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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-14729
POLK AUDIO, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-0954180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 METRO DRIVE
BALTIMORE, MARYLAND 21215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(410) 358-3600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing bid price for the registrant's common stock,
as reported by the American Stock Exchange as of June 12, 1996, was
$12,052,019.
Number of shares of Common Stock of the registrant outstanding as of June 12,
1996: 1,797,035 SHARES
TOTAL NUMBER OF PAGES: 99
EXHIBIT INDEX STARTS ON PAGE: 19
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DOCUMENTS INCORPORATED BY REFERENCE
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LOCATION IN FORM 10-K INCORPORATED DOCUMENT
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PART II:
Item 5 - Market for Registrant's 1996 Annual Report to
Common Equity and Related Stockholders for the Fiscal
Stockholder Matters Year ended March 31, 1996
Item 6 - Selected Financial Data 1996 Annual Report
to Stockholders for the Fiscal
Year ended March 31, 1996
Item 7 - Management's Discussion 1996 Annual Report
and Analysis of Financial to Stockholders for the Fiscal
Condition and Results of Year ended March 31, 1996
Operation
Item 8 - Financial Statements and 1996 Annual Report
Supplementary Data to Stockholders for the Fiscal
Year ended March 31, 1996
PART III:
Item 10 - Directors and Executive Proxy Statement for the
Officers of the Registrant 1996 Annual Meeting
of Stockholders to be filed
within 120 days of the end of
the Company's fiscal year
Item 11 - Executive Compensation Proxy Statement for the
1996 Annual Meeting
of Stockholders to be filed
within 120 days of the end of
the Company's fiscal year
Item 12 - Security Ownership of Proxy Statement for the
Certain Beneficial 1996 Annual Meeting
Owners and Management of Stockholders to be filed
within 120 days of the end of
the Company's fiscal year
Item 13 - Certain Relationships Proxy Statement for the
and Related Transactions 1996 Annual Meeting
of Stockholders to be filed
within 120 days of the end of
the Company's fiscal year
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PART I
ITEM 1. BUSINESS
Polk Audio, Inc. ("Polk" or the "Company") was organized under the laws
of Maryland in 1972. Polk engineers, manufactures and markets high quality
loudspeaker systems intended for use in home audio and video entertainment
systems and in aftermarket automotive audio systems. The Company's loudspeaker
systems are marketed under the brand names Polk Audio and Eosone.
An electronic home entertainment system may consist of audio components
(such as record players, compact disc players, receivers, cassette decks, other
supporting electronics and loudspeakers) video components (such as televisions,
video-cassette recorders and videodisc players) or both audio and video
components combined in an integrated system which may incorporate technologies
such as Dolby(R) Pro-Logic(R), Dolby AC-3(R) and DSS(R) Satellite. The Company
emphasizes superior sound quality in promoting its products. The Company
intends to continue to both refine and improve its existing product lines and
add new models.
MARKETS
The Company believes that total sales to United States dealers of home
loudspeaker systems in 1996 were in excess of $300 million and that the total
sales to United States dealers of aftermarket automotive speaker systems (i.e.,
excluding products installed as original equipment in new cars) was
approximately $350 million in 1996. The Company believes that significant
markets for loudspeaker systems exist outside of the United States,
particularly in the advanced industrial nations including Canada, Western
Europe, Japan, Australia and certain other East Asian nations. The Company does
not possess reliable data on the size of the market for loudspeakers installed
as original equipment in automobiles.
Loudspeaker systems vary widely in price and performance, from
inexpensive products, available for as low as $70 per pair or less, offering
modest performance, to very expensive products costing $10,000 or more, which
reproduce recorded material as accurately as is technically feasible. Also,
complete audio component systems include the Company's loudspeakers and
electronic components from other manufacturers, typically ranging in retail
price from as little as $200 to more than $10,000.
PRODUCT LINES
Polk Audio
The Company manufactures, markets and sells eleven separate lines of
loudspeaker systems under the Polk Audio brand name.
The Signature Reference Theater "SRT" System was introduced during
fiscal 1996 and retails for $9,000 per system. This is Polk Audio's flagship
home theater system that incorporates five proprietary technologies, consists
of 35 active drive units housed in seven enclosures, including two 300 watt
powered subwoofers, and a Control Center with a wireless remote.
The Reference Theater or "RT" Series, introduced during fiscal 1996,
consists of 8 models and range in retail price from $280 to $1,000 per pair.
These are value-oriented, high-quality floor standing, bookshelf and rear
channel speaker systems designed to appeal to the quality-conscious consumer at
lower and medium prices. The RT product line feature both new component
subassemblies, developed through a joint
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effort with the Johns Hopkins University, and enhanced cosmetic design.
The "LS" Series, consisting of 4 models and ranging in retail price from
$600 to $1,700 per pair, are value-oriented, high-quality floor standing
speaker systems designed to appeal to the quality-conscious consumer at medium
prices. These product lines were introduced during fiscal 1993 and are sold
primarily in the Company's export markets.
The M Series, consisting of four models with three more planned for
fiscal 1997, are known as the Multi-application Studio Monitor M3II, the M5,
the All Weather M3II and the All Weather M5. The M3II, introduced in fiscal
1995, is an improved version of the original M3 introduced during fiscal 1992.
The M5, introduced in 1995, is a larger version of the very popular M3II. M
series models may be employed as the primary speaker in a quality high fidelity
system, a video surround speaker, or a remote speaker in a secondary location.
These products range in retail price from $250 to $450 per pair.
The Center Channel/Video loudspeaker series (CS series) introduced in
fiscal 1992 consists of four models. These products are magnetically shielded
for use with video applications and are designed for use in increasingly
popular home theater, 5-channel Dolby(R) Pro Logic(R) surround-sound systems.
The CS models range in retail price from $200 to $450 per speaker.
The Home self-powered (active) Sub-woofer series (PSW series), consists
of 2 models ranging in retail price from $550 to $800 per unit. These systems
were introduced during fiscal 1995 and incorporate patented High Velocity
Compression Drive technology. These products have been very well received and
are commonly used as enhancements in home-theater applications. The PSW models
may either be purchased separately or packaged with the popular RM Series
satellites and center channel speaker.
The Reference Monitor or "RM" Series includes the RM-3000 Series II
3-piece subwoofer/satellite system, modified during fiscal 1995, with a retail
price of $850 per set; the RM-5000 4-piece passive subwoofer/satellite/center
channel system, modified during fiscal 1995, with a retail price of $1,100 per
set; and the RM7000 4-piece active subwoofer/satellite/center channel system
introduced in fiscal 1995, with a retail price of $1,350 per system. The RM
satellites, center channel and subwoofer components may also be purchased
separately. These are compact speaker systems designed to provide big-speaker
sound in a compact package and have shown increasing popularity in recent
years.
The Architectural Reference Series, presently consisting of six models,
range in retail price from approximately $150 to $570 per pair. These products
are designed to be installed directly into the walls or ceilings of the
consumers' homes, and are also suitable for certain types of commercial
applications. They are designed to be as unobtrusive as possible so as to avoid
clashing with the other decor of the environment in which they are installed.
The Company provides a line of accessory grilles for these products suitable
for outdoor installation.
The DB Series, consisting of ten models with more planned during fiscal
1997, are high-end, automotive full range and Subwoofer speakers systems sold
in the automotive aftermarket. The DB Series are sold as separate units or in
combination as systems and range in retail price from $150 per unit to $260
per system. This product line was introduced during fiscal 1996 and replaced
several products from the Mobile Monitor "MM" Series product line, introduced
in 1983.
The EX Series, consisting of twelve models, are automotive full range
and Subwoofer speakers systems at lower to medium prices also sold in the
automotive aftermarket. The EX Series, introduced in 1995, are sold as separate
units or in combination as systems and range in retail price from $60 to $240
per system. This product category was introduced to expand the Company's
product offerings in the after-market car stereo market.
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The MM Series, currently consisting of four models, are high-quality
automotive speakers sold in the aftermarket. The Mobile Monitors are sold as
separate units or in combination as systems and range in retail price from $100
per pair to $380 per system. These automotive systems were originally
introduced in 1983, and since then the product line has continuously been
expanded and improved.
Eosone
Eosone, founded in 1996, is a new line of home speaker systems
manufactured and marketed by the Company. Many of the systems incorporate
Radiant Surround Field (TM) technology, which uses drive units on the front and
rear of the cabinet enclosure to reproduce sound providing a wider sound field
for the listener.
The RSF Series, consisting of three models and ranging in retail price
from $700 to $2,200 per pair, are high-end floor standing speaker systems
incorporating Radiant Surround Field Technology. The RSF1000, which is the
flagship model in the RSF Series, incorporates a 120 watt power amplifier for
perfectly matched self amplification. All RSF models are designed to be used
for both music and home theater sound reproduction.
The RSP Series, consisting of two models and priced at $550 and $750
respectively, are home self-powered (active) Sub-woofer systems. The RSP
models may either be purchased separately or packaged with the RSS Series
satellites and center channel speaker to create a home theater system.
The Radiant Surround Center, or RSC300, retailing for $250 per speaker,
is a magnetically shielded center channel speaker for use with video
applications and is designed for use in home theater, 5-channel Dolby(R)
surround-sound systems.
The Radiant Surround Rear, or RSR350, retailing for $430 per pair, are
high-quality rear speaker systems designed for use with video applications and
are designed to maximize performance in use in increasingly popular home
theater technologies including 5-channel Dolby(R) Pro Logic(R) and AC-3(R)
Video surround-sound applications.
The Radiant Satellite System or "RSS" Series includes the RSS-702
3-piece subwoofer/satellite system with a retail price of $850 per set; the
RSS-703 4-piece subwoofer/satellite/center channel system with a retail price
of $1,000 per set; and the RSS-705 6-piece subwoofer/front and rear
satellite/center channel system with a retail price of $1,300 per set. The
satellite speakers are magnetically shielded and are also suitable for use in
home theater surround-sound systems. Each system includes the RSP910 active
subwoofer system.
RESEARCH AND DEVELOPMENT
Many of the Company's Polk Audio products incorporate innovative
features based on technology developed by or under the supervision of Matthew
S. Polk, Jr., the Company's Chairman. In addition, the Eosone product line was
designed jointly with Arnold Nudell, co-founder of Genesis Technologies, Inc.
(TM), pursuant to an engineering consulting agreement.
The Company is continuously engaged in the development of improved
manufacturing and quality testing technologies with the goal of improving
product quality and containing or reducing production costs. The Company
employs 23 persons full time in its product and process engineering programs.
The Company
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historically has, and may continue to, periodically subcontract for
out-of-house consulting and design expertise. The Company's expenditures for
research and development were approximately $3,266,000 for the fiscal year
ended March 31, 1996, $2,565,000 for the fiscal year ended March 26, 1995, and
$1,703,000 for the fiscal year ended March 27, 1994.
PATENTS AND TRADEMARKS
The Company, through its wholly-owned subsidiary, Britannia Investment
Corporation, a Delaware corporation ("BIC"), formerly Polk Investment
Corporation, is the holder of fifteen United States patents relating to various
aspects of loudspeaker design. The Company also holds three Canadian patents,
two United Kingdom patents one German patent and one Japanese patent through
BIC. The Company has patents pending in the U.S. and Japan.
Additionally, BIC holds several registered trademarks including but not
limited to Polk(R), Eosone(TM), Stereo/Dimensional Array(R), the Speaker
Specialists(R) and Radiant Surround Field(TM).
The Company believes that its ultimate growth, competitive position and
success in the marketplace are more dependent on its technical expertise and
marketing skills than upon the ownership of patent and trademark rights. While
the Company believes that the patent and trademark rights owned by BIC are
valuable, there can be no assurance that any such patents or trademark
registrations, as may now or hereafter exist, will ultimately be proven valid
if challenged nor can any assurance be given that any pending patent or
trademark applications will result in the actual granting and issuance of
patents or trademark registrations.
MARKETING
The Company's products are differentiated from competing products by
their sound quality, value, proprietary technology and styling. The Company
actively promotes and advertises its Polk Audio and Eosone brand name products
to stimulate consumers to seek out its products at related dealer outlets. The
Company carefully selects its dealers based on their knowledge of audio
products, marketing ability and financial strength, with the objective of
securing their long-term sales support for the Company's product lines.
The Company is selective in choosing its dealers because of its desire
to contract with dealers who will (1) maintain a high level of knowledge about
Polk's products among its sales staff, (2) enhance the quality image of the
Company's products and (3) remain loyal by making consistent efforts to sell
the Company's products to consumers.
DISTRIBUTION
Polk Audio
The Company's home products are selectively distributed in the United
States through approximately 340 dealers (some of which have multiple outlets),
that are typically audio or audio/video specialist retailers. The Company's
dealers usually stock and sell a broad variety of audio components including,
in most cases, competing loudspeaker product lines. Often the Company's
dealers also stock and sell automotive sound systems and video products. The
Company seeks dealers who emphasize quality products and are knowledgeable
about home entertainment products. The Company has written dealer agreements,
that,
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among other things, require the dealer to display the Company's products
properly and to employ sales staff who are knowledgeable about audio products.
Generally, the dealer agreements are nonexclusive and may be terminated by
either party on 30 days' notice.
The Company is selective in choosing its dealers because of its desire
to contract with dealers who will (1) maintain a high level of knowledge about
Polk's products among its sales staff, (2) enhance the quality image of the
Company's products and (3) remain loyal by making consistent efforts to sell
the Company's products to consumers.
The Company's products are sold to United States and NATO servicemen in
Europe and in the Pacific through the Army-Air Force Exchange System. They are
also exported through approximately 45 exclusive distributors to certain
foreign countries, including various European, South American and Asian
markets. The Company's sales to foreign customers were approximately
$8,847,000, $5,159,000 and $3,933,000 for the fiscal years ended March 31,
1996, March 26, 1995 and March 27, 1994, respectively.
The Company sells its DB, EX and MM Automotive Series products in the
United States through approximately 400 dealers, including autosound specialist
retailers and some of its regular home audio dealers.
During fiscal 1995, the Company established a field sales and
distribution operation in the United Kingdom and Germany. The operation was
established to provide enhanced service to the Company's distributors in its
European markets and currently sells directly to approximately 190 retailers in
the United Kingdom, the Netherlands and Germany with more planned during fiscal
1997.
In addition, during fiscal 1995, the Company established a field sales
operation in Canada to service its retailer base which was previously serviced
through a distributor. Currently, the Company sells directly to approximately
50 retailers in Canada with more planned during fiscal 1997.
Eosone
Eosone Products are sold in the USA exclusively through Best Buy Co.,
Inc.(R) (Best Buy), a large specialty retailer of consumer electronics with
approximately 260 stores located throughout the United States. These stores
offer a wide range of consumer electronics, personal computers, appliances and
entertainment software.
Pursuant to a dealer agreement between Best Buy and the Company, Best
Buy will continue to be the exclusive USA retailer of Eosone subject to
certain conditions, including but not limited to, the obligation of purchasing
a minimum quantity of Eosone products during fiscal 1997 and thereafter, and
providing in-store product displays and point-of-purchase sales materials.
ADVERTISING AND SALES PROMOTION
The Company advertises its products primarily in audio and or video
enthusiast-oriented publications such as Stereo Review, Audio, Video and Home
Theater Technology, the readers of which purchase audio products for themselves
and may influence the purchasing decisions of others. In addition to
advertising in magazines, Polk engages in other forms of promotion, including
descriptive literature available in the dealers' showrooms, point of purchase
sales aids, direct mail promotions and reader inquiry fulfillment programs.
Additionally, the Company offers its dealers market development and promotional
ad support to
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be used for local advertising and promotion. These resources are used for radio
and television advertising, newspaper and local magazine advertising, direct
mail and various other types of sales promotions.
The Company maintains a salaried sales force who service the Company's
dealers and train their sales personnel in the preferred techniques for selling
the Company's products. Military markets and certain geographical markets for
DB, EX and MM Automotive Series product lines are serviced by commissioned
manufacturer's representatives, who typically represent other manufacturers as
well as the Company.
PRICING AND CREDIT TERMS
The Company establishes its suggested retail prices after taking into
account production and operating costs and the prices of competitive products.
Pricing to Polk Audio dealers is based on a discount schedule from the
suggested retail prices. The Company will run temporary price promotions to
dealers in order to stimulate demand on certain products or to liquidate
slow-moving or obsolete products.
The Company's normal terms of sale for Domestic customers require payment
within 30 days from the invoice date, although the Company does provide
extended terms for promotional purposes of 90 days or more from invoice date.
A certain percentage of sales are financed by dealers through third party
floor-planning. Export transactions outside North America may be on a secured
basis, including, but not limited to, irrevocable letters of credit, or on an
unsecured basis depending on the customer size, financial strength and market
volatility. Payment terms for export transactions generally range from 60 to
90 days or more. The Company currently insures a portion of its accounts
receivable against uncollectability or the insolvency of the creditor.
From time to time, the Company has accepted returns of unsold products
from its dealers although, historically, returns of unsold products are
insignificant. The Company generally does not sell to its dealers on a
consignment basis.
COMPETITION
The market for branded loudspeaker systems is served by many
manufacturers, both foreign and domestic. Many products are available over a
broad price range and the market is highly fragmented and competitive. The
Company distributes its products primarily through specialty retailers,
although loudspeaker systems can also be purchased by consumers through mass
merchandisers, department stores, mail-order merchants and catalog showrooms.
The Company's principal competitors are other branded speaker
manufacturers, which compete with the Company for dealer support, display space
and untimately sales in retail outlets. These competitors include such firms
as Bose Corporation; JBL and Infinity (divisions of Harman International
Industries, Inc.); Acoustic Research and Advent (Divisions of International
Jensen, Inc.); Boston Acoustics, Inc.; Klipsch and Associates; Yamaha
Corporation and many others. Many of the Company's competitors have greater
technical and financial resources and greater brand recognition than the
Company.
In addition to competition from other branded loudspeaker manufacturers,
the Company's products must also compete with single-brand "rack", "mini" or
"shelf" systems, which contain all the components needed to form an audio/video
system, such as a receiver, cassette and/or compact disc player and
loudspeakers, which may also include a furniture "rack" to house the
components. Principal suppliers of rack and mini systems include Fisher (an
affiliate of Sanyo), Pioneer, Technics (a brand of Matsushita Electric), Denon,
Yamaha Corporation and many other, principally Asian, suppliers. Rack and mini
systems
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are generally sold through mass merchandisers and department stores, although
many of the Company's dealers also sell rack and mini systems. The Company's
products are sometimes included in dealer-assembled systems which compete
directly with rack systems in the Company's dealer outlets. The Company
believes that sales of rack and mini systems have been substantial in recent
years and that some of this success has been at the expense of the lower-priced
models offered by branded speaker manufacturers. However, rack and mini system
loudspeakers are typically of a much lower sonic quality than those supplied by
branded manufacturers such as the Company and are designed to appeal to less
demanding consumers. Because the Company is not heavily dependent for a large
portion of its sales and profits on inexpensive products that would compete
most directly with rack and mini systems and because the Company's sales of its
inexpensive products have generally increased in recent years, the Company
believes that its competitive position relative to rack systems continues to be
good.
The Company attempts to enhance its competitive position by (1)
producing technically advanced products which provide unique features and
superior price/performance characteristics, (2) supporting an active
engineering and research program, (3) maintaining an effective and motivated
network of dealers who actively promote the sale of the Company's products to
the consumer and (4) actively advertising and promoting its products.
MANUFACTURING PLANTS
The Company's products are manufactured at facilities located in
Baltimore, Maryland and in Tijuana, B.C., Mexico. In the Baltimore facility,
the Company performs final assembly of certain high-end home products,
warehousing and east-coast distribution. The Baltimore facility also houses
the Company's principal offices, sales and marketing operations and engineering
facilities. Pursuant to a contractual arrangement with Cal Pacifico, Inc. of
San Diego, California ("Cal"), and Cal's Subsidiary, Central de Ensambles,
S.A. de C.V.("CESA"), the Company operates an 111,000 square foot assembly,
woodworking and warehousing operation located in Tijuana, B.C., Mexico. Most
of the Company's manufacturing operations are housed in these Tijuana
facilities. The Company's contract with CPI requires the Company to compensate
Cal on a cost-plus-fee basis for substantially all of the direct costs of
operating the Tijuana facility. The Company has the right at any time to
purchase all the capital stock of CESA, or the assets of CESA, for nominal
consideration. CESA is qualified as a shelter operator under the Mexican
Maquiladora (Border Industries) Program for export industries.
SUPPLIERS
The Company purchases parts used in the manufacture and assembly of its
products from approximately 180 suppliers, most of whom are located in the
United States. The other suppliers of parts are located in Europe, South
America, Central America and the Far East. Although Polk has in the past
relied, in some cases, on single suppliers for certain parts, the Company
could, if necessary or desirable, develop multiple sources of supply for its
parts. The Company does not have long-term or exclusive purchase commitments
with its suppliers and no one supplier accounted for more than 26% of the total
purchases made by the Company in fiscal 1996.
With some exceptions, the Company currently manufactures all the
component subassemblies required for its various home loudspeaker system
models, however, it may elect in the future to purchase part or all of its
requirements in subassemblies from outside sources. The Company has imported
some fully assembled DB, EX and MM Series products. Such purchases decreased
from 20% of total purchases in fiscal 1995 to 17% in fiscal 1996. The Company
also purchases certain subassemblies from suppliers in Japan and Taiwan. These
subassembly units are incorporated into select finished products with final
testing
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done by the Company.
QUALITY CONTROL
Polk's manufacturing operation includes a program of quality testing at
each principal stage of subassembly and final assembly production. In some
cases the Company utilizes statistical sampling methods but, in many cases,
continues to test 100% of its component subassemblies and finished products in
addition to periodic quality audits of finished goods in inventory.
INVENTORY AND BACKLOG
The Company's current policy is to attempt to maintain sufficient
inventories of finished goods to fill all orders within two business days of
their receipt. However, the Company's backlog of unfilled orders may at times
rise significantly, either as a result of dealer orders following new product
introductions which exceed initial production, dealer orders for products which
are not yet in production, unforeseen fluctuations in demand, supply problems
or production problems. The Company's backlog was approximately $2,057,000 and
$1,296,000 at March 31, 1996 and March 26, 1995, respectively. The Company
anticipates the entire backlog as of March 31, 1996 to be filled during fiscal
1997.
WARRANTIES
The Company warrants its Polk Audio and Eosone products (excepting car
stereo products and active subwoofers) to the original retail purchaser to be
free from defects in materials and workmanship for a period of five years from
date of purchase by such original purchaser. The warranty period for DB, EX
and Mobile Monitor automotive products is one year, while the warranty period
for active subwoofer products ranges from one to five years. The warranty is a
"limited warranty" insofar as it (1) imposes certain shipping costs on the
consumer, (2) excludes cosmetic deficiencies, except for those evident when the
product is delivered, and (3) is not transferable. The Company's normal
practice is to have its dealers perform warranty service in the field, using
parts supplied on an exchange basis by the Company. The Company does not
normally reimburse the dealers for their labor in performing warranty service
on its products. If a consumer requiring warranty service does not have ready
access to a dealer, he may ship the product to the Company for warranty
service.
EMPLOYEES
As of June 14, 1996 the Company had approximately 140 full-time
employees who were engaged as follows:
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Production and warehousing 41
Engineering 24
Sales and marketing 53
Administrative 22
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None of the Company's employees are represented by a collective
bargaining unit and the Company believes its relations with its employees are
satisfactory. In addition to their base pay, Company employees
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receive a variety of fringe benefits, including health, life and disability
insurance, pension or profit-sharing plan participation, paid vacation,
holidays and leave time.
Except for the Company's one resident operations manager and four
managers representing engineering, quality assurance, manufacturing and general
plant services at the Tijuana facilities, all other employees at the Tijuana
facilities, including assemblers, supervisory and clerical personnel, who
numbered 209 persons in all on June 14, 1996, are CESA employees.
ITEM 2. PROPERTIES
In August, 1986, the Company moved its operations to a new 100,000
square foot leased facility located at 5601 Metro Drive, Baltimore, Maryland
21215. This facility currently houses the Company's engineering, sales and
administrative offices, east-coast distribution operations and certain
manufacturing operations for high-end finished systems and related warehousing.
In August, 1988, the Company and IMEC Corporation, which was the
predecessor of Cal, set up certain subassembly operations in a 23,000 sq. ft.
leased facility located in Parque Industrial La Mesa, Tijuana, B.C. Mexico. In
December, 1993 the Company and Cal expanded its operations into an additional
39,000 sq. ft. leased facility located in the same industrial park as the
original Tijuana facility. In November, 1994 the Company expanded its
operations further to include an additional 29,000 sq. ft. leased facility in
the same industrial park as both facilities noted above. In January, 1996, the
Company further expanded its operations to include an additional 20,000 sq. ft.
leased facility in the same industrial park as the three facilities noted
above. These facilities house the woodworking, cabinet assembly, transducer and
system assembly and certain warehousing functions of the Company.
In September, 1994, the Company entered into a lease for
approximately 33,000 sq. ft. located in San Diego, California. Located in this
facility are the Company's west-coast distribution operations and certain
quality assurance and warehousing operations. In March, 1996, to become
effective April 1, 1996, the Company expanded its operations in this building
to a total of approximately 49,500 sq. ft.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Incorporated by reference to the 1996 Annual Report to Stockholders.
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ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to the 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Incorporated by reference to the 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference to the 1996 Annual Report to Stockholders; see also
PART IV, Item 14 for a list of the Financial Statements and Schedules filed as
a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Company's Proxy Statement with respect to its
1996 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's Proxy Statement with respect to its
1996 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement with respect to its
1996 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
Page 12
<PAGE> 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's Proxy Statement with respect to its
1996 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
1. FINANCIAL STATEMENTS (INCORPORATED BY REFERENCE TO THE 1996
ANNUAL REPORT TO STOCKHOLDERS, PAGES 5 - 13):
- Independent Auditors' Report.
- Consolidated Balance Sheets as of March 31, 1996 and March
26, 1995.
- Consolidated Statements of Earnings for the fiscal years
ended March 31, 1996, March 26, 1995 and March 27, 1994.
- Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended March 31, 1996, March 26, 1995
and March 27, 1994.
- Consolidated Statements of Cash Flows for the fiscal years
ended March 31, 1996, March 26, 1995 and March 27, 1994.
- Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES (INCLUDED IN THIS REPORT):
- Independent Auditors' Report.
- Schedule II - Valuation and Qualifying Accounts for the
fiscal years ended March 31, 1996, March 26, 1995 and
March 27, 1994.
All other schedules have been omitted because required information is
not present or is not present in amounts sufficient to require
submission of schedules.
3. EXHIBITS
3.1 (*1) Articles of Amendment and Restatement of the Company
3.2 (*1) By-Laws of the Company
3.3 (*2) Articles of Amendment of the Company
10.1 * 1986 Equity Participation Plan as amended August 3,
1992
10.2 (*1) Exec-U-Care Medical Reimbursement Insurance Policy
10.3 (*1) Summary Description of Wage Continuation Plan
10.4 (*1) Agreement between Selling Stockholders and the
Company dated May 16, 1986
10.5 (*1) Stockholders' Buy-Sell Agreement dated May 22, 1986
10.6 (*1) Stockholders' Agreement Regarding Stock Transfers
Subsequent to Public Offering dated May 21, 1986
Page 13
<PAGE> 14
10.7 (*1) License Agreement between Carver Corporation and the
Company dated May 22, 1986
10.8 (*1) License Agreement between Marrs Development, Inc. and
the Company dated May 22, 1986
10.9 (*1) Lease by and between Klopfer Associates Limited
Partnership and the Company dated
September 23, 1985.
10.10 (*3) Lease Amendment by and between Klopfer Associates
Limited Partnership and the Company dated
September 23, 1993.
10.11 (*3) Services Agreement between Cal Pacifico of
California and the Company dated January 15, 1993.
10.12 (*3) Addendum to Services Agreement between Cal Pacifico
of California and the Company dated
September 3, 1993.
10.13 (*3) Commodatum Agreement between Cal Pacifico of
California, Central de Ensambles, S.A. de C.V.
and the Company dated August 4, 1993.
10.14 (*4) Financing Agreement dated November 30, 1994 by and
between NationsBank, N.A. and the Company.
10.15 (*4) $2,000,000 Term Note dated November 30, 1994 by and
between NationsBank, N.A. and the Company.
10.16 (*4) $5,000,000 Revolving Credit Note dated November 30,
1994 by and between NationsBank, N.A. and the
Company.
10.17 * First Amendment to Financing Agreement dated October
15, 1995 by and between NationsBank, N.A. and the
Company.
10.18 * Second Amendment to Financing Agreement dated March
22, 1996 by and between NationsBank, N.A. and the
Company.
10.19 * Lease by and between Otay Mesa Woodland Hills
Partnership and the Company dated July 1, 1994.
10.20 * First Lease Amendment by and between Otay Mesa
Woodland Hills Partnership and the Company
dated January 18, 1995.
10.21 * Second Lease Amendment by and between Otay Mesa
Woodland Hills Partnership and the Company dated
November 20, 1995.
10.22 * Third Lease Amendment by and between Woodland Hills
Partnership and the Company dated November 20, 1995.
10.23 * Assignment of Leases as of and between Woodland
Hills Properties-W, Inc. and Klopfer Associates
dated March 18, 1996.
10.24 * Form of full recourse promissory note executed by
participants under the 1986 Equity Participation
Plan in connection with the receipt of a loan from
the Company to Fund a cash exercise of stock
options under such plan.
10.25 * Form of pledge agreement executed by participants
under the 1986 Equity Participation Plan in
connection with promissory note referenced in
Exhibit 10.24.
11.1 * Statement re computation of per-share earnings
13.1 * Annual Report to Stockholders for the fiscal year
ended March 31, 1996.
21.1 * Subsidiaries of the Registrant
23.1 * Consent of KPMG Peat Marwick LLP, Independent
Auditors
27.1 * Financial Data Schedule
(*1) Incorporated by reference to the Company's Registration Statement
on Form S-1 Number 33-5961) filed with the Securities and
Exchange Commission on May 23, 1986, as amended.
Page 14
<PAGE> 15
(*2) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended March 31, 1991 filed with the Securities
and Exchange Commission on June 25, 1991.
(*3) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended March 27, 1994 filed with the Securities and
Exchange Commission on June 24, 1994.
(*4) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended March 26, 1995 filed with the Securities and
Exchange Commission on June 19, 1995.
(*) Filed herewith.
(B) REPORTS ON FORM 8-K
A Form 8-K was filed on June 14, 1996 to report the Company's trading
change from the Nasdaq National Market to the American Stock Exchange effective
June 6, 1996.
Page 15
<PAGE> 16
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, this 28th day of
June, 1996.
POLK AUDIO, INC.
By /s/ George M. Klopfer
--------------------------
George M. Klopfer
Chief Executive Officer
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ George M. Klopfer Chief Executive Officer June 28, 1996
- ------------------------- and Director
George M. Klopfer
/s/ Matthew S. Polk,Jr. Chairman of the Board, June 28, 1996
- ------------------------- Vice President and
Matthew S. Polk, Jr. Secretary and Director
/s/ James M. Herd President June 28, 1996
- -------------------------
James M. Herd
/s/Craig C. Georgi Vice President and June 28, 1996
- ------------------------- Director
Craig C. Georgi
/s/ Gary B. Davis Treasurer, Chief Financial Officer June 28, 1996
- ------------------------- and Chief Accounting Officer
Gary B. Davis
/s/ Wilbert H. Sirota Director June 28, 1996
- -------------------------
Wilbert H. Sirota
/s/Robert B. Barnhill,Jr. Director June 28, 1996
- -------------------------
Robert B. Barnhill, Jr.
</TABLE>
Page 16
<PAGE> 17
FINANCIAL STATEMENT SCHEDULES
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Polk Audio, Inc.:
Under date of May 14, 1996, we reported on the consolidated balance sheets of
Polk Audio, Inc. and subsidiaries as of March 31, 1996 and March 26, 1995, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial statement Schedule II -
Valuation and Qualifying Accounts for the fiscal years ended March 31, 1996,
March 26, 1995 and March 27, 1994. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
May 14, 1996
PAGE 17
<PAGE> 19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
POLK AUDIO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts(1) Deductions(2) of Period
- ----------- --------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996:
Allowance for doubtful accounts receivable . . $ 160,287 79,600 66,557 136,048 170,396
------------ ----------- ----------- ----------- -------------
FISCAL YEAR ENDED MARCH 26, 1995:
Allowance for doubtful accounts receivable . . $ 152,879 84,000 10,637 87,229 160,287
------------ ----------- ----------- ----------- -------------
FISCAL YEAR ENDED MARCH 27, 1994:
Allowance for doubtful accounts receivable . . $ 141,747 102,004 25,605 116,477 152,879
------------ ----------- ----------- ----------- -------------
</TABLE>
(1) Recovery of amounts previously charged off.
(2) Amounts charged off.
page 18
<PAGE> 20
EXHIBITS INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10.1 1986 Equity Participation Plan as amended August 3, 1992 20
10.17 First Amendment to Financing Agreement dated October 15, 1995 by and
between NationsBank, N.A. and the Company. 29
10.18 Second Amendment to Financing Agreement dated March 22, 1996 by and
between NationsBank, N.A. and the Company. 43
10.19 Lease by and between Otay Mesa Woodland Hills Partnership and the
Company dated July 1, 1994. 46
10.20 First Lease Amendment by and between Otay Mesa Woodland Hills Partnership
and the Company dated January 18, 1995. 57
10.21 Second Lease Amendment by and between Otay Mesa Woodland Hills Partnership
and the Company dated November 20, 1995. 60
10.22 Third Lease Amendment by and between Otay Mesa Woodland Hills Partnership
and the Company dated November 20, 1995. 62
10.23 Assignment of Leases as of and between Woodland Hills Properties-W, Inc. and
Klopfer Associates dated March 18, 1996. 64
10.24 Form or full recourse promissory note executed by participants under the 1986
Equity Participation Plan in connection with the receipt of a loan from the
Company to fund a cash exercise of stock options under such plan. 69
10.25 Form of pledge agreement executed by participants under the 1986 Equity
Participation Plan in connection with the receipt of a loan from the
Company to fund a cash exercise of stock options under such plan. 71
11.1 Statement re computation of per-share earnings 76
13.1 Annual Report to Stockholders for the fiscal year ended March 31, 1996. 77
21.1 Subsidiaries of the Registrant 97
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants 98
27.1 Financial Data Schedule 99
</TABLE>
Page 19
<PAGE> 21
EXHIBIT 10.1
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.
20
<PAGE> 22
EXHIBIT 10.1
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 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
21
<PAGE> 23
EXHIBIT 10.1
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
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
22
<PAGE> 24
EXHIBIT 10.1
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 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. Me transfer of an Optionee from the employ of the Company
to a subsidiary
23
<PAGE> 25
EXHIBIT 10.1
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 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
24
<PAGE> 26
EXHIBIT 10.1
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 Communittee
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 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.
25
<PAGE> 27
EXHIBIT 10.1
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 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.
26
<PAGE> 28
EXHIBIT 10.1
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.
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.
27
<PAGE> 29
EXHIBIT 10.1
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.
28
<PAGE> 30
EXHIBIT 10.17
FIRST AMENDMENT
TO
FINANCING AGREEMENT
THIS FIRST AMENDMENT TO FINANCING AGREEMENT (this "Agreement") is made
this 15th day of October, 1995, by and among POLK AUDIO, INC., a corporation
organized under the laws of the State of Maryland ("Polk Audio"), POLK
INVESTMENT CORP., a corporation organized under the laws of the State of
Delaware ("Polk Investment"), POLK INTERNATIONAL SALES CORPORATION, a
corporation organized under the laws of the United States Virgin Islands
("Polk International"), and POLK AUDIO EUROPE, INC., a corporation organized
under the laws of the State of Maryland ("Polk Europe") (each, a "Borrower";
collectively, the "Borrowers") and NATIONSBANK, N.A., a national banking
association (the "Lender").
RECITALS
A. The Borrowers and the Lender entered into a Financing
Agreement dated November 30, 1994 (the same, as amended, modified, substituted,
extended, and renewed from time to time, the "Financing Agreement"). Under the
terms of the Financing Agreement, the Lender provided the Revolving Loan (as
that term is defined in the Financing Agreement) in the maximum principal
amount of $5,000,000 (under which the Lender provides letters of credit not to
exceed $2,500,000 and revolving loans) and the Term Loan (as that term is
defined in the Financing Agreement) in the amount of $2,000,000.
B. The Borrowers have applied to the Lender for an increase in
the maximum amount of the Revolving Credit Loans to $6,500,000, under which the
Lender would provide also foreign exchange and interest rate contracts not to
exceed $100,000.
C. The Lender has approved the Borrowers' applications on the
terms and conditions set forth in this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, receipt of which is hereby acknowledged, the
Borrowers and the Lender agree as follows:
1. The Borrowers and the Lender agree that the Recitals above are
a part of this Agreement. Unless otherwise expressly defined in this
Agreement, terms defined in the Financing Agreement shall have the same meaning
under this Agreement.
2. The Financing Agreement is hereby amended as follows:
29
<PAGE> 31
EXHIBIT 10.17
(a) Section 1.1 of the Financing Agreement is amended by adding or
amending the following:
"Base Rate" means the Prime Rate or the LIBOR Floating Rate,
as applicable.
"Base Rate Loan" means any Loan for which interest is to be
computed with reference to a Base Rate.
"Foreign Exchange/Swap Agreement" means each foreign currency
forward contract or interest rate or currency swap agreement, cap,
floor, and collar agreement, or other similar agreement and
arrangement substantially in the form of the Lender's then standard
form foreign exchange agreements or such other form as may be approved
by the Lender, executed and delivered by the Borrowers, as the same
may from time to time be amended, restated, supplemented or modified
and "Foreign Exchange/Swap Agreements" means all of the foregoing in
effect at any time and from time to time.
"LIBOR Floating Rate" means the floating and fluctuating per
annum daily LIBOR rate of interest of the Lender, as established and
declared by the Lender at any time or from time to time, plus 175
basis points. The LIBOR Floating Rate shall be adjusted
automatically, without notice, as of the effective date of any change
in such daily LIBOR rate. The LIBOR Floating Rate does not
necessarily correspond to the LIBOR Base Rate.
"Revolving Credit Termination Date" means the earliest of (a)
October 31, 1997, (b) the date on which the Revolving Credit Note
matures (by acceleration or otherwise), or (c) the date on which the
Lender's obligation to make advances under the Revolving Loan is
terminated by the Lender following an Event of Default.
(b) Section 2.2.1 of the Financing Agreement is amended in its
entirety as follows:
2.2.1 Subject to and upon the provisions of this Agreement,
the Lender establishes a revolving credit facility in favor of the
Borrowers (the "Revolving Loan"). The outstanding principal balance
of the Revolving Loan shall at no time exceed $6,500,000 minus the
aggregate amount of all Obligations (fixed or contingent) with respect
to Letter of Credit Agreements among the Lender and any one or more of
the Borrowers minus the aggregate amount of all Obligations (fixed or
contingent) with respect to Foreign Exchange/Swap
30
<PAGE> 32
EXHIBIT 10.17
Agreements among the Lender and any one or more of the Borrowers. The
Lender's obligation to make advances under the Revolving Loan shall
terminate on the Revolving Credit Termination Date, and following a
Default or an Event of Default under this Agreement, may be limited,
suspended or terminated at the Lender's sole and absolute discretion
exercised from time to time.
(c) New Section 2.7 is added to the Financing Agreement as
follows:
2.7 Foreign Exchange/Swap Agreements.
2.7.1 Subject to and upon the provisions of this
Agreement, and as a part of the Revolving Loan facility, the Borrowers
may, upon the prior approval of the Lender, obtain Foreign
Exchange/Swap Agreements from October 15, 1995, through and
including the Business Day preceding the Revolving Credit Termination
Date. The Borrowers will not be entitled to enter obtain a Foreign
Exchange/Swap Agreement hereunder unless the Borrowers are then able
to obtain a Revolving Loan from the Lender in an amount not less than
the amount of the Foreign Exchange/Swap Agreement.
2.7.2 The Borrowers shall pay to the Lender any and
all customary issuance, negotiation, processing, transfer or other
fees to the extent and as and when required by the provisions of any
Foreign Exchange/Swap Agreement.
2.7.3 The Borrowers shall give the Lender written
notice at least three (3) Business Days prior to the date on which a
Foreign Exchange/Swap Agreement is requested to be opened of their
request for a Foreign Exchange/Swap Agreement. Such notice shall be
accompanied by a duly executed and delivered Foreign Exchange/Swap
Agreement, which would not cause all Obligations, on a risk adjusted
basis, relating to Foreign Exchange/Swap Agreements to exceed $100,000
and which would expire later than the Revolving Credit Expiration
Date. Upon receipt of the Foreign Exchange/Swap Agreement and the
corresponding fee, the Lender shall process such Foreign Exchange/Swap
Agreement in accordance with its customary procedures and enter into
such Foreign Exchange/Swap Agreement on the Business Day specified in
such notice.
3. Unless the Borrowers and the Lender agree otherwise from time to
time, (a) the LIBOR Floating Rate shall be the Base
31
<PAGE> 33
EXHIBIT 10.17
Rate applicable to the Revolving Loan, (b) the Borrowers may not elect for the
Revolving Loan an interest rate based on the LIBOR Base Rate, (c) the Prime
Rate shall be the Base Rate applicable to the Term Loan, and (d) the Borrowers
may, at the times and in the manner provided in the Financing Agreement, elect
for the Term Loan an interest rate based on the LIBOR Base Rate.
4. The Borrowers' obligation to repay the advances of the
Revolving Loan, as increased under Section 2(b) above, shall be evidenced by a
promissory note dated the same date as this Agreement in substantially the form
attached to this Agreement as EXHIBIT A-2 and in the aggregate principal amount
of $6,500,000 having a maturity date, repayment terms and interest rate as set
forth in EXHIBIT A-2, which promissory note shall be executed and delivered in
substitution for the Borrower's $5,000,000 Revolving Credit Note. References
in the Financing Agreement and the other Financing Documents to the "Revolving
Credit Note" shall mean that substituted promissory note.
5. The Borrowers hereby issue, ratify and confirm the
representations, warranties and covenants contained in the Financing Agreement,
as amended hereby. The Borrowers agree that this Agreement is not intended to
and shall not cause a novation with respect to any or all of the Obligations.
6. The Borrowers shall pay at the time this Agreement is executed
and delivered all fees, commissions, costs, charges, taxes and other expenses
incurred by the Lender and its counsel in connection with this Agreement,
including, but not limited to, reasonable fees and expenses of the Lender's
counsel and all recording fees, taxes and charges.
7. This Agreement may be executed in any number of duplicate
originals or counterparts, each of such duplicate originals or counterparts
shall be deemed to be an original and all taken together shall constitute but
one and the same instrument. The Borrowers agree that the Lender may rely on a
telecopy of any signature of any Borrowers. The Lender agrees that the
Borrowers may rely on a telecopy of this Agreement executed by the Lender.
IN WITNESS WHEREOF, the Borrowers and the Lender have executed this
Agreement under seal as of the date and year first written above.
<TABLE>
<S> <C>
WITNESS OR ATTEST: POLK AUDIO, INC.
[SIG] By: /s/ GEORGE M. KLOPFER (SEAL)
- ------------------------ -----------------------
George M. Klopfer,
President
</TABLE>
32
<PAGE> 34
EXHIBIT 10.17
<TABLE>
<S> <C>
WITNESS: POLK INVESTMENT CORP.
[SIG] By: /s/ GEORGE M. KLOPFER (SEAL)
- ------------------------ -------------------------
Name:
Title:
WITNESS: POLK INTERNATIONAL SALES
CORPORATION
[SIG] By: /s/ GEORGE M. KLOPFER (SEAL)
- ------------------------ -------------------------
Name:
Title:
WITNESS: POLK AUDIO EUROPE, INC.
[SIG] By: /s/ GEORGE M. KLOPFER (SEAL)
- ------------------------ -------------------------
Name:
Title:
WITNESS: NATIONSBANK, N.A.
[SIG] By: /s/ J. MATTHEW MACIVER, JR. (SEAL)
- ------------------------ ----------------------------
J. Matthew MacIver, Jr.
Commercial Banking Officer
</TABLE>
33
<PAGE> 35
EXHIBIT 10.17
REVOLVING CREDIT NOTE
$6,500,000 BALTIMORE, MARYLAND
OCTOBER 15, 1995
FOR VALUE RECEIVED, POLK AUDIO, INC., a corporation organized under
the laws of the State of Maryland, POLK INVESTMENT CORP., a corporation
organized under the laws of the State Of Delaware, POLK INTERNATIONAL SALES
CORPORATION, a corporation organized under the laws of the United States Virgin
Islands, and POLK AUDIO EUROPE, INC., a corporation organized under the laws of
the State of Maryland (collectively, the "Borrowers"), jointly and severally,
promise to pay to the order of NATIONSBANK, N.A., a national banking
association (the "Lender"), the principal sum of SIX MILLION FIVE HUNDRED
THOUSAND DOLLARS ($6,500,000) (the "Principal Sum"), or so much thereof as has
been or may be advanced/readvanced to or for the account of the Borrowers
pursuant to the terms and conditions of the Financing Agreement (as hereinafter
defined), together with interest thereon at the rate or rates hereinafter
provided, in accordance with the following:
1. INTEREST. (a) As used in this Note "Applicable Interest Rate"
means the LIBOR Floating Rate (as that term is defined in the Financing
Agreement). The Applicable Interest Rate shall be determined in the manner
provided in the Financing Agreement.
(b) Commencing as of the date hereof and continuing until
repayment in full of all sums due hereunder, the unpaid Principal Sum shall
bear interest at the Applicable Interest Rate.
34
<PAGE> 36
EXHIBIT 10.17
2. PAYMENTS AND MATURITY. The unpaid Principal Sum, together
with interest thereon at the rate or rates provided above, shall be payable as
follows:
(a) Interest only on the unpaid Principal Sum shall be
shall be paid at the times and in the manner set forth in the Financing
Agreement.
(b) Unless sooner paid, the unpaid Principal Sum, together
with interest accrued and unpaid thereon, shall be due and payable in full on
October 31, 1997.
The fact that the balance hereunder may be reduced to zero from time
to time pursuant to the Financing Agreement will not affect the continuing
validity of this Note or the Financing Agreement, and the balance may be
increased by the Borrower to the Principal Sum after any such reduction to
zero.
3. DEFAULT INTEREST. Upon the occurrence of an Event of Default
(as hereinafter defined), the unpaid Principal Sum shall bear interest
thereafter at a rate two percent (2%) per annum in excess of Applicable
Interest Rate until such Event of Default is waived or cured.
4. LATE CHARGES. If the Borrowers shall fail to make any
payment under the terms of this Note within fifteen (15) days after the date
such payment is due, the Borrowers shall pay to the Lender on demand a late
charge equal to five percent (5%) of such payment.
5. APPLICATION AND PLACE OF PAYMENTS. All payments, made on
account of this Note shall be applied first to the payment of any late charge
then due hereunder, second to the payment of any
35
<PAGE> 37
EXHIBIT 10.17
prepayment fee then due hereunder, third to the payment of accrued and unpaid
interest then due hereunder, and the remainder, if any, shall be applied to the
unpaid Principal Sum. All payments on account of this Note shall be paid in
lawful money of the United States of America in immediately available funds
during regular business hours of the Lender at its principal office in
Baltimore, Maryland or at such other times and places as the Lender may at any
time and from time to time designate in writing to the Borrowers.
6. PREPAYMENT. The Borrowers may prepay the Principal Sum upon
the terms and conditions set forth in the Financing Agreement.
7. FINANCING AGREEMENT AND OTHER FINANCING DOCUMENTS. This Note
is the "Revolving Credit Note" described in the First Amendment to Financing
Agreement dated the same date as this Note, which amends the Financing
Agreement dated November 30, 1994 (as amended by that First Amendment and as
amended, modified, restated, substituted, extended and renewed at any time and
from time to time, the "Financing Agreement") among the Borrowers and the
Lender and is one of the "Financing Documents" (as that term is defined in the
Financing Agreement). The indebtedness evidenced by this Note is included
within the meaning of the term "Obligations" as defined in the Financing
Agreement.
8. REMEDIES. Upon the occurrence of an Event of Default (as that
term is defined in the Financing Agreement), at the option of the Lender, all
amounts payable by the Borrowers to the Lender under the terms of this Note
shall immediately become due and payable by the Borrowers to the Lender without
notice to the
36
<PAGE> 38
EXHIBIT 10.17
Borrowers or any other person, and the Lender shall have all of the rights,
powers, and remedies available under the terms of this Note, any of the other
Financing Documents and all applicable laws. The Borrowers and all endorsers,
guarantors, and other parties who may now or in the future be primarily or
secondarily liable for the payment of the indebtedness evidenced by this Note
hereby severally waive presentment, protest and demand, notice of protest,
notice of demand and of dishonor and non-payment of this Note and expressly
agree that this Note or any payment hereunder may be extended from time to time
without in any way affecting the liability of the Borrowers, guarantors and
endorsers.
9. CONFESSED JUDGMENT. Upon the occurrence of an Event of
Default, each of the Borrowers hereby authorizes any attorney designated by the
Lender or any clerk of any court of record to appear for the Borrowers in any
court of record and confess judgment without prior hearing against each of the
Borrowers in favor of the Lender for and in the amount of the unpaid Principal
Sum, all interest accrued and unpaid thereon, all other amounts payable by the
Borrowers to the Lender under the terms of this Note or any of the other
Financing Documents, costs of suit, and attorneys' fees of fifteen percent
(15%) of the unpaid Principal Sum and interest then due hereunder. Each of the
Borrowers hereby releases, to the extent permitted by applicable law, all
errors and all rights of exemption, appeal, stay of execution, inquisition, and
other rights to which the Borrowers, or either of them, may otherwise be
entitled under the laws of the United States of
37
<PAGE> 39
EXHIBIT 10.17
America or of any state or possession of the United States of America now in
force and which may hereafter be enacted. The authority and power to appear
for and enter judgment against the Borrowers shall not be exhausted by one or
more exercises thereof or by any imperfect exercise thereof and shall not be
extinguished by any judgment entered pursuant thereto. Such authority may be
exercised on one or more occasions or from time to time in the same or
different jurisdictions as often as the Lender shall deem necessary or
desirable, for all of which this Note shall be a sufficient warrant.
10. EXPENSES. The Borrowers, jointly and severally, promise to
pay to the Lender on demand by the Lender all costs and expenses incurred by the
Lender in connection with the collection and enforcement of this Note,
including, without limitation, reasonable attorneys' fees and expenses and all
court costs.
11. NOTICES. Any notice, request, or demand to or upon the
Borrowers or the Lender shall be deemed to have been properly given or made
when delivered in accordance with the manner provided in the Financing
Agreement for the giving of notices.
12. MISCELLANEOUS. Each right, power, and remedy of the Lender as
provided for in this Note or any of the other Financing Documents, or now or
hereafter existing under any applicable law or otherwise shall be cumulative
and concurrent and shall be in addition to every other right, power, or remedy
provided for in this Note or any of the other Financing Documents or now or
hereafter existing under any applicable law, and the exercise or
38
<PAGE> 40
EXHIBIT 10.17
beginning of the exercise by the Lender of any one or more of such rights,
powers, or remedies shall not preclude the simultaneous or later exercise by
the Lender of any or all such other rights, powers, or remedies. No failure or
delay by the Lender to insist upon the strict performance of any term,
condition, covenant, or agreement of this Note or any of the other Financing
Documents, or to exercise any right, power, or remedy consequent upon a breach
thereof, shall constitute a waiver of any such term, condition, covenant, or
agreement or of any such breach, or preclude the Lender from exercising any
such right, power, or remedy at a later time or times. By accepting payment
after the due date of any amount payable under the terms of this Note, the
Lender shall not be deemed to waive the right either to require prompt payment
when due of all other amounts payable under the terms of this Note or to
declare an Event of Default for the failure to effect such prompt payment of
any such other amount. No course of dealing or conduct shall be effective to
amend, modify, waive, release, or change any provisions of this Note.
13. PARTIAL INVALIDITY. In the event any provision of this Note
(or any part of any provision) is held by a court of competent jurisdiction to
be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision (or
remaining part of the affected provision) of this Note; but this Note shall be
construed as if such invalid, illegal, or unenforceable provision (or part
thereof)
39
<PAGE> 41
EXHIBIT 10.17
had not been contained in this Note, but only to the extent it is invalid,
illegal, or unenforceable.
14. CAPTIONS. The captions herein set forth are for convenience
only and shall not be deemed to define, limit, or describe the scope or intent
of this Note.
15. APPLICABLE LAW. Each of the Borrowers acknowledges and agrees
that this Note shall be governed by the laws of the State of Maryland, even
though for the convenience and at the request of the Borrowers, this Note may
be executed elsewhere.
16. CONSENT TO JURISDICTION. Each of the Borrowers irrevocably
submits to the jurisdiction of any state or federal court sitting in the State
of Maryland over any suit, action, or proceeding arising out of or relating to
this Note. Each of the Borrowers irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of venue of any such suit, action, or proceeding brought in any such court and
any claim that any such suit, action, or proceeding brought in any such court
has been brought in an inconvenient forum. Final judgment in any such suit,
action, or proceeding brought in any such court shall be conclusive and binding
upon the Borrowers and may be enforced in any court in which the Borrowers are
subject to jurisdiction by a suit upon such judgment provided that service of
process is effected upon the Borrowers as provided in this Note or as otherwise
permitted by applicable law.
17. SERVICE OF PROCESS. Each of the Borrowers hereby consents to
process being served in any suit, action, or proceeding
40
<PAGE> 42
EXHIBIT 10.17
instituted in connection with this Note by (i) the mailing of a copy thereof by
certified mail, postage prepaid, return receipt requested, to the Borrowers
and (ii) serving a copy thereof upon William H. Sirota, the agent hereby
designated/the agent hereinabove designated and appointed by the Borrowers as
the Borrowers' agent for service of process. The Borrowers irrevocably agree
that such service shall be deemed in every respect effective service of process
upon the Borrowers in any such suit, action or proceeding, and shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon the Borrowers. Nothing in this Section shall affect the right of the
Lender to serve process in any manner otherwise permitted by law or limit the
right of the Lender otherwise to bring proceedings against the Borrowers in
the courts of any jurisdiction or jurisdictions.
18. WAIVER OF TRIAL BY JURY. EACH OF THE BORROWERS HEREBY WAIVES
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWERS, OR EITHER OF
THEM, AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO
(A) THIS NOTE OR (B) THE FINANCING DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT
THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL
PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE
NOT PARTIES TO THIS NOTE.
THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE
BORROWERS, AND THE BORROWERS HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT
OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY
JURY OR TO IN ANY WAY MODIFY OR
41
<PAGE> 43
EXHIBIT 10.17
NULLIFY ITS EFFECT. THE BORROWERS FURTHER REPRESENT THAT THEY HAVE BEEN
REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD
THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
IN WITNESS WHEREOF, the Borrowers have caused this Note to be executed
under seal by their duly authorized officers as of the date first written
above.
<TABLE>
<S> <C>
WITNESS OR ATTEST: POLK AUDIO, INC.
[SIG] By: /s/ GEORGE M. KLOPFER, (SEAL)
- ----------------------- -------------------------
George M. Klopfer,
President
WITNESS: POLK INVESTMENT CORP.
[SIG] By: /s/ GEORGE M. KLOPFER, (SEAL)
- ----------------------- -------------------------
Name: George M. Klopfer
Title: President
WITNESS: POLK INTERNATIONAL SALES CORPORATION
[SIG] By: /s/ GEORGE M. KLOPFER, (SEAL)
- ----------------------- -------------------------
Name: George M. Klopfer
Title: President
WITNESS: POLK AUDIO EUROPE, INC.
[SIG] By: /s/ GEORGE M. KLOPFER, (SEAL)
- ----------------------- -------------------------
Name: George M. Klopfer
Title: President
</TABLE>
42
<PAGE> 44
EXHIBIT 10.18
SECOND AMENDMENT
TO
FINANCING AGREEMENT
THIS SECOND AMENDMENT TO FINANCING AGREEMENT (this "Agreement") is
made this 22nd day of March, 1996, by and among POLK AUDIO, INC., a corporation
organized under the laws of the State of Maryland ("Polk Audio"), POLK
INVESTMENT CORP., a corporation organized under the laws of the State of
Delaware ("Polk Investment"), POLK INTERNATIONAL SALES CORPORATION, a
corporation organized under the laws of the United States Virgin Islands ("Polk
International"), and POLK AUDIO EUROPE, INC., a corporation organized under the
laws of the State of Maryland ("Polk Europe") (each, a "Borrower";
collectively, the "Borrowers") and NATIONSBANK, N.A., a national banking
association (the "Lender").
RECITALS
A. The Borrowers and the Lender entered into a Financing
Agreement dated November 30, 1994 (the same, as amended, modified, substituted,
extended, and renewed from time to time, the "Financing Agreement"). Under the
terms of the Financing Agreement, the Lender provided the Revolving Loan (as
that term is defined in the Financing Agreement) in the maximum principal
amount of $5,000,000 (under which the Lender provides letters of credit not to
exceed $2,500,000 and revolving loans) and the Term Loan (as that term is
defined in the Financing Agreement) in the amount of $2,000,000.
B. The Lender increased in the maximum amount of the Revolving
Credit Loans to $6,500,000, under which the Lender would provide also foreign
exchange and interest rate contracts not to exceed $100,000, pursuant to a
First Amendment to Financing Agreement dated October 15th, 1995 by and among
the Borrowers and the Lender (the "First Amendment").
C. The Borrowers have requested and the Lender has agreed to
amend the financial covenants, among other things, on the terms and
conditions set forth in this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, receipt of which is hereby acknowledged, the
Borrowers and the Lender agree as follows:
1. The Borrowers and the Lender agree that the Recitals above are
a part of this Agreement. Unless otherwise expressly
43
<PAGE> 45
EXHIBIT 10.18
defined in this Agreement, terms defined in the Financing Agreement shall have
the same meaning under this Agreement.
2. The Financing Agreement is hereby amended as follows:
(a) Section 1.1 of the Financing Agreement is hereby
amended by amending the following:
"Fixed Charge Coverage Ratio" means the sum of
operating income before interest and taxes, plus depreciation
and amortization, plus lease payments made to parties related
to the Borrowers (including the Seton and Britannia leases);
the sum thereof to be divided by the sum of interest payments,
plus lease payments made to parties related to the Borrowers
(including the Seton and Brittannia leases), plus the current
maturity of the long term debt of the Borrowers (but excluding
the current portion, if any, of amounts drawn under the
Revolving Loan) plus dividends paid on the common stock of
Polk Audio to its shareholders (but excluding intercompany
dividends among the Borrowers).
(b) Section 5.2.4 of the Financing Agreement is hereby
amended as follows:
5.2.4 Fixed Charge Coverage Ratio. The Borrowers
will maintain, tested as of the last day of each of the
Borrowers' fiscal quarters for the four (4) quarter period
ending on that date, a Fixed Charge Coverage Ratio of not less
than 1.60 to 1.0.
3. The Borrowers hereby issue, ratify and confirm the
representations, warranties and covenants contained in the Financing Agreement,
as amended hereby. The Borrowers agree that this Agreement is not intended to
and shall not cause a novation with respect to any or all of the Obligations.
4. The Borrowers shall pay at the time this Agreement is executed
and delivered all fees, commissions, costs, charges, taxes and other expenses
incurred by the Lender and its counsel in connection with this Agreement,
including, but not limited to, reasonable fees and expenses of the Lender's
counsel and all recording fees, taxes and charges.
5. This Agreement may be executed in any number of duplicate
originals or counterparts, each of such duplicate originals or counterparts
shall be deemed to be an original and all taken together shall constitute but
one and the same instrument. The Borrowers agree that the Lender may rely on
a telecopy of any signature of any Borrowers. The Lender agrees
44
<PAGE> 46
EXHIBIT 10.18
that the Borrowers may rely on a telecopy of this Agreement executed by the
Lender.
IN WITNESS WHEREOF, the Borrowers and the Lender have executed this
Agreement under seal as of the date and year first written above.
<TABLE>
<S> <C>
WITNESS OR ATTEST: POLK AUDIO, INC.
DEBORAH J. SMITH By: /s/ GEORGE M. KLOPFER (SEAL)
- --------------------- -------------------------
George M. Klopfer, CEO
WITNESS: POLK INVESTMENT CORP.
DEBORAH J. SMITH By: /s/ GEORGE M. KLOPFER (SEAL)
- --------------------- -------------------------
Name: George M. Klopfer
Title: CEO
WITNESS: POLK INTERNATIONAL SALES CORPORATION
DEBORAH J. SMITH By: /s/ GEORGE M. KLOPFER (SEAL)
- --------------------- -------------------------
Name: George M. Klopfer
Title: CEO
WITNESS: POLK AUDIO EUROPE, INC.
DEBORAH J. SMITH By: /s/ GEORGE M. KLOPFER (SEAL)
- --------------------- -------------------------
Name: George M. Klopfer
Title: CEO
WITNESS: NATIONSBANK, N.A.
By: (SEAL)
- --------------------- -------------------------
J. Matthew MacIver, Jr.
Assistant Vice President
</TABLE>
45
<PAGE> 47
EXHIBIT 10.19
BUSINESS CENTER LEASE
<TABLE>
<S> <C>
1. BASIC LEASE TERMS
a. DATE OF LEASE EXECUTION: July , 1994
-------------------------------------------------------------------------------------------------
b. TENANT: POLK AUDIO, INC., A MARYLAND CORPORATION
------------------------------------------------------------------------------------------------------------------
Trade Name:
--------------------------------------------------------------------------------------------------------------
Address (Leased Premises): 2550 Brittannia Boulevard, San Diego, CA 92173
-----------------------------------------------------------------------------------------------
Building: Unit: 11 AND 12
------------------------------------------------------------------------------------------------ ----------
Address (For Notices): 5101 METRO DRIVE BALTIMORE MD 21215
---------------------------------------------------------------------------------------------------
ATT- GEORGE M. KLOPFER, PRESIDENT
-------------------------------------------------------------------------------------------------------------------------
c. LANDLORD: Otay Mesa WHP #1, a California Ltd. Partnership
---------------------------------------------------------------------------------------------------------------
Address (For Notices): c/o Voit Companies, 2382 Faraday Avenue, Suite 110, Carlsbad, CA
---------------------------------------------------------------------------------------------------
92008
-------------------------------------------------------------------------------------------------------------------------
d. TENANT'S USE OF PREMISES: AS SET FORTH IN SECTION 29 HEREOF
-----------------------------------------------------------------------------------------------
e. PREMISES AREA: -16,442- Rentable Square Feet
--------------------------------------------------------------------------------------
f. PROJECT AREA: 146,207 Square Feet
-------------------------------------------------------------------------------------------------
g. PREMISES PERCENT OF PROJECT: 11.25%
--------------------------------------------------------------------------------------------
h. TERM OF LEASE: Commencement SEPT. 1, 1994 Expiration FEB 26, 1997
----------------------------- ----------------------------------------------------
Number of Months 30
----------------------------
i. BASE MONTHLY RENT: $ 4,768.--
-------------------------------------------------------------------------------------------------------
j. RENT ADJUSTMENT (Initial One):
(1) Cost of Living. The cost of living provisions of section 4.b(1)apply.
(2) Step Increase. The step adjustment provisions of Section 4.b(2) apply as follows:
Effective Date of New
Rent increase Monthly Rent
SEPT 1, 1995 $5,097.--
------------ ------------
k. ANNUAL EXPENSE BASE:
Expense Rate $1.09 MAX EXPENSES SHALL NOT
-------------
Premises Area Square Feet X16,442 EXCEED $1,480 PER
-------------
Annual Expense Base $17,757.00 MONTH.
-------------
l. PREPAID RENT:9/94 $6,248.--
-------------
m. TOTAL SECURITY DEPOSIT: $ 6,248.-- INCLUDING A $ 0 non-refundable cleaning fee.
------------------------ ------------------------------
n. BROKER(S): Grubb & Ellis and Scher-Voit
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
o. GUARANTORS:
None
-------------------------------------------------------------------------------------------------------------------------
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</TABLE>
p. ADDITIONAL SECTIONS
Additional sections of this lease numbered 28 through 33 are attached
hereto and made a part hereof. If none, so state in the following
space______________________________.
q. ADDITIONAL EXHIBITS
Additional exhibits lettered C through _________________ are attached
hereto and made a part hereof. If none, so state in the following
space None
46
<PAGE> 48
EXHIBIT 10.19
2. PREMISES: Landlord leases to Tenant the premises described in Section 1
and in Exhibit A (the "Premises"), located in this project described on
Exhibit B (the "Project"). Landlord reserves the right to modify Tenant's
percentage of the Project as set forth in Section 1 if the Project size
is increased through the development of additional property. By entry on
the Premises, Tenant acknowledges that it has examined the Premises and
accepts the Premises in their present condition, subject to any
additional work Landlord has agreed to do.
3. TERM. The term of this Lease is for the period set forth in Section 1,
commencing on the date in Section 1. If Landlord, for any reason, cannot
deliver possession of the Premises to Tenant upon commencement of the
term, this Lease shall not be void or voidable, nor shall Landlord be
liable to Tenant for any loss or damage resulting from such delay. In
that event, however, there shall be a rent abatement covering the period
between the commencement of the term and the time when Landlord delivers
possession to Tenant, and all other terms and conditions of this Lease
shall remain in full force and effect, provided, however, that if
Landlord cannot deliver possession of the Premises to Tenant, this Lease
shall be void. If a delay in possession is caused by Tenant's failure to
perform any obligation in accordance with this Lease, the term shall
commence as set forth in Section 1 and there shall be no reduction of
rent between the commencement of the term and the time Tenant takes
possession.
4. RENT.
a. BASE RENT. Tenant shall pay Landlord monthly base rent in the
initial amount in Section 1 which shall be payable monthly in
advance on the first day of each and every calendar month ("Base
Monthly Rent") provided, however, the first month's rent is due and
payable upon execution of this Lease. If the term of this Lease
contains any rental abatement period. Tenant hereby agrees that if
Tenant breaches the Lease and/or abandons the Premises before the
end of the Lease term, or if Tenant's right to possession is
terminated by Landlord because of Tenant's breach of the Lease,
Landlord shall, at its option, (1) void the rental abatement period;
and (2) recover from Tenant, in addition to any damages due Landlord
under the terms and conditions of the Lease, rent prorated for the
duration of the rental abatement period at a rental rate equivalent
to two (2) times the Base Monthly Rent.
For purposes of Section 467 of the Internal Revenue Code, the
parties to this Lease hereby agree to allocate the stated rents,
provided herein, to the periods which correspond to the actual rent
payments as provided under the terms and conditions of this
agreement.
b. RENT ADJUSTMENT.
2) STEP INCREASE. Section 1.j(2) is initialed, Base Monthly Rent
shall be increased periodically to the amounts as at the times
set forth in Section 1.j(2).
c. EXPENSES. The purpose of this Section 4.c is to ensure that Tenant
bears a share of all Expenses related to the use, maintenance,
ownership, repair or replacement, and insurance of the Project.
Accordingly, beginning on the date Tenant takes possession of the
Premises, Tenant shall pay to Landlord that portion of Tenant's
share of Expenses related to the Project which is in excess of the
Annual Expense Base shown in Section 1.
1) EXPENSES DEFINED. The term "Expenses" shall means all costs
and expenses of the ownership, operation, maintenance, repair
or replacement, and insurance of the Project, including without
limitation, the following costs:
(a) All supplies, materials, labor, equipment, and utilities
used in or related to the operation and maintenance of the
Project;
(b) All maintenance, management, janitorial, legal,
accounting, insurance, and service agreement costs related
to the Project;
(c) All maintenance, replacement and repair costs relating to
the areas within or around the Project, including, without
limitation, air conditioning systems, sidewalks,
landscaping, service areas, driveways, parking areas,
(including resurfacing and restriping parking areas),
walkways, building exteriors (including paintings), signs
and directories, repairing and replacing roofs, walls,
etc. These costs may be included either based on actual
expenditures or the use of an accounting reserve based on
past cost experience for the Project.
47
<PAGE> 49
EXHIBIT 10.19
(d) Amortization (along with reasonable financing charges) of
capital improvements made to the Project which may be
required by any governmental authority or which will
improve the operating efficiency of the Project (provided,
however, that the amount of such amortization for
improvements not mandated by government authority shall
not exceed in any year the amount of costs reasonably
determined by Landlord in its sole discretion to have been
saved by the expenditure either through the reduction or
minimization of increases which would have otherwise
occurred).
(e) Real Property Taxes including all taxes, assessments
(general and special) and other impositions or charges
which may be taxed, charged, levied, assessed or imposed
upon all or any portion of or in relation to the Project
or any portion thereof, any leasehold estate in the
Premises or measured by rent from the Premises, including
any increase caused by the transfer, sale or encumbrance
of the Project or any portion thereof. "Real Property
Taxes" shall also include any form of assessment, levy,
penalty, charge or tax (other than estate, inheritance,
net income or franchise taxes) imposed by any authority
having a direct or indirect power to tax or charge,
including, without limitation, any city, county, state,
federal or any improvement or other district, whether such
tax is (1) determined by the area of the Project or the
rent or other sums payable under this Lease; (2) upon or
with respect to any legal or equitable interest of
Landlord in the Project or any part thereof; (3) upon this
transaction or any document to which Tenant is a party
creating a transfer in any interest in the Project; (4) in
lieu of or as a direct substitute in whole or in part of
or in addition to any real property taxes on the Project;
(5) based on any parking spaces or parking facilities
provided in the Project; or (6) in consideration for
services, such as police protection, fire protection,
street, sidewalk and roadway maintenance, refuse removal
or other services that may be provided by any governmental
or quasi-governmental agency from time to time which were
formerly provided without charge or with less charge to
property owners or occupants.
2) ANNUAL ESTIMATE OF EXPENSES. When Tenant takes possession of
the Premises, Landlord shall estimate Tenant's portion of
Expenses for the remainder of the calendar year based on the
Tenant's portion of the Project Area set forth in Section 1. At
the commencement of each calendar year thereafter, Landlord
shall estimate Tenant's portion of Expenses for the coming year
based on the Tenant's portion of the Project Area set forth in
Section 1.
3) MONTHLY PAYMENT OF EXPENSES. If Tenant's portion of said
estimate of Expenses shows an increase for the remainder of the
calendar year over the Annual Expense Base, as set forth in
Section 1, Tenant shall pay to Landlord, as additional rent,
such estimated increase in monthly installments of one-twelfth
(1/12) beginning on the date Tenant takes possession of the
Premises. If Tenant's portion of said estimate of Expenses
shows an increase for subsequent calendar years over the Annual
Expense Base, as set forth in Section 1, Tenant shall pay to
Landlord, as additional rent, such estimated increase in monthly
installments of one-twelfth (1/12) beginning on January 1 of
the forthcoming calendar year, and one-twelfth (1/12) on the
first day of each succeeding calendar month. As soon as
practical following each calendar year, Landlord shall prepare
an accounting of actual Expenses incurred during the prior
calendar year and such accounting shall reflect Tenant's share
of Expenses. If the additional rent paid by Tenant under this
Section 4.c.3 during the preceding calendar year was less than
the actual amount of Tenant's share of Expenses, Landlord shall
so notify Tenant and Tenant shall pay such amount to Landlord
within 30 days of receipt of such notice. Such amount shall be
deemed to have accrued during the prior calendar year and shall
be due and payable from Tenant even though the term of this
Lease has expired or this Lease has been terminated prior to
Tenant's receipt of this notice. Tenant shall have thirty (30)
days from receipt of such notice to contest the amount due;
failure to so notify Landlord shall represent final
determination of Tenant's share of expenses. If Tenant's
payments were greater than the actual amount, then such
overpayment shall be credited by Landlord to all present rent
due under this Section 4.c.3.
4. RENT WITHOUT OFFSET AND LATE CHARGE. All rent shall be paid by
Tenant to Landlord monthly in advance on the first day of every
calendar month, at the address shown in Section 1, or such
other place as Landlord may designate in writing from time to
time. All rent shall be paid without prior demand or notice and
without any deduction or offset whoever. All rent shall be paid
in lawful currency of the United States of America. All rent
due for any partial month shall be prorated at the rate of
1/30th of the total monthly rent per day. Tenant acknowledges
that late payment by Tenant to Landlord of any rent or other
sums due under this Lease will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of such costs
being extremely difficult and impracticable to ascertain. Such
costs include, without limitation, processing and accounting
charges and late charges that may be imposed on Landlord by the
terms of any encumbrance or note secured by the Premises.
Therefore, if any rent or other sum due from Tenant is not
received when due, Tenant shall pay to Landlord an additional
sum equal to 10% of such overdue payment. Landlord and Tenant
hereby agree that such late charge represents a fair and
reasonable estimate of the costs the Landlord will incur by
reasons of any such late payment and that the late charge is in
addition to any and all remedies available to the Landlord and
the assessment and/or collection of the late charge shall not
be deemed a waiver of any other default. Additionally, all such
delinquent rent or other sums, plus this late charge, shall
bear interest at the then maximum lawful rate permitted to be
charged by Landlord. Any payments of any kind returned for
insufficient funds will be subject to an additional handling
charge of $25.00, and thereafter, Landlord may require Tenant
to pay all future payments of rent or other sums due by money
order of cashier's check.
PREPAID RENT. Upon the execution of this Lease, Tenant shall pay to Landlord
the prepaid rent set forth in Section 1, and if Tenant is no in default or any
provisions of this Lease, such prepaid rent shall be applied toward the rent
due for the last month of the term. Landlord's obligations with respect to
the prepaid rent are those of a debtor and not of a trustee, and Landlord can
commingle the prepaid rent with Landlord's general funds. Landlord shall not
be required to pay Tenant interest on the prepaid rent. Landlord shall be
entitled to immediately endorse and cash Tenant's prepaid rent; however, such
endorsement and cashing shall not constitute Landlord's acceptance of this
lease. In the event Landlord does not accept this Lease, Landlord shall return
said prepaid rent.
48
<PAGE> 50
EXHIBIT 10.19
6. DEPOSIT. Upon execution of this Lease, Tenant shall deposit the security
deposit set forth in Section 1 with Landlord, in part as security for the
performance by Tenant of the provisions of this Lease and in part as a
cleaning fee. If Tenant is in default, Landlord can use the security
deposit or any portion of it to cure the default or to compensate
Landlord for any damages sustained by Landlord resulting from Tenant's
default. Upon demand, Tenant shall immediately pay to Landlord a sum
equal to the portion of the security deposit expended or applied by
Landlord to maintain the security deposit in the amount initially
deposited with Landlord. In no event will Tenant have the right to apply
any part of the security deposit to any rent or other sums due under this
Lease. If Tenant is not in default at the expiration or termination of
this Lease, Landlord shall return the entire security deposit to Tenant,
except for 10% of first month's rent or $125, whichever is greater, which
Landlord shall retain as a non-refundable cleaning fee. Landlord's
obligations with respect to the deposit are those of a debtor and not of a
trustee, and Landlord can commingle the security deposit with Landlord's
general funds. Landlord shall not be required to pay Tenant interest on
the deposit. Landlord shall be entitled to immediately endorse and cash
Tenant's prepaid deposit; however, such endorsement and cashing shall not
constitute Landlord's acceptance of this Lease. In the event Landlord does
not accept this Lease, Landlord shall return said prepaid deposit.
7. USE OF PREMISES AND PROJECT FACILITIES. Tenant shall use the Premises
solely for the purposes set forth in Section 1 and for no other purpose
without obtaining the prior written consent of Landlord. Tenant
acknowledges that neither Landlord nor any agent of Landlord has made any
representation or warranty with respect to the Premises or with respect
to the suitability of the Premises or the Project for the conduct of
Tenant's business, nor has Landlord agreed to undertake any modification,
alteration or improvement to the Premises or the Project, except as
provided in writing in this Lease. Tenant acknowledges that Landlord may
from time to time, at its sole discretion, make such modifications,
alterations, deletions or improvements to the Project as Landlord may deem
necessary or desirable, without compensation or notice to Tenant. Tenant
shall promptly comply with all laws, ordinances, orders and regulations
affecting the Premises and the Project, including, without limitation,
any rules and regulations that may be attached to this Lease and to any
reasonable modifications to these rules and regulations as Landlord may
adopt from time to time. Tenant shall not do or permit anything to be
done in or about the Premises or bring or keep anything in the Premises
that will in any way increase the premiums paid by Landlord on its
insurance related to the Project or which will in any way increase the
premiums paid by Landlord on its insurance related to the Project or
which will in any way increase the premiums for fire or casualty
insurance carried by other tenants in the Project. Tenant will not
perform any act or carry on any practices that may injure the Premises or
the Project; that may be a nuisance or menace to other tenants in the
Project; or that shall in any way interfere with the quiet enjoyment of
such other tenants. Tenant shall not use the Premises for sleeping,
washing clothes, cooking or the preparation, manufacture or mixing of
anything that might emit any objectionable odor, noises, vibrations or
lights onto such other tenants. If sound insulation is required to muffle
noise produced by Tenant on the Premises, Tenant at its own cost shall
provide all necessary insulation. Tenant shall not do any thing on the
premises which will overload any existing parking or service to the
Premises. Pets and/or animals of any type shall not be kept on the
Premises.
8. SIGNAGE. All signing shall comply with rules and regulations set forth
by landlord as may be modified from time to time. Current rules and
regulations relating to signs are described on Exhibit C. Tenant shall
place no window covering (e.g., shades, blinds, curtains, drapes,
screens, or tinting materials), stickers, signs, lettering, banners or
advertising or display material on or near exterior windows or doors if
such materials are visible from the exterior of the Premises, without
Landlord's prior written consent. Similarly, Tenant may not install any
alarm boxes, foil protection tape or other security equipment on the
Premises without Landlord's prior written consent. Any material violating
this provision may be destroyed by Landlord without compensation is
Tenant.
9. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes,
assessments, license fees and public charges levied, assessed or imposed
upon its business operations as well as upon all trade fixtures,
leasehold improvements, merchandise and other personal property in or
about the Premises.
10. PARKING. Landlord grants to Tenants and Tenant's customers, suppliers,
employees and invitees, a non-exclusive license to use the designated
parking areas in the Project for the use of motor vehicles during the
term of this Lease. Landlord reserves the right at any time to grant
similar non-exclusive use to other tenants, to promulgate rules and
regulations relating to the use of such parking areas, including
reasonable restrictions on parking by tenants and employees, to designate
specific spaces for the use of any tenant, to make changes in the parking
layout from time to time, and to establish reasonable time limits on
parking. Overnight parking is prohibited and any vehicle violating this
or any other vehicle regulation adopted by Landlord is subject to removal
at the owner's expense.
11. UTILITIES. (Strike and initial clause which does not apply).
b. INDUSTRIAL SPACE. Tenant shall pay for all water, gas, heat, light,
power, sewer, electricity, telephone or other service metered,
chargeable or provided to the Premises. Landlord reserves the right
to install separate meters for any such utility and to charge Tenant
for the cost of such installation.
49
<PAGE> 51
EXHIBIT 10.19
12. MAINTENANCE. Landlord shall maintain, in good condition, the structural
parts of the Premises, which shall include only the foundations, bearing
the exterior walls (excluding glass), subflooring and roof (excluding
skylights), the unexposed electrical, plumbing and sewerage systems,
including without limitation, those portions of the systems lying outside
the Premises, exterior doors (excluding glass), window frames, gutters
and downspouts on the Building and the heating ventilating and air
conditioning system servicing the Premises; provided, however, the cost
of all such maintenance shall be considered "Expenses" for purposes of
Section 4.c. Except as provided above, Tenant shall maintain and repair
the Premises in good condition, including, without limitation,
maintaining and repairing all walls, floors, ceilings, interior doors,
exterior and interior windows and fixtures as well as damage caused by
Tenant, its agents, employees or invitees. Upon expiration or termination
of this Lease. Tenant shall surrender the Premises of Landlord in the
same condition as existed a the commencement of the term, except for
reasonable wear and tear or damage caused by fire or other casualty for
which Landlord has received all funds necessary for restoration of the
Premises from insurance proceeds.
13. ALTERATIONS. Tenant shall not make any alterations to the Premises, or
to the Project, including any changes to the existing landscaping,
without Landlord's prior written consent. if Landlord gives its consent
to such alterations, Landlord may post notices in accordance with the
laws of the state in which the premises are located. Any alterations made
shall remain on and be surrendered with the Premises upon expiration or
termination of this Lease, except that Landlord may, within 30 days
before or 30 days after expiration of the term, elect to require Tenant
to remove an alterations which Tenant may have made to the Premises. If
Landlord so elects, at its own cost Tenant shall restore the Premises to
the condition designated by Landlord in its election, before the last day
of the term or within 30 days after notice of its election is given,
whichever is later.
Should Landlord consent in writing to Tenant's alteration of the
Premises, Tenant shall contract with a contractor approved by Landlord
for the construction of such alterations, shall secure all appropriate
governmental approvals and permits, and shall complete such alterations
with due diligence in compliance with plans and specifications approved
by Landlord. All such construction shall be performed in a manner which
will not interfere with the quiet enjoyment of other tenants of the
Project. Tenant shall pay all costs for such construction and shall keep
the Premises and the Project free and clear of all mechanics' liens which
may result from construction by Tenant.
14. RELEASE AND INDEMNITY. As material consideration to Landlord, Tenant
agrees that Landlord shall not be liable to Tenant for any damage to
Tenant or Tenant's property from any cause, and Tenant waives all claims
against Landlord for damage to persons or property arising for any
reason, except for damage resulting directly from Landlord's breach of
its express obligations under this Lease which Landlord has not cured
within a reasonable time after receipt of written notice of such breach
from Tenant. Tenant shall indemnify and hold Landlord harmless from all
damages arising out of any damage to any person or property occurring in,
on or about the Premises or Tenant's use of the Premises or Tenant's
breach of any term of this Lease.
15. INSURANCE. Tenant, at its cost, shall maintain public liability and
property damage insurance and products liability insurance with a single
combined liability limit of $1,000,000, insuring against all liability of
Tenant and its authorized representatives arising out of or in connection
with Tenant's use or occupancy of the Premises. Public liability
insurance, products liability insurance and property damage insurance
shall insure performance by Tenant of the indemnity provisions of Section
14. Landlord shall be named as additional insured and the policy shall
contain cross-liability endorsements. On all its personal property, at
its cost, Tenant shall maintain a policy of standard fire and extended
coverage insurance with vandalism and malicious mischief endorsements and
"all risk" coverage on all Tenant's improvements and alterations in or
about the Premises, to the extent of at least 90% of their full
replacement value. The proceeds from any such policy shall be used by
Tenant for the replacement of personal property and the restoration of
Tenant's improvements or alterations. All insurance required to be
provided by Tenant under this Lease shall release Landlord from any
claims for damage to any person or the Premises and the Project, and to
Tenant's fixtures, personal property, improvements and alterations in or
on the Premises or the Project, caused by or resulting from risks insured
against under any insurance policy carried by Tenant and in force at the
time of such damage. All insurance required to be provided by Tenant
under this Lease: (a) shall be issued by insurance companies authorized
to do business in the state in which the premises are located with a
financial rating of at least an A - XII status as rated in the most
recent edition of Best's Insurance Reports; (b) shall be issued as a
primary policy; and (c) shall contain an endorsement requiring at least
30 days prior written notice of cancellation to Landlord and Landlord's
lender, before cancellation or change in coverage, scope or amount of any
policy. Tenant shall deliver a certificate or copy of such policy
together with evidence of payment of all current premiums to Landlord
within 30 days of execution of this Lease. Tenant's failure to provide
evidence of such coverage to Landlord may, in Landlord's sole discretion,
constitute a default under this Lease.
16 DESTRUCTION. If during the term, the Premises or Project are more than
10% destroyed from any cause, or rendered inaccessible or unuseable from
any cause. Landlord may, in its sole discretion, terminate this Lease by
delivery of notice to Tenant within 30 days of such event without
compensation to Tenant. If in Landlord's estimation, the Premises cannot
be restored within 90 days following such destruction, the Landlord shall
immediately notify Tenant and Tenant may terminate this Lease by delivery
of notice to Landlord within 30 days of receipt of Landlord's notice. If
Landlord does not terminate this lease and if in Landlord's estimation
the Premises can be restored within 90 days, then Landlord shall commence
to restore the Premises in compliance with then existing laws and shall
complete such restoration with due diligence. In such event, this Lease
shall remain in full force and effect, but there shall be an abatement of
rent between the date of destruction and the date of completion of
restoration, based on the extent to which destruction interferes with
Tenant's use of the Premises.
17. CONDEMNATION.
a. DEFINITIONS. The following definitions shall apply. (1)
"Condemnation" means (a) the exercise of any governmental power of
eminent domain, whether by legal proceedings or otherwise by
condemnor and (b) the voluntary sale or transfer by Landlord to any
condemnor either under threat of condemnation or while legal
proceeding for condemna-
50
<PAGE> 52
EXHIBIT 10.19
tion are proceeding: (2) "Date of Taking" means the date the
condemnor has the right to possession of the property being
condemned: (3) "Award" means all compensation, sums or anything of
value awarded, paid or received on a total or partial condemnation;
and (4) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having a power of condemnation.
b. OBLIGATIONS to be Governed by Lease. If during the term of the
Lease there is any taking of all or any part of the Premises or the
Project, the rights and obligations of the parties shall be
determined pursuant to this Lease.
c. TOTAL OR PARTIAL TAKING. If the Premises are totally taken by
condemnation, this Lease shall terminate on the date of taking. If
any portion of the Premises is taken by condemnation, this Lease
shall remain in effect, except that Tenant can elect to terminate
this Lease if the remaining portion of the Premises is rendered
unsuitable for Tenant's continued use of the Premises. If Tenant
elects to terminate this Lease, Tenant must exercise its right to
terminate by giving notice to Landlord within 30 days after the
nature and extent of the taking having been finally determined. If
Tenant elects to terminate this Lease. Tenant shall also notify
Landlord of the date of termination, which date shall not be earlier
than 30 days nor later than 90 days after Tenant has notified
Landlord of its election to terminate; except that this Lease shall
terminate on the date of taking if the date of taking falls on a
date before the date of termination as designated by Tenant. If any
portion of the Premises is taken by condemnation and this Lease
remains in full force and effect, on the date of taking the rent
shall be reduced by an amount in the same ratio as the total number
of square feet in the Premises immediately before the date of
taking.
18. ASSIGNMENT OF SUBLEASE. Tenant shall not assign or encumber its interest
in this Lease or the Premises or sublease all or any part of the Premises
or allow any other person or entity (except Tenant's authorized
representatives, employees, invitees, or guests) to occupy or use all or
any part of the Premises without first obtaining Landlord's consent which
Landlord may withhold in its sole discretion. Any assignment, encumbrance
or sublease without Landlord's written consent shall be voidable and at
Landlord's election, shall constitute a default. If Tenant is a
partnership, a withdrawal or change, voluntary, involuntary or by
operation of law of any partner, or the dissolution of the partnership,
shall be deemed a voluntary assignment. If Tenant consists of more than
one person, a purported assignment, voluntary or involuntary or operation
of law from one person to the other shall be deemed a voluntary
assignment. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or sale or other transfer
of a controlling percentage of the capital stock of Tenant, or the sale of
at least 25% of the value of the assets of Tenant shall be deemed a
voluntary assignment. The phrase "controlling percentage" means ownership
of and right to vote stock possessing at least 25% of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding
and entitled to vote for election of directors. This Section 18 shall not
apply to corporations the stock of which is traded through an exchange or
over the counter. All rent received by Tenant from its subtenants in
excess of the rent payable by Tenant to Landlord under this Lease shall be
paid to Landlord, or any sums to be paid by an assignee to Tenant in
consideration of the assignment of this Lease shall be paid to Landlord.
If Tenant requests Landlord to consent to a proposed assignment or
subletting Tenant shall pay to Landlord, whether or not consent is
ultimately give, $100 or Landlord's reasonable attorney's fees incurred in
connection with such request, whichever is greater.
No interest of Tenant in this Lease shall be assignable by involuntary
assignment through operation of law (including without limitation the
transfer of this Lease by testacy or intestacy). Each of the following
acts shall be considered an involuntary assignment: (a) If Tenant is or
becomes bankrupt or insolvent, makes an assignment for the benefit of
creditors, or institutes proceedings under the Bankruptcy Act in which
Tenant is the bankrupt; or if Tenant is a partnership or consists of more
than one person or entity, if any partner of the partnership or other
person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; or (b) If a writ of attachment
or execution is levied on this Lease; or (c) If any proceeding or action
to which Tenant is a party, a receiver is appointed with authority to
take possession of the Premises. An involuntary assignment shall
constitute a default by Tenant and Landlord shall have the right to elect
to terminate this Lease, in which case this Lease shall not be treated as
an asset of Tenant.
19. DEFAULT. The occurrence of any of the following shall constitute a
default by Tenant. (a) A failure to pay rent or other charge when due;
(b) Abandonment and vacation of the Premises (failure to occupy and
operate the Premises for ten consecutive days shall be deemed an
abandonment and vacation); or (c) Failure to perform any other provision
of this Lease.
20. LANDLORD'S REMEDIES. Landlord shall have the following remedies if
Tenant is in default. (These remedies are not exclusive; they are
cumulative and in addition to any remedies now or later allowed by law):
Landlord may terminate Tenant's rights to possession of the Premises at
any time. No act by Landlord other than giving notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises,
or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest under this Lease shall not constitute a termination
of Tenant's right to possession. Upon termination of Tenant's right to
possession, Landlord has the right to recover from Tenant: (1) The worth
of the unpaid rent that had been earned at the time of termination of
Tenant's right to possession; (2) The worth of the amount of the unpaid
rent that would have been earned after the date of termination of
Tenant's right to possession; (3) Any other amount, including court,
attorney and collection costs, necessary to compensate Landlord for all
detriment proximately caused by Tenant's default. "The Worth," as used
for Item 20(1) in this Paragraph 20 is to be computed by allowing
interest at the maximum rate an individual is permitted of charge by law
or 12%, whichever is greater. "The worth at the time of the award" as
used for Item 20(2) in this Paragraph 20 is to be computed by discounting
the amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of termination of Tenant's right of possession.
21. ENTRY ON PREMISES. Landlord and its authorized representatives shall
have the right to enter the Premises at all reasonable times for any of
the following purposes: (a) To determine whether the Premises are in good
condition and whether Tenant is complying with its obligations under this
Lease; (b) To do any necessary maintenance and to make any restoration to
the Premises or the Project that Landlord has the right or obligation to
perform; (c) To post "for sale" signs at any time during the term, to post
"for rent" or "for lease" signs during the last 90 days of the term, or
during any period while Tenant is in default; (d) To show the Premises to
prospective brokers, agents, buyers, tenants or persons
51
<PAGE> 53
EXHIBIT 10.19
interested in leasing or purchasing the Premises, at any time
during the term; or (e) To repair, maintain or improve the Project and to
erect scaffolding and protective barricades around and about the Premises
but not as so to prevent entry to the Premises and to do any other act or
thing necessary for the safety or preservation of the Premises or the
Project. Landlord shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising out of
Landlords entry onto the Premises as provided in this Section 21. Tenant
shall not be entitled to an abatement or reduction of rent if Landlord
exercises any rights reserved in this Section 21. Landlord shall conduct
his activities on the Premises as provided herein in a manner that will
cause the least inconvenience, annoyance or disturbance to Tenant. For
each of these purposes, Landlord shall at all times have and retain a key
with which to unlock all the doors in, upon and about the Premises,
excluding Tenants vaults and safes. Tenant shall not alter any lock or
install a new or additional lock or bolt on any door of the Premises
without prior written consent of Landlord. If Landlord gives its consent,
Tenant shall furnish Landlord with a key for any such lock.
22. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or any beneficiary of a Deed of Trust
with a lien on the Project or any ground lessor with respect to the
Project, the Lease shall be subject to subordinate at all times to (a) all
ground leases or underlying leases which may now exist or hereafter be
executed affecting the Project, and (b) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which
the Project, ground leases or underlying leases, or Landlords interest or
estate in any of said items is specified as security. In the event that
nay ground lease or underlying lease terminates for any reason or any
mortgage or Deed of Trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason. Tenant shall, notwithstanding any
subordination, attorn or and become the Tenant of the successor in interest
to Landlord, at the option of such successor in interest. Tenant covenants
and agrees to execute and deliver, upon demand by Landlord and in the form
requested by Landlord any additional documents evidencing the priority or
subordination of the Lease with respect to any such ground lease or
underlying leases or the lien of any such mortgage or Deed of Trust.
Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant
to execute, deliver and record any such document in the name and on behalf
of Tenant.
Tenant, within ten days from notice form Landlord, shall execute and
deliver to Landlord, in recordable form, certificates stating that this
Lease is not in default, is unmodified and in full force and effect or
in full force and effect as modified and stating the modifications. This
certificate should also state the amount of current monthly rent, the dates
to which rent has been paid in advance, and the mount of any security
deposit and prepaid rent. Failure to deliver this certificate to Landlord
within ten days shall be conclusive upon Tenant that this Lease is in full
force and effect and has not been modified except as may be represented by
Landlord.
23. NOTICE. Any notice, demand, request, consent, approval or communication
desired by either party or required to be given, shall be in writing and
served either personally or sent by prepaid certified first call mail,
addressed as set for in Section 1. Either party may change its address by
notification to the other party. Notice shall be deemed to be communicated
48 hours form the time of mailing, or from the time of service as provided
in this Section 23.
24. WAIVER. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver. No
act or conduct of Landlord, including without limitation, acceptance of the
keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the term. Only written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish termination of the Lease. Landlords consent
to or approval of any act by Tenant requiring Landlords consent or approval
shall not be deemed to waive or render unnecessary Landlords consent to or
approval of any subsequent act by Tenant. Any waiver by Landlord of any
default must be in writing and shall not be a waiver of any other default
concerning the same or any other provision of the Lease.
25. SURRENDER OF PREMISES; HOLDING OVER. Upon expiration of the term,
Tenant shall surrender to Landlord the Premises and all Tenant improvements
and alterations in good condition, except for ordinary wear and tear and
alterations Tenant has the right or is obligated to remove under the
provisions of Section 13 herein. Tenant shall remove all personal property
including, without limitation, all wallpaper, paneling and other decorative
improvements or fixtures and shall perform all restoration made necessary
by the removal of any alterations or Tenants personal property before the
expiration of the term, including for example restoring all wall surfaces
to their condition prior to the commencement of this Lease. Landlord can
elect to retain or dispose of in any manner Tenants personal property not
removed form the Premises by Tenant prior to the expiration of the term.
Tenant waives all claims against Landlord for any damage to Tenant
resulting from Landlords retention or disposition of Tenants personal
property. Tenant shall be liable to Landlord for Landlords cost for
storage, removal or disposal of Tenants personal property.
If Tenant, with Landlords consent, remains in possession of the
Premises after expiration or termination of the term, or after the date in
any notice given by Landlord to Tenant terminating this Lease, such
possession by Tenant shall be deemed to be a month-to-month tenancy
terminable on written 30-day notice at any time, by either party. All
provisions of this Lease, except those pertaining to term and rent, shall
apply to the month-to-month tenancy. Tenant shall pay monthly rent in an
amount equal to 125% of Rent for the last full calendar month during the
regular term plus 100% of said last months estimate of Tenants share of
Expenses pursuant to Section 4.c.3.
26. LIMITATION OF LIABILITY. In consideration of the benefits accruing
thereunder, Tenant agrees that, in the event of any actual or alleged
failure, breach or default of this Lease by Landlord, if Landlord is a
partnership:
a. The sole and exclusive remedy shall be against the partnership and
its partnership assets;
b. No partner of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of the
partnership);
52
<PAGE> 54
EXHIBIT 10.19
c. No service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the
partnership);
d. No partner of Landlord shall be required to answer or otherwise
plead to any service or process;
e. No judgment may be taken against any partner of Landlord;
f. Any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
g. No writ of execution will ever be levied against the assets of any
partner of Landlord;
h. These covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing provisions shall be
applicable to any covenant or agreement either expressly contained
in this Lease or imposed by statute or at common law.
27. MISCELLANEOUS PROVISIONS.
a. TIME OF ESSENCE. Time is of the essence of each provision of this
Lease.
b. SUCCESSOR. This Lease shall be binding on and inure to the benefit
of the parties and their successors, except as provided in Section
18 herein.
c. LANDLORD'S CONSENT. Any consent required by Landlord under this
Lease must be granted in writing and may be withheld by Landlord in
its sole and absolute discretion.
d. COMMISSIONS. Each Party represents that it has not had dealings with
any real estate broker, finder or other person with respect to this
Lease in any manner, except for the broker identified in Section 1,
who shall be compensated by Landlord.
e. OTHER CHARGES. If Landlord becomes a party to any litigation
concerning this Lease, the Premises or the Project by reason of any
act or omission of Tenant or Tenant's authorized representatives,
Tenant shall be liable to Landlord for reasonable attorneys' fees
and court costs incurred by Landlord in the litigation whether or
not such litigation leads to actual court action. Should the court
render a decision which is thereafter appealed by any party thereto,
Tenant shall be liable to Landlord for reasonable attorneys' fees
and court costs incurred by Landlord in connection with such appeal.
If either party commences any litigation against the other party or
files an appeal of a decision arising out of or in, connection with
this Lease, the prevailing party shall be entitled to recover from
the other party reasonable attorneys' fees and costs of suit. If
Landlord employs a collection agency to recover delinquent charges,
Tenant agrees to pay all collection agency and attorneys' fees
charged to Landlord in addition to rent, late charges, interest and
other sums payable under this Lease. Tenant shall pay a charge of
$75 to Landlord for Preparation of a demand for delinquent rent.
f. LANDLORD'S SUCCESSORS. In the event of a sale or conveyance by
Landlord of the Project, the same shall operate to release Landlord
from any liability under this Lease, and in such event Landlord's
successor in interest shall be solely responsible for all
obligations of Landlord under this lease.
g. INTERPRETATION. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the premises are
located. This Lease constitutes the entire agreement between the
parties with respect to the Premises and the Project, except for
such guarantees or modifications as may be executed in writing by
the parties from time to time. When required by the context of this
Lease, the singular shall include the plural and the masculine shall
include the feminine and/or neuter. "Party" shall mean Landlord or
Tenant. If more than one person or entity constitutes Landlord or
Tenant, the obligations imposed upon that party shall be joint and
several. The enforceability, invalidity or illegality of any
provision shall not render the other provisions unenforceable,
invalid or illegal
Otay Mesa WHP #1
Landlord: A California Ltd. Partnership Tenant: Polk Audio Inc.
-------------------------------- ----------------
By /s/ E.A. GALLAGHER By [SIG]
------------------------------ --------------------
By /s/ CRAIG C. GEORGI
--------------------
53
<PAGE> 55
EXHIBIT 10.19
ADDENDUM TO LEASE BY AND BETWEEN
OTAY MESA - WHP #1, A CALIFORNIA LTD. PARTNERSHIP (LANDLORD)
POLK AUDIO INC (TENANT)
28. Emissions; Storage, Use and Disposal of Waste
28.1 Emissions. Tenant shall not:
a. Permit any vehicle on the premises to emit exhaust which is in
violation of any governmental law, rule, regulation or requirement;
b. Discharge, emit or permit to be discharged or emitted, any
liquid, solid or gaseous matter, or any combination thereof, into the
atmosphere, the ground or any body of water, which matter, as
reasonably determined by Lessor or any governmental entity, does, or
may pollute or contaminate the same, or is, or may become, radioactive
or does, or may, adversely affect the (1) health of safety of persons,
wherever located, whether on the premises or anywhere else, (2)
condition, use or enjoyment of the premises or any other real or
personal property, whether on the premises or anywhere else, or (3)
premises or any of the improvements thereto or thereon including
buildings, foundations, pipes, utility lines, landscaping or parking
areas;
c. Produce, or permit to be produced, any intense glare, light or
heat except within an enclosed or screened area and then only in such
manner that the glare, light or heat shall not be discernible from
outside the premises;
d. Create, or permit to be created, any sound pressure level which
will interfere with the quite enjoyment of any real property outside
the premises; or which will create a nuisance or violate any
governmental law, rule, regulation or requirement;
e. Create, or permit to be created, any ground vibration that is
discernible outside the premises;
f. Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is harmful or
hazardous to any person or property in, on or about the premises, or
anywhere else.
28.2 Storage and Use.
a. Storage. Subject to the uses permitted and prohibited to
Tenant under this lease, Tenant shall store in appropriate leak proof
containers all solid, liquid, or gaseous matter, or any combination
thereof, which matter, if discharged or emitted into the atmosphere,
the ground or any body of water, does or may (1) pollute or
contaminate the same, or (2) adversely affect the (i) health or safety
of persons, whether on the premises or anywhere else (ii) condition,
use or enjoyment of the premises or any real or personal property,
whether on the premises or anywhere else, or (iii) premises or any of
the improvements thereto or thereon.
b. Use. In addition, without Landlord's prior written consent, Tenant
shall not use, store or permit to remain on the premises any solid,
liquid or gaseous matter which is, or may become, radioactive. If
Landlord does give its consent, Tenant shall store the materials in
such a manner that no radioactivity will be detectable outside a
designated storage area and Tenant shall use the materials in such a
manner that (1) no real or personal property outside the designated
storage area shall become contaminated thereby or (2) there are and
shall be no adverse effects on the (i) health or safety of persons,
whether on the premises or anywhere else, (ii) condition, use or
enjoyment of the premises or any real or personal property thereon
or therein, or (iii) premises or any of the improvements thereto or
thereon.
28.3 Disposal of Waste.
a. Refuse Disposal. Tenant shall not keep any trash, garbage,
waste or other refuse on the premises except in sanitary containers
and shall regularly and frequently remove same from the premises.
Tenant shall keep all incinerators, containers or equipment used for
the storage or disposal of such materials in a clean and sanitary
condition.
b. Sewage Disposal. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system (1) for the
disposal of anything except sanitary sewage or (2) excess of the
lesser of the amount (a) reasonably contemplated by the uses permitted
under this Lesser or (b) permitted by any governmental entity. Tenant
shall keep the sewage disposal system free of all obstructions and in
good operating condition.
c. Disposal of Other Waste. Tenant shall properly dispose of all
other waste or other matter delivered to, stored upon, located upon or
within, used on, or removed from, the premises in such a manner that
it does not, and will not adversely affect the (1) health or safety
of persons, wherever located, whether on the premises or elsewhere,
(2) condition, use or enjoyment of the premises or any other real or
personal property, wherever located, whether on the premises or
anywhere else, or (3) premises or any of the improvements thereto or
thereon including buildings, foundations, pipes, utility lines,
landscaping or parking areas.
28.4 Compliance With Law. Notwithstanding any other provision in
the Lease to the contrary, Tenant shall comply with all laws, statues,
ordinances, regulations, rules and other governmental requirements in
complying with its obligations under this Lease, and in particular,
relating to the storage, use and disposal of hazardous or toxic
matter.
28.5 Indemnification. Tenant shall defend, indemnity and hold
Landlord and its agents harmless from any loss, claim, liability or
expenses, including attorney's loss and cost, arising out of or in
connection with its failure to observe or comply with the provisions
of this Lease.
/s/ GEORGE M. KLOPTER /s/ E.A. GALLAGHER
- ---------------------------- --------------------------------
Tenant Landlord
54
<PAGE> 56
EXHIBIT 10.19
29. QUIET ENJOYMENT; SUBORDINATION; USE & OCCUPANCY. As long as the Tenant
complies with the terms, covenants, and provisions of this Lease on Tenants
part, Tenant shall have the peaceful and quiet use and possession of the Leased
Premises against the claims of all persons claiming by, through, or under
Landlord, subject to the further provisions hereof. As long as Tenant shall
fully perform its obligations under this Lease, its tenancy shall not be
disturbed as a result of any default of the Landlord in any of its obligations,
or by Landlords bankruptcy or insolvency, or by any assignment of the benefit
of the creditors of the Landlord, or by any foreclosure proceeding brought
against Landlord by any secured or other creditor of Landlord. In the event of
any sale or transfer of the property of which the Leased Premises comprise a
part shall take place during the term of this Lease or of any extensions
hereof, whether as a result of foreclosure or otherwise, such sale or transfer
shall be subject to this Lease, and Landlord shall thereafter be relieved of
all obligations and liabilities expressed in this Lease, or implied by law.
Tenant hereby agrees to attorn to any party which may, subsequent to the date of
execution hereof, acquire title to the Lease Premises, whether through
foreclosure, sale or otherwise, so long as this Lease remains in effect. Except
upon the written authority of Landlord, the Leased Premises shall be used by
Tenant for the purpose of a manufacturing plant, offices and research
facilities, together with related warehousing and shipping, for the
fabrication, assembly, distribution and sale of audio and related home
entertainment products, and other related activities of the Tenant, and for no
other purpose.
30. RENEWAL OPTIONS. The Tenant shall have the right and option to extend the
term of this Lease, for up to two additional terms of two years each, by giving
written notice thereof to the Landlord not less than ninety (90) days before
the effective termination date of the initial term or any renewal term hereof.
The Tenant may exercise these renewal options separately and sequentially. In
the event that the Tenant shall exercise either or both of its options to renew
the term of this Lease, the base rental payable for the first two-year renewal
term of this Lease shall be six percent (6%) higher than the base rental
payable on the last month of the initial term hereof, and the base rental
payable during the second renewal term hereof shall be eight percent (8%)
higher than the base rental payable on the last month of the first renewal term
hereof.
31. RIGHT OF FIRST REFUSAL ON CONTIGUOUS SPACE. At all times during the term of
this Lease and any extensions or renewals hereof, the Tenant shall have the
right (a) to match any bona fide offer from any third party to lease the
adjacent 8,221 square foot portion of the facility identified on the attached
plat as Unit 13, and/or (b) in the absence of any third party offer to lease
Unit 13, to lease the said Unit 13 form the Landlord upon the same terms and
conditions, and at the same rentals per square foot as are contained in this
Lease, for a term to end on the dame date as the initial term hereof and with
identical renewal options as are granted herein for Units 11 and 12. Prior to
entering into a lease agreement of Unit 13 with a third party, the Landlord
shall give the Tenant ten (10) days' notice of its intention to do so, together
with he terms and conditions of such proposed lease. Tenant shall have five
(5) days thereafter to give the Landlord notice of its intent to lease the same
portions of the Property on terms no less favorable to the Tenant than those
proposed by, or offered by Landlord to, the said third party. In the event
that the Tenant shall else Unit 13 pursuant to this Lease or otherwise, the
Landlord shall construct at its own expense a demising wall to divide Unit 13
form the other parts of the facility, and shall correct any deficiencies in the
electrical wiring therein.
55
<PAGE> 57
EXHIBIT 10.19
32. TENANT IMPROVEMENTS. Prior to the commencement date of the initial term
hereof, the Landlord shall at its own expense perform the following repairs to
the Premises:
a. Replace or repair missing or inoperative plumbing and
electrical parts; and
b. Put the HVAC systems in good working order, including office
A/C systems.
In addition, subject to a direct cost limit of $16,000, the Landlord shall
perform the following further repairs and improvements to the Premises prior
to the commencement date of the initial term:
c. Repaint the interior office and warehouse walls and repair
holes and damages, including in the offices; replace two
missing doors from office to warehouse.
d. Replace office area carpeting;
e. Strip extraneous wires etc out of the ceiling in the
warehouse/plant area and ensure that warehouse lighting is
operable;
f. Clean the warehouse area;
g. Replace wooden door with metal door between Units 12 and 13;
h. Remove steel exterior stairway blocking loading dock and
replace bumper;
i. Demolish & remove the small closet construction between the
loading dock doors;
j. Replace wall cabinets missing over kitchenette counter in
office area;
k. The premises will meet applicable government requirements such
as building codes, ADA, etc.
33. MISCELLANEOUS MATTERS. The parties also agree as follows:
a. The portion of the last sentence in Section 12 hereof beginning
with the words "for which Landlord has not received", to the end of Section
12, is deleted in its entirety.
b. Notwithstanding any contrary provision of Section 21, Landlord
shall not be given keys to the Premises, and access, except in cases of extreme
emergency, shall be given only during normal business hours.
c. Notwithstanding Section 27(c), consents shall not be unreasonably
or arbitrarily withheld, conditioned or delayed.
WITNESS/ATTEST: LANDLORD:
[SIG] /s/ E.A. GALLAGHER (SEAL)
- ------------------------- ---------------------------
by:
WITNESS: TENANT
/s/ CRAIG C. GEORGI /s/ GEORGE M. KLOPFER (SEAL)
- ------------------------- ---------------------------
by: George M. Klopfer, President
56
<PAGE> 58
EXHIBIT 10.20
FIRST AMENDMENT TO BUSINESS CENTER LEASE
FOR BRITANNIA BUILDING
BETWEEN
WOODLAND HILLS PROPERTIES-W, INC.,
A NEVADA CORPORATION
AND
POLK AUDIO, INC. A MARYLAND CORPORATION
The First Amendment to Lease ("Amendment") is dated January 18, 1995 by and
between WOODLAND HILLS PROPERTIES-W, INC. a Nevada corporation (correction of
incorrect Landlord name originally referenced as "Otay Mesa WHP-#1, a
California Ltd Partnership"), "LANDLORD", and POLK AUDIO, INC. a Maryland
corporation, "TENANT".
RECITALS
A. Landlord and Tenant entered into a lease dated July 1994 for space
within the area known as Otay Mesa, in the City and County of San Diego, State
of California (the "Lease").
B. Landlord and Tenant desire to revise the obligations between the
parties concerning the term of the Lease, size of the Premises and the Tenant
Improvements to be provided by Landlord. In this regard, Landlord and Tenant
desire to amend the Lease as hereinafter provided.
AGREEMENT
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Lease. Landlord and Tenant hereby covenant and agree as follows:
1. TENANT (BUILDING UNIT):
a) Effective January 15, 1995, or upon completion of tenant
improvement as hereinafter defined, Tenant desires to expand
into units 13 and 14. Building Unit in Section 1.b. shall be:
11, 12, 13 and 14.
-----------------
2. PREMISES AREA:
a) Effective February 28, 1995, Premises Area in Section 1.e.
and 1.k. shall be: 32,884 square feet.
------------------
3. PREMISES PERCENT OF PROJECT:
a) Effective February 15, 1995, Premises Percent of Project
in Section 1.g. shall be: 22.50%.
-------
4. TERM OF LEASE:
a) Term of Lease in Section 1.h. shall show lease expiration
as: February 28, 1998.
-----------------
5. BASE MONTHLY RENT:
a) Effective February 1, 1995, Base Monthly Rent in Section
1.i. shall be: $9,536.36.
---------
57
<PAGE> 59
First Amendment to EXHIBIT 10.20
Polk Audio Lease
January 18, 1995
Page 2
6. RENT ADJUSTMENT:
Rent Adjustment (2) Step Increase in Section 1.j. shall be
replaced with the following:
<TABLE>
<CAPTION>
EFFECTIVE DATE OF RENT INCREASE NEW BASE MONTHLY RENT
------------------------------- ---------------------
<S> <C>
September 1, 1995 $10,194.04 ($0.31 per square foot)
February 28, 1997 $10,851.72 ($0.33 per square foot)
</TABLE>
7. ANNUAL EXPENSE BASE:
Annual Expense Base in Section 1.k. shall be amended to read:
Expenses through February 28, 1997 shall not exceed $0.09 per
--------------------------------------------------------------
square foot per month ($2,956.56). From March 1, 1997 through
--------------------------------------------------------------
February 28, 1998 expenses shall not exceed $0.10 per square
--------------------------------------------------------------
foot per month ($3,288.40).
---------------------------
8. TOTAL SECURITY DEPOSIT:
Additional Security Deposit of $3,289.00 to be paid upon
execution of this amendment. This will bring Total Security
Deposit in Section 1.m. to $9,537.00.
9. SITE PLAN:
The Site Plan (Exhibit "A") shall be replaced with the
attached site plan (Exhibit "A1").
10. TENANT IMPROVEMENTS:
Landlord agrees to perform the following at their sole cost
and expense.
A. Remove any non-bearing walls between unit 13 and 14.
B. Construct walls needed to demise units 13 and 14 from
units 5 and 6.
If the above tenant improvements cost less than $16,442, the
difference will be credited to the following months rent.
11. RENEWAL OPTIONS:
Section 30 of the Lease is hereby amended to provide one (1)
two year extension only. All other terms of the Renewal
Options remain the same.
12. RIGHT OF FIRST REFUSAL:
During the term of this lease, tenant shall have the Right to
match any bonafide offer from any third party to lease units 6
and 7, and/or in the absence of any third party offer to lease
units 6 and 7 from Landlord, upon the same terms and
58
<PAGE> 60
First Amendment to EXHIBIT 10.20
Polk Audio Lease
January 18, 1995
Page 3
conditions and at the same rental rate as are contained in
this Amendment. The minimum lease term will be two (2) years.
If the lease term extends beyond the February 28, 1998
expiration, then the rental rate will increase by 4% per annum
beginning March 1, 1998.
In the event Landlord receives a bonafide offer to
lease units 6 and/or 7 from a third party, Landlord will
notify tenant in writing outlining the terms and conditions of
such offer. Tenant shall have four (4) days thereafter to give
Landlord notice of its intent to lease the space on terms no
less favorable than those offered to such third party.
Landlord shall not enter into lease negotiations on units 6 or
7 with any third party for six months from the date of this
Amendment.
Except as set forth in this First Amendment to Lease, all provisions of the
Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum as of the
date first above written.
LANDLORD TENANT
WOODLAND HILLS PROPERTIES-W, INC. POLK AUDIO, INC.
a Nevada corporation a Maryland corporation
by: /s/ E.A. GALLAGHER By: /s/ CRAIG C. GEORGI
-------------------- --------------------
E.A. Gallagher Vice President
Vice President Polk Audio, Inc.
59
<PAGE> 61
EXHIBIT 10.21
SECOND AMENDMENT TO BUSINESS CENTER LEASE
FOR BRITANNIA BUILDING
BETWEEN
WOODLAND HILLS PROPERTIES-W, INC.,
A NEVADA CORPORATION
AND
POLK AUDIO, INC. A MARYLAND CORPORATION.
The Second Amendment to Lease ("Amendment") is dated as of November 20, 1995 by
and between WOODLAND HILLS PROPERTIES-W, INC. a Nevada corporation (correction
of incorrect Landlord name originally referenced as "Otay Mesa WHP-#1, a
California Ltd Partnership"), "LANDLORD", and POLK AUDIO, INC. a Maryland
corporation, "TENANT".
RECITALS
A. Landlord and Tenant entered into a lease dated July 1994 for space
within the area known as Otay Mesa, in the City and County of San Diego, State
of California which was subsequently amended by a First Amendment to Lease
dated January 18, 1995 (the "Lease").
B. Landlord and Tenant desire to revise the obligations between the
parties concerning the size of the Premises and the Tenant Improvements to be
provided by Landlord. In this regard, Landlord and Tenant desire to amend the
Lease as hereinafter provided.
AGREEMENT
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Lease. Landlord and Tenant hereby covenant and agree as follows:
1. TENANT (BUILDING UNIT):
a) Effective January 1, 1996, or upon completion of tenant
improvement as hereinafter defined, Tenant desires to expand
into unit 4. Building Units in Section 1.b. shall be: 11, 12,
--------
13, 14, and 4.
-------------
2. PREMISES AREA:
a) Effective January 1, 1996, or upon completion of tenant
improvement as hereinafter defined, Premises Area in Sections
1.e. and 1.k. shall be: 41,205 square feet.
--------------------
3. PREMISES PERCENT OF PROJECT:
a) Effective January 1, 1996, or upon completion of tenant
improvement as hereinafter defined, Premises Percent of
Project in Section 1.g. shall be: 28.18%.
-----
4. TERM OF LEASE:
a) Term of Lease in Section 1.h. shall remain unchanged and
show lease expiration as: February 28, 1998.
-----------------
5. BASE MONTHLY RENT:
a) Effective January 1, 1996, or upon completion of tenant
improvement as hereinafter defined, Base Monthly Rent in
Section 1.i. shall be: $12,773.55.
----------
6. RENT ADJUSTMENT:
Rent Adjustment (2) Step Increase in Section 1.j. shall be
replaced with the following:
<TABLE>
<CAPTION>
EFFECTIVE DATE OF RENT INCREASE NEW BASE MONTHLY RENT
------------------------------- ---------------------
<S> <C>
March 1, 1997 $13,597.65 ($0.33 per square foot)
</TABLE>
60
<PAGE> 62
Second Amendment to EXHIBIT 10.21
Polk Audio Lease
November 1995
Page 2
7. ANNUAL EXPENSE BASE:
Annual Expense Base in Section 1.k. shall be amended to read:
Expenses through February 28, 1997 shall not exceed $0.09 per
square foot per month ($3,699.45). From March 1, 1997 through
February 28, 1998 expenses shall not exceed $0.10 per square
foot per month ($4,110.50).
8. TOTAL SECURITY DEPOSIT:
Additional Security Deposit of $2,548.00 to be paid upon
execution of this amendment. This will bring Total Security
Deposit in Section 1.m. to $12,085.00.
9. SITE PLAN:
The Site Plan (Exhibit "A") shall be replaced with the
attached site plan (Exhibit "A1").
10. TENANT IMPROVEMENTS:
Landlord agrees to perform the following at their sole cost
and expense:
A. Provide access from Unit 14 to Unit 4, through Unit
15. Said access will be large enough to accommodate a
forklift. The dimensions of the access will be 10 ft. long x
10 ft. wide x 12 ft. high.
Landlord acknowledges that providing access is a condition of
this lease.
B. Install a demising wall between Unit 4 and Unit 3.
C. Electrical power will be drawn from Tenant's present
power source.
Except as set forth in this Second Amendment to Lease, all provisions of the
Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum as of the
date first above written.
LANDLORD TENANT
WOODLAND HILLS PROPERTIES-W, INC. POLK AUDIO, INC.
a Nevada corporation a Maryland corporation
by: By:
------------------ ---------------------
E.A. Gallagher ---------------------
Vice President ---------------------
61
<PAGE> 63
EXHIBIT 10.22
THIRD AMENDMENT TO BUSINESS CENTER LEASE
FOR BRITANNIA BUILDING
BETWEEN
WOODLAND HILLS PROPERTIES-W, INC.,
A NEVADA CORPORATION
AND
POLK AUDIO, INC., A MARYLAND CORPORATION.
The Third Amendment to Lease ("Amendment"), dated March 6, 1996, for
reference purposes only, by and between WOODLAND HILLS PROPERTIES-W, INC. a
Nevada Corporation (correction of incorrect Landlord name originally referenced
as "Otay Mesa WHP-#1, a California Ltd Partnership"), ("LANDLORD"), and POLK
AUDIO, INC., a Maryland Corporation, ("TENANT").
RECITALS
A. Landlord and Tenant entered into a lease dated July 1994 ("Lease") for
space within the area known as Otay Mesa, in the City and County of San Diego,
State of California, which was subsequently amended by a First Amendment to
Lease dated January 18, 1995, and a Second Amendment to Lease dated November
20, 1995.
B. Landlord and Tenant desire to revise the obligations between the
parties concerning the size of the premises. In this regard, Landlord and
Tenant desire to amend the Lease as hereinafter provided.
AGREEMENT
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Lease. Landlord and Tenant hereby covenant and agree as follows:
1. TENANT (BUILDING UNIT):
a.) Effective on the later of (i) the date that Leviton
Manufacturing Co. has vacated Unit 3 in the Building, or (ii)
April 1, 1996 (hereinafter referred to as the "Effective
Date"), Tenant desires to expand into unit 3. Thereafter,
Building Units in Section 1.b. shall be: 11, 12, 13, 14, 3
-----------------
and 4.
-----
2. PREMISES AREA:
a.) After the Effective Date, the Premises Area in Sections
1.e. and 1.k. shall be: 49,426 square feet.
------------------
3. PREMISES PERCENT OF PROJECT:
a.) After the Effective Date, the Premises Percent of Project
in Section 1.g. shall be: 33.57%
------
4. TERM OF LEASE:
a.) Term of Lease in Section 1.h. shall be amended to show
lease expiration as: February 28, 2002.
-----------------
5. BASE MONTHLY RENT:
a.) After the Effective Date, the Base Monthly Rent in
Section 1.i. shall be : $15,322.06.
----------
6. RENT ADJUSTMENT:
Rent Adjustment (2) Step Increase in Section 1.j. shall be
replaced with the following:
<TABLE>
<CAPTION>
EFFECTIVE DATE OF RENT INCREASE NEW BASE MONTHLY RENT
----------------------------------------------------------------
<S> <C>
March 1, 1997 $16,310.58 ($0.33 per square foot)
</TABLE>
After March 1, 1997, there shall be no further increase in
Base Rent through the end of the Lease term, as amended in
Section 4 hereof.
Initials
-------- --------
62
<PAGE> 64
Third Amendment to EXHIBIT 10.22
Polk Audio Lease
March 6, 1996
Page 2
7. ANNUAL EXPENSE BASE:
Annual Expense Base in Section 1.k. shall be amended to read:
Expenses through February 28, 1997 shall not exceed $0.09 per
square foot per month ($4,448.34). From March 1, 1997 through
February 28, 2002 expenses shall not exceed $0.10 per square
foot per month ($4,942,60).
8. TOTAL SECURITY DEPOSIT:
Additional Security Deposit of $2,548.00 to be paid upon
execution of this amendment. This will bring Total Security in
Section 1.m. to $14,633.00.
9. SITE PLAN:
The Site Plan (Exhibit "A") shall be replaced with the
attached site plan (Exhibit "A3").
10. TENANT IMPROVEMENTS:
Tenant will be responsible for any and all tenant improvements
to Unit 3.
Except as set forth in this Third Amendment to Lease, all provisions of the
Lease and the First and Second Amendments thereto, shall remain unchanged and
in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date first above written.
LANDLORD TENANT
WOODLAND HILLS PROPERTIES-W, INC. POLK AUDIO, INC.
a Nevada Corporation a Maryland Corporation
By: /s/ E.A. GALLAGHER By: /s/ CRAIG C. GEORGI
------------------ -------------------
E.A. Gallagher Craig C. Georgi
Vice President Vice President
63
<PAGE> 65
EXHIBIT 10.23
ASSIGNMENT OF LEASES
THIS ASSIGNMENT OF LEASES ("Assignment") is dated for reference
purposes only as of March 18, 1996 by and between WOODLAND HILLS PROPERTIES-W,
INC., a Nevada corporation ("WHP"), and KLOPFER ASSOCIATES LIMITED PARTNERSHIP,
a Maryland limited partnership ("Assignee"), with reference to the following
facts:
RECITALS
A. As of the Effective Date, as defined below, Assignee shall
acquire that certain real property in the County of San Diego, California more
particularly described on Exhibit "A" attached hereto. Such land, together with
the improvements, personal property and other items transferred by WHP to
Assignee as of the date hereof are being purchased by Assignee pursuant to a
Purchase and Sale Agreement and Escrow Instructions dated as of February 5,
1996 (the "Purchase Agreement"), and are hereinafter referred to collectively
as the "Property."
B. WHP desires to induce Assignee to consummate the purchase of
the Property by assigning to Assignee its interest in all leases and occupancy
agreements affecting the Property (collectively, the "Leases") on the terms and
conditions set forth herein.
NOW THEREFORE, in reliance upon the foregoing Recitals and in
consideration of the mutual covenants set forth herein and in the Purchase
Agreement and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
1. ASSIGNMENT OF LEASES. WHP hereby assigns, transfers and
delivers to Assignee, and to Assignee's successors and assigns, all of its
right, title and interest in and to the Leases.
2. NO REPRESENTATIONS. Assignee acknowledges and agrees that all
of the Leases are herein being assigned, transferred and delivered without
warranty or representation by WHP of any kind whatsoever, express or implied,
except as otherwise expressly set forth in the Purchase Agreement, and subject
to all restrictions on use or enjoyment existing thereon or as may be imposed
thereunder.
3. ASSUMPTION. Assignee hereby unconditionally assumes and
agrees to perform all of the duties, obligations, liabilities and undertakings
of WHP under the Leases accruing with respect to all facts, actions or
omissions arising or occurring from and after the Effective Date hereof.
4. EFFECTIVE DATE. The "Effective Date" hereof shall be the date
the Deed, as defined in the Purchase Agreement is recorded in the Official
Records for San Diego County, California.
64
<PAGE> 66
EXHIBIT 10.23
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first set forth above.
WHP: WOODLAND HILLS PROPERTIES-W, INC.
a Nevada corporation
By: /s/ ELIZABETH A. GALLAGHER
----------------------------------
Elizabeth A. Gallagher,
Vice President
ASSIGNEE: KLOPFER ASSOCIATES LIMITED PARTNERSHIP,
a Maryland limited partnership
By:
----------------------------------
George M. Klopfer,
General Partner
By:
----------------------------------
Matthew S. Polk, Jr.,
General Partner
By:
----------------------------------
Craig G. Georgi,
General Partner
65
<PAGE> 67
EXHIBIT 10.23
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first set forth above.
WHP: WOODLAND HILLS PROPERTIES-W, INC.
a Nevada corporation
By:
----------------------------------
Elizabeth A. Gallagher,
Vice President
ASSIGNEE: KLOPFER ASSOCIATES LIMITED PARTNERSHIP,
a Maryland limited partnership
By: /s/ GEORGE M. KLOPFER
----------------------------------
George M. Klopfer,
General Partner
By: /s/ MATTHEW S. POLK, JR.
----------------------------------
Matthew S. Polk, Jr.,
General Partner
By:
----------------------------------
Craig G. Georgi,
General Partner
66
<PAGE> 68
EXHIBIT 10.23
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first set forth above.
WHP: WOODLAND HILLS PROPERTIES-W, INC.
a Nevada corporation
By:
----------------------------------
Elizabeth A. Gallagher,
Vice President
ASSIGNEE: KLOPFER ASSOCIATES LIMITED PARTNERSHIP,
a Maryland limited partnership
By:
----------------------------------
George M. Klopfer,
General Partner
By:
----------------------------------
Matthew S. Polk, Jr.,
General Partner
By: /s/ CRAIG G. GEORGI
----------------------------------
Craig G. Georgi,
General Partner
67
<PAGE> 69
EXHIBIT 10.23
LEGAL DESCRIPTION
Real property located in San Diego County, California, and legally described as
follows:
Lot 1 of Britannia Commerce Center, in the City of San Diego, County
of San Diego, according to Map thereof No. 11612, filed in the Office
of the County Recorder of San Diego County, September 11, 1986, as
File/Page No. 86-399842 of Official Records
68
<PAGE> 70
EXHIBIT 10.24
PROMISSORY NOTE
$_________ Baltimore, Maryland
______ __, 1996
FOR VALUE RECEIVED, the undersigned, _____________ (the "Maker")
promises to pay to Polk Audio, Inc., a Maryland corporation, (the "Payee") the
principal sum of ________________________________________________Dollars
($__________), together with interest at the rate of ____ percent (per annum),
compounded annually, accruing on the unpaid principal balance in the following
manner: the full principal amount of $_______ shall be paid as a single cash
payment on _____ __, 2001; interest on the unpaid balance shall be paid
annually in arrears on _____ __, ____, ____, ____, ____ and ____.
In the event the Maker shall fail to make any interest payment within
ten (10) days after its due date, the Maker shall pay a late charge of five
percent (5%) of the amount not paid in a timely manner, without written notice
or additional demand therefor. Any such late charge shall be payable with the
interest payment on which it is imposed.
All payments required under the terms of the Note shall be paid in
lawful currency of the United States of America at such place as the holder of
this Note shall designate to Maker in writing at any time or from time to time.
The Maker may prepay the principal amount outstanding, in full or in
part, at any time, without premium or penalty. All payments made pursuant to
this Note shall be applied, first, to any late fees and penalties hereunder,
next, to all accrued and outstanding interest on the principal amount hereof,
and lastly to the principal amount outstanding hereunder.
If this Note rightfully is forwarded to an attorney for collection,
the Maker shall pay on demand all costs and expenses of collection, including
reasonable attorneys' fees and costs not to exceed Fifteen Percent (15%) of the
then outstanding principal balance hereunder.
Any of the following events shall constitute a default under the terms
of this Note ("Events of Default"): (1) the failure of the Maker to pay any
obligation hereunder within ten (10) days after the due date thereof or (2) the
failure of the Maker to repay the entire unpaid principal amount plus all
accrued interest and unpaid late charges upon the termination of the Maker's
employment with the Payee.
If an Event of Default shall occur, the holder of this Note may
declare the entire unpaid principal balance of this Note, together with any
accrued and unpaid interest, and any unpaid late charges imposed thereon,
immediately due and payable.
-1-
69
<PAGE> 71
EXHIBIT 10.24
The rights and remedies set forth in this Note may be exercised by the
holder of this Note during any default by the Maker, regardless of any prior
forbearance, and are in addition to any other rights or remedies provided by
law or in equity.
This Note is the Note referred to in that certain Pledge Agreement of
even date herewith made by the Maker in favor of Payee, and all obligations of
the Maker are secured thereby. No release of any security for the debt or
extension of time for payment shall release, modify, or effect the liability of
the Maker hereunder.
The Maker hereby waives presentment for payment, demand for payment,
protest, notice of protest and of dishonor, and any and all demands and notices
that might otherwise be required by law.
This Note shall be deemed to be made in, and shall be governed by the
laws of, the State of Maryland.
The terms of any documents referred to herein are incorporated herein
by reference as though fully set forth herein.
IN WITNESS WHEREOF, the Maker has executed this Note, under seal, the
day and year first above written.
(SEAL)
----------------------------
-2-
70
<PAGE> 72
EXHIBIT 10.25
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated _____ __, 1996, made by _____________
("Pledgor"), to Polk Audio, Inc., a Maryland corporation (the "Pledgee");
PRELIMINARY STATEMENTS:
(1) The Pledgor is the owner of ______ shares of Common Stock of
Polk Audio, Inc., acquired on _____ __, 1996, pursuant to the exercise of
options granted under the 1986 Equity Participation Plan of Polk Audio,
Inc. (the "Pledged Shares").
(2) The Pledgee has entered into a Promissory Note dated as of
_____ __, 1996 (which may hereafter be amended or otherwise modified from
time to time) (the "Note"), with the Pledgor. It is a condition precedent
to the advance of funds by the Pledgee under the Note that the Pledgor
shall have made the pledge contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, and in
order to induce the Pledgee to make the loan to the Pledgor pursuant to the
Note, the Pledgor hereby agrees with the Pledgee as follows:
SECTION 1. Pledge; Delivery of Shares. The Pledgor hereby pledges
and grants to the Pledgee a security interest in the Pledged Shares, all
earnings on the Pledged Shares (except cash dividends) and all proceeds of
the Pledged Shares (the "Pledged Collateral"). In connection with the
foregoing pledge, the Pledgor has delivered the Pledged Shares to the
Pledgee along with appropriate undated stock powers with respect thereto
duly executed by the Pledgor in blank.
SECTION 2. Security for Obligations. This Agreement secures the
payment of all obligations of the Pledgor to the Pledgee, now or hereafter
existing under the Note, whether for principal, interest, fees, expenses or
otherwise, and all obligations of the Pledgor now or hereafter existing
under this Agreement (collectively, the "Obligations").
SECTION 3. Representations and Warranties. The Pledgor represents
and warrants as follows:
(a) The Pledgor is the legal and beneficial owner of
record of the Pledged Collateral free and clear of any lien, security
interest, option or other encumbrances except for the security interest
created by this Agreement.
-1-
71
<PAGE> 73
EXHIBIT 10.25
(b) The pledge of the Pledged Shares pursuant to this
Agreement creates a valid and perfected first priority security interest in
the Pledged Shares, securing the payment of the Obligations.
(c) Pledgor (i) has good right and legal authority to
pledge the Pledged Collateral owned by him in the manner hereby
contemplated and (ii) will defend his title against any and all liens,
claims, encumbrances, security interests or other impediments of any
nature.
(d) The Pledgor will not sell or otherwise dispose of,
or grant any option with respect to, any of the Pledged Collateral, or
create or permit to exist any lien, security interest, or other encumbrance
upon any of the Pledged Collateral, except for the security interest under
this Agreement.
SECTION 4. Voting Rights; Dividends. Unless an Event of Default
shall have occurred and be continuing, or unless otherwise provided in this
Agreement, the Pledgor shall have the right to: (a) vote the Pledged
Shares and to give consents, waivers and ratifications with respect to the
Pledged Shares and (b) receive any cash dividends in connection with the
Pledged Shares; however, non-cash dividends shall be subject to this
Agreement.
SECTION 5. Continuing Security Interest; Release and Return of
Collateral. This Agreement shall create a continuing security interest in
the Pledged Collateral and shall (i) remain in full force and effect until
payment in full of the Obligations; (ii) be binding upon the Pledgor and
his personal representatives, successors and assigns; and (iii) inure to
the benefit of the Pledgee and its successors, transferees and assigns.
Upon the payment in full of the Obligations, (and provided no Event of
Default shall have occurred and be continuing), the Pledgee shall promptly
release from the pledge and return to the pledgor the Pledged Shares and
any earnings thereon. Upon final payment of the Note this Agreement shall
become void.
SECTION 6. Reasonable Care. The Pledgee shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded
treatment substantially equal to that which the Pledgee accords its own
property. No action taken by the Pledgee or omitted to be taken with
respect to the Pledged Collateral shall give rise to any defense,
counterclaim or offset in favor of the Pledgor or to any claim or action
against the Pledgee in the absence of the gross negligence or willful
misconduct of the Pledgee.
SECTION 7. Event of Default; Right to Cure Default. An "Event of
Default" under the Note shall constitute an Event of Default under this
Agreement (the "Event of Default"). In case of an Event of Default, the
Pledgor shall have a reasonable time to cure the default, provided the
Pledgor gives reasonable written notice to the Pledgee of his intent to
attempt to cure the default.
-2-
72
<PAGE> 74
EXHIBIT 10.25
SECTION 8. "Put" Right Upon Termination of Employment. If the
Event of Default is the Pledgor's termination of employment with the
Pledgee for any reason and provided that the Pledgor gives the Pledgee
prompt written notice of the Pledgor's intention to exercise his rights
under this paragraph, for ninety (90) days following the Pledgor's
termination of employment, the Pledgor shall have the right to "put" to the
Pledgee that portion of the Pledged Collateral with a "fair market value"
equal to the entire unpaid principal balance of the Note, together with any
accrued and unpaid interest and any unpaid late charges imposed thereon,
and the Pledgee shall be required to purchase such portion of the Pledged
Collateral from the Pledgee. For purposes of the Pledgor's "put" right,
"fair market value" shall be the average reported closing price of Polk
Audio, Inc. Common Stock for the last twenty (20) business days prior to
the Pledgor's exercise of the "put" right for which a closing price for the
Common Stock was reported, as determined by the Pledgee. The Pledgee shall
apply all proceeds from the exercise of the "put" right to repay the entire
unpaid principal balance of the Note, together with any accrued and unpaid
interest and any unpaid late charges imposed thereon. Notwithstanding the
foregoing, the enforceability of the Pledgor's "put" right established by
this Section 8 is contingent upon such right being permitted under
agreements which the Pledgee may maintain with lenders in the course of the
Pledgee's business, such as a line of credit or other indebtedness.
SECTION 9. "Call" Right Upon Termination of Employment. If the
Event of Default is the Pledgor's termination of employment with the
Pledgee for any reason, and the Pledgor has not exercised his "put" right,
as provided in Section 8, then the Pledgee shall have the right to "call"
from the Pledgee that portion of the Pledged Collateral which has a "fair
market value" equal to the entire unpaid principal balance of the Note,
together with any accrued and unpaid interest and any unpaid late charges
imposed thereon, and the Pledgor shall be required to sell such portion of
the Pledged Collateral to the Pledgee. For purposes of the Pledgee's
"call" right, "fair market value" shall be the average reported closing
price of Polk Audio, Inc. Common Stock for the last twenty (20) business
days prior to the Pledgor's exercise of the "put" right for which a closing
price for the Common Stock was reported, as determined by the Pledgee. The
Pledgee shall apply all proceeds from the exercise of the call to repay the
entire unpaid principal balance of the Note, together with any accrued and
unpaid interest and any unpaid late changes imposed thereon.
SECTION 10. Remedies upon Default If the Pledgor has not exercised
his "put" right as provided in Section 8 and the Pledgee has not exercised
its "call" right as provided in Section 9, the Pledgee may utilize the
following remedies. If any Event of Default shall have occurred and be
continuing, in addition to the remedies otherwise provided hereunder, the
Pledgee shall have all rights allowed by law with respect to the Pledged
Collateral and may (but need not) sell the Pledged Collateral at public or
private sale or at any broker's board or on any securities exchange for
cash, upon credit or for future delivery as the Pledgee shall deem
appropriate. The Pledgee shall be authorized at
-3-
73
<PAGE> 75
EXHIBIT 10.25
any such sale to restrict the prospective bidders or purchasers to persons
who will represent and agree that they are purchasing the Pledged
Collateral for their own account for investment and not with a view to the
distribution or sale thereof, and upon consummation of any such sale the
Pledgee shall have the right to assign, transfer and deliver the Pledged
Collateral to the purchaser. Each such purchaser at any such sale shall
hold the property sold absolutely, free from any claim or right on the part
of the Pledgor, and the Pledgor hereby waives (to the extent permitted by
law) all rights of redemption, stay and appraisal which the Pledgor now has
or may at any time in the future have under any rule of law or statute now
existing or hereafter enacted. The Pledgee shall give the Pledgor at least
10 days' written notice (which the Pledgor agrees is reasonable notice
within the meaning of Section 9-504(3) of the Annotated Code of Maryland,
Commercial Law Article) of the Pledgee's intention to make any sale of
Pledged Collateral. The Pledgee shall apply the net proceeds of any such
sale to the payment of delinquent amounts under the Note and any surplus
will be returned to the Pledgor.
SECTION 11. Amendments; Waiver. No amendment or waiver of any
provision of this Agreement shall be effective unless in writing and signed
by the Pledgee. Any waiver shall be effective only in the specific
instance and for the specific purpose for which given.
SECTION 12. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing and, if to the
Pledgor, mailed or delivered to him, addressed to him at Polk Audio, Inc.,
5601 Metro Drive, Baltimore, Maryland 21215 or his last known address in
the records of the Pledgee, and if to the Pledgee, mailed or delivered to
it, addressed to Polk Audio, Inc., 5601 Metro Drive, Baltimore, Maryland
21215; or as to each party at such other address as shall be designated by
such party in a written notice to each other party complying as to delivery
with the terms of this Section. All such notices and other communications
shall, be effective when deposited in the mails or when confirmed receipt
is obtained if addressed as aforesaid.
SECTION 13. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Maryland.
Unless otherwise defined herein or in the Note, terms defined in Title 9 of
the Annotated Code of Maryland, Commercial Law Article are used as therein
defined.
SECTION 14. Severability. If any provision hereof is or shall at
any time be invalid and unenforceable, then, to the fullest extent
permitted by law the other provisions hereof shall remain in full force and
effect and shall be liberally construed in favor of the Pledgee in order to
carry out the intentions of the parties as nearly as may be possible.
SECTION 15. WAIVER OF TRIAL BY JURY. PLEDGOR WAIVES ALL RIGHT TO
TRIAL BY JURY OF ALL CLAIMS, DEFENSES, COUNTERCLAIMS AND SUITS OF ANY KIND
ARISING FROM OR RELATING TO THIS PLEDGE
-4-
74
<PAGE> 76
EXHIBIT 10.25
AGREEMENT. PLEDGOR ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND
THAT PLEDGOR MAKES THIS WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION
WITH, OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF HIS CHOICE. PLEDGOR
AGREES THAT ALL SUCH CLAIMS, DEFENSES, COUNTERCLAIMS AND SUITS SHALL BE
TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION, WITHOUT A JURY.
IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly
executed, under seal, and delivered as of the date first above written.
WITNESS:
[SEAL]
----------------------------- ------------------------------
-5-
75
<PAGE> 77
EXHIBIT 11.1
POLK AUDIO, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------
March 31, March 26, March 27,
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Earnings per share:
Net earnings $ 1,173,711 1,451,936 988,449
========= =========== ===========
Weighted average number of
shares outstanding 1,634,295 1,616,307 1,599,618
Weighted average number of stock
options granted 65,852 57,355 60,703
----------- ----------- -----------
Adjusted weighted average number
of shares outstanding 1,700,147 1,673,662 1,660,321
--------- --------- ---------
Earnings per share $ 0.69 0.86 0.60
======= ======= =======
</TABLE>
76
<PAGE> 78
EXHIBIT 13.1
[POLK AUDIO LOGO]
The Speaker Specialists(R)
Annual Report
Fiscal Year 1996
77
<PAGE> 79
Financial Highlights
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended March 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Results
Net sales $52,171 $41,673 $33,957
Operating income 2,217 2,341 1,434
Earnings before income taxes 1,971 2,305 1,507
Net earnings 1,174 1,452 988
Earnings per share 0.69 0.86 0.60
Year-end Position
Working capital $16,077 $12,862 $ 9,735
Total assets 30,191 22,224 15,974
Long-term debt 6,055 2,400 --
Stockholders' equity 15,436 14,153 12,474
</TABLE>
ABOUT THE COVER
The Polk Audio Signature Reference Theater (SRT) system is our ultimate home
theater system, incorporating five proprietary technologies. Its basic
configuration consists of 35 active drive units housed in seven enclosures
(including two 300 watt powered subwoofers) and a Control Center with wireless
remote.
ABOUT THE COMPANY
Polk Audio, Inc., is a premier engineer, manufacturer, and marketer of high
quality loudspeaker systems for the home and automotive markets marketed under
the brand names Polk Audio and Eosone. Since its founding in 1972, Polk Audio
has grown to become one of the top brands of loudspeakers in the United States.
Polk's products all emphasize superior sound quality and many of them
feature innovative and patented technologies. The Company's home products range
in retail price from $150 per pair for the Polk Audio mini monitor bookshelf
system to$9,000 for the SRT system. Autosound products range in retail price
from $55 to $370 per system. They are primarily sold through a network of
audio/video specialty retailers throughout the USA, through military post
exchanges in Europe and the Pacific, and through distributors in approximately
45 foreign countries.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights inside front cover
President's Letter page 1
Interim Financial Information page 5
Independent Auditors' Report page 5
Consolidated Financial Statements and Notes page 6
Management's Discussion and Analysis page 14
Seven-Year Financial Summary page 16
Market and Dividend Information page 16
Directors and Executive Officers inside back cover
Corporate Information inside back cover
</TABLE>
78
<PAGE> 80
To Our Shareholders:
The fiscal year ended March 31, 1996 represented Polk Audio's fourth
consecutive year of record growth. Net sales equaled $52.2 million, an increase
of 25% over the prior year's sales of $41.7 million. Although net earnings
declined in fiscal 1996 to $1.17 million, or $0.69 per share, from $1.45
million, or $0.86 per share, earned in fiscal 1995, we were encouraged by our
results in the fourth quarter of the year as net sales rose by 67% and net
earnings increased by 389% over fourth quarter results from the prior year. Our
continued sales growth momentum was made possible by the introduction of 23 new
loudspeaker products, including a completely new brand of loudspeakers, Eosone,
to be sold exclusively in the U.S. to a national consumer electronics retail
chain.
FISCAL YEAR 1996 IN RETROSPECT
This was a landmark year for new products. We replaced our core S and
LS Series models with the new RT Bookshelf and Tower speakers, a line of seven
models. The new RT models have experienced excellent market acceptance. We
began initial shipments in the second half of fiscal 1996 of our SRT System,
which is an integrated, five channel home theater system with seven loudspeaker
enclosures containing thirty-five drive elements, 600 watts of amplification
and associated control electronics. Much of the proprietary technology included
in the "showcase" SRT System is being incorporated into less expensive models
over the next several years and we expect this to have a favorable carry-over
effect on a broader series of products.
[PHOTO]
George M. Klopfer
Chief Executive Officer
Fiscal 1996 was also the year in which we began shipments of our
Eosone line, developed jointly with Genesis Technologies and sold through Best
Buy Co., a "big box" retailer of consumer electronics. Our strategy for Eosone
is to provide high-performance home theater products at competitive prices
through a rapidly growing, national retail chain. We initially introduced eight
Eosone models, of which the first shipments commenced late in the fourth
quarter. Early indications of sales progress have been very encouraging.
During the year, we completed the transfer of substantially all of
Polk's manufacturing from Baltimore to our facility in Tijuana, Baja
California. We set up an automated woodworking facility, also in Tijuana, to
begin producing cabinets that we previously out-sourced. These were critical
moves that should result in significant future cost savings for the Company.
These four developments experienced a number of start-up problems, not
untypical of many new projects. As a result, certain costs associated with the
new RT and
1
79
<PAGE> 81
SRT lines, the Eosone products and the transfer of production and cabinet
making to Tijuana were initially higher than we anticipate they will be as we
move forward. We have addressed these cost factors and are confident that the
improvement in operating margins we began to see toward the end of the fourth
quarter will continue through the current fiscal year.
We announced in December a general management reorganization, which
included the appointment of James M. Herd as President. The restructuring
simplifies the management organization to clarify lines of authority and
accountability, moves operational decision making as far down in the Company as
possible and focuses day-to-day managerial responsibility and authority on the
President. Management was realigned based on three broad product groups, Polk
Home Entertainment Products, Polk Automotive Products and Eosone International.
Each of these Strategic Business Units is responsible for sales, distribution
and product line management and each is set up internally as a discrete profit
center run by a Business Unit Manager. Polk Manufacturing, also a discrete
profit center run by a Business Unit Manager, has been restructured along the
lines of a full-service supplier to serve the three product Strategic Business
Units and will provide them with engineering, product development and
production.
This flatter management structure will enable each of the four
Business Unit Managers to operate with greater authority and profit
accountability. Each of these line organization executives will report to the
President, as will the heads of the two remaining staff departments, Marketing
and Finance. The Chief Financial Officer will also report to the Board of
Directors. These management changes will enable the Company's founders,
Chairman Matthew Polk and me, to focus our personal efforts more toward medium
and long-term business planning and strategy formulation, identification and
assessment of entrepreneurial growth opportunities for the Company, analysis
and development of longer-term marketing, R&D and technology strategies, and a
more proactive investor relations program.
[PHOTO]
Matthew S. Polk, Jr.
Chairman of the Board
Recently we listed our common stock on the American Stock Exchange
(AMEX). This step was taken to improve the liquidity of shareholdings in public
hands and to reduce transaction costs typically incurred in the buying and
selling of our shares. This is one of several steps we have taken and plan to
take going forward to increase our visibility and attractiveness to the
investment community.
2
80
<PAGE> 82
THE FUTURE
We believe we are entering an especially exciting new era for consumer
electronics and, in particular, for Polk Audio. Our industry has gone through
several technology-driven transitions since the first major transition in the
1970's, when loudspeakers, benefiting from the introduction of solid state
electronics and other technological advances in acoustics, were used primarily
for music playback. It was at this point that audio became a mass market
product. During the '80s and early '90s, we saw the integration of audio and
video technologies into home theater and big screen television products. VCRs
and CD players combined with surround sound audio technologies such as Dolby
Prologic to propel what had been a specialty "hobbyist" market toward becoming
a mass "appliance" market. We believe, that during the second half of the '90s
the key technologies will be multimedia, interactivity, and connectivity. Input
sources will expand to include Digital Satellite Systems, CD-I and most
importantly, the Digital Video Disk (DVD).
Multi-channel sound systems will require more loudspeakers, which are
rapidly evolving to become suitable output devices for multimedia systems. We
have the technology and the growing distribution capability to play a key role
in these developments. As the technologies driving our industry's products
evolve and proliferate, the range of potential uses for them will naturally
expand to keep pace. We anticipate this evolution will make our products more
interesting, useful and accessible to an ever-widening universe of end-users
around the world. As the graph below so dramatically illustrates, this
phenomenon has been the basic growth engine of our industry and, not
coincidentally, for Polk Audio over the past two decades.
[PHOTO]
James M. Herd
President
The continuing expansion of the retail sector of the consumer
electronics industry has also been a powerful growth factor affecting Polk's
development. Polk Home Entertainment Products distributes its products through
more than 700 retail outlets in the U.S., 125 outlets in Canada, 125 in the
U.K. and 80 in Germany. We estimate that these existing retailers will
POLK NET SALES VS. ALL CONSUMER ELECTRONICS SALES
[Line Graph]
3
81
<PAGE> 83
be adding dozens of new outlets annually over the next two to three years. In
addition we envision substantial further market penetration outside the USA for
the Company. Polk Automotive Products distributes loudspeakers through some 500
retail outlets in the United States. Polk's distribution in some 45 countries
throughout the world encompasses approximately 1,000 retail outlets. And,
Eosone International sells exclusively in the U.S. through Best Buy's 260
stores. Best Buy has indicated it expects to open approximately forty new
stores per year, which increases annually our available outlets for this line
by a significant proportion.
Because of the continuing rapid rate of technological innovation
indirectly affecting overall demand for loudspeakers, particularly in the
computer and digital communications fields, which is leveraged by the
continuing quantitative and qualitative improvement of the retailers we use to
present our products to the consumer, we are very confident that these
long-term industry growth trends will accelerate during the next decade. In
this favorable environment, we expect to encounter many growth opportunities
for our Company.
At present we have a very new and competitive product line-up, with
the vast majority of our sales coming from products less than 18 months old.
Start-up costs for certain product manufacturing and distribution that we
experienced last year are unlikely to be repeated in fiscal 1997. Our
distribution capabilities are greatly improved and are further expanding. Our
management restructuring has positioned us to be more responsive to market
dynamics and to more effectively direct and control our results. All told, we
look toward this year and beyond with optimism.
Cordially,
/s/ GEORGE M. KLOPFER
- ------------------------
George M. Klopfer
Chief Executive Officer
June 10, 1996
4
82
<PAGE> 84
Interim Financial Information (Unaudited) Polk Audio, Inc. and Subsidiaries
<TABLE>
<CAPTION>
1996 Quarter ended
- ----------------------------------------------------------------------------------------------------------
March 31, December 31, October 1, July 2,
1996 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $18,068,604 13,120,047 11,239,712 9,742,321
Gross Profit 7,310,322 5,981,611 4,817,326 4,172,435
Net earnings (loss) 741,925 416,571 120,017 (104,802)
Earnings (loss) per share 0.44 0.25 0.07 (0.06)
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 Quarter ended
- ----------------------------------------------------------------------------------------------------------
March 26, December 25, September 25, June 26,
1995 1994 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $10,801,187 13,895,937 10,280,382 6,695,431
Gross Profit 5,082,110 6,919,708 4,626,662 2,692,379
Net earnings (loss) 156,053 1,134,633 501,505 (340,255)
Earnings (loss) per share 0.09 0.67 0.30 (0.21)
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 Quarter ended
- ----------------------------------------------------------------------------------------------------------
March 27, December 26, September 26, June 27,
1994 1993 1993 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 9,225,149 10,130,210 7,938,796 6,662,599
Gross Profit 4,122,746 4,669,883 3,362,159 2,665,917
Net earnings (loss) 320,186 692,502 220,945 (245,184)
Earnings (loss) per share 0.19 0.42 0.13 (0.15)
==========================================================================================================
</TABLE>
Independent Auditors' Report
[KPMG PEAT MARWICK LLP LOGO]
The Board of Directors and Stockholders
Polk Audio, Inc.:
We have audited the accompanying consolidated balance sheets of Polk
Audio, Inc. and subsidiaries (the Company) as of March 31, 1996 and March 26,
1995 and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended March 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
PolkAudio, Inc. and subsidiaries as of March 31, 1996 and March 26, 1995 and
the results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Baltimore, Maryland
May 14, 1996
5
83
<PAGE> 85
Consolidated Balance Sheets Polk Audio, Inc. and Subsidiaries
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 184,118 615,150
Trade accounts receivable, less allowance for doubtful accounts
of $170,396 in 1996 and $160,287 in 1995 15,660,909 8,599,560
Inventories:
Finished goods 3,579,287 4,019,699
Work-in-process 596,436 882,336
Raw materials and supplies 3,752,715 3,127,715
- --------------------------------------------------------------------------------------------------------------
Total inventories 7,928,438 8,029,750
- --------------------------------------------------------------------------------------------------------------
Income taxes recoverable -- 198,489
Deferred income taxes (note 4) 469,000 470,000
Prepaid expenses and other current assets 298,831 257,514
Notes receivable -- 85,443
- --------------------------------------------------------------------------------------------------------------
Total current assets 24,541,296 18,255,906
Property and equipment, at cost
less accumulated depreciation and amortization (note 2) 4,626,848 3,045,095
Deposits and other assets (note 8) 262,775 644,612
Notes receivable--officers 224,237 --
Deferred income taxes (note 4) 536,000 278,000
- --------------------------------------------------------------------------------------------------------------
$30,191,156 22,223,613
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 4,666,043 2,522,595
Bank overdraft 450,336 --
Income taxes payable 228,445 --
Accrued expenses and other liabilities (note 9) 2,429,938 2,221,577
Current portion of long-term debt (note 3) 400,000 400,000
Current portion of accrued product warranty 290,000 249,700
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 8,464,762 5,393,872
- --------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Long-term debt, less current portion (note 3) 6,055,149 2,400,000
Accrued product warranty, less current portion 235,000 193,300
Pension liability (note 8) -- 83,836
- --------------------------------------------------------------------------------------------------------------
Total long-term liabilities 6,290,149 2,677,136
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 6 and 7):
Common stock, par value $.01 per share. Authorized 20,000,000 shares;
issued and outstanding 1,797,035 shares in 1996 and
1,632,035 shares in 1995 17,970 16,320
Additional paid-in capital 1,253,489 302,514
Foreign currency translation adjustments (55,373) (27,177)
Notes receivable-stock (note 7) (814,500) --
Retained earnings 15,034,659 13,860,948
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,436,245 14,152,605
Commitments (notes 5 and 8)
- --------------------------------------------------------------------------------------------------------------
$30,191,156 22,223,613
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
84
<PAGE> 86
Consolidated Statements of Earnings Polk Audio, Inc. and Subsidiaries
(Three-year period ended March 31, 1996)
<TABLE>
<CAPTION>
March 31, March 26, March 27,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $52,170,684 41,672,937 33,956,754
Cost of goods sold 29,888,990 22,352,078 19,136,049
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 22,281,694 19,320,859 14,820,705
Selling, research, general and administrative expenses 20,064,845 16,979,472 13,387,013
- ------------------------------------------------------------------------------------------------------------------------
Operating income 2,216,849 2,341,387 1,433,692
Other income (expense):
Interest income 32,132 71,087 46,301
Interest expense (294,482) (101,167) (11,699)
Other, net 16,212 (6,371) 39,155
- ------------------------------------------------------------------------------------------------------------------------
(246,138) (36,451) 73,757
- ------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,970,711 2,304,936 1,507,449
Income taxes (note 4) 797,000 853,000 519,000
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,173,711 1,451,936 988,449
========================================================================================================================
Earnings per common and common equivalent share $ 0.69 0.86 0.60
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
85
<PAGE> 87
Consolidated Statements of Stockholders'
Equity Polk Audio, Inc. and Subsidiaries
(Three-year period ended March 31, 1996)
<TABLE>
<CAPTION>
Foreign
Additional Currency Notes Total
Number Common Paid-in Translation Receivable- Retained Stockholders'
of Shares Stock Capital Adjustments Stock Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 28, 1993 1,600,812 $16,008 -- -- -- 11,420,563 11,436,571
Compensation recognized
under grant of stock options -- -- 95,628 -- -- -- 95,628
Foreign currency
translation adjustments -- -- -- (4,547) -- -- (4,547)
Stock repurchases (note 6) (4,777) (48) (41,754) -- (41,802)
Net Earnings -- -- -- -- -- 988,449 988,449
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 27, 1994 1,596,035 15,960 53,874 (4,547) -- 12,409,012 12,474,299
Compensation recognized
under grant of stock options -- -- 40,000 -- -- -- 40,000
Foreign currency
translation adjustments -- -- -- (22,630) -- -- (22,630)
Exercise of stock options
by employees 36,000 360 208,640 -- -- -- 209,000
Net Earnings -- -- -- -- -- 1,451,936 1,451,936
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 26, 1995 1,632,035 16,320 302,514 (27,177) -- 13,860,948 14,152,605
Compensation recognized
under grant of stock options -- -- 138,125 -- -- -- 138,125
Foreign currency
translation adjustments -- -- -- (28,196) -- -- (28,196)
Exercise of stock options
by employees 165,000 1,650 812,850 -- (814,500) -- --
Net Earnings -- -- -- -- -- 1,173,711 1,173,711
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,797,035 $17,970 1,253,489 (55,373) (814,500) 15,034,659 15,436,245
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
86
<PAGE> 88
Consolidated Statements of Cash Flows Polk Audio, Inc. and Subsidiaries
(Three-year period ended March 31, 1996)
<TABLE>
<CAPTION>
March 31, March 26, March 27,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,173,711 1,451,936 988,449
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,655,924 1,486,032 1,088,622
Noncash compensation recognized under stock option plan 138,125 40,000 95,628
Gain on sale of fixed assets (22,230) (13,414) (36,548)
Deferred income taxes (257,000) (84,000) (9,000)
Increase in accrued product warranty 82,000 30,000 13,000
Increase (decrease) from changes in working capital:
Accounts receivable (7,061,348) (2,383,190) (1,063,109)
Inventories 101,312 (3,057,496) (1,080,855)
Income taxes recoverable or payable 202,697 (208,502) 31,230
Prepaid expenses and other current assets (41,317) (39,232) (68,619)
Accounts payable, trade 2,143,447 733,390 (1,453)
Accrued expenses and other current liabilities 208,360 1,015,510 173,108
Other (83,836) 2,896 (3,938)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,760,155) (1,026,070) 126,515
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (3,237,676) (1,979,889) (1,611,598)
Proceeds from disposal of equipment 22,230 13,414 36,548
Repayment of (investment in) notes receivable 85,443 64,399 (149,842)
Decrease (increase) in deposits and other assets 381,837 (471,770) 9,348
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,748,166) (2,373,846) (1,715,544)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in bank overdraft 450,336 -- --
Proceeds from revolving line of credit 4,055,149 2,300,000 --
Payments on revolving line of credit -- (1,500,000) --
Proceeds from term note payable -- 2,000,000 --
Payments on term note payable (400,000) -- --
Proceeds from exercise of stock options -- 209,000 --
Repurchases of common stock -- -- (41,802)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,105,485 3,009,000 (41,802)
Effect of exchange rate changes on cash (28,196) (22,630) (4,547)
- --------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (431,032) (413,546) (1,635,378)
Cash and cash equivalents at beginning of year 615,150 1,028,696 2,664,074
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 184,118 615,150 1,028,696
================================================================================================================================
Non-cash transactions:
Notes receivable--stock--received for exercise of stock options $ 814,500 -- --
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
87
<PAGE> 89
Notes to Consolidated Financial Statements Polk Audio, Inc. and Subsidiaries
(Three-year period ended March 31, 1996)
(1) Summary of Significant
Accounting Policies
Principles of Consolidation and Basis of Presentation
Polk Audio, Inc. engineers and manufactures high quality loudspeaker
systems for home and automotive markets.
The consolidated financial statements include the accounts of Polk
Audio, Inc. and its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's fiscal year is the 52-53 week fiscal year ending the
last Sunday in March. The financial statements present results of operations
and cash flows for the fiscal years ended March 31, 1996 (53 weeks), March 26,
1995 (52 weeks) and March 27, 1994 (52 weeks).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with
original maturities of three months or less.
Inventories
Inventories, consisting of material, labor and overhead, are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
Property and Equipment
Depreciation and amortization are calculated using the straight-line
method over the estimated useful lives of the related assets. The estimated
economic lives of equipment, machinery, furniture and fixtures range from three
to eight years. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the assets. Maintenance and repairs
are charged to expense as incurred.
Patents
Costs of obtaining and protecting patents are charged to expense as
incurred.
Product Warranty
Estimated warranty costs are provided in the year of sale. Accrued
costs applicable to warranty obligations beyond one year are classified as
long-term liabilities.
Fair Value of Financial Instruments
The fair value of instruments, including accounts receivable, accounts
payable and long-term debt approximate carrying value.
Research and Development Costs
Costs associated with the development of new products and enhancements
to existing products are charged to operations as incurred. Such costs were
approximately $3,266,000 in 1996, $2,565,000 in 1995 and $1,703,000 in 1994.
Income Taxes
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share
Earnings per share computations are based on the weighted average
number of shares of common stock and common stock equivalents (representing
employee stock options) outstanding during each period. The numbers of shares
used in the computations were 1,700,147 shares in 1996, 1,673,662 shares in
1995 and 1,660,321 shares in 1994.
(2) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Equipment, machinery
and tooling $7,173,550 6,368,441
Leasehold improvements 1,786,004 1,300,072
Furniture and fixtures 255,337 234,370
Transportation equipment 339,031 414,319
- ----------------------------------------------------------------------------
9,553,922 8,317,202
Less accumulated
depreciation and
amortization 4,927,074 5,272,107
- ----------------------------------------------------------------------------
$4,626,848 3,045,095
============================================================================
</TABLE>
(3) Credit Arrangements
The Company has a revolving credit agreement with a commercial bank
providing for maximum borrowings of $6,500,000 at the LIBOR rate plus 1.75%
(7.15% at March 31, 1996). Any borrowings under this agreement will be due
October 31, 1997. Among other things, the agreement requires the Company to
maintain certain minimum financial ratios for debt to tangible net worth,
income to fixed charges and working capital. The agreement provides that
outstanding cash balances at the bank automatically curtail the outstanding
borrowings. Borrowings at March 31, 1996 and March 26, 1995 totaled $4,855,149
and $800,000, respectively.
10
88
<PAGE> 90
During fiscal year 1995, the Company entered into a $2,000,000 5-year
unsecured term loan with a commercial bank. The loan incurs interest at the
LIBOR rate plus 2 percent, 7.3% at March 31, 1996, and the loan matures on
December 31, 1999. Borrowings at March 31, 1996 and March 26, 1995 totaled
$1,600,000 and $2,000,000, respectively. Principal payments are due as follows:
$400,000 in 1997, $400,000 in 1998, $400,000 in 1999 and $400,000 in 2000.
Interest payments for supplementary cash flow information totaled
approximately $269,000, $89,000 and $11,000 during 1996, 1995 and 1994,
respectively.
(4) Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Fiscal Years Ended
- ------------------------------------------------------------------------------------------
March 31, March 26, March 27,
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ 732,800 805,000 498,000
State 64,200 48,000 21,000
- ------------------------------------------------------------------------------------------
797,000 853,000 519,000
==========================================================================================
Current 1,054,000 937,000 528,000
Deferred (257,000) (84,000) (9,000)
- ------------------------------------------------------------------------------------------
$ 797,000 853,000 519,000
==========================================================================================
</TABLE>
The provision for income taxes is reconciled to the amount computed by
applying the Federal corporate tax rate of 34% to earnings before income taxes
as follows:
<TABLE>
<CAPTION>
March 31, March 26, March 27,
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at
statutory rate $670,000 784,000 512,000
State income taxes,
net of Federal
tax benefit 41,000 32,000 14,000
Research and
development
credits (53,000) (61,000) (54,000)
Net increase in
valuation allowance 93,000 113,000 --
Non-deductible
employee meals 46,000 46,000 13,000
Foreign sales
corporation -- (22,000) (19,000)
Non-deductible
legal costs -- 28,000 --
Stock option
compensation -- (42,000) --
Other, net -- (25,000) 53,000
- ------------------------------------------------------------------------------------------
$797,000 853,000 519,000
==========================================================================================
Income tax
payments for
supplementary
cash flow
information $641,000 1,115,000 498,000
==========================================================================================
</TABLE>
11
89
<PAGE> 91
Notes to Consolidated Financial Polk Audio, Inc. and Subsidiaries
Statements (continued)
(Three-year period ended March 31, 1996)
The components of the deferred income tax asset at March 31, 1996 and
March 26, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 407,000 204,000
Product warranty and
accrued advertising 235,000 194,000
Employee compensation,
including stock options 190,000 204,000
Inventory 168,000 142,000
State income tax net
operating loss carryforward 97,000 59,000
Allowance for doubtful accounts 62,000 59,000
Net capital loss carryforwards 31,000 31,000
Other 55,000 5,000
- ------------------------------------------------------------------------------
Deferred tax assets 1,245,000 898,000
Less valuation allowance 206,000 113,000
- ------------------------------------------------------------------------------
Deferred tax assets, net 1,039,000 785,000
- ------------------------------------------------------------------------------
Deferred tax liabilities:
State income taxes 13,000 14,000
Prepaid expenses 21,000 23,000
- ------------------------------------------------------------------------------
Deferred tax liabilities 34,000 37,000
- ------------------------------------------------------------------------------
Net deferred tax asset $1,005,000 748,000
==============================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the excess of deferred tax assets over
taxes paid available in carryback years and future reversals of certain
existing taxable temporary differences.
(5) Commitments
The Company is obligated under two noncancellable operating leases
with a partnership comprised of the principal stockholders of the Company for
plant, warehouse and office facilities. One lease provides for annual rentals
of approximately $633,000 through September, 2003 while the other provides for
annual rentals of $196,000 beginning April, 1996 and extending through
February, 2002. Both provide for additional rents for changes in the Consumer
Price Index, real estate taxes, insurance, utilities and maintenance. Rentals
paid to such partnership were approximately $624,000 in 1996, $608,000 in 1995
and $626,000 in 1994. In addition, the Company is obligated under
noncancellable operating leases for various equipment and vehicles. The
approximate future minimum rentals are $1,602,000 in 1997, $1,176,000 in 1998,
$961,000 in 1999, $863,000 in 2000, $841,000 in 2001 and $1,762,000 thereafter.
(6) Common Stock
The Company's charter provides that all shares are initially
classified as common stock and empowers the Board of Directors to reclassify
any unissued shares into classes of preferred or similar stock by setting
preference, conversion or other rights; voting powers; dividend or other
limitations, restrictions or qualifications; or terms or conditions of
redemption of such shares.
In November, 1993 and June, 1992, the Board of Directors approved the
repurchase, in the aggregate, of up to 400,000 shares of the Company's common
stock. The Company did not repurchase any shares during 1996 and 1995,
however, it did repurchase 4,777 shares in 1994 for approximately $42,000.
(7) Equity Participation Plan
Under the Company's Equity Participation Plan for officers and key
employees, an aggregate of 600,000 shares of common stock have been reserved
for issuance as stock bonus awards, incentive stock options or non-qualified
stock options. Incentive stock options may be granted, subject to certain
limitations defined in the plan, at no less than fair market value at the date
of grant (110% of fair market value for more than 10% stockholders) and
non-qualified stock options may be granted at no less than 85% of fair market
value at the date of grant. The maximum exercise period is ten years (five
years for more than 10% stockholders) from the date the option is granted. The
plan also provides for granting stock appreciation rights and tax benefit
rights in tandem with non-qualified stock options and stock bonus awards. Under
certain conditions, the optionee may surrender the related option and receive
cash or shares of common stock based on formulas set forth in the plan.
The Company has granted to certain key employees non-qualified stock
options to purchase an aggregate 368,500 shares of common stock. During 1996,
165,000 shares have been exercised at an average price of $4.94 per share. In
lieu of cash consideration, the Company accepted full recourse notes
receivables which bear interest of 5.45%. Such notes are due March 26, 2001.
Shares exercisable at March 31, 1996 totaled 70,296 and are exercisable at
prices ranging from $4.75 to $8.94 per share. Such options expire at various
dates through 1998.
(8) Pension Plan
The Company has a defined benefit pension plan covering most domestic
employees excluding sales, research and administrative staffs. Benefits to
participants are based on years of service and compensation during the
employee's term of service. The Company's funding policy is to contribute
annually an amount sufficient to fund benefits called for under the plan.
12
90
<PAGE> 92
The plan's funded status and amounts recognized in the Company's
balance sheet at March 31, 1996 and March 26, 1995 are as follows:
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $238,683 343,080
Nonvested 7,481 7,013
- ---------------------------------------------------------------------------
246,164 350,093
Effect of compensation increases -- 40,470
- ---------------------------------------------------------------------------
Projected benefit obligation 246,164 390,563
Plan assets at fair value, primarily
guaranteed investment contracts 240,534 324,242
- ---------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets $ 5,630 66,321
===========================================================================
Unrecognized prior service cost $ -- 95,673
Unrecognized loss on plan assets 6,162 28,633
Deferred pension cost 5,630 25,851
Adjustment required to recognize
minimum liability (6,162) (83,836)
- ---------------------------------------------------------------------------
Pension liability $ 5,630 66,321
===========================================================================
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
Fiscal Years Ended
- --------------------------------------------------------------------------------
March 31, March 26, March 27,
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--
benefits earned $ -- 27,099 31,140
Interest cost on
projected benefit
obligation 20,786 27,730 26,747
Actual return on
plan assets (14,066) (13,268) (7,250)
Amortization of
prior service costs 3,001 2,916 895
- --------------------------------------------------------------------------------
Net pension cost $ 9,721 44,477 51,532
================================================================================
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation are as follows: weighted-average discount rate of
8%; expected rate of return on assets of 8% and assumed rate of salary
increases of 5%.
The Company also provides a contributory profit-sharing plan for
employees who are not participants of the aforementioned pension plan. Company
contributions to the plan totaled $157,480 in 1996, $110,440 in 1995 and
$87,096 in 1994.
(9) Accrued Expenses and
Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, March 26,
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Accrued advertising allowances $ 780,416 555,625
Accrued vacation 414,246 414,995
Accrued salary and bonuses 602,827 487,827
Accrued freight 130,000 170,000
Accrued relocation expenses -- 295,000
Other 502,449 298,130
- ----------------------------------------------------------------------------
$2,429,938 2,221,577
============================================================================
</TABLE>
(10) Business and Credit
Concentrations
The Company markets its products to audio retailers throughout the
U.S.A. and to distributors in forty-five foreign countries. Related trade
receivables are generally unsecured. During fiscal years 1996 and 1995, sales
to one customer amounted to approximately 12.6% and 13.9% of net sales,
respectively. At March 31, 1996, one customer individually comprised 32.5% of
total trade accounts receivable.
Export sales, including sales to overseas installations of the United
States government, were approximately $8,847,000 in 1996, $5,586,000 in 1995
and $4,538,000 in 1994. Such sales represented 17.0%, 13.4% and 13.4%,
respectively, of net sales for such periods. Sales to all installations of the
United States government represented 1.0%, 0.7% and 1.8%, respectively, of net
sales for such periods.
(11) Foreign Operations
Included in the Company's consolidated balance sheet at March 31,
1996, are certain assets of the Company's manufacturing operations, primarily
inventory and equipment, all of which are located in Tijuana, B.C., Mexico and
which total approximately $5.33 million.
13
91
<PAGE> 93
Management's Discussion and Analysis of Financial
Condition and Results of Operations Polk Audio, Inc. and Subsidiaries
Results of Operations
Net earnings of $1,173,711 in 1996 decreased 19.2% from $1,451,936 in
1995 which increased from $988,449 in 1994. The following table sets forth for
the periods indicated certain income, expenses and earnings as a percentage of
net sales.
<TABLE>
<CAPTION>
(percentage of net sales) Fiscal Years Ended
- -----------------------------------------------------------------------------
March 31, March 26, March 27,
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0 100.0
Cost of goods sold (57.3) (53.6) (56.4)
Selling, research, general
and administrative
expenses (38.5) (40.8) (39.4)
- -----------------------------------------------------------------------------
Operating income 4.2 5.6 4.2
Other income (expense) (0.5) (0.1) 0.2
- -----------------------------------------------------------------------------
Earnings before
income taxes 3.7 5.5 4.4
Income taxes (1.5) (2.0) (1.5)
- -----------------------------------------------------------------------------
Net earnings 2.2% 3.5 2.9
=============================================================================
</TABLE>
Net Sales and Cost of Goods Sold
Fiscal 1996 compared to fiscal 1995
Net sales in fiscal 1996 of $52,170,684 increased 25.2% from
$41,672,937 in fiscal 1995. The increase reflects introductions of several new
products coupled with additional domestic and international distribution. Cost
of goods sold, as a percentage of net sales, increased to 57.3% in 1996 from
53.6% in 1995. The increase primarily reflects higher direct material costs and
certain start up costs of production facilities in Tijuana, B.C., Mexico.
Fiscal 1995 compared to fiscal 1994
Net sales in fiscal 1995 of $41,672,937 increased 22.7% from
$33,956,754 in fiscal 1994. The increase reflects introductions of several new
products coupled with additional domestic and international distribution in
addition to continued improvement in the domestic economic environment as
compared with the prior year. Cost of goods sold, as a percentage of net sales,
decreased to 53.6% in 1995 from 56.4% in 1994. The decrease primarily reflects
lower direct material and direct labor costs as a percentage to net sales, of
improved margins on new products introduced during fiscal 1995 and to the
higher absorption on manufacturing overhead costs.
Selling, Research, General and
Administrative Expenses
Fiscal 1996 compared to fiscal 1995
Selling, research, general and administrative (SRG&A) expenses
increased to $20,064,845 in 1996 from $16,979,472 in 1995, an increase of
18.2%. As a percentage of net sales, SRG&A expenses decreased to 38.5% in 1996
from 40.8% in 1995. The increase in SRG&A expenses primarily reflects increased
promotion, selling and shipping costs and increased research and development
expenses relative to the prior year.
Fiscal 1995 compared to fiscal 1994
Selling, research, general and administrative (SRG&A) expenses
increased to $16,979,472 in 1995 from $13,387,013 in 1994, an increase of
26.8%. As a percentage of net sales, SRG&A expenses increased to 40.8% in 1995
from 39.4% in 1994. The increase in SRG&A expenses primarily reflects increased
promotion, selling and shipping costs and increased research and development
expenses relative to the prior year. In addition, during the fourth fiscal
quarter of 1995 the Company incurred costs of approximately $310,000, or 0.7%
of net sales, resulting from its decision to relocate certain manufacturing
operations from its Baltimore facility to its facilities in San Diego,
California and Tijuana, B.C., Mexico.
Other Income and Expense
Fiscal 1996 compared to fiscal 1995
Other expense in fiscal 1996 of $246,000 increased approximately
$210,000 from $36,000 in fiscal 1995. The net decrease primarily resulted from
interest expense incurred on outstanding balances of its revolving and term
notes payable during fiscal 1996.
Fiscal 1995 compared to fiscal 1994
Other income (expense) in fiscal 1995 of ($36,000) decreased
approximately $110,000 from income of $74,000 in fiscal 1994. The net decrease
primarily resulted from increased interest expense on outstanding balances on
its revolving and term notes payable during fiscal 1995.
Income Taxes
Income taxes, as a percentage of earnings before income taxes,
increased to 40.4% in 1996 from 37.0% in 1995 which increased from 34.4% in
1994. The increase in income taxes in 1996 compared with 1995, as a percentage
to earnings before income taxes, results from higher state income taxes. The
increase in income taxes in 1995 compared with 1994, as a percentage to
earnings before income taxes, also resulted from higher state income taxes.
14
92
<PAGE> 94
Seasonality
The home audio market is somewhat seasonal, with the majority of the
Company's sales and earnings occurring historically in the quarters ending
December and March. See interim financial information.
Inflation
The Company's financial statements have been prepared on the
historical cost basis, as required by generally accepted accounting principles.
However, the operating results would not have been significantly different if
the financial statements had been prepared on a price level adjusted basis to
reflect the impact of inflation, because the Company has historically been able
to increase prices to offset rising costs.
Foreign Currency Exchange Rates
The Company procures certain raw materials, component parts and other
products from suppliers in the Far East, Europe, South America and Central
America. In addition, the Company makes sales to customers in Europe, Canada,
South America, Central America, the Middle East and the Far East. Although the
majority of all such transactions are denominated in U.S. dollars, the
Company's costs and ability to compete in foreign markets are affected by
fluctuations in the value of the U.S. dollar in relation to these currencies.
Increased costs generally have been offset by price increases to customers.
Aggregate purchases from foreign suppliers and sales to foreign customers were
$9,941,000 and $8,847,000 in 1996, $8,208,000 and $5,159,000 in 1995, and
$4,374,000 and $3,933,000 in 1994, respectively.
The Company leases four manufacturing facilities in Tijuana, B.C.,
Mexico and its net book value in property and equipment at March 31, 1996 was
approximately $2,316,000. The functional currency of such operations is the
U.S. dollar.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121). The statement established accounting standards for the
impairment of long-lived assets and certain identifiables to be disposed of.
This statement requires a write down to fair value when long-lived assets to be
held and used are impaired. The statement also requires long-lived assets to be
disposed of to be carried at the lower of cost or fair value less cost to sell
and does not allow such assets to be depreciated. The adoption of this
statement effective April 1, 1996 will not have a material effect on results of
operations, financial condition or liquidity.
In October 1995, the Financial Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is effective for fiscal years beginning after December 15,
1995 and for transactions occurring after December 15, 1995. The Statement
defines a fair value based method of accounting for an employee stock option or
similar equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The Statement
encourages all entities to adopt the fair value method of accounting for an
employee stock option or similar equity instrument, however, it allows an
entity to continue to measure compensation costs for stock options or similar
equity instruments using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value based method, compensation costs are the excess, if
any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Entities electing to remain with the accounting in Opinion 25 must make
proforma disclosure of net income and earnings per share as if the fair value
method of accounting had been applied. The Company has elected to continue to
measure compensation costs for stock options using the intrinsic value based
method of accounting and will disclose proforma net income and earnings per
share as if the fair value based method of accounting had been applied.
Liquidity and Capital Resources
The Company has historically financed its operations through cash
generated by operations, term loan borrowings, revolving credit line borrowings
and normal trade credit extended by its suppliers.
Net cash used in operating activities during the fiscal year ended
March 31, 1996 was $1,760,155. As of March 31, 1996, the Company's working
capital was $16,076,534 and its current ratio was 2.9 to 1. In addition, the
Company presently has an unsecured revolving credit agreement with a commercial
bank providing for maximum borrowings of $6,500,000 of which $1,644,851 was
available at March 31, 1996, and an unsecured five-year term loan agreement
with the same bank for $2,000,000, of which $1,600,000 was outstanding at March
31, 1996. The Company believes funds provided by operations, working capital
and temporary borrowings from its credit agreement and term loan will be
sufficient to meet its current operating needs and anticipated capital
expenditures for fiscal 1997.
15
93
<PAGE> 95
Seven-Year Financial Summary Polk Audio, Inc. and Subsidiaries
<TABLE>
<CAPTION>
As of and for the Fiscal Years Ended
- -------------------------------------------------------------------------------------------------------------------------
March 31, March 26, March 27, March 28, March 29, March 31, March 25,
1996 1995 1994 1993 1992 1991 1990
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Statement Data:
Net sales $52,171 41,673 33,957 29,822 27,465 27,866 27,540
Gross profit 22,282 19,321 14,821 11,505 10,298 10,961 11,444
Selling, research,
general and
administrative expenses 20,065 16,979 13,387 10,840 9,204 9,280 8,592
Operating income 2,217 2,341 1,434 665 1,094 1,681 2,852
Earnings before
income taxes 1,971 2,305 1,507 883 502 1,781 2,907
Net earnings 1,174 1,452 988 592 321 1,200 1,972
Earnings per share $ 0.69 0.86 0.60 0.36 0.18 0.68 1.09
Balance Sheet Data:
Working capital $16,077 12,862 9,735 9,327 9,666 8,441 8,049
Total assets 30,191 22,224 15,974 14,745 15,787 14,691 12,859
Long-term debt 6,055 2,400 -- -- -- -- --
Stockholders' equity 15,436 14,153 12,474 11,437 11,690 11,370 10,169
</TABLE>
Market and Dividend Information
As of May 31, 1996, there were 154 stockholders of record. This number
does not reflect the number of beneficial owners of the Company's common stock
for whom shares are held by certain brokerage firms and others.
The Company has not paid or declared any dividends since its
inception. The Company intends to follow a policy of retained earnings in order
to finance the growth and development of the business.
During the fiscal year ended March 31, 1996 the Company's common stock
was traded over-the-counter. Effective June 6, 1996 the Company's common stock
will be traded on the American Stock Exchange. The high and low bid prices per
share, as adjusted for stock splits, during the last four fiscal years were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993
High Low High Low High Low High Low
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 13 9 1/2 10 1/2 9 3/4 10 1/2 8 3/4 7 4 1/4
September 12 1/2 10 1/2 10 7 3/8 9 1/2 7 3/4 6 5 1/4
December 12 1/4 9 1/4 10 3/4 8 1/4 9 7 3/4 8 1/2 5 1/2
March 9 3/4 8 13 1/2 10 10 1/2 8 1/2 9 1/2 7 1/2
- -------------------------------------------------------------------------------------------------
</TABLE>
16
94
<PAGE> 96
BOARD OF DIRECTORS &
EXECUTIVE OFFICERS
Matthew S. Polk, Jr.
Chairman of the Board of Directors
Secretary and Vice President of Engineering
George M. Klopfer
Chief Executive Officer and Director
James M. Herd
President
Craig C. Georgi
Vice President of Manufacturing and Director
Gary B. Davis
Treasurer and Chief Financial Officer
Peter D. Gaskarth
Vice President of Polk Home Entertainment Products
Robert E. Limbaugh
Vice President of Polk Automotive Products
Thomas C. Roddam
Vice President of Eosone Home Products
Keith A. Ballard
Vice President of Marketing
Wilbert H. Sirota
Director
a Partner in the law firm of
Piper & Marbury L.L.P.
Robert B. Barnhill, Jr.
Director
President and CEO of TESSCO, Inc.
Corporate Offices
5601 Metro Drive
Baltimore, Maryland 21215, USA
Telephone (410) 358-3600
Telecopier (410) 764-5266
Transfer Agent and Registrar
Chemical Mellon Shareholder Services
New York, New York
Annual Meeting
The Annual Meeting of Stockholders will be held
on Monday, August 5, 1996 at 9:00 a.m. at the Offices
of Piper & Marbury L.L.P., 36 South Charles Street,
2nd floor, Baltimore, Maryland 21201.
Form 10-K
Form 10-K is available without charge to stockholders upon written request.
Exhibits to Form 10-K will be furnished upon payment of $.50 per page with a
minimum charge of $5.00. Please direct requests to President, Polk Audio, Inc.,
5601 Metro Drive, Baltimore, MD 21215, USA.
Stock Information
Polk Audio, Inc. is traded on the American Stock Exchange under the symbol PKA.
Designed by Curran & Connors, Inc.
95
<PAGE> 97
Polk Audio, Inc.
5601 Metro Drive
Baltimore, Maryland 21215, USA
(410) 358-3600
http://www.polkaudio.com/
96
<PAGE> 98
EXHIBIT 21.1
POLK AUDIO, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
1) Britannia Investment Corporation, incorporated under the laws of Delaware.
2) Polk International Sales Corporation, incorporated under the laws of the
United States Virgin Islands.
3) Polk Audio Europe Inc., incorporated under the laws of Maryland.
4) Polk Audio International Limited, incorporated under the laws of the United
Kingdom.
5) Eosone International, Inc., incorporated under the laws of Maryland.
97
<PAGE> 99
Exhibit 23.1
The Board of Directors
Polk Audio, Inc.
We consent to the use of our reports included herein or incorporated herein by
reference.
Baltimore, Maryland
June 24, 1996
98
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> MAR-27-1995
<PERIOD-END> MAR-31-1996
<CASH> 184,118
<SECURITIES> 0
<RECEIVABLES> 15,831,305
<ALLOWANCES> 170,396
<INVENTORY> 7,928,438
<CURRENT-ASSETS> 24,541,296
<PP&E> 9,553,922
<DEPRECIATION> 4,927,074
<TOTAL-ASSETS> 30,191,156
<CURRENT-LIABILITIES> 8,464,762
<BONDS> 0
0
0
<COMMON> 17,970
<OTHER-SE> 15,418,275
<TOTAL-LIABILITY-AND-EQUITY> 30,191,156
<SALES> 52,170,684
<TOTAL-REVENUES> 52,170,684
<CGS> 29,888,990
<TOTAL-COSTS> 49,953,835
<OTHER-EXPENSES> 246,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,482
<INCOME-PRETAX> 1,970,711
<INCOME-TAX> 797,000
<INCOME-CONTINUING> 1,173,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,173,711
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
