<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Polk Audio, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
POLK AUDIO [LOGO]
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MONDAY, AUGUST 3, 1998
------------------------
To the Stockholders of
POLK AUDIO, INC.:
Notice is hereby given that the 1998 Annual Meeting of Stockholders (the
"Meeting") for POLK AUDIO, INC. (the "Company") will be held at 9:00 a.m. local
time on Monday, August 3, 1998 at the offices of Piper & Marbury L.L.P., 2nd
Floor, 36 South Charles Street, Baltimore, Maryland 21201, for the following
purposes:
(1) to elect six (6) directors to serve until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified;
and
(2) to transact such other business as may properly come before the Meeting
or any adjournments or postponements thereof.
The Board of Directors has fixed May 13, 1998 as the record date for the
Meeting. Only stockholders of record at the close of business on May 13, 1998
will be entitled to notice of, and to vote at, the Meeting and any adjournments
or postponements thereof.
By order of the Board of Directors
Matthew S. Polk, Jr.,
Secretary
Baltimore, MD
June 23, 1998
IT IS IMPORTANT TO YOU AND THE COMPANY THAT YOUR SHARES BE REPRESENTED AT
THE MEETING. YOU ARE INVITED TO ATTEND THE MEETING IN PERSON. HOWEVER, WHETHER
OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO READ THE
ACCOMPANYING PROXY STATEMENT CAREFULLY AND THEN TO SIGN, DATE, AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED STAMPED AND ADDRESSED ENVELOPE. THE GIVING OF
YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE AT THE MEETING IF SUCH PROXY IS
REVOKED AS SET FORTH IN THE ACCOMPANYING PROXY STATEMENT.
<PAGE> 3
POLK AUDIO, INC.
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement, Notice of Annual Meeting of Stockholders, and the
accompanying form of proxy are furnished in connection with the solicitation of
proxies by the Board of Directors of Polk Audio, Inc. (the "Company") for use at
the Annual Meeting of Stockholders (the "Meeting") to be held on August 3, 1998
and at any adjournments or postponements thereof. Only stockholders of record at
the close of business on May 13, 1998 (the "Record Date") will be entitled to
notice of, and to vote at, the Meeting. Management anticipates that the mailing
to stockholders of these proxy materials and a copy of the Company's Annual
Report to Stockholders for the fiscal year ended March 29, 1998 will occur on or
about June 23, 1998.
The Company's principal executive offices are located at 5601 Metro Drive,
Baltimore, Maryland 21215, and its telephone number at such address is (410)
358-3600.
If the accompanying proxy is properly executed and returned, the shares
represented thereby will be voted in accordance with the instructions specified
thereon. In the absence of instructions to the contrary, such shares will be
voted for all the nominees for election to the Board of Directors listed in this
proxy statement and named in the accompanying proxy and in the best discretion
of the proxy holders as to any other matters, including, but not limited to, the
election of one or more persons to fill any vacancy that exists on the Board of
Directors at the time of the Meeting or any adjournments or postponements
thereof. Any stockholder executing a proxy has the power to revoke it at any
time prior to the voting thereof on any matter (without, however, affecting any
vote taken prior to such revocation) by delivering written notice of revocation
to the Secretary of the Company, or by executing another proxy dated as of a
later date, or by voting in person at the Meeting.
The only voting securities of the Company are shares of common stock, par
value $0.01 per share (the "Common Stock"), each of which is entitled to one
vote. At the Record Date, the Company had issued and outstanding 1,849,035
shares of Common Stock. The presence, in person or by proxy, of holders of a
majority of the issued and outstanding shares of Common Stock entitled to vote
at the Meeting shall constitute a quorum. Directors are elected by a plurality
of the votes cast by the holders of shares of Common Stock of the Company
present or represented by proxy at the Meeting, with a quorum present. The
affirmative vote of the holders of the majority of the shares of Common Stock
present or represented by proxy at the Meeting is required for the approval of
any other matter that may properly come before the Meeting. Abstentions and
broker non-votes will not be considered to be votes cast for the foregoing
purposes.
ELECTION OF DIRECTORS
A Board of Directors consisting of six (6) members will be elected at the
Meeting to hold office until the next Annual Meeting of Stockholders of the
Company or until their successors are duly elected and qualified. The Board of
Directors has unanimously approved the nominees named below, all of whom are
current members of the Board of Directors. Unless otherwise instructed, it is
the intention of the persons named in the accompanying form of proxy to vote
shares represented by properly executed proxies for the six nominees to the
Board of Directors named below. Although the Board of Directors anticipates that
all of the nominees will be available to serve as directors of the Company,
should any one or more of them not accept the nomination, or otherwise be
unwilling or unable to serve, it is intended that the proxies will be voted for
the election of a substitute nominee or nominees designated by the Board of
Directors.
<PAGE> 4
The following table lists the names and ages of the nominees to the Board
of Directors as of the Record Date and the year in which they were first elected
directors of the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE FOLLOWING NOMINEES:
<TABLE>
<CAPTION>
SERVED AS
NAME AGE DIRECTOR SINCE
---- --- --------------
<S> <C> <C>
George M. Klopfer........................................... 48 1972
Matthew S. Polk, Jr......................................... 48 1972
Craig C. Georgi............................................. 49 1977
Wilbert H. Sirota........................................... 60 1986
Robert B. Barnhill, Jr...................................... 54 1992
Dennis J. Shaughnessy....................................... 51 1997
</TABLE>
Matthew S. Polk, Jr., a founder of the Company, has served as Chairman of
the Board of Directors of the Company since its founding in June 1972. In
addition, he served as the Company's Treasurer from 1972 to 1983 and has been
its Secretary from 1977 to the present. Mr. Polk also served as Vice
President -- Engineering from 1981 to 1995. Mr. Polk graduated from The Johns
Hopkins University in 1971 with an undergraduate degree in physics and has spent
his entire working career with the Company.
George M. Klopfer, a founder of the Company, has been a Director of the
Company since its founding in June 1972. He has been the Company's Chief
Executive Officer from 1984 to present. In addition, he served as the Company's
President from 1972 through 1995, the Company's Secretary from 1972 to 1977 and
the Company's Treasurer from 1984 to 1995. Mr. Klopfer graduated from The Johns
Hopkins University in 1971 and has spent his entire working career with the
Company.
Craig C. Georgi joined the Company as its first assembly worker in 1974. He
became a Director in 1977 and has been Vice President -- Manufacturing since
1981. Mr. Georgi has a Masters in Business Administration from Loyola College
and has spent his entire working career with the Company.
Wilbert H. Sirota joined the law firm of Piper & Marbury L.L.P., Baltimore,
Maryland, as a partner in June, 1992. Prior to that time, he had been a partner
of the Baltimore law firm of Frank, Bernstein, Conaway & Goldman since 1966. Mr.
Sirota holds an LLM in taxation from Georgetown University.
Robert B. Barnhill, Jr. is Chairman and Chief Executive Officer of TESSCO
Technologies Incorporated (NASDAQ/NNM:TESS). TESSCO is a technology supplier to
the wireless communications industry. Mr. Barnhill holds a Bachelor of Science
degree in Electrical Engineering from Cornell University and a Masters in
Business Administration from the Wharton School of Business at the University of
Pennsylvania. Mr. Barnhill is also a member of the Board of Directors of
Provident Bankshares Corporation, a Maryland-based bank holding company
(NASDAQ/NNM:PBKS).
Dennis J. Shaughnessy is Managing Director at Grotech Capital Group, Inc.,
a Mid-Atlantic venture capital firm. Prior to joining Grotech, Mr. Shaughnessy
was the president and CEO of CRI International, Inc. Mr. Shaughnessy is also a
member of the Board of Directors of Forensic Technologies, Inc. (NASDAQ: FTIC),
Secured Computing, Inc. (NASDAQ: SCUR), TESSCO Technologies Incorporated.
(NASDAQ: TESS) and US Vision (NASDAQ: USVI). In addition to these public company
boards, Mr. Shaughnessy also serves on the boards of several private companies
and as a trustee of the Baltimore Museum of Art.
Executive Officers. The following information is provided regarding James
M. Herd, the President of the Company, Gary B. Davis, the Treasurer and Chief
Financial Officer of the Company, Peter D. Gaskarth, Vice President of Polk Home
Entertainment Products, Robert E. Limbaugh, Vice President of Polk Automotive
Products, Thomas C. Roddam, Vice President of Eosone Home Products, and Keith A.
Ballard, Vice President of Marketing. These are the only executive officers of
the Company who are not also Directors.
James M. Herd, age 49, was elected President in December 1995, with his
duties commencing in January 1996, and has been with the Company since December
1991. He served as Vice President of Sales
2
<PAGE> 5
and Marketing from 1991 through 1995. Mr. Herd was employed at Bose Corporation,
a manufacturer of stereo loudspeaker systems, as Director of North American
Sales prior to his employment at the Company. Mr. Herd's career at Bose
Corporation spanned 15 years where he held various sales and management
positions.
Gary B. Davis, age 38, Treasurer, since July 1995 and Chief Financial
Officer since July 1989, has been with the Company since October 1983. Mr. Davis
was employed with Heine & Hermann, P.A. CPAs prior to his employment at the
Company and attained his C.P.A. degree in 1982. Mr. Davis graduated from
Westminster College in 1981 with an undergraduate degree in Business and
Accounting.
Peter D. Gaskarth, age 53, Vice President of Polk Home Entertainment
Products since March 1996, has been with the Company since 1992. Mr. Gaskarth
was employed at AGI (Electronics) Ltd. where he acted as Chief Executive Officer
for ten years. Mr. Gaskarth graduated from Bradford University in the U.K. in
1968.
Robert E. Limbaugh, age 43, Vice President of Polk Automotive Products
since March 1996, has been with the Company since May 1993. Mr. Limbaugh has
been involved in the consumer electronics industry since 1973, most recently
employed as U.S. National Sales Manager for seven years at Linear Power, Inc., a
manufacturer of automotive amplifiers.
Thomas C. Roddam, age 44, Vice President of Eosone Home Products since
March 1996, has been with the Company since September 1994. Prior to joining the
Company, Mr. Roddam had been in the consumer electronics industry for seventeen
years and most recently served as Western Regional Manager for the Bose
Corporation. Mr. Roddam graduated with a Masters in Business Administration from
the University of Denver in 1991.
Keith A. Ballard, age 48, Vice President of Marketing since March 1996, has
been with the Company since February 1985. Mr. Ballard has been involved in the
advertising and design industry for the past twenty four years. Mr. Ballard
graduated from North Carolina State University in 1973 with a dual undergraduate
degree in Industrial and Visual Design.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Directors' Compensation. Employee directors receive no additional
compensation for service on the Board of Directors or any of its committees.
Messrs. Sirota and Barnhill were paid a fee of $1,000 per month during fiscal
1998, regardless of the number of meetings attended, except for Mr. Shaughnessy
who is not paid a fee to serve on the Board. Mr. Shaughnessy was granted options
to acquire 20,000 shares of the Company's Common Stock of which options to
acquire 6,666 shares were exercisable immediately upon the grant; the remainder
of the options are exercisable in accordance with a vesting schedule, subject to
Mr. Shaughnessy remaining a Director of the Company.
Board and Committee Meetings. The Audit Committee of the Board, consisting
of Messrs. Sirota and Barnhill, meets with the Company's independent public
accountants to review the scope of audit coverage and to review the results of
the accountants' audit of the Company's financial statements. The Audit
Committee met once during fiscal 1998. The Board does not have a standing
nominating or compensation committee.
During fiscal 1998, each Director of the Company attended 75% or more of
the aggregate of all Board meetings and all meetings of committees on which such
director served, except Mr. Shaughnessy, who attended 75% or more of the
aggregate of all Board meetings since joining the Board in December 1997. The
Board met five times during fiscal year 1998.
3
<PAGE> 6
SECURITIES BENEFICIALLY OWNED
The following table sets forth, at the Record Date, the amount and
percentage of the Company's outstanding Common Stock beneficially owned by each
director and nominee for director, each executive officer named in the Summary
Compensation Table, all directors and executive officers as a group and by all
persons, to the knowledge of the Company, beneficially owning more than five
percent (5%) of the Company's Common Stock. Unless otherwise indicated in the
notes following the table, the individuals named below have sole voting and
investment powers over the shares beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE OF
NAME BENEFICIAL OWNERSHIP (1) OUTSTANDING SHARES
---- ------------------------ ------------------
<S> <C> <C>
George M. Klopfer......................... 346,458 18.7%
Matthew S. Polk, Jr....................... 346,458 18.7%
Craig C. Georgi........................... 120,800 6.5%
Wilbert H. Sirota......................... 11,000 *
Robert B. Barnhill, Jr.................... 10,000 *
Dennis J. Shaughnessy..................... 6,666 *
James M. Herd............................. 106,250 5.7%
Peter D. Gaskarth......................... 55,000 3.0%
All directors and executive officers as a
group (12 persons)...................... 1,028,865(1) 54.1%
NAME AND ADDRESS OF OTHER
5% HOLDERS OF COMMON STOCK
- ------------------------------------------
Lighthouse Capital Management, Inc. (2)... 140,600 7.6%
10000 Memorial Drive, #660
Houston, TX 77024
Athena Capital Management, Inc. (3)....... 111,990 6.1%
621 E. Germantown Pike, Suite 105
Plymouth Valley, PA 19401
</TABLE>
- ---------------
* Constitutes less than 1% of the outstanding shares of Common Stock eligible
to vote.
(1) The number of shares stated as "beneficially owned" includes shares that
certain persons, as of June 5, 1998, have the right to acquire beneficial
ownership within 60 days upon the exercise of outstanding options. If such
options are exercised Mr. Klopfer would acquire 6,250 shares; Mr. Polk,
6,250 shares; Mr. Georgi, 2,500 shares; Mr. Sirota, 10,000 shares; Mr.
Shaughnessy, 6,666 shares; Mr. Herd, 6,250 shares; Mr. Gaskarth, 5,000
shares and all other officers as a group, 10,000 shares.
(2) Based on information provided to the Company on Form 13G dated February 6,
1998. Lighthouse Capital Management, Inc. has shared voting and disposition
power with respect to such shares.
(3) Based on information provided to the Company on Form 13G dated January 26,
1998. Athena Capital Management, Inc. has shared voting and disposition
power with respect to such shares.
4
<PAGE> 7
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation for the last three completed fiscal
years of the Chief Executive Officer and the four executive officers of the
Company and its subsidiaries who, in addition to the Chief Executive Officer,
received the highest compensation during the fiscal year ended March 29, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1) SECURITIES
----------------------------- UNDERLYING
FISCAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS(#) COMPENSATION($)(2)
--------------------------- ------ --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
George M. Klopfer..................... 1998 231,984 16,239 -- 4,800
Director & 1997 228,379 14,543 -- 4,500
Chief Executive Officer 1996 230,632 -- 12,500 4,500
Matthew S. Polk, Jr................... 1998 204,406 14,308 -- 4,800
Chairman of the Board & 1997 204,693 12,542 -- 4,500
Secretary 1996 203,329 -- 12,500 4,500
Craig C. Georgi....................... 1998 224,806 14,616 -- 4,800
Director & Vice President -- 1997 222,633 32,841 -- 4,500
Manufacturing 1996 220,123 -- 5,000 4,500
James M. Herd......................... 1998 201,994 85,343 -- 4,800
President 1997 208,285 12,662 -- 4,500
1996 208,190 -- 12,500 4,500
Peter Gaskarth........................ 1998 174,595 49,025 -- 4,800
Vice President -- Home 1997 182,002 12,438 -- 4,500
Entertainment Products 1996 147,080 -- 10,000 --
</TABLE>
- ---------------
(1) Except as disclosed in this table and in the following discussion of benefit
programs, no officer named above received any perquisites or other personal
benefits the aggregate amount of which exceeded the lesser of either $50,000
or 10% of the total of annual salary and bonus reported in the Summary
Compensation Table.
(2) These amounts represent the Company's annual contributions to its 401(k)
Profit Sharing Plan.
Option Grants. None of the named executive officers was granted stock
options during the fiscal year ended March 29, 1998.
5
<PAGE> 8
Aggregated Option Exercises in Last Fiscal Year and Year-End Option
Values. The following table sets forth the fiscal year-end value of all
unexercised options held by named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE MARCH 29, 1998 MARCH 29, 1998
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---- --------------- ----------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
George M. Klopfer....... 0 0 0/12,500 $0/$36,719
Matthew S. Polk, Jr..... 0 0 0/12,500 $0/$36,719
Craig C. Georgi......... 0 0 0/ 5,000 $0/$18,750
James M. Herd........... 0 0 0/12,500 $0/$46,875
Peter D. Gaskarth....... 0 0 0/10,000 $0/$37,500
</TABLE>
- ---------------
(1) Options granted pursuant to the 1986 Equity Participation Plan. The Equity
Plan offers eligible employees and directors the opportunity to acquire (a)
shares of Common Stock through Stock Awards, Incentive Stock Options,
Non-Qualified Stock Options; (b) Common Stock or cash through Stock
Appreciation Rights, and (c) cash through Tax Benefit Rights.
GENERAL
Pension Plan. The Company established a defined benefit pension plan (the
"Pension Plan") effective as of April 1, 1989, for hourly employees who meet
minimum age and service requirements, plus Messrs. Klopfer, Polk and Georgi. The
Pension Plan is funded entirely by the Company. As of September 1, 1995, all
benefit accruals under the plan were frozen meaning that no wages earned after
said date are taken into account in computing benefits under the plan.
A participant's accrued benefit under the Pension Plan will be equal to the
sum of the following amounts: First, for plan years of service completed by a
participant prior to April 1, 1989, his or her accrued benefit will be equal to
his or her 1988 calendar year compensation multiplied by 0.75% multiplied by the
number of his or her plan years of service completed prior to April 1, 1989.
Second, for each plan year of service completed after March 31, 1989 and prior
to September 1, 1995, his or her accrued benefit will be equal to his or her
compensation for the calendar year ending in that plan year multiplied by 0.75%.
Each participant in the Pension Plan is always fully vested in his or her
accrued benefit in the event of death, disability, or attainment of the normal
retirement age (65 years) or attainment of the early retirement date (attainment
of age 55 and completion of 5 years of service) while he or she is employed by
the Company. Each other participant becomes vested in his or her accrued benefit
upon completion of five years of service with the Company.
Benefits under the Pension Plan are paid in the form of annual payments for
the life of the participant. The estimated annual benefits payable upon
retirement at normal retirement date for each of George M. Klopfer, Matthew S.
Polk, Jr., Craig C. Georgi and James M. Herd are $25,218, $25,630, $23,355 and
$3,577, respectively. James M. Herd entered the Plan as a participant beginning
April 1, 1993.
6
<PAGE> 9
STOCK PERFORMANCE CHART
The following chart compares the cumulative total shareholder return on the
Company's Common Stock during the five years ended March 29, 1998 with the
cumulative total return on the CRSP Total Return Index for the NASDAQ Stock
Market (US Companies) and a peer group comprised of publicly traded consumer
electronics manufacturers. Included in the peer group are the following
companies: Harman International Industries Inc., Boston Acoustics Inc., Carver
Corporation, Sony Corporation, Pioneer Electronics, Emerson Radio Corporation
and Cobra Electronics Corporation. The returns for each of the companies in the
peer group were weighted according to their respective stock market
capitalization. The comparison assumes $100 was invested on March 31, 1993, in
the Company's Common Stock and in both the CRSP Index and the selected peer
group, and the reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG POLK AUDIO, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP
MHM PERFORMANCE CHART
<TABLE>
<CAPTION>
NASDAQ
STOCK
MEASUREMENT PERIOD POLK PEER MARKET
(FISCAL YEAR COVERED) AUDIO, INC GROUP (U.S.)
<S> <C> <C> <C>
3/93 100 100 100
3/94 111 142 108
3/95 134 124 120
3/96 109 150 163
3/97 109 164 181
3/98 136 198 275
</TABLE>
* $100 invested on 3/31/93 in stock or index -- including reinvestment of
dividends. Fiscal year ending March 31.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is primarily comprised
of base salary, cash bonuses and awards of stock bonuses or options under the
Company's 1986 Equity Participation Plan. In addition, the Company's executive
officers participate in the Company's 401(k) Profit Sharing Plan and Pension
Plan.
The Company's compensation philosophy is to (i) provide a competitive total
compensation package that enables the Company to attract and retain the key
executive talent needed to accomplish its corporate goals and (ii) provide
incentive compensation that is directly linked with the performance of the
Company and that align executive compensation with the interests of
shareholders. In assessing the Company's performance, the Board of Directors
takes into consideration the Company's earnings and return-on-equity among other
financial criteria, although no specific weight is given to any one factor.
7
<PAGE> 10
In order to align executive compensation with the interests of
shareholders, the Board of Directors bases increases in base salary and the
amount of cash bonuses and stock or option awards on the individual performance
of the executive as well as the performance of the Company, as measured by the
level of earnings and return on equity.
In order to align executive compensation with the interests of
shareholders, the Board of Directors bases increases in base salary and the
amount of cash bonuses and stock or option awards on the individual performance
of the executive as well as the performance of the Company, as measured by the
level of earnings and return on equity.
Adjustments in the levels of base salary and bonuses and awards under the
Company's Equity Participation Plan can be made when the Board of Directors
determines that the Company's financial performance warrants such compensation.
For the fiscal year ended March 29, 1998, the Board of Directors increased the
base salaries of Messrs. Klopfer, Polk, Georgi and Herd as indicated in the
Summary Compensation Table. In particular, with respect to the Company's CEO,
the Board awarded Mr. Klopfer a bonus of $16,239 for the fiscal year ended March
29, 1998 and increased his base salary from $228,379 to $231,984 for that year.
The bonus and salary increase is based on the Board's assessment of Mr.
Klopfer's significant role in the Company's operations and performance in fiscal
1998.
The Securities and Exchange Commission requires compensation committees of
public companies or Board of Directors performing that function, to state their
compensation policies with respect to the recently enacted Federal income tax
laws that limit to $1 million the deductibility of compensation paid to any
executive officer named in the proxy statement of such companies. In light of
the current level of compensation for the Company's named executive officers,
the Board of Directors has not adopted a policy with respect to the
deductibility limit but will adopt such a policy should it become relevant.
George M. Klopfer
Matthew S. Polk, Jr.
Craig C Georgi
Wilbert H. Sirota
Robert B. Barnhill, Jr.
Dennis J. Shaughnessy
ADDITIONAL INFORMATION
Certain Relationships and Related Transactions. On September 23, 1985, the
Company entered into a lease agreement (the "Seton Lease") with Klopfer
Associates Limited Partnership ("KALP"), a Maryland limited partnership. The
general partners of KALP are George M. Klopfer, Matthew S. Polk, Jr. and Craig
C. Georgi. Certain trusts established for the benefit of the children of George
M. Klopfer and Craig C. Georgi are limited partners of KALP. The Seton Lease
obligated the Company to pay annual rentals of $500,000 per year for eight
years, adjusted in each year after the second anniversary of its commencement to
reflect changes in the Consumer Price Index, beginning on August 1, 1986, for a
100,000 square foot facility constructed to the Company's specifications at
Seton Business Park, 5601 Metro Drive, Baltimore, Maryland 21215 (the "Seton
Facility"). Rental payments are also subject to adjustment in the event the
interest payable on the $2.8 million Industrial Development Revenue Bond (the
"Revenue Bond") used to finance construction of the Seton Facility became
taxable to the bondholders. Annual rent payable under the lease at the end of
the lease term (in 1993) was approximately $660,000. On September 23, 1993, the
Seton Lease was amended (the "First Seton Lease Amendment") to extend the term
of the Seton Lease and to reduce the amount payable thereunder. The First Seton
Lease Amendment obligated the Company to pay annual rentals of $600,000 per year
for ten years beginning on October 1, 1993 for the Seton Facility, adjusted in
each year after the second anniversary of its commencement to reflect changes in
the Consumer Price Index. The First Seton Lease Amendment also provides the
Company with a right to terminate after five years for a specified fee and
requires that the Company maintain certain financial performance ratios. The
First Seton Lease Amendment was unanimously approved by the Company's outside
Directors at the time, and except as noted above, kept in
8
<PAGE> 11
effect all other terms and conditions provided under the original Seton Lease.
In addition to the payment of rent, the Company continues to be obligated by the
terms of the First Seton Lease Amendment to pay various other costs, including
real estate taxes, insurance, utilities and maintenance. KALP's interest in the
Seton Lease and the First Seton Lease Amendment is collaterally assigned to
NationsBank, N.A. (the "Bank"), as successor to Maryland National Bank as
partial security for the Revenue Bond, and also as partial security for a $1.6
million subordinated loan originally made to KALP in 1989 by the Bank (the
"Subordinated Loan"). On March 25, 1996, the principal balance on the
Subordinated Loan was increased to $2.7 million pursuant to an amended
Subordinated Loan agreement between KALP and the Bank. The terms of the Revenue
Bond and the Subordinated Loan are normal, arm's-length commercial terms, and
KALP neither requested nor obtained concessions from the Bank in negotiating the
terms of the Revenue Bond and/or the Subordinated Loan, based upon, involving or
affecting in any way the Company's banking relationship with the Bank. On March
31, 1997, the Seton Lease was amended (the "Second Seton Lease Amendment") to
extend the term of the First Seton Lease Amendment and to decrease the square
footage and annual base rent. The Second Seton Lease Amendment reduces to 76,000
the square footage covered under the lease. The Second Seton Lease Amendment
obligated the Company to pay annual rentals of $535,000 per year for ten years
beginning April 1, 1997 for the Seton Facility, adjusted in each year after the
first anniversary of its commencement to reflect changes in the Consumer Price
Index. The Second Seton Lease Amendment does not allow the Company the right to
terminate the lease after five years. All other aspects of the First Seton Lease
Amendment remain in full force and effect.
In July 1994, the Company entered into a lease agreement (the "Britannia
Lease") for the term commencing September 1, 1994 and ending February 28, 1997,
with Woodland Hills Properties-W, Inc., an unrelated Nevada Corporation
("Woodland"), which obligated the Company to pay a first year annual base rental
(subject to escalation) of $57,216 per year for 16,442 square feet of
distribution and office space (the "Britannia Facility"), in a 146,232 square
foot building known as 2550 Britannia Boulevard, San Diego, California 92173
(the "Britannia Project"). Annual base rentals payable under the Britannia Lease
increased to $61,164 effective as of September 1, 1995. The Britannia Lease also
provided for reimbursement by the Company to the landlord of its prorata share
(according to square footage) of all the operating expenses of the Britannia
Property. On January 18, 1995, to become effective February 28, 1995, the
Britannia Lease was amended (the "First Britannia Lease Amendment") to increase
the rented area of the Britannia Facility to 32,884 square feet, to extend the
term of the Britannia Lease to February 28, 1998 and to increase the annual base
rental to $114,436. The First Britannia Lease Amendment provided for escalation
in the base annual rental to $122,328 effective September 1, 1995, and to
$130,221 effective February 28, 1997. The First Britannia Lease Amendment also
provided the Company the right and option to further extend the term of the
Britannia Lease until February 28, 2002, at a 4% annual increase in the base
rent payable. On November 20, 1995, to become effective January 1, 1996, the
Britannia Lease was again amended (the "Second Britannia Lease Amendment") to
increase the rented area of the Britannia Facility to 41,205 square feet, and to
increase the annual base rental to $153,283. The Second Britannia Lease
Amendment also provided for escalation of the base annual rental to $163,172
effective February 28, 1997. Finally, on March 6, 1996, to become effective
April 1, 1996, the Britannia Lease was further amended (the "Third Britannia
Lease Amendment") to increase the rented area of the Britannia Facility to
49,426 square feet, and to increase the annual base rental to $183,865. In the
Third Britannia Lease Amendment, the Company also exercised its options to
extend the term of the Britannia Lease to February 28, 2002, and Woodland waived
its right to receive annual rent escalations after March 1997 through the end of
the amended Britannia Lease term in February 2002. On March 27, 1996, KALP
purchased the Britannia Project from Woodland, together with the landlord's
interest in all tenant leases thereon, including but not limited to the
Company's Britannia Lease as amended by the First, Second and Third Britannia
Lease Amendments. In connection with its acquisition of the Britannia Project,
KALP assigned the lessor's interest in all tenant leases on the Britannia
Project to Wells Fargo Bank, N.A. as partial security for a commercial mortgage
on normal terms in the amount of $3.5 million (the "Britannia Loan"). There are
no material banking relationships between the Company and Wells Fargo Bank, and
KALP neither requested nor obtained concessions from Wells Fargo Bank in
negotiating the terms of the Britannia Loan, based upon, involving or affecting
in any way the Company's actual or contemplated banking relationships. On March
15, 1996, Klopfer Associates Limited Liability Corporation ("KALLC"), a
9
<PAGE> 12
California Limited Liability Company was established. General Managers of KALLC
are George M. Klopfer, Matthew S. Polk, Jr. and Craig C. Georgi. Certain trusts
established for the benefit of the children of George M. Klopfer and Craig C.
Georgi are also members of KALLC. The Britannia Facility was transferred to
KALLC from KALP. On March 21, 1997 the Company agreed with UETA, Inc. ("UETA"),
an unrelated corporation, to assume UETA's then existing lease on an additional
15,696 square feet of space in the Britannia Facility beginning May 1, 1997 and
continuing through May 31, 1999. The assumed UETA lease calls for annual rents
of $80,510 plus charges for the common area maintenance.
The Company's outside Directors at the time, based on detailed market
surveys of the Baltimore and San Diego areas, determined that the terms of the
Seton Lease as amended, and the terms of the Britannia Lease, as amended,
respectively, were at least as advantageous to the Company as could have been
obtained at the respective times these leases were executed, in arm's length
transactions with unrelated parties. The Company has adopted a policy that any
future transactions between itself and any affiliates will continue to be
subject to the unanimous approval of its disinterested directors and will be on
terms no less favorable to the Company than those obtainable at arm's length
from unrelated parties.
Wilbert H. Sirota, a director of the Company, is a partner in the law firm
of Piper & Marbury L.L.P. This firm serves as general counsel to the Company.
Indebtedness of Management. On March 26, 1996, the Company lent Messrs.
Herd, Gaskarth and Davis cash equal to the full exercise price for 100,000
shares, 50,000 shares and 15,000 shares, respectively, plus an amount equal to
the Federal and state income and employment taxes due on the exercise of the
option. The loan to Mr. Herd was in the amount of $628,833 of which $475,000 was
for the option exercise price and $153,833 was for taxes due on the exercise.
The loan to Mr. Gaskarth was in the amount of $330,199, of which $262,500 was
for the option exercise price and $67,699 was for taxes due on the exercise. The
loan to Mr. Davis was in the amount of $94,299 of which $77,000 was for the
option exercise price and $17,299 was for taxes due on the exercise. On
September 6, 1996, 1997 the Company lent Mr. Ballard cash equal to the full
exercise price for 1,000 shares, amounting to $9,459 of which $7,750 was for the
option exercise price and $1,709 was for taxes due on the exercise. On August 1,
1997 the Company lent Mr. Barnhill cash equal to the full exercise price for
10,000 shares, amounting to $52,500 which related in full to the option price
for such shares. All five loans are evidenced by a full recourse promissory note
bearing interest at the applicable Federal mid-term rate, with interest to be
paid annually in arrears, and one payment of principal due at the maturity date
of each loan. Each note is secured by the pledge of the shares acquired on March
26, 1996 by Messrs. Herd, Gaskarth and Davis, respectively, on September 6, 1996
by Mr. Ballard, and on August 1, 1997 by Mr. Barnhill.
Employment Contracts. In December 1995, the Company reinstated an
employment agreement with Mr. Herd that was originally entered into in October
1991. The employment agreement, as reinstated, was for an initial term that
expired December 31, 1997 and has been and automatically will be extended for
additional two-year periods unless terminated by either party 180 days prior to
the end of the then current term. The Company may terminate the employment
agreement without cause, and upon such termination, Mr. Herd will be entitled to
receive six months' base salary and benefits plus a prorated portion of any
bonus which may have been payable to Mr. Herd for the fiscal year in which he
was terminated. Mr. Herd may terminate the employment agreement within ninety
days of (i) a change in control or (ii) a substantial material change in Mr.
Herd's job description or duties by providing the Company with 30 days prior
notice; upon such termination, Mr. Herd will be entitled to receive the same
salary, benefits, and bonus as if terminated by the Company without cause. The
employment agreement provides that Mr. Herd's salary, bonus and other employee
benefits will be as determined from time to time by the Board of Directors.
Compliance with Section 16(a). Section 16(a) of the Securities Exchange
Act of 1934 requires the Company's officers and directors, and persons who own
more than 10% of a registered class of the Company's securities, to file reports
of ownership and changes in ownership. Based solely on its review of copies of
the forms received by it, or written representations from certain reporting
persons that they were not required to file Form 4's, the Company believes that
during the last fiscal year, all filing requirements were complied with on a
timely basis.
10
<PAGE> 13
Compensation Committee Interlocks and Insider Participation. The Company
does not have an Executive Compensation Committee of the Board of Directors.
Accordingly, the Board of Directors is responsible for establishing the levels
of compensation and benefits for the executive officers of the Company. Messrs.
Klopfer, Polk, and Georgi are executive officers and employees and also served
on the Board of Directors of the Company during fiscal 1998. Accordingly, each
participated in deliberations of the Company's Board of Directors concerning
executive compensation except such executive officers did not participate in
deliberations concerning their own compensation.
RELATIONSHIP WITH INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has appointed KPMG Peat Marwick LLP to continue as
its independent certified public accountants and to examine the financial
statements of the Company for the current fiscal year. Representatives of KPMG
Peat Marwick LLP are expected to be present at the Meeting and will have the
opportunity to make a statement if they so desire, and are expected to be
available to respond to appropriate questions.
OTHER BUSINESS
At the present time, management knows of no other business which will be
presented for action at the Meeting. If any other business requiring a vote of
the stockholders should come before the Meeting, the persons designated as
proxies will vote or refrain from voting in accordance with their best judgment.
STOCKHOLDER PROPOSALS FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS
Stockholder proposals to be presented at the 1999 Annual Meeting of
Stockholders must be received in writing by the Secretary of the Company at the
Company's principal executive offices no later than February 24, 1999 in order
to be included in the Company's proxy materials relating to that meeting.
REPORT ON FORM 10-K
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED MARCH 29, 1998, INCLUDING ALL
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, IS AVAILABLE TO
STOCKHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST. EXHIBITS TO FORM 10-K WILL BE
FURNISHED UPON PAYMENT OF $.50 PER PAGE, WITH A MINIMUM CHARGE OF $5.00. SEND
REQUESTS TO POLK AUDIO, INC., 5601 METRO DRIVE, BALTIMORE, MD 21215, ATTENTION:
GARY B. DAVIS, TREASURER.
SOLICITATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors of the
Company and the cost of soliciting proxies for the meeting will be borne by the
Company. Proxies may be solicited by officers, directors, and regular executive
employees of the Company, none of whom will receive any additional compensation
for their services. Solicitation of proxies may be made personally, or by mail,
telephone, telegraph or messenger. The Company will pay persons holding shares
of Common Stock in their names or in the names of nominees, but not owning such
shares beneficially, such as brokerage houses, banks and other fiduciaries, for
the expense of forwarding soliciting materials to their principals.
11
<PAGE> 14
PROXY
POLK AUDIO, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
1998 ANNUAL MEETING OF STOCKHOLDERS
THE OFFICES OF PIPER & MARBURY L.L.P., 2ND FLOOR
36 SOUTH CHARLES STREET, BALTIMORE, MARYLAND 21201
MONDAY, AUGUST 3, 1998, 9:00 A.M. EDT
The undersigned hereby appoints MATTHEW S. POLK, JR. and GEORGE M. KLOPFER,
jointly and severally, proxies, with full power of substitution, to represent
and vote all shares of Common Stock which the undersigned is entitled to
vote at the 1998 Annual Meeting of Stockholders of Polk Audio, Inc., and any
adjournments or postponements thereof, upon any matters which may properly be
brought before such Meeting, provided that said shares shall be voted as
specified on the matter referred to on the reverse side of this Proxy Card.
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE.)
<PAGE> 15
<TABLE>
<CAPTION>
PLEASE MARK YOUR
A [X] VOTES AS IN THIS
EXAMPLE.
<S> <C> <C>
FOR all nominees WITHHOLD
listed to the right AUTHORITY
(except as marked to vote for all nominees
to the contrary) listed to the right
Item 1.
Election of [ ] [ ] NOMINEES:
Directors Matthew S. Polk, Jr.
To withhold authority to vote for any individual nominee(s), George M. Klopfer
write the name(s) of such nominee(s)below. Craig C. Georgi
Wilbert H. Sirota
- -------------------------------------------------------------- Robert B. Barnhill, Jr.
- -------------------------------------------------------------- Dennis J. Shaughnessy
- --------------------------------------------------------------
</TABLE>
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR ITEM 1. THE UNDERSIGNED HEREBY AUTHORIZES THE APPOINTED
PROXIES TO VOTE,
IN THEIR DISCRETION, UPON ALL OTHER MATTERS WHICH MAY PROPERLY COME
BEFORE THE MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE COMPANY'S 1998 ANNUAL
REPORT AND NOTICE OF ANNUAL MEETING AND PROXY STATEMENT RELATING TO SUCH
ANNUAL MEETING. THE UNDERSIGNED REVOKES ALL PROXIES HERETOFORE GIVEN FOR
SAID ANNUAL MEETING OR ANY ADJOURNMENTS THEREOF.
Signature__________________ Signature__________________Dated:___________,1998
NOTE: Please sign exactly as your name appears hereon. Executors,
administrators, trustees, etc. should so indicate when signing. If shares
are held jointly, each holder should sign.
