<PAGE>
FORM 10-Q SB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number
-----------------------------------------------------
CARVER CORPORATION
------------------
(Exact Name of Registrant as specified in its charter)
WASHINGTON 91-1043157
---------- ----------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15300 WOODINVILLE REDMOND ROAD N.E., WOODINVILLE, WA 98072
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(425) 482-3400
--------------
(Registrant's telephone number, including area code)
20121 - 48TH AVENUE WEST, LYNNWOOD, WA 98036
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AT JUNE 30, 1997, 3,837,463 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
Page 1 of 22 pages.
Exhibit Index appears at Page 14.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARVER CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 313,000 $ 65,000
Marketable securities 5,000 5,000
Accounts receivable, trade, net 1,711,000 1,627,000
Inventories 3,971,000 4,176,000
Note receivable and other assets 104,000
Prepaid expenses 688,000 662,000
--------------- --------------
Total current assets 6,688,000 6,639,000
Property and equipment, less accumulated depreciation 650,000 2,444,000
Other assets 133,000 141,000
--------------- --------------
Total Assets $ 7,471,000 $ 9,224,000
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable $ 489,000 $ 1,110,000
Accounts payable 458,000 410,000
Accrued liabilities
Commissions and advertising 63,000 127,000
Payroll and related taxes 230,000 264,000
Warranty 107,000 113,000
Other 147,000 42,000
--------------- --------------
Total current liabilities 1,494,000 2,066,000
--------------- --------------
Shareholders' equity
Preferred shares, par value $.01 per share
2,000,000 shares authorized, 1,411,764 shares
issued and outstanding 14,000 14,000
Common shares, par value $.01 per share
20,000,000 shares authorized, 3,837,463 shares
issued and outstanding 38,000 37,000
Additional paid-in capital 19,221,000 19,006,000
Accumulated deficit (13,296,000) (11,899,000)
--------------- --------------
Total shareholders' equity 5,977,000 7,158,000
--------------- --------------
Total liabilities and shareholders' equity $ 7,471,000 $ 9,224,000
=============== ==============
</TABLE>
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
2
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,442,000 $ 3,045,000 $ 4,543,000 $ 7,393,000
Cost of sales 2,186,000 2,547,000 4,106,000 6,055,000
-------------- ------------ ------------- -----------
Gross profit 256,000 498,000 437,000 1,338,000
Operating expense
Selling 562,000 543,000 1,166,000 1,182,000
General & administrative 683,000 586,000 1,170,000 1,010,000
Engineering, research & development 271,000 178,000 505,000 331,000
-------------- ------------ ------------- -----------
1,516,000 1,307,000 2,841,000 2,523,000
-------------- ------------ ------------- -----------
Loss from operations (1,260,000) (809,000) (2,404,000) (1,185,000)
Other income (expense)
Gain on sale of headquarters facility 859,000 - 859,000 -
Interest expense (13,000) (89,000) (53,000) (143,000)
Interest income 5,000 23,000 7,000 49,000
Other 214,000 (96,000) 316,000 (77,000)
-------------- ------------ ------------- -----------
Net loss $ (195,000) $ (971,000) $ (1,275,000) $ (1,356,000)
============== ============ ============= ===========
Loss per common share $ (.05) $ (0.26) $ (0.34) $ (0.37)
============== ============ ============= ===========
</TABLE>
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
3
<PAGE>
CARVER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,275,000) $(1,356,000)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 506,000 120,000
Gain on sale of headquarters facility (859,000)
Changes in:
Accounts receivable (84,000) 490,000
Inventories 205,000 (623,000)
Prepaid expenses (353,000) (580,000)
Accounts payable and accrued liabilities 49,000 (262,000)
Other assets 8,000 (20,000)
----------- -----------
Net cash used by operating activities (1,803,000) (2,231,000)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment, net (244,000) (37,000)
Proceeds (increase) in note receivable 104,000 1,072,000
Net proceeds from sale of headquarters facility 2,808,000
----------- -----------
Net cash used by investing activities 2,668,000 1,035,000
----------- -----------
FINANCING ACTIVITIES:
Increase (Decrease) in notes payable (621,000) 717,000
Repayment of long-term debt (696,000)
Issuance of common shares 4,000
Issuance of Preferred Stock 956,000
----------- -----------
Net cash provided by financing activities (617,000) 977,000
----------- -----------
Increase (decrease) of cash and cash equivalents 248,000 (219,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 65,000 261,000
----------- -----------
End of period $ 313,000 $ 42,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 49,000 $ 126,000
NON CASH FINANCING:
Dividend on preferred shares $ 121,000
</TABLE>
(SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
4
<PAGE>
CARVER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
In the opinion of management, the consolidated financial statements include all
adjustments necessary to present fairly the changes in financial position and
results of operations for the interim periods reported. The results of
operations for any interim period are not necessarily indicative of the results
for the entire year.
The financial statements should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein and the "Notes to Consolidated Financial Statements" set forth
in the Company's 10-K filing for the year ended December 31, 1996.
NOTE 2 - INCOME TAXES - For tax reporting purposes, the Company has
approximately $17,900,000 of net operating losses which may be utilized to
offset future taxable income. These loss carryforwards expire between the years
2004 and 2011. Under FAS109 the Company is required to recognize the future
benefit of its net operating loss carryforwards. Management is of the opinion
that it is not appropriate to record such a benefit at this time. As future
operating results improve, management will re-assess its position in this
matter.
NOTE 3 - COMMITMENTS - As of August 12, 1997, the Company has open purchase
orders for finished goods of approximately $4,116,000 of inventory expected to
be received in 1997 from various vendors a portion of which may be cancelable.
NOTE 4 - SALE OF HEADQUARTERS FACILITY - On April 16, 1997, the Company sold
its headquarters facility in Lynnwood, Washington for $3,100,000, resulting in a
gain of $859,000 recognized in the second quarter. In June 1997, the Company
moved to a smaller more appropriate leased facility in Woodinville, Washington.
5
<PAGE>
PART 1. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's product
development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry
and generation of additional working capital, constitute forward-looking
statements which are subject to a number of known or unknown risks,
uncertainties and other factors which might cause actual results to differ
materially from stated expectations. These risks and uncertainties include
product development or production difficulties or delays due to supply
constraints, technical problems or other factors; technological changes; the
effect of global, national and regional economic conditions; changes in consumer
preferences; the impact of competitive products and pricing; changes in demand;
increases in component prices or other costs; inventory risks due to shifts in
market demand, product obsolescence or other factors; and a number of other
risks including those risks and uncertainties described under the caption "Risk
Factors" in the Company's Annual Report on Form 10K and those identified by the
Company from time to time in other filings with the Commission, press releases
and other communications. Although the Company believes that all forward-
looking statements are reasonable, there can be no assurance that actual
results, achievements, performance or developments will not differ materially
from those expressed or implied by such forward-looking statements.
RECENT DEVELOPMENTS -
- -------------------
SALE OF COMPANY'S MANUFACTURING FACILITY
On April 16, 1997, the Company sold its headquarters facility in Lynnwood,
Washington for $3,100,000, resulting in a gain of $859,000 recognized in the
second quarter. In June 1997, the Company moved to a smaller more appropriate
leased facility in Woodinville, Washington.
6
<PAGE>
RESULTS OF OPERATIONS -
- ---------------------
The following tables set forth items in the consolidated statement of income as
a percentage of net sales for the quarter and six-month periods ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of Sales 89.5 83.6 90.3 81.9
------ ------- ------- -------
Gross Profit 10.5 16.4 9.7 18.1
Operating Expenses
Selling 23.0 17.8 25.7 16.0
General and Administrative 28.0 19.3 25.8 13.6
Engineering, research and development 11.1 5.9 11.1 4.5
------ ------- ------- -------
Loss from Operations (51.6) (26.6) (52.9) (16.0)
Gain on sale of headquarters facility 35.2 18.9
Interest Expense (0.5) (2.9) (1.2) (1.9)
Interest Income 0.2 0.8 0.2 0.6
Other Income (Expense) 8.8 (3.2) 7.0 (1.0)
------ ------- ------- -------
Net Loss (7.9)% (31.9)% (28.0)% (18.3)%
====== ======= ======= =======
</TABLE>
Net sales for the quarter ended June 30, 1997 were $2,442,000, a decrease of 20%
from net sales of $3,045,000 for the same period of 1996. Net sales for the six
months ended June 30, 1997 were $4,543,000, a 39% decrease from net sales of
$7,393,000 in the first six months of 1996. 1997 sales continued to be affected
by vendor delivery delays on three - key products. During the second quarter,
the Company began receiving limited quantities of two of these products: a new
two-channel preamplifier/tuner and a new five disc compact disc changer. The
third product, a multi-channel, AC-3(R) ready, preamplifier/tuner has been
canceled. In its place a line of Dolby(R) Digital 5.1 electronics is in
development by the Company to be manufactured at its US factory for expected
introduction in the fourth quarter of 1997. The first six months of 1996
included $432,000 of residual sales of professional products. This product line
has been sold and, therefore, no professional product sales occurred in 1997.
7
<PAGE>
As a result of the delivery delays previously discussed, the Company has been
unable to offer a complete product line resulting in lower sales volumes also
for other related products such as amplifiers and receivers. In addition,
market conditions for audio equipment have slowed, contributing to the decline
in sales compared to the prior year. Recent limitations on product availability
may have adversely affected relationships with distributors and dealers which
may adversely affect future sales.
Domestic sales of the Company's consumer products decreased 34% to $3,848,000
compared to sales of $5,850,000 in the first half of 1996. Of the domestic
sales, approximately $1,183,000 or 26% were sales made by the Company to Circuit
City, down from sales of $3,185,000 to Circuit City in the first half of 1996.
Management believes this decline is primarily attributable to initial stocking
orders in the prior year, as well as the delivery delays and market conditions
previously discussed. Non Circuit City domestic sales increased 11% in the
second quarter and were unchanged for the six months ended June 30, 1997. Sales
outside of the United States decreased approximately 37% from $637,000 to
$404,000 in the first half of 1997. Management believes this is attributable to
limited availability of international product versions to sell to its
international distributors. Management plans to introduce 10 new international
products in August 1997 at a major European tradeshow. Approximately 47% of the
Company's sales in the first half of 1997 were attributable to products which
the Company sources offshore compared to 55% for the first half of 1996.
Gross profit declined as a percent of net sales to 10.5% in the second quarter
of 1997 from 16.4% in the second quarter of 1996. Gross profit for the first
six months of 1997 was 9.6% down from 18% in the same period of the prior year.
The Company is currently operating at significantly less than its production
capacity which increases its cost of goods sold. In addition, the Company has
made price concessions on the sale of older model products. These factors more
than offsets the benefits of a stronger dollar and shift in mix of sales to
somewhat higher margin domestically manufactured product. Management believes
that it may experience improvements in gross profit as it increases its domestic
production. However, there can be no assurance that the mix of sales will shift
to higher margin products, that sales will increase or that foreign exchange
rates, cost increases or other factors will not negatively impact margins on the
Company's sourced product. (See "Liquidity and Capital Resources".)
Operating expenses in the second quarter of 1997 increased 16% when compared to
the second quarter of 1996 and 13% in the first half of 1997 compared to the
first half of the prior year. These increases were due primarily to increased
research and development expense associated with new product development and
introduction activities as well as the expense associated with the use of
management consultants of which $90,000 represents non cash expense associated
with the issuance of warrants.
Other income during the six months ended June 30, 1997 includes a $859,000 gain
on the sale of the Company's headquarters facility in Lynnwood, Washington (See
"Liquidity and Capital Resources".); a $202,000 payment from Phoenix Gold
International, Inc. from the sale the Company's professional product line in
November of 1995; and a $114,000 refund from the Internal Revenue Service for
previously paid taxes.
8
<PAGE>
Net losses for the quarter and six month period ended June 30, 1997 were
$195,000 (7.9% of net sales) or $0.05 per share and $1,275,000 (28.0% of net
sales) or $0.34 per share, respectively. Excluding the gain on the sale of the
headquarters facility, net losses for the quarter and six months ended June 30,
1997 would have been $1,054,00 (43% of net sales) or $0.28 per share, and
$2,134,000 (47% of net sales) or $0.56 per share respectively. This compares to
net losses of $971,000 (31.9% of net sales) or $0.26 per share for the second
quarter and $1,356,000 (18.3% of net sales) or $0.37 per share for the six month
period ended June 30, 1996.
SEASONALITY. The markets for consumer audio equipment are moderately seasonal,
- -----------
with somewhat higher sales expected to occur in the last six months of the year.
The introduction of new products may affect this seasonality and period-to-
period comparisons. Demand for audio products also exhibits some cyclicality,
reflecting the general state of the economy and consumer expectations.
LIQUIDITY AND CAPITAL RESOURCES -
- -------------------------------
On August 12, 1997, the Company's immediate sources of working capital consisted
of approximately $100,000 in cash (and cash equivalents) and its line of credit.
The Company has an agreement with a financial institution which provides for
working capital advances up to $6,000,000. A maximum of $1,000,000 of this line
may be used to secure letters of credit of which $160,000 in letters of credit
were outstanding on August 12, 1997. Funds available under this agreement are
restricted, however, to a portion of eligible accounts receivable and
inventories. Advances are collateralized by substantially all assets of the
Company and bear interest at the prime lending rate plus 2%. There was $788,000
outstanding on the line of credit at August 12, 1997 and approximately $840,000
was additionally available to be borrowed. The agreement expires on July 31,
1998.
The Company's inventory decreased $205,000 from December 31, 1996 to June 30,
1997 due to lower production of amplifiers manufactured in the US, as the demand
for these units were reduced due in part to the lack of availability of the
associated preamp/tuner from an offshore supplier.
In the first half of 1997, the Company purchased $244,000 of capital equipment,
primarily associated with a new computer system which was implemented in July of
1997. The Company plans to expend approximately $150,000 during the remainder
of 1997 principally for leasehold improvements.
On April 16, 1997, the Company sold its headquarters facility in Lynnwood,
Washington for $3,100,000, resulting in a gain of $859,000 which was recognized
in the second quarter. Net proceeds of approximately $2,800,000 from this sale
were used to pay down the bank line of credit and to provide working capital.
The Company moved to a smaller more appropriate leased facility in Woodinville,
Washington in July 1997.
9
<PAGE>
Earlier this year the Company announced the introduction of a line of home
theater speakers. The "Cinema Series" speaker line is scheduled to be available
for delivery in the fourth quarter of 1997 and is expected to be available
through dealers nationwide including Circuit City stores. The Company has
received an initial forecast for orders from its dealers for approximately $5
million for 1997. Management is currently attempting to obtain the necessary
working capital financing to fulfill this forecast or a portion of the forecast.
However, there can be no assurance that the Company will be able to obtain
additional equity or debt financing on terms that the Company finds acceptable.
Management has determined that the Company must obtain additional working
capital in the near term in order to execute its business plan and meet its
obligations as they come due. The exact amount and timing of the Company's need
for additional working capital will be determined by numerous factors including:
the extent to which the Company is able to revise purchase orders or negotiate
payment terms with the Company's suppliers and customers which are more
favorable than those currently in place; the timing, level of and margin on
sales; and the occurrence of unanticipated expenses. The Company is actively
seeking additional working capital from a variety of sources and has retained
The Commerce Bank's Investment banking group to help explore and advise on its
strategic alternatives.
There can be no assurance that the Company will be able to obtain additional
equity or debt financing on terms that the Company finds acceptable, or at all,
if and when needed, or that the Company will be able to continue as a going
concern. Any additional equity or debt financing may involve substantial
dilution of the Company's shareholders. If the Company is not able to generate
additional working capital the Company likely will be required to sell assets,
restructure debt, reorganize, or curtail operations.
EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
- --------------------------------------------------------------------
All sales of the Company's products are in U.S. dollars. Since 1996, the
Company has purchased the majority of its materials at an agreed per unit price
payable in U.S. Dollars. Accordingly, fluctuations in foreign currency rates
had no material impact on the Company's gross margin in the first half of 1997.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------------------
None.
ITEM 2. CHANGES IN SECURITIES.
----------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The Company's Annual Meeting of Shareholders was held on May 20, 1997.
(a) Election of Directors. The nominees identified in the following table were
elected by the holders of the shares of the Company's Common Stock for a
term of one year or until their successors are duly elected and qualified.
Except as set forth in the following table, there was no director of the
Company whose term of office continued after the Annual Meeting.
<TABLE>
<CAPTION>
Against/ Abstentions/
Nominee's Name For Withheld Broker Non-votes
- --------------------- --- -------- ----------------
<S> <C> <C> <C>
Thomas C. Graham 3,239,001 29,718 0
John F. Vynne 3,239,001 29,718 0
Stephen M. Williams 3,239,033 29,686 0
</TABLE>
In addition, each of the above-named nominees received 1,411,764 preferred
share votes for re-election.
11
<PAGE>
(b) The individuals named below were nominated for re-election by the holders
of shares of the Company's Preferred Stock. Each nominee identified in the
following table were elected by the holders of the shares of the Company's
Preferred Stock for a term of one year or until their successors are duly
elected and qualified.
<TABLE>
<CAPTION>
Against/ Abstentions/
Nominee's Name For Withheld Broker Non-votes
- -------------- --- -------- ----------------
<S> <C> <C> <C>
Raj Bhatia 1,411,764 0 0
James McCullough 1,411,764 0 0
</TABLE>
ITEM 5. OTHER INFORMATION.
------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibit 11
Computation of Earnings per Share
(b) Exhibit 10.49
Warrant Agreement dated May 14, 1997 between the Company
and Claes Larsson
(c) Reports on Form 8-K
None.
12
<PAGE>
SIGNATURES
In accordance the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CARVER CORPORATION
Dated: August 14, 1997 /s/ Debra L. Griffith
Debra L. Griffith
Vice President Finance and
Administration (Principal Financial
and Chief Accounting Officer)
13
<PAGE>
CARVER CORPORATION
EXHIBIT INDEX
EXHIBIT TITLE PAGE
- -------------------------------------------------------------
11 Computation of Earnings Per Share 15
10.49 Warrant Agreement dated May 14, 1997 between
the Company and Claes Larsson. 16
14
<PAGE>
EXHIBIT 11
CARVER CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE NET LOSS $ (195,000) $ (971,000) $(1,275,000) $(1,356,000)
---------- ---------- ----------- -----------
Weighted average number
of shares outstanding 3,803,384 3,692,850 3,781,862 3,690,677
Add shares issuable from
the assumed exercise
of options or
conversion of
preferred stock * * * *
Add shares issuable from
the assumed conversion
of preferred shares * * * *
_________ __________ ___________ __________
Weighted average number
of shares outstanding,
as adjusted 3,803,384 3,692,850 3,781,862 3,690,677
---------- ---------- ----------- ----------
LOSS PER COMMON SHARE $ (0.05) $ (0.26) $ (0.34) $ (0.37)
=========== ========== =========== ==========
</TABLE>
*Effect on loss per share is antidilutive
15
<PAGE>
EXHIBIT 10.49
THE WARRANT EVIDENCED BY THIS AGREEMENT AND THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED UNDER STATE OR FEDERAL
SECURITIES LAWS. THIS WARRANT AGREEMENT MAY NOT BE TRANSFERRED EXCEPT AS
PROVIDED IN SECTION 3 BELOW. THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
OF THE WARRANT MAY NOT BE OFFERED OR SOLD, PLEDGED (EXCEPT A PLEDGE PURSUANT TO
THE TERMS OF WHICH ANY OFFER OR SALE UPON FORECLOSURE WOULD BE MADE IN A MANNER
THAT WOULD NOT VIOLATE THE REGISTRATION PROVISIONS OF FEDERAL OR STATE
SECURITIES LAWS) OR OTHERWISE DISTRIBUTED FOR VALUE, NOR MAY THE SHARES OF
COMMON STOCK ISSUED UPON EXERCISE OF THE WARRANT BE TRANSFERRED ON THE BOOKS OF
THE COMPANY, WITHOUT AN OPINION OF COUNSEL, CONCURRED IN BY COUNSEL FOR THE
COMPANY, THAT NO VIOLATION OF SAID REGISTRATION PROVISIONS WOULD RESULT
THEREFROM.
WARRANT AGREEMENT
-----------------
THIS AGREEMENT is entered into as of the 14th day of May, 1997 (the
"Date of Issuance") between CARVER CORPORATION, a Washington corporation (the
"Company"), and CLAES LARSSON ("Holder").
AGREEMENT
NOW, THEREFORE, the Company hereby issues, for good and valuable
consideration, to Holder this warrant to purchase, upon the terms and conditions
set forth herein, Ninety Thousand (90,000) shares (the "Shares") of common stock
("Common Stock") in the Company (the "Warrant").
EXERCISE PRICE. The "Exercise Price" for the Warrant shall be $1.375 per
---------------
share of Common Stock, subject to adjustment as provided for in Section 6.
VESTING. The Warrant is fully vested and immediately exercisable.
--------
TRANSFER OF WARRANT. Subject to the provisions of paragraphs 4 and 8
--------------------
hereof and the receipt of prior written consent of the Company, the Warrant and
all rights hereunder are transferable, in whole or in part, by the holder hereof
in person or by duly authorized attorney, upon surrender of this Warrant
properly endorsed. Each taker and holder of this Warrant, by taking and holding
the same, consents and agrees that the bearer of this Warrant, when endorsed,
may be treated by the Company and all other persons dealing with this Warrant as
the absolute owner hereof for any purpose and as the person entitled to exercise
the rights represented by this Warrant, or to the hereof on the books of the
Company, any notice to the contrary notwithstanding; but until such transfer on
such books, the Company may treat the registered holder hereof as the owner for
all purposes.
INVESTMENT INTENT. By accepting the Warrant, Holder represents and agrees
------------------
for himself and all persons who acquire rights in the Warrant through Holder,
that none of the shares of Common
16
<PAGE>
Stock purchased upon exercise of the Warrant will be distributed in violation of
applicable federal and state laws and regulations. If requested by the Company,
Holder shall furnish evidence satisfactory to the Company (including a written
and signed representation letter and a consent to be bound by all transfer
restrictions imposed by applicable law, legend condition or otherwise) to that
effect, prior to delivery of the purchased shares of Common Stock.
TERMINATION OF WARRANT. The Warrant shall terminate, to the extent not
-----------------------
previously exercised, five (5) years from the Date of Issuance.
STOCK. In the case of any stock split, stock dividend or like change in the
------
nature of shares covered by this Agreement, the number of shares and Warrant
price shall be proportionately adjusted as set forth below:
Stock Dividend, Reorganization or Liquidation.
In case the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, (iii) combine or reclassify its outstanding shares of Common Stock into
a smaller number of shares, or (iv) issue shares of Common Stock upon
conversion of Series A Cumulative Convertible Preferred Stock at a conversion
rate which provides for the issuance of a greater number of shares than provided
by the conversion rate of Series A Cumulative Convertible Preferred Stock as
originally issued, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination, reclassification or issuance shall be adjusted so that it shall
equal the price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
If the Company is liquidated or dissolved, the Company may allow the Holders of
any outstanding Warrants to exercise all or any part of the portion of the
Warrants held by them; provided, however, that such Warrants must be exercised
prior to the effective date of such liquidation or dissolution. If the Warrant
holders do not exercise their Warrants prior to such effective date, each
outstanding Warrant shall terminate as of the effective date of the liquidation
or dissolution.
The foregoing adjustments in the shares subject to Warrants shall be made by the
Company, or by any successor to the Company, or by the applicable terms of any
assumption or substitution document.
The issuance of this Warrant shall not affect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure, to merge, consolidate or dissolve, to
liquidate or to sell or transfer all or any part of its business or assets.
17
<PAGE>
EXERCISE OF WARRANT.
--------------------
CASH PAYMENT. Each exercise of the Warrant shall be by means of
delivery of a Notice of Election to Exercise (which may be in the form attached
hereto as Exhibit A) to the Secretary of the Company at its principal executive
office, specifying the number of shares of Common Stock to be purchased and
accompanied by payment in cash, or by certified or cashier's check payable to
the order of the Company, of the full exercise price for the Common Stock to be
purchased or by payment method as specified in Section 7(b) below.
Cashless Exercise.
------------------
In addition to and without limiting the rights of the holder of this Warrant
under the terms of this Warrant, the Holder of this Warrant shall have the right
(the "Conversion Right") to convert this Warrant or any portion thereof into
shares of Common Stock as provided in this Section 7(b) at any time or from time
to time and prior to its expiration, subject to the restrictions set forth in
paragraph (b)(3) below. Upon exercise of the Conversion Right with respect to a
particular number of shares subject to this Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the holder of this Warrant, without
payment by the holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as hereinafter defined) of the Converted Warrant Shares by the
fair market value (as defined in paragraph (b)(4) below) of a single share of
Common Stock, determined in each case as of the close of business on the
Conversion Date (as hereinafter defined). The "Net Value" of the Converted
Warrant Shares shall be determined by subtraction the aggregate warrant purchase
price of the Converted Warrant Shares from the aggregate fair market value of
the Converted Warrant Shares. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the holder of this Warrant an amount in cash equal to the fair
market value of the resulting fractional share.
The Conversion Right may be exercised by the holder of this Warrant by the
surrender of this Warrant at the principal office of the Company together with a
Notice of Election to Exercise (which may be in the form attached hereto as
Exhibit A) specifying that the Holder thereby intends to exercise the Conversion
Right and indicating the number of shares subject to this Warrant which are
being surrendered (referred to in paragraph (b)(1) above as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid documents, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the holder of this Warrant promptly following the Conversion Date.
In the event the Conversion Right would, at any time this Warrant remains
outstanding, be deemed by the Company's independent certified public accountants
to give rise to a charge to the Company's earnings for financial reporting
purposes, then the Conversion Right shall automatically terminate upon the
Company's written notice to the holder of this Warrant of such adverse
accounting treatment.
For purposes of this Section 7(b), the "fair market value" of a share of Common
Stock as of a particular date shall be, if the Common Stock is publicly traded,
the last sales price (or, if no last sales price is
18
<PAGE>
reported, the average of the high bid and low asked prices) for a share of
Common Stock on that day (or, if that day is not a trading day, on the next
preceding trading day), as reported by the principal exchange on which the
Common Stock is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices
or quotations are not reported by The Nasdaq Stock Market, as reported by any
other available source of prices or quotations. If none of the foregoing
applies, the "fair market value" shall be determined by the Board of Directors
of the Company in good faith.
Taxes. Holder agrees that he will also pay to the Company the amount
-----
necessary for the Company to satisfy its withholding obligations under the Code,
if any.
HOLDER ACKNOWLEDGMENTS. Holder acknowledges that he has read and
-----------------------
understands the terms of this Warrant, and that:
The issuance of shares of Common Stock pursuant to the exercise of the
Warrant, and any resale of the shares of Common Stock, may only be effected in
compliance with applicable state and federal laws and regulations and that
Holder may be required to execute and deliver representations and warranties to
that effect prior to the exercise of any portion of the Warrant;
Holder is not entitled to any rights as a shareholder with respect to
any shares of Common Stock issuable hereunder until Holder becomes a shareholder
of record;
The shares of Common Stock subject hereto may be adjusted in the event
of certain changes in the capital structure of the Company; and
As a condition to the exercise of the Warrant, Holder may be required
to make such arrangements as the Company requires for the satisfaction of any
federal, state or local withholding tax obligations.
PROFESSIONAL ADVICE. The acceptance and exercise of the Warrant and the
--------------------
sale of Common Stock issued pursuant to the exercise of the Warrant may have
consequences under federal and state tax and securities laws which may vary
depending on the individual circumstances of Holder. Accordingly, Holder
acknowledges that Holder has been advised to consult his personal legal and tax
advisors in connection with this Agreement and Holder's dealings with respect to
the Warrant or the Common Stock.
REGISTRATION RIGHTS. If on or before December 31, 1999, the Company
--------------------
proposes to register any of its shares of Common Stock under the Securities Act
of 1933, as amended (the "Securities Act") in connection with an underwritten
public offering of such Common Stock for the account of the Company solely for
cash on a form that would also permit registration of the shares of Common Stock
issued upon exercise of this Warrant (the "Warrant Shares"), it will promptly
give written notice to Holder of its intention to do so and, upon the written
request of Holder given within twenty (20) days after receipt of any such notice
(which request shall specify the number of Warrant Shares desired to be included
in such underwritten public offering by Holder), the Company will use its
reasonable best efforts to cause all Shares requested by Holder to be included
in such registration to be registered to permit their inclusion in such
underwritten public offering; provided, however, that the Company shall not be
required to cause any Warrant Shares to be so registered or included or to give
notice of registration if in the underwriters' opinion the inclusion will
jeopardize the success of the offering of
19
<PAGE>
shares of Common Stock by the Company or if the registration is being effected
pursuant to a contractual demand right of any person which precludes the
inclusion of any of the Warrant Shares in such registration or public offering.
If some but not all shares of Common Stock with respect to which the Company
shall have received requests for registration pursuant to piggyback registration
rights granted hereunder or pursuant to any other agreement shall be excluded
from such registration, the Company shall make appropriate allocation of shares
to be registered among all holders of Common Stock having a contractual right to
register their shares and at the time desiring to register their shares pro rata
in the proportion that the number of shares of Common Stock held by each such
holder bears to the total number of shares of Common Stock held by all such
holders then desiring to have their shares registered for sale. With respect to
the Shares so included, Holder shall bear the cost of any underwriting discount
or selling expenses for the sale of such Shares and the cost of the attorneys'
fees for Holder's own attorney, if any, and the Company shall bear all other
costs and expenses of the registration, including attorneys and accountants
fees, printing costs, SEC and blue sky filing fees and transfer agent fees and
expenses. the Company shall not be required under this section to include any of
the Warrant Shares in an underwriting of shares unless Holder (i) accepts the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, assuming normal and customary underwriting terms
and (ii) furnishes to the Company such information regarding itself as shall be
reasonably required to effect the registration of the Shares. The rights granted
pursuant to this paragraph may not be assigned by Holder without the Company's
prior written consent. Holder hereby agrees that it shall not, to the extent
required by the Company and the underwriter of the offering giving rise to
piggyback rights hereunder sell or otherwise transfer or dispose of (other than
to donees who agree to be similarly bound) any shares of Common Stock during the
one-hundred-eighty day period following the effective date of a registration
statement filed by the Company under the Securities Act with respect to such
offering. The Company retains the right in its sole discretion to abandon or
withdraw any registration statement at any time.
NOTICES: All notices and other communications called for or required by
--------
this Agreement shall be in writing and shall be addressed to the parties at
their respective addresses stated below or to such other address as a party may
subsequently specify by written notice and shall be deemed to have been received
(i) upon delivery in person, (ii) five days after mailing it by U.S. certified
or registered mail, return receipt requested and postage prepaid, or (iii) two
days after depositing it with a commercial overnight carrier which provides
written verification of delivery:
To the Company: Carver Corporation
PO Box 137
Woodinville, Washington 98072-0137
Attention: President
To Holder: Claes Larsson
11 Overlook Drive
Port Washington, New York 11050
GOVERNING LAW. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Washington without giving effect to
principles of conflicts of laws.
20
<PAGE>
ENTIRE AGREEMENT. This Warrant, comprises the entire understanding between
-----------------
the Company and Holder, supersedes any oral agreements on the subject matter
hereof. This Agreement may not be amended or modified except in a writing signed
by both parties.
Holder
/s/ Claes Larsson
- -----------------
Claes Larsson
Carver Corporation
By: /s/ John P. World
-----------------
Name:John P. World
-------------
Title:Executive Vice President
21
<PAGE>
Exhibit A
---------
Notice of Election to Exercise
------------------------------
This Notice of Election to Exercise shall constitute proper notice
pursuant to Section 7 of that certain Warrant Agreement (the "Agreement") dated
as of June __, 1997 between Carver Corporation (the "Company") and the
undersigned.
The undersigned hereby elects to exercise Holder' Warrant to purchase
_______________ shares of the common stock of the Company at a purchase price of
$___________ per share, for aggregate consideration of $___________, on the
terms and conditions set forth in the Agreement. Such aggregate consideration,
in the form specified in Section 7 of the Agreement, accompanies this Notice.
The undersigned has executed this Notice this ____ day of
________________, ______.
___________________________________
Name Typed or Printed
___________________________________
Signature
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 0 313,000
<SECURITIES> 0 5,000
<RECEIVABLES> 0 1,711,000
<ALLOWANCES> 0 172,000
<INVENTORY> 0 3,971,000
<CURRENT-ASSETS> 0 6,688,000
<PP&E> 0 2,128,000
<DEPRECIATION> 0 1,478,000
<TOTAL-ASSETS> 0 7,471,000
<CURRENT-LIABILITIES> 0 1,494,000
<BONDS> 0 0
0 0
0 14,000
<COMMON> 0 38,000
<OTHER-SE> 0 5,925,000
<TOTAL-LIABILITY-AND-EQUITY> 0 7,471,000
<SALES> 2,442,000 4,543,000
<TOTAL-REVENUES> 2,442,000 4,543,000
<CGS> (2,186,000) (4,106,000)
<TOTAL-COSTS> (2,186,000) (4,106,000)
<OTHER-EXPENSES> (1,297,000) (2,518,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (13,000) (53,000)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 859,000 859,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (195,000) (1,275,000)
<EPS-PRIMARY> (.05) (.34)
<EPS-DILUTED> (.05) (.37)
<FN>
<F1>
859,000 represents the gain on sale of the headquarters facility.
</FN>
</TABLE>
