-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDSZhHzEDqeNQ8D1eMh6zLmO/2Rw/7iR+OH6bgUU3OQjM/mMOPRaYsbrxbKmCP/u Jd+9WMoqDnYAQFyb5esfig== 0000898430-97-001263.txt : 19970401 0000898430-97-001263.hdr.sgml : 19970401 ACCESSION NUMBER: 0000898430-97-001263 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVER CORP CENTRAL INDEX KEY: 0000766177 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 911043157 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14482 FILM NUMBER: 97568369 BUSINESS ADDRESS: STREET 1: 20121 48TH AVE W STREET 2: P O BOX 1237 CITY: LYNNWOOD STATE: WA ZIP: 98036 BUSINESS PHONE: 2067751202 MAIL ADDRESS: STREET 1: 20121 48TH AVE CITY: LYNNWOOD STATE: WA ZIP: 98036 10-K 1 FORM 10-K FORM 10-K --------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 0-14482 CARVER CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 91-1043157 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYERIDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 20121--48TH AVENUE WEST, LYNNWOOD, WA 98036 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (206) 775-1202 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price for the registrant's Common Stock, as reported by the National Association of Securities Dealers' Automated Quotation National Market System on March 27, 1997 was $6,763,288. Number of shares of Common Stock of the Registrant outstanding as of March 27, 1997: 3,742,403 shares. Items 10, 11, 12 and 13 of Part II are incorporated by reference to the Company's definitive proxy statement for its 1997 Annual Meeting of shareholders which involves the election of directors and which will be filed with the Commission within 120 days after the close of the fiscal year. 1 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS....................................................... 3 ITEM 2. PROPERTIES..................................................... 11 ITEM 3. LEGAL PROCEEDINGS.............................................. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS........................................................ 12 ITEM 6. SELECTED FINANCIAL DATA........................................ 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................ 32 ITEM 11. EXECUTIVE COMPENSATION......................................... 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................ 32
2 PART I ITEM 1. BUSINESS INTRODUCTION FORWARD-LOOKING STATEMENTS Statements in this report covering future performance, developments, expecta- tions or events, including the discussion of the Company's strategy, product development and introduction plans and various statements concerning the Company's expectations for its growth and for the consumer electronics indus- try and generation of additional working capital, constitute forward-looking statements which are subject to a number of known or unknown risks, uncertain- ties and other factors which might cause actual results to differ materially from stated expectations. These risks and uncertainties include product devel- opment or production difficulties or delays due to supply constraints, techni- cal problems or other factors; technological changes; the effect of global, national and regional economic conditions; changes in consumer preferences; the impact of competitive products and pricing; changes in demand; increases in component prices or other costs; inventory risks due to shifts in market demand, product obsolescence or other factors; and a number of other risks in- cluding those risks and uncertainties described under the caption "Risk Fac- tors" in Part I of this report and those identified by the Company from time to time in other filings with the Commission, press releases and other commu- nications. Although the Company believes that all forward-looking statements are reasonable, there can be no assurance that actual results, achievements, performance or developments will not differ materially from those expressed or implied by such forward-looking statements. DESCRIPTION OF BUSINESS Carver Corporation ("Carver" or the "Company") designs, develops, manufac- tures and markets high-fidelity audio/video components targeted to the mid-to high-end home entertainment audio/video systems market. Carver products are positioned in the middle and upper price range of most audio components. The Company offers technically innovative audio/video prod- ucts for the home entertainment market that deliver affordable "audiophile" quality. It targets its distribution channels toward knowledgeable consumers who insist on high quality products which offer superior features and perfor- mance. During 1996, the Company's strategy was to update its products, to broaden its market presence and return its operations to profitability. The Company re-engineered every key product category with the introduction of new multi and two channel amplifiers, pre-amplifier/tuners and a receiver. The Company also took several steps to restructure its retail network. The Company was incorporated in the State of Washington in 1978, and its ini- tial public offering occurred in May 1985. Its Common Stock is traded on the Nasdaq National Market under the symbol CAVR. The Company is located at 20121- 48th Avenue West, Lynnwood, Washington 98046. Its telephone number is (206) 775-1202. INDUSTRY OVERVIEW Carver estimates, based on market industry surveys, the U.S. consumer (in- home use) high-fidelity audio market (electronics of all types including por- table and mobile audio) to be currently in excess of $3.6 billion per year at the factory selling price. Home audio/video systems vary widely in design, quality and price from inex- pensive systems having relatively low-quality sound reproduction to expensive systems designed for the high-fidelity sound enthusiasts who demand that their systems duplicate, as closely as possible, the sound of a live performance. System prices range from under $100 to well over $100,000. Carver considers itself positioned between the middle segment and the extreme high-end compa- nies. It estimates the total size of the market for separate audio components to be around $2 billion annually. A Carver system, including loudspeakers, ranges in price from approximately $3,200 to approximately $7,300. RECENT DEVELOPMENTS PRIVATE PLACEMENT OF SECURITIES In the second and third quarters of 1996, the Company sold 1,411,764 shares of Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and issued five-year warrants (the "Warrants") to acquire up to 300,000 shares of the Company's Common Stock pursuant to a Stock Purchase Agreement (the "Agree- ment") with Renwick Capital Management, Inc. and certain Renwick affiliates ("Renwick"). The Shares of Preferred Stock and Warrants are convertible into 1,711,764 shares of Common Stock, or approximately 46% of the current shares outstanding. See Item 7 of Part II below. The price of the Preferred Stock was $2.125 per share and each share of Pre- ferred Stock is convertible at any time at the option of the holder into one share of Common Stock. The Company received gross proceeds of $3,000,000 from the sale of the Preferred Stock. 3 The holders of the Preferred Stock are entitled to one vote for each share of Common Stock into which the Preferred Stock is convertible and to elect two representatives to the Company's Board of Directors. By virtue of the number of votes to be controlled by Renwick and its affiliates, their right to elect two of the Company's five directors and the fact that various actions may not be taken by the Company without the approval of the holders of at least a ma- jority of the Preferred Stock, such holders may be deemed to have acquired control of the Company. The exercise price of the Warrants is $1.50 per share of Common Stock, if ex- ercised from the date of the initial closing through the date two years from the date of the initial closing, $1.75 for the next year, $2.00 for the next year, and $2.125 for the final year, subject to certain potential antidilution adjustments. Renwick is a New York-based investment banking firm founded in 1994 which specializes in the identification of undervalued growth companies exhibiting the potential for an operational turn-around. Renwick actively supports its principal investments through involvement in the industry and Wall Street pro- fessionals familiar with turn-around situations. SALE OF COMPANY'S MANUFACTURING FACILITY The Company has entered into an agreement to sell its existing headquarters and manufacturing facility in Lynnwood, Washington for approximately $3,000,000 in cash, which would yield net proceeds of approximately $2,800,000. The closing of this transaction in the second quarter of 1997 is subject to satisfaction of a contingency related to an environmental audit, which is expected to be completed by April 1, 1997. PROPERTY CAUSALITY LOSS On December 30, 1996, a Pacific Northwest snow storm temporarily interrupted the Company's normal business operations and caused a roof section at its man- ufacturing and corporate headquarters to collapse. The Company is insured for losses caused by an interruption to its business and damage to its property, and as a result no material losses are anticipated. CUSTOMS AUDIT Late in 1994, the United States Customs Service completed an audit of the Company's import operations. The Customs Service found that the Company had made late duty payments totaling $99,000 on tooling between 1989 to 1993. On March 9, 1995, the Customs Service issued to the Company a prepenalty notice indicating that it would assess a penalty up to approximately $400,000. The Company has provided documentation to the Customs Service, and the Company paid the Customs Service $50,000 in 1995 as an offer in compromise of the pen- alty which was accepted by the Customs Service in May 1996 as full settlement. PERSONNEL Debra L. Griffith was elected Vice President of Finance and Chief Financial Officer in July 1996. Mark A. Nygren was elected Vice President of Operations in January 1997. See "Executive Officers of the Registrant" in this item. Raj K. Bhatia and James R. McCullough, principals of Renwick, were elected directors of the Company in June 1996 in connection with the Renwick financings. See "Private Placement of Securities". Robert W. Carver resigned as a director of the Company in August 1996, and Robert A. Fulton resigned as a director of the Company in January 1997. PRODUCTS In 1996, five Carver products were named a Recommended Component by Stereophile Magazine, one of the industry's most influential and prestigious publications. This rating is based predominately on performance, with consid- eration given to products offering exceptional value for their suggested re- tail price. The Carver products earning Recommended Component rating were the TFM-35x amplifier, AV-806x amplifier, Lightstar Reference amplifier, Lightstar Direct preamplifier and the HTR-880 A/V receiver. In 1996, two Carver products received "Product of the Year" awards from AudioVideo International's Hi-Fi Grand Prix: the CT-23 preamp/tuner and TFM- 6cb amplifier. AudioVideo International is an influential trade publication in both domestic and international markets. In addition, two more Carver prod- ucts, the TFM-35x amplifier and CT-28v preamp/tuner, received "Special Recog- nition" awards in their respective categories from AudioVideo International. HOME AUDIO/VIDEO PRODUCTS In recent years, Carver has concentrated its efforts on the growing market for audio/video or home theater separates. The Company markets a home audio/video component line of 18 products which include 5 two channel power amplifiers, 2 multi-channel amplifiers, 4 preamplifier/tuners, 1 receiver, 2 preamplifiers and one model each of a tuner, CD changer, cassette deck and loudspeakers. Manufacturer's U.S. Suggested Retail Price on the Company's products ranged from $399-$2500. An audio entertainment system typically includes a signal source such as a CD player, cassette deck or radio tuner which outputs to a preamplifier that con- trols the volume level, tone, and source switching. Specialized amplification circuits in the preamplifier 4 convert input signal to a compatible format and feed it to the amplifier which increases the signal strength to a level strong enough to drive loudspeakers. An audio/video receiver accomplishes most of these functions in one box, but the consumer is typically compromising performance to achieve compactness. Al- though Carver offers a receiver it believes its strength lies in its separate components which allow the consumer the flexibility to customize power and features to suit their home acoustics and listening preferences. Separate com- ponents also provide superior audio performance, improved reliability and more upgrade options. The Company believes consumers select separates primarily by power, accuracy or sonic superiority, features and price. Until November 1995, Carver offered multiple lines of professional power am- plifiers that covered a wide range of professional applications. The Company discontinued sales of professional products in November 1995 in connection with the sale of its professional product line to Phoenix Gold International, Inc. CARVER TECHNOLOGIES Historically, the Company has identified certain fundamental limitations of the stereophonic sound reproduction process and then developed innovative electronic circuits or other technologies which address these limitations. In recent years, the Company has developed technologies which it believes en- hances the listener's enjoyment of audio/video or home theater components and systems. The Company holds fifteen patents with respect to certain of the technologies described below and licenses an additional technology. See "Pat- ents and Trademarks." The Company's technologies include: LIGHTSTAR(R) POWER AMPLIFIER TECHNOLOGY. The Company believes its Lightstar Technology represents the most advanced power amplifier technology on the mar- ket today. This technology offers performance advantages over current ampli- fier designs in terms of current capability, the capability to drive any loud- speaker load independent from voltage fluctuations from the AC power line and effortless sound quality. The Company holds patents on its Lightstar technolo- gy. The patents expire beginning in 2014. MAGNETIC FIELD POWER AMPLIFIER(TM) TECHNOLOGY. Carver Magnetic Field amplifi- ers are capable of delivering both high voltage and high current simultane- ously into modern speaker designs which can swing as low as two ohms in cer- tain frequency ranges. The patents relating to Magnetic Field Power Amplifier technology are licensed by the Company from Robert W. and Diana R. Carver. TRANSFER FUNCTION MODIFICATION TECHNOLOGY. The t-modification process allows the Company to duplicate many of the sonic characteristics of very costly tube amplifiers in solid state designs at a fraction of the cost. CINEMA HOLOGRAPHY(R) AND SONIC HOLOGRAPHY(R). Using principles analogous to those employed in producing visual holograms with intersecting laser beams, the Company's Cinema and Sonic Holography technologies produce the illusion that the musical program is being performed by instruments arrayed on a three- dimensional stage. Cinema Holography also creates a much wider sound stage and side images that are focused in specific positions. The Company holds two U.S. patents relating to Sonic Holography which will expire beginning in 1999. ASYMMETRICAL CHARGE-COUPLED FM DETECTION TECHNOLOGY. Carver's patented Asym- metrical Charge-Coupled FM Detector (ACCD) circuit substantially reduces in- terference caused by multipath distortion and noise present in weak stereo ra- dio broadcast signals. Thus, high quality stereo reproduction can be achieved from FM signals which would produce unacceptably poor sound quality on other equipment. The two patents for the Asymmetrical Charge-Coupled FM Detection Technology will expire beginning in 2000. PLANAR SPEAKER TECHNOLOGY. The Company's Flat Panel Speaker technology was developed to address many of the problems encountered in conventional speaker designs and ribbon array speakers. This dipole ribbon technology employs inno- vative materials, panel geometry and driver positioning to achieve a sharply focused, yet large three-dimensional sound effect. The Company's patent ex- pires in 2010. POWER STEERING(TM). Some of the most startling effects in a motion picture are those that allow a sound to move from left to right or, even more impres- sively, from left front to right rear such as a jet flying across a room. These effects are made to happen by "steering" the levels of a given sound to the various channels to achieve the desired image position at any given point in time. Most power amplifiers have a clipping level on each channel that doesn't vary significantly because only one or all channels are being driven at the same time. This means that while one channel is driven to full power the other channels are idling. Much of the capability of the power supply is being wasted, just sitting dormant, while the dominant channel is taking just one channel's worth of power. The Company's Power Steering Technology allows the power amplifier to deliver its full rated power into all channels driven simultaneously, and, as the directional cues in the program cause the signal to be "steered" to a specific channel, focus a greater portion of the power supply to the channel demanding the greatest output. This ability to provide significant power gains into the most demanding channel on a continuous basis or to all five chan- 5 nels dynamically results in greater authority, clarity and spaciousness that is not available in conventional power amplifiers. MAGNIFIED CURRENT AMPLIFICATION(TM) TECHNOLOGY. Using principles learned from its Lightstar Technology, the Company has developed a multi-state hybrid power amplifier design which can deliver more than twice the current of conventional amplifier designs using the same power transistors. The Company's Magnified Current Amplification Technology utilizes the full current capability of out- put power transistors which maximizes both the voltage and current capability available for loudspeaker load. INFINITE DECORRELATION(TM). The Company's Infinite Decorrelation technology was developed to maximize the surround space and directional cues from sur- round sound channels for home theater applications. This technology eliminates the lack of rear left or right separation for sounds that are placed behind the listener in home theater applications and produces a much more realistic and lifelike sound. TOTAL DIRECT COUPLING(TM). As transistor power amplifiers incorporated de- signs which eliminated output transformers, they required the use of stabiliz- ing inductors which created colorations in the reproduction of the upper har- monics of most instruments. The Company's Total Direct Coupling (TDC) Technol- ogy allows the output circuits of power amplifiers to be directly connected to a loudspeaker without the use of stabilizing inductor network and the associ- ated sonic disadvantages. TDC allows the Company's amplifiers to be stable into a variety of speaker loads. BIDAC(TM). The Company's BiDAC Technology is utilized in the Company's digi- tal to analog convertor which uses bitestream conversion for low-level pas- sages (ones that typically contain the mid and high frequencies) and continu- ous calibration multibit for the high-level passages (that typically contain the high level low frequencies). PATENTS AND TRADEMARKS The Company holds fifteen domestic patents issued between 1980 and 1997 on several of its technologies which are incorporated into a number of its prod- ucts. See "Carver Technologies" above. Patents with respect to Sonic Holography(R), ACCD and Flat Panel Speaker Technology have been issued by var- ious countries. Robert W. and Diana R. Carver personally own domestic and foreign patents on the Magnetic Field Power Amplifier technology. The Company has a non-exclusive license to use the technology which requires the Company to pay Robert W. and Diana R. Carver royalties on sales of products incorporating such technology. While the Company believes that the patent rights owned and licensed by the Company are important and cover and protect adequately the Company's proprie- tary rights in the patented technologies, there can be no assurance that any current or future patents will prove valid. Moreover, the Company believes that its growth, competitive position and future success are more dependent upon technical expertise and marketing skills than on the ownership of patent rights. "Carver," "Cinema Holography," "Sonic Holography," and "Lightstar," are reg- istered trademarks of the Company. Trademark registrations pending are "Great American Sound," "GAS," "Ampzilla" and "Power Steering." The Company claims common law rights to the following trademarks: "Digital Time Lens," "Magnetic Field Amplifier," "Soft EQ," "KLW Audio," the "Amazing Loudspeaker," "Amazing Loudspeakers" and "TAL". SALES AND MARKETING The Company markets its audio/video products in the United States primarily through retail outlets, ranging from audio/video specialty stores to national retailers of brand-name consumer electronics, serviced by 16 independent manu- facturers' representative companies and the Company's sales and marketing staff. The Company's dealers typically stock a broad variety of audio/video equipment and may also carry automobile audio systems, televisions, video cas- sette recorders and other consumer-oriented electronic products. The Company seeks dealers who emphasize high quality audio systems and who are knowledge- able about the characteristics of audio/video products. The Company's sales and marketing department emphasizes dealer education programs and product lit- erature to enable individual sales people to understand and explain to consum- ers the superior price/performance features offered by the Company's products. In order to maintain a high quality distribution system that is competitive with those of other brands, the Company sells products only to dealers who have signed dealer agreements reflecting the Company's distribution policies. Purchasers of high quality audio equipment tend to rely on audio specialty publications, the recommendations of their friends and acquaintances who are audio enthusiasts and recommendations of and demonstrations by knowledgeable sales people. Accordingly, the Company believes that the favorable reviews of the Company's products that have been featured in such publications as Stereo Review, Audio, Stereophile, Stereophile Guide to Home Theater, Audio/Video In- teriors, Audio Adventure, Home Theater, and The $ensible Sound in addition to the Company's general reputation for producing superior products are impor- 6 tant keys of its sales and marketing program. Domestic sales of consumer audio products accounted for approximately 57%, 51%, and 83% of the Company's sales in 1994, 1995 and 1996, respectively. Total Company sales of consumer audio products were 71%, 60%, and 91%, respectively, for the same years. Prior to mid-November 1995, the Company designed, manufactured, marketed and sold a line of professional audio products. Worldwide sales of professional audio products accounted for approximately 25% of the Company's sales in 1994 and 1995 and approximately 3% in 1996. From mid-November 1995 through December 31, 1996, the Company manufactured and sold certain professional sound prod- ucts solely to the purchaser of its professional products line pursuant to a Manufacturing Agreement entered into by the Company at the time of the sale. The Company has fulfilled its obligations under this Agreement and expects to make incidental sales of discontinued professional products in 1997. OEM PRODUCT Original Equipment Manufacturer (OEM) production accounted for approximately 1%, 8% and 1% of sales in 1994, 1995 and 1996, respectively. Most of the prod- ucts which the Company sold as an OEM prior to 1996 were professional audio products, and the underlying contracts for such OEM sales were included in the sale of Carver's professional product line. INTERNATIONAL SALES The Company has a network of 49 distributors who provide retail sales cover- age in over 50 countries. Foreign sales accounted for approximately 27%, 28%, and 9% of the Company's sales in 1994, 1995 and 1996, respectively. Management intended to allocate more resources in global marketing in 1996 in an effort to increase its international revenues. Cash constraints in 1995 and 1996 pre- vented the Company from allocating additional resources to the development of products for its international markets and from marketing its existing prod- ucts. The Company intends to introduce 12 new products for its international markets in 1997. See "Risk Factors--Risks of International Business." COMPETITION The consumer electronics industry is intensely competitive. Many large and small manufacturers offer audio systems which vary widely in price and quality and which are distributed through a variety of distribution channels, includ- ing audio specialty stores, discount stores, department stores and mail order firms. The Company has chosen to concentrate its efforts on the segments of the market served principally by audio specialty stores and a major national consumer electronics retailer, Circuit City. See "Risk Factors--Concentration of Accounts." In recognition of current market trends which show that consum- ers are purchasing more electronics via direct mail, Carver products can now be purchased through upscale direct marketing companies such as Cambridge SoundWorks and Crutchfield. In the home audio market, the Company competes mainly with Adcom, Parasound, Marantz and Harman Kardon. Most of the Company's competitors have substan- tially greater financial and technical resources than the Company. The Company believes that its competitive position in the consumer audio components market is enhanced by unique Carver technologies and features which have given the Company strong price/performance, as well as brand recognition advantages. See "Risk Factors--Competition." PRODUCT RETURNS From time to time the Company has accepted returns of unsold products from its dealers. Historically, the financial impact associated with the return of unsold products has been insignificant. BACKLOG The Company's policy is to maintain sufficient finished goods inventory to fill orders within three business days after they are received. However, dur- ing most of 1995 and the first seven months of 1996, the Company operated un- der very tight cash constraints, and it's backlog rose somewhat higher than normal due to the Company's deferral of the purchase of sourced product. Also, the Company's backlog of orders may rise following major product introductions as dealers place orders for the new products in excess of the number produced in initial production runs or if an offshore supplier fails to make on-time deliveries of product. During the second half of 1996, two of the Company's overseas vendors were unable to deliver three new models on time. See "Risk Factors--Dependence on Outside Manufacturers." Because of the Company's policy of filling an order promptly after receipt, the Company does not view the level of backlog to be an important index of future performance. The Company's backlog of orders at January 31, 1997 was approximately $618,000, compared to approximately $2,575,000 on January 31, 1996. ENGINEERING, RESEARCH AND DEVELOPMENT The Company recognizes that its future is dependent on its ability to intro- duce products which incorporate technological innovation and advanced fea- tures. See "Risk Factors--Technological and Product Obsolescence." 7 The modular amplifier design that the engineering group developed in 1996 has been successfully introduced in five new amplifiers that have set new stan- dards for the Company in performance, assembly, efficiency and reliability. Three of the new amplifiers are multi-channel amplifiers which incorporate the Company's Power Steering(TM) technology. The engineering group has designed a two-channel amplifier, the A-220, which will be manufactured by the Company and replace an existing two-channel ampli- fier currently sourced offshore, representing a continuation of the Company's strategy to return production to the United States. The engineering group is also developing a modular digital processor design which will be used in a new line of "Dolby Digital(R)" surround sound pre- amplifiers/tuner and processors scheduled for introduction beginning in April 1997. The completion of these new designs marks the Company's continuing ef- fort to bring the majority of development and production back to the United States, not only in power amplification, but also in "small signal" components that have for the last several years been developed for the Company by over- seas suppliers. The Company has developed three new home theater speaker systems that are scheduled to be offered for sale mid-1997, including a LucasFilm THX(R) certi- fied system. In addition, the Company plans to introduce at least one new ver- sion of its ribbon loudspeaker product later this year that will feature an improved design. The Company also plans to introduce new models of ribbon speakers that will complete the ribbon line for high-end home theater applica- tions. Carver expects to release approximately 20 new and replacement products dur- ing 1997. There can be no assurances that product development or introduction plans will be accomplished on schedule or that the new products will be well received by the market. See "Risk Factors--Dependence on Outside Manufac- tures," "Economic Conditions" and "Competition." The Company employs eight full-time technical personnel in its research, de- velopment, engineering and product development organization. The Company also employs temporary technical personnel to augment its product development team as activity levels require. The Company's expenditures for engineering, re- search and development in 1994, 1995 and 1996 were $1,164,000, $808,000 and $711,000, respectively. MANUFACTURING During 1996, approximately 54% of the Company's sales were of products manu- factured by third parties to the Company's specifications. The Company pres- ently sources these products from five different suppliers located in the Far East. The Company determines whether a product will be manufactured by the Company or a third party principally on the basis of two factors: 1) the loca- tion of the sources of parts and subassemblies, and 2) the cost relative to expected volume of products to be manufactured. During 1995 and the first two quarters of 1996, the Company was forced, due to cash restraints, to defer purchases of sourced product and delay payment of certain of its vendors. These actions resulted in interruptions in the availability of products manu- factured by the suppliers. Availability of these products is also dependent on the suppliers' continued cooperation and responsiveness to the Company's needs. Should the Company be required to supplement or replace a supplier, the Company believes that there are a number of alternate sources, although the transition to a new supplier would probably involve added costs and delays. The Company entered into a relationship with another supplier from whom the Company expected to source at least two of its new products scheduled for in- troduction in mid-1996. Availability of these key new products was delayed to second quarter 1997 due to the continued inability of the supplier to manufac- ture and ship the products on schedule. See "Risk Factors--Dependence on Out- side Manufactures," and "Risks of International Business." Carver's goal is to manufacture as many of its products in the United States as practical. The Company is currently in discussions with other potential OEM customers. However, there can be no assurances that these discussions will be completed favorably or that any OEM business will result from these discus- sions. Carver is vigorously pursuing "Total Quality Management" (TQM), and "Continu- ous Quality Improvement" (CQI) techniques in an effort to increase quality, lower costs and add profitability. Carver will concentrate on value-added op- erations where in-house manufacturing skills and process control are most important. Consistent with its commitment to quality, the Company maintains strict test- ing procedures. All products, whether manufactured in the United States or by OEM suppliers, are tested at their respective manufacturing facilities prior to shipment. The Company retests products manufactured by OEM suppliers on a statistical sample basis at its Lynnwood facility to monitor quality control. A program to establish strategic partnerships with certain vendors has been implemented to ensure timely delivery of quality raw materials, cost effective pricing and creative value engineering between Carver and vendor engineering departments. The Company offers a three-year limited warranty on amplifiers, and loud- speakers; a two-year limited warranty on preamplifiers, integrated amplifiers, preamplifier/tuners, receivers and tuners; and a one- 8 year limited warranty on tape decks, compact disc players and changers. HUMAN RESOURCES On March 1, 1997, the Company had 84 full-time employees, of whom 51 were en- gaged in production and customer service, 8 in research, development, engineering and product development, 11 in general and administrative func- tions and 14 in sales and marketing. None of the Company's employees is cov- ered by a collective bargaining agreement. The Company believes its relations with its employees are good. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Corporation who are not directors are listed in the following table. A description of their occupations for the past five years also appears below.
NAME AGE POSITION - ---- --- -------- James Croft.................... 44 Vice President of Research and Development Debra L. Griffith.............. 38 Vice President of Finance and Administration Mark A. Nygren................. 34 Vice President of Operations John P. World.................. 50 Executive Vice President and General Manager
Mr. Croft joined the Company in October 1992 as its Director of Product Re- search and Marketing Development. He became Vice President of Marketing and Product Development in March 1993 and Vice President Research and Development in February 1995. From 1990 through October 1992, Mr. Croft was employed by Dahlquist, Inc., a loudspeaker manufacturer, most recently as its Vice Presi- dent of Research and Development. Mr. Croft is a Vice President of Definitive Audio, Inc., a Seattle audio specialty retailer which he co-founded in 1975 and managed until 1985. Ms. Griffith joined the Company in July 1996 as its Vice President of Fi- nance. She became Vice President of Finance and Administration in January 1997. From 1983 to July 1996, Ms Griffith was employed by Teltone Corporation, a telecommunications manufacturer, most recently as its Vice President of Fi- nance and Administration. Ms. Griffith has been a Certified Public Accountant since 1980, and she received her Bachelor of Arts in Business Administration with honors in 1980 from the University of Washington. Mr. Nygren joined the Company in February 1995 as its Director of Manufactur- ing. Mr. Nygren became Director of Operations in February 1996 and Vice Presi- dent of Operations in January 1997. From 1990 through February 1995, Mr. Ny- gren was employed by Crane/Eldec Corporation, a manufacturer of power supplies and other equipment for civilian and military aerospace customers, most re- cently as its Manufacturing Manager. Mr. Nygren received his Master of Busi- ness Administration degree in 1990 from Harvard Graduate School and Bachelor of Arts magna cum laude in 1985 from Whitman College. Mr. World joined the Company in February 1987 as General Counsel. Mr. World is currently responsible for the internal operations of the Company. Mr. World also provides management support for the Company's international sales activi- ties. Since joining the Company in 1987, Mr. World has at various times been responsible for the administration, credit, human resource, legal, order en- try, day care and facilities departments. Mr. World received his Juris Doctor in 1975 from the University of Puget Sound and his Bachelor of Arts degree in Political Science in 1972 from the University of Washington. RISK FACTORS In addition to the other information contained or incorporated by reference herein, the following factors should be considered carefully in evaluating the Company and its business. Prospective investors in the Company are cautioned that an investment in the Company involves a very high degree of risk. The Company's ability to halt the deterioration of its results of operations and financial condition and successfully implement its operating strategy is sub- ject to a number of material risks and uncertainties. The contingencies and other risks discussed below could affect the Company in ways not presently an- ticipated by its management and thereby impair its ability to maintain or im- prove its performance. A careful review and understanding of each of the risk factors set forth below, as well as the other information contained in this report, is essential for an investor seeking to make an informed investment decision with respect to the Company. DEPENDENCE ON OUTSIDE MANUFACTURERS The Company is dependent upon outside manufacturers for production of several of its products which represented approximately 54% of its sales in 1996. The Company expects sales of products manufactured by suppliers to continue to ac- count for over 50% of its revenue in 1997. In 1996, the Company was unable to fill orders for three key products due to production delays experienced by the off-shore suppliers of these products. These delays had a material adverse ef- fect on sales in 1996. Any delay in obtaining products in the future would likely have a similar impact. Unavaila- 9 bility of product due to production delay or for any other reason could have an adverse impact on the Company's relationship with its key dealers, such as Circuit City. In addition, products procured from offshore suppliers require significant advance payment for tooling and non recurring engineering ex- penses. Due to the significant nature of this investment, it is impractical to have multiple suppliers for a single product. As a result, any delay in ob- taining products may result in lost revenues to the Company until such time as a transition to an alternate supplier can be completed. The Company believes that there are a number of possible alternate suppliers who could manufacture the Company's sourced product should it be necessary to replace an existing supplier. However, production delays in 1996 demonstrate that the transition to a new supplier can involve delays which occasion the loss or delay of sales and added expenses. POSSIBLE NEED FOR ADDITIONAL FINANCING At March 21, 1997, the Company's immediately available sources of working capital consisted of cash of approximately $50,000 and available borrowings of approximately $2,600,000 under the Company's revolving working capital line of credit. The Company believes that its headquarters facility is larger than required for its current operations and therefore represents an underutilized asset. As a result, the Company has entered into an agreement to sell its existing head- quarters and manufacturing facility in Lynnwood, Washington for approximately $3,000,000 in cash, which would yield net proceeds of approximately $2,800,000. The closing of this transaction in the second quarter of 1997 is subject to satisfaction of a contingency related to an environmental audit, which is expected to be completed by April 1, 1997. There can be no assurance that closing of the sale of the Company's current headquarters facility will occur. If this sale does not occur, the Company may be required to obtain ad- ditional equity or debt financing. There can be no assurance that any such re- financing or asset sales would be available when needed on terms that the Com- pany finds acceptable. Any additional equity or debt financing may involve substantial dilution to the interests of the Company's shareholders. The exact amount and timing of the Company's working capital requirements will be determined by numerous factors, including the level of and gross mar- gin on future sales, payment terms achieved by the Company, timing of capital expenditures and the occurrence of unanticipated expenses. However, the Com- pany believes that its line of credit and anticipated cash flows from the sale of the headquarters facility will satisfy the Company's projected working cap- ital and capital expenditure requirements for at least the next 12 months. RECENT AND CONTINUED OPERATING LOSSES During the last four completed fiscal years, the Company has incurred aggre- gate net losses of approximately $14,641,000 or $3.97 per share. There can be no assurance that it will generate profits in future periods. The Company's future operating results will be dependent upon a number of factors, particu- larly those associated with the change-over of its product lines, the perfor- mance of its suppliers, increased sales and margins, the control of overhead costs, the ability of the Company to successfully identify and respond to emerging trends in the consumer electronics industry, the level of competition and general economic conditions. See "Business--Sales and Marketing" and "Man- agement's Discussion and Analysis of Financial Conditions and Results of Oper- ations." CONCENTRATION OF ACCOUNTS; DEPENDENCE UPON RELATIONSHIP WITH CIRCUIT CITY Late in 1995, the Company entered into a distribution arrangement with Cir- cuit City, one of the largest retailers of consumer electronics in the United States. Circuit City accounted for 33% of the Company's receivables as of March 27, 1997. Due to anticipated pattern of purchases by Circuit City, the Company anticipates that accounts receivable from this customer will continue to be approximately the same percentage of the Company's total trade accounts receivables. Sales to Circuit City were 41% of the Company's revenue in 1996. While 1997 sales to this customer are expect to be similar, the Company's experience with Circuit City is limited. Circuit City may not be able to suc- cessfully market and sell the Company's products on an ongoing basis. Factors which could effect the volume of sales by Circuit City include factors which generally influence retail sales of electronic products. Dependence on a sin- gle customer for a significant percentage of sales involves a number of risks, including the risk that the Company's inventory of finished goods could in- crease sharply if Circuit City orders smaller quantities than those antici- pated by the Company, or discontinue doing business with the Company. The agreement between the Company and Circuit City may be terminated by either party for any reason upon 30 days advance written notice without penalty. In the event of an unexpected termination of this agreement, the Company many not be able to change its operations quickly enough to respond to a significantly lower level of sales. Also, due to the significant buying power of Circuit City, pricing of product sold to Circuit City yields a smaller margin than that realized by the Company on sales to most other customers. 10 ECONOMIC CONDITIONS The success of the Company's operations depends to a significant extent upon a number of factors relating to discretionary consumer spending. These factors include economic conditions such as unemployment levels, business conditions, interest rates and taxation. The Company's business is also sensitive to con- sumer spending patterns and consumer preferences. There can be no assurances that consumer spending and consumer preferences will not be adversely affected by general social trends and economic conditions, thereby impacting the Company's revenues, sales and product types. If the demand for consumer elec- tronics, in particular mid- to high-end audio entertainment systems, were to decline, the Company's business, financial condition and operating results could be adversely affected. COMPETITION The consumer electronics industry is highly competitive. The Company's prod- ucts compete directly against other mid- to high-end audio entertainment sys- tems and indirectly against other functionally similar products which vary widely in price and quality and which are distributed through a variety of distribution channels, including audio specialty stores, discount stores, de- partment stores and mail order firms. The Company competes against a number of companies, many of which have substantially greater resources than the Compa- ny. Such competition could have a material adverse effect on the Company's business, financial condition and operating results. The Company believes that success in the consumer electronics industry depends, in part, on providing consumers with unique technologies and features, and on brand name recogni- tion. There can be no assurance that the Company will be able to continue to develop such products, or that, if and when introduced, such products will be accepted by its customers. See "Business--Competition." TECHNOLOGICAL AND PRODUCT OBSOLESCENCE The consumer electronics industry has been characterized in recent years by significant technological changes, frequent new product introductions and declining end-user prices. Current competitors or new market entrants could introduce new or enhanced products with features and/or prices which render the Company's products obsolete or less marketable. The ability of the Company to compete successfully will depend in large measure on its ability to main- tain a technically competent research and development staff and to adapt to technological changes and advances in the industry. There can be no assurance that the Company will be able to keep pace with the technological or other competitive demands of the marketplace. RISKS OF INTERNATIONAL BUSINESS The Company's business is subject to the risks generally associated with do- ing business internationally, such as fluctuations in exchange rates, foreign governmental regulation and changes in economic conditions. These factors, among others, could influence both the Company's ability to sell its products in the international market and its ability to procure products or components from sources outside of the United States. In addition, the Company's business is subject to the risks associated with the imposition of legislation and reg- ulations relating to imports, including quotas, duties or taxes and other charges, restrictions or retaliatory actions on imports to the United States and other countries in which the Company's products are manufactured or sold. The Company cannot predict whether the foregoing legislation and regulation will be imposed by the United States or other countries, nor can it predict what effect such imposition would have on its business or results of opera- tions. ITEM 2. PROPERTIES The Company owns its 74,000 square foot headquarters and manufacturing facil- ities located in Lynnwood, Washington, a suburb of Seattle. The Company be- lieves that its facilities are adequate but too large for its current opera- tions. The Company has entered into an agreement to sell its existing head- quarters and manufacturing facility in Lynnwood, Washington for approximately $3,000,000 in cash, which would yield net proceeds of approximately $2,800,000. The closing of this transaction in the second quarter of 1997 is subject to satisfaction of a contingency related to an environmental audit, which is expected to be completed by April 1, 1997. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter of the Company's fiscal year. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS DIVIDEND POLICY It has been Company policy to retain all earnings to fund operations. STOCK MARKET ACTIVITY The common stock of Carver Corporation has traded over the counter on the Nasdaq National Market under the sumbol CAVR since its initial public offering on May 9, 1985. The following table sets forth high and low sales prices by quarter as reported by the Nasdaq National market in 1996 and 1995:
FISCAL YEAR FISCAL YEAR 1996 1995 - ---------------------------------------------------------- QUARTER HIGH LOW HIGH LOW - ------- ------ ------ ------ ------ FIRST $2 1/2 $1 1/4 $3 3/8 $2 1/4 SECOND 3 3/8 2 1/8 2 7/8 1 THIRD 3 1/2 2 1/8 2 1/2 1 5/8 FOURTH 3 1/2 2 2 1/8 1
The approximate number of shareholders of record as of March 27, 1997 was 490. ITEM 6. SELECTED FINANCIAL DATA FIVE YEAR SELECTED FINANCIAL DATA (Dollars in Thousands Except Per Share Data)
FISCAL YEARS INCOME STATEMENT DATA 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------- Net Sales $14,519 $18,428 $22,171 $26,274 $25,596 Gross profit 2,915 3,390 4,676 4,469 6,924 Loss from operations (3,030) (2,857) (2,536) (2,994) (1,153) Loss before in come tax and discontinued operations (3,203) (3,157) (2,873) (3,564) (1,328) Net loss $(3,203) $(3,157) $(2,873) $(5,408) $(1,328) Loss per share* $ (.86) $ (.86) $ (.78) $ (1.47) $ (.36) BALANCE DATA 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------- Working capital $ 4,573 $ 4,931 $ 7,589 $ 9,943 $14,012 Total assets 9,224 10,674 16,628 18,897 22,914 Long-term debt - - 899 716 735 Shareholders' equity $ 7,158 $ 7,389 $10,537 $13,408 $18,808
* Earnings per share are calculated on the basis of 3,671,000 shares in 1992, 3,676,000 shares in 1993, 3,678,000 shares in 1994, 3,680,000 in 1995, and 3,706,000 in 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Statements in this report covering future performance, developments, expecta- tions or events, including the discussion of the Company's strategy, product development and introduction plans and various statements concerning the Company's expectations for its growth and for the consumer electronics indus- try, constitute forward-looking statements which are subject to a number of known and unknown risks, uncertainties and other factors which might cause ac- tual results to differ materially from stated expectations. These risks and uncertainties include product development or production difficulties or delays due to supply constraints; technical problems or other factors; technological changes; the effect of global, national and regional economic conditions; changes in consumer preferences; the impact of competitive products and pric- ing; changes in demand; increases in component prices or other costs; inven- tory risks due to shifts in market demand, product obsolescence or other fac- tors; and a number of other risks including those risks and uncertainties de- scribed under the caption "Risk Factors" in Part I of this report and those identified by the Company from time to time in other filings with the Commis- sion, press releases and other communications. Although the Company believes that all forward-looking statements are reasonable, there can be no assurance that actual results, achievements, performance or developments will not differ materially from those expressed or implied by such forward-looking statements. INTRODUCTION The market for high-fidelity audio/video equipment is somewhat seasonal with moderately higher sales generally occurring in the last five months of the year. Demand for audio products also exhibits some cyclicality, reflecting the general state of the economy and consumer expectations. The Company's sales in the first six months of 1996 were $7,396,000 compared to $7,123,000 in the last six months of the year. The introduction of new products may affect this seasonality and year-to-year comparisons. The decline in sales in the second half of 1996 is attributable primarily to inventory shortages due to late de- livery of three new products from two off shore suppliers. The portion of the Company's business involving products which the Company elects to have manufactured by its suppliers may be influenced by factors affecting imports, such as changes in the dollar exchange rate as well as United States and the vendor countries' policies relating to tariffs, trade restrictions and taxation. See "Effects of Inflation and Changes in Foreign Currency Exchange Rates." RESULTS OF OPERATIONS 1996 COMPARED WITH 1995 Net sales for 1996 were $14,519,000, a decrease of 21% from net sales of $18,428,000 for 1995. This decrease is attributable largely to the November 1995 sale of the Company's professional product line and certain related OEM accounts to Phoenix Gold International, Inc. In 1995 net sales included sales of professional products of $4,225,000 and OEM sales of $1,499,000 which in total represented 31% of 1995 net sales. Contracts which represented 95% of the Company's 1995 OEM sales were included in the assets sold with the profes- sional products line. Domestic sales of the Company's consumer products increased to $11,989,000 or 21% compared to sales of $9,399,000 in 1995. Of the domestic sales, approxi- mately $5,953,000 or 50% were sales made by the Company to Circuit City. Consumer sales outside of the United States decreased approximately 52% from $2,655,000 to $1,279,000 in 1996. The Company believes this is attributable in large part to limited availability of product to sell to its international distributors. Approximately 54% of the Company's sales in 1996 were attribut- able to products which the Company sources offshore compared to 47% for the same period of the prior year. The Company's sales of consumer products, although higher in 1996 than in the prior year, were negatively affected by a severe shortfall in working capital during most of 1995 and in the first half of 1996. In addition, one of the Company's offshore vendors failed to deliver two new products (CT-24, a two- channel preamplifier/tuner, and MV-5, a five-disc compact disc changer) on the scheduled delivery dates due to production problems. A second vendor has failed to deliver a third new product (a multi-channel, AC-3 ready, THX(R) certified preamplifier/tuner), which was originally scheduled to be available in 12 October 1996. As a result, the Company has been out of two channel pre- amplifier/tuners and compact disc players since August and October 1996, re- spectively. In addition, these products often generate additional sales of other products manufactured by the Company (e.g., amplifiers and loudspeak- ers). The Company believes these factors had a significant negative impact on the Company's sales during 1996. These new product introduction delays have continued into the first quarter of 1997. As a result, the Company is fore- casting continued losses in the first and second quarter of 1997. (See "Li- quidity and Capital Resources" below.) On December 30, 1996, a Pacific Northwest snow storm temporarily interrupted the Company's normal business operations and caused a roof section at its man- ufacturing and corporate headquarters to collapse. The Company is insured for losses caused by an interruption to its business and damage to its property, and as a result no material losses are anticipated. The Company's gross margin increased from 18% in 1995 to 20% in 1996. Sales during 1996 included $432,000 of sales of professional products to the purchaser of the Company's professional product line pursuant to an agreement entered into at the time of the sale of the line. These sales were at the Company's cost and, therefore, yielded no margin. In addition, approximately $5,953,000 in sales to Circuit City in 1996 were at a lower margin than the Company realizes on its sales to other domestic customers. Despite these fac- tors, the Company experienced improvements in gross margin as it increased its domestic production. Margins are expected to continue to improve as the Com- pany introduces new products from offshore suppliers located outside of Japan. However, there can be no assurance that foreign exchange rates, cost increases or other factors will not negatively impact margins. (See "Liquidity and Capi- tal Resources" below.) Operating expense decreased in 1996 in comparison to the prior year by 5%, primarily due to the elimination of expenses attributable to the Company's professional products line. This reduction affected selling and research and development. These reductions were partially offset by increased research and development investment on new consumer products, use of consultants as well as increased field sales support and media advertising. Research and development expenses were increased due to the development of loudspeakers for home the- ater application and to pursue the safety and electrical approvals necessary to sell the Company's products in the European Common Market countries. The Company recognizes that the need to invest in the development of new technologies is vital to assure its future success. The Company experienced a loss on the sale of professional products line due primarily to the write-down of the remaining holdback amount on the purchase price from Phoenix Gold In- ternational Inc., of $200,000, as well as $225,000 in inventories and $156,000 in trade accounts receivable. Average borrowings were down in 1996 from the same period of 1995 because of the infusion of capital associated with the Renwick private placement (See "Liquidity and Capital Resources") and therefore interest expense decreased approximately $133,000 when compared to 1995. Net losses for 1996 were $3,203,000 (22% of net sales) or $0.86 per common share. This compares to net losses of $3,157,000 (17% of net sales) or $0.86 per share in 1995. The Company has approximately $16,697,000 of net operating losses which may be utilized to reduce taxable income in future years. These loss carryforwards will expire between the years 2004 and 2011. Management is of the opinion that it is not appropriate to record a benefit for net operating loss carryforwards at this time. If operating results improve, management will re-assess its po- sition in this matter. 1995 COMPARED WITH 1994 Net sales in 1995 were $18,428,000 which were down 16.9% from 1994 sales of $22,171,000. The sales decline represented a $2,927,000 decrease in domestic consumer sales and a $823,000 decrease in domestic sales of professional prod- ucts. Sales of mobile products were $489,000 less in 1995 compared to 1994 and sales to military exchange systems were down $626,000. OEM sales increased in 1995 by $1,275,000 over 1994 sales; however, contracts which represented 95% of 1995 OEM sales were included in the assets sold to Phoenix Gold Interna- tional, Inc. in the professional audio products transaction. Sales of profes- sional products in 1995 were down when compared to 1994 due, in large part, to the closing of the sale of the professional products in mid-November 1995. Sales of professional products were down in 1995 from 1994 levels also due to the Company's decision to reduce its sales and marketing presence in the mar- ket at the same time that Carver's competitors in the professional market were engaged in aggressive price cutting. Military exchange sales were down primarily due to a decision, in the first half of 1995 by the exchange system to discontinue the product category in the Army Air Force Exchange System. The decline in consumer domestic sales was due in part to the Company's strategy of reducing the number of products in its product line, especially those products at the low end of the price range and with low margins. Howev- er, the single largest factor in the 13 decline of 1995 sales over 1994 was the severe cash restraints under which the Company was forced to operate for most of 1995. Due to its cash constraints the Company was unable to purchase enough of the products which it sources offshore to fill orders throughout the second half of 1995. Export sales were flat from 1994 to 1995. Early in 1995, the Company in- creased its international marketing efforts. However, when the Company's cash position tightened and, as part of its efforts to reduce expenses, it sharply reduced expenditures for the Company's international sales and marketing. 1995 export sales were also negatively effected by the lack of availability of product. The Company's gross margin declined from 21% in 1994 to 18% in 1995. The 1995 gross margin was adversely impacted by a year end inventory and tooling write- off of $311,000. Other major factors which adversely affected the gross margin in 1995 were inventory write downs and severance paid. In addition, increased material costs on product sourced from Japan due to the weakness of the U.S. dollar versus the Japanese Yen in the first half of 1995 further decreased the margin. In 1995, 47% of sales were of product that was sourced from offshore suppliers compared to 60% in 1994. Operating expense decreased in 1995 in comparison to the prior year by 13% as a result of cost containment efforts while the Company operated under cash constraints. In addition, operating expenses associated with the mobile prod- ucts as well as military exchange sales were reduced. Engineering, research and development expense decreased from 5% of sales in 1994 to 4% in 1995. While cash constraints reduced the Company's efforts to research and develop new technologies, in 1995 the Company developed its "Power Steering"(TM) technology and made further improvements in its patented Lightstar(R) and Sonic Holography(R) technologies. In mid-November 1995, Carver sold its professional product line to Phoenix Gold International, Inc. ("Phoenix Gold"). The transaction included all of the tangible and intangible assets used by the Company in the manufacture and sale of its professional products including one patent. In addition, the transac- tion included the right of Phoenix Gold to use the name "Carver Professional" for five years and the agreement of the Company not to compete with Phoenix Gold during the five-year period. Sales of professional products and equipment contributed approximately 33% and 30% of the Company's revenues in 1995 and 1994, respectively. The Company sold the professional product line in an ef- fort to focus on its consumer business, reduce staff and overhead and improve its liquidity and balance sheet. The total proceeds from the transaction were approximately $2,100,000. Of this amount, payment of $350,000 was deferred un- til November 1996, and $209,000 was paid directly to Robert W. and Diana R. Carver as payment of the remaining installment payments due pursuant to the settlement of litigation between the Company and Mr. and Mrs. Carver in Decem- ber 1994. The gain on the sale of the professional products line was $1,208,000. As part of the transaction, the Company signed a one-year supply and manufacturing agreement with Phoenix Gold to continue to manufacture cer- tain products for and to sell certain raw materials used in the professional products to Phoenix Gold. The Company recorded a restructuring charge of $1,319,000 in December 1995 which included a $287,000 tooling write down, a $740,000 inventory write down and $223,000 in severance costs. As of December 31, 1995, $143,000 of the sev- erance costs was accrued relating to personnel reductions that were completed in 1996. The restructuring charge is a result of the change in the Company's operations due to the sale of the professional products line, the discontinua- tion of the current mobile product line, and the early discontinuation of cer- tain consumer product models. Losses from operations for the year ended December 31, 1995 were $2,857,000 compared to losses of $2,536,000 from operations for the year ended December 31, 1994. In addition to the gain on the sale of the professional products line and the restructuring charges, net losses for 1995 include $311,000 in write offs of tooling and inventory and a $150,000 increase at year end in the reserve for doubtful accounts. The operating results for the year ended Decem- ber 31, 1994 include an aggregate of $391,000 payable relating to settlement of and attorneys' fees incurred in litigation between the Company and Robert W. and Diana R. Carver and $50,000 accrued and subsequently paid in 1995 to the U.S. Customs Service in an offer and compromise of a penalty imposed by U.S. Customs (See Note 15 to Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES The Company's working capital on December 31, 1996 was $4,573,000 which in- cluded cash and short-term investments aggregating approximately $70,000. This compares with working capital of $4,931,000 and cash and short-term invest- ments of $266,000 at December 31, 1995. At March 27, 1997, the Company's imme- diate capital resources consisted of approximately $50,000 in cash (and cash equivalents) and the credit facility described below. The Company's inventory increased $249,000 from December 31, 1995 to December 31, 1996 due to the build up of 14 initial quantities of amplifiers manufactured in the U.S. The sales of these units were delayed due to the lack of availability of the associated preamp/tuner from an offshore supplier. Accounts receivable decreased $677,000 from the end of 1995 due to lower revenues and a tightening of credit policies and terms. The Company has an agreement with a financial institution which provides for working capital advances up to $6,000,000. A maximum of $1,000,000 of this line may be used to secure letters of credit. Funds available under this agreement are restricted, however, to a portion of eligible accounts receiv- able and inventories. The lender has agreed to make advances to the Company over the amount otherwise available under the formulas described above. The terms of the accommodation allow the Company to borrow up to an additional $1,500,000. The Company granted its lender a deed of trust on the Company's Lynnwood, Washington facility as additional security. The overadvance limit will be reduced by $17,858 per month beginning March 1, 1997 and continuing each month until the earlier of March 1, 2002 or such time as the real estate has been sold. Advances are collateralized by substantially all assets of the Company and bear interest at the prime lending rate plus 2%. The outstanding balance on the line of credit was $1,110,000 and $1,216,000 at December 31, 1996 and 1995, respectively and approximately $2,600,000 was available to be borrowed at March 27, 1997. The agreement expires on July 31, 1998. Maximum and average amounts outstanding during the year ended December 31, 1996 were $2,154,000 and $1,329,000, respectively. The weighted average interest rate at December 31, 1996 was 10.25% and the weighted average interest rate during the year, computed monthly, was 10.29%. Late in the second quarter and during the third quarter of 1996 the Company sold 1,411,764 shares of Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") and issued five year warrants (the "Warrants") to acquire up to 300,000 shares of the Company's Common Stock pursuant to a Stock Pur- chase Agreement (the "Agreement") with Renwick Capital Management, Inc. and certain Renwick affiliates ("Renwick"). The Shares of Preferred Stock and War- rants are convertible into or exercisable for 1,711,764 shares of Common Stock, or approximately 46% of the current shares outstanding. The price of the Preferred Stock was $2.125 per share and each share of Pre- ferred Stock is convertible at any time at the option of the holder into one share of Common Stock, subject to certain potential antidilution adjustments to be triggered by the issuance of additional shares of Common Stock at less than the lesser of the then current market price or $2.125. The Preferred Stock is entitled to an 8% compounding annual dividend payable quarterly. In the first year, such dividend will be and has been paid with shares of autho- rized but unissued Common Stock. In years two and three (the Preferred Stock will automatically be converted into Common Stock on the third anniversary of issuance, thereby terminating the accruing dividend), the Company has the op- tion of paying the dividend either in cash or with shares of Common Stock. If paid with Common Stock, the number of shares will be based on the greater of $2.125 per share or the average of the closing bid prices for the Common Stock for the 30 days prior to the dividend payment date. The number of shares of Common Stock which might be issued over the life of the dividend cannot be de- termined at this time as such number will vary with the market price of the Common Stock. The holders of the Preferred Stock are entitled to one vote for each share of Common Stock into which the Preferred Stock is convertible. In addition, the holders of the Preferred Stock are entitled to elect two representatives to the Company's Board of Directors. The Company's Board of Directors was in- creased by two positions, and Raj K. Bhatia and James R. McCullough have been appointed to the Board of Directors to represent holders of the Preferred Stock. Messrs. Bhatia and McCullough are partners of Renwick. By virtue of the number of votes to be controlled by Renwick and its affiliates, their right to elect two of the Company's directors and the fact that various actions may not be taken by the Company without the approval of the holders of at least a ma- jority of the Preferred Stock, such holders may be deemed to have acquired control of the Company. Certain actions by the Company, such as a merger or liquidation of the Company, the sale of substantially all of its assets, pay- ment of dividends, amendment of the Company's articles of incorporation, the issuance of additional securities or the incurrence of certain indebtedness will require the approval of at least a majority of the Preferred Stock. The Agreement also provides that the investors will have preemptive rights to subscribe for additional shares issued by the Company and rights to have the Company register shares of Common Stock issued upon conversion of the Pre- ferred Stock or exercise of the Warrants. The exercise price of the Warrants is $1.50 per share of Common Stock, if ex- ercised from the date of the initial closing through the date two years from the date of the initial closing, $1.75 for the next year, $2.00 for the next year and $2.125 for the final year, again subject to certain potential antidilution adjustments. Renwick is a New York-based investment banking firm founded in 1994 which specializes in the identifi- 15 cation of undervalued growth companies exhibiting the potential for an opera- tional turn-around. Renwick actively supports its principal investments through the involvement of the industry and Wall Street professionals familiar with turn-around situations. In January 1990, the Company purchased a 16,000 square foot office building adjacent to its facility in Lynnwood, Washington. The purchase price for this building was $1,260,000 including the assumption of a $793,000 note which was payable at a rate of $7,790 per month with final payment due April 10, 2010. In September 1993, the Company sold this office building at a loss, after closing costs, of $194,000. Terms of the agreement included a down payment of $112,750 in cash at closing and a promissory note and deed of trust in favor of the Company in the amount of $1,013,000 at a fixed interest rate of 8 1/2% per annum payable in equal monthly payments of $8,000 per month for 36 months with a balloon payment for the remaining interest and principal. The Company received the balloon payment in 1996 and at that time paid the underlying mortgage which yielded approximately $300,000 in cash. In 1996, the Company purchased $384,000 of capital equipment, primarily asso- ciated with a new computer system which is expected to be implemented in the second quarter of 1997. In 1997, the Company expects to purchase approximately $292,000 of capital equipment, a significant amount of which are costs associated with the computer system conversion effort. Of this amount the Com- pany has made a firm commitment for $150,000 of these expenditures. The Company has entered into an agreement to sell its existing headquarters and manufacturing facility in Lynnwood, Washington for approximately $3,000,000 in cash, which would yield net proceeds of approximately $2,800,000. The closing of this transaction in the second quarter of 1997 is subject to satisfaction of a contingency related to an environmental audit, which is expected to be completed by April 1, 1997. The Company believes that its line of credit and anticipated cash flows from the sale of the headquarters facility will satisfy the Company's projected working capital and capital expenditure requirements for at least the next 12 months. However, if the sale of the facility does not occur or if the Company's revenues drop significantly or incurs unanticipated expenses, existing sources of working capital may not be sufficient and there can be no assurance that additional financing would be available when needed. EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Due to the competitive conditions in the market for consumer electronics, historically the Company has been limited in its ability to increase prices for its products in amounts sufficient to offset increased production and op- erating costs. The Company increased its domestic consumer and worldwide pro- fessional prices an average of 5% on January 15, 1995 to partially offset the increase in material and labor costs it had been experiencing as well as the continued erosion in the strength of the U.S. dollar. Consumer export prices were increased a like amount in July 1995. While some revenue fall off is an- ticipated due to these price increases, the Company believes that it is appro- priate to trade some decline in sales for an improvement in margins. The Com- pany intends to continue to monitor costs and its market and adjust prices as necessary. All sales of the Company's products are in U.S. dollars. The Company purchased the majority of these products at an agreed per unit price payable in U.S. Dollars. Accordingly, fluctuations in foreign currency rates had no material impact on the Company's gross margin. As of December 31, 1996, the Company has committed to the purchase of approx- imately $2,932,000 of inventory which it expects to receive in 1997. Of this amount, an immaterial amount is payable in Japanese Yen. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Independent Auditors' Report.............................................. 19 Consolidated Balance Sheet as of December 31, 1996 and 1995............... 20 Consolidated Statement of Operations, Years Ended December 31, 1996, 1995 and 1994................................................................. 21 Consolidated Statement of Shareholders' Equity, Years Ended December 31, 1996, 1995 and 1994...................................................... 22 Consolidated Statement of Cash Flows, Years Ended December 31, 1996, 1995 and 1994................................................................. 23 Notes to Consolidated Financial Statements................................ 24 Independent Auditors' Report on Supplemental Schedule..................... 30 Supplemental Schedule II--Valuation and Qualifiying Accounts and Reserves Years Ended December 31,................................................. 31
18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Carver Corporation We have audited the accompanying consolidated balance sheet of Carver Corpo- ration and subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the consolidated financial statements referred to above pres- ent fairly, in all material respects, the financial position of Carver Corpo- ration and subsidiary as of December 31, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting prin- ciples. Moss Adams LLP Seattle, Washington March 7, 1997 19 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET - ----------------------------------------------------------------------------
ASSETS December 31 - ---------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------- Current Assets Cash $ 65,000 $ 261,000 Marketable securities 5,000 5,000 Accounts receivable, trade, net 1,627,000 2,304,000 Inventories 4,176,000 3,927,000 Note receivable and other assets 104,000 1,342,000 Prepaid expenses 662,000 377,000 - ---------------------------------------------------------------------------- Total current assets 6,639,000 8,216,000 - ---------------------------------------------------------------------------- Property and equipment Land 440,000 440,000 Buildings and improvements 2,452,000 2,452,000 Equipment 2,299,000 2,019,000 - ---------------------------------------------------------------------------- 5,191,000 4,911,000 Less accumulated depreciation (2,747,000) (2,620,000) - ---------------------------------------------------------------------------- 2,444,000 2,291,000 - ---------------------------------------------------------------------------- Other assets 141,000 167,000 - ---------------------------------------------------------------------------- Total assets $ 9,224,000 $10,674,000 - ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Note payable $ 1,110,000 $ 1,216,000 Accounts payable 410,000 842,000 Accrued liabilities Commissions 127,000 104,000 Payroll and related taxes 264,000 198,000 Warranty 113,000 73,000 Other 42,000 156,000 Current portion of long-term debt - 696,000 - ---------------------------------------------------------------------------- Total current liabilities 2,066,000 3,285,000 - ---------------------------------------------------------------------------- Commitments and contingency (Notes 7 and 14) Shareholders' equity Preferred shares, par value $.01 per share, 2,000,000 shares authorized, 1,411,764 shares issued and outstanding 14,000 - Common shares, par value $.01 per share, 20,000,000 shares authorized, 3,738,820 shares issued and outstanding 37,000 37,000 Additional paid-in capital 19,006,000 15,940,000 Accumulated deficit (11,899,000) (8,588,000) - ---------------------------------------------------------------------------- Total shareholders' equity 7,158,000 7,389,000 - ---------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,224,000 $10,674,000 - ----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements 20 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, - ------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------ Net sales $14,519,000 $18,428,000 $22,171,000 Cost of sales 11,604,000 15,038,000 17,495,000 - ------------------------------------------------------------------------------ Gross margin 2,915,000 3,390,000 4,676,000 - ------------------------------------------------------------------------------ Operating expenses Selling 2,629,000 3,441,000 3,827,000 General and administrative 2,079,000 1,887,000 2,221,000 Engineering, research and development 711,000 808,000 1,164,000 Restructuring Charges - 1,319,000 - Loss (Gain) on sale of professional products line 526,000 (1,208,000) - - ------------------------------------------------------------------------------ Total operating expenses 5,945,000 6,247,000 7,212,000 - ------------------------------------------------------------------------------ Loss from operations (3,030,000) (2,857,000) (2,536,000) - ------------------------------------------------------------------------------ Other (income) expense Interest expense 202,000 335,000 365,000 Interest income (50,000) (86,000) (87,000) (Gain) Loss on disposal of property and equipment (8,000) 3,000 2,000 Miscellaneous 29,000 48,000 57,000 - ------------------------------------------------------------------------------ Total other (income) expense 173,000 300,000 337,000 - ------------------------------------------------------------------------------ Net loss $(3,203,000) $(3,157,000) $(2,873,000) - ------------------------------------------------------------------------------ Loss per share $ (0.86) $ (0.86) $ (0.78) - ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements 21 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Shares Preferred Shares Additional ----------------- ----------------- Paid-In Accumulated Shares Amount Shares Amount Capital Deficit Total - --------------------------------------------------------------------------------------------------- Balance, December 31, 1993 3,677,556 $37,000 $15,929,000 $ (2,558,000) $ 13,408,000 Issuance of shares 1,118 2,000 2,000 Net loss (2,873,000) (2,873,000) - --------------------------------------------------------------------------------------------------- Balance, December 31, 1994 3,678,674 37,000 15,931,000 (5,431,000) (10,537,000) Issuance of shares 7,656 9,000 9,000 Net loss (3,157,000) (3,157,000) - --------------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,686,330 37,000 15,940,000 (8,588,000) 7,389,000 Issuance of shares 14,655 1,411,764 $14,000 2,856,000 2,870,000 Dividend on preferred shares 37,835 108,000 (108,000) - Issuance of warrants 102,000 102,000 Net Loss (3,203,000) (3,203,000) - --------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 3,738,820 $37,000 1,411,764 $14,000 $19,006,000 $(11,899,000) $ 7,158,000 - ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements 22 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, - ----------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(3,203,000) $(3,157,000) $(2,873,000) Adjustments to reconcile net loss to cash flows (used by) from operating activities Depreciation and amortization 474,000 300,000 371,000 Loss (Gain) on sale of professional products line 526,000 (1,208,000) - Restructuring Costs - 1,319,000 - (Gain) Loss on disposal of property and equipment (8,000) 3,000 2,000 Common shares and warrants issued for services 64,000 - - Changes in assets and liabilities Accounts receivable, trade, net 521,000 1,526,000 1,261,000 Inventories (444,000) 2,555,000 1,053,000 Prepaid expenses (512,000) (31,000) (300,000) Other assets and deferred charges (3,000) 126,000 87,000 Accounts payable and accrued lia- bilities (417,000) (1,159,000) 846,000 - ----------------------------------------------------------------------------- (3,002,000) 274,000 447,000 - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from repayment of note re- ceivable 992,000 10,000 10,000 Proceeds from sale of professional products line 71,000 1,632,000 - Acquisition of property and equip- ment (384,000) (44,000) (139,000) Proceeds from disposal of property and equipment 21,000 2,000 2,000 - ----------------------------------------------------------------------------- 700,000 1,600,000 (127,000) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common shares 10,000 9,000 2,000 Issuance of preferred shares 2,898,000 - - Decrease in note payable (106,000) (1,851,000) (226,000) Repayment of long-term debt (696,000) (20,000) (18,000) - ----------------------------------------------------------------------------- 2,106,000 (1,862,000) (242,000) - ----------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH (196,000) 12,000 78,000 CASH Beginning of year 261,000 249,000 171,000 - ----------------------------------------------------------------------------- End of year $ 65,000 $ 261,000 $ 249,000 - -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 23 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Carver Corporation and its wholly-owned subsidiary, Carver In- ternational, Ltd., a Foreign Sales Corporation (FSC). Significant intercompany transactions are eliminated in consolidation. OPERATIONS - The Company is engaged primarily in the development, manufacture and distribution of audio/video entertainment systems. Sales are approximately 90% in the United States and 10% in various foreign nations. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION - Revenue is recognized when products are shipped. The Company warrants its products for a period of one to three years following the date of sale. Estimated warranty costs are recorded in the period of the sale. INVENTORIES - Inventories consist of electronic components and audio/video equipment and are stated at the lower of cost (determined on a first-in, first-out basis) or market. Inventories consist of the following:
December 31, - ------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------ Raw materials and service spare parts $ 484,000 $ 893,000 Work-in-progress 1,154,000 1,284,000 Finished products 2,538,000 1,750,000 - ------------------------------------------------------------ $4,176,000 $3,927,000 - ------------------------------------------------------------
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Deprecia- tion for financial reporting purposes is provided using straight-line methods. Estimated useful lives range from three to thirty years. LONG-LIVED ASSETS - The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") during 1996. FAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1996 the Company determined that no impairment loss need be recognized for applicable assets of continuing operations. INTANGIBLES - Patents are amortized over the useful lives which range from seven to seventeen years. PREPAID TOOLING - Advance payments for tooling associated with new product development are amortized over the estimated life of the product which ranges from one to two years. STOCK BASED COMPENSATION - Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation ("SFAS No. 123"). The new standard measures compensation cost using a fair value method, which computes compensation cost as the dif- ference between the options' fair value and the option price on the grant date. However, SFAS No. 123 allows companies to continue to measure compensa- tion cost using the intrinsic value method, which computes compensation cost as the difference between a company's stock price and the option price at the grant date. The Company has elected to continue to use the intrinsic value method. RESEARCH AND DEVELOPMENT - Costs associated with product research and devel- opment are charged to operations when incurred and are included in operating expenses. ADVERTISING - The Company expenses the costs of advertising as incurred. Ad- vertising expense in 1996, 1995 and 1994 was $452,000, $777,000, and $868,000, respectively. EARNING PER SHARE - Earnings per share are based on earnings for the period, divided by the weighted average number of shares and common share equivalents outstanding during each year. The earnings per share calculations exclude com- mon share equivalents as the effect would be anti-dilutive. The weighted aver- age number of common shares for purposes of computing earnings per share amounted to 3,706,000, 3,680,000 and 3,678,000 shares for the years ended De- cember 31, 1996, 1995 and 1994, respectively. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - The Company paid $1,000 for income tax in 1994 and paid no income tax in 1995 or 1996. The Company paid $202,000, $335,000 and $365,000 for interest in 1996, 1995, and 1994, re- spectively. Non-cash financing activities during 1996 included the issuance of warrants valued at $102,000. These warrants included a $60,000 closing fee relating to obtaining capital. Additionally, the Company issued a dividend on the Pre- ferred Stock paid in common shares valued at $108,000 and common stock compen- sation valued at $64,000. 24 NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable are as follows:
December 31, - -------------------------------------------------------- 1996 1995 - -------------------------------------------------------- Trade Receivables $1,890,000 $2,570,000 Allowance for doubtful accounts (245,000) (233,000) Allowance for discounts (18,000) (33,000) - -------------------------------------------------------- $1,627,000 $2,304,000 - --------------------------------------------------------
NOTE 3 - NOTE RECEIVABLE In September 1993, the Company received a note for $1,015,000 secured by deed of trust in connection with the sale of land and building. The note was pay- able in monthly installments of $8,000 including interest of 8.5%. The note was paid in full in June 1996. NOTE 4 - FINANCING & LIQUIDITY REDEEMABLE PREFERRED STOCK - Late in the second quarter and during the third quarter of 1996, the Company sold 1,411,764 shares of Series A Cumulative Con- vertible Preferred Stock ("Preferred Shares") and issued five-year warrants ("Warrants") to acquire up to 300,000 shares of the Company's Common Shares pursuant to a Stock Purchase Agreement (the "Agreement") with Renwick Capital Management, Inc. and certain Renwick affiliates ("Renwick"). The Shares of Preferred Stock and Warrants are convertible into or exercisable for 1,711,764 shares of Common Stock, or approximately 46% of the current shares outstand- ing. The price of the Preferred Shares was $2.125 per share and each Preferred Share is convertible at any time at the option of the holder into one Common Share, subject to certain potential antidultion adjustments. The Preferred Shares are entitled to an 8% compounding annual dividend payable quarterly. In the first year, such dividend has been paid with Common Shares. The holders of the Preferred Shares are entitled to one vote for each share of Common Shares into which the Preferred Shares are convertible. In addition, the holders of the Preferred Shares are entitled to elect two representatives to the Company's Board of Directors and preference in liquidity. The preferred shareholders may be deemed to have acquired control of the Company, and ac- cordingly, certain actions by the Company require the approval of at least a majority of the preferred shareholders. The exercise price of the Warrants is $1.50 per share of Common Shares, if exercised from the date of the initial closing through a date two years from the date of the initial closing, $1.75 for the next year, $2.00 for the next year and $2.125 for the final year, all subject to certain potential antidilution adjustments. SHORT-TERM BORROWINGS - The Company has an agreement with a financial insti- tution which provides for working capital advances up to $6,000,000. A maximum of $1,000,000 of this line may be used to secure letters of credit. Funds available under this agreement are restricted, however, to 70% of eligible ac- counts receivable and 50% of inventories. The lender has agreed to make ad- vances to the Company over the amount otherwise available under the formulas described above. The terms of the accommodation allow the Company to borrow up to an additional $1,500,000. The Company granted its lender a deed of trust on the Company's Lynnwood, Washington facility as additional security for the overadvance. The overadvance limit will be reduced by $17,858 per month begin- ning March 1, 1997 and continuing each month until the earlier of March 1, 2002 or such time as the Lynnwood facility has been sold. Advances are collat- eralized by substantially all assets of the Company and bear interest at the prime lending rate plus 2%. The outstanding balance on the line of credit was $1,110,000 and $1,216,000 at December 31, 1996 and 1995, respectively. The agreement expires on July 31, 1998. Maximum and average amounts outstanding during the year ended December 31, 1996 were $2,154,000 and $1,329,000, respectively. The weighted average inter- est rate at December 31, 1996 was 10.25% and the weighted average interest rate during the year, computed monthly, was 10.29%. LONG-TERM DEBT - The Company assumed a $790,000 note secured by a deed of trust in connection with the purchase of land and a building in 1990. The note was payable in monthly installments of $7,790 at an interest rate of 10.375%. The land and building were sold during 1993, for cash and a note receivable (Note 3). The balance was paid in full in 1996 upon collection of the note re- ceivable. SALES AND OPERATIONS - The Company believes it has adequate working capital and liquidity to cover planned operations for the next twelve months. The Com- pany has entered into an agreement to sell its existing headquarters and manu- facturing facility in Lynnwood, Washington for approximately $3,000,000 in cash, which would yield net proceeds of approximately $2,800,000. The closing of this transaction in the second quarter of 1997 is subject to satisfaction of a contingency related to an environmental audit, which is expected to be completed by April 1, 1997. The sale of the facility along with anticipated cash flows from operations, will enable the Company to meet its 1997 projected working capital and capital expenditure requirements. The Company has new products which are expected to produce sales growth and expects sales of prod- ucts sourced offshore to account for over 25 50% of its revenue in 1997. Lack of sourced product from the Company's off- shore vendors would result in revenues significantly less than forecasted in 1997. NOTE 5 - MAJOR CUSTOMER & EXPORT SALES BY REGION Operating revenue from a single customer was $5,953,000 in 1996. Foreign rev- enues are denominated in U.S. dollars. Net export sales by geographic areas are as follows:
Years Ended December 31, - ------------------------------------------------ 1996 1995 1994 - ------------------------------------------------ Western Europe $ 136,000 $1,608,000 $1,974,000 Canada 233,000 577,000 683,000 Asia 772,000 1,771,000 1,706,000 Other 148,000 1,236,000 1,547,000 - ------------------------------------------------ $1,289,000 $5,192,000 $5,910,000 - ------------------------------------------------
NOTE 6 - INCOME TAX A reconciliation of the income tax benefit to the amounts computed by apply- ing the federal statutory income tax rate to income before income tax is as follows:
1996 1995 1994 - ---------------------------------------------------------------------------------------- % OF % of % of PRE-TAX Pre-Tax Pre-Tax AMOUNT INCOME Amount Income Amount Income - ---------------------------------------------------------------------------------------- Income tax benefit at federal statutory rate $(1,089,000) (34.0)% $(1,073,000) (34.0)% $(977,000) (34.0)% FSC income - - - (6,000) (.2) Other 1,000 (99,000) (3.1)% 111,000 3.9 Change in valuation allowance 1,088,000 34.0 % 1,172,000 37.1 % 872,000 30.3 % - ---------------------------------------------------------------------------------------- $ - - % $ - - % $ - - % - ----------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant por- tions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
1996 1995 - --------------------------------------------------------- Deferred tax assets Net operating loss $ 5,677,000 $ 4,618,000 Other 205,000 178,000 Deferred tax liabilities Accelerated depreciation (400,000) (398,000) Other (1,000) (5,000) - --------------------------------------------------------- Total computed deferred taxes 5,481,000 4,393,000 Less valuation allowance (5,481,000) (4,393,000) - --------------------------------------------------------- Net deferred taxes $ - $ - - ---------------------------------------------------------
For tax reporting purposes, the Company has approximately $16,697,000 of net operating losses which may be utilized to offset future taxable income. These loss carryforwards expire between the years 2004 and 2011. Under FAS 109, the Company is required to recognize the future benefit of its net operating loss carryforwards. The Company has recorded a valuation allowance of 100% of the computed deferred tax assets. 26 NOTE 7 - COMMITMENTS PURCHASE COMMITMENTS - As of December 31, 1996, the Company has committed to the purchase of approximately $2,932,000 of inventory and $150,000 of capital equipment expected to be received in 1997 from various vendors. Of this amount, the portion denominated in foreign currencies was immaterial. NOTE 8 - EMPLOYEE BENEFIT & STOCK INCENTIVE PLANS WARRANTS - At December 31, 1996, warrants to purchase 600,000 common shares are outstanding at prices ranging from $1.50 per share to $5.75 per share. These warrants are fully exercisable. STOCK BONUS PLAN - In 1995, the Company adopted a stock bonus plan for em- ployees, directors and consultants. The plan allows the Board of Directors to grant shares of authorized, unissued common shares. In 1996 and 1995, 9,510 and 1,500 shares were granted, respectively. STOCK PURCHASE PLAN - The Company has a stock purchase plan for the benefit of its employees. Employees who choose to participate enroll semi-annually and may make voluntary contributions to a fund. On June 30 and December 31 of each year, the participant may apply contributed funds toward the purchase of shares of Company stock at 85% of the prevailing market price or 85% of the market price on the date of enrollment in the plan. The Company has reserved 100,000 shares for issuance under this plan. The shares issued under this plan and the proceeds received for the three most recent fiscal years are as fol- lows:
Shares Proceeds - --------------------- 1996 2,554 $4,463 1995 2,663 3,500 1994 1,118 2,000
PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan for the benefit of all full-time employees. Participants may make voluntary contribu- tions while the Company, at its discretion, may make a matching contribution at a rate of $.50 for every $1 of participant contribution up to $1,000 per participant. The Company made no contributions to the Plan in 1996, 1995 or 1994. STOCK OPTIONS - The Company's 1995 Stock Option Plan provides for grants to key employees, directors and consultants. There are 660,000 shares authorized for grants of options under the Plan. The Company also has a 1985 Stock Option Plan for employees and a 1985 Stock Option Plan for directors. Under all plans, the Board of Directors determines the option price at the date of grant. Options granted under all plans generally vest between three and four and one half years after grant and expire between five and ten years from the date of grant. At December 31, 1996, 394,985 shares were vested and 118,500 were available for future grants under the plans. The Company granted options of 50,000 shares on August 6, 1993 and 50,000 shares on August 26, 1994 to key employees as a condition of employment. The option price is the fair market value of the underlying common stock on the date of grant. These options were fully vested on the date of grant and have terms of ten years and lapse at the earlier of three years from the date of termination of employment or one year from the date of death or disability, whichever comes first. 27 The following summary sets forth the activity under the plans in 1996, 1995 and 1994.
1996 1995 1994 - ------------------------------------------------------------------------------------ WEIGHTED- Weighted- Weighted- AVERAGE Average Average EXERCISE Exercise Exercise Option Activity SHARES PRICE Shares Price Shares Price - ------------------------------------------------------------------------------------ Outstanding at beginning of year 488,864 $2.58 521,614 $2.63 331,889 $2.63 Granted 435,000 2.36 209,500 2.50 250,000 2.63 Exercised (2,500) 2.25 0 0 Forfeited (148,258) 2.76 (242,250) 2.61 (60,275) 2.63 - ------------------------------------------------------------------------------------ Outstanding at year-end 773,106 $2.42 488,864 $2.58 521,614 $2.63 - ------------------------------------------------------------------------------------ Options exercisable at year-end 394,985 $2.48 300,114 $2.64 Weighted-average fair value of options granted during the year $1.71 $2.36
Options Outstanding Options Exercisable - ---------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/96 Life Price at 12/31/96 Price - ---------------------------------------------------------------------- $1.50 - $1.80 155,500 9.25 $1.50 51,835 $1.50 1.81 - 2.25 94,000 6.76 2.04 82,375 2.01 2.50 - 2.50 162,750 7.89 2.50 63,750 2.50 2.63 - 2.63 50,000 7.65 2.63 50,000 2.63 2.83 - 2.83 5,000 9.67 2.83 1,667 2.83 2.88 - 2.88 222,000 7.78 2.88 61,502 2.88 3.00 - 3.00 35,000 4.71 3.00 35,000 3.00 3.25 - 3.25 48,856 5.17 3.25 48,856 3.25 - ---------------------------------------------------------------------- $1.50 - $3.25 773,106 7.67 $2.42 394,985 $2.48
SFAS No. 123 requires proforma disclosure of net income as if the fair value method were used. If compensation cost for the Company's 1996 and 1995 grants under stock-based compensation plans were determined under the fair value method, the Company's net loss, net loss applicable to common share owners and net loss per common share for 1996 and 1995 would approximate the proforma amounts below. The fair value of the options granted during 1996 is estimated at $1.71 on the date of grant using Black-Scholes option-pricing model with the following assumptions: no dividend yield, volatility of 80%, risk-free in- terest rate of 6.7%, forfeitures recognized as incurred and an expected life ranging from 5 to 8 years.
1996 1995 - ------------------------------------------------------------------------- AS REPORTED PROFORMA As Reported Proforma - ------------------------------------------------------------------------- Net loss $(3,203) $(3,473) $(3,157) $(3,235) - ------------------------------------------------------------------------- Net loss applicable to common share owners $(3,203) $(3,473) $(3,157) $(3,235) - ------------------------------------------------------------------------- Net loss per common share $ (0.86) $ (0.94) $ (0.86) $ (0.88)
The effects of applying SFAS 123 in this proforma disclosure are not indica- tive of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. 28 NOTE 9--RELATED PARTY TRANSACTIONS PATENTS AND ROYALTIES - Robert W. and Diana R. Carver, shareholders of Carver Corporation, hold three patents on the Magnetic Field Amplifier technology which has been used in certain Carver products. Pursuant to terms of the li- cense agreement, Carver Corporation pays royalties to Robert W. and Diana R. Carver for each amplifier sold which incorporates the licensed technology. Such royalties amounted to $9,000 in 1996, $45,000 in 1995 and $57,000 in 1994. NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter - ----------------------------------------------------------------- (All amounts in thousands except per share amounts) Year Ended December 31, 1996 Revenues $4,348 $ 3,045 $4,336 $ 2,790 Operating loss (376) (809) (68) (1,777) Loss before income taxes (385) (971) (89) (1,758) Net loss (385) (971) (89) (1,758) Net loss per share (.10) (.26) (.02) (.48) Year Ended December 31, 1995 Revenues $5,230 $ 4,931 $4,494 $ 3,773 Operating loss (542) (1,140) (81) (1,094) Loss before income taxes (632) (1,303) (151) (1,071) Net loss (632) (1,303) (151) (1,071) Net loss per share (.17) (.35) (.04) (.30)
NOTE 11 - FINANCIAL INSTRUMENTS CONCENTRATION OF CREDIT RISK - Financial instruments that subject the Company to concentrations of credit risk are cash and accounts receivable. The Company places its cash with major financial institutions. The Company performs ongo- ing credit evaluations of its customers and generally does not require collat- eral. The Company has not experienced a history of significant credit-related losses. At December 31, 1996, accounts receivable from one customer was $530,000. FAIR VALUES - The following methods and assumptions were used to estimate the value of each class of financial instruments for which it is practical to es- timate that value: The carrying value for the note receivable and note payable and the current portion of long-term debt approximates the fair value due to the current clas- sification of the notes and debt. The estimated fair value of the Company's financial instruments are summa- rized as follows:
DECEMBER 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------- CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value - ----------------------------------------------------------------------------- Note Receivable - - $ 992,000 $ 992,000 Note Payable $(1,110,000) $(1,110,000) (1,216,000) (1,216,000) Current portion of long- term debt - - (696,000) (696,000)
The carrying value of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term nature of these items. NOTE 12 - RESTRUCTURING CHARGES In the fourth quarter of 1995, the Company recorded a restructuring charge of $1,319,000 for costs associated with downsizing of operations, consolidating facilities, and the disposal, either through sale or abandonment, of certain product lines. The charges include severance costs and write-off of intangible assets and inventories. As of December 31, 1995, $143,000 was accrued relating to personnel reduction that was completed in 1996. NOTE 13 - SALE OF PROFESSIONAL PRODUCTS LINE On November 20, 1995, the Company sold assets relating to its professional products line for a gain of $1,208,000. The purchase price, net of certain selling 29 expenses, was $1,982,000, in which $350,000 was held back to be paid to the Company one year from the closing date and $209,000 was paid directly to Rob- ert W. and Diana R. Carver in settlement of a royalty dispute. Of the holdback amount $200,000 remained unpaid at December 31, 1996. NOTE 14 - CONTINGENCY On December 30, 1996 a Pacific Northwest snow storm temporarily interrupted the Company's normal business operations and caused a roof section at its man- ufacturing and corporate headquarters to collapse. The Company is insured for losses caused by an interruption to its business and damage to its property, and as a result no material losses are anticipated. NOTE 15 - CLAIM SETTLEMENT Late in 1994, the United States Customs Service conducted an audit of the Company's import operations. The Customs Service found that the Company had made late duty payments totaling $99,000 on tooling paid to its offshore ven- dors between 1989 to 1993. On March 9, 1995, the Customs Service issued to the Company a prepenalty notice indicating that it would assess a penalty up to approximately $400,000. The Company had provided documentation to the Customs Service which significantly mitigated the penalty. In July 1995, the Company paid the Customs Service $50,000 as an offer in compromise of the penalty. In June 1996, the Customs Service notified the Company that it had accepted that payment as settlement in full of the assessed penalties. INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE To the Board of Directors and Shareholders Carver Corporation Under date of March 7, 1997, we reported on the consolidated balance sheet of Carver Corporation and subsidiary as of December 31, 1996 and 1995 and the re- lated consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1996, as listed in Item 8 of the Annual Report on Form 10-K for the year 1996. In connection with our audit of the aforementioned consolidated financial state- ments, we also audited the related supplemental financial statement schedule. In our opinion, this financial statement schedule, when considered in rela- tion to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Moss Adams LLP Seattle, Washington March 7, 1997 30 CARVER CORPORATION AND SUBSIDIARY SUPPLEMENTAL SCHEDULE II - VALUATION AND QUALIFIYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31,
Additions Balance At Charged To Balance Beginning Costs and At End Descriptions of Year Expenses Deductions(1) Of Year - ------------------------------------------------------------------------------ Allowance for doubtful accounts- deducted from accounts receivable in the balance sheet 1996 $233,000 $231,000 $219,000 $245,000 1995 183,000 447,000 397,000 233,000 1994 190,000 195,000 202,000 183,000 - ------------------------------------------------------------------------------ Allowance for discounts-deducted from accounts receivable in the balance sheet 1996 $ 33,000 $197,000 $212,000 $ 18,000 1995 61,000 450,000 478,000 33,000 1994 90,000 580,000 609,000 61,000 - ------------------------------------------------------------------------------
(/1/) Represents uncollectible accounts written off and discounts taken by cus- tomers. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Incorporated by reference to the Proposal 1 - Election of Directors, "Nomi- nees," section of the Company's Proxy Statement with respect to its 1997 An- nual Meeting of Shareholders to be filed by April 14, 1997. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Directors' Compensation and Executive Com- pensation sections of the Company's Proxy Statement with respect to its 1997 Annual Meeting of Shareholders to be filed by April 14, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Securities and Principal Holders, Proposal 1 - Elections of Directors, "Nominees," and Executive Compensation, sections of the Company's Proxy Statement with respect to its 1997 Annual Meeting of Shareholders to be filed by April 14, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Certain Transactions section of the Company's Proxy Statement with respect to its 1997 Annual Meeting of Share- holders to be filed by April 14, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 1. FINANCIAL STATEMENTS
Page in Financial Statements Index This Report - ------------------------------------------------------------------------------- Independent Auditors' Report....................................... 19 Consolidated Balance Sheet at December 31, 1996 and 1995........... 20 Consolidated Statement of Operations, Years Ended December 31, 1996, 1995 and 1994............................................... 21 Consolidated Statement of Shareholders' Equity, Years Ended December 31, 1996, 1995 and 1994.................................. 22 Consolidated Statement of Cash Flows, Years Ended December 31, 1996, 1995 and 1994............................................... 23 Notes to Consolidated Financial Statements......................... 24
2. FINANCIAL STATEMENT SCHEDULES
Page in This Report - ------------------------------------------------------------------------------- Independent Auditors' Report on Supplemental Schedule.............. 30 Supplemental Schedule II--Valuation and Qualifying Accounts and Reserves.......................................................... 31
All other schedules are omitted because they are not applicable or the re- quired information is shown in the consolidated financial statements or notes thereto. (B) REPORTS ON FORM 8-K. None. (C) EXHIBITS. Executive Compensation Plans and Arrangements The following list is a subset of the list of exhibits described below and contains all compensatory plans, contracts or arrangements in which any direc- tor or executive officer of the Company is a participant, unless the method of allocation of benefits thereunder is the same for management and non-manage- ment participants: 32 (1) The Company's Amended 1985 Incentive Stock Option Plan. See Exhibit 10.3. (2) The Company's Amended 1985 Non-Qualified Stock Option Plan. See Exhibit 10.4. (3) Form of Amended Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Incentive Stock Option Plan. See Ex- hibit 10.5. (4) Employment Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.14. (5) Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.15. (6) Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.16. (7) Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company. See Exhibit 10.26. (8) The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Ste- phen M Williams and the Company. See Exhibit 10.27. (9) Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company. See Exhibit 10.28. (10) Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company. See Exhibit 10.29. (11) Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company. See Exhibit 10.30. (12) Stock Option Agreement dated September 20, 1996 between Stephen M. Wil- liams and the Company. See Exhibit 10.40. (13) Stock Option Agreement dated September 20, 1996 between Stephen M. Wil- liams and the Company. See Exhibit 10.41. (14) Stock Option Agreement dated September 20, 1996 between John P. World and the Company. See Exhibit 10.42. (15) Stock Option Agreement dated September 20, 1996 between John P. World and the Company. See Exhibit 10.43. (16) Stock Option Agreement dated January 15, 1996 between John P. World and the Company. See Exhibit 10.44. (17) Stock Option Agreement dated March 11, 1995 between John P. World and the Company. See Exhibit 10.45. (18) Nonqualified Stock Option Agreement dated February 23, 1993 between John P. World and the Company. See Exhibit 10.46. (19) Nonqualified Stock Option Agreement dated March 2, 1992 between John P. World and the Company. See Exhibit 10.47. EXHIBIT INDEX
Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------- 2.1 Asset Purchase and Sale Agreement dated as of December 23, 1992 among Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation. (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K dated December 23, 1992). 2.2 Asset Purchase Agreement dated November 19, 1993 between Carver Corporation and Bose Corporation. (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-K for the year ended December 31, 1993.). 2.3 Series A Preferred Stock Purchase Agreement, dated as of June 12, 1996, by and among the Company and each of those persons and entities whose names are set forth on Exhibit A thereto (the "Investors"). (Incorporated by reference Exhibit 2.3 to the Company's Form 8-K dated June 12, 1996.). 3.1 The Company's Restated Articles of Incorporation filed July 29, 1988. (Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10- K for the year ended December 31, 1989). 3.2* The Company's Eighth Amended and Restated Bylaws dated June 5, 1996. 4.1 Warrant Agreement, dated as of June 12, 1996, by and among the Company and Renwick Capital Management, Inc. (Incorporated by reference Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996.). 4.2 Registration Rights Agreement, dated as of June 12, 1996, by and among the Company and the Investors. (Incorporated by reference Exhibit 4.2 to the Company's Form 8-K dated June 12, 1996.). 4.3 Certificate of Designation, as filed with the Secretary of State of the State of Washington on June 12, 1996. (Incorporated by reference Exhibit 4.3 to the Company's Form 8-K dated June 12, 1996.). 4.4 Form of Series A Cumulative Convertible Preferred Stock Certificate. (Incorporated by reference Exhibit 4.4 to the Company's Form 8-K dated June 12, 1996.). 4.5 Form of Warrant Certificate evidencing the right to acquire shares of the Company's Common Stock. (Incorporated by reference Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996.).
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Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------- 10.1 License Agreement dated as of June 1, 1980 between the Company and Carver Technology Development, Inc. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 2-96896). 10.2 The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.3 The Company's Amended 1985 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-8, No. 33-31344). 10.4 Form of the Amended Stock Option Agreement used in connection with the Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.5 The Company's Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.6 Employment Agreement dated February 28, 1992, between Thomas C. Graham and the Company. (Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1992). 10.7 Severance Agreement dated as of September 22, 1993 between Thomas C. Graham and the Company. (Incorporated by reference to Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1989). 10.8 Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and the Company. (Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1993.). 10.9 Form of Authorized Dealer Agreement. (Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1989). 10.10 Amended Carver Corporation Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1992).
Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------- 10.11 Letter Agreement for Accounts Receivable Financing between the Company and Congress Financial Corporation (Western) dated October 24, 1990, and related Security Agreements dated December 20, 1990. (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1990). 10.12 Ninth Amendment to the Accounts Financing Agreement between Carver Corporation and Congress Financial Corporation (Western) dated March 31, 1994. (Incorporated by reference to Exhibit 10.15 to the Registrant's Form 10-K for the year ended December 31, 1994.) 10.13 Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and the Company. (Incorporated by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1994.). 10.14 Employment Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1994.). 10.15 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1994.). 10.16 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.24 to the Company's Form 10-K for the year ended December 31, 1994.). 10.17 Settlement Agreement dated December 8, 1994 between Robert W. and Diana R. Carver and the Company. (Incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the year ended December 31, 1994.). 10.18 The Company's 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June 30, 1995.). 10.19 The Company's 1995 Stock Bonus Plan. (Incorporated by reference to Exhibit 10.27 to the Company's Form 10-Q for the quarter ended June 30, 1995.). 10.20 Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated December 5, 1995.).
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Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------- 10.21 Amendment No. 1 to Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.2 to the Company's Form 8-K dated December 5, 1995). 10.22 License Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.3 to the Company's Form 8-K dated December 5, 1995.). 10.23 Tenth Amendment to the Accounts Financing Agreement dated November 20, 1995 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.31 to the Company's Form 10K for year ended December 31, 1995.). 10.24 Eleventh Amendment to the Accounts Financing Agreement dated January 15, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.32 to the Company's Form 10K for year ended December 31, 1995.). 10.25 Twelfth Amendment to the Accounts Financing Agreement dated February 26, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.33 to the Company's Form 10K for year ended December 31, 1995.). 10.26 Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.34 to the Company's Form 10K for year ended December 31, 1995.). 10.27 The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.35 to the Company's Form 10K for year ended December 31, 1995.). 10.28 Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.36 to the Company's Form 10K for year ended December 31, 1995.). 10.29 Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.37 to the Company's Form 10K for year ended December 31, 1995.).
Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------- 10.30 Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.38 to the Company's Form 10K for year ended December 31, 1995.). 10.31 Thirteenth Amendment to the Accounts Financing Agreement dated March 28, 1996 between Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.39 to the Company's Form 10Q for the quarter ended March 31, 1996.). 10.32 Fourteenth Amendment to the Accounts Financing Agreement dated April 29, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.40 to the Company's Form 10Q for the quarter ended March 31, 1996.). 10.33 Fifteenth Amendment to the Accounts Financing Agreement dated May 24, 1996 between Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.41 to the Company's Form 10Q for the quarter ended June 30, 1996.). 10.34 Agreement for Financial Public Relations Services dated August 22, 1996 between Corporate Relations Group and the Company. (Incorporated by reference to Exhibit 10.42 to the Company's Form 10Q for the quarter ended September 30, 1996.). 10.35 Sixteenth Amendment to the Accounts Financing Agreement dated November 11, 1996 between Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.43 to the Company's Form 10Q for the quarter ended September 30, 1996.). 10.36* Seventeenth Amendment to the Accounts Financing Agreement dated January 17, 1997 between Congress Financial Corporation (Northwest) and the Company. 10.37* First Amendment to Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing dated January 7, 1997 between Congress Financial Corporation (Northwest) and the Company. 10.38* Warrant Agreement dated September 30, 1996 between Martin Rutstein and the Company. 10.39* Registration Rights Agreement dated September 30, 1996 between Martin Rustein and the Company.
35
Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------ 10.40* Stock Option Agreement dated September 20, 1996 between Stephen M. Williams and the Company. 10.41* Stock Option Agreement dated September 20, 1996 between Stephen M. Williams and the Company. 10.42* Stock Option Agreement dated September 20, 1996 between John P. World and the Company. 10.43* Stock Option Agreement dated September 20, 1996 between John P. World and the Company. 10.44* Stock Option Agreement dated January 15, 1996 between John P. World and the Company. 10.45* Stock Option Agreement dated March 11, 1995 between John P. World and the Company. 10.46* Nonqualified Stock Option Agreement dated February 23, 1993 between John P. World and the Company. 10.47* Nonqualified Stock Option Agreement dated March 2, 1992 between John P. World and the Company.
Exhibit Number See Attachment "Exhibits" - ------------------------------------------------------------------------------ 11* Computation of Earnings Per Share for years ended December 31, 1996, 1995 and 1994. 21* Subsidiaries of the Registrant. 23.1* Consent of Moss Adams. 28.1 Amendment to Registration Statements Re: Indemnification. (Incorporated by reference to Exhibit 28.1 to the Company's Form 10-Q for the quarter ended September 30, 1990). 99.1 Non-Binding Agreement in Principle, dated May 1, 1996 between Renwick Capital Management and the Company. (Incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated May 1, 1996.) 99.2 Letter to Shareholders of Carver Corporation, dated May 22, 1996. (Incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated May 1, 1996.).
- ------- * Filed herewith 36 PURSUANT TO THE REQUIREMENT OF SECTION 13 OF THE SECURITIES EXCHANGE COMMIS- SION ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CARVER CORPORATION /s/STEPHEN M. WILLIAMS /s/DEBRA L. GRIFFITH By:______________________________ By: _____________________________________ Stephen M. Williams, Debra L. Griffith President and Chief Vice President Finance and Executive Officer Chief Financial Officer Date: March 28, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. - ------------------------------------------------------------------------------- Signature Title Date - ------------------------------------------------------------------------------- /s/RAJ A. BHATIA Director March 28, 1997 ------------------------ Raj A. Bhatia /s/THOMAS C. GRAHAM Director March 28, 1997 ------------------------ Thomas C. Graham /s/JAMES R. MCCULLOUGH Director March 28, 1997 ------------------------ James R. McCullough /s/JOHN F. VYNNE Director March 28, 1997 ------------------------ John F. Vynne /s/STEPHEN M. WILLIAMS Director March 28, 1997 ------------------------ Stephen M. Williams 37 EXHIBIT INDEX
PAGE IN THIS ITEM DESCRIPTION REPORT - ------------------------------------------------------------------------------- 2.1 Asset Purchase and Sale Agreement dated as of December 23, 1992 among Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation. (Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K dated December 23, 1992) 2.2 Asset Purchase Agreement dated November 19, 1993 between Carver Corporation and Bose Corporation. (Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-K for the year ended December 31, 1993.) 2.3 Series A Preferred Stock Purchase Agreement, dated as of June 12, 1996, by and among the Company and each of those persons and entities whose names are set forth on Exhibit A thereto (the "Investors"). (Incorporated by reference Exhibit 2.3 to the Company's Form 8-K dated June 12, 1996.) 3.1 The Company's Restated Articles of Incorporation filed July 29, 1985. (Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K for the year ended December 31, 1989) 3.2* The Company's Eighth Amended and Restated Bylaws. 56 4.1 Warrant Agreement, dated as of June 12, 1996, by and among the Company and Renwick Capital Management, Inc. (Incorporated by reference Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996.). 4.2 Registration Rights Agreement, dated as of June 12, 1996, by and among the Company and the Investors. (Incorporated by reference Exhibit 4.2 to the Company's Form 8-K dated June 12, 1996.). 4.3 Certificate of Designation, as filed with the Secretary of State of the State of Washington on June 12,1996. (Incorporated by reference Exhibit 4.3 to the Company's Form 8-K dated June 12, 1996.). 4.4 Form of Series A Cumulative Convertible Preferred Stock Certificate. (Incorporated by reference Exhibit 4.4 to the Company's Form 8-K dated June 12, 1996.). 4.5 Form of Warrant Certificate evidencing the right to acquire shares of the Company's Common Stock. (Incorporated by reference Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996.). 10.1 License Agreement dated as of June 1, 1980 between the Company and Carver Technology Development, Inc. (Incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, No. 2-96896) 10.2 The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 1992) 10.3 The Company's Amended 1985 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-8, No. 33-31344) 10.4 Form of the Amended Stock Option Agreement used in connection with the Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1992) 10.5 The Company's Amended 1988 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1992) 10.6 Employment Agreement dated February 28, 1992, between Thomas C. Graham and the Company. (Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1992) 10.7 Severance Agreement dated as of September 22, 1993 between Thomas C. Graham and the Company. (Incorporated by reference to Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1993.) 10.8 Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and the Company. (Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1993.) 10.9 Form of Authorized Dealer Agreement. (Incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 1989)
38
PAGE IN THIS ITEM DESCRIPTION REPORT - ------------------------------------------------------------------------------- 10.10 Amended Carver Corporation Stock Appreciation Rights Plan. (Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1992) 10.11 Letter Agreement for Accounts Receivable Financing between the Company and Congress Financial Corporation (Western) dated October 24, 1990, and related Security Agreements dated December 20, 1990. (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1990) 10.12 Ninth amendment to the Accounts Financing Agreement between Carver Corporation and Congress Financial Corporation (Western) dated March 31, 1994. (Incorporated by reference to Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 1994) 10.13 Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and the Company. (Incorporated by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1994.). 10.14 Employment Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1994.). 10.15 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1994.). 10.16 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.24 to the Company's Form 10-K for the year ended December 31, 1994.). 10.17 Settlement Agreement dated December 8, 1994 between Robert W. and Diana R. Carver and the Company. (Incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the year ended December 31, 1994.). 10.18 The Company's 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June 30, 1995.) 10.19 The Company's 1995 Stock Bonus Plan. (Incorporated by reference to Exhibit 10.27 to the Company's Form 10-Q for the quarter ended June 30, 1995.) 10.20 Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated December 5, 1995.) 10.21 Amendment No. 1 to Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.2 to the Company's Form 8-K dated December 5, 1995) 10.22 License Agreement dated November 20, 1995 between Phoenix Gold International, Inc. and the Company. (Incorporated by reference to Exhibit 2.3 to the Company's Form 8-K dated December 5, 1995.) 10.23 Tenth Amendment to the Accounts Financing Agreement dated November 20, 1995 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.31 to the Company's Form 10K for year ended December 31, 1995.). 10.24 Eleventh Amendment to the Accounts Financing Agreement dated January 15, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.32 to the Company's Form 10K for year ended December 31, 1995.). 10.25 Twelfth Amendment to the Accounts Financing Agreement dated February 26, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.33 to the Company's Form 10K for year ended December 31, 1995.). 10.26 Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.34 to the Company's Form 10K for year ended December 31, 1995.).
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PAGE IN THIS ITEM DESCRIPTION REPORT - ------------------------------------------------------------------------------- 10.27 The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.35 to the Company's Form 10K for year ended December 31, 1995.). 10.28 Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.36 to the Company's Form 10K for year ended December 31, 1995.). 10.29 Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.37 to the Company's Form 10K for year ended December 31, 1995.). 10.30 Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company. (Incorporated by reference to Exhibit 10.38 to the Company's Form 10K for year ended December 31, 1995.). 10.31 Thirteenth Amendment to the Accounts Financing Agreement dated March 28, 1996 Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.39 to the Company's Form 10Q for the quarter ended March 31, 1996.). 10.32 Fourteenth Amendment to the Accounts Financing Agreement dated April 29, 1996 between Congress Financial Corporation (Western) and the Company. (Incorporated by reference to Exhibit 10.40 to the Company's Form 10Q for the quarter ended March 31, 1996.). 10.33 Fifteenth Amendment to the Accounts Financing Agreement dated May 24, 1996 Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.41 to the Company's Form 10Q for the quarter ended June 30, 1996.). 10.34 Agreement for Financial Public Relations Services dated August 22, 1996 between Corporate Relations Group and the Company. (Incorporated by reference to Exhibit 10.42 to the Company's Form 10Q for the quarter ended September 30, 1996.). 10.35 Sixteenth Amendment to the Accounts Financing Agreement dated November 11, 1996 Congress Financial Corporation (Northwest) and the Company. (Incorporated by reference to Exhibit 10.43 to the Company's Form 10Q for the quarter ended September 30, 1996.). 10.36* Seventeenth Amendment to the Accounts Financing Agreement 74 dated January 17, 1997 between Congress Financial Corporation (Northwest) and the Company. 10.37* First Amendment to Trust Deed, Assignment of Rents, Security 77 Agreement and Fixture Filing dated January 7, 1997 between Congress Financial Corporation (Northwest) and the Company. 10.38* Warrant Agreement dated September 30, 1996 between Martin 80 Rutstein and the Company. 10.39* Registration Rights Agreement dated September 30, 1996 between 100 Martin Rustein and the Company. 10.40* Stock Option Agreement dated September 20, 1996 between 107 Stephen M. Williams and the Company. 10.41* Stock Option Agreement dated September 20, 1996 between 110 Stephen M. Williams and the Company. 10.42* Stock Option Agreement dated September 20, 1996 between John 113 P. World and the Company. 10.43* Stock Option Agreement dated September 20, 1996 between John 116 P. World and the Company. 10.44* Stock Option Agreement dated January 15, 1996 between John P. 119 World and the Company. 10.45* Stock Option Agreement dated March 11, 1995 between John P. 122 World and the Company. 10.46* Nonqualified Stock Option Agreement dated February 23, 1993 125 between John P. World and the Company. 10.47* Nonqualified Stock Option Agreement dated March 2, 1992 129 between John P. World and the Company.
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PAGE IN THIS ITEM DESCRIPTION REPORT - ------------------------------------------------------------------------------ 11* Computation of Earnings Per Share for years ended December 31, 132 1995, 1994 and 1993 21* Subsidiaries of the Registrant 133 23.1* Consent of Moss Adams 134 28.1 Amendment to Registration Statements RE: Indemnification. (Incorporated by reference to Exhibit 28.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1990) 99.1 Non-Binding Agreement in Principle, dated May 1, 1996 between Renwick Capital Management and the Company. (Incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated May 1, 1996.) 99.2 Letter to Shareholders of Carver Corporation, dated May 22, 1996. (Incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated May 1, 1996.). - ------------------------------------------------------------------------------
* Filed herewith 41 EX-3.2 2 EIGHTH AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 EIGHTH AMENDED AND RESTATED BYLAWS OF CARVER CORPORATION ARTICLE I Offices (1) Registered Office and Registered Agent: The registered office of the corporation shall be located in the State of Washington at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office. (2) Other Offices: The corporation may have other offices within or outside the State of Washington at such place or places as the Board of Directors may from time to time determine. ARTICLE II Shareholders' Meetings (1) Meeting Place: All meetings of the shareholders shall be held at the principal place of business of the corporation, or at such other place as shall be determined from time to time by the Board of Directors, and the place at which any such meeting shall be held shall be stated in the notice of the meeting. (2) Annual Meeting Time: The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held in May or June of each year at a date, time and a place to be determined by the Board of Directors, provided that notification of such date, time and place shall meet the notice requirements pursuant to Article II (5) hereunder. (3) Annual Meeting - Order of Business: At the annual meeting of shareholders, the order of business shall be as follows: (a) Calling the meeting to order. (b) Proof of notice of meeting (or filing waiver). (c) Reading of minutes of last annual meeting. (d) Reports of officers. (e) Reports of committees. (f) Election of directors. 1 (g) Miscellaneous business. (4) Special Meetings: Special meetings of the shareholders for any purpose may be called at any time the President, Board of Directors, or the holders of not less than one-tenth of all shares entitled to vote at the meeting. (5) Shareholder Proposals at Annual Meeting: Business may be properly brought before an annual meeting by a shareholder only upon the shareholder's timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than ninety (90) days prior to the date one (1) year from the date of the immediately preceding annual meeting of shareholders. For purposed of the Section 5, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty (30) days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no business may be brought before any reconvened meeting unless pursuant to a notice which was timely for the meeting on the date as originally scheduled. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the proposal; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the proposal; (c) any material interest of such shareholder in such proposal; and (d) such other information regarding such proposal as would be required to be disclosed in solicitations of proxies pursuant to the Securities Exchange Act of 1934, as amended. Notwithstanding the foregoing, nothing in this Section 5 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the discretion of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a proposal was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall be disregarded. (6) Notice: (a) Notice of the time and place of the annual meeting of shareholders shall be given by delivering personally or by mailing a written or printed notice of the same, at least ten (10) days, and not more than sixty (60) days, prior to the meeting to each shareholder of record entitled to vote at such meeting. 2 (b) At least ten (10) days and not more than sixty (60) days prior to the meeting, written or printed notice of each special meeting of shareholders, stating the place, day and hour of such meeting, and the purpose or purposes for which the meeting is called, shall be delivered personally or mailed to each shareholder of record entitled to vote at such meeting. (7) Voting Record: At least ten days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, by voting group, and within each voting group by class or series of shares, showing the address of and number of shares held by each. The record must be available for inspection by any shareholder, beginning ten (10) days prior to the meeting and continuing through the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder, the shareholder's agent, or the shareholder's attorney is entitled to inspect the list, during regular business hours and at the shareholder's expense, during the period it is available for inspection. (8) Quorum: Except as otherwise required by law: (a) A quorum at any annual or special meeting of shareholders shall consist of shareholders present at such meeting representing, either in person or by proxy, a majority of the outstanding shares of each voting group of the corporation entitled to vote at such meeting. (b) The votes of a majority in interest of those present at any properly called meeting or adjourned meeting of shareholders at which a quorum as in this paragraph defined is present, shall be sufficient to transact business. (9) Voting of Shares: Except as otherwise provided in these Bylaws or to the extent that voting rights of the shares of any class or classes are limited or denies by the Articles of Incorporation, each shareholder, on each matter submitted to a vote at a meeting of shareholders, shall have one vote for each share of stock registered in his name in the books of the corporation. (10) Fixing Record Date: For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, the Board of Directors may provide that 3 the stock transfer books shall be closed for a stated period not to exceed seventy (70) days nor less than ten (10) days preceding such meeting. (11) Proxies: A shareholder may vote either in person or by proxy executed in writing by the shareholder or his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. (12) Action by Shareholders without a Meeting: Any action required or which may be taken at a meeting of shareholders of the corporation may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Such consent shall have the same force and effect as a unanimous vote of shareholders. (13) Waiver of Notice: A shareholder may waive any notice before or after the day and time of the meeting that is the subject of such notice or, in the case of a written consent, before or after the action is effective. Such waiver shall be in writing, signed by the shareholder entitled to notice, and be delivered to the corporation for inclusion in the minutes or filed with the corporate records. A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. (14) Action of Shareholders by Communications Equipment: Shareholders may participate in a meeting of shareholders by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. ARTICLE III Stock (1) Certificates: Certificates of stock shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by the President or a Vice President, and the Secretary or an Assistant Secretary, and may be sealed with the seal of the corporation or a facsimile thereof. The signatures of such officers may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other then the corporation itself or an employee of the corporation. If an officer who has signed or whose facsimile 4 signature has been placed upon such certificate ceases to be such officer before the certificate is issued, it may be issued by the corporation with the same effect as if the person were an officer on the date of issue. Each certificate of stock shall state: (a) That the corporation is organized under the laws of this state; (b) The name of the person to whom issued; (c) The number and class of shares and the designation of the series, if any, which such certificate represents; and (2) Transfers: (a) Transfers of stock shall be made only upon the stock transfer books of the corporation, kept at the registered office of the corporation or at its principal place of business, or at the office of its transfer agent or registrar. The Board of Directors may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of share therein. (b) Shares of stock shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the holder of said certificate. No share of stock shall be transferred on the books of the corporation until the outstanding certificates therefor have been surrendered to the corporation. (3) Registered Owner: Registered shareholders shall be treated by the corporation as the holders-in-fact of the stock standing in their respective names and the corporation shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided below or by the laws of the State of Washington. The Board of Directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified 5 person or persons. The resolution shall set forth: (a) The classification of shareholder who may certify; (b) The purpose of purposes for which the certification may be made; (c) The form of certification and information to be contained therein; (d) If the certification is with respect to a record date or closing of the stock transfer books, the date within which the certification must be received by the corporation; and (e) Such other provisions with respect to the procedure as are deemed necessary or desirable. Upon receipt by the corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. (4) Mutilated, Lost or Destroyed Certificates: In case of any mutilation, loss or destruction of any certificate of stock, another may be issued in its place on proof of such mutilation, loss or destruction. The Board of Directors may impose conditions on such issuance and may require the giving of a satisfactory bond or indemnity to the corporation in such sum as it might determine or establish such other procedures as it deems necessary. (5) Fractional Share or Scrip: The corporation may: (a) issue fractions of a share which shall entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation; (b) arrange for the disposition of fractional interests by those entitled thereto; (c) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such shares are determined; or (d) issue scrip in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip aggregating a full share. 6 (6) Share of Another Corporation: Shares owned by the corporation in another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Board of Directors may determine or, in the absence of such determination, by the President of the corporation. ARTICLE IV Board of Directors (1) Number and Powers: The management of all affairs, property and interest of the corporation shall be vested in a Board of Directors. The Board of Directors shall consist of seven (7) persons, who shall be elected for a term of one (1) year, and shall hold office until a successor is elected and qualified. Directors need not be shareholders of the corporation. In addition to the powers and authorities by these Bylaws and the Articles of Incorporation expressly conferred upon it, the Board of Directors may exercise all such powers of the corporation and do all such lawful acts as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. (2) Notice of Shareholder Nominees: Nominations of persons for election to the Board of Directors shall be made only at a meeting of shareholders and only (i) by the Board of Directors or a committee appointed by the Board of Directors, or (ii) by any shareholder entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation (i) with respect to an election to be held at an annual meeting of shareholders, ninety (90) days prior to the date one (1) year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 2, any adjournment(s) or postponements(s) of the original meeting whereby the meeting will reconvene within thirty (30) days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no nominations by a shareholder of persons to be elected directors of the corporation may be made at any such reconvened meeting unless pursuant to a notice which was timely for the meeting on the date originally scheduled. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be 7 nominated; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to the Securities Exchange Act of 1934, as amended; and (e) the consent of each nominee to serve as a director of the corporation if so elected. Notwithstanding the foregoing, nothing in this Section 2 shall be interpreted or construed to require the inclusion of information about any such nominee in any proxy statement distributed by, at the direction of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (3) Change of Number: The number of directors may at any time be increased or decreased by the shareholders at any annual or special meeting provided that no decrease shall have the effect of shortening the term of any incumbent director except as provided in paragraphs (4) and (5) hereunder. (4) Vacancies: All vacancies in the Board of Directors, whether caused by resignation, death or otherwise, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill any vacancy shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders. (5) Removal of Directors: At a meeting of shareholders called expressly for that purpose, the entire Board of Directors, or any member thereof, may be removed by a vote of the holders of a majority of shares then entitled to vote at an election of such directors. (6) Regular Meetings: Regular meetings of the Board of Directors or any committee may be held without notice at the principal place of business of the corporation or at such other 8 place or places, either within or without the State of Washington, as the Board of Directors or such committee, as the case may be, may from time to time designate. The annual meeting of the Board of Directors shall be held without notice immediately after the adjournment of the annual meeting of shareholders. (7) Special Meetings: (a) Special meetings of the Board of Directors may be called at any time by the President or by any director, to be held at the principal place of business of the Corporation or at such other place or places as the Board of Directors or the person or persons calling such meeting may from time to time designate. Notice of all special meetings of the Board shall be given to each director by one (1) day's service of the same by telegram, by letter, by telefax, or personally. Such notice need not specify the business to be transacted at, nor the purpose of, the meeting. (b) Special meetings of any committee may be called at any time by such person or persons and with such notice as shall be specified for such committee by the Board of Directors, or in the absence of such specification, in the manner and with the notice required for special meetings of the Board of Directors. (8) Quorum: A majority of the whole Board of Directors shall be necessary at all meetings to constitute a quorum for the transaction of business. (9) Waiver of Notice: Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. A waiver of notice must be in writing, signed by the director or directors entitled to notice, and delivered to the corporation for inclusion in the minutes or filing with the corporate records, whether before or after the time stated for the meeting, shall be equivalent to the giving of notice. (10) Registering Dissent: A director who is present at a meeting of the Board of Directors at which action on a corporate matter is taken shall be presumed to have assented to such action unless his dissent shall be entered in the minutes of the meeting, or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting, before the adjournment thereof, or unless he shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 9 (11) Executive and Other Committees: The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an Executive Committee and one or more other standing or special committees. The Executive Committee shall have and may exercise all the authority of the Board of Directors, and other standing or special committees may be invested with such powers, subject to such conditions, as the Board of Directors shall see fit; provided that notwithstanding the above, no committee of the Board of Directors shall have the authority to: (a) approve a distribution except accounting to a general formula or method prescribed by the Board of Directors; (b) propose to shareholders action that is required by law to be approved by shareholders; (c) fill vacancies on the Board of Directors or on any of its committees; (d) amend articles of incorporation; (e) adopt, amend or repeal bylaws; (f) approve a plan of merger not requiring shareholder approval; or (g) approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except within the limits specifically prescribed by the Board of Directors. The designation of any such committee and the delegation of authority thereto shall not relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. (12) Remuneration: No stated salary shall be paid directors, as such, for their service, but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board; provided, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of standing or special committees may be allowed like compensation for attending committee meetings. (13) Action by Directors Without a Meeting: Any action required or which may be taken at a meeting of the directors, or of a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken or to be taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be. Such consent shall have the same effect as a unanimous vote. (14) Action of Directors by Communications Equipment: Any action required or which may be taken at a meeting of directors, or of a committee thereof, may be taken by means of a conference telephone or similar communications equipment by means of which all persons participating can hear each other during the meeting. ARTICLE V 10 Officers (1) Designations: The officers of the corporation shall be a President, one or more Vice-Presidents (one or more of whom may be Executive Vice- Presidents), a Secretary and a Treasurer, and such Assistant Secretaries and Assistant Treasurers as the Board may designate, who shall be elected for one year by the directors at their its first meeting after the annual meeting of shareholders, and who shall hold office until their successors are elected and qualified. Any two or more offices may be held by the same person. (2) The President: The President shall preside at all meetings of shareholders and directors, shall have general supervision of the affairs of the corporation, and shall perform all such other duties as are incident to his office or are properly required of him by the Board of Directors. (3) Vice Presidents: During the absence of disability of the President, the Executive Vice-Presidents, if any, and the Vice-Presidents in the order designated by the Board of Directors, shall exercise all the functions of the President. Each Vice-President shall have such powers and discharge such duties as may be assigned to him from time to time by the Board of Directors. (4) Secretary and Assistant Secretaries: The Secretary shall issue notices for all meetings, except for notices for special meetings of the shareholders and special meetings of the directors which are called by the requisite number of shareholders or directors; shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to his office, or are properly required of him by the Board of Directors. The Assistant Secretary, or Assistant Secretaries in the order designated by the Board of Directors, shall perform all of the duties of the Secretary during the absence or disability of the Secretary, and at other times may perform such duties as are directed by the President or the Board of Directors. (5) The Treasurer: The Treasurer shall have the custody of all moneys and securities of the corporation and shall keep regular books of account. He shall disburse the funds of the corporation in payment of the just demands against the corporation or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of him an account of all his transactions as Treasurer and of the financial conditions of the corporation. He shall perform such other duties incident to his office or that are properly required of him by the Board of Directors. The Assistant Treasurer, or Assistant 11 Treasurers in the order designated by the Board of Directors, shall perform all of the duties of the Treasurer in the absence or disability of the Treasurer, and at other times may perform such other duties as are directed by the President or the Board of Directors. (6) Delegation: In the case of absence or inability to act of any officer of the corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any director or other person whom it may select. (7) Vacancies: Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting of the Board. (8) Other Officers: Directors may appoint such other officers and agents as it shall deem necessary or expedient, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. (9) Term - Removal: The officers of the corporation shall hold office until their successors are appointed and qualified. Any officer or agent elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the whole Board of Directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. (10) Bonds: The Board of Directors may, be resolution, require any and all of the officers to give bonds to the corporation, with sufficient surety or sureties, conditioned for the faithful performance of the duties of their respective offices, and to comply with such other conditions as may from time to time be required by the Board of Directors. ARTICLE VI Distributions and Finance (1) Distributions: The Board of Directors may authorize a distribution of money or other property to the corporation's shareholders in the form of a dividend or a purchase, redemption or other acquisition of the corporation's shares; provided that no distribution may be made if, after giving it effect, either: (a) the corporation would not be able to pay its debts as they become due in the usual course of business; or 12 (b) the corporation's total assets would be less than the sum of its total liabilities plus the amount which would be needed to satisfy any shareholder's preferential rights in liquidation if the corporation is in the process of liquidation at the time of the authorization of the distribution. The stock transfer books may be closed for the making of distributions during such periods of not exceeding seventy (70) days, as from time to time may be fixed by the Board of Directors. The Board of Directors, however, without closing the books of the corporation, may authorize distribution to only the holders of record at the close of business, on any business day not more than seventy (70) days prior to the date on which distribution is made. (2) Measure of Effect of Distribution: For purposes of determining whether a distribution may be authorized by the Board of Directors and paid by the corporation under Article VI, paragraph (1) of these bylaws, the effect of distribution is measured, (a) in the case of a distribution by purchase, redemption or other acquisition if the corporation's shares, as of the earlier of (i) the date on which the money or other property is transferred to the shareholders or the date on which the debt is incurred by the corporation; or (ii) the date on which the shareholder ceases to be a shareholder with respect to the acquired shares; and (b) in any other case, (i) as of the date on which the distribution is authorized, if payment occurs within one hundred twenty (120) days thereafter; or (ii) the date of payment if such date occurs more than one hundred twenty (120) days after the date of authorization. (3) Reserves: Before making any distribution, there may be set aside out of the sum available to the corporation for distribution such sum or sums as the directors from time to time in their absolute discretion deem expedient as a reserve fund to meet contingencies, or for equalizing distributions, or for maintaining any property of the corporation, or for any other purpose. Any sum in any year which is not distributed in that year shall be deemed to have been thus set aside until otherwise disposed of by the Board of Directors. (4) Depositories: The moneys of the corporation shall be deposited in the name of the corporation in such bank or banks or trust company or trust companies as the Board of Directors shall designate, and shall be drawn out only by check in other order for payment of money signed by such persons and in such manner as may be determined by resolution of the Board of Directors. ARTICLE VII 13 Notices Except as may otherwise be required by law, any notice to any shareholder or director may be delivered personally or by mail. If mailed, the notice shall be deemed to have been delivered when deposited in the United States mail, addressed to the addressee at his last known address in the records of the corporation, with postage thereon prepaid. ARTICLE VIII Seal The corporate seal of the corporation shall be in such form and bear such inscription as may be adopted by resolution of the Board of Directors, or by usage of the officers on behalf of the corporation. ARTICLE IX Indemnification of Officers, Directors, Employees and Agents (1) Definitions: As used in this Article: (a) "Action" means any actual or threatened claim, suit or proceeding, whether civil, criminal, administrative or investigative. (b) "Another Enterprise" means a corporation (other than the Corporation), partnership, joint venture, trust, association, committee, employee benefit plan or other group or entity. (c) "Corporation" means Carver Corporation and any predecessor to it and any constituent corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger. (d) "Director or Officer" means each person who is serving or who has served as a director or officer of the Corporation or, at the request of the Corporation, as a director, officer, employee or agent of Another enterprise. (e) "Indemnitee" means each person who was, is or is threatened to be made a party to or is involved (including without limitation, as a witness) in an Action because the person is or was a Director or Officer of the Corporation. 14 (f) "Loss" means loss, liability, expenses (including attorneys' fees), judgements, fines, ERISA excise taxes or penalties and amounts to be paid in settlement, actually and reasonably incurred or suffered by Indemnitee in connection with an Action. (2) Right to Indemnification: The Corporation shall indemnify and hold each Indemnitee harmless against all Loss except for Losses arising out of: (a) the Indemnitee's acts or omissions finally adjudged to be intentional misconduct or a knowing violation of law, (b) the Indemnitee's approval of certain distributions or loans which are finally adjudged to be in violation of RCW 23B.08.310, or (c) any transaction in which it is finally adjudged that the Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled. Except as provided in Section (4) of this Article, the Corporation shall not indemnify an Indemnitee in connection with an Action (or part thereof) initiated by the Indemnitee unless such Action (or part thereof) was authorized by majority vote of a quorum consisting of directors not at the time parties to such Action. If, after the effective date of this Article, the Washington Business Corporation Act is amended to authorize further indemnification of directors or officers, then Directors and Officers of this Corporation shall be indemnified to the fullest extent permitted by the Washington Business Corporation Act, as so amended. (3) Burden of Proof and Procedure for Payment: (a) The Indemnitee shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (including a claim for expenses incurred in defining any Action in advance of its final disposition, where the undertaking in (b) below has been tendered to the corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled. (b) The right indemnification conferred in this Article shall include the right to be paid by the corporation all expenses (including attorneys' fees) incurred in defending any Action in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of an Action shall be made upon delivery to the Corporation of an undertaking, by or on behalf of such Director or Officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or Officer is not entitled to be indemnified under this Article or otherwise. 15 (4) Right of Indemnitee to Bring Suit: If a claim under this Article is not paid in full by the corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be 20 days, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its board of directors, its shareholders or independent legal counsel) that the Indemnitee is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Indemnitee is not so entitled. (5) Nonexclusivity of Rights: The right to indemnification and the payment of expenses incurred in defining an Action in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any stature, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. (6) Insurance, Contracts and Funding: The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or Another Enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The Corporation may, without further shareholder action, enter into contracts with any Director or Officer of the Corporation in furtherance of the provisions of this Article, and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. (7) Indemnification of Employees and Agents of the Corporation: The Corporation may, by action of its board of directors from time to time, provide indemnification and pay expenses in advance of the final disposition of an Action to employees and agents of the Corporation with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of Directors and 16 Officers of the corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise. (8) Contract Right: Rights of indemnification under this Article shall continue as to an Indemnitee who has ceased to be a director or Officer and shall insure to the benefit of his or her heirs, executors and administrators. The right to indemnification conferred in this Article shall be a contract right upon which each Director or Officer shall be presumed to have relied on in determining to serve or to continue to serve as such. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a Director or Officer of the Corporation for or with respect to any acts or omissions of such Director or Officer occurring prior to such amendment or repeal. (9) Severability: If any provision of this Article or any application thereof shall be invalid, unenforceable or contrary to applicable law, the remainder of this Article, or the application of such provisions to persons or circumstances other than those as to which it is held invalid, unenforceable or contrary to applicable law, shall not be affected thereby and shall continue in full force and effect. ARTICLE X Books and Records The corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and Board of Directors (and committees thereof); and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. Any books, records, and minutes may be in written form within a reasonable time. ARTICLE XI Amendments (1) By Shareholders: These Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the voting stock issued and outstanding at any regular or special meeting of the shareholders. (2) By Directors: The Board of Directors shall have power to make, alter, amend and repeal by the Bylaws of this 17 corporation. However any such Bylaws, or any alteration, amendment or repeal of the Bylaws, may be changed or repealed by the holders of a majority of the stock entitled to vote at any shareholders' meeting. (3) Emergency Bylaws: The Board of Directors may adopt emergency Bylaws, subject to repeal or change by action of the shareholders, which shall be operative during any emergency in the conduct of the business of the corporation resulting from an attack on the United States or any nuclear or atomic disaster. Amended and restated as of June 5, 1996. /s/John P. World 18 EX-10.36 3 SEVENTEENTH AMENDMENT TO ACCOUNTS FIN. AGREEMENT EXHIBIT 10.36 January 17, 1997 Congress Financial Corporation (Northwest) 101 S.W. Main Street, Suite 725 Portland, OR 97204 Re: Seventeenth Amendment to Accounts Financing Agreement ----------------------------------------------------- Ladies and Gentlemen: This Seventeenth Amendment to Accounts Financing Agreement (this "Amendment") is made for the purpose of amending the Accounts Financing Agreement [Security Agreement] which we entered into on or about December 20, 1990, as it has been previously amended (the "Accounts Financing Agreement"). For valuable consideration, receipt and sufficiency of which are acknowledged, we agree as follows: 1. Section 2.7 is revised in its entirety as follows: "2.7 In addition to amounts otherwise available under the formulas described above, but subject to the Maximum Credit limit, you will temporarily allow us an overadvance of up to $1,500,000 (the "Overadvance Limit"). All overadvance amounts shall bear interest at the rate prescribed in Section 3 hereof. The Overadvance Limit will be automatically reduced by the sum of $17,858 per month, beginning March 1, 1997 and continuing on the first day of each month thereafter, and any overadvance amounts in excess of such reduced Overadvance Limit must be immediately repaid. The Overadvance limit will be automatically reduced to zero dollars, and any remaining balance of the overadvance must be repaid upon the earlier of (i) March 1, 2002, (ii) the sale or disposition of our real property in Lynnwood, Washington more fully described in Exhibit C hereto (the "Lynnwood Property"), or (iii) expiration or termination of the Accounts Financing Agreement. 2. We agree to enter into a modification of the Trust Deed with respect to the Lynnwood Property to appropriately reflect this Amendment. We also agree to provide to you, at our expense, additional title insurance in the sum of $500,000 from an insurer acceptable to you insuring your Trust Deed as a first lien on the Lynnwood Property. 3. For the accommodation described in this Amendment, we agree to pay you a fee in the sum of $7,500. 4. To induce you to accept this Amendment, we make the following representations, warranties, and covenants: (a) Each and every recital, representation, and warranty contained in this Amendment, the Accounts Financing Agreement, and the Deed of Trust is correct as of the date of this Amendment. Congress Financial Corporation (Northwest) January 17, 1997 Page 2 (b) No event has occurred or is continuing which constitutes or, with the giving of notice, the passage of time, or both, would constitute, an Event of Default under the Accounts Financing Agreement. 5. We shall pay all expenses, including attorney fees, which you incur in connection with the preparation and implementation of this Amendment and any related documents. 6. Except as specifically provided above, the Accounts Financing Agreement remains fully valid, binding, and enforceable according to its terms. 7. We waive and discharge any and all defenses, claims, counterclaims, and offsets which we may have against you and which have arisen or accrued up to the date of this Amendment. We acknowledge that you and your employees, agents and attorneys have made no representations or promises to us except as specifically reflected in this Amendment and in the written agreements which have been previously executed. In this connection, we specifically waive the provisions of California Civil Code (S) 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, must have materially affected his settlement with the debtor." Very truly yours, CARVER CORPORATION By /s/ Debra L. Griffith Its Vice President Finance Congress Financial Corporation (Northwest) January 17, 1997 Page The undersigned guarantor acknowledges that Congress Financial Corporation (Northwest) ("Congress") has no obligation to provide it with notice of, or to obtain its consent to, the terms of this Amendment. The undersigned guarantor nevertheless hereby (i) acknowledges and agrees to the terms and conditions of this Amendment; (ii) acknowledges that its guaranty remains fully valid, binding and enforceable; and (iii) waives any and all defenses, claims, counterclaims and offsets against Congress which may have accrued to date. In connection with these waivers, the undersigned guarantor specifically waives the provisions of California Civil Code (S) 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which, if known by him, must have materially affected his settlement with the debtor." USS CORPORATION, dba US Sound By /s/ John P. World Its Secretary ACCEPTED AND AGREED: CONGRESS FINANCIAL CORPORATION (NORTHWEST) By /s/ Drew C. Stawin Its Vice President EX-10.37 4 FIRST AMENDMENT TO TRUST DEED EXHIBIT 10.37 ================================================================================ [space above this line for Recorder] Recording Requested By, and LINE OF CREDIT INSTRUMENT - --------------------------- After Recording, Please Return To: This instrument secures indebtedness to be advanced by - --------------------------------- Beneficiary under an Accounts Financing Agreement (the "Financing Agreement"). The maximum amount to be advanced Bruce G. Berning by Beneficiary pursuant to the Financing Agreement is Tonkon, Torp, Galen, Marmaduke & Booth $6,000,000. The current term of the Financing Agreement 1600 Pioneer Tower expires July 31, 1998, but is subject to renewal thereafter. 888 SW Fifth Avenue Portland, OR 97204-2099
FIRST AMENDMENT TO TRUST DEED, ASSIGNMENT OF RENTS, SECURITY AGREEMENT, AND FIXTURE FILING (LINE OF CREDIT INSTRUMENT) THIS FIRST AMENDMENT TO TRUST DEED, ASSIGNMENT OF RENTS, SECURITY AGREEMENT, AND FIXTURE FILING (this "Amendment"), dated as of January 7, 1996, amends the Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing dated as of January 9, 1996 and recorded in the real property records of Snohomish County, Washington on March 26, 1996 as instrument number 9603260342 in Volume 3140, Pages 2877 through 2887 and affecting the property described in Exhibit A (the "Trust Deed"). The Trust Deed was made by CARVER CORPORATION, A Washington corporation whose address is 20121 48th Avenue West, Lynnwood, Washington 98036 ("Grantor"), to CHICAGO TITLE INSURANCE COMPANY, having its address at 19725 40th Avenue West, Suite A, Lynnwood, Washington 98036 ("Trustee"), for the benefit of CONGRESS FINANCIAL CORPORATION (NORTHWEST), having its office at 101 SW Main Street, Suite 725, Portland, Oregon 97204 ("Beneficiary"). All capitalized terms that are not defined in this Amendment have the meanings assigned to those terms in the Trust Deed. BACKGROUND Grantor has asked Beneficiary, and Beneficiary has agreed, to enter into a modification of the Financing Agreement to provide for a temporary overadvance in an amount not to exceed the sum of $1,500,000, which amount will be included in the maximum credit of $6,000,000 to be advanced by Beneficiary. In addition, Grantor and Beneficiary have extended the maturity date of the Financing Agreement to July 31, 1998. AMENDMENT For valuable consideration, receipt and sufficiency of which are acknowledged, Grantor and Beneficiary agree as follows: 1. The paragraph which appears in the upper righthand portion of the first page of the Trust Deed is amended in its entirety to read as follows: "LINE OF CREDIT INSTRUMENT "This instrument secures indebtedness to be advanced by Beneficiary under an Accounts Financing Agreement (the "Financing Agreement"). The maximum amount to be advanced by Beneficiary pursuant to the Financing Agreement is $6,000,000. The current term of the Financing Agreement expires July 31, 1998, but is subject to renewal thereafter." 2. The paragraph on page 1 of the Trust Deed which currently reads as follows: "WHEREAS, Beneficiary has agreed to enter into a modification of the Financing Agreement to provide for a temporary overadvance in an amount not to exceed $1,000,000 or such lesser amount as is described in the Eleventh Amendment to Accounts Financing Agreement, of even date herewith; and" is hereby amended to read as follows: "WHEREAS, Beneficiary has agreed pursuant to the Seventeenth Amendment to the Financing Agreement to provide a temporary overadvance in an amount not to exceed $1,500,000, which amount is included in the aggregate $6,000,0000 limit described above; and" 3. Except as specifically provided above, the Trust Deed remains fully valid, binding and enforceable in accordance with its terms. GRANTOR: CARVER CORPORATION By /s/ Debra Griffith Title Vice President Finance 2 BENEFICIARY: CONGRESS FINANCIAL CORPORATION (NORTHWEST) By /s/ Drew C. Stawin Title Vice President STATE OF WASHINGTON ) ) ss. County of Snohomish ) On this 20th day of January, 1997, before me personally appeared Debra L. Griffith, who being duly sworn, stated that he is the V.P. Finance of CARVER CORPORATION, a Washington corporation, and acknowledged the foregoing instrument to be the voluntary act and deed of the corporation, executed by authority of its board of directors. /s/ John P. World Notary Public for Washington My Commission Expires: 4-9-00 STATE OF OREGON ) ) ss. County of Multnomah ) On this 31st day of January, 1997, before me personally appeared Drew C. Stawin, who being duly sworn, stated that he is the Vice President of CONGRESS FINANCIAL CORPORATION, an Oregon corporation, and acknowledged the foregoing instrument to be the voluntary act and deed of the corporation, executed by authority of its board of directors. /s/ Jennifer Jean Grable Notary Public for Oregon My Commission Expires: 4-3-98 3 EX-10.38 5 WARRANT AGREEMENT EXHIBIT 10.38 WARRANT AGREEMENT WARRANT AGREEMENT dated as of September 30, 1996 (the "Effective Date") between CARVER CORPORATION, a Washington corporation (the "Company"), and MARTIN RUTSTEIN (hereinafter referred to as the "Holder"). W I T N E S S E T H: -------------------- WHEREAS, the Company proposes to issue to the Holder the right (the "Warrants") to purchase up to 120,000 shares (the "Shares") of Common Stock of the Company, par value $.01 per share (the "Common Stock") at exercise prices ranging from $1.50 to $2.125 per share in connection with Holder's assistance in connection with the purchase of equity securities of the Company by certain affiliates of Renwick Capital Management, Inc. NOW, THEREFORE, in consideration of the premises, the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Holder is hereby granted the right to purchase, at any ----- time from the Effective Date until 5:00 P.M., New York time, on the September 30, 2001 (the "Warrant Exercise Term"), up to 120,000 fully-paid and non- assessable Shares at an initial exercise price (subject to adjustment as provided in Article 6 hereof) ("Exercise Price") as follows: (a) $1.50 per share if the Warrants are exercised at any time between the Effective Date and 5:00 P.M., New York time, on September 30, 1998; (b) $1.75 per share if the Warrants are exercised on or between October 1, 1998 and 5:00 P.M., New York time, on September 30, 1999; (c) $2.00 per share if the Warrants are exercised on or between October 1, 1999 and 5:00 P.M., New York time, on September 30, 2000; and (d) $2.125 per share if the Warrants are exercised on or between October 1, 2000 and 5:00 P.M., New York time, September 30, 2001. The purchase rights granted hereunder shall terminate at 5:00 New York time, on the September 30, 2001. Holder acknowledges and agrees that the rights granted hereby are in full and complete satisfaction of any claim on its part for 1 compensation in connection with any services performed by Holder for the Company. 2. Warrant Certificates. The warrant certificates (the "Warrant -------------------- Certificates") delivered pursuant to this Agreement shall be in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate --------- insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. The Warrants are exercisable at the prices set ------------------- forth in Section 1 hereof, payable in cash, by certified or official bank check in New York Clearing House Funds payable to the order of the Company, or by wire transfer of immediately available funds to an account designated by the Company, subject to adjustment as provided in Article 7 hereof. Upon surrender of the Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares purchased, at the Company's principal offices (currently located at 20121 48th Avenue West, Lynnwood, Washington 98036), Holder shall be entitled to receive a certificate or certificates for the Shares so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of Holder, in whole or in part (but not as to fractional Shares) in increments of at least 15,000 shares (or, if the number of shares available for purchase is less than 15,000, such lesser amount). In the case of the purchase of less than all the Shares purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. 4. Issuance of Certificates. Upon the exercise of the Warrants, the ------------------------ issuance of certificates for the Shares purchased shall be made as promptly as practicable (and in any event within five business days thereafter) without charge to Holder including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of Holder, provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in the name other than that of the Holder (which may not occur except in compliance with Articles 5 and 14 below) and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 2 The Warrant Certificates and the certificates representing the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future President or Vice President of the Company attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares shall bear a legend substantially similar to the following: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND SUCH SECURITIES MAY NOT BE OFFERED FOR RESALE, SOLD, ASSIGNED OR OTHERWISE HYPOTHECATED FOR VALUE (INCLUDING BY ANY PLEDGEE) UNLESS (A) THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND THE SECURITIES LAWS OF ALL APPLICABLE STATES OF THE UNITED STATES, OR (B) THE SECURITIES ARE OFFERED AND SOLD IN COMPLIANCE WITH AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS AND, AT THE OPTION OF THE COMPANY, THE HOLDER PROVIDES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY TO SUCH EFFECT. 5. Restriction on Transfer of Warrants. By acceptance of a Warrant ----------------------------------- Certificate Holder represents and agrees that Holder is acquiring the Warrants evidenced thereby, and that upon exercise thereof it will acquire the Shares, with its own funds for its own account and not with a view to any sale, distribution or transfer thereof in violation of the Securities Act of 1933, as amended (the "Act") and acknowledges and agrees that the Warrants and the Shares may not be sold, transferred or otherwise disposed of without registration under the Act or any applicable exemption from the registration requirements of the Act. Holder further acknowledges that the Shares will not be issued pursuant to the exercise of a Warrant unless the exercise of the Warrant and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including without limitation, the Act, and other federal and state securities laws and regulations and the requirements of any stock exchange on which the Shares may then be listed, as established to the reasonable satisfaction of Company. The shares are subject to a Registration Rights Agreement of even date herewith between the Company and the Holder. 6. Price. ------ 6.1 Initial and Adjusted Exercise Price. The initial ----------------------------------- 3 exercise price of each Warrant shall be as set forth in Section 1 hereof. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 7 hereof. 6.2 Exercise Price. The term "Exercise Price" shall mean the initial -------------- exercise price or the adjusted exercise price, depending upon the context. 7. Exercise Price Adjustments. The Exercise Price in effect at any time -------------------------- and the number and kind of securities purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall fix a record date for the issuance of rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the lesser of the current market price of the Common Stock (as defined in Subsection (h) below) on the record date mentioned below, or the Exercise Price on such record date (the lesser of such two being the "Adjustment Trigger Price") the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at 4 the Adjustment Trigger Price and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) In case the Company shall hereafter distribute to the holders of its Common Stock evidences of its indebtedness or assets or subscription rights or warrants (excluding those referred to in Subsection (b) above), then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Subsection (h) below), less the fair market value (as determined by the Company's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. Such adjustment shall be made successively whenever such a record date is fixed. (d) In case the Company shall issue shares of its Common Stock [excluding shares issued (i) in any of the transactions described in Subsection (a) or (b) above, (ii) any Permitted Issuance (as defined in Subsection (m) below), (iii) to shareholders of any corporation which merges into the Company in proportion to their stock holdings of such corporation immediately prior to such merger, upon such merger, or issued in a bona fide public offering pursuant to a firm commitment underwriting, but only if no adjustment is required pursuant to any other specific subsection of this Article (7) (without regard to Subsection (i) below) with respect to the transaction giving rise to such rights] for a consideration per share (the "Offering 5 Price") less than the Adjustment Trigger Price, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received or to be received [determined as provided in Subsection (g) below] for the issuance of such additional shares would purchase at the Adjustment Trigger Price and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. (e) In case the Company shall issue any securities convertible into or exchangeable for its Common Stock [excluding securities issued in transactions described in Subsections (b) and (c) above] for a consideration per share of Common Stock (the "Conversion Price") initially deliverable upon conversion or exchange of such securities [determined as provided in Subsection (g) below] less than the Adjustment Trigger Price, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such securities and the number of shares of Common Stock which the aggregate consideration received or to be received [determined as provided in Subsection (g) below] for such securities would purchase at the Adjustment Trigger Price and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance and the maximum number of shares of Common Stock of the Company deliverable upon conversion of or in exchange for such securities at the initial conversion or exchange price or rate. Such adjustment shall be made successively whenever such an issuance is made. (f) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above, the number of Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date of such adjustment and dividing the product so obtained by the Exercise Price, as adjusted, such quotient to be rounded up to the next whole number. (g) For purposes of any computation respecting consideration received pursuant to Subsections (b), (c), (d) and 6 (e) above the following shall apply: (i) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith. (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Company (irrespective of the accounting treatment thereof), whose determination shall be conclusive; and (iii) in the case of the issuance of options, warrants or other securities exercisable for, convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion or exchange thereof [the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this Subsection (g)]. If such securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or a decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, any adjustments made pursuant to this Article 7, and any subsequent adjustments based thereon, shall upon such increase or decrease becoming effective, be recomputed to reflect such increase or decrease with respect to such options, warrants, rights and securities not already exercised, converted or exchanged prior to such increase or decrease becoming effective, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options, warrants or rights or the conversion or exchange of such securities in accordance with their terms. Furthermore, upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange, the Exercise Price and number or kind of shares purchasable upon exercise of Warrants shall forthwith be readjusted to such Exercise Price or number or nature of securities as would have been obtained had the adjustment which was made upon the issuance of such options, warrants, rights or securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options, warrants or rights or upon the conversion or exchange of such securities. (h) For the purpose of any computation under 7 Subsections (b), (c), (d) and (e) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 30 consecutive business days before such date. The closing price for each day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the average of the highest reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors, whose determination shall be conclusive. (i) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least ten cents ($0.10) in such price; provided, however, that any adjustments which by reason of this Subsection (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 7 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 7 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 7, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants). (j) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly, but no later than 10 days after any event giving rise to an adjustment, cause a notice setting forth the adjusted Exercise Price, adjusted number of Shares issuable upon exercise of each Warrant and information describing the transactions giving rise to such adjustments, to be mailed to the Holders at their last addresses appearing in the Warrant register, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 7, and a certificate signed by such firm certifying to the correctness of such computation shall be conclusive evidence of the correctness of such adjustment. No adjustment of the Exercise Price or the number or kind of shares purchasable upon 8 exercise of the Warrants shall made upon the issuance of any shares of Common Stock which are issued pursuant to the exercise, conversion or exchange of any option, warrant or convertible or exchangeable security if any adjustment shall previously have been made upon the issuance of such securities as above provided. (k) In the event that at any time, as a result of an adjustment made pursuant to Subsection (a) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (a) to (i), inclusive above. (l) Notwithstanding any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issued pursuant to this Agreement. (m) "Permitted Issuance" shall mean (i) shares issued in connection with an underwritten public offering, (ii) shares issued pursuant to the Company's employee benefit plans in existence on the Closing Date or as subsequently adopted with the approval of the shareholders of the Company in the manner required by any applicable law, (iii) shares of Common Stock in an amount not greater than ten percent of the Company's then outstanding shares of Common Stock issued to strategic partners, (iv) Common Stock issued as a stock dividend to holders of Common Stock or the Company's Series A Cumulative Convertible Preferred Stock (the "Series A Preferred") or upon any subdivision or combination of such shares, (v) shares issued upon conversion of Series A Preferred or as payment of dividends thereon, (vi) securities issued in connection with the merger or consolidation of the Company or any subsidiary with any other operating entity, or the exchange of securities for stock of another operating entity; (vii) the issuance of securities in connection with the purchase of all or substantially all of the assets of another operating business entity or a division of another operating business entity; (viii) the offering or issuance of securities in connection with the purchase of any tangible or intangible assets for use in the Company's business, including, without limitation, patents, trade secrets and leasehold interests, the lease of equipment by the Company, the provision of lease financing to the Company or the purchase of capital equipment by, the Company; (ix) shares of Common Stock (initially 250,000 shares) issuable upon exercise of warrants issued to Renwick Capital Management, Inc.; (x) shares of Common 9 Stock issued upon exercise of the Warrants; or (xi) shares of Common Stock issued upon exercise of the rights granted to Corporate Relations Group pursuant to that certain Agreement for Financial Public Relations Services dated as of August 22, 1996. 8. Exchange and Replacement of Warrant Certificates. Each Warrant ------------------------------------------------ Certificate is exchangeable without expense, upon the surrender hereof by the Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 9. Elimination of Fractions. The Company shall not be required to issue ------------------------ certificates representing fractions of Shares upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of Shares. 10. Right of First Refusal. Holder will not Transfer (as defined below) ---------------------- all or any part of the Shares unless such Holder has made an Offer (also as defined below) to the Company and such Offer has not been accepted by the Company in the manner described below. The selling Holder shall first make a written offer (the "Offer") to the Company to sell the Shares that pertain to the proposed Transfer (the "Offer Shares"). A statement attached to the Offer shall set forth (i) the intention to Transfer; (ii) the name and address of the prospective transferee, if known; (iii) the amount of the Offer Shares; and (iv) any additional terms and conditions of the Transfer, including the proposed purchase price for the Offer Shares and any related expenses of disposition payable by the selling Holder (the "Transaction Expenses"). Within two (2) business days after its receipt of the Offer, the Company may, at its option, accept the Offer as to all, but not less than all, of the Offer Shares by delivering written notice to the selling Holder that the Company is electing to purchase the Offer Shares. The Company's right to purchase shall be at a price equal to the proposed purchase price set forth in the Offer net of the Transaction Expenses. If the Company does not elect to purchase all of the 10 Offer Shares, the selling Holder may transfer the Offer Shares to the prospective Transferee named in the statement attached to the Offer, such transfer to be made only in strict accordance with the terms set forth in such statement, and to be completed within 90 days following the expiration of the time provided for the election by the Company to purchase the Offer Shares, after which time any Transfer shall again become subject to all the restrictions of this Article. No Transfer of any right, title or interest in the Shares shall be effective, and the Company shall not record or recognize any such Transfer, until there has been compliance with the provisions of this Article. If no offer is made as herein required, the Company may nevertheless exercise its rights hereunder as to the Shares being Transferred and may do so at any time, even after the Transfer of the Shares. The restrictions on Transfer imposed by this Article 10 shall expire and be of no further force or affect as of September 30, 2006. For purposes of this Article, "Transfer" shall mean to sell, assign, transfer, pledge, hypothecate, mortgage, incumber or dispose, during any one day, of more than two thousand (2,000) of the Shares; provided, however, that Transfer shall not include a transfer (i) by will or by the applicable laws of descent and distribution or (ii) for no consideration by way of gift of Shares to the spouse of a Holder or to his or her lineal descendants, or to a trust solely for his benefit or for the benefit of his or her spouse or lineal descendants, provided that the transferees, whether pursuant to (i) or (ii) above, take Shares subject to the transfer restrictions of this Article 10. Each certificate evidencing any of the Shares shall bear a legend substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RIGHTS OF FIRST REFUSAL FOR THE BENEFIT OF CARVER CORPORATION PURSUANT TO THE TERMS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF SEPTEMBER 30, 1996, AS AT ANY TIME AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR INCUMBERED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS OF SAID AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE." 11. Reservation and Listing of Securities. The Company shall at all times ------------------------------------- reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive 11 rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on or quoted by NASDAQ. 12. Notices to Warrant Holders. Nothing contained in this Agreement -------------------------- shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company (other than under circumstances covered by Subsection 7(a) above); or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor (other than under circumstances covered by Subsection 7(a) above); or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or (d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or (e) the Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate 12 to all the shareholders of the Company; then, in any one or more of said events, the Company shall give written notice to the Holder or Holders of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. Any notice required to be given pursuant to this Agreement ------- shall be given in writing. Any notice, consent, approval, demand and other communication in connection with this Agreement shall be deemed to be given if given in writing (including facsimile, telecopy or similar transmission) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received by the addressor), and if either (a) actually delivered in fully legible form to such address (evidenced in the case of a telecopy by receipt of a telecopy transmission confirmation) or (b) in the case of a letter, five days shall have elapsed after the same shall have been deposited in the United States mails (i) with first- class postage prepaid and registered or certified, with return receipt requested, or (ii) with express delivery postage prepaid, with receipt required for delivery. If to the Company, to it at 20121-48th Avenue West, Lynnwood, Washington 98036. If to any Investor, to it at R. Martin & Co., 480 Juneberry Road, Riverwoods, IL 60015. 14. Course of Dealing; Amendments, Waivers and Consents. No course of --------------------------------------------------- dealing between Holder, on one hand, and the Company, on the other hand, shall operate as a waiver of Holder's rights under this Agreement or any other Transaction Document. The Company acknowledges that if Holder, without being required to do so by this Agreement or any other Transaction Document, gives any notice of information to, or obtains any consent from, the Company, Holder shall not by implication have amended, waived or modified any provision of this Agreement or any other Transaction Document, or created any duty to give any such notice or information or to obtain such consent on any future occasion. No delay or omission on the part of Holder in exercising any 13 right under this Agreement or any other Transaction Document shall operate as a waiver of such right or any other right hereunder or thereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No amendment, waiver or consent with respect to this Agreement shall be binding unless it is in writing and signed by each of the Company and the Holder. Any amendment or waiver effected in accordance with this Section 14 shall be binding upon each Holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible or exercisable) and each future holder of any of such securities and the Company. 15. Survival of Covenants; Assignability of Rights. The Warrants may ---------------------------------------------- not be sold, assigned, or transferred except in compliance with Section 5 above. All covenants, agreements, representations and warranties of the Company made in this Agreement and any other written information delivered or furnished to any Investor in connection herewith or therewith shall inure to the benefit of each of the Holder and its respective successors and assigns and each permitted transferee of any Warrants (whether so expressed or not), but only if such transferee is (A) an affiliate, partner or stockholder of Holder or transferee or (B) a transferee or assignee of Warrants to purchase at least 25,000 Shares, as adjusted for any stock split, stock dividend or other recapitalization, provided in any event that the Company is given written notice at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and provided, further, that the transferee or assignee agrees in writing to abide by and assume each and every duty and obligation of an Investor pursuant to this Agreement. 16. Governing Law. This Agreement and each Warrant Certificate issued ------------- hereunder shall be deemed to be a contract made under the laws of the State of Washington and for all purposes shall be construed in accordance with the laws of said State without regard to the conflicts of laws provisions thereof. 17. Benefits of This Agreement. Nothing in this Agreement shall be -------------------------- construed to give to any person or corporation other than the Company and the Holder and any other permitted registered holder or holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Holder and any other permitted holder or holders of the Warrant Certificates. 18. Entire Agreement. This Agreement, the Warrant Certificates and the ---------------- Registration Rights Agreement between the Company and the original Holder set forth the entire agreement 14 between the parties with respect to the transactions contemplated hereby and supersede all prior or contemporaneous agreements, arrangements and understandings relating to the subject matter hereof, whether written or oral. 19. Counterparts. This Agreement may be executed in any number of ------------ counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 15 IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed, as of the day and year first above written. CARVER CORPORATION By: /s/John P. World Name: John P. World Title: Executive Vice President Martin Rutstein /s/ Martin Rutstein 16 EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH LAW IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, September 30, 2001 No. W-2 __________ WARRANT CERTIFICATE This Warrant Certificate certifies that Martin Rutstein or registered assigns, is the registered holder of Warrants to purchase, at any time from September ___, 1996 until 5:00 P.M. New York City time on September 30, 2001 ("Expiration Date"), up to 70,000 fully-paid and non-assessable share(s) of common stock, $.01 par value ("Common Stock"), of Carver Corporation, a Washington corporation (the "Company"), at the exercise prices, subject to adjustment in certain events (the "Exercise Price"), as set forth in Section 1 of that certain Warrant Agreement dated as of September 30, 1996 between the Company and Martin Rutstein (the "Warrant Agreement"), upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Warrant Agreement. Payment of the Exercise Price may be made in cash, by certified or official bank check in New York Clearing House funds payable to the order of the Company, any combination of cash or check, or by wire transfer of immediately available funds. This Warrant may not be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all rights evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by, reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of 17 the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. No holder of this Warrant Certificate shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, to give or withhold consent to any corporate action, or to receive dividends or subscription rights or otherwise, until the Warrant evidenced by this Warrant Certificate shall have been exercised and the Common Stock issuable upon the exercise thereof shall have become deliverable as provided in the Warrant Agreement. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 2 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: September ___, 1996 CARVER CORPORATION By: ______________________________________ Name: Title: 3 [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase __________ Shares of Common Stock and herewith tenders in payment for such securities, cash, certified or official bank check payable in New York Clearing House Funds to the order of Carver Corporation, any combination of cash or certified or official bank check in New York Clearing House funds, or by wire transfer of immediately available funds in the amount of $__________, all in accordance with the terms hereof. The undersigned requests that a certificate for such securities be registered in the name of ____________________, whose address is ______________________________, and that such Certificate be delivered to ____________________, whose address is ______________________________. Dated: Signature: _______________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ______________________________ ______________________________ (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED ____________________ hereby sells, assigns and transfers unto __________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature: _______________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) ______________________________ ______________________________ (Insert Social Security or Other Identifying Number of Holder) EX-10.39 6 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.39 REGISTRATION RIGHTS AGREEMENT ----------------------------- AGREEMENT, dated as of the 30th day of September, 1996, between Martin Rutstein ("Holder") and Carver Corporation, a Washington corporation, having its principal place of business at 20121 48th Avenue West, Lynnwood, Washington 98036 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holder and the Company are entering into a Warrant Agreement pursuant to Holder is receiving warrants (the "Warrants") to purchase up to 120,000 shares (the "Warrant Shares") of common stock, $.01 par value, of the Company ("Common Stock"); and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein with respect to the Warrant Shares, NOW, THEREFORE, the parties hereto mutually agree as follows: 1. REGISTRATION RIGHTS. ------------------- (a) Registration Under the Securities Act of 1933. None of the Warrants or --------------------------------------------- the Warrant Shares have been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). (b) Registrable Securities. As used herein, the term "Registrable ---------------------- Security" means the Warrant Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Registrable Securities; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security, when as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for subsequent public distribution of such security, (iii) it has ceased to be outstanding or (iv) it is no longer beneficially owned by a Holder or a permitted transferee of the rights of a Holder pursuant to Section 9 of this Agreement. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. (c) Piggyback Registration. (i) If at any time on or prior to August 12, ---------------------- 2002 the Company proposes to prepare and file one or more registration statements under the Act to register any shares of Common Stock on a registration form that may be used for registration of Registrable Securities (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form) (for purposes of this Section 1, collectively, the "Registration Statement"), it will give written notice of its intention 1 to do so by registered mail or certified ("Notice"), at least twenty (20) days prior to the filing of each such Registration Statement, to each Holder. Upon the written request of any Holder (a "Requesting Holder"), made within twenty (20) days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall use its reasonable best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holder; provided, however, that if, in the written opinion of the Company's managing underwriter, if any, for such offering, the inclusion of all or a portion of the Registrable Securities requested to be registered, when added to the securities being registered by the Company or other selling shareholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially adversely affecting the entire offering, then the Company may exclude from such offering all or a portion of the Registrable Securities which it has been requested to register. (ii) If securities are proposed to be offered for sale pursuant to such Registration Statement by other security holders of the Company and the total number of securities to be offered by the Requesting Holder and such other selling security holders is required to be reduced pursuant to a request from the managing underwriter (which request shall be made only for the reasons and in the manner set forth above) the aggregate number of Registrable Securities to be offered by the Requesting Holder pursuant to such Registration Statement shall equal the number which bears the same ratio to the maximum number of securities that the underwriter believes may be included for all the selling security holders (including the Requesting Holder) as the original number of Registrable Securities proposed to be sold by the Requesting Holder bears to the total original number of securities proposed to be offered by the Requesting Holder and the other selling security holders. (iv) Notwithstanding the provisions of this Section 1(c), the Company shall have the right at any time after it shall have given written notice pursuant to this Section 1(c) (irrespective of whether any written request for inclusion of such securities shall have already been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. 2. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company ----------------------------------------------------- covenants and agrees as follows: (a) In connection with any registration under Section I(d) hereof, the Company shall use its best efforts to file the Registration Statement as expeditiously as possible, but in any event no later than forty-five (45) days following receipt of any demand therefor, shall use its reasonable best efforts to have any such Registration Statement declared effective at the earliest possible time and shall furnish each holder of Registrable Securities such number of prospectuses as shall reasonably be requested. 2 (b) The Company shall pay all costs, fees and expenses in connection with all Registration Statements filed pursuant to this Agreement including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. However, each Holder shall be solely responsible for the fees of any counsel retained by him or her in connection with such registration and any transfer taxes or underwriting discounts or commissions applicable to the Registrable Securities sold by him or her. (c) The Company shall indemnify and hold harmless each Holder and each underwriter, within the meaning of the Act, who may purchase from or sell for the Holder, any Registrable Securities, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any other registration statement filed by the Company under the Act, any post-effective amendment to such registration statements, or any prospectus included therein required to be filed or furnished by reason of this Agreement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by a Holder or underwriter expressly for use therein; which indemnification shall include each person, if any, who controls any such underwriter within the meaning of the Act and each officer, director, employee and agent of such underwriter. The Holder and any such underwriter and other person, shall be obligated to indemnify the Company, its directors, each officer signing the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any registration statement or any prospectus required to be filed or furnished by reason of this Agreement or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission based upon information furnished in writing to the Company by the Holder or underwriter or other person expressly for use therein. (d) If for any reason the indemnification provided for in the preceding subparagraph is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party, and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. (e) Nothing contained in this Agreement shall be construed as requiring the Holder to exercise the Warrants prior to the initial filing of any registration statement or the effectiveness thereof. 3 (f) The Company shall deliver promptly to the Holder of Registrable Securities participating in the offering in which the Holder's shares are being registered pursuant to Section 1(c) hereof copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement and permit the Holder and underwriters to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as the Holder of Registrable Securities or underwriter shall reasonably request. (g) Upon the written request therefor by the Holder, the Company shall include in the Registration Statement covering any of the Registrable Securities any other shares of Common Stock held by the Holder as of the date of filing of such Registration Statement, provided that such holder pays the incremental costs associated with registration of such additional shares. 3. Additional Terms. The following provisions shall be applicable to any ---------------- Registration Statement filed pursuant to Section 1 of this Agreement: (a) If any stop order shall be issued by the Commission in connection with registration hereunder, the Company will use its reasonable efforts to obtain the removal of such order. Following the effective date of the Registration Statement, the Company shall, upon the request of the Holder, forthwith supply such reasonable number of copies of the Registration Statement, preliminary prospectus and prospectus meeting the requirements of the Act, and other documents necessary or incidental to a public offering, as shall be reasonably requested by the holder to permit the Holder to make a public distribution of his or her Registrable Securities. The Company will use its reasonable efforts to qualify the Registrable Securities for sale in such states as the Holder of Registrable Securities shall reasonably request, provided that no such qualification will be required in any jurisdiction where, solely as a result thereof, the Company, would be subject to service of general process or to taxation or qualification as a foreign corporation doing business in such jurisdiction. The obligations of the Company hereunder with respect to the Holder's Registrable Securities are expressly conditioned on the Holder's furnishing to the Company such appropriate information concerning the Holder, the Holder's Registrable Securities and the terms of the Holder's offering of such Registrable Securities as the Company may reasonably request. (b) Neither the filing of a Registration Statement by the Company pursuant to this Agreement nor the making of any request for prospectuses by the Holder shall impose upon the Holder any obligation to sell his or her Registrable Securities. (c) The Holder, upon receipt of notice from the Company that an event has 4 occurred which requires a post-effective amendment to the Registration Statement or a supplement to the prospectus included therein, shall promptly discontinue the sale of his or her Registrable Securities until the Holder receives a copy of a supplemented or amended prospectus from the Company, which the Company shall provide as soon as practicable after such notice. (d) The Company shall not be required to include any Registrable Securities in a registration pursuant to this Agreement unless the Holders accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company. Furthermore, Holder shall cooperate with the Company in connection with the preparation of a Registration Statement, and for so long as the Company is obligated to file and keep effective the Registration Statement, shall provide to the Company, in writing, for use in the Registration Statement, all such information regarding Holders and his or its plan of distribution with respect to the Registrable Securities covered thereby as the Company from time to time may reasonably request to prepare the Registration Statement and prospectus covering the Registrable Securities, to maintain the currency and effectiveness thereof and otherwise to comply with all applicable requirements of law in connection therewith. Holder covenants that it will promptly notify the Company in writing of any changes in the information set forth in a Registration Statement regarding such Holder or his or its plan of distribution of Registrable Securities covered thereby. 4. Amendment or Waiver. The provisions of this Agreement may be amended ------------------- at any time and from time to time, and particular provisions of this Agreement may be waived, with an agreement or consent in writing, executed in one or more counterparts, signed by the Company and by Holders holding not less than a majority of the Registrable Securities outstanding and held by holders as of the date of such amendment or waiver. Any amendment or waiver effected in accordance with this paragraph shall be binding on the Company and all Holders. 5. Entire Agreement. This Agreement constitutes the entire agreement of ---------------- the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 6. Execution in Counterparts. This Agreement may be executed in one or ------------------------- more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 7. Notices. All notices, requests, demands or other communications ------- required by or otherwise given with respect to this Agreement shall be in writing and shall be deemed to have been duly given to any party when delivered personally (by courier service or otherwise), four days after being mailed by United States first-class mail, postage prepaid and return receipt requested, or when delivered by facsimile (if a confirming copy is sent by mail as aforesaid), in each case to the applicable addresses set forth below: If to the Holder, to his or her address set forth on the signature page of this 5 Agreement. If to the Company, to the address set forth on the first page of this Agreement. 8. Binding Effect; Benefits. A Holder may assign his or her rights here ------------------------ under to a transferee or assignee of at least 15,000 Registrable Securities, as adjusted by any stock split, stock dividend or similar change in the Common Stock, provided in any event that the Company is given written notice at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and provided, further, that the transferee or assignee agrees in writing to abide by and assume each and every duty and obligation of a holder pursuant to this Agreement. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. Nothing herein contained, express or implied, is intended to confer upon any person other than the parties hereto and their respective heirs, legal representatives, successors and such permitted assigns, any rights or remedies under or by reason of this Agreement. 9. Headings. The headings contained herein are for the sole purpose of -------- convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 10. Severability. Any provision of this Agreement which is held by a court ------------ of competent jurisdiction to be prohibited or unenforceable in any jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 11. Governing Law. This Agreement shall be deemed to be a contract made ------------- under the laws of the State of Washington and for all purposes shall be construed in accordance with the laws of said State without regard to the conflicts of laws provisions thereof. 6 IN WITNESS WHEREOF, this Registration Rights Agreement has been executed and delivered by the parties hereto as of the date first above written. CARVER CORPORATION By: /s/ John P. World Name: John P. World Title: Executive Vice President MARTIN RUTSTEIN: /s/ Martin Rutstein Martin Rutstein 7 EX-10.40 7 INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10.40 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and Stephen M. Williams (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 45,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is September 20, 1996. 2. The exercise price for the Option granted pursuant hereto is $2.875 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule: 22,500 shares if the Corporation achieves a net profit for the fourth quarter of 1996 of $150,000 or more; and 22,500 shares upon the achievement of the annual objectives for the fiscal year ending December 31, 1997. 4. This Option shall expire, to the extent not previously exercised, on the earlier of September 19, 2006 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: 2 (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the September 20, 1996. EMPLOYEE CARVER CORPORATION _____________________________ By:____________________ /s/ Stephen M. Williams /s/ John P. World Exec. V. President 3 EX-10.41 8 INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10.41 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and Stephen M. Williams (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 45,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is September 20, 1996. 2. The exercise price for the Option granted pursuant hereto is $2.875 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule:
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase ---------------------- ---------------------- September 20, 1996 15,000 September 20, 1997 15,000 September 20, 1998 15,000
4. This Option shall expire, to the extent not previously exercised, on the earlier of September 19, 2006 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 2 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the September 20, 1996. EMPLOYEE CARVER CORPORATION - ----------------------------- By:------------------------------ /s/ Stephen M. Williams /s/ John P. World Executive Vice President 3 EX-10.42 9 INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10.42 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 30,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is September 20, 1996. 2. The exercise price for the Option granted pursuant hereto is $2.875 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule:
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase ---------------------- ---------------------- September 20, 1996 10,000 September 20, 1997 10,000 September 20, 1998 10,000
4. This Option shall expire, to the extent not previously exercised, on the earlier of September 19, 2006 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 2 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the September 20, 1996. EMPLOYEE CARVER CORPORATION - -------------------------- ---------------------------------- /s/John P. World /s/Stephen M. Williams President & CEO 3 EX-10.43 10 INCENTIVE STOCK AGREEMENT EXHIBIT 10.43 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 30,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is September 20, 1996. 2. The exercise price for the Option granted pursuant hereto is $2.875 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule: 15,000 shares if the Corporation achieves a net profit for the fourth quarter of 1996 of $150,000 or more; and 15,000 shares upon the achievement of the annual objectives for the fiscal year ending December 31, 1997. 4. This Option shall expire, to the extent not previously exercised, on the earlier of September 19, 2006 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: 2 (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the September 20, 1996. EMPLOYEE CARVER CORPORATION _____________________________ By:______________________ /s/John P. World /s/Stephen M. Williams President & CEO 3 EX-10.44 11 INCENTIVE STOCK AGREEMENT EXHIBIT 10.44 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 30,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is January 15, 1996. 2. The exercise price for the Option granted pursuant hereto is $1.50 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule:
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase - ---------------------- ---------------------- July 15, 1996 10,000 July 15, 1997 10,000 July 15, 1998 10,000
4. This Option shall expire, to the extent not previously exercised, on the earlier of January 14, 2006 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 2 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the 15/th/ day of January, 1996. EMPLOYEE CARVER CORPORATION _____________________________ By:______________________ /s/John P. World /s/Stephen M. Williams President & CEO 3 EX-10.45 12 INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10.45 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World (the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1995 Stock Option Plan (the "Plan"), effective as of February 15, 1995, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 25,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is March 11, 1995. 2. The exercise price for the Option granted pursuant hereto is $2.50 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule:
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase ---------------------- ---------------------- March 11, 1996 6,250 March 11, 1997 6,250 March 11, 1998 6,250 March 11, 1999 6,250
4. This Option shall expire, to the extent not previously exercised, on the earlier of March 10, 2004 or the first to occur of either of the following events: (a) The date of the Employee's termination of employment with the Company for cause as defined in the Plan; (b) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than for cause as defined in the Plan; or (c) The expiration of one (1) year from the date of death of the Employee, or cessation of the Employee's employment with the Company by reason of disability as defined in the Plan. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by: payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the common Stock to be purchased; delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price; or delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of loan or sale proceeds to pay the exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by al transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased share of Common Stock. 2 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock usable thereunder until he becomes a shareholder of record; and (c) The share of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the Corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the 11/th/ day of March, 1995. EMPLOYEE CARVER CORPORATION _____________________________ By:____________________ /s/John P. World /s/Robert A. Fulton President and CEO 3 EX-10.46 13 NONQUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10.46 CARVER CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World(the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1985 Incentive Stock Option Plan (the "Plan"), effective as of January 19, 1985, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 1,000 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is February 23, 1993. 2. The exercise price for the Option granted pursuant hereto is $2.25 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule.
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase ---------------------- -------------------------- February 23, 1993 250 February 23, 1994 250 February 23, 1995 250 February 23, 1996 250
SALE OF ANY SHARE OF STOCK GRANTED PURSUANT TO THIS OPTION WITHIN SIX (6) MONTHS FROM THE DATE OF GRANT MAY BE A VIOLATION OF RULE 16b OF THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION. 4. This Option shall expire, to the extent not previously exercised, on the earlier of (Date that is 10 years minus one day from the Date of Grant) or the first to occur of either of the following events: 4.1 The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than death; or 4.2 The expiration of one (1) year from the date of death of the Employee. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the Common Stock to be purchased or by delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by all transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased shares of Common Stock. 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: 10.1 The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of Common Stock, may only be effected in compliance with applicable state and federal laws and regulations; 10.2 He is not entitled to any rights as a shareholder with respect to any shares of Common Stock issuable hereunder until he becomes a shareholder of record; and 10.3 The shares of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its Common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the 23rd day of February, 1993. EMPLOYEE CARVER CORPORATION _________________________ By:______________________________ /s/John P. World /s/Thomas C. Graham, President & CEO EX-10.47 14 NONQUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10.47 CARVER CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and John P. World(the "Employee"), on the date set forth below. WITNESSETH THAT: WHEREAS, the Corporation has adopted the Carver Corporation 1985 Incentive Stock Option Plan (the "Plan"), effective as of January 19, 1985, pursuant to which the Board of Directors, or a special committee thereof, is authorized to grant, in its sole discretion, to key employees of the Corporation options to purchase shares of the Corporation's common stock (the "Common Stock"), and WHEREAS, the Compensation Committee of the Board of Directors granted to Employee an option under the Plan to purchase shares of Common Stock under the terms hereof. NOW, THEREFORE, in consideration of the foregoing, the Corporation and the Employee have executed this Agreement evidencing and confirming the issuance by the Corporation to the Employee of an option for the purchase of 29,021 shares of Common Stock (the "Option") in accordance with the following terms and conditions: 1. The date of grant of the Option represented hereby is March 2, 1992. 2. The exercise price for the Option granted pursuant hereto is $3.25 per share. 3. This Option shall be exercisable in accordance with the following vesting schedule.
Number of Shares of Common Date Shares Become Stock Which Shall Become Available for Purchase Available for Purchase ---------------------- -------------------------- March 2, 1992 18,748 May 16, 1992 2,219 June 4, 1992 3,750 October 7, 1992 1,147 May 16, 1993 2,219 June 4, 1993 3,750
SALE OF ANY SHARE OF STOCK GRANTED PURSUANT TO THIS OPTION WITHIN SIX (6) MONTHS FROM THE DATE OF GRANT MAY BE A VIOLATION OF RULE 16b OF THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION. 4. This Option shall expire, to the extent not previously exercised, on the earlier of March 1,2002 or the first to occur of either of the following events: (a) The expiration of ninety (90) days from the date of the Employee's termination of employment with the Company for any reason whatsoever other than death; or (b) The expiration of one (1) year from the date of death of the Employee. The unvested portion of this Option shall terminate immediately upon Employee's termination of employment for any reason whatsoever, including death. 5. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Secretary of the Corporation at its principal executive office in Lynnwood, Washington, specifying the number of shares of Common Stock to be purchased and accompanied by payment in cash, by certified or cashier's check payable to the order of the Corporation of the full exercise price for the Common Stock to be purchased or by delivery of previously acquired shares of Common Stock with a fair market value equal to or greater than the full exercise price. 6. Prior to delivery of any common stock purchased on exercise of this Option, the Corporation shall determine the amount of any United States federal and state income tax, if any, which is required to be withheld under applicable law and shall, as a condition of exercise of this Option and delivery of certificates representing the common stock purchased upon exercise of the Option, collect from the employee the amount of any such tax to the extent not previously withheld. 7. Employee shall not have any rights as a shareholder with respect to any common stock subject to this Option until the date that a stock certificate for such common stock as to which the Employee has exercised this Option has been issued to the Employee. Subject to its obligation to withhold set forth in Section 6 hereof, and to its obligations under federal and state securities laws set forth in Section 9 below, the Corporation shall issue such stock certificate as soon as practicable following the exercise of the Option. If any law or regulation, whether related to securities or otherwise, requires the Corporation to take any action with respect to any common stock prior to the transfer thereof, or prohibits, limits or delays the issuance thereof, then the date for delivery of such Common Stock shall be extended for the period reasonable necessary to take and conclude such action, or during the period of such prohibition, limitation or delay. 8. Neither this Option, the execution of this Agreement nor the exercise of any portion of this Option shall confer upon the Employee any right to, or guarantee of, continued employment by the Corporation, or in any way limit the right of the Corporation to terminate employment of Employee at any time, subject to the terms of any employment agreements between the Corporation and Employee. 9. By accepting this Option, Employee represents and agrees for himself, and all persons who acquire rights in this Option in accordance with the Plan through Employee, that none of the shares of Common Stock purchased upon exercise of this Option will be distributed in violation of applicable federal and state laws and regulations, and Employee shall furnish evidence satisfactory to the Corporation (including a written and signed representation letter and a consent to be bound by all transfer restrictions imposed by applicable law, legend condition, or otherwise) to that effect, prior to delivery of the purchased shares of Common Stock. 10. Employee acknowledges that he has read and understands the terms of this Agreement and the Plan and that: (a) The issuance of shares of Common Stock pursuant to the exercise of this Option, and any resale of the shares of Common Stock, may only be effected in compliance with applicable state and federal laws and regulations; (b) He is not entitled to any rights as a shareholder with respect to any shares of Common Stock issuable hereunder until he becomes a shareholder of record; and (c) The shares of Common Stock subject hereto may be adjusted in the event of certain organic changes in the capital structure of the corporation or for any other reason permitted by the Plan. 11. This Option may not be transferred, except by will or the laws of descent and distribution, and during the lifetime of Employee this Option shall be exercisable only by him. 12. This Option and this Agreement evidencing and confirming the same are subject to the terms and conditions set forth in the Plan and in any amendments to the Plan existing now or in the future, which terms and conditions are incorporated herein by reference. Should any conflict exist between the provisions of the Plan and those of this Agreement, those of the Plan shall govern and control. The Employee acknowledges receipt of a copy of the Plan as presently in effect. This Agreement and the Plan comprise the entire understanding between the Corporation and Employee with respect to the Option and shall be construed and enforced under the laws of the State of Washington. 13. The Corporation hereby warrants that a sufficient number of shares of its Common Stock have been reserved and are available to satisfy the requirements of the Plan. Dated as of the second of March, 1992. EMPLOYEE CARVER CORPORATION _________________________ By:______________________________ /s/John P. World /s/Thomas C. Graham, President & CEO EX-11 15 COMPUTATION OF EARNING PER SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Primary Net loss $(3,203,000) $(3,157,000) ($2,873,000) =========== =========== =========== Shares Weighted average common shares outstanding 3,706,000 3,680,000 3,678,000 Net common shares issuable on exercise of certain stock options - - - ----------- ----------- ----------- Net common shares issuable upon conversion of preferred stock - - - ----------- ----------- ----------- Average common and common share equivalents outstanding, as adjusted 3,706,000 3,680,000 3,678,000 =========== =========== =========== Primary loss per common share $( .86) $( .86) $( .78) =========== =========== =========== Assuming full dilution Average common and common share equivalents as adjusted 3,706,000 3,680,000 3,678,000 Net additional common shares issuable on exercise of certain stock options - - - ----------- ----------- ----------- Net additional common shares upon conversion of preferred stock - - - ----------- ----------- ----------- Average common and common share equivalents outstanding, as adjusted 3,706,000 3,680,000 3,678,000 =========== =========== =========== Loss per common share assuming full dilution $( .86) $( .86) $( .78) =========== =========== ===========
EX-21 16 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation ---- ----------------------------- Carver International Ltd. Guam GREAT AMERICAN SOUND COMPANY Washington, State EX-23.1 17 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Carver Corporation We consent to the incorporation by reference into the Registration Statements on Form S-8 (Registration No. 33-65005, 33-70902, 33-50076, 33-31344, 33-23168, 33- 23167 and 33-04273) of our reports on the financial statements and supplementary schedules dated March 7, 1997, which appear in the December 31, 1996 annual report on Form 10-K of Carver Corporation, and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ Moss Adams LLP Seattle, Washington March 7, 1997 EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FISCAL YEAR DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 65,000 5,000 1,890,000 263,000 4,176,000 6,639,000 5,191,000 2,747,000 9,224,000 2,066,000 0 0 14,000 37,000 7,107,000 9,224,000 14,519,000 14,519,000 11,604,000 11,604,000 5,945,000 231,000 202,000 (3,203,000) 0 (3,203,000) 0 0 0 (3,203,000) (.86) (.86)
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