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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 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____to _____
Commission File Number: 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 16, 1997, was $7,894,556.
Number of shares of Common Stock of the registrant outstanding as of
June 16, 1997: 1,823,035 SHARES
TOTAL NUMBER OF PAGES: 64
EXHIBIT INDEX STARTS ON PAGE: 20
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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 1997 Annual Report to
Common Equity and Related Stockholders for the Fiscal
Stockholder Matters Year ended March 30, 1997
Item 6 - Selected Financial Data 1997 Annual Report
to Stockholders for the Fiscal
Year ended March 30, 1997
Item 7 - Management's Discussion 1997 Annual Report
and Analysis of Financial to Stockholders for the Fiscal
Condition and Results of Year ended March 30, 1997
Operation
Item 8 - Financial Statements and 1997 Annual Report
Supplementary Data to Stockholders for the Fiscal
Year ended March 30, 1997
PART III:
Item 10 - Directors and Executive Proxy Statement for the
Officers of the Registrant 1997 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
1997 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 1997 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 1997 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 after-market 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 1997 were in excess of $300 million and that the total
sales to United States dealers of after-market automotive speaker systems (i.e.,
excluding products installed as original equipment in new cars) were in excess
of $350 million in 1997. 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.
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The Reference Theater or "RT" Series, also introduced during fiscal 1996,
consists of 8 models, with 3 replacement models planned during fiscal 1998, and
range in retail price from $280 to $2,100 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
effort with the Johns Hopkins University, and enhanced cosmetic design.
The M Series, consisting of seven models are known as the
Multi-application Studio Monitor M3II, the M5, the M2, the M1, the All Weather
M3II, the All Weather M5 and the All Weather M2. 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. The M1
and M2 models are smaller versions of the popular M3 and M5. 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 $200 to $500 per pair.
The Center Channel/Video loudspeaker series (CS series) introduced in
fiscal 1992 consists of four models, with 2 replacement models and one new model
scheduled during fiscal 1998. 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 $149 to $450 per speaker.
The Home Self-Powered (active) Subwoofer series (PSW series), consists of
4 models ranging in retail price from $450 to $800 per unit. A new model is
planned for introduction in fiscal 1998. 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-3300 Series II
3-piece sub-woofer/satellite system, modified during fiscal 1996, with a retail
price of $800 per set; the RM-5300 4-piece subwoofer/satellite/center channel
system, modified during fiscal 1996, with a retail price of $1,100 per set; and
the RM7300 4-piece active subwoofer/satellite/center channel system, modified in
fiscal 1996, with a retail price of $1,600 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 for installation 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 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 "f/x" Series or "Surround Effects Series" was introduced during fiscal
1997 and retails for $450 to $600. There are 2 models in this product line with
3 more anticipated to be introduced in fiscal 1998. These models were designed
for specific use as rear channel surround speakers designed to give powerful
surround effects when using Dolby Pro Logic(R) processors.
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The "R" Series, introduced in fiscal 1997, consists of two models and
retail for $160 and $220 per pair. The "R" Series is a modestly priced line of
small bookshelf speakers designed to produce efficient and high levels of sound
even when using low powered receivers.
The DB Series, consisting of ten models are high-end, automotive full
range and Subwoofer speakers systems sold in the automotive after-market. The DB
Series are sold as separate units or in combination as systems and range in
retail price from $130 per unit to $450 per system. This product line was
introduced during fiscal 1996 and replaced the popular Mobile Monitor "MM"
Series product line.
The EX II Series, consisting of thirteen models, replaced the EX Series in
fiscal 1997. The EX II Series are automotive full range and Subwoofer speakers
systems at lower to medium prices also sold in the automotive after-market. The
EX II Series models are sold as separate units or in combination as systems and
range in retail price from $60 to $250 per system. This product category was
introduced to expand the Company's product offerings in the after-market car
stereo market.
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 $800 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 for use 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) Subwoofer 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 $280 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 $750 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 $1,100 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.
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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 historically has, and may continue to, periodically subcontract for
consulting and design expertise. The Company's expenditures for research and
development were approximately $2,726,000 for the fiscal year ended March 30,
1997, $3,266,000 for the fiscal year ended March 31, 1996 and $2,565,000 for the
fiscal year ended March 26, 1995.
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,
four United Kingdom patents two German patent and one Japanese patent through
BIC. The Company has patents pending in the U.S., Canada, China, Japan, Brazil
and the European Patent Office and Patent Cooperation Treaty.
Additionally, BIC holds several registered trademarks including but not
limited to Polk Audio(R), Eosone(R), Stereo Dimensional Array(TM), 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.
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DISTRIBUTION
Polk Audio
The Company's home products are selectively distributed in the United
States through approximately 325 dealers (some of which have multiple outlets),
that are typically audio or audio/video specialist retailers. The Company also
sells its DB, and EX II Automotive Series products in the United States through
approximately 425 dealers, including auto-sound specialist retailers and some of
its regular home audio dealers.
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, among other things, require the dealer to display the Company's
products properly and to employ a sales staff who is knowledgeable about audio
products. Generally, the dealer agreements are nonexclusive and may be
terminated by either party on 30 days notice
The Company's products are exported through approximately 53 exclusive
distributors to certain foreign countries, including various European, South
American and Asian markets. The Company also maintains 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 240 retailers in
the United Kingdom, the Netherlands and Germany with more planned during fiscal
1998. In addition, during fiscal 1995, the Company established a field sales
operation in Canada to service its retailer base that was previously serviced
through a distributor. Currently, the Company sells directly to approximately 50
retailers in Canada with more planned during fiscal 1998.
The Company's sales to foreign customers were approximately $9,538,000,
$8,847,000 and $5,159,000 for the fiscal years ended March 30, 1997, March 31,
1996 and March 26, 1995, respectively.
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 272 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 1998 and thereafter, and providing
in-store product displays and point-of-purchase sales materials.
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ADVERTISING AND SALES PROMOTION
The Company has historically advertised 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 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. The DB and EX Automotive Series product lines are
primarily 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
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 is 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
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 ultimately sales in retail outlets. These competitors
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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
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 that 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. Since the Company is not heavily dependent on 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
and 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 Tijuana,
B.C., Mexico. 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 assembly, woodworking and warehousing
operation located in four separate facilities, totaling approximately 125,000
square feet, within the same industrial park in Tijuana, B.C., Mexico. All 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
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multiple suppliers 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 15% of the total purchases made by the Company in fiscal 1997.
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 R Series and certain CS products are
purchased as fully assembled products. Also, the Company has imported some fully
assembled DB and EX Series products. Such purchases decreased from 17% of total
purchases in fiscal 1996 to 16% in fiscal 1997. The Company also purchases
certain subassemblies from suppliers in Japan and Taiwan. These subassembly
units are incorporated into select finished products with final testing done by
the Company.
QUALITY CONTROL
Polk's manufacturing operation includes a program of quality testing at
each principal stage of 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 delays or
production problems. The Company's backlog was approximately $1,022,000 and
$2,057,000 at March 30, 1997 and March 31, 1996, respectively. The Company
anticipates the entire backlog as of March 31, 1997 to be filled during fiscal
1998.
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. Also, the Company may sometimes
reimburse 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.
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EMPLOYEES
As of June 3, 1997 the Company had approximately 143 full-time employees
who were engaged as follows:
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Activity Number
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Production and warehousing 41
Engineering 26
Sales and marketing 52
Administrative 24
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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 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 five 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 283 persons in all on June 3, 1997, are CESA employees.
ITEM 2. PROPERTIES
Since August 1986, the Company has leased a 100,000 square foot facility
located at 5601 Metro Drive, Baltimore, Maryland 21215. As of June 1, 1997, the
Company is leasing 76,000 square feet of this facility where it houses the
Company's engineering, sales and administrative offices.
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
42,000 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 40,000 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 square feet located in San Diego, California. Located in this facility
are the Company's west-coast distribution operations and certain quality
assurance and warehousing operations. Effective April 1, 1996, the Company
expanded its operations in this building to a total of approximately 49,500
square feet. In March 1997, to become effective May, 1997, the Company expanded
its operations further in this building to a total of approximately 65,000
square feet for the purpose of housing the Company's warranty and certain
customer service operations. For additional information regarding these
transactions, refer to "Certain Transactions" in the Polk Audio, Inc. "Notice of
Annual Meeting of Stockholders," dated June 26, 1997.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Incorporated by reference to the 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to the 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Incorporated by reference to the 1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference to the 1997 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
1997 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
1997 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
13
<PAGE> 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement with respect to its
1997 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's Proxy Statement with respect to its
1997 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.
(A) DOCUMENTS FILED AS PART OF THE REPORT
1. FINANCIAL STATEMENTS (INCORPORATED BY REFERENCE TO THE 1997 ANNUAL
REPORT TO STOCKHOLDERS, PAGES 5 - 13):
- Independent Auditors' Report.
- Consolidated Balance Sheets as of March 30, 1997 and March 31,
1996.
- Consolidated Statements of Earnings for the fiscal years ended
March 30, 1997, March 31, 1996 and March 26, 1995.
- Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended March 30, 1997, March 31, 1996 and March 26,
1995.
- Consolidated Statements of Cash Flows for the fiscal years ended
March 30, 1997, March 31, 1996 and March 26, 1995.
- 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 30, 1997, March 31, 1996 and March 26, 1995.
All other schedules have been omitted because required information is not
present or is not present in amounts sufficient to require submission of
schedules.
14
<PAGE> 15
3. EXHIBITS
<TABLE>
<S> <C> <C>
3.1 (*1) Articles of Amendment and Restatement of the Company
3.2 (*1) By-Laws of the Company
(*2) Articles of Amendment of the Company
10.1 (*5) 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
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 (*5) First Amendment to Financing Agreement dated October 15, 1995 by and
between NationsBank, N.A. and the Company.
10.17 (*5) Second Amendment to Financing Agreement dated March 22, 1996 by and
between NationsBank, N.A. and the Company.
10.18 (*5) Lease by and between Otay Mesa Woodland Hills
Partnership and the Company dated July 1, 1994.
10.19 (*5) First Lease Amendment by and between Otay Mesa
Woodland Hills Partnership and the Company dated January
18, 1995.
10.20 (*5) Second Lease Amendment by and between Otay Mesa
Woodland Hills Partnership and the Company dated November
20, 1995.
10.21 (*5) Third Lease Amendment by and between Woodland Hills
Partnership and the Company dated November 20, 1995.
10.22 (*5) Assignment of Leases as of and between Woodland Hills Properties-W, Inc. and
Klopfer Associates dated March 18, 1996.
10.23 (*5) 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.
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
10.24 (*5) Form of pledge agreement executed by participants
under the 1986 Equity Participation Plan in connection with
promissory note referenced in Exhibit 10.24.
10.25 * Assignment of Lease by and among UETA, the Company, and
Klopfer Associates LLC dated March 21, 1997.
10.26 * Lease Amendment by and between Klopfer Associates Limited
Partnership and the Company dated March 27, 1997.
10.27 * Third Amendment to Financing Agreement dated October 23, 1996 by and
between NationsBank, N.A. and the Company.
10.28 * $8,000,000 Revolving Credit Note dated October 23, 1996 by and between
NationsBank, N.A. and the Company.
11.1 * Statement re computation of per-share earnings
13.1 * Annual Report to Stockholders for the fiscal year ended March 30, 1997.
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.
(*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.
(*5) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended March 31, 1996 filed with the Securities and Exchange
Commission on June 28, 1996.
(*) Filed herewith.
</TABLE>
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on April 7, 1997 to report the Company's operational
restructuring and the reactivation of its share buyback program.
16
<PAGE> 17
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 26th day of June,
1997.
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 26, 1997
George M. Klopfer and Director
/s/ Matthew S. Polk, Jr.
- ------------------------ Chairman of the Board, June 26, 1997
Matthew S. Polk, Jr. Vice President and
Secretary and Director
/s/ James M. Herd President June 26, 1997
- ------------------------
James M. Herd
/s/ Craig C. Georgi Vice President and June 26, 1997
- ------------------------ Director
Craig C. Georgi
/s/ Gary B. Davis Treasurer, Chief Financial Officer June 26, 1997
- ------------------------ and Chief Accounting Officer
Gary B. Davis
/s/ Wilbert H. Sirota Director June 26, 1997
- ------------------------
Wilbert H. Sirota
/s/ Robert B. Barnhill, Jr. Director June 26, 1997
- ------------------------
Robert B. Barnhill, Jr.
</TABLE>
17
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Polk Audio, Inc.:
Under date of May 14, 1997, we reported on the consolidated balance sheets of
Polk Audio, Inc. and subsidiaries as of March 30, 1997 and March 31, 1996, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended March 30, 1997. 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 30, 1997,
March 31, 1996 and March 26, 1995. 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, 1997
18
<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 30, 1997:
Allowance for doubtful accounts receivable $170,396 377,424 35,087 197,800 385,107
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
</TABLE>
(1) Recovery of amounts previously charged off.
(2) Amounts charged off.
19
<PAGE> 20
EXHIBITS INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
10.25 Assignment of Lease by and among UETA, the Company, and Klopfer
Associates LLC dated March 21, 1997. 21
10.26 Lease Amendment by and between Klopfer Associates Limited Partnership
and the Company dated March 27, 1997. 25
10.27 Third Amendment to Financing Agreement dated October 23, 1996 by and
between NationsBank, N.A. and the Company. 28
10.28 $8,000,000 Revolving Credit Note dated October 23, 1996 by and between
NationsBank, N.A. and the Company. 32
11.1 Statement re computation of per-share earnings 41
13.1 Annual Report to Stockholders for the fiscal year ended March 30, 1997. 42
21.1 Subsidiaries of the Registrant 62
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors 63
27.1 Financial Data Schedule 64
</TABLE>
20
<PAGE> 1
EXHIBIT 10.25
ASSIGNMENT OF LEASE
This Assignment of Lease is made this 21st day of March 1997, by and
among UETA, Inc. ("UETA"), Polk Audio, Inc. ("Polk") and Klopfer Associates LLC
("Landlord").
RECITALS
A. UETA is the tenant under a certain lease with the Koll Company,
landlord, dated March 8, 1989, and amended March 8, 1989 and May 18, 1993 (which
lease and amendments are hereinafter collectively referred to as the "Lease").
B. The Lease is for 15,696 square feet of space (the "Leased
Premises") in the Britannia Business Center, 2550 Britannia Boulevard, San
Diego, CA (the "Facility"), with a term expiring May 31, 1999.
C. Landlord is the successor in interest of the Koll Company, as the
present owner of the Facility.
D. UETA wishes to vacate, and Polk wishes to occupy, the Leased
Premises, upon the further terms and conditions herein contained.
AGREEMENTS
In consideration of One Dollar ($1.00) and other good and valuable
consideration, the receipt and sufficiency of which is hereby mutually
acknowledged:
1. Assignment Effective Date. As of May 1, 1997 (the "Effective
Date"), and subject to the further provisions hereof, UETA does hereby
irrevocably assign its rights and duties under the Lease to Polk, Polk hereby
accepts such assignment and Landlord consents herein.
2. Repairs and Restoration. UETA shall, on or before the Effective
Date, vacate the Leased Premises, and shall turn over the Leased Premises to
Polk in a broom-clean condition and with all appurtenances thereto in good
working order and repair. Prior to the effective date, UETA shall perform and
complete at its own expense, and in a diligent and workmanlike manner, all
items of repair and maintenance to which it would be obligated pursuant to the
applicable provisions of the Lease, as though the Effective Date were the end
of the Lease Term.
21
<PAGE> 2
page 2
3. Tenant Improvements. Within fifteen (15) days from the date of
execution hereof by all parties, Polk shall make an inspection of the Premises
to determine which leasehold improvements installed by UETA are to be removed
by UETA pursuant to the applicable provisions of the Lease. Polk shall advise
UETA in writing within no more than twenty (20) days from the date of execution
hereof by all parties, which tenant improvements are to be removed by UETA as
provided in the Lease, prior to the Effective Date. All other tenant
improvements installed by UETA are hereby assigned to Polk. Subject to the
other provisions hereof, Landlord hereby releases UETA from any obligation to
remove said tenant improvements.
4. Inspection. Polk shall have the right to inspect the Leased Premises
at any reasonable time or times during normal business hours prior to the
Effective Date to verify that UETA has fully met its obligation to perform
repairs, restoration, maintenance and removals as set forth herein. In the
event that UETA shall fail to have performed its obligation to perform repairs,
restoration and maintenance, or to remove leasehold improvements as set forth
herein, then Polk shall have the option, in its sole and absolute discretion,
either (i) to perform such repairs, restoration, maintenance or removals and
deduct the cost thereof from reimbursements otherwise due to UETA for security
deposits held by the Landlord, or alternatively (ii) to postpone the Effective
Date until such time that UETA has completed said repairs, restoration,
maintenance or removals.
5. Release of UETA. After the Effective Date, subject to Section 6
hereof and provided that it has complied with all of its obligations hereunder,
and its obligations under the Lease prior to the Effective Date, UETA shall
thereafter be relieved and released of any further responsibility and liability
under the Lease.
6. Representations and Warranties. UETA warrants and represents to Polk
and the Landlord as follows:
a. UETA has at all times maintained insurance coverage as
required under the Lease and such insurance will afford sufficient coverage for
any claims arising from events prior to UETA's departure from the Premises.
b. UETA is not currently in default of any of its obligations
under the Lease. This representation will survive beyond the Effective Date.
7. Security Deposits. On the Effective Date, and subject to the full
22
<PAGE> 3
page 3
performance by UETA of its obligations under the Lease prior to the Effective
Date and its obligations hereunder, Polk shall pay over to UETA the sum of
$5,964.48 as reimbursement for security deposits held by the Landlord.
Thereafter, UETA's title and interest in security deposits held by the Landlord
shall be the property of Polk.
8. Release of Landlord. After the Effective Date, UETA shall have no
further claims against Landlord arising out of the Lease or the tenancy created
thereunder, nor against Polk except to the extent that Polk shall not have
performed its obligations to UETA hereunder, including without limitation the
obligation to return UETA's security deposits (if any) paid to Koll Company and
held by Landlord.
9. Indemnification. Notwithstanding any contrary provision hereof, UETA
shall indemnify Polk and Landlord against any and all liabilities and expenses
which either Polk or Landlord may incur, arising out of the occupancy, acts or
omissions of UETA prior to the Effective Date.
10. Common Area Charges. UETA shall remain liable for any pass through
common area charges which remain unbilled as of the Effective Date, which
relate to UETA's period of occupancy of the Premises.
11. Waivers. UETA waives any claims for undrawn tenant allowances,
property tax rebates and refunds, and/or refunds for any disputed expenses of
any kind.
12. Consent by Bank. The effectiveness of this Assignment agreement is
subject to and contingent upon the consent of Wells Fargo Bank, NA, as
mortgagee on the Facility.
13. Miscellaneous.
a. Time is of the essence hereof.
b. This Assignment shall be construed and enforced with
reference to the laws of California. Any controversies arising hereunder shall
be litigated in California.
c. Except as it may be expressly modified herein, the Lease
shall remain in full force and effect in accordance with its terms.
23
<PAGE> 4
page 4
IN WITNESS WHEREOF, the parties have extracted this Assignment on the year and
date first above written.
WITNESS: UETA, INC.
/s/ David C. Lopez, Jr. /s/ Robert J. Brady
- ---------------------------------- -----------------------------------
David C. Lopez, Jr. by: Robert J. Brady, Vice President
WITNESS: POLK AUDIO, INC.
/s/ Pamela Lauria /s/ James M. Herd
- ----------------------------------- -----------------------------------
by: James M. Herd, President
WITNESS: KLOPFER ASSOCIATES LLC
/s/ Pamela Lauria /s/ George M. Klopfer
- ----------------------------------- -----------------------------------
by: George M. Klopfer, Manager
Consent given:
[SIG]
- ----------------------------------- 4-9-97
Wells Fargo Bank, NA date
by: ITS' VICE PRESIDENT
24
<PAGE> 1
EXHIBIT 10.26
THIS SECOND LEASE AMENDMENT ("Second Amendment") dated this 21st day of
March, 1997, by and between Klopfer Associates Limited Partnership, a Maryland
limited partnership (hereinafter referred to as the "Landlord") and Polk Audio,
Inc., a Maryland corporation (hereinafter referred to as the "Tenant").
WITNESSETH, THAT WHEREAS Landlord and Tenant entered into a certain
Lease Agreement dated September 23, 1985 (hereinafter referred to as the
"Lease"); and
WHEREAS Landlord and the Tenant amended the said Lease by means of a
Lease Amendment dated September 23, 1993 (hereinafter referred to as the "First
Amendment"); and
WHEREAS the parties desire to redefine the Leased Premises, to extend
the term of the Lease and to make certain other changes thereto;
NOW THEREFORE for and in consideration of the mutual covenants and
other undertakings herein contained, the parties do hereby agree to further
amend the Lease and the First Amendment as follows:
1. Term. The term of the Lease shall be extended to the last day of
May, 2007. Section 5 of the First Amendment shall remain in full force and
effect.
2. Leased Premises. Effective as of June 1, 1997, or on the actual
effective commencement date of the lease dated 17th September, 1996 by and
between Landlord and Sinai Hospital of Baltimore, Inc., as further amended by
an Amendment dated 18th February, 1997 (collectively, the "Sinai Lease"),
whichever shall be later (the "Effective Date"), the Leased Premises shall
constitute 76,000 square feet at the west end of the building addressed as 5601
Metro Drive, Baltimore MD 21215, as shown outlined and crosshatched in red in
Section 1 of the attached plat marked Exhibit "A", together with ninety five
(95) parking spaces set aside for the exclusive use of the Tenant, as outlined
and crosshatched in red in Section 2 of Exhibit "A", together with easements to
use in common with others the private access driveways and rear exterior paved
loading areas of the Property, (such interior building space, reserved parking
areas and easements leased hereby being hereinafter collectively referred to as
the "Leased Premises"). Tenant shall not use parking areas or loading docks
other than those reserved for its exclusive use.
3. Rent. The annual base rental payable for the Leased Premises, as
set forth in Section #2 of the Lease, commencing on the Effective Date, shall
be FIVE HUNDRED THIRTY FIVE THOUSAND DOLLARS ($535,000.00) for the Leased
Premises (as defined in the preceding Section hereof) on an "as-is" basis,
payable in equal monthly installments of FORTY FOUR THOUSAND FIVE HUNDRED
EIGHTY THREE AND 33/00 DOLLARS ($44,583.33) each (the "Base Rental"). In
addition thereto Tenant shall be liable for additional rent taxes, insurance
and maintenance costs as provided in Sections 4 and 5 hereof and as provided in
the Lease (except as expressly modified herein), including without limitation
Sections 7, 8, 9, 10, 11, 18 and 32 hereof.
25
<PAGE> 2
Second Amendment to Lease
Klopfer Associates Ltd. Partnership/Polk Audio, Inc.
page 2
4. Escalation. The Base Rental shall be adjusted on January 31 of
each year starting in 1998, in the manner set forth in Section 9 of the Lease,
to reflect changes in the Consumer Price Index from October 1996 to October
1997, and in a like manner annually thereafter.
5. Brokerage and Other Expenses. Tenant shall be responsible for
direct payment of brokerage commissions due to Miller Corporate Real Estate
Services, Inc. relating to the Sinai Lease, as well as all other expenses
incident to the initial implementation of the Sinai Lease, including without
limitation the cost of construction of all demising walls and other tenant
improvements, legal fees, architectural and engineering fees and incidental
costs such as those related to zoning actions.
6. Deletions to First Amendment. Sections 7 and 8 of the First
Amendment are hereby deleted in their entirety.
7. Other Provisions. Except as expressly modified or deleted herein,
all other provisions of the Lease and the First Amendment shall remain in full
force and effect. Except as otherwise provided herein, all terms used herein
shall have the same meaning ascribed to them in the Lease and/or the First
Amendment.
8. Conditions Precedent. Landlord's willingness and ability to enter
into the Second Amendment is expressly conditioned on (i) the final
effectiveness of the Sinai Lease (as described above) and (ii) obtaining the
consent of NationsBank to this Amendment. If before April 15, 1997 the Sinai
Lease shall not have become effective and noncancellable by the tenant therein
in accordance with its terms, or if the Landlord shall not have obtained the
consent of NationsBank in writing to the Sinai Lease or to this Second
Amendment, then this Second Amendment shall be null and void and the Lease and
the First Amendment shall continue unmodified in full force and effect. If
Landlord has reason to believe that either or both of the foregoing conditions
precedent is not likely to be satisfied, it shall promptly notify the Tenant
thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized officer or partner to execute and enseal this Second Amendment, on
the year and day first above written.
26
<PAGE> 3
Second Amendment to Lease
Klopfer Associates Ltd. Partnership/Polk Audio, Inc.
page 3
WITNESS/ATTEST: LANDLORD:
KLOPFER ASSOCIATES L.P.
/s/ DEBORAH J. SMITH /s/ GEORGE M. KLOPFER
- ------------------------------- ----------------------- (SEAL)
by: George M. Klopfer
General Manager
WITNESS/ATTEST: LANDLORD:
POLK AUDIO, INC.
/s/ DEBORAH J. SMITH /s/ JAMES M. HERD
- ------------------------------- ----------------------------- (SEAL)
by: James M. Herd, President
Consent given to
Second Amendment to Lease:
NATIONSBANK, N.A.
- -------------------------------------
by: Andrew John, Senior V.P. (date)
27
<PAGE> 1
EXHIBIT 10.27
THIRD AMENDMENT
TO
FINANCING AGREEMENT
THIS THIRD AMENDMENT TO FINANCING AGREEMENT (this "Agreement") is made
this 23rd day of October, 1996, by and among POLK AUDIO, INC., a corporation
organized under the laws of the State of Maryland ("Polk Audio"), BRITTANIA
INVESTMENT CORP. (formerly known as 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, as modified by a First Amendment to Financing Agreement
dated October 15, 1995 and as further modified by a Second Amendment to
Financing Agreement dated March 22, 1996 (the same, as amended, modified,
substituted, extended, and renewed from time to time, collectively, 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 $6,500,000 (under which the Lender provides
letters of credit not to exceed $2,500,000, foreign exchange and interest rate
contracts not to exceed $100,000 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 a temporary increase
in the maximum amount of the Revolving Credit Loans to $8,000,000.
C. The Lender has approved the Borrowers' application 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:
28
<PAGE> 2
1. The Borrowers and the Lenders 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. Section 1.1 of the Financing Agreement is modified by deleting
the definition of Revolving Credit Termination Date and inserting the following
definition in its place:
""Revolving Credit Termination Date" means the earliest of (a)
October 31, 1998, (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."
3. The Financing Agreement is hereby amended as follows:
(a) 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 a) $8,000,000
until March 31, 1997 at which time the maximum principal amount shall
not exceed $6,500,000 minus b) 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 c) the aggregate
amount of all Obligations (fixed or contingent) with respect to Foreign
Exchange/Swap 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."
(b) A new section 2.2.7 is hereby added to the Financing
Agreement as follows:
"2.2.7 The Borrowers shall make mandatory prepayments as
required to comply with the reduction in the maximum principal amount of
the Revolving Loan as set forth in Section 2.2.1."
29
<PAGE> 3
4. The Borrowers' obligation to repay the advances of the Revolving
Loan, as increased under Section 1 (a) 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 $8,000,000 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 $6,500,000 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.
WITNESS OR ATTEST: POLK AUDIO, INC.
/s/ Gary B. Davis By: /s/ George M. Klopfer (SEAL)
- -------------------------- ----------------------------
Gary B. Davis George M. Klopfer
CEO
/s/ Gary B. Davis By: /s/ Matthew S. Polk, Jr. (SEAL)
- -------------------------- ----------------------------
Gary B. Davis Name:
Title: Chairman
30
<PAGE> 4
WITNESS: BRITTANIA INVESTMENT CORP. (formerly
known as POLK INVESTMENT CORP.)
/s/ Gary B. Davis By: /s/ George M. Klopfer (SEAL)
- --------------------------- ----------------------------
Gary B. Davis Name: George M. Klopfer
Title: President
WITNESS: POLK INTERNATIONAL SALES CORPORATION
/s/ Gary B. Davis By: /s/ George M. Klopfer (SEAL)
- ----------------------------- ----------------------------
Gary B. Davis Name: George M. Klopfer
Title: President
WITNESS: POLK AUDIO EUROPE, INC.
/s/ Gary B. Davis By: /s/ George M. Klopfer (SEAL)
- --------------------------- ----------------------------
Gary B. Davis Name: George M. Klopfer
Title: President
WITNESS: NATIONSBANK, N.A.
By: (SEAL)
- -------------------------- ----------------------------
Thomas O. Holland
Vice President
31
<PAGE> 1
EXHIBIT 10.28
REVOLVING CREDIT LINE
$8,000,000 Baltimore, Maryland
October 23, 1996
FOR VALUE RECEIVED, POLK AUDIO, INC., a corporation organized under the
laws of the State of Maryland, BRITTANIA INVESTMENT CORP. (formerly known as
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 EIGHT MILLION DOLLARS ($8,000,000) (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.
32
<PAGE> 2
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 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, 1998.
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 any 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 prepayment fee then due
hereunder, third to the payment of accrued
33
<PAGE> 3
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 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 shall make mandatory prepayments as
required pursuant to Section 2.2.7 of the Financing Agreement and may make such
other prepayments of 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 Third Amendment to Financing
Agreement dated the same date as this Note, which amends the Financing
Agreement dated November 30, 1994 (as amended by a First Amendment to Financing
Agreement dated October 15, 1995 and as further amended by a Second Amendment
dated March 22, 1996 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
34
<PAGE> 4
under the terms of this Note shall immediately become due and payable by the
Borrowers to the Lender without notice to the 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
35
<PAGE> 5
otherwise be entitled under the laws of the United States of 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
36
<PAGE> 6
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) had not been
contained in this Note, but only to the extent it is invalid, illegal, or
unenforceable.
37
<PAGE> 7
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 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
38
<PAGE> 8
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 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 to 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
OPTION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY
OR TO IN ANY WAY MODIFY OR 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
39
<PAGE> 9
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.
WITNESS OR ATTEST: POLK AUDIO, INC.
/s/ Gary B. Davis By: /s/ GEORGE M. KLOPFER (SEAL)
- -------------------------------- -----------------------------
George M. Klopfer,
CEO
/s/ Gary B. Davis By: /s/ MATTHEW S. POLK, JR. (SEAL)
- -------------------------------- -----------------------------
Name: Matthew S. Polk, Jr.
Title: Chairman
WITNESS: BRITANNIA INVESTMENT CORP. (formerly
known as POLK INVESTMENT CORP.)
/s/ Gary B. Davis By: /s/ GEORGE KLOPFER (SEAL)
- -------------------------------- -----------------------------
Name: George Klopfer
Title: President
WITNESS: POLK INTERNATIONAL SALES CORPORATION
/s/ Gary B. Davis By: /s/ GEORGE KLOPFER (SEAL)
- -------------------------------- -----------------------------
Name: George Klopfer
Title: President
WITNESS: POLK AUDIO EUROPE, INC.
/s/ Gary B. Davis By: /s/ GEORGE KLOPFER (SEAL)
- -------------------------------- -----------------------------
Name: George Klopfer
Title: President
40
<PAGE> 1
EXHIBIT 11.1
POLK AUDIO, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------
March 30, March 31, March 26,
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Earnings per share:
Net earnings $ 751,729 1,173,711 1,451,936
========== ========= =========
Weighted average number of
shares outstanding 1,811,849 1,634,295 1,616,307
Weighted average number of common
stock equivalents 15,617 65,852 57,355
---------- --------- ---------
Adjusted weighted average number
of shares outstanding 1,827,466 1,700,147 1,673,662
---------- --------- ---------
Earnings per share $ 0.41 0.69 0.86
========== ========= =========
</TABLE>
41
<PAGE> 1
[POLK AUDIO LOGO] Annual Report
Fiscal Year 1997
[PHOTO]
42
<PAGE> 2
[PHOTO]
ABOUT THE COVER
The Polk Audio RT20p tower loudspeakers incorporate built-in powered
subwoofers, making them ideal for use in today's home theater systems. Polk
CS350 center channel (right) and LS f/x surround speakers (foreground) round
out this innovative and high performance system.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights.......................................... page 1
CEO's Letter to the Shareholders.............................. page 2
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.............................. Back Cover
Corporate Information......................................... Back Cover
</TABLE>
[PHOTO]
[PHOTO]
43
<PAGE> 3
Polk Audio, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Results
Net sales $54,416 52,171 41,673 33,957 29,822
Operating income 1,612 2,217 2,341 1,434 665
Earnings before income taxes 1,284 1,971 2,305 1,507 883
Net earnings 752 1,174 1,452 988 592
Earnings per share 0.41 0.69 0.86 0.60 0.36
Year-end Position
Working capital $13,568 16,077 12,862 9,735 9,327
Total assets 24,997 30,268 22,224 15,974 14,745
Long-term debt 2,347 6,055 2,400 -- --
Stockholders' equity 16,544 15,436 14,153 12,474 11,437
</TABLE>
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 $159 per pair for the Polk Audio R1 to $9,000 for the SRT
system. Autosound products range in retail price from $70 to $500 per system.
They are primarily sold through a network of audio/video speciality retailers
throughout the USA, Canada and Europe, and through distributors in approximately
53 other foreign countries.
[PHOTO]
1
44
<PAGE> 4
TO OUR SHAREHOLDERS: [PHOTO]
GEORGE M. KLOPFER
CHIEF EXECUTIVE OFFICER
The fiscal year ended March 1997 started out well, but ended on a sour
note. As the year went on, general business conditions in our industry
progressively deteriorated, for reasons which I will attempt to explain more
fully below. As a consequence, both our sales and profits were significantly
below our original expectations for the year.
To summarize the more detailed figures presented elsewhere in this Annual
Report, for the fiscal year ended March 1997 our sales were $54.4 million, up
4.3% over the prior year, and earnings per common share were $.41, down 40.6%
from the prior year. Gross margins declined from 42.7% to 42.4%, reflecting
declines and markdowns in pricing which became necessary during the second half
of the year to maintain sales momentum and keep inventories at acceptable
levels. Profits were also eroded by larger than usual charges for bad debts,
reflecting concerns about the overall financial strength of certain customers,
and by a reserve taken at year-end in connection with plans to close down
warehousing, manufacturing and service operations in our Baltimore facilities
and consolidate them into our San Diego facilities.
In the midst of all this gloomy news, there were many positive
accomplishments for the year, too, which we hope will set the stage for
improving results in fiscal 1998 and beyond. We made excellent progress in
establishing a newly created parallel brand, Eosone, in a parallel distribution
channel, Best Buy Company. Our manufacturing operations have progressed
considerably, in particular our woodworking operations which were started up a
year and a half ago and which are now supplying a steady stream of high-quality
cabinets at reduced costs. During the year we brought out a noteworthy number of
successful new models, including the RT20p powered tower speaker system, the
RM5300, six-piece home theater powered-subwoofer/satellite system and the M1
Multi-application monitor system, all of which helped us keep our overall
revenue picture moving in a positive direction, Lastly, our operating
Management Team, under the able leadership of Jim Herd, has been able to make
considerable strides in terms of controlling costs, managing working capital
assets efficiently, getting new products out on time and on budget, and
improving our overall responsiveness to customer needs. There is much work which
still remains to be done in all these areas, of course, and in the coming year
we plan to focus operating management's efforts on improving key indicators of
operating efficiency such as reducing material lead times, driving down fixed
costs further, improving customer service and reducing product development cycle
times.
As mentioned above, the past year has been a very tough one for our
industry as a whole. Almost without exception, consumer electronics retailers in
the USA have been experiencing downturns in retail traffic and in
comparable-store sales, sometimes quite substantial ones. In addition,
realizable margins on large segments of their merchandise assortments have
dropped to unsustainably low levels. This in turn has exposed financial
weaknesses and liquidity problems in the more highly leveraged players, which in
turn has caused manufacturers, including ourselves, to tighten credit policies,
even at the
2
45
<PAGE> 5
[PHOTO]
MATTHEW S. POLK, JR.
CHAIRMAN OF THE BOARD
expense of foregone sales. Polk, as a leading brand in its distribution
channels, has not been immune to these pressures, and we have found it necessary
to reduce effective net selling prices to maintain market share and sales
momentum in the face of these countervailing influences.
The obvious question is, what is the root cause of these industry-wide
problems and what is to be done about it? Somewhat paradoxically, we think the
fundamental problem is being caused by the same factor that has driven the
growth of our industry over the past two decades; improvements in technology.
In our Annual Report last year, we published a very interesting graph,
which charts the growth of our company since 1977 against the growth of the
entire consumer electronics business during the same period.
Polk Net Sales vs. All Consumer Electronics Sales
[GRAPH]
What is striking about this graph is how parallel the lines have remained
over an extended period; we have grown over the long-term, basically because we
are in a growing industry. The long-term growth of the consumer electronics
business is the result of continuous innovations in the technology of electronic
home entertainment products, which have made the products more interesting and
useful for the consumer. The list is long, and familiar to all of us; VCR's, CD
players, DSS direct satellite systems, surround sound and so on. Over the same
20 year period, audio and video products have become inextricably linked to each
other; by now we estimate that over 85% of our speakers sold in the USA are used
by the customer in conjunction with video components in integrated "Home
Theater" systems. This has been very good, because it has broadened the market
for audio products in general, and loudspeakers in particular. It has also tied
the fate of the audio business directly into the fortunes of the video business
- -- in effect, audio has gone from being a freestanding product category 20 years
ago, to a big-ticket, high-margin video accessory category today.
In the past year, there have been announced to the public the imminent
arrivals of several important and fundamental new video technologies -- most
notably DVD (Digital Video Disk) and High-Definition Digital TV broadcasting. In
the best tradition of the consumer electronics business, these technologies
represent a stunning, categorical improvement in performance over the old
technologies they are replacing, those being the VHS videocassette recorder and
low-definition analog TV broadcasting, respectively. The industry's short-term
problem is simply this: we have already told the consumer about these wonderful
new products, but we're not shipping yet. The consumer's response is equally
simple: they are
3
46
<PAGE> 6
[PHOTO]
JAMES M. HERD
PRESIDENT
staying on the sidelines until the new stuff arrives. Thus, the lack of traffic
in the retailers' showrooms, the declines in comparable-store sales and so on.
In our view, we are faced with a tough short-term operating situation,
probably to be followed by a resumption of the pattern of long-term growth
portrayed in the graph. By informed estimates, in the USA alone there is an
installed base of over 250 million televisions (an average of 2.5 per
household), none of which are equipped to receive the digital broadcasts which
the Federal Government has recently mandated as the new standard to be
implemented by 2002. That means a lot of people are going to be replacing their
TV's in the next few years.
The specialty retailers that are Polk's chosen channel of distribution
are well-schooled in the art of selling high-margin audio products to go along
with the low-margin video products that brought the customer into the store.
Accordingly, we are optimistic that the emerging new video technologies will
stimulate a lot of audio sales in their wake over the next decade or so.
In the meanwhile, we are focused on the problem of getting through what
will probably continue to be a tough market in the next year. To this end, we
have made some fairly substantial cuts in fixed operating expenses, so as to
reduce the amount of revenue we need to bring in to produce an acceptable return
on the shareholder capital invested in the business. Early on this fiscal year,
we are planning a rollout of redesigned versions of our already very successful
RT Towers. We have already shown these new models to our key dealers, who were
exceedingly enthusiastic about them, and accordingly we expect good sales
results from these new products. Later on in the year we will be rolling out new
center and rear channel products, and new powered subwoofers. We are bringing in
additional CNC woodworking machines, which will permit us to self-source 100% of
our cabinet requirements with improved quality and reduced costs. We are
planning ways of substantially reducing lead times on key purchased components
(such as power amplifiers), which will permit us to reduce investment in
inventories and improve customer service at the same time. By all these means,
we expect to be able to get past the market's present difficulties in good form
in the coming year.
Cordially,
/s/ George M. Klopfer
- ---------------------
George M. Klopfer
Chief Executive Officer
4
47
<PAGE> 7
Polk Audio, Inc. and Subsidiaries
INTERIM FINANCIAL
INFORMATION (unaudited)
<TABLE>
<CAPTION>
1997 Quarter ended
- -------------------------------------------------------------------------------------------------
MARCH 30, December 29, September 29, June 30,
1997 1996 1996 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $13,197,014 15,456,015 14,479,338 11,283,956
Gross profit 5,264,742 6,887,980 6,143,229 4,771,478
Net earnings (loss) (280,360) 543,692 453,713 34,684
Earnings (loss) per share (0.15) 0.30 0.25 0.02
=================================================================================================
<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)
=================================================================================================
<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>
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 30, 1997 and March 31,
1996 and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended March 30,
1997. 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 Polk Audio,
Inc. and subsidiaries as of March 30, 1997 and March 31, 1996 and the results
of their operations and their cash flows for each of the years in the
three-year period ended March 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
May 14, 1997
5
48
<PAGE> 8
Polk Audio Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 30, March 31,
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 422,043 184,118
Trade accounts receivable, less allowance for doubtful accounts
of $385,107 in 1997 and $170,396 in 1996 9,510,232 15,660,909
Inventories:
Finished goods 4,109,323 3,579,287
Work-in-process 804,199 596,436
Raw materials and supplies 2,985,000 3,752,715
- --------------------------------------------------------------------------------------------------------------------------
Total inventories 7,898,522 7,928,438
- --------------------------------------------------------------------------------------------------------------------------
Income taxes recoverable 53,184 --
Deferred income taxes (note 4) 784,000 546,000
Prepaid expenses and other current assets 671,769 298,831
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 19,339,750 24,618,296
Property and equipment, at cost less accumulated
depreciation and amortization (note 2) 4,299,000 4,626,848
Deposits and other assets 382,686 262,775
Notes receivable--officers 225,946 224,237
Deferred income taxes (note 4) 750,000 536,000
- --------------------------------------------------------------------------------------------------------------------------
$24,997,382 30,268,156
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,758,117 4,666,043
Bank overdraft 44,126 450,336
Income taxes payable -- 305,445
Accrued expenses and other liabilities (note 9) 2,302,394 2,429,938
Current portion of long-term debt (note 3) 400,000 400,000
Current portion of accrued product warranty 267,000 290,000
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,771,637 8,541,762
- --------------------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Long-term debt, less current portion (note 3) 2,346,795 6,055,149
Accrued product warranty, less current portion 335,000 235,000
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 6 and 7):
Common stock, par value $.01 per share. Authorized 20,000,000 shares;
issued and outstanding 1,823,035 shares in 1997 and 1,797,035 shares in 1996 18,230 17,970
Additional paid-in capital 1,586,478 1,253,489
Foreign currency translation adjustments (24,896) (55,373)
Notes receivable--stock options (822,250) (814,500)
Retained earnings 15,786,388 15,034,659
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,543,950 15,436,245
Commitments (notes 3, 5 and 8)
- --------------------------------------------------------------------------------------------------------------------------
$24,997,382 30,268,156
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
49
<PAGE> 9
Polk Audio, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three-year period MARCH 30, March 31, March 26,
ended March 30, 1997 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $54,416,323 52,170,684 41,672,937
Cost of goods sold 31,348,894 29,888,990 22,352,078
- ----------------------------------------------------------------------------------------
Gross profit 23,067,429 22,281,694 19,320,859
Selling, research, general
and administrative expenses 21,454,963 20,064,845 16,979,472
- ----------------------------------------------------------------------------------------
Operating income 1,612,466 2,216,849 2,341,387
Other income (expense):
Interest income 3,883 32,132 71,087
Interest expense (349,508) (294,482) (101,167)
Other, net 16,888 16,212 (6,371)
- ----------------------------------------------------------------------------------------
(328,737) (246,138) (36,451)
- ----------------------------------------------------------------------------------------
Earnings before income taxes 1,283,729 1,970,711 2,304,936
Income taxes (note 4) 532,000 797,000 853,000
- ----------------------------------------------------------------------------------------
Net earnings $ 751,729 1,173,711 1,451,936
========================================================================================
Earnings per common and
common equivalent share $ 0.41 0.69 0.86
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
50
<PAGE> 10
Polk Audio, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Additional Notes Currency Total
Three-year period Number Common Paid-in Receivable Translation Retained Stockholders'
ended March 30, 1997 of Shares Stock Capital Options Adjustments Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (814,500) (55,373) 15,034,659 15,436,245
Foreign currency
translation adjustments - - - - 30,477 - 30,477
Exercise of stock options
by employees 26,000 260 332,989 (7,750) - - 325,499
Net earnings - - - - - 751,729 751,729
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 30, 1997 1,823,035 $18,230 1,586,478 (822,250) (24,896) 15,786,388 16,543,950
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
51
<PAGE> 11
Polk Audio, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 30, March 31, March 26,
Three-year period ended March 30, 1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 751,729 1,173,711 1,451,936
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,032,998 1,655,924 1,486,032
Noncash compensation recognized under stock option plan -- 138,125 40,000
Gain on sale of fixed assets (40,242) (22,230) (13,414)
Deferred income taxes (440,000) (257,000) (84,000)
Increase in accrued product warranty 77,000 82,000 30,000
Increase (decrease) from changes in working capital:
Accounts receivable 6,150,677 (7,061,348) (2,383,190)
Inventories 29,916 101,312 (3,057,496)
Income taxes recoverable or payable (370,629) 202,697 (208,502)
Prepaid expenses and other current assets (372,938) (41,317) (39,232)
Accounts payable, trade (1,907,926) 2,143,447 733,390
Accrued expenses and other current liabilities (127,544) 208,360 1,015,510
Other -- (83,836) 2,896
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,783,041 (1,760,155) (1,026,070)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,705,150) (3,237,676) (1,979,889)
Proceeds from disposal of equipment 40,242 22,230 13,414
Repayments of notes receivable -- 85,443 64,399
Decrease (increase) in deposits and other assets (121,620) 381,837 (471,770)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,786,528) (2,748,166) (2,373,846)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft (406,210) 450,336 --
Net proceeds from (payments on) revolving line of credit (3,308,354) 4,055,149 --
Proceeds from revolving line of credit -- -- 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) (400,000) --
Proceeds from exercise of stock options 325,499 -- 209,000
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,789,065) 4,105,485 3,009,000
Effect of exchange rate changes on cash 30,477 (28,196) (22,630)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 237,925 (431,032) (413,546)
Cash and cash equivalents at beginning of year 184,118 615,150 1,028,696
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 422,043 184,118 615,150
==================================================================================================================
Non-cash transactions:
Notes receivable--stock--received for exercise of stock options 7,750 814,500 --
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
9
52
<PAGE> 12
Polk Audio, Inc. and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(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 30, 1997 (52 weeks), March 31,
1996 (53 weeks) and March 26, 1995 (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
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 since the instruments are
either short-term in nature or the interest rates float above market indices.
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 $2,726,000 in 1997, $3,266,000 in 1996 and $2,565,000 in 1995.
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 1,827,466 shares in 1997, 1,700,147 shares in
1996 and 1,673,662 shares in 1995.
Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123, which is
effective for fiscal years beginning after December 15, 1995, establishes
financial accounting and reporting standards for stock-based employee
compensation plans and for transactions in which an entity issues its equity
instruments to acquire goods and services from nonemployees. SFAS 123 allows
companies to account for stock-based compensation either under the new
provisions of SFAS 123 or under the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," but
requires pro forma disclosure in the footnotes to the financial statements as
if the measurement provisions of SFAS 123 had been adopted. The Company has
continued to account for its stock-based compensation in accordance with APB
25. Information required by SFAS 123 regarding the Company's Stock-Based
Compensation Plan is provided in Note 7.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on April 1,
1996. This Statement requires that long-lived assets and certain
10
53
<PAGE> 13
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations or liquidity.
Reclassifications
Certain amounts for prior years have been reclassified to conform to
the presentation for 1997.
(2) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 30, March 31,
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Equipment, machinery and tooling $ 8,174,406 7,173,550
Leasehold improvements 1,912,968 1,786,004
Furniture and fixtures 309,465 255,337
Transportation equipment 244,156 339,031
- -------------------------------------------------------------------------------------
10,640,995 9,553,922
Less accumulated depreciation and amortization 6,341,995 4,927,074
- -------------------------------------------------------------------------------------
$ 4,299,000 4,626,848
=====================================================================================
</TABLE>
(3) CREDIT ARRANGEMENTS
The Company has a revolving credit agreement with a commercial bank
providing for maximum borrowings of $8,000,000, until March 31, 1997, and
$6,500,000 thereafter, at the LIBOR rate plus 1.75% (7.44% at March 30, 1997).
Any borrowings under this agreement will be due October 31, 1998. 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 30, 1997
and March 31, 1996 totaled $1,546,795 and $4,855,149, respectively.
The Company also has a $2,000,000 5-year unsecured term loan with a
commercial bank. The loan incurs interest at a rate of prime plus 1/4 percent
(8.75% at March 30, 1997) and the loan matures on December 31, 1999. Borrowings
at March 30, 1997 and March 31, 1996 totaled $1,200,000 and $1,600,000,
respectively. Principal payments are due as follows: $400,000 in 1998, $400,000
in 1999 and $400,000 in 2000.
Interest payments for supplementary cash flow information totaled
approximately $352,000, $269,000 and $89,000 during 1997, 1996 and 1995,
respectively.
(4) INCOME TAXES
The provision for income taxes is as follows for the fiscal years
ended:
<TABLE>
<CAPTION>
Fiscal Years Ended
- --------------------------------------------------------------------------
MARCH 30, March 31, March 26,
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ 500,000 732,800 805,000
State 32,000 64,200 48,000
- --------------------------------------------------------------------------
532,000 797,000 853,000
==========================================================================
Current 972,000 1,054,000 937,000
Deferred (440,000) (257,000) (84,000)
- --------------------------------------------------------------------------
$ 532,000 797,000 853,000
==========================================================================
</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 30, March 31, March 26,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $ 436,000 670,000 784,000
State income taxes, net of Federal tax benefit 21,000 41,000 32,000
Research and development credits (7,000) (53,000) (61,000)
Foreign sales corporation -- -- (22,000)
Non-deductible employee meals and entertainment 65,000 46,000 46,000
Non-deductible legal costs -- -- 28,000
Stock option compensation -- -- (42,000)
Net increase in valuation allowance 13,000 93,000 113,000
Other, net 4,000 -- (25,000)
- ----------------------------------------------------------------------------------------------------------
$ 532,000 797,000 853,000
==========================================================================================================
Income tax payments for supplementary cash flow information $1,142,000 641,000 1,115,000
==========================================================================================================
</TABLE>
The components of the deferred income tax asset at March 30, 1997 and
March 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 555,000 407,000
Product warranty costs and accrued advertising 263,000 235,000
Employee compensation, including stock options 276,000 190,000
Inventory 250,000 168,000
State income tax net operating loss carryforward 122,000 97,000
Allowance for doubtful accounts 141,000 62,000
Net capital loss carryforwards 31,000 31,000
Other 80,000 55,000
- ---------------------------------------------------------------------------------------------------
Deferred tax assets 1,718,000 1,245,000
Less valuation allowance 142,000 129,000
- ---------------------------------------------------------------------------------------------------
Deferred tax assets, net 1,576,000 1,116,000
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
State income taxes 13,000 13,000
Prepaid expenses 29,000 21,000
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities 42,000 34,000
- ---------------------------------------------------------------------------------------------------
Net deferred tax asset $1,534 000 1,082,000
===================================================================================================
</TABLE>
11
54
<PAGE> 14
Polk Audio Inc. and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
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
partnerships comprised of the principal stockholders of the Company for plant,
warehouse and office facilities. One lease provides for annual rentals of
approximately $501,000 through September, 2006, while the other provides for
annual rents of approximately $344,000 through 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
$905,000 in 1997, $624,000 in 1996 and $608,000 in 1995. In addition, the
Company is obligated under noncancellable operating leases for various
equipment and vehicles. In the aggregate, rental payments under all operating
leases totaled $1,644,000 in 1997, $1,340,000 in 1996 and $982,000 in 1995. The
approximate future minimum rentals are $1,764,000 in 1998, $1,077,000 in 1999,
$972,000 in 2000, $911,000 in 2001, $824,000 in 2002 and $752,000 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.
Under the terms of an approved Stock Repurchase Plan the Company can
repurchase up to 400,000 shares of the Company's common stock.
(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. The Company has granted to
certain key employees non-qualified stock options to purchase an aggregate
368,500 shares of common stock. The following table summarizes the transactions.
<TABLE>
<CAPTION>
MARCH 30, March 31, March 26,
Stock Option Plan 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 142,796 253,000 264,000
Granted -- 72,500 25,000
Exercised (26,000) (165,000) (36,000)
Terminated -- (17,704) --
- -----------------------------------------------------------------
End of year 116,796 142,796 253,000
=================================================================
Exercisable at
end of year 44,296 70,296 171,000
=================================================================
</TABLE>
The weighted average exercise prices for the aforementioned options are
presented below for the years ended March 30, 1997, March 31, 1996 and March
26, 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding beginning of period $7.40 5.46 6.02
Exercised 6.19 4.94 5.81
Surrendered -- 6.10 --
Granted -- 8.41 8.94
Outstanding end of period 7.67 7.40 5.46
Exercisable at end of period 6.47 6.37 7.08
=================================================================
Weighted average fair value of
options granted during the period -- 5.10 --
=================================================================
</TABLE>
During 1997, 1,000 shares have been exercised at a price of $7.75 per share.
In lieu of cash consideration, the Company accepted a full recourse note
receivable that bears interest at 6.64% and is due September 4, 2001. During
1996, 165,000 shares were exercised at an average price of $4.94 per share. In
lieu of cash consideration, the Company accepted full recourse notes receivable
that bear interest at 5.45%. Such notes are due March 26, 2001.
If compensation expense had been recorded based on the fair value at the
grant dates for awards under the Plans consistent with the method prescribed by
SFAS 123, the Company's net income and income per
12
55
<PAGE> 15
share would have been adjusted to the pro forma amounts presented below:
<TABLE>
<CAPTION>
MARCH 30, March 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $751,729 1,173,711
Pro forma 687,597 1,109,579
Income per common share:
As reported 0.41 0.69
Pro forma 0.38 0.65
=================================================================
</TABLE>
The fair value of each option is estimated on the date of the grant
using a type of Black-Scholes option-pricing model with the following
assumptions used for grants issued during the years ended March 30, 1997 and
March 31, 1996: no dividend yield, expected volatility of 43.5%, risk-free
interest rate of 6.5%, and expected terms of 5 and 10 years. No vesting can
occur until 1998.
A summary of information about stock options outstanding at March 30,
1997 is as follows:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
- --------------------------------------------------------------------------
Weighted
Average
Remaining
Shares Life (years) Shares
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Exercise price per share:
$5.00 6,000 0.75 6,000
5.25 20,000 0.25 20,000
8.13 47,500 9.00 --
8.29 18,296 0.33 18,296
8.94 25,000 9.00 --
- --------------------------------------------------------------------------
116,796 5.72 44,296
==========================================================================
</TABLE>
(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.
The plan's funded status and amounts recognized in the Company's
balance sheet at March 30, 1997 and March 31, 1996 are as follows:
<TABLE>
<CAPTION>
MARCH 30, March 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $366,538 238,683
Nonvested -- 7,481
- -----------------------------------------------------------------
Projected benefit obligation 366,538 246,164
Plan assets at fair value, primarily
guaranteed investment contracts 295,086 240,534
- -----------------------------------------------------------------
Projected benefit obligation
in excess of plan assets $ 71,452 5,630
=================================================================
Unrecognized loss on plan assets $ 80,642 6,162
Deferred pension cost 71,452 5,630
Pension liability (80,642) (6,162)
- -----------------------------------------------------------------
$ 71,452 5,630
=================================================================
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
MARCH 30, March 31, March 26,
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--
benefit earned $ -- -- 27,099
Interest cost on projected
benefit obligation 24,118 20,786 27,730
Actual return on plan assets (15,975) (14,066) (13,268)
Amortization of
prior service costs 38,200 3,001 2,916
- ------------------------------------------------------------------------------
Net pension cost $ 46,343 9,721 44,477
==============================================================================
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation are as follows: weighted-average discount rate of
6.93% in 1997 and 8.00% in 1996 and 1995; expected rate of return on assets of
6.93% in 1997 and 8.00% in 1996 and 1995 and assumed rate of salary increases
of 0.00% in 1997 and 5.00% in 1996 and 1995.
As of September 1, 1995 all benefit accruals under the Plan were
frozen, therefore, no wages earned after said date have been taken into account
in computing benefits under the Plan.
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 $175,815 in 1997, $157,480 in 1996 and
$110,440 in 1995.
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 30, March 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Accrued advertising allowances $ 866,036 780,416
Accrued vacation 464,388 414,246
Accrued salary and bonuses 403,439 602,827
Other 568,531 632,449
- -----------------------------------------------------------------
$2,302,394 2,429,938
=================================================================
</TABLE>
(10) BUSINESS AND CREDIT CONCENTRATIONS
The Company markets its products to audio retailers throughout the USA
and to distributors in 53 foreign countries. Related trade receivables are
generally unsecured. During fiscal year 1997, sales to two customers
individually amounted to approximately 11.2% and 11.4% of net sales. During
fiscal year 1996, sales to one of those same customers amounted to
approximately 12.6% of net sales. At March 30, 1997, one customer individually
comprised 11.2% of total trade accounts receivables.
Export sales, including sales to overseas installations of the United
States government, were approximately $9,538,000 in 1997, $8,847,000 in 1996
and $5,586,000 in 1995. Such sales represented 17.5%, 17.0% and 13.4%,
respectively, of net sales for such periods.
(11) FOREIGN OPERATIONS
Included in the Company's consolidated balance sheet at March 31, 1997,
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 $4.60 million.
13
56
<PAGE> 16
Polk Audio, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION &
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, risks
associated with the receipt and timing of future customer orders, price
pressures and other competitive factors leading to a decrease in anticipated
revenues and gross profit margins.
RESULTS OF OPERATIONS
Net earnings of $751,729 in 1997 decreased 36.0% from $1,173,711 in 1996
which decreased from $1,451,936 in 1995. The following table sets forth for the
periods indicated certain income, expenses and earnings as a percentage of net
sales.
<TABLE>
<CAPTION>
Fiscal Years Ended
- ------------------------------------------------------------------------------
MARCH 30, March 31, March 26,
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0 100.0
Cost of goods sold (57.6) (57.3) (53.6)
Selling, research, general and
administrative expenses (39.4) (38.5) (40.8)
- ------------------------------------------------------------------------------
Operating income 3.0 4.2 5.6
Other income (expense) (0.6) (0.5) (0.1)
- ------------------------------------------------------------------------------
Earnings before income taxes 2.4 3.7 5.5
Income taxes (1.0) (1.5) (2.0)
- ------------------------------------------------------------------------------
Net earnings 1.4% 2.2 3.5
==============================================================================
</TABLE>
NET SALES AND COST OF GOODS SOLD
Fiscal 1997 compared to fiscal 1996
Net sales in fiscal 1997 of $54,416,323 increased 4.3% from $52,170,684
in fiscal 1996. 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 57.6% in 1997 from 57.3% in
1996. The increase is primarily the result of the following factors: 1) price
reductions resulting from market pressures experienced primarily in the last
quarter of fiscal 1997, 2) lower margin products representing a larger portion
of the overall sales mix and 3) certain higher and under-absorbed manufacturing
overhead costs as compared with the prior year. Based on current information,
the Company has reason to believe that gross margins may continue to be
affected by price reductions resulting from market pressures throughout fiscal
1998.
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.
SELLING, RESEARCH, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1997 compared to fiscal 1996
SRG&A expenses increased to $21,454,963 in 1997 from $20,064,845 in
1996, an increase of 6.9%. As a percentage of net sales, SRG&A expenses
increased to 39.4% in 1997 from 38.5% in 1996. The increase in SRG&A expenses
primarily reflects increased promotion, selling and shipping costs in addition
to larger than usual bad debt reserves, coupled with a charge during the fourth
quarter for the relocation and centralization of the Company's warehousing and
customer service operations of $260,000.
Fiscal 1996 compared to fiscal 1995
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.
OTHER INCOME AND EXPENSE
Fiscal 1997 compared to fiscal 1996
Other expense in fiscal 1997 of $329,000 increased approximately
$83,000 from $246,000 in fiscal 1996. The net increase primarily resulted from
higher interest expense incurred on outstanding balances of its revolving and
term notes payable during fiscal 1997, as compared with the prior year.
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 increase primarily resulted from
interest expense incurred on outstanding balances of its revolving and term
notes payable during fiscal 1996.
14
57
<PAGE> 17
INCOME TAXES
Income taxes, as a percentage of earnings before income taxes,
increased to 41.4% in 1997 from 40.4% in 1996 which increased from 37.0% in
1995. The increase in income taxes in 1997 compared with 1996 and 1996 compared
with 1995, as a percentage to earnings before income taxes, results from a
higher effective tax rate related to higher state income taxes in each year.
SEASONALITY
The home audio market is somewhat seasonal, with the majority of the
Company's sales and earnings occurring historically in the quarters ending
September, 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
$9,759,000 and $9,538,000 in 1997, $9,941,000 and $8,847,000 in 1996 and
$8,208,000 and $5,159,000 in 1995, respectively.
The Company leases four manufacturing facilities in Tijuana, B.C.,
Mexico, and its net book value in property and equipment at March 30, 1997 was
approximately $2,316,000. The functional currency of such operations is the
U.S. dollar.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) which is
effective for periods ending after December 15, 1997; earlier application is
not permitted. This standard replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The adoption of this statement will not have
material effects on the disclosed results of operations.
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 provided by operating activities during the fiscal year ended
March 30, 1997 was $5,783,000. As of March 30, 1997, the Company's working
capital was $13,568,113 and its current ratio was 3.4 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 $4,953,205 was
available at March 30, 1997, and an unsecured five-year term loan agreement
with the same bank for $1,200,000. 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 in fiscal 1998.
15
58
<PAGE> 18
Polk Audio, Inc. and Subsidiaries
SEVEN-YEAR
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(in thousands, except per share data) As of and for the Fiscal Years Ended
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 30, March 31, March 26, March 27, March 28, March 29, March 31,
1997 1996 1995 1994 1993 1992 1991
(52 WEEKS) (53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Statement Data:
Net sales $54,416 52,171 41,673 33,957 29,822 27,465 27,866
Gross profit 23,067 22,282 19,321 14,821 11,505 10,298 10,961
Selling, research,
general and admin-
istrative expenses 21,455 20,065 16,979 13,387 10,840 9,204 9,280
Operating income 1,612 2,217 2,341 1,434 665 1,094 1,681
Earnings before
income taxes 1,284 1,971 2,305 1,507 883 502 1,781
Net earnings 752 1,174 1,452 988 592 321 1,200
Earnings per share $ 0.41 0.69 0.86 0.60 0.36 0.18 0.68
Balance Sheet Data:
Working capital $13,568 16,077 12,862 9,735 9,327 9,666 8,441
Total assets 25,032 30,268 22,224 15,974 14,745 15,787 14,691
Long-term debt 2,347 6,055 2,400 - - - -
Stockholders' equity $16,544 15,436 14,153 12,474 11,437 11,690 11,370
</TABLE>
MARKET AND
DIVIDEND INFORMATION
As of May 23, 1997, there were 140 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 retaining earnings in order to finance
the growth and development of the business.
During the first two months of the fiscal year ended March 30, 1997 the
Company's common stock was traded over-the-counter. Effective June 6, 1996 the
Company's common stock is 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>
1997 1996 1995 1994
HIGH LOW High Low High Low High Low
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 16 8 1/4 13 9 1/2 10 1/2 9 3/4 10 1/2 8 3/4
September 14 1/2 10 7/8 12 1/2 10 1/2 10 7 3/8 9 1/2 7 3/4
December 13 1/4 9 7/8 12 1/4 9 1/4 10 3/4 8 1/4 9 7 3/4
March 12 3/8 9 1/8 9 3/4 8 13 1/2 10 10 1/2 8 1/2
- -----------------------------------------------------------------------------------------
</TABLE>
16
59
<PAGE> 19
[PHOTO]
Designed by Curran & Connors, Inc.
60
<PAGE> 20
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
http://www.polkaudio.com
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services
New York, New York
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Monday, July 28, 1997 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.
[POLK AUDIO LOGO] [PHOTO]
61
<PAGE> 1
EXHIBIT 21.1
POLK AUDIO, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
1) Britannia Investment Corporation, incorporated under the laws of Delaware.
2) Polk Audio Europe Inc., incorporated under the laws of Maryland.
3) Polk Audio International Limited, incorporated under the laws of the United
Kingdom.
4) Eosone International, Inc., incorporated under the laws of Maryland.
62
<PAGE> 1
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.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
June 23, 1997
63
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-30-1997
<CASH> 422,043
<SECURITIES> 0
<RECEIVABLES> 9,895,339
<ALLOWANCES> 385,107
<INVENTORY> 7,898,522
<CURRENT-ASSETS> 19,339,750
<PP&E> 10,640,995
<DEPRECIATION> 6,341,995
<TOTAL-ASSETS> 24,997,382
<CURRENT-LIABILITIES> 5,771,637
<BONDS> 0
0
0
<COMMON> 18,230
<OTHER-SE> 16,525,720
<TOTAL-LIABILITY-AND-EQUITY> 24,997,382
<SALES> 54,416,323
<TOTAL-REVENUES> 54,416,323
<CGS> 31,349,894
<TOTAL-COSTS> 21,454,963
<OTHER-EXPENSES> 328,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 349,508
<INCOME-PRETAX> 1,283,729
<INCOME-TAX> 532,000
<INCOME-CONTINUING> 751,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751,729
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
