529) (752) (38,126)
--------- --------- --------- --------- --------- ---------
Revenue from external
customers .................................. $ 70,077 $ 47,577 $ 42,206 $ 1,100 $ 747 $ 161,707
========= ========= ========= ========= ========= =========
Gross profit .................................. $ 22,367 $ 12,960 $ 13,309 $ 146 $ 1,116 $ 49,898
Selling, general and
administrative expenses .................... 13,365 4,564 12,679 1,319 16,100 48,027
Asset impairment .............................. -- -- -- -- 4,466 4,466
Depreciation and amortization
expense .................................... 396 159 380 246 4,130 5,311
--------- --------- --------- --------- --------- ---------
Operating profit (loss) ....................... $ 8,606 $ 8,237 $ 250 $ (1,419) $ (23,580) $ (7,906)
========= ========= ========= ========= ========= =========
Total assets .................................. 18,145 9,659 23,008 13,333 57,619 121,764
Capital additions ............................. 32 2 592 189 1,163 1,978
2000
----
Total revenue ................................. $ 91,401 $ 60,411 $ 76,622 $ 24,395 $ 6 $ 252,835
Intersegment revenue .......................... (968) -- (29,427) (22,442) -- (52,837)
--------- --------- --------- --------- --------- ---------
Revenue from external
customers .................................. $ 90,433 $ 60,411 $ 47,195 $ 1,953 $ 6 $ 199,998
========= ========= ========= ========= ========= =========
Gross profit (loss) ........................... $ 23,460 $ 11,406 $ 14,897 $ (1,077) $ (2,124) $ 46,562
Selling, general and
administrative expenses..................... 21,565 5,282 28,541 915 14,820 71,123
Asset impairment .............................. -- -- 15,420 -- 4,378 19,798
Special charges ............................... -- -- -- 159 956 1,115
Depreciation and amortization
expense .................................... 650 276 755 114 4,687 6,482
--------- --------- --------- --------- --------- ---------
Operating profit (loss) ....................... $ 1,245 $ 5,848 $ (29,819) $ (2,265) $ (26,965) $ (51,956)
========= ========= ========= ========= ========= =========
Total assets .................................. 35,969 16,362 27,977 11,644 51,545 143,497
Capital additions ............................. 2,722 (89) 1,007 657 1,235 5,532
F-28
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - SEGMENT DISCLOSURE AND FOREIGN OPERATIONS - Continued
US International
1999 PSG DSG PSG Supply Corporate Total
---- ----- ----- ----- -------- --------- -------
Total revenue $92,508 $53,188 $ 81,675 $ 22,556 $ - $249,927
Intersegment revenue (1,512) - (17,658) (22,556) - (41,726)
------- --- ------- ------- --- -------
Revenue from external
customers $90,996 $53,188 $ 64,017 $ - $ - $208,201
====== ====== ======= === === =======
Gross profit $29,820 $14,947 $ 21,041 $ 399 $ 1,162 $ 67,369
Selling, general and
administrative expenses 18,125 5,723 18,657 966 13,206 56,677
Special charges 876 213 2,036 - 750 3,875
Depreciation and amortization
expense 3,401 1,775 673 62 - 5,911
------- ------- ------ ------ --------- ------
Operating profit (loss) $ 7,418 $ 7,236 $ (325) $ (629) $(12,794) $ 906
======= ======= ====== ====== ======== =====
Total assets 48,475 27,700 46,531 14,099 63,546 200,351
Capital additions 2,386 1,422 2,375 - 1,692 7,875
Sales by geographic area were as follows (in thousands):
Year ended December 31,
-----------------------------------------
2001 2000 1999
------ ------ ------
United States $119,430 $152,803 $144,185
Italy 10,537 8,989 10,798
United Kingdom 6,837 6,924 16,853
Germany 6,730 9,484 11,302
France 4,644 8,023 14,378
Poland 3,618 2,003 527
South Africa 3,617 3,103 3,549
Australia 3,068 4,404 5,418
Switzerland 1,950 1,867 604
Other 1,276 2,398 587
------- ------- --------
Total revenues $161,707 $199,998 $208,201
======== ======== ========
F-29
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - INCOME (LOSS) PER SHARE
Following is a reconciliation of basic and diluted earnings (loss) per
share from continuing operations (in thousands, except share and per share
data):
2001 2000 1999
----------------------------- ------------------------------ ------------------------------
Loss Loss Income
allocable to Per allocable to Per allocable to Per
common share common share common share
stockholders Shares amount stockholders Shares amount stockholders Shares amount
------------ ------ ------ ------------ ------ ------ ------------ ------ ------
Income (loss) from
continuing operations
allocable to common
stockholders $(1,578) 12,183,401 $(0.13) $(57,804) 11,686,049 $(4.95) $555 11,644,941 $0.05
====== =====
Effect of dilutive securities
Contingently issuable
shares - - - - - 98,773
Stock options - - - - - 149,587
Convertible preferred
stock - - - - 117 406,981
------- ---------- -------- ---------- ---- ----------
Income (loss) from continuing
operations allocable to
common stockholders
after assumed conversions $(1,578) 12,183,401 $(0.13) $(57,804) 11,686,049 $(4.95) $672 12,300,282 $0.05
======= ========== ====== ======== ========== ====== ==== ========== =====
For the years ended December 31, 2001 and 2000, respectively, no stock
options were included in the computation of diluted loss per share because
the effect would have been antidilutive.
For the year ended December 31, 1999, 201,503 stock options were
outstanding but not included in the computation of diluted income per share
because the option exercise prices were greater than the average market
price of the common shares and, therefore, the effect would have been
antidilutive.
NOTE M - UNAUDITED QUARTERLY OPERATING RESULTS
Unaudited quarterly operating results for the years ended December 31, 2001
and 2000 are as follows (in thousands):
First Second Third Fourth
2001: Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
Sales $44,418 $40,167 $40,045 $ 37,077
Gross profit 13,304 13,614 11,643 11,337
Net income (loss) 6,614 (889) (423) (6,763)
Income (loss) per share:
Basic $0.56 $(0.08) $(0.04) $(0.50)
Diluted 0.54 (0.08) (0.04) (0.50)
F-30
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - UNAUDITED QUARTERLY OPERATING RESULTS - Continued
First Second Third Fourth
2000: Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
Sales $52,134 $53,919 $47,265 $ 46,680
Gross profit 16,186 16,669 14,025 (318)
Net income (loss) (428) 69 (3,803) (53,525)
Income (loss) per share:
Basic $(0.04) $ - $(0.33) $(4.58)
Diluted (0.04) - (0.33) (4.58)
See Note O for detail of 2000 special charges.
NOTE N - DISCONTINUED OPERATIONS
The Company sold Dental Vision Direct, Inc. on August 5, 1998 and completed
the disposal in 1999. The Company had no revenues, expenses, or gains from
discontinued operations in 2001 and 2000. In 1999, revenues and loss from
operations, net of tax benefit of $55,000, totaled $616,000 and $(107,000),
respectively.
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES
2001 Write-down of Assets
During 2001, the Company wrote down the carrying value of certain of its
inventories by $800,000.
F-31
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES - Continued
2000 Special Charges - Fourth Quarter
During the fourth quarter of 2000, the Company, in conjunction with changes
in key management personnel, made several changes in its strategic plan
which resulted in significant expenses. Additionally, based on this new
strategic direction, certain assets were assessed for impairment. The
charges to income related to these items are summarized as follows (in
thousands):
Closure of European distribution center $ 7,246
Goodwill impairment - France 10,103
Goodwill impairment - Germany 2,985
Closure of business - France 2,686
Inventory write-downs 9,521
Severance - United States 561
Software development costs 1,985
Impairment of internal use software 2,899
Foreign currency losses 4,197
Other 105
-------
$42,288
=======
Closure of European Distribution Center
During 1998 and 1999, the Company opened a European distribution center
located in Antwerp, Belgium. The purpose of the distribution center was to
consolidate purchasing, reduce overhead and create efficiencies. Because of
declining sales and operational difficulties, the Company concluded in the
fourth quarter 2000 its European distribution center strategy would not be
successful. Therefore, the Company evaluated the net realizable value of its
European distribution center assets and wrote off and/or wrote down assets
that could not be fully recovered or utilized in the other European
operations. These consisted of inventory costs ($2,705,000), personnel
($667,000), fixed assets ($1,187,000) and lease termination and other exit
costs ($2,687,000). The personnel costs provided for the termination of its
13 employees.
During 2001, the Company negotiated favorable settlement of certain
liabilities provided for at December 31, 2000 as well as selling its
facility in Belgium for higher than expected proceeds. These actions
resulted in reduction of selling, general and administrative expenses of
$950,000 in 2001. The Company still has approximately $90,000 at December
31, 2001 accrued for final closure costs.
F-32
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES - Continued
Goodwill Impairment/Closure of Business - France
The Company's continuing losses in France triggered an impairment review in
2000 of its long-lived assets. This decision and the lack of resulting
future cash flows in France caused the Company to conclude all associated
goodwill, amounting to $10,103,000, was impaired. The primary components of
the closure costs involved personnel costs ($1,081,000), writeoffs of fixed
assets, accounts receivable and other assets ($1,101,000) and other exit
costs ($504,000). The personnel costs provided for termination of its 24
employees.
The 2000 accruals were based on a liquidation of the business in France;
however, the Company was able to sell the French business in 2001. The sale
of the French business resulted in a change in estimate of the restructuring
accrual of $650,000. At December 31, 2001, the Company has liabilities
remaining for severance to one employee ($177,000) and other final
settlement costs ($383,000). The net effect on operations in 2001 was a
reduction of selling, general and administrative expenses of $650,000.
Goodwill Impairment - Germany
As a result of the unsuccessful European centralization strategy and
continuing losses in Germany, management performed an impairment review of
its long-lived assets at its German subsidiary in 2000. As a result of this
analysis, the Company concluded, based on future undiscounted cash flows,
that the entire amount of goodwill should be written off.
Inventory Write Downs
Inventory write downs are related to discontinued product lines and returned
inventory which management has deemed the refurbishing to not be economic.
Severance - United States
In 2000, the Company determined certain United States positions would no
longer be necessary. As a result, severance compensation was accrued in the
fourth quarter of 2000 for 33 employees.
Software Development Costs
The Company evaluated products under development during the fourth quarter
2000. Based on this review, capitalized software development costs were
written off relating to product designs that were abandoned and did not
correspond with future product objectives.
Impairment of Internal Use Software
As a result of the outsourcing of certain manufacturing operations in 2000,
it was determined that internal use software costs related to those
operations was impaired.
F-33
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES - Continued
Foreign Currency Losses
Foreign currency losses in 2000 of $4,196,630 are related to foreign
currency translation losses that were realized upon the sale or closure of
foreign operations.
Summary
Details of the charges are as follows (in thousands):
Amount Accrued 2001 Amount Accrued
2000 Non-cash paid in December 31, charge paid in December 31,
charge portion cash 2000 (credit) cash 2001
------- --------- ------- ----------- -------- ------- ------------
Asset impairments $19,798 $(19,798) $ - $ - $ - $ - $ -
Inventory charges 12,370 (12,370) - - - - -
Foreign currency losses 4,197 (4,197) - - - - -
Employee severance and
termination benefits 2,327 - (255) 2,073 (1,253) (643) 177
Leased facilities and other
termination costs 3,191 - - 3,191 (347) (2,371) 473
Other 405 (404) - - - - -
------- -------- ----- ------ ------- ------- ----
$42,288 $(36,769) $(255) $5,264 $(1,600) $(3,014) $650
======= ======== ===== ====== ======= ======= ====
Also, there were other charges in the fourth quarter of 2000 for bad debt
provisions, other asset write-downs and sales of investments totaling $4.8
million.
The losses (credits) have been allocated to the 2001 and 2000 statements of
operations as follows (in thousands):
2001 2000
------ ------
Cost of sales $ - $12,370
General and administrative (1,600) 9,488
Asset impairment charges - 19,798
Foreign exchange losses - 4,197
Loss on sale of investments - 637
Other expenses - 600
------- -------
$(1,600) $47,090
======= =======
F-34
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES - Continued
2000 Special Charges - Third Quarter
Special charges of $1,361,000 were incurred in the quarter ended September
30, 2000. These charges included severance obligations of the Company
related to the separation of three former executives and severance
obligations related to the outsourcing of manufacturing operations in
California and Australia. Additionally, costs associated with the proxy
contest with Detection Systems, Inc. were recorded. The detail of these
charges is as follows (in thousands):
Accrued at Accrued at
2000 December 31, December 31,
Charge Settled 2000 Settled 2001
------ ------- ------------ ------- ------------
Severance $584 $(220) $364 $(364) $ -
California outsourcing 84 (78) 6 (6) -
Australia outsourcing 75 (75) - - -
Detection Systems, Inc.
Proxy Contest 618 (618) - - -
------ ----- ---- ----- ---
$1,361 $(991) $370 $(370) $ -
====== ===== ==== ===== ===
During 2001, $47,000 of amounts accrued at December 31, 2000 were credited
to selling, general and administrative expenses due to favorable settlement.
1999 Special Charges
During the first quarter of 1999, the Company incurred charges totaling
$750,000 related to severance obligations. During the second quarter of
1999, the Company incurred charges totaling $3,125,000 pertaining to
restructuring costs for (1) its four European locations including costs for
employee severance, terminating leases, and consolidation of all purchasing,
shipping, and billing activity to Antwerp, Belgium and (2) closing costs of
three United States sales and distribution offices.
The Company's exit plan commenced in June 1999 and provided for the
termination of 54 employees (19 employees in the United States and 35
employees in Europe). The exit plan was completed in 2000 and resulted in
the termination of 19 employees in the United States and 35 employees in
Europe. Upon completion of the exit plan in October 2000, the Company had
approximately $250,000 remaining for leased facilities and other termination
costs. This amount has been presented as a credit under the caption "special
charges" in the 2000 statement of operations.
F-35
ULTRAK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SPECIAL CHARGES AND CHANGES IN ESTIMATES - Continued
The restructuring charge and the amount settled are as follows (in
thousands):
Accrued at
December 31,
Charge Settled 2000
------ -------- ------------
Severance and other related employee costs $2,608 $(2,608) $ -
Leased facilities and other termination costs 1,267 (1,267) -
------ ------- ---
$3,875 $(3,875) $ -
====== ======= ===
Change in Estimate
During the fourth quarter of 1999, the Company increased its allowance for
doubtful accounts for its European and South African subsidiaries by
approximately $1.0 million.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company would realize
in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value.
Cash, cash equivalents, accounts receivable, accounts payable, line of
credit, and other debt are carried at cost, which approximates their fair
value based on the short maturities of these instruments and the variable
rates on the line of credit. The Company's financing obligation of $6.6
million approximates its fair value as the transaction was completed in
December 2001.
The Company uses an interest rate swap arrangement to manage exposure to
interest rate fluctuations. The differential paid or received on interest
rate swap agreements is recognized as an adjustment to interest expense in
the period incurred or earned. The fair value of the interest rate swap at
December 31, 2001 is approximately $194,000 and included in other current
liabilities in the balance sheet.
F-36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
--------------------------------------------------------------
Board of Directors and Stockholders
Ultrak, Inc.
In connection with our audit of the consolidated financial statements of Ultrak,
Inc. and Subsidiaries referred to in our report dated March 1, 2002, which is
included in Part IV of this Form 10-K, we have also audited Schedule II for each
of the three years in the period ended December 31, 2001. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
Dallas, Texas
March 1, 2002
SCHEDULE II
ULTRAK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2001, 2000 and 1999
(in thousands)
Balance at Charged Balance at
Beginning Charged to to other End
Description of Period Operations Accounts Deductions of Period
----------- ----------- ---------- -------- ---------- -----------
Allowance for doubtful trade accounts
Year ended December 31, 2001 $5,791 $ 129 $(105)(1) $(3,312)(2) $ 2,503
Year ended December 31, 2000 2,402 3,556 - (1) (167)(2) 5,791
Year ended December 31, 1999 1,658 813 23 (1) (92)(2) 2,402
Deferred tax valuation allowance
Year ended December 31, 2001 $8,432 $13,529 $ - $ - $21,961
Year ended December 31, 2000 - 8,432 - - 8,432
Notes
- -----
(1) Balances recorded from business combinations and other.
(2) Balances written off.
S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
There is hereby incorporated by reference the information regarding the
Company's directors to appear under the caption "Election of Directors" in the
Company's proxy statement for its 2002 Annual Meeting of Stockholders (the "2002
Proxy Statement"), which the Company expects to file with the Securities and
Exchange Commission on or about April 30, 2002. See also the list of the
Company's executive officers and related information under "Directors and
Executive Officers" in Part I of the 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
There is hereby incorporated by reference the information to appear under
the captions "Election of Directors" and "Executive Compensation and Other
Information" in the 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
There is hereby incorporated by reference the information with respect to
security ownership to appear under the caption "Security Ownership of Principal
Stockholders and Management" in the 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
There is hereby incorporated by reference the information to appear under
the caption "Executive Compensation and Other Information - Certain
Transactions" in the 2002 Proxy Statement.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statement Schedules filed as part of this Annual Report on
Form 10-K.
Financial Statements:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets as of December 31, 2001, and 2000.
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Additional financial information pursuant to the requirements of Form 10-K:
Report of Independent Certified Public Accountants on Schedule
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are either not
applicable or the required information has been provided elsewhere in the
Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed with the Securities and
Exchange Commission on November 1, 2001 reporting the private placement of
2,337,700 shares of the Company's Common Stock to Niklaus Zenger for a per
share cash price of $1.90, and the announcement by George K. Broady that he
had contracted to (a) sell his 195,351 shares of Series A 12% Convertible
Preferred Stock (the "Preferred Stock") to Mr. Zenger and/or Mr. Zenger's
assigns (these shares of the Preferred Stock represent 3,255,915 votes), and
(b) grant Mr. Zenger a voting proxy on 1,150,000 shares of Mr. Broady's
Common Stock for a period of approximately 8 months.
(c) Exhibits
3.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995)
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995)
4.1 Form of certificate representing shares of the Common Stock
(filed as Exhibit 4.1 the Company's Registration Statement on
Form S-2, Registration No. 333-02891)
10.7 Ultrak, Inc. Incentive Stock Option Plan (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997)
10.13 Credit Agreement, dated as of February 16, 1999, among Ultrak,
Inc., Bank One, Texas, N.A. and Certain Lenders (filed as
Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998)
25
10.18 First Amended and Restated Credit Agreement between Ultrak,
Inc., Bank One of Texas, N.A. and Certain Lenders, dated
August 12, 1999 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999)
10.21 First Amendment to First Amended and Restated Credit Agreement
between Ultrak, Inc., Bank One of Texas, N.A. and Certain
Lenders, dated November 12, 1999 (filed as Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)
10.22 Second Amendment to First Amended and Restated Credit
Agreement between Ultrak, Inc., Bank One of Texas, N.A. and
Certain Lenders, dated January 31, 2000 (filed as Exhibit
10.22 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.23 Third Amendment to First Amended and Restated Credit Agreement
between Ultrak, Inc., Bank One of Texas, N.A. and Certain
Lenders, dated February 29, 2000 (filed as Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)
10.25 Amended and Restated Credit Agreement between Ultrak
Operating, L.P., American National Bank and Trust Company of
Chicago and Certain Lenders, dated March 22, 2000 (filed as
Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000)
10.26 First Amended and Restated Credit Agreement among Ultrak
Operating, L.P., American National Bank and Trust Company of
Chicago and Harris Trust Savings Bank, dated May 17, 2000
(filed as Exhibit 10.26 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000)
10.28 Fourth Amendment and Continuation of Waivers effective March
1, 2001 between Ultrak Operating, L.P., American National Bank
and Trust Company of Chicago and Harris Trust Savings Bank
(filed as Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000)
10.29 Fifth Amendment and Continuation of Waivers dated March 28,
2001 between Ultrak Operating, L.P., American National Bank
and Trust Company of Chicago and Harris Trust Savings Bank
(filed as Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000)
10.30 Employment Agreement, effective January 1, 2001, between the
Company and Peter Beare (filed as Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.33 Sixth Amendment to First Amended and Restated Credit Agreement
between Ultrak Operating, L.P., Ultrak, Inc., American
National Bank and Trust Company of Chicago and Harris Trust
Savings Bank, dated April 6, 2001 (filed as Exhibit 10.33 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)
10.34 Seventh Amendment and Waiver to the First Amended and Restated
Credit Agreement between Ultrak Operating, L.P., Ultrak, Inc.,
American National Bank and Trust Company of Chicago and Harris
Trust Savings Bank, dated May 15, 2001 (filed as Exhibit 10.34
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001)
10.35 Eighth Amendment to Operative Agreements between Ultrak
Operating LP, Ultrak, Inc., First Security Bank, National
Association, Wells Fargo Bank Texas, National Association and
Bank One, N.A. dated May 30, 2001 (filed as Exhibit 10.35 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001)
26
10.36 Waiver - Minimum Excess Availability of the First Amended and
Restated Credit Agreement between Ultrak Operating, LP,
Ultrak, Inc., American National Bank and Trust Company of
Chicago and Harris Trust and Savings Bank, dated July 20, 2001
(filed as Exhibit 10.36 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001)
10.37 Ninth Amendment to Operative Agreements between Ultrak
Operating LP, Ultrak, Inc., First Security Bank, National
Association, Wells Fargo Bank Texas, National Association and
Bank One, N.A. dated September 27, 2001 (filed as Exhibit
10.37 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
*10.38 Tenth Amendment to Operative Agreements between Ultrak
Operating LP, Ultrak, Inc., First Security Bank, National
Association, Wells Fargo Bank Texas, National Association and
Bank One, N.A. dated November 9, 2001
*10.39 Pledge Agreement dated as of November 14, 2001 between Ultrak
Operating, LP and Wells Fargo Bank Texas, National Association
10.40 Tender Offer Statement under Section 14(d)(1) or 13(e)(1) of
the Securities Exchange Act of 1934 (filed on Schedule TO-1
dated June 11, 2001)
10.41 Tender Offer Statement under Section 14(d)(1) or 13(e)(1) of
the Securities Exchange Act of 1934, Amendment No. 1 (filed on
Schedule TO-1/A dated June 29, 2001)
10.42 Stock Purchase Agreement dated September 27, 2001, between
Ultrak, Inc. and Niklaus Zenger (filed as Item 5 on the
Company's 8-K filing dated October 23, 2001)
*10.43 Amended and Restated to Ultrak, Inc 1988 Non-Qualified Stock
Option Plan, adopted by the Board as of June 1, 2001
*10.44 Employment Agreement, effective January 1, 2002, between the
Company and Wendy Diddell
*10.45 Employment Agreement effective January 1, 2002, between the
Company and Chris Sharng
*10.46 Severance Agreement dated as of December 4, 2001, between
Ultrak Operating, LP, Ultrak, Inc. and George K. Broady
*10.47 Amendment No. 1 to Ultrak, Inc. 1988 Non-Qualified Stock
Option Plan (As Amended and Restated Effective June 1, 2001)
effective as of December 4, 2001
*10.48 Contract of Sale between Ultrak Operating, L.P. and Briarwood
Capital Corporation, dated December 13, 2001
*10.49 Guaranty Reimbursement Agreement dated December 17, 2001
between Ultrak, Inc. and George K. Broady
*10.50 Warrant Agreement dated January 14, 2002 between Ultrak, Inc.
and George K. Broady
*10.51 Eighth Amendment and Waiver to the First Amended and Restated
Credit Agreement between Ultrak Operating, L.P., Ultrak, Inc.,
American National Bank and Trust Company of Chicago and Harris
Trust Savings Bank, dated February 6, 2001
*21.1 Subsidiaries of the Company
- ------------
* Exhibits 10.38, 10.39, 10.43, 10.44, 10.45, 10.46, 10.47, 10.48, 10.49,
10.50, 10.51 and 21.1 are filed herewith.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 12th day of April,
2002.
ULTRAK, INC.
By /s/ George K. Broady
----------------------
George K. Broady
Chairman and Chief Executive
Officer
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.
NAME TITLE DATE
/s/George K. Broady Chairman of the Board and Chief
-------------------------------- Executive Officer
George K. Broady (Principal Executive Officer)
/s/ Chris Sharng Senior Vice President-Finance,
-------------------------------- Secretary, Treasurer and Chief
Chris Sharng Financial Officer (Principal
Financial and Accounting
Officer)
/s/ Peter D. Beare Director
--------------------------------
Peter D. Beare
/s/ Alastair J.A.B. Gunning Director
--------------------------------
Alastair J.A.B. Gunning
/s/ Ronald F. Harnisch Director
--------------------------------
Ronald F. Harnisch
/s/ Bryan C. Tate Director
--------------------------------
Bryan C. Tate
/s/ Michael G. Morris Director
--------------------------------
Michael G. Morris
/s/ Gerard Codeluppi Director
---------------------------------
Gerard Codeluppi
/s/ Niklaus F. Zenger Director
---------------------------------
Niklaus F. Zenger
28