SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
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Commission File No.2-331855
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GO-VIDEO, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0492122
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7835 East McClain Drive
Scottsdale, Arizona 85260-1732
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(602) 998-3400
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing price of the stock quoted on the American Stock Exchange
on June 24, 1998, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $30,820,000. See Item 5 of
this Form 10-K.
The number of shares of common stock outstanding as of June 24, 1998, was
13,005,153.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement relating to its Annual Meeting of Stockholders to be held August 20,
1998 are incorporated by reference in Part III of this Form 10-K.
Exhibit Index at page 18
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TABLE OF CONTENTS
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<TABLE>
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PART I
<S> <C> <C>
Item 1. Business........................................................................... 1
Executive Officers of the Registrant...............................................11
Item 2. Properties.........................................................................12
Item 3. Legal Proceedings..................................................................12
Item 4. Submission of Matters to a Vote of Security Holders................................12
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters...................................................13
Item 6. Selected Financial Data............................................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................18
Item 8. Financial Statements and Supplementary Data........................................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................18
PART III
Item 10. Directors and Executive Officers of the Registrant.................................19
Item 11. Executive Compensation.............................................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................19
Item 13. Certain Relationships and Related Transactions.....................................19
PART IV
Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K...................19
SIGNATURES........................................................................S-1
</TABLE>
THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS REFER TO
FUTURE EVENTS OR INCLUDE TERMS SUCH AS: THE COMPANY "BELIEVES", "EXPECTS",
"INTENDS", "PLANS", AND OTHER USES OF FUTURE TENSES. SEE ITEM 1, ITEM 5, AND
ITEM 7. ALSO SEE "MANAGMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" IN PART II, ITEM 7 FOR A DISCUSSION OF IMPORTANT
FACTORS THAT COULD AFFECT THE VALIDITY OF ANY SUCH FORWARD LOOKING STATEMENTS.
SUCH FACTORS INCLUDE THE FOLLOWING: BUSINESS CONDITIONS AND GENERAL ECONOMIC
CONDITIONS; CHANGES IN LEGISLATION THAT MAY AFFECT THE COMPANY'S ABILITY TO SELL
ITS PRODUCTS; COMPETITIVE FACTORS, SUCH AS PRICING AND MARKETING EFFORTS OF
RIVAL COMPANIES; TIMING OF PRODUCT INTRODUCTIONS; SUCCESS OF COMPETING OR FUTURE
TECHNOLOGIES; THE ABILITY OF THE COMPANY TO NEGOTIATE REDUCED PRODUCT
MANUFACTURING COSTS; THE PACE AND SUCCESS OF PRODUCT RESEARCH AND DEVELOPMENT,
PARTICULARLY WITH THE DIRECT VIEW DIGITAL TELEVISION DEVELOPMENT WITH LOEWE OPTA
GMBH; AND THE SUCCESSFUL INTEGRATION OF CALIFORNIA AUDIO LABS WHICH WAS ACQUIRED
BY THE COMPANY EFFECTIVE APRIL 1, 1998.
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Go-Video, Inc. ("Go-Video" or the "Company") designs, develops, and markets
consumer electronic and video security products. The Company believes that it
and its licensees are the exclusive North American distributors of VHS video
cassette player/recorders ("VCR's") with two decks built into one unit - the
Dual-Deck(TM) VCR. The Company patented the Dual-Deck system which incorporates
proprietary circuitry and software to perform duplicating, dual recording,
editing, and video view switching functions not available from regular VCR's.
The Dual-Deck VCR has constituted substantially all of the Company's sales over
the last five fiscal years. The Company expanded its product line into home and
business video security and surveillance products in 1995 and further expanded
its product line into home theater audio, video, and television products in
1998.
Go-Video was incorporated in Arizona in 1984, completed its initial public
offering in 1986, and reincorporated in Delaware in 1987. In 1984, the Company
filed its first successful patent application that was ultimately issued in 1988
for the Dual-Deck VCR. The Company pursued a manufacturer until 1989 when the
Company entered into manufacturing and license agreements with Samsung
Corporation ("Samsung"), one of the world's largest manufacturers of consumer
electronic products. Sales of the Dual-Deck VCR began in June 1990. The Company
added a second manufacturer of Deck-Deck VCR's in 1996, when it entered into a
manufacturing agreement with Shintom Company Ltd. and Talk Corporation
("Shintom").
The Company typically designs and develops its products which are then
manufactured for the Company under contract by independent manufacturers. The
Company ordinarily takes delivery of the finished products into its warehouse
facilities and then markets and distributes its products to retailers, catalogs,
distributors, and other customers. The Company conducts its sales and marketing
activities through its Consumer Electronics, Security Products, and Home Theater
divisions, and through its wholly-owned subsidiary, California Audio Labs LLC.
The Company's executive office is located at 7835 East McClain Drive,
Scottsdale, Arizona, 85260-1732, and its telephone number is (602) 998-3400.
Business Strategy
The Company's objective is to develop, market, and distribute innovative, high
performance electronic products that incorporate advanced technology, ease of
use, and superior industrial design. The Company believes that it can capitalize
on its technology, engineering and industry know-how, product distribution
network, and reputation for bringing innovative products to the electronics
marketplace to pursue its objective and increase its revenues and earnings.
The more significant components of the Company's business strategy include:
Reduce the manufacturing and selling costs of the Dual-Deck VCR product line to
increase consumer demand and to broaden distribution. Since the June 1990
introduction of the Dual-Deck VCR, the Company has experienced an overall market
for VCR's that is highly competitive, with decreasing selling prices and profit
margins for most industry participants. The unique features of the Dual-Deck
VCR, combined with the Company's patents and other intellectual property,
sustained the introduction and initial growth of sales of the Company's various
models of Dual-Deck VCR's. However, the Company was unable to translate the
initial success of the Dual-Deck VCR into significant net income over the first
five years following its introduction, primarily due to high manufacturing costs
resulting from the Company's exclusive manufacturing relationship with a single
supplier. In 1994, the Company began to seek additional manufacturers of the
Dual-Deck VCR to improve its negotiating power and, consequently, lower the
selling price of the Dual-Deck VCR while simultaneously adding features and
improving the Company's profit margins. The Company successfully added a second
manufacturer, Shintom, in early 1996, and as anticipated, manufacturing costs of
Dual-Deck VCR's decreased significantly. During that time, the Company lowered
the selling prices of its line of Dual-Deck VCR's
<PAGE>
between 9% to 20% which increased unit sales by 35% for the fiscal year ended
March 31, 1997 compared to the prior fiscal year and allowed the Company to
significantly improve its revenues, gross profit dollars and operating margins.
The increases during the fiscal year in 1997 were followed by similar increases
in unit sales during the fiscal year ended March 31, 1998.
The Company is continuing to pursue its strategy of increasing the Dual-Deck
VCR's share of the VCR market through further decreases in retail prices. The
Company's goal is to reach retail price "sweet spots" which would provide the
most significant potential increases for the Dual-Deck VCR as measured by unit
shipments and market share. The Company plans to introduce a new model beginning
in June 1998 that is anticipated to be commonly offered for a retail price of
$299, a 25% price decrease from the model it replaces. The Company also plans to
reduce selling prices on its other models to support retail price reductions by
similar dollar amounts. As a result, the Company anticipates that it will be
able to increase consumer demand and open new retail accounts, including
additional national retailers with significant market share of the consumer
electronics market and thereby expand its already broad distribution network.
The Company intends to continue to work with its manufacturers to further reduce
manufacturing costs of the Dual-Deck VCR so that it may support additional
reductions of retail sales prices while sustaining or improving the Company's
operating profit margins, although there is no assurance that the Company will
be successful in this effort.
Broaden the product line into high growth, higher margin products that leverage
the Company's product development, marketing, sales, and distribution assets.
The Company has identified the home theater and security products markets as
opportunities for the Company to broaden its product offerings and grow its
revenues and earnings.
Home Theater: The Company believes that there is meaningful market demand for
higher-performance, higher-margin products designed for the home theater
consumer electronics market segment which is not being addressed by current
industry participants. As a result, the Company also believes that the home
theater market segment offers the Company a promising future profit opportunity.
The Company's goal is to offer a complete and integrated line of products within
the high-performance segment of the home theater market. To accomplish this, the
Company is pursuing internal development and strategic alliances for television,
audio and video products.
In 1997, the Company entered a development, marketing, and distribution
agreement with Loewe Opta GmbH ("Loewe"), a German manufacturer of television
and home audio consumer electronics. Under the agreement, Loewe and the Company
are developing a line of high-performance, digital direct view televisions for
distribution in North America by Go-Video's Home Theater Division. The
televisions incorporate advanced digital technology that offer an improved
picture, surrounded by an attractive industrial design. The Company expects to
offer Loewe televisions in screen sizes from 27" to 36" and in both the standard
4:3 and wide-screen 16:9 formats. The Company, if successful with its
development and market launch, anticipates that sales of the televisions will
begin in late 1998. However, there can be no assurance that this will occur.
In April 1998, the Company purchased California Audio Labs L.L.C. ("Cal Audio").
Cal Audio designs, develops, manufactures (and has products manufactured under
contract), markets and distributes high-performance audio, video, and projection
television products. The Company's acquisition of Cal Audio added DVD players,
CD players, digital-to-analog converters, and front projection television
products to the Company's home theater product line. The Company also expects to
introduce amplifiers and surround sound decoders in early 1999. The Company
expects to commit substantial resources and management attention to the further
expansion and integration of the home theater product line.
Security Products: The Company's Security Products Division competes within the
closed-circuit television ("CCTV") market. Products include color and
black-and-white cameras, monitors, time-lapse VCR's, digital multiplexers, and
related items designed for security applications in commercial and home
settings. The market for video security and surveillance systems has increased
over the last five years as consumers and businesses have become more concerned
about personal and property security. The Company intends to compete in this
market with expanded product offerings, improved features, lower prices, and
technological advancements.
<PAGE>
In 1995, the Company acquired the assets of a security products company.
Subsequently, the Company developed simplified consumer versions of some
security products and expanded distribution into the consumer electronics retail
channels as a market test. When the test results did not support further rollout
of security products to other consumer electronic retailers, the Company shifted
its strategy to target more traditional distribution channels and products. In
March 1998, the Company entered into an agreement with Samsung whereby the
Company became the sole marketer and distributor of Samsung-brand video security
products in North America. As a result of the Samsung relationship, the Company
believes it is now able to offer a more competitive line of products to security
dealers, distributors, and installers.
Because of the potential cost and opportunistic and highly variable nature of a
product development and acquisition strategy, there is no assurance that
Go-Video will be successful in pursuing additional or complementary products or
product lines.
Industry Background
The consumer electronics industry is highly competitive and is characterized by
declining prices and demands for improving quality and new features.
Manufacturing is dominated by large companies, all of which compete with the
Company for consumer electronics market share. Manufacturing dominance is
maintained by substantial technological and entry cost barriers.
Sales of consumer electronic products in the United States have become
increasingly consolidated into large national and regional consumer electronics
chains, warehouse clubs, and mass merchants, all of which exercise considerable
purchasing power. Independent and smaller regional retailers have, in many
cases, abandoned lower and mid-priced consumer electronic product categories to
concentrate on premium consumer electronic products, such as high-performance
home theater systems, specialized audio components and speakers, and custom
installations of home entertainment systems. Security products are generally
sold through national security product distributors, installers, and home
improvement retail stores.
As a result of the industry consolidation, there are substantial hurdles for
bringing new products to the consumer electronic marketplace, particularly if
the company offering the product is not already distributing other consumer
electronic products. Retailers of consumer electronic products have considerable
negotiating power and generally require that suppliers have sufficient
financial, operational, and marketing wherewithal to provide a high level of
support for any product line carried by that retailer. Go-Video is one of few
companies over the last ten years that has been able to bring a new product line
and category into the consumer electronic home entertainment marketplace.
Principal Products
Go-Video markets and distributes two main product lines: consumer electronic
products and video security products. During the fiscal year ended March 31,
1998, Dual-Deck VCR's accounted for 96% of the Company's revenues, while
security products accounted for 4% of revenues.
Consumer Electronic Products: The principal consumer electronic product offered
by the Company during the fiscal year ended March 31, 1998 was the Dual-Deck
VCR. Go-Video offers several models of Dual-Deck VCR's that vary from one
another by features and configuration (the two VCR decks are either side-by-side
or stacked on one another). All current models of the Dual-Deck VCR contain the
patented technology and proprietary software of the "AmeriChrome" circuitry that
facilitates electronic signal preservation and transfer from deck to deck
without external wiring. AmeriChrome circuitry allows home consumers to create a
high quality duplicate of original VHS or VHS-C format videocassette tapes.
AmeriChrome is an improvement over the alternative method of duplicating
prerecorded video tapes which requires that two single-deck videocassette
recorders be externally wired together by the consumer. Many prerecorded tapes
contain electronic encoded signals to take advantage of single deck VCR design
weaknesses, resulting in poor or unusable copies.
AmeriChrome is not subject to such limitations.
The Dual-Deck VCR has been designed for home use as a full featured video
cassette recorder. Company-
<PAGE>
prepared literature and owner manuals caution consumers that the Dual-Deck VCR
should not be used in a manner which infringes on the rights of owners of
copyrighted material. However, the Company cannot predict the likelihood that
distribution of current or future Dual-Deck VCR models will be challenged for
any reason, or that laws governing home recording devices will be amended or
applied in the future so as to require changes to the operation or performance
of the Dual-Deck VCR. The Company believes that the Dual-Deck VCR is the video
equivalent or betterment of the dual-transport audio tape deck, which has become
an accepted audio industry standard, and that it would have meritorious defenses
to any challenge under current copyright law. The Company is not currently
developing a digital formatted recorder and is unable to predict the impact on
the Company of developing digital technologies or of possible future changes in
intellectual property rights legislation which could restrict the Company's
ability to offer Dual-Deck VCR's with AmeriChrome circuitry.
The Company expects that Dual-Deck VCR's will account for a decreasing
percentage of its total sales in future years due to the Company's product
diversification efforts.
Video Security Products: The Company's video security product line includes
closed-circuit television ("CCTV") products which are primarily used for
security and general observation and recording purposes. The product line
includes wired and wireless color and black-and-white cameras, monitors, time
lapse VCR's, VCR controllers, observation and switching systems, motion sensors
and post recording image processors. Through variations of these products, a
complete security solution can be designed to work as an integrated system. The
Company's Security Products Division markets and distributes its products to
both the commercial and consumer segments of the security and surveillance
market under the GVI Security and Samsung brands. The consumer segment had been
the Company's primary focus until early 1998, when the Company shifted its focus
to security product distributor, commercial and custom installer accounts.
Competition
The consumer electronics market is highly competitive and is characterized by
technological change and general price erosion. Most of the Company's
competitors in each of its market segments have substantially greater financial,
manufacturing, and technical resources than does the Company. Moreover, many of
these same companies have larger marketing, sales, and distribution channels
that also afford them a competitive advantage.
Dual-Deck VCR's. The market for VCR's in general is mature, with increasing unit
shipments offsetting lower average selling prices. The Company's Dual-Deck VCR
strategy is designed to capture an increasing share of the worldwide VCR market.
The Company believes that the majority of sales of VCR's consists of
replacement, upgrade, and second-unit purchases. While, to the Company's
knowledge, no other company is selling a consumer VHS-to-VHS Dual-Deck VCR in
the United States, several companies have the technical skill and practical
ability to design, manufacture, and sell such a product. "Double deck
videocassette recorders" have been developed by potential competitors of the
Company. An English company, Amstrad, introduced a product stacking two video
cassettes within one housing, formatted for the European television standard
(PAL) and not compatible with U.S. television standards (NTSC). Amstrad
announced in July 1990 that it had no current plans to introduce its product in
the United States and announced in 1994 that it was ceasing all distribution of
its PAL units in Europe. Orion is believed to sell a PAL formatted "double deck"
VCR in Germany. In Japan, Panasonic has developed a VHS-C to VHS VCR for editing
VHS-C tapes, and Sony has developed an 8mm-to-VHS VCR. Hitachi and other
Japanese companies have marketed in Japan "twin loading" VHS VCR's which load
two tapes in succession to a single deck VCR transport mechanism. There is no
assurance that a potential competitor will not attempt to introduce competing
products in the United States or other world markets in the future. However, the
Company intends to vigorously enforce its proprietary technology rights.
The Company believes that its principal North American competition is currently
from top-end single-deck VCR's offering a variety of features and available at
various prices, all of which are less expensive than comparable Dual-Deck VCR's.
Samsung has the right under its agreement with the Company, upon payment of a
royalty to the Company, to manufacture and sell, under certain conditions,
Dual-Deck VCR's incorporating the Company's proprietary technology, thereby
allowing Samsung to compete with the Company in its principal
<PAGE>
marketplace (see "Licensing"). Samsung has not to date exercised its right to
enter the North American marketplace. The Company believes that if Samsung were
to exercise its right, the Company's net revenues and profitability could be
affected in a materially adverse manner. The Company has licensed to Samsung and
Goldstar USA the worldwide nonexclusive right to manufacture, use, and sell the
8mm-to-VHS format Dual-Deck VCR (see "Licensing").
The Company anticipates that VCR's will begin to face obsolescence issues at
some point as a result of the introduction and market acceptance of a
digitally-based home player/recorder consumer product. Nevertheless, the Company
is not aware of any product that is currently sold within the consumer
electronics marketplace that is considered a viable replacement for the VCR as
the primary home video recording device. However, there is no assurance
regarding how long the VCR will remain the primary home video recording device
up to or beyond any specific time frame.
Home Theater Products. Home theater products include televisions with screen
sizes over 27" that are combined with audio and video components and multiple
speakers designed to replicate the movie theater experience in a consumer's
home. Home theater products are differentiated by wide variations in price,
performance, design, user interface, technology, and marketing and distribution
strategy. The home theater market is served by large, multinational consumer
electronic manufacturers as well as smaller companies that compete mostly in the
higher-priced, specialist audio/video segment. Products are distributed through
national and regional consumer electronics retailers that generally offer home
theater products designed for popular price points and mass market acceptance,
and specialist audio/video retailers and custom installers who primarily service
consumers with more demanding performance requirements.
Video Security Products. Within the past decade as consumers and businesses have
become more concerned about personal and property security, industry sales of
video security and surveillance systems have increased. Competitors include
diversified consumer electronic manufacturers and more specialized security
product manufacturers, all of who compete on the basis of features, price, and
ease and suitability to use. Major competitors include Magnavox, Ultrak,
Goldbeam, Vivitar, Linear, Focus, and Polestar.
Licensing
The Company and Samsung Corporation entered into a License Agreement in February
1989 under which the Company granted Samsung, under certain conditions, the use
of its patented and proprietary technology to: (i) on an exclusive basis,
manufacture and distribute Dual-Deck VCR's in the Republic of Korea; (ii) the
right to manufacture Dual-Deck VCR's for the Company; (iii) on a non-exclusive
basis, manufacture and distribute Dual-Deck VCR's in all markets except the
United States and its territories; and (iv) on a non-exclusive basis,
manufacture and distribute Dual-Deck VCR's in the United States and its
territories under Samsung's own trademark and trade names. Sales of licensed
Dual-Deck VCR's by Samsung to any party other than Go-Video are subject to a per
unit royalty based as a percentage of the net selling price. To date, the
Company has not received royalty payments under the Agreement. The License
Agreement requires that the Company offer improvements in its Dual-Deck
technology without additional fee or royalty to Samsung throughout the life of
the License Agreement and survives termination of the Manufacturing Agreement
unless such termination is for any cause attributable to Samsung. Unless
terminated earlier, the License Agreement expires in October 2004. The
Manufacturing Agreement is automatically renewed in one year increments unless
notice of cancellation is given at least six months prior to its expiration and
currently extends through February 1999 (see "Product Development and
Manufacturing").
In July 1994, the Company entered into an agreement with Goldstar U.S.A., Inc.
in which the Company granted Goldstar a non-exclusive, non-assignable,
non-transferable license to manufacture and distribute worldwide 8mm-to-VHS
VCR's. Payment for the license was received as a one-time fee. The Goldstar
agreement expires when the last of certain patents held by the Company expire.
The Company has no further obligation under the license agreement and therefore
the license fee was fully recognized as revenue in fiscal 1994.
In April 1996, the Company agreed to license to Samsung, upon payment of a
one-time fee to the Company, the worldwide nonexclusive right to manufacture,
use, and sell the 8mm-to-VHS format Dual-Deck VCR. The
<PAGE>
Company has no further obligations under the license agreement and therefore the
license fee was fully recognized as revenue in fiscal 1997.
Sales and Marketing
The Company conducts its sales and marketing activities through its Consumer
Electronics, Security Products, and Home Theater divisions. The Consumer
Electronics Division's actual and target customer base includes major national
consumer electronic retailers, catalogs, warehouse clubs, and mass merchants.
The Company's Security Products Division's actual and target customer base
includes national distributors of security products, security installation
companies, home improvement retailers, and warehouse clubs. The Home Theater
Division, which includes sales and marketing of Loewe televisions and Cal Audio
product lines, is pursuing distribution through regional and specialist
audio/video retailers and custom home theater installers.
The Company's consumer electronic product lines are sold primarily to retailers,
warehouse clubs, catalogs, and direct mailers with the support of independent
manufacturer's representatives that represent specific geographic categories
throughout North America and who also represent numerous other consumer
electronic companies. The Company sells products to over two hundred accounts in
North America, including some of the better known retailers, catalogs, and
warehouse clubs such as Circuit City, Sam's Club, Costco Warehouse, Damark,
Fingerhut, Sears, The Good Guys, Nobody Beats The Wiz, Montgomery Wards, Sun
T.V., Rex Stores, Capital Audio, J.C. Penney, Fry's Electronics, QVC, and Sound
Advice. The Company's marketing methods include attendance at trade shows, trade
publication advertising, television, radio, and print advertising, sales
promotion and other sales support programs, and publicity.
The Company's Consumer Electronics and Home Theater Divisions compete in the
consumer electronics industry, which experiences seasonal buying patterns with a
majority of sales occurring between September and January. The Company's product
line is subject to the same seasonality. Accordingly, the Company expects to
experience peaks in its sales during its third fiscal quarter.
The Company's terms of sale vary according to the quantity and price of units
purchased and the creditworthiness of the purchaser, but generally do not exceed
thirty days. Warranty terms vary according to the product offered. The most
extensive warranty offered is three months labor and one year parts for both
VCR's and video security products. The Company has service agreements for its
current models of Dual-Deck VCR's with service centers located throughout the
United States and also provides service work at its Scottsdale, Arizona
location. The Company believes it has established adequate reserves for its
warranty contingencies.
Significant Customers
For the fiscal year ended March 31, 1998, Sam's Club and Circuit City
represented 27% and 13% of the Company's revenue, respectively. For the fiscal
year ended March 31, 1997, sales to Circuit City, Sam's Club, and Damark
represented 16%, 11%, and 10% of the Company's revenues, respectively. Although
the Company's significant customers fluctuate over time, the loss of a
significant customer would have a materially adverse effect on its operating
results.
Backlog Orders
The Company's practice is to maintain sufficient inventories to fill orders
promptly and not carry a backlog of orders. The Company did not have a material
level of backlog at June 24, 1998 or June 25 of the previous year.
Product Development and Manufacturing
The Company's product development activities consist of hardware and software
design and engineering as well as co-development and engineering of new products
with manufacturers and technology partners. The Company has focused its research
and product development on the development of lower-cost Dual-Deck VCR's,
development of unique features and/or quality enhancements for the Company's
video security products, development of a line of digital direct view
televisions, and evaluation of potential new products, acquisitions, or
<PAGE>
joint ventures.
Almost all of the Company's products are manufactured for the Company by
independent manufacturers. The Company's line of Dual-Deck VCR's are
manufactured for the Company by Samsung and Shintom. The Company and Samsung
entered into a Manufacturing Agreement in February 1989 (see "Licensing") under
which Samsung manufactures Dual-Deck VCR's to the Company's specifications in
conformity to the highest standards of quality maintained by Samsung in the
manufacturing of VCR's. Quality control and assurance is performed by Samsung at
the manufacturing facility and the Company samples and verifies product quality
by sample testing upon the products arrival in the United States. The Company
generally places purchase orders for Dual-Deck VCR's three months prior to
production in accordance with its forecasted needs. The Manufacturing Agreement
sets forth statistical defect tolerances and indicates that the costs of quality
defects above the level of standards is to be borne by Samsung. The Company
purchases the Dual-Deck VCR's from Samsung F.O.B. Korea using commercial import
letters of credit opened approximately thirty days prior to ship date. Payment
for the product is by draft due thirty days after the bill of lading (ship)
date. The Manufacturing Agreement is automatically renewed for one year periods
unless terminated by six months advance notice in writing from either party.
This Manufacturing Agreement currently extends to February 1999.
The Company and Shintom entered into a Manufacturing Agreement in January 1996
under which Shintom manufactures Dual-Deck VCR's to the Company's specifications
in conformity to the highest standards of quality maintained by Shintom in the
manufacturing of VCRs. Quality control and assurance is performed by Shintom at
the manufacturing facility and the Company samples and verifies product quality
by sample testing upon the products arrival in the United States. The Company
generally places purchase orders for Dual-Deck VCR's three months prior to
production in accordance with its forecasted needs. The Manufacturing Agreement
sets forth statistical defect tolerances and indicates that the costs of quality
defects above the level of standards is to be borne by Shintom. The Company
purchases the Dual-Deck VCR's from Shintom F.O.B. Singapore using an
international wire transfer for payment of the merchandise upon shipment of an
order. The initial term of this manufacturing agreement was two years and is
automatically renewed for one year periods unless terminated by twelve months
advance notice from either party. This Manufacturing Agreement currently extends
to January 2000.
The Company's security product line is currently manufactured under purchase
orders by various manufacturers including Samsung. The Company purchases
security products from Samsung F.O.B. Korea using commercial import letters of
credit opened approximately thirty days prior to ship date. Payment for other
security products is typically on open account.
Patents, Trademarks, and Proprietary Rights
In August 1988, the Company obtained United States Patent No. 4,768,110 entitled
"Videocassette Recorder(s) Having Dual Decks For Selective Simultaneous
Functions". The Company had by that date filed corresponding Japanese
applications, and has since filed additional U.S. and foreign patent
applications for enhancements related to the Dual-Deck VCR. The Dual-Deck VCR
technology is complex, and as a result the Company's patent claims are also
complex. In general terms, the patent covers a videocassette recorder system
that has two decks contained in one housing and that has switching combinations
which permit simultaneous and/or auxiliary functions to occur, such as allowing
one deck to record while the other plays. In July 1992, the Company obtained
U.S. Patent No. 5,124,807, entitled "Dual Deck Videocassette Recorder System",
featuring the further enhanced ability of a Dual-Deck VCR system to duplicate
high quality videocassette tapes with good fidelity and avoidance of copy
degradation.
During fiscal 1993, the Company was issued four new U.S. patents. The first
patent issued, No. 5,194,963, relates to a unique circuit that results in
high-quality duplication of a videocassette tape for in-home use. This circuit
is identified by the registered trademark "AmeriChrome". A second patent, No.
5,216,552, relates to a unique Dual-Deck VCR video switching system with or
without a built-in tuner. The third patent, No. 5,216,499, relates to a Cable
Select Box Supplemental Splitter, identified by the trademark "Cable Ready
Plus". The fourth patent, No. 5,189,691, relates to a Dual-Deck VCR that
includes an answering machine logic that allows the VCR to be used to answer a
video telephone system.
<PAGE>
During fiscal 1994, the Company was issued three new U.S. patents. The first
patent issued, No. 5,307,193, relates to a method of control over an infrared
controlled device such as a TV, VCR, or stereo without the use of an infrared
emitter. This method of control uses voltage-induced energy for direct control
of a device with or without a line of sight. A second patent, No. 5,177,618,
relates to additional AmeriChrome circuitry and identification and hardware
control in the presence of certain anti-copy encoding on a videocassette. A
third patent, No. 5,249,087, relates to a rotating scanning device for use with
magnetic storage media. Other U.S. and foreign patent applications are currently
pending. There is no assurance that any additional patents will be granted to
the Company or that the Company's patents will provide meaningful protection
from competition. The Company intends to vigorously enforce its proprietary
technology rights.
The Company has registered its "Go-Video" service mark and its "Go-Video",
"AmeriChrome", "Palm-Mate", "Private Eye", and "VCR-2" trademarks with the
United States Patent and Trademark Office and has registered "Go-Video" as a
trademark with the State of Arizona. The Company has filed for registration with
the United States Patent and Trademark Office for various other trademarks. The
Company has developed and owns the proprietary operating system software
relating to the Dual-Deck VCR. The Company believes that patents, trademarks,
trade names, and proprietary rights, once established, are generally important
in the consumer electronics market, and the loss, denial, or infringement of
such patents, trademarks, trade names, and proprietary rights could have a
materially adverse effect on the Company.
Environmental Matters
Although the Company is subject to various federal, state, and local
environmental laws and regulations, compliance with such laws and regulations
has not had a material effect on the Company.
Year 2000 Compliance
The Company is conducting its evaluation of its management information systems
and the possible effect of Year 2000 hardware and software issues. In addition,
the Company is communicating with its significant external suppliers, financial
institutions, and other parties that provide critical services or supplies to
the Company to assess their respective compliance with Year 2000 issues. There
can be no assurance that the Company's significant suppliers will properly
address and resolve such Year 2000 issues. Expenditures to make the Company Year
2000 compliant will be expensed as incurred and are not expected to be material
to the Company's consolidated financial position or results of operations.
Employees
As of June 24, 1998, the Company employed 76 full-time employees, including its
five executive officers. None of the Company's employees is represented by a
labor union. The Company considers its relations with its employees to be good.
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth certain information concerning the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Roger B. Hackett 47 Chief Executive Officer, President, and Chief Operating Officer
Ralph F. Palaia 48 Senior Vice President, Marketing and Sales
Steven G.T. Maine 56 Senior Vice President and Chief Technology Officer
Edward J. Brachocki 42 Vice President, Corporate Development
Douglas P. Klein 37 Vice President, Chief Financial Officer, Secretary and Treasurer
</TABLE>
Roger B. Hackett was first elected to the Board of Directors in December 1992
and joined the Company as President and Chief Operating Officer in January 1993.
In March 1994, Mr. Hackett was elected Chief Executive Officer and Chairman of
the Board. Prior to joining Go-Video, Mr. Hackett served as an executive officer
of Serving Software Inc., a Minneapolis, Minnesota-based provider of computer
software used in the health care industry. In 1986, Mr. Hackett founded the CAMS
division of ATI Medical, Inc., a provider of critical care medical equipment,
and over six years developed CAMS into a leading provider of bar-code-based
information systems. In January 1992, Mr. Hackett negotiated the sale of the
CAMS division to Serving Software Inc., where he then served as Vice President
of the CAMS division until being named Senior Vice President, Corporate Affairs
in January 1993. He also served as a director of Serving Software from January
1993 until September 1994 when Serving Software was acquired by HBO & Co. Mr.
Hackett received a Bachelor of Science Degree in Business Administration from
Ohio State University.
Ralph F. Palaia joined the Company in December 1997 as Senior Vice President,
Marketing and Sales. Prior to joining the Company, Mr. Palaia was a member of
the Company's Board of Directors where he had served from December 1994 until
his resignation effective with his appointment as an executive officer of the
Company. Prior to joining Go-Video, Mr. Palaia was co-owner of Innovative
Marketing Group, a marketing and distribution firm founded in April 1994, which
performed marketing-related consultation and services for consumer electronics
and other related product clients. From February 1991 to April 1994, Mr. Palaia
served in several sales and marketing executive positions, most recently as
Senior Vice President of Marketing and Sales for Philips Consumer Electronics,
Knoxville, Tennessee, a division of Philips N.V., a leading international
manufacturer and distributor of consumer electronic products. Earlier positions
with Philips included Vice President of Retail Sales, Vice President of National
Account Sales, and Vice President of Marketing for the Personal Computer
Category. Prior to joining Philips in February 1991, Mr. Palaia founded MGN
Technology Corp., Knoxville, Tennessee, in 1987 and served as its President
until he sold the company to Craig Electronics in December 1990. From 1984 until
1987, Mr. Palaia was Director of Marketing for the VCR-Camcorder Product Group
of Philips. He received a Bachelor of Arts Degree in Economics from Duke
University.
Stephen G.T. Maine joined the Company in April 1998 as Senior Vice President and
Chief Technology Officer. Prior to joining the Company, Mr. Maine was Senior
Director of New Business Development for Broadcom Corporation, Irvine,
California, where he was responsible for identifying new product opportunities
for high performance mixed signal VLSI products and technology for the broadband
communications and networking markets. Prior to joining Broadcom in August 1997,
Mr. Maine was employed by General Instruments from 1974 to July 1997 in a
variety of positions, most recently as Vice President of Business Development
for Satellite & Data Networks. Prior positions held at General Instruments
included Vice President of Business Development, Vice President of Marketing and
Business Development for Microchip Technology Inc., which was subsequently
divested by GI Microelectronics, General Manager and Founder, Image Management
Systems, a start-up company funded by General Instruments to develop advanced
video and graphics systems, and other technical and marketing management
positions in the United States and England within General Instruments. Before
joining General Instruments, he managed the Microelectronics division of Hughes
Aircraft in the United Kingdom. Mr. Maine graduated from the University of Aston
with a Bachelor of Science degree in Electrical Engineering and the Birmingham
College of Advanced Technology with a Diploma in Technology (MSEE equivalent.)
He holds numerous patents and has published several articles on integrated
circuit computer
<PAGE>
architectures. He was one of thirty people selected by Electrical Engineering
Times as a major contributor to the Integrated Circuit Industry.
Edward J. Brachocki joined the Company in February 1993 as Vice President,
Marketing, and was named Vice President, Corporate Development, in August 1994.
From July 1992 until joining the Company, Mr. Brachocki was a Senior Associate
for MTA/EMCI, a Washington, D.C.-based consulting firm for the
telecommunications and cable television industries, where he advised clients on
marketing issues for technology-based consumer products. From November 1989 to
June 1992, he was Director of Marketing and Business Development for Goldstar
Products Co., Ltd. Prior to joining Goldstar, Mr. Brachocki served for two years
as a consultant and General Manager of Bliss Marketing, a Phoenix, Arizona-based
marketing and strategic planning company. Mr. Brachocki received a Bachelor of
Science Degree in Psychology from Fairfield University in Connecticut.
Douglas P. Klein joined the Company in April 1993 as Assistant Treasurer and was
named Treasurer and Vice President of Finance in October 1993, Corporate
Secretary in April 1994, Chief Financial Officer in September 1995, and Vice
President, Finance and Administration in 1997. Mr. Klein was employed from June
1983 through October 1992 by Continental Bank N.A., Chicago, Illinois, where he
served in various accounting and corporate banking positions, most recently as
Portfolio Manager responsible for structuring, syndicating and managing credit
and derivative exposure to Continental's largest Midwestern-based clients.
Earlier positions included Portfolio Manager for the Investment Grade Division,
Commercial Lending Officer, Senior Credit Analyst, Senior Planning Analyst, and
Senior Internal Auditor. Mr. Klein serves on the Board of Directors of Desert
Schools Federal Credit Union, a federally-charted credit union with $1 billion
in assets. Mr. Klein received a Bachelor of Science Degree in Management from
Purdue University, and a Masters Degree in Management from the J.L. Kellogg
Graduate School of Management, Northwestern University.
Item 2. Properties
----------
The Company leases a 33,000 square foot executive office and warehouse facility
in north Scottsdale, Arizona, which is fully utilized and in good condition. The
lease began in January 1996 and has a term of seven years, with one three year
extension at the option of the Company. The Company is currently considering its
space requirements in relation to its business plan which anticipates increased
needs for personnel, office, and warehousing space. As such, the Company expects
to require additional space, which would increase the Company's overall rental
costs.
Item 3. Legal Proceedings
-----------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of Security Holders during the
fourth quarter of the fiscal year ended March 31, 1998.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
-----------------------------------------------------------------------
Matters
-------
The following table sets forth the high and low sales prices for the Common
Stock during the period from April 1, 1996 through March 31, 1998, as reported
to the Company by the American Stock Exchange. Sales prices do not include
commissions or other adjustments to the selling price.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
-------------------------------- --------------------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $1.9375 $1.2500 $1.3750 $1.0000
Second Quarter $2.6250 $1.3750 $1.5625 $0.9375
Third Quarter $2.8750 $2.0000 $1.5000 $1.0000
Fourth Quarter $2.6250 $1.7500 $2.1250 $1.1250
</TABLE>
As of March 31, 1998, the Company believes there were approximately 8,000
beneficial holders of the Company's Common Stock, including approximately 1,800
stockholders of record (certificate holders registered directly rather than on
account at various brokerages or trustees).
The Company has never paid cash dividends on its Common Stock, and it intends
for the foreseeable future to retain any earnings to support the growth of its
business. Any payment of cash dividends in the future, as determined at the
discretion of the Board of Directors, will be dependent on the Company's
financial condition, capital requirements, and other factors deemed relevant. In
addition, the Company's credit agreement currently prohibits the payment of
dividends without the consent of the lender.
Item 6. Selected Financial Data
-----------------------
The selected financial data of the Company set forth below, insofar as relates
to the period from August 1, 1992 to March 31, 1998, has been derived from the
Company's audited Consolidated Financial Statements, certain of which are
included elsewhere herein. This data should be read in conjunction with the
Consolidated Financial Statements, related Notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Statement of Operations
Fiscal Year Ended March 31 Fiscal Year Ended July 31,
---------------------------------------- Eight Months Ended ---------------------------
1998 1997 1996 March 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 48,897,883 $40,175,195 $34,646,406 $27,602,708 $41,192,644 $30,928,531
Net income (loss) 3,083,350 1,884,331 (2,871,170) 117,801 105,741 116,706
Net income (loss)
per share - basic 0.25 0.17 (0.25) 0.01 0.01 0.01
Weighted average
shares 12,248,724 11,407,553 11,304,261 11,194,200 11,090,549 10,592,326
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet
Fiscal Year Ended March 31 Fiscal Year Ended July 31,
--------------------------------------- Eight Months Ended --------------------------
1998 1997 1996 March 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $16,065,174 $12,489,674 $ 9,630,183 $10,035,234 $10,165,288 $ 9,697,545
Current liabilities 7,068,737 5,486,850 6,236,720 3,184,011 3,608,489 3,967,437
Long-term assets (net) 2,979,435 1,391,630 1,567,803 464,963 541,940 1,249,167
Long-term liabilities 868,658 1,268,131 283,405 6,245 19,004 63,803
Total assets 19,044,609 13,881,304 11,197,986 10,500,197 10,707,228 10,946,712
Total liabilities 7,937,395 6,754,981 6,520,125 3,190,256 3,627,493 4,031,240
Stockholders' equity 11,107,214 7,126,323 4,677,861 7,309,941 7,079,735 6,915,472
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Overview
The Company was incorporated in May 1984 and was engaged in development-stage
activities until the fiscal year ended July 31, 1990, when it began its primary
operations of developing, marketing and distributing consumer electronic
products. The Company experienced substantial losses from its formation through
the fiscal year ended July 31, 1992. The Company changed its fiscal year-end to
March 31 beginning with the eight month transition period ended March 31, 1995.
Results of Operations
The table below highlights significant information in a percentage relationship
to net sales with regard to the Company's results of operations during the
periods indicated.
Year Ended March 31,
---------------------------------
1998 1997 1996
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Gross profit 24.8% 25.2% 15.5%
Sales and marketing expense 10.1% 8.8% 11.7%
Research and development expense 1.9% 2.8% 2.1%
General and administrative expense 6.3% 7.1% 8.1%
Total operating expenses 18.2% 18.6% 21.9%
Operating income (loss) 6.6% 6.6% (6.4%)
Other income (expense) (1.2%) (1.8%) (1.9%)
Pre-tax income 5.4% 4.8% (8.3%)
Net income (loss) 6.3% 4.7% (8.3%)
Fiscal year ended March 31, 1998 compared with the fiscal year ended March 31,
- --------------------------------------------------------------------------------
1997
- ----
Net sales increased 22% to $48.9 million for the fiscal year ended March 31,
1998 ("fiscal 1998") from $40.2 million during the fiscal year ended March 31,
1997 ("fiscal 1997"). The increase in net sales was primarily due to a 30%
increase in Dual-Deck VCR ("DDVCR") units sold by the Company's Consumer
Electronics Division during fiscal 1998 compared to fiscal 1997, offset in part
by a 6.2% decrease in the average selling price per unit over the two periods.
The increase in net DDVCR units sold was due to the expansion of sales into
warehouse clubs and increased consumer demand for most models of the Company's
current model line of DDVCR's as a result of lower retail prices. The Company
anticipates that its average selling price per DDVCR unit will continue to
decline during the fiscal year ending March 31, 1999 ("fiscal 1999"), as
compared with prior periods. In particular, the Company is preparing to
introduce a line of DDVCR models late in the first quarter of fiscal 1999 that
are expected to be sold at retail prices reduced between 17% to 25% from the
models they are replacing. Sales by the Company's Security Products Division
contributed approximately 4% of the Company's total net sales for fiscal 1998.
The Company anticipates that sales from its Security Products Division and its
new Home Theater Division will contribute an increasing percentage of its total
revenue for fiscal 1999, subject to the successful introduction of new product
lines planned for these divisions.
Gross profit was $12.1 million and $10.1 million for fiscal 1998 and fiscal
1997, respectively, representing a 20% increase in gross profit dollars. The
increase in gross profit dollars was primarily due to higher sales of DDVCR's in
fiscal 1998 compared to fiscal 1997. Gross profit as a percentage of net sales
("gross margin") decreased slightly to 24.8% for fiscal 1998 from 25.2% for
fiscal 1997, primarily as a result of the 6.2% decrease in the average DDVCR
selling price offset in part by a 5.7% decrease in the average manufacturing
cost per unit. The Company anticipates that it will be able to maintain gross
margin near historic levels but that the actual gross margin realized in fiscal
1999 will be heavily influenced by the actual mix of high-fi and mono DDVCR
units
<PAGE>
sold, the successful introduction of new product lines in the Security Products
and Home Theater Divisions (particularly in the second half of the fiscal year),
and the Company's ability to realize additional reductions in manufacturing
costs.
Sales and marketing expenses increased 39% to $4.9 million for fiscal 1998 from
$3.5 million for fiscal 1997. As a percentage of net sales, sales and marketing
expenses increased from 8.8% to 10.1% over the same period. The increase in
sales and marketing expense for fiscal 1998 was primarily due to a bad debt
charge of $440,000 as a result of the December 1997 bankruptcy of Nobody Beats
The Wiz, a large retail customer of the Company. Excluding the bad debt charge,
sales and marketing expenses increased from 8.8% to 9.2% of sales, primarily as
a result of higher marketing expenses related to the expansion of
direct-to-consumer marketing activities and increased marketing expenditures by
the Company's Security Products Division.
Research and development expenses decreased 18.5% to $0.9 million for fiscal
1998 from $1.1 million for fiscal 1997. The decrease in research and development
expenses was primarily due to an agreement reached effective January 1, 1997
with Loewe Opta GmbH in which Loewe agreed to develop and manufacture,
exclusively for the Company, a line of digital direct view televisions built to
the Company's specifications. Prior to the agreement with Loewe, the Company had
borne certain development costs primarily related to software and hardware
modifications of the televisions to prepare them for sale in North America.
Execution of the Company's strategy to develop and market innovative consumer
electronic products is expected to require increased research and development
expenditures in fiscal 1999 and beyond, although the Company anticipates that,
as a percentage of sales, research and development expenses will remain
consistent with the Company's experience over the last several fiscal years.
General and administrative expenses increased 8.6% to $3.1 million for fiscal
1998 from $2.8 million for fiscal 1997. The increase was primarily due to higher
depreciation and amortization expenses related to increased investments in
information systems hardware and software. Also contributing to the higher
general and administrative expenses were higher compensation, temporary labor,
recruitment, and training expenses. As a percentage of net sales, general and
administrative expenses decreased to 6.3% for fiscal 1998 from 7.1% for fiscal
1997. The Company expects that these trends will continue in fiscal 1999.
As a result of the above, the Company recorded operating income of $3.2 million
for fiscal 1998 compared with operating income of $2.7 million for fiscal 1997.
The Company recorded net other expense of $0.6 million for fiscal 1998 compared
with net other expense of $0.7 million for fiscal 1997. The decrease in net
other expense was primarily due to lower interest expense resulting from a
decrease in the average effective interest rate on the Company's line of credit,
offset in part by an increase in the average daily loan outstanding.
The Company reported net income of $3.1 million for fiscal 1998, up $1.2 million
or 64% from net income of $1.9 million for fiscal 1997. Included in fiscal 1998
net income was an net income tax benefit of $427,000 resulting from the
Company's determination that it is more likely than not that $530,000 of
deferred tax assets will be realized in future years, offset in part by a
provision for alternative minimum income tax and state income tax. The Company
recorded a provision for its alternative minimum income tax liability of $40,000
for fiscal 1997.
Fiscal year ended March 31, 1997 compared with the fiscal year ended March 31,
- --------------------------------------------------------------------------------
1996
- ----
Net sales increased 16% to $40.2 million for the fiscal year ended March 31,
1997 ("fiscal 1997") from $34.6 million for the fiscal year ended March 31, 1996
("fiscal 1996"). The increase in net sales was primarily due to a 35% increase
in Dual-Deck VCR ("DDVCR") units sold during fiscal 1997 compared to fiscal
1996, offset in part by a 14% decrease in the average selling price per unit
over the two periods. The increase in DDVCR units sold was primarily due to
increased consumer demand for a new DDVCR model introduced at the end of the
first quarter of fiscal 1997 which was priced approximately 20% below the
comparable model it replaced from the previous fiscal year. Sales by the
Company's Security Products Division, which was acquired in April 1995, were
approximately 3% of total net sales for fiscal 1997, up slightly over the prior
period.
Gross profit was $10.1 million and $5.4 million for fiscal 1997 and fiscal 1996,
respectively, representing an 89% increase in gross profit dollars. Gross profit
as a percentage of net sales increased from 15.5% for fiscal
<PAGE>
1996 to 25.2% for fiscal 1997. The increase in gross profit as a percentage of
net sales was primarily due to higher gross margins realized on DDVCR model
lines due to lower manufacturing costs negotiated from both of the Company's
DDVCR contract manufacturers. In addition, fiscal 1996 gross profit included an
inventory adjustment for a discontinued product line which reduced gross profit
dollars by approximately $1.3 million.
Sales and marketing expenses decreased 13% to $3.5 million for fiscal 1997 from
$4.1 million for fiscal 1996. As a percentage of net sales, sales and marketing
expenses decreased from 11.7% to 8.8% over the same period. The decrease in
sales and marketing expense as a percentage of net sales was primarily due to
reduced spending on market development funds and promotional items offset in
part by expenses incurred for the Company's national television advertising
campaign undertaken in the third and fourth quarters of fiscal 1997.
Research and development expenses increased 56% to $1.1 million for fiscal 1997
from $0.7 million for fiscal 1996. The increase in research and development
expenses was primarily due to expenses incurred in connection with the Company's
commencement of development of a line of digital direct view televisions.
General and administrative expenses were unchanged at $2.8 million for fiscal
1997 from fiscal 1996. As a percentage of net sales, general and administrative
expenses decreased from 8.1% for fiscal 1996 to 7.1% for fiscal 1997.
As a result of the above, the Company recorded operating income of $2.7 million
for fiscal 1997 compared with an operating loss of $2.2 million for fiscal 1996.
Other expenses of $0.7 million were unchanged for fiscal 1997 from fiscal 1996.
The Company reported net income of $1.9 million for fiscal 1997 compared with a
net loss of $2.9 million for fiscal 1996. The Company recorded a provision for
income taxes of $40,000 for fiscal 1997 representing its alternative minimum
income tax liability. The Company did not recognize either an income tax
liability or benefit during fiscal 1996.
Seasonality
The Company's primary product lines compete within the consumer electronics
industry, which generally experience seasonality in sales. Accordingly, the
Company expects to experience peaks in its sales from September through January,
which covers the holiday selling season.
Future Results
The Company's expectations for results of operations and other forward-looking
statements contained in this annual report on Form 10-K, particularly statements
relating to the sustainability of profitable growth, expected results from the
introduction of lower-priced models of its Dual-Deck VCR, and expected results
from the security products and home theater markets, involve a number of risks
and uncertainties. Among the factors that could affect future operating results
are the following: business conditions and general economic conditions; changes
in legislation that may affect the Company's ability to sell its products;
competitive factors, such as the pricing and marketing efforts of rival
companies; timing of product introductions, success of competing or future
technologies, the ability of the Company to negotiate reduced product
manufacturing costs, the pace and success of product research and development,
particularly with the direct view digital television development with Loewe Opta
GmbH, and the successful integration of California Audio Labs which was acquired
by the Company effective April 1, 1998.
Capital Resources and Liquidity
Net cash provided by operating activities was $1.6 million for the fiscal year
ended March 31, 1998 ("fiscal 1998") compared with net cash consumed of $0.5
million for the fiscal year ended March 31, 1997 ("fiscal 1997"). The increase
in cash provided by operating activities for fiscal 1998 was primarily the
result of higher net income and an increase of $0.9 in other current
liabilities, offset in part by a $2.3 million increase in receivables and a $1.0
million increase in inventory. The increase in receivables resulted from a
combination of higher sales levels and timing of fourth quarter shipments, as
the Company's fiscal 1998 receivable collection experience and sales terms
remained consistent with prior periods. The increase in the inventory balance
for fiscal 1998 compared to fiscal 1997 was primarily due to an increased number
of Dual-Deck VCR inventory models carried by the Company in fiscal 1998 as well
as higher inventories of video security products resulting from the Company's
March 1998 agreement with Samsung Electronics to market and distribute
Samsung-branded security products in addition to the Company's own GVI
Security-branded product line. The increase in other current
<PAGE>
liabilities was primarily due to a deferred liability recorded for digital
direct-view television product development expense reimbursements received from
Loewe Opta GmbH ahead of the actual performance and billing by third parties of
certain development expenses.
The Company had net working capital of $9.0 million and $7.0 million at March
31, 1998 and March 31, 1997, respectively. At March 31, 1998, the Company's
current ratio (current assets divided by current liabilities) was 2.3 to 1,
unchanged from March 31, 1997.
The Company funds its cash requirements through a combination of cash flow from
operations and loans under a line of credit with Congress Financial Corporation.
During the fiscal year, the Company's sales seasonality generally requires
incremental working capital for investment primarily in inventories and
receivables. The Company's primary source of funds for the fiscal year ended
March 31, 1998 was cash flow from operations, although during fiscal 1998 the
Company borrowed a maximum of $8.9 million under its line of credit to fund
seasonal working capital needs, compared to its maximum borrowing of $6.2
million during fiscal 1997. The financing agreement with Congress Financial was
first entered into in October 1992 and was last amended in November 1996. The
maximum line of credit, as amended, is $14.0 million, limited by a borrowing
base determined by specific inventory and receivable balances. The line provides
for cash loans, letters of credit, and acceptances. The agreement, as amended,
expires in November 1999 with a prepayment (if applicable) fee of 1%. Loans are
priced at prime plus 1%. The lender is collateralized by all assets of the
Company. The unused and available line of credit at March 31, 1998 was
approximately $6.7 million. The Company capitalized $0.5 million of closing
costs related to the origination and amendment of the financing agreement. These
costs were fully amortized at March 31, 1998. The Company believes its current
financial resources to be adequate to support operations over the next twelve
months.
The Company sold $1.5 million of convertible subordinated notes in a private
placement with institutional holders in August 1996. Notes outstanding after
August 1999 must be converted to common stock at the option of the Company. As
of March 31, 1998, notes with a principle amount of $625,000 had been converted.
The Company entered into an agreement with Loewe Opta GmbH of Kronach, Bavaria,
Germany, to develop and market a line of digital television products designed
specifically for the North American market. The initial agreement is effective
through January 1, 2003 with built in five year extensions. The Company will
incur fees totaling $1.7 million and Deutsche Marks 1,050,000 (approximately
$0.6 million as of June 19, 1998) for the exclusive right to market and
distribute Loewe Opta direct view televisions in North America. The fee, as
structured, is due in installments through August 1998. The Company expects to
receive the first shipments of product from Loewe during the third quarter of
its fiscal year 1999.
On April 1, 1998, the Company acquired California Audio Labs, LLC ("Cal Audio").
Cal Audio designs, develops, manufactures and distributes digital audio and
video products marketed to the high-performance home theater market under the
California Audio Labs and Cinevision brand names. The purchase price was
$775,000 in cash plus assumption of liabilities of $1.2 million. The Company
expects to incur increased expenses related to the integration and development
of the Cal Audio business and therefore does not anticipate a meaningful
contribution to operating income by Cal Audio during the fiscal year ending
March 31, 1999.
The Company leases a 33,000 square foot executive office and warehouse facility
in Scottsdale, Arizona, which is fully utilized and in good condition. The lease
began in January 1996 and has a term of seven years, with one three year
extension at the option of the Company. The Company is currently considering its
space requirements in relation to its business plan which anticipates increased
needs for personnel, office, and warehousing space. As such, the Company may be
required to seek additional space, which would increase the Company's overall
rental costs.
Inflation
Inflation has had no material effect on the Company's operations or financial
condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
<PAGE>
The Company does not utilize market risk sensitive instruments.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Pages F-1 through F-19
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
None
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Go-Video, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Go-Video, Inc.
and subsidiary (the "Company") as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1998. 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 the Company at March 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998 in conformity with generally accepted
accounting principles.
/S/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 4, 1998
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31,
-------------------------
ASSETS (Note 12) 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 445,925 $ 302,788
Receivables - less allowance for doubtful accounts
of $100,000 and $130,000, respectively 9,460,081 7,125,384
Inventories (Note 5) 6,012,022 5,026,149
Prepaid expenses and other assets 47,146 35,353
Deferred income taxes (Note 9) 100,000
----------- -----------
Total current assets 16,065,174 12,489,674
----------- -----------
EQUIPMENT AND IMPROVEMENTS (Note 10):
Furniture, fixtures and equipment 600,143 563,246
Leasehold improvements 212,830 208,888
Office equipment 844,056 664,002
Tooling 1,353,360 1,296,260
----------- -----------
Total 3,010,389 2,732,396
Less accumulated depreciation and amortization 2,109,376 1,595,705
----------- -----------
Equipment and improvements - net 901,013 1,136,691
DUAL-DECK VCR PATENTS - Net of amortization
of $54,410 and $45,894, respectively 121,607 67,626
GOODWILL - Net of amortization of $51,139 and
$34,092, respectively 119,324 136,371
MARKET EXCLUSIVITY FEE (Note 3) 1,374,248
DEFERRED INCOME TAXES (Note 9) 430,000
OTHER ASSETS 33,243 50,942
----------- -----------
TOTAL $19,044,609 $13,881,304
=========== ===========
(Continued)
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,999,330 $ 1,226,644
Accrued expenses 1,042,039 980,163
Current portion of capital lease obligations (Note 10) 89,380 82,820
Other current liabilities (Note 6) 1,894,495 1,040,120
Warranty reserve - current 160,000 173,000
Income taxes payable 23,000 20,000
Line of credit (Note 12) 1,860,493 1,964,103
------------ ------------
Total current liabilities 7,068,737 5,486,850
DEFERRED RENT 37,152 29,739
CAPITAL LEASE OBLIGATIONS (Note 10) 90,673 180,059
MANDATORY CONVERTIBLE
SUBORDINATED DEBT (Note 7) 740,833 1,058,333
------------ ------------
Total liabilities 7,937,395 6,754,981
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 10)
STOCKHOLDERS' EQUITY (Note 8):
Common stock, $.001 par value - authorized,
50,000,000 shares; issued and outstanding, 12,643,297 and
11,837,285 shares, respectively 12,643 11,837
Additional capital 20,480,154 19,588,421
Unamortized consulting services (5,002)
Accumulated deficit (9,385,583) (12,468,933)
------------ ------------
Total stockholders' equity 11,107,214 7,126,323
------------ ------------
TOTAL $ 19,044,609 $ 13,881,304
============ ============
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
--------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SALES $ 48,897,883 $ 40,175,195 $ 34,646,406
COST OF SALES 36,757,540 30,035,136 29,266,086
------------ ------------ ------------
Gross profit 12,140,343 10,140,059 5,380,320
------------ ------------ ------------
OTHER OPERATING COSTS:
Sales and marketing 4,928,532 3,539,828 4,068,170
Research and development (Note 3) 906,638 1,112,675 713,600
General and administrative expenses 3,078,512 2,836,019 2,809,573
------------ ------------ ------------
Total other operating costs 8,913,682 7,488,522 7,591,343
------------ ------------ ------------
Operating income (loss) 3,226,661 2,651,537 (2,211,023)
------------ ------------ ------------
OTHER REVENUES (EXPENSES):
Interest income 11,206 16,846 4,258
Interest expense (572,866) (670,522) (648,804)
Other (8,651) (73,530) (15,601)
------------ ------------ ------------
Total other expenses - net (570,311) (727,206) (660,147)
------------ ------------ ------------
INCOME (LOSS) BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES 2,656,350 1,924,331 (2,871,170)
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 9) (427,000) 40,000
------------ ------------ ------------
NET INCOME (LOSS) $ 3,083,350 $ 1,884,331 $ (2,871,170)
============ ============ ============
BASIC NET INCOME (LOSS) PER
COMMON SHARE (Note 4) $ .25 $ .17 $ (0.25)
============ ============ ============
DILUTED NET INCOME (LOSS) PER COMMON
SHARE AND SHARE EQUIVALENT (Note 4) $ .23 $ .16 $ (0.25)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Unamortized
--------------------------- Additional Consulting Accumulated
Shares Amount Capital Services Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 (Note 8) 11,273,012 $ 11,273 $ 18,943,342 $ (162,580) $(11,482,094) $ 7,309,941
Stock options exercised for cash 58,000 58 45,542 45,600
Warrants issued for
consulting services 65,912 (65,912)
Amortization of consulting costs 193,490 193,490
Net loss (2,871,170) (2,871,170)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1996 (Note 8) 11,331,012 11,331 19,054,796 (35,002) (14,353,264) 4,677,861
Stock options exercised for cash 104,000 104 115,276 115,380
Stock grant 35,466 36 42,080 42,116
Private placement (Note 7) 60,000 60 27,306 27,366
Conversion of subordinated
debt (Note 7) 206,807 206 224,063 224,269
Exercise of warrants issued in
conjunction with private
placement (Note 7) 100,000 100 124,900 125,000
Amortization of consulting costs 30,000 30,000
Net income 1,884,331 1,884,331
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 (Note 8) 11,837,285 11,837 19,588,421 (5,002) (12,468,933) 7,126,323
Stock options exercised for cash 175,020 175 188,597 188,772
Payment of interest on subordinated
debt in stock 54,342 54 99,946 100,000
Conversion of subordinated debt 341,400 342 339,059 339,401
Exercise of warrants issued in
conjunction with private placement 224,000 224 279,767 279,991
Stock issued - private placement 11,250 11 (11)
Cash paid for conversion costs (Note 7) (15,625) (15,625)
Amortization of consulting costs 5,002 5,002
Net income 3,083,350 3,083,350
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 (Note 8) 12,643,297 $ 12,643 $ 20,480,154 $ -- $ (9,385,583) $ 11,107,214
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
-----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,083,350 $ 1,884,331 $(2,871,170)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 583,571 623,407 1,149,677
Provision for losses on accounts receivable (30,000) (5,761)
Loss (gain) on sale of equipment 10,578 (834) 1,752
Changes in operating assets and liabilities - net of acquisition:
Receivables (2,304,697) (2,978,241) 558,914
Inventories (985,873) 100,954 98,708
Prepaid expenses and other assets (11,793) 6,668 45,256
Deferred income taxes (530,000)
Patents (62,497) 3,230 (1,363)
Other assets 17,699 73,308 27,868
Accounts payable 772,686 (1,285,950) 1,652,476
Accrued expenses 183,777 604,191 (29,890)
Other current liabilities 854,375 417,233 369,942
Warranty reserve (13,000) (18,000) 68,000
Income taxes payable 3,000 20,000
Other long-term liabilities 7,413 14,219 14,274
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,578,589 (535,484) 1,078,683
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment and improvement expenditures (327,906) (467,938) (1,454,261)
Cash acquired from acquisition 39,951
Market exclusivity fee (1,374,248)
----------- ----------- -----------
Net cash used in investing activities (1,702,154) (467,938) (1,414,310)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 468,763 295,098 45,600
Registration costs (15,625) (17,500)
Net (repayments) borrowings under line of credit (103,610) (466,227) 779,438
Payment on capital lease obligations (82,826) (108,943)
Net proceeds from issuance of mandatory
convertible debt 1,350,000
Payment of financing costs (60,134) (85,000)
Payment of debt assumed in acquisition (257,314)
----------- ----------- -----------
Net cash provided by financing activities 266,702 992,294 482,724
----------- ----------- -----------
</TABLE>
(Continued)
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 143,137 (11,128) 147,097
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 302,788 313,916 166,819
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 445,925 $ 302,788 $ 313,916
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ 100,000 $ 20,000
========= =========
Cash paid for interest $ 483,789 $ 391,625 $ 567,257
========= ========= =========
Common shares issued for consulting services $ 75,000
=========
Warrants issued for consulting services (Note 8) $ 65,912
=========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debt, accrued interest and
payment of interest to common stock (Note 7) $ 439,401 $ 224,269
========= =========
Capital lease obligations entered into by the Company $ 399,435
=========
In connection with the acquisition:
Liabilities assumed $ 361,120
=========
Fair value of assets acquired, including
$39,951 in cash $ 190,657
=========
Excess of cost over fair value of acquired assets $ 170,463
=========
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Go-Video, Inc. and subsidiary (the "Company") develops, designs, engineers
and markets consumer electronic and video security products. The Company
currently contracts with independent electronics manufacturers to produce
its products to its specific standards. The Company normally receives such
products at its Scottsdale, Arizona facility. Distribution of its products
occurs upon receipt of customer orders.
The following are the significant accounting and financial policies used
in the preparation of the consolidated financial statements of the
Company.
a. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Go-Video Productions, Inc.
(the "Subsidiary"), which has not initiated operations.
b. Cash and cash equivalents consisted of the following at March 31:
1998 1997
Money market funds $130,868 $263,133
Cash in checking accounts 315,057 39,655
-------- --------
Total $445,925 $302,788
======== ========
Cash and cash equivalents have initial maturity dates of three
months or less and are stated at cost which approximates market.
c. Inventories are stated at the lower of cost (first-in, first-out) or
market.
d. Equipment and improvements are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful
lives of the assets of two to five years. Amortization, by the
straight-line method, of leased furniture and improvements to leased
property is based upon the term of the applicable lease or the
estimated useful lives of such assets, whichever is less. Tooling
costs primarily relate to Dual-Deck VCRs. Depreciation of tooling is
calculated using the number of new units sold (not to exceed two
years) as the tooling costs relate directly to the manufacturing of
the new units.
e. Dual-Deck VCR patents represent professional fees and other costs
incurred in connection with obtaining patents for the Dual-Deck VCR.
The patent costs are amortized by the straight-line method over the
estimated life of the patents.
<PAGE>
f. Goodwill represents the excess of the cost of the acquired company
over the fair value of the net assets at the date of acquisition.
Goodwill is amortized using the straight-line method over a period
of ten years.
g. Revenue Recognition - Sales of products are recognized once the
product is shipped to the customer and the title passes.
h. Income Taxes - The Company files a consolidated tax return. As of
August 1, 1993, the Company adopted the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 109, Accounting for Income Taxes, which
requires the use of the liability method of accounting for deferred
income taxes.
i. Accounting for Stock-Based Compensation - In October 1995, the FASB
issued SFAS No. 123, Accounting for Stock Based Compensation. As
permitted, the Company has elected not to change to the fair value
method and will continue to use Accounting Principles Board Opinion
No. 25 for measurement and recognition of employee stock based
transactions. Pro forma information reflecting the fair value method
is presented in Note 8.
j. Earnings Per Share - In February 1997, the FASB issued SFAS No. 128,
Earnings Per Share, effective for both interim and annual periods
ending after December 15, 1997. This statement specifies the
computation, presentation and disclosure of earnings per share for
entities with publicly-held common stock or potential common stock.
The Company adopted this SFAS for fiscal year 1998 and, upon
adoption, the Company restated all earnings per share data
presented. In accordance with SFAS No. 128, basic income (loss) per
common share is computed based on the weighted average number of
common shares outstanding during each period. Diluted income (loss)
per share is computed based on the weighted average number of common
and common equivalent shares outstanding during each year and
includes shares issuable upon exercise of stock options, except in
those circumstances where such options would be antidilutive.
k. New Accounting Pronouncements - The FASB recently issued SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The
Reporting Comprehensive Income standard is effective for fiscal
years beginning after December 15, 1997. The standard changes the
reporting of certain items currently reported in the stockholders'
equity section of the balance sheet. The Company is currently
evaluating the effect this standard will have on the Company's
consolidated financial statements. The Disclosures about Segments on
an Enterprise and Related Information standard is effective for
fiscal years beginning after December 15, 1997. This standard
requires that public companies report certain information about
operating segments in their financial statements. It also
establishes related disclosures about products and services,
geographic areas, and major customers. The Company is currently
evaluating the effect this standard will have on its disclosures.
l. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
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.
m. Product Concentration - The market for the Company's products is
characterized by changing technology and short product life cycles.
The Company has derived substantially all of its revenues from the
sale of Dual-Deck VCRs throughout the United States.
<PAGE>
n. Certain reclassifications have been made to the prior year financial
statements to conform to the classifications used in the 1998
presentation.
2. COMPANY OPERATIONS
The Company was incorporated in May 1984 and was engaged in development
stage activities until late in the fiscal year ended July 31, 1990, when
the Company began its primary operations of distribution and marketing
Dual-Deck VCRs, which are being manufactured for the Company by Samsung
Electronics Company Ltd. ("Samsung") and Shintom Company Ltd., and Talk
Corporation ("Shintom & Talk"). The Company also distributes and markets a
line of video security products.
Sales and Marketing - The Company's current marketing strategy is to sell
Dual-Deck VCRs and video security products with the support of independent
sales representatives that represent specific geographic territories
throughout the United States and who also represent many other brand name
consumer electronic products. The Company currently sells its product
lines directly to retailers nationwide and warehouse clubs including
numerous national and regional chains, catalog accounts, specialty stores,
and Armed Services PXs.
During fiscal 1998, sales to the Company's two major customers totaled
$13,310,000 and $6,271,000, which represents approximately 27 percent and
13 percent, respectively, of the Company's 1998 sales. Accounts receivable
from these customers totaled $3,893,000 and $1,164,000, respectively, at
March 31, 1998.
During fiscal 1997, sales to the Company's three major customers totaled
$6,395,000, $4,377,000 and $4,137,000, respectively. These amounts
represent 16 percent, 11 percent and 10 percent, respectively, of the
Company's 1997 sales. Accounts receivable from these customers totaled
$437,000, $2,441,000 and $1,484,000, respectively, at March 31, 1997.
During fiscal 1996, sales to the Company's major customer totaled
$4,879,000. This amount represents 14 percent of the Company's 1996 sales.
Accounts receivable from this customer totaled $1,072,000 at March 31,
1996.
3. PRODUCT MANUFACTURING AND LICENSING
On February 28, 1989, the Company entered into an agreement with Samsung,
pursuant to which Samsung agreed to manufacture Dual-Deck VCRs to the
Company's design and specification ("Manufacturing Agreement"). As part of
its arrangement with Samsung, the Company has licensed to Samsung the use
of the Company's proprietary and patented technology: (1) the right to
manufacture Dual-Deck VCRs for the Company; (2) on an exclusive basis, the
right to manufacture, use and sell Dual-Deck VCRs in the Republic of
Korea; (3) on a non-exclusive basis, the right to manufacture, use and
sell the Dual-Deck VCRs in all markets except the United States and its
territories; and (4) on a non-exclusive basis, the right to sell Dual-Deck
VCRs under its own trademark and trade name in the United States and its
territories. Under the license agreement, the Company is entitled to
receive royalties calculated as a percentage of net sales of Dual-Deck
VCRs by Samsung or its sublicensees. The license agreement has a term of
15 years but may be terminated by the Company if the Manufacturing
Agreement is terminated for any cause attributable to Samsung. The Company
has received no royalties to date from Samsung under this agreement.
Under the Manufacturing Agreement, Samsung manufactures Dual-Deck VCRs for
the Company pursuant to the Company's specifications. Quality control and
assurance is performed by Samsung at the manufacturing facility, and the
Company verifies product quality by sample testing in the United States.
The Manufacturing Agreement sets forth statistical defect tolerances, and
indicates that the
<PAGE>
costs of any quality defects above the level of standards will be borne by
Samsung. Generally, the Company purchases Dual-Deck VCRs from Samsung FOB
Korea. The Manufacturing Agreement is automatically renewed for one year
periods unless terminated by written notice from either party and
currently extends until at least February 28, 1999.
On January 9, 1996, the Company entered into an agreement with Shintom &
Talk pursuant to which Shintom & Talk have agreed to manufacture Dual-Deck
VCR's to the Company's design and specification. The agreement sets forth
statistical defect tolerances, and indicates that the costs of any quality
defects above the level of standards will be borne by Shintom & Talk.
Generally, the Company will purchase Dual-Deck VCRs FOB Singapore. The
initial term of the Manufacturing Agreement was two years. The agreement
is automatically renewed for one year periods unless terminated by either
party and currently extends until at least February 1999.
The Company entered into an agreement with Loewe Opta GmbH of Kronach,
Bavaria, Germany, to develop and market a line of digital television
products designed specifically for the North American Market. The initial
agreement is effective through January 1, 2003 with built in five year
extensions. The Company will incur fees totaling $1.7 million and Deutsche
Marks 1,050,000 (approximately $568,000 as of March 31, 1998) for the
exclusive right to market and distribute Loewe Opta direct view
televisions in North America. The fee, as structured, is due in
installments through August 1998. Additionally, the agreement is
structured so that Loewe Opta reimburses development and marketing costs
for the project. Through March 31, 1998, Loewe Opta had reimbursed
$2,000,000, of which $590,000 remained to be incurred as an expense. This
amount is included in other current liabilities (Note 6). The Company
expects to receive the first shipments of product from Loewe during the
third quarter of its fiscal year 1999.
4. EARNINGS PER SHARE
As discussed in Note 1, the following is a reconciliation of the
numerators and denominators of basic and diluted per share computations
for income from continuing operations as required by SFAS No. 128:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) $ 3,083,350 $ 1,884,331 $ (2,871,170)
============ ============ ============
Average outstanding common shares 12,248,724 11,407,553 11,304,261
============ ============ ============
Basic net income (loss) per share from
continuing operations $ 0.25 $ 0.17 $ (0.25)
============ ============ ============
Diluted net income (loss) per common share -
Income available to common stockholders,
from above $ 3,083,350 $ 1,884,331 $ (2,871,170)
Add interest on presumed conversion of
convertible debt 89,077 76,951
------------ ------------ ------------
Net income (loss) available for diluted earnings
per share $ 3,172,427 $ 1,961,282 $ (2,871,170)
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Average outstanding common shares,
from above 12,248,724 11,407,553 11,304,261
Additional dilutive shares related to stock
options and warrants 685,555 258,467
Additional dilutive shares related to
subordinated notes 866,352 902,320
----------- ----------- -----------
Average outstanding and potentially dilutive
common shares 13,800,631 12,568,340 11,304,261
=========== =========== ===========
Diluted net income (loss) per share from
continuing operations $ 0.23 $ 0.16 $ (0.25)
=========== =========== ===========
</TABLE>
Options and warrants to purchase 257,700, 1,137,500 and 1,707,500 shares
of common stock at various prices during the years ended March 31, 1998,
1997 and 1996, respectively, were not included in the computation of
diluted earnings per share because the exercise of options and warrants
was determined to be antidilutive.
No events have occurred subsequent to March 31, 1998 which would have
changed materially the number of common shares or potential common shares
outstanding at March 31, 1998 had the events occurred prior to March 31,
1998.
5. INVENTORIES
Inventories consisted of the following at March 31:
1998 1997
Service replacement parts and raw materials $ 561,896 $ 581,283
Finished goods 5,450,126 4,444,866
---------- ----------
Total $6,012,022 $5,026,149
========== ==========
6. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Compensation and related benefits $ 886,236 $ 728,302
Sales returns reserve 411,844 310,505
Unexpended development and marketing advance (Note 3) 590,124
Other 6,291 1,313
---------- ----------
Total $1,894,495 $1,040,120
========== ==========
</TABLE>
<PAGE>
7. MANDATORY CONVERTIBLE SUBORDINATED DEBT
The Company sold $1,500,000 of convertible subordinated notes (the
"Notes") in a Private Placement with institutional holders in August 1996.
The Private Placement included six Units, each consisting of one 10
percent Convertible Subordinated Note in the principle amount of $250,000
and warrants to purchase 100,000 shares of common stock at $1.25 per share
(Note 8). The Notes bear interest at 10 percent per annum, accrued
quarterly, paid annually in shares of common stock. At the Unit Holder's
election at any time, or the Company's election following the third
anniversary of the issuance of the Units, each Note will be convertible
into shares of common stock. The warrants have been valued at $230,000.
In connection with the Private Placement, the Company also issued 120,000
warrants to purchase common shares at $1.25 per share and 60,000 shares of
common stock to the placement agent with a fair value of $46,000 and
$75,000, respectively. In addition, professional fees in the amount of
approximately $236,000 were incurred by the Company in connection with the
Private Placement.
In 1997, Notes with a principle amount of $250,000 were converted. The
transaction, including interest, resulted in the issuance of 206,807
shares of common stock to note holders. In addition, 100,000 warrants held
by a note holder were exercised to purchase 100,000 shares of common stock
at a price of $1.25 per share.
In 1998, Notes with a principal amount of $375,000 were converted. The
transactions, including interest on all Notes outstanding, resulted in the
issuance of 395,742 shares of common stock to note holders. In addition,
224,000 warrants issued to note holders and the placement agent in the
prior year were exercised to purchase stock at a price of $1.25 per share.
8. STOCKHOLDERS' EQUITY
Stock Warrants - During the year ended March 31, 1996, the Company entered
into four separate consulting agreements. In exchange for services, the
Company issued 110,000 warrants. Each warrant entitles the holder to
purchase one share of the Company's common stock. The warrants are
exercisable for four years, commencing one year after the date of grant.
The associated consulting costs for these agreements have been fully
amortized as of March 31, 1998.
A summary of warrant activity is as follows:
Warrants Warrant
Outstanding Price per Share
Balance, April 1, 1995 2,708,395 $ 1.688 - $ 8.250
Issued 110,000 1.563 - 1.688
Expired (185,000) 3.375 - 4.200
---------- ---------- - ----------
Balance, March 31, 1996 2,633,395 1.563 - 8.250
Issued (Note 7) 720,000 1.250
Exercised (100,000) 1.250
Expired (2,146,951) 4.950 - 8.250
---------- ---------- - ----------
Balance, March 31, 1997 1,106,444 1.250 - 3.125
Issued 22,500 1.250
Exercised (224,000) 1.250
Expired (76,444) 2.250 - 3.125
---------- ---------- ----------
Balance, March 31, 1998 828,500 $ 1.250 $ 1.688
========== ========== ==========
<PAGE>
Stock Option Plans - Effective December 1986, the Company adopted a
Nonstatutory Stock Option plan. Pursuant to the terms of the plan, only
employees of the Company are eligible to participate. Eligibility is
determined by a committee (the "Committee") appointed by the Board of
Directors to administer the plan. The Company reserved 2,000,000 shares of
its common stock to be granted under the plan.
Effective November 1989, the Board of Directors approved the 1989
Nonstatutory Stock Option Plan. Pursuant to the terms of the plan, only
full-time employees and directors of the Company or any entity in which
the Company has at least 50 percent ownership are eligible to participate.
Eligibility is determined by the Committee which administers the plan. The
Company has reserved 500,000 shares of its common stock to be granted
under the 1989 plan.
Effective November 1991, the Company's stockholders approved the Go-Video,
Inc. 1991 Employee Stock Option Plan. This plan provides for the granting
of incentive and nonqualified stock options to eligible officers and
employees of the Company as determined by the plan Committee who
administers the plan. The Company reserved 500,000 shares of its common
stock to be granted under the plan.
Effective December 1993, the Company's stockholders approved the Go-Video,
Inc. 1993 Employee Stock Option Plan. The plan provides for the granting
of incentive and nonqualified stock options to officers and key employees
of the Company as determined by the 1993 plan committee who administers
the plan. The Company reserved 500,000 shares of its common stock to be
granted under the plan. During 1997, the Company reserved an additional
500,000 shares of its common stock to be granted under the Plan.
Options granted under the above plans expire up to ten years after the
date of grant. The exercise price of such shares, as determined by the
committees on the date of grant, may be equal to or in excess of the fair
market value of the Company's registered common stock on the date of
grant. Options that expire or terminate prior to exercise are added to the
shares available for future grants.
Effective November 1991, the Company's stockholders approved a
Nonstatutory Directors' Stock Option Plan. The plan provides for the
automatic annual grant of stock options to the Chairman of the Board and
directors of the Company. The Company reserved 500,000 shares of its
common stock to be granted under the plan. During fiscal 1996, the Company
reserved an additional 250,000 shares to be granted under the plan.
Options granted under the plan expire ten years after the date of grant.
The exercise price of such shares is the fair market value on the date of
grant. Participants are entitled to exercise such options at any time six
months after date of grant. Options that expire or terminate prior to
exercise are added to the shares available for future grants.
<PAGE>
A summary of changes in stock options is as follows:
Option Weighted Average
Shares Option Price
Balance, April 1, 1995 1,644,880 1.96
Granted 240,000 1.58
Exercised (58,000) 0.79
Canceled (49,900) 3.13
---------- -----
Balance, March 31, 1996 1,776,980 1.93
Granted 453,253 1.11
Exercised (104,000) 1.11
Canceled (378,800) 1.62
---------- -----
Balance, March 31, 1997 1,747,433 1.83
Granted 400,000 1.69
Exercised (175,020) 1.08
Canceled (46,500) 2.43
---------- -----
Balance, March 31, 1998 1,925,913 $1.86
========== =====
The following information, aggregated by option price ranges, is
applicable to those shares outstanding at March 31, 1998:
<TABLE>
<S> <C> <C> <C>
Range of exercise prices $.50 - $1.00 $1.25 - $3.00 $4.00 - $8.50
Shares outstanding in range 293,200 1,613,013 19,700
Weighted-average exercise price $ .82 $ 2.01 $ 4.35
Weighted average remaining contractual life (years) 6.21 6.42 2.32
Shares currently exercisable 293,200 1,513,013 19,700
Weighted average exercise price of shares
currently exercisable $ .82 $ 2.01 $ 4.35
</TABLE>
The Company applies Accounting Principle Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized based on the fair value at the grant
dates for awards under those plans. Had compensation for the Company's
stock option plans been determined based upon the fair value at the grant
date for awards under the plans consistent with a methodology prescribed
in SFAS No. 123, the Company's net income (loss) and net income (loss) per
share for the years ended March 31, 1998, 1997 and 1996 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) - as reported $ 3,083,350 $ 1,884,331 $ (2,871,170)
=========== =========== ============
Net income (loss) - pro forma $ 2,725,178 $ 1,639,516 $ (3,055,234)
=========== =========== ============
Basic net income (loss) per share - as reported $ .25 $ .17 $ ( .25)
=========== =========== ============
Basic net income (loss) per share - pro forma $ .22 $ .14 $ ( .27)
=========== =========== ============
Diluted net income (loss) per share - as reported $ .23 $ .16 $ ( .25)
=========== =========== ============
Diluted net income (loss) per share - pro forma $ .20 $ .14 $ ( .27)
=========== =========== ============
</TABLE>
<PAGE>
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
1998 1997 1996
Expected dividend yield 0% 0% 0%
Expected volatility 60.8% 52.8% 52.8%
Risk-free interest rate 7% 7% 7%
Expected life 4 years 4 years 4 years
401(k) Plan - Effective January 1, 1996, the Company established a 401(k)
plan for its employees. Employees may contribute between 1 percent and 16
percent of their total compensation to the Plan. The Company may make
matching contributions, on a discretionary basis, equal to a percentage of
an employee's covered compensation contributed to the Plan for the year.
In addition, the Company may make an annual profit sharing contribution to
the Plan. The Company's contribution to the Plan for the years ended March
31, 1998, 1997 and 1996 was $50,121, $35,724 and $8,054, respectively.
9. INCOME TAXES
The (benefit) provision for income taxes is as follows:
1998 1997
Current $ 103,000 $ 40,000
Deferred (530,000)
--------- ---------
Total $(427,000) $ 40,000
========= =========
The following is a reconciliation of the reported effective income tax
rates to the statutory rates:
1998 1997 1996
Federal statutory income tax rate 34.0% 34.0% 34.0%
Utilization of net operating losses (34.0) (34.0) (34.0)
Reversal of valuation allowance (20.0)
AMT and state income taxes 3.9 2.1 0.0
---- ---- ----
Effective rate (16.1)% 2.1% 0.0%
==== ==== ====
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards.
<PAGE>
The tax effect of significant items comprising the Company's net deferred
tax asset for the years ended March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current - reserves not currently deductible $ 748,000 $ 602,000
Non-current:
Difference between book and tax basis
of property 438,000 254,000
Operating loss carryforwards 6,687,000 6,787,000
Tax credit carryforwards 189,000 189,000
Contribution carryforwards
Other intangibles 77,000 95,000
----------- -----------
Net deferred tax asset 8,139,000 7,927,000
Valuation allowance (7,609,000) (7,927,000)
----------- -----------
Net deferred asset $ 530,000 $ --
=========== ===========
</TABLE>
During 1998, the Company reduced the valuation allowance to recognize a
deferred tax asset at March 31, 1998. The recognized deferred tax asset is
based upon expected utilization of net operating loss carryforwards and
reversal of certain temporary differences.
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that approximately $530,000 of
deferred tax assets will be realized. The remaining valuation allowance of
approximately $7,609,000 is maintained against deferred tax assets which
the Company has not determined to be more likely than not realizable at
this time.
At March 31, 1998, for income tax purposes, the Company had available the
following net operating loss and investment and research and development
tax credit carryforwards:
Net Investment Research and
Operating Tax Development
Date of Expiration Loss Credit Tax Credit
2000 $ 1,700
2001 $ 300
2002
2003 $ 747,000 3,400
2004 3,420,000 3,200
2005 7,336,000 22,400
2006 602,000 60,400
2007 1,513,000 97,600
2008 720,000
2009 484,000
2010 13,000
2011 1,626,000
2012 43,000
----------- ----------- -----------
Total $16,504,000 $ 1,700 $ 187,300
=========== =========== ===========
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, furniture and office space under capital and
operating lease agreements having initial periods ranging from two to
seven years. The Company currently has an operating lease for a 33,000
square foot facility. The term of the lease is seven years and began on
January 26, 1996. Monthly rentals are based on a fixed schedule which
provides for periodic rental adjustments during the lease term. Upon
expiration of the initial term of the lease, the Company has the option to
extend the term for an additional three years.
At March 31, 1998, future minimum payments required under noncancelable
operating leases and the present value of future minimum capital lease
payments with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Future
Minimum
Operating
Capital Lease
Leases Payment
<S> <C> <C>
1999 $ 100,550 $ 296,896
2000 85,938 307,126
2001 9,843 309,174
2002 319,400
2003 266,180
Thereafter
---------- ----------
Total 196,331 $1,498,776
==========
Less imputed interest-rates ranging from 11% to 14% 16,278
----------
Present value of minimum capital lease obligations 180,053
Less current portion of capital lease obligations 89,380
----------
Long-term portion of capital lease obligations $ 90,673
==========
</TABLE>
The Company's rental expense for the years ended March 31, 1998, 1997 and
1996 was $302,725, $306,528 and $321,389, respectively.
11. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1998, 1997 and 1996, the Company paid its
directors $91,157, $124,346 and $150,151, respectively, for directors'
fees, legal services and consulting services rendered.
12. FINANCING AGREEMENT
In October 1992, the Company entered into a financing agreement which was
last amended and restated on November 1, 1996. The maximum line of credit
is $14,000,000, limited by a borrowing base determined by specific
inventory and receivable balances, and provides for cash loans, letters of
credit and acceptances. The agreement, as amended, has a term of three
years. Interest is charged at prime (8.5% at March 31, 1998) plus 1
percent. The Company pays a monthly fee on the unused balance of the line
of credit of .25 percent per year. The line of credit is collateralized by
all assets of the Company. The line of credit is estimated to approximate
fair value as the actual rate is consistent with the rate estimated to be
currently available for debt of similar terms.
<PAGE>
Certain information relative to the line of credit for the years ended
March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Maximum amount of loans outstanding during the period $8,868,682 $6,183,219
Average daily loans outstanding during the period 3,760,731 2,676,475
Average effective interest rate 9.5% 10.4%
</TABLE>
Amortization expense of costs incurred in connection with obtaining,
amending and renewing the financing agreement for the years ended March
31, 1998, 1997 and 1996, was $0, $65,833 and $81,547, respectively. At
March 31, 1998, all such costs have been fully amortized.
The Company had letters of credit of $1,768,000 outstanding at March 31,
1998. The unused and available line of credit at March 31, 1998 was
approximately $6,694,000.
13. BUSINESS COMBINATIONS
On April 1, 1995, the Company acquired the net assets of Dublin Companies,
a home and business video security products marketer and distributor. The
transaction was accounted for using the purchase method. The fair value of
assets acquired and liabilities assumed was $190,657 and $361,120,
respectively. The excess of cost over the fair value of assets acquired of
$170,463 was recorded as goodwill. The goodwill is being amortized on a
straight-line basis over a period of ten years. The acquired company
became the Security Products Division of Go-Video, Inc.
Effective April 1, 1998, the Company acquired California Audio Labs, LLC
("California Audio"). California Audio designs, develops, manufactures,
and distributes digital audio and video products marketed to the
high-performance home theater market under the California Audio Labs and
Cinevision brand names. The purchase price was $775,000 plus assumption of
liabilities of $1,206,000.
* * * * * *
<PAGE>
PART III
Item 10. Directors, and Executive Officers of the Registrant
---------------------------------------------------
The information regarding executive officers required by Item 10 is furnished
under "Executive Officers of the Registrant" in Part I of this Report. The other
information required by Item 10 is hereby incorporated by reference from the
Company's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on August 20, 1998 (the "Proxy Statement").
Item 11. Executive Compensation
----------------------
Information on executive compensation is incorporated herein by reference from
the Registrant's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information on security ownership of certain beneficial owners and management is
incorporated herein by reference from the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information on certain relationships and related transactions is incorporated
herein by reference from the Registrant's Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
<TABLE>
<CAPTION>
Page or
Method of Filing
----------------
<S> <C> <C>
(a) Financial Statements:
(1) Report of Deloitte & Touche LLP. Page F-1
(2) Consolidated Financial Statements and Notes to Consolidated Financial Page F-2
Statements of the Company for the fiscal years ended March 31, 1998,
1997, and 1996.
(b) Financial Statement Schedules:
</TABLE>
Schedules have been omitted because of the absence of conditions under which
they are required or because the required material information is included in
the Consolidated Financial Statements or Notes to the Consolidated Financial
Statements included herein.
(c) Exhibits
The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit Page or
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company Incorporated by reference to
Exhibit 3-A of S-1 No.
33-17277
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
3.2 Bylaws of the Company Incorporated by reference to
Exhibit 4-B to S-2 No.
33-38445
4.1 Specimen Certificate representing Common Stock Incorporated by reference to
Exhibit 4-A to S-1 No.
33-17277
4.2 Specimen Warrant Certificate Incorporated by reference to
Exhibit 4-B to S-1 No.
33-17277
4.4 Form of Warrant Certificate Incorporated by
reference to Exhibit 4.3
to the Company's S-2
Registration and Filing
No. 333-15731 filed
November 7, 1996
4.5 Form of Mandatory Convertible Subordinated Note Incorporated by
reference to Exhibit 4.3
to the Company's S-2
Registration and Filing
No. 333-15731 filed
November 7, 1996
10.2 Assignment of U.S. Patent Rights to Go-Video, Inc., Incorporated by
by R. Terren Dunlap and Richard A. Lang, dated reference to
October 11, 1985 Exhibit 10-B(1) to S-1
No. 33-17277
10.3 Assignment of Japanese Patent Rights to Go-Video, Inc., Incorporated by
by R. Terren Dunlap and Richard A. Lang, dated reference to Exhibit
August 5, 1987 10-B(2) to S-1 No.
33-17277
10.4 Assignment of U.S. Patent Rights to Go-Video, Inc., Incorporated by
by R. Terren Dunlap, John Berkheimer, and Dwayne reference to Exhibit
Woodmas, dated August 4, 1988 10-B(3) to Annual
Report on Form 10K for
the fiscal year ended
July 31, 1988 (the
"1988 10K")
10.5 Assignment of U.S. Patent Rights to Go-Video, Inc., Incorporated by
by R. Terren Dunlap, John Berkheimer, and reference to Exhibit
Richard Otto, dated September 9, 1988 10-B(4) to Company's
1988 10K.
10.6 * Form of 1987 Nonstatutory Stock Option Plan, as amended Incorporated by reference to
Exhibit 4-A to S-8 No.
33-18428
10.7 * Form of 1989 Nonstatutory Stock Option Plan, as amended Incorporated by reference to
Exhibit 10-C (2) to S-2 No.
33-33033
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.8 * Form of 1991 Directors' Nonstatutory Stock Option Plan, Incorporated by
as amended reference to Exhibit
28.1 to S-8 No.
33-49924 and Exhibit
A to the Company's
1995 Proxy Statement.
10.9 * Form of 1991 Employee Stock Option Plan Incorporated by reference to
Exhibit 28.1 to S-8 No.
33-49926
10.11 Settlement Agreement, Manufacturing Agreement, Incorporated by
License and Technical Assistance Agreement and Mutual reference to
Release between Go-Video, Inc., and Samsung Exhibit 10-E(10) to
Electronics Co. Ltd., dated February 28, 1989. S-1 No. 33-18433
10.14 ** Manufacturing Agreement between Go-Video, Inc. Incorporated by
and Samsung Corporation, dated September 14, 1993. reference to
Exhibit 10.14 to
1993 10K.
10.16 * Separation Agreement between Roger B. Hackett Incorporated by
and Go-Video, Inc., dated August 2, 1993. reference to
Exhibit 10.16 to
1993 10K.
10.17 ** License Agreement between Go-Video Inc. Incorporated by
and Goldstar U.S.A., Inc., dated July 11, 1994. reference to
Exhibit 10.17 to
Annual Report Form
10K for fiscal year
ended July 31, 1994
(the "1994 10K").
10.22 Office Lease Agreement between Go-Video Inc. Incorporated by
and 78 McClain, L.L.C., for premises at 7835 East reference to
McClain Drive, Scottsdale, AZ, dated November Exhibit 10.22 to
15, 1994. Quarterly Report
Form 10Q for the
quarter ended
January 31, 1995.
10.23 Purchase Agreement between Go-Video Inc. Incorporated by
and Dublin Companies reference to
Exhibit 10.23 to
the Transition
Report 1995 10K.
10.24 *Form of 1993 Employee Stock Option Plan Incorporated by
reference to
Exhibit 10.24 to
the Transition
Report 1995 10K.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.26 **Manufacturing Agreement between Go-Video, Inc. Incorporated by
and Shintom Co. Ltd. and Talk Corporation, dated reference to
January 9, 1996. Exhibit 10.26 to
Quarterly Report
Form 10Q for the
quarter ended
December 31, 1995.
10.27 **First Amendment to Manufacturing Agreement between Incorporated by
Go-Video, Inc. and Samsung Corporation dated reference to Exhibit
April 1, 1996. 10.27 to the 1996 10K.
10.29 Amended and Restated Loan and Security Agreement between Incorporated by
Go-Video Inc. and Congress Financial dated November 1, 1996. reference to Exhibit
10.29 to the Quarterly
Report Form 10Q for the
Quarter ended December 31,
1996.
10.30 Development, Marketing, and Distribution Agreement between Incorporated by
Go-Video Inc. and Loewe Opta GmbH dated January 1, 1997. Reference to Exhibit 10.30
to the Quarterly Report Form
10Q for the quarter ended
September 30, 1997.
10.31 Acquisition Agreement By and Between Go-Video, Inc. and Filed Herewith
Go-Video Productions, Inc. and Pornthep Srichawla, Akradej
Srichawla, and Vorthep Srichawla dated April 1, 1998
21 List of Subsidiaries Incorporated by reference to
Exhibit 22 to Annual Report
Form 10K for fiscal year
ended July 31, 1988.
23 Independent Auditor's Consent Filed Herewith
27 Financial Data Schedule Filed Herewith
</TABLE>
- --------------------------------------------------------------------------------
* Management contract or compensatory plan
** Confidential treatment requested
(d) Reports on Form 8-K:
The Company did not file any Reports on Form 8-K during the fourth
quarter of the fiscal year ended March 31, 1998.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GO-VIDEO, INC.
By /s/ Roger B. Hackett
-------------------------------
Roger B. Hackett
Chairman of the Board of Directors,
Chief Executive Officer, President,
and Chief Operating Officer
Dated: June 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
------------------ ----- ----
<S> <C> <C>
/s/ Roger B. Hackett Chairman of the Board of June 25, 1998
- ----------------------------- Directors, Chief Executive Officer,
Roger B. Hackett President, and Chief Operating Officer
(principal executive officer)
/s/ Douglas P. Klein Vice President, Chief Financial Officer, June 25, 1998
- ----------------------------- Secretary and Treasurer
Douglas P. Klein (principal financial and
accounting officer)
/s/ Carmine F. Adimando Director June 25, 1998
- -----------------------------
Carmine F. Adimando
/s/ Thomas F. Hartley, Jr. Director June 25, 1998
- -----------------------------
Thomas F. Hartley, Jr
/s/ Thomas E. Linnen Director June 25, 1998
- -----------------------------
Thomas E. Linnen
/s/ William T. Walker, Jr. Director June 25, 1998
- -----------------------------
William T. Walker, Jr.
</TABLE>
S-1
ACQUISITION AGREEMENT
THIS ACQUISITION AGREEMENT (the "Agreement") is made as of the 1st day
of April, 1998, by and among GO-VIDEO, INC. ("Go-Video") and GO-VIDEO
PRODUCTIONS, INC. ("GVP"), both Delaware corporations with principal executive
offices at 7835 E. McClain, Scottsdale, Arizona, 85260 (collectively
"Purchaser"), and PORNTHEP SRICHAWLA, AKRADEJ SRICHAWLA, and VORATHEP SRICHAWLA
(collectively referred to as "Sellers" and individually as "Seller").
W I T N E S S E T H:
WHEREAS, Sellers desire to sell to Purchaser, and Purchaser desires to
purchase from Sellers, all ownership interests, whether represented by shares,
certificates of interest, or otherwise ("Interests"), in and to CALIFORNIA AUDIO
LABS L.L.C., a California limited liability company (the "Company") on the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the covenants and mutual agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in reliance upon the
representations and warranties contained herein, the parties do hereby agree as
follows:
ARTICLE 1
PURCHASE AND SALE OF INTERESTS
1.1 Purchase and Sale of the Interests. Upon the terms and subject to
the conditions set forth herein, and in reliance on the respective
representations and warranties of the parties, Sellers agree to sell, transfer,
assign, and deliver to Purchaser, and Purchaser agrees to purchase from Sellers,
good and marketable title in any and all Interests in the Company. Go-Video
shall own 99% of the Interests and GVP shall own 1% of the Interests.
1.2 No Assumed Liabilities. Purchaser shall not assume any liabilities
of Sellers of any kind or nature incurred before or after the Closing Date.
Sellers hereby agree to indemnify Purchaser and its affiliates from any and all
claims arising, directly or indirectly, from liabilities or obligations of
Sellers, including, without limitation, any and all taxes related, directly or
indirectly, to Sellers' Interests in the Company including any liabilities and
obligations related to the closing of this transaction.
1.3 Purchase Price. The total purchase price for the Interests shall be
$775,000.00 ("Purchase Price"). The Purchase Price shall be paid by Purchaser in
cash (99% payable by Go-Video and 1% payable by GVP) in proportions designated
by Sellers for their respective ownership interests of the Company.
1.4 Closing. This Agreement shall be executed on April 1, 1998 (the
"Execution Date"). The Closing of the sale by the Sellers (the "Closing") shall
occur at the offices of
<PAGE>
Snell & Wilmer L.L.P., One Arizona Center, Phoenix, Arizona, on April 2, 1998,
or on such other day or at such other time or place as the Purchaser and the
Sellers shall agree upon in writing (the "Closing Date") following satisfaction
of conditions precedent.
ARTICLE 2
EMPLOYMENT AGREEMENT
2.1 Employment Agreement. In connection with this Agreement, Purchaser
and Daniel Donnelly ("Donnelly") shall enter into an employment agreement in the
form attached hereto as Exhibit A (the "Employment Agreement").
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLERS
3.1 Representations and Warranties of Sellers. As of the date hereof
and as of the Closing Date, Sellers, jointly and severally, hereby represent and
warrant to Purchaser the following:
3.2 Organization and Standing. The Company is a California limited
liability company, duly organized, validly existing, and in good standing under
the laws of its state of organization. The Company has all necessary power and
authority to engage in the business in which it is presently engaged, and to own
all of the tangible and intangible assets of the Company ("Assets"). The Company
is qualified to do business as a foreign corporation in all states and countries
where the nature of its business requires such qualification. The copies of the
Operating Agreement and Articles of Formation and other formation documents of
the Company (collectively referred to as the "Operating Agreement"), attached as
Schedule 3.2, are true and correct. The Operating Agreement has not been
subsequently amended or repealed.
3.3 Authority, Restrictions, and Enforceability. Each of Sellers has
the authority and capacity to execute and deliver this Agreement and to perform
its obligations hereunder. Neither Sellers nor the Company are subject to any
restriction, agreement, law, judgment, or decree which would prohibit or be
violated by the execution, delivery or performance of the Agreement. This
Agreement has been duly executed and delivered by each of Sellers and
constitutes a legal, valid, and binding obligation of each of them, enforceable
against each in accordance with its terms.
3.4 Interests of Sellers in the Company. The Interests constitute all
ownership interests in the Company and are owned of record and beneficially, and
free and clear, by the Sellers, with no other person owning or having any rights
(including without limitation any voting rights, whether as proxy,
attorney-in-fact, assignee, transferee, or otherwise) in or with respect
thereto. The Company is owned in its entirety by the Sellers in equal
proportions. There are no outstanding options, rights, or other agreements or
commitments obligating Sellers or the Company to issue or to transfer any
Interests in the Company to any Person.
2
<PAGE>
3.5 Financial Statements. Prior to Closing, Sellers shall have
delivered to Purchaser the unaudited balance sheets of the Company at December
31, 1997, and the related statements of income for the fiscal year then ended,
together with the related notes thereto, as certified by the Sellers, the
unaudited financial statements of the Company at January 31, 1998, and the
unaudited balance sheets at December 31, 1996 and 1995, respectively, and the
related statements of operations for the fiscal years then ended (collectively
the "Financial Statements"). The Company's Financial Statements are complete and
correct in all material respects and in accordance with the books of account and
records of the Company, and present fairly the Company's financial position. The
aforementioned Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied.
3.6 Subsidiaries. The Company does not own, directly or indirectly, any
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, trust, or other entity.
3.7 Title and Condition of Assets. The Company has good and marketable
title to the Assets free and clear of any and all liens, claims, charges,
restrictions, security interests, equities or encumbrances whatsoever. To the
best of Sellers' knowledge, all of the Assets are in good operating condition
and repair.
3.8 No Material Adverse Change. Except as disclosed on Schedule 3.8
hereto, since December 31, 1997, there have not been any:
(a) Transactions by the Company except in the usual and
ordinary course of business;
(b) Undisclosed material adverse changes in the business,
operations, financial condition, property, or affairs of the Company, as a
result of any occurrence or development, whether or not insured against, and no
threatened occurrence or development exists which would materially adversely
affect the properties or assets, or the business operations or affairs of the
Company;
(c) Labor disputes or other events or conditions of any
character materially and adversely affecting the financial condition, business,
assets, or prospects of the Company;
(d) Change in the accounting methods or practices (including,
without limitation, any change in depreciation or amortization policies or
rates) of the Company;
(e) Amendment or termination of any contract, agreement, or
license to which the Company is a party, or by which it or any of its assets or
properties are subject, except in the ordinary course of business;
(f) Citations received for any violations of any act, law,
rule, or regulation of any governmental agency;
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(g) Claims incurred for damages or alleged damages for actual
or alleged negligence or other tort or breach of contract which is not fully
covered by insurance underwritten by responsible insurers;
(h) Sales, transfers, or disposal of, or agreements to sell,
transfer, or otherwise dispose of any of the assets, properties, or rights of
the Company, except as incurred in the ordinary course of business consistent
with the past practices of the Company;
(i) Agreements entered into granting any preferential rights
to purchase any of the Assets or requiring the consent of any party to the
transfer and assignment of the Assets;
(j) Sales or disposal of any capital assets; or
(k) Agreements by the Company or by the Sellers, individually
or in any combination by or on behalf of the Company, to do any of the things
described in the preceding clauses (a) through (j).
3.9 Leases. Neither the Company, nor the Sellers, individually or in
any combination, by or on behalf of the Company, are a party to any leases,
agreements, subleases, or covenants pertaining to real property other than those
described on Schedule 3.9.
3.10 Assets. The Assets constitute all personal property and rights
necessary for the operation of the Company's business as now conducted.
.
3.11 Absence of Undisclosed Liabilities. Except as set forth in the
Financial Statements or in any Schedule attached to this Agreement, the Company
has not incurred, and none of the Assets are subject to, any liabilities or
obligations (accrued, absolute, contingent or otherwise including, without
limitation, accrued but not yet payable tax liabilities) whether or not such
liabilities are normally shown or reflected on a balance sheet prepared in a
manner consistent with generally accepted accounting principles, other than
unsecured trade accounts payable arising in the ordinary course of business
since December 31, 1997 and estimated federal and state income tax accrued in
respect of the operations of the Sellers since December 31, 1997. The Company is
not in default in respect of any term or condition of any indebtedness or
liability. There are no facts in existence on the date hereof and known to
Sellers or the Company that might reasonably serve as the basis for any
liabilities or obligations of Sellers or the Company not disclosed in this
Agreement, the Financial Statements or the Schedules attached to this Agreement.
3.12 Litigation. Except as set forth on Schedule 3.12, there are no
suits, claims, actions, arbitration, investigations, or proceedings entered
against, now pending, or, to the Sellers' knowledge, threatened against Sellers
or the Company before any court, arbitration, administrative or regulatory body,
or any governmental agency which may result in any judgment, order, award,
decree, liability, or other determination which will or could reasonably be
expected to have any effect upon the Sellers' Interests or upon the Company.
Neither
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Sellers nor the Company are subject to any continuing court or administrative
order, writ, injunction, or decree applicable to it, property, or employees, and
neither Sellers nor the Company are in default with respect to any order, writ,
injunction, or decree of any court or federal, state, municipal, or other
governmental department, commission, board, agency, or instrumentality.
3.13 Consents. Except as otherwise disclosed on Schedule 3.13, neither
the Sellers nor the Company are required to obtain any consents or other
approvals from any governmental agency, bureau, or authority, or other Person,
including any lender, vendor, or lessor in order to effect the transaction
contemplated hereby; provided, however, that with respect to any necessary
consents disclosed on Schedule 3.13, Sellers have obtained at their sole
expense, prior to Closing, all such consents.
3.14 Taxes. The Company is and from its inception has been treated as a
partnership for tax purposes. Sellers have duly filed all tax reports and
returns required to be filed in respect of the Sellers' Interests and the
Company and have duly paid all taxes shown to be due on such tax returns or
reports or claimed to be due from them by federal, state, or local taxing
authorities (including, without limitation, those due in respect of its
properties, income, franchise, licenses, sales, and payrolls). Sellers have no
knowledge of any state of facts which would constitute grounds for the
assessment of any material tax liability against the Sellers' Interest or the
Company with respect to any tax reports and returns filed. Neither Sellers nor
the Company have caused or permitted a change in any method of accounting for
tax purposes during or applicable to its current tax year which would render
inaccurate, misleading, or incomplete the information concerning taxes set forth
in or referred to in this Section 3.14, or which would have an adverse effect on
Sellers' Interests or the Company for any period ending on or before the Closing
Date.
3.15 Licenses and Permits. Schedule 3.15 sets forth a list of all of
the licenses, franchises, certificates, permits, easements, consents, rights,
and privileges, including, without limitation, those of any federal, state, or
local governmental or regulatory body, that are necessary and appropriate to the
operation of the Company. All such items are in full force and effect and true
and correct copies thereof have heretofore been furnished to Purchaser.
3.16 Compliance with Laws. Neither Sellers nor the Company are in
default under or in violation of any applicable statute, law, ordinance, decree,
order, rule, regulation, franchise, permit, or license of any governmental body,
which had or may have an adverse affect upon any property or assets of the
Company or upon any Interest of the Sellers, or upon the Company's business,
condition (financial or other) or results of operations.
3.17 Contracts. Except as set forth in Schedule 3.17 hereto, there is
no legally enforceable contract, agreement, commitment, or arrangement
("Contract"), or any outstanding unaccepted offer ("Offer"), whether written or
oral, express or implied, fixed or contingent, having a value of greater than
Ten Thousand Dollars ($10,000), to which the Company is a party or by which any
property or assets of the Company or any Interests of the Sellers is or could be
bound; provided, however, that the Contracts and Offers set forth on
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Schedule 3.17 include all service contracts to which the Company is a party
regardless of value. Sellers have made available to Purchaser true and correct
copies of all written (and has furnished to Purchaser accurate and complete
written summaries of all material provisions of all oral) Contracts and Offers,
all as presently in effect. The Company is not in default in the payment of any
obligation under, or in the performance of any material covenant or obligation
to be performed by such party pursuant to, any Contract. Except only as to
contracts, agreements, and other documents listed in Schedule 3.17 attached
hereto or any other Schedule attached hereto, neither the Company nor the
Sellers, whether individually or in any combination by or on behalf of the
Company, are a party to or bound by any written or oral:
(a) Contract not made in the ordinary course of business;
(b) Employment or independent contractor agreement;
(c) Contract with any labor union or association;
(d) Bonus, pension, profit sharing, retirement, stock
purchase, hospitalization, medical reimbursement, insurance, or other plan
providing employee benefits;
(e) Lease with respect to any property, real or personal,
whether as lessor or lessee;
(f) Continuing contract for the future purchase of materials,
supplies, or equipment;
(g) Contract or commitment for capital expenditures;
(h) Contract continuing over a period of more than thirty (30)
days from its date;
(i) Contract for the lease, operation, or maintenance of any
machinery or equipment; or
(j) Contract or agreement to pay any royalties or fees with
respect to any sales of Sellers.
Schedule 3.17 also contains a list of all customers who have conducted business
with the Company during the one (1) year period prior to the Closing Date.
3.18 Patents and Trademarks. Attached hereto as Schedule 3.18 is a
complete list of all trademarks, trademark registrations or applications,
service marks, patents, trade names, copyrights, or copyright registrations or
applications used by the Company. No Person owns any trademark, trademark
registration or application, service mark, patent, trade name, copyright, or
copyright registration or application, the use of which is necessary or
contemplated in connection with the operation of the Company or in connection
with the
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performance of any contract to which the Company is a party. The Company is not
infringing upon or otherwise acting adversely to any right or claimed right of
any person related to any patents, trademarks, copyrights, or other intellectual
property rights.
3.19 Employee Benefit Plans. Except as set forth on Schedule 3.19
hereto, there are no pension, bonus, profit sharing, stock option, or employee
benefit plans maintained by the Company or to which the Company contributes or
is required to contribute. All such plans set forth on Schedule 3.19 hereto, and
their related trusts, if any, comply with the provisions of and have been
administered in compliance with the provisions of the Employee Retirement Income
Security Act of 1974 as amended ("ERISA"), and all other applicable laws, rules,
and regulations, and any necessary governmental approvals of the plans set forth
on Schedule 3.19 hereto have been obtained. True and complete copies of the
plans set forth on Schedule 3.19 hereto and reports filed with any governmental
agency with respect thereto and the amount of contributions made by the Company
to any such plans for the last three (3) fiscal years of the Company have been
furnished to Purchaser by Sellers.
3.20 Warranties. Except as set forth on Schedule 3.20, neither the
Company nor Sellers have given or made any express warranties to third parties
with respect to any products sold or services performed by the Company. Sellers
have no knowledge of any state of facts or the occurrence of any event forming
the basis of any present claim against the Company or Sellers' Interests therein
for liability due to any express or implied warranty.
3.21 Labor Matters. The Company is not a party to any collective
bargaining agreement with any labor union or association. There are no
discussions, negotiations, demands, or proposals that are pending or that have
been conducted or made with or by any labor union or association, and there are
no pending or threatened labor disputes, strikes, or work stoppages that may
have a material and adverse effect the Company or upon Sellers Interests. The
Company is in compliance with all federal and state laws respecting employment
and employment practices, terms and conditions of employment, and wages and
hours, and is not engaged in any unfair labor practices.
3.22 Accounts Receivable. Schedule 3.22 consists of an accurate and
complete listing of all the accounts receivable of the Company as of December
31, 1997. The accounts receivable of the Company, which are reflected in the
Financial Statements and all of its accounts receivable which have arisen since
December 31, 1997 (except such accounts receivable as have been collected since
then) in excess of reserves for doubtful accounts are valid and enforceable
claims in all material respects, and the goods and services sold and delivered
which gave rise to such accounts were sold and delivered in conformity with the
applicable purchase orders, agreements, and specifications. Such accounts
receivable are subject to no valid defense or offsets except routine customer
complaints or warranty demands of an immaterial nature. An adequate reserve for
doubtful accounts in the ordinary course of business has been established.
3.23 Inventories. Schedule 3.23 consists of an accurate and complete
listing of all the inventories of the Company as of December 31, 1997. The
inventories of the Company, which are reflected in the Financial Statements and
all inventory items which have been
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acquired since December 31, 1997, consist of raw materials, supplies,
work-in-process, and finished goods in all material respects of such quality and
in such quantities as are being used and are currently usable or are being sold
and are currently selling in the ordinary course of its business. The value of
all items that are below standard quality or obsolete has been written down to
net realized value or adequate reserves have been provided therefore.
3.24 Prorations. Certain prepaid expenses and certain accrued expenses
or liabilities related to the operation of the Company's business will cover
periods before and after the Closing Date including, without limitation, such
things as rent, realty taxes, utilities, telephone, payroll, commissions,
bonuses, vacation pay, percentage rent and/or common area charges, and employee
benefits (collectively the "Proration Items"). The Company is not in default on
any Proration Item covering periods prior to the Closing Date.
3.25 Provision for Returns of Merchandise Made After Closing. The
Company has provided for adequate reserves to account for merchandise sold by
the Company in a bona fide transaction to a customer prior to the Closing Date
and returned by the customer to the Purchaser for refund or credit.
3.26 Environmental Matters.
(a) No properties owned or leased by the Company are in
violation of any applicable environmental law, regulation, ordinance, or order
of any federal, state, or local government entity, dealing with "superfund",
water pollution, air pollution, solid and hazardous waste, underground storage
tanks, "sanitary landfills", and "open dumps", injection and drywell, or any
other federal, state, or local laws relating to contamination of or adverse
effect on the environment, and neither the properties nor any underlying ground
water contain any concentrations of regulated substances, hazardous substances,
hazardous materials, toxic substances, or similar substances, residues, and
wastes;
(b) Neither Sellers, the Company, nor any of its employees,
agents, or representatives have conducted activities for or on behalf of the
Company involving any hazardous substances or materials or substances otherwise
regulated as provided in paragraph (a) or have taken, or refrained from taking,
any action that has caused or will cause a violation of any regulation provided
in paragraph (a); and
(c) Schedule 3.26 identifies all environmental audits or
assessments undertaken by Sellers, the Company, or any governmental entities
relating to or affecting the Company or any properties or assets owned or leased
by or affecting the Company.
3.27 Brokers and Finders. Sellers have not dealt with any broker,
finder, or other person entitled to any broker's or finder's fee, commission, or
other similar compensation in connection with the transaction contemplated
hereby.
3.28 No Default. There has been no default in any material respect in
any obligation to be performed by the Company under any contract, lease,
agreement, commitment, or undertaking to which it is a party or by which it or
its assets or properties are bound, nor has
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the Company waived any material right under any such contract, lease, agreement,
commitment, or undertaking.
3.29 Transactions with Affiliated Parties. Attached hereto as Schedule
3.29 is a list and description of all material transactions engaged in among or
between any of Sellers, the Company, or any employee, agent, officer, or
director of the Company, or any of their spouses or children, any trust of which
any such person is the grantor, trustee, or beneficiary, any corporation of
which any such person or party is a shareholder, employee, officer, or director,
or any partnership in which any such person or party owns an interest (all such
persons, trusts, corporations, and partnerships being herein referred to
collectively as "Affiliated Parties" and individually as "Affiliated Party").
Except as set forth in Schedule 3.29 hereto, no Affiliated Party has any
material or controlling ownership interest, directly, indirectly, or
beneficially, in any competitor or potential competitor, supplier, or customer
of Sellers.
3.30 Books and Records. The books and records of account of the Company
are complete and correct in all material respects and reflect a true record of
all financial affairs of the Company in all material respects as prepared in the
normal course of business through the date hereof, and the minute books and
other records of the Company fairly reflect the meetings and proceedings of the
Company and Sellers. All books, files, computer systems, and records of account
have been made fully available without restriction for examination by the
Purchaser.
3.31 Authority of Sellers. The execution, delivery, and performance by
Sellers of this Agreement has been fully authorized by each Seller individually
as a Member of the Company ("Member"). No further action is necessary on the
part of Sellers or the Company to make this Agreement valid and binding upon
Sellers, and this Agreement is enforceable in accordance with its terms. Upon
execution of this Agreement, Sellers will have no economic, managerial, or other
interest in the Company.
3.32 Minimum Working Capital. On the Closing Date, the Company will
possess a minimum amount of Working Capital (current assets less current
liabilities, excluding the Factory Line of Credit) of at least $1,000,000.
3.33 Territorial Restriction. The Company is not restricted by any
agreement or understanding with any other Person from carrying on the business
of the Company anywhere in the world. Neither Purchaser, nor any of its
Affiliates will, as a result of its purchase of the Sellers' Interests from
Seller pursuant hereto, become restricted in carrying on the business of the
Company anywhere in the world as a result of any Contract or other agreement to
which Sellers or the Company are a party or by which they or any of their
Affiliates are bound.
3.34 Customers. Schedule 3.34 sets forth (a) the names and addresses of
all customers of the Company that ordered products, goods or services from the
Company with an aggregate value for each such customer of $5,000 or more during
the twelve month period ended December 31, 1997 and (b) the amount for which
each such customer was invoiced during such period. The Company has received no
notice and the Company has no reason
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to believe that any significant customer of the Company (i) has ceased, or will
cease, to use the products, goods, or services of the Company which relate to
the business, (ii) has substantially reduced, or will substantially reduce, the
use of products, goods, or services of the Company which relate to the business
or (iii) has sought, or is seeking, to reduce the price it will pay for
products, goods or services of the Company, which relate to the business,
including in each case after the consummation of the transactions contemplated
hereby. To the best knowledge of Sellers, no customer of the Company with
respect to the business described in clause (a) of this section has otherwise
threatened to take any action described in the preceding sentence as a result of
the consummation of the transactions contemplated by this Agreement.
3.35 Suppliers. Schedule 3.35 sets forth (a) the names and addresses of
all suppliers from which the Company ordered inventories, and other products,
goods, and services with an aggregate purchase price for each such supplier of
$5,000 or more during the twelve month period ended December 31, 1997 and (b)
the amount for which each such supplier invoiced the Company during such period.
Seller has not received any notice from any such supplier indicating that there
is or will be a material change in the price of such items or services, and
Seller has no reason to believe that there will be any such material change in
the price of such items or services, or that any such supplier will not sell
such items to Purchaser at any time after the Closing Date on terms and
conditions similar to those used in its current sales to the Company, subject to
general and customary price increases. Except as described in Schedule 3.35, to
the best knowledge of Sellers, no supplier to Seller described in clause (a) of
the first sentence of this section has otherwise threatened to take any action
described in the preceding sentence as a result of the consummation of the
transactions contemplated by this Agreement.
3.36 Insurance. Schedule 3.36 contains a complete and correct list and
summary description of all insurance policies maintained by Sellers and/or the
Company for the benefit of or in connection with the Company. Sellers have
delivered to Purchaser complete and correct copies of all such policies together
with all riders and amendments thereto. Such policies are in full force and
effect, and all premiums due thereon have been paid. Sellers have complied in
all material respects with the terms and provisions of such policies. Schedule
3.36 sets out all claims made by the Company under any policy of insurance
during the past two years with respect to the Company and in the opinion of
Sellers reasonably formed and held, there is no basis on which a claim should or
could be made under any such policy with respect to it.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
4.1 Representation and Warranties of Purchaser. As of the date hereof
and as of the Closing Date, Purchaser hereby represents and warrants to Sellers
the following:
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4.2 Organization and Standing. Purchaser is a duly organized and
validly existing corporation in good standing under the laws of the State of
Delaware and has all the requisite corporate power to enter into and perform
this Agreement.
4.3 Authority of Purchaser. Purchaser is duly authorized to execute and
deliver this Agreement and to perform its obligations hereunder, and all
required corporate action with respect thereto has been duly and validly taken
and this Agreement is binding upon the Purchaser and enforceable in accordance
with its terms.
4.4 Restrictions. Purchaser is not subject to any restriction,
agreement, law, judgment, or decree which would prohibit or be violated by the
execution, delivery, or performance hereof.
4.5 Brokers and Finders. Purchaser has not dealt with any broker,
finder, or other person entitled to any broker's or finder's fee, commission, or
other similar compensation in connection with the transaction contemplated
hereby.
4.6 Litigation. There is no suit, claim, arbitration, investigation,
action, or proceeding entered against, now pending, or, to the Purchaser's
knowledge, threatened against Purchaser before any court, arbitration,
administrative, or regulatory body or any governmental agency which may result
in any judgment, order, award, decree, liability, or other determination which
will, or could reasonably be expected to, materially impair the ability of the
Purchaser to fulfill and perform its obligations under this Agreement.
ARTICLE 5
COVENANTS OF SELLERS
5.1 Sellers' Covenants. Sellers hereby covenant and agree that from the
date of this Agreement until the Closing Date:
5.2 Access to Information. Purchaser and its counsel, accountants, and
other representatives will have full access during normal business hours to all
properties, books, accounts, records, contracts, and documents of or relating to
Sellers' Interests to and the Company so that Purchaser may have full
opportunity to make such investigation as it shall desire to make of the affairs
of the Company and the Sellers' Interests. Sellers shall furnish or cause to be
furnished to Purchaser and its representatives all data and information
concerning the Sellers' Interests or the Company and its finances and properties
that may reasonably be requested.
5.3 Conduct of Business. Except as specifically contemplated in this
Agreement, from the date of this Agreement to the Closing Date, the Company will
be operated only in the ordinary course, and, in particular, the Company and the
Sellers, with respect to the Company's business, will not, without the prior
written consent of Purchaser:
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(a) Cancel or permit any insurance to lapse or terminate,
unless renewed or replaced by like coverage;
(b) Be in default under any material contract, agreement,
commitment, or undertaking of any kind;
(c) Knowingly violate or fail to comply with any laws
applicable to it or its properties or business;
(d) Commit any act or permit the occurrence of any event or
the existence of any condition of the type described in clauses (a) through (k)
of Section 3.8 hereof;
(e) Enter into any contract, agreement, or other commitment of
the type described in Section 3.17 hereof;
(f) Fail to maintain and repair its assets and properties in
accordance with good standards of maintenance and as required in any leases or
other agreements pertaining thereto;
(g) Merge, consolidate or agree to merge or consolidate with
or into any other corporation or other entity; or
(h) Agree to do any of the actions described in the preceding
clauses (a) through (g), either individually or in any combination by or on
behalf of the Company.
5.4 Business Relationships. Sellers will use their best efforts to
preserve the Company's business organizations intact, to keep available to
Purchaser its present officers and employees, and to preserve its present
relationships with customers, suppliers, and others having business
relationships with the Company.
5.5 Organizational and Company Matters. From the date of this Agreement
until the Closing Date, the Sellers will not:
(a) Amend its Operating Agreement;
(b) Issue any additional rights or interests in the Company to
any other members; or
(c) Agree to do any of the acts listed above.
5.6 Insurance. Sellers will cause the Company to continue to carry its
existing insurance, subject to variations in amounts required for the ordinary
operations.
5.7 Employees. Sellers shall not cause the Company to do, or agree to
do, by or on behalf of the Company, any of the following acts:
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(a) Grant any increase in salaries payable, or to become
payable by it, to any officer, employee, sales agent, or representative;
(b) Increase benefits payable to any officer, employee, sales
agent, or representative under any bonus or pension plan or other contract or
commitment; or
(c) Modify any collective bargaining agreement to which it is
a party or by which it may be bound.
5.8 New Business. Sellers will not cause the Company to, or agree to do
by or on behalf of the Company, without Purchaser's written consent, any of the
following acts:
(a) Enter into any contract, commitment, or transaction not in
the usual and ordinary course of business; or
(b) Sell or dispose of any capital assets relating to the
Company's business except in the ordinary course of business.
5.9 Liability and Waiver. Sellers will not cause the Company to, or
agree to do by or on behalf of the Company, without Purchaser's written consent,
any of the following acts:
(a) Pay any obligation or liability, fixed or contingent,
other than current liabilities;
(b) Waive or compromise any right or claim relating to the
Company's business except in the ordinary course of business; or
(c) Cancel, without full payment, any note, loan, or other
obligation owing to Sellers' Interests or the Company relating to the Company's
business except in the ordinary course of business.
5.10 Agreements. Sellers will not cause the Company to modify, amend,
cancel, or terminate any of its existing contracts or agreements, or agree to,
by or on behalf of the Company, any of those acts other than in the ordinary
course of business.
5.11 Warranties at Closing. All representations and warranties of
Sellers set forth in this Agreement and in any written statements delivered to
Purchaser by Sellers under this Agreement will also be true and correct as of
the Closing Date as if made on that date.
5.12 Tax on Prior Sales. Sellers agree to furnish to Purchaser
certificates from state and foreign taxing authorities and any related
certificates that Purchaser may reasonably request as evidence that all sales
and use tax liabilities of the Company accruing before the Closing Date have
been fully satisfied or provided for.
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5.13 Confidentiality. Sellers and their representatives will hold in
strict confidence, and will not divulge, communicate, use to the detriment of
Purchaser or for the benefit of any other person or persons, or misuse in any
way, any financial information, including the terms of this Agreement, or other
data obtained in connection with this Agreement, including, without limitation,
any Confidential Information of Purchaser, personnel information, secret
processes, know how, customer lists, formulas, or other technical data; and if
the transactions contemplated by this Agreement are not consummated, Sellers and
their representatives will return to Purchaser all such data and information as
Purchaser may reasonably request, including, without limitation, work sheets,
test reports, manuals, lists, memoranda, and other documents prepared by or made
available to Sellers in connection with this transaction. "Confidential
Information" shall mean the technical information, trade secrets, and all other
information about the Purchaser, the Company, or its products. Information shall
not be considered "Confidential Information" to the extent that the disclosing
party can clearly demonstrate the information (i) is publicly and openly known
and in the public domain through no fault of the receiving party and without a
breach of this Agreement, (ii) is or has lawfully been disclosed to the
receiving party by a third party without any obligation of confidentiality, or
(iii) is required to be disclosed by law. Sellers may disclose such information
to its attorneys and accountants so long as they agree to keep such information
confidential.
5.14 Closing. Sellers shall use their best efforts to cause the
conditions specified in Article 5 hereof to be satisfied at or prior to the
Closing Date hereof.
ARTICLE 6
COVENANTS OF PURCHASER
6.1 Purchaser's Covenants. Purchaser hereby covenants and agrees that
from the date of this Agreement until the Closing Date:
6.2 Confidentiality. Purchaser and its officers, directors, and other
representatives will hold in strict confidence, and will not divulge,
communicate, use to the detriment of Sellers or for the benefit of any other
person or persons, or misuse in any way, any financial information or other data
related to Sellers obtained in connection with this Agreement, including,
without limitation, any confidential information or trade secrets of Sellers,
personnel information, secret processes, know how, customer lists, formulas, or
other technical data; and if the transactions contemplated by this Agreement are
not consummated, Purchaser will return to Sellers all such data and information
as Sellers may reasonably request, including, without limitation, work sheets,
test reports, manuals, lists, memoranda, and other documents prepared by or made
available to Purchaser in connection with this transaction.
6.3 Closing. Purchaser will use its best efforts to cause the
conditions specified in Article 6 hereof to be satisfied at or as soon as
practicable prior to the Closing Date.
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ARTICLE 7
POST CLOSING COVENANTS
7.1 Books and Records. Sellers and Purchaser hereby covenant and agree
that as soon as is reasonably practicable after the Closing Date, Sellers'
representatives and Purchaser's representatives will cooperate in reviewing the
books and records of the Company relating to the Company's business and the
Sellers' Interests. Purchaser agrees to provide to Sellers and their
representatives during business hours and upon reasonable notice, any books and
records relating to the Company's business and the Sellers' Interests desired by
Sellers for tax purposes. Such items will be copied for and given to Sellers at
Sellers' expense. All books and records relating to the Company's business and
Sellers' Interests shall belong to the Company.
7.2 Non-Competition. Sellers, jointly and severally, agree with
Purchaser that for a period of three (3) years from the Closing Date they will
not, whether for their own account or for the account of any other person, firm,
corporation, or other business entity, interfere with the Purchaser's
relationship with, or endeavor to entice away from the Purchaser, any person,
firm, corporation, or other business entity who or which at the Closing Date was
an employee, consultant, agent, customer, or in the habit of dealing with the
Company unless the Purchaser has formally terminated its business relationship
with said employee, consultant, agent, or customer.
7.3 Repayment of Factory Line of Credit. The Company's principal
balance outstanding at the Closing Date under its Factory Line of Credit with
California Audio Labs (Thailand) LTD (the "Factory") which is set forth in
Schedule 7.3 (the "Line Amount") will be repaid by the Company concurrent with
the Closing, less a seven and one half percent (7.5%) prepayment discount. No
interest shall be payable by the Company for the Line Amount.
7.4 Section 754 Election. Sellers agree to prepare and timely file with
the appropriate government authorities documentation necessary or appropriate to
constitute a Section 754 Election under the Internal Revenue Code and under any
corresponding provision of state or local law. Sellers agree to facilitate a
review of Seller's tax return(s) and related documentation by Purchaser's public
accountants, Deloitte & Touche, and to submit all such returns and
documentation, prior to filing, to Purchaser's public accountants for review and
comment.
7.5 Release. Effective as of the Closing Date, each Seller hereby
irrevocably waives and releases all known and unknown claims such Seller may
have against the Company, Purchaser, any of the Purchaser's affiliates, or any
present and former directors, officers, agents, and employees of the Company,
Purchaser, or any of the Purchaser's affiliates, and irrevocably waives and
releases any and all actions, claims, causes of action, or liabilities of any
nature, in law or equity, known or unknown, and whether or not heretofore
asserted, which such Seller ever had, now has, or hereafter can, will, or may
have against any of the foregoing, upon or by reason of any matter, cause, or
thing whatsoever from the formation of the Company to the Closing Date.
15
<PAGE>
7.6 Name Change. Sellers agree that, within three months from the
execution of this Agreement, they and any and all affiliates of Sellers,
including without limitation California Audio Labs (Thailand) LTD, a Thai
company, shall have commenced proceedings to remove any reference to, or
otherwise use, either in whole or in part, "California Audio Labs" as a company
and/or d/b/a name or trademark under which it conducts any business worldwide,
and that it shall use its best efforts to effect such change as soon as
possible.
ARTICLE 8
CONDITIONS PRECEDENT TO PURCHASER'S PERFORMANCE
8.1 Conditions. All obligations of Purchaser to proceed with Closing
and to consummate the transactions contemplated hereby are subject to
fulfillment and satisfaction by Sellers on or before the Closing Date of each of
the conditions precedent set forth in this Article 8. Purchaser may waive any or
all of these conditions in whole or in part without prior notice to Sellers;
provided, however, that no waiver of a condition shall constitute a waiver by
Purchaser of any of its other rights or remedies, at law or in equity, if
Sellers shall be in default of any of its representations, warranties, or
covenants under this Agreement.
8.2 Accuracy of Representations and Warranties. The representations and
warranties of Sellers contained herein and in any certificate or other writing
delivered pursuant hereto or in connection herewith shall be true and correct in
all material respects on and as of the Closing Date as though made at that time.
8.3 Performance of Sellers. Sellers shall have duly performed or
complied with all of the covenants, acts, and obligations to be performed or
complied with by Sellers hereunder at or prior to the Closing Date including the
deliveries set forth in Section 10.1.
8.4 No Material Changes. During the period from December 31, 1997 to
the Closing Date, there shall not have been any undisclosed material adverse
change in the Sellers' Interests, or the financial condition or results of
operations of the Company, and neither the Sellers' Interests nor the Company
shall have sustained any material casualty or other loss, damage, or
destruction. Since December 31, 1997, there shall have been no undisclosed
material adverse change in the assets, liabilities, or business of the Company
and no indebtedness shall have been incurred by the Company other than accounts
payable, taxes, and similar liabilities incurred in the ordinary course of
business. Without limiting the generality of the foregoing, neither the Company
nor the Sellers shall have incurred any liability or have engaged in any conduct
since the Execution Date that would have a undisclosed material adverse effect
on Purchaser with respect to the transaction contemplated hereunder.
8.5 Sellers' Certificate. Purchaser shall have received a certificate,
dated the Closing Date, signed and verified by the Sellers' certifying, in such
detail as Purchaser and its counsel may reasonably request, that the conditions
specified in Section 8.2 and Section 8.4, above, have been fulfilled.
16
<PAGE>
8.6 Absence of Litigation. No action, suit, or proceeding before any
court or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation, shall have been
instituted or threatened on or before the Closing Date.
8.7 Chief Financial Officer's Certificate. Purchaser shall have
received from the Chief Financial Officer of the Company a letter, dated the
Closing Date, that on the basis of his or her review (not an audit) of the
latest available accounting records of the Company, consultations with other
responsible officers of the Company, and other pertinent inquiries that he or
she may deem necessary, he or she has no reason to believe that during the
period from December 31, 1997, to the Closing Date, there has been any
undisclosed change in the financial condition or results of operations of the
Company except changes incurred in the ordinary and usual course of business
during that period that in the aggregate are not materially adverse, and other
changes or transactions, if any, contemplated by this Agreement.
8.8 Consents. All necessary agreements and consents of any parties to
the consummation of the transactions contemplated by this Agreement, or
otherwise pertaining to the matters covered by it, shall have been obtained by
Sellers and delivered to Purchaser.
8.9 Approval of Documents. The form and substance of all certificates,
instruments, opinions, Schedules, and other documents delivered to Purchaser
under this Agreement shall be satisfactory in all respects to Purchaser and its
counsel.
8.10 Opinion of Counsel. Sellers shall have delivered to Purchaser an
opinion of counsel to Purchaser, dated as of the Closing Date, in the form of
Exhibit B.
8.11. Employment Agreement. Sellers shall have delivered to Purchaser
an Employment Agreement for Daniel Donnelly in the form attached as Exhibit A.
8.12. Company Approval of Purchaser as a Member. If required by the
Operating Agreement or the laws of the State of California, Sellers will take
whatever steps are necessary to insure that Purchaser will, on the Closing Date,
have all rights and powers of a member of the Company under the Operating
Agreement or the laws of the State of California, including, but not limited to,
conducting a proper meeting at which Sellers, by unanimous vote, approve of the
sale, transfer, and assignment of Sellers' Interests to Purchaser and their
acceptance of Purchaser as the new, and sole, member of the Company.
8.13. Execution of Manufacturing Agreement. On or before the Closing
Date, California Audio Labs (Thailand) LTD and the Company shall have entered
into a Manufacturing Agreement in the forms of Exhibit C ("Manufacturing
Agreement"), which shall set forth all rights of Sellers and California Audio
Labs (Thailand) LTD regarding the Company after the Closing Date.
17
<PAGE>
ARTICLE 9
CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE
9.1 Conditions. All obligations of Sellers to proceed with Closing are
subject to fulfillment and the satisfaction on or before the Closing Date of
each of the conditions precedent set forth in this Article 9, unless otherwise
waived, in writing, by Sellers:
9.2 Accuracy of Representations and Warranties. The representations and
warranties of Purchaser contained herein and in any certificate or other writing
delivered pursuant hereto or in connection herewith shall be true and correct in
all material respects on and as of the Closing Date as though made at that time.
9.3 Performance of Purchaser. Purchaser shall have duly performed or
complied with all of the covenants, acts, and obligations to be performed or
complied with by Purchaser hereunder at or prior to the Closing Date.
ARTICLE 10
DELIVERIES AT CLOSING
10.1 Sellers' Obligations. In addition to any other documents that
Purchaser may require to be delivered by Sellers at Closing, Sellers shall
deliver to Purchaser at Closing the following documents:
(a) Executed assignments of all Contracts and Offers (with
consents if required) in the form attached hereto as Exhibit D;
(b) Executed assignments or consents of all assignable
licenses and permits issued to Sellers by any governmental entity or vendor;
(c) All books, records, and other data relating to the
Company's business;
(d) Instruments of assignment and transfer of all other
property of Sellers directly related to and/or owned by the Company of every
kind and description and wherever situated;
(e) Executed Employment Agreement;
(f) Sellers' Certificate as provided for in Section 8.5
hereof;
(g) Chief Financial Officer's Certificate as provided for in
Section 8.7 hereof;
(h) The consents as provided for in Section 8.8 hereof;
(i) The Manufacturing Agreement;
18
<PAGE>
(j) Such other documents as Purchaser or its counsel or any
lender or lessor of Purchaser may reasonably request in order to effectuate the
transactions contemplated under this Agreement.
Sellers, at any time before or after the Closing, will execute,
acknowledge, and deliver any further deeds, assignments, conveyances, and other
assurances, documents, and instruments of transfer, reasonably requested by
Purchaser, and will take any other action consistent with the terms of this
Agreement that may reasonably be requested by Purchaser, for the purpose of
assigning, transferring, granting, conveying, and confirming to Purchaser, or
reducing to possession, any or all property to be conveyed and transferred by
this Agreement. If requested by Purchaser, Sellers further agree to prosecute or
otherwise enforce in its own name for the benefit of Purchaser, any claims,
rights, or benefits that are transferred to Purchaser by this Agreement and that
require prosecution or enforcement in Sellers' name. Any prosecution or
enforcement of claims, rights, or benefits under this Section shall be solely at
Purchaser's expense, unless the prosecution or enforcement is made necessary by
a breach of this Agreement by Sellers.
10.2 Purchaser's Obligations. Purchaser shall deliver to Sellers:
(a) The Purchase Price payable at Closing as provided in
Section 1.3 hereof;
(b) Executed counterparts of such of the closing documents as
shall require acceptance by Purchaser.
ARTICLE 11
POST CLOSING
11.1 Nature of Statements. All statements contained herein, in any
Schedule or Exhibit hereto, or in any certificate or other written instrument
delivered by or on behalf of Sellers or Purchaser pursuant to this Agreement, or
in connection with the transactions contemplated hereby, shall be deemed
representations and warranties by Sellers or Purchaser, as the case may be.
11.2 Survival of Representations and Warranties. Regardless of any
investigation at any time made by or on behalf of any party hereto, or of any
information any party may have in respect thereof, all covenants, agreements,
representations, and warranties made hereunder or pursuant hereto or in
connection with the transactions contemplated hereby shall survive for a period
of five (5) years after the Closing.
11.3 Indemnification of Purchaser by Sellers. Sellers shall, jointly
and severally, indemnify, defend, and hold harmless Purchaser and its direct and
indirect parent companies, subsidiaries, and affiliates, and their respective
officers, directors, and shareholders, successors and assigns, from and against
any and all costs, expenses, losses, damages, fines, penalties, or liabilities
(including, without limitation, interest which may be imposed in connection
therewith, court costs, litigation expenses, reasonable attorneys' fees, and
19
<PAGE>
accounting fees) ("Actual Loss") incurred by Purchaser, directly or indirectly,
with respect to, in connection with, arising from or out of:
(a) A breach by Sellers of any representation or warranty made
by Sellers and contained in this Agreement or in any certificate or other
document delivered by said party to Purchaser hereunder or thereunder;
(b) A breach by Sellers of any covenant, restriction, or
agreement made by or applicable to Sellers and contained in this Agreement or in
any certificate or other document delivered by said party to Purchaser hereunder
or thereunder; and
(c) Any claim, debt, suit, cause of action, investigation, or
proceeding of any kind whatsoever, whether instituted or commenced prior to or
after the Closing Date and which relates to or arises from the business or
assets of the Company on or before the Closing Date which was not specifically
disclosed in a schedule to this Agreement.
The parties hereby agree that claims arising out of Section 11.3(a) and
Section 11.3(b) above, and to the extent practicable claims arising out of
Section 11.3(c) above, shall be resolved by arbitration pursuant to the
procedure set forth in Section 11.6 below.
11.4 Indemnification of Sellers by Purchaser. Purchaser shall
indemnify, defend, and hold Sellers harmless from and against any and all costs,
expenses, losses, damages, fines, penalties, or liabilities (including, without
limitation, interest that may be imposed in connection therewith, court costs,
litigation expenses, reasonable attorneys' fees, and accounting fees) ("Actual
Loss") incurred by Sellers with respect to, in connection with, arising from, or
out of:
(a) A breach by Purchaser of any representation or warranty
made by Purchaser and contained in this Agreement or in any certificate or other
document delivered by Purchaser to Sellers hereunder or thereunder; and
(b) A breach by Purchaser of any covenant, restriction, or
agreement made by or applicable to Purchaser and contained in this Agreement or
in any certificate or other document delivered by Purchaser to Sellers hereunder
or thereunder.
The parties hereby agree that claims arising out of Section 11.4(a) and
Section 11.4(b) above, shall be resolved by arbitration pursuant to the
procedure set forth in Section 11.6 below.
11.5 Procedure for Indemnification.
(a) The party which is entitled to be indemnified hereunder
(the "Indemnified Party") shall promptly give notice hereunder to the party
required to indemnify (the "Indemnifying Party") after obtaining written notice
of any claim as to which recovery may be sought against the indemnifying party
because of the indemnity in Section 11.3 and Section 11.4 hereof and, if such
indemnity shall arise from the claim of a third party, shall permit the
Indemnifying Party to assume the defense of any such claim and any litigation
resulting from
20
<PAGE>
such claim. Notwithstanding the foregoing, the right to indemnification
hereunder shall not be affected by any failure of an Indemnified Party to give
such notice, or delay by an Indemnified Party in giving such notice unless, and
then only to the extent that, the rights and remedies of the Indemnifying Party
shall have been prejudiced as a result of the failure to give, or delay in
giving, such notice. Failure by an Indemnifying Party to notify an Indemnified
Party of its election to defend any such claim or action by a third party within
forty five (45) days after notice thereof shall have been given to the
Indemnifying Party shall be deemed a waiver by the Indemnifying Party of its
right to defend such claim or action.
(b) If the Indemnifying Party assumes the defense of such
claim or litigation resulting therefrom, the obligations of the Indemnifying
Party hereunder as to such claim shall include taking all steps necessary in the
defense or settlement of such claim or litigation and holding the Indemnified
Party harmless from and against any and all damages caused by or arising out of
any settlement approved by the Indemnifying Party or any judgment in connection
with such claim or litigation. The Indemnifying Party shall not, in the defense
of such claim or any litigation resulting therefrom, consent to entry of any
judgment (other than a judgment of dismissal on the merits without costs) except
with the written consent of the Indemnified Party, or enter into any settlement
(except with the written consent of the Indemnified Party) which does not
include as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all liability in respect of
such claim or litigation. Anything in this Section 11.5 to the contrary
notwithstanding, the Indemnified Party may, with counsel of its choice and at
its expense, participate in the defense of any such claim or litigation.
(c) If the Indemnifying Party shall not assume the defense of
any such claim by a third party or litigation resulting therefrom after receipt
of notice from such Indemnified Party, the Indemnified Party may defend against
such claim or litigation in such manner as it deems appropriate, and unless the
Indemnifying Party shall deposit with the Indemnified Party a sum equivalent to
the total amount demanded in such claim or litigation plus the Indemnified
Party's estimate of the costs of defending the same, the Indemnified Party may
settle such claim or litigation on such terms as it may deem appropriate and the
Indemnifying Party shall promptly reimburse the Indemnified Party for the amount
of such settlement and for all damages incurred by the Indemnified Party in
connection with the defense against or settlement of such claim or litigation.
(d) The Indemnifying Party shall promptly reimburse the
Indemnified Party for the amount of any judgment rendered with respect to any
claim by a third party in such litigation and for all damage incurred by the
Indemnified Party in connection with the defense against such claim or
litigation, whether or not resulting from, arising out of, or incurred with
respect to, the act of a third party.
11.6 Arbitration. Any controversy or claim arising solely between the
parties out of or relating to Section 11.3 or Section 11.4 herein, or the breach
thereof, shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, to be held in the
State of California, and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof. The parties agree that
21
<PAGE>
within six (6) months of notice of such a controversy or claim by one party to
another, said controversy or claim, if unresolved, shall be submitted to
arbitration.
ARTICLE 12
MISCELLANEOUS
12.1 Liens. In the event Purchaser receives any notice or claim of lien
upon any of Sellers' assets which lien is not satisfied or released as of the
Closing Date, and Purchaser becomes obligated to pay any amounts due in
connection with such lien, Purchaser shall have the right in addition to any
other remedy to offset against any payments due any or all of the Sellers, which
offset shall be in lieu of the payment of such amounts. Purchaser shall comply
with the terms of all notices and orders issued by such authorities, and shall
have no responsibility for the correctness or accuracy of such notices and
orders. If any such offset is made, then Purchaser's rights and interests shall
be assigned to Sellers, who can then seek recovery from the third party
responsible for said offset.
12.2 Written Agreement to Govern. This Agreement sets forth the entire
understanding and supersedes all prior oral or written agreements among the
parties hereto relating to the subject matter contained herein, and merges all
prior and contemporaneous discussions among them. No party hereto shall be bound
by any definition, condition, representation, warranty, covenant, or provision
other than as expressly stated in this Agreement or as hereafter set forth in a
written instrument executed by such party or by a duly authorized representative
of such party.
12.3 Severability. The parties hereto expressly agree that it is not
the intention of any party hereto to violate any public policy, statutory, or
common law rules, regulations, treaties, or decisions of any government or
agency thereof. If any provision of this Agreement is judicially or
administratively interpreted or construed as being in violation of any such
provision, such articles, sections, sentences, words, clauses, or combinations
thereof shall be inoperative, and the remainder of this Agreement shall remain
binding upon the parties hereto.
12.4 Notices and Other Communications. Every notice or other
communication required, contemplated, or permitted by this Agreement by any
party shall be in writing and shall be delivered either by personal delivery,
telegram, private courier service, or by certified or registered mail, postage
prepaid, return receipt requested, addressed to the party to whom intended at
the following address:
(a) If to Purchaser:
---------------
Go-Video, Inc. and Go-Video Productions, Inc.
7835 E. McClain Drive
Scottsdale, Arizona 85260
Attn: President
(602) 951-4404 - facsimile
22
<PAGE>
Copy to:
Samuel C. Cowley
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004
(602) 382-6070 - facsimile
(b) If to Sellers:
-------------
Mr. Akradej Srichawla
4 1/2 World Trade Center
Section B-422
Pathumwan, Bangkok 10330
Thailand
(662) 255-6288 - facsimile {Thailand}
Copy to:
Gregory J. Carrigan, CPA
P.O. Box 6602
Malibu, California 90264
(310) 457-6821 - facsimile
or at such other address as the intended recipient shall from time to time
designate by written notice delivered in accordance herewith. Notice by courier
or certified or registered mail shall be effective on the date it is officially
recorded as delivered to the intended recipient by return receipt or the date of
attempted delivery where delivery is refused by the intended recipient. All
notices and communications required, contemplated, or permitted by this
Agreement to be delivered in person shall be deemed to have been delivered to
and received by the addressee, and shall be effective, on the date of personal
delivery. Any notice transmitted by telegram shall be deemed to have been
delivered to and received by the addressee, and shall be effective, on the date
said notice is delivered to the telegram company for transmission.
12.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute one and the same agreement.
12.6 Governing Law. The validity, construction, and enforceability of
this Agreement shall be governed in all respects by the laws of the State of
California, without regard to its conflict of laws rules.
12.7 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors, and assigns;
provided, however, that this Agreement may not be assigned by Sellers without
the prior written consent of Purchaser.
23
<PAGE>
12.8 Further Assurances. At any time on or after the date hereof, the
parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such other
things consistent with the terms of this Agreement as may be reasonably
necessary to accomplish the transaction contemplated in this Agreement or
otherwise carry out the purpose of this Agreement.
12.9 Gender, Number and Headings. The masculine, feminine, or neuter
pronouns used herein shall be interpreted without regard to gender, and the use
of the singular or plural shall be deemed to include the other whenever the
context so requires.
12.10 Schedules and Exhibits. The Schedules and Exhibits referred to
herein and attached hereto, are incorporated herein by such reference as if
fully set forth in the text hereof.
12.11 Waiver of Provisions. The terms, covenants, representations,
warranties, and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party at
any time to require performance of any provisions hereof shall, in no manner,
affect the right at a later date to enforce the same. No waiver by any party of
any condition, or breach of any provision, term, covenant, representation, or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or of the breach of any other provision,
term, covenant, representation, or warranty of this Agreement.
12.12 Specific Performance. Each party's obligations under this
Agreement are unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely impracticable
to measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other available rights or remedies, may sue in equity for
specific performance, and the parties each expressly waive the defense that a
remedy in damages will be adequate. Notwithstanding any breach or default by any
of the parties of any of their respective representations, warranties,
covenants, or agreements under this Agreement, if the purchase and sale
contemplated by it shall be consummated at the Closing, each of the parties
waives any rights that it or he may have to rescind this Agreement or the
transaction consummated by it; provided, however, this waiver shall not affect
any other rights or remedies available to the parties under this Agreement or
under the law.
12.13 Costs. If any legal action or any arbitration or other proceeding
is brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
12.14 Assignment. This Agreement may not be assigned by any party
hereto without the consent of the other party hereto.
24
<PAGE>
12.15 Section and Paragraph Headings. The Article and Section headings
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
12.16 Amendment. This Agreement may be amended only by an instrument in
writing executed by all parties hereto.
12.17 Expenses. Except as otherwise expressly provided herein, each
party shall bear its own expenses incident to this Agreement and the
transactions contemplated hereby, including without limitation, all fees of
counsel, consultants, and accountants.
12.18 Waiver of Objection to Personal Jurisdiction. Sellers hereby
expressly submit and consent in advance to jurisdiction in any action or
proceeding commenced by Purchaser in arbitration in California or in the
Superior Court of California or the United States District Court for the
Northern District of California, and hereby waives personal service of the
Summons and Complaint, or other process of papers issued therein, and agrees
that service of such Summons and Complaint or other process or papers may be
made by Federal Express or other international commercial mail carrier addressed
to Sellers at the address to which notices are to be sent pursuant to this
agreement. Seller waives any claim that San Francisco, California or the
Northern District of California is an inconvenient forum or an improper forum
based on lack of venue. Should Sellers, after being so served, fail to appear or
answer to any summons, complaint, process or papers so served within the number
of days prescribed by law after the mailing thereof, Sellers shall be deemed in
default and an order and/or judgment may be entered by Purchaser against Sellers
as demanded or prayed for in such summons, complaint, process or papers. The
exclusive choice of forum for Sellers set forth in this section shall not be
deemed to preclude the enforcement, by Purchaser, or any judgment obtained in
any other form or the taking, by Purchaser, of any action to enforce the same in
any other appropriate jurisdiction, and Sellers hereby waive the right to
collaterally attack any such judgment or action.
12.19 Waiver of Right to Jury Trial. Purchaser and Sellers acknowledge
and agree that any controversy which may arise under this Agreement or with
respect to the transactions contemplated thereby would be based upon difficult
and complex issues and, therefore, the parties agree that any lawsuit arising
out of any such controversy shall be tried in a court of competent jurisdiction
by a judge sitting without a jury.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
"SELLERS" ------------------------------------
PORNTHEP SRICHAWLA
------------------------------------
AKRADEJ SRICHAWLA
------------------------------------
VORATHEP SRICHAWLA
"PURCHASER" GO-VIDEO, INC., a Delaware corporation
By:
---------------------------------
Roger B. Hackett
Its: Chairman, Chief Executive Officer,
and President
GO-VIDEO PRODUCTIONS, INC., a Delaware corporation
By:
---------------------------------
Roger B. Hackett
Its: Chairman, Chief Executive Officer,
and President
"FACTORY" CALIFORNIA AUDIO LABS (Thailand) LTD
{As to Section
7.3 only} By:
---------------------------------
Its:
--------------------------------
By:
---------------------------------
Its:
--------------------------------
26
<PAGE>
Exhibit A
---------
EMPLOYMENT AGREEMENT
27
<PAGE>
Exhibit B
---------
OPINION OF COUNSEL
28
<PAGE>
Exhibit C
---------
MANUFACTURING AGREEMENT
29
<PAGE>
Exhibit D
---------
ASSIGNMENTS OF CONTRACTS AND OFFERS
30
<PAGE>
Schedule 3.2
------------
OPERATING AGREEMENT
31
<PAGE>
Schedule 3.8
------------
CHANGES OUTSIDE ORDINARY COURSE OF BUSINESS
32
<PAGE>
Schedule 3.9
------------
LEASES
------
33
<PAGE>
Schedule 3.12
-------------
LITIGATION
34
<PAGE>
Schedule 3.13
-------------
CONSENTS
35
<PAGE>
Schedule 3.15
-------------
LICENSES AND PERMITS
36
<PAGE>
Schedule 3.17
-------------
CONTRACTS
37
<PAGE>
Schedule 3.18
-------------
PATENTS AND TRADEMARKS
38
<PAGE>
Schedule 3.19
-------------
EMPLOYEE BENEFIT PLANS
39
<PAGE>
Schedule 3.20
-------------
WARRANTIES
40
<PAGE>
Schedule 3.22
-------------
ACCOUNTS RECEIVABLE
41
<PAGE>
Schedule 3.23
-------------
INVENTORIES
42
<PAGE>
Schedule 3.26
-------------
ENVIRONMENTAL MATTERS
43
<PAGE>
Schedule 3.29
-------------
TRANSACTIONS WITH RELATED PARTIES
44
<PAGE>
Schedule 3.34
-------------
CUSTOMERS
45
<PAGE>
Schedule 3.35
-------------
SUPPLIERS
46
<PAGE>
Schedule 3.36
-------------
INSURANCE
47
<PAGE>
Schedule 7.3
------------
FACTORY LINE OF CREDIT
48
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Go-Video, Inc.
Scottsdale, Arizona
We consent to the incorporation by reference in Registration Statements No.
33-18428 on Form S-8, No. 33-39859 on Form S-8, No. 33-49924 on Form S-8, No.
33-49926 on Form S-8, No. 333-52329 on Form S-8, No. 33-58720 on Form S-3 and
No. 333-15731 on Form S-2 of our report dated May 4, 1998 appearing in this
Annual Report on Form 10-K of Go-Video, Inc. for the year ended March 31, 1998.
DELOITTE & TOUCHE LLP
Phoenix, AZ
June 25, 1998
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