<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
POLK AUDIO, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[POLK AUDIO LOGO]
-------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Monday, August 5, 1996
------------------------------------------------------
To the Stockholders of
POLK AUDIO, INC.:
Notice is hereby given that the 1996 Annual Meeting of Stockholders (the
"Meeting") for POLK AUDIO, INC. (the "Company") will be held at 9:00 a.m. local
time on Monday, August 5, 1996 at the offices of Piper & Marbury L.L.P., 2nd
Floor, 36 South Charles Street, Baltimore, Maryland 21201, for the following
purposes:
(1) To elect five (5) directors to serve until the next Annual
Meeting of Stockholders or until their successors are duly
elected and qualified;
(2) To ratify and approve certain amendments to the 1986 Equity
Participation Plan; and
(3) To transact such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed May 20, 1996 as the record date of the
Meeting. Stockholders of record on the books of the Company at the close of
business as of May 20, 1996 will be entitled to notice of, and to vote at, the
Meeting and any adjournments or postponements thereof.
By order of the Board of Directors
Matthew S. Polk, Jr., Secretary
Baltimore, MD
June 28, 1996
IT IS IMPORTANT TO YOU AND THE COMPANY THAT YOUR SHARES BE REPRESENTED
AT THE MEETING. YOU ARE INVITED TO ATTEND THE MEETING IN PERSON. HOWEVER,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO READ
THE ACCOMPANYING PROXY STATEMENT CAREFULLY AND THEN TO SIGN, DATE, AND RETURN
THE ACCOMPANYING PROXY IN THE ENCLOSED STAMPED AND ADDRESSED ENVELOPE. THE
GIVING OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE AT THE MEETING IF SUCH
PROXY IS REVOKED AS SET FORTH IN THE ACCOMPANYING PROXY STATEMENT.
<PAGE> 3
POLK AUDIO, INC.
PROXY STATEMENT
This Proxy Statement, Notice of Annual Meeting of Stockholders, and
the accompanying form of proxy are furnished in connection with the
solicitation of proxies by the Board of Directors of Polk Audio, Inc. (the
"Company") for use at the Annual Meeting of Stockholders (the "Meeting") to be
held on August 5, 1996 and at any adjournments or postponements thereof. Only
stockholders of record at the close of business on May 20, 1996 (the "Record
Date") will be entitled to notice of, and to vote at, the Meeting. Management
anticipates that the mailing to stockholders of these proxy materials and a
copy of the Company's Annual Report to Stockholders for the fiscal year ended
March 31, 1996 will occur on or about June 28, 1996.
The Company's principal executive offices are located at 5601 Metro
Drive, Baltimore, Maryland 21215, and its telephone number at such address is
(410) 358-3600.
If the accompanying proxy is properly executed and returned, the
shares represented thereby will be voted in accordance with the instructions
specified thereon. In the absence of instructions to the contrary, such shares
will be voted for all the nominees for election to the Board of Directors
listed in this proxy statement and named in the accompanying proxy and in the
best discretion of the proxy holders as to any other matters, including, but
not limited to, the election of one or more persons to fill any vacancy that
exists on the Board of Directors at the time of the Meeting or any adjournments
or postponements thereof. Any stockholder executing a proxy has the power to
revoke it at any time prior to the voting thereof on any matter (without,
however, affecting any vote taken prior to such revocation) by delivering
written notice of revocation to the Secretary of the Company, or by executing
another proxy dated as of a later date, or by voting in person at the Meeting.
The only voting securities of the Company are shares of common stock,
par value $0.01 per share (the "Common Stock"), each of which is entitled to
one vote. At the Record Date, the Company had issued and outstanding 1,797,035
shares of Common Stock. The presence, in person or by proxy, of holders of a
majority of the issued and outstanding shares of Common Stock entitled to vote
at the Meeting shall constitute a quorum. Directors are elected by a plurality
of the votes cast by the holders of shares of Common Stock of the Company
present or represented by proxy at the Meeting, with a quorum present. The
affirmative vote of the holders of the majority of the shares of Common Stock
present or represented by proxy at the Meeting is required for the approval of
the amendments to the 1986 Equity Participation Plan and any other matter that
may properly come before the Meeting. Abstentions and broker non-votes will not
be considered to be votes cast for the foregoing purposes.
ELECTION OF DIRECTORS
A Board of Directors consisting of five (5) members will be elected at
the Meeting to hold office until the next Annual Meeting of Stockholders of the
Company or until their successors are duly elected and qualified. The Board of
Directors has unanimously approved the nominees named below, all of whom are
current members of the Board of Directors. Unless otherwise instructed, it is
the intention of the persons named in the accompanying form of proxy to vote
shares represented by properly executed proxies for the five nominees to the
Board of Directors named below. Although the Board of Directors anticipates
that all of the nominees will be available to serve as directors of the
Company, should any one or more of them not accept the nomination, or otherwise
be unwilling or unable to serve, it is intended that the proxies will be voted
for the election of a substitute nominee or nominees designated by the Board of
Directors.
2
<PAGE> 4
The following table lists the names and ages of the nominees to the Board of
Directors as of the Record Date and the year in which they were first elected
directors of the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE FOLLOWING NOMINEES:
<TABLE>
<CAPTION>
Year First
Elected
Name Age Director
- ---- --- ---------
<S> <C> <C>
George M. Klopfer 46 1972
Matthew S. Polk, Jr. 46 1972
Craig C. Georgi 47 1977
Wilbert H. Sirota 58 1986
Robert B. Barnhill, Jr. 52 1992
</TABLE>
Matthew S. Polk, Jr., a founder of the Company, has served as Chairman of the
Board of Directors of the Company since its founding in June, 1972. In
addition, he served as the Company's Treasurer from 1972 to 1983 and has been
its Secretary from 1977 to the present. Mr. Polk has also served as Vice
President - Engineering from 1981 to 1995. Mr. Polk graduated from The Johns
Hopkins University in 1971 with an undergraduate degree in physics and has
spent his entire working career with the Company.
George M. Klopfer, a founder of the Company, has been a Director of the Company
since its founding in June, 1972. He has been the Company's Chief Executive
Officer from 1984 to present. In addition, he served as the Company's President
from 1972 through 1995, the Company's Secretary from 1972 to 1977 and the
Company's Treasurer from 1984 to 1995. Mr. Klopfer graduated from The Johns
Hopkins University in 1971 and has spent his entire working career with the
Company.
Craig C. Georgi joined the Company as its first assembly worker in 1974. He
became a Director in 1977 and Vice President - Manufacturing in 1981. Mr.
Georgi has a Masters in Business Administration from Loyola College and has
spent his entire working career with the Company.
Wilbert H. Sirota joined the law firm of Piper & Marbury L.L.P., Baltimore,
Maryland, as a partner in June, 1992. Prior to that time, he had been a
partner of the Baltimore law firm of Frank, Bernstein, Conaway & Goldman since
1966. Mr. Sirota holds an LLM in taxation from Georgetown University.
Robert B. Barnhill, Jr. has been President and Chief Executive Officer of
TESSCO Technologies, Inc. since 1975. TESSCO is a technology supplier to the
paging, cellular telephone and mobile communications industries. Mr. Barnhill
holds a Bachelor of Science degree in Electrical Engineering from Cornell
University and a Masters in Business Administration from the Wharton School of
Business at the University of Pennsylvania. Mr. Barnhill is also a member of
the Board of Directors of Provident Bankshares Corporation, a Maryland-based
bank holding company.
Executive Officers. The following information is provided regarding James M.
Herd, the President of the Company, Gary B. Davis, the Treasurer and Chief
Financial Officer of the Company, Peter D. Gaskarth, Vice President of Home
Entertainment Products, Robert E. Limbaugh, Vice President of Automotive
Products, Thomas C. Roddam, Vice President of Eosone Home Products, and Keith
A. Ballard, Vice President of Marketing. These are the only executive officers
of the Company who are not also Directors.
3
<PAGE> 5
James M. Herd, age 47 and President since early, 1996, joined the Company in
December, 1991 and served as Vice President of Sales and Marketing from 1991
through 1995. Mr. Herd was employed at Bose Corporation, a manufacturer of
stereo loudspeaker systems, as Director of North American Sales prior to his
employment at the Company. Mr. Herd's career at Bose Corporation spanned 15
years where he held various sales and management positions.
Gary B. Davis, age 36, Treasurer and Chief Financial Officer, has been with the
Company since 1983. Mr. Davis was employed with Heine & Hermann, P.A. CPAs
prior to his employment at the Company and attained his C.P.A. in 1982. Mr.
Davis graduated from Westminster College in 1981 with an undergraduate degree
in Business and Accounting.
Peter D. Gaskarth, age 51, Vice President of Polk Home Entertainment Products,
has been with the Company since 1992. Mr. Gaskarth was employed at AGI
(Electronics) Ltd. where he acted as Chief Executive Officer for ten years. Mr.
Gaskarth graduated from Bradford University in the U.K. in 1968.
Robert E. Limbaugh, age 41, Vice President of Polk Automotive Products, joined
the Company in May, 1993. Mr. Limbaugh has been involved in the consumer
electronics industry since 1973, most recently employed as U.S. National Sales
Manager for seven years at Linear Power, Inc., a manufacturer of automotive
amplifiers.
Thomas C. Roddam, age 42, Vice President of Eosone Home Products, joined the
Company in September, 1994. Prior to joining the Company, Mr. Roddam had been
in the consumer electronics industry for seventeen years and most recently
served as Western Regional Manager for the Bose Corporation.
Keith A. Ballard, age 46, Vice President of Marketing, joined the Company in
February, 1985. Mr. Ballard has been involved in the advertising and design
industry for the past twenty three years. Mr. Ballard graduated from North
Carolina State University in 1973 with a dual undergraduate degree in
Industrial and Visual Design.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Directors' Compensation. Employee directors receive no additional compensation
for service on the Board of Directors or any of its committees. Directors who
are not also employees of the Company are paid a fee of $1,000 per month,
regardless of the number of meetings attended.
Board and Committee Meetings. The Audit Committee of the Board, consisting of
Messrs. Sirota and Barnhill, meets with the Company's independent public
accountants to review the scope of audit coverage and to review the results of
the accountants' audit of the Company's financial statements. The Audit
Committee met once during fiscal 1996. The Board does not have a standing
nominating or compensation committee.
During fiscal 1996, all directors of the Company attended 75% or more of the
aggregate of all Board meetings and all meetings of committees of which they
were a member. The Board met five times during fiscal year 1996.
4
<PAGE> 6
SECURITIES BENEFICIALLY OWNED
The following table sets forth, at the Record Date, the amount and percentage
of the Company's outstanding Common Stock beneficially owned by each director
and nominee for director, each executive officer named in the Summary
Compensation Table, all directors and executive officers as a group and by all
persons, to the knowledge of the Company, beneficially owning more than five
percent (5%) of the Company's Common Stock. Unless otherwise indicated in the
notes following the table, the individuals named below have sole voting and
disposition powers over the shares beneficially owned by them.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name Beneficial Ownership Outstanding Shares
- ------- -------------------- -------------------
<S> <C> <C>
George M. Klopfer 346,583 19.3%
Matthew S. Polk, Jr. 346,583 19.3%
Craig C. Georgi 120,550 6.7%
Wilbert H. Sirota 1,000 *
Robert B. Barnhill, Jr. 10,000 (1) *
James M. Herd 100,000 5.6%
Peter D. Gaskarth 50,000 2.8%
All directors and executive
officers as a group
(11 persons) 994,536 (1) 54.9%
Name and Address of Other
5% Holders of Common Stock
- --------------------------
Lighthouse Capital Management (2) 144,825 8.1%
10000 Memorial Drive, #660
Houston, TX 77024
</TABLE>
* Constitutes less than 1% of the outstanding shares of Common Stock eligible
to vote.
- --------------------
(1) The number of shares stated as "beneficially owned" includes shares that
certain persons, as of the Record Date, have the right to acquire
beneficial ownership within 60 days upon the exercise of outstanding
options. If such options are exercised Mr. Barnhill would acquire
10,000 shares and all other directors and executive officers as a
group would acquire 4,587 shares.
(2) Based on information provided to the Company on Form 13G dated February
12, 1996, Lighthouse Capital Management has shared voting and
disposition power with respect to such shares.
5
<PAGE> 7
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain information
concerning the compensation for the last three completed fiscal years of the
Chief Executive Officer and the four executive officers of the Company and its
subsidiaries who, in addition to the Chief Executive Officer, received the
highest compensation during the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
Long-term
Annual Compensation (1) Compensation
----------------------------------------- ------------
Securities
underlying
Fiscal Options/ All other
Name and Principal Position Year Salary ($) Bonus ($) SARs (#) Compensation ($) (2)
- --------------------------- ---- ---------- --------- -------- --------------------
<S> <C> <C> <C> <C> <C>
George M. Klopfer 1996 230,632 -- 12,500 4,500
Director & 1995 207,492 20,000 -- 4,500
Chief Executive Officer 1994 190,305 20,000 -- 3,475
Matthew S. Polk, Jr. 1996 203,329 -- 12,500 4,500
Chairman of the Board & 1995 180,325 17,780 -- 4,500
Secretary 1994 172,913 17,780 -- 3,504
Craig C. Georgi 1996 220,123 -- 5,000 4,500
Director & Vice President - 1995 180,325 17,780 -- 4,500
Manufacturing 1994 172,913 17,780 -- 3,672
James M. Herd 1996 208,190 -- 12,500 4,500
President 1995 177,500 17,000 -- 4,500
1994 170,000 17,000 -- 3,231
Peter D. Gaskarth 1996 147,080 -- 10,000 --
Vice President - Home 1995 108,448 7,610 -- --
Entertainment Products 1994 94,980 -- -- --
</TABLE>
(1) Except as disclosed in this table and in the following discussion
of benefit programs, no officer named above received any
other annual compensation the aggregate amount of which exceeded
the lesser of either $50,000 or 10% of the total annual salary
and bonus reported in the Summary Compensation Table.
(2) These amounts represent the Company's annual contributions to its
401(k) Profit Sharing Plan.
6
<PAGE> 8
Option Grants
The following table sets forth information concerning grants of stock options
during the fiscal year ended March 31, 1996 to each of the named executive
officers.
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Number of Shares Annual Rates of
Number Underlying Stock Price
of Shares Options Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Expiration -----------------------
Name Granted(1) Fiscal Year (%) ($/Sh)(2) Date(3) 5% ($) 10% ($)
--------------- -------------- --------------- ------------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
George M. Klopfer 12,500 17.24% $8.9375 3/25/01 17,904 68,205
Matthew S. Polk, Jr. 12,500 17.24% $8.9375 3/25/01 17,904 68,205
Craig C. Georgi 5,000 6.90% $8.125 3/25/06 25,549 64,746
James M. Herd 12,500 17.24% $8.125 3/25/06 63,872 161,864
Peter D. Gaskarth 10,000 13.79% $8.125 3/25/06 51,098 129,492
- ----------
</TABLE>
(1) The options become exercisable as follows: (1) If, for any continuous
30-calendar day period during the term of the option, the closing price
of the Common Stock on each trading day during such period consistently
exceeds $15.00, the option shall vest and become exercisable as to 50% of
the shares covered by the option on the first day following the end of
such 30-day period, on the later of March 26, 1998 or the end of such
30-day period, provided the optionee is still employed by the Company on
such date; (2) If for any continuous 30-calendar day period during the
term of the option, the closing price of the Common Stock on each trading
day during such period consistently exceeds $20.00, the option shall vest
and become exercisable as to 100% of the shares covered by the option on
the later of March 26, 1998 or the end of such 30-day period, provided
that the optionee is still employed by the Company on such date; (3) For
Messrs. Klopfer and Polk, if the option does not vest earlier, then the
option shall vest and become exercisable as to 100% of the shares subject
to the option on September 26, 2000; (4) For Messrs. Georgi, Herd and
Gaskarth, if the option does not vest earlier, then the option shall vest
and become exercisable as to 100% of the shares subject to the option on
September 26, 2005; (5) Under no circumstances will the options become
vested prior to March 26, 1998.
(2) Because the options are intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code, Messrs. Georgi, Herd and
Gaskarth's options were granted at 100% of the fair market value of the
Common Stock on the date of grant. Messrs. Klopfer and Polk's options
were granted at 110% of fair market value because Messrs. Klopfer and
Polk each own greater than 10% of the Company's Common Stock.
(3) Because the options are intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code, the options granted to
Messrs. Georgi, Herd and Gaskarth will expire 10 years from the date of
grant. The options granted to Messrs. Klopfer and Polk will expire 5
years after the date of grant because Messrs. Klopfer and Polk each own
greater than 10% of the Company's Common Stock.
7
<PAGE> 9
Aggregate Option Exercises and Option Year-End Value
The following table sets forth the fiscal year-end value of all unexercised
options held by named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED MARCH 31, 1996 MARCH 31, 1996
NAME ON EXERCISE (#) VALUE REALIZED ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------ ---------------- --------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
George M. Klopfer 0 0 0 / 12,500 $0 / $7,031
Matthew S. Polk, Jr. 0 0 0 / 12,500 $0 / $7,031
Craig C. Georgi 0 0 0 / 5,000 $0 / $6,875
James M. Herd 100,000 $337,500 0 / 12,500 $0 / $17,188
Peter D. Gaskarth 50,000 $143,750 0 / 10,000 $0 / $13,750
------------
</TABLE>
(1) The Company lent Messrs. Herd and Gaskarth cash equal to the full
exercise price, plus an amount equal to the Federal and state income and
employment taxes due on the exercise of the options. The loan to Mr.
Herd was in the amount of $628,833, of which $475,000 was for the option
exercise price and $153,833 was for taxes due on the exercise. The loan
to Mr. Gaskarth was in the amount of $323,899, of which $262,500 was for
the option exercise price and $61,399 was for taxes due on the exercise.
Both loans are evidenced by a full recourse promissory note bearing
interest at the applicable Federal mid-term rate, with interest to be
paid annually in arrears. Each note is secured by the pledge of the
shares acquired on March 26, 1996 by Messrs. Herd and Gaskarth,
respectively.
Equity Participation Plan. The 1986 Equity Participation Plan offers the
Company's key employees and directors the opportunity to acquire (1) shares of
Common Stock through Stock Awards, Incentive Stock Options (for employees
only), and Non-Qualified Stock Options; (2) Common Stock or cash through Stock
Appreciation Rights; and (3) cash through Tax Benefit Rights. The Plan is
described more fully under Proposal 2.
Pension Plan. The Company established a defined benefit pension plan (the
"Pension Plan") effective as of April 1, 1989, for hourly employees who meet
minimum age and service requirements, plus Messrs. Klopfer, Polk and Georgi.
The Pension Plan is funded entirely by the Company. As of September 1, 1995,
all benefit accruals under the plan were frozen meaning that no wages earned
after said date are taken into account in computing benefits under the plan.
A participant's accrued benefit under the Pension Plan will be equal to
the sum of the following amounts: First, for plan years of service completed by
a participant prior to April 1, 1989, his or her accrued benefit will be equal
to his or her 1988 calendar year compensation multiplied by 0.75% multiplied by
the number of his or her plan years of service completed prior to April 1,
1989. Second, for each plan year of service completed after March 31, 1989 and
prior to September 1, 1995, his or her accrued benefit will be equal to his or
her compensation for the calendar year ending in that plan year multiplied by
0.75%.
8
<PAGE> 10
Each participant in the Pension Plan is always fully vested in his or her
accrued benefit in the event of death, disability, or attainment of the normal
retirement age (65 years) or attainment of the early retirement date
(attainment of age 55 and completion of 5 years of service) while he or she is
employed by the Company. Each other participant becomes vested in his or her
accrued benefit upon completion of five years of service with the Company.
Benefits under the Pension Plan are paid in the form of annual payments
for the life of the participant. The estimated annual benefits payable upon
retirement at normal retirement date for each of George M. Klopfer, Matthew S.
Polk, Jr., Craig C. Georgi and James M. Herd are $25,218, $25,630, $23,355 and
$3,577, respectively. James M. Herd entered the Plan as a participant beginning
April 1, 1993.
STOCK PERFORMANCE CHART
The following chart compares the cumulative total shareholder return on
the Company's Common Stock during the five years ended March 31, 1996 with the
cumulative total return on the CRSP Total Return Index for the NASDAQ Stock
Market (US Companies) and a peer group comprised of publicly traded consumer
electronics manufacturers. Included in the peer group are the following
companies: Harman International Industries Inc., Boston Acoustics Inc., Carver
Corporation, Sony Corporation, Pioneer Electronics, Emerson Radio Corporation,
Cobra Electronics Corporation and International Jensen Inc. The returns for
each of the companies in the peer group was weighted according to their
respective stock market capitalization. The comparison assumes $100 was
invested on March 31, 1991, in the Company's Common Stock and in both the CRSP
Index and the selected peer group, and the reinvestment of dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG POLK AUDIO, INC., THE NASDAQ STOCK MARKET-US INDEX
AND A PEER GROUP
<TABLE>
<CAPTION>
PEER GROUP
POLK AUDIO, INC. (DOLLARS) NASDAQ STOCK MARKET-US
<S> <C> <C> <C>
3/91 100 100 100
3/92 83 149 127
3/93 117 139 147
3/94 130 187 158
3/95 157 228 176
3/96 127 234 239
</TABLE>
* $100 INVESTED ON 03/31/91 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS
FISCAL YEAR ENDING MARCH 31.
9
<PAGE> 11
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is primarily
comprised of base salary, cash bonuses and awards of stock bonuses or options
under the Company's 1986 Equity Participation Plan. In addition, the Company's
executive officers participate in the Company's 401(k) Profit Sharing Plan and
Pension Plan.
The Company's compensation philosophy is to (i) provide a competitive
total compensation package that enables the Company to attract and retain the
key executive talent needed to accomplish its corporate goals and (ii) provide
incentive compensation that is directly linked with the performance of the
Company and that align executive compensation with the interests of
shareholders. In assessing the Company's performance, the Board of Directors
takes into consideration the Company's earnings and return on equity among
other financial criteria, although no specific weight is given to any one
factor.
In order to align executive compensation with the interests of
shareholders, the Board of Directors bases increases in base salary and the
amount of cash bonuses and stock or option awards on the individual performance
of the executive as well as the performance of the Company, as measured by the
level of earnings and return on equity.
For the fiscal year ended March 31, 1996, the Board of Directors increased
the base salaries of Messrs. Klopfer, Polk, Georgi and Herd as indicated in the
Summary Compensation Table. Adjustments in the levels of base salary and
bonuses and awards under the Company's Equity Participation Plan can be made
when the Board of Directors determine that the Company's financial performance
warrants such compensation.
The Securities and Exchange Commission requires compensation committees of
public companies or Board of Directors performing that function, to state their
compensation policies with respect to the recently enacted Federal income tax
laws that limit to $1 million the deductibility of compensation paid to any
executive officer named in the proxy statement of such companies. In light of
the current level of compensation for the Company's named executive officers,
the Board of Directors has not adopted a policy with respect to the
deductibility limit but will adopt such a policy should it become relevant.
George M. Klopfer
Matthew S. Polk, Jr.
Craig C Georgi
Wilbert H. Sirota
Robert B. Barnhill, Jr.
Related Party Transactions. On September 23, 1985, the Company entered into a
lease agreement (the "Seton Lease") with Klopfer Associates Limited Partnership
("KALP"), a Maryland limited partnership, the general partners of KALP are
George M. Klopfer, Matthew S. Polk, Jr. and Craig C. Georgi. Certain trusts
established for the benefit of the children of George M. Klopfer and Craig C.
Georgi are limited partners of KALP. The Seton Lease obligated the Company to
pay annual rentals of $500,000 per year for eight years, adjusted in each year
after the second anniversary of its commencement to reflect changes in the
Consumer Price Index, beginning on August 1, 1986, for a 100,000 square foot
facility constructed to the Company's specifications at Seton Business Park,
5601 Metro Drive, Baltimore, Maryland 21215 (the "Seton Facility"). Rental
payments are also subject to adjustment in the event the interest payable on
the $2.8 million Industrial Development Revenue Bond (the "Revenue Bond") used
to finance construction of the Seton Facility became taxable to the
bondholders. Annual rent payable under the lease at the end of the lease term
(in 1993) was approximately $660,000. On September 23, 1993, the Seton Lease
was amended (the "First Seton Lease Amendment") to
10
<PAGE> 12
extend the term of the Seton Lease and to reduce the amount payable thereunder.
The First Seton Lease Amendment obligated the Company to pay annual rentals of
$600,000 per year for ten years beginning on October 1, 1993 for the Seton
Facility, adjusted in each year after the second anniversary of its
commencement to reflect changes in the Consumer Price Index. The First Seton
Lease Amendment also provides the Company with a right to terminate after five
years for a specified fee and requires that the Company maintain certain
financial performance ratios. The First Seton Lease Amendment was unanimously
approved by the Company's non-affiliated Directors, and except as noted above,
kept in effect all other terms and conditions provided under the original Seton
Lease. In addition to the payment of rent, the Company continues to be
obligated by the terms of the First Seton Lease Amendment to pay various other
costs, including real estate taxes, insurance, utilities and maintenance.
KALP's interest in the Seton Lease and the First Seton Lease Amendment is
collaterally assigned to NationsBank, N.A. (the "Bank"), as successor to
Maryland National Bank as partial security for the Revenue Bond, and also as
partial security for a $1.6 million subordinated loan originally made to KALP
in 1989 by the Bank (the "Subordinated Loan"). On March 25, 1996, the principal
balance on the Subordinated Loan was increased to $2.7 million pursuant to an
amended Subordinated Loan agreement between KALP and the Bank. The terms of the
Revenue Bond and the Subordinated Loan are normal, arm's-length commercial
terms, and KALP neither requested nor obtained concessions from the Bank in
negotiating the terms of the Revenue Bond and/or the Subordinated Loan, based
upon, involving or affecting in any way the Company's banking relationship with
the Bank.
In July, 1994, the Company entered into a lease agreement (the "Britannia
Lease") for the term commencing September 1, 1994 and ending February 28, 1997,
with Woodland Hills Properties-W, Inc., an unrelated Nevada Corporation
("Woodland"), which obligated the Company to pay a first year annual base
rental (subject to escalation) of $57,216 per year for 16,442 square feet of
distribution and office space (the "Britannia Facility"), in a 146,232 square
foot building known as 2550 Britannia Boulevard, San Diego, California 92173
(the "Brittania Project"). Annual base rentals payable under the Britannia
Lease increased to $61,164 effective as of September 1, 1995. The Britannia
Lease also provided for reimbursement by the Company to the landlord of its
prorata share (according to square footage) of all the operating expenses of
the Britannia Property. On January 18, 1995, to become effective February 28,
1995, the Britannia Lease was amended (the "First Britannia Lease Amendment")
to increase the rented area of the Britannia Facility to 32,884 square feet, to
extend the term of the Britannia Lease to February 28, 1998 and to increase the
annual base rental to $114,436. The First Britannia Lease Amendment provided
for escalation in the base annual rental to $122,328 effective September 1,
1995, and to $130,221 effective February 28, 1997. The First Britannia Lease
Amendment also provided the Company the right and option to further extend the
term of the Britannia Lease until February 28, 2002, at a 4% annual increase
in the base rent payable. On November 20, 1995, to become effective January 1,
1996, the Britannia Lease was again amended (the "Second Britannia Lease
Amendment") to increase the rented area of the Britannia Facility to 41,205
square feet, and to increase the annual base rental to $153,283. The Second
Britannia Lease Amendment also provided for escalation of the base annual
rental to $163,172 effective February 28, 1997. Finally, on March 6, 1996, to
become effective April 1, 1996, the Britannia Lease was further amended (the
"Third Britannia Lease Amendment") to increase the rented area of the Britannia
Facility to 49,426 square feet, and to increase the annual base rental to
$183,865. In the Third Britannia Lease Amendment, the Company also exercised
its options to extend the term of the Britannia Lease to February 28, 2002, and
Woodland waived its right to receive annual rent escalations after March, 1997
through the end of the amended Britannia Lease term in February 2002. On March
27, 1996, KALP purchased the Britannia Project from Woodland, together with the
landlord's interest in all tenant leases thereon, including but not limited to
the Company's Britannia Lease as amended by the First, Second and Third
Britannia Lease Amendments. In connection with its acquisition of the Britannia
Project, KALP assigned the lessor's interest in all tenant leases on the
Britannia Project to Wells Fargo Bank, N.A as partial security for a commercial
mortgage on normal terms in the amount of $3.5 million (the "Britannia Loan").
There are no material banking relationships between the Company and Wells Fargo
Bank, and KALP neither requested nor obtained concessions from Wells Fargo Bank
in negotiating the terms of the Britannia Loan, based upon, involving or
affecting in any way the Company's actual or contemplated banking
relationships.
The non-affiliated Directors of the Company, based on detailed market
surveys of the Baltimore and San Diego areas, believe that the terms of the
Seton Lease as amended, and the terms of the Britannia Lease, as amended,
respectively, were at least as advantageous to the Company as could have been
obtained at the respective times these
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leases were executed, in arm's length transactions with unrelated parties. The
Company has adopted a policy that any future transactions between itself and
any affiliates will continue to be subject to the unanimous approval of its
disinterested directors and will be on terms no less favorable to the Company
than those obtainable at arm's length from unrelated parties.
Wilbert H. Sirota, a director of the Company, is a partner in the law firm
of Piper & Marbury L.L.P. This firm serves as general counsel to the Company.
On March 26, 1996, the Company lent Messrs. Herd and Gaskarth cash
equal to the full exercise price for 100,000 shares and 50,000 shares,
respectively, plus an amount equal to the Federal and state income and
employment taxes due on the exercise of the option. The loan to Mr. Herd was
in the amount of $628,833 of which $475,000 was for the option exercise price
and $153,833 was for taxes due on the exercise. The loan to Mr. Gaskarth was
in the amount of $323,899, of which $262,500 was for the option exercise price
and $61,399 was for taxes due on the exercise. Both loans are evidenced by a
full recourse promissory note bearing interest at the applicable Federal
mid-term rate, with interest to be paid annually in arrears. Each note is
secured by the pledge of the shares acquired on March 26, 1996 by Messrs. Herd
and Gaskarth, respectively.
Compliance with Section 16(a). Section 16(a) of the Securities Exchange Act of
1934 requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's securities, to file reports of
ownership and changes in ownership. Based solely on its review of copies of the
forms received by it, or written representations from certain reporting persons
that they were not required to file Form 4's, the Company believes that during
the last fiscal year, all filing requirements were complied with on a timely
basis, with the exception of the late filing of Forms 4 for Messrs. Klopfer,
Polk, Herd and Roddam reflecting a change in their beneficial ownership. The
Form 4's have since been filed.
Compensation Committee Interlocks and Insider Participation. The Company does
not have an Executive Compensation Committee of the Board of Directors.
Accordingly, the Board of Directors is responsible for establishing the levels
of compensation and benefits for the executive officers of the Company.
Messrs. Klopfer, Polk, and Georgi are executive officers and also served on the
Board of Directors of the Company during fiscal 1996. Accordingly, each
participated in deliberations of the Company's Board of Directors concerning
executive compensation except such executive officers did not participate in
deliberations concerning their own compensation.
RATIFICATION AND APPROVAL OF THE AMENDMENTS TO
THE 1986 EQUITY PARTICIPATION PLAN
On March 26, 1996, the Board of Directors amended the 1986 Equity
Participation Plan (the "Equity Plan" or "Plan"), to (1) extend the term of the
Plan to March 24, 2006; (2) limit the number of shares granted to any person
under the Plan to 300,000 shares; (3) allow the Option Committee to provide
that a Non-Qualified Stock Option may be transferred to members of the
optionee's immediate family if no consideration is paid for such transfer; and
(4) provide more flexible methods of exercising options, including broker
assisted cashless exercises. These amendments require approval of the majority
of the Company's shareholders.
The Equity Plan offers eligible employees and directors the
opportunity to acquire (a) shares of Common Stock through Stock Awards,
Incentive Stock Options ("ISO's"), Non-Qualified Stock Options ("NSO's"); (b)
Common Stock or cash through Stock Appreciation Rights ("SAR's"); and (c) cash
through Tax Benefit Rights ("TBR's") (collectively, the
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<PAGE> 14
"Awards"). Only employees are eligible to receive ISO grants. The following
description of the Equity Plan is a fair and complete summary; however, it is
qualified in its entirety by reference to the full text of the Plan which is
available from the Company.
GENERAL
Purpose. The Equity Plan is intended to encourage the Company's key employees
and directors to acquire an equity interest in the Company, which thereby will
create a stronger incentive to expend maximum effort for the growth and success
of the Company. Funds received under the Equity Plan may be used for any
general corporate purpose.
Eligibility. All employees and directors of the Company are eligible to
participate in the Equity Plan.
Shares Available under the Plan. The Equity Plan authorizes the issuance of up
to 600,000 shares of Common Stock. The maximum number of shares which may be
acquired under the Equity Plan by any individual is 300,000 shares. However,
the number of shares issuable under the Equity Plan will be adjusted for stock
dividends, stock splits, reclassifications and other changes affecting the
Company's Common Stock. Because the Equity Plan provides for discretionary
grants of Awards, the specific number of shares to be granted to particular
persons cannot be determined in advance.
Administration. The Equity Plan is administered by the Option Committee (the
"Committee"), whose members are appointed by the Board of Directors. The
Committee has the sole authority and discretion to select employees to
participate in the Equity Plan, to grant Awards, to specify the terms and
conditions of Awards granted within the limitations of the Plan and to
otherwise interpret and construe the terms of the Plan and any agreements
governing Awards granted under the Equity Plan. Members of the Committee are
eligible to receive Awards under the Equity Plan, provided that no Committee
member shall participate in the approval of Awards granted to him or her under
the Plan and any award to a Committee member must be ratified by the unanimous
vote of those members of the Board who are neither members of the Committee nor
employees of the Company.
STOCK GRANTED UNDER THE PLAN
The Committee may authorize the issuance of Stock Awards to key
employees or directors on such terms as the Committee shall determine.
OPTIONS GRANTED UNDER THE PLAN
General. All options granted under the Equity Plan will be evidenced by a
written agreement setting forth the terms and conditions governing the option.
The Committee has broad discretion to determine the timing, amount,
exercisability and other terms and conditions of options granted under the
Equity Plan. A participant shall have no rights as a stockholder with respect
to shares covered by the options until the date of issuance of shares to the
participant.
Types of Options. Both Incentive Stock Options and Non-Qualified Stock Options
are available under the Equity Plan. For Incentive Stock Options, the option
price shall be not less than the fair market value of a share of Common Stock
on the date the option is granted. However, if the employee receiving the
option is a more than 10% owner of the Company's Common Stock, the option price
shall not be less than the greater of par value or 110% of the fair market
value of a share of Common Stock on the date the option is granted. For
Non-Qualified Stock Options, the option price shall not be less than the par
value of the Common Stock.
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Exercise. Options granted under the Equity Plan may be exercised by delivery
to the Company of a written notice of exercise. The notice must specify the
number of shares being exercised and must be accompanied by payment in full of
the option price for the shares being exercised (unless the optionee's written
notice of exercise directs that the stock certificates for the shares issued
upon the exercise be delivered to a licensed broker acceptable to the Company
as the agent for the optionee and at the time the stock certificates are
delivered to the broker, the broker will tender to the Company cash or cash
equivalents acceptable to the Company equal to the exercise price).
The option price may be paid (a) in cash or certified check; (b) by
tendering shares of Common Stock the optionee has held for at least 6 months or
acquired under an option granted not less than 6 months prior, and which shall
be valued at the fair market value on the date of exercise; (c) by causing the
Company to withhold shares otherwise issuable equal in value to the option
price or any portion thereof; or (d) with any combination of these methods. An
optionee shall not have any of the rights of a shareholder until payment in
full for the shares is received and a stock certificate is issued.
The Committee may prescribe in the option agreement that the optionee
may elect to satisfy any Federal, state or local withholding tax requirements
by directing the Company to apply shares of Common Stock, to which the optionee
is entitled as a result of the exercise of the option, in order to satisfy such
withholding requirements.
Termination of Employment. After termination of employment, other than by
reason of death, disability or retirement, any unexercised options shall be
canceled, however, the optionee may exercise any options which have not expired
and which are otherwise exercisable within three months after such termination.
If the optionee retires, all options become fully vested and the optionee may
exercise any unexpired options within three months after retirement. If the
optionee dies while employed by the Company or within three months after
retirement from the Company, any unexpired options granted under the Plan may
be exercised by the optionee's estate or legatee within one year after the
optionee's death. If the optionee terminates employment due to disability, the
optionee may exercise any unexpired options within one year of such
termination.
Term of Options. Each option granted under the Equity Plan will terminate no
later than 10 years after the date the option is granted. However, options
intended to be Incentive Stock Options granted under the Equity Plan will
expire no later than 5 years after the date of the grant if the option is
granted to an employee who owns (or is deemed to own) more than 10% of the
outstanding Common Stock. The Committee will establish a vesting schedule in
each participant's written agreement. The Committee may accelerate the
exercisability of any options granted under the Equity Plan. In the event of a
merger, consolidation or sale of the Company which is (a) approved by the Board
of Directors and (b) contemplated that, upon the completion of such
transaction, the Company's stockholders will own less than 35% of the surviving
corporation, then all options granted under the Equity Plan will automatically
become fully exercisable.
Transferability. Incentive Stock Options granted under the Equity Plan are not
assignable or transferable, other than by will or in accordance with the laws
of descent and distribution. During the participant's lifetime, the Incentive
Stock Options are only exercisable by the participant. Non-Qualified Stock
Options may be transferable, at the discretion of the Committee, if the option
agreement so provides.
STOCK APPRECIATION RIGHTS GRANTED UNDER THE PLAN
General. A Stock Appreciation Right is the right to receive from the Company,
upon surrender of an option or a portion thereof without payment to the
Company, an amount equal to the fair market value on the exercise date of the
total number of shares of Common Stock for which the SAR is exercised, less the
exercise price which the participant would have otherwise been required to pay
upon purchase of the relevant shares.
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<PAGE> 16
Grant of Rights. Each SAR shall relate to a specific Non-Qualified Stock
Option granted under the Equity Plan and may be granted concurrently with the
option to which it relates or at any time prior to the exercise, termination or
expiration of such option. SAR's granted concurrently with options shall be
governed by the terms set forth in the Equity Plan and in the Stock Option
Agreement. SAR's not granted concurrently with options shall be governed by
the terms set forth in the Equity Plan and in a Stock Appreciation Rights
Agreement.
Exercise. Neither the SAR nor any related option may be exercised during the
first 6 months of their respective terms, but this 6-month restriction shall
not apply if the option holder dies or becomes disabled prior to the expiration
of the 6-month period. SARs are exercisable only to the extent the related NSO
is exercisable. Upon the exercise of a SAR, payment may be in cash or Common
Stock or a combination of both, as the Committee shall determine. The
Committee may limit the term or amount payable for a SAR at any time. Unless
the Committee determines otherwise, SARs are automatically exercised for a cash
settlement on the expiration of its original term.
TAX BENEFIT RIGHTS GRANTED UNDER THE PLAN
General. A Tax Benefit Right entitles the participant to receive from the
Company an amount in cash equal to the then-existing maximum statutory federal
income tax rates (including any surtax or similar charges or assessment) for
corporations, multiplied by the amount of ordinary income, if any realized by
the participant for federal income tax purposes as a result of the exercise of
an option granted under the Equity Plan.
Grant. Tax Benefit Rights are granted to such participants and on such terms
as the Committee may determine. A TBR may be granted only with respect to a
Non-Qualified Stock Option under the Equity Plan, and may be granted
concurrently with or after the grant of the NSO.
Exercise. The Committee shall determine the term and the amount payable for a
TBR at any time, and shall determine all other terms and provisions of any TBR
grant. TBR's expire or become exercisable to the extent of their underlying
options.
AMENDMENT OR TERMINATION OF THE PLAN.
The Board may amend or terminate the Equity Plan at any time, provided
however, that no amendment shall, without the approval of a majority of the
stockholders of the Company (a) materially change the eligibility requirements
for receiving Awards under the Equity Plan; (b) increase the aggregate number
of shares of Common Stock that may be issued pursuant to the Equity Plan or (c)
materially increase the benefits provided under the Equity Plan. In addition,
no amendment shall result in the failure of the Equity Plan or any Incentive
Stock Options granted thereunder to comply with Section 422 of the Internal
Revenue Code (the "Code") or shall adversely affect any option granted prior to
the amendment under the Equity Plan, except where such amendment or termination
is required by statute, or rules and regulations promulgated thereunder, or
otherwise permitted under the Plan. The Equity Plan will terminate no later
than 10 years after its effective date.
INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE PLAN
The following is a general summary of the Federal income tax treatment
of options granted under the Plan based upon the current provisions of the Code
and regulations promulgated thereunder.
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Incentive Stock Options. Incentive Stock Options granted under the Plan are
intended to meet the requirements of Code section 422. No tax consequences
result from the grant of the option. If an option holder acquires stock upon
the exercise, no income will be recognized by the option holder for ordinary
income tax purposes (although the difference between the option exercise price
and the fair market value of the stock subject to the option may result in
alternative minimum tax liability to the option holder). The Company will be
allowed no deduction as a result of the exercise, if the following conditions
are met: (a) at all times during the period beginning with the date of the
granting of the option and ending on the day three months before the date of
such exercise, the option holder is an employee of the Company; and (b) the
option holder makes no disposition of the Stock within two years from the date
the option is granted nor within one year after the stock is transferred to the
option holder. In the event of a sale of such stock by the option holder after
compliance with these conditions, any gain realized over the price paid for
stock will ordinarily be treated as long-term capital gain, and any loss will
be treated as a long-term capital loss, in the year of the sale.
If the option holder fails to comply with the employment or holding
period requirements discussed above, the option holder will recognize ordinary
income in an amount equal to the lesser of (i) the difference between the fair
market value of the Common Stock received upon exercise and the option exercise
price or (ii) the excess of the amount realized upon such disposition over the
exercise price. If the option holder is treated as having received ordinary
income because of his failure to comply with either condition above, an
equivalent deduction will be allowed to the Company in the same year.
Non-Qualified Stock Options. No tax consequences result from the grant of the
option. An option holder who exercises a Non-Qualified Stock Option with cash
generally will realize compensation taxable as ordinary income in an amount
equal to the difference between the fair market value of the option shares on
the date of exercise and the option exercise price, and the Company will be
entitled to a deduction from income in the same amount. The option holder's
basis in such shares will be the fair market value on the date exercised, and
when the shares are disposed of, capital gain or loss, either long-term or
short-term, will be recognized depending on the holding period of the shares.
SHAREHOLDER APPROVAL
The amendments to the Equity Plan must be approved by the Stockholders
in order for the Equity Plan to continue to qualify under the Internal Revenue
Code. The Board of Directors has unanimously approved the amendments to the
1986 Equity Participation Plan, all of whom are current members of the Board
of Directors. Unless otherwise instructed, it is the intention of the persons
named in the accompanying form of proxy to vote shares represented by properly
executed proxies for the ratification and approval of the amendments to the
1986 Equity Participation Plan. If Stockholders fail to approve the amendments
to the Equity Plan, the Company will be foreclosed from granting Incentive
Stock Options under the Plan, which will limit the Company's ability to
attract, retain and motivate key employees. THE BOARD RECOMMENDS THAT YOU VOTE
FOR THE RATIFICATION AND APPROVAL OF THE AMENDMENTS TO THE 1986 EQUITY
PARTICIPATION PLAN.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has appointed KPMG Peat Marwick LLP to continue
as its independent certified public accountants and to examine the financial
statements of the Company for the current fiscal year. Representatives of KPMG
Peat Marwick LLP are expected to be present at the Meeting with the opportunity
to make a statement if they so desire, and are expected to be available to
respond to appropriate questions.
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OTHER BUSINESS
At the present time, management knows of no other business which will
be presented for action at the Meeting. If any other business requiring a vote
of the stockholders should come before the Meeting, the persons designated as
proxies will vote or refrain from voting in accordance with their best
judgment.
STOCKHOLDER PROPOSALS FOR THE
1997 ANNUAL MEETING OF STOCKHOLDERS
Stockholder proposals to be presented at the 1997 Annual Meeting of
Stockholders must be received in writing by the Secretary of the Company at the
Company's principal executive offices no later than February 28, 1997 in order
to be included in the Company's proxy materials relating to that meeting.
REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended March 31, 1996 is available to
stockholders without charge upon written request. Exhibits to Form 10-K will be
furnished upon payment of $.50 per page, with a minimum charge of $5.00. Send
requests to Polk Audio, Inc., 5601 Metro Drive, Baltimore, MD 21215, Attention:
Gary B. Davis, Treasurer.
SOLICITATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors of the
Company and the cost of soliciting proxies for the meeting will be borne by the
Company. Proxies may be solicited by officers, directors, and regular executive
employees of the Company, none of whom will receive any additional compensation
for their services. Solicitation of proxies may be made personally, or by
mail, telephone, telegraph or messenger. The Company will pay persons holding
shares of Common Stock in their names or in the names of nominees, but not
owning such shares beneficially, such as brokerage houses, banks and other
fiduciaries, for the expense of forwarding soliciting materials to their
principals.
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APPENDIX INDEX
1-A 1986 Equity Participation Plan of Polk Audio, Inc.
1-B Excerpt from Minutes of Meeting of the Board of Directors and Option
Committee relating to the proposed amendments to the 1986 Equity
Participation Plan
<PAGE> 20
APPENDIX 1-A
<PAGE> 21
AS AMENDED AUGUST 3, 1992
1986 EQUITY PARTICIPATION PLAN
OF
POLK AUDIO, INC.
1. PURPOSE
This plan, which shall be known as the "1986 Equity Participation
Plan" (the "Plan"), is intended to attract, retain and motivate key employees
and/or directors of Polk Audio, Inc. (the "Company") and of any subsidiaries
presently existing or which may be formed in the future, by providing them with
a means to acquire a proprietary interest or to increase their proprietary
interest in the Company's success.
The term "key employee(s)" when used in this Plan shall include
officers, executives, and supervisory personnel, as well as other employees who
make a valuable contribution to the Company.
The word "Company" when used in the Plan shall include
subsidiaries of the Company. The word "subsidiary" when used herein shall mean
any corporation a majority of the voting stock of which is owned directly or
indirectly by the Company.
2. ADMINISTRATION
The Plan shall be administered by a Committee appointed by the
Board of Directors of the Company (the "Committee"). The Committee shall
consist of not less than three members. The members of the committee as of the
date of this amendment are George M. Klopfer, Matthew S. Polk, Jr., and Craig
C. Georgi. The Board of Directors may from time to time remove members from or
add members to the Committee. Vacancies on the Committee, howsoever caused,
shall be filled by additions made by the Board of Directors. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as it may determine. The Committee shall act by majority
agreement of its members or by written consent signed by a majority of its
members.
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<PAGE> 22
Members of the committee shall not be ineligible to receive
benefits or stock options under this Plan or any other plan of the Company or
any of its affiliates solely by reason of their membership on the Committee,
provided that the award of an option under this Plan to a member of the
Committee shall be approved as provided in Section 3.2.4.
The Committee is authorized, subject to the provisions of the
Plan, from time to time to establish such rules and regulations and to appoint
such agents as it deems appropriate for the proper administration of the Plan,
and to make such determinations under, and such interpretations of, and to take
such steps in connection with the Plan or the options granted hereunder as it
deems necessary or advisable. The Committee shall, from time to time, award
options upon such terms and conditions as it deems necessary, subject to the
provisions of the Plan. The total amount of Common Stock which may be
delivered on exercise of options granted under the Plan (the "Options") and
which may be issued as award shares (the "Stock Awards") shall not exceed in
the aggregate Six Hundred Thousand (600,000) shares of the Company's authorized
Common Stock, $0.01 per share par value.
3. STOCK OPTIONS
3.1 Option Shares. The stock to be issued upon exercise of the
Options under the Plan shall be shares of the Company's Common Stock and may be
either authorized and unissued shares or issued shares held in the treasury of
the Company. Such number of shares is subject to adjustment in accordance with
the provisions of Section 7 hereof. The shares involved in the unexercised
portion of any terminated or expired options under the Plan may again be
subjected to options under the Plan.
3.2 Award of Options.
3.2.1 The Committee, at any time and from time to time,
may grant options under the Plan to any key employee or director of the Company
(the "Optionee") for such numbers of shares as the Committee shall designate,
subject to the provisions of this Section 3. The date on which an option shall
be granted shall be the date of the Committee's authorization
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<PAGE> 23
of such grant or such later date as may be determined by the Committee at the
time such grant is authorized. At the time of the grant of each option under
the Plan, the Committee shall determine whether such option is to be designated
a nonqualified option, an incentive stock option (within the meaning of Section
422A of the Internal Revenue Code of 1986 as amended (the "Code")) or a
combination of both; provided, however, that directors which are not also
employees of the Company shall not be eligible to receive incentive stock
options. Any Optionee at any one time and from time to time may hold more than
one option granted under the Plan or under any other stock plan of the Company.
3.2.2 In the case of an incentive stock option, the
aggregate fair market value (determined as of the date of grant) with respect
to which incentive stock options are exercisable for the first time by an
Optionee in any calendar year (under all stock option plans of the Company and
its subsidiaries) shall not exceed One Hundred Thousand Dollars ($100,000), or
such other amount which may be permitted under the Code from time to time.
3.2.3 Each option shall be evidenced by a stock option
agreement (the "Stock Option Agreement") in such form and containing such
provisions not inconsistent with the provisions of the Plan as the Committee
from time to time shall approve.
3.2.4 No member of the Committee shall participate in
the approval of options granted to him or her under this Plan. The award of
any option to a member of the Committee shall be ratified by the unanimous vote
or written consent of those members of the Board of Directors who are neither
members of the Committee nor employees of the Company. Notwithstanding Section
3.2.1, the date on which an option granted to a member of the Committee shall
be the date of the ratification of such grant by the Board of Directors.
3.3 Option Price. The price of each option granted pursuant to
this Plan shall be determined by the Committee in its sole and absolute
discretion, including a price below fair market value per share as that term is
hereinafter defined. In the case of a non-qualified stock option, the option
price shall not be less than eighty-five percent (85%) of the fair market value
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<PAGE> 24
per share on the date of the grant. In the case of an incentive stock option,
the option price shall not be less than one hundred percent (100%) of the fair
market value per share on the date of grant. However, in the event that an
incentive stock option is granted to an employee who, at the time of the grant,
owns stock representing more than ten percent (10%) of the voting power of all
the classes of stock of the Company, the option price shall be not less than
one hundred ten percent (110%) of the fair market value of the stock subject to
the option at the time the option is granted.
During any time the Company's Common Stock is not listed upon an
established stock exchange, the fair market value per share shall be the
reported "bid" price of the Common Stock in the over-the-counter market on the
date preceding the date of the grant as reported by the National Association of
Securities Dealers, Inc. If the stock is listed upon an established stock
exchange or exchanges, its fair market value shall be deemed to be the highest
closing price of the Company's Common Stock on that stock exchange or exchanges
on the date preceding the date of the grant, or, if no sale of the Company's
Common Stock shall have been made on any stock exchange on that day, then on
the next preceding day on which there was a sale.
3.4 Term of Option. The term of each option granted pursuant
to this Plan shall not exceed ten years and, further, in the event of an
incentive stock option is granted to an employee who, at the time of the grant,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company, no option shall be exercisable more than five
years from the date it is granted.
3.5 Effect of Termination of Employment, Death or Disability.
3.5.1 In the event of the termination of employment of
an Optionee (otherwise than by reason of death, disability or retirement of the
Optionee, as described below), any option or options granted to the Optionee
under the Plan to the extent not theretofore exercised shall be deemed canceled
and terminated forthwith, except that, such Optionee may exercise any options
theretofore granted which have not expired and which are otherwise
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<PAGE> 25
exercisable within three (3) months after such termination. If the employment
of an Optionee shall be terminated by reason of the Optionee's retirement by
the Company, the Optionee shall have the right to exercise such option or
options held by the Optionee to the extent that such options have not expired,
at any time within three (3) months after such retirement. Upon Optionee's
retirement by the Company, all options held by an Optionee shall be immediately
exercisable in full. The transfer of an Optionee from the employ of the
Company to a subsidiary corporation or vice versa or from one subsidiary
corporation of the Company to another shall not be deemed to constitute a
termination of employment for purposes of this Plan.
3.5.2 In the event that an Optionee shall die while
employed by the Company or shall die within three (3) months after retirement
by the Company, any option or options granted to him under the Plan and not
theretofore exercised or expired shall be exercisable by the estate of the
Optionee or by any person who has acquired such option by bequest or
inheritance from the Optionee at any time within one (1) year of the death of
the Optionee.
3.5.3 In the event of the termination of employment of
an Optionee by reason of Optionee's disability, the Optionee shall have the
right to exercise all options held to the extent that options have not
previously expired or been exercised at any time within one year after such
termination. The term "disability" shall, for the purposes of this Plan, be
defined in the same manner as such term is defined in Section 105(d)(4) of the
Code.
3.5.4 Whether any leave of absence shall constitute
termination of employment for the purposes of any option granted under the Plan
shall be determined in each case by the Committee in its sole discretion.
3.6 Payments for Options. The option price shall become
immediately due upon exercise of the option and shall be payable in full in
cash or cash equivalents; provided, however, that the Committee shall have the
authority, exercisable at its discretion, either at the time the
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<PAGE> 26
option is granted or at the time it is exercised, to make the option price
payable in one or more of the alternative forms specified below:
3.6.1 full payment in shares of Common Stock having a
fair market value on the date of exercise equal to the option price; or
3.6.2 a combination of shares of Common Stock valued at
fair market value on the date of exercise and cash or cash equivalent, equal in
the aggregate to the option price.
4. STOCK AWARDS
The Committee may authorize the issuance of Stock Awards to such
key employees and directors and on such terms as the Committee shall determine.
The Committee shall determine the types of awards made, the number of shares
and any other terms, conditions or restrictions relating to the awards as it
may deem appropriate.
5. STOCK APPRECIATION RIGHTS
The Committee may grant stock appreciation rights covering shares
of Common Stock ("SARs") to such Optionees and on such terms as the Committee
shall determine. A SAR may be granted only in tandem with a related
nonqualified stock option under the Plan, and may be granted concurrently with
or after the grant of the stock option, but neither the SAR nor any related
option may be exercised during the first six (6) months of their respective
terms (this limitation shall not apply in the event death or disability of the
Optionee occurs prior to the six-month period). A SAR shall entitle the
Optionee to receive, in lieu of exercising the related stock option, a payment
equal to the excess of the fair market value of the shares of Common Stock
covered by the SAR on the date of exercise over the exercise price for such
shares. A SAR shall be exercisable only to the extent that the related stock
option is exercisable. The base from which the value of the SAR is measured at
its exercise shall be the purchase price under the related stock option.
Payment may be made in cash or shares of Common Stock or a combination of both,
as the Committee shall determine in its sole discretion. The Committee may
cancel or place a limit on the term of or the amount payable for any SAR at any
time. The
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<PAGE> 27
Committee shall determine all other terms and provisions of any SAR grant.
Unless the Committee shall otherwise determine, to the extent a SAR is
exercisable, it will be exercised automatically for a cash settlement on the
expiration date of its original term. Upon exercise of a SAR as to some or all
of the shares covered by the grant and payment in accordance with the
Committee's determination, the related stock option (including any related tax
benefit right) shall be canceled automatically to the extent of the number of
shares covered by such exercise. Conversely, if the related stock option is
exercised as to some or all of the shares covered by the grant, the related
SAR, if any, shall be canceled automatically to the extent of the number of
shares covered by the stock option exercise.
SARS may only be exercised when there is a positive spread i.e.
when the fair market value of the shares subject to the option exceeds the
option price under the related option.
6. TAX BENEFIT RIGHTS
The Committee may grant tax benefit rights ("TBRs") to such
Optionees and on such terms as the Committee shall determine. A TBR may be
granted only with respect to a nonqualified stock option under the Plan, and
may be granted concurrently with or after the grant of the stock option. A TBR
shall entitle an Optionee to receive from the Company an amount in cash equal
to the then existing maximum statutory federal income tax rates (including any
surtax or similar charge or assessment) for corporations, multiplied by the
amount of ordinary income, if any, realized by the Optionee for Federal income
tax purposes as a result of the exercise of an option granted under the Plan.
The Committee may cancel or place a limit on the term of or the amount payable
for any TBR at any time. The Committee shall determine all other terms and
provisions of any TBR grant.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The total number of shares of Common Stock which may be purchased
on exercise of options granted under the Plan, the total number of shares of
Common Stock for which options may be granted under the Plan to any one
individual and option rights (both as to the number of
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<PAGE> 28
shares of Common Stock and the option price) shall be appropriately adjusted by
the committee for any increase or decrease in the number of outstanding shares
of Common Stock resulting from a stock dividend, stock split or combination of
shares or reclassification. In the event of a merger or consolidation of the
Company, the Committee may make such adjustments with respect to options or
take such other actions as it deems necessary or appropriate to reflect on in
anticipation of or in connection with such merger or consolidation including,
without limitation, the substitution of new options.
8. TRANSFERABILITY
No option or related SAR or TBR granted pursuant to this Plan
shall be transferable by an Optionee and any option granted pursuant to this
Plan shall be exercisable only by such Optionee except as set forth in Section
3.5.2.
9. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN
The Board of Directors, upon recommendation of the Committee or at
its own discretion, at any time may terminate, and at any time and from time to
time, and in any respect, may amend or modify, the Plan; provided, however,
that no such action of the Board of Directors shall, without the approval of
the stockholders, take any action which would result in the failure of the Plan
and the incentive stock options granted thereunder to comply with Section 422A
of the Code. No amendment, modification or termination of the Plan shall in
any manner adversely affect any option theretofore granted under the Plan
without the consent of the Optionee.
10. FINALITY OF DETERMINATIONS
The interpretation and construction by the Committee of any
provisions of the Plan or of any stock option under it shall be final unless
otherwise determined by the Board of Directors. No members of the Board of
Directors or the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any option granted under it.
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<PAGE> 29
11. WITHHOLDING
The Company shall withhold any and all employment taxes required
to be withheld by Federal, State or local law from, or with respect to, any
stock, cash or other property distributed or paid to any Optionee under this
Plan. If a distribution is to be made in stock or property other than cash,
the Company shall have the right to withhold a sufficient amount of such
Optionee's wages, or require that the Optionee make a direct cash payment to
the Company, sufficient to discharge the Company's withholding obligations
under applicable law. Until the Company has discharged its withholding
obligations, it shall have the right to refuse the issuance of, or delivery of,
the stock for which the option has been exercised. The Company may make such
other arrangements as it deems reasonable or convenient, consistent with this
Plan, to discharge its withholding obligations under applicable law.
12. RIGHT TO CONTINUED EMPLOYMENT
Nothing in this Plan shall confer on an Optionee or a recipient of
a stock award any right to continue in the employ of the Company or any
subsidiary, or affect in any way the right of the Company to terminate such
person's employment at any time.
13. GOVERNING LAW
The Plan and all agreements hereunder shall be construed in
accordance with and governed by the laws of the State of Maryland.
14. EFFECTIVE DATE
The initial effective date of this Plan was May 21, 1986. The
effective date of the first amendment to this Plan is June 13, 1990. The
effective date of the second amendment to this Plan is August 3, 1992.
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<PAGE> 30
APPENDIX 1-B
<PAGE> 31
POLK AUDIO, INC.
EXCERPT FROM MINUTES OF MEETING OF THE BOARD OF DIRECTORS AND
THE OPTION COMMITTEE ESTABLISHED PURSUANT TO
THE RESTATED 1986 EQUITY PARTICIPATION PLAN
I. AMENDMENTS TO THE 1986 EQUITY PARTICIPATION PLAN.
The 1986 Equity Participation Plan (the "Plan") was originally adopted
by the Board of Directors of Polk Audio, Inc. (the "Company") and approved by
the stockholders of the Company on May 21, 1986. The Plan has been amended
from time to time since its initial adoption. On March 25, 1996, the Board of
Directors authorized the amendment of the Plan in order to extend the term of
the Plan for an additional 10 years (until 2006) and to increase the
flexibility of the Plan.
RESOLVED: The effective as of March 25, 1996, the Plan shall
be amended as follows:
1. No grants shall be made under the Plan after March
24, 2006.
2. The maximum number of shares which may be granted to
any one individual under the Plan is 300,000 shares.
3. The Amendment shall include the following provisions
relating to the exercise of options granted thereunder:
An Option which is exercisable may be exercised by delivery
to the Company on any business day, at its principal office addressed
to the attention of the Treasurer, of written notice of exercise.
Such notice shall specify the number of shares for which the Option
is being exercised and shall be accompanied by payment in full of the
option price of the shares for which the Option is being exercised.
Payment in full of the Option price need not accompany the written
notice of exercise provided the notice directs that the stock
certificates for the shares issued upon the exercise be delivered to
a licensed broker acceptable to the Company as the agent for the
individual exercising the option and at the time the stock
certificates are delivered to the broker, the broker will tender to
the Company cash or cash equivalents acceptable to the Company equal
to the exercise price.
Payment of the option price for the shares of Common Stock
purchased pursuant to the exercise of an Option shall be made as
follows:
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<PAGE> 32
(a) in cash or by certified check payable to the
order of the Company;
(b) through the tender to the Company of shares of
Common Stock, which must have been held by the individual exercising
the option for at least six months at the time of surrender or must
have been acquired under a grant not less than six months prior to
the time of surrender and which shall be valued, for purposes of
determining the extent to which the option price has been paid, at
their fair market value on the date of exercise;
(c) to the extent permitted by applicable law, by
causing the Company to withhold shares of Common Stock otherwise
issuable pursuant to exercise of an Option equal in value to the
option price or any portion thereof; or
(d) by a combination of the foregoing methods or any
other method that the Committee may allow.
Notwithstanding the preceding, the Committee may, in its
discretion, impose such limitations or prohibitions on the methods of
exercise as the Committee deems appropriate. Promptly after the
exercise of an Option and the payment in full of the option price of
the shares of Common Stock covered thereby, the individual exercising
the Option shall be entitled to the issuance of a stock certificate
or certificates evidencing such individual's ownership of such
shares. A separate stock certificate or certificates shall be issued
for any shares purchased pursuant to the exercise of an Option which
is an Incentive Stock Option, which certificate or certificates shall
not include any shares which were purchased pursuant to the exercise
of an Option which is not an Incentive Stock Option. An individual
holding or exercising an Option shall have none of the rights of a
stockholder until the shares of Common Stock covered thereby are
fully paid and issued to such individual and no adjustment shall be
made for dividends or other rights for which the record date is prior
to the date of such issuance.
4. Notwithstanding any provision of the Plan to the contrary, effective
March 25, 1996, the Committee may, in its discretion, expressly
provide that an option, whether granted before or after March 26,
1996, may be transferred to (i) members of the immediate family of the
optionee (children, grandchildren, or spouse); (ii) trusts for the
benefit of such family members; or (iii) partnerships whose only
partners are such family members. No consideration may be paid for
any such transfer of options.
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<PAGE> 33
PROXY
POLK AUDIO, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
1996 ANNUAL MEETING OF STOCKHOLDERS
THE OFFICES OF PIPER & MARBURY L.L.P., 2ND FLOOR
36 SOUTH CHARLES STREET, BALTIMORE, MARYLAND 21201
MONDAY, AUGUST 5, 1996, 9:00 A.M. EDT
The undersigned hereby appoints MATTHEW S. POLK, JR. and GEORGE M. KLOPFER,
jointly and severally, proxies, with full power of substitution, to represent
and vote all shares of Common Stock which the undersigned would be entitled to
vote at the 1996 Annual Meeting of Stockholders of Polk Audio, Inc., and any
adjournments or postponements thereof, upon any matters which may properly be
brought before such Meeting, provided that said shares shall be voted as
specified on the matter referred to on the reverse side which is more fully set
out in the Proxy Statement dated June 28, 1996.
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE).
- FOLD AND DETACH HERE -
<PAGE> 34
<TABLE>
<S> <C> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2: PLEASE MARK
YOUR VOTE AS X
INDICATED IN
THIS EXAMPLE
</TABLE>
<TABLE>
<S> <C>
ITEM 1 - ELECTION OF DIRECTORS: Nominees: Matthew S. Polk, Jr.; George M. Klopfer; Craig C. Georgi;
Wilbert H. Sirota; Robert B. Barnhill, Jr.
</TABLE>
<TABLE>
<S> <C> <C>
FOR ALL NOMINEES WITHHOLD
LISTED TO THE RIGHT AUTHORITY (To withhold authority to vote for any individual nominee, write that nominee's
(EXCEPT AS MARKED TO VOTE FOR ALL NOMINEES name below.)
TO THE CONTRARY) LISTED TO THE RIGHT
------------------------------------------------------------------------------
/ / / /
</TABLE>
<TABLE>
<S> <C>
ITEM 2 - RATIFICATION AND APPROVAL OF THE AMENDMENTS TO THE 1986 EQUITY PARTICIPATION PLAN THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED AS DIRECTED
FOR AGAINST ABSTAIN BY THE UNDERSIGNED STOCKHOLDER.
/ / / / / / IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED FOR ITEM 1
AND FOR ITEM 2. THE APPOINTED
PROXIES MAY VOTE IN THEIR
DISCRETION, UPON MATTERS WHICH
MAY PROPERLY COME BEFORE THE
MEETING AND ANY ADJOURNMENTS
OR POSTPONEMENTS THEREOF.
Dated: , 1996
-------------------
-------------------------------
Signature
-------------------------------
Signature
Please sign exactly as name
appears hereon. Executors,
administrators, trustees etc.
should so indicate when
signing. If shares are held
jointly, each holder should
sign.
</TABLE>
- FOLD AND DETACH HERE -
