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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File Number 0-511

COBRA ELECTRONICS CORPORATION

(Exact name of Registrant as specified in its Charter)

Registrant’s telephone number, including area code: (773) 889-8870

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.33 ¹/3 Per Share

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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨        NO  x

The aggregate market value of the voting and non-voting common equity (only Common Stock) held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Stock Market on June 30, 2002, was $52,376,585.

The number of shares of Registrant’s Common Stock outstanding as of March 10, 2003 was 6,419,777.

Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders scheduled to be held May 13, 2003, are incorporated by reference into Part III of this Report.

PART I

Item 1.    Business

General

Cobra Electronics Corporation (the “Company” or “Cobra”), which was incorporated in Delaware in 1961, is a public company traded on The Nasdaq Stock Market under the symbol “COBR”. The Company is a leading global manufacturer of two-way mobile communications products, holding the number one or strong number two position in every market in which it does business. The Company has a 40-year track record of innovation and award-winning products, and leads the industry in developing technology applications that serve the market. Products are marketed under the COBRA brand name. Management believes that the Company’s future success depends upon its ability to predict and respond in a timely and effective manner to changes in the markets it serves. Product performance, reliability, price, availability and service are the main competitive factors. Also, sales are dependent upon timely introduction of new products, which incorporate new features desired by consumers, at competitive prices. Cobra is the number one brand in Citizens Band radios and radar detectors and a strong number two in the worldwide Family Radio Service/General Mobile Radio Service (“FRS/GMRS”) two-way radio category. In 2003, Cobra will enter into the hand-held Global Positioning System (“GPS”) market with the introduction of hand-held devices for recreational use.

Recent Developments

Innovation remains the hallmark of Cobra’s success, as demonstrated by just a few of its recent product introductions and other recent developments:

Breakthrough features and design enhancements of the PR 950DX and the PR 1100WX GMRS radios, introduced in the second quarter of 2002, included a new Switchable Power Output feature. The 2002 FRS line, also introduced in the second quarter of 2002, included four new designs, developed on the basis of extensive consumer research in the United States and Europe.

Additionally, in the first half of 2002, seven cutting edge radar detectors were introduced, including an innovative new feature that is standard on Cobra’s 10 Band radar/laser detectors, SmartMute^™ technology. SmartMute technology automatically mutes unwanted audible alerts below a driver-set speed, based on engine revolutions per minute.

At the January 2003 International Consumer Electronics Show (“CES”), the Company announced several significant product introductions planned for 2003. Most significant is Cobra’s entry into the hand-held GPS market with three new products, the GPS 100, GPS 500 and GPS 1000. All models feature exclusive Accelerated Satellite Acquisition Protocol^™ (A.S.A.P.^™), technology that uses 18 channels, as opposed to the category standard of 12, to locate a user’s position up to twice as fast as any hand-held GPS technology currently on the consumer market.

Featuring 500 waypoints, waterproofing and a route feature, the GPS 100 and 500 models are expected to be available in the second quarter of 2003 and the GPS 1000 is expected to be available in the second half of 2003. The GPS 500 and GPS 1000 models will also offer Worldwide Cities and State Boundaries features. A personal computer interface on the GPS 500 and GPS 1000 will enable users to download maps, points of interest and other navigation information from a personal computer. In addition, the GPS 1000 will include a United States highway map featuring all interstates.

Additionally, Cobra announced an exclusive product development and licensing agreement with Horizon Navigation, Inc. for the development of Cobra-branded after-market mobile navigation products that are targeted to begin shipping in early 2004.

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Each of the five models in Cobra’s user-friendly 2003 microTALK^™ two-way radio line features 22 channels with 38 privacy codes, selectable Roger Beep and Key Lock. These radios operate from a two mile range to a seven mile range (depending on terrain and conditions), providing a professional grade of power that can penetrate trees, buildings and other obstacles. All models are available in various configurations, including value packs featuring rechargeable batteries and chargers. The PR 4000 WX model, which delivers up to a 7 mile range, was one of only 17 products selected to receive Popular Mechanics’ prestigious “Editor’s Choice” award at the 2003 CES.

Two new cutting edge radar detectors for 2003 feature an 11^th band-the Spectre Alert^™ system-that gives an audio and visual alert when it senses the Spectre technology used to detect vehicles using radar detectors. In addition, both models are undetectable by Spectre devices, as are all current Cobra models, and both models received the Design & Engineering Innovations Award at the 2003 CES.

Suppliers

One of the Company’s fundamental strengths is its product sourcing ability. Substantially all of the Company’s products are manufactured to its specifications and engineering designs by a number of suppliers, primarily in China, Thailand, Hong Kong and South Korea. The Company maintains control over the design and production quality of its products through its wholly owned subsidiary in Hong Kong which seeks out new suppliers, monitors technological changes, performs source inspection of key suppliers, and expedites shipments from vendors.

Over a period of years, the Company has developed a network of suppliers for its products. To maintain flexibility in product sourcing, the Company has not entered into any supply contracts with any of its vendors that are not “cancellable at will”. Despite management’s goal of maintaining strong relationships with its current suppliers, it also believes that, if necessary, alternate suppliers could be found. The extent to which a change in a supplier would have an adverse effect on the Company’s business depends upon the timing of the change, the product or products that the supplier produces for the Company and the volume of that production. The Company also maintains insurance coverage that would, under certain limited circumstances, reimburse the Company for lost profits resulting from a vendor’s inability to fulfill its commitments to the Company. The Company negotiates substantially all of its purchases in U.S. dollars to protect itself from currency fluctuations. Assets located outside of the United States, principally Company-owned tooling at suppliers, had a net book value of $2.4 million at December 31, 2002.

Suppliers also include various providers and/or developers of intellectual property. Cobra has negotiated long-term exclusive (as it pertains to product categories and distribution channels) arrangements with these parties that management believes protect the Company’s rights to the underlying intellectual property.

Research, engineering and product development expenditures are expensed as incurred. These expenditures amounted to approximately $1,480,000 in 2002, $1,209,000 in 2001, and $1,100,000 in 2000.

Products

The Company operates only in the consumer electronics industry. Principal products include:

The Company competes primarily in the United States with various manufacturers and distributors of consumer electronics products, principally on the basis of product features and price, and expects the market for its products to remain highly competitive. The Company also markets its products in over 30 countries around the world.

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The Company does not believe that patents are of material importance to its products. However, when the Company develops a unique technology (such as SoundTracker noise reduction technology), patents are applied for to preserve exclusivity, wherever possible. microTALK FRS/GMRS two-way radios, 9 Band and 10 Band detectors with exclusive Strobe Alert technology, SoundTracker and Nightwatch Citizens Band radios, HighGear accessories, and Safety Alert transmitters and receivers are marketed under the COBRA brand name.

In 1997, the Company entered the rapidly growing FRS two-way radio market and in the fall of 1998 began selling its new microTALK line. The Company has attained a strong number two market position in the FRS/GMRS two-way radio market. The Company estimates that the domestic market for FRS/GMRS two-way radios in factory net sales in 2002 was approximately $214 million (based on Industrial Marketing Research (IMR) and Personal Technology Research (PTR) data). In spite of the rapid historical growth of these markets, future household penetration is estimated to be less than 25 percent, allowing for potential unit growth in the future.

FRS/GMRS two-way radios operate on UHF FM frequencies, which allow for an extremely small hand-held radio and exceptionally clear sound that penetrates through buildings and other obstacles. Unlike cellular phones, these radios require no monthly fee and provide coverage even in the most remote areas. Because of their range—up to two miles (up to seven miles for certain 2003 GMRS models, which require a license)—and exceptionally clear sound quality, the radios enable families and friends to easily keep in touch in hundreds of situations where they typically get separated and are out of earshot, such as in shopping malls, amusement parks and ski resorts. In addition, the number of potential business-related applications for these radios is substantial, including construction crews, retail stores, restaurants and warehouses. FRS two-way radios also provide parents with an easy way to maintain contact with children when they are outside playing.

The Company’s microTALK two-way radios have innovative features. These include incoming call alert that lets one user “ring” another user and talk confirmation tones that subtly let users know when the other party is done talking. Certain models even have a patented VibrAlert^™ feature that works like a silent vibrating pager, which makes it perfect for situations where noiseless operation is important or where a ring alert cannot be easily heard. Also, certain models incorporate a ten-channel NOAA all hazards alert radio, which warns of weather, chemical and other civilian emergencies.

The Company launched its European line of microTALK radios in the United Kingdom, France, Spain, Germany, Sweden and Finland in 1999. As part of its European strategy to be closer to customers, the Company formed an Irish subsidiary, Cobra Electronics Europe Limited, with an office in Dublin, Ireland in 2000. As of December 31, 2002, the Company had 11 distributors serving approximately 22 countries in Europe.

In the second quarter of 2000, Cobra began selling its microTALK FRS radios in Canada, which approved the technology in March 2000, and now holds the number one share in this market.

In 2001, GMRS two-way radios started to become more of a factor in the market place as consumers began to demand a greater operating range than conventional FRS radios provide. Through 2002, GMRS radios provided up to a five mile range in contrast to the two mile range of FRS radios; in 2003 Cobra will introduce six mile and seven mile range GMRS two-way radios. Breakthrough features and design enhancements of two GMRS radios, introduced in the second quarter of 2002, included a new Switchable Power Output feature.

Another key to Cobra’s recent success in the FRS/GMRS market has been its emphasis on value packs, which include battery chargers and rechargeable batteries along with the radios. This has enabled the Company to increase its revenue-per-sale as well as its dollar market share.

Cobra is the number one brand in the domestic market for integrated radar/laser detectors, which in factory net sales the Company estimates is approximately $74 million (based on IMR and PTR data). Cobra commands a significant market share by offering innovative products with the latest technology.

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The Company has been a leader in applying laser detection technology, including introducing the industry’s first laser-signal detector and the industry’s first integrated radar/laser detector with 360 degree laser detection capability. The Company was also the first to introduce to the retail channel “intelligent” detection systems capable of alerting drivers with a differentiated signal for each of the frequencies emitted by the Company’s patented, FCC-approved Safety Alert transmitter. The Company’s Safety Alert Traffic Warning System is designed to help drivers avoid potentially serious accidents with police, fire, EMS and public utility vehicles.

In late 1999, the Company introduced the world’s first and, then, only line of 9 Band radar detection systems. This line provides detection of two new laser systems, Ultra Lyte and ProLaser. In addition, this line was the first to incorporate the exclusive Strobe Alert feature. This technology alerts drivers to the presence of high-speed emergency vehicles equipped with strobe transmitters to control traffic signals. In 2000, the Company introduced the world’s first 10 Band radar detection system, which features a high-speed RISC processor and offers 10 bands of protection, including Cobra’s patented Safety Alert warning system and exclusive Strobe Alert detection. Unlike competing radar detection systems, 10 Band radar detectors enable motorists to detect eight speed monitoring systems and distinguish between four types of laser systems on the road today, including, LTI 20/20, Ultra Lyte, ProLaser and ProLaser III. In 2001, Cobra introduced the world’s first radar detector incorporating a 10-channel weather radio.

In 2002, the Company introduced an innovative new feature that is standard on Cobra’s 10 Band radar/laser detectors, SmartMute^™ (through 2003; Intellimute afterwards) technology. SmartMute technology automatically mutes unwanted audible alerts below a driver-set speed, based on engine revolutions per minute.

In 2003, the Company is introducing the market’s first 11 Band models, which detect the new Spectre devices, which are used to detect the presence of radar detectors in vehicles. These models also employ SmartPower^™ technology, which avoids inadvertent car battery draining by turning the detector off once the vehicle has been turned off for 30 minutes.

Because of the popularity of the Company’s unique 9 Band and 10 Band technologies and continued innovations, such as Weather Alert and SmartMute, Cobra was the fastest growing radar detector brand over the past several years and has become the market leader.

Cobra is the leading brand in the domestic Citizens Band radio market, which in factory net sales the Company estimates to be approximately $40 million annually (based on IMR data). Approximately 90 percent of this market is for mobile Citizens Band radios, most of which are purchased by professional truck drivers. The remaining part of the domestic market is for hand-held Citizens Band radios used for sport and recreational activities. Also in 1999, the Company began shipping several new Citizens Band models specifically designed for the European market.

The Company has a history of being the technology leader in the Citizens Band radio market. The Company was the first Citizens Band radio marketer to combine a National Weather Service receiver with a mobile Citizens Band radio, enabling motorists to obtain weather and travel information broadcasts. As a major enhancement of this feature, the Company also introduced the industry’s first mobile Citizens Band radio that incorporates an automatic alert feature to warn of National Weather Service emergency advisories. In 1997, the Company introduced its Soundtracker technology. This patented noise reduction technology, which dramatically improves the sound quality of the Citizens Band radios, was the first significant product innovation in this category in several years. This feature significantly reduces “white noise”, or static, when the Citizens Band radio is in receiving mode. Additionally, SoundTracker technology allows the user’s voice to break through cluttered airwaves and to be more easily heard when transmitting.

In 1999, the Company introduced a new line of Citizens Band radios featuring an adjustable illuminated front panel. The NightWatch line enhances drivers’ safety by making it dramatically easier for them to see and adjust

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their Citizens Band radio controls at night. The vast majority of the nine million mobile Citizens Band radios used by professional truck drivers today are not illuminated despite the fact that these drivers spend a significant amount of time driving at night. In 2003, Cobra will introduce its neon-illuminated Streetxtreme^™ two-way Citizens Band radio, which is aimed at “Generation Y” drivers as a way to keep in touch while cruising without the expense of monthly service fees.

Additionally, in 2000 Cobra started its HighGear accessories division to develop and market high quality Citizens Band radio antennas, microphones, and external speakers.

Competition

Major competitors are Motorola, Audiovox and Bell South (FRS/GMRS); Whistler and Escort/Beltronics (Detectors); Uniden, Midland and Radio Shack (Citizens Band Radios); and, when the Company enters the market, Garmin and Magellan (GPS receivers).

Sales and Distribution

Demand for consumer electronics products is somewhat seasonal and varies according to channel of distribution. Historically, sales in the last half of the year are greater than in the first half, reflecting increasing purchases by retailers for various promotional activities that begin mainly in the second quarter and culminate with the holiday selling season. Also, because an increasing portion of the Company’s business is with mass retail accounts, the Company has experienced a shift in orders from the third quarter to the fourth quarter when the mass retailers normally begin their load-in for the holiday selling season. As the Company’s channel mix continues to shift more towards retail, the Company expects additional shifts toward heavier third and fourth quarter sales volumes.

Cobra products are distributed through a strong, well-established network of over 300 retailers and distributors located primarily in the United States. Approximately 65 percent of the sales are made directly to domestic mass marketers, such as consumer electronics specialty stores, large department store chains, warehouse clubs, office supply chains, television home-shopping, direct-response merchandisers, home centers and specialty stores. Most of the remaining sales are through two-step wholesale distributors that carry Cobra products to fill orders for travel centers, truck stops, small department stores, appliance dealers, duty-free shops on cruise lines and for export. Cobra’s primary sales force is composed of independent sales representatives who work on a straight commission basis. They do not sell products of the Company’s competitors.

The Company’s mix of customers can shift significantly from year to year and two to three customers generally comprise 25% to 35% of net sales in any one year, however, the specific retailers and distributors that represent those significant customers also vary year to year given the Company’s broad customer base. Customers which exceeded 10% of net sales in any one year are as follows: In 2002, sales to Best Buy and Wal-Mart were 14.3 percent and 13.3 percent of net sales, respectively. In 2001, sales to Costco Wholesale, K-Mart and Best Buy were 14.4 percent, 12.5 percent and 10.4 percent of net sales, respectively. In 2000, sales to K-Mart and Best Buy were 14.4 percent and 11.2 percent of net sales, respectively.

International sales, including Canada, were $15.1 million, $12.9 million, and $14.4 million in 2002, 2001 and 2000, respectively. For additional financial information about geographic areas, see Note 10 to the Consolidated Financial Statements.

The Company’s return policies and payment terms are similar to those of other companies serving the consumer electronics market. Market conditions are such that products generally must be shipped within a short time after an order is received. As a result, order backlog is not significant.

The Company’s right to sell products under the COBRA trademark is substantially worldwide. The Company believes the COBRA trademark, which is indefinitely renewable by the Company, is a significant factor in the successful marketing of its products.

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Website Access to Company Reports

The Company’s website address is “www.Cobra.com”. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through our website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Employees

As of December 31, 2002, the Company employed 129 persons in the U.S. and 15 in its international operations. None of the Company’s employees is a member of a union.

Item 2.  Properties

The Company owns one building in Chicago, Illinois containing a total of approximately 93,000 sq. feet of office and warehouse space. The Company has approximately 7,000 sq. feet of leased office space in Hong Kong for its international operations. The Company also has 1,650 sq. feet of leased office space in Dublin, Ireland for its European operations. The Company believes that these facilities are adequate to meet its current needs.

Item 3.  Legal Proceedings

The Company is subject to various unresolved legal actions, which arise, in the normal course of its business. None of these actions is expected to have a material adverse effect on the Company’s business or financial condition.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 4A.  Executive Officers of The Registrant

See Part III, Item 10.

PART II

Item 5.  Market for the Registrant’s Common Equity and Related Shareholder Matters

The Company’s common stock trades on The NASDAQ Stock Market under the symbol COBR. As of March 6, 2003, the Company had approximately 855 shareholders of record and approximately 1,753 shareholders for whom securities firms acted as nominees. The Company’s common stock is the only class of equity securities outstanding.

Under the terms of its credit agreement, the Company may not pay cash dividends.

STOCK PRICE AND TRADING VOLUME DATA

Note: Data compiled from The NASDAQ Stock Market Monthly Summary of Activity Reports.

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Item 6.  Selected Financial Data

FIVE YEAR FINANCIAL SUMMARY

Note: Under the terms of its credit agreement, the Company may not pay cash dividends.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corporate Overview

Net sales decreased 9.5% to $135.8 million for the year ended December 31, 2002, compared to 2001, while gross margin also declined from 26.0% to 25.2%. Net income in 2002 was $1.7 million, or $0.26 per diluted share, compared to $4.7 million, or $0.73 per diluted share for 2001. Results for 2001 included after-tax expenses of approximately $800,000 associated with a terminated acquisition.

Results of Operations

        2002 Compared to 2001

The $14.2 million decline in net sales mostly reflected a $15.7 million drop in sales to K-Mart due to the restrictions the Company imposed on this account at the time of its bankruptcy filing, as well as the difficult economy, which intensified pressure for reduced prices, particularly in the two-way FRS/GMRS radio market. Another factor in the decline in 2002 net sales was the selection by Costco of a competitor for an FRS promotion, resulting in a decline in net sales to this account of $15.6 million. Partially offsetting the overall decrease were sales to Wal-Mart, which increased $13.2 million in 2002 and increased international sales (from $12.9 million to $15.1 million).

Gross margin for 2002 was 25.2% compared to 26.0% in 2001. The decrease primarily reflected a decline in liquidation prices for FRS and Detection units that are returned by consumers but are not sent back to the vendor for credit or refurbished and sold as refurbished product, as well as increases in the rates of return of FRS and

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Detection products. Additionally, the Federal Communication Commission’s decision to regulate the radar detector industry affected it to a lesser degree (and was offset by several other items) as some non-compliant Detection products had to be sold off more quickly at lower prices.

Selling, general and administrative expense, excluding the expenses for the terminated acquisition of Lowrance Electronics, Inc. (“Lowrance”) in 2001, increased $2.7 million, or 9.4%, and as a percentage of net sales increased to 22.9% in 2002 from 18.9% in 2001. Approximately $2.3 million of the increase reflected additional variable selling expenses incurred in connection with marketing support that the Company provided its retail customers as it shifted away from promotional pricing towards more cooperative advertising and similar programs to build store traffic. Also, the Company purchased insurance on a portion of the outstanding accounts receivable balance beginning in 2000. In 2002, the Company increased the insurance coverage, permitting a reduction of $772,000 in the allowance for claims and doubtful accounts.

Interest expense for 2002 was $228,000, which was $559,000 lower than 2001, because of significantly lower average debt in 2002.

Other income for 2002 was $91,000 compared to an expense of $117,000 in 2001. The difference represented losses incurred in 2001 on disposal of fixed assets in conjunction with the remodeling of the Company’s Chicago headquarters.

Income tax expense decreased $2.2 million to $1.3 million in 2002 due to lower pre-tax income. The effective tax rate was 43.9% in 2002 compared to 43.4% in 2001.

        2001 Compared to 2000

Net sales increased 4.8% to $150.0 million in 2001. Sales growth resulted principally from higher sales of the Company’s domestic microTALK FRS two-way radios because of strong consumer demand and increased retail distribution, offset in part by the weak economy.

Contributing to the increase in domestic FRS two-way radio sales was the introduction of several new products, including a new GMRS two-way radio and two new SNAP^™ replacement front FRS models. Additionally, domestic retail distribution of FRS increased with sales to Wal-Mart, a new FRS customer for 2001, and substantially higher sales to several other existing customers. The Company also developed new distribution channels for FRS in 2001, including food and drug chains, home improvement chains and cruise ship lines.

Gross margin for 2001 was 26.0% compared to 27.5% in 2000, reflecting pricing pressures in the marketplace for Detection and FRS products, partially offset by improved sourcing. The Company responded to competitive opportunities with targeted promotions and merchandising efforts, including special displays, price reductions and consumer rebates.

Selling, general and administrative expense, excluding the expenses for the terminated acquisition of Lowrance, increased $1.8 million, or 6.8%, and as a percentage of sales increased to 18.9% in 2001 from 18.6% in 2000. The overall increase reflected primarily additional variable and fixed selling expenses. The increase in variable selling expenses, which accounted for the vast majority of the overall increase, was due to higher sales volume and the Company’s efforts to take advantage of opportunities to increase shelf space and consumer awareness as well as higher costs incurred to drive consumer demand in the face of the economic slowdown. The increase in fixed selling expenses resulted primarily from increased investments in building the Company’s European business.

On May 2, 2001, the Company terminated its tender offer for Lowrance common stock and the related merger agreement due to a material adverse change in Lowrance’s net sales and earnings relative to financial projections provided to Cobra by Lowrance. During the second quarter of 2001, the Company recorded a $1.4 million charge for expenses associated with the terminated acquisition. These expenses consisted of bank, legal and due diligence fees. All charges pertaining to the terminated acquisition were recorded in the second quarter of 2001.

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Interest expense for 2001 was $787,000, which was $102,000 lower than 2000, primarily because of a lower weighted average interest rate in 2001.

Other expense for 2001 was $117,000 compared to $611,000 in 2000 due to lower bank fees, lower losses on disposal of fixed assets in conjunction with the remodeling of the Company’s Chicago headquarters and lower losses that were recognized on investments in the cash surrender value of life insurance policies.

Income tax expense decreased $538,000 to $3.6 million in 2001 due to the lower pre-tax income. The effective tax rate in 2001 was 43.4%. Major items contributing to the higher effective tax rate were the following: an excess net operating loss (NOL) deferred tax asset that was written off as all of the Company’s remaining NOLs were fully utilized in 2001; a nondeductible net loss at the Company’s Irish subsidiary because of investments made in building the European business; and an increase in partially non-deductible permanent items, such as meals and entertainment expenses, which were higher as the Company aggressively continued to expand its customer base.

Liquidity and Capital Resources

On January 31, 2002 the Company executed a new three-year revolving credit agreement for $55 million with three financial institutions. Borrowings and letters of credit issued under the agreement are secured by substantially all of the assets of the Company, with the exception of real property and the cash surrender value of certain life insurance policies owned by the Company. The credit agreement was amended as of February 18, 2003 to address certain covenant violations then existing and decrease the earnings requirements for each calendar quarter through March 31, 2004 and to provide for increased permitted capital expenditures in 2003. Loans outstanding under the amendment bear interest, at the Company’s option, at prime rate or at LIBOR plus 200 basis points. The amendment also increased the fee on letters of credit from 1.0% to 1.25%. The credit agreement specifies that the Company may not pay cash dividends and contains certain financial and other covenants, including a requirement that James R. Bazet continue as CEO of the Company. At December 31, 2002, the Company had approximately $28.3 million available under this credit line based on asset advance formulas.

Net cash flows generated in operating activities were $19.6 million for the year ended December 31, 2002. Operating cash flows were generated principally from a $17.0 million decrease in accounts receivable. Accounts receivable decreased because of lower fourth quarter 2002 sales combined with strong cash collections.

Working capital requirements are seasonal, with demand for working capital being higher later in the year as customers begin purchasing for the holiday selling season. The Company believes that cash generated from operations and from borrowings under its credit agreement will be sufficient in 2003 to fund its working capital needs. In 2002, the Company utilized approximately $433,000 of AMT credit carryforwards. AMT credit carryforwards of $276,000 at December 31, 2002 are expected to be used in 2003. Upon utilization of all of its AMT credit carryforwards, the Company will begin making payments for federal income taxes.

Investing activities required cash of $2.6 million in 2002, principally for the purchase of tooling and equipment. Cash used in financing activities amounted to $14.9 million in 2002, reflecting $15.4 million of net repayments under the Company’s line-of-credit agreement, which was paid using cash collected from customer receivables.

The Company believes that for the foreseeable future, it will be able to continue to fund its operations with cash generated from operations using existing or similar future bank credit agreements to fund its seasonal working capital needs.

In August 1998, the Company’s Board of Directors authorized a repurchase of up to $1 million of the Company’s common stock. On May 1