<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [ ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
COBRA ELECTRONICS
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
COBRA ELECTRONICS
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
COBRA LETTERHEAD
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 1998
To the Shareholders:
The Annual Meeting of Shareholders of Cobra Electronics Corporation (the
"Company") will be held at the offices of Sidley & Austin, One First National
Plaza, 55th Floor, Room 2-C, Chicago, Illinois on Tuesday, May 12, 1998 at 11:00
a.m. to:
1. Elect two Class III directors of the Company to hold office until the
2001 Annual Meeting of Shareholders;
2. Consider and vote upon a proposal to approve the 1998 Stock Option Plan;
and
3. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on April 3, 1998 are
entitled to notice of and to vote at the meeting or any adjournments thereof. A
complete, alphabetic list of such shareholders showing their addresses and the
number of shares registered for each will be kept open at the offices of the
Company, 6500 West Cortland Street, Chicago, Illinois 60707, for examination by
any shareholder during ordinary business hours for a period of ten days prior to
the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
A copy of the Summary Annual Report for the year ended December 31, 1997, a
Proxy Statement and Proxy Card accompany this notice.
By order of the Board of Directors,
GERALD M. LAURES
Secretary
Chicago, Illinois
April 17, 1998
<PAGE> 3
COBRA ELECTRONICS CORPORATION
6500 WEST CORTLAND STREET
CHICAGO, ILLINOIS 60707
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 1998
This Proxy Statement is furnished in connection with a solicitation of
proxies by the Board of Directors of Cobra Electronics Corporation (the
"Company") to be voted at the Company's 1998 Annual Meeting of Shareholders to
be held on Tuesday, May 12, 1998 at the offices of Sidley & Austin, One First
National Plaza, 55th Floor, Room 2-C, Chicago, Illinois at 11:00 a.m. The
principal executive offices of the Company are located at 6500 West Cortland
Street, Chicago, Illinois 60707. This Proxy Statement, the accompanying Proxy
Card and the 1997 Summary Annual Report were first mailed to shareholders on or
about April 17, 1998.
RECORD DATE AND OUTSTANDING VOTING SECURITIES
Only shareholders of record at the close of business on April 3, 1998 are
entitled to notice of and to vote at the meeting. On that date the Company had
outstanding 6,218,416 shares of Common Stock, par value $.33 1/3 per share.
Owners of Common Stock are entitled to one vote for each share held. The Company
has no other outstanding voting securities.
REVOCATION OF PROXIES AND OTHER VOTING INFORMATION
Proxies given pursuant to this solicitation may be revoked at any time
prior to the voting thereof (by giving written notice to the Secretary of the
Company, by executing a proxy bearing a later date which is voted at the meeting
or by attending the 1998 Annual Meeting of Shareholders and voting in person);
once voted, however, proxies may not be retroactively revoked.
With respect to the election of directors, a shareholder may (i) vote for
the election of both nominees designated below as Class III directors, (ii)
withhold authority to vote for both director nominees or (iii) vote for the
election of such director nominees other than a nominee with respect to whom the
shareholder withholds authority to vote by striking a line through the nominee's
name on the proxy. With respect to the proposal to approve the 1998 Stock Option
Plan, a shareholder may (i) vote for the proposal, (ii) vote against the
proposal or (iii) abstain from voting on the proposal. All outstanding shares of
Common Stock represented by properly executed and unrevoked proxies received in
time for the meeting will be voted as instructed in the accompanying proxy. If
no instructions are given, the shares will be voted for the election of both
nominees designated below to serve as Class III directors and for approval of
the 1998 Stock Option Plan.
A proxy submitted by a shareholder may indicate that all or a portion of
the shares represented by such proxy are not being voted by such shareholder
with respect to a particular matter (the "non-voted shares"). Non-voted shares
will be considered shares not present and entitled to vote on such matter,
although such shares will count for purposes of determining the presence of a
quorum. The affirmative vote of a plurality of the shares of Common Stock
present in person or by proxy at the meeting and entitled to vote in the
election of directors is required to elect directors. Thus, if a quorum is
present at the meeting, the two persons receiving the greatest number of votes
will be elected to serve as Class III directors. Accordingly, non-voted shares
and withholding authority to vote for a director nominee will not affect the
outcome of the election of directors. If a quorum is present at the meeting,
approval of the 1998 Stock Option Plan requires the affirmative vote of a
majority of the shares of Common Stock present in person or by proxy at the
meeting and entitled to vote on such matter. An abstention with respect to the
proposal to approve the 1998 Stock Option Plan has the legal effect of a vote
against such proposal. Non-voted shares with respect to such proposal will not
affect the determination of whether the 1998 Stock Option Plan is approved.
1
<PAGE> 4
PROPOSAL I -- ELECTION OF DIRECTORS
The Company's Certificate of Incorporation classifies the Board of
Directors into three classes, as nearly equal in number as possible, each of
whom serves for three years. The term of office of one class of directors
expires each year in rotation so that one class is elected at each annual
meeting for a full three-year term. The terms of two of the present directors
will expire at the 1998 Annual Meeting of Shareholders. Mr. William P.
Carmichael, appointed a director in 1994, and Mr. Carl Korn, Chairman of the
Board of the Company, have been nominated for election as Class III directors
for three-year terms expiring at the 2001 Annual Meeting of Shareholders and
until their successors are elected and qualified. The terms of the other five
directors will continue as indicated below.
Unless otherwise specified in the proxy, it is the present intention of the
persons named in the accompanying proxy to vote such proxy for the election of
William P. Carmichael and Carl Korn, the two nominees designated below, to serve
as Class III directors. Management is not aware of any nominee for director to
be proposed by others. If on account of death or unforeseen contingencies,
either of Messrs. Carmichael or Korn should not be available for election, the
persons named in the accompanying proxy reserve the right to vote such proxy for
such other person or persons as may be nominated to serve as a Class III
director by the management of the Company. Management has no reason to believe
that any Class III nominee will be unable to serve if elected.
The names of the Company's directors and director nominees, their principal
occupations and certain biographical information relating to such persons are
set forth below.
<TABLE>
<CAPTION>
NOMINEES AND DIRECTORS AGE PRINCIPAL OCCUPATION
---------------------- --- --------------------
<S> <C> <C>
James Bazet, Class I 50 President and Chief Executive Officer of the
(Term expiring in 1999) Company, January 1998 to present; Executive Vice
President and Chief Operating Officer of the
Company, July 1997 to December 1997; President and
Chief Executive Officer, Ryobi Motor Products Floor
Care Division, 1995-1997; President and Chief
Executive Officer, Code-A-Phone Corporation,
1991-1994. Director since May 1997.
William P. Carmichael, Class III 54 Senior Vice President & Chief Accounting Officer,
(Nominee, term, if elected, Sara Lee Corporation, 1991-1993; retired 1993;
expiring in 2001) Senior Vice President and Chief Financial Officer,
Beatrice Company, 1988-1990. Director since 1994.
Samuel B. Horberg, Class II 71 Vice President, Secretary and Treasurer of the
(Term expiring in 2000) Company, 1985-1986; retired 1986; Vice
President-Finance, Secretary and Treasurer of the
Company, 1961-1985. Director since 1961.
Jerry Kalov, Class I 62 Vice Chairman of the Board of the Company, May 1997
(Term expiring in 1999) to present; President and Chief Executive Officer
of the Company, August 1986 to January 1, 1998,
retired January 1, 1998; President and Chief
Operating Officer of the Company, April 1985 to
August 1986; President, Kalov & Associates, Inc.,
management consultants, 1983-1985; President,
Harman International Industries, Inc., 1980-1983.
Director since 1985.
Carl Korn, Class III 76 Chairman of the Board of the Company, 1961 to
(Nominee, term, if elected, present; President and Chief Executive Officer of
expiring in 2001) the Company, 1961-1985. Director since 1961.
Gerald M. Laures, Class II 50 Vice President-Finance of the Company, since March
(Term expiring in 2000) 1994; Corporate Secretary of the Company, 1989 to
present; Corporate Controller of the Company
1988-1994. Director since 1994.
Harold D. Schwartz, Class I 72 President, Chez & Schwartz, Inc., marketing and
(Term expiring in 1999) sales consultants, 1973 to present. Director since
1983.
</TABLE>
2
<PAGE> 5
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company held 5 meetings during fiscal year
1997. Each member of the Board of Directors attended at least 75% of all the
meetings of the Board of Directors and committees of which they are members. The
Board of Directors has four committees: the Audit Committee, the Finance
Committee, the Compensation Committee and the Stock Option Plan Committee.
During fiscal year 1997, these committees met four times, one time, two times
and one time, respectively.
The members of the Audit Committee are: Harold D. Schwartz (Chairman),
William P. Carmichael, Samuel B. Horberg and Carl Korn. The Audit Committee
assists the Board of Directors in fulfilling its responsibility for the
accounting practices of the Company and reviews the selection of, and
recommendations by, the Company's independent auditors.
The members of the Finance Committee are: William P. Carmichael (Chairman),
James R. Bazet, Jerry Kalov and Gerald M. Laures. The Finance Committee reviews
and recommends financing plans and agreements.
The members of the Compensation Committee are: Samuel B. Horberg
(Chairman), Jerry Kalov and Harold D. Schwartz. The Compensation Committee
reviews the compensation of the Company's executive officers, except for options
issued under the Company's stock option plans.
The members of the Stock Option Plan Committee are: William P. Carmichael
(Chairman) and Harold D. Schwartz. The Stock Option Plan Committee administers
the Company's 1995 Stock Option Plan and the 1997 Stock Option Plan.
The Company has no nominating or similar committee.
COMPENSATION OF DIRECTORS
Mr. Korn in his capacity as Chairman of the Board of the Company currently
receives an annual retainer of $25,000. Messrs. Carmichael, Horberg, Kalov and
Schwartz, who are not employees of the Company, currently receive annual
retainers of $10,000 and a fee of $1,000 for each Board meeting and $500 for
each committee meeting attended, not to exceed one Board meeting and one
committee meeting or two committee meetings on any one day. When a committee
meeting occurs on the same day as a Board meeting or another committee meeting,
the fee for the committee meeting or meetings is reduced to $400 for each such
meeting. For the period commencing May 13, 1997 and ending July 28, 1997, Mr.
Bazet's date of employment, Mr. Bazet received $1,000 for the May board meeting
and $2,082, representing the pro rata portion of the $10,000 annual retainer for
nonemployee board members. In addition, Messrs. Carmichael, Horberg and
Schwartz, each of whom serves as a chairman of a committee of the Board,
receives a $1,000 annual retainer. At the present time, the other directors of
the Company who serve on the Board or any committee thereof receive no
compensation for doing so.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As indicated above, the members of the Compensation Committee are: Samuel
B. Horberg (Chairman), Jerry Kalov and Harold D. Schwartz. Mr. Horberg served as
Vice President, Secretary and Treasurer of the Company from 1961 until his
retirement in 1986. Mr. Kalov served as President and Chief Executive Officer of
the Company from August 1986 to January 1, 1998.
During 1997, the Company repurchased 300,000 shares of its common stock.
These shares, owned by Jerry Kalov, Vice Chairman of the Board of Directors, had
been part of a total of 375,000 shares purchased by Mr. Kalov through the
exercise of options in 1990. Pursuant to Mr. Kalov's employment agreement, the
Company loaned Mr. Kalov $1.25 million for the share purchase. The Company paid
for the purchased shares by canceling Mr. Kalov's indebtedness to the Company in
the amount of $1,905,105, which included the $1.25 million plus accrued
interest, and by paying Mr. Kalov $44,895. During fiscal 1997, the largest
amount outstanding under the loan was $1,905,105 and the average interest rate
from the inception of the loan to the date the loan was paid was 6.57%.
3
<PAGE> 6
PROPOSAL 2 -- APPROVAL OF 1998 STOCK OPTION PLAN
GENERAL
The Board of Directors is proposing for shareholder approval the Cobra
Electronics Corporation 1998 Stock Option Plan (the "Plan"). During 1997, the
Company granted 150,000 options to James R. Bazet and 75,000 options to Anthony
A. Mirabelli. In February of 1998 the Company granted an additional 75,000
options to Anthony A. Mirabelli. As a result, the number of shares available to
provide further grants of stock options under existing Company plans is 57,875.
The Board of Directors believes that it is in the interest of the Company to
continue its longstanding practice of making stock options available to those
officers and other key employees responsible for significant contributions to
the Company's business. The Board of Directors believes that the equity stake in
the growth and success of the Company afforded by stock options provides such
employees with an incentive to continue to put forth maximum efforts in applying
their talents within the Company. Accordingly, on March 12, 1998, the Board of
Directors unanimously approved the Plan and directed that it be submitted for
approval by the shareholders of the Company.
The purposes of the Plan are (i) to align the interests of the Company's
shareholders and the recipients of options under the Plan by increasing the
proprietary interest of such recipients in the Company's growth and success and
(ii) to advance the interests of the Company by attracting and retaining
officers and other employees. Under the Plan, the Company may grant
non-qualified stock options and "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code"). Approximately 125
officers and other employees are eligible to participate in the Plan. On April
2, 1998, the closing sale price of a share of Common Stock on the Nasdaq
National Market was $6.125. Reference is made to Exhibit A to this Proxy
Statement for the complete text of the Plan which is summarized below.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR approval of the Plan. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR APPROVAL OF THE COBRA ELECTRONICS CORPORATION 1998 STOCK OPTION PLAN.
DESCRIPTION OF THE PLAN
Administration. The Plan will be administered by a committee of the Board
of Directors (the "Committee") consisting of at least two members who may be
"Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act") and who are "outside directors" within
the meaning of Section 162(m) of the Code.
Section 162(m) of the Code generally limits to $1 million the amount that a
publicly held corporation is allowed each year to deduct for the compensation
paid to each of the corporation's chief executive officer and the corporation's
four most highly compensated executive officers other than the chief executive
officer, subject to certain exceptions. One such exception is "qualified
performance-based" compensation. Compensation attributable to a stock option is
"qualified performance-based" compensation if all of the following conditions
are satisfied: (i) the option is granted by a committee consisting solely of two
or more "outside directors", (ii) the plan under which the option is granted
states the maximum number of shares with respect to which options may be granted
during a specified period to any employee, (iii) under the terms of the option,
the amount of compensation the employee could receive is based solely on an
increase in the value of stock after the date of grant of the option and (iv)
the material terms of the plan under which the option is granted are disclosed
to the publicly held corporation's shareholders and approved by them before any
compensation under the plan is paid. The Committee which will administer the
Plan currently consists solely of "outside directors" as defined for purposes of
Section 162(m) of the Code. It is expected that the Company generally will seek
to satisfy the conditions described above. If such conditions are satisfied,
compensation under the Plan that is payable with respect to options would not be
subject to the $1 million deduction limit under Section 162(m) of the Code.
Subject to the express provisions of the Plan, the Committee has the
authority to select eligible officers and other employees or persons who are
expected to become employees who will receive options and determine all of the
terms and conditions of each option. All options will be evidenced by a written
agreement
4
<PAGE> 7
containing such provisions not inconsistent with the Plan as the Committee shall
approve. The Committee will also have authority to prescribe rules and
regulations for administering the Plan and to decide questions of interpretation
or application of any provision of the Plan.
Available Shares. Under the Plan, 310,000 shares of Common Stock will be
available for grants of options, subject to adjustment in the event of a stock
split, stock dividend, recapitalization, reorganization, merger, spin-off or
other similar event or change in capitalization. To the extent shares subject to
an outstanding option are not issued or delivered by reason of the expiration,
termination, cancellation or forfeiture of such option or by reason of the
delivery or withholding of shares of Common Stock to pay all or a portion of the
exercise price of such option, or to satisfy all or a portion of the tax
withholding obligations relating to such option, then such shares of Common
Stock shall again be available under the Plan. The maximum number of shares of
Common Stock with respect to which options may be granted during any calendar
year to any person is 150,000, subject to adjustment as described above.
Effective Date, Termination and Amendment. If approved by shareholders, the
Plan will become effective as of March 12, 1998 (the date the Plan was approved
by the Board of Directors) and will terminate on March 12, 2008, unless
terminated earlier by the Board of Directors. The Board of Directors may amend
the Plan at any time, subject to any requirement of shareholder approval
required by applicable law, rule or regulation.
Exercise of Stock Options. The period for the exercise of a non-qualified
stock option will be determined by the Committee. The exercise price of a
non-qualified option will be determined by the Committee. No incentive stock
option will be exercisable more than ten years after its date of grant, unless
the recipient of the incentive stock option owns greater than ten percent of the
voting power of all shares of capital stock of the Company (a "ten percent
holder"), in which case the option must be exercised within five years after its
date of grant. The exercise price of an incentive stock option will not be less
than the fair market value of the Common Stock on the date of grant of such
option, unless the recipient of the incentive stock option is a ten percent
holder, in which case the option exercise price will be the price required by
the Code, currently 110% of fair market value. Upon exercise of an option, the
purchase price may be paid in cash or by delivery of previously owned whole
shares of Common Stock.
Termination of Employment. Unless otherwise set forth in the option
agreement, in the event of termination of employment by reason of death, each
non-qualified stock option will be exercisable only to the extent that such
option is exercisable on the date of death, and may thereafter be exercised for
a period of no more than one year (or such other period as set forth in the
option agreement) after the date of death, but in no event after the expiration
of such option. Unless otherwise set forth in the option agreement, in the event
of termination of employment for any reason other than death, each non-qualified
stock option will be exercisable only to the extent that such option is
exercisable on the date of such termination of employment, and may thereafter be
exercised for a period of no more than three months (or such other period as set
forth in the option agreement) after the date of such termination of employment,
but in no event after the expiration of such option. Unless otherwise set forth
in the option agreement, if an optionee dies during the three-month period (or
such other period as set forth in the option agreement) following termination of
employment for any reason other than death, each non-qualified stock option will
be exercisable only to the extent that such option is exercisable on the date of
death, and may thereafter be exercised for a period of no more than three months
(or such other period as set forth in the option agreement) after the date of
death, but in no event after the expiration of such option.
In the event of a termination of employment by reason of death or permanent
and total disability (as defined in Section 22(e)(3) of the Code), each
incentive stock option will be exercisable only to the extent that such option
is exercisable on the date of such termination of employment, and may thereafter
be exercised for a period of no more than one year (or such shorter period as
set forth in the option agreement) after such termination of employment, but in
no event after the expiration of the incentive stock option. In the event of a
termination of employment for any reason other than death or permanent and total
disability, each incentive stock option will be exercisable only to the extent
that such option is exercisable on the date of such termination of employment,
and may thereafter be exercised for a period of no more than three months after
5
<PAGE> 8
such termination of employment, but in no event after the expiration of the
incentive stock option. If the holder of an incentive stock option dies during
the one-year period (or such shorter period as set forth in the option
agreement) following termination of employment by reason of permanent and total
disability, or during the three-month period following termination of employment
for any other reason, each incentive stock option will be exercisable only to
the extent that such option is exercisable on the date of death, and may
thereafter be exercised for a period of no more than six months (or such shorter
period as set forth in the option agreement) after the date of death, but in no
event after expiration of the incentive stock option.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the U.S. federal income tax
consequences generally arising with respect to options granted under the Plan.
An optionee will not recognize any income upon the grant of an option. An
optionee will recognize compensation taxable as ordinary income (and subject to
income tax withholding) upon exercise of a non-qualified stock option equal to
the excess of the fair market value of the shares purchased over their exercise
price, and the Company will be entitled to a corresponding deduction. An
optionee will not recognize income (except for purposes of the alternative
minimum tax) upon exercise of an incentive stock option. If the shares acquired
by exercise of an incentive stock option are held for the longer of two years
from the date the option was granted and one year from the date the shares were
transferred, any gain or loss arising from a subsequent disposition of such
shares will be taxed as long-term or mid-term capital gain or loss, and the
Company will not be entitled to any deduction. If, however, such shares are
disposed of within the above-described period, then in the year of such
disposition the optionee generally will recognize compensation taxable as
ordinary income equal to the excess of the lesser of (i) the amount realized
upon such disposition and (ii) the fair market value of such shares on the date
of exercise over the exercise price, and the Company will be entitled to a
corresponding deduction.
6
<PAGE> 9
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as to the beneficial ownership
of Common Stock, as of February 1, 1998, of each of the Company's directors and
director nominees, each person named in the summary compensation table below and
the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF OUTSTANDING
NAME OWNERSHIP(1) COMMON STOCK
---- ----------------- ----------------------
<S> <C> <C>
James R. Bazet.......................... 0 *
William P. Carmichael................... 10,000 *
Samuel B. Horberg....................... 8,900 *
Jerry Kalov............................. 529,143(2) 8.1%
Carl Korn............................... 261,581 4.2%
Gerald M. Laures........................ 57,900(3) *
Anthony A. Mirabelli.................... 18,750(4) *
Harold D. Schwartz...................... 20,354(5) *
All directors, director nominees and
executive officers as a group (8
persons).............................. 906,628(6) 13.7%
</TABLE>
- ------------
* Less than 1% of the outstanding Common Stock.
(1) Except as otherwise disclosed, beneficial ownership includes both sole
investment and voting power with respect to the shares indicated.
(2) The amount includes 321,000 shares, which Mr. Kalov may acquire pursuant to
the exercise of stock options.
(3) The amount includes 53,500 shares, which Mr. Laures may acquire pursuant to
the exercise of stock options.
(4) The amount shown represents 18.750 shares, which Mr. Mirabelli may acquire
pursuant to the exercise of stock options.
(5) The amount shown represents 18,195 shares owned by Chez & Schwartz, Inc.
Profit Sharing Trust and 2,000 shares held by the Chez & Schwartz Pension
Plan, as to both of which Mr. Schwartz is the sole beneficiary, and 159
shares owned by Chez & Schwartz, Inc., of which Mr. Schwartz is President
and sole shareholder.
(6) The amount includes 393,250, which such directors and executive officers may
acquire pursuant to the exercise of stock options.
Other than Mr. Kalov, 6500 West Cortland Street, Chicago, Illinois 60707,
to the knowledge of the Company, as of December 31, 1997, the only beneficial
owners of more than 5% of the outstanding shares of Common Stock are as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF OUTSTANDING
NAME AND ADDRESS OWNERSHIP(1) COMMON STOCK
---------------- ----------------- ----------------------
<S> <C> <C>
Dimensional Fund Advisors............... 471,950 7.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Fidelity Investments.................... 524,700 8.4%
82 Devonshire Street
Boston, MA 02109-3614
</TABLE>
- ------------
(1) Beneficial ownership includes both sole investment and voting power with
respect to the shares indicated.
7
<PAGE> 10
EXECUTIVE COMPENSATION
ANNUAL AND LONG-TERM COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended December
31, 1997, 1996 and 1995 for (i) the chief executive officer of the Company and
(ii) each other executive officer of the Company whose annual salary and bonus
exceeded $100,000 during fiscal year 1997 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
SECURITIES ALL
OTHER ANNUAL UNDERLYING OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)(2)
--------------------------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James R. Bazet................. 1997 152,212 32,127 -0- 150,000 -0-
President and Chief Executive
Officer
Jerry Kalov.................... 1997 300,000 142,403 -0- -0- 11,150
Vice Chairman of the Board 1996 300,000 34,474 -0- -0- 6,000
and Former President and 1995 300,000 -0- 5,500(1) -0- 4,620
Chief Executive Officer
Gerald M. Laures............... 1997 130,000 12,927 -0- 15,000 9,917
Vice President -- Finance 1996 125,000 10,000 -0- 10,000 5,620
and Corporate Secretary 1995 115,000 10,000 -0- 10,500 3,465
Anthony A. Mirabelli........... 1997 152,052 49,710 -0- 75,000 10,585
Senior Vice President,
Marketing and Sales
</TABLE>
- ------------
(1) Amount relates to reimbursement for taxes owed for certain perquisites.
(2) Represents the Company's matching contributions under The Cobra Electronics
Corporation Profit Sharing and 401(k) Incentive Savings Plan.
STOCK OPTION GRANTS IN 1997
Shown below is information with respect to grants during fiscal year 1997
to the Named Officers of options to purchase Common Stock of the Company. No
stock appreciation rights ("SARs") were granted in 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF STOCK
SECURITIES PERCENTAGE OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS/SARS EXERCISE OR OPTION TERM
OPTIONS/SARS GRANTED TO BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) EMPLOYEES IN 1997 ($/SHARE) DATE 5%($) 10%($)
---- ------------ ------------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James R. Bazet........... 150,000(1) 40.2% 5.625 07/27/02 233,112 515,118
Jerry Kalov.............. -- -- -- -- -- --
Gerald M. Laures......... 15,000(1) 4.0% 2.875 03/11/02 11,915 26,328
Anthony A. Mirabelli..... 75,000(1) 20.1% 3.375 02/10/02 69,934 154,535
</TABLE>
- ------------
(1) Option becomes exercisable in annual 25% increments commencing twelve months
after the date of grant.
8
<PAGE> 11
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Shown below is information with respect to options exercised during fiscal
year 1997 and unexercised options to purchase Common Stock of the Company held
by the Named Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT DECEMBER 31,
NUMBER OF SHARES DECEMBER 31, 1997(#) 1997($)(1)(2)
UNDERLYING OPTIONS VALUE ---------------------------- ----------------------------
NAME EXERCISED($) RECEIVED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Bazet........... -- -- 0 150,000 -- --
Jerry Kalov.............. 170,986 466,585 321,000 -- 782,438 --
Gerald M. Laures......... -- -- 41,000 34,000 147,344 117,906
Anthony A. Mirabelli..... -- -- -- 75,000 -- 220,313
</TABLE>
- ------------
(1) No SARs were outstanding as of December 31, 1997.
(2) Based on the closing price on the Nasdaq National Market on December 31,
1997.
REPORT ON EXECUTIVE COMPENSATION
The members of the Compensation Committee of the Board of Directors and the
Stock Option Plan Committee have furnished the following report on executive
compensation:
The Compensation Committee administers the Company's various incentive
plans, including its annual bonus plan and stock incentive plans, other than the
Company's stock option plans. In addition, the Compensation Committee reviews
with the Board of Directors in detail the compensation of the Named Officers.
The Stock Option Plan Committee administers the Company's 1995 Stock Option Plan
and the Company's 1997 Stock Option Plan.
The compensation policy of the Company, which is endorsed by each
Committee, is designed to align the interests of the Company's executive
officers and key employees with that of the Company's shareholders and to
advance the interests of the Company and its shareholders by attracting and
retaining well-qualified executive officers and key employees. Therefore, it is
the Company's policy that a substantial portion of the incentive compensation of
each Named Officer relates to and must be contingent upon the performance of the
Company, as well as the individual contribution of each officer. When
considering the compensation of the Company's executive officers, each Committee
considers, as applicable, the following factors: (a) Company performance; (b)
the individual performance of each executive officer; (c) compensation levels
for similar positions at comparable companies; (d) the recommendations of the
Chief Executive Officer; (e) in the case of Mr. Kalov, the terms of his ten-year
employment agreement with the Company dated January 1, 1988, as amended (the
"Employment Agreement"); (f) in the case of Mr. Bazet, the terms of his
employment agreement with the Company dated April 18, 1997; and (g) in the case
of Mr. Mirabelli, the terms of his employment with the Company dated January 31,
1997.
Mr. Kalov's salary and bonus are determined pursuant to his Employment
Agreement. The Employment Agreement provides that Mr. Kalov will be paid an
annual salary of $300,000 and an annual bonus equal to 4% of the Company's
pretax accounting income, if any. Accordingly, Mr. Kalov's bonus in respect of
1997 was $142,403.
Mr. Bazet's salary and bonus are determined pursuant to his Employment
Agreement. During the period commencing July 28, 1997 and ending July 31, 1998,
Mr. Bazet will receive an annual salary of $345,000. During the period
commencing August 1, 1998 and ending July 31, 1999, Mr. Bazet will receive an
annual salary of $360,000. The Employment Agreement provides that Mr. Bazet will
be paid an annual bonus up to 20% of his base salary if the Company meets or
exceeds specified net income targets under the Approved Profit Plan relating to
1997. The Company met the performance criteria for 1997. Accordingly, Mr.
Bazet's bonus in respect of 1997 was $32,127.
9
<PAGE> 12
Mr. Mirabelli's salary and bonus are determined pursuant to his Employment
Agreement. The Employment Agreement provides that Mr. Mirabelli will be paid an
annual salary of $170,000 and an annual bonus equal to 35% of his salary for any
year during which the Company meets or exceeds specified net income targets
under the Approved Profit Plan relating to 1997. The Company met the performance
criteria for 1997. Accordingly, Mr. Mirabelli's bonus in respect of 1997 was
$49,710, which represents his prorated amount from February 10, 1997, the date
he joined the Company.
For the other executive officers, base salaries are set at competitive
levels. Salary increases and bonuses are paid based upon both the performance of
the entire Company and individual performance. The Compensation Committee does
not assign any specific weight to any measure of Company or individual
performance.
The Stock Option Plan Committee may grant options to purchase the Company's
Common Stock under the Company's stock option plans to certain key employees.
The Compensation Committee may recommend to the Board of Directors that certain
key employees be granted options to purchase the Company's Common Stock under
all other stock incentive plans. The exercise price of each option granted is
generally equal to 100% of the fair market value of the shares on the date of
grant and options granted are generally exercisable in part from time to time
commencing twelve months after the grant date, generally in an amount equal to
25% of the total number of shares covered during each successive twelve-month
period. The Committees believe that such grants are an important way to link
directly the financial interests of key employees with those of the Company's
shareholders. In fiscal year 1997, Mr. Kalov was not granted any options to
purchase common stock. Mr. Bazet received options to purchase 150,000 shares of
Common Stock at the exercise price of $5.625 per share. Mr. Laures received
options to purchase 15,000 shares of Common Stock at the exercise price of
$2.875 per share. Mr. Mirabelli received options to purchase 75,000 shares of
Common Stock at the exercise price of $3.375 per share.
The foregoing report has been furnished by:
Mr. Horberg (Chairman of Compensation Committee)
Mr. Carmichael (Chairman of Stock Option Plan Committee)
Mr. Kalov
Mr. Schwartz
10
<PAGE> 13
PERFORMANCE GRAPH
The following Performance Graph compares the yearly percentage change in
the Company's cumulative total shareholder return on the Company's Common Stock
for the five-year period, December 31, 1992 to December 31, 1997, with the
percentage change in the cumulative total return for The Nasdaq Stock Market
(U.S. Companies), which includes the Company, and a peer group of companies
selected by the Company (the "Peer Group").
Companies used to construct the Peer Group index are Koss Corporation and
Zenith Electronics Corporation. In selecting companies for the Peer Group, the
Company focused on publicly traded companies that design and market electronics
products, which have characteristics similar to that of the Company's in terms
of one or more of the following: type of product, end market, distribution
channels, sourcing or sales volume. Cincinnati Microwave, Inc. and Code Alarm
were deleted from the Peer Group because their stock is no longer publicly
traded.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
The graph assumes $100 invested on December 31, 1992 in each of the
Company's Common Stock, The Nasdaq Stock Market (U.S. Companies) and the Peer
Group. Reinvestment of dividends, if any, has been assumed and, with respect to
each Company in the Peer Group, the returns of such Company have been weighted
to reflect stock market capitalization at the beginning of each period indicated
on the Performance Graph. The graph was plotted using the following data:
<TABLE>
<CAPTION>
MEASUREMENT PERIOD (FISCAL YEAR COVERED)
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cobra........................... $100.000 $ 60.000 $ 42.858 $ 68.573 $ 77.145 $144.292
Nasdaq.......................... 100.000 114.796 112.214 158.699 195.192 239.527
Peer Group...................... 100.000 132.250 201.562 118.780 184.168 114.147
</TABLE>
Note: Sources include The Nasdaq Stock Market, CDA Investment Technologies,
Inc. and Standard & Poor's Corporation.
11
<PAGE> 14
EMPLOYMENT AGREEMENTS
According to the terms of Mr. Kalov's employment agreement, the Company is
obligated to make payments to him or his designated beneficiary beginning as of
January 1, 1998, the expiration date of his employment period. The Company is to
make payments for a period of 15 years in an amount equal to $253,938. The
obligation of the Company to make such payments is irrevocable in the case of
death or permanent disability.
Mr Bazet's agreement became effective July 28, 1997 and runs through July
31, 1999. The minimum salary to be paid is $345,000 in the first year of
employment and $360,000 in the second year. A bonus of up to 20% of base salary
will be earned if the Company meets or exceeds specified performance targets.
AUDITORS
Deloitte & Touche LLP has been selected by the Board of Directors to serve
as the Company's independent auditors for 1998, as they have been for three
years past. A representative of Deloitte & Touche LLP will be present at the
1998 Annual Meeting of Shareholders and will be given an opportunity to make a
statement and to respond to appropriate questions from shareholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of copies of reports of ownership, reports of
changes of ownership and written representations under Section 16(a) of the
Securities Exchange Act of 1934 which were furnished to the Company by persons
who were, at any time during 1997, directors or executive officers of the
Company or beneficial owners of more than 10% of the outstanding shares of
Common Stock, no such persons failed to file on a timely basis reports required
by such Section 16 during or with respect to 1997, except that: Anthony A.
Mirabelli failed to file on a timely basis an initial statement on Form 3, upon
his appointment as an officer of the Company.
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
Proposals of shareholders intended to be presented at the next Annual
Meeting of Shareholders, currently scheduled for May 11, 1999, must be received
by the Secretary of the Company not later than December 18, 1998, in order to be
considered for inclusion in the proxy statement and proxy relating to that
meeting.
REQUEST TO VOTE, SIGN AND RETURN PROXIES
Whether or not you plan to attend the Annual Meeting of Shareholders on May
12, 1998, please mark, sign, date and return the enclosed proxy as soon as
possible in the enclosed postage-paid envelope.
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors is not aware of
any matters, other than the election of Class III directors and the vote on the
1998 Stock Option Plan, that may be brought before the 1998 Annual Meeting.
However, if any other matters properly come before the Meeting, it is the
intention of the persons named in the enclosed proxy to vote such proxy in
accordance with their judgment on such matters. In addition to use of the mails,
the Company may also solicit proxies by telephone, telegraph or similar means.
The Company's registrar and transfer agent, American Stock Transfer & Trust
Company, will assist the Company in its solicitation of proxies and will not
receive any additional fee for its services. Other than American Stock Transfer
& Trust Company, no specially engaged employees or paid solicitors will be used
in this solicitation, the expenses of which will be paid by the Company (such
expenses are not expected to exceed the amount normally expended for an
uncontested solicitation in connection with an election of directors). Officers
and other regular employees of the Company will not receive any additional
compensation in connection with this solicitation.
12
<PAGE> 15
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 1997 AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE REQUIRED FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULE, WILL BE FURNISHED WITHOUT CHARGE,
BY FIRST CLASS MAIL, UPON THE WRITTEN OR ORAL REQUEST OF ANY SHAREHOLDER,
INCLUDING ANY BENEFICIAL OWNER ENTITLED TO VOTE AT THE MEETING DIRECTED TO THE
ATTENTION OF GERALD M. LAURES, THE COMPANY'S SECRETARY, 6500 WEST CORTLAND
STREET, CHICAGO, ILLINOIS 60707, TELEPHONE: (773) 889-8870.
By order of the Board of Directors,
GERALD M. LAURES
Secretary
Cobra Electronics Corporation
Chicago, Illinois
April 17, 1998
13
<PAGE> 16
EXHIBIT A
COBRA ELECTRONICS CORPORATION
1998 STOCK OPTION PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1998 Stock Option Plan (the "Plan") of
Cobra Electronics Corporation (the "Company") and its subsidiaries from time to
time (individually a "Subsidiary" and collectively the "Subsidiaries") are to
align the interests of the Company's stockholders and the recipients of options
under this Plan by increasing the proprietary interest of such recipients in the
Company's growth and success and to advance the interests of the Company by
attracting and retaining officers and other employees. For purposes of this
Plan, references to employment by the Company shall also mean employment by a
Subsidiary.
1.2 ADMINISTRATION. This Plan shall be administered by a committee (the
"Committee") designated by the Board of Directors of the Company (the "Board")
consisting of at least two members of the Board, each of whom may be a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Committee shall, subject to the terms of this Plan, select eligible
persons for participation in this Plan and determine the number of shares of
common stock, $.33 1/3 par value, of the Company ("Common Stock") subject to
each option granted hereunder, the exercise price of such option, the time and
conditions of exercise of such option and all other terms and conditions of such
option, including, without limitation, the form of the option agreement. The
Committee shall, subject to the terms of this Plan, interpret this Plan and the
application thereof, establish rules and regulations it deems necessary or
desirable for the administration of this Plan and may impose, incidental to the
grant of an option, conditions with respect to the grant, such as limiting
competitive employment or other activities. All such interpretations, rules,
regulations and conditions shall be conclusive and binding on all parties. Each
option hereunder shall be evidenced by a written agreement (an "Agreement")
between the Company and the optionee setting forth the terms and conditions
applicable to such option.
A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (i) acts of a majority of the members of the Committee
present at any meeting at which a quorum is present or (ii) acts approved in
writing by all of the members of the Committee without a meeting.
1.3 ELIGIBILITY. Participants in this Plan shall consist of such officers
and other employees or persons who are expected to become employees of the
Company and its Subsidiaries as the Committee in its sole discretion may select
from time to time. The Committee's selection of a person to participate in this
Plan at any time shall not require the Committee to select such person to
participate in this Plan at any other time.
1.4 SHARES AVAILABLE. Subject to adjustment as provided in Section 3.7,
310,000 shares of Common Stock shall be available for grants of options under
this Plan. To the extent that shares of Common Stock subject to an outstanding
option are not issued or delivered by reason of the expiration, termination,
cancellation or forfeiture of such option or by reason of the delivery of shares
of Common Stock to pay all or a portion of the exercise price of such option or
to satisfy all or a portion of the tax withholding obligations relating to such
option, then such shares of Common Stock shall again be available under this
Plan.
Shares of Common Stock to be delivered under this Plan shall be made
available from authorized and unissued shares of Common Stock, or authorized and
issued shares of Common Stock reacquired and held as treasury shares or
otherwise, or a combination thereof.
To the extent required by Section 162(m) of the Code and the rules and
regulations thereunder, the maximum number of shares of Common Stock with
respect to which options may be granted during any calendar year to any person
shall be 150,000, subject to adjustment as provided in Section 3.7.
A-1
<PAGE> 17
II. STOCK OPTIONS
2.1 GRANTS OF STOCK OPTIONS. The Committee may, in its discretion, grant
options to purchase shares of Common Stock to such eligible persons as may be
selected by the Committee. Each option, or portion thereof, that is not an
incentive stock option, shall be a non-qualified stock option. An incentive
stock option shall mean an option to purchase shares of Common Stock that meets
the requirements of Section 422 of the Code, or any successor provision, which
is intended by the Committee to constitute an incentive stock option. Each
incentive stock option shall be granted within ten years of the effective date
of this Plan. To the extent that the aggregate Fair Market Value (determined as
of the date of grant) of shares of Common Stock with respect to which options
designated as incentive stock options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other plan of the
Company, or any parent or Subsidiary) exceeds the amount (currently $100,000)
established by the Code, such options shall constitute non-qualified stock
options. "Fair Market Value" shall mean the closing price of a share of Common
Stock on The Nasdaq Stock Market on the date as of which such value is being
determined or, if there shall be no closing price on such date, on the next
preceding date for which a closing price was reported; provided, however, that
if Fair Market Value for any date cannot be determined as above provided, Fair
Market Value shall be determined by the Committee by whatever means or method as
the Committee, in the good faith exercise of its discretion, shall at such time
deem appropriate.
2.2 TERMS OF STOCK OPTIONS. Options shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. The number of shares of Common
Stock subject to an option and the purchase price per share of Common Stock
purchasable upon exercise of the option shall be determined by the Committee;
provided, however, that the purchase price per share of Common Stock purchasable
upon exercise of any incentive stock option shall not be less than 100% of the
Fair Market Value of a share of Common Stock on the date of grant of such
option; provided further, that if an incentive stock option shall be granted to
any person who, at the time such option is granted, owns capital stock
possessing more than ten percent of the total combined voting power of all
classes of capital stock of the Company (or of any parent or Subsidiary) (a "Ten
Percent Holder"), the purchase price per share of Common Stock shall be the
price (currently 110% of Fair Market Value) required by the Code in order to
constitute an incentive stock option.
(b) Option Period and Exercisability. The period during which an option may
be exercised shall be determined by the Committee; provided, however, that no
incentive stock option shall be exercised later than ten years after its date of
grant; provided further, that if an incentive stock option shall be granted to a
Ten Percent Holder, such option shall not be exercised later than five years
after its date of grant. The Committee may, in its discretion, establish
performance measures which shall be satisfied or met as a condition to the grant
of an option or to the exercisability of all or a portion of an option. The
Committee shall determine whether an option shall become exercisable in
cumulative or non-cumulative installments and in part or in full at any time. An
exercisable option, or portion thereof, may be exercised only with respect to
whole shares of Common Stock.
(c) Method of Exercise. An option may be exercised (i) by giving written
notice to the Company specifying the number of whole shares of Common Stock to
be purchased and accompanied by payment therefor in full (or arrangement made
for such payment to the Company's satisfaction) either (A) in cash, (B) by
delivery of previously owned whole shares of Common Stock (which the optionee
has held for at least six months prior to the delivery of such shares and for
which the optionee has good title, free and clear of all liens and encumbrances)
having a Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (C) in cash by a
broker-dealer acceptable to the Company to whom the optionee has submitted an
irrevocable notice of exercise or (D) a combination of (A) and (B), in each case
to the extent set forth in the Agreement relating to the option and (ii) by
executing such documents as the Company may reasonably request. The Committee
shall have sole discretion to disapprove of an election pursuant to any of
clauses (B)-(D). Any fraction of a share of Common Stock
A-2
<PAGE> 18
which would be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the optionee. No certificate
representing Common Stock shall be delivered until the full purchase price
therefor has been paid.
2.3 TERMINATION OF EMPLOYMENT.
(a) Death. Subject to paragraph (d) below and unless otherwise specified in
the Agreement relating to an option, if an optionee's employment by the Company
terminates by reason of death, each option held by such optionee shall be
exercisable only to the extent that such option is exercisable on the date of
such optionee's death and may thereafter be exercised by such optionee's
executor, administrator, legal representative, beneficiary or similar person, as
the case may be, until and including the earliest to occur of (i) the date which
is one year (or such other period as set forth in the Agreement relating to such
option) after the date of death and (ii) the expiration date of the term of such
option.
(b) Other Termination. Subject to paragraph (d) below and unless otherwise
specified in the Agreement relating to an option, if an optionee's employment
with the Company terminates for any reason other than death, each option held by
such optionee shall be exercisable only to the extent that such option is
exercisable on the effective date of such optionee's termination of employment
and may thereafter be exercised by such optionee (or such optionee's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months (or such other period as set forth in the
Agreement relating to such option) after the effective date of such optionee's
termination of employment and (ii) the expiration date of the term of such
option.
(c) Death Following Termination of Employment. Subject to paragraph (d)
below and unless otherwise specified in the Agreement relating to an option, if
an optionee dies during the three-month period (or such other period as set
forth in the Agreement relating to such option) following termination of
employment for any other reason other than death, each option held by such
optionee shall be exercisable only to the extent that such option is exercisable
on the date of such optionee's death and may thereafter be exercised by such
optionee's executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until and including the earliest to occur of (i) the
date which is three months (or such other period as set forth in the Agreement
relating to such option) after the date of death and (ii) the expiration date of
the term of such option.
(d) Termination of Employment -- Incentive Stock Options. If the employment
with the Company of a holder of an incentive stock option terminates by reason
of death or Permanent and Total Disability (as defined in Section 22(e)(3) of
the Code), each incentive stock option held by such optionee shall be
exercisable only to the extent that such option is exercisable on the date of
such optionee's death or on the effective date of such optionee's termination of
employment by reason of Permanent and Total Disability, as the case may be, and
may thereafter be exercised by such optionee (or such optionee's executor,
administrator, legal representative, beneficiary or similar person) until and
including the earliest to occur of (i) the date which is one year (or such
shorter period as set forth in the Agreement relating to such option) after the
date of death or the effective date of such optionee's termination of employment
by reason of Permanent and Total Disability, as the case may be, and (ii) the
expiration date of the term of such option.
If the employment with the Company of a holder of an incentive stock option
terminates for any reason other than death or Permanent and Total Disability,
each incentive stock option held by such optionee shall be exercisable only to
the extent such option is exercisable on the effective date of such optionee's
termination of employment, and may thereafter be exercised by such optionee (or
such optionee's legal representative or similar person) until and including the
earliest to occur of (i) the date which is three months after the effective date
of such optionee's termination of employment and (ii) the expiration date of the
term of such option.
If the holder of an incentive stock option dies during the one-year period
following termination of employment by reason of Permanent and Total Disability
(or such shorter period as set forth in the Agreement relating to such option),
or if the holder of an incentive stock option dies during the three-month period
following termination of employment for any reason other than death or Permanent
and Total
A-3
<PAGE> 19
Disability, each incentive stock option held by such optionee be exercisable
only to the extent such option is exercisable on the date of the optionee's
death and may thereafter be exercised by the optionee's executor, administrator,
legal representative, beneficiary or similar person, as the case may be, until
and including the earliest to occur of (i) the date which is six months (or such
shorter period as set forth in the Agreement relating to such option) after the
date of death and (ii) the expiration date of the term of such option.
III. GENERAL
3.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the
stockholders of the Company for approval and, if approved by the affirmative
vote of a majority of the shares of Common Stock present in person or
represented by proxy at the 1998 Annual Meeting of Stockholders, shall become
effective as of the date of approval by the Board. This Plan shall terminate ten
years after its effective date unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any option
granted prior to termination.
Options may be granted hereunder at any time prior to the termination of
this Plan, provided that no option may be granted later than ten years after the
effective date of this Plan. In the event that this Plan is not approved by the
stockholders of the Company, this Plan and any options granted hereunder shall
be void and of no force or effect.
3.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation, including Section 162(m) of the Code. No amendment may
impair the rights of a holder of an outstanding option without the consent of
such holder.
3.3 AGREEMENT. No option shall be valid until an Agreement is executed by
the Company and the optionee and, upon execution by the Company and the optionee
and delivery of the Agreement to the Company, such option shall be effective as
of the effective date set forth in the Agreement.
3.4 NON-TRANSFERABILITY. No option shall be transferable other than (i) by
will or the laws of descent and distribution or pursuant to beneficiary
designation procedures approved by the Company or (ii) as set forth in the
Agreement relating to an option. Each option may be exercised during the
optionee's lifetime only by the optionee or the optionee's legal representative
or similar person. Except as permitted by the second preceding sentence, no
option shall be sold, transferred, assigned, pledged, hypothecated, encumbered
or otherwise disposed of (whether by operation of law or otherwise) or be
subject to execution, attachment or similar process. Upon any attempt to so
sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any option, such option and all rights thereunder shall immediately become null
and void.
3.5 TAX WITHHOLDING. The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock, payment by the optionee
of any Federal, state, local or other taxes which may be required to be withheld
or paid in connection with an option hereunder. An Agreement may provide that
the optionee may satisfy any obligation to withhold or pay taxes arising on any
date (the "Tax Date") in connection with the option in the amount necessary to
satisfy any such obligation by any of the following means: (A) a cash payment to
the Company, (B) delivery to the Company of previously owned whole shares of
Common Stock (which the optionee has held for at least six months prior to the
delivery of such shares and for which the optionee has good title, free and
clear of all liens and encumbrances) having an aggregate Fair Market Value,
determined as of the Tax Date, equal to the amount necessary to satisfy any such
obligation, (C) a cash payment by a broker-dealer acceptable to the Company to
whom the optionee has submitted an irrevocable notice of exercise or (D) a
combination of (A) and (B), in each case to the extent set forth in the
Agreement relating to the option; provided, however, that the Committee shall
have sole discretion to disapprove of an election pursuant to any of clauses
(B)-(D). An Agreement may provide for shares of Common Stock to be delivered
having an aggregate Fair Market Value in excess of the minimum amount required
to be withheld, but not in excess of the amount determined by applying the
optionee's maximum marginal tax rate. Any fraction of a share of Common Stock
which would be required to satisfy such an obligation shall be disregarded and
the remaining amount due shall be paid in cash by the optionee.
A-4
<PAGE> 20
3.6 RESTRICTIONS ON SHARES. Each option hereunder shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any option bear a legend indicating that the sale,
transfer or other disposition thereof by the holder is prohibited except in
compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
3.7 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding option and the
purchase price per security shall be appropriately adjusted by the Committee,
such adjustments to be made in the case of outstanding options without an
increase in the aggregate purchase price. The decision of the Committee
regarding any such adjustment shall be final, binding and conclusive. If any
adjustment would result in a fractional security being (i) available under this
Plan, such fractional security shall be disregarded, or (ii) subject to an
option under this Plan, the Company shall pay the optionee, in connection with
the first exercise of the option in whole or in part, occurring after such
adjustment, an amount in cash determined by multiplying (A) the fraction of such
security (rounded to the nearest hundredth) by (B) the excess, if any, of (x)
the Fair Market Value on the exercise date over (y) the exercise price of the
option.
3.8 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right
to participate in this Plan. Neither this Plan nor any option granted hereunder
shall confer upon any person any right to continued employment by the Company,
any Subsidiary or any affiliate of the Company or affect in any manner the right
of the Company, any Subsidiary or any affiliate of the Company to terminate the
employment of any person at any time without liability hereunder.
3.9 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder
of the Company with respect to any shares of Common Stock which are subject to
an option hereunder until such person becomes a stockholder of record with
respect to such shares of Common Stock.
3.10 GOVERNING LAW. This Plan, each option hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 12, 1998.
A-5
<PAGE> 21
COBRA ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CORPORATE OVERVIEW
Higher sales and gross margin and a $1.1 million one-time gain on the sale
of a building resulted in $4.7 million of net income in 1997. An increase in
sales of both CB radios, with the company's exclusive, patent-pending
SoundTracker(TM) technology, and radar detectors, both domestically and
internationally, fueled the sales growth and improved the gross margin to its
highest level in the 1990s.
Also late in 1997, the company announced the industry's first line of
six-band radar detectors, scheduled for shipment beginning in the Spring of
1998. The company has designed these detectors to alert drivers to each of the
four current speed monitoring systems in use -- X, K, Ka and Laser -- plus VG-2,
the "detector detector" monitoring band, and the Safety Alert(R) Traffic Warning
System band. This makes the unique Cobra six-band detector the most
comprehensive alert system in the industry and for the first time allows drivers
to be aware of all four speed monitoring systems as well as the presence of VG-2
and Safety Alert transmissions. Because 6 Band(TM) technology represents the
first really significant innovation since the introduction several years ago of
the current four-band models, retailer demand for these proprietary units has
been very strong and has resulted in new distribution opportunities for Cobra.
For example, the company recently added Best Buy and Circuit City as radar
detector customers for 1998 because of six band detectors.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income for 1997 increased to $4.7 million from $601,000 in 1996.
Included in net income for 1997 was a $1.1 million gain on the third quarter
sale of a building that the company did not need for its operations and was
leasing to an outside party. Net income, excluding the gain on the sale of the
building, increased $3.0 million to $3.6 million in 1997 from $601,000 in 1996.
Net sales increased $13.8 million, or 15.3%, to $104.1 million from $90.3
million in 1996. Selling, general and administrative expense increased to $16.7
million from $14.4 million, but, as a percentage of net sales, remained
substantially unchanged at 16%.
Sales of mobile electronics products (mainly CB radios, Family Radio
Service two-way radios and integrated radar/laser detectors) increased
approximately $23.8 million, or 39.6% in 1997 compared to 1996. (In the fourth
quarter of 1997, sales of mobile electronic products increased $4.3 million, or
24.4%.) Sales of CB radios increased 28% in 1997 mainly because of strong demand
for radios with the company's exclusive, patent-pending SoundTracker technology,
introduced early in the year. Additionally, an all-new radar detector lineup
helped drive sales volume in the U.S., while internationally the company
capitalized on the strong demand in Russia for radar detectors. In total,
international sales of mobile electronics products increased $9.8 million in
1997.
Telecommunication products sales decreased $10 million because of lower
sales of both 25-channel cordless phones and integrated cordless phone answering
systems to several large retail customers. Also contributing to the sales
decrease was lower sales of factory reconditioned products as a result of
agreements with some of the company's vendors that allow product returned from
the company's customers to be returned to the vendor for partial credit towards
future purchases. Prior to these agreements, which were entered into in 1996,
the company repaired and resold this returned merchandise as factory
reconditioned product. The company also restricted expanding distribution for
its 25-channel cordless phones as it seeks to de-emphasize this product line in
favor of the rapidly growing 900 MHz segment which the company will enter in the
Fall of 1998 with several 900 MHz cordless phone models.
Gross margin for 1997 increased to 20.7% from 18.1% in 1996 primarily due
to an improvement in sales mix of higher margin CB and radar detector products.
Sales of mobile electronics products increased as a percentage of total sales
from 67% in 1996 to 81% in 1997. In addition, gross margin on radar detectors
increased due to the new radar detector lineup, which included lower cost models
that replaced higher cost
F-1
<PAGE> 22
models. Also contributing to the gross margin improvement was lower repair costs
on returned products, which declined because of return to vendor agreements
discussed above. Partially offsetting the favorable impact of these items was
$555,000 of increased air freight expense mainly to satisfy the strong demand
for CB radios with the SoundTracker system. Normally the company uses
significantly less expensive ocean freight to import its products.
Selling, general and administrative expense increased $2.3 million during
1997 and, as a percentage of net sales, remained relatively unchanged from 1996.
Sales and marketing expenses increased due to: higher variable expenses
resulting from the increase in sales volume; the addition of a senior vice
president of marketing and sales, a newly created position, in February 1997;
and increased promotional spending mainly to promote the new SoundTracker
technology. In addition, higher bonus and bad debt expense in 1997 also
contributed to the increase in selling, general and administrative expenses. Bad
debt expense increased because of the bankruptcy of a small customer and a
potential preference payment issue for a prior year's bankruptcy. In addition,
prior year's bad debt expense reflected a favorable reserve adjustment because
of improvement in the quality of the receivable portfolio and favorable
collections experience.
Interest expense for 1997 decreased to $1.3 million from $1.7 million. Debt
levels declined due to lower average inventory and receivable levels. In
addition, the company sold a building, which was not needed for operations and
was being leased to an outside party, in the third quarter of 1997 for
approximately $2 million. The sale resulted in a $1.1 million gain.
Other expense was $60,000 in 1997 compared to other income of $275,000 in
1996. In 1996 there was a gain of $373,000 from a suit against a former
distributor for violation of a licensing agreement and $217,000 of royalty
income from Safety Alert licensing agreements, offset by a $384,000 writedown of
a building related to a discontinued operation.
1996 COMPARED TO 1995
Net income for 1996 was $601,000 compared to a net loss of $1.1 million in
the year ago period. Selling, general and administrative expense decreased $1.7
million to 15.9 percent of net sales from 17.8 percent of net sales in the prior
year. 1996 net sales were substantially unchanged from the prior year.
Sales of mobile electronics products (mainly CB radios and integrated
radar/laser detectors) declined approximately $900,000 in 1996 compared to 1995.
Higher domestic CB sales were offset by a large drop in international CB sales,
mainly because of a trademark dispute that limited shipments to a South American
distributor. Also, offsetting some of this drop was increased sales of
integrated radar/laser detectors primarily because of expanded distribution
overseas.
Telecommunications product sales increased $1.6 million in 1996 compared to
1995, primarily due to increased sales to Sprint of the exclusive Sprint-branded
Intenna cordless telephone and Cobra-branded integrated Intenna cordless
phone/answering systems. 1996 sales to Sprint doubled from their 1995 levels.
Partially offsetting this increase was a decrease in international sales of
telecommunications products due to a lack of cordless phone availability because
of constraints in capacity at the company's cordless phone supplier as well as
compliance issues with local regulatory requirements.
Gross margin for 1996 and 1995 was 18.1 percent and 18.3 percent,
respectively. Increased cordless phone margins, which reflected strong demand
for 25-channel phones that were not available in 1995, were offset by lower
answering system margins due mainly to increased air freight expenses to import
the company's popular Intenna answering systems in order to take advantage of
customer orders that exceeded original forecasts. As a result, the company was
not able to use less expensive ocean freight as it normally does and still
satisfy this demand in a timely manner. Also offsetting the higher cordless
phone margins were a decrease in detector margins, which was due to downward
pricing pressures on several higher-priced models. CB margins were essentially
unchanged from the prior year.
Selling, general and administrative expenses decreased $1.7 million due to
lower sales and marketing expenses, which declined because of lower advertising
expenses, a change in sales commission programs, and the implementation of other
cost reduction programs such as bringing in house some packaging and print
F-2
<PAGE> 23
media design activities. In addition, 1995 expenses included higher than normal
marketing and product development costs incurred to build sales volume.
Partially offsetting the lower selling and marketing expenses was a $1.2 million
charge to reduce advertising credits to their net realizable value, which was
partially offset by a decline in bad debts expense because of improvement in the
quality of the receivable portfolio and favorable collections experience.
Interest expense for 1996 decreased to $1.7 million from $1.8 million in
the prior year due primarily to lower interest rates. In addition, as a result
of consolidation of warehousing activities the Company sold one of its three
Chicago buildings for approximately $1 million, which reduced borrowings.
Other income increased to $275,000 in 1996 from $127,000 in 1995 and
reflects a gain of $373,000 from a suit against a former distributor for
violation of a licensing agreement and $217,000 of royalty income from Safety
Alert licensing agreements, offset by a $384,000 writedown of a building related
to a discontinued operation.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the company had a $30 million secured credit facility
that included a fixed term loan. Borrowings and letters of credit issued under
this agreement were collateralized by the company's assets, and usage of the
non-term loan portion was limited to certain percentages of accounts receivable
and inventory. The fixed term loan was secured by the company's buildings and
equipment and required both monthly principal payments of $43,000 and a balloon
payment of $2 million at the time of expiration.
The credit agreement specified that the company may not pay cash dividends
and contained a material adverse change clause, which, under certain
circumstances, could accelerate the payment of the debt. Because of this clause
the company classified the debt as short-term for financial reporting purposes.
The company does not believe a material adverse change is likely. At December
31, 1997, the company had approximately $8.4 million of unused credit line.
On February 3, 1998, the company entered into a new $35 million secured
credit agreement with two financial institutions for a three-year revolving
credit facility, replacing the existing $30 million credit agreement. Loans
outstanding under the new agreement bear interest, at the company's option, at
the prime rate or, under a LIBOR option, at LIBOR plus 2 percent. Additionally,
the new agreement provides for higher advance rates on eligible inventory and
receivables and eliminates the 2 percent per annum charge that the company was
obligated to pay on its average outstanding balance of letters of credit under
the previously existing agreement.
Cash flows provided by operating activities were $540,000 for the year
ended December 31, 1997. Receivables increased compared to the prior year
because of higher sales volume. Inventories increased mainly because of higher
CB and radar detector inventories as well as investment in inventories for the
new power inverter line and for the growing Safety Alert transmitter business.
CB inventory increased in anticipation of continued strong demand for
SoundTracker models in the first quarter of 1998. Radar detector inventories
increased because of lower than anticipated year end domestic sales. Accrued
liabilities increased due to: higher product warranty costs as a result of the
higher sales volume in 1997 compared to 1996; and increased accrued salaries and
commissions due to higher bonus and deferred compensation accruals.
Cash flows provided by operating activities were $8.2 million for the year
ended December 31, 1996. Receivables decreased compared to the prior year
because the 1995 balance included amounts from several large customers which
were due prior to year end but were received shortly thereafter. Inventories
decreased because soft demand at retail during the fourth quarter of 1995
resulted in lower than anticipated sales and higher than expected inventory
levels at the end of 1995. Other assets decreased due to a charge to reduce
advertising credits to their net realizable value. Accounts payable declined
because of reduced purchases of product on open account from a domestic supplier
and lower unpaid letters of credit due to timing of payments.
Cash flows used in operating activities were $4.8 million for the year
ended December 31, 1995; losses from operations of $1.1 million together with an
increase in working capital requirements provided for the cash
F-3
<PAGE> 24
outflow. The increase in receivables is due mainly to higher fourth quarter
sales compared to the prior year as well as payments from several large
customers which were due prior to year end but were received shortly thereafter.
Inventories increased mainly as a result of lower than anticipated sales during
the year-end holiday selling season because of soft demand at the retail level.
Accounts payable increased because of additional purchases of product on open
account from a domestic supplier. The majority of the company's purchases are
from foreign suppliers and are financed with letters of credit, which require
payment at the time of shipment.
Investing activities provided cash of $683,000 in 1997 and required cash of
$703,000 and $1.9 million in 1996 and 1995, respectively. Most of the cash
outflows during these years related to the purchase of tooling and equipment. In
1997 the company sold a building that the company did not need for operations
and was leasing to an outside party for approximately $2 million. In 1996 due to
consolidation of the warehousing activities, the company sold a building for
approximately $1 million.
Cash flows provided by and used for financing activities for the three
years ending December 31, 1997, primarily reflect changes in the company's
borrowing requirements under its line-of-credit agreement.
At December 31, 1997, the company had no material commitments, other than
approximately $21.1 million in outstanding purchase orders for products compared
with $23.8 million at the end of the prior year.
The company believes that cash generated from operations and from
borrowings under its credit agreement will be sufficient in 1998 to fund its
working capital needs. In addition, the majority of any taxable income in 1998
will be offset by net operating loss carryforwards that totaled $30.4 million at
December 31, 1997.
YEAR 2000
The company initiated the process of preparing its computer systems and
applications for the Year 2000 in 1997. This process involves modifying or
replacing certain hardware and software maintained by the company. Management
expects to have substantially all of the system and application changes
completed by the end of 1998 and believes its level of preparedness is
appropriate.
The total cost to the company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. The costs and the date on which the
company plans to complete the Year 2000 modification are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued
F-4
<PAGE> 25
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
COBRA ELECTRONICS CORPORATION
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------ ------------------ ------------------ ------------------
QUARTER ENDED 1997 1996 1997 1996 1997 1996 1997 1996
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $17,915 $19,272 $29,472 $21,395 $31,353 $25,388 $25,358 $24,269
Cost of sales................ 14,403 16,139 23,776 17,260 24,585 20,657 19,783 19,898
Gross profit................. 3,512 3,133 5,696 4,135 6,768 4,731 5,575 4,371
Selling, general and
administrative expense..... 3,134 3,417 4,147 3,622 5,022 3,873 4,352 3,462
Operating income (loss)...... 378 (284) 1,549 513 1,746 858 1,223 909
Gain on sale of building..... -- -- -- -- 1,132 -- -- --
Net income (loss)............ 93 (583) 1,249 284 2,625 410 725 490
Net income (loss) per
share(a):
Basic...................... 0.01 (0.09) 0.20 0.05 0.43 0.07 0.12 0.08
Diluted.................... 0.01 (0.09) 0.20 0.05 0.39 0.07 0.11 0.08
Weighted average shares
outstanding:
Basic...................... 6,242 6,230 6,242 6,230 6,170 6,230 6,173 6,231
Diluted.................... 6,332 6,230 6,308 6,263 6,652 6,272 6,643 6,306
Stock Price
High....................... 3 5/8 4 1/8 3 3/8 3 1/8 8 7/8 3 1/8 10 7/8 3 7/8
Low........................ 2 1/2 2 1/4 2 1/2 1 15/16 2 13/16 2 5 1/4 2 1/8
End of Quarter............. 2 7/8 2 1/2 2 5/32 2 7/8 7 3/8 2 3/4 6 5/16 3 3/8
Trading Volume............... 704 1,624 583 725 9,402 344 4,966 1,265
</TABLE>
- ------------
(a) The total quarterly income per share may not equal the annual amount because
net income per share is calculated independently for each quarter.
F-5
<PAGE> 26
COBRA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... $104,098 $90,324 $90,442
Cost of sales............................................... 82,547 73,954 73,865
-------- ------- -------
Gross profit................................................ 21,551 16,370 16,577
Selling, general and administrative expense................. 16,655 14,374 16,097
-------- ------- -------
Operating income....................................... 4,896 1,996 480
Other income (expense):
Interest expense.......................................... (1,276) (1,670) (1,752)
Gain on sale of building.................................. 1,132 -- --
Other income (expense), net............................... (60) 275 127
-------- ------- -------
Income (loss) before income taxes........................... 4,692 601 (1,145)
Income taxes................................................ -- -- --
-------- ------- -------
Net income (loss)........................................... $ 4,692 $ 601 $(1,145)
======== ======= =======
Net income (loss) per common share:
Basic..................................................... $ .76 $ .10 $ (0.18)
======== ======= =======
Diluted................................................... $ .73 $ .10 $ (0.18)
======== ======= =======
Weighted average shares outstanding:
Basic..................................................... 6,207 6,231 6,227
Diluted................................................... 6,459 6,285 6,227
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1997
---------------------------------------------------------
NOTE
COMMON PAID-IN RETAINED TREASURY RECEIVABLE
STOCK CAPITAL EARNINGS STOCK FROM OFFICER
------ ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance -- January 1, 1995..................... $2,345 $22,118 $ 2,124 $ 5,545 $ 1,613
Net loss..................................... -- -- (1,145) -- --
Note receivable interest..................... -- -- -- -- 110
------ ------- ------- ------- -------
Balance -- December 31, 1995................... 2,345 22,118 979 5,545 1,723
Net income................................... -- -- 601 -- --
Note receivable interest..................... -- -- -- -- 101
Transactions related to exercise of options,
net....................................... -- (56) -- (95) --
------ ------- ------- ------- -------
Balance -- December 31, 1996................... 2,345 22,062 1,580 5,450 1,824
Net income................................... -- -- 4,692 -- --
Note receivable interest..................... -- -- -- -- 81
Exchange of note receivable for common stock
(Note 9).................................. -- -- -- 1,905 (1,905)
Transactions related to exercise of options,
net....................................... -- (1,381) -- (1,730) --
------ ------- ------- ------- -------
Balance -- December 31, 1997................... $2,345 $20,681 $ 6,272 $ 5,625 $ --
====== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 27
COBRA ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,815 $ 2,606
Receivables, less allowance for doubtful accounts of $958
in 1997 and $792 in 1996............................... 15,685 12,314
Inventories, primarily finished goods..................... 19,830 15,418
Other current assets...................................... 1,337 733
-------- --------
Total current assets........................................ 38,667 31,071
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 330 482
Buildings and improvements................................ 3,553 5,804
Tooling and equipment..................................... 11,264 10,091
-------- --------
15,147 16,377
Accumulated depreciation and amortization................. (10,436) (10,244)
-------- --------
Net property, plant and equipment......................... 4,711 6,133
-------- --------
Other assets................................................ 4,901 5,392
-------- --------
Total assets................................................ $ 48,279 $ 42,596
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,637 $ 3,335
Accrued salaries and commissions.......................... 1,307 340
Accrued advertising and sales promotion costs............. 1,093 654
Accrued product warranty costs............................ 4,173 2,838
Other accrued liabilities................................. 1,170 1,446
Short-term debt........................................... 10,995 13,277
-------- --------
Total current liabilities................................... 22,375 21,890
-------- --------
Long-term liability:
Deferred compensation..................................... 2,231 1,993
-------- --------
Total liabilities........................................... 24,606 23,883
-------- --------
Shareholders' equity:
Preferred stock, $1 par value, shares
authorized -- 1,000,000; none issued................... -- --
Common stock, $.33 1/3 par value, 12,000,000 shares
authorized, 7,039,100 issued and 6,217,791 outstanding
for 1997 and 6,241,648 outstanding for 1996............ 2,345 2,345
Paid-in capital........................................... 20,681 22,062
Retained earnings......................................... 6,272 1,580
-------- --------
29,298 25,987
-------- --------
Treasury stock, at cost (821,309 shares for 1997 and
797,452 shares for 1996)............................... (5,625) (5,450)
Note receivable from officer's exercise of stock
options................................................ -- (1,824)
-------- --------
Total shareholders' equity.................................. 23,673 18,713
-------- --------
Total liabilities and shareholders' equity.................. $ 48,279 $ 42,596
======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 28
COBRA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 4,692 $ 601 $(1,145)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization.......................... 3,198 3,080 1,826
Gain on sale of fixed assets........................... (1,132) (123) --
Changes in assets and liabilities:
Receivables.......................................... (3,371) 3,447 (4,948)
Inventories.......................................... (4,412) 2,287 (2,611)
Other current assets................................. (686) 138 466
Other assets......................................... (754) 666 (1,429)
Accounts payable..................................... 302 (2,735) 2,648
Accrued liabilities -- current....................... 2,465 571 277
Deferred compensation................................ 238 231 162
------- ------- -------
Net cash flows from operating activities.................... 540 8,163 (4,754)
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of fixed assets........................ 1,999 1,086 --
Capital expenditures...................................... (1,316) (1,789) (1,678)
Net cash used for discontinued operation.................. -- -- (263)
------- ------- -------
Net cash flows from investing activities.................... 683 (703) (1,941)
------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) under the line-of-credit
agreement.............................................. (2,282) (6,091) 7,907
Transactions related to exercise of stock options, net.... 268 (62) (110)
------- ------- -------
Net cash flows from financing activities.................... (2,014) (6,153) 7,797
------- ------- -------
Net increase (decrease) in cash............................. (791) 1,307 1,102
Cash at beginning of year................................... 2,606 1,299 197
------- ------- -------
Cash at end of year......................................... $ 1,815 $ 2,606 $ 1,299
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest............................................... $ 1,274 $ 1,716 $ 1,654
Taxes.................................................. 338 83 --
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 29
COBRA ELECTRONICS CORPORATION
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales............................ $104,098 $90,324 $90,442 $82,131 $98,844
Gross profit......................... 21,551 16,370 16,577 14,466 13,903
Selling, general and administrative
expense........................... 16,655 14,374 16,097 14,602 15,741
Operating income (loss).............. 4,896 1,996 480 (136) (2,914)
Gain on sale of building............. 1,132 -- -- -- --
Net Income (loss).................... 4,692 601 (1,145) (1,515) (4,392)
Net income (loss) per share:
Basic earnings (loss)................ .76 .10 (0.18) (0.24) (0.70)
Diluted earnings (loss).............. .73 .10 (0.18) (0.24) (0.70)
Dividends per share.................. None None None None None
As of December 31:
Total assets......................... 48,279 42,596 50,081 40,342 46,389
Short-term debt...................... 10,995 13,277 19,368 11,461 13,689
Shareholders' equity................. 23,673 18,713 18,174 19,429 20,960
Book value per share................. 3.81 3.29 3.20 3.38 3.62
Shares outstanding................... 6,218 6,242 6,227 6,227 6,227
</TABLE>
F-9
<PAGE> 30
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The company designs and markets consumer electronics products, a majority
of which are purchased from overseas suppliers, primarily in China, Malaysia,
Thailand, Korea, and Japan. The consumer electronics market is characterized by
rapidly changing technology and certain products may have limited life cycles.
Management believes that it maintains strong relationships with its current
suppliers and, if necessary, other suppliers could be found. Production delays
or a change in suppliers, however, could cause a delay in obtaining inventories
and a possible loss of sales, which could adversely affect operating results.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its subsidiaries.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are recorded at the lower of cost, on a first-in, first-out
basis, or market.
DEPRECIATION
Depreciation of buildings, improvements, tooling and equipment is computed
using the straight-line method and the following estimated useful lives:
<TABLE>
<CAPTION>
CLASSIFICATION LIFE
-------------- ----
<S> <C>
Buildings................................................... 30 years
Building improvements....................................... 20 years
Motor vehicles.............................................. 3-5 years
Equipment................................................... 5-10 years
Tools, dies and molds....................................... 2 years
</TABLE>
LONG-LIVED ASSETS
Long-lived assets are reviewed for possible impairment whenever events
indicate that the carrying amount of such assets may not be recoverable. If such
a review indicates an impairment, the carrying amount of such assets is reduced
to estimated recoverable value.
RESEARCH, ENGINEERING AND PRODUCT DEVELOPMENT EXPENDITURES
Research, engineering and product development expenditures are expensed as
incurred and amounted to $.8 million in 1997 and 1996 and $1.1 million in 1995.
INCOME TAXES
The company provides for income taxes under the asset and liability method
of accounting for deferred income taxes. Deferred tax assets and liabilities are
recorded based on the expected tax effects of future
F-10
<PAGE> 31
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
taxable income or deductions resulting from differences in the financial
statement and tax bases of assets and liabilities. A valuation allowance is
recorded when necessary to reduce net deferred tax assets to the amount
considered more likely than not to be realized.
REVENUE RECOGNITION
Revenue from the sale of goods is recognized at the time of shipment.
Obligations for sales returns and allowances and product warranties are
recognized at the time of sale on an accrual basis.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" and, in 1998 they issued SFAS No. 132,
" Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments and related disclosures about products and services,
geographic areas and major customers. SFAS No. 132 revises current disclosure
requirements for employers' pensions and other retiree benefits. These standards
are effective for years beginning after December 15, 1997. These standards
expand or modify current disclosures and accordingly, are not expected to have a
significant impact on the company's reported financial position, results of
operations and cash flows.
In 1997, the company adopted Statement of Financial Standard No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to all entities with publicly
held common stock or potential common stock and requires restatement of earnings
per share for all periods reported. This statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS reflects the potential dilution of securities that could share in the
earnings.
RECLASSIFICATION
Certain amounts for prior years have been reclassified to conform with 1997
financial statement presentations.
F-11
<PAGE> 32
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. TAXES ON INCOME
Deferred tax assets (liabilities) by component at December 31, 1997 and
1996 were:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 12,006 $ 15,768
Investment tax credit carryforwards......................... 1,938 1,938
Alternative minimum tax credit carryforwards................ 1,298 1,097
Tax lease income............................................ (7,354) (7,785)
Receivable reserves......................................... 202 128
Warranty reserves........................................... 1,444 1,100
Inventory reserves.......................................... 901 590
Accrued promotion expenses.................................. 1,824 1,036
Sales related reserves...................................... 634 575
Compensation reserves....................................... 1,153 793
Other, net.................................................. 116 558
-------- --------
Net deferred tax assets..................................... 14,162 15,798
Valuation allowance......................................... (13,756) (15,596)
-------- --------
Net deferred tax assets..................................... $ 406 $ 202
======== ========
</TABLE>
Net deferred tax assets are classified with other noncurrent assets in the
consolidated balance sheets.
The tax lease income resulted from the purchase of several 1983 tax lease
agreements to acquire tax benefits under the provisions of the Economic Recovery
Tax Act of 1981. The total cash price paid by the company was $12.4 million. The
economic value of these leases was not impaired by the Tax Reform Act of 1986.
The company realized temporary tax savings from accelerated depreciation and
permanent tax savings from credits associated with the leases, subject to
statutory limitations. These savings offset current taxes payable which would
otherwise have been due on income from normal operations. In 1996 approximately
$6,917,000 of net operating loss carryforwards were scheduled to expire.
Effective December 31, 1996, the company terminated one of its tax lease
agreements which resulted in the recognition of approximately $5.8 million in
taxable income.
Prior to 1996, the company had a history of net losses resulting in a
significant net deferred tax asset and valuation allowance. Under SFAS No. 109,
a history of operating losses in recent years generally requires recognition of
such an allowance. Accordingly, the company recorded a valuation allowance for
substantially all of the net deferred tax asset as of December 31, 1997. If the
company continues its growth in net income, SFAS No. 109 will require management
to assess the need for a valuation allowance. If it is determined that the
valuation allowance is not needed, it will be credited to income. In 1997, the
valuation allowance for net deferred tax assets was reduced by approximately
$1,840,000 to recognize the utilization of net operating loss carryforwards and
net changes in temporary differences.
At December 31, 1997, the company has net operating loss
carryforwards("NOL") available to offset future taxable income, and both
investment tax credit ("ITC") and alternative minimum tax credit carryforwards
to offset future income tax payments. The alternative minimum tax credit
carryforwards, amounting to $1,298,000, do not expire.
In 1997, the company utilized approximately $9.6 million of net operating
loss carryforwards to offset taxable income. The company's taxable income for
1997 exceeded its book income mainly because of charges to reserves which are
not expensed for tax purposes until actually incurred in future periods.
F-12
<PAGE> 33
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net operating loss and investment tax credit carryforwards expire as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR OF EXPIRATION NOL ITC
------------------ --- ---
<S> <C> <C>
1998................................................... $ -- $1,804
1999................................................... -- 112
2000................................................... -- 22
2002................................................... -- --
2006................................................... 5,509 --
2007................................................... 11,575 --
2008................................................... 9,920 --
2009................................................... 3,355 --
------- ------
Total.................................................. $30,359 $1,938
======= ======
</TABLE>
The statutory Federal income tax rates are reconciled to the effective income
tax rates as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
----------- ---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0% 34.0%
State taxes, net of Federal income tax benefits............. 4.7 4.7 4.7
Utilization of net operating loss carryforwards............. (38.7) (38.7) (38.7)
----- ----- -----
Effective tax rate.......................................... --% --% --%
===== ===== =====
</TABLE>
3. FINANCING ARRANGEMENTS
The company had a $30 million secured credit facility that included a fixed
term loan. In October, 1996 the agreement for this credit facility was extended
to March 31, 1998.
Borrowings and letters of credit issued under this agreement were
collateralized by the company's assets, and usage of the non-term loan portion
was limited to certain percentages of accounts receivable and inventory. The
fixed term loan was secured by the company's buildings and equipment and
required both monthly principal payments of $43,000 and a balloon payment of $2
million at the time of expiration. Interest was payable monthly at prime (8.50%
at December 31, 1997) plus one and one-half percent.
The credit agreement specified that the company may not pay cash dividends
and contained a material adverse change clause, which, under certain
circumstances, could accelerate the payment of the debt. Because of this clause,
the company classified the debt as short-term for financial reporting purposes.
Management does not believe a material adverse change is likely and does not
believe that repayment of the debt will be accelerated. Maximum borrowings
outstanding at any month-end were $15.7 million and $19.8 million in 1997 and
1996, respectively. Aggregate average borrowings outstanding were $12 million
during 1997 and $17 million during 1996 with weighted average interest rates
thereon of 10.3% and 9.5% during 1997 and 1996, respectively.
The maximum value of letters of credit outstanding at any month end were
$11.0 million and $8.4 million in 1997 and 1996, respectively. At December 31,
1997, the company had approximately $8.4 million of unused credit line.
During 1997, 1996 and 1995, the company made interest payments of $1.3
million, $1.7 million and $1.7 million, respectively.
On February 3, 1998, the company entered into a new $35 million secured
credit agreement with two financial institutions for a three-year revolving
credit facility, replacing the existing $30 million credit agreement with
another lender. Loans outstanding under the new agreement bear interest, at the
company's
F-13
<PAGE> 34
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option, at the prime rate or, under a LIBOR option, at LIBOR plus 2 percent.
Additionally, the new agreement provides for higher advance rates on eligible
inventory and receivables and eliminates the 2 percent per annum charge that the
company was obligated to pay on its average outstanding balance of letters of
credit under the previously existing agreement.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's financial instruments include cash, accounts receivable,
accounts payable, short term debt and letters of credit. The fair values of
cash, accounts receivable and accounts payable approximate fair value because of
the short maturity of these instruments. The carrying amounts of the Company's
bank borrowings under its credit facility approximate fair value because the
interest rates are reset periodically to reflect current market rates. The
letters of credit reflect fair value as a condition of their underlying purpose
and are subject to fees competitively determined in the marketplace. The
contract value/fair value of the letters of credit at December 31, 1997 and 1996
was $8.0 million and $5.6 million, respectively. These letters of credit are
only executed with major financial institutions, and full performance is
anticipated.
5. LEASE TRANSACTIONS
The company leases facilities and equipment under noncancellable leases
with remaining terms of one year or more. The terms of these agreements provide
that the company pay certain operating expenses. Some of these lease agreements
also provide the company with the option to purchase the related assets at the
end of the respective initial lease terms.
Rental amounts committed in future years are summarized at December 31, 1997 as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES TOTAL
--------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
1998......................................... $ 7 $111 $118
1999......................................... 7 72 79
2000......................................... 7 59 66
2001......................................... 1 -- 1
2002......................................... 0 -- 0
--- ---- ----
Total........................................ $22 $242 $264
=== ==== ====
</TABLE>
Total rental expense amounted to $6,000 in 1997, $16,000 in 1996 and
$225,000 in 1995. Future capital lease rental payments include executory costs
of $82,000, interest expense of $9,000 and principal payments of $151,000.
6. SHAREHOLDERS' EQUITY
Preferred Stock -- Preferred stock is issuable from time to time in one or
more series, which series may have such voting powers, and such designations,
preferences, and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue of such stock
adopted by the Board of Directors. No preferred stock has been issued.
Earnings per share -- Weighted average common shares outstanding used in
the basic earnings per share calculation were 6,206,812 in 1997 and 6,231,075 in
1996 and 6,226,648 in 1995. Diluted earnings per share are calculated using the
treasury stock method and giving effect to common share equivalents. Weighted
average common shares outstanding used in the diluted earnings per share
calculation includes the effect of stock options of 252,012 in 1997, 54,193 in
1996 and none in 1995.
F-14
<PAGE> 35
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS
The company has six Stock Option Plans -- 1997, 1995, 1988, 1987, 1986 and
1985 ("the Plans"). Under the terms of the Plans, the consideration received by
the company upon exercise of the options may be paid in cash or by the surrender
and delivery to the company of shares of its common stock, or by a combination
thereof. The optionee is credited with the fair market value of any stock
surrendered and delivered as of the exercise date.
Options granted under the 1985 nonqualified plan may include provisions
that are similar to stock appreciation rights in that they entitle the holder to
additional compensation at the date of exercise or, if later, at the date when
the exercise transaction becomes taxable. The anticipated cost is recognized
over the vesting period of the options, which ranges from one to five years.
Currently there are no options outstanding that include these provisions.
The company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for the Plans. Accordingly, no compensation cost
has been recognized. Had compensation cost been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the company's net income (loss) and earnings (loss) per share
would have been adjusted to the pro forma amounts indicated below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income:
As Reported............................... $4,692 $601 $(1,145)
Pro forma................................. 4,366 467 (1,178)
Earnings (loss) per share:
Basic
As Reported............................ $ .76 $.10 $ (.18)
Pro forma.............................. .70 .07 (.19)
Diluted
As Reported............................ $ .73 $.10 $ (.18)
Pro forma.............................. .68 .07 (.19)
</TABLE>
A summary of certain provisions and amounts related to the Plans follows:
<TABLE>
<CAPTION>
1997 1995 1988 1987 1986 1985
PLAN PLAN PLAN PLAN PLAN PLAN
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Authorized, unissued shares available
for grant........................... 300,000 300,000 500,000 150,000 225,000 525,000
Nonqualified options granted at not
less than 80% of fair value at date
of grant............................ -0- -0- -0- -0- -0- -0-
Incentive stock options granted at
100% of fair value at date of
grant............................... -0- -0- -0- -0- -0- -0-
Shares exercisable at December 31,
1997................................ -0- 4,875 322,250 -0- 42,500 18,750
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividends; expected volatility of 49 percent; risk-free
interest rate of 5.4 percent; and expected lives of 5 years.
F-15
<PAGE> 36
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Plans as of December 31, 1997, 1996 and
1995, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
FIXED OPTIONS (000) PRICE (000) PRICE (000) PRICE
------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 935 $3.06 855 $3.06 1,039 $3.24
Granted.................................... 374 4.46 114 2.88 178 2.44
Exercised.................................. (328) 2.63 (16) 2.56 -- --
Cancellations and Expirations.............. (67) 2.65 (18) 2.68 (362) 3.24
----- ----- ------
Outstanding at end of year................. 914 935 855
===== ===== ======
Options exercisable at year end............ 388 584 476
Weighted-average fair value of options
granted during the year.................. $2.20 $1.29 $ .97
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
EXERCISE PRICES (000) PRICE LIFE (000) PRICE
--------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $2.............................. 39 $1.88 2.1 2 $1.90
$2.01 to $3.00............................ 257 2.79 3.1 48 2.62
$3.01 to $4.00............................ 443 3.71 1.7 338 3.84
$4.01 to $5.00............................ -- -- -- -- --
$5.01 to $6.00............................ 150 5.63 4.6 -- --
$6.01 to $7.00............................ -- -- -- -- --
$7.01 to $8.00............................ -- -- -- -- --
$8.01 to $9.00............................ 25 8.50 4.6 -- --
--- ---
914 3.82 2.7 388 3.68
=== ===
</TABLE>
8. RETIREMENT BENEFITS
The only qualified retirement plan for employees is the Cobra Electronics
Corporation Profit Sharing and 401(k) Incentive Savings Plan (the "Plan"). The
company may make a discretionary annual profit sharing contribution that is
allocated among accounts of persons employed by the company for more than one
year, prorated based on the compensation paid to such persons during the year.
Profit sharing expense for 1997 and 1996 was $169,000 and $55,000, respectively.
There were no profit sharing contributions in 1995.
As of December 31, 1997 and 1996, deferred compensation of $2.2 million and
$2.0 million, respectively, was recorded as a long-term liability. The current
portion of the deferred compensation liability was included in accrued salaries
and commissions, and amounted to $253,000 at December 31, 1997. There was no
current portion at December 31, 1996. Deferred compensation obligations arise
pursuant to outstanding key executive employment agreements, the majority of
which relates to the former president and chief executive officer.
9. RELATED PARTY TRANSACTIONS
In August 1997, the company exchanged its note receivable from the
company's president and chief executive officer, of approximately $1.9 million,
for 300,000 common shares owned by the executive. In 1990,
F-16
<PAGE> 37
COBRA ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pursuant to an employment agreement, the executive exercised options on 375,000
common shares by executing a note with the company in the amount of $1.25
million. The face amount of the note plus accrued interest amounted to $1.9
million at the date of exchange.
10. COMMITMENTS
At December 31, 1997 and 1996, the company had outstanding inventory
purchase orders with suppliers totaling approximately $21.1 million and $23.8
million, respectively.
11. INDUSTRY SEGMENT INFORMATION
The company operates in only one business segment -- consumer electronics.
Excluding company-owned tooling at suppliers with a net book value of $906,000
at December 31, 1997, assets located outside the United States are not material.
Foreign sales were $19.1 million, $10.1 million and $12.2 million in 1997, 1996
and 1995, respectively. For 1996, sales to one customer totaled 10.7% of
consolidated net sales. There were no sales in excess of 10% of consolidated net
sales to a single customer or a group of entities under common control in 1997
and 1995. The company does not believe that the loss of any one customer would
have a material adverse effect on its business.
12. ADVERTISING BARTER CREDITS
During 1992, the company received $3.8 million of advertising credits in
exchange for certain discontinued products. These credits can be used to reduce
the cash cost of a variety of media services (by 30 to 50 percent) prior to
their expiration in December 1998. The company is exploring opportunities to
exchange a portion of the credits for various goods and services used by the
company as well as the outright sale of the credits to third parties. During
1997, 1996, and 1995, the company utilized credits of approximately $10,000,
$20,000, and $329,000, respectively. In 1997, 1996 and 1995 the company recorded
charges of $1.1 million, $1.2 million and $.1 million, respectively to reduce
the credits to their estimated net realizable value. The net carrying value of
the credits at December 31, 1997 and 1996 was $0 and $1.2 million, respectively.
13. OTHER ASSETS
In addition to the advertising barter credits, other assets at December 31,
1997 and 1996 included the cash value on officer life insurance policies of $3.9
million and $3.4 million, respectively. The cash value of officer life insurance
policies is pledged as collateral for the company's secured lending agreement
and is maintained to fund deferred compensation obligations (see Notes 3 and 8).
14. CONTINGENCIES
The company is subject to various unresolved legal actions which arise in
the normal course of its business, the most prevalent of which relates to
federal excise tax. During 1996, the company received notice from the Internal
Revenue Service (IRS) asserting deficiencies in federal excise taxes for filing
periods October 1, 1993 through December 31, 1995. The excise tax relates to the
use of ozone-depleting chemicals ("ODCs"). The company has protested the
deficiencies and has filed an environmental excise tax protest. Management
believes that they have substantial defenses and intends to defend these actions
vigorously. Although it is not possible to predict with certainty the outcome of
this tax dispute, management believes the ultimate outcome of this dispute will
not result in a material impact on the company's consolidated results of
operations or financial position. Also in 1996, the company recognized $373,000
of income related to a lawsuit against a former distributor for violation of a
licensing agreement.
F-17
<PAGE> 38
COBRA ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Cobra Electronics Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Cobra
Electronics Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cobra Electronics Corporation and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 27, 1998
F-18
<PAGE> 39
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
A /x/ PLEASE MARK YOU VOTES AS IN THIS EXAMPLE.
<TABLE>
<CAPTION>
WITHHOLD AUTHORITY
FOR TO VOTE
VOTE FOR FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C> <C> <C>
1. ELECTION / / / / 2. APPROVAL OF 1998 STOCK OPTION PLAN / / / / / /
OF
DIRECTORS. 3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
NOMINEES: WILLIAM P. CARMICHAEL
CARL KORN
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR This proxy, when properly executed below, will be voted in the manner
EITHER PERSON, STRIKE A LINE THROUGH THE NOMINEE'S directed therein by the undersigned share holder. If no direction
is made, this proxy will be voted FOR this election of the nominees
NAME.) listed in Item (1) and FOR approval of the 1998 Stock Option Plan as listed
in Item (2).
The Directors recommend a vote FOR the election of the Boards's nominees to
the Board of Directors and FOR approval of the 1998 Stock Option Plan.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
SIGNATURE
SIGNATURE DATE (IF HELD JOINTLY) DATE
------------------------------------- -------------- -------------------- ------------------.
Note: Please sign exactly as name appears above. When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or as guardian, please give full title. Please sign in full corporate name by
President or other authorized person. If a partnership, please sign in the partnership name by an authorized person.
</TABLE>
- --------------------------------------------------------------------------------
PROXY
COBRA ELECTRONIC CORPORATION
6500 WEST CORTLAND, CHICAGO, IL 60707
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harold D. Schwartz and Gerald M. Laures
as Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated on the reverse side, all the shares
of common stock of Cobra Electronics Corporation held of record by the
undersigned on April 3, 1998 at the Annual Meeting of Shareholders to be held on
May 12, 1998, or any adjournments thereof.
(TO BE SIGNED ON REVERSE SIDE)
