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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
CAMBRIDGE SOUNDWORKS, INC.
(Name of Subject Company)
CAMBRIDGE SOUNDWORKS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class of Securities)
132514-100
(CUSIP Number of Class of Securities)
THOMAS J. DEVESTO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAMBRIDGE SOUNDWORKS, INC.
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
(617) 332-5936
(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person(s) filing statement)
With a copy to:
JOSEPH D. S. HINKLEY, ESQ.
PEABODY & ARNOLD
50 ROWES WHARF
BOSTON, MASSACHUSETTS 02110
(617) 951-2100
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is Cambridge SoundWorks, Inc., a
Massachusetts corporation ("CSW" or the "Company"), and the address of its
principal executive offices is 311 Needham Street, Newton, Massachusetts
02164. The title of the class of equity securities to which this statement
relates is the Common Stock, without par value, of the Company (the "Common
Stock" or the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER
This statement relates to the tender offer by CSW Acquisition Corporation
("Purchaser"), a Massachusetts corporation and a wholly owned subsidiary of
Creative Technology Ltd., a Singapore corporation ("Creative" or "Parent"), to
purchase all of the outstanding Shares held by the Company's stockholders
other than Parent or its affiliates (such stockholders, the "Public
Stockholders" and such Shares, the "Publicly Held Shares") at $10.68 per
Share, net to the seller in cash (the "Offer Price"), upon the terms and
subject to the conditions set forth in Purchaser's Offer to Purchase dated
November 3, 1997 (the "Offer to Purchase") and the related Letter of
Transmittal (which together with the Offer to Purchase constitute the
"Offer"), copies of which are filed respectively as Exhibits 1 and 2 hereto
and are incorporated herein by reference in their entirety. The Offer is
disclosed in a Tender Offer Statement on Schedule 14D-1 dated November 3, 1997
(the "Schedule 14D-1") and in a Rule 13e-3 Transaction Statement on Schedule
13E-3 dated November 3, 1997 (the "Schedule 13E-3"), both of which are filed
with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules promulgated by the SEC thereunder. The Offer is being made by Purchaser
pursuant to an Agreement and Plan of Merger, dated as of October 30, 1997, by
and among Parent, Purchaser and the Company (as the same may be amended from
time to time, the "Merger Agreement"), a copy of which is filed as Exhibit 3
hereto and incorporated herein by reference in its entirety.
According to the Purchaser's Schedule 14D-1, the address of the principal
executive offices of Parent is 31 International Business Park, Creative
Resource, Singapore 609921, and the address of the principal executive offices
of the Purchaser is 1901 McCarthy Boulevard, Milpitas, California 95035.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
statement, are set forth in Item 1 above.
(b) Except as described herein, in Annex I attached hereto which is
incorporated herein by reference, and in the Company's Proxy Statement dated
September 29, 1997 relating to the Company's 1997 Annual Meeting of
Stockholders (the "1997 Proxy Statement") (filed as Exhibit 4 hereto and
incorporated herein by reference), to the knowledge of the Company, as of the
date hereof there are no material contracts, agreements, arrangements or
understandings, or any potential or actual conflicts of interest between the
Company or its affiliates and (1) the Company, its executive officers,
directors or affiliates, or (2) the Purchaser, its executive officers,
directors or affiliates.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement, a
copy of which appears as an Exhibit to the Tender Offer Statement on Schedule
14D-1 filed by the Purchaser and Parent with the SEC in connection with the
Offer. Such summary is qualified in its entirety by reference to the Merger
Agreement.
The Offer. The Merger Agreement provides for the commencement of the Offer
as promptly as reasonably practicable after the date thereof, but in no event
later than five business days after the initial public announcement of
Purchaser's intention to commence the Offer. The Merger Agreement further
provides that the Purchaser will not, without the consent of the Company,
accept for payment any Shares tendered pursuant to the
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Offer unless at least two-thirds of then issued and outstanding Shares (on a
fully diluted basis) will have been validly tendered and not withdrawn prior
to the expiration of the Offer, thereby satisfying the Minimum Share
Condition. The obligation of the Purchaser to accept for payment and pay for
Shares tendered pursuant to the Offer is subject to the satisfaction or waiver
of the Minimum Share Condition and certain other conditions that are described
in "THE OFFER -- Certain Conditions of the Offer" in the Offer to Purchase.
The Purchaser and Parent have agreed that no change in the Offer may be made
which decreases the Offer Price, changes the form of consideration payable in
the Offer or reduces the maximum number of Shares to be purchased in the Offer
or which imposes conditions to the Offer in addition to those described in
"THE OFFER -- Certain Conditions of the Offer" in the Offer to Purchase. The
Purchaser may (x) from time to time extend (and re-extend) the Offer, if at
the scheduled expiration date of the Offer any of the conditions to the Offer
have not been satisfied or waived, until such time as such conditions have
been satisfied or waived, (y) extend the Offer for any period required by any
rule, regulation, interpretation or position of the SEC or the staff thereof
applicable to the Offer; or (z) extend (and re-extend) the Offer for any
reason on one or more occasions for an aggregate period of not more than 20
business days beyond the latest expiration date that would otherwise be
permitted under clause (x) or (y) above, if on such expiration date at least
that number of Shares necessary to permit the Merger to be effected without a
meeting of the Company's stockholders in accordance with the Massachusetts
Business Corporation Law ("MBCL") have not been tendered.
The Merger. The Merger Agreement provides that as soon as practicable after
the purchase of Shares pursuant to the Offer and the satisfaction of the other
conditions set forth in the Merger Agreement and in accordance with the
relevant provisions of the MBCL, the Purchaser will be merged with and into
the Company (the "Merger"). As a result of the Merger, the separate corporate
existence of the Purchaser will cease and the Company will continue as the
Surviving Corporation and will become a wholly-owned subsidiary of Parent. At
the Effective Time (as defined in the Merger Agreement), each Share issued and
outstanding immediately prior to the Effective Time (other than Shares held in
the treasury of the Company, Shares owned by Parent, the Purchaser or any
subsidiary of Parent or the Company or Shares held by stockholders who will
have properly demanded and perfected appraisal rights under the MBCL) will be
cancelled and converted automatically into the right to receive the Offer
Price of $10.68 per share.
The Purchaser or the designated paying agent will be entitled to deduct and
withhold from the consideration otherwise payable pursuant to the Merger
Agreement to any holder of Shares such amounts that the Purchaser or the
paying agent is required to deduct and withhold with respect to the making of
such payment under the United States Internal Revenue Code of 1986, as amended
(the "Code"), the rules and regulations promulgated thereunder or any
provision of state, local or foreign tax law.
Pursuant to the Merger Agreement, each share of common stock, par value $.01
per share, of the Purchaser issued and outstanding immediately prior to the
Effective Time will be converted into one validly issued, fully paid and
nonassessable share of common stock, par value $.01 per share, of the
Surviving Corporation.
Promptly upon the purchase by the Purchaser of Shares in the Offer, and from
time to time thereafter, the Purchaser will be entitled to designate that
number of directors, rounded up to the next whole number, on the Company's
Board of Directors (the "Company Board") that equals the product of (i) the
total number of directors on the Company Board (giving effect to the election
of any additional directors pursuant to the Merger Agreement) and (ii) the
percentage that the number of Shares owned by the Purchaser, Parent and any
direct or indirect wholly owned subsidiary of Parent (including Shares
purchased in the Offer) bears to the total number of Shares outstanding at
such time, and to effect the foregoing the Company will upon request by the
Purchaser, at the Company's election, either increase the number of directors
comprising the Company Board or seek and accept resignations of incumbent
directors. The first date on which designees of the Purchaser will constitute
a majority of the Company Board is referred to as the "Cut-Off Date." At such
times, the Company will use its reasonable best efforts to cause individuals
designated by the Purchaser to constitute the same percentage of each
committee of the Company Board as such individuals represent on the Company
Board.
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Following the Cut-Off Date and prior to the Effective Time, the Company
Board will have at least one director who is neither designated by the
Purchaser, an employee of the Company nor otherwise affiliated with the
Purchaser (one or more of such directors, the "Independent Directors") and any
amendment of the Merger Agreement or the Articles of Organization or Bylaws of
the Company, any termination or amendment of the Merger Agreement by the
Company, any extension by the Company of the time for the performance of any
of the obligations or other acts of Parent or the Purchaser or any exercise or
waiver of any of the Company's rights thereunder, will require the concurrence
of a majority of the Independent Directors.
The Merger Agreement provides that the directors of the Purchaser at the
Effective Time will be the initial directors of the Surviving Corporation and
that the officers of the Company at the Effective Time will be the initial
officers of the Surviving Corporation. The Merger Agreement provides that, at
the Effective Time, the Articles of Organization of the Purchaser will be the
Articles of Organization of the Surviving Corporation; provided, however,
that, at the Effective Time, Article I of the Articles of Organization of the
Surviving Corporation will be amended to read as follows: "The name of the
corporation is Cambridge SoundWorks, Inc." The Merger Agreement also provides
that the Bylaws of the Purchaser will be the bylaws of the Surviving
Corporation.
At the Effective Time, each holder of an option to purchase shares of
Company common stock (a "Company Option") issued pursuant to the Company's
1993 Stock Option Plan (the "Stock Option Plan") will become entitled to
receive from the Surviving Corporation, for each such Company Option, an
amount in cash equal to the product of (i) the excess, if any, of the Merger
Price over the applicable exercise price of each such Company Option and (ii)
the number of Shares such holder could have purchased had such holder
exercised such Company Option immediately prior to the Effective Time, and
thereafter each such Company Option will be cancelled. The Stock Option Plan
will terminate as of the Effective Time and the Company will use reasonable
efforts to ensure that following the Effective Time no holder of options or
any participant in the Stock Option Plan has any right thereunder to acquire
any equity securities of the Company or the Surviving Corporation.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto, including
representations by the Company, Parent and the Purchaser as to corporate
status and the enforceability of the Merger Agreement against each such party
and by the Company as to its capitalization, compliance with law, the accuracy
of financial statements and filings with the SEC and the absence of certain
material adverse changes or events concerning the Company's business from June
29, 1997 to the date of the Merger Agreement.
Covenants of Parent, the Purchaser and the Company. Pursuant to the Merger
Agreement, the Company will, if required by applicable law in order to
consummate the Merger, duly call, give notice of, convene and hold a special
meeting of its stockholders as promptly as practicable following consummation
of the Offer for the purpose of considering and taking action on the Merger
Agreement and the transactions contemplated thereby (the "Stockholders'
Meeting"). At the Stockholders' Meeting, Parent and the Purchaser will cause
all Shares then owned by them to be voted in favor of the approval and
adoption of the Merger Agreement and the transactions contemplated thereby. In
the event that the Purchaser acquires such number of Shares that, when taken
together with the Shares previously owned by Parent and Purchaser, constitute
at least 90% of the outstanding Shares, the parties have agreed to take all
necessary and appropriate action to cause the Merger to become effective, in
accordance with Section 82 of the MBCL, as soon as reasonably practicable
after such acquisition, without a meeting of the stockholders of the Company.
The Merger Agreement provides that the Company will, if required by
applicable law, as soon as practicable following consummation of the Offer,
file a proxy statement with the SEC under the Exchange Act (the "Proxy
Statement"), and will use its best efforts to have the Proxy Statement cleared
by the SEC. Parent, the Purchaser and the Company will cooperate with each
other in the preparation of the Proxy Statement, and the Company will notify
Parent of the receipt of any comments of the SEC with respect to the Proxy
Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information and will provide promptly to Parent
copies of all correspondence between the Company or any representative of the
Company
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and the SEC. The Company will give Parent and its counsel the opportunity to
review and comment upon the Proxy Statement prior to its being filed with the
SEC and will give Parent and its counsel the opportunity to review and comment
upon all amendments and supplements to the Proxy Statement and participate in
the preparation of any written responses to requests for additional
information and replies to comments prior to their being filed with, or sent
to, the SEC. The Company and its counsel will be given the opportunity to
review and comment on the Offer documents and any amendments thereto prior to
the filing thereof with the SEC. Parent and the Purchaser will provide the
Company and its counsel with a copy of any written comments or telephonic
notification of any verbal comments Parent or the Purchaser may receive from
the SEC or its staff with respect to the Offer documents promptly after the
receipt thereof and will provide the Company and its counsel with a copy of
any written responses and telephonic notification of any verbal responses of
Parent, the Purchaser or their counsel. Each of the Company, Parent and the
Purchaser agrees to use reasonable efforts, after consultation with the other
parties, to respond promptly to all such comments of and requests by the SEC
and to cause the Proxy Statement and all required amendments and supplements
thereto to be mailed to the holders of Shares entitled to vote at the
Stockholders' Meeting at the earliest practicable time.
Pursuant to the Merger Agreement, the Company has agreed that neither it nor
any of its employees or directors will initiate or solicit any inquiries in
respect of, or make any proposal for, a Third Party Acquisition (as defined
below), or engage in any negotiations concerning a Third Party Acquisition;
provided, however, that if at any time prior to the acceptance for payment of
Shares pursuant to the Offer, the Company Board determines in good faith,
after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to the Company's stockholders under
applicable law, the Company may, in response to an unsolicited Third Party
Acquisition, (x) furnish only such information with respect to the Company as
was delivered to Parent and (y) participate in the discussions and
negotiations regarding such offer; and further provided, that the Company or
the Company Board may comply with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act with regard to any proposed Third Party Acquisition. The Company
has agreed to notify Parent promptly if any inquiries relating to or proposals
for a Third Party Acquisition are received by the Company or any negotiations
in connection with a possible Third Party Acquisition are sought to be
initiated or continued with the Company.
Except as set forth below, the Company Board has agreed not withdraw its
recommendation of the Offer or the Merger and other transactions contemplated
hereby or approve or recommend any Third Party Acquisition. Notwithstanding
the preceding sentence, if the Company Board determines that it is necessary
to do so in order to comply with its fiduciary duties to the Company's
stockholders under applicable law, the Company Board may withdraw or alter its
recommendation of the Offer or the Merger, or approve or recommend or cause
the Company to enter into an agreement with respect to a Superior Proposal (as
defined below), but in each case only (i) after providing written notice to
Parent advising it that the Company Board has received a Superior Proposal and
(ii) if Parent does not, within five business days (or within two business
days with respect to any amendment to any Superior Proposal) after Parent's
receipt of notice, make an offer which the Company Board determines in its
good faith judgment to be as favorable to the Company's stockholders as such
Superior Proposal; provided, however, that the Company will not be entitled to
enter into any agreement with respect to a Superior Proposal unless the Merger
Agreement is concurrently terminated by its terms. For purposes of the Merger
Agreement, "Third Party Acquisition" means the occurrence of any of the
following events: (i) the acquisition of the Company by merger or otherwise by
any person or entity (which includes a "person" as such term is defined in
Section 13(d)(3) of the Exchange Act) other than Parent, the Purchaser or any
affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of
30% or more of the total assets of the Company (other than the purchase of the
Company's products in the ordinary course of business); (iii) the acquisition
by a Third Party of 30% or more of the outstanding Shares; (iv) the adoption
by the Company of a plan of partial or complete liquidation or the declaration
or payment of an extraordinary dividend; (v) the repurchase by the Company of
30% or more of the outstanding Shares; or (vi) the acquisition by the Company
by merger, purchase of stock or assets, joint venture or otherwise of a direct
or indirect ownership interest or investment in any business whose annual
revenues, net income or assets is equal to or greater than 30% of the annual
revenues, net income or assets of the Company. For purposes of the Merger
Agreement, a "Superior Proposal" means any
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bona fide proposal to acquire directly or indirectly for consideration
consisting of cash and/or securities more than 50% of the Shares then
outstanding or all or substantially all the assets of the Company and
otherwise on terms which the Board of Directors of the Company by a majority
vote determines in its good faith judgment (based on consultation with
Hambrecht & Quist LLC ("Hambrecht & Quist") or another financial adviser of
nationally recognized reputation) to be reasonably capable of being completed
(taking into account all legal, financial, regulatory and other aspects of the
proposal and the person or entity making the proposal, including the
availability of financing therefor) and more favorable to the Company's
stockholders than the Offer and the Merger.
Pursuant to the Merger Agreement, the Company has covenanted and agreed
that, between the date of the Merger Agreement and the Cut-Off Date, unless
Parent otherwise agrees in writing: (i) the businesses of the Company and its
subsidiaries will be conducted only in, and the Company will not take any
action except in, the ordinary course of business and in a manner consistent
with past practice; (ii) the Company will endeavor to preserve substantially
intact the business organization of the Company, to keep available the
services of the current officers and employees of the Company and to preserve
the current relationships of the Company with customers, suppliers and other
persons with which the Company has significant business relations; and (iii)
the Company will not declare or pay dividends, split, combine or reclassify
its stock, issue convertible securities or issue rights, warrants or options
to purchase Shares other than shares issuable upon exercise of warrants or
Company Options outstanding as of the date of the Merger Agreement; amend its
Articles of Organization or Bylaws; acquire or agree to acquire any business
or any corporation or other business organization or division thereof;
authorize any single capital expenditure which is in excess of $50,000 or
capital expenditures which are, in the aggregate, in excess of $150,000;
increase the compensation payable to its officers or employees, except for
increases in accordance with past practices, or grant any severance or
termination pay to, or enter into any employment or severance agreement with
any director, officer or other employee of the Company, or establish or amend
any collective bargaining, compensation, stock option, or other arrangement
for the benefit of any director, officer or employee; make any tax election or
settle or compromise any material federal, state, local or foreign income tax
liability; pay or settle any suit, claim, liability or obligation, other than
the payment, discharge or satisfaction, in the ordinary course of business and
consistent with past practice, of liabilities reflected or reserved against in
the Company's balance sheet dated as of June 29, 1997 as filed by the Company
with the SEC in its Annual Report on Form 10-K for its fiscal year ended June
29, 1997 or subsequently incurred in the ordinary course of business and
consistent with past practice; or take any action that would result in any of
the representations and warranties of the Company set forth in this Agreement
becoming untrue in any material respect or in any of the conditions to the
Offer or any of the conditions to the Merger not being satisfied.
The Company and Parent are each obligated under the Merger Agreement to give
each other prompt notice of (i) the occurrence, or non-occurrence, of any
event the occurrence, or non-occurrence, of which would be likely to cause any
representation or warranty contained in the Merger Agreement to be untrue or
inaccurate and (ii) any failure of the Company, Parent or Purchaser, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it thereunder.
The parties have agreed that all rights to indemnification by the Company
existing as of the date of the Merger Agreement in favor of each present and
former director and officer of the Company as provided in the Company's
Articles of Organization or Bylaws or pursuant to any other agreements in
effect as of such date will survive the Merger and will continue in full force
and effect for a period of at least six years from the Effective Time. The
Merger Agreement also provides that the Surviving Corporation will use
commercially reasonable efforts to maintain in effect for six years from the
Effective Time directors' and officers' liability insurance covering those
persons who are currently covered by the Company's directors' and officers'
liability insurance policy on terms comparable to such existing insurance
coverage (including coverage amounts); provided, however, that in no event
will the Surviving Corporation be required to expend more than an amount per
year equal to 125% of current annual premiums paid by the Company for such
insurance. The Surviving Corporation's obligation to maintain such insurance
will, however, terminate at such time following the first anniversary of the
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Merger Agreement as Parent, in its sole discretion, agrees in writing to
assume in all respects the general indemnification obligations of the Company
with respect to its directors and officers.
Pursuant to the terms of the Merger Agreement and subject to the conditions
thereof, each of the parties thereto will use its reasonable efforts to take,
or cause to be taken, all appropriate action, and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
the Merger Agreement, including, without limitation, using its reasonable
efforts to obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with the Company and its subsidiaries as are necessary for the consummation of
the transactions and to fulfill the conditions to the Offer and the Merger.
Under the Merger Agreement, Parent and the Company agree to consult with one
another before issuing any press release or otherwise making any public
statements with respect to the Merger Agreement or the transactions
contemplated thereby. Parent and the Company further agree not to issue any
such press release or make any such public statement prior to such
consultation, except as may be required by law or any listing agreement with a
national securities exchange to which Parent or the Company is a party.
Conditions to the Merger. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the satisfaction
at or prior to the Effective Time of the following conditions: (a) to the
extent required by the MBCL and the Company's Articles of Organization and
Bylaws, the Merger Agreement, the Merger and the transactions contemplated
thereby shall have been approved and adopted by the affirmative vote or
consent of the stockholders of the Company; (b) no foreign, United States or
state governmental authority or other agency or commission or foreign, United
States or state court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or
permanent) which is then in effect and has the effect of making the
acquisition of Shares by Parent or the Purchaser or any affiliate of either of
them illegal or otherwise restricting, preventing or prohibiting consummation
of the transactions contemplated by the Merger Agreement, provided, however,
that each of the parties shall have used its reasonable efforts to prevent the
entry of any such injunction or other order and to appeal as promptly as
practicable any injunction or other order that may be entered; (c) the waiting
period applicable to the consummation of the Merger under the Hart-Scott-
Rodino Act ("HSR") shall have expired or been terminated, and all other
required governmental filings and consents shall have been made or obtained,
other than the filing of the Articles of Merger; (d) the Purchaser shall have
purchased all Shares validly tendered and not withdrawn pursuant to the Offer;
(e) the representations and warranties of the Company, Parent and the
Purchaser set forth in the Merger Agreement shall be true and correct in all
material respects as of the date of the Merger Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date of the Merger as though made on and as of the Closing Date;
and (f) the Company, Parent and the Purchaser shall have performed in all
material respects all obligations required to be performed by each of them
under the Merger Agreement at or prior to the Closing Date of the Merger.
Termination; Certain Payments; Fees and Expenses. The Merger Agreement may
be terminated and the Merger may be abandoned at any time prior to the
Effective Time, notwithstanding any requisite approval of the Merger Agreement
and the transactions contemplated thereby by the stockholders of the Company:
(a) by mutual written consent duly authorized by the Boards of Directors of
the Company, Parent and the Purchaser; (b) by either Parent or the Company if
any court of competent jurisdiction or other governmental authority will have
issued an order, decree, ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the acceptance for payment of,
or payment for, Shares pursuant to the Offer or the Merger and such order,
decree, ruling or other action will have become final and nonappealable; (c)
by either Parent or the Company if (i) the Offer will have terminated or
expired in accordance with its terms without the Purchaser having accepted for
payment any Shares pursuant to the Offer; or (ii) the Purchaser will not have
accepted for payment any Shares pursuant to the Offer within 120 days
following the commencement of the Offer; provided, however, that the right to
terminate the Merger Agreement will not be available to any party whose
failure (or failure of its affiliates) to perform in any material respect any
of its obligations under the Merger Agreement results in the failure of any
condition set forth in Annex I of the Merger Agreement or if the failure
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of such condition results from facts or circumstances that constitute a
material breach of a representation or warranty under the Merger Agreement by
such party; (d) by Parent if (i) prior to the purchase of Shares pursuant to
the Offer, (A) the Company Board or any committee thereof will have withdrawn
or modified in a manner adverse to the Purchaser or Parent its approval or
recommendation of the Offer, the Merger Agreement, the Merger or any other
transaction contemplated by the Merger Agreement; (B) the Company Board or any
committee thereof will have recommended to the stockholders of the Company
acceptance of a Third Party Acquisition; (C) the Company will have entered
into any definitive agreement with respect to a Third Party Acquisition; or
(D) the Company Board or any committee thereof will have resolved to do any of
the foregoing; or (ii) the Company will have breached in any material respect
any of its representations, warranties, covenants or other agreements
contained in the Merger Agreement which breach cannot be or has not been cured
20 days after the giving of written notice to the Company; or (e) by the
Company if (i) the Company Board will have withdrawn or modified in a manner
adverse to the Purchaser or Parent its approval or recommendation of the
Offer, the Merger Agreement or the Merger in order to approve the execution by
the Company of a definitive agreement providing for the transactions
contemplated by a Superior Proposal, provided that the Company will have
complied with the provisions of the Merger Agreement, including the notice
provisions therein, and will have made simultaneous payment of the fee
contemplated by the Merger Agreement, as described below; or (ii) Parent or
the Purchaser will have breached in any material respect any of their
respective representations, warranties, covenants or other agreements
contained in the Merger Agreement which breach cannot be or has not been cured
20 days after the giving of written notice to Parent or the Purchaser, as
applicable, except, in any case, for such breaches which are not reasonably
likely to affect adversely Parent's or the Purchaser's ability to complete the
Offer or the Merger.
If the Merger Agreement is terminated, the Merger Agreement will become void
and of no effect with no liability on the part of any party hereto, except for
fraud and for willful breach of a material obligation contained herein and
except that the certain agreements contained in the Merger will survive the
termination hereof.
In the event that: (i) the Merger Agreement is terminated (A) pursuant to
Section 8.1(d)(i) or Section 8.1(e)(i) of the Merger Agreement, or (B)
pursuant to Section 8.1(c) or 8.1(d)(ii) of the Merger Agreement, to the
extent that the termination or the failure to accept any Shares for payment,
as the case may be, will relate to the intentional failure of the Company to
perform in any material respect any material covenant or agreement of it
contained in the Merger Agreement or the intentional material breach by the
Company of any material representation or warranty of it contained in the
Merger Agreement; or (ii) any person will have commenced, publicly proposed or
communicated to the Company a proposal with respect to a Third Party
Acquisition and (A) the Offer will have remained open for at least 20 business
days, (B) the Minimum Share Condition will not have been satisfied, (C) the
Merger Agreement will have been terminated and (D) the Company will have
consummated a Third Party Acquisition with any person other than Parent or any
of its affiliates before or within 12 months after the date of such
termination, then, in any such event, the Company will pay Parent promptly
(but in no event later than 1 business day after the first of such events will
have occurred) a fee of $1,250,000, plus an amount, not to exceed $750,000,
equal to Parent's actual and reasonably documented out-of-pocket fees and
expenses incurred by Parent and the Purchaser in connection with the Offer,
the Merger, the Merger Agreement and the consummation of the transactions
contemplated thereby, which amounts will be payable in immediately available
funds.
In the event that (i) Parent or the Purchaser shall willfully or
intentionally breach in any material respect any of their respective
representations, warranties, covenants or other agreements contained in the
Merger Agreement and as a result thereof the Company shall terminate the
Merger Agreement pursuant to Section 8.1 (e)(ii) of such agreement or (ii)
Parent shall elect to terminate the Merger Agreement and fail to proceed to
consummate the Offer or the Merger after all applicable conditions shall have
been satisfied, then, in either of such events, Parent shall pay to the
Company promptly (but in no event later than one business day after the date
of such termination) a fee of $1,250,000, plus an amount, not to exceed
$400,000, equal to the Company's actual and reasonably documented out-of-
pocket fees and expenses incurred by the Company in connection with the Offer,
the Merger, the Merger Agreement and the consummation of the transactions
thereby, which amounts
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shall be payable in immediately available funds. Such payment by Parent to the
Company shall represent the sole and exclusive remedy at law or in equity to
which the Company and its officers, directors, representatives and other
affiliates shall be entitled in the event the Merger Agreement shall be
terminated in the circumstances contemplated by clauses (i) and (ii) of this
paragraph.
In the event that either the Company or Parent fails to pay any amounts
owing pursuant to the foregoing when due, interest will be paid on such unpaid
amounts, commencing on the date such amounts became due, at a rate equal to
the rate of interest publicly announced by Bank of America NT&SA from time to
time in San Francisco, California, as such bank's "reference rate" plus 3%.
Except as set forth above and in "THE OFFER -- Fees and Expenses" in the
Offer to Purchase, all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be paid by the
party incurring such fees and expenses, whether or not the transactions
contemplated by the Merger Agreement are consummated.
INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER
In considering the recommendations of the Company Board with respect to the
Offer and the Merger and the fairness of the consideration to be received in
the Offer and the Merger, stockholders should be aware that certain officers
and directors of the Company have interests in the Offer and the Merger which
are described below and which may be in addition to their interests as
stockholders of the Company. Stockholders also should be aware that Parent and
the Purchaser have certain interests that present actual or potential
conflicts of interest in connection with the Offer and the Merger. The Company
Board was aware of these actual and potential conflicts of interest and
considered them along with the other matters described in Item 4(b),
Recommendations of the Company Board; Fairness of the Offer and the Merger"
below.
Company Stock Option Plan. In 1995 the Company's 1993 Stock Option Plan was
amended to provide that, in the event of a transaction such as that
contemplated by the Offer, all outstanding stock options under such plan will
become fully vested and exercisable with respect to 100% of the Shares covered
thereby. If the Purchaser purchases Shares in the Offer and the Minimum Share
Condition is not waived, the vesting referred to above will be deemed to occur
immediately prior to such purchase.
The following table sets forth the number of Company options (if fully
vested) held by each director and officer of the Company and the net value to
be received by reason of the consummation of the Offer.
<TABLE>
<CAPTION>
NAME TITLE NET VALUE
---- ----- ----------
<S> <C> <C>
Thomas J. DeVesto President & CEO $1,281,650
Wayne P. Garrett Vice President-Finance $ 275,550
Thomas J. Hannaher Vice President-Marketing $ 246,475
Robert S. Mainiero Vice President-Business $ 290,550
Sandy Ruby Vice President-Retail $ 274,350
Thomas E. Brew, Jr. Director $ 37,440
Franklin S. Browning, Jr. Director $ 42,400
Leo Kahn Director $ 37,440
Peter B. Seamans Director $ 54,440
</TABLE>
Indemnification and Insurance. Under the MBCL, corporations incorporated
under the laws of the Commonwealth of Massachusetts are permitted to indemnify
their current and former directors, officers, employees and agents under
certain circumstances against certain liabilities and expenses incurred by
them by reason of their serving in such capacities. The Company's Articles of
Organization provide that each director and officer will be indemnified by the
Company to the fullest extent permitted under the MBCL against liabilities
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and expenses incurred in connection with any threatened, pending or completed
legal action or proceeding to which he or she may be made a party or
threatened to be made a party by reason of being a director of the Company or
a predecessor company, or serving any other enterprise as a director or
officer at the request of the Company. The directors and officers of the
Company have entered into indemnification agreements with the Company for the
purpose of confirming such rights. The Company has also purchased directors'
and officers' liability insurance for the benefit of these persons. The Merger
Agreement provides that the indemnification rights of the directors and
officers of the Company set forth in the Surviving Corporation's charter
documents will not for a period of at least six years be modified in a manner
that adversely affects such persons. Furthermore, Parent has confirmed in the
Merger Agreement that it will cause the Surviving Corporation to honor the
existing indemnification agreements with these persons. And finally, the
Surviving Corporation will be obligated to maintain the directors' and
officers' insurance at the current benefit level for a period of six years
following the closing of the Merger unless, at a time following the first
anniversary of the date of the Merger Agreement, Parent agrees to directly
assume the indemnification obligations of the Surviving Corporation described
above. In that event the Surviving Corporation will not be required to
continue the insurance coverage. See Item 3(b), "The Merger Agreement--
Covenants of Parent, the Purchaser and the Company" above.
Change of Control and Severance Agreement. Mr. Wayne Garrett, Vice
President-Finance and Chief Financial Officer of the Company, has entered into
a letter agreement with the Company, dated as of August 4, 1997, which
provides that in the event he is terminated without cause within twelve months
after a change of control of the Company, he will be entitled to severance pay
in the amount of one times his highest annual base salary during the three
years prior to termination of employment. If Mr. Garrett is terminated without
cause absent a change of control event, he will be entitled to three months'
severance pay. Mr. Garrett's annual base salary for the fiscal year ending
June 29, 1997 was approximately $144,000. A "change of control" would be
deemed to have taken place if (i) the Company Board appoints a new Chief
Executive Officer, or (ii) in connection with any tender or exchange offers or
other change in share ownership, a merger or other business combination, or a
sale of assets, the persons who were Directors of the Company before such
transaction cease to constitute a majority of the Company Board after such
transaction. Consummation of the Offer will be deemed a "change of control"
for purposes of Mr. Garrett's letter agreement. A "termination of employment"
includes a resignation by Mr. Garrett in response to any material diminution
of his duties and responsibilities from those currently held by him as Chief
Financial Officer of the Company. "Cause" is defined as willful misconduct,
conviction of a felony or other crime involving moral turpitude, or fraud,
embezzlement or other conduct involving material dishonesty.
INTERCOMPANY ARRANGEMENTS BETWEEN PARENT AND THE COMPANY
Common Stock and Warrant Purchase Agreement. Parent and the Company entered
into a Common Stock and Warrant Purchase Agreement dated as of February 20,
1997 (the "Common Stock and Warrant Purchase Agreement"), pursuant to which
Parent purchased 912,294 shares of Common Stock of the Company, at a purchase
price of $5.25 per share, and a warrant to purchase 257,314 shares of Common
Stock of the Company at an exercise price of $6.00 per share.
Common Stock Purchase Warrant. Pursuant to the Common Stock and Warrant
Purchase Agreement, on February 28, 1997, Parent purchased a warrant to
purchase 257,314 shares of Common Stock of the Company (the "Warrant") for a
consideration of $1,000. The exercise price of the shares under the Warrant is
$6.00 per share. The Warrant may be exercised at any time prior to February
28, 2001, provided that (i) the Company will have received a blanket purchase
order from Parent within twenty days of the issuance of the Warrant for the
purchase of at least $3,000,000 of the Company's products during the first
twelve months after the issuance of the Warrant and (ii) concurrently with the
issuance of such purchase order, Parent delivers funds in the amount of
$1,000,000 to the Company to be applied against purchase orders issued by
Parent for the Company's products. Parent has fulfilled the foregoing
conditions and is entitled to exercise the Parent Warrant.
Investors' Rights Agreement. Parent and the Company entered into an
Investors' Rights Agreement dated as of February 28, 1997 (the "Investors'
Rights Agreement"), pursuant to which the Company granted Parent
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(i) certain rights to register the shares of Common Stock (including shares
issuable upon exercise of the Warrant) purchased by Parent under the Common
Stock and Warrant Purchase Agreement with the SEC, (ii) so long as Parent holds
at least 456,142 shares of Common Stock, a right of first refusal to purchase,
on a pro rata basis, any new securities proposed to be issued by the Company,
subject to certain exceptions, (iii) so long as Parent holds at least 250,000
shares of Common Stock, a right to receive annual, quarterly and monthly
financial statements from the Company, and (iv) so long as Parent holds at
least 456,147 shares of Common Stock, a right to designate one nominee for
election to the Company Board or, if no director on the Company Board is a
designee of Parent, a right to attend meetings of the Company Board as a
nonvoting observer.
Voting Agreement. Parent, the Company, Henry E. Kloss and Thomas J. DeVesto
entered into a Voting Agreement dated as of February 28, 1997, pursuant to
which (i) the Company agreed, at all elections of directors, to nominate one
person designated by Parent, and (ii) Henry Kloss and Thomas DeVesto agreed to
vote all their shares for the election of such nominee. This Voting Agreement
terminates upon the earlier of ten years from the date of the agreement or at
such time that Parent holds less than 456,147 shares of Common Stock of the
Company.
Exclusive Distribution Agreement. Parent and the Company entered into an
Exclusive Distribution Agreement dated as of February 28, 1997 (the
"Distribution Agreement"), pursuant to which the Company granted Parent an
exclusive right to distribute and sell the Company's multimedia products.
Parent's right of exclusive distribution of the Company's multimedia products
is subject to certain performance milestones described in the Distribution
Agreement.
Non-Disclosure Agreement. The Company and Creative Labs, Inc., a wholly owned
subsidiary of Parent ("Creative Labs"), entered into a Mutual Confidentiality
and Non-Disclosure Agreement dated October 18, 1996, pursuant to which the
Company and Creative Labs agreed to treat and maintain all proprietary and
confidential information received from the other in confidence. As a term of
the Merger Agreement, Parent and the Company have agreed that all of the
information passed between them in connection with their respective review and
evaluation of the Offer and the Merger would be deemed subject to this
Agreement.
DeVesto Employment Agreement. On February 18, 1997, Mr. DeVesto, President
and Chief Executive Officer of the Company, entered into an Employment
Agreement with the Company providing for the employment of Mr. DeVesto for a
three-year period terminating on February 17, 2000. As compensation for such
service for the first year under the Employment Agreement, Mr. DeVesto is to
receive an annual base salary of not less than $385,000. This salary will be
subject to adjustment as determined in the discretion of the Company Board.
Under the Employment Agreement, Mr. DeVesto has also agreed to certain non-
competition and non-solicitation provisions effective during the term of his
employment with the Company and for a one-year period thereafter. Both the
Company and Mr. DeVesto have agreed to give the other six months' prior notice
in the event that one of them intends to terminate the employment of Mr.
DeVesto. In the event that either the Company or Mr. DeVesto elects to
terminate his employment with the Company at any time, Mr. DeVesto will be
entitled to receive a lump sum payment equal to one-year's base salary in
consideration for his agreements with respect to non-competition and non-
solicitation. In connection with the negotiation of the Merger Agreement and
the transactions contemplated thereby, Parent requested that Mr. DeVesto agree
to certain clarifications to his Employment Agreement, principally relating to
the effect of the Company failing to give a full six months' notice prior to
terminating Mr. DeVesto's employment with the Company. Mr. DeVesto consented to
these clarifications, and the Employment Agreement was amended and restated to
incorporate these changes effective October 29, 1997.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) The Company's Board of Directors (the "Company Board") (with the director
who is the designee of Parent not present or participating in any such meeting
or discussion of the Company Board) has unanimously determined that each of the
Offer and the Merger is fair to, and in the best interests of, the Public
Stockholders of the Company and the Company Board (with the director who is a
designee of Parent not present or
11
<PAGE>
participating in any pertinent meeting or discussion of the Company Board)
unanimously recommends that the Public Stockholders of the Company accept the
Offer and tender their Shares pursuant to the Offer.
(b) BACKGROUND OF THE OFFER AND THE MERGER.
In September 1996 Mr. Robert Mainiero, Vice President of the Company, and Mr.
Chris Kukshtel, Product Marketing Manager of Creative Labs had an initial
telephone discussion regarding the possibility of Parent distributing the
Company's multimedia speaker products. In mid-September, a meeting occurred
between the two gentlemen to continue these discussions.
On October 7, 1996 in Milpitas, California, representatives of the companies
met at Creative Labs' headquarters. Company representatives demonstrated a
number of the Company's speaker products. The parties also discussed
distribution plans for various products. Present at this meeting were Mr.
Thomas DeVesto, President and Chief Executive Officer of the Company, Mr.
Maineiro and Mr. Fred Pinkerton, a Vice President of the Company, Mr. Craig
McHugh, Vice President, General Manager of Creative Labs, Mr. Hock Leow, Vice
President, Multimedia Products of Creative Labs, John Danforth, Vice President
and General Counsel of Creative Labs, Greg Woock, Vice President of Sales for
Creative Labs and Mr. Kukshtel.
Following this meeting, via a series of telephone conferences and a face-to-
face meeting at Comdex in Las Vegas, Nevada during the second week of November
1996, Mr. DeVesto and Mr. McHugh met and continued discussing the terms
regarding a potential distributor relationship, including product launches,
product pricing and distribution channels.
During a conference call the first week of January 1997 among Mr. DeVesto,
Mr. McHugh, Mr. Mainiero, and Ken Fong, Marketing Manager of Creative Labs, the
parties decided that they wanted to pursue the distributor relationship. Near
the end of this conversation, Mr. McHugh inquired as to the possibility of
Parent making an equity investment in the Company. At the conclusion of this
call, Mr. DeVesto stated that he would discuss the possibility of such equity
investment with the Company Board.
Further discussions regarding a potential equity investment, possible product
launch plans, plans for branding existing and future products and specific
potential parameters of an exclusive distribution arrangement for Parent with
respect to the Company's current and future multimedia speaker products
occurred among Messrs. DeVesto, Mainiero and Fong at the Consumer Electronics
Show in Las Vegas during the second week of January 1997. During these
meetings, Mr. Devesto stated that the Company Board had authorized him to
continue discussions with Parent regarding a potential equity investment by the
Parent.
In the last week of January 1997, a meeting took place in the offices of
Creative Labs in Milpitas, California to continue these discussions. Present at
the meeting were Mr. DeVesto, Mr. Mainiero, Mr. Fong, Mr. Pinkerton, Mr. Sim
Wong Hoo, Chairman and Chief Executive Officer of Parent, Mr. Ng Keh Long, Vice
President, Corporate Treasurer and Acting Chief Financial Officer of Parent,
and Mr. Danforth. The meeting consisted of a presentation by Company management
regarding the Company's business and a demonstration of a prototype of PC
Works(TM) -- a three piece multimedia speaker consisting of two speakers and a
subwoofer. After substantial negotiation, Mr. DeVesto stated that he would
present a proposal to the Company Board in which Parent would, among other
things, (i) purchase 19.5% of the Company's fully diluted equity, and (ii)
receive a warrant to purchase an additional 5.5% of the Company's fully diluted
equity.
During the last week of January 1997, Venture Law Group, outside counsel to
Parent, distributed draft investment and distribution agreements to Peabody &
Arnold, outside counsel to the Company.
During the first week of February 1997, Mr. Leow, Mr. Fong and Ms. Erika
Rottenberg, Associate Counsel for Creative Labs, visited the Company's
headquarters in Newton, Massachusetts. Mr. Leow, Mr. Fong and Ms. Rottenberg
were introduced to the Company Board, toured the Company's facilities, met a
number of the Company's employees, and discussed plans regarding product
distribution and corporate governance issues with Mr. DeVesto, Mr. Mainiero and
Mr. Wayne Garrett, Vice President of Finance and Chief Financial Officer of
12
<PAGE>
the Company. The parties also discussed a number of due diligence items and
plans regarding product and packaging issues. Ms. Rottenberg also met with
Donald Burnham and William Kelly of Peabody & Arnold to discuss and negotiate
drafts of the agreements necessary to consummate the acquisition and
distribution relationship.
Various due diligence meetings and telephone conferences among the parties
occurred throughout early and mid February 1997.
On February 20, 1997, the Company and Parent entered into definitive
agreements providing for the purchase by Parent of 912,294 shares of Company
Common Stock at a price of $5.25 per share and issuance to Parent of a warrant
to acquire an additional 257,314 shares of Company Common Stock at an exercise
price of $6.00 per share, subject to Parent meeting certain performance
milestones. These transactions closed on February 28, 1997. As a part of the
transaction, Parent was granted the right to designate one nominee for
election to the Company Board.
Following completion of the initial equity investment, Parent and the
Company began implementing the distribution arrangement for multimedia speaker
products. Early on in the parties' relationship, Parent began to realize that
the pricing mechanics of the distribution agreement did not permit it to be
competitive in the OEM and bulk speaker businesses, which businesses represent
a majority of the speakers sold worldwide.
Several meetings between the companies occurred between May and July 1997
regarding the working relationship and the Company's new products--PCWorks and
two-piece speaker products. During these meetings, the subject of product
pricing under the distribution arrangement continued to be discussed. During
the third week of June 1997, the parties participated in the E3 Conference in
Atlanta, Georgia, and held meetings with their respective customers. Mr.
DeVesto and Mr. McHugh also met with each other during the conference to
discuss a number of items, including the Parent's belief that the prices the
Company was charging Parent for the Company's products were too high for
Parent to meet the Company's and Parent's mutual distribution volume goals,
and the Company's belief that it would need to increase the prices it was
charging to Parent to meet the Company's profitability goals. Mr. DeVesto and
Mr. McHugh discussed a number of possible solutions to the product pricing
issue, including the possibility of Parent increasing its equity stake in the
Company, modifying the distribution arrangement from an exclusive relationship
to a non-exclusive relationship, or terminating the distribution agreement.
Discussions regarding the Parent acquiring more equity in the Company
continued throughout the summer months. During a telephone conversation
between Mr. DeVesto and Mr. McHugh on August 8, 1997, Mr. DeVesto and Mr.
McHugh agreed that they would present a proposal to their respective teams
regarding Parent acquiring all of the remaining equity of the Company to
determine whether there was any true interest in pursuing such a transaction.
Mr. McHugh of Creative Labs was appointed to the Company Board at a meeting
of the Company Board of Directors held on August 13, 1997. Mr. McHugh excused
himself from the Company Board meeting when the Company Board discussed the
Company's margins, channel profitability and prospective strategic business
proposals and direction.
In the second week of September, Hambrecht & Quist was informally retained
by the Company to assist it in connection with the evaluation of the Company's
various strategic alternatives. This arrangement was formalized in an
engagement letter dated September 29, 1997.
After receiving positive indications from both teams, a meeting was held at
Creative Labs' headquarters in Milpitas, California on September 19, 1997
between teams representing the Company and Parent to continue discussions.
Messrs. DeVesto and Garrett from the Company, and Mr. Ng, Mr. McHugh, Mr.
Danforth, Mr. Fong and Ms. Rottenberg from Parent and Creative Labs
participated in the meeting, as did Mr. David Golden, of Hambrecht & Quist
representing the Company. At this meeting, Mr. Ng indicated that Parent was
prepared to purchase all of the remaining outstanding shares at a price of
$8.40 per share, representing a premium of approximately 60% over the then-
current trading price for the Company's Shares. The representatives of the
13
<PAGE>
Company informed Mr. Ng that they would not be in a position to support a price
at this level, but did indicate that they would discuss the matter with the
Company Board. During this meeting, Mr McHugh indicated his tentative intention
to withdraw from the Company Board in order to avoid any potential conflict of
interest in connection with the Company Board's consideration of a possible
transaction involving Parent acquiring all remaining equity of the Company.
During the fourth week of September, Mr. DeVesto contacted the representatives
of Parent to convey that the Company Board had considered the Parent's proposal
of $8.40 per share and rejected it.
On September 23 and 24, meetings occurred in Lisbon, Portugal between Mr. Sim
and Mr. DeVesto in which Mr. Sim indicated on a preliminary basis that Parent
might consider raising the offered price to a price in the range of $10.00 per
share. Discussions between the two parties continued, with representatives of
the Company inquiring as to the possibility of whether Parent might be willing
to raise its offer. The Company Board discussed the proposal at a meeting held
on September 29, 1997.
During the first week of October 1997, a telephone discussion occurred among
Mr. McHugh, Mr. Danforth, Mr. Fong and Mr. Golden in which Mr. McHugh stated
that the highest price that Parent would be willing to pay was $10.68 per
Share. Mr. Golden indicated that he would present and recommend this price to
the Company Board at a meeting to be convened on October 3, 1997. Within a few
days Mr. Golden telephoned Mr. Danforth and informed him that the Company
wished to proceed toward definitive agreements on the basis of the $10.68 per
Share price.
On October 6, 1997, the Company received an inquiry from The Nasdaq Stock
Market regarding the fact that the trading volume in the Company's stock had
been unusually high for the day. There was also an increase in the trading
price in the Company's Common Stock. In response to this, the Company issued a
press release stating that the Company was in discussions with Parent regarding
a possible acquisition transaction. Trading in the Company's Stock was halted
for a period of time on this day.
At the direction of the two parties, counsel for each party began to make
preparations for the transactions beginning in the first week of October.
Various due diligence items were exchanged by the parties. Draft definitive
documents were circulated to the parties by Venture Law Group on October 10,
1997.
On October 15, 1997, Mr. Sim and Mr. Ng from Parent, Mr. McHugh and Ms.
Rottenberg from Creative Labs, and Mr. Michael Graves of Price Waterhouse,
independent accountants to Parent, met at the Company's headquarters with Mr.
DeVesto, Mr. Garrett and Mr. Mainiero of the Company, Joseph Hinkley and Laurie
Bazarian from Peabody & Arnold, Mr. Golden and Mr. Frank Pittilo of Hambrecht &
Quist, and George Neble from Arthur Andersen, independent accountants to the
Company. The representatives from Parent and Creative Labs took a tour of the
Company's headquarters and were introduced to and met with a number of the
Company's department heads in an effort to allow the Parent and Creative Labs
to understand the Company's operating procedures and plans. Mr. Sim, Mr. Ng and
Mr. McHugh, along with Mr. DeVesto, visited two of the Company's stores. Ms.
Rottenberg, Mr. Hinkley and Ms. Bazarian discussed a number of due diligence
items and, in a phone conference with Mr. Steven Tonsfeldt of Venture Law
Group, worked towards negotiating the terms of the Merger Agreement. Mr.
Graves, Mr. Garrett and Mr. Pittilo discussed a number of financial issues
relating to the transaction.
During the remainder of October, the parties continued to negotiate the
transaction documents.
On October 27 and 28, 1997, the Company Board held meetings to discuss the
Offer and the Merger. At the October 27th meeting, Hambrecht & Quist made a
presentation of certain financial analyses it had performed in connection with
its review of the Offer and the Merger. On October 30, 1997 Hambrecht & Quist
rendered its opinion to the Company Board that the consideration to be received
by the holders of Company's Common Stock (other than Parent and the Purchaser)
pursuant to the Offer and the Merger was fair to such holders from a financial
point of view. Representatives of Peabody & Arnold also gave a presentation
during these meetings regarding the various legal aspects of the transaction as
well as a summary of the principal terms of the Merger Agreement. At the
conclusion of these meetings, the Company Board authorized the officers of the
Company to
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<PAGE>
proceed with the transaction on terms consistent with those presented and to
execute the Merger Agreement. Mr. McHugh of Creative Labs did not attend or
participate in any meeting of the Company Board at which the proposed
transaction with Parent was discussed or considered, nor was his input sought
by the Company Board in connection with the proposed transaction.
At various times through the month of October, the Board of Directors of
Parent discussed on an informal basis the proposed Offer and Merger and terms
of the Merger Agreement. At the conclusion of these discussions, by execution
of resolutions by circular dated October 30, 1997, the Board of Directors of
Parent voted unanimously to approve the Merger Agreement and authorized the
officers of Parent to proceed with the transaction on terms consistent with
those discussed.
The Merger Agreement was executed on October 30, 1997, and Parent and the
Company issued a joint press release before the opening of the U.S. stock
markets on October 31, 1997 announcing such execution.
On November 3, 1997, the Purchaser commenced the Offer.
RECOMMENDATIONS OF THE COMPANY BOARD; FAIRNESS OF THE OFFER AND THE MERGER
The Company Board. The Company Board (with the director who is the designee
of Parent not present or participating in any such meeting or discussion of
the Company Board) has unanimously determined that each of the Offer and the
Merger is fair to, and in the best interests of, the stockholders of the
Company (other than Parent and Purchaser), and the Company Board (with the
director who is the designee of Parent not present or participating in any
such meeting or discussion of the Company Board) unanimously recommends that
the Company's stockholders accept the Offer and tender their Shares pursuant
to the Offer. In reaching these determinations, the Company Board considered
the following factors, each of which, in the view of the Company Board,
supported such determinations:
(i) the historical market prices and recent trading activity of the Shares,
including the fact that the $10.68 per Share cash consideration to be received
by the stockholders of the Company (other than Parent and Purchaser) in the
Offer and Merger represents a premium of approximately 50% over the reported
closing price on the last full trading day preceding the public announcement
of the fact that the Company and Parent were in discussions regarding a
possible acquisition transaction, and a premium of approximately 72% and 101%
over the average closing price for the one-month and three-month periods,
respectively, preceding such date, and the fact that such price would be
payable in cash, thus eliminating any uncertainties in valuing the
consideration to be received by the Company's stockholders;
(ii) the history of the negotiations between the Company Board and its
representatives and Parent and its representatives, including the Company
Board's belief that Parent and the Purchaser would not further increase the
Offer Price and that $10.68 per Share was the highest price that could be
obtained from Parent and the Purchaser;
(iii) the opinion of Hambrecht & Quist that the consideration to be received
by holders of the Company's common stock (other than Parent and the Purchaser)
pursuant to the Offer and the Merger was fair to such stockholders from a
financial point of view, and the report and analysis presented by Hambrecht &
Quist in connection therewith;
(iv) Parent's role as a significant wholesale purchaser of the Company's
products, representing a significant portion of the Company's actual and
projected revenues and the possibility that, if the Merger were not
consummated, the Company and Parent might be unable to resolve a basis upon
which to further pursue their exclusive distribution arrangements, thereby
potentially impacting the Company's future growth and profits. In addition, if
the Company could not find an alternative significant strategic partner, the
Company might potentially be required to pursue alternative financing to fund
the future growth of the Company which might impact the Company's business and
prospects and dilute stockholder's interests in the Company;
(v) the effect of the Minimum Share Condition that, without the consent of
the Company Board, the Offer will not be consummated unless at least that
number of Shares that when added to the Shares owned by Parent
15
<PAGE>
will constitute two-thirds of the Shares then outstanding (on a fully diluted
basis) are validly tendered pursuant to the Offer and not properly withdrawn;
(vi) the availability of appraisal rights in the Merger for the stockholders
of the Company (other than Parent and Purchaser) under the MBCL;
(vii) the possibility that, because of a future decline in the Company's
business, the trading price of the Shares or the stock market in general, the
consideration that the stockholders of the Company (other than Parent and
Purchaser) would obtain in a future transaction might be less advantageous than
the consideration they would receive pursuant to the Offer and the Merger;
(viii) the review of the possible alternatives to the Offer and Merger
(including the possibility of continuing to operate the Company as an
independent entity in light of the Company's relative size and the presence of
significant competitors in both the retail and wholesale consumer electronics
marketplace), the range of possible benefits and risks to the Company's
stockholders of such alternatives and the timing and the likelihood of actually
accomplishing any such alternatives;
(ix) the likelihood that the proposed acquisition would be consummated, based
in part on the financial condition of Parent;
(x) the terms and conditions of the Merger Agreement;
(xi) the fact that pursuant to the Merger Agreement the Company is not
prohibited from responding to any unsolicited Superior Proposal (as such term
is defined in the Merger Agreement) to acquire the Company, and that, after
giving the Parent notice of the receipt of a Superior Proposal and an
opportunity to make an offer which the Company Board determines, in its good
faith judgment, is as favorable as the Superior Proposal, the Company may elect
to terminate the Merger Agreement and pay the termination fee provided for in
the Merger Agreement; and
(xii) the structure of the transaction, which is designed, among other
things, to result in receipt by the stockholders at the earliest practicable
time of the consideration to be paid in the Offer and the fact that the per
Share consideration to be paid in the Offer and the Merger is the same.
Additional Considerations of the Company Board. The members of the Company
Board evaluated the various factors listed above in light of their knowledge of
the business, financial condition and prospects of the Company and based upon
the advice of financial and legal advisors. In light of the number and variety
of factors that the Company Board considered in connection with its evaluation
of the Offer and the Merger, the Company Board did not find it practicable to
assign relative weights to the foregoing factors and, accordingly, the Company
Board did not do so. In addition to the factors listed above, the Company Board
considered the fact that while consummation of the Offer would result in the
stockholders of the Company receiving a premium for their Shares over the
trading prices of the Shares prior to the public announcement of the fact that
Parent and the Company were in discussions regarding a possible acquisition
transaction, consummation of the Offer and the Merger would eliminate any
opportunity for stockholders of the Company (other than Parent and Purchaser)
to participate in the potential future growth prospects of the Company. The
Company Board determined, however, that (i) the loss of opportunity is
reflected in the Offer Price, and (ii) there are continued business risks
associated with independent operations which could impact the Company's long-
term financial prospects.
In addition, the Company Board determined that the Offer and the Merger are
procedurally fair to the stockholders of the Company (other than Parent and
Purchaser) because, among other things: (i) the Company Board retained
Hambrecht & Quist as its independent financial advisor to assist it in
evaluating the Offer and the Merger; (ii) the Minimum Share Condition, which
may not be waived without the consent of the Company, was made a condition to
the Offer; (iii) there were deliberations pursuant to which the Company Board
evaluated the Offer and the Merger and alternatives thereto; and (iv) the
$10.68 per Share price and the other terms and
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conditions of the Merger Agreement resulted from active arm's-length bargaining
between representatives of the Company, on the one hand, and Parent, on the
other.
The Company Board recognized that the Merger is not structured to require the
approval of two-thirds of the stockholders of the Company other than Parent or
Purchaser, and that if the Offer is consummated Parent and the Purchaser will
have sufficient voting power to approve the Merger without the affirmative vote
of any other stockholder of the Company. Consummation of the Offer, however, is
conditioned upon, among other things, the Minimum Share Condition, which may
not be waived without consent of the Company. Pursuant to the Merger Agreement,
the purchase by the Purchaser of all Shares validly tendered in the Offer and
not withdrawn is a condition to the Merger.
In making its determinations and recommendations, the Company Board was aware
of the matters set forth under Item 3(b), "Interests of Certain Persons in the
Offer and Merger" above.
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
The Company engaged Hambrecht & Quist to act as its financial advisor in
connection with the Offer and the Merger (collectively, the "Proposed
Transaction") and to render an opinion as to the fairness from a financial
point of view to the stockholders of the Company (other than Parent and the
Purchaser) of the consideration to be received in the Proposed Transaction.
Hambrecht & Quist rendered its oral opinion, subsequently confirmed in writing,
on October 30, 1997, to the Company Board that, as of such date, the
consideration to be received by the holders of common stock of the Company
(other than Parent and the Purchaser) was fair to such holders from a financial
point of view. A COPY OF HAMBRECHT & QUIST'S OPINION DATED OCTOBER 30, 1997,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND
LIMITATION OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT &
QUIST IS ATTACHED AS EXHIBIT 15 HERETO. THE COMPANY'S STOCKHOLDERS ARE ADVISED
TO READ THE OPINION IN ITS ENTIRETY. Stockholders should note that the opinion
was written for the information of the Company Board in connection with their
evaluation of the Proposed Transaction. No limitations were placed on Hambrecht
& Quist by the Company Board with respect to the investigation made or the
procedures followed in preparing and rendering its opinion.
In its review of the Proposed Transaction, and in arriving at its opinion,
Hambrecht & Quist, among other things: (i) reviewed the publicly available
consolidated financial statements of the Company for recent years and interim
periods to date and certain other relevant financial and operating data of the
Company made available to Hambrecht & Quist from published sources and from the
internal records of the Company; (ii) reviewed certain internal financial and
operating information, including projections, relating to the Company provided
by the management of the Company; (iii) discussed with certain members of the
management of the Company the business, financial condition and prospects of
the Company; (iv) reviewed the publicly available financial statements of
Parent for recent years and interim periods to date and certain other relevant
financial and operating data of Parent made available to Hambrecht & Quist from
published sources; (v) reviewed the recent reported prices and trading activity
for the Company's Common Stock and compared such information and certain
financial information of the Company with similar information for certain other
companies engaged in businesses Hambrecht & Quist considered comparable to
those of the Company; (vi) reviewed the financial terms, to the extent publicly
available, of certain comparable merger and acquisition transactions; (vii)
reviewed the Merger Agreement; and (viii) performed such other analyses and
examinations and considered such other information, financial studies, analyses
and investigations and financial, economic and market data Hambrecht & Quist
deemed relevant.
Hambrecht & Quist did not independently verify any of the information
concerning the Company or Parent considered in connection with such parties'
review of the Proposed Transaction and, for purposes of its opinion, Hambrecht
& Quist assumed and relied upon the accuracy and completeness of all such
information. In connection with its opinion, Hambrecht & Quist did not prepare
or obtain any independent evaluation or appraisal of any of the assets or
liabilities of the Company or Parent, nor did they conduct a physical
inspection
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of the properties and facilities of the Company or Parent. With respect to the
financial forecasts and projections used in its analysis, Hambrecht & Quist
assumed that they reflect the best currently available estimates and judgments
of the expected future performance of the Company. Hambrecht & Quist also
assumed that neither the Company nor Parent was a party to any pending
transactions, including external financings, recapitalizations or material
merger discussions, other than the Proposed Transaction and those in the
ordinary course of conducting their respective businesses. Hambrecht & Quist's
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this letter and
any change in such conditions would require a reevaluation of their opinion.
Hambrecht & Quist was not requested to, and did not, formally solicit
indications of interest from any other parties in connection with a possible
acquisition of, or business combination with, the Company.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not purport to be a
complete description of the presentation by Hambrecht & Quist to the Company
Board. In arriving at its opinion, Hambrecht & Quist did not attribute any
particular weight to any analyses or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Hambrecht & Quist believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the following
summary, without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the
Hambrecht & Quist presentation to the Company Board and its opinion. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. The
analyses performed by Hambrecht & Quist (and summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to
be appraisals or to reflect the prices at which businesses actually may be
acquired.
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to the
Company Board on October 30, 1997:
Comparison of Recent Reported Prices and Trading Activity: Hambrecht & Quist
compared the average price and trading activity for the Company's Common Stock
for a variety of periods prior to October 3, 1997, the last trading day prior
to the public announcement of discussions between the Company and Parent. The
average price for the week prior to October 3, 1997 was $6.95 per share, the
average price for the month prior to October 3, 1997 was $6.14 per share, the
average price for the previous three months prior to October 3, 1997 was $5.29
per share and the average price for the six months prior to October 3, 1997 was
$5.16 per share. Additionally, Hambrecht & Quist analyzed the volume traded at
specific prices for the period from January 1, 1995 to October 3, 1997 and
found that for 1995 and 1997, the maximum number of shares traded in the range
of $5.20 per share to $5.50 per share. In 1996, the maximum number of shares
traded in the range of $3.70 to $4.00 per share. This compared with a value of
$10.68 per share pursuant to the Offer and Merger.
Premium Analysis: Hambrecht & Quist compared the price per share of the Offer
as of October 30, 1997 to the last sale price of the Company's Common Stock on
both October 3 (the last trading day prior to the public announcement of
discussions between the Company and Parent) and September 4, 1997 (the
twentieth trading day preceding such announcement) to similar premiums for
certain technology and consumer transactions announced since August 1, 1993.
Hambrecht & Quist analyzed 10 such public company technology transactions and
observed that the average one-day premium and average four-week premium paid in
such transactions was 23% and 27%, respectively. Hambrecht & Quist also
analyzed 10 such public company consumer transactions and observed that the
average one-day premium and average four-week premium paid in such transactions
was 25% and 39%, respectively. This compared with the Offer in which the one-
day premium was 50% and the four-week premium was 114%. Based on the analysis
of premiums paid in comparable transactions, the Company's implied equity value
ranged from approximately $6.35 per share to $8.92 per share. This compared
with a value of $10.68 per share in the Offer.
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Analysis of Publicly Traded Comparable Companies: Hambrecht & Quist compared
selected historical and projected financial information of the Company to
publicly traded companies Hambrecht & Quist deemed to be comparable to the
Company. Such data and ratios included enterprise value to historical revenue,
market value to projected 1997 net income based on management estimates, market
value to projected 1998 net income based
on management estimates, market value to projected 1997 net income based on
published estimates from various brokerage houses ("Wall Street estimates"),
market value to projected 1998 net income based on Wall Street estimates, and
market value to historical book value. Given the Company's recent history of
operating and net losses, analysis of ratios of historic net income, EBIT and
EBITDA was not meaningful. All multiples were based on closing stock prices on
October 23, 1997. Companies viewed as comparable included certain branded
consumer retail companies including Gap, Gucci, Gymboree, Starbucks, Tiffany
and Williams-Sonoma; and selected stereo retailers, stereo manufacturers and
peripherals manufacturers including Boston Acoustics, Inc., Circuit City
Stores, Inc., Good Guys, Inc., Harman International Industries, Inc., Iomega
Corp., Recoton Corp., and Zenith Electronics Corp. Hambrecht & Quist determined
that the average multiple of the last-twelve-months ended June 30, 1997
revenues for the branded retail companies was 2.1. Hambrecht & Quist determined
that the average multiples of calendar-year 1997 estimated net income and
calendar-year 1998 estimated net income were 25.9 and 20.8 respectively.
Hambrecht & Quist also determined that the average multiple of book value for
these companies was 6.2. Based on the analysis of these publicly traded
comparable consumer companies, the Company's implied equity value ranged from
approximately $2.51 per share to $26.57 per share. Hambrecht & Quist determined
that the average multiple of the last-twelve-months ended June 30, 1997
revenues for the stereo retailers, stereo manufacturers and peripherals
manufacturers was 1.1. Hambrecht & Quist determined that the average multiples
of calendar-year 1997 estimated net income and calendar-year 1998 estimated net
income were 22.9 and 17.4 respectively. Hambrecht & Quist also determined that
the average multiple of book value for these companies was 4.0. Based on the
analysis of these publicly traded comparable stereo retailers, stereo
manufacturers and peripherals manufacturers companies, the Company's implied
equity value ranged from approximately $2.21 per share to $14.76 per share.
Discounted Cash Flow Analysis: Hambrecht & Quist analyzed the theoretical
valuation of the Company based on the unlevered discounted cash flow of the
potential financial performance of the Company as calculated by Hambrecht &
Quist. Unlevered free cash flow was derived by taking tax-affected earnings
before interest and taxes ("EBIT"), adding non-cash charges for the relevant
period, and subtracting other anticipated cash needs for the relevant periods.
To estimate the total present value of the Company, before giving effect to its
capital structure, Hambrecht & Quist discounted to present value (1) the
projected stream of after-tax cash flows and (2) the terminal value (the
hypothetical value of selling the enterprise in its entirety at some future
date) of the Company's business using discount rates from 12% to 20%. The
terminal value of the Company was based on multiples of 0.50, 0.75 and 1.00
times the projected revenues for the fiscal year ended June 30, 2002. At a 12%
discount rate, the foregoing analysis yielded an implied equity value for the
Company of $7.51 per share to $15.74 per share; at a 16% discount rate, $6.17
per share to $13.29 per share; and at a 20% discount rate, $5.02 to $11.17 per
share.
Analysis of Selected Merger and Acquisition Transactions: Hambrecht & Quist
compared the Proposed Transaction with selected comparable merger and
acquisition transactions. This analysis included 10 comparable consumer
transactions and 10 comparable technology transactions. In examining these
transactions, Hambrecht & Quist analyzed certain income statement and balance
sheet parameters of the acquired company relative to the consideration offered.
Multiples analyzed included consideration offered to historical revenue and to
historical book value. Given the Company's recent history of operating and net
losses, analysis of multiples of operating and net earnings were viewed as
being not meaningful. Selected consumer transactions analyzed include
Stairmaster Sports/Medical Products/John Rutledge Partners, Starsight Telecast,
Inc./Gemstar International, Inc., Armor All/Clorox, Duracell International,
Inc./The Gillette Company, International Jensen, Inc./Recoton Corporation,
Marietta Corporation/BFMA Holding Corp., Neutrogena Corp./Johnson & Johnson,
Mr. Coffee, Inc./Singapore Brands USA, Inc., Gerber Products/Sandoz Ltd. and
Goody Products/Newall Co. The consideration offered in the forgoing
transactions was an average multiple of 2.0 times revenue and 4.3 times book
value. Based on the analysis of these selected merger and acquisition
transactions, the Company's implied
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equity value ranged from approximately $16.17 per share to $24.04 per share.
Selected technology transactions analyzed include Sterling Electronics
Corporation/Marshall Industries, Wyle Electronics/Raab Karcher AG,
Microcom/Compaq Computer, Compression Labs/V-Tel. U.S. Robotics/3Com, Augat,
Inc./Thomas & Betts Corp, Brooktree Corp./Rockwell International,
NetWorth/Compaq Computer, Conner Peripherals, Inc./Seagate Technology, Inc.,
and Acuity Imaging, Inc./Robotic Vision Systems, Inc. The consideration
offered in the foregoing transactions was an average multiple of 1.4 times
revenue and 4.2 times book value. Based on the analysis of these selected
merger and acquisition transactions, the Company's implied equity value ranged
from approximately $15.73 per share to $17.04 per share.
No company or transaction used in the above analyses is identical to the
Company or Parent or the Proposed Transaction. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading values of the companies or company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion which is attached as
Exhibit 15 hereto.
Pursuant to an engagement letter dated September 29, 1997 (the "Engagement
Letter"), the Company has agreed to pay Hambrecht & Quist a fee in connection
with its services as financial advisor to the Company's Board and the
rendering of a fairness opinion. The fee with respect to the delivery of a
fairness opinion is owed upon the delivery of such opinion, and the fee with
respect to financial advisory services is owed upon the closing of the Merger
and is not dependent upon the value of the transaction. The Company also has
agreed to reimburse Hambrecht & Quist for its reasonable out-of-pocket
expenses and to indemnify Hambrecht & Quist against certain liabilities,
including liabilities under the federal securities laws or relating to or
arising out of Hambrecht & Quist's engagement as financial advisor.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
In connection with the Offer and other matters arising in connection
therewith, Hambrecht & Quist has been retained as the exclusive financial
advisor to the Company. Pursuant to the Engagement Letter, Hambrecht & Quist
agreed to render the following financial advisory services to the Company: (i)
review with the Company Board and members of management the Company's
financial plans, its strategic plans and business alternatives; (ii) assist
the Company in the evaluation and, if determined to be advisable, selection of
potential acquirors and represent the Company in contacting, qualifying and
negotiating with potential acquirors approved by the Company; (iii) meet with
the Company Board and members of management to discuss the Company's position
and any recommendation to stockholders concerning any proposal to acquire the
Company as well as available strategic alternatives and their financial
implications; (iv) assist the Company in the preparation of confidential
descriptive materials for review by potential one or more acquirors in
connection with their evaluation of a sale transaction; (v) offer counsel with
respect to the adequacy of the consideration offered in any proposal to
acquire the Company as well as advisable negotiating tactics, if any; (vi) if
requested, render an opinion for the use of the Company Board in their
evaluation of the proposed sale as to the fairness from a financial point of
view to the Company and its stockholders of the consideration to be received
by the Company and its stockholders in connection with the sale of the Company
(a "Fairness Opinion"); and (vii) render such additional assistance as the
Company may reasonably request in connection with the sale of the Company.
Pursuant to the Engagement Letter, the Company has agreed to pay Hambrecht &
Quist (i) if a Fairness Opinion is requested by the Company, a fee, payable in
cash on delivery of such Fairness Opinion (orally or in writing, whichever
occurs first), equal to $200,000.00, such fee to be credited against any
further fees payable pursuant to the Engagement Letter, and (ii) upon
consummation of the sale of the Company, an additional fee, payable in cash at
closing, equal to $400,000.00 plus 4.0% of consideration received in excess of
$11.00 per share, less any Fairness Opinion fee previously paid. In addition,
the Company agreed to reimburse Hambrecht & Quist for reasonable out-of-pocket
expenses incurred in connection with the Merger and to indemnify Hambrecht &
Quist for certain liabilities that may arise out of its engagement by the
Company and the rendering of its opinion. Hambrecht & Quist is a
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nationally recognized firm and, as part of its investment banking activities,
is regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Hambrecht & Quist also has performed certain investment banking
services for the Company. The Company selected Hambrecht & Quist as its
financial advisor on the basis of its experience and expertise in transactions
similar to the Offer and the Merger, its reputation in the technology and
investment communities and its knowledge of and familiarity with the Company
resulting from the investment banking services it has previously provided to
the Company.
Except as set forth above, neither the Company nor any person acting on its
behalf has employed, retained or compensated any person to make solicitations
or recommendations to stockholders with respect to the Offer or the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) To the best knowledge of the Company, no transactions in Shares have
been effected during the past 60 days by the Company or any of its executive
officers, directors or affiliates.
(b) To the best knowledge of the Company, all of its executive officers,
directors or affiliates presently intend to tender all Shares to Purchaser
pursuant to the Offer, which are owned beneficially by such persons, subject
to and consistent with any fiduciary obligations in the case of Shares held by
fiduciaries.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth in Item 3 or in Item 4(b) above, or below, the
Company is not engaged in any negotiations in response to the Offer which
relates to or would result in (i) an extraordinary transaction, such as a
merger or reorganization, involving the Company or any subsidiary of the
Company; (ii) a purchase, sale or transfer of a material amount of assets by
the Company or any subsidiary of the Company; (iii) a tender offer for or
other acquisition of securities by or of the Company, or (iv) any material
change in the present capitalization or dividend policy of the Company.
(b) Except as described in Item 3(b) above, there are no transactions, Board
of Directors resolutions, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
events referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Nasdaq Matters
Depending upon the number of Shares purchased pursuant to the Offer, the
Company's Shares may no longer meet the standards for continued inclusion in
The Nasdaq Stock Market. According to published guidelines, the Company's
Shares would not be eligible to be included for listing if, among other
things, the number of publicly held shares falls below 500,000, the number of
holders falls below 400 or the aggregate market value of such publicly held
shares falls below $3,000,000. If these standards are not met, the Company's
shares might continue to be listed on The Nasdaq SmallCap Market, Inc., but if
the number of holders falls below 300, or if the number of publicly held
shares falls below 100,000, or if the aggregate market value of such publicly
held shares falls below $200,000 or there are not at least two registered and
active market makers (one of which may be a market maker entering a
stabilizing bid), The Nasdaq Stock Market rules provide that the securities
would no longer qualify for inclusion and would cease to provide any
quotations. Shares held directly or indirectly by an officer or director of
the Company or by a beneficial owner of more than 10% of the Shares will
ordinarily not be considered as being publicly held for purposes of these
standards. In the event the Company's Shares are no longer eligible for
quotation on The Nasdaq Stock Market, quotations might still be available from
other sources. The extent of the public market for the Company Shares and the
availability of
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such quotations would, however, depend upon the number of holders of such
shares remaining at such time, the interest in maintaining a market in such
shares on the part of securities firms, the possible termination of
registration of such shares under the Exchange Act as described below, and
other factors.
On October 22, 1997, the Company received a letter from The Nasdaq Stock
Market, Inc. ("Nasdaq"), dated October 22, 1997 (the "Nasdaq Letter"),
concerning the private placement to Parent on February 28, 1997 of 912,294
shares of the Company's Common Stock and a Warrant to purchase 257,314 shares
of the Common Stock of the Company. The Nasdaq Letter states that Nasdaq has
determined that the private placement may have occurred in violation of
Marketplace Rule 4460(i)(1)(b) of The Nasdaq Stock Market. Marketplace Rule
4460(i)(1)(b) generally requires an issuer with shares traded on The Nasdaq
Stock Market to obtain shareholder approval when an issuance of its stock
would result in a change of control of the issuer.
Nasdaq has requested that the Company provide to Nasdaq, by no later than
November 4, 1997, a summary and supporting documentation as to why shareholder
approval was not obtained for the private placement to Parent. If the
Company's submission is deemed not to warrant continued listing on The Nasdaq
Stock Market, the Nasdaq Letter states that Nasdaq will immediately send the
Company a formal notice of deficiency and commence the process of delisting
the Company's Common Stock from The Nasdaq Stock Market. The Nasdaq Letter
states that no delisting action will be taken until the Company has had
adequate time to respond to Nasdaq's formal notice.
The Company believes that the private placement to Parent did not result in
a change of control of the Company and that no grounds exist for the delisting
of the Company's shares from The Nasdaq Stock Market. However, in the event
that the Offer is not consummated and the Company's Common Stock is delisted
from The Nasdaq Stock Market, such delisting would likely have an adverse
effect upon the trading value of the Company's Common Stock, the Company's
ability to effect equity financings, and, accordingly, could have a material
adverse effect upon the Company.
Appraisal Rights
No appraisal rights are available in connection with the Offer. However, if
the Merger is consummated, stockholders of the Company may have certain rights
under the MBCL to dissent and demand appraisal of, and payment in cash for the
fair value of, the Shares. Such rights, if the statutory procedures are
complied with, could lead to a judicial determination of fair value (excluding
any element of value arising from accomplishment or expectation of the Merger)
required to be paid in cash to such dissenting holders for their Shares. Any
such judicial determination of the fair value of Shares could be based upon
considerations other than or in addition to the price paid in the Offer and
the market value of the Shares, including asset values and the investment
value of the Shares. The value so determined could be more or less than the
purchase price per Share pursuant to the Offer or the consideration per Share
to be paid in the Merger.
Tax Matters
The summary of Federal income tax consequences set forth below is for
general information only and is based on the law as currently in effect. The
tax consequences to each stockholder will depend in part upon such
stockholder's particular situation. Special tax consequences not described
herein may be applicable to particular classes of taxpayers, such as financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States and stockholders who acquired their Shares through the exercise
of an employee stock option or otherwise as compensation. ALL STOCKHOLDERS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICABILITY
AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL OR FOREIGN
INCOME AND OTHER TAX LAWS AND OF CHANGES IN SUCH TAX LAWS.
The receipt of cash for Shares pursuant to the Offer will be a taxable
transaction for Federal income tax purposes under the Code, and may also be a
taxable transaction under applicable state, local or foreign income and other
tax laws. Generally, for Federal income tax purposes, a tendering stockholder
will recognize gain or
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loss in an amount equal to the difference between the cash received by the
stockholder pursuant to the Offer and the stockholder's adjusted tax basis in
the Shares tendered by the stockholder and purchased pursuant to the Offer.
For Federal income tax purposes, such gain or loss will be a capital gain or
loss if the Shares are a capital asset in the hands of the stockholder, and a
long-term capital gain or loss if the stockholder's holding period is more
than one year.
A stockholder (other than certain exempt stockholders including, among
others, all corporations and certain foreign individuals and entities) that
tenders Shares may be subject to 31% backup withholding unless the stockholder
provides its TIN and certifies that such number is correct or properly
certifies that it is awaiting a TIN, or unless an exemption applies. A
stockholder who does not furnish its TIN may be subject to a penalty imposed
by the IRS. See "THE OFFER -- Procedure for Accepting the Offer and Tendering
Shares" in the Offer to Purchase.
If backup withholding applies to a stockholder, the Depositary (as defined
in the Merger Agreement) is required to withhold 31% from payments to such
stockholder. Backup withholding is not an additional tax. Rather, the amount
of the backup withholding can be credited against the Federal income tax
liability of the person subject to the backup withholding, provided that the
required information is given to the IRS. If backup withholding results in an
overpayment of tax, a refund can be obtained by the stockholder upon filing an
appropriate income tax return.
The receipt of cash by stockholders pursuant to the Merger should result in
Federal income tax consequences to such stockholders similar to those
described above.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<C> <S>
Exhibit 1 -- Form of Offer to Purchase, dated as of November 3, 1997
(incorporated herein by reference to Exhibit (a)(1) to the
Schedule 14D-1 filed by Purchaser and Parent with the SEC on
November 3, 1997).
Exhibit 2 -- Form of Letter of Transmittal (incorporated herein by
reference to Exhibit (a)(2) to the Schedule 14D-1 filed by
Purchaser and Parent with the SEC on November 3, 1997).
Exhibit 3 -- Agreement and Plan of Merger dated as of October 30, 1997 by
and among Parent, Purchaser and the Company (incorporated
herein by reference to Exhibit (c)(1) to the Schedule 14D-1
filed by Purchaser and Parent with the SEC on November 3,
1997).
Exhibit 4 -- Proxy Statement of the Company dated September 29, 1997
relating to the Company's 1997 Annual Meeting of Stockholders
Exhibit 5 -- Text of Press Release, dated October 6, 1997, issued by the
Company (incorporated herein by reference to Exhibit 1 to the
Schedule 13D (Amendment No. 1) filed by Parent with the SEC on
October 8, 1997).
Exhibit 6 -- Text of Joint Press Release, dated October 31, 1997, issued by
the Company and Parent (incorporated herein by reference to
Exhibit (a)(9) to the Schedule 14D-1 filed by Purchaser and
Parent with the SEC on November 3, 1997).
Exhibit 7 -- Employment Agreement, dated February 18, 1997, between the
Company and Thomas J. DeVesto, as amended and restated
effective October 29, 1997 (incorporated herein by reference
to Exhibit (c)(2) to the Schedule 14D-1 filed by Purchaser and
Parent with the SEC on November 3, 1997).
Exhibit 8 -- Common Stock and Warrant Purchase Agreement dated as of
February 20, 1997 by and between Parent and the Company
(incorporated herein by reference to Exhibit 10.39 to the
Company's Quarterly Report on Form 10-Q filed with the SEC on
May 14, 1997).
Exhibit 9 -- Common Stock Purchase Warrant dated February 28, 1997 having
Parent as Registered Holder (incorporated herein by reference
to Exhibit 10.40 to the Company's Quarterly Report on Form 10-
Q filed with the SEC on May 14, 1997).
Exhibit 10 -- Investors' Rights Agreement dated as of February 28, 1997
between Parent and the Company (incorporated herein by
reference to Exhibit 10.41 to the Company's Quarterly Report
on Form 10-Q filed with the SEC on May 14, 1997).
Exhibit 11 -- Voting Agreement dated as of February 28, 1997 by and among
Parent, the Company, Henry E. Kloss and Thomas J. DeVesto
(incorporated herein by reference to Exhibit 1 to the Schedule
13D filed by Parent with the SEC on March 19, 1997).
Exhibit 12 -- Exclusive Distribution Agreement dated as of February 28, 1997
between Parent and the Company (incorporated herein by
reference to Exhibit 10.42 to the Company's Quarterly Report
on Form 10-Q filed with the SEC on May 14, 1997).
Exhibit 13 -- Mutual Confidentiality and Non-disclosure Agreement, dated
October 18, 1996, between Creative Labs, Inc. and the Company
(incorported herein by reference to Exhibit (c)(8) to the
Schedule 14D-1 filed by Purchaser and Parent with the SEC on
November 3, 1997).
Exhibit 14 -- Letter to Stockholders of the Company dated November 3, 1997.*
Exhibit 15 -- Opinion of Hambrecht & Quist LLC, dated October 30, 1997.*
</TABLE>
- --------
* Included with Schedule 14D-9 mailed to stockholders.
24
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
CAMBRIDGE SOUNDWORKS, INC.
By: /s/ Thomas J. DeVesto
Dated: November 3, 1997 ----------------------------------
Name: Thomas J. DeVesto
Title: President and Chief Executive
Officer
25
<PAGE>
ANNEX I
INFORMATION STATEMENT
PURSUANT TO SECTION 14(f) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about November 3, 1997 as
part of the Cambridge SoundWorks, Inc. (the "Company")
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
with respect to the tender offer by CSW Acquisition Corporation (the
"Purchaser") to the holders of record of the Company's Common Stock, without
par value per share (the "Common Stock"). Capitalized terms used and not
otherwise defined herein shall have the meanings set forth in the Schedule 14D-
9. You are receiving this Information Statement in connection with the possible
election of persons designated by Purchaser to a majority of the seats on the
Board of Directors of the Company (the "Company Board") pursuant to an
Agreement and Plan of Merger among dated as of October 30, 1997 by and among
Creative Technology Ltd. (the "Parent"), Purchaser and the Company (the "Merger
Agreement"). The Merger Agreement provides, among other things, that promptly
upon the purchase by the Purchaser of Shares in the Offer, and from time to
time thereafter, the Purchaser will be entitled to designate that number of
directors, rounded up to the next whole number, on the Company Board that
equals the product of (i) the total number of directors on the Company Board
(giving effect to the election of any additional directors pursuant to the
Merger Agreement) and (ii) the percentage that the number of Shares owned by
the Purchaser, Parent and any direct or indirect wholly owned subsidiary of
Parent (including Shares purchased in the Offer) bears to the total number of
Shares outstanding at such time, and to effect the foregoing the Company will
upon request by the Purchaser, at the Company's election, either increase the
number of directors comprising the Company Board or seek and accept
resignations of incumbent directors. The first date on which designees of the
Purchase will constitute a majority of the Company Board is referred to as the
"Cut-Off Date." At such time, the Company will use its reasonable best efforts
to cause individuals designated by the Purchaser to constitute the same
percentage of each committee of the Board as such individuals represent on the
Company Board.
Following the Cut-Off Date and prior to the Effective Time, the Company Board
will have at least one director who is neither designated by the Purchaser, an
employee of the Company nor otherwise affiliated with the Purchaser (one or
more of such directors, the "Independent Directors") and any amendment of the
Merger Agreement or the Articles of Organization or Bylaws of the Company, any
termination or amendment of the Merger Agreement by the Company, any extension
by the Company of the time for the performance of any of the obligations or
other acts of Parent or the Purchaser or any exercise or waiver of any of the
Company's rights thereunder, will require the concurrence of a majority of the
Independent Directors.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended, and Rule 14F-1 promulgated thereunder.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action.
WE ARE NOT NOW ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY AT THIS TIME.
The information contained in this Information Statement concerning Purchaser
and Parent has been furnished to the Company by Parent and the Company assumes
no responsibility for the accuracy, completeness or fairness of any such
information.
Purchaser has informed the Company that it currently intends to designate the
following persons (the "Acquisition Designees") for election:
26
<PAGE>
<TABLE>
<CAPTION>
NAME, CITIZENSHIP AND MATERIAL POSITIONS
CURRENT BUSINESS PRESENT OCCUPATION OR HELD DURING THE
ADDRESS AGE EMPLOYMENT PAST FIVE YEARS
--------------------- --- ---------------------------- -------------------
<C> <C> <S> <C>
Sim Wong Hoo(1) 42 Chairman of the Parent's N/A
Board of Directors and Chief
Executive Officer of Parent
since 1981.
Ng Keh Long(1) 38 Vice President, Corporate Senior Manager,
Treasurer and Acting Chief Price Waterhouse
Financial Officer of Parent from prior to 1992
since May 1996; Held various to 1993.
financial positions from
April 1993 through April
1996.
Craig L. McHugh(2) 40 Vice President and General Vice President of
Manager of Creative Labs Sales and
since January 1996; Held Marketing, Trace,
various positions at Inc. from prior to
Creative Labs from November 1992 to 1993.
1993 to January 1995.
John D. Danforth(2) 39 Vice President and General Partner, Morrison &
Counsel of Creative Labs Foerster from prior
since October 1995; General to 1992 to 1994.
Counsel since July 1994.
Chon H. Leow(2) 46 Vice President of Multimedia Independent
Division of Creative Labs management
since July 1996; Held consultant from
various positions at prior to 1992 to
Creative Labs from May 1993 1993.
through July 1996.
Erika F. Rottenberg(2) 35 Associate Counsel of Associate, Cooley
Creative Labs since Godward from 1992
September 1996. to 1996.
</TABLE>
- --------
(1) Mr. Sim and Mr. Ng are citizens of Singapore, and their current business
address is Creative Technology Ltd., 31 International Business Park,
Creative Resource, Singapore 609921.
(2) Mr. McHugh, Mr. Danforth, Mr. Leow and Ms. Rottenberg are citizens of the
United States, and their current business address is 1901 McCarthy
Boulevard, Milpitas, California 95035.
None of the Acquisition Designees (i) is currently a director of, or holds
any position with the Company, other than Mr. McHugh, (ii) has a familial
relationship with any of the directors or executive officers of the Company or
(iii) to Parent's knowledge, beneficially owns any equity (or rights to
acquire any equity) of the Company, except to the extent that the Shares of
Common Stock under the control of Parent may be attributed to any of the
Acquisition Designees (of which beneficial ownership is hereby disclaimed).
The Company has been advised by Parent that, to Parent's knowledge, none of
the Acquisition Designees has been involved in any transaction with the
Company or any of its directors, executive officers or affiliates which is
required to be disclosed pursuant to the rules and regulations of the
Commission, except as may be disclosed herein or in the Schedule 14D-9.
It is expected that the Acquisition Designees may assume office at any time
following the purchase by Purchaser of a majority of Shares pursuant to the
Offer. Purchaser has informed the Company that each of the Acquisition
Designees has consented to act as a director of the Company, if so designated.
INFORMATION WITH RESPECT TO THE COMPANY
As of October 23, 1997, there were 3,804,824 shares of Common Stock, without
par value, of the Company issued and outstanding, all of which shares are
entitled to one vote per share. The Common Stock is the only class of voting
securities of the Company which are outstanding.
27
<PAGE>
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 23, 1997, by (i) each director of
the Company, (ii) each of the executive officers named in the Summary
Compensation Table included elsewhere in this Annex I under "Executive
Compensation", (iii) all directors and executive officers of the Company as a
group and (iv) each person known by the Company to own beneficially more than
5% of the Common Stock.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table, of
any voting securities of the Company if he or she has or shares voting power
or investment power with respect to such security or has the right to acquire
beneficial ownership at any time within 60 days of October 23, 1997. As used
herein, "voting power"is the power to vote or direct the voting of shares, and
"investment power" is the power to dispose of or direct the disposition of
shares. Except as indicated in the notes following the table below, each
person named has sole voting and investment power with respect to shares
listed as being beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
-------------------------
NUMBER PERCENT
------------- -----------
<S> <C> <C>
Creative Technology Ltd (1)........................... 1,169,608 28.8%
31 International Business Park
Creative Resource
Singapore, 609921
William R. Hambrecht (2).............................. 337,000 8.9%
c/o Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Henry E. Kloss........................................ 322,766 8.5%
174 Brattle Street
Cambridge, MA 02138
DIRECTORS AND OFFICERS
Thomas J. DeVesto (3)................................. 438,605 11.3%
Thomas E. Brew, Jr. (4)............................... 8,000 *
Franklin S. Browning, Jr. (4)......................... 8,000 *
Wayne P. Garrett (5).................................. 21,666 *
Thomas J. Hannaher (6)................................ 25,394 *
Leo Kahn (4).......................................... 14,300 *
Robert S. Mainiero (7)................................ 15,000 *
Craig L. McHugh....................................... -- --
Sandy Ruby (8)........................................ 21,666 *
Peter B. Seamans (4).................................. 8,000 *
All directors and executive officers as a group
(10 persons)(3)(4)(5)(6)(7)(8)....................... 560,631 14.0%
</TABLE>
- --------
* Less than one percent.
(1) According to a report filed with the Securities and Exchange Commission on
Schedule 13D, dated March 5, 1997, Creative Technology Ltd. exercises sole
voting power with respect to 1,169,608 shares of Common Stock including
currently exercisable warrants to purchase 257,314 shares of Common Stock.
(2) According to a report filed with the Securities and Exchange Commission on
Amendment No. 1 to Schedule 13D, dated August 15, 1997, William R.
Hambrecht is the Chairman of Hambrecht & Quist Group ("H&Q
28
<PAGE>
Group", which is the sole parent of Hambrecht & Quist California),
Hambrecht & Quist California ("H&Q California", which is a member of
Hambrecht & Quist LLC) and Hambrecht & Quist LLC ("H&Q LLC") and is a
trustee of The Hambrecht 1980 Revocable Trust ("Trust"). Mr. Hambrecht
shares voting and investment power with respect to the 145,000 shares
(3.4%) held by H&Q LLC and 192,000 shares (4.4%) held by the Trust. Mr.
Hambrecht disclaims beneficial ownership as to 337,000 shares. Each of H&Q
Group and H&Q California disclaims beneficial ownership as to 145,000
shares.
(3) Includes currently exercisable options granted to Mr. DeVesto to purchase
74,167 shares of Common Stock and a currently exercisable option to
purchase 100,000 shares of Common Stock from Henry Kloss pursuant to an
agreement between Mr. DeVesto and Mr. Kloss. Includes 11,530 shares of
Common Stock held by Mr. DeVesto as custodian for minor children with
respect to all of which shares Mr. DeVesto disclaims beneficial ownership.
(4) Includes currently exercisable options granted to each of Messrs. Brew,
Browning, Kahn and Seamans to purchase 8,000 shares of Common Stock.
(5) Includes currently exercisable options granted to Mr. Garrett to purchase
21,666 shares of Common Stock.
(6) Includes currently exercisable options granted to Mr. Hannaher to purchase
25,394 shares of Common Stock.
(7) Includes currently exercisable options granted to Mr. Mainiero to purchase
15,000 shares of Common Stock.
(8) Includes currently exercisable options granted to Mr. Ruby to purchase
21,666 shares of Common Stock.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and stockholders who own more than 10% of the outstanding
Common Stock of the Company to file with the Securities and Exchange
Commission and Nasdaq reports of ownership and changes in ownership of voting
securities of the Company and to furnish copies of such reports to the
Company. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company, during the year ended June 29, 1997, or
written representations in certain cases, the Company believes that all
Section 16(a) filling requirements were satisfied during the year ended June
29, 1997, except that through inadvertence, Leo Kahn failed to file a Form 4
to reflect certain Common Stock purchases for which a Form 5 has now been
filed with the Commission and Nasdaq.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Thomas J. DeVesto 50 President, Chief Executive Officer and Director
Vice President-Finance, Chief Financial
Wayne P. Garrett 41 Officer, Treasurer and Clerk
Thomas J. Hannaher 45 Vice President-Marketing
Robert S. Mainiero 41 Vice President-Business Development
Sandy Ruby 56 Vice President-Retail
Thomas E. Brew, Jr. (1)(2) 55 Director
Franklin S. Browning, Jr. 69 Director
Leo Kahn (1)(2) 80 Director
Craig L. McHugh 40 Director
Peter B. Seamans (1) (2) 73 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
29
<PAGE>
THOMAS J. DEVESTO co-founded the Company. He has been a director, President
and Chief Executive Officer since 1988. From 1985 to 1988, he was a consultant
to ITT Corporation and represented ITT in connection with its relationship with
Kloss Video Corporation. From 1978 to 1985, he was Vice President of Sales and
Marketing of Kloss Video Corporation. From 1976 through 1978, Mr. DeVesto held
various sales management positions in the international and domestic divisions
of Advent.
WAYNE P. GARRETT has been Vice President--Finance, Chief Financial Officer,
Treasurer and Clerk of the Company since June 1995. Mr. Garrett was employed by
Argus Management Corp. as a management consultant from 1983 to 1995. From 1978
to 1981, he was employed as an auditor by Price Waterhouse. Mr. Garrett has BS
and MBA degrees from Boston College and is a Certified Public Accountant.
THOMAS J. HANNAHER has been Vice President--Marketing of the Company since
December 1993. From 1979 to 1993, he owned and operated an advertising and
marketing agency and provided consulting services to a number of companies,
including the Company, Boston Acoustics, NAD, Tweeter and Apple Computer.
ROBERT S. MAINIERO has been Vice President--Business Development of the
Company since January 1996. Mr. Mainiero was Vice President--Sales for a/d/s
from October 1993 to December 1995. From 1985 to 1993 he served as Zone Manager
for Alpine Electronics of America and previously served as Assistant National
Sales Manager of Kloss Video Corporation.
SANDY RUBY has been Vice President--Retail of the Company since July 1995.
From 1985 to 1995, Mr. Ruby was a systems consultant and Vice President of
Practicorp International. Mr. Ruby was a founder and Chief Executive Officer of
Tech HiFi, a 70-store consumer electronics retail chain from 1968 to 1984.
THOMAS E. BREW, JR., has been a director of the Company since June 1995. Mr.
Brew has been the President, Chief Executive Officer and a director of Kurzweil
Applied Intelligence, Inc., since November 1994. From 1979 to 1994 he was co-
founder and Executive Vice President of Argus Management Corp. Mr. Brew is a
Certified Public Accountant and an attorney.
FRANKLIN S. BROWNING, JR. has been a director of the Company since November
1996. Mr. Browning co-founded the Boston advertising agency Humphrey Browning
McDoughall in 1970. He was Chairman of HBM until 1983.
LEO KAHN has been a director of the Company since June 1995. Mr. Kahn has
been a partner of United Properties since 1985, and a director of Big V
Supermarkets and of Grossman's, Inc., since 1986. In 1948 Mr. Kahn was a
founder, President and Chief Executive Officer of Purity Supreme, Inc., and co-
founder of Staples, Inc., in 1986.
CRAIG L. MCHUGH has been a director of the Company since August 1997. Mr.
McHugh has been Vice President, General Manager of Creative Labs, Inc. since
January 1996. He joined Creative in October 1993 as General Manager of
Worldwide OEM and later served as Vice President of Sales and Marketing. Prior
to Creative, Mr. McHugh was Vice President of Sales and Marketing at Trace,
Inc. and was also a member of their Board of Directors.
PETER B. SEAMANS has been a director of the Company since March 1996. Mr.
Seamans has been a partner with the law firm of Peabody & Arnold since 1957. He
previously served as a director of Kloss Video Corporation and Advent
Corporation and currently serves on the board of the Peabody Essex Museum and
the USS Constitution Museum.
All directors hold office until the next annual meeting of the stockholders
and until their successors are elected and qualified. All officers of the
Company are elected annually by the Board of Directors and serve at the Board's
discretion. There are no family relationships among any of the directors, or
officers of the Company.
30
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Woody Kaplan, a former director of the Company, owns a minority interest in
six shopping mall locations in which the Company leases space.
In February 1994, the Company entered into a License Agreement (the "License
Agreement") with Henry Kloss. The License Agreement provides that the Company
has the perpetual right to use Henry Kloss's name on products that Mr. Kloss
designed or had a substantial role in designing. The rights granted to the
Company by Mr. Kloss terminate as to any product whose appearance or
performance specifications are materially changed by the Company without Mr.
Kloss' consent. Upon termination of Mr. Kloss's employment, the Company agreed
not to use his name generically or in connection with a product unless the
Company had previously done so or Mr. Kloss consented to such use. Under this
Agreement, the Company was not required to make any payments to Mr. Kloss for
the right to use his name.
In April 1996, the Company entered into a Consulting Agreement (the
"Consulting Agreement") with Henry Kloss whereby Mr. Kloss agreed to assist
the Company in its selection and design of current and future products. The
Consulting Agreement expires in September 1999. Pursuant to the terms of the
Consulting Agreement, the Employment Agreement and the License Agreement were
effectively terminated. No Additional payments were due to Mr. Kloss upon the
termination of his Employment Agreement. The Consulting Agreement called for
annual payments to Mr. Kloss of $330,000, plus certain fringe benefits,
through September 1996 with annual payments thereafter of $110,000, plus
certain fringe benefits. The term of the Consulting Agreement extends through
September 1999.
Effective September 30, 1996, Mr. Kloss terminated the Consulting Agreement.
At the same time, Mr. Kloss notified the Company of his intention not to stand
for reelection as a Director. Mr. Kloss continues to act as a consultant to
the Company, for which he is paid $10,565 per month, but for which there is no
formal agreement. This arrangement can be terminated by either party at will.
Mr. Kloss provided consulting services to the Company during year ended June
29, 1997 for which he received approximately $179,000 from the Company.
The Company will not extend or guarantee loans to officers, directors,
employees or affiliates of the Company unless such loans are (i) approved both
by a majority of the Board of Directors and by a majority of the disinterested
directors, and (ii) on terms no less favorable to the Company than could be
obtained from unaffiliated parties.
For a discussion of Directors' and Officers' Indemnification and Insurance,
see the information contained in Item 3(b) in the Schedule 14D-9, which is
incorporated herein by reference.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors met five times during the fiscal year ended June 29,
1997. There was no director who during the fiscal year attended fewer than 75
percent of the aggregate of all board meetings and all meetings of committees
on which he served.
The Board of Directors has a three-member Audit Committee which is
reconstituted at the first meeting of the Board following the annual meeting
of stockholders. The Audit Committee, which met one time during fiscal 1997,
meets with the Company's independent auditors and principal financial
personnel to review the scope and results of the annual audit and the
Company's financial reports. The Audit Committee also reviews the scope of
audit and non-audit services performed by the independent public accountants,
reviews the independence of the independent public accountants and reviews the
adequacy and effectiveness of internal accounting controls. The present
members of the Audit Committee are Messrs. Brew, Kahn and Seamans.
The "disinterested" directors, for purposes for Rule 16b-3 under the
Exchange Act, Messrs. Brew, Kahn and Seamans acting as a Compensation
Committee, have the authority, subject to the express provisions of the
31
<PAGE>
Company's 1993 Stock Option Plan, to determine the employees of the Company to
receive options, the number of shares to be optioned and the terms of the
options granted; to construe and interpret the 1993 Stock Option Plan and
outstanding options; and to make all other determinations that they deem
necessary and advisable for administering the 1993 Stock Option Plan.
The Board of Directors does not have a standing committee on nominations.
DIRECTORS' COMPENSATION
Outside directors are compensated for their service on the Board of
Directors at the rate of $1,000 per meeting plus expenses. Outside directors
also receive options to purchase 8,000 shares of the Company's Common Stock
upon their election to the Company Board. Such options are exercisable at an
exercise price equal to the closing price of the Common Stock on the first
business day of the quarter following the quarter in which the director was
elected to the Company Board. Directors who are employees of the Company are
not paid any additional compensation for serving as directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered to the
Company in all capacities for the years ended June 29, 1997, June 30, 1996 and
July 2, 1995, by its Chief Executive Officer and each of the Company's other
executive officers whose total salary and bonus exceeded $100,000 during such
12 month periods:
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- --------------------
OTHER ANNUAL STOCK ALL OTHER
NAME AND YEARS SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION ENDED(1) $ $ ($)(2) (#)(3) ($)(4)
------------------ -------- ------- ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. DeVesto 6/29/97 371,162 27,000 -- 205,000 --
President and Chief
Executive Officer 6/30/96 335,692 -- -- 155,000 --
7/2/95 312,693 -- -- 25,000 --
Henry E. Kloss 6/29/97 0 -- -- -- --
Former Chairman of the
Board and 6/30/96 269,077 -- -- 6,250 --
Former Director of
Product 7/2/95 312,693 -- -- 25,000 --
Development
Wayne P. Garrett 6/29/97 144,498 10,800 -- 45,000 --
Vice President--Finance
and Chief 6/30/96 126,947 -- -- 30,000 --
Financial Officer 7/2/95 18,269 -- -- 20,000 --
Thomas J. Hannaher 6/29/97 148,984 10,800 -- 45,000 --
Vice President--
Marketing 6/30/96 126,947 -- -- 30,000 --
7/2/95 148,000 -- -- 13,720 --
Robert S. Mainiero 6/29/97 130,772 10,800 -- 45,000 --
Vice President--
Business 6/30/96 62,500 -- -- 30,000 --
Development 7/2/95 0 -- -- -- --
Sandy Ruby 6/29/97 126,526 10,800 -- 45,000 --
Vice President--Retail 6/30/96 117,789 -- -- 30,000 --
7/2/95 0 -- -- -- --
</TABLE>
32
<PAGE>
- --------
(1) On March 14, 1995, the Company's fiscal year was changed to end on the
Sunday nearest the end of June. Therefore, the Company's fiscal year for
1995 consisted of only six months ended on July 2, 1995. The amount shown
for July 2, 1995 has been restated to include the 12 months ended July 2,
1995.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or ten percent of the total
annual salary and bonus reported for the executive officer during the years
ended June 29, 1997, June 30, 1996 and July 2, 1995.
(3) Options represent the right to purchase shares of Common Stock at a fixed
price per share (fair market value) in accordance with vesting schedules
applicable to each option.
(4) The Company did not grant any restricted stock awards or stock appreciation
rights (SARs) or make any long-term incentive plan payouts during the year
ended June 29, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all options granted to each of the named executive
officers of the Company during the year ended June 29, 1997, and the potential
value at stock price appreciation rates of 5% and 10% over the ten year term of
the options. The 5% and 10% rates of appreciation are not intended to forecast
possible future actual appreciation, if any, in the Company's stock prices. The
Company did not use an alternative present value formula because the Company is
not aware of any such formula that can determine with reasonable accuracy the
present value based on future unknown or volatile factors.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
------------------------- ---------------------
% OF TOTAL
OPTIONS/SARS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE
UNDERLYING IN THE YEAR OR BASE
OPTIONS/SARS ENDED PRICE EXP.
NAME GRANTED(#) 6/29/97 ($/SH)(3) DATE 5%($) 10%($)
---- ------------ ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. DeVesto....... 50,000(1) 26.6% 4.13 1/14/07 129,867 329,108
Wayne P. Garrett........ 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Thomas J. Hannaher...... 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Robert S. Mainiero...... 10,000(2) 5.3% 5.38 12/30/06 33,835 85,743
15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Sandy Ruby.............. 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
</TABLE>
- --------
(1) These options are exercisable on January 14, 1997, at which time the
options are 33 1/3%
vested with options vesting in additional 33 1/3% increments in two annual
installments commencing on January 14, 1998.
(2) These options are exercisable on December 30, 1997, at which time the
options are 33 1/3%
vested with options vesting in additional 33 1/3% increments in two annual
installments commencing on December 30, 1998.
(3) The exercise price per share is the market price of the underlying Common
Stock on the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise. Actual gains, if any, are dependent on the performance
of the Common Stock and the date on which the option is exercised. There
can be no assurance that the amounts reflected will be achieved.
33
<PAGE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED JUNE 29, 1997 AND OPTION VALUES
AT JUNE 29, 1997
The following table sets forth certain information with respect to the
unexercised stock options held as of June 29, 1997, by the executive officers
named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT JUNE 29, 1997 JUNE 29, 1997($)
ON VALUE ------------------------- -------------------------
EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. DeVesto....... -- -- 74,167 130,833 43,875 88,375
Wayne P. Garrett........ -- -- 21,666 23,334 6,850 13,100
Thomas J. Hannaher...... -- -- 25,394 19,606 10,750 17,000
Robert S. Mainiero...... -- -- 15,000 30,000 12,917 25,833
Sandy Ruby.............. -- -- 21,666 23,334 6,250 12,500
</TABLE>
- --------
(1) Value realized equals fair market value on the date of exercise, less the
exercise price, times the number of shares acquired without deducting
taxes or commissions paid by employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 29, 1997, the Compensation Committee of
the Board of Directors of the Company was responsible for establishing
executive compensation. No executive officer of the Company served as a
director or member of a Compensation Committee, or its equivalent, of another
entity, one of whose executive officers served as director of the Company.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE EXCHANGE
ACT, THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS ANNEX I IN WHOLE OR
IN PART, THE FOLLOWING REPORT AND THE STOCK PERFORMANCE GRAPH CONTAINED
ELSEWHERE HEREIN SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS
NOR SHALL THEY BE DEEMED TO BE SOLICITING MATERIAL OR DEEMED FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER THE EXCHANGE ACT.
REPORT OF THE COMPENSATION COMMITTEE AND THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During the fiscal year ended June 29, 1997, the Compensation Committee of
the Board of Directors of the Company was responsible for establishing and
administering the policies which govern annual compensation for the Company's
executive officers and was responsible for considering stock option
compensation for the Company's executive officers.
OVERVIEW
The Compensation Committee of the Board of Directors has historically
established levels of executive compensation that provide for a base salary
and bonuses intended to allow the Company to hire, motivate and retain
qualified executive officers. Bonuses were declared in fiscal 1997. From time
to time, the Compensation Committee also grants stock options to executive
officers and key employees in order to bring the stockholders' interests more
sharply into the focus of such officers and employees.
The Compensation Committee of the Board of Directors establishes the annual
salary and bonus of each of the executive officers other than the Chief
Executive Officer, based on the recommendations made by the Chief Executive
Officer. In determining the recommendations for salary and bonus for each of
the other executive officers, the Chief Executive Officer considers each
officer's individual performance, attainment of individual goals and the
contribution to the overall attainment of the Company's goals.
34
<PAGE>
STOCK OPTIONS AND OTHER COMPENSATION
Long-term incentive compensation for executive officers consists exclusively
of stock options granted under the Company's Stock Option Plans (the "Plans").
Executive officers as well as other key employees of the Company participate in
the Plans. During fiscal 1997, the Compensation Committee granted options to
Mr. DeVesto and Robert S. Mainiero, to certain newly appointed executive
officers and those executive officers whose duties and responsibilities had
increased since the prior fiscal year as a result of promotions or departmental
restructuring.
BASIS FOR THE COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The compensation of Mr. DeVesto, Chief Executive Officer, during the year
ended June 29, 1997, was based upon the DeVesto Employment Agreement. The
DeVesto Employment Agreement, amended on February 14, 1997, provides for an
initial salary of not less than $385,000 and an annual $8,000 car allowance,
subject to adjustment at the discretion of the Board of Directors. The Company
also awarded Mr. DeVesto options to purchase 50,000 shares of Common Stock.
Mr. DeVesto received a bonus of $27,000 during the fiscal year ended June 29,
1997.
The Company does not have, nor does it intend to have in the future, a
Chairman of the Board of Directors.
Thomas E. Brew, Jr.
Leo Kahn
Peter B. Seamans
35
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
Set forth below is a line graph comparing the Company's 38 month cumulative
total stockholder return with the Nasdaq Stock market--US Index and the Nasdaq
Non-Financial Index. Cumulative total return is measured assuming an initial
investment of $100 and reinvestment of dividends.
COMPARISON OF 38 MONTH CUMULATIVE TOTAL RETURN*
AMONG CAMBRIDGE SOUNDWORKS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ NON-FINANCIAL INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
CAMBRIDGE NASDAQ NASDAQ
Measurement Period SOUNDWORKS, NON- STOCK MARKET
(Fiscal Year Covered) INC. FINANCIAL (U.S.)
- ------------------- ---------- --------- -----------
<S> <C> <C> <C>
Measurement Pt-04/14/94 $100 $100 $100
FYE 12/31/94 $ 63 $ 98 $104
FYE 07/02/95 $ 84 $124 $130
FYE 06/30/96 $ 44 $158 $167
FYE 06/29/97 $ 63 $186 $203
</TABLE>
- --------
* $100 INVESTED ON 04/14/94 IN STOCK OR INDEX INCLUDING REINVESTMENT OF
DIVIDENDS.
36
<PAGE>
EXECUTIVE AGREEMENTS
EMPLOYMENT AND CONSULTING AGREEMENTS
On February 14, 1997 the Company entered into a three year employment
agreement with Thomas J. DeVesto (the "DeVesto Employment Agreement")
employing him as President and Chief Executive Officer. Pursuant to the
DeVesto Employment Agreement, which provides for an initial salary of not less
than $385,000, with such adjustments thereto after the first year which the
Board of Directors of the Company may approve, Mr. DeVesto is also entitled to
certain fringe benefits, including the right to participate in all bonus and
benefit programs that the Company makes available to its employees and an
annual $8,000 car allowance. The DeVesto Employment Agreement may be
terminated by either party on six month's prior notice for any reason in which
event Mr. DeVesto is entitled to a payment equal to his then annual salary in
consideration of an agreement not to compete with the Company for one year
following the termination of his employment.
For a description of an amendment and restatement to the DeVesto Employment
Agreement, see the information contained in Item 3(b), "Intercompany
Arrangements Between Parent and the Company--DeVesto Employment Agreement" in
the Schedule 14D-9, which is incorporated herein by reference.
Effective September 30, 1996, Henry Kloss terminated the Consulting
Agreement dated April 24, 1996 which he had entered into with the Company to
provide general and specific advice, counsel and assistance to the Company
with respect to the selection and design by the Company of its current and
future products. At the same time, Mr. Kloss notified the Company of his
intention not to stand for reelection as a Director. Mr. Kloss continues, on
an informal basis, to act as a consultant to the Company for which he is paid
$10,565 per month but for which there is no formal written agreement. This
arrangement can be terminated by Mr. Kloss or the Company at will.
STOCK PLANS
On December 31, 1993, the Company adopted, and on January 13, 1994, the
stockholders approved, the Company's 1993 Stock Option Plan (the "1993 Stock
Option Plan"), pursuant to which options to purchase up to 301,500 shares of
Common Stock may be granted to directors, officers and employees of, and
consultants or advisors to, the Company. The 1993 Stock Option Plan is
intended to encourage ownership of the Company's Common Stock by directors,
officers and employees of, and consultants and advisors to, the Company. The
1993 Stock Option Plan provides for the granting of incentive stock options
which are intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") as well as non-qualified stock
options which do not meet the requirements of Section 422 of the Code. If any
unexercised option granted pursuant to the 1993 Stock Option Plan lapses or
terminates for any reason, the shares of Common Stock covered thereby may
again be optioned under the 1993 Stock Option Plan.
The 1993 Stock Option Plan is currently administered by the Compensation
Committee of the Board of Directors, which consists of three directors, each
of whom must be a "disinterested person" within the meaning of Rule 16b-3
under the Exchange Act. The Compensation Committee determines the employees to
whom options will be granted, the number of shares to be covered by such
options and the terms of such options. No option is exercisable after 10 years
from the date on which it is granted.
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to incentive stock options which first become exercisable in
any calendar year by an employee or officer may not exceed $100,000. Incentive
stock options may not be granted at less than the fair market value of the
Common Stock on the date of grant or 110% of fair market value in the case of
incentive stock options granted to any optionee holding 10% or more of all
classes of voting stock of the Company.
Options issued under the 1993 Stock Option Plan are not transferable, except
by will or the laws of descent and distribution. Each option is exercisable
only while the optionee is in the employ or serving as a director of, or
consultant or advisor to, the Company, except that an incentive stock option
is exercisable within up to three months after termination of employment or
service to the extent such option has vested at the time of such termination
and non-qualified stock options may be exercisable for a longer period after
termination of employment or any service arrangement. If an optionee dies
while employed or retained by the Company or
37
<PAGE>
within three months of the termination of his or her employment by or service
to the Company, such optionee's options may be exercised up to 12 months after
his or her death. If an optionee is permanently disabled during his or her
employment by or service to the Company, such optionee's options may be
exercised up to one year following termination of his or her employment or
service due to such disability. The exercise price of options granted under the
1993 Stock Option Plan must be paid in full upon exercise in cash, shares of
Common Stock already owned by the optionee or by any other means the Board of
Directors determines, or a combination thereof.
The 1993 Stock Option Plan will terminate on January 13, 2004, 10 years from
the date the plan was approved by the Company's stockholders, but the Board of
Directors may, at any time, terminate, modify or amend such plan. The Board of
Directors may not, without the prior approval of the stockholders of the
Company, increase the maximum aggregate number of shares for which options may
be granted under the 1993 Stock Option Plan.
The 1993 Stock Option Plan was amended at a Special Meeting of the
Stockholders of the Company on November 28, 1995 which was temporarily
adjourned and reconvened on December 12, 1995. The amendment to the 1993 Stock
Option Plan (i) increased the number of shares of Common Stock authorized for
issuance under the 1993 Stock Option Plan, by 168,500, to 470,000 shares, (ii)
granted existing and future non-employee directors of the Company options to
purchase 8,000 shares of Common Stock under certain conditions and
(iii) provided for the immediate vesting of all options under the 1993 Stock
Option Plan in the event of a sale of all or substantially all of the Company's
assets or Common Stock to a third party.
In fiscal year 1997, the Company granted incentive stock options under the
1993 Stock Option Plan to an aggregate of 18 employees of the Company
exercisable for an aggregate of 187,820 shares at exercise prices between $3.75
and $5.38 per share, all of which vest over a period of two years or three
years. Of the 187,820 shares granted, an option to purchase 10,000 shares was
issued to Robert S. Mainiero, on December 31, 1997, at an exercise price of
$5.38 per share and an option to purchase 50,000 shares was issued to Thomas J.
DeVesto on January 14, 1997, at an exercise price of $4.13, and an option to
purchase 15,000 shares was issued to each of Thomas J. Hannaher, Wayne P.
Garrett, Robert S. Mainiero and Sandy Ruby, on January 14, 1997, at an exercise
price of $3.75 per share.
38
<PAGE>
EXHIBIT 4
CAMBRIDGE SOUNDWORKS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 4, 1997
You are hereby notified that the Annual Meeting of Stockholders of
Cambridge SoundWorks, Inc. (the "Company") will be held on November 4, 1997 at
11:00 a.m. at the principal executive offices of Cambridge SoundWorks, Inc.
located at 311 Needham Street, Newton, Massachusetts 02164, to consider and act
upon the following matters:
l. To elect directors for the ensuing year.
2. To ratify the action of the Directors in appointing Arthur Andersen
LLP as auditors for the Company.
3. To transact such other business as may properly come before the
meeting.
Even if you plan to attend the meeting, please be sure to sign, date and
return the enclosed proxy in the enclosed envelope to:
Boston EquiServe Limited Partnership
150 Royall Street
Canton, Massachusetts 02021
Attention: Laurie Batstone
Only stockholders of record on the books of the Company at the close of
business on September 12, 1997 will be entitled to receive notice of and vote at
this meeting.
By order of the Board of Directors,
WAYNE P. GARRETT,
Clerk
September 29, 1997
IMPORTANT: IN ORDER TO SECURE A QUORUM AND TO AVOID THE EXPENSE OF SENDING
FOLLOW-UP LETTERS, PLEASE MAIL YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
YOUR COOPERATION IS GREATLY APPRECIATED.
<PAGE>
CAMBRIDGE SOUNDWORKS, INC.
311 NEEDHAM STREET
NEWTON, MASSACHUSETTS 02164
PROXY STATEMENT
SOLICITATION AND VOTING OF PROXIES
This proxy statement and the accompanying proxy card are being mailed to
stockholders commencing on or about September 29, 1997. The accompanying proxy
is solicited by the Board of Directors of Cambridge SoundWorks, Inc.
(hereinafter called the "Company") for use at the Annual Meeting of Stockholders
to be held on November 4, 1997, and any adjournment or adjournments thereof.
The cost of solicitation of proxies will be borne by the Company. Directors,
officers and a few employees may assist in the solicitation of proxies by mail,
telephone, telegraph and personal interview without additional compensation.
When a proxy is returned properly signed, the shares represented thereby
will be voted by the proxies named in accordance with the stockholder's
directions. You are urged to specify your choices on the enclosed proxy card.
If the proxy is signed and returned without specifying choices, the shares will
be voted "FOR" proposals 1 and 2 and in the discretion of the proxies as to
other matters that may properly come before the meeting. Sending in a proxy
will not affect a stockholder's right to attend the meeting and vote in person.
A proxy may be revoked by notice in writing delivered to the Clerk at any time
prior to its use or by voting in person at the meeting. A proxy may also be
revoked by a later dated proxy. A stockholder's attendance at the meeting will
not by itself revoke a proxy.
VOTING SECURITIES AND RECORD DATE
The Board of Directors has fixed September 12, 1997 as the record date for
the meeting. Only stockholders of record on the record date are entitled to
notice of and to vote at the meeting. On the record date, there were 3,803,027
shares of Common Stock, without par value, of the Company issued and
outstanding, all of which shares are entitled to one vote per share.
The Company's By-laws provide that a quorum shall consist of the
representation in person or by proxy at the annual meeting of stockholders
entitled to vote 51% of the votes that are entitled to be cast at the meeting.
Abstentions and broker non-votes will be counted for purpose of determining the
presence or absence of a quorum. "Broker non-votes" are shares held by brokers
or nominees which are present in person or represented by proxy, but which are
not voted on a particular matter because instructions have not been received
from the beneficial
-2-
<PAGE>
owner. The effect of abstentions and broker non-votes to be brought before the
Annual Meeting of Stockholders is discussed below.
With respect to the two matters scheduled to come before the stockholders
at the Annual Meeting, (i) directors shall be elected by a plurality of the
voting power present in person or represented by proxy at the meeting and
entitled to vote and (ii) the appointment of the auditors shall be determined by
a majority of the voting power present in person or represented by proxy at the
meeting and entitled to vote. With respect to the election of directors, only
shares that are voted in favor of a particular nominee will be counted towards
such nominee's achievement of a plurality. Shares present at the meeting that
are not voted for a particular nominee, shares present by proxy with respect to
which the stockholder properly withholds authority to vote for such nominee and
broker non-votes will not be counted towards such nominee's achievement of a
plurality. With respect to ratification of the appointment of the auditors,
abstentions and broker non-votes are considered present at the meeting for such
matter but, since they are not affirmative votes for the matter, they will have
the same effect as votes against the matter.
The Company's Annual Report to Stockholders, including financial statements
for the fiscal year ended June 29, 1997, is being mailed to stockholders of
record of the Company concurrently with this proxy statement. The Annual Report
is not, however, a part of the proxy soliciting materials.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 12, 1997, by (i) each director of
the Company, (ii) each of the executive officers named in the Summary
Compensation Table, (iii) all directors and executive officers of the Company as
a group and (iv) each person known by the Company to own beneficially more than
5% of the Common Stock.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table, of any
voting securities of the Company if he or she has or shares voting power or
investment power with respect to such security or has the right to acquire
beneficial ownership at any time within 60 days of September 12, 1997. As used
herein, "voting power" is the power to vote or direct the voting of shares, and
"investment power" is the power to dispose of or direct the disposition of
shares. Except as indicated in the notes following the table below, each
person named has sole voting and investment power with respect to shares listed
as being beneficially owned by such person.
-3-
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
-----------------------
NUMBER PERCENT
----------- ----------
<S> <C> <C>
Creative Technology Ltd (1) 1,169,608 27.02%
31 International Business Park
Creative Resource
Singapore, 609921
William R. Hambrecht (2) 337,000 7.78%
c/o Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Henry E. Kloss 322,766 7.46%
174 Brattle Street
Cambridge, MA 02138
DIRECTORS AND OFFICERS
Thomas J. DeVesto (3) 338,605 7.82%
Thomas E. Brew, Jr. (4) 8,000 *
Franklin S. Browning, Jr. (4) 8,000 *
Wayne P. Garrett (5) 21,666 *
Thomas J. Hannaher (6) 25,394 *
Leo Kahn (4) 15,300 *
Robert S. Mainiero (7) 15,000 *
Craig L. McHugh --- ---
Sandy Ruby (8) 21,666 *
Peter B. Seamans (4) 8,000 *
All directors and executive officers as a group (10 461,631 10.64%
persons)(3)(4)(5)(6)(7)(8)
</TABLE>
_______________________
* Less than one percent.
(1) According to a report filed with the Securities and Exchange Commission on
Schedule 13D, dated March 5, 1997, Creative Technology Ltd. exercises sole
voting power with respect to 1,169,608 shares of Common Stock including
currently exercisable warrants to purchase 257,314 shares of Common Stock.
(2) According to a report filed with the Securities and Exchange Commission on
Amendment No. 1 to Schedule 13D, dated August 15, 1997, William R.
Hambrecht is the Chairman of Hambrecht & Quist Group ("H&Q Group", which is
the sole parent of Hambrecht & Quist California), Hambrecht & Quist
California ("H&Q California", which is a member of Hambrecht & Quist LLC)
and Hambrecht & Quist LLC ("H&Q LLC") and is a trustee
-4-
<PAGE>
of The Hambrecht 1980 Revocable Trust ("Trust"). Mr. Hambrecht shares
voting and investment power with respect to the 145,000 shares (3.4%) held
by H&Q LLC and 192,000 shares (4.4%) held by the Trust. Mr. Hambrecht
disclaims beneficial ownership as to 337,000 shares. Each of H&Q Group and
H&Q California disclaims beneficial ownership as to 145,000 shares.
(3) Includes currently exercisable options granted to Mr. DeVesto to purchase
74,167 shares of Common Stock. Includes 11,530 shares of Common Stock held
by Mr. DeVesto as custodian for minor children with respect to all of which
shares Mr. DeVesto disclaims beneficial ownership.
(4) Includes currently exercisable options granted to each of Messrs. Brew,
Browning and Kahn to purchase 8,000 shares of Common Stock.
(5) Includes currently exercisable options granted to Mr. Garrett to purchase
21,666 shares of Common Stock.
(6) Includes currently exercisable options granted to Mr. Hannaher to purchase
25,394 shares of Common Stock.
(7) Includes currently exercisable options granted to Mr. Mainiero to purchase
15,000 shares of Common Stock.
(8) Includes currently exercisable options granted to Mr. Ruby to purchase
21,666 shares of Common Stock.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
executive officers and stockholders who own more than 10% of the outstanding
Common Stock of the Company to file with the Securities and Exchange Commission
and Nasdaq reports of ownership and changes in ownership of voting securities of
the Company and to furnish copies of such reports to the Company. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the year ended June 29, 1997, or written
representations in certain cases, the Company believes that all Section 16(a)
filling requirements were satisfied during the year ended June 29, 1997, except
that through inadvertence, Leo Kahn failed to file a Form 4 to reflect certain
Common Stock purchases for which a Form 5 has now been filed with the Commission
and Nasdaq.
-5-
<PAGE>
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
One of the purposes of the meeting is to elect seven (7) directors to serve
until the next Annual Meeting of Stockholders and until their successors shall
have been duly elected and qualified. It is intended that the proxies solicited
by the Board of Directors will be voted in favor of the seven (7) nominees named
below, unless otherwise specified on the proxy card. All of the nominees except
Joseph M. Piccirilli are currently members of the Board and have consented to be
named and to serve if elected. Mr. Piccirilli has also consented to be named
and serve, if elected. There are no family relationships between any nominees,
directors or executive officers of the Company.
The Board knows of no reason why any of the nominees will be unavailable or
unable to serve as a director, but in such event, proxies solicited hereby will
be voted for the election of another person or persons to be designated by the
Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
NOMINEES LISTED BELOW.
The following are summaries of the background and business experience and
descriptions of the principal occupations of the nominees:
<TABLE>
<CAPTION>
PRESENT PRINCIPAL EMPLOYMENT
NAME AGE AND PRIOR BUSINESS EXPERIENCE DIRECTOR SINCE
- ---------------------- --- --------------------------------------- --------------
<S> <C> <C> <C>
Thomas J. DeVesto 50 Mr. DeVesto, a co-founder of the 1988
Company, has served as Director,
President and Chief Executive Officer
since 1988. From 1985 to 1988, he
was a consultant to ITT Corporation
and represented ITT Corporation in
connection with its relationship with
Kloss Video Corporation. From 1978
to 1985, he was Vice President of
Sales and Marketing of Kloss Video
Corporation. From 1976 to 1978,
Mr. DeVesto held various sales
management positions in the
international and domestic divisions
of Advent Corporation.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Thomas E. Brew, Jr. 55 Mr. Brew served as Acting Co-Chief 1995
Executive Officer and President of
Kurzweil Applied Intelligence, Inc., a
speech recognition software company,
from May 1994 until November 1994
when he was elected President, Chief
Executive Office and a director.
From 1979 to May 1994, Mr. Brew
was a founder and Executive Vice
President of Argus Management
Corporation, a firm that provides
interim management services in crisis
situations.
Franklin S. 69 Franklin S. Browning, Jr. has been a 1996
Browning, Jr. director of the Company since
November 1996. Mr. Browning co-
founded the Boston advertising
agency Humphrey Browning
McDoughall in 1970. He was
chairman of Humphrey Browning
McDoughall from 1970 until 1983.
Leo Kahn 80 Mr. Kahn was a founder, President 1995
and Chief Executive Officer of Purity
Supreme, Inc. prior to the sale of the
company in 1984. After the sale,
Mr. Kahn co-funded Staples, Inc., a
retail office supply chain and took
part in various other business
ventures including Health
Development Corporation, a
chain of exercise centers and Fresh
Fields, Inc., a chain of health food
supermarkets. He has been a partner
of United Properties since 1985, a
director of Big V Supermarkets and
Grossmans, Inc. since 1986.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Craig L. McHugh 40 Craig L. McHugh has been a director 1997
of the Company since August 1997.
In connection with Creative Labs,
Inc.'s investment in the Company,
Mr. McHugh was elected to the
Board of Directors. Mr. McHugh
has been Vice President, General
Manager of Creative Labs, Inc. since
January 1996. He joined Creative
Labs, Inc. in October 1993 as
General Manager of Worldwide OEM
and later served as Vice President of
Sales and Marketing of Creative
Labs, Inc.
Prior to his employment at Creative
Labs, Inc., Mr. McHugh was Vice
President of Sales and Marketing at
Trace, Inc. and was also a member of
Trace, Inc.'s Board of Directors.
Joseph M. Piccirilli 48 Mr. Piccirilli has been consultant to
the consumer electronics industry
since 1988. He is also President of
the Academy for the Advancement of
High End Audio and Video. In 1974,
Mr. Piccirilli was one of the founders
of Sound Advice Inc., a publicly
traded, Florida based consumer
electronics retailer.
Peter B. Seamans 73 Mr. Seamans has been a partner with 1996
the law firm of Peabody & Arnold
since 1957. He previously served as
a director of Kloss Video Corporation
and Advent Corporation and currently
serves on the Board of Directors of
the Peabody Essex Museum and the
USS Constitution Museum.
</TABLE>
-8-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Woody Kaplan, a former director of the Company, owns a minority interest in
six shopping mall locations in which the Company leases space.
In February, 1994, the Company entered into a License Agreement (the
"License Agreement") with Henry Kloss. The License Agreement provides that the
Company has the perpetual right to use Henry Kloss's name on products that Mr.
Kloss designed or had a substantial role in designing. The rights granted to the
Company by Mr. Kloss terminate as to any product whose appearance or performance
specifications are materially changed by the Company without Mr. Kloss's
consent. Upon termination of Mr. Kloss's employment, the Company agreed not to
use his name generically or in connection with a product unless the Company had
previously done so or Mr. Kloss consented to such use. Under this Agreement, the
Company was not required to make any payments to Mr. Kloss for the right to use
his name.
In April 1996, the Company entered into a Consulting Agreement (the
"Consulting Agreement") with Henry Kloss whereby Mr. Kloss agreed to assist the
Company in its selection and design of current and future products. The
Consulting Agreement expires in September 1999. Pursuant to the terms of the
Consulting Agreement, the Employment Agreement and the License Agreement were
effectively terminated. No Additional payments were due to Mr. Kloss upon the
termination of his Employment Agreement. The Consulting Agreement called for
annual payments to Mr. Kloss of $330,000, plus certain fringe benefits, through
September 1996 with annual payments thereafter of $110,000, plus certain fringe
benefits. The term of the Consulting Agreement extends through September 1999.
Effective September 30, 1996, Mr. Kloss terminated the Consulting
Agreement. At the same time, Mr. Kloss notified the Company of his intention not
to stand for reelection as a Director. Mr. Kloss continues to act as a
consultant to the Company, for which he is paid $10,565 per month, but for which
there is no formal agreement. This arrangement can be terminated by either party
at will. Mr. Kloss provided consulting services to the Company during year ended
June 29, 1997 for which he received approximately $179,000 from the Company.
The Company will not extend or guarantee loans to officers, directors,
employees or affiliates of the Company unless such loans (i) are approved both
by a majority of the Board of Directors and by a majority of the disinterested
directors, and (ii) are on terms no less favorable to the Company than could be
obtained from unaffiliated parties.
-9-
<PAGE>
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors met five times during the fiscal year ended June 29,
1997. There was no director who during the fiscal year attended fewer than 75
percent of the aggregate of all board meetings and all meetings of committees on
which he served.
The Board of Directors has a three-member Audit Committee which is
reconstituted at the first meeting of the Board following the annual meeting of
stockholders. The Audit Committee, which met one time during fiscal 1997, meets
with the Company's independent auditors and principal financial personnel to
review the scope and results of the annual audit and the Company's financial
reports. The Audit Committee also reviews the scope of audit and non-audit
services performed by the independent public accountants, reviews the
independence of the independent public accountants and reviews the adequacy and
effectiveness of internal accounting controls. The present members of the Audit
Committee are Messrs. Brew, Kahn and Seamans.
The "disinterested" directors, for purposes for Rule 16b-3 under the
Exchange Act, Messrs. Brew, Kahn and Seamans acting as a Compensation Committee,
have the authority, subject to the express provisions of the Company's 1993
Stock Option Plan, to determine the employees of the Company to receive options,
the number of shares to be optioned and the terms of the options granted; to
construe and interpret the 1993 Stock Option Plan and outstanding options; and
to make all other determinations that they deem necessary and advisable for
administering the 1993 Stock Option Plan.
The Board of Directors does not have a standing committee on nominations.
Directors' Compensation
Outside directors are compensated for their service on the Board of
Directors at the rate of $1,000 per meeting plus expenses. Directors who are
employees of the Company are not paid any additional compensation for serving as
directors.
-10-
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the years ended June 29, 1997, June 30, 1996 and July 2,
1995, by its Chief Executive Officer and each of the Company's other executive
officers whose total salary and bonus exceeded $100,000 during such 12 month
periods:
<TABLE>
<CAPTION>
LONG-TERM
-------------------
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER ALL
ANNUAL STOCK OTHER
NAME AND YEARS SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION ENDED(1) $ $ ($)(2) (#)(3) ($)(4)
- ---------------------------------- ------- -------- ------- ------------ ------- -------------
Thomas J. DeVesto
President and Chief Executive
Officer 6/29/97 371,162 27,000 --- 205,000 ---
6/30/96 335,692 --- --- 155,000 ---
7/2/95 312,693 --- --- 25,000 ---
Henry E. Kloss
Former Chairman of the
Board and
Former Director of Product
Development 6/29/97 0 --- --- --- ---
6/30/96 269,077 --- --- 6,250 ---
7/2/95 312,693 --- --- 25,000 ---
Wayne P. Garrett
Vice President - Finance and
Chief Financial Officer 6/29/97 144,498 10,800 --- 45,000 ---
6/30/96 126,947 --- --- 30,000 ---
7/2/95 18,269 --- --- 20,000 ---
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Hannaher
Vice President - Marketing 6/29/97 148,984 10,800 --- 45,000 ---
6/30/96 126,947 --- --- 30,000 ---
7/2/95 148,000 --- --- 13,720 ---
Robert S. Mainiero
Vice President - Business
Development 6/29/97 130,772 10,800 --- 45,000 ---
6/30/96 62,500 --- --- 30,000 ---
7/2/95 0 --- --- --- ---
Sandy Ruby
Vice President - Retail 6/29/97 126,526 10,800 --- 45,000 ---
6/30/96 117,789 --- --- 30,000 ---
7/2/95 0 --- --- --- ---
</TABLE>
_________________________
(1) On March 14, 1995, the Company's fiscal year was changed to end on the
Sunday nearest the end of June. Therefore, the Company's fiscal year for
1995 consisted of only six months ended on July 2, 1995. The amount shown
for July 2, 1995 has been restated to include the 12 months ended July 2,
1995.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or ten percent of the total
annual salary and bonus reported for the executive officer during the years
ended June 29, 1997, June 30, 1996 and July 2, 1995.
(3) Options represent the right to purchase shares of Common Stock at a fixed
price per share (fair market value) in accordance with vesting schedules
applicable to each option.
(4) The Company did not grant any restricted stock awards or stock appreciation
rights (SARs) or make any long-term incentive plan payouts during the year
ended June 29, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-12-
<PAGE>
The following table shows all options granted to each of the named executive
officers of the Company during the year ended June 29, 1997, and the potential
value at stock price appreciation rates of 5% and 10% over the ten year term of
the options. The 5% and 10% rates of appreciation are not intended to forecast
possible future actual appreciation, if any, in the Company's stock prices. The
Company did not use an alternative present value formula because the Company is
not aware of any such formula that can determine with reasonable accuracy the
present value based on future unknown or volatile factors.
-13-
<PAGE>
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS/SARS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(4)
---------------------------------
OPTIONS/SARS IN THE YEAR PRICE EXP.
NAME GRANTED (#) ENDED 6/29/97 ($/SH)(3) DATE 5%()$ 10%($)
- -------------------- ---------- ------------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. DeVesto 50,000(1) 26.6% 4.13 1/14/07 129,867 329,108
Wayne P. Garrett 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Thomas J. 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Hannaher
Robert S. Mainiero 10,000(2) 5.3% 5.38 12/30/06 33,835 85,743
15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
Sandy Ruby 15,000(1) 8.0% 3.75 1/14/07 35,375 89,648
</TABLE>
(1) These options are exercisable on January 14, 1997, at which time the
options are 33 1/3% vested with options vesting in additional 33 1/3%
increments in two annual installments commencing on January 14, 1998.
(2) These options are exercisable on December 30, 1997, at which time the
options are 33 1/3% vested with options vesting in additional 33 1/3%
increments in two annual installments commencing on December 30, 1998.
(3) The exercise price per share is the market price of the underlying Common
Stock on the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based upon assumed rates of share price appreciation set by the
Securities and Exchange Commission of five percent and ten percent
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise. Actual gains, if any, are dependent on the performance
of the Common Stock and the date on which the option is exercised. There
can be no assurance that the amounts reflected will be achieved.
-14-
<PAGE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED JUNE 29, 1997 AND OPTION VALUES AT
JUNE 29, 1997
The following table sets forth certain information with respect to the
unexercised stock options held as of June 29, 1997, by the executive officers
named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED NUMBER OF SECURITIES IN-THE-MONEY
ON VALUE UNDERLYING UNEXERCISED OPTIONS AT
EXERCISE REALIZED(1) OPTIONS AT JUNE 29, 1997 JUNE 29, 1997($)
-------- ----------- ------------------------ --------------------
EXER- UNEXER- EXER- UNEXER-
CISABLE CISABLE CISABLE CISABLE
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. --- --- 74,167 130,833 43,875 88,375
DeVesto
Wayne P. Garrett --- --- 21,666 23,334 6,850 13,100
Thomas J. --- --- 25,394 19,606 10,750 17,000
Hannaher
Robert S. Mainiero --- --- 15,000 30,000 12,917 25,833
Sandy Ruby --- --- 21,666 23,334 6,250 12,500
</TABLE>
- ----------
(1) Value realized equals fair market value on the date of exercise, less the
exercise price, times the number of shares acquired without deducting taxes
or commissions paid by employee.
-15-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 29, 1997, the Compensation Committee of
the Board of Directors of the Company was responsible for establishing executive
compensation. No executive officer of the Company served as a director or
member of a Compensation Committee, or its equivalent, of another entity, one of
whose executive officers served as director of the Company.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE EXCHANGE ACT,
THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT IN WHOLE
OR IN PART, THE FOLLOWING REPORT AND THE STOCK PERFORMANCE GRAPH CONTAINED
ELSEWHERE HEREIN SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS
NOR SHALL THEY BE DEEMED TO BE SOLICITING MATERIAL OR DEEMED FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE EXCHANGE ACT.
REPORT OF THE COMPENSATION COMMITTEE AND THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
During the fiscal year ended June 29, 1997, the Compensation Committee of
the Board of Directors of the Company was responsible for establishing and
administering the policies which govern annual compensation for the Company's
executive officers and was responsible for considering stock option compensation
for the Company's executive officers.
OVERVIEW
The Compensation Committee of the Board of Directors has historically
established levels of executive compensation that provide for a base salary and
bonuses intended to allow the Company to hire, motivate and retain qualified
executive officers. Bonuses were declared in fiscal 1997. From time to time,
the Compensation Committee also grants stock options to executive officers and
key employees in order to bring the stockholders' interests more sharply into
the focus of such officers and employees.
The Compensation Committee of the Board of Directors establishes the annual
salary and bonus of each of the executive officers other than the Chief
Executive Officer, based on the recommendations made by the Chief Executive
Officer. In determining the recommendations for salary and bonus for each of
the other executive officers, the Chief Executive Officer considers each
officer's individual performance, attainment of individual goals and the
contribution to the overall attainment of the Company's goals.
-16-
<PAGE>
STOCK OPTIONS AND OTHER COMPENSATION
Long-term incentive compensation for executive officers consists
exclusively of stock options granted under the Company's Stock Option Plans (the
"Plans"). Executive officers as well as other key employees of the Company
participate in the Plans. During fiscal 1997, the Compensation Committee granted
options to Mr. DeVesto and Robert S. Mainiero, to certain newly appointed
executive officers and those executive officers whose duties and
responsibilities had increased since the prior fiscal year as a result of
promotions or departmental restructuring.
BASIS FOR THE COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The compensation of Mr. DeVesto, Chief Executive Officer, during the year
ended June 29, 1997, was based upon the DeVesto Employment Agreement. The
DeVesto Employment Agreement, amended on February 14, 1997, provides for an
initial salary of not less than $385,000 and an annual $8,000 car allowance,
subject to adjustment at the discretion of the Board of Directors. The Company
also awarded Mr. DeVesto options to purchase 50,000 shares of Common Stock.
Mr. DeVesto received a bonus of $27,000 during the fiscal year ended June
29, 1997.
The Company does not have, nor does it intend to have in the future, a
Chairman of the Board of Directors.
Thomas E. Brew, Jr.
Leo Kahn
Peter B. Seamans
-17-
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
Set forth below is a line graph comparing the Company's 38 month cumulative
total stockholder return with the Nasdaq Stock market - US Index and the Nasdaq
Non-Financial Index. Cumulative total return is measured assuming an initial
investment of $100 and reinvestment of dividends.
-18-
<PAGE>
EXECUTIVE AGREEMENTS
EMPLOYMENT AND CONSULTING AGREEMENTS
On February 14, 1997 the Company entered into a three year employment
agreement with Thomas J. DeVesto (the "DeVesto Employment Agreement") employing
him as President and Chief Executive Officer. Pursuant to the DeVesto
Employment Agreement, which provides for an initial salary of not less than
$385,000, with such adjustments thereto after the first year which the Board of
Directors of the Company may approve, Mr. DeVesto is also entitled to certain
fringe benefits, including the right to participate in all bonus and benefit
programs that the Company makes available to its employees and an annual $8,000
car allowance. The DeVesto Employment Agreement may be terminated by either
party on six month's prior notice for any reason in which event Mr. DeVesto is
entitled to a payment equal to his then annual salary in consideration of an
agreement not to compete with the Company for one year following the termination
of his employment.
Effective September 30, 1996, Henry Kloss terminated the Consulting
Agreement dated April 24, 1996 which he had entered into with the Company to
provide general and specific advice, counsel and assistance to the Company with
respect to the selection and design by the Company of its current and future
products. At the same time, Mr. Kloss notified the Company of his intention not
to stand for reelection as a Director. Mr. Kloss continues, on an informal
basis, to act as a consultant to the Company for which he is paid $10,565 per
month but for which there is no formal written agreement. This arrangement can
be terminated by Mr. Kloss or the Company at will.
STOCK PLANS
On December 31, 1993, the Company adopted, and on January 13, 1994, the
stockholders approved, the Company's 1993 Stock Option Plan (the "1993 Stock
Option Plan"), pursuant to which options to purchase up to 301,500 shares of
Common Stock may be granted to directors, officers and employees of, and
consultants or advisors to, the Company. The 1993 Stock Option Plan is
intended to encourage ownership of the Company's Common Stock by directors,
officers and employees of, and consultants and advisors to, the Company. The
1993 Stock Option Plan provides for the granting of incentive stock options
which are intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") as well as non-qualified stock
options which do not meet the requirements of Section 422 of the Code. If any
unexercised option granted pursuant to the 1993 Stock Option Plan lapses or
terminates for any reason, the shares of Common Stock covered thereby may again
be optioned under the 1993 Stock Option Plan.
The 1993 Stock Option Plan is currently administered by the Compensation
Committee of the Board of Directors, which consists of three directors, each of
whom must be a "disinterested person" within the meaning of Rule 16b-3 under the
Exchange Act. The
-19-
<PAGE>
Compensation Committee determines the employees to whom options will be granted,
the number of shares to be covered by such options and the terms of such
options. No option is exercisable after 10 years from the date on which it is
granted.
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to incentive stock options which first become exercisable in
any calendar year by an employee or officer may not exceed $100,000. Incentive
stock options may not be granted at less than the fair market value of the
Common Stock on the date of grant or 110% of fair market value in the case of
incentive stock options granted to any optionee holding 10% or more of all
classes of voting stock of the Company.
Options issued under the 1993 Stock Option Plan are not transferable,
except by will or the laws of descent and distribution. Each option is
exercisable only while the optionee is in the employ or serving as a director
of, or consultant or advisor to, the Company, except that an incentive stock
option is exercisable within up to three months after termination of employment
or service to the extent such option has vested at the time of such termination
and non-qualified stock options may be exercisable for a longer period after
termination of employment or any service arrangement. If an optionee dies
while employed or retained by the Company or within three months of the
termination of his or her employment by or service to the Company, such
optionee's options may be exercised up to 12 months after his or her death. If
an optionee is permanently disabled during his or her employment by or service
to the Company, such optionee's options may be exercised up to one year
following termination of his or her employment or service due to such
disability. The exercise price of options granted under the 1993 Stock Option
Plan must be paid in full upon exercise in cash, shares of Common Stock already
owned by the optionee or by any other means the Board of Directors determines,
or a combination thereof.
The 1993 Stock Option Plan will terminate on January 13, 2004, 10 years
from the date the plan was approved by the Company's stockholders, but the Board
of Directors may, at any time, terminate, modify or amend such plan. The Board
of Directors may not, without the prior approval of the stockholders of the
Company, increase the maximum aggregate number of shares for which options may
be granted under the 1993 Stock Option Plan.
The 1993 Stock Option Plan was amended at a Special Meeting of the
Stockholders of the Company on November 28, 1995 which was temporarily adjourned
and reconvened on December 12, 1995. The amendment to the 1993 Stock Option
Plan (i) increased the number of shares of Common Stock authorized for issuance
under the 1993 Stock Option Plan, by 168,500, to 470,000 shares, (ii) granted
existing and future non-employee directors of the Company options to purchase
8,000 shares of Common Stock under certain conditions and (iii) provided for the
immediate vesting of all options under the 1993 Stock Option Plan in the event
of a sale of all or substantially all of the Company's assets or Common Stock to
a third party.
-20-
<PAGE>
In fiscal year 1997, the Company granted incentive stock options under the
1993 Stock Option Plan to an aggregate of 18 employees of the Company
exercisable for an aggregate of 187,820 shares at exercise prices between $3.75
and $5.38 per share, all of which vest over a period of two years or three
years. Of the 187,820 shares granted, an option to purchase 10,000 shares was
issued to Robert S. Mainiero, on December 31, 1997, at an exercise price of
$5.38 per share and an option to purchase 50,000 shares was issued to Thomas J.
DeVesto on January 14, 1997, at an exercise price of $4.13, and an option to
purchase 15,000 shares was issued to each of Thomas J. Hannaher, Wayne P.
Garrett, Robert S. Mainiero and Sandy Ruby, on January 14, 1997, at an exercise
price of $3.75 per share.
-21-
<PAGE>
PROPOSAL NO. 2 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors of the Company has appointed Arthur Andersen LLP as
auditors of the Company for the fiscal year ending June 28, 1998 and has further
directed that management submit the selection of auditors for ratification by
the stockholders. Arthur Andersen LLP were the Company's auditors for the fiscal
year ended June 29, 1997.
Representatives of Arthur Andersen LLP are expected to be present at the
meeting, with the opportunity to make a statement if they desire to do so, and
are expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO RATIFY
THE CHOICE OF ARTHUR ANDERSEN LLP AS THE COMPANY'S AUDITORS.
STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
Any stockholder desiring to present a proposal for consideration at the
Company's 1998 annual meeting of stockholders, scheduled to be held on or about
November 2, 1998 and included in the Company's proxy statement, must submit the
proposal to the Company so that it is received at the executive offices of the
Company not later than August 1, 1998. Any stockholder desiring to submit a
proposal should consult applicable regulations of the Securities and Exchange
Commission.
OTHER MATTERS
As of the date of this proxy statement, management of the Company knows of
no matter not specifically referred to above as to which any action is expected
to be taken at the meeting of stockholders. It is intended, however, that the
persons named as proxies will vote the proxies, insofar as the same are not
instructed to the contrary, in regard to such other matters and the transaction
of such other business as may properly be brought before the meeting, as seems
to them to be in the best interests of the Company and its stockholders.
FORM 10-K AVAILABLE
THE ANNUAL REPORT OF THE COMPANY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K IS AVAILABLE TO STOCKHOLDERS WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE VICE PRESIDENT/FINANCE OF THE COMPANY AT 311 NEEDHAM
STREET, NEWTON, MASSACHUSETTS 02164.
-22-
<PAGE>
EXHIBIT 14
[LOGO OF CAMBRIDGE SOUNDWORKS APPEARS HERE]
November 3, 1997
To Our Stockholders:
I am pleased to inform you that on October 30, 1997, Cambridge SoundWorks,
Inc. (the "Company") entered into an Agreement and Plan of Merger ("Merger
Agreement") with Creative Technology Ltd. ("Parent") and CSW Acquisition
Corporation ("Purchaser"), a wholly-owned subsidiary of Parent. Under the
Merger Agreement, Purchaser has commenced a cash tender offer to purchase all
of the outstanding shares of Common Stock of the Company for $10.68 per share.
Following the completion of the Offer, subject to the terms and conditions of
the Merger Agreement, the Company will be merged into the Purchaser (the
"Merger") and any remaining shares of Common Stock, other than shares owned by
dissenting stockholders, will be converted into the right to receive $10.68
per share in cash, without interest.
YOUR BOARD OF DIRECTORS BY UNANIMOUS VOTE OF ALL DIRECTORS PRESENT AND
VOTING (WITH THE DIRECTOR WHO IS THE DESIGNEE OF PARENT NOT PRESENT OR
PARTICIPATING IN ANY SUCH MEETING OR DISCUSSION) HAS DETERMINED THAT THE OFFER
AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF
THE COMPANY (OTHER THAN PARENT AND THE PURCHASER), HAS APPROVED THE OFFER AND
THE MERGER, AND RECOMMENDS THAT COMPANY STOCKHOLDERS ACCEPT THE OFFER AND
TENDER THEIR SHARES PURSUANT TO THE OFFER.
In arriving at their recommendations, the Board of Directors gave careful
consideration to a number of factors, which are described in the attached
Schedule 14D-9 that the Company has filed today with the Securities and
Exchange Commission. These factors include, among other things, the opinion of
Hambrecht & Quist LLC, the financial advisor to the Company, that the
consideration to be received by holders of the Company's Common Stock (other
than Parent and its affiliates) pursuant to the Merger Agreement is fair to
such stockholders from a financial point of view, as of the date of such
opinion. A copy of the opinion is set forth in the Schedule 14D-9 and should
be read carefully and in its entirety for a description of the procedures
followed, the factors considered and the assumptions made by Hambrecht & Quist
LLC.
In addition to the attached Schedule 14D-9 relating to the Offer, also
enclosed is the Offer to Purchase, dated November 3, 1997, of Purchaser,
together with related materials to be used for tendering your shares. These
documents set forth the terms and conditions of the Offer and the Merger and
provide instructions as to how to tender your shares. I urge you to read the
enclosed materials carefully.
Sincerely,
Thomas J. DeVesto
President and Chief Executive
Officer
- ----------------
311 Needham Street
Newton, MA 02164
(617) 332-5936
-----
<PAGE>
HAMBRECHT & QUIST LLC
EXHIBIT 15
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415)576-3300
October 30, 1997
Confidential
- ------------
The Board of Directors
Cambridge SoundWorks, Inc.
333 Needham Street
Newton, Massachusetts 02164
Dear Board of Directors:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock, no par value
per share (the "Common Stock"), Cambridge SoundWorks Inc. (the "Company") of
the consideration to be received by such holders in connection with a proposed
transaction as set forth below.
We understand that the Company, Creative Technology Ltd., ("Creative") and CSW
Acquisition Corporation (the "Purchaser") propose to enter into an Agreement
and Plan of Merger (the "Agreement") dated as of October 30, 1997. The terms
of the Agreement provide, among other things, that (i) the Purchaser will
promptly commence a tender offer (the "Offer") to purchase for cash all of the
outstanding shares of Common Stock at a purchase price of $10.68 per share,
net to the seller in cash, upon the terms and subject to the conditions set
forth in the Agreement and certain ancillary documents to be filed with the
Securities and Exchange Commission; and (ii) the Purchaser will subsequently
be merged (the "Merger") with and into the Company in a transaction which will
provide all remaining holders of shares of Common Stock (other than the
Company, Creative, the Purchaser or their respective subsidiaries, and holders
who have perfected their appraisal rights under Massachusetts law) with $10.68
per share in cash. The Offer and the Merger constitute the "Proposed
Transaction."
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic
transactions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of the Company in connection with the
Proposed Transaction, and we will receive a fee for our services, which
include the rendering of this opinion.
In the past, we have provided investment banking and other financial advisory
services to the Company and have received fees for rendering these services.
In particular, Hambrecht & Quist acted as lead managing underwriter in the
Company's initial public offering in 1994. In the ordinary course of business,
Hambrecht & Quist acts as a market maker and broker in the publicly traded
securities of the Company and receives customary compensation in connection
therewith, and also provides research coverage for the Company. In the
ordinary course of business, Hambrecht & Quist actively trades in the equity
and derivative securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. In addition, Hambrecht & Quist and its
affiliates currently own approximately 337,000 shares of Company Common Stock.
<TABLE>
<S> <C>
SAN FRANCISCO . NEW YORK . BOSTON
MEMBERS NEW YORK STOCK EXCHANGE . AMERICAN STOCK EXCHANGE . PACIFIC STOCK EXCHANGE
</TABLE>
<PAGE>
The Board of Directors
Cambridge SoundWorks, Inc.
Page 2
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Creative for recent years and interim periods to date and certain other
relevant financial and operating data of Creative made available to us
from published sources;
(ii) reviewed the financial statements of the Company for recent years and
interim periods to date and certain other relevant financial and
operating data of the Company made available to us from published
sources and from the internal records of the Company;
(iii) reviewed certain internal financial and operating information
relating to the Company, including certain financial projections,
prepared by the management of the Company;
(iv) discussed the business, financial condition and prospects of the Company
with certain of its officers;
(v) reviewed the recent reported prices and trading activity for the common
stock of the Company and compared such information and certain financial
information for the Company with similar information for certain other
companies engaged in businesses we consider comparable;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(vii) reviewed the Agreement; and
(viii) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning the Company or Creative
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not undertaken any independent valuation or appraisal of
any of the assets or liabilities of the Company or Creative; nor have we
conducted a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections used in our
analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of the
Company. For purposes of this Opinion, we have assumed that neither the
Company nor Creative is a party to any pending transactions, including
external financings, recapitalizations or material merger discussions, other
than the Proposed Transaction and those activities undertaken in the ordinary
course of conducting their respective businesses. Our opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of this letter and any change in such
conditions would require a reevaluation of this opinion. We were not requested
to, and did not, formally solicit indications of interest from any other
parties in connection with a possible acquisition of, or business combination
with, the Company.
It is understood that this letter is addressed to and for the information of
the Board of Directors in connection with their evaluation of the Proposed
Transaction and may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced in full
in any filing with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934. This letter does not constitute a
recommendation to any stockholder of the Company as to whether such
stockholder should accept the Offer.
<PAGE>
The Board of Directors
Cambridge SoundWorks, Inc.
Page 3
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of Company Common Stock in the
Proposed Transaction is fair to such holders from a financial point of view.
We express no opinion, however, as to the adequacy or financial fairness of
any consideration received in the Proposed Transaction by Creative or any of
its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
/s/ David Golden
By _______________________________________
David Golden
Managing Director
