<PAGE> 1
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 29, 1998
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. /X/
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 9, 1998, was $14,842,462.
Number of shares of Common Stock of the registrant outstanding as of June 9,
1998: 1,849,035 SHARES
TOTAL NUMBER OF PAGES: 111
EXHIBIT INDEX STARTS ON PAGE: 21
1
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-K INCORPORATED DOCUMENT
PART I:
Item 1 - Description of Business: 1998 Annual Report to
Seasonality, Foreign Operations, Stockholders for the Fiscal
Working Capital Year ended March 29, 1998
Item 2 - Properties Proxy Statement for the 1998
Annual Meeting of Stockholders
to be filed within 120 days of
the end of the Company's
fiscal year.
PART II:
Item 5 - Market for Registrant's 1998 Annual Report to
Common Equity and Related Stockholders for the Fiscal
Stockholder Matters Year ended March 29, 1998
Item 6 - Selected Financial Data 1998 Annual Report
to Stockholders for the Fiscal
Year ended March 29, 1998
Item 7 - Management's Discussion 1998 Annual Report
and Analysis of Financial to Stockholders for the Fiscal
Condition and Results of Year ended March 29, 1998
Operation
Item 8 - Financial Statements and 1998 Annual Report
Supplementary Data to Stockholders for the Fiscal
Year ended March 29, 1998
PART III:
Item 10 - Directors and Executive Proxy Statement for the
Officers of the Registrant 1998 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
1998 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 1998 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 1998 Annual Meeting
of Stockholders to be filed
within 120 days of the end of
the Company's fiscal year
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. The
Company's actual results could differ significantly from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Annual Report on Form 10-K.
GENERAL
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 compact disc players, receivers, cassette decks, other supporting
electronics and loudspeakers) video components (such as televisions,
video-cassette recorders, Digital-Video Disc (DVD) 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 1998 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
approximately $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 manufacturers, markets and sells eleven separate lines of
loudspeaker systems under
3
<PAGE> 4
the Polk Audio brand name.
The Signature Reference Theater "SRT" System was introduced during
fiscal 1996 and retails for $10,000 per system. This is Polk Audio's flagship
home theater system that incorporates five proprietary technologies, consists of
35 active drive units housed in seven enclosures, including two 300 watt powered
subwoofers, and a Control Center with a wireless remote.
The Reference Theater or "RT" Series, introduced during fiscal 1996
consists of 11 models, with one model, the RT3000p floor-standing model,
introduced during March 1998. Several replacement models are planned during
fiscal 1999. This product line ranges in retail price from $280 per pair for the
RT3 bookshelf system to $3,600 per pair for the newly introduced RT3000p system.
These are value-oriented, high-quality floor-standing and bookshelf systems
designed to appeal to the quality-conscious consumer at lower and medium prices.
The RT product-line feature Dynamic Balance(R) mid/bass driver and tweeter
components (developed through a joint effort with the Johns Hopkins University)
and enhanced cosmetic design.
The M Series consists of six models known as the Multi-application
Studio Monitor M3II, the All Weather M3II, the M5, the All Weather M5, the All
Weather M2 and the M1. 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 indoor model is a
smaller version 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. The All Weather M2, M3II and M5 models
are designed for use in outdoor environments designed to resist corrosion and be
suitable in various climate conditions. 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 five models, with one model, the CS1000p self-powered
center channel system, introduced in March 1998. Four replacement models are
scheduled during fiscal 1999. 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 for the CS101 speaker to $1,200 for the newly
introduced CS1000p.
The Home self-powered (active) Sub-woofer series (PSW series) consists
of 4 models and range in retail price from $340 to $800 per unit. Three
replacement models are planned for introduction during fiscal 1999. 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 subwoofer/satellite system, modified during fiscal 1996, with a retail
price of $800 per set; the RM-5400 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 models
are scheduled to be replaced during fiscal 1999. 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 five
models, range in retail price from approximately $160 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
4
<PAGE> 5
they are installed.
The "f/x" Series or "Surround Effects Series", presently consisting of
three models with one being introduced during fiscal 1998, range in retail for
$450 to $1,200. 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.
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, introduced in 1983.
The EX II Series, consisting of thirteen models, replaced the EX Series
in fiscal 1997. The EX II Series of products 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 line of home speaker systems manufactured
and marketed by the Company. Many of the systems incorporate Radiant Surround
Field 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 floor standing speaker systems and
one bookshelf system, range in retail price from $600 to $2,200 per pair, and
incorporate 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 one model priced at $750, is a home
self-powered (active) Sub-woofer system. 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 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
5
<PAGE> 6
are also suitable for use in home theater surround-sound systems. Each system
includes the RSP910 active subwoofer system.
RESEARCH AND DEVELOPMENT
Many of the Company's Polk Audio products incorporate innovative
features based on technology developed by or under the supervision of Matthew S.
Polk, Jr., the Company's Chairman. In addition, the Eosone product line was
designed jointly with Arnold Nudell, co-founder of Genesis Technologies(TM),
Inc., 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
22 persons full time in its product and process engineering programs. The
Company historically has, and may continue to, periodically subcontract for
out-of-house consulting and design expertise. The Company's expenditures for
research and development were approximately $2,469,000 for the fiscal year ended
March 29, 1998, $2,726,000 for the fiscal year ended March 30, 1997 and
$3,266,000 for the fiscal year ended March 31, 1996.
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 patents and one Japanese patent through
BIC. The Company has patents pending in the U.S., Canada, China, Japan, Brazil,
EPO and PCT.
Additionally, BIC holds several Federally registered trademarks
including but not limited to Polk Audio(R), Eosone(R), Stereo Dimensional
Array(R), The Speaker Specialists(R) and Signature Reference Theater(R).
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.
QUALITY CONTROL
Polk's manufacturing operation includes a program of quality testing at
each principal stage of subassembly and final assembly production. In some cases
the Company utilizes statistical sampling methods but, in many cases, continues
to test 100% of its component subassemblies and finished products in addition to
periodic quality audits of finished goods in inventory.
MARKETING
The Company's products are differentiated from competing products by
their sound quality, value,
6
<PAGE> 7
proprietary technology and styling. The Company actively promotes and advertises
its Polk Audio and Eosone brand name products to stimulate consumers to seek out
its products at related dealer outlets. The Company carefully selects its
dealers based on their knowledge of audio products, marketing ability and
financial strength, with the objective of securing their long-term sales support
for the Company's product lines.
The Company is selective in choosing its dealers because of its desire
to contract with dealers who will (1) maintain a high level of knowledge about
Polk's products among its sales staff, (2) enhance the quality image of the
Company's products, and (3) remain loyal by making consistent efforts to sell
the Company's products to consumers.
DISTRIBUTION AND CUSTOMERS
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 300 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 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.
During fiscal 1998, the Company entered into an agreement to sell to
Circuit City Stores, Inc.(R) (Circuit City) a complete assortment of Polk Audio
home and car loudspeaker systems with shipments commencing in February 1998.
Circuit City currently maintains approximately 530 outlets located throughout
the United States. Sales to Circuit City were approximately 22% of total Company
sales during fiscal 1998. Additionally, sales to the Good Guys(R), Inc. were
approximately 10% of total Company sales during fiscal 1998. The loss of either
customer would have a material adverse effect on the Company's business.
The Company's products are exported through approximately 50
distributors to certain foreign countries, including various European, South
American and Asian markets. The Company also maintains a independent field sales
force and distribution operation to service approximately 100 retailers in
Germany. During fiscal 1998, the Company closed and replaced its locally managed
field sales operation for the purpose of servicing retailers in the United
Kingdom and the Netherlands with distributors in those markets. 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.
The Company's sales to foreign customers were approximately $7,929,000,
$9,538,000 and $8,847,000 for the fiscal years ended March 29, 1998, March 30,
1997 and March 31, 1996, respectively.
Eosone
Eosone Products are sold in the USA primarily through Best Buy Co.,
Inc.(R) (Best Buy), a large specialty retailer of consumer electronics with
approximately 280 stores located throughout the United
7
<PAGE> 8
States. These stores offer a wide range of consumer electronics, personal
computers, appliances and entertainment software. The Company expects to also
sell its Eosone Products to Crutchfield Corporation for offering in its
catalogue commencing early in fiscal 1999.
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 discount schedules from the suggested
retail prices. The Company will run temporary price promotions to dealers in
order to stimulate demand on certain products or to liquidate slow-moving or
obsolete products.
The Company's normal terms of sale for Domestic customers require
payment within 15 to 30 days from the invoice date, although the Company does
provide extended terms for promotional purposes of 90 days or more from invoice
date. A certain percentage of sales are financed by dealers through third party
floor-planning. Export transactions outside North America may be on open account
or 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
account 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 large national consumer
electronics retailers and specialty retailers, although loudspeaker systems can
also be purchased by consumers through mass merchandisers, department stores,
mail-order merchants and catalog showrooms.
8
<PAGE> 9
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 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 the Company believes that its competitive
position relative to rack systems continues to be good.
The Company attempts to enhance its competitive position by: (1)
producing technically advanced products which provide unique features and
superior price/performance characteristics, (2) supporting an active engineering
and research program, (3) maintaining an effective and motivated network of
dealers who actively promote the sale of the Company's products to the consumer,
and (4) actively advertising and promoting its products.
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. More information with respect to the
seasonality of the Company's business is contained in the Company's 1998 Annual
Report to Stockholders, "Interim Financial Information."
INVENTORY AND BACKLOG
The Company's current policy is to attempt to maintain sufficient
inventories of finished goods to fill all orders within two business days of
their receipt. However, the Company's backlog of unfilled orders may at times
rise significantly, either as a result of dealer orders following new product
introductions which exceed initial production, dealer orders for products which
are not yet in production, unforeseen fluctuations in demand, supply problems or
production problems. The Company's backlog was approximately $756,000 and
$1,022,000 at March 29, 1998 and March 30, 1997, respectively. The Company
anticipates the entire backlog as of March 29, 1998 to be filled during fiscal
1999.
ROYALTY AGREEMENTS
9
<PAGE> 10
During fiscal 1998 the Company entered into a licensing agreement
between Polk Audio, Inc. and its subsidiary Britannia Investment Corporation and
Hewlett Packard Company, Inc. ("HP") which covers a package of trademarks,
patents and designs for loudspeakers speakers which will be sold as part of the
HP Pavilion line of multimedia personal computer systems. Actual manufacture of
the licensed products is currently being performed by third parties in Asia
under the Company's and HP's joint discretion. The term of the agreement is for
a period of five years but may be terminated by HP after two years or earlier by
the Company if minimum royalty targets are not attained. Royalties earned by the
Company under this arrangement were approximately $420,000 during fiscal 1998.
Beginning in October, 1997 the Company entered into a licensing
agreement with KEP, a Korean supplier of speakers to Samsung Corporation for
certain designs and technologies developed by the Company, which will be
incorporated into certain television set models manufactured by Samsung. The
term of the agreement is for a period of two years and requires, among other
things, for annual minimum royalty thresholds to be attained. Royalties earned
under this arrangement were approximately $4,000 during fiscal 1998.
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 ("CPI"), and CPI'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 is 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, many of whom are located in the
United States. The other suppliers of parts are located in Europe, South
America, Central America and the Far East. Although Polk has in the past relied,
in some cases, on single suppliers for certain parts, the Company could, if
necessary or desirable, develop multiple sources of supply for its parts. The
Company does not have long-term or exclusive purchase commitments with its
suppliers and no one supplier accounted for more than 14% of the total purchases
made by the Company in fiscal 1998.
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 and PSW
products are purchased as fully assembled products. The Company has imported
some fully assembled DB and EX Series products. Such purchases increased from
16% of total purchases in fiscal 1997 to 18% in fiscal 1998. 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.
FOREIGN OPERATIONS
10
<PAGE> 11
Additional information pertaining to the Company's foreign sales and
operations is incorporated by reference to the 1998 Annual Report to
Stockholders, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and to the 1998 Annual Report to Stockholders, "Notes to
Consolidated Financial Statements."
ENVIRONMENTAL MATTERS
With operations in different jurisdictions, the Company is subject to
the environmental laws and regulations of general business applicability of
various national, state and local governments. Under such laws and regulations,
an operator (including a lessee) of real estate may become liable for the cost
of removal or remediation of hazardous substances on such property. Such legal
requirements may impose liability without regard to fault. Although the Company
has not been notified of, and is not aware of, any environmental liability in
connection with its leased facilities, there can be no assurance that the
Company will not be required to bear any such costs in the future.
WORKING CAPITAL
Information pertaining to the Company's working capital, liquidity and
capital resources is incorporated by reference to the 1998 Annual Report to
Stockholders, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and to the 1998 Annual Report to Stockholders, "Market
and Dividend Information."
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 up to five years
from date of purchase by such original purchaser. The warranty period for DB, EX
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.
EMPLOYEES
As of June 1, 1998 the Company had 124 full-time employees who were
engaged as follows:
<TABLE>
<CAPTION>
Activity Number
<S> <C>
Production, warehousing and factory service 35
Engineering 22
Sales and marketing 44
Administrative 23
</TABLE>
11
<PAGE> 12
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 376 persons in all on May 11, 1998, are CESA employees.
INVESTMENT IN GENESIS TECHNOLOGIES, INC.
In December 1997, the Company, through Britannia Investment
Corporation, invested $500,000 in convertible preferred securities of Genesis
Technologies(TM), Inc. (Genesis) of Eagle, Colorado, and obtained a three-year
option to purchase the business of Genesis. The Company had also invested
$100,000 in common stock of Genesis representing 6.75% of the outstanding common
stock of Genesis. Genesis is a manufacturer of high-end audiophile oriented
loudspeaker systems and digital electronics.
ITEM 2. PROPERTIES
In August 1986, the Company moved its operations to a new 100,000 square foot
leased facility located at 5601 Metro Drive, Baltimore, Maryland 21215. Since
June 1, 1997, the Company has been leasing 76,000 square feet of this facility
where it houses the Company's engineering, sales and administrative offices.
More details pertaining to this lease is contained in the Company's Proxy
Statement with respect to its 1998 Annual Meeting of Stockholders.
In August 1988, the Company and IMEC Corporation, which was the
predecessor of CPI, 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 CPI 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.
Also, the Company is currently committed to a month to month lease for 30,000
sq. ft. for temporary warehouse space in the same industrial park. 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
warehouse operations. Effective April 1, 1996, the Company expanded its
operations in this building to a total of approximately 49,500 square feet. In
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/factory service operations. More details
pertaining to this lease is contained in the Company's Proxy Statement with
respect to its 1998 Annual Meeting of Stockholders. Also, the Company is
currently committed to a month to month lease for 25,000 sq. ft. for temporary
warehouse space in the same industrial park.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Incorporated by reference to the 1998 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to the 1998 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Incorporated by reference to the 1998 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated by reference to the 1998 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.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Company's Proxy Statement with respect to its
1998 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
1998 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement with respect to its
1998 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
1998 Annual Meeting of Stockholders to be filed within 120 days of the end of
the Company's fiscal year.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
1. FINANCIAL STATEMENTS (INCORPORATED BY REFERENCE TO THE 1998
ANNUAL REPORT TO STOCKHOLDERS, PAGES 5 - 13):
- Independent Auditors' Report.
- Consolidated Balance Sheets as of March 29, 1998 and
March 30, 1997.
- Consolidated Statements of Earnings for the fiscal years
ended March 29, 1998, March 30, 1997 and March 31, 1996.
- Consolidated Statements of Changes in Stockholders'
Equity for the fiscal years ended March 29, 1998, March
30, 1997 and March 31, 1996.
- Consolidated Statements of Cash Flows for the fiscal
years ended March 29, 1998, March 30, 1997 and March 31,
1996.
- 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 29, 1998, March 30, 1997 and
March 31, 1996.
All other schedules have been omitted because they are not required or
are not applicable, or the required information has been included in the
Consolidated Financial Statements or the Notes thereto.
3. EXHIBITS
3.1 (*1) Articles of Amendment and Restatement of the Company
3.2 (*1) By-Laws of the Company
3.3 (*2) Articles of Amendment of the Company
10.1 (*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.
15
<PAGE> 16
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.
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 (*6) Assignment of Lease by and among UETA, the Company,
and Klopfer Associates LLC dated March 21, 1997.
10.26 (*6) Lease Amendment by and between Klopfer Associates
Limited Partnership and the Company dated March 27,
1997.
10.27 (*6) Third Amendment to Financing Agreement dated October
23, 1996 by and between NationsBank, N.A. and the
Company.
10.28 * Fourth Amendment to Financing Agreement dated
December 23, 1997 by and between NationsBank, N.A.
and the Company.
10.29 * $8,500,000 Revolving Credit Note dated December 23,
1997 by and between NationsBank, N.A. and the
Company.
10.30 * Preferred Stock Purchase Agreement dated December 29,
1997 by and between Genesis Technologies, Inc. and
Britannia Investment Corporation.
10.31 * Stockholder's Agreement dated December 29, 1997 by
and between Genesis Technologies, Inc. and Britannia
Investment Corporation.
13.1 * Annual Report to Stockholders for the fiscal year
ended March 29, 1998.
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.
16
<PAGE> 17
(*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.
(*6) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended March 30, 1997 filed with the Securities and
Exchange Commission on June 24, 1997.
(*) Filed herewith.
(b) REPORTS ON FORM 8-K
A Form 8-K was filed during the last quarter of the period covered by
this Report, on December 31, 1997, in connection with the Company's investment
of $500,000 in convertible preferred securities of Genesis Technologies, Inc. of
Eagle, Colorado. Also on that date the Company announced the appointment of
Dennis J. Shaughnessy to its Board of Directors. No financial statements were
filed therewith.
17
<PAGE> 18
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 24th day of June,
1998.
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.
Signature Title Date
/s/ George M. Klopfer Chief Executive Officer June 24, 1998
George M. Klopfer and Director
/s/ Matthew S. Polk, Jr. Chairman of the Board, June 24, 1998
Matthew S. Polk, Jr. Vice President and
Secretary and Director
/s/ James M. Herd President June 24, 1998
James M. Herd
/s/ Craig C. Georgi Vice President and June 24, 1998
Craig C. Georgi Director
/s/ Gary B. Davis Treasurer, Chief Financial Officer June 24, 1998
Gary B. Davis and Chief Accounting Officer
/s/ Wilbert H. Sirota Director June 24, 1998
Wilbert H. Sirota
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Polk Audio, Inc.:
Under date of May 5, 1998, we reported on the consolidated balance sheets of
Polk Audio, Inc. and subsidiaries as of March 29, 1998 and March 30, 1997, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended March 29, 1998. 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 29, 1998,
March 30, 1997 and March 31, 1996. 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 5, 1998
19
<PAGE> 20
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 29, 1998:
Allowance for doubtful accounts
receivable........................ $ 385,107 42,471 30,807 269,617 188,768
------------ ----------- ------------ ------------- ----------
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
============ =========== ============ ============= ==========
(1) Recovery of amounts previously charged off.
(2) Amounts charged off.
</TABLE>
<PAGE> 21
EXHIBITS INDEX
10.28 Fourth Amendment to Financing Agreement dated December
23, 1997 by and between NationsBank, N.A. and the Company.
10.29 $8,500,000 Revolving Credit Note dated December 23, 1997
by and between NationsBank, N.A. and the Company.
10.30 Preferred Stock Purchase Agreement dated December 29,
1997 by and between Genesis Technologies, Inc. and
Britannia Investment Corporation.
10.31 Stockholder's Agreement dated December 29, 1997 by and
between Genesis Technologies, Inc. and Britannia
Investment Corporation.
13.1 Annual Report to Stockholders for the fiscal year ended
March 29, 1998.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors
27.1 Financial Data Schedule
21
<PAGE> 1
FOURTH AMENDMENT TO FINANCING AGREEMENT
THIS FOURTH AMENDMENT TO FINANCING AGREEMENT (this "Agreement") is made
this 23rd day of December, 1997, by and among POLK AUDIO, INC., a corporation
organized under the laws of the State of Maryland ("Polk Audio"), BRITANNIA
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, a Second Amendment to Financing Agreement dated March
22, 1996 and a Third Amendment to Financing Agreement dated October 23, 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 $8,500,000.
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:
1. The Borrowers and the Lender agree that the Recitals above are a part
of this Agreement. Unless otherwise expressly defined in this Agreement, terms
defined in the Financing Agreement shall have the same meaning under this
Agreement.
2. 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) August
1
<PAGE> 2
31, 1999, (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) $8,500,000 until June 30, 1998 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) Section 5.2.4 of the Financing Agreement is deleted in its
entirety and the following section is inserted in its place:
"Fixed Charge Coverage Ratio. The Borrowers will maintain, tested as
of the last day of each of the Borrowers' fiscal quarters for the four (4)
quarter period ending on that date, a Fixed Charge Coverage Ratio of not
less than 1.5 to 1.0."
(c) As of the fiscal quarter ending March 1998, Section 5.2.2 of the
Financing Agreement is modified by changing the amount in subparagraph (a) to
"$15,000,000". Commencing with the test of the Tangible Net Worth covenant as
of March, 1998, the base amount of the Borrowers Tangible Net Worth shall be
$15,000,000.
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 $8,500,000
having a maturity date, repayment terms and interest rate as set forth in
EXHIBIT A-2, which promissory note shall be executed and delivered in
substitution for the Borrower's previous 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
2
<PAGE> 3
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/ James M. Herd By: /s/ George M. Klopfer
- -------------------------- ----------------------------- (SEAL)
George M. Klopfer
CEO
/s/ George M. Klopfer By: /s/ James M. Herd
- -------------------------- ----------------------------- (SEAL)
Name: James M. Herd
Title: President
WITNESS: BRITANNIA INVESTMENT CORP.
(formerly known as POLK
INVESTMENT CORP.)
/s/ James M. Herd By: /s/ George M. Klopfer
- -------------------------- ----------------------------- (SEAL)
Name: George M. Klopfer
Title: CEO
3
<PAGE> 4
WITNESS: POLK INTERNATIONAL SALES CORPORATION
/s/ James M. Herd By: /s/ George Klopfer (SEAL)
- ---------------------------- ---------------------------
Name: George Klopfer
Title: CEO
WITNESS: POLK AUDIO EUROPE, INC.
/s/ James M. Herd By: /s/ George Klopfer (SEAL)
- ----------------------------- ---------------------------
Name: George Klopfer
Title: CEO
WITNESS: NATIONSBANK, N.A.
/s/ Deborah Floyd By: /s/ Thomas O. Holland (SEAL)
- ----------------------------- ---------------------------
Thomas O. Holland
Vice President
4
<PAGE> 1
REVOLVING CREDIT NOTE
$8,500,000
Baltimore, Maryland
December 25, 1997
FOR VALUE RECEIVED, POLK AUDIO, INC., a corporation organized under the
laws of the State of Maryland, BRITANNIA 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 FIVE HUNDRED THOUSAND DOLLARS ($8,500,000) (the "Principal
Sum"), or so much thereof as has been or may be advanced/readvanced to or for
the account of the Borrowers pursuant to the terms and conditions of the
Financing Agreement (as hereinafter defined), together with interest thereon at
the rate or rates hereinafter provided, in accordance with the following:
1. Interest.
(a) As used in this Note "Applicable Interest Rate" means the LIBOR
Floating Rate (as that term is defined in the Financing Agreement). The
Applicable Interest Rate shall be determined in the manner provided in the
Financing Agreement.
(b) Commencing as of the date hereof and continuing until repayment in
full of all sums due hereunder, the unpaid Principal Sum shall bear interest at
the Applicable Interest Rate.
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 August
31, 1999.
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.
1
<PAGE> 2
3. Default Interest.
Upon the occurrence of an Event of Default (as hereinafter defined), the
unpaid Principal Sum shall bear interest thereafter at a rate two percent (2%)
per annum in excess of Applicable Interest Rate until such Event of Default is
waived or cured.
4. Late Charges.
If the Borrowers shall fail to make any payment under the terms of this
Note within fifteen (15) days after the date such payment is due, the Borrowers
shall pay to the Lender on demand a late charge equal to five percent (5%) of
such payment.
5. Application and Place of Payments.
All payments, made on account of this Note shall be applied first to the
payment of any late charge then due hereunder, second to the payment of any
prepayment fee then due hereunder, third to the payment of accrued and unpaid
interest then due hereunder, and the remainder, if any, shall be applied to the
unpaid Principal Sum. All payments on account of this Note shall be paid in
lawful money of the United States of America in immediately available funds
during regular business hours of the Lender at its principal office in
Baltimore, Maryland or at such other times and places as the Lender may at any
time and from time to time designate in writing to the Borrowers.
6. Prepayment.
The Borrowers 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 Fourth 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, a Second Amendment dated March __,
1996, a Third Amendment to Financing Agreement dated October 23, 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 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
2
<PAGE> 3
Documents and all applicable laws. The Borrowers and all endorsers, guarantors,
and other parties who may now or in the future be primarily or secondarily
liable for the payment of the indebtedness evidenced by this Note hereby
severally waive presentment, protest and demand, notice of protest, notice of
demand and of dishonor and non-payment of this Note and expressly agree that
this Note or any payment hereunder may be extended from time to time without in
any way affecting the liability of the Borrowers, guarantors and endorsers.
9. Confessed Judgment
Upon the occurrence of an Event of Default, each of the Borrowers hereby
authorizes any attorney designated by the Lender or any clerk of any court of
record to appear for the Borrowers in any court of record and confess judgment
without prior hearing against each of the Borrowers in favor of the Lender for
and in the amount of the unpaid Principal Sum, all interest accrued and unpaid
thereon, all other amounts payable by the Borrowers to the Lender under the
terms of this Note or any of the other Financing Documents, costs of suit, and
attorneys' fees of fifteen percent (15%) of the unpaid Principal Sum and
interest then due hereunder. Each of the Borrowers hereby releases, to the
extent permitted by applicable law, all errors and all rights of exemption,
appeal, stay of execution, inquisition, and other rights to which the Borrowers,
or either of them, may otherwise be entitled under the laws of the United States
of 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 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
3
<PAGE> 4
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.
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 (a)
the mailing of a copy thereof by
4
<PAGE> 5
certified mail, postage prepaid, return receipt requested, to the Borrowers and
(b) serving a copy thereof upon Wilbert H. Sirota, Esq., c/o Piper & Marbury, 36
South Charles Street, Baltimore, Maryland 21201 the agent hereby designated/the
agent hereinabove designated and appointed by the Borrowers as the Borrowers'
agent for service of process. The Borrowers irrevocably agree that such service
shall be deemed in every respect effective service of process upon the Borrowers
in any such suit, action or proceeding, and shall, to the fullest extent
permitted by law, be taken and held to be valid personal service upon the
Borrowers. Nothing in this Section shall affect the right of the Lender to serve
process in any manner otherwise permitted by law or limit the right of the
Lender otherwise to bring proceedings against the Borrowers in the courts of any
jurisdiction or jurisdictions.
18. WAIVER OF TRIAL BY JURY.
EACH OF THE BORROWERS HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO WHICH THE BORROWERS, OR EITHER OF THEM, AND THE LENDER MAY BE
PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS NOTE OR (B) THE
FINANCING DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A
WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR
PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE.
THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY THE BORROWERS,
AND THE BORROWERS HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION
HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO
IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. THE BORROWERS FURTHER REPRESENT THAT
THEY HAVE BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF
THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND
THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
IN WITNESS WHEREOF, the Borrowers have caused this Note to be executed
under seal by their duly authorized officers as of the date first written above.
WITNESS OR ATTEST: POLK AUDIO, INC.
/s/ James M. Herd By: /s/ George M. Klopfer (SEAL)
George M. Klopfer,
CEO
/s/ George M. Klopfer By: /s/ James M. Herd (SEAL)
James M. Herd
President
5
<PAGE> 6
Title:
WITNESS: BRITANNIA INVESTMENT CORP. (formerly
known as POLK INVESTMENT CORP.)
/s/ James M. Herd By: /s/ George Klopfer (SEAL)
- --------------------------- ---------------------------
Name: George Klopfer
Title: CEO
WITNESS: POLK INTERNATIONAL SALES CORPORATION
/s/ James M. Herd By: /s/ George Klopfer (SEAL)
- --------------------------- ---------------------------
Name: George Klopfer
Title: CEO
WITNESS: POLK AUDIO EUROPE, INC.
/s/ James M. Herd By: /s/ George Klopfer (SEAL)
- --------------------------- ---------------------------
Name: George Klopfer
Title: CEO
6
<PAGE> 1
PREFERRED STOCK PURCHASE AGREEMENT
BY AND BETWEEN
GENESIS TECHNOLOGIES, INC.
AND
BRITANNIA INVESTMENT CORPORATION
DATED AS OF DECEMBER 29, 1997
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I PURCHASE AND SALE OF THE PREFERRED SHARES ..................... 1
1.01 Closing ..................................................... 1
1.02. Issuance, Sale and Delivery of the Preferred Shares ......... 1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE MANAGEMENT STOCKHOLDERS ............................................. 2
2.01. Organization, Good Standing, Qualifications and Power ....... 2
2.02. Authorization of Agreements, Etc. ........................... 3
2.03. Validity .................................................... 3
2.04. Authorized Capital Stock .................................... 3
2.05. Financial Statements and Projections ........................ 4
2.06. Transactions With Affiliates ................................ 4
2.07. Loans and Advances .......................................... 5
2.08. Assumptions, Guaranties, Etc., of Indebtedness of
Other Persons ............................................. 5
2.09. Certain Payments ............................................ 5
2.10. No Undisclosed Liabilities .................................. 5
2.11. Absence of Certain Changes .................................. 5
2.12. Events Subsequent to September 30, 1997 ..................... 5
2.13. Books and Records ........................................... 6
2.14. Litigation; Compliance with Laws ............................ 6
2.15. Governmental Approvals ...................................... 7
2.16. Licenses; Permits ........................................... 7
2.17. Tax Matters ................................................. 7
2.18. Assets ...................................................... 8
2.19 Intellectual Property ....................................... 8
2.20. Corporate Name .............................................. 10
2.21. Proprietary Information of Third Parties .................... 10
2.22. Officers and Directors; Management Stockholders ............. 10
2.23. Employee and Labor Relations ................................ 11
2.24. Employee Benefits Matters ................................... 11
2.25. Document List ............................................... 14
2.26. Insurance Policies .......................................... 15
2.27. Environmental Matters ....................................... 15
2.28. Disclosure .................................................. 16
2.29. Brokers or Finders .......................................... 16
-i-
<PAGE> 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER ........... 16
ARTICLE IV CONDITIONS TO THE CLOSING ................................. 17
4.01. Conditions to the Obligations of the Purchaser .............. 17
4.02 Conditions to the Obligations of the Company and the Parent . 20
ARTICLE V COVENANTS OF THE COMPANY .................................. 20
5.01. Financial Information and Inspection Rights ................. 20
5.02. Financial Covenants ......................................... 22
5.03. Reserve for Conversion Shares ............................... 23
5.04. Corporate Existence ......................................... 22
5.05. Properties, Business, Insurance ............................. 23
5.06. Expenses of Directors ....................................... 23
5.07. Boards of Directors ......................................... 23
5.08. Compensation ................................................ 23
5.09. Bylaws ...................................................... 23
5.10. Compliance with Laws ........................................ 23
5.11. Keeping of Records and Books of Account ..................... 23
5.12. Subsidiaries ................................................ 24
5.13. Restrictive Agreements Prohibited ........................... 24
5.14. Use of Proceeds ............................................. 24
5.15. Negative Covenants .......................................... 24
5.16. Option to Acquire Additional Shares of Common Stock ......... 24
ARTICLE VI EVENTS OF NONCOMPLIANCE; EVENTS OF DEFAULT ................ 25
6.01. Events of Noncompliance; Events of Default .................. 25
6.02. Special Board Rights ........................................ 27
ARTICLE VII MISCELLANEOUS ............................................. 27
7.01. Fees and Expenses ........................................... 27
7.02. Survival of Agreements ...................................... 27
7.03. Parties in Interest ......................................... 28
7.04. Notices ..................................................... 28
7.05. Governing Law ............................................... 29
7.06. Entire Agreement ............................................ 29
7.07. Counterparts ................................................ 29
7.08. Amendments .................................................. 29
-ii-
<PAGE> 4
7.09. Severability ................................................ 29
7.10. Titles and Subtitles ........................................ 29
7.11. Recitals .................................................... 29
7.12. Pronouns .................................................... 30
7.13. Waiver of Jury Trial ........................................ 30
EXHIBITS
A Form of Amended and Restated Certificate of Incorporation of
the Company
B Form of Amendment to the Bylaws of the Company
C Form of Stockholders' Agreement
D List of Stockholders of the Company Before the Purchase of the
Preferred Shares
E Financial Statements of the Company
SCHEDULE
II The Disclosure Schedule
-iii-
<PAGE> 5
THIS PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT") is made and
entered into as of December 29, 1997, by and between Genesis Technologies, Inc.,
a Delaware corporation (the "COMPANY") and Britannia Investment Corporation, a
Delaware corporation (the "PURCHASER").
RECITALS
WHEREAS, the Company desires to issue and sell to the Purchaser, and
the Purchaser desires to purchase (the "PURCHASE") from the Company, an
aggregate of 5,000 shares (the "PREFERRED SHARES") of its authorized but
unissued preferred stock designated Convertible Preferred Stock, $100.00 par
value per share (the "PREFERRED Stock"), pursuant to the terms and subject to
the conditions set forth in this Agreement;
WHEREAS, Arnold Nudell, Paul McGowan, and Mark Schifter are officers,
directors, and significant stockholders of the Company (the "MANAGEMENT
STOCKHOLDERS") and are joining this Agreement for the purpose making and
confirming certain representations and warranties set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE PREFERRED SHARES
SECTION 1.01. Closing. The closing of the transactions contemplated
hereunder (the "CLOSING") and the sale of the Preferred Shares shall take place
at the offices of Piper & Marbury L.L.P., 36 South Charles Street, Baltimore,
Maryland 21201, at 10:00 A.M., Baltimore time, on December ___, 1997, or at such
other location, date and time as may be agreed to by the Purchaser and the
Company (such date and time being hereinafter called, the "CLOSING DATE").
SECTION 1.02. Issuance, Sale and Delivery of the Preferred Shares.
(a) Subject to the terms and conditions of this Agreement, the
Company agrees to issue and sell to the Purchaser and, subject to and in
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Purchaser hereby agrees to purchase from the Company, the
Preferred Shares at the purchase price of One Hundred Dollars ($100.00) per
share. On the Closing Date, the Company shall issue and deliver to the Purchaser
a certificate in definitive form, registered in the name of the Purchaser,
evidencing the Preferred Shares to be issued and sold to the Purchaser
hereunder.
(b) As payment in full for the Preferred Shares being
purchased by the Purchaser hereunder, and against delivery thereof as aforesaid,
on the Closing Date, the Purchaser shall deliver to the Company, by wire
transfer to a bank account designated in writing by the Company, immediately
available funds in the aggregate purchase price amount of $500,000 less the Note
Payoff Amount (the "AGGREGATE PURCHASE PRICE"). The "NOTE PAYOFF AMOUNT" means
the principal sum, together with all interest and costs due and owing to Polk
<PAGE> 6
Audio, Inc., the Purchaser's parent company ("POLK"), as of the Closing Date
pursuant to that certain Promissory Note executed by the Company and dated
December 2, 1997 (the "NOTE").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE MANAGEMENT STOCKHOLDERS
Each of the Company and, as applicable, the Management Stockholders,
hereby, jointly and severally, represents and warrants to the Purchaser that,
except as set forth in the Disclosure Schedule attached hereto as Schedule II
(which Disclosure Schedule makes explicit reference to the particular
representation or warranty as to which exception is taken, which in each case
shall constitute the sole representation and warranty as to which such exception
shall apply) ("SCHEDULE II"):
SECTION 2.01. Organization, Good Standing, Qualifications and Power.
(a) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware, is
engaged primarily in the business of manufacturing and distributing audio
equipment (the "BUSINESS"), and is duly licensed or qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the nature of the business transacted by it or the character of the
properties owned or leased by it requires such licensing or qualification. The
Company has the requisite corporate power and authority to (i) own and hold its
properties and to carry on its business as conducted and as currently proposed
to be conducted; (ii) adopt and file, with the office of the Secretary of State
of the State of Delaware, the Amended and Restated Certificate of Incorporation,
substantially in the form as attached hereto as Exhibit A (the "AMENDED
CHARTER"), to the Company's Certificate of Incorporation (the "CHARTER"); (iii)
adopt the First Amendment to the Company's Bylaws, substantially in the form as
attached hereto as Exhibit B (the "AMENDED BYLAWS"); (iv) execute and deliver
this Agreement and the Stockholders' Agreement of even date herewith by and
among the Purchaser, the Company, and Management Stockholders, substantially in
the form as attached hereto as Exhibit C (the "STOCKHOLDERS' AGREEMENT"); (v)
issue, sell and deliver the Preferred Shares and the shares of Common Stock of
the Company, $0.01 par value per share (the "COMMON STOCK"), issuable upon
conversion of the Preferred Shares (the "CONVERSION SHARES"); and (vi) carry out
and perform the provisions of this Agreement and the Stockholders' Agreement.
(b) The Company does not have any subsidiaries. Additionally,
the Company (i) does not own of record or beneficially, directly or indirectly,
(A) any shares of capital stock or securities convertible into capital stock of
any other corporation or (B) any participating interest in any partnership,
joint venture or other non-corporate business enterprise, and (ii) does not
control, directly or indirectly, any other entity.
SECTION 2.02. Authorization of Agreements, Etc.
(a) Each of the (i) execution and delivery by the Company of
this Agreement and the Stockholders' Agreement, (ii) performance of all
obligations of the Company hereunder
- 2 -
<PAGE> 7
and thereunder, (iii) adoption and filing of the Amended Charter, (iv) issuance,
sale and delivery of the Preferred Shares, and (v) reservation, issuance and
delivery of the Conversion Shares upon the conversion of the Preferred Shares,
has been duly authorized by all requisite corporate action on the part of the
Company, its officers, directors and stockholders, and has not and will not
violate any provision of applicable law, any order of any court or other agency
of government, the Amended Charter, or the Bylaws of the Company, as amended
(the "BYLAWS"), or any provision of any indenture, agreement or other instrument
to which the Company or any of its properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever (a "LIEN"), upon any of the properties or
assets of the Company.
(b) The Preferred Shares, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration herein
expressed, will be duly and validly issued, fully paid and nonassessable shares
of the Preferred Stock with no personal liability attaching to the ownership
thereof and will be free and clear of all Liens imposed by or through the
Company, except as set forth herein, in the Amended Charter or in the
Stockholders' Agreement. The Conversion Shares have been duly and validly
reserved for issuance upon conversion of the Preferred Shares. Upon conversion
of the Preferred Shares, the Conversion Shares will be duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock, with no personal
liability attaching to the ownership thereof and will be free and clear of all
Liens imposed by or through the Company, except as set forth herein, in the
Amended Charter or in the Stockholders' Agreement. Neither the issuance, sale or
delivery of the Preferred Shares nor the issuance or delivery of the Conversion
Shares is subject to any preemptive right of stockholders of the Company or to
any right of first refusal or other right in favor of any person.
SECTION 2.03. Validity. Each of this Agreement and the Stockholders'
Agreement has been duly executed and delivered by the Company and, assuming the
execution and delivery of them by the other parties thereto, constitutes the
legal, valid and binding obligations of the Company, enforceable in accordance
with its respective terms, except as its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, or other laws affecting the
enforcement of creditors' rights generally, or by general equitable principles.
SECTION 2.04. Authorized Capital Stock. Immediately before the filing
of the Amended Charter with the Secretary of State of the State of Delaware, the
authorized capital stock of the Company consisted of 1,000 shares of common
stock, par value $0.00 per share. Notwithstanding said authorized capital, 8004
shares of Common Stock were issued and held by the persons and entities set
forth on Exhibit D, in the amounts set forth opposite their respective names.
Immediately after the Closing, (i) the authorized capital stock of the Company
shall consist of 35,000 shares of Common Stock and 25,000 shares of Preferred
Stock; (ii) the designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company as set forth in the Amended Charter will be valid,
binding and enforceable and in accordance with all applicable laws; (iii) other
than 8,004 shares of the Common Stock and 5,000 shares of Preferred Stock
acquired by the Purchaser, no shares of capital stock of the Company will be
issued and outstanding; and (iv) except for the Conversion Shares and for shares
of Common Stock to be issued pursuant to
- 3 -
<PAGE> 8
Section 5.16 below, no shares of Common Stock or other capital stock of the
Company will be reserved for possible future issuance. Except pursuant to the
terms of the Amended Charter, this Agreement, and the Stockholders' Agreement,
(I) there is no commitment by the Company to issue shares, subscriptions,
warrants, options, convertible securities or other such rights or to distribute
to holders of any of its equity securities any evidence of indebtedness or
asset; (II) the Company has no obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity or debt securities or any interest
therein or to pay any dividend or make any other distribution in respect
thereof; and (III) there are no voting trusts or agreements, stockholders'
agreements, pledge agreements, buy-sell agreements, rights of first refusal,
preemptive rights or proxies relating to any securities of the Company.
SECTION 2.05. Financial Statements and Projections. Attached hereto as
Exhibit E are the audited balance sheet of the Company as at December 31, 1996
and the related audited statements of income and retained earnings and cash
flows for the fiscal year then ended, together with a report thereon of Martin,
Vejvoda, Jones and Associates Incorporated, independent certified public
auditors for the Company (collectively, the "AUDITED FINANCIAL STATEMENTS"), and
the unaudited balance sheet of the Company as at December 31, 1995 and September
30, 1997 (the "UNAUDITED BALANCE SHEETS"), and the related unaudited statements
of income and retained earnings and cash flows for the fiscal year ended
September 30, 1997 (together with the Unaudited Balance Sheets, the "UNAUDITED
FINANCIAL STATEMENTS") (the Audited Financial Statements and the Unaudited
Financial Statements are collectively, the "FINANCIAL STATEMENTS"). The
Financial Statements, including the notes thereto, (i) fairly present the
financial position and results of operations of the Company as at the respective
dates of and for the periods referred to therein, and (ii) were prepared in
accordance with United States generally acceptable accounting principles,
consistently applied ("GAAP"), except that the Unaudited Financial Statements
are subject to normal year-end adjustments and the absence of certain footnote
disclosures. No financial statements of any person or entity are required by
GAAP to be consolidated with those of the Company.
SECTION 2.06. Transactions With Affiliates. Except for the Nudell Loan
and the Leasehold Transactions (as those terms are defined below), no director,
officer, employee or stockholder of the Company or member of the family of any
such person (each, an "AFFILIATED PERSON"), or any corporation, partnership,
trust or other entity of which any Affiliated Person serves as an officer,
director, trustee, partner or holds more than five percent (5.0%) of the
outstanding capital stock or other ownership interests (each, an "AFFILIATED
ENTITY") (collectively, the Affiliated Persons and Affiliated Entities are the
"AFFILIATES"), is presently or contemplated to be a party to any transaction
with the Company, including any contract, agreement or other arrangement
providing for the employment of, furnishing of services by, rental of real or
personal property from or otherwise requiring payments to any such Affiliated
Person or Affiliated Entity.
SECTION 2.07. Loans and Advances; Amounts Owed. Except as disclosed in
the Financial Statements and except for a loan that Arnold Nudell made to the
Company in the original principal amount of $125,000, as evidenced by that
certain Promissory Note dated December 1, 1997, a copy of which has been given
to the Preferred Stockholder (the "NUDELL LOAN"), the Company does not have any
outstanding loans or advances to any person and is not
- 4 -
<PAGE> 9
obligated to make any such loans or advances, except, in each case, for advances
to employees thereof in respect of reasonable reimbursable business expenses
anticipated to be incurred by them in connection with their performance of
services thereto. The Company is now, or shall be within 5 days after Closing,
current with respect to all amounts due and owing on all debts, accounts
payable, and leases in connection with the Business.
SECTION 2.08. Assumptions, Guaranties, Etc., of Indebtedness of Other
Persons. The Company has not assumed, guaranteed, endorsed or otherwise become
directly or contingently liable on any indebtedness of any person (including,
without limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise invest
in the debtor, or otherwise to assure the creditor against loss).
SECTION 2.09. Certain Payments. None of the Company nor any director,
officer, agent or employee thereof or any other person or entity associated with
or acting for or on behalf of the Company has directly or indirectly (a) made
any contribution, gift, bribe, rebate, payoff, influence payment, kickback or
other payment to any person or entity, private or public, regardless of form,
whether in money, property or services (i) to obtain favorable treatment in
securing business, (ii) to pay for favorable treatment for business secured, or
(iii) to obtain special concessions or for special concessions already obtained,
for or in respect of the Company, or (b) established or maintained any fund or
asset that has not been recorded on the books and records of the Company.
SECTION 2.10. No Undisclosed Liabilities. The Company has no material
liabilities or obligations of any nature (whether known or unknown and whether
absolute, accrued, contingent or otherwise) except for liabilities or
obligations reflected in the Unaudited Balance Sheet and current liabilities
incurred in the ordinary course of business.
SECTION 2.11. Absence of Certain Changes. Since September 30, 1997, the
Business has been conducted in the ordinary course of business consistent with
past practices and there has not been any material adverse change in the assets,
financial position or results of operations of the Business that has not been
disclosed in writing to the Purchaser.
SECTION 2.12. Events Subsequent to September 30, 1997. Since September
30, 1997:
(a) Except for: (i) those matters that do not have a material
adverse affect on the Company, (ii) those matters that have previously been
disclosed in writing to the Purchaser, and (iii) certain amendments to and
exercises of rights under real property leases to which the Company and an
Affiliated Entity, Arnie Enterprises LLC, are parties, as further described in
the Disclosure Schedule (the "LEASEHOLD Transactions"),
(b) the Company has not: (i) issued any stock, bond or other
corporate security, (ii) borrowed any amount or incurred or become subject to
any liability (absolute, accrued or contingent), except current liabilities
incurred and liabilities under contracts entered into in the ordinary course of
business and except the Note, (iii) discharged or satisfied any Lien or incurred
or paid any obligation or liability (absolute, accrued or contingent) other than
current liabilities shown on the Unaudited Balance Sheet and current liabilities
incurred since such date
- 5 -
<PAGE> 10
in the ordinary course of business, (iv) declared or made any payment or
distribution to stockholders or purchased or redeemed any share of its capital
stock or other security, (v) mortgaged, pledged or subjected to Lien any of its
assets, tangible or intangible, other than Liens of current real property taxes
not yet due and payable, (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii) sold, assigned, transferred or granted any exclusive license with respect
to any patent, trademark, service mark, trade name, copyright, trade secret or
other intangible asset, (viii) suffered any loss of property not covered
substantially by insurance or waived any right of substantial value whether or
not in the ordinary course of business, (ix) made any change in officer
compensation, (x) made any change in the manner of business or operations, (xi)
made any change in its accounting practices, (xii) entered into any transaction
except in the ordinary course of business or as otherwise contemplated hereby,
(xiii) entered into any commitment (contingent or otherwise) to do any of the
foregoing or (xiv) engaged in any transaction with any Affiliated Person or with
any Affiliated Entity.
SECTION 2.13. Books and Records. The accounting records of the Company
are complete and correct and have been maintained in accordance with sound
business practices, including the maintenance of an adequate system of controls.
The minute books, stock record books, and other records of the Company, all of
which have been made available to the Purchaser and its agents, are
substantially complete and correct.
SECTION 2.14. Litigation; Compliance with Laws.
(a) Except for a lawsuit currently pending in Eagle County, CO
state court involving an amount in dispute of no more than $5,500, there is no
(i) action, suit, claim, proceeding or investigation pending or threatened
against or affecting the Company, at law or in equity, or before or by any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) arbitration
proceeding relating to the Company pending under collective bargaining
agreements or otherwise or (iii) governmental inquiry pending or threatened
against or affecting the Company, and, to the best knowledge of the Company,
there is no basis for any of the foregoing. The Company is not in default with
respect to any order, writ, injunction or decree known to or served upon the
Company of any court or of any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign. There is no action or suit by the Company pending or threatened against
others.
(b) To the best knowledge of the Company, the Company has
complied in all material respects with all laws, rules, regulations and orders
which are applicable to its business, operations, properties, assets, products
and services, including, without limitation, those promulgated by the federal,
state and local governmental agencies, domestic or foreign, that regulate the
sale of electronic manufactures, and the Company has all necessary permits,
licenses and other authorizations, including environmental, required to conduct
its business as conducted and as proposed to be conducted. To the best knowledge
of the Company, there is no existing or proposed law, rule, regulation or order,
whether Federal, state, or local, domestic or foreign, which would prohibit or
restrict the Company from, or otherwise materially adversely affect the
- 6 -
<PAGE> 11
Company in, conducting the Business in any jurisdiction in which it is now
conducting business or in which it proposes to conduct business.
SECTION 2.15. Governmental Approvals. Subject to the accuracy of the
representations and warranties of the Purchaser set forth in Article III hereof,
no registration or filing with, or consent or approval of or other action by,
any Federal, state or other governmental agency or instrumentality is or will be
necessary for (a) the valid execution, delivery and performance by the Company
of this Agreement or the Stockholders' Agreement, (b) the issuance, sale and
delivery of the Preferred Shares and, (c) upon conversion of the Preferred
Shares, the issuance and delivery of the Conversion Shares, other than (i)
filings pursuant to Federal and state securities laws (all of which filings have
been or, with respect to those filings which may be duly made after the Closing
will be, made by or on behalf of the Company) in connection with the sale of the
Preferred Shares and the Conversion Shares, (ii) with respect to the
Stockholders' Agreement, the registration of the shares covered thereby with the
Securities and Exchange Commission (the "COMMISSION") and filings pursuant to
Federal and state securities laws, and (iii) the filing of the Amended Charter
with the office of the Secretary of State of the State of Delaware.
SECTION 2.16. Licenses; Permits. All licenses, permits or authorities
of the Company are validly held by the Company; the Company and has complied
with all requirements in connection therewith and the same will not be subject
to suspension, modification or revocation as a result of this Agreement or the
consummation of the transactions contemplated hereby. All licenses, permits and
authorities issued or granted by foreign, local, state or federal government
authorities or agencies which are necessary for the conduct of the Business and
which are held in the name of any employee, officer, director, shareholder,
agent or otherwise of the Company shall be deemed included under this warranty.
SECTION 2.17. Tax Matters.
(a) The Company has filed (or has had filed on its behalf) or
will file (or will have filed on its behalf) when due all federal, state, local
and foreign income tax returns and reports in all requisite jurisdictions for
all years and periods ended on or before the Closing Date. For purposes of this
Agreement, "TAXES" or "TAX" means all income, capital gains, gross income, gross
receipts, transfer, value added, sales, use, service, ad valorem, franchise,
profits, capital stock, license, withholding, payroll, employment, social
security, unemployment compensation, utility, excise, production, severance,
stamp, occupation, premium, real or personal property, alternative minimum,
environmental, or windfall profit taxes, customs, duties, or other taxes, fees,
assessments, levies, imposts or charges of any kind whatsoever imposed by any
governmental authority (a "TAXING AUTHORITY") responsible for the imposition of
any such Tax (domestic or foreign) together with any interest and any penalties,
additions to tax, or additional amounts imposed by any Taxing Authority.
(b) There are no claims or investigations by any Taxing
Authority pending or threatened against the Company; the Company has not
received any notice of any threatened claims or investigations by any Taxing
Authority; and, with respect to any Tax return filed by the
- 7 -
<PAGE> 12
Company, there has been no waiver of any applicable statute of limitations or
extension of the time for the assessment of any Tax.
(c) The Company has provided the Purchaser with copies of all
separate federal, state, local and foreign Tax returns filed by the Company for
each of its taxable years for the three years immediately preceding the Closing.
(d) There exist no tax sharing agreements between the Company
and any Subsidiary.
SECTION 2.18. Assets.
(a) Assets Other than Real Property. The Company has good and
valid title to all of its assets. All of the tangible personal property of the
Company has been maintained in accordance with generally accepted industry
practice and is, in all material respects, in good operating condition and
repair, ordinary wear and tear excepted. All leased personal property is, in all
material respects, in the condition required of such property by the terms of
the lease applicable thereto during the term of the lease and upon the
expiration thereof.
(b) Title to Real Property.
(i) The Company does not own any real property or interests in
real property other than the leasehold interests granted pursuant to
written leases, copies of which have previously been delivered to the
Purchaser.
(ii) The Company has not granted and is not subject to any
options to purchase, or rights of first refusal, with respect to any
real property.
(iii) All of the Company's leases of real and personal
property are in full force and effect and have not been modified or
amended, and the Company is not in default in any respect thereunder.
SECTION 2.19. Intellectual Property.
(a) Set forth in Schedule II hereto is a true and complete
list of:
(i) all patents held by the Company or any Affiliate and used
in or relating to the Business, and all reissues, divisions,
continuations, continuations in part and extensions thereof and all
pending patent applications by the Company or any Affiliate relating to
the Business, including, for each such patent, the serial or patent
number, country, grant date and title;
(ii) all trademarks, service marks, trade names, trademark or
service mark license agreements, logos, trade styles, and other sources
of business identifiers of the Business (collectively, the "MARKS"),
including (A) for each such registered Mark, or for each such Mark for
which registration has been applied, a copy of the application, the
serial number or registration number, the dates of filing and
registration, and the date and
- 8 -
<PAGE> 13
nature of any subsequent filings, the filing jurisdiction, and the
international class(es), and (B) for all other Marks, a description of
the Mark, the medium and jurisdiction of use, and a description of the
goods and services in connection with which such Mark has, is, or will
be, used.
(iii) all registered copyrights in all works of the Company
the Parent and any Affiliate pending applications for registration
thereby of copyrights used in or relating to the Business, including
for each such registered copyright, the registration number, country
and registration and expiration date; and
(iv) all licenses and other contracts to which the Company and
any Affiliate, or any person affiliated with any of the foregoing, is a
party (either as licenser, licensee, sublicensor or sublicensee) and
which affects the validity of or right to use the patents, Marks,
copyrights (or registrations or applications therefor), trade secrets
or other proprietary information used in or relating to the Business
(the intellectual property described in subsections (i) through (iv)
hereof is collectively hereinafter called, the "INTELLECTUAL
PROPERTY").
(b) The Company has good, valid, subsisting, unexpired and
enforceable title to, or otherwise possesses adequate rights to use, all
Intellectual Property listed in Schedule II hereto. All filings that are
necessary to maintain, perfect, and protect the Company's rights in and to the
Intellectual Property have been and shall be made in a timely fashion
(including, without limitation, the filing of a "Section 15 Affidavit" under the
Federal trademark laws regarding the incontestability of the Mark "Genesis"; if
such Section 15 Affidavit has not been filed with the Patent and Trademark
Office, the Company hereby covenants and represents that it will file such
Affidavit within sixty (60) days after Closing). No other intellectual property
is necessary to permit the Company to conduct the Business. No governmental
authority has rendered any holding, decision or judgment that would limit,
cancel or question the validity of any of the Intellectual Property.
(c) To the best knowledge of the Company, no assets,
properties or rights transferred hereunder or used in the Business have
infringed upon any patent, trademark, service mark, trade name, copyright, or
other intellectual property, or misappropriated or misused any invention, trade
secret or other proprietary information entitled to legal protection, and the
use of the aforesaid by the Company, or any Affiliate in a manner consistent
with the manner in which the aforesaid are being used thereby, will not
constitute an infringement, misappropriation or misuse of any patent, trademark,
service mark, trade name, copyright, invention, trade secret, proprietary
information, nondisclosure or other rights of any third party. No person or
entity has asserted any claim regarding the use of, or challenging or
questioning the right of the Company, or any Affiliate or its respective title
in, any Intellectual Property, or challenging or questioning the validity or
effectiveness of any license, contract or commitment relating thereto, and the
Company knows of no valid basis for any such claim. There exists no legal
opinion of counsel to the Company, or any affiliate thereof (or request
therefor) or a legal opinion delivered to the Company, or any affiliate thereof
that the Business as conducted or contemplated infringes or is likely to
infringe any patent, trademark, service mark copyright, trade name, invention,
trade secret or other proprietary information or property rights of any other
person.
- 9 -
<PAGE> 14
SECTION 2.20. Corporate Name. To the best knowledge of the Company, no
person, firm or corporation or other business association is presently
authorized by the Company to use the name "Genesis" in connection with the
manufacture or sale of audio speakers.
SECTION 2.21. Proprietary Information of Third Parties. To the best
knowledge of the Company, no third party has claimed or has reason to claim that
any person now or previously employed or engaged as a consultant by the Company
has (a) violated or may be violating any of the terms or conditions of his
employment, non-competition or non-disclosure agreement with such third party,
(b) disclosed or may be disclosing or utilized or may be utilizing any trade
secret or proprietary information or documentation of such third party or
violated any confidential relationship which such person may have had with such
third party in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company or (c) interfered or may be interfering in the
employment relationship between such third party and any of its present or
former employees. No third party has requested information from the Company
which reasonably suggests that such a claim might be contemplated. To the best
knowledge of the Company, neither the execution nor the delivery of this
Agreement, nor the carrying on of the Business by any officer, director or key
employee of the Company will conflict with or result in a breach of the terms,
conditions provisions of or constitute a default under any contract, covenant or
instrument under which any such person is obligated.
SECTION 2.22. Officers and Directors; Management Stockholders.
(a) Except for a written employment agreement with Mark
Schifter, a copy of which shall be delivered to the Purchaser before Closing,
and except as provided herein, there exist no oral or written employment
agreements by and between the Company and any of its employees.
(b) A complete list of all directors, officers, and management
personnel of the Company has been provided to the Purchaser.
(c) Together with the Company, each of the Management
Stockholders represents and warrants that:
(i) During the past 10 years, none of the
directors or officers of the Company has been arrested or convicted of any
material crime, nor has any of them been bankrupt or a director or officer of a
bankrupt company;
(ii) Each of the Management Stockholders
currently lives or maintains a residence in the Eagle County, Colorado area, and
will continue to maintain such residence for as long as the Purchaser owns any
Preferred Shares;
(iii) Each of the Management Stockholders shall
not sell, assign, transfer, or otherwise dispose of any of the shares of Common
Stock owned by such Management Stockholder without the prior written consent of
the Purchaser and as further provided in the Stockholders' Agreement;
- 10 -
<PAGE> 15
(iv) Each of the Management Stockholders
currently devotes and will, for as long as the Purchaser owns any Preferred
Shares, continue to devote his full time efforts and attention to the Business;
(v) Without the prior written consent of the
Purchaser, for as long as the Purchaser owns any Preferred Shares, the base
salary of each of the Management Stockholders will only be raised subject to the
approval of the Board of Directors and the Board of Directors will not raise the
base salary of any of the Management Stockholders more than ten percent (10%)
above the level of any immediately preceding fiscal year.
(d) Each of the Management Stockholders covenants that he,
either directly or indirectly, for himself, or through, on behalf of, or in
conjunction with any person or entity:
(i) shall not divert or attempt to divert any
business or customer to any competitor of the Company or of Polk, by direct or
indirect inducement or otherwise, or do or perform directly or indirectly, any
other act injurious or prejudicial to the good will associated with the Marks,
the Business, or Polk's business; and
(ii) shall not employ or seek to employ any
person who is at that time employed by Company or by Polk or by any subsidiary
or other affiliate of either of them, or otherwise directly or indirectly induce
such person to leave his or her employment; and
(iii) shall not either directly or indirectly, for
himself or through, on behalf of, or in conjunction with any other person or
entity, own, maintain, operate, engage in, or have any interest in any business
which business is the same as or similar to the Business or to the business of
Polk (a "COMPETING BUSINESS"); and shall not, either directly or indirectly, for
himself, or through, on behalf of, or in conjunction with any other person or
entity, own, maintain, operate, engage in, or have any interest in any Competing
Business, which Competing Business is, or intended to be, located anywhere in
the world.
The foregoing restrictive covenants shall remain the obligation of, and be
binding upon, each of the Management Stockholders (i) for as long as there shall
be any shares of Preferred Stock outstanding or, (ii) if the Preferred
Stockholder shall have exercised its option (the PURCHASE OPTION") to acquire
substantially all of the assets of the Company pursuant to Section 10 of the
Stockholders' Agreement (as defined below) during the term of the earnout (the
"EARNOUT TERM") provided, however, if the employment of a Management Stockholder
is involuntarily terminated during the Earnout Term, the restrictive covenants
shall only be binding upon him if the Company elects, in its sole discretion, to
pay such Management Stockholder the sum of $8,000 per month for a period of time
no longer than the expiration of the Payout Term. It is understood and agreed
that if the Preferred Stockholder chooses to exercise the Purchase Option, the
Preferred Stockholder shall, upon the closing thereunder, cause the Company to
enter into reasonable employment agreements with the Management Stockholders,
which employment agreements shall (i) be for a term no longer than the Earnout
Term; and (ii) provide reasonable protections against abusive discharge.
SECTION 2.23. Employee and Labor Relations.
- 11 -
<PAGE> 16
(a) There is no labor strike, dispute, slowdown or work
stoppage or lockout actually pending or threatened, against or affecting the
Company; during the past three years, there has not been any such action against
the Business;
(b) no union organizational campaign is in progress with
respect to the employees of the Company and no question concerning
representation exists respecting such employees;
(c) to the best knowledge of the Company, the Company is in
compliance in all material respects with all applicable laws, rules and
regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours, and is not engaged in any unlawful labor
practice;
(d) there is no unfair labor practice charge or complaint
against the Company pending or threatened before the National Labor Relations
Board;
(e) to the best knowledge of the Company, there is no
grievance that would have a material adverse effect on the Company pending or
threatened;
(f) no charges with respect to or relating to the Company are
pending before the Equal Employment Opportunity Commission or any state or local
agency, domestic or foreign, responsible for the prevention of unlawful
employment practices; and
(g) the Company has not received notice of the intent of any
federal, state, local or foreign agency responsible for the enforcement of labor
or employment laws to conduct an investigation with respect to or relating to
the Company and no such investigation is in progress.
SECTION 2.24. Employee Benefits Matters.
(a) Schedule II contains a complete and accurate list of all
Employee Benefit Plans (as such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and any other
employee benefit arrangements or payroll practices, including, without
limitation, employment agreements, severance agreements, board of directors and
executive compensation arrangements, incentive programs or arrangements, sick
leave, severance pay policies, plant closing benefits, salary continuation for
disability, consulting or other compensation arrangements, workers'
compensation, retirement, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement or
scholarship programs, any plans providing benefits or payments in the event of a
change of control, change in ownership, or sale of a substantial portion
(including all or substantially all) of the assets of the Company, maintained by
the Company or to which the Company has contributed or is or was obligated to
make payments, in each case with respect to any employees (or, if the Company
has any existing liability, former employees) of the Company (hereinafter, the
"EMPLOYEE BENEFIT PLANS"). All Employee Benefit Plans which constitute Employee
Pension Benefit Plans (as defined in Section 3(2) of ERISA)(hereinafter, the
"EMPLOYEE PENSION PLANS") are separately listed in Schedule II hereto, and those
Employee Pension Plans which are intended to qualify under Section 401 of the
Code are clearly identified as such. The Company does not
- 12 -
<PAGE> 17
and has never maintained or participated in, and has no liability with respect
to, any Employee Benefit Plan which is: (i) subject to Title IV of ERISA or the
minimum funding requirements of Section 412 of the Code or Section 302 of ERISA,
(ii) a "MULTI-EMPLOYER PLAN" (as defined in Section 3(37) of ERISA), or (iii) a
funded vacation pay plan. No amount is due or owing from the Company (A) on
account of a multi-employer plan or on account of any withdrawal therefrom or
(B) on account of a plan otherwise subject to Title IV of ERISA or on account of
any withdrawal therefrom. Other than as contained in the written employment
agreements listed in Schedule II, no management employee of the Company nor any
fiduciary with respect to the Employee Benefit Plans has issued or distributed
any written communication to any present or former employees of the Company
regarding the transactions contemplated by this Agreement or any effect the
transactions would have on any Employee Benefit Plan or other employee-related
practice, policy, or arrangement.
- 13 -
<PAGE> 18
(b) Except as set forth in Schedule II hereto:
(i) the Employee Pension Plans which are intended to qualify
under Section 401 of the Code are so qualified and the trusts
maintained pursuant thereto are exempt from federal income taxation
under Section 501 of the Code, and nothing has occurred with respect to
the operation of such plans which could cause the loss of such
qualification or exemption or the imposition of any material liability,
lien, penalty, or tax under ERISA or the Code;
(ii) true, correct and complete copies of the following
documents, with respect to each of the Employee Benefit Plans will be
provided by the Company to the Purchaser when available: (A) all plan
documents, including trust agreements, insurance policies and service
agreements and amendments thereto, (B) the most recent Forms 5500 and
any financial statements attached thereto and those for the prior three
years, (C) the last Internal Revenue Service determination letter, (D)
summary plan descriptions, (E) the most recent actuarial report and
those for the prior three years (if applicable), and (F) written
descriptions of all non-written agreements relating to any such plan;
(iii) there are no material pending claims or lawsuits which
have been asserted or instituted by or against the Employee Benefit
Plans, against the assets of any of the trusts under such plans or by
or against the plan sponsor, plan administrator, or any fiduciary of
the Employee Benefit Plans (other than routine benefit claims) nor does
the Company or the Parent have knowledge of facts which could form the
basis for any such claim or lawsuit;
(iv) the Employee Benefit Plans have been maintained in all
material respects in accordance with their plan documents, if required
under ERISA, and with all provisions of the Code and ERISA (including
rules and regulations thereunder and including the reporting and
disclosure requirements thereof) and other applicable law. Neither the
Company, the Parent nor any "party in interest" or "disqualified
person" with respect to the Employee Benefits Plans has engaged in a
"prohibited transaction" within the meaning of Section 4975 of the Code
or Title I, Part 4 of ERISA;
(v) none of the Employee Benefit Plans contains any provisions
which would prohibit the transactions contemplated by this Agreement or
which would give rise to any severance, termination or other payments
or liabilities as a result of the transactions contemplated by this
Agreement;
(vi) no Employee Benefit Plan which constitutes an Employee
Welfare Benefit Plan (as defined in Section 3(1) of ERISA) (hereafter
"WELFARE PLAN") provides benefits to former employees or their
beneficiaries other than in order to avoid excise taxes under Section
4980B of the Code and Title I, Part 6 of ERISA;
(vii) the Company has at all times complied in all material
respects with the notification and coverage continuation requirements
under Code Section 4980B and Title 1, Part 6 of ERISA, if required by
ERISA to do so;
- 14 -
<PAGE> 19
(viii) each of the Employee Benefit Plans may be terminated or
amended by the Company, at any time upon no more than 60 days notice,
and the Company has made no agreements or arrangements which limit its
rights to terminate or amend any Employee Benefit Plan; and
(ix) the Company has no liability (whether actual, contingent,
with respect to any of its assets or otherwise) with respect to any
Employee Benefit Plan maintained by any trade or business, whether or
not incorporated, under common control of the Company or the Parent
within the meaning of Section 414(b), (c), (m) or (o) of the Code (an
"ERISA AFFILIATE").
(d) Except as disclosed in Schedule II hereto, the Company has
not prepaid or prefunded any Welfare Plan through a trust, and is not aware of
any reserve, premium stabilization or similar account that may be held by an
insurer under a policy relating to any Welfare Plan.
SECTION 2.25. Document List.
(a) Except as has been previously been delivered or disclosed
in writing to the Purchaser, the Company is not a party to or bound by any
written or oral (i) contract not made in the ordinary course of business,
including, without limitation, any "side agreements" with any individual or
entity in which the Company or its management has agreed to take any action
beyond the obligations contained in written agreements executed by the Company;
(ii) collective bargaining agreement or other contract with any labor union;
(iii) bonus, deferred compensation, profit sharing, pension, retirement, stock
option, stock purchase, hospitalization, insurance or other plan or arrangement
providing for employee benefits to present or former officers, directors or
employees; (iv) dealers', manufacturers' representatives' or distributors'
agreement which is not terminable by it without cost or liability to it or its
successors on 60 days' notice or less; (v) contract requiring capital
expenditures (excluding capital expenditures for which the Company shall be
substantially reimbursed in accordance with the terms of an insurance policy
held thereby) in excess of Twenty-Five Thousand Dollars ($25,000.00); (vi)
contract for the sale of goods or the rendering of services continuing for a
period of more than 30 days from the date of this Agreement, except such
contracts entered into in the ordinary course of business consistent with past
practices; (vii) contract for the purchase of supplies, materials or services
for delivery over a period of more than 30 days from the date of this Agreement,
except such contracts entered into in the ordinary course of business consistent
with past practices; (viii) covenant not to compete; (ix) contract or agreement
of any kind continuing for a period of more than one year from the date of this
Agreement; (x) agreement or contract under which the Company has borrowed or
loaned any money or issued any note, bond, indenture or other evidence of
indebtedness or directly or indirectly guaranteed (including, without
limitation, through so-called take-or-pay or keep well agreements and also any
inter-company loan between the Company and any Subsidiary) indebtedness,
liabilities or obligations of others (other than endorsements for the purpose of
collection in the ordinary course of business consistent with past practices);
(xi) mortgage, pledge, security agreement, deed of trust or other document
granting a Lien (including, but not limited to, liens upon properties acquired
under conditional sales, capital leases or other title retention or security
devices); or (xii) any other agreement, contract, lease,
- 15 -
<PAGE> 20
license, commitment or instrument to which the Company is a party or by or to
which it or any of its assets or business is bound or subject which individual
agreement has an aggregate future liability in excess of Fifty Thousand Dollars
($50,000.00).
(b) The Company and each other party thereto have performed
all the obligations required to be performed by them under each agreement,
contract, lease, license, commitment or instrument to which it is a party
(collectively, the "CONTRACTS") to date. The Company (i) has not received any
notice of default and is not in default, in any respect (with due notice or
lapse of time or both) under any Contract now in effect to which it is a party
or by which either it or its respective property may be bound; (ii) has no
present expectation or intention of not fully performing all of its obligations
under each such Contract in all respects, and (iii) has no knowledge of any
breach and has not received any written notice of any anticipated breach by the
other party to any contract or commitment to which it is a party.
(c) The Company has previously delivered to the Purchaser
copies of all Contracts relating to any indebtedness of the Company to any
lender in an amount in excess of Ten Thousand Dollars ($10,000.00), including,
without limitation, the Contract relating to the Company's existing credit
facility with Merrill Lynch Business Financial Services (the "SENIOR LENDER").
SECTION 2.26. Insurance Policies. The Company maintains policies of
fire and casualty, extended coverage, public and product liability and other
forms of insurance in such amounts, with such deductibles and against such risks
and losses as are reasonable for the Business and the Company's assets and will
continue such insurance in effect after the Closing Date.
SECTION 2.27. Environmental Matters. The Company has not released,
emitted, buried or otherwise disposed of Regulated Substances (as hereinafter
defined) on any of the Properties (as hereinafter defined) in violation of any
Environmental Law (as hereinafter defined). To the best knowledge of the
Company, no one else has released, emitted, buried or otherwise disposed of
Regulated Substances on any of the Properties. To the best knowledge of the
Company, the Company has complied with all Environmental Laws relating to its
operations or the Properties. The Company has not received any notice, demand,
suit or information request pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") or any comparable state law,
nor does it have knowledge of any other party's receipt of same relating to any
of the Properties. The Company has not received written notice that any of the
Properties is listed on any regulatory list of contaminated properties,
including but not limited to the National Priorities List promulgated pursuant
to CERCLA or any federal, state or local counterpart. To the best knowledge of
the Company, the Company has no any existing or potential liability under any
Environmental Laws. To the best knowledge of Company, no environmental
approvals, clearances or consents are required under applicable law from any
governmental entity or authority in order for the Purchaser to purchase the
Preferred Shares hereunder or for the Company to continue its business after the
Closing Date in a manner consistent with the present operations of the Business.
To the best knowledge of Company, neither the Company is not required to have,
nor does it have, any permits or approvals issued under any Environmental Law.
- 16 -
<PAGE> 21
As used in this Environmental Matters Section: (i) "ENVIRONMENTAL LAW"
means any statute, regulation, rule, code, common law, order or judgment of any
applicable federal, state, local or foreign jurisdiction relating to pollution,
hazardous substances, hazardous wastes, petroleum or otherwise relating to
protection of the environment, natural resources or human health, including, by
way of example and not by way of limitation, the Clean Air Act, the Clean Water
Act, CERCLA, the Resource Conservation Recovery Act ("RCRA"), the Toxic
Substances Control Act ("TSCA"), and the Emergency Planning and Community
Right-to-Know Act, all as currently amended; (ii) "REGULATED SUBSTANCES" means
any substance regulated under Environmental Laws, including but not limited to
hazardous waste, as defined pursuant to RCRA, hazardous substances, as defined
pursuant to CERCLA, toxic substances as defined under TSCA, hazardous materials,
as defined under the Hazardous Materials Transportation Act, petroleum and its
fractions, ACM's and PCB's; (iii) the "COMPANY" includes any predecessors or
affiliates; and (iv) the "PROPERTIES" means any real property or facility
currently owned, leased or operated by the Company or previously owned, leased
or operated by the Company or any predecessors thereof (including, without
limitation, any corporations, partnerships or joint ventures previously
affiliated with the Company ).
SECTION 2.28. Disclosure. The representations and warranties contained
in this Article II and in Schedule II are true, complete and correct in all
material respects, and no such representation or warranty contains any untrue
statement of material fact or omits to state any material fact necessary to make
the statements made not misleading. There is no material fact which the Company
has not disclosed to the Purchaser which will or could materially and adversely
affect the business, prospects, financial condition, operations, property or
affairs of the Company.
SECTION 2.29. Brokers or Finders. The Company is not liable,
contingently or otherwise, for the payment of brokerage or finders' fees or
agents' commissions or other similar payments in connection with this Agreement
or the transactions contemplated hereby and has no knowledge of any such fee due
or owing in connection herewith.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as of the Closing
Date that it:
(a) is an "accredited investor" within the meaning of Rule 501
under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "SECURITIES ACT"), and was not organized for the
specific purpose of acquiring the Preferred Shares;
(b) has sufficient knowledge and experience in investing in
companies similar to the Company in terms of the Company's stage of development
so as to be able to evaluate the risks and merits of his or its investment in
the Company and he or it is able financially to bear the risks thereof;
- 17 -
<PAGE> 22
(c) has had an opportunity (i) to ask questions of, and
receive answers from, the Company relating to all aspects of the transactions
contemplated by this Agreement and the Stockholders' Agreement (including,
without limitation, the accounting practices, the compensation of the employees
and officers, the tax returns and the operations of the Company), (ii) to obtain
such additional information necessary to make an informed investment decision
hereunder, and has reviewed, among other things, the copies of the Contracts and
documents that the Company has delivered in connection with this Agreement;
(d) is acquiring the Preferred Shares for its own account for
the purpose of investment and not with a view to or for resale in connection
with any distribution thereof;
(e) understands that (i) the Preferred Shares have not been
registered under the Securities Act by reason of their issuance in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) or Section 3(b) thereof or Rule 506 promulgated thereunder; (ii)
the Preferred Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration; (iii) the Securities will bear a legend to such effect; (iv) the
Preferred Shares are subject to the restrictions set forth in the Stockholders'
Agreement; and (v) the Company will make a notation on its transfer books to
such effect;
(f) has taken all corporate action on its part necessary to
authorize the execution, delivery and performance of this Agreement and the
Stockholders' Agreement and the consummation of the transactions contemplated
hereby and thereby;
(g) this Agreement and the Stockholder's Agreement have been
duly executed and delivered by the Purchaser and, assuming the execution and
delivery of them by the Company, constitute its legal, valid and binding
obligation, enforceable in accordance with its terms, except as its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, or other laws affecting the enforcement of creditors' rights
generally, or by general equitable principles; and
(h) the execution and delivery of this Agreement and the
Stockholders' Agreement will not violate any provision of applicable law, any
order of any court or other agency of government, the Certificate of
Incorporation, or the Bylaws of the Purchaser, or any provision of any
indenture, agreement or other instrument to which the Purchaser or any of its
properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Purchaser.
ARTICLE IV
CONDITIONS TO THE CLOSING
SECTION 4.01. Conditions to the Obligations of the Purchaser. The
obligations of the Purchaser to consummate the transactions contemplated by this
Agreement are subject to the fulfillment or written waiver, on or before the
Closing Date, of each of the following conditions:
- 18 -
<PAGE> 23
(a) Amended Charter and Amended Bylaws.
(i) The Company shall have adopted and filed
with the office of the Secretary of State of the State of Delaware and such
office shall have accepted for filing, on or before the Closing Date, the
Amended Charter, substantially in the form attached hereto as Exhibit A, which
Amended Charter shall contain the designations, rights and preferences of the
Preferred Shares.
(ii) The Company shall have adopted the Amended
Bylaws substantially in the form attached hereto as Exhibit B.
(b) Performance. The Company shall have performed and
complied, in all material respects, with all agreements, obligations and
conditions contained herein that are required by it to be performed or complied
with on or before the Closing Date and all of the representations and warranties
of the Company and the Parent shall be true and correct in all respects.
(c) The Stockholders' Agreement. Each of the Company and the
Management Stockholders shall have executed and delivered the Stockholders'
Agreement to the Purchaser.
(d) [Intentionally Deleted]
(e) The Preferred Stock. The Company shall have delivered to
the Purchaser a stock certificate in definitive form representing Five Thousand
(5,000) shares of Preferred Stock.
(f) [Intentionally Deleted]
(g) Key Man Insurance. The Company shall have obtained, or
hereby covenants and represent that it will obtain within sixty (60) days after
Closing, key-man life insurance policies on each of the Management Stockholders
with the Company named as the policyholder and beneficiary thereof (the "KEY MAN
POLICIES"), each in the amount of One Hundred Fifty Thousand Dollars ($150,000).
(h) No Actions. No preliminary or permanent injunction or
other order, decree or ruling issued by any court of competent jurisdiction nor
any statute, rule, regulation or order entered, promulgated or enacted by any
governmental, regulatory or administrative agency or authority shall be pending,
threatened or in effect that would prevent the consummation of the transactions
contemplated hereby.
(i) Approvals. The Company shall have obtained all consents or
approvals required to be obtained in order to consummate the transactions
contemplated hereby.
(j) All Proceedings to be Satisfactory. All corporate and
other proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to the Purchaser and its counsel, and the Purchaser and its
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they reasonably may request.
- 19 -
<PAGE> 24
(k) Opinions. The Purchaser shall have received from Rudy &
Associates, P.C., counsel to the Company, an opinion dated as of the Closing
Date, in form acceptable to the Purchaser.
(l) Fees and Expenses. The Company, at or prior to the
Closing, shall have paid the fees and expenses set forth in Section 7.01 hereof.
(m) Supporting Documents. The Purchaser and its counsel shall
have received copies of the following documents:
(i) (A) the Amended Charter together with copies of
all other documents filed by the Company with the office of the
Secretary of State of the State of Delaware, certified as of a recent
date by the Secretary of State of the State of Delaware; (B) a
certificate of the Secretary of State of the State of Delaware, dated
as of a recent date, as to the due incorporation and good standing of
the Company; and (C) a certificate as to the authority of the Company
to transact business issued by the Secretary of State of each such
jurisdiction, or comparable legal authority in each foreign
jurisdiction, in which the Company conducts the Business;
(ii) a certificate of the Secretary of the Company
dated the Closing Date and certifying: (A) that attached thereto is a
true and complete copy of the Amended Charter and the Bylaws of the
Company as in effect on the Closing Date; (B) that attached thereto is
a true and complete copy of all resolutions adopted by the Board of
Directors (the "BOARD") and the stockholders of the Company authorizing
the execution, delivery and performance of this Agreement and the
Stockholders' Agreement, the filing of the Amended Charter with the
Secretary of State of the State of Delaware, the issuance and delivery
of the shares of Preferred Stock and the reservation of the Conversion
Shares, and that all such resolutions are in full force and effect and
are all the resolutions adopted in connection with the transactions
contemplated by this Agreement and the Stockholders' Agreement; and (C)
to the incumbency and specimen signature of each officer of the Company
executing this Agreement, the Stockholders' Agreement, the certificates
representing the Preferred Stock, and any certificate or instrument
furnished pursuant hereto, and a certification by another officer of
the Company as to the incumbency of the officer signing the certificate
referred to herein;
(iii) a certificate signed by the President of the
Company, dated as of the Closing Date, affirming that all of the
conditions set forth in this Section 4.01 have been satisfied at or
prior to the Closing, with the exception of 4.01 (f), if applicable,
but affirming that such condition shall be satisfied within the time
period set forth therein;
(iv) such additional supporting documents and other
information with respect to the operations and affairs of the Company
as the Purchaser or its counsel reasonably may request.
- 20 -
<PAGE> 25
SECTION 4.02. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated by this
Agreement are subject to the fulfillment or written waiver, on or before the
Closing Date, of each of the following conditions:
(a) Stockholders' Agreement. The Purchaser shall have executed
and delivered the Stockholders' Agreement to the Company.
(b) Purchase by The Purchaser. The Purchaser shall have
consummated the Purchase in accordance with the terms of this Agreement.
(c) Representations and Warranties to be True and Correct. The
representations and warranties of the Purchaser contained in Article III hereof
shall be true, complete and correct.
ARTICLE V
COVENANTS OF THE COMPANY
For so long as any shares of the Preferred Stock or any Conversion
Shares are outstanding and until
(a) The successful completion by the Company of a firm
commitment underwritten initial public offering of the Common Stock pursuant to
an effective registration statement on Form S-1 (or its equivalent) under the
Securities Act in which (x) the per share price of shares of Common Stock
offered for sale to the public equals or exceeds Four Hundred Dollars ($400.00)
per share (as adjusted for any stock splits in anticipation of the public
offering), and (y) the net proceeds to the Company are not less than Fifteen
Million Dollars ($15,000,000) (an "IPO"); or
(b) The Redemption Date immediately following the delivery of
the Redemption Notice (as such terms are defined under the Amended Charter); or
(c) The delivery of a Put Notice (as defined in the
Stockholders' Agreement), the Company covenants and agrees with the Purchaser
that:
SECTION 5.01. Financial Information and Inspection Rights. The Company
shall furnish to the Purchaser:
(a) within 90 days after the end of each fiscal year, an
audited balance sheet and related statements of income, cash flows and
stockholders' equity, showing the financial condition of the Company for the
fiscal year then ended, prepared in accordance with GAAP and certified by a
reputable accounting firm selected by the Board and acceptable to the Purchaser;
(b) within 30 days after the end of each calendar month,
internal management statements, including a management summary of operations and
all related financial data as prepared by and for the Company's management;
- 21 -
<PAGE> 26
(c) within 45 days after the end of each month of each fiscal
quarter (i) a balance sheet and related statements of income, cash flows and
stockholders' equity, showing the financial condition of the Company, unaudited
but prepared in accordance with GAAP and certified by the Chief Financial
Officer of the Company, or the principal accounting officer thereof if no Chief
Financial Officer has been elected and duly qualified, as being fairly stated in
all material respects when considered in relation to the financial statements of
the Company, such balance sheet to be as of the end of such month and such
statements of income, cash flows and stockholders' equity to be for such month
and for the period from the beginning of the fiscal year to the end of such
month (with comparisons to the budget for such period), in each case with
comparative statements for the prior fiscal year and (ii) a report detailing
sales prospects and the amount and age of the accounts payable and accounts
receivable of the Company;
(d) before the end of each fiscal year, capital and operating
expense budgets, cash flow projections and income and loss projections for the
Company in respect of the next three fiscal years thereof, all itemized in
reasonable detail and, promptly after preparation, any revisions to any of the
foregoing;
(e) at the time of delivery of each annual financial statement
pursuant to Section 5.01(a) hereof, a certificate executed by the President and
the Chief Financial Officer of the Company, or the principal accounting officer
thereof if no Chief Financial Officer has been elected and duly qualified,
stating that such officers have reviewed this Agreement, the Amended Charter,
and the Stockholders' Agreement and have no knowledge of any default by the
Company in the performance or observance of any of the provisions of this
Agreement, the Amended Charter, the Stockholders' Agreement, or any other
material agreement of the Company, or, if such officers have such knowledge,
specifying such default and the nature thereof;
(f) promptly (but in no event later than 30 days) following
receipt by the Company, each audit response letter disclosing pending or
threatened litigation or unasserted claims or assessments considered to be
probable of assertion and any accountant's management letter and other written
report submitted to the Company by its independent auditors in connection with
an annual or interim audit of the books thereof;
(g) within 30 days of receipt by the Company of notice of all
material (that is, involving an amount in excess of $5,000) actions, suits,
claims and proceedings;
(h) promptly (but in no event later than 30 days) upon
sending, making available or filing the same, all press releases, reports and
financial statements that the Company sends or makes available to its
stockholders or directors or files with the Commission, the Internal Revenue
Service or any foreign tax authority, or any other governmental agency, whether
federal or state, domestic or foreign;
(i) promptly, from time to time, such other information
regarding the Business, prospects, financial condition, operations, property or
affairs of the Company as the Purchaser reasonably may request;
- 22 -
<PAGE> 27
(j) permit the Purchaser, or any authorized representative
thereof, to visit and inspect the properties of the Company, including its
corporate and financial records, and to discuss its business and finances with
its officers, all at such reasonable times as may be requested by the Purchaser.
The Purchaser or representative thereof shall maintain the confidentiality of
all information acquired by it in exercising such rights and shall execute a
written non-disclosure agreement if requested by the Company in form reasonably
acceptable thereto;
(k) within 10 days after receipt thereof, provide the
Purchaser with a copy of any notification relating to the default by the Company
under any loan agreement, lease or material contract; and
(l) within 30 days after the end of each fiscal quarter, a
certificate executed by the President of the Company stating that no default has
occurred under this Agreement or the Stockholders' Agreement with respect to the
Company's obligations and duties hereunder and thereunder; and
(m) upon the request of the Purchaser, the Company shall
promptly supply to the Purchaser or its prospective transferees all information
regarding the Company that is required to be delivered in connection with a
transfer pursuant to Rule 144A of the Securities and Exchange Commission.
SECTION 5.02. Financial Covenants. The Company shall comply with all
financial covenants, including, without limitation, financial performance
ratios, set forth or required with respect to all Contracts, including, without
limitation, all Contracts with the Senior Lender.
SECTION 5.03. Reserve for Conversion Shares. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the conversion of the Preferred
Shares. If at any time the number of authorized but unissued shares of the
Common Stock shall not be sufficient to permit conversion of the Preferred
Shares or otherwise to comply with the terms of this Agreement, the Company will
forthwith take such corporate action as may be necessary to increase its
authorized but unissued shares of the Common Stock to such number of shares as
shall be sufficient for such purposes. The Company will obtain any
authorization, consent, approval or other action by or make any filing with any
court or administrative body that may be required under applicable Federal or
state securities laws in connection with the issuance of shares of the Common
Stock upon conversion of the Preferred Shares.
SECTION 5.04. Corporate Existence. Except as contemplated hereunder,
the Company shall maintain its corporate existence, rights and franchises in
full force and effect.
SECTION 5.05. Properties, Business, Insurance. The Company shall
maintain, as to its properties and businesses, with financially sound and
reputable insurers, insurance against such casualties and contingencies and of
such types and in such amounts as is customary for companies similarly situated,
which insurance shall be deemed by the Company to be sufficient, including,
without limitation, Federal Flood Insurance if any of the Company's offices or
- 23 -
<PAGE> 28
operations are located in a designated Federal Flood Area. The Company shall not
cause or permit any assignment or change in the loss payees (other than to the
Company and its Senior Lender) of such policies and shall not borrow against any
such policy. The Company shall pay all premiums and take whatever action is
necessary to maintain the Key Man Policies in effect for as long as the
Purchaser owns any shares of the Preferred Shares. The Company shall add the
name of the Purchaser as a notice party to the Key Man Policies and shall
request the issuer of such policies to provide the Purchaser with at least 10
days' notice before such policy is terminated for failure to pay premiums or
otherwise or assigned or before any change is made in the beneficiary thereof.
The Company shall annually supply the Purchaser with a list of all required
insurance policies.
SECTION 5.06. Expenses of Directors. The Company shall promptly
reimburse in full each director of the Company who is not an employee of the
Company for all of his reasonable out-of-pocket expenses incurred in attending
each meeting of the Board or any committee thereof.
SECTION 5.07. Board of Directors. The Company shall hold meetings of
its Board of Directors at least once every three months. Except as set forth in
Section 6.02 below, the Board of Directors of the Company shall consist of four
members, one of whom shall be nominated and elected by the holders of the
majority of the shares of the Preferred Stock then issued and outstanding
(including the holders of the Conversion Shares, if any), voting or consenting
to such action separately as a class (the "MAJORITY INTEREST"), either in
writing or by vote at any annual meeting or any special meeting called for the
purpose (the "PREFERRED DIRECTOR"). George M. Klopfer initially shall serve as
the Preferred Director.
SECTION 5.08. Compensation. The Company shall pay to its officers
compensation as determined by the Board and pursuant to the provisions of
Section 2.22 hereof.
SECTION 5.09. Bylaws. The Company shall at all times maintain
provisions in its Bylaws and/or its Amended Charter indemnifying all directors
against liability and absolving all directors from liability to the Company and
its stockholders to the maximum extent permitted under the laws of the State of
Delaware.
SECTION 5.10. Compliance with Laws. The Company shall comply with all
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect their respective businesses or condition, financial
or otherwise.
SECTION 5.11. Keeping of Records and Books of Account. The Company
shall keep adequate records and books of account, in which complete entries will
be made in accordance with GAAP, reflecting all financial transactions thereof
and in which, for each fiscal year, all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.
SECTION 5.12. Subsidiaries. The Company shall not permit any Subsidiary
to take any action which would violate any of the covenants contained herein.
The Company shall not sell or otherwise transfer any shares of its Subsidiaries
to any third party.
- 24 -
<PAGE> 29
SECTION 5.13. Restrictive Agreements Prohibited. The Company shall not
become a party to any agreement which by its terms restricts the performance
thereby of this Agreement, the Amended Charter or the Stockholders' Agreement,
as applicable.
SECTION 5.14. Use of Proceeds. The Company shall use the proceeds from
the sale of the Preferred Shares to expand the Business and for working capital
purposes.
SECTION 5.15. Negative Covenants. Without the prior written consent of
the holders of the Majority Interest, the Company shall not:
(a) With the exception of the Leasehold Transactions, enter
into any transaction: (i) with any of its directors or officers, (ii) with any
holder of more than ten percent (10.0%) of the outstanding capital stock of any
class or series of capital stock issued thereby, or (iii) with any member of the
family of any such person, or any corporation, partnership, trust or other
entity in which any such person, or member of the family of any such person, is
a director, officer, trustee, partner, members or holder of more than five
percent (5.0%) of the outstanding capital stock thereof, except for transactions
which are no less favorable to the Company than could be obtained from an
independent third party in an arm's-length transaction and which is approved by
the Majority Interest. The Company may enter into employment contracts with its
employees in the ordinary course of business which contain reasonable terms
(including, without limitation, compensation terms) substantially in accordance
with industry custom and practice;
(b) Issue or sell any capital stock, options or convertible
debt, or issue or grant any stock appreciation rights or other rights in or to
stock, or redeem any of these, except as contemplated herein, provided that the
Purchaser's consent shall not be unreasonably withheld, conditioned or delayed;
(c) Enter into any loan agreements or other borrowing
arrangements, or incur any funded indebtedness, excluding customer financing in
the ordinary course of business, or increase borrowings under any senior debt
facility which would require annual payments in excess of one hundred thousand
dollars ($100,000), or which do not expressly permit (without obligation) the
Purchaser to cure any default with fifteen (15) days notice of such default
thereunder;
(d) Alter its corporate structure or establish or purchase any
subsidiary, or invest in any Affiliate;
(e) Make any cash or other dividend distributions to any
stockholder (except for the Preferred Dividends);
(f) Sell or otherwise dispose of any of its assets, except in
the ordinary course of its business;
(g) Merge or consolidate with another corporation or entity or
dissolve or otherwise liquidate;
- 25 -
<PAGE> 30
(h) Expend funds in excess of $200,000.00 per annum for
capital improvements;
(i) Change the location or nature of its business operations,
or invest any funds in any concern or entity not strictly related to the
Business;
(j) Enter into any agreements, including, without limitation,
leases, that are not in the ordinary course of its business if such require
annual payments in excess of $50,000;
SECTION 5.16. Option to Acquire Additional Shares of Common Stock. In
addition to any Conversion Rights that the Purchaser has under the Amended
Charter, the Company hereby grants to the Purchaser the option (the "COMMON
STOCK OPTION") to purchase that number of shares of the Common Stock of the
Company which, after the issuance of such shares of Common Stock, and together
with the shares of Common Stock standing in the name of Polk, will equal Twenty
and Twenty-Six One Hundredths Percent (20.26%) of the outstanding shares of
Common Stock of the Company on a fully diluted basis. The term of the Common
Stock Option shall last for as long as there are any shares of Common or
Preferred Stock standing in the name of the Purchaser or Polk. The exercise
price per share of Common Stock shall be equal to the per-share par value of the
Common Stock.
ARTICLE VI
EVENTS OF NONCOMPLIANCE; EVENTS OF DEFAULT
SECTION 6.01. Events of Noncompliance; Events of Default. For so long
as any Preferred Shares shall remain outstanding, if any of the following events
shall occur and be continuing (each, an "EVENT OF NONCOMPLIANCE"):
(a) The Company shall fail to effect the redemption of the
Preferred Shares within 90 calendar days of the period stated in accordance with
the provisions of the Amended Charter; or
(b) The Company shall default in the performance of any other
covenant or provision of this Agreement, the Amended Charter or the
Stockholders' Agreement and the default continues uncured for a period of thirty
(30) days after notice thereof; or
(c) Any representation or warranty made by the Company in this
Agreement or in any certificate, instrument or written statement contemplated by
or made or delivered pursuant to or in connection with this Agreement shall
prove to have been incorrect when made or as of the Closing Date and continues
uncured for a period of 30 days after notice thereof; or
(d) The Company shall fail to repay any indebtedness, whether
pursuant to any permitted senior indebtedness or any indebtedness other than
such permitted senior indebtedness, for borrowed money owing thereby (the
"DEBT"), or any interest or premium thereon, when due (or, if permitted by the
terms of the relevant document, within any applicable grace period), whether
such Debt shall become due by scheduled maturity, by required
- 26 -
<PAGE> 31
prepayment, by demand or otherwise, or shall receive notice of an event of
default or a notice of noncompliance from the holder of the Debt, or the Company
shall be in default under any other Contracts and such defaults is not cured
within any applicable grace periods; or
(e) The Company shall be involved in financial difficulties as
evidenced by (i) its admitting in writing its inability to pay its debts
generally as they become due; (ii) its commencement of a voluntary case under
Title 11 of the United States Bankruptcy Code as from time to time in effect (or
its foreign equivalent), or by its authorizing, by appropriate proceedings of
its Board of Directors or other governing body, the commencement of such a
voluntary case; (iii) its filing an answer or other pleading admitting or
failing to deny the material allegations of a petition filed against it
commencing an involuntary case under said Title 11, or seeking, consenting to or
acquiescing in the relief therein provided, or by its failing to controvert
timely the material allegations of any such petition; (iv) the entry of an order
for relief in any involuntary case commenced under said Title 11, which order is
not dismissed within 60 days; (v) its seeking relief as a debtor under any
applicable law, other than said Title 11, of any jurisdiction relating to the
liquidation or reorganization of debtors or to the modification or alteration of
the rights of creditors, or by its consenting to or acquiescing in such relief;
(vi) the entry of an order by a court of competent jurisdiction (A) finding it
to be bankrupt or insolvent, (B) ordering or approving its liquidation,
reorganization or any modification or alteration of the rights of its creditors,
or (C) assuming custody of, or appointing a receiver or other custodian for, all
or a substantial part of its property, which order is not dismissed within 60
days; or (vii) its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property;
or
(f) Any material, final judgment (not subject to further
appeal) is rendered against the Company or its properties;
(g) Any representation, warranty or other statement made in
any certificate, instrument or written statement contemplated by, or made or
delivered pursuant to, or in connection with this Agreement by any officer,
director or stockholder of the Company shall prove to have been incorrect when
made or as of the Closing Date in any material respect or any covenant or
provision made therein shall be in material default and the default continues
uncured for a period of 60 days after notice thereof; or
(h) Any payment required to be made hereunder or pursuant to
the Stockholders' Agreement by the Company shall not be made when due and such
amount remains unpaid for a period of 30 days; or
(i) The Company shall fail to make a Put Payment (as such term
is defined in the Stockholder's Agreement) or a payment of the Redemption Price
on a Payment Date (as such terms are defined in the Amended Charter); or
(j) Any of the Management Stockholders shall no longer be
employed by the Company (other than by reason of death or permanent disability),
or does not reasonably devote
- 27 -
<PAGE> 32
his full time efforts and attention to the Business, or breaches any other
warranty contained in Section 2.22; or
(k) There has been a change in control of the Company such
that any of the Management Stockholders is no longer a director or such that the
holders of the Shares of Common Stock who are currently entitled to elect a
majority of the directors are not able to continue to do so after such change in
control;
then, and in any such event, the holders of the Majority Interest, by notice to
the Company, may declare an event of default (an "EVENT OF DEFAULT").
SECTION 6.02. Special Board Rights. For so long as any Preferred Shares
or Conversion Shares are outstanding, in addition to and without limiting any of
the provisions of Section 6.01 hereof and the rights and remedies available to
the Purchaser and any holder of any shares of the Preferred Stock, upon the
declaration of an Event of Default and upon the request of the holders of the
Majority Interest, until the Event of Noncompliance which gave rise to the
default is cured or waived by a vote of the holders of the Majority Interest,
the holders of the Majority Interest, voting together as a separate class of
stock in accordance with the terms of the Amended Charter, shall be entitled,
notwithstanding any other provisions of the Amended Charter, and shall have the
sole power to elect three (3) directors (in addition to the one (1) Preferred
Director), or such greater or lesser number as shall equal one-half of the
number of directors of the Company plus one rounded to the next highest full
integer. The directors elected pursuant to the preceding sentence shall serve
until the Event of Noncompliance is cured or waived as aforesaid, after which
time the directors removed may be reelected to the Board and the provisions of
the Amended Charter relating to the election of directors of the Company in
situations not constituting an Event of Noncompliance shall once again apply.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Fees and Expenses. At or prior to the Closing, the
Company shall pay (a) the reasonable fees and disbursements of Piper & Marbury
L.L.P., special counsel to the Purchaser, in connection with the preparation of
this Agreement, the Amended Charter, the Stockholders' Agreement, and the
transactions otherwise contemplated hereby and thereby, such fees and expenses
not to exceed Ten Thousand Dollars ($10,000.00) in the aggregate; and (b) all
other Closing costs and recording fees in connection with the transactions
contemplated hereby, if any.
SECTION 7.02. Survival of Agreements. All covenants, agreements,
representations and warranties made herein, in the Stockholders' Agreement or in
any certificate or instrument delivered to the Purchaser pursuant to or in
connection with this Agreement or the Stockholders' Agreement shall survive the
execution and delivery of this Agreement, the Stockholders' Agreement, the
issuance, sale and delivery of the Preferred Shares, and the issuance and
delivery of the Conversion Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or thereunder
or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company.
- 28 -
<PAGE> 33
SECTION 7.03. Parties in Interest. All representations, warranties,
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
Without limiting the generality of the foregoing, all representations, covenants
and agreements benefiting the Purchaser shall inure to the benefit of any and
all subsequent holders from time to time of the Preferred Shares or Conversion
Shares.
SECTION 7.04. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in person,
by overnight express mail, mailed by certified or registered mail, return
receipt requested, or by facsimile (if followed by certified or registered mail,
return receipt requested) addressed as follows:
(a) If to the Company:
Genesis Technologies, Inc.
36 Chambers Court
Brush Creek Industrial Center
Eagle, Colorado 81631
Attention: Arnold Nudell
Telephone: (970) 328-9515
Telecopier: (970) 328-9522
With a copy to:
Peter Rudy & Associates, P.C.
108 South Frontage Road West
Vail, Colorado 81657
Attention: Peter H. Rudy, Esq.
Telephone: (970) 479-8865
Telecopier: (970) 479-9773
(b) If to the Purchaser:
Britannia Investment Corporation
c/o Polk Audio, Inc.
5601 Metro Drive
Baltimore, Maryland 21215
Attention: Mr. George Klopfer, CEO
Telephone: (410) 358-3600
Telecopier: (410) 764-6040
With a copy to:
- 29 -
<PAGE> 34
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
Attention: Wilbert H. Sirota, Esquire
Telephone: (410) 576-7696
Telecopier: (410) 576-1700
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others. Any action requiring consent
or approval by the Majority Interest shall be effected by the delivery of
written notice to the Secretary of the Company from the holders of the Majority
Interest in accordance with the provisions of this Section 7.04.
SECTION 7.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
giving effect to its conflicts of laws provisions. The parties hereto agree and
acknowledge that each party has retained counsel in connection with the
negotiation and preparation of this Agreement and the Stockholders' Agreement,
and that any rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the foregoing agreements or any amendment, schedule or exhibits thereto.
SECTION 7.06. Entire Agreement. This Agreement, including the Schedules
and Exhibits hereto, together with the Stockholders' Agreement, constitutes the
sole and entire agreement of the parties hereto and supersede all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof. All Schedules and Exhibits hereto are
incorporated herein by reference in their entirety. Notwithstanding the
foregoing, the liquidated damages provisions set forth in Subsection 8.2 of that
certain letter of intent dated December 2, 1997, between the Company and the
Purchaser, shall survive the execution hereof.
SECTION 7.07. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
SECTION 7.08. Amendments. This Agreement may not be amended or
modified, and no provisions hereof may be waived, without the written consent of
the Company and the holders of the Majority Interest.
SECTION 7.09. Severability. Each provision of this Agreement shall be
treated as a separate and independent clause, and the unenforceability of any
one clause shall in no way impair the enforceability of any of the other clauses
herein. If one or more of the provisions contained in this Agreement shall for
any reason be held to be excessively broad as to scope, activity, subject or
otherwise so as to be unenforceable at law, such provision or provisions shall
be construed by the appropriate judicial body by limiting or reducing it or
them, so as to be enforceable to the maximum extent compatible with the
applicable law as it shall then appear.
- 30 -
<PAGE> 35
SECTION 7.10. Titles and Subtitles. The titles and subtitles used in
this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement.
SECTION 7.11. Recitals. The Recitals hereto are specifically made a
part of this Agreement and are incorporated herein by reference.
SECTION 7.12. Pronouns. All pronouns used herein shall be deemed to
refer to the masculine, feminine or neuter gender as the context requires.
SECTION 7.13. Waiver of Jury Trial. EACH OF THE PARTIES HERETO WAIVES
ALL RIGHT TO TRIAL BY JURY OF ALL CLAIMS OF ANY KIND ARISING FROM OR RELATING TO
THIS AGREEMENT. EACH SUCH PARTY ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL
- 31 -
<PAGE> 36
RIGHT AND THAT IT MAKES THIS WAIVER VOLUNTARILY AND KNOWINGLY AFTER
CONSULTATION WITH COUNSEL OF ITS CHOICE. EACH SUCH PARTY AGREES THAT ALL SUCH
CLAIMS SHALL BE TRIED BEFORE A JUDGE OF A COURT OF COMPETENT JURISDICTION, AND
NOT A JURY, AND ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL PART
OF THE CONSIDERATION FOR THE TRANSACTIONS CONTEMPLATED HEREBY.
[remainder of page intentionally left blank]
- 32 -
<PAGE> 37
IN WITNESS WHEREOF, each of the parties to this Agreement has executed,
or has caused its duly elected and qualified officer to execute, this Agreement
as of the day and year first above written.
ATTEST/WITNESS: BRITANNIA INVESTMENT CORPORATION
____________________________ By: /s/ George M. Klopfer (SEAL)
_______________________________
Name: George M. Klopfer
Title: President
GENESIS TECHNOLOGIES, INC.
____________________________ By: /s/ Arnold Nudell (SEAL)
_______________________________
Name: Arnold Nudell
Title: CEO
MANAGEMENT STOCKHOLDERS
____________________________ /s/ Arnold Nudell
_______________________________
Arnold Nudell
____________________________ /s/ Paul Mcgowan
_______________________________
Paul McGowan
___________________________ /s/ Mark Shifter
_______________________________
Mark Schifter
- 33 -
<PAGE> 1
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS' AGREEMENT (this "AGREEMENT") is made and entered
into as of December 29, 1997, (the "EFFECTIVE DATE") by and among (a) Genesis
Technologies, Inc., a Delaware corporation (the "COMPANY"), (b) the following
three individuals, all of whom are residents of Colorado and who are
collectively referred to herein as the "MANAGEMENT STOCKHOLDERS": Arnold Nudell
("NUDELL"), Paul McGowan ("MCGOWAN"), and Mark Schifter ("SCHIFTER"); and
Britannia Investment Corporation, a Delaware corporation (the "PREFERRED
STOCKHOLDER"). The common stock of the Company owned by the stockholders of the
Company (including the Management Stockholders, the "STOCKHOLDERS") is sometimes
herein referred to collectively as the "SHARES." Capitalized terms used in this
Agreement but not otherwise defined herein shall have the meanings assigned to
such terms in that certain Preferred Stock Purchase Agreement dated as of
December 29, 1997, by and between the Company and the Preferred Stockholder (the
"PURCHASE AGREEMENT").
RECITALS
WHEREAS, pursuant to the terms of the Purchase Agreement, the Company
sold and the Preferred Stockholder purchased, simultaneously with the execution
and delivery of this Agreement, a total of 5,000 shares of Convertible Preferred
Stock, $100.00 par value per share (the "PREFERRED STOCK") (shares of Preferred
Stock held by the Preferred Stockholder, together with Shares that were received
by the Preferred Stockholder in exchange for the conversion of shares of
Preferred Stock that are still held by the Preferred Stockholder, are referred
to collectively herein as the "PREFERRED SHARES");
WHEREAS, immediately after the closing of the Purchase Agreement, each
of the Stockholders and the Preferred Stockholder own that number of shares of
Common Stock or Preferred Stock as set forth opposite their respective names on
Schedule I hereto.
WHEREAS, a condition precedent to the obligations of the Preferred
Stockholder to consummate the Purchase under the Purchase Agreement is that this
Agreement be executed and delivered by the parties hereto; and
WHEREAS, the Company, the Management Stockholders and the Preferred
Stockholder, among other things, desire to assure continuity and to perpetuate
harmony in the Company's management, policies and operations and, to that end,
wish to enter into this Agreement to provide certain rights and obligations
among themselves and to facilitate the Closing under the Purchase Agreement.
<PAGE> 2
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and mutual agreements,
covenants and provisions herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
SECTION 1. RECITALS AND SCHEDULES. The Recitals and Schedules hereto
are specifically incorporated herein by reference and made a part hereof.
SECTION 2. PURCHASE AND SALE. Except if made in accordance with the
terms and conditions of this Agreement and pursuant to applicable securities
laws, no purchase, sale, gift, endorsement, assignment (including an assignment
of voting rights), transfer, pledge, encumbrance or other disposition, whether
voluntary, involuntary or by operation of law, including, without limitation,
any transfer pursuant to a divorce decree (hereinafter collectively referred to
as, a "TRANSFER"), of the Shares by any Management Stockholder shall be valid
and binding; provided, however, that any Management Stockholder shall be
permitted to transfer the Shares to immediate family members (that is, sons,
daughters, grandchildren and their respective spouses) for estate planning
purposes on the condition that any such transferee of such Shares or rights
shall become a party to this Agreement. The attempted bad faith Transfer of any
Shares for the purpose of evading the provisions of this Agreement, ostensibly
appearing as a Transfer to an immediate family member, shall be null and void
and shall not be recognized on the stock record books of the Company.
SECTION 3. DEATH OR MENTAL INCAPACITY OF A STOCKHOLDER. In the event of
the death or incapacity of a Stockholder (the "DECEASED STOCKHOLDER"), the
Deceased Stockholder's, his personal representative or executor, as appropriate
(the "PERSONAL REPRESENTATIVE"), shall not Transfer the Deceased Stockholder's
Shares (except for a transfer to an immediate family member in accordance with
the provisions of Section 2 hereof) without first complying with the provisions
of this Agreement.
SECTION 4. LIFETIME TRANSFERS OF STOCK.
Except as otherwise permitted by this Agreement, each of the Management
Stockholders agree that, for so long as any shares of the Preferred Stock are
outstanding:
(a) VOLUNTARY TRANSFER.
(i) He will not Transfer any or all of his respective
Shares unless the holders owning at least a majority in interest of the shares
of the Preferred Stock outstanding at the time (the "MAJORITY INTEREST") shall
have given their consent in writing to such Transfer.
(ii) If a Management Stockholder voluntarily
terminates his employment with the Company, the Company then shall have the
option, for a period of 90 days after such termination event, to purchase that
Management Stockholder's Shares at a price equal to the higher of (x) the net
book value of the Shares, as determined in accordance with generally accepted
accounting principles, consistently applied ("GAAP"), in good faith by the
Company's independent auditors, at the close of the immediately preceding fiscal
year or (y) the price that
-2-
<PAGE> 3
such Management Stockholder paid for such Shares. The Company may exercise the
option granted under this Section 4(a)(ii) by delivering written notice to the
former employee, at any time prior to the close of business on the 90th calendar
day immediately following such employee's termination date.
(b) INVOLUNTARY TRANSFER. If any portion of a Management
Stockholder's Shares are transferred due to his death or incapacity (except for
a Transfer to an immediate family member in accordance with the provisions of
Section 2 hereof), attached or taken in execution, or if a Management
Stockholder applies for the benefit of, or files a case under, any provision of
the Federal bankruptcy law or any other law relating to insolvency or relief of
debtors, or if a case or proceeding is brought against a Management Stockholder
under any provision of the Federal bankruptcy law or any other law relating to
insolvency or relief of debtors which is not dismissed within 60 days after the
commencement thereof, or if a Management Stockholder makes an assignment for the
benefit of creditors, or if any portion of a Management Stockholder's Shares is
made subject to a charging order, or is transferred pursuant to a divorce decree
(each such event shall be referred to as an "INVOLUNTARY TRANSFER"), such
Management Stockholder, or his personal representative, as appropriate (the
"SUBJECT STOCKHOLDER"), shall give immediate written notice of the Involuntary
Transfer to the Company, and the Preferred Stockholder, and the Company and
Preferred Stockholder shall have the option to purchase any or all of the Shares
subject to the Involuntary Transfer in accordance with the provisions of Section
5 hereof.
SECTION 5. RIGHT OF FIRST REFUSAL.
(a) So long as any shares of Preferred Stock are outstanding
if a Management Stockholder, his executor or his personal representative, as
appropriate (collectively, the "TRANSFERRING STOCKHOLDER"), receives a bona fide
offer to purchase any of the Shares then beneficially owned by the Transferring
Stockholder that the Transferring Stockholder is willing to accept, then the
Transferring Stockholder shall first offer in writing (the "OFFER") to sell the
Shares (the "OFFERED SHARES") to the Preferred Stockholder at the price and on
the terms for which the Transferring Stockholder proposes to transfer the
Offered Shares to the proposed bona fide transferee.
The Offer shall set forth (i) the number of Offered Shares,
(ii) the name and address of the proposed bona fide transferee, (iii) the amount
of consideration to be received by the Transferring Stockholder in the proposed
sale of the Offered Shares, and (iv) the method of proposed payment. The
Preferred Stockholder shall have the option to acquire all or any of the Offered
Shares at the price and upon the terms provided in the Offer for a period of
sixty (60) days (the "OFFER PERIOD") following notice of the Offer by notifying
the Transferring Stockholder in writing of its intention to purchase at Closing
all or any of the Offered Shares.
(b) If the Preferred Stockholder elects to purchase less than
all of the Offered Shares pursuant to Section 5(a) hereof, the Transferring
Stockholder may (i) either proceed to Closing with respect to those Offered
Shares to be purchased by the Preferred Stockholder and sell any remaining
shares pursuant to Section 5(c) hereof, or (ii) elect not to sell any of the
Offered Shares to the Preferred Stockholder by providing notice to the Preferred
Stockholder within 15 days after the expiration of the Offer Period and sell all
Offered Shares pursuant to Section 5(c) hereof.
-3-
<PAGE> 4
(c) Any Offered Shares that are not so purchased pursuant to
Section 5(a) hereof by the Preferred Stockholder may be sold by the Transferring
Stockholder to the bona fide transferee named in the Offer within a period of 90
days after the expiration of the Offer Period. Such Offered Shares may be
transferred to the bona fide transferee named in the Offer provided that they
are sold at the price and on the terms set forth in the Offer. Any Offered
Shares not actually sold or transferred to such bona fide transferee by the
Transferring Stockholder within such ninety (90) day period at the price and on
the terms set forth in the Offer shall remain subject to all of the provisions
of this Agreement.
SECTION 6. PREFERRED STOCKHOLDER'S TAG ALONG RIGHTS. So long as any
Preferred Shares are outstanding, the Preferred Stockholder may elect to
participate in any sale by any Management Stockholder (each, a "SECTION 6
TRANSFERRING STOCKHOLDER" under Section 5(c) hereof by giving notice to the
Section 6 Transferring Stockholder at least five days prior to the date of the
proposed sale. Such notice from the Section 6 Transferring Stockholder shall
specify the number of Shares which it proposes to sell. If the Preferred
Stockholder elects to participate in such sale, and gives timely notice of such
election in accordance with the provisions of this Section 6, then the Section 6
Transferring Stockholder shall not effect such sale unless either (a) the
proposed purchaser of such Shares offers to purchase from the Preferred
Stockholder, at the same time and on the same terms (including price) as the
Shares that are being purchased from the Section 6 Transferring Stockholder,
that number of shares of stock of the Company owned by the Preferred Stockholder
that bears the same proportion to the total number of shares of fully-diluted
capital stock of the Company which the Preferred Stockholder beneficially own as
the number of Shares being sold by the Section 6 Transferring Stockholder bears
to the total number of shares of capital stock of the Company owned by the
Section 6 Transferring Stockholder, or (b) to the extent the proposed purchaser
is unwilling to purchase shares of the Preferred Stockholder's capital stock of
the Company as calculated above, then the number of shares of the Preferred
Stockholder's capital stock of the Company as so calculated, and the number of
Shares of the Section 6 Transferring Stockholder as otherwise to be sold, shall
each be reduced proportionately to equal the total number of shares to be
purchased by the proposed purchaser, who will thereupon offer to purchase that
number of shares of the Preferred Stockholder' capital stock of the Company as
so calculated at the same time as the number of Shares to be sold by the Section
6 Transferring Stockholder, as recalculated herein.
If the Preferred Stockholder elects to exercise the rights contained in
this Section 6, it shall, with respect to the Preferred Shares to be sold
hereunder (collectively, the "TAG ALONG SHARES"), immediately prior to the sale
of such Tag Along Shares, if such shares are shares of Preferred Stock, convert
the Tag Along Shares into shares of Common Stock, provided, however, that if the
sale of the Tag Along Shares is not consummated for whatever reason, any
conversion thereof shall not be effective.
-4-
<PAGE> 5
SECTION 7. UNLOCKING OPTION.
(a) SHAREHOLDER NOTICE. At any time after the third (3rd)
anniversary of the Effective Date, if a bona fide offer (a "BONA FIDE OFFER") is
made by an independent third party to purchase all or substantially all of the
assets or equity securities of the Company, the Management Stockholder or the
Preferred Stockholder that received such Bona Fide Offer shall promptly notify
the Company in writing of the terms, including price, and conditions of the Bona
Fide Offer. Upon receipt of the notice from the Management Stockholder or the
Preferred Stockholder, or, if the Bona Fide Offer is received by the Company
directly from the independent third party, the Company promptly shall notify
(the "COMPANY NOTICE") the Preferred Stockholder in writing of the Bona Fide
Offer, specifying the terms, including price, and conditions of the Bona Fide
Offer.
(b) UNLOCKING OPTION. The Majority Interest shall have the
option (the "UNLOCKING Option") for a period of 30 days from the date of receipt
of the Company Notice, to require the Company and the Management Stockholders
(i) to accept the Bona Fide Offer or instead (ii) at the election of the
Company, to acquire all the shares of Preferred Stock and any shares of Common
Stock issued upon the conversion thereof (such securities are hereinafter
collectively called, the "SECTION 7 SECURITIES") on the same terms, including
price (calculated, in the event of a sale of all or substantially all of the
assets of the Company, based upon the value per share of Capital Stock
determined by the price to be paid for such assets), and subject to the same
conditions as specified in the Bona Fide Offer. Any election by the Company
pursuant to this Section 7(b) shall be at the direction of a majority of the
members of the Board of Directors of the Company (the "BOARD") (with the Board
representatives of the holders of the Preferred Stock abstaining from any such
vote).
(c) EXERCISE OF UNLOCKING OPTION. Should the holders of the
Majority Interest desire to exercise the Unlocking Option, they shall notify the
Company (the "UNLOCKING NOTICE") in writing of their exercise of the Unlocking
Option prior to the expiration of the aforementioned 30-day period. The Company
shall have 90 days from the date of the Unlocking Notice to elect whether to
acquire the Section 7 Securities or to accept the Bona Fide Offer. If the
Company declines to acquire the Section 7 Securities, the Management
Stockholders hereby agree to effect the sale of their equity securities or
consent to a sale of all or substantially all of the Company's assets, as
applicable, pursuant to the Bona Fide Offer. If the Company elects to acquire
the Section 7 Securities, it shall pay one-half (1/2) of the purchase price
therefor before the expiration of a One Hundred Eighty (180) day period
commencing from the date of the delivery of the Unlocking Notice and it shall
pay the remaining one-half (1/2) of the purchase price no later than Three
Hundred Sixty (360) days after the date of the delivery of the Unlocking Notice.
(d) FAILURE TO CONSUMMATE THE PURCHASE. If the Company elects
to acquire the Section 7 Securities but fails to consummate the acquisition of
one-half of the Section 7 Securities before the expiration of the 180-day period
set forth in Subsection 7(c), then the Company and the Management Stockholders
shall accept the Bona Fide Offer. If, however, the Bona Fide Offer has been
withdrawn prior to such date, then the holders of the Preferred Stock shall have
the option (the "SECTION 7 PUT") to require the Company to acquire the Section 7
Securities (the "PUT SHARES") for the consideration set forth in Section 7(e)
hereof at a price per
-5-
<PAGE> 6
share calculated based upon the value of the Bona Fide Offer (which value, if in
dispute, shall be determined by an appraisal process substantially the same as
the appraisal process set forth in Subparagraph (E)(2) of Article Fifth of the
Amended and Restated Certificate of Incorporation of the Company ("the "AMENDED
CHARTER")), and subject to the same conditions as specified in the Bona Fide
Offer. The Preferred Stockholder may exercise the Section 7 Put, in whole or in
part, by delivery of written notice (the "PUT NOTICE") to the Company at any
time and from time to time after the expiration of the 180-day period. Promptly
after the receipt of a Put Notice, the Company shall promptly acquire the Put
Shares for the consideration as set forth in Section 7(e) hereof. The Company
shall make payment of 25% of the total amount of such consideration (each, a
"PUT PAYMENT") on the Closing Date (as that term is defined in Subsection 8
below) and on each of the first through the third 90-day anniversaries thereof
(each, a "PUT PAYMENT DATE").
(e) CONSIDERATION. The acquisition by the Company of the
Section 7 Securities shall be for cash consideration, or such other
consideration as the Majority Interest shall elect, in its sole and absolute
discretion, to accept. If the Bona Fide Offer is accepted, the Preferred
Stockholder shall be entitled to receive the same form of consideration as the
Company's other stockholders. Any consideration paid to any employee or
affiliate of the Company related directly or indirectly to the Bona Fide Offer
(including a Bona Fide Offer under Section 10(g) hereof) shall be included in
the calculation of the consideration received in the transaction contemplated
thereby.
(f) RIGHTS SUBSEQUENT TO PUT. Notwithstanding the delivery of
the Put Notice, the holders of the Put Shares shall be entitled to all rights
and privileges with respect to such shares of Preferred Stock, including,
without limitation, voting rights, liquidation preferences, the right to
participate in dividends, and the right of the holders to receive the Put Price
on the Put Payment Dates and the rights set forth in Section 7(h) hereof upon
the non-payment of the Put Price when due.
(g) DEPOSIT OF FUNDS. On each Put Payment Date, the Company
shall deposit, with any bank or trust Company, having a capital and surplus of
at least Twenty Five Million Dollars ($25,000,000.00), as a trust fund, a sum
equal to the aggregate Put Price of all Put Shares to be sold on such Payment
Date, with irrevocable instructions and authority to the bank or trust Company
to pay, on and after each such Payment Date, the applicable Put Price to the
respective holders upon the surrender of their share certificates (or in lieu
thereof, an affidavit of lost certificate in form reasonably acceptable to the
Company). From and after the date of such deposit (but not prior to each Put
Payment Date), the Put Shares shall be sold on such Put Payment Date. The
deposit shall constitute full payment of the shares, and from and after each Put
Payment Date, the shares sold on such Put Payment Date shall be deemed to be no
longer outstanding, and the holders thereof shall cease to be shareholders with
respect to such shares and shall have no rights with respect thereto, except the
rights to receive, from the bank or trust Company, payment of the applicable Put
Price, without interest, upon surrender of their certificates therefor. Any
funds so deposited and unclaimed at the end of one year from the date of each
Put Payment Date shall be released or repaid to the Company, after which time
the holders of shares shall be entitled to receive payment of the applicable Put
Price only from the Company.
-6-
<PAGE> 7
(h) EFFECT OF FAILURE TO PAY PUT PRICE.
(i) If the Company shall not have sufficient funds
legally available to purchase all of the Put Shares to be purchased on the
applicable Payment Date at the full Put Price, or if for any other reason the
Company fails to pay the Put Price on all Put Shares to be purchased on the
applicable Payment Date, then the Company shall not purchase any Put Shares on
the applicable Payment Date (each, a "PUT DEFAULT DATE") but shall purchase all
such shares on the first date funds are legally available therefor at the Put
Price (each a "DEFAULT PAYMENT DATE"). From and after each Put Default Date, and
until the payment in full of the Put Price on all Put Shares on each Default
Payment Date, interest shall accrue from each Put Default Date on the Put Price
payable on the Put Shares at the greater of (x) 15% per annum and (y) the Prime
Rate (as defined below) plus 4% and shall be calculated on the basis of the
actual number of days elapsed divided by a year of 360 days with twelve equal
months and payable monthly. The term "PRIME RATE" shall mean the prime rate of
interest charged by the nation's leading banking institutions as reported in the
Wall Street Journal under the caption "Interest Rate - Prime Rate".
(ii) If the Company fails to pay the Put Price on all
Put Shares on any applicable Put Payment Date, an Event of Noncompliance shall
be deemed to have occurred under the Purchase Agreement and, upon the
declaration of an Event of Default by the Majority Interest, the Majority
Interest shall be entitled to elect a majority of the members of the Board in
accordance with the provisions of Subparagraph (A)(2)(b) of the Amended Charter
until the Put Price, together with any interest thereon, is paid in full to the
holders of the Preferred Stock on a Default Payment Date.
SECTION 8. CALL OPTION.
(a) RIGHT TO CALL THE PREFERRED SHARES. At any time after the
third (3rd) anniversary of the Effective Date and subject to the terms of this
Section 8, the Company shall have the option (the "SECTION 8 CALL") to redeem
all (but not less than all) outstanding Preferred Shares for the purchase price
(the "CALL REDEMPTION PRICE") set forth below; provided, however, that (i) no
events have occurred for which notice may or shall be given to the Preferred
Stockholder under Sections 5, 6, 7, or 9 and (ii) the Preferred Stockholder has
not given notice of its intention to exercise the Purchase Option under Section
10 hereof (collectively, the "NOTIFICATION EVENTS").
(b) CALL REDEMPTION PRICE. The Call Redemption Price shall be
calculated in accordance with the provisions for calculating the Redemption
Price under Subparagraph E (2) of Article Fifth of the Amended Charter,
provided, however, that the calculation set forth in Section E (2) (b) of
Article Fifth shall be made as if the Preferred Shares had accrued, as from the
date of original issue, quarterly dividends equal to $14,700, payable by the
quarterly issuance and delivery of 147 shares of Preferred Stock.
(c) NOTIFICATION. The Company shall notify the Preferred
Stockholder in writing (the "CALL NOTICE") of its determination to exercise the
Section 8 Call. Following the receipt of the Call Notice, the Preferred
Stockholder shall have Forty Five (45) days to notify the Company in writing
(the "STOP-CALL NOTICE") of the Preferred Stockholder's determination to
-7-
<PAGE> 8
proceed, in lieu of the Section 8 Call, with the conversion of all of the
Preferred Shares into shares of Common Stock or to elect to otherwise proceed to
exercise any rights available to the Preferred Stockholder in connection with
any of the Notification Events, provided, however, that if the Preferred
Stockholder fails to consummate the transactions identified in the Stop-Call
Notice within 90 days of the date of the Stop-Call Notice, then the Company
shall have the option to proceed with the Section 8 Call in accordance with the
terms of the following provisions; provided, however, that such failure is
through no fault of the Company or the Managing Stockholders.
(d) EXERCISE OF THE CALL. After the expiration of the 45-day
period, if the Preferred Stockholder has not delivered a Stop-Call Notice, the
Company may proceed with the Section 8 Call by following, and subject to, the
provisions regarding the exercise of a Redemption Election set forth in
Subparagraphs (3) through (7) of Paragraph E of Article Fifth of the Amended
Charter, as if the Section 8 Call is a Redemption thereunder.
SECTION 8.1 CLOSING. Closing (the "CLOSING") on the sale of any
securities sold pursuant to this Agreement shall be, unless otherwise specified
in this Agreement or unless otherwise agreed to in writing by a bona fide
third-party purchaser, the purchasing stockholder, the Company, as appropriate,
on the one hand (the "BUYER"), or the selling stockholders or his personal or
legal representative, or successor, as appropriate, on the other hand (the
"SELLER"), held at the principal place of business of the Company 30 days after
the earlier of (a) the date on which an option is exercised to purchase Shares
offered for sale pursuant to this Agreement (or, if an election is made to sell
less than all of the offered Shares, then upon the date on which an option is
subsequently exercised to purchase the remaining portion of such offered Shares)
or (b) if all of such Shares offered for sale are not purchased pursuant to this
Agreement, the date on which the last option period to purchase such offered
Shares expires (collectively, the "CLOSING DATE"). At the Closing, the Seller
shall surrender the certificates representing the Shares to be transferred and
any documentation reasonably requested by the Buyer to convey the Shares
transferred, properly endorsed or executed for transfer.
SECTION 9. PIGGY-BACK REGISTRATION RIGHTS.
(a) CERTAIN DEFINITIONS: As used in this Section 9, the
following terms shall have the following meanings:
"COMMON STOCK" means and includes any issued and outstanding
shares of capital stock of any class of the Company which shall not be
limited to a fixed sum or percentage of par value in respect of the
rights of the holders thereof to participate in dividends or in the
distribution of assets upon a liquidation, dissolution or winding up of
the Company or Parent, whether voluntary or involuntary.
"COMMISSION" means the Securities and Exchange Commission, or
any other Federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
-8-
<PAGE> 9
"IPO" means an underwritten initial public offering of the
Common Stock of the Company.
"REGISTRATION EXPENSES" means the expenses so described in
Section 9(d) hereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" means the expenses so described in Section
9(d) hereof.
(b) COMPANY OR MANAGEMENT STOCKHOLDER REGISTRATION. If the
Company at any time determines to register any of its securities under the
Securities Act for sale to the public for its own account, or, at the request of
any Management Stockholder, for the account of such Management Stockholder, or
both (except with respect to registration statements on Forms S-4, S-8 or
another form not available for registering the Section 9 Shares, as that term is
defined below, for sale to the public), each such time the Company will give
written notice to the Preferred Stockholder of its intention so to do. Upon the
written request of the Preferred Stockholder, delivered to the Company within 30
days after the giving of any such notice by the Company to register all or a
portion of the Preferred Stockholder's shares of Common Stock issued upon the
conversion of the Preferred Stock (the "SECTION 9 SHARES") (whether or not such
Section 9 Shares are issued or outstanding at the time), in whole or in part
(which request shall state the intended method of disposition thereof), the
Company will use its best efforts to cause the Section 9 Shares as to which
registration shall have been so requested to be included in the securities to be
covered by the registration statement proposed to be filed by the Company, all
to the extent requisite to permit the sale or other disposition by the Preferred
Stockholder (in accordance with its written request) of such Section 9 Shares so
registered. In the event that any registration pursuant to this Section 9(b)
shall be, in whole or in part, an underwritten public offering of Common Stock,
the number of shares of Common Stock to be included in such an underwriting may
be reduced, in whole or in part, if and to the extent that the managing
underwriter shall be of the opinion that such inclusion would adversely affect
the marketing of the securities to be sold by the Registering Party therein; in
each such case pro rata based on the Preferred Stockholder's ownership of the
Section 9 Shares requested to be registered. Notwithstanding the foregoing
provisions, the Registering Party may withdraw any registration statement
referred to in this Section 9(b) without thereby incurring any liability to the
Preferred Stockholder.
(c) REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Subsection 9(b) to use its best efforts to effect
the registration of any Section 9 Shares under the Securities Act, the Company
will, as expeditiously as possible:
(i) prepare (and afford counsel for the selling
Preferred Stockholder reasonable opportunity to review and comment thereon) and
file with the Commission a registration statement (which, in the case of an
underwritten public offering pursuant to Section 9(b) hereof, shall be on Form
S-1 or such other form of general applicability satisfactory to the managing
underwriter selected as therein provided) with respect to such securities and
use its
-9-
<PAGE> 10
best efforts to cause such registration statement to become and remain effective
for the period of the distribution contemplated thereby (determined as
hereinafter provided);
(ii) prepare (and afford counsel for the selling
Preferred Stockholder reasonable opportunity to review and comment thereon) and
file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective for the period specified in
subparagraph (i) above and comply with the provisions of the Securities Act with
respect to the disposition of all Section 9 Shares covered by such registration
statement in accordance with the sellers' intended method of disposition set
forth in such registration statement for such period;
(iii) furnish to each seller of Section 9 Shares and
to each underwriter such number of copies of the registration statement and the
prospectus included in the registration statement (including each preliminary
prospectus) as such persons reasonably may request in order to facilitate the
public sale or other disposition of the Section 9 Shares covered by such
registration statement;
(iv) use its best efforts to register or qualify the
Section 9 Shares covered by such registration statement under the securities or
"blue sky" laws of such jurisdictions as the sellers of Section 9 Shares or, in
the case of an underwritten public offering, the managing underwriter reasonably
shall request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(v) use its best efforts to list the Section 9 Shares
covered by such registration statement with any securities exchange on which the
Common Stock is then listed;
(vi) immediately notify each seller of Section 9
Shares and each underwriter under such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
(vii) if the offering is underwritten and at the
request of any seller of Section 9 Shares, use its best efforts to furnish on
the date that Section 9 Shares are delivered to the underwriters for sale
pursuant to such registration: (A) an opinion dated such date of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters and to such seller, stating that such registration statement has
become effective under the Securities Act and that (1) to the best knowledge of
such counsel, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (2) the registration statement, the
related prospectus and each amendment or supplement thereof comply as to form in
all material respects with the requirements of the Securities Act (except that
such counsel need not express any opinion as to financial statements contained
therein) and (3) to such other effects as reasonably
-10-
<PAGE> 11
may be requested by counsel for the underwriters or by such seller or its
counsel and (B) a letter dated such date from the independent public accountants
retained by the Company, addressed to the underwriters and to such seller,
stating that they are independent public auditors within the meaning of the
Securities Act and that, in the opinion of such auditors, the financial
statements of the Company included in the registration statement or the
prospectus, or any amendment or supplement thereof, comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, and such letter shall additionally cover such other financial matters
(including information as to the period ending not more than five business days
prior to the date of such letter) with respect to such registration as such
underwriters reasonably may request; and
(viii) make available for inspection by the seller of
Section 9 Shares, upon such seller signing an appropriate confidentiality
agreement, any underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent retained by
such seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
registration statement.
For purposes of Section 9(c)(i) and (ii), the period of
distribution of Section 9 Shares in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
distribution of all securities purchased by it (but no later than 180 days), and
the period of distribution of Section 9 Shares in any other registration shall
be deemed to extend until the earlier of the sale of all Section 9 Shares
covered thereby and 120 days after the effective date thereof.
In connection with each registration hereunder, the sellers of
Section 9 Shares will furnish to the Company in writing such information with
respect to themselves and the proposed distribution by them as reasonably shall
be necessary in order to assure compliance with Federal and applicable state
securities laws.
In connection with each registration pursuant to Section 9(b)
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature; provided
that such agreement shall not contain any provision applicable to the Company
which is inconsistent with the provisions hereof.
(d) EXPENSES. All expenses incurred by the Company in
complying with Section 9(b), including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public auditors for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
fees of transfer agents and registrars, costs of insurance and reasonable fees
and disbursements of one law firm for the seller of Section 9 Shares, but
excluding any Selling Expenses, are called "REGISTRATION EXPENSES". All
underwriting discounts and selling commissions applicable to the sale of the
Section 9 Shares are called "SELLING EXPENSES".
-11-
<PAGE> 12
The Company shall pay all Registration Expenses in connection
with each registration statement under Section 9(b). All Selling Expenses in
connection with each registration statement under Section 9(b), and any
Registration Expenses borne by the sellers pursuant to the preceding sentence
shall be borne by the participating sellers in proportion to the number of
Shares sold by each, or by such participating sellers (including the Company if
it shall be a participating seller) as they may agree, provided, however, that
the Preferred Stockholder shall not be responsible to pay any Registration
Expenses or Selling Expenses except its pro rata share of the underwriting
discounts, if any.
(e) INDEMNIFICATION AND CONTRIBUTION.
(i) In the event of a registration of any of the
Section 9 Shares under the Securities Act pursuant to Section 9(b), the Company
(the "INDEMNIFYING PARTY") will indemnify and hold harmless the Preferred
Stockholder seller of such Section 9 Shares thereunder, each underwriter of such
Section 9 Shares thereunder and each other person, if any, who controls such
seller or underwriter within the meaning of the Securities Act (each, an
"INDEMNIFIED PARTY," and collectively, the "INDEMNIFIED PARTIES"), against any
losses, claims, damages, liabilities or expenses, joint or several (or actions
in respect thereof), to which such Indemnified Party may become subject under
the Securities Act, Exchange Act, or other Federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement (the "REGISTRATION STATEMENT") under which such Section 9 Shares were
registered or qualified under the Securities Act or applicable state securities
laws pursuant to Section 9(b)hereof, any preliminary prospectus (the
"PRELIMINARY PROSPECTUS") or final prospectus ("PROSPECTUS") contained therein,
or any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based in whole or in part on any inaccuracy in the
representations and warranties of the Company contained in an underwriting
agreement with the underwriters or any failure of the Company to perform its
obligations under such underwriting agreement or under law; and will reimburse
each such seller, each such Indemnified Party for any legal and other expenses
as such expenses are reasonably incurred by them in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; provided, however, that the Indemnifying
Party will not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished in writing by any such seller, any such underwriter or any
such controlling person.
(ii) Promptly after receipt by an Indemnified Party
hereunder of notice of the commencement of any action, such Indemnified Party
will, if a claim in respect thereof is to be made against the Indemnifying Party
hereunder, notify the Indemnifying Party in writing of the commencement thereof,
but the omission so to notify the Indemnifying Party will not relieve
-12-
<PAGE> 13
it from any liability which it may have to such Indemnified Party for
contribution or otherwise other than as specifically set forth under the terms
of this Subsection 9(e) and shall only relieve it from any liability which it
may have to such Indemnified Party under this Subsection 9(e) if and to the
extent the Indemnifying Party is materially prejudiced by such omission. In case
any such action shall be brought against any Indemnified Party and such
Indemnified Party seeks or intends to seek indemnity from the Indemnifying
Party, the Indemnifying Party will be entitled to participate in and, to the
extent it may desire, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such Indemnified Party; provided, however, if the defendants in any such action
include both the Indemnified Party and the Indemnifying Party and the
Indemnified Party shall have reasonably concluded that there may be a conflict
between the positions of the Indemnifying Party and the Indemnified Party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other Indemnified Parties which are different from or
additional to those available to the Indemnifying Party, the Indemnified Party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such Indemnified Party or parties. Upon receipt of notice from the Indemnifying
Party to such Indemnified Party of its election so to assume the defense of such
action and approval by the Indemnified Party of counsel, the Indemnifying Party
will not be liable to such Indemnified Party for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the defense
thereof unless (A) the Indemnified Party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the
provisions of the preceding sentence (it being understood, however, that the
Indemnifying Party shall not be liable for the expenses of more than one
separate counsel) or (B) the Indemnifying Party shall not have employed counsel
reasonably satisfactory to the Indemnified Party to represent the Indemnified
Party within a reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be at the expense of
the Indemnifying Party.
(f) CHANGES IN PREFERRED STOCK OR COMMON STOCK. If, and as
often as, there is any change in the Preferred Stock or Common Stock by way of a
stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the
Preferred Stock or Common Stock as so changed and shall apply to any securities
received in any such transaction.
(g) TRANSFER AND TERMINATION OF REGISTRATION RIGHTS. The
Preferred Stockholder (or any valid transferee thereof) may transfer to any
transferee its registration rights pursuant to this Section 9.
-13-
<PAGE> 14
SECTION 10. OPTION TO PURCHASE SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY.
(a) CERTAIN DEFINITIONS. As used in this Section 10, the
following terms shall have the following meanings:
(i) "ADDITIONAL DOWNPAYMENT" means the product of (x)
2.5 multiplied by (y) EBITDA calculated for the most recent twelve (12) month
period ending on the most recent calendar quarter before the date of the
Exercise Notice.
(ii) "APPLICABLE PERCENTAGE" means the percentage
determined by dividing (A) the total number of Shares owned at the Option
Closing by Stockholders other than the Preferred Stockholder and Polk Audio,
Inc. ("POLK") by (B) the total number of Shares then outstanding, computed as if
all Preferred Shares had been converted to Shares immediately before such
determination in accordance with Paragraph D of Article Fifth of the Amended
Charter.
(iii) "ASSET PURCHASE AGREEMENT" means the definitive
Asset Purchase Agreement to be entered into by the Company and the Preferred
Stockholder promptly after the delivery of the Exercise Notice. The Asset
Purchase Agreement will contain the usual and customary provisions,
representations, and warranties of sellers and buyers in respect of the sort of
transaction contemplated hereby, in addition to including the rights,
obligations, and conditions precedent outlined in Subsections 10 (c), (d), (e),
and (f) below.
(iv) "ASSETS" includes, without limitation, all
tangible and intangible property used by the Company in its business or with
respect to its product lines, whether such property is currently titled in the
name of the Company or in the name of one or more Stockholders, including the
right to assume any and all contracts of the Company that the Preferred
Stockholder elects to assume, including, without limitation, all real property
leases to which the Company is party (but excluding any real property leases
with entities controlled by one or more of the Management Stockholders).
(v) "DOWNPAYMENT" means the net book value,
calculated in accordance with GAAP, of all of the Assets that are tangible
property, including, without limitation, inventory, receivables, prepaid
expenses, machinery, furniture, fixtures, and equipment, and leasehold
improvements (for leases assumed), minus debt of the Company assumed by the
Preferred Stockholder, if any.
(vi) "EBITDA" means the net earnings of the Company
before interest, income taxes, depreciation and amortization, and before
consulting fees, commissions and royalties relating to the Eosone product line,
for the specified period of time.
(vii) "OPTION PERIOD" means the period of time
beginning on the Effective date and ending one day before the third (3rd)
anniversary of the Effective Date.
-14-
<PAGE> 15
(viii) "PURCHASE OPTION" means the right to purchase
substantially all of the Assets of the Company in accordance with the terms and
provisions of this Section 10 and the Asset Purchase Agreement.
(b) GRANT; OPTION PERIOD. The Company hereby grants the
Purchase Option to the Preferred Stockholder. The Preferred Stockholder shall
have the right to exercise the Purchase Option at any time during the Option
Period by delivering written notice thereof to the Company (the "EXERCISE
NOTICE").
(c) REVIEW PERIOD. The Preferred Stockholder shall have a
period of sixty (60) days (the "REVIEW PERIOD") to conduct a due diligence
review of all of the records, books, offices, and facilities of the Company and
the Business, and shall be afforded full and complete access to same during such
Review Period. The Preferred Stockholder shall be under no obligation to
consummate the Assets Sale, and shall have no liability to the Company under the
Asset Purchase Agreement, unless the Preferred Stockholder is satisfied, in its
sole judgment, with the results of its due diligence review.
(d) PURCHASE PRICE. The purchase price for the Assets (the
"ASSETS PURCHASE PRICE") shall be calculated and payable as follows:
(i) At the closing of the Assets Purchase (the
"OPTION CLOSING"), the Preferred Stockholder shall pay to the Company the
product of (A) the sum of the Downpayment and the Additional Downpayment
multiplied by (B) the Applicable Percentage.
(ii) One Hundred Twenty Days after the first
anniversary of the Option Closing, the Preferred Stockholder shall pay to the
Company the additional sum of the product of (A) 1.7 multiplied by (B) EBITDA
calculated for the first twelve (12) month period after the Option Closing that
ends on a calendar quarter multiplied by (C) the Applicable Percentage (the
"FIRST DEFERRED PAYMENT").
(iii) One Hundred Twenty Days after the second
anniversary of the Option Closing, the Preferred Stockholder shall pay to the
Company the additional sum of the product of (A) 1.7 multiplied by (B) EBITDA
calculated for the first twenty-four (24) month period after the Option Closing
that ends on a calendar quarter multiplied by (C) the Applicable Percentage,
minus the First Deferred Payment (the "SECOND DEFERRED PAYMENT").
(iii) One Hundred Twenty Days after the third
anniversary of the Option Closing, the Preferred Stockholder shall pay to the
Company the additional sum of the product of (A) 1.7 multiplied by (B) EBITDA
calculated for the first thirty-six (36) month period after the Option Closing
that ends on a calendar quarter multiplied by (C) the Applicable Percentage,
minus the Second Deferred Payment (the "THIRD DEFERRED PAYMENT").
(e) REDEMPTION OF CERTAIN SHARES. At the Option Closing, the
Company shall redeem, for the redemption price of One Dollar ($1.00) all shares
of Common and Preferred Stock standing in the name of the Preferred Stockholder
or Polk.
-15-
<PAGE> 16
(f) STOCKHOLDERS' OBLIGATION TO EFFECT THE SALE OF ASSETS.
Each Management Stockholder hereby acknowledges and consents to the grant of the
Purchase Option and hereby agrees to take all steps necessary to effect the
transaction contemplated in this Section 10 (the "ASSETS SALE"), including,
without limitation:
(i) Upon the exercise of the Purchase Option, each
Management Stockholder shall vote his Shares in favor of the Asset Sale and
shall join, execute, and deliver any and all resolutions, consents, instruments,
certificates, deeds, and agreements necessary to effect the same; and
(ii) To the extent any Asset is currently, or, at the
time of the exercise of the Purchase Option, will be, titled in the name of one
or more Management Stockholders, such Management Stockholder(s) shall, before
the closing of the Asset Sale, convey to the Company good title in and to such
Asset, free and clear of all liens, claims, and title defects.
(g) THIRD-PARTY OFFERS TO ACQUIRE THE BUSINESS OR THE ASSETS.
If, during the Option Period, the Company receives a Bona Fide Offer from an
independent third party to purchase all or substantially all of the assets or
equity securities of the Company, and the Board shall have determined that it
would be in the best interests of the Management Stockholders and the Preferred
Stockholder to accept such offer, irrespective of the offered purchase price,
then the Preferred Stockholder shall have a period of sixty (60) days after
receipt of written notice of such Board determination, together with all
available information concerning such Bona Fide Offer, to either: (i) exercise
the Purchase Option in accordance with the terms set forth herein; (ii) match
such third party offer; or (iii) agree to sell all Preferred Shares (together
with any Shares received upon conversion of Preferred Shares) to the third party
as part of the sale of the Business to such third party.
SECTION 11. ELECTION/REMOVAL OF DIRECTORS. Each Management Stockholder
agrees to vote his Shares in accordance with the provisions of the Amended
Charter.
SECTION 12. ENDORSEMENT OF CERTIFICATE. Upon the execution of this
Agreement, each certificate for shares of Common Stock and Preferred Stock now
registered or to be issued in the name of the Management Stockholders or
Preferred Stockholder shall be endorsed by the Secretary of the Company as
follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE (FEDERAL) SECURITIES ACT OF 1933 OR THE APPLICABLE
SECURITIES ACT OF ANY STATE BUT HAVE BEEN ISSUED IN RELIANCE UPON
EXEMPTIONS FROM REGISTRATION CONTAINED IN SAID ACTS. NO SALE, OFFER TO
SELL OR OTHER TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY BE MADE UNLESS A REGISTRATION STATEMENT UNDER SAID ACTS
IS IN EFFECT WITH RESPECT TO THE SECURITIES, OR AN EXEMPTION FROM THE
REGISTRATION PROVISIONS OF SUCH ACTS IS THEN APPLICABLE.
THIS CERTIFICATE IS TRANSFERABLE ONLY UPON COMPLIANCE WITH THE
PROVISIONS OF THAT CERTAIN STOCKHOLDERS' AGREEMENT DATED AS OF DECEMBER
29, 1997, A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE SECRETARY OF
THE COMPANY AND IS AVAILABLE UPON THE REQUEST OF ANY STOCKHOLDER
WITHOUT CHARGE.
-16-
<PAGE> 17
All certificates for any Shares and for any Preferred Shares
hereinafter issued by the Company during the term of this Agreement shall bear
the same endorsement, and this Agreement shall cover all such stock.
If any shares of capital stock of the Company become eligible for sale
pursuant to Rule 144 (k), the Company, as appropriate, shall, upon the request
of the holder of such securities, issue new certificates for such securities not
bearing the legend set forth in this Section 11.
SECTION 13. TERM. Except for provisions contained herein which, by
their terms, extend beyond the occurrence of the following, notwithstanding
anything contained herein to the contrary, this Agreement shall terminate, and
all rights and obligations hereunder shall cease, upon the earlier to occur of
the termination of this Agreement as provided by applicable Delaware law or the
occurrence of any of the following events:
(a) The written agreement of each of the then parties
hereto; or
(b) The cessation of the Company's business.
SECTION 14. NOTICES. All notices, offers, acceptances, requests and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed by certified or registered mail to the
Stockholders at their addresses on the Company records, and to the Company at
the Company's principal place of business. Any party hereto may change his or
its address for notice by giving notice thereof in the manner herein above
provided.
SECTION 15. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement, including the Schedules
hereto, constitutes the entire agreement of the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof. The Schedules hereto are incorporated by reference herein
in their entirety.
(b) GOVERNING LAW; FORUM. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Delaware,
without giving effect to its conflicts of laws provisions.
(c) JURISDICTION. The parties hereby irrevocably and
unconditionally submit to the exclusive jurisdiction of the state and federal
courts located in the city of Denver, Colorado, for any actions, suits, or
proceedings arising out of or relating to this Agreement and the transactions
contemplated hereby (and the parties agree not to commence any action, suit, or
proceeding relating thereto except in such courts), and further agree that
service of any process, summons, notice or document by U.S. registered mail to
its address set forth above shall be effective service of process of any action,
suit, or proceeding brought against it in any such court. The parties hereby
irrevocably and unconditionally waive any objection to the laying of venue of
any action, suit, or proceeding arising out of this Agreement or the
transactions contemplated hereby in such state or federal courts as aforesaid
and hereby further irrevocably and unconditionally waive and agree not to plead
or claim in any such court that any such action,
-17-
<PAGE> 18
suit, or proceeding brought in any such court has been brought in an
inconvenient forum. The parties waive any rights they may have to a jury trial.
(d) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) AMENDMENTS. This Agreement may not be amended or modified,
and no provisions hereof may be waived, without the written consent of the
Company and the Majority Interest.
(f) SEVERABILITY. Each provision of this Agreement shall be
treated as a separate and independent clause, and the unenforceability of any
one clause shall in no way impair the enforceability of any of the other clauses
herein. If one or more of the provisions contained in this Agreement shall for
any reason be held to be excessively broad as to scope, activity, subject or
otherwise so as to be unenforceable at law, such provision or provisions shall
be construed by the appropriate judicial body by limiting or reducing it or
them, so as to be enforceable to the maximum extent compatible with the
applicable law as it shall then appear.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
- 18 -
<PAGE> 19
IN WITNESS WHEREOF, each of the parties has executed, or has caused its
duly elected and authorized officers to execute in its name or on its behalf,
this Agreement as of the day and year first above written.
ATTEST/WITNESS: GENESIS TECHNOLOGIES, INC.
By:/s/ Arnold Nudell (SEAL)
- ------------------------------------ --------------------------------
NAME: ARNOLD NUDELL
TITLE: CEO
MANAGEMENT STOCKHOLDERS
/s/ Arnold Nudell (SEAL)
- ------------------------------------ --------------------------------
ARNOLD NUDELL
/s/ Paul McGowan (SEAL)
- ------------------------------------ --------------------------------
PAUL MCGOWAN
/s/ Mark Shifter (SEAL)
- ------------------------------------ --------------------------------
MARK SCHIFTER
BRITANNIA INVESTMENT CORPORATION
By:/s/ George M. Klopfer (SEAL)
- ------------------------------------ --------------------------------
NAME: GEORGE M. KLOPFER
TITLE:PRESIDENT
-19-
<PAGE> 20
SCHEDULE I to the Stockholders' Agreement
by and among Genesis Technologies, Inc., Britannia Investment Corporation,
and the Management Stockholders
<TABLE>
<CAPTION>
COMMON STOCKHOLDER CURRENT OWNERSHIP OWNERSHIP OF COMMON STOCK AFTER
FULL CONVERSION
No. of Common
Stock Shares Percentage No. Shares Percentage
<S> <C> <C> <C> <C>
Arnold Nudell 3,265 40.80% 3,265 34.89%
Paul McGowan 1,635 20.40% 1,635 17.44%
Mark Schifter 800 10.00% 800 8.55%
David Nudell 144 1.80% 144 1.54%
Pu Hsiao Hsuing 540 6.75% 540 5.77%
Dale Kinsler 810 10.10% 810 8.64%
Michael Kay 270 3.40% 270 2.91%
Polk Audio, Inc. 540 6.75% 540 5.77%
Britannia Investment
Corporation -- -- 1,356 14.49%
------ ------ ------ ------
8,004 100.00% 9,360 100.00%
</TABLE>
<TABLE>
<CAPTION>
CURRENT OWNERSHIP OF CONVERTIBLE
PREFERRED STOCKHOLDER PREFERRED STOCK
No. Shares Percentage
<S> <C> <C>
Britannia Investment 5,000 100%
Corporation
</TABLE>
<PAGE> 1
EXHIBIT 13.1
1998 Annual Report
[GRAPHIC]
[POLK AUDIO LOGO]
The Speaker Specialists(R)
<PAGE> 2
ABOUT THE COVER
The highly anticipated Polk RT5000 Home Theater system was introduced in
March 1998 and inherits its technology and configuration from the highly
acclaimed Polk Signature Reference System (SRT(TM)) introduced in 1995.
[GRAPHIC]
The RT5000 introduced to the industry the concept of a built in powered
subwoofer section in the center channel loud speaker providing unsurpassed
performance with today's digital home theater applications such as Dolby Digital
(AC-3(R)).
This Annual Report to Stockholders contains forward-looking statements within
the meaning of that term in the Private Securities Litigation Reform Act of 1995
(the Act). Statements contained herein that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Act. Forward-looking statements may include, but are not limited to,
projections of revenue, income, or loss and capital expenditures, statements
regarding future operations, financing needs, and plans relating to products of
the Company, assessments of materiality, and predictions of future events, as
well as assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, and the Company's actual results
could differ materially from those set forth in or underlying the
forward-looking statements contained in this Report as a result of various
factors including, without limitation, consumer acceptance of new technology
and new products, competition, pricing, borrowing costs, foreign manufacturing,
sourcing, and sales, and other risk factors.
TABLE OF CONTENTS
Financial Highlights 1
Company Profile 1
CEO's Letter to Stockholders 2
[GRAPHIC] Interim Financial Information 4
Independent Auditors' Report 4
Consolidated Financial Statements 5
Management's Discussion and Analysis 14
Seven-Year Financial Summary 16
Market and Dividend Information 16
Directors and Executive Officers IBC
[POLK AUDIO LOGO]
The Speaker Specialists(R)
90
<PAGE> 3
===========================
Financial Highlights
===========================
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended March 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $54,153 54,416 52,171 41,673 33,957
Operating income 1,782 1,612 2,217 2,341 1,434
Earnings before income taxes 1,948 1,284 1,971 2,305 1,507
Net earnings 1,106 752 1,174 1,452 988
Earnings per share--diluted 0.60 0.41 0.69 0.86 0.60
YEAR-END POSITION
Working capital $14,532 13,568 16,077 12,862 9,735
Total assets 31,775 24,997 30,268 22,224 15,974
Long-term debt 3,615 2,347 6,055 2,400
Stockholders' equity 17,727 16,544 15,436 14,153 12,474
</TABLE>
=============================
Company Profile
=============================
Polk Audio, Inc., is a premier engineer, manufacturer, and marketer of high
quality loudspeaker systems for the home and automotive markets that are
marketed under the brand names Polk Audio(R) and Eosone(R). 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 $10,000 for the SRT
Home Theater system. Autosound products range in retail price from $70 to $500
per system. The Company's products are primarily sold through a network of
audio/video specialty retailers throughout the USA, Canada and Europe, and
through distributors in approximately 53 other foreign countries.
91
Polk Audio, Inc. and Subsidiaries 1
<PAGE> 4
=============================
To Our Stockholders
=============================
[GRAPHIC]
The RT3000p System is a four-piece "powered tower" system consisting of left and
right full-range speakers and dual powered subwoofers. This system can be
purchased separately or as part of the RT5000 Home Theater System as shown on
the cover.
The Fiscal Year ended March 1998, started out rocky but ended on a
good note. The first three quarters of the year were as tough as any we have
seen in our 26 years of corporate existence. The entire market for consumer
electronics was in a weak condition and many of our key dealers were suffering
with declining sales, operating losses and in some cases, liquidity troubles.
The picture overseas was not much better, with Asian and European markets both
experiencing difficulties. Our sales for the first three quarters in fiscal 1998
were down from previous periods, and for the first two fiscal quarters we lost
money. Our losses were mitigated by our successful efforts to reduce costs and
gain efficiencies. Also during this period we were planning the launch of the
Polk product line into Circuit City Stores. Revenues connected with that launch
began in February and consequently fourth quarter sales and profits were way up.
We ended the fiscal year with sales approximately flat compared to the prior
year (at a little over $54 million) but with a 46% increase in earnings per
share, from $.41 in FY97 to $.60 in FY98.
Circuit City Stores, lnc.(R) has positioned Polk Audio as a top
quality product in its assortment of home and car audio merchandise. The power
of Circuit's advertising, which places them among the top 10 U.S. advertisers,
should help to significantly improve the prominence of our brand among a broader
cross-section of consumers. While this increased visibility in our U.S. market
should help the sales of Polk products in all outlets, there undoubtedly will be
Polk dealers unhappy about sharing our product line with Circuit City. One of
our primary missions in the coming year will be to work hard to retain as much
of their valued support as possible.
Another very positive influence in helping the Polk brand gain
prominence this year has been our relationship with Hewlett-Packard(R). Through
a technology and brand license agreement with our company, HP is supplying Polk
Audio speakers with each of their Pavilion(TM) desktop home computers. Our
efforts with HP helped their Pavilion(TM) line gain an excellent reputation for
sound quality. HP has been successful in this market and has placed our brand on
the shelves of most quality computer dealers and in the hands of a very large
number of new end users.
In this same vein, we have recently entered into a similar licensing
arrangement with Silicon Graphics(R) Incorporated, the world's pre-eminent
supplier to industry of high tech computer work stations. While the volumes and
royalties with SGI will be smaller than with HP, we nonetheless will enjoy the
association of the Polk brand with yet another world class company in the high
technology sector.
As our company's brand reputation grows and we find, as with HP and
SGI, that our technical expertise can be used to meet the needs of customers
outside of our
92
<PAGE> 5
[PHOTO]
Matthew S. Polk, Jr.
Chairman of the Board
[PHOTO]
George M. Klopfer
Chief Executive Officer
[PHOTO]
James M. Herd
President
traditional specialty marketplace, we will continue to look for ways to multiply
our opportunities and contribute to our profitability.
In the meantime, business conditions in the consumer electronics
market remain fairly soft, although there seems to be some evidence that it is
not declining as it was a year ago. We are keeping a close watch on our cost
structure. Further, after year-end, the company has substantially repaid its
bank debt.
In last year's annual report, we attempted to explain why our
industry seems to be doing so poorly, in the midst of one of the greatest
economic booms in U.S. history of the last half-century. In a nutshell, we think
that the rapidly developing technologies underlying consumer electronics
products, which normally have been the engine driving growth in our industry,
have become a temporary drag on growth instead. This is because there are a lot
of new consumer audio and video technologies on the horizon which have been
announced but not yet been fully implemented in the marketplace. This is giving
the consumer reason to pause and consider, instead of buying, waiting until the
future direction of things is a little clearer. The ongoing uncertainty with the
adoption of HDTV broadcast standards, as well as the continuing uncertainty
surrounding the DVD format and its competitors, appear to be the principal
questions here. Eventually, we think, these uncertainties will resolve
themselves and at that point our industry may be facing some pent-up demand from
consumers who delayed their purchasing decisions.
While we think it is nice to contemplate that some day soon our
markets may resume their historical pattern of growth, our present preoccupation
as a management team is fixed firmly on operational matters which are more
within our control. Our most critical priorities over the coming year are (1) to
do a good job serving our pre-Circuit City dealer base and thereby retain them;
(2) to do a good job serving our new dealer Circuit City; (3) to relentlessly
manage our direct and indirect operating expenses and; (4) to manage our working
and fixed capital assets more efficiently to further improve returns on the
stockholder capital utilized in the business. As the year progresses we will
look forward to reporting to you on our progress in these four areas of
priority.
Cordially,
/s/ GEORGE M. KLOPFER, CEO
George M. Klopfer, CEO
May 14, 1998
93
Polk Audio, Inc. and Subsidiaries 3
<PAGE> 6
Interim Financial Information
(Unaudited) (in thousands except per share data)
<TABLE>
<CAPTION>
1998 Quarter ended
- -------------------------------------------------------------------------------------------------------------
March 29, December 28, September 29, June 30,
1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $21,174 12,953 10,275 9,752
Gross profit 8,433 5,130 3,795 3,775
Net earnings (loss) 1,321 372 (238) (349)
Earnings (loss) per share--diluted 0.71 0.20 (0.13) (0.19)
=============================================================================================================
<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 15,456 14,479 11,284
Gross profit 5,265 6,888 6,143 4,771
Net earnings (loss) (280) 544 454 35
arnings (loss) per share--diluted (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 $18,069 13,120 11,240 9,742
Gross profit 7,310 5,982 4,817 4,172
Net earnings (loss) 742 417 120 (105)
Earnings (loss) per share--diluted 0.44 0.25 0.07 (0.06)
=============================================================================================================
</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 29, 1998 and March 30,
1997 and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended March 29,
1998. 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 29, 1998 and March 30, 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 29, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Baltimore, Maryland
May 5, 1998
4
<PAGE> 7
Consolidated Balance Sheets
March 29, 1998 and March 30, 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 363,948 422,043
Trade accounts receivable, less allowance
for doubtful accounts of $188,768 in 1998 and $385,107
in 1997 13,514,314 9,510,232
Inventories:
Finished goods 3,577,283 4,109,323
Work-in-process 951,445 804,199
Raw materials and supplies 4,849,388 2,985,000
- --------------------------------------------------------------------------------------------------------------
Total inventories 9,378,116 7,898,522
- --------------------------------------------------------------------------------------------------------------
Income taxes recoverable - 53,184
Deferred income taxes (note 4) 825,000 784,000
Prepaid expenses and other current assets 515,204 671,769
- --------------------------------------------------------------------------------------------------------------
Total current assets 24,596,582 19,339,750
Property and equipment, at cost less accumulated
depreciation and amortization (note 2) 5,011,989 4,299,000
Deposits and other assets (note 9) 856,797 382,686
Notes receivable--officers (note 7) 259,767 225,946
Deferred income taxes (note 4) 1,050,000 750,000
- --------------------------------------------------------------------------------------------------------------
$ 31,775,135 24,997,382
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 5,178,899 2,758,117
Bank overdraft 496,240 44,126
Income taxes payable 840,194 -
Accrued expenses and other liabilities (note 10) 2,744,343 2,302,394
Current portion of long-term debt (note 3) 400,000 400,000
Current portion of accrued product warranty 404,556 267,000
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 10,064,232 5,771,637
- --------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Long-term debt, less current portion (note 3) 3,615,045 2,346,795
Accrued product warranty, less current portion 350,000 335,000
Other 18,423 -
- --------------------------------------------------------------------------------------------------------------
Total long-term liabilities 3,983,468 2,681,795
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 6 and 7):
Common stock, par value $.01 per share. Authorized
20,000,000 shares; issued and outstanding
1,849,035 shares in 1998 and 1,823,035 shares in 1997 18,490 18,230
Additional paid-in capital 1,751,218 1,586,478
Foreign currency translation adjustments 7,421 (24,896)
Notes receivable--stock options (942,250) (822,250)
Retained earnings 16,892,556 15,786,388
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,727,435 16,543,950
Commitments (notes 5 and 8)
- --------------------------------------------------------------------------------------------------------------
$ 31,775,135 24,997,382
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
Polk Audio, Inc. and Subsidiaries 5
<PAGE> 8
Consolidated Statements of Earnings
Three-year period ended March 29, 1998
<TABLE>
<CAPTION>
March 29, March 30, March 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $54,153,476 54,416,323 52,170,684
Cost of goods sold 33,019,849 31,348,894 29,888,990
- --------------------------------------------------------------------------------------------------------------------
Gross profit 21,133,627 23,067,429 22,281,694
Selling, research, general and administrative expenses 19,351,132 21,454,963 20,064,845
- --------------------------------------------------------------------------------------------------------------------
Operating income 1,782,495 1,612,466 2,216,849
Other income (expense):
Interest income 19,538 3,883 32,132
Interest expense (257,872) (349,508) (294,482)
Royalty income 423,760 - -
Other, net (19,753) 16,888 16,212
- --------------------------------------------------------------------------------------------------------------------
165,673 (328,737) (246,138)
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,948,168 1,283,729 1,970,711
Income taxes (note 4) 842,000 532,000 797,000
Net earnings $ 1,106,168 751,729 1,173,711
====================================================================================================================
Earnings per share:
Basic $ 0.60 0.41 0.72
Diluted 0.60 0.41 0.69
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
Consolidated Statements of Stockholders' Equity
Three-year period ended March 29, 1998
<TABLE>
<CAPTION>
Notes Foreign
Additional Receivable- Currency Total
Number Common Paid-in Stock Translation Retained Stockholders'
of Shares Stock Capital Options Adjustments Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Foreign currency translation
adjustments - - - - 32,317 - 32,317
Exercise of stock options
by employees 26,000 260 164,740 (120,000) - - 45,000
Net earnings - - - - - 1,106,168 1,106,168
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 29, 1998 1,849,035 $18,490 1,751,218 (942,250) 7,421 16,892,556 17,727,435
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Polk Audio, Inc. and Subsidiaries 7
<PAGE> 10
Consolidated Statements of Cash Flows
Three-year period ended March 29, 1998
<TABLE>
<CAPTION>
March 29, March 30, March 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,106,168 751,729 1,173,711
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,191,400 2,032,998 1,655,924
Noncash compensation recognized under stock option plan - - 138,125
Gain on sale of fixed assets (1,500) (40,242) (22,230)
Deferred income taxes (341,000) (440,000) (257,000)
Increase in accrued product warranty 152,556 77,000 82,000
Increase (decrease) from changes in working capital:
Accounts receivable (4,004,082) 6,150,677 (7,061,348)
Inventories (1,479,594) 29,916 101,312
Income taxes recoverable or payable 893,378 (370,629) 202,697
Prepaid expenses and other current assets 156,565 (372,938) (41,317)
Accounts payable, trade 2,420,782 (1,907,926) 2,143,447
Accrued expenses and other liabilities 460,372 (127,544) 208,360
Other - - (83,836)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,555,045 5,783,041 (1,760,155)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,904,389) (1,705,150) (3,237,676)
Proceeds from disposal of equipment 1,500 40,242 22,230
Repayment of (investment in) notes receivable (33,821) - 85,443
Decrease (increase) in deposits and other assets (474,111) (121,620) 381,837
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,410,821) (1,786,528) (2,748,166)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft 452,114 (406,210) 450,336
proceeds from (payments on) revolving line of credit 1,768,250 (3,308,354) 4,055,149
Payments on term note payable (500,000) (400,000) (400,000)
Proceeds from exercise of stock options 45,000 325,499 -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,765,364 (3,789,065) 4,105,485
Effect of exchange rate changes on cash 32,317 30,477 (28,196)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (58,095) 237,925 (431,032)
Cash and cash equivalents at beginning of year 422,043 184,118 615,150
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 363,948 422,043 184,118
==============================================================================================================================
Non-cash transactions
Notes receivable--stock--received for exercise of stock options $ 120,000 7,750 814,500
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 11
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 29, 1998 (52 weeks), March 30, 1997 (52
weeks) and March 31, 1996 (53 weeks).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less.
Inventories
Inventories, consisting of material, labor and overhead, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
Property and Equipment
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the related assets. The estimated economic
lives of equipment, machinery, furniture and fixtures range from three to eight
years. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the assets. Maintenance and repairs are charged
to expense as incurred.
Patents
Costs of obtaining and protecting patents are charged to expense as
incurred.
Revenues
Revenues from product sales are generally recorded upon shipment, with
return and other allowances established at the time of sale. Royalties are
recorded as earned in accordance with the specific terms of each license
agreement.
Product Warranty
Estimated warranty costs are provided in the year of sale, based upon
product return experience. Accrued costs applicable to warranty obligations
beyond one year are classified as long-term liabilities.
Fair Value of Financial Instruments
The fair value of instruments, including accounts receivable, accounts
payable and long-term debt approximate carrying value.
Research and Development Costs
Costs associated with the development of new products and enhancements to
existing products are charged to operations as incurred. Such costs were
approximately $2,469,000 in 1998, $2,726,000 in 1997, and $3,266,000 in 1996.
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
Effective December 28, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). This standard
replaces the presentation of primary EPS with the 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 table provides
the reconciliation of the numerators and denominators of the basic and diluted
EPS computations.
<TABLE>
<CAPTION>
March 29, March 30, March 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings--
basic and diluted $1,106,168 751,729 1,173,711
- ---------------------------------------------------------------------------------------
Weighted average number
of shares--basic 1,837,845 1,811,849 1,634,295
Effect of dilutive
stock options 6,782 15,617 65,852
- ---------------------------------------------------------------------------------------
Weighted average number
of shares--diluted 1,844,627 1,827,466 1,700,147
- ---------------------------------------------------------------------------------------
</TABLE>
Polk Audio, Inc. and Subsidiaries 9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock Based Compensation
The Company uses the intrinsic value method to account for stock based
compensation plans. Under this method, compensation cost is recognized for
awards of shares of common stock to employees only if the quoted market price of
the stock at the grant date (or other measurement date, if later) is greater
than the amount an employee must pay to acquire the stock. Information
concerning the pro forma effect of using the optional fair market value-based
method to account for stock based employee compensation is provided in Note 7.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
for possible 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 undiscounted 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.
(2) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 29, March 30,
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Equipment, machinery and tooling $ 9,329,271 8,174,406
Leasehold improvements 2,657,670 1,912,968
Furniture and fixtures 365,916 309,465
Transportation equipment 244,156 244,156
- ----------------------------------------------------------------------------------
12,597,013 10,640,995
Less accumulated depreciation
and amortization 7,585,024 6,341,995
- ----------------------------------------------------------------------------------
$ 5,011,989 4,299,000
- ----------------------------------------------------------------------------------
</TABLE>
(3) CREDIT ARRANGEMENTS
The Company has a revolving credit agreement with a commercial bank
providing for maximum borrowings of $8,500,000, until June 30, 1998, and
$6,500,000 thereafter, at the LIBOR rate plus 1.75% (7.44% at March 29, 1998).
Any borrowings under this agreement will be due August 31, 1999. 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 29, 1998
and March 30, 1997 totaled $3,315,045 and $1,546,795, 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 29, 1998, and the loan matures on December 31, 1999. Borrowings
at March 29, 1998 and March 30, 1997 totaled $700,000 and $1,200,000,
respectively. Principal payments are due as follows: $400,000 in 1999 and
$300,000 in 2000.
Interest payments for supplementary cash flow information totaled
approximately $275,000, $352,000 and $269,000 during 1998, 1997 and 1996,
respectively.
(4) INCOME TAXES
The provision for income taxes is as follows for the fiscal years ended:
<TABLE>
<CAPTION>
Fiscal years ended
- ------------------------------------------------------------------------------------
MARCH 29, March 30, March 31,
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ 697,000 500,000 732,800
State 145,000 32,000 64,200
- ------------------------------------------------------------------------------------
$ 842,000 532,000 797,000
- ------------------------------------------------------------------------------------
Current $1,183,000 972,000 1,054,000
Deferred (341,000) (440,000) (257,000)
- ------------------------------------------------------------------------------------
$ 842,000 532,000 797,000
- ------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
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>
Fiscal years ended
- ------------------------------------------------------------------------------------
MARCH 29, March 30, March 31,
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $662,000 436,000 670,000
State income taxes, net of
Federal tax benefit 96,000 21,000 41,000
Research and
development credits (50,000) (7,000) (53,000)
Non-deductible meals
and entertainment 53,000 65,000 46,000
Net increase in
valuation allowance 6,000 13,000 93,000
Other, net 75,000 4,000 --
- ------------------------------------------------------------------------------------
$842,000 532,000 797,000
- ------------------------------------------------------------------------------------
</TABLE>
The components of the deferred income tax asset at March 29, 1998 and March
30, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 823,000 555,000
Product warranty costs,
accrued advertising and discounts 310,000 263,000
Employee compensation,
including stock options 216,000 276,000
Inventory 370,000 250,000
State income tax net operating
loss carryforward 117,000 122,000
Allowance for doubtful accounts 90,000 141,000
Net capital loss carryforwards 31,000 31,000
Legal fees 100,000 74,000
Other 28,000 6,000
- ------------------------------------------------------------------------------------
Deferred tax assets 2,085,000 1,718,000
Less valuation allowance 148,000 142,000
- ------------------------------------------------------------------------------------
Deferred tax assets, net 1,937,000 1,576,000
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
State income taxes 31,000 13,000
Prepaid expenses 31,000 29,000
- ------------------------------------------------------------------------------------
Deferred tax liabilities 62,000 42,000
- ------------------------------------------------------------------------------------
Net deferred tax asset $1,875,000 1,534,000
- ------------------------------------------------------------------------------------
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the excess of deferred tax assets over
taxes paid available in carryback years and future reversals of certain existing
taxable temporary differences.
(5) COMMITMENTS
The Company is obligated under two non-cancelable operating leases with a
partnership comprised of the principal stockholders of the Company for plant,
warehouse and office facilities. One lease provides for annual rentals of
approximately $535,000 through September, 2006, while the other provides for
annual rents of approximately $352,000 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
$889,000 in 1998, $905,000 in 1997, and $624,000 in 1996. In addition, the
Company is obligated under non-cancelable operating leases for various equipment
and vehicles. In the aggregate, rental payments under all operating leases
totaled $1,837,000 in 1998, $1,644,000 in 1997 and $1,340,000 in 1996. The
approximate future minimum rentals are $1,842,000 in 1999, $1,087,000 in 2000,
$922,000 in 2001, $858,000 in 2002 and $535,000 in 2003 through 2008.
The Company subleases a portion of one of its facilities. Sublease income
earned during fiscal 1998 amounted to $40,000 with commitments to receive
$120,000 annually through November 2006. No sublease income was recognized in
fiscal 1997 and 1996.
(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.
Polk Audio, Inc. and Subsidiaries 11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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
388,500 shares of common stock. The following table summarizes the transactions.
<TABLE>
<CAPTION>
MARCH 29, March 30, March 31,
Stock Option Plan 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year 116,796 142,796 253,000
Granted 20,000 -- 72,500
Exercised (26,000) (26,000) (165,000)
Terminated (18,296) -- (17,704)
- -----------------------------------------------------------------------------------------
End of year 92,500 116,796 142,796
- -----------------------------------------------------------------------------------------
Exercisable at end of year 6,666 44,296 70,296
- -----------------------------------------------------------------------------------------
</TABLE>
The weighted average exercise prices for the aforementioned options are
presented below for the years ended March 29, 1998, March 30, 1997 and March 31,
1996.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding beginning of period $ 7.67 7.40 5.46
Exercised 5.19 6.19 4.94
Surrendered 8.29 -- 6.10
Granted 10.25 -- 8.41
Outstanding end of period 8.80 7.67 7.40
Exercisable at end of period 10.25 6.47 6.37
- ---------------------------------------------------------------------------------------
</TABLE>
During 1998, 23,000 shares have been exercised at an average price of $5.19
per share where, in lieu of cash consideration, the Company accepted full
recourse notes receivable that bear interest ranging from 6.02% to 6.39%. Such
notes are due ranging from August 1, 2002 to December 22, 2002. During 1997,
1,000 shares were exercised at a price of $7.75 per share where, in lieu of cash
consideration, the Company accepted a full recourse note receivable that bears
interest of 6.64% and is due September 4, 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 share would have been adjusted
to the pro forma amounts presented below:
<TABLE>
<CAPTION>
MARCH 29, March 30, March 31,
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $1,106,168 751,729 1,173,711
Pro forma 1,040,881 687,597 1,109,579
Income per common share:
As reported 0.60 0.43 0.69
Pro forma 0.56 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 29, 1998 and March 30, 1997: no
dividend yield, expected volatility of 37.1%, risk-free interest rate of 6.5%,
and expected terms of 5 and 10 years. A summary of information about stock
options outstanding at March 29, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS Options
OUTSTANDING Exercisable
- ---------------------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
Shares LIFE (YEARS) Shares
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Exercise price per share:
$ 8.13 47,500 8.0 --
8.94 25,000 4.0 --
10.25 20,000 9.5 6,666
- ---------------------------------------------------------------------------
92,500 7.0 6,666
- ---------------------------------------------------------------------------
</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. As of
September 1, 1995, all benefit accruals under the plan were frozen meaning that
no wages earned after said date are taken into account in computing benefits
under the plan.
12
<PAGE> 15
The plan's funded status and amounts recognized in the Company's balance
sheet at March 29, 1998 and March 30, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 29, March 30,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested $ 412,835 366,538
Nonvested -- --
- ------------------------------------------------------------------------------
Projected benefit obligation 412,835 366,538
Plan assets at fair value, primarily
guaranteed investment contracts 298,701 295,086
- ------------------------------------------------------------------------------
Projected benefit obligation in
excess of plan assets $ 114,134 71,452
- ------------------------------------------------------------------------------
Unrecognized loss on plan assets $ 151,381 80,642
Deferred pension cost 114,134 71,452
Pension liability (151,381) (80,642)
- ------------------------------------------------------------------------------
$ 114,134 71,452
- ------------------------------------------------------------------------------
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
MARCH 29, March 30, March 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned $ -- -- --
Interest cost on projected
benefit obligation 24,140 24,118 20,786
Actual return on plan assets (15,294) (15,975) (14,066)
Amortization of prior
service costs 3,095 38,200 3,001
- --------------------------------------------------------------------------------
Net pension cost $ 11,941 46,343 9,721
- --------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation are as follows: weighted average discount rate of 5.95% in
1998, 6.93% in 1997 and 8.00% in 1996 and expected rate of return on assets of
5.95% in 1998, 6.93% in 1997 and 8.00% in 1996.
The Company also provides a contributory profit-sharing plan for employees
who are not participants of the aforementioned pension plan except for certain
key officers who are participants of both plans. Company contributions to the
plan totaled $176,094 in 1998, $175,815 in 1997 and $157,480 in 1996.
(9) DEPOSITS AND OTHER ASSETS
Included in other assets is the Company's investment in Genesis
Technologies, Inc.(TM) represented by convertible preferred securities of
$500,000 acquired during fiscal 1998 and $100,000 in common stock previously
acquired. Both investments are carried at cost.
(10) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 29, March 30,
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued advertising allowances $1,124,906 866,036
Accrued vacation 422,890 464,388
Accrued salary and bonuses 708,373 403,439
Other 488,174 568,531
- --------------------------------------------------------------------------------
$2,744,343 2,302,394
- --------------------------------------------------------------------------------
</TABLE>
(11) LICENSE AGREEMENTS
The Company entered into two license agreements during 1998 relating to the
use of certain technologies. Such agreements generated $423,760 in royalty
income during 1998. The terms of the license agreements generally range to two
years, subject to annual extensions.
(12) BUSINESS AND CREDIT CONCENTRATIONS
The Company markets its products to audio retailers throughout the U.S.A.
and to distributors in fifty-three foreign countries. Related trade receivables
are generally unsecured. During fiscal year 1998, sales to two customers
individually amounted to approximately 22% and 10% of net sales, respectively.
During fiscal 1997, sales to one of those same customers amounted to
approximately 11% of net sales. At March 29, 1998, one customer individually
comprised approximately 53% of total trade accounts receivables.
Export sales were approximately $7,929,000 in 1998, $9,538,000 in 1997 and
$8,847,000 in 1996. Such sales represented approximately 15%, 18% and 17%,
respectively, of net sales for such periods.
(13) FOREIGN OPERATIONS
Included in the Company's consolidated balance sheet at March 29, 1998, 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 $7.9 million.
Po1k Audio, Inc. and Subsidiaries 13
<PAGE> 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
Net earnings of $1,106,168 in 1998 increased 47.0% from $751,729 in 1997
which decreased from $1,173,711 in 1996. 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 29, March 30, March 31,
(percentage of net sales) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0 100.0
Cost of goods sold (60.9) (57.6) (57.3)
Selling, research, general and
administrative expenses (35.8) (39.4) (38.5)
- ----------------------------------------------------------------------------------
Operating income 3.3 3.0 4.2
Other income (expense) 0.3 (0.6) (0.5)
- ----------------------------------------------------------------------------------
Earnings before income taxes 3.6 2.4 3.7
Income taxes (1.6) (1.0) (1.5)
- ----------------------------------------------------------------------------------
Net earnings 2.0% 1.4 2.2
- ----------------------------------------------------------------------------------
</TABLE>
NET SALES AND COST OF GOODS SOLD
Fiscal 1998 compared to fiscal 1997
Net sales in fiscal 1998 of $54,153,476 decreased 0.5% from $54,416,323 in
fiscal 1997. The decrease primarily resulted from lower domestic and
international demand in the consumer electronics industry relative to the prior
year offset by an increase of sales in the March, 1998 quarter, relative to the
prior year, to a significant new customer. Cost of goods sold, as a percentage
of net sales, increased to 60.9% in 1998 from 57.6% in 1997. The increase is
primarily the result of continued price reductions resulting from market
pressures experienced primarily during fiscal 1998 and lower margin products
representing a larger portion of the overall sales mix. Based on current
information, the Company has reason to believe that gross margins may continue
to be affected by average price reductions resulting from market pressures and
sales mix throughout fiscal 1999.
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.
SELLING, RESEARCH, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 1998 compared to fiscal 1997
Selling, research, general and administrative (SRG&A) expenses decreased to
$19,351,132 in 1998 from $21,454,963 in 1997, a decrease of 9.8%. As a
percentage of net sales, SRG&A expenses decreased to 35.8% in 1998 from 39.4% in
1997. The decrease in SRG&A expenses primarily reflects decreased promotion,
selling and shipping costs and general and administrative costs primarily
resulting from cost reduction efforts initiated during fiscal 1998 coupled with
lower costs resulting from the centralization of the Company's warehousing and
customer service operations initiated late in fiscal 1997.
Fiscal 1997 compared to fiscal 1996
Selling, research, general and administrative (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.
OTHER INCOME AND EXPENSE
Fiscal 1998 compared to fiscal 1997
Other income (expense) in fiscal 1998 of $165,673 increased approximately
$495,000 from ($328,737) in fiscal 1997. The net increase primarily resulted
from royalty income earned of approximately $424,000 coupled with lower interest
expense incurred on outstanding balances of its revolving and term notes payable
during fiscal 1998, as compared with the prior year.
Fiscal 1997 compared to fiscal 1996
Other income (expense) in fiscal 1997 of ($328,737) increased approximately
$83,000 from ($246,138) 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.
INCOME TAXES
Income taxes, as a percentage of earnings before income taxes, increased to
43.2% in 1998 from 41.4% in 1997 which increased from 40.4% in 1996. The
increase in income taxes in 1998 compared with 1997 and 1997 compared with 1996,
as a percentage of earnings before income taxes, results from a higher effective
tax rate due to higher state income taxes in each year.
14
<PAGE> 17
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 $11,510,000 and
$7,929,000 in 1998, $9,759,000 and $9,538,000 in 1997 and $9,941,000 and
$8,847,000 in 1996, respectively.
The Company leases four manufacturing facilities in Tijuana, B.C., Mexico
and its net book value in property and equipment at March 29, 1998 was
approximately $2,742,000. The functional currency of such operations is the U.S.
dollar.
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
29, 1998 was $1,555,045. As of March 29, 1998, the Company's working capital was
$14,532,350 and its current ratio was 2.4 to 1. In addition, the Company
presently has an unsecured revolving credit agreement with a commercial bank
providing for maximum borrowings of $8,500,000 of which $5,184,955 was available
at March 29, 1998 and an unsecured five-year term loan agreement with the same
bank for $700,000. 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 for fiscal 1999.
YEAR 2000 ACTION PLAN
The Company has adopted a Year 2000 Action Plan (the "Plan") which
identifies the process by which the Company will address Year 2000 related
issues. It also establishes a committee represented by all departments of the
Company assigned the responsibility to complete Year 2000 preparations with a
targeted completion date of no later than December 31, 1999. The Plan strives to
identify Year 2000 issues, assesses its impact on Company operations, identifies
the cost, and outlines the implementation plan to have critical software and
hardware platforms Year 2000 compliant.
Costs associated with the Year 2000 project will primarily include costs
incurred to upgrade existing software and hardware platforms not currently Year
2000 compliant. The Company estimates that these costs will be incurred in the
normal course of business as software and hardware is ordinarily upgraded to
keep pace with technological advances. Actual costs could range to $200,000 over
a period of eighteen months, most of which will be capitalized.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. It requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with
other financial statements. It requires that an enterprise display an amount
representing total comprehensive income for each period. It does not require
per share amounts of comprehensive income to be disclosed. SFAS No. 130 is
effective for both interim and annual periods beginning after December 15,
1997.
In June 1997 the FASB also issued SFAS No. 131 Disclosures about Segments of
an Enterprise and Related Information, which among other things, requires
information about operating segments in both annual and interim reports. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997, but is not required for interim periods in
the initial year of adoption.
In February of 1998 the FASB issued SFAS No. 132 Employers' Disclosures
about Pensions and Other Postretirement Benefits, which among other things,
standardizes the disclosure requirements of pensions and other postretirement
benefits. SFAS No. 132 is effective for years beginning after December 15, 1997.
Management has adopted the above standards effective April 1, 1998 and will
provide the appropriate disclosures in subsequent annual and interim reports as
required.
Polk Audio, Inc. and Subsidiaries 15
<PAGE> 18
SEVEN-YEAR FINANCIAL SUMMARY
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the Fiscal Years Ended
- -----------------------------------------------------------------------------------------------------------------------------------
March 29, March 30, March 31, March 26, March 27, March 28, March 29,
1998 1997 1996 1995 1994 1993 1992
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Statement Data
Net sales $54,153 54,416 52,171 41,673 33,957 29,822 27,465
Gross profit 21,134 23,067 22,282 19,321 14,821 11,505 10,298
Selling, research, general and
administrative expenses 19,351 21,455 20,065 16,979 13,387 10,840 9,204
Operating income 1,782 1,612 2,217 2,341 1,434 665 1,094
Earnings before income taxes 1,948 1,284 1,971 2,305 1,507 883 502
Net earnings 1,106 752 1,174 1,452 988 592 321
Earnings per share--diluted 0.60 0.41 0.69 0.86 0.60 0.36 0.18
Balance Sheet Data:
Working capital $14,532 13,568 16,077 12,862 9,735 9,327 9,666
Total assets 31,775 24,997 30,268 22,224 15,974 14,745 15,787
Long-term debt 3,615 2,347 6,055 2,400 -- -- --
Stockholders' equity 17,727 16,544 15,436 14,153 12,474 11,437 11,690
</TABLE>
MARKET AND DIVIDEND INFORMATION
As of May 13, 1998, there were 127 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 has followed a policy of retaining earnings in order to finance the
growth and development of the business. In deciding whether to pay dividends in
the future, the Company's Board of Directors will consider factors it deems
relevant, including the Company's earnings and financial condition and its
working capital and capital expenditure requirements.
The Company's common stock is traded on the American Stock Exchange. The
high and low bid prices per share during the last four fiscal years were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 9 7/8 8 16 8 1/4 13 9 1/2 10 1/2 9 3/4
September 10 8 1/8 14 1/2 10 7/8 12 1/2 10 1/2 10 7 3/8
December 11 1/2 8 13 1/4 9 7/8 12 1/4 9 1/4 10 3/4 8 1/4
March 11 7/8 8 3/4 12 3/8 9 1/8 9 3/4 8 13 1/2 10
</TABLE>
16
<PAGE> 19
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 Technologies Incorporated
Dennis J. Shaughnessy
Director
Managing Director, Grotech Capital Group, 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
American Stock Transfer & Trust Company
New York, New York
ANNUAL MEETING
The Annual Meeting of Stockholders will be held
on Monday, August 3, 1998 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 Treasurer, 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.
<PAGE> 20
[POLK AUDIO LOGO]
5601 Metro Drive, Baltimore, Maryland 21215, USA
<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.
Page 109
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Polk Audio, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-61463) on Form S-8 of Polk Audio, Inc. of our report dated May 5, 1998
relating to the consolidated balance sheets of Polk Audio, Inc. and subsidiaries
as of March 29, 1998 and March 31, 1997 and the related consolidated statements
of earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended March 29, 1998, and our report dated May 5, 1998
relating to the schedule of valuation and qualifying accounts for each of the
years in the three-year period ended March 29, 1998, which reports appear in the
annual report on Form 10-K of Polk Audio, Inc.
Baltimore, Maryland
June 23, 1998
Page 110
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-END> MAR-29-1998
<CASH> 363,948
<SECURITIES> 0
<RECEIVABLES> 13,703,082
<ALLOWANCES> 188,768
<INVENTORY> 9,378,116
<CURRENT-ASSETS> 24,596,582
<PP&E> 12,597,013
<DEPRECIATION> 7,585,024
<TOTAL-ASSETS> 31,775,135
<CURRENT-LIABILITIES> 10,064,232
<BONDS> 0
0
0
<COMMON> 18,490
<OTHER-SE> 17,708,945
<TOTAL-LIABILITY-AND-EQUITY> 31,775,135
<SALES> 54,153,476
<TOTAL-REVENUES> 54,153,476
<CGS> 33,019,849
<TOTAL-COSTS> 19,351,132
<OTHER-EXPENSES> (423,545)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257,872
<INCOME-PRETAX> 1,948,168
<INCOME-TAX> 842,000
<INCOME-CONTINUING> 1,106,168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,168
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
