-----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, N3amH7VqMF7hXnDecWIBGuMCTSetj+3y9fNbpMhEubP1IisDX9jyqoDrcWlS0wZj 4ccbaggNoGaTLiDAYSFtfA== 0000950109-96-001882.txt : 19960401 0000950109-96-001882.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950109-96-001882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 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: 96541944 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 [FEE REQUIRED] For the fiscal year ended December 31, 1995 ------------------------------------------------------ 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 (I.R.S. Employer of incorporation or organization) Identification Number) 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 26, 1996 was $6,845,586. Number of shares of Common Stock of the Registrant outstanding as of March 25, 1996: 3,687,080 shares. Items 10, 11, 12 and 13 of Part II are incorporated by reference to the Company's definitive proxy statement for its 1996 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 PART I PAGE - ------ ---- Item 1. Business.................................................. Item 2. Properties................................................ Item 3. Legal Proceedings......................................... Item 4. Submission of Matters to a Vote of Security Holders.......................................... PART II - ------- Item 5. Market for the Company's Common Stock and Related Security Holder Matters........................... Item 6. Selected Financial Data................................... Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. Item 8. Financial Statements and Supplementary Data............... Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ PART III - -------- Item 10. Directors and Executive Officers of the Company............ Item 11. Executive Compensation..................................... Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. Item 13. Certain Relationships and Related Transactions............. PART IV - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................ 2 PART I ITEM 1. BUSINESS INTRODUCTION Forward-Looking Statements Statements in this report covering future performance, developments, expectations 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 industry, and generations of additional working capital, constitute forward-looking statements which are subject to a number of risks and uncertainties which might cause actual results to differ materially from stated expectations. These include the risks and uncertainties described 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 Commission, press releases and other communications. Description of Business Carver Corporation ("Carver" or "the Company") designs, develops, manufactures and markets high-fidelity audio components targeted to the mid-to high-end audio entertainment systems market. Carver products are positioned in the middle and upper price range of most audio components. The Company offers technically innovative audio products for the home hi-fi 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 performance. During 1995, the Company continued to pursue its strategy designed to broaden its market presence and return its operations to profitability. It continued to streamline its product lines to focus the Company's resources on its core strength, the design and marketing of amplifiers and preamplifiers. The Company continued to cut overhead expenses. It broadened and strengthened Carver's distribution network. It concluded the sale of the Company's professional product line to Phoenix Gold International, Inc. and discontinued its mobile product line of products. The Company was incorporated in the State of Washington in 1978, and its initial public offering occurred in May 1985. Its 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 high- fidelity audio market (electronics of all types including portable and mobile audio) to be currently in excess of $11 billion per year at the factory selling price. Home audio systems vary widely in design, quality and price from inexpensive 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 companies. It estimates the total size of the market for separate audio components to be around $2.6 billion annually. A Carver system, including loudspeakers, ranges in price from approximately $2,800 to approximately $7,800. 3 RECENT DEVELOPMENTS Significant New Customer - The Circuit City Affiliation. In December 1995, the Company announced that the Company's consumer product line would be carried in the superstores operated by Circuit City Stores, Inc., ("Circuit City") the nation's largest retailer of brand-name consumer electronics. Circuit City operates approximately 352 superstores throughout the United States. Pursuant to the Company's agreement with Circuit City, opening orders will be shipped in three stages. The initial product roll out was shipped in late December 1995 and early January 1996; the second roll out was shipped in February 1996; and the third roll out is expected to ship in May 1996. If shipments of the Company's products to all Circuit City superstores are as contemplated by Carver and Circuit City, the number of retail outlets selling the Company's consumer products will be approximately twice the number of retail outlets that were selling the Company's consumer products on December 1, 1995. (See Item 1-- Certain Risks and Item 7--Management's Discussion and Analysis Financial Condition and Results of Operations). Sale of Professional Audio Product Line. In November 1995, the Company sold all of the tangible and intangible assets related to its professional audio products line to Phoenix Gold International, Inc ("Phoenix Gold"). The transaction included a license which allows Phoenix Gold to use the name "Carver Professional", and an agreement by the Company not to compete against Phoenix Gold in the professional audio market for a period of five years from the date of the sale. The transaction provided needed working capital and enabled the Company to focus on its consumer product business, and further reduce staff and related overhead. However, there can be no assurance that such benefits from the sale will accrue to the Company. Cash generated by the transaction allowed Carver to purchase previously deferred shipments of offshore-sourced consumer products. (See Item 7 - Management's Discussion and Analysis Financial Condition and Results of Operations). Customs Audit Between 60% to 70% of the Company's revenues in prior years were of products which are sourced from offshore suppliers primarily from the Far East. 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 which the Company believes should significantly mitigate any penalty. In July 1995, the Company paid the Customs Service $50,000 as an offer in compromise of the penalty. While the Company believes its offer will be accepted, there can be no assurances of this. The Company's current cash flow position would not allow it to pay a $400,000 penalty. (See Item 7 - Management's Discussion and Analysis Financial Condition and Results of Operations). Mobile Products In an effort to further streamline its operations, the Company discontinued its mobile product line in 1995. The Company had not been able to invest in research, development and marketing which this intensely competitive market would require. In December 1995, the Company wrote off its remaining mobile product raw material inventory. Personnel Robert A. Fulton resigned as the President and Chief Executive Officer in January 1996 and Stephen M. Williams, formerly the Company's Executive Vice President and Chief Operating Officer, was elected President and Chief Executive Officer. Mr. Fulton remains with the Company as one of its directors. In February 1996, Sandra L. 4 Jenkins, the Company's Vice President of Finance and Administration and Chief Financial Officer, resigned. The Company expects to complete the process of recruiting a successor to Ms. Jenkins during the second quarter of 1996. Thomas C. Graham was elected Chairman of Carver's Board of Directors and John F. Vynne was elected Vice-Chairman in November 1995. Walter C. Howe, Jr. resigned as a director of the Company in November 1995. Robert W. Carver was elected to the Board of Directors in December 1995. PRODUCTS In 1996, Carver's AV-806x was named the "THX Amplifier of the Year" by Britian's Home Cinema, a British trade magazine. The Company's Lightstar Reference Amplifier won the Special Technology Award in the influential Hi Fi Grand Prix award given by Audio Video International, an important trade publication. Products are nominated by retailers and then a panel of audio engineers and magazine writers review the benefits, features and overall value of the product. These are compiled to produce three or four winners in each category. Carver's products have historically been well represented in this competition. Other awards received in 1995 were the Electronics Industries Association's Design and Engineering award, called Innovations. Manufacturers are invited to submit entries. A panel of judges consisting of industry engineers, audio press editors and other experts review each entry and evaluate such items like aesthetic appeal, improvement of quality of life and technological advances. Votes are then cast and the winning products are displayed in a special exhibit at the Consumer Electronics Show in Las Vegas in January. Three Carver products won this award in 1995: The Carver Research Lightstar Direct remote controlled preamplifier; the Carver AV-806x power amplifier; and the Z-5 power expander. Home Audio Products The Company markets a home audio video component line of 17 products which include 4 power amplifiers, 2 multi-channel amplifiers, 2 preamplifier/ tuners, 1 integrated amplifier, 1 receiver, 2 preamplifiers and one model each of a tuner, CD changer, CD player, cassette deck and loudspeakers. Manufacturers Suggested Retail Price on consumer home products ranged from $399-$4000. 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 controls the volume level, tone, and source switching. Specialized amplification circuits in the preamplifier 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. Although Carver offers receivers, 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. Separates 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. In recent years, Carver has concentrated its efforts on the major area for growth in audio products, audio for video or home theater separates. The Company has discontinued most of its signal source products, its lower priced preamplifiers and receivers, and its home theater loudspeakers. Professional Products. Until November 1995, Carver offered multiple lines of professional power amplifiers that covered a wide range of professional applications. Sale of all of the products were discontinued by the Company upon completion of the sale of the professional product line to Phoenix Gold. 5 Carver Technologies The Company's business strategy has involved the identification of certain fundamental limitations of the stereophonic sound reproduction process and the development of innovative electronic circuits or other technologies which address these limitations. The Company holds thirteen patents with respect to certain of the technologies described below and licenses an additional technology. See "Patents and Trademarks". The Company's technologies include: Lightstar Power Amplifier Technology. The Company believes Lightstar Reference represents the most advanced power amplifier technology on the market today. This technology offers performance advantages over current amplifier designs in terms of current capability, the capability to easily drive any loudspeaker load, independence from voltage fluctuations from the AC power line and effortless sound quality. The Company has filed three patent applications on its Lightstar technology, one of which has been granted. Magnetic Field Power Amplifier Technology enables the Company's amplifiers to deliver more current, more power and more voltage than competitively-priced designs while dealing with demanding, variable speaker impedances. Carver Magnetic Field amplifiers are capable of delivering both high voltage and high current simultaneously into modern speaker designs which can swing as low as two ohms in certain frequency ranges. The patents relating to Magnetic Field Power Amplifier technology are licensed by the Company from Robert W. and Diana R. Carver. The patents expire from 1997 to 2003. Transfer Function Modification Technology. The t-modification process allows the Company to duplicate many of the sonic characteristics of its very costly amplifier in solid state designs at a fraction of the cost. Sonic Holography(R). Using principles analogous to those employed in producing visual holograms with intersecting laser beams, the Company's patented Sonic Holography technology produces the illusion that the musical program is being performed by instruments arrayed on a three-dimensional stage. The Company's U.S. patent relating to Sonic Holography will expire in 1997. Asymmetrical Charge-Coupled FM Detection Technology. Carver's patented Asymmetrical Charge-Coupled FM Detector (ACCD) circuit substantially reduces interference caused by multipath distortion and noise present in weak stereo radio broadcast signals. Thus, high quality stereo reproduction can be achieved from FM signals which would produce unacceptably poor sound quality on other equipment. The patent for the Asymmetrical Charge-Coupled FM Detection Technology will expire in 2001. Flat Panel 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 innovative materials, panel geometry and driver positioning to achieve a sharply focused, yet large three-dimensional sound effect. The Company's patent expires in 2007. Patents and Trademarks The Company holds thirteen domestic patents issued between 1980 and 1994 on several of its technologies which are incorporated into a number of its products. See "Carver Technologies" above. Patents with respect to Sonic Holography (R) and ACCD have been issued by various countries. Robert W. and Diana R. Carver personally own domestic and foreign patents on the Magnetic Field Power Amplifier technology which expire beginning in 1997. The Company has a non-exclusive license to the technology and pays Robert W. and Diana R. Carver royalties on sales of products incorporating such technology. While the Company believes that the patent rights owned by the Company and under which the Company is licensed are important and cover and protect adequately the Company's proprietary 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 6 than on the ownership of patent rights. "Carver", "Cinema Holography", "Sonic Holography", "Lightstar", "Great American Sound", and "Ampzilla" are registered trademarks of the Company. The Company claims common law rights to the following trademarks: "Digital Time Lens", "Magnetic Field Amplifier", "Soft EQ", and "KLW Audio". SALES AND MARKETING Home Audio Systems. The Company markets its home audio 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 18 independent manufacturers' representatives and the Company's sales and marketing staff. The Company's dealers typically stock a broad variety of audio equipment and may also carry automobile audio systems, televisions, video cassette recorders and other consumer-oriented electronic products. The Company seeks dealers who emphasize high quality audio systems and who are knowledgeable about the characteristics of audio/video products. The Company's sales and marketing department emphasizes dealer education programs and product literature to enable individual sales people to understand and explain to consumers 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, High Performance Review, Audio/Video Interiors, Video, Home Theater magazines, Sensible $ounds and Guide to Home Theater and the Company's general reputation for producing superior products are important elements of its sales and marketing program. Domestic sales of consumer audio products accounted for approximately 57%, 57%, and 46% of the Company's sales in 1993, 1994 and 1995, respectively. Total Company sales of consumer audio products were 72%, 71%, and 60%, respectively, for the same years. Professional Sound Equipment The Company's professional audio products were marketed principally through musical instrument and professional audio retailers, sound contractors and to major touring sound companies. The Company had a domestic network of 18 manufacturer's representatives for its professional audio products. Worldwide sales of professional audio products accounted for approximately 25 percent of the Company's sales in each of 1993, 1994 and 1995, respectively. Figures for 1995 are based on sales of professional audio products through mid-November 1995 when the Company sold its professional audio products line. OEM Product Prior to 1994, Carver built product in its Lynnwood facility for other audio manufacturers to be resold under their brand name on a very limited basis. In 1994, the Company expanded this aspect of its business to include contracts to supply product as an Original Equipment Manufacturer (OEM). OEM production accounted for approximately 1% and 8% of sales in 1994 and 1995, respectively. Most of the products which the Company sold as an OEM were professional audio products, and the underlying contracts for the OEM products were included in the sale of Carver's professional product line. Since then, the Company's OEM sales have returned to their pre-1994 levels. International Sales The Company has a network of 56 distributors who provide retail sales coverage in over 56 countries. International sales are also made to U.S. military exchanges. Foreign sales accounted for approximately 25, 27, and 28 percent of the Company's sales in 1993, 1994 and 1995, respectively. Management had intended to allocate more resources in 7 global marketing in 1995 in an effort to increase its international revenues. The Company's cash restraints in 1995 prevented it from allocating additional resources in developing products for its international markets and from marketing its existing products. 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, including 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. In recognition of current market trends which show that consumers 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 NAD. Most of the Company's competitors have substantially 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 advantages. The Company also believes that consumers of high fidelity audio products have a greater awareness of the Carver brand name than that of the Company's competitors. Product Returns From time to time the Company has accepted returns of unsold products from its dealers. Historically, return of unsold products has been insignificant. Backlog The Company's current policy is to attempt to maintain sufficient finished goods inventory to fill orders within three business days after they are received. However, during most of 1995, the Company operated under 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 significantly following major product introductions as dealers place orders for the new products in excess of the numbers produced in initial production runs or if an offshore supplier fails to make on-time deliveries of product. 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, 1996 was approximately $2,575,000, compared to approximately $1,035,000 on January 31, 1995. Engineering, Research and Development The Company recognizes that its future is dependent on its ability to introduce products which incorporate technological innovation and advanced features. The engineering group has developed a modular amplifier design which will be used in a new line of amplifiers scheduled for introduction beginning in April 1996. The new amplifiers will also incorporate the Company's "Power Steering" technology which allows up to 40% more power on demand for selected amplifier channels. Carver expects to release approximately 10 new and replacement products during 1996. The engineering group has designed a five-channel amplifier, the AV-505, which will be manufactured by the Company and replace an existing five channel amplifier currently sourced offshore, representing a continuation of the Company's strategy to return production to the United States. 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. 8 The Company employs 6 full-time technical personnel in its research, development, engineering and product development organization. The Company's expenditures for engineering, research and development in 1993, 1994, and 1995 were $1,310,000, $1,160,000, and $808,000, respectively. Manufacturing During 1995, approximately 47% of the Company's sales were of products manufactured by third parties to the Company's specifications. The Company presently sources these products from five different suppliers primarily 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 location of the sources of parts and subassemblies, and 2) the cost relative to expected volume of products to be manufactured. The Company believes it has excellent working relationships with its various suppliers. During 1995, 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 manufactured 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 has recently entered into a relationship with another supplier from whom the Company expects to source at least two of its new products scheduled for introduction in mid-1996. Four of 17 current Carver consumer products and two accessories are built in its Lynnwood, Washington facility. 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 discussions. Carver is vigorously pursuing "Total Quality Management" (TQM), and "Continuous Quality Improvement" (CQI) techniques in an effort to increase quality, lower costs, and add profitability. Carver will concentrate on value-added operations where in-house manufacturing skills and process control are most important. Consistent with its commitment to quality, the Company maintains strict testing 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 consumer amplifiers, pre- amplifiers and loudspeakers; a two-year limited warranty on integrated amplifiers, pre-amp tuners, receivers and tuners; and a one-year limited warranty on compact disc players and tape decks. Human Resources On March 18, 1996, the Company had 83 full-time employees, of whom 55 were engaged in production and customer service, 6 in research, development, engineering and product development, 11 in general and administrative functions, and 11 in sales and marketing. None of the Company's employees is covered by a collective bargaining agreement. The Company believes its relations with its employees are satisfactory. 9 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 43 Vice President of Research and Development John P. World 49 Executive Vice President and General Manager
Mr. Croft joined the Company in October 1992 as its Director of Product Research 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 President 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. Mr. World was employed by 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 activities. Since joining the Company in 1987, Mr. World has at various times been responsible for the administration, credit, human resource, legal, order entry, 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. Risks Factors Late in 1995, the Company entered into a distribution arrangement with a new customer ("Key Customer"). Sales to the Key Customer are projected to be as much as 50%, or more, of the Company's revenue in 1996. However, the Company has no prior sales experience with the Key Customer on which to base its projection and has no history of re-orders from the Key Customer. Although the Company has shipped two of the three opening orders to the Key Customer, the Company does not have purchase orders for the third shipment. The Key Customer may not be able to successfully market and sell the Company's products. Factors which could affect the volume of sales by the Key Customer include factors which generally influence retail sales of electronic products. The agreement between the Company and the Key Customer 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 may not be able to change its operations quickly enough to respond to a significantly lower level of sales. The Company expects sales of products sourced offshore to account for over 50% of its revenue in 1996. Due to the size of the orders for sourced products which the Company expects to receive from the Key Customer, the Company plans to submit larger than normal orders for sourced products. Larger lot sizes increase the risk that the Company's inventory of finished goods could increase sharply if the Key Customer or a significant number of other customers of the Company order smaller quantities than those forecasted by the Company. Although, the Company believes that its forecast is conservative, the Company has no prior sales history with the Key Customer and there can be no assurance that the forecast will be met or that it will generate cash flow sufficient to provide operating capital for the Company that it requires. If revenues are significantly less than forecasted in 1996 or if the Company is not successful in obtaining additional capital to fund operations during the second and third quarters of 1996 (See, Liquidity and Capital Reserves, below), it may not be able to purchase adequate quantities of sourced product. There can be no assurance that the Company's actual cash requirements will not exceed its anticipated cash requirement projections or that additional cash requirements will not arise. Lack of product whether due to delays in or cancellation of deliveries of sourced product would result in revenues significantly below those forecasted by the Company. Product delivery delays greater than 90 days may result in the termination of the Company's relationships with certain of its dealers, 10 including the Key Customer. During the last four completed fiscal years, the Company has incurred aggregate net losses of approximately $12,766,000 or $3.47 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, particularly those associated with the streamlining of its product lines, increased sales and margins, the reduction 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 "Management's Discussion and Analysis of Financial Conditions and Results of Operations." 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 employment, business conditions, interest rates and taxation. The Company's business is also sensitive to consumer 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 electronics, in particular middle to high-end audio entertainment systems, were to decline, the Company's business, financial condition and operating results could be adversely affected. The consumer electronics industry is highly competitive. The Company's products compete directly against other middle to high-end audio entertainment systems and 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, department stores and mail order firms. The Company competes against a number of companies, many of which have substantially greater resources than the Company. 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 recognition. Given the Company's current financial situation, 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" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." Concentration of Accounts Two of the Company's customers, including the Key Customer, accounted for 60% of its receivables as of March 25, 1996. Due to the anticipated pattern of purchases by the Key Customer, the Company anticipates that the Key Customer's accounts receivable will be 35% of the Company's total accounts receivables. The purchases by the other customer of the Company are for raw materials associated with the transfer of the professional products line to Phoenix Gold. Although there are inconsistencies between the amount the Company and Phoenix Gold each believe is payable for the raw materials, the Company believes that these receivables will be paid by the end of April. ITEM 2. PROPERTIES The Company owns its 74,000 square foot headquarters and manufacturing facilities located in Lynnwood, Washington, a suburb of Seattle. In December 1995, after the sale of its professional audio products line, the Company listed this facility for sale. The Company believes that its facilities are adequate for its operations. 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 symbol 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 1995 and 1994:
Fiscal Year 1995 Fiscal Year 1994 ---------------- ---------------- Quarter High Low High Low - --------- -------- ------ -------- ------ First $3 3/8 2 1/4 $3 1/8 $2 Second 2 7/8 1 3 1/4 2 1/4 Third 2 1/2 1 5/8 3 3/8 2 1/8 Fourth 2 1/8 1 3 1/2 2 3/4
The approximate number of shareholders of record as of March 22, 1996 was 509. 12 ITEM 6. SELECTED FINANCIAL DATA FIVE YEAR SELECTED FINANCIAL DATA (Dollars in Thousands Except Per Share Data)
FISCAL YEARS 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Income Statement Data - --------------------- Net sales $18,428 $22,171 $26,274 $25,596 $27,776 Gross profit 3,390 4,676 4,469 6,924 8,087 Income (loss) from operations (2,857) (2,536) (2,994) (1,153) 561 Income (loss) before income tax and discontinued operations (3,157) (2,873) (3,564) (1,328) 306 Net income (loss) $(3,157) $(2,873) $(5,408) $(1,328) $ 306 ------- ------- ------- ------- ------- Earnings (loss) per share* $( .86) $ (.78) $ (1.47) $( .36) $ .08 ------- ------- ------- ------- ------- Balance Sheet Data Working capital $ 4,931 $ 7,589 $ 9,943 $14,012 $16,035 Total assets 10,674 16,628 18,897 22,914 22,305 Long-term debt -- 899 716 735 751 Shareholders' equity $ 7,389 $10,537 $13,408 $18,808 $20,124 ------- ------- ------- ------- -------
* Earnings per share are calculated on the basis of 3,659,000 shares in 1991, 3,671,000 shares in 1992, 3,676,000 shares in 1993, 3,678,000 shares in 1994 and 3,680,000 in 1995. 13 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, expectations 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 industry constitute forward-looking statements which are subject to a number of risks and uncertainties which might cause actual results to differ materially from stated expectations. These include the risks and uncertainties described 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 Commission, press releases and other communications. The markets for high-fidelity audio equipment are somewhat seasonal with moderately higher sales generally occurring in the last six months of the year. The Company's sales in the first six months of 1995 were $10,161,000 compared to $8,267,000 in the last six months of the year. The decline in sales in the second half of 1995 is attributable primarily to inventory shortage due to working capital constraints and the November 1995 sale of the Company's professional products line. The introduction of new products may affect this seasonality and year-to-year comparisons. Demand for audio products also exhibits some cyclicality, reflecting the general state of the economy and consumer expectations. 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 1995 Compared with 1994 Net revenues in 1995 were $18,428,000 which were down 16.9% from 1994 sales of $22,171,000. The sales decline represents a $2,927,000 decrease in domestic consumer sales and a $823,000 decrease in domestic sales of professional products. 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 International, Inc. in the professional audio products transaction. Sales of professional 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. Fourth quarter 1995 sales of professional products were $428,000 compared to sales of $1,320,000 in the fourth quarter of 1994. 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 market 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 its product line, especially those at the low end of the price range and with low margins. However, the single largest factor in the 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. Sales of tuner/preamplifiers and preamplifiers decreased 13%, CD players decreased 46% and receivers decreased 58% in year-to-year comparisons. Sales of amplifiers grew by 5% in 1995. Export sales were flat from 1994 to 1995. Early in 1995, the Company had increased its international marketing 14 efforts. However, when the Company's cash 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 on mobile products raw material and finished goods inventory and severance payable to employees who were laid off in a work force reduction in June 1995. 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. Margins are expected to improve as the Company introduces its new Lynnwood produced amplifiers in 1996 and purchases other new products to be introduced in 1996 from offshore vendors located outside of Japan. Although there can be no assurance that foreign exchange rates, cost increases or other factors will not negatively impact margins. In an effort to improve its overall gross margin, the Company increased prices by approximately 5% in January 1995. In 1995, 47% of sales were of product that was sourced from offshore suppliers compared to 60% in 1994. Selling expense increased slightly as a percent of sales in year-to-year comparisons. Selling expense is expected to increase in 1996 as part of management's plan to increase the Company's distribution. The Company has employed three persons as technical/product trainers and increased the travel schedule and related expenses of its sales managers, trainers and support staff to provide additional field support and training to the Company's dealers. General and administrative expense decreased more than $330,000 from 1994 to 1995 but remained flat as a percent of sales. Decreases in salary and legal expenses were offset by an increase in bad debt expense and expenses associated with investigation of strategic alternatives. Early in 1995, the Company retained the services of the investment banking firm of Cruttenden Roth to seek a strategic partner, capital infusion or buyer for part or all of the Company. After conducting discussions with various interested parties, the Company concluded a sale of its professional audio products line. The Company subsequently terminated its agreement with Cruttenden Roth. Engineering, research and development expense decreased from 5% of sales in 1994 to 4% in 1995 primarily due to decreased expenditures for salaries, new project material and agency and safety approvals. Management does not expect further decreases in research and development expense as it believes that the current level of expenditures is necessary to complete the introduction of nine new products scheduled for release in the second and third quarters of 1996. After release of the new products and/or when the Company obtains additional capital, management intends to commence development of a new line of loudspeakers for home theater application and 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. While cash constraints have reduced the Company's efforts to research and develop new technologies, it has in 1995 developed its "Power Steering" technology and made further improvements in its patented Lightstar and Sonic Holography 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 transaction 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 believes that sale of the professional product line will benefit it by allowing Carver to focus on its consumer business, reduce staff and overhead, and improve its liquidity and balance sheet. The total amount of the transaction was approximately $2,100,000. Of this amount, payment of $350,000 is deferred until mid-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 December 1994. The gain on the sale of the professional products line was $1,208,000. Cash from this transaction was used by the Company to purchase shipments of offshore sourced product which the Company had previously deferred due to its cash shortage. As part of the transaction, the Company signed a one-year supply and manufacturing agreement with Phoenix Gold to 15 continue to manufacture certain products for and to sell certain raw materials used in the professional products to Phoenix Gold. The Company's obligation to source and sell raw material to Phoenix Gold ends in June 1996. The Company anticipates that it will manufacture few products for Phoenix Gold after April 1996. 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 severance costs was accrued relating to personnel reductions that have been substantially 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 discontinuation of the current mobile product line, the early discontinuation of certain consumer product models, a decision to change product vendors by mid-1996 and a decision to sell its Lynnwood facility and move to a facility that is one-third the size. 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 December 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 paid to the U.S. Customs Service in an offer and compromise of a penalty imposed by U.S. Customs (See Notes 13 and 14 to Consolidated Financial Statements.) The Company has approximately $13,581,000 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 2010. Management is of the opinion that it is not appropriate to record a benefit for net operating loss carryforwards of approximately $13,581,000 at this time. As future operating results improve, management will re-assess its position in this matter. The Company's 1995 net loss was $3,157,000 compared with a net loss of $2,873,000 in 1994. 1994 Compared with 1993 Net revenues in 1994 were $22,171,000 which were off 15.6% from sales of $26,274,000 for the fiscal year of 1993. The sales shortfall was primarily comprised of a $2,500,000 drop in sales to military exchange systems and a $1,200,000 decrease in domestic sales of professional product. The military exchange sales of $3,500,000 in 1993 were an anomaly due to a one time military promotion that featured certain Carver products and extended credit to the military exchange customers. The drop in professional sales was due to delays in the first shipments of new products and the traditional lag in the acceptance of new professional amplifiers. Inventory supplies of the old product were depleted before the new product was available. At the same time, Carver's competitors in the professional market were engaged in aggressive price cutting. Management had anticipated a significant decline in consumer domestic sales in 1994 due to the discontinuance of nearly one-third of the product offerings, especially those at the low end of the price range. A 49% decrease in cassette decks and a 43% decrease in CD players was largely offset by an actual unit increase of 15% in tuner/preamplifiers while unit sales of consumer amplifiers remained relatively stable in year-to-year comparisons. Total consumer domestic sales decreased less than 5%. Export sales decreased 8.2% from 1993 to 1994 primarily in sales to Europe, but increased slightly as a percentage of total sales. Management believed export sales declined for much the same reasons as consumer sales. In 1994, 60% of sales were of product that was sourced from offshore suppliers. Due to price increases, the gross margin on sourced product improved by 3% in 1994, even though the yen-to-dollar rate deteriorated by 11% thereby greatly inflating costs. 16 Selling expense decreased slightly as a percent of sales in year-to-year comparisons. The decrease in variable selling expense associated with a decline in revenues was somewhat offset by a $100,000 increase in advertising and promotional expense. General and administrative expense increased approximately $320,000 from 1993 to 1994. A $300,000 decrease in salary expense largely associated with the elimination of the Company's onsite childcare center was somewhat offset by increased legal expenses and increased bank fees. Costs associated with the settlement of the lawsuit between the Company and Robert and Diana Carver and a reserve of $50,000 associated with a proposed settlement with U.S. customers, (see Note 13 of Notes to consolidated Financial Statements), also contributed to increased General and Administrative expense. Engineering, research and development expense decreased 11.2% from 1993 primarily due to decreased expenditures for salaries, new project material and agency and safety approvals. The Company sustained losses of $2,536,000 from operations for the year ended December 31, 1994 which compared to losses of $2,994,000 for the year ended December 31, 1993 which had included a write down of discontinued inventory and tooling in excess of $1,000,000. By reducing expenses the Company was able to improve its operating performance in the face of a significant decrease in net revenues. Interest expense was $365,000 in fiscal 1994 compared with $330,000 in 1993 due to an increase in the effective interest rate. Other expense in 1993 included a disposition charge of $1,055,000 associated with the discontinuation and sale of the Company's 80%-owned subsidiary, US Sound (See Note 15 of Notes to Consolidated Financial Statements) and $790,000 associated with the operations of US Sound. 1993 also included $194,000 of losses recorded on the sale of the office building adjacent to the Company's headquarters. The Company's net loss was $2,873,000 in 1994 compared with a net loss of $5,408,000 in 1993. Liquidity and Capital Resources The Company's working capital on December 31, 1995 was $4,931,000 which included cash and short-term investments aggregating approximately $266,000. This compares with working capital of $7,589,000 and cash and short-term investments of $254,000 at December 31, 1994. At March 25, 1996, the Company's immediate capital resources consisted of approximately $49,000 in cash (and cash equivalents) and the credit facility described below. The Company has a $6,000,000 revolving line of credit, $1,000,000 of which can be used to open commercial letters of credit. Borrowings under this agreement are restricted to 70% of eligible accounts receivable and 50% of eligible inventory. As a condition to its approval of the sale of the professional products line, the Company's lender required that borrowings under the line of credit be reduced by an "Availability Block" of $250,000 plus twenty percent of the gross proceeds from the sale of raw material and work-in-process inventories used for professional products and sold as part of the sale to Phoenix Gold. At March 25, 1996, the Company had borrowed $2,258,000 of the $2,440,000 then available under this facility. The line is collateralized by substantially all assets of the Company and bears interest at the prime lending rate plus 2%. On January 15, 1996, the lender agreed to make temporary overadvances to the Company in amounts of up to $1,000,000 in addition to amounts otherwise available under the formulas described above. The Company granted its lender a Deed of Trust on Carver's Lynnwood, Washington facility as security for the temporary accommodation. The overadvance must be repaid in the following amounts on the following dates: $575,000 on February 29, 1996; $75,000 on March 31, 1996; $100,000 on April 30, 1996; and $250,000 on May 31, 1995. This line expires May 31, 1996. In February 1996, management met with representatives from its lender to discuss the renewal of its line of credit. Based on this discussion, the Company believes that its lender will renew the line of credit for a two year term and the temporary accommodation for an additional 120 days on substantially the same terms. However, there can be no assurance that the Company will be able to renew its line of credit or that it will be able to do so on a timely basis or on favorable terms. The Company's lender has also indicated that it will extend the expiration date of the line of credit to June 30, 1996 to allow sufficient time to complete the renewal process. 17 The Company's inventory decreased $4,123,000 from December 31, 1994 to December 31, 1995 due to the streamlining of the product line, better inventory management procedures, sale of the professional product line and inventory write off. Improved inventory turns is one of the major benefits the Company expects to realize by returning more of its production to its Lynnwood facility and from purchasing products sourced offshore from vendors who will allow the Company to purchase smaller lot sizes. Accounts receivable decreased $1,526,000 from the end of 1994 due to lower revenues and a tightening of credit policies and terms. As the Company's borrowing base is dependent on its inventory and receivables, the borrowing availability has contracted to a level at which the Company is likely to experience a cash shortfall and could be forced to delay the payment of its accounts payables which could impair its relationship with its vendors and/or delay receipt of major sourced product purchases. Another alternative would be to sharply lower prices to generate cash which would impair margins. During most of the second half of 1995, the Company was forced to defer payments to its vendors and canceled delayed receipt of purchase orders totaling more than $1,000,000. As a result, the Company's revenues in 1995 declined due to lack of product availability. The Company believes that cash flow from operations and borrowings available under its credit line, including the $1,000,000 temporary accommodation, will be sufficient to provide for its immediate working capital needs if it carefully manages it cash and controls its expenses. The Company's current operating plan indicates that the Company will experience a cash shortfall during the second quarter of 1996. If the Company is unable to obtain an extension of the $1,000,000 special accommodation from its lender, the Company believes that it can obtain a short-term mortgage from another lender or delay payments to vendors to meet the cash shortfall. During the third quarter, the Company's expects its cash needs to exceed the cash available to it from operations and borrowings available under its credit line. The Company is seeking a buyer for its headquarters in Lynnwood, Washington. Although, the Company believes that proceeds from the sale of its headquarters would enable it to meet its third quarter cash needs, there can be no assurance of this. Nor can there be any assurance that the facility will sell by the time the Company requires the additional cash for its operations. If the Company is unable to obtain sufficient cash to meet its needs in the second and third quarters, it will be forced to cancel purchase orders or defer the placement of purchase orders for product sourced offshore. Such cancellations or deferrals will have a significant negative impact on product availability and may result in severely reduced revenues. In addition, if revenues fail to meet the Company's expectations for the remainder of the year, the Company may not have sufficient cash from its operations and borrowings available under its line of credit to meet its operating needs. It is unlikely that the Company will be able to benefit from certain opportunities it has available without additional working capital. There can be no assurance that the Company would be able to generate additional sources of working capital on terms favorable to the Company, if at all. If the Company does not attract additional financing and if it continues to record losses, the Company likely would have to delay payment of suppliers and be forced to seek other relief from its creditors. 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 is 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 sale 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 at which time a balloon payment for the remaining interest and principal will be entirely due. The Company believes that it will receive the balloon payment as scheduled in September 1996. Upon its receipt of the payment, the Company will payoff the underlying mortgage and net approximately $300,000 in cash. In 1996, the Company expects to purchase approximately $75,000 of capital equipment, primarily manufacturing and office equipment, and has made a firm commitment for $35,000 of these expenditures. 18 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 operating costs. The Company increased its domestic consumer and worldwide professional prices on 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 anticipated due to these price increases, the Company believes that it is appropriate to trade some decline in sales for an improvement in margins. The Company 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. Approximately 47% of the Company's net sales in 1995 and 60% in 1994 were of products designed by and/or manufactured to the Company's specifications by overseas suppliers. The Company purchased a substantial portion of these products at an agreed per unit price payable in Japanese Yen. Accordingly, a weakening in the value of the dollar versus the Yen in the first quarter of 1995 had an adverse effect on the Company's gross margin. Although the dollar recovered somewhat against the Yen later in the year, the Company received minimum benefits from the recovery because it was unable to purchase sourced product for much of the year due to its severe cash restraints. The adverse impact of the weak dollar was somewhat mitigated by the Company's decreased reliance on offshore sourcing of its products. The Company's 1996 plan presently is for 58% of its revenues to be sourced offshore. Historically, the Company has had a policy of generally hedging its foreign currency exposure between the date orders are placed with overseas suppliers and the date at which payment is made. Due to credit restrictions under its line of credit, the Company is not hedging at this time and therefore does have exposure to currency fluctuations which might adversely effect its gross profits in 1996. As of December 31, 1995, the Company has committed to the purchase of approximately $2,371,000 of inventory which it expects to receive in 1996. Of this amount, approximately $1,883,000 is denominated for payment in Japanese Yen. A 15% appreciation in the Yen against the U.S. Dollar would increase the amount which the Company has committed to purchase approximately $282,000 to a total of $2,165,450. As of December 31, 1995, the Company has committed to the purchase of approximately $2,371,000 of inventory which it expects to receive in 1996. Of this amount, approximately $1,883,000 is denominated for payment in Japanese Yen. A 15% appreciation in the Yen against the U.S. Dollar would increase the amount which the Company has committed to purchase approximately $282,000 to a total of $2,165,450. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ---- Report of Independent Certified Accountants 21 Consolidated Balance Sheet as of December 31, 1995 and 1994 22 Consolidated Statement of Operations, Years Ended December 31, 1995, 1994 and 1993 23 Consolidated Statement of Shareholder's Equity, Years Ended December 31, 1995, 1994 and 1993 24 Consolidated Statement of Cash Flows, Years Ended December 31, 1995, 1994 and 1993 25 Notes to Consolidated Financial Statement 26 20 [LETTERHEAD OF MOSS-ADAMS LLP APPEARS HERE] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Carver Corporation We have audited the accompanying consolidated balance sheet of Carver Corporation and subsidiary as of December 31, 1995 and 1994, 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, 1995. 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 standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carver Corporation and subsidiary as of December 31, 1995 and 1994, and the results of their operations and cash flows for each of the years in the three year period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Moss Adams LLP Seattle, Washington February 15, 1996 21 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ASSETS
December 31, ------------------------- 1995 1994 ------------ ----------- Current assets Cash and cash equivalents $ 261,000 $ 249,000 Marketable securities 5,000 5,000 Accounts receivable, trade, net 2,304,000 3,830,000 Inventories 3,927,000 8,050,000 Current portion of note receivable 1,342,000 13,000 Prepaid expenses 377,000 634,000 ----------- ----------- Total current assets 8,216,000 12,781,000 ----------- ----------- Property and equipment Land 440,000 440,000 Buildings and improvements 2,452,000 2,444,000 Equipment 2,018,000 2,026,000 ----------- ----------- 4,911,000 4,910,000 Less accumulated depreciation (2,620,000) (2,382,000) ----------- ----------- 2,291,000 2,528,000 ------------ ----------- Other assets and deferred charges Note receivable, net of current portion - 989,000 Other 167,000 330,000 ----------- ----------- 167,000 1,319,000 ----------- ----------- Total assets $10,674,000 $16,628,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Note payable $ 1,216,000 $ 3,067,000 Accounts payable 842,000 1,383,000 Accrued liabilities Commissions and advertising 104,000 221,000 Payroll and related taxes 198,000 243,000 Warranty 73,000 103,000 Other 156,000 155,000 Current portion of long-term debt 696,000 20,000 ----------- ----------- Total current liabilities 3,285,000 5,192,000 ----------- ----------- Long-term settlement payable, net of current portion - 203,000 Long-term debt, net of current portion - 696,000 ----------- ----------- Total long-term liabilities - 899,000 ----------- ----------- Commitment and contingencies (Notes 7 and 13) Shareholders' equity Preferred stock, par value $.01 per share, 2,000,000 shares authorized, no shares issued Common stock, par value $.01 per share, 20,000,000 shares authorized 37,000 37,000 Additional paid-in capital 15,940,000 15,931,000 Accumulated deficit (8,588,000) (5,431,000) ----------- ----------- Total shareholders' equity 7,389,000 10,537,000 ----------- ----------- Total liabilities and shareholders' equity $10,674,000 $16,628,000 =========== ===========
See accompanying notes to consolidated financial statements. 22 CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31, --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net sales $18,428,000 $22,171,000 $26,274,000 Cost of sales 15,038,000 17,495,000 21,805,000 ----------- ----------- ----------- Gross profit 3,390,000 4,676,000 4,469,000 ----------- ----------- ----------- Operating expenses Selling 3,441,000 3,827,000 4,254,000 General and administrative 1,887,000 2,221,000 1,899,000 Engineering, research and development 808,000 1,164,000 1,310,000 Restructuring Charges 1,319,000 - - Gain on sale of professional products line (1,208,000) - - ----------- ----------- ----------- 6,247,000 7,212,000 7,463,000 ----------- ----------- ----------- Loss from operations (2,857,000) (2,536,000) (2,994,000) ----------- ----------- ----------- Other (income) expense Interest expense 335,000 365,000 330,000 Interest income (86,000) (87,000) (24,000) Loss on disposal of property and equipment 3,000 2,000 194,000 Miscellaneous 48,000 57,000 70,000 ----------- ----------- ----------- 300,000 337,000 570,000 ----------- ----------- ----------- Loss before discontinued operations (3,157,000) (2,873,000) (3,564,000) ----------- ----------- ----------- Discontinued operations Loss from operations of discontinued subsidiary - - (790,000) Loss on sale of subsidiary - - (1,054,000) ----------- ----------- ----------- - - (1,844,000) ----------- ----------- ----------- Net loss $(3,157,000) $(2,873,000) $(5,408,000) =========== =========== =========== Loss per share Loss before discontinued operations $(.86) (.78) $ (.97) Discontinued operations - - (.50) ----- ----- ------ Net loss $(.86) $(.78) $(1.47) ===== ===== ======
See accompanying notes to consolidated financial statements -23- CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS'EQUITY
Common Stock $.01 Par Value Additional Retained --------------------- Paid-In Earnings Shares Amount Capital (Deficit) Total --------- -------- ----------- ----------- ----------- Balance, December 31, 1992 3,673,511 $ 37,000 $15,921,000 $ 2,850,000 $18,808,000 Issuance of stock 4,045 - 8,000 - 8,000 Net loss - - - (5,408,000) (5,408,000) --------- -------- ----------- ----------- ----------- Balance, December 31, 1993 3,677,556 37,000 15,929,000 (2,558,000) 13,408,000 Issuance of stock 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 stock 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 ========= ======= ========== =========== ===========
See accompanying notes to consolidated financial statements. -24- CARVER CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (3,157,000) $(2,873,000) $(5,408,000) Adjustments to reconcile net loss to cash flows from operating activities Depreciation and amortization 300,000 371,000 536,000 Gain on sale of professional products line (1,208,000) - - Restructuring Costs 1,319,000 - - Loss on disposal of property and equipment 3,000 2,000 200,000 Loss on discontinued operations - - 1,844,000 Changes in assets and liabilities Accounts receivable, trade, net 1,526,000 1,261,000 1,943,000 Inventories 2,555,000 1,053,000 97,000 Prepaid expenses (31,000) (300,000) 155,000 Other assets and deferred charges 126,000 87,000 (170,000) Accounts payable and accrued liabilities (1,159,000) 846,000 (54,000) ------------ ----------- ----------- Cash flows from operating activities 274,000 447,000 (857,000) Cash flows from discontinued activities - - (1,159,000) ------------ ----------- ----------- 274,000 447,000 (2,016,000) ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from repayment of note receivable 10,000 10,000 - Proceeds from sale of professional products line 1,632,000 - - Proceeds from sale of investment - - 102,000 Proceeds from sale of discontinued subsidiary - - 374,000 Acquisition of property, plant and equipment (44,000) (139,000) (210,000) Proceeds from disposal of property and equipment 2,000 2,000 13,000 ------------ ----------- ----------- Cash flows from investing activities 1,600,000 (127,000) 279,000 ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 9,000 2,000 8,000 Increase (decrease) in note payable, net (1,851,000) (226,000) 1,454,000 Repayment of long-term debt (20,000) (18,000) (17,000) ------------ ----------- ----------- Cash flows from financing activities (1,862,000) (242,000) 1,445,000 ------------ ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,000 78,000 (292,000) CASH AND CASH EQUIVALENTS Beginning of year 249,000 171,000 463,000 ------------ ----------- ----------- End of year $ 261,000 $ 249,000 $ 171,000 ============ =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Income tax paid $ - $ 1,000 $ 2,600 ============ =========== =========== Interest paid $ 335,000 $ 365,000 $ 329,000 ============ =========== =========== Non-cash investing and financing activity Proceeds from sale of building and land in exchange for long-term note receivable $ - $ - $ 1,013,000 ============ =========== =========== Proceeds from sale of professional products line in exchange for short-term note receivable $ 350,000 $ - $ - ============ =========== ===========
See accompanying notes to consolidated financial statements -25- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Carver Corporation; its wholly-owned subsidiary, Carver International, Ltd., a Foreign Sales Corporation (FSC); and its 80%-owned subsidiary, USS Corporation through the date of disposition (Note 15). Significant intercompany transactions are eliminated in consolidation. OPERATIONS - The Company is engaged primarily in the development, manufacture and distribution of audio entertainment systems. Sales are conducted throughout the United States and various foreign nations. Net export sales by geographic areas are as follows:
Years Ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Western Europe $ 1,608,000 $ 1,974,000 $ 2,590,000 Canada 577,000 683,000 759,000 Asia 1,771,000 1,706,000 1,000,000 Other 1,236,000 1,547,000 2,090,000 ----------- ----------- ----------- $ 5,192,000 $ 5,910,000 $ 6,439,000 =========== =========== ===========
REVENUE RECOGNITION - Revenue is recognized when products are shipped. The Company warrants its products for a period of one to five 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 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, ----------------------- 1995 1994 ---------- ----------- Raw materials $ 893,000 $ 1,444,000 Work-in-process 1,284,000 1,712,000 Finished products 1,750,000 4,894,000 ---------- ----------- $3,927,000 $ 8,050,000 ========== ===========
-26- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation for financial reporting purposes is provided using straight-line and accelerated methods. Estimated useful lives range from three to thirty years. INTANGIBLES - Patents are amortized over the useful lives which range from seven to seventeen years. RESEARCH AND DEVELOPMENT - Costs associated with product research and development are charged to operations when incurred and are included in operating expenses. ADVERTISING - The Company expenses the costs of advertising the first time the advertising takes place. Advertising expense in 1995, 1994 and 1993 was $777,000, $868,000 and $754,000, respectively. CASH EQUIVALENTS - The Company considers all short-term investments with a maturity at the date of purchase of three months or less to be cash equivalents. EARNINGS 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 common share equivalents because the effect would be anti-dilutive. The weighted average number of common shares for purposes of computing earnings per share amounted to 3,680,000, 3,678,000 and 3,676,000 shares for the years ended December 31, 1995, 1994 and 1993, respectively. PRESENTATION - Certain balances have been reclassified in the 1994 presentation to conform with the 1995 presentation. 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. -27- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable are as follows:
December 31, ------------------------- 1995 1994 ----------- ------------ Trade receivables $ 2,570,000 $ 4,074,000 Allowance for doubtful accounts (233,000) (183,000) Allowance for discounts (33,000) (61,000) ----------- ----------- $ 2,304,000 $ 3,830,000 =========== ===========
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 a building and land. The note is payable in monthly installments of $8,000 including interest of 8.5% with the unpaid balance due in September 1996. The building and land are being held as collateral on the original mortgage (Note 4) and will be transferred to the buyer upon full satisfaction of the mortgage and this obligation. NOTE 4 - FINANCING SHORT-TERM BORROWINGS - 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 receivable and inventories. Advances are collateralized by substantially all assets and bear interest at the prime lending rate plus 2%. The outstanding balance on the line of credit was $1,216,000 and $3,067,000 at December 31, 1995 and 1994, respectively. The agreement expires with extensions on May 31, 1996. Maximum and average amounts outstanding during the year ended December 31, 1995 were $3,067,000 and $2,195,000, respectively. The weighted average interest rate at December 31, 1995 was 10.75% and the weighted average interest rate during the year, computed monthly, was 10.64%. -28- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 4 - FINANCING (CONTINUED) LONG-TERM DEBT - The Company assumed a $790,000 note secured by a deed of trust in connection with the purchase of a building and land in 1990. The note is payable in monthly installments of $7,790 and bears interest at 10.375%. The building and land were sold during 1993 for a note receivable (Note 3). The Company continues to be the primary debtor of the note payable. The $696,000 balance outstanding at December 31, 1995 is expected to be paid in full in 1996 upon collection of the note receivable. Accordingly, the debt has been reclassified to current in the accompanying financial statements. NOTE 5 - FINANCIAL INSTRUMENTS AND CREDIT RISK FINANCIAL INSTRUMENTS AND CREDIT RISK - Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains cash accounts with creditworthy financial institutions and credit risk is deemed to be minimal. At December 31, 1995, accounts receivable with one customer were $1,004,000. The Company enters into purchase commitments with foreign companies (Note 7). FAIR VALUES - The carrying amounts of cash and cash equivalents, note receivable, notes payable and the current portion of long term debt approximated fair value as of December 31, 1995. -29- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 6 - INCOME TAX A reconciliation of the income tax benefit to the amounts computed by applying the federal statutory income tax rate to income before income tax is as follows:
1995 1994 1993 ----------------------- ---------------------- ----------------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ----------- ---------- ---------- ---------- ----------- ---------- Income tax provision (benefit) at federal statutory rate (1,073,000) (34.0)% $(977,000) (34.0)% $(1,212,000) (34.0)% FSC income - - (6,000) (.2) (16,000) (.1) Benefit from discontinued operations - - - - (627,000) (1.9) Loss for which no tax benefit is currently available 1,073,000 34.0 983,000 34.2 1,855,000 36.0 ---------- -------- --------- -------- ----------- ------ $ - - % $ - - % $ - - % ========== ======== ========= ======== =========== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below:
1995 1994 ------------ ------------ Deferred tax assets Net operating loss $ 4,618,000 $ 3,423,000 Other 178,000 230,000 Deferred tax liabilities Accelerated depreciation (398,000) (413,000) Other (5,000) (19,000) ----------- ----------- Total gross deferred taxes 4,393,000 3,221,000 Less valuation allowance (4,393,000) (3,221,000) ----------- ----------- Net deferred taxes $ - $ - =========== ===========
-30- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 6 - INCOME TAX (CONTINUED) For tax reporting purposes, the Company has approximately $13,581,000 of net operating losses which may be utilized to offset future taxable income. These loss carryforwards expire between the years 2004 and 2010. Under FAS 109, the Company is required to recognize the future benefit of its net operating loss carryforwards. The Company has a benefit from its net operating loss carryforwards of approximately $4,618,000 and has recorded a valuation allowance of 100% of the deferred tax asset. NOTE 7 - COMMITMENT INVENTORY PURCHASE - As of December 31, 1995, the Company has committed to the purchase of approximately $2,371,000 of inventory expected to be received in 1996 from various vendors. Of th is amount, approximately $1,883,000 is denominated in Japanese Yen. NOTE 8 - EMPLOYEE BENEFITS KEY EMPLOYEES' BONUS - The Company has an incentive bonus program which provides for payment of cash bonuses to its executive officers and department managers. During each fiscal year, the Board of Directors determines a bonus amount to be paid to participants. Expense for this program was $30,000 in 1995. No amounts were paid during 1994 and 1993. EMPLOYEE BONUS PLANS - The Company has a bonus plan in which all employees are eligible to participate other than those who are eligible for the Key Employees' Bonus program. Pursuant to this plan, a portion of operating income (to a maximum of $100,000 quarterly) is allocated among eligible employees based upon department performance, base salaries and individual performance. No allocations were made in 1995, 1994 or 1993. In addition, certain incentive programs exist which provide for cash bonuses upon achievement of sales goals and meeting of product introduction dates. Total expense amounted to $15,000 in 1995. No payments were made under this plan during 1994 or 1993. -31- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 8 - EMPLOYEE BENEFITS (CONTINUED) STOCK BONUS PLAN - In 1995, the Company adopted a stock bonus plan for employees, directors, and consultants. The plan allows the Board of Directors to grant shares of authorized, unissued common stock. In 1995, 1,500 shares were granted to three directors of the Company. STOCK PURCHASE PLAN - The Company has a stock purchase plan for the benefit of its employees. Employees who choose to participate enroll 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 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 are as follows:
Shares Proceeds -------- ---------- 1995 2,663 $ 3,500 1994 1,118 2,000 1993 4,045 8,000
PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan for the benefit of all full-time employees. Participants may make voluntary contributions 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 1995, 1994 or 1993. STOCK OPTIONS - The Company has a 1985 Incentive Stock Option (ISO) Plan for employees and a 1985 Non-Qualified Stock Option (NSO) Plan for directors. The Company also has a 1995 stock option plan which provides for grants to key employees, directors, and consultants. Under all plans, the Board of Directors determines the option price at the date of grant (not to be less than the fair market value for ISOs and equal to the fair market value for NSOs). Options granted under all plans generally vest between three and four and one half years and expire between five and ten years from the date of grant. At December 31, 1995, 148,239 shares were vested and 192,500 were available for future grants under the plans. -32- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 8 - EMPLOYEE BENEFITS (CONTINUED) 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 subject to earlier lapse three years from the date of termination of employment or one year from the date of death or disability whichever comes first. Option prices at December 31, 1995 range from $1.81 to $3.25 per share. The following summary sets forth the activity under the plans in 1995 and 1994.
Number of Shares ------------------- ISO NSO's --------- -------- Balance, December 31, 1993 200,639 131,250 Granted 200,000 50,000 Lapsed (60,275) - -------- ------- Balance, December 31, 1994 340,364 181,250 Granted 182,000 27,500 Lapsed (226,000) (16,250) -------- ------- Balance, December 31, 1995 296,364 192,500 ======== =======
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 is used in several Carver products. Pursuant to terms of the license 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 $45,000 in 1995, $57,000 in 1994 and $102,000 in 1993. -33- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) 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, 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) Year ended December 31, 1994 Revenues $ 5,516 $ 4,800 $ 5,675 $ 6,180 Operating loss (462) (866) (379) (829) Loss before income taxes (544) (948) (887) (494) Net loss (544) (948) (887) (494) Net loss per share (.15) (.26) (.24) (.13)
NOTE 11 - 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 is expected to be substantially complete during March 1996. -34- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 12 - 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 expenses, was $1,982,000, of which $350,000 will be paid to the Company one year from the closing date and $209,000 was paid directly to Robert W. and Diana R. Carver in settlement of a royalty dispute. NOTE 13 - CONTINGENCIES The Company has recently undergone a United States Customs Service audit. The results of the audit have been referred to the Office of Investigations of the Customs Service for possible civil penalty action on late payments of duty relating to imported equipment and materials for periods prior to 1994. Negotiations commenced with the government as to a possible disposition of the case, however, it could be several months before any final resolution is accomplished. The Customs Service issued to the Company a pre-penalty notice indicating that it will assess a penalty of up to approximately $400,000. The Company, by regulation, was afforded the opportunity to respond. At December 31, 1994, the Company recorded a liability of $50,000. In 1995, the Company submitted an offer in compromise to the Customs Service and included a payment of $50,000. The Customs Service has not yet responded to the offer in compromise. In 1996, a suit was filed against the Company by a former employee alleging that the Company engaged in discriminatory employment practices. The suit does not specify damages. Management has indicated its plans to vigorously contest this suit and believes that the loss, if any, resulting from the suit will not have a material impact on the Company's financial position, results of operations, or cash flows in future years. NOTE 14 - LITIGATION SETTLEMENT On December 8, 1994, the Company executed an agreement which settled a lawsuit with Robert and Diana Carver for royalties payable. The agreement provided, in part, that the Company pay the Carvers $300,000 in forty-eight monthly installments. The entire balance was paid in full in 1995 in connection with the sale of the professional products line (Note 12). Operating losses in 1994 include a charge of $391,000 relating to settlement of the litigation including legal fees. -35- CARVER CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (CONTINUED) NOTE 15 - DISCONTINUED OPERATIONS On November 19, 1993, the Company sold its subsidiary USS Corporation, including all patents, contract rights, licenses, files and records, equipment and inventory. Proceeds from the sale of USS Corporation amounted to $374,000 as well as royalty payments of 7.5% of net revenues for the next five years and 4% thereafter. The sale resulted in a loss of $1,054,000 which includes amounts paid to terminate employment obligations. Revenues and operating loss for this subsidiary for the years ended December 31, 1994 and 1993 were $182,000 and $790,000, respectively. -36- [LETTERHEAD OF MOSS-ADAMS LLP APPEARS HERE] INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE To the Board of Directors and Shareholders Carver Corporation Under date of February 15, 1996, we reported on the consolidated balance sheet of Carver Corporation and subsidiary as of December 31, 1995 and 1994 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, 1995, as listed in item 8 of the Annual Report on Form 10-K for the year 1995. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related supplemental financial statement schedule. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Seattle, Washington February 15, 1996 37 CARVER CORPORATION AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING 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 1995 $ 183,000 $ 447,000 $ 397,000 $ 233,000 1994 190,000 195,000 202,000 183,000 1993 72,000 231,000 113,000 190,000 Allowance for discounts - deducted from accounts receivable in the balance sheet 1995 $ 61,000 $ 450,000 $ 478,000 $ 33,000 1994 90,000 580,000 609,000 61,000 1993 113,000 655,000 678,000 90,000
(1) Represents uncollectible accounts written off and discounts taken by customers. -38- 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, "Nominees," section of the Company's Proxy Statement with respect to its 1996 Annual Meeting of Shareholders to be filed by April 12, 1996. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Directors' Compensation and Executive -------------------------------------- Compensation sections of the Company's Proxy Statement with respect to its 1996 - ------------ --------------- Annual Meeting of Shareholders to be filed by April 12, 1996. 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 1996 Annual Meeting of --------------- Shareholders to be filed by April 12, 1996. 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 1996 Annual Meeting of Shareholders to be filed by April 12, 1996. 39 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 THIS Financial Statements Index REPORT - --------------------------- ------ Report of Independent Accountants 21 Consolidated Balance Sheet at December 31, 1995 and 1994 22 Consolidated Statement of Operations, Years Ended December 31, 1995, 1994 and 1993 23 Consolidated Statement of Shareholders' Equity, Years Ended December 31, 1995, 1994 and 1993 24 Consolidated Statement of Cash Flows, Years Ended December 31, 1995, 1994 and 1993 25 Notes to Consolidated Financial Statements 26 PAGE IN THIS 2. FINANCIAL STATEMENT SCHEDULES REPORT ------------------------------- ------ Report of Independent Accountants on Supplemental Schedule 37 II - Valuation and Qualifying Accounts and Reserves 38 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K. One report on Form 8-K was filed on December 5, 1995 describing the transaction in which the Company sold its professional product line to Phoenix Gold International, Inc. (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 director or executive officer of the Company is a participant, unless the method of allocation of benefits thereunder is the same for management and non-management participants: 40 (1) License Agreement dated as of June 1, 1980 between the Company and Carver Technology Development, Inc. See Exhibit 10.1. (2) The Company's Amended 1985 Incentive Stock Option Plan. See Exhibit 10.3. (3) The Company's Amended 1985 Non-Qualified Stock Option Plan. See Exhibit 10.4. (4) Form of Amended Stock Option Agreement used in connection with options granted under the Company's Amended 1985 Incentive Stock Option Plan. See Exhibit 10.5. (5) Stock Option Agreement dated August 6, 1993 between Robert A. Fulton and the Company. See Exhibit 10.10. (6) Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and the Company. See Exhibit 10.21. (7) Employment Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.22. (8) Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.23. (9) Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. See Exhibit 10.24. (10) Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company. See Exhibit 10.34. (11) The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Stephen M Williams and the Company. See Exhibit 10.35. (12) Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company. See Exhibit 10.36. (13) Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company. See Exhibit 10.37. (14) Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company. See Exhibit 10.38. 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.). 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). 41 3.2* The Company's Seventh Amended and Restated Bylaws. 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 Employment Agreement dated as of April 4, 1985 between Robert W. Carver and the Company. (Incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, No. 2-96896). 10.3 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). 10.4 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). 10.5 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). 10.6 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). 10.7 Stock Purchase Agreement dated April 2, 1985 among Marubeni Corporation, Robert W. and Diana R. Carver and the Company. (Incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, No. 2-96896). 10.8 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). 10.9 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). 10.10 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). 10.11 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). 10.12 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). 10.13 License Agreement dated July 20, 1988 between the Company and Toshiba Corporation. (Incorporated by reference to Exhibit Number 10.20 to the Company's Form 10-K for the year ended December 31, 1988). 10.14 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). 42 10.15 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.) 10.16 Employment Agreement dated as of December 23, 1992, among John Lemon, USS Corporation and Carver Corporation. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K dated December 23, 1992.) 10.17 Employment Agreement dated as of December 23, 1992, among Clifford Henricksen, USS Corporation and Carver Corporation. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K dated December 23, 1992.) 10.18 Noncompetition Agreement dated as of December 23, 1992, among Carver Corporation, U.S. Sound, Inc., John Lemon and Clifford Henricksen. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K dated December 23, 1992.) 10.19 Severance Agreement dated November 19, 1993 by and among U.S. Sound, Inc., Carver Corporation and John Lemon. (Incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K for the year ended December 31, 1993.) 10.20 Severance Agreement dated November 9, 1993 by and among U.S. Sound, Inc., Carver Corporation and Clifford Henricksen. (Incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-K for the year ended December 31, 1993.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 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.) 10.25 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.) 10.26 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.) 10.27 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.) 10.28 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.) 43 10.29 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). 10.30 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.). 10.31* Tenth Amendment to the Accounts Financing Agreement dated November 20, 1995 between Congress Financial Corporation (Western) and the Company. 10.32* Eleventh Amendment to the Accounts Financing Agreement dated January 15, 1996 between Congress Financial Corporation (Western) and the Company. 10.33* Twelfth Amendment to the Accounts Financing Agreement dated February 26, 1996 between Congress Financial Corporation (Western) and the Company. 10.34* Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company. 10.35* The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Stephen M. Williams and the Company. 10.36* Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company. 10.37* Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company. 10.38* Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company. 11* Computation of Earnings Per Share for years ended December 31, 1995, 1994 and 1993. 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). _____________ *Filed herewith 44 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. 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 Seventh Amended and Restated Bylaws. 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 Employment Agreement dated as of April 4, 1985 between Robert W. Carver and the Company. (Incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, No. 2-96896) 10.3 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 10.4 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) 10.5 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) 10.6 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) 10.7 Stock Purchase Agreement dated April 2, 1985 among Marubeni Corporation, Robert W. and Diana R. Carver and the Company. (Incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, No. 2-96896) 45 PAGE IN THIS REPORT 10.8 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.) 10.9 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.) 10.10 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.) 10.11 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.) 10.12 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.) 10.13 License Agreement dated July 20, 1988 between the Company and Toshiba Corporation. (Incorporated by reference to Exhibit Number 10.20 to the Company's Form 10-K for the year ended December 31, 1988.) 10.14 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.) 10.15 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.) 10.16 Employment Agreement dated as of December 23, 1992, among John Lemon, USS Corporation and Carver Corporation. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K dated December 23, 1992.) 10.17 Employment Agreement dated as of December 23, 1992, among Clifford Henricksen, USS Corporation and Carver Corporation. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K dated December 23, 1992.) 10.18 Noncompetition Agreement dated as of December 23, 1992, among Carver Corporation, U.S. Sound, Inc., John Lemon and Clifford Henricksen. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K dated December 23, 1992.) 46 10.19 Severance Agreement dated November 19, 1993 by and among U. S. Sound, Inc., Carver Corporation and John Lemon. (Incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K for the year ended December 31, 1993) 10.20 Severance Agreement dated November 9, 1993 by and among U. S. Sound, Inc., Carver Corporation and Clifford Henricksen. (Incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-K for the year ended December 31, 1993.) 10.21 Stock Option Agreement dated March 10, 1994 between Robert A. Fulton and the Company. 10.22 Employment Agreement dated August 26, 1994 between Stephen M. Williams and the Company. 10.23 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. 10.24 Stock Option Agreement dated August 26, 1994 between Stephen M. Williams and the Company. 10.25 Settlement Agreement dated December 8, 1994 between Robert W. and Diana R. Carver and the Company. 10.26 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.) 10.27 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.) 10.28 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.) 10.29 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.) 10.30 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.) 10.31* Tenth Amendment to the Accounts Financing Agreement dated November 20, 1995 between Congress Financial Corporation (Western) and the Company. 10.32* Eleventh Amendment to the Accounts Financing Agreement dated January 15, 1996 between Congress Financial Corporation (Western) and the Company. 47 10.33* Twelfth Amendment to the Accounts Financing Agreement dated February 26, 1996 between Congress Financial Corporation (Western) and the Company 10.34* Employment Agreement dated January 2, 1996 between Stephen M. Williams and the Company 10.35* The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between Stephen M. Williams and the Company 10.36* Stock Option Agreement dated March 11, 1995 between Stephen M. Williams and the Company 10.37* Stock Option Agreement dated March 24, 1995 between Stephen M. Williams and the Company 10.38* Stock Option Agreement dated January 15, 1996 between Stephen M. Williams and the Company 11* Computation of Earnings Per Share for years ended December 31, 1995, 1994 and 1993 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 Registrant's Form 10-Q for the quarter ended September 30, 1990) ____________ *Filed herewith 48 Pursuant to the requirement of Section 13 of the Securities Exchange Commission Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARVER CORPORATION By: /s/STEPHEN M. WILLIAMS By:/s/JOHN P. WORLD ---------------------- ---------------- Stephen M. Williams, John P. World President and Chief Executive Vice President, Executive Officer General Manager and Principal Accounting Officer Date: March 28, 1995 - --------------------- 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/ROBERT W. CARVER Director March 28, 1996 - ------------------- -------------- Robert W. Carver /s/ROBERT A. FULTON Director March 28, 1996 - ------------------- -------------- Robert A. Fulton /s/THOMAS C. GRAHAM Director March 28, 1996 - ------------------- -------------- Thomas C. Graham /s/JOHN F. VYNNE Director March 28, 1996 - ---------------- -------------- John F. Vynne /s/STEPHEN M. WILLIAMS Director March 28, 1996 - ---------------------- -------------- Stephen M. Williams
49 EX-3.2 2 SEVENTH AMENDED AND RESTATED BYLAWS Exhibit 3.2 SEVENTH 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. (g) Miscellaneous business. (4) Special Meetings: Special meetings of the shareholders 1 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. (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 2 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 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 3 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 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; 4 (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 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 5 (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) 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 not fewer than three (3) nor more than eleven (11) persons, which number shall be designated by the Board of Directors, who shall be elected for a term of one (1) year, and shall hold office until a 6 successor is elected and qualified. Directors must be residents of the State of Washington, but 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 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. 7 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 or Directors 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 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 8 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. (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 9 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 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. 10 (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 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. 11 (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 (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 12 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 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: 13 (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. (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: 14 (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. (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 15 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 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 16 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 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 February 16, 1996. /s/ John P. World ------------------------ g:\pmj\21232\bylaws.7 17 EX-10.31 3 TENTH AMENDMENT TO ACCOUNTS FINANCING AGREEMENT Exhibit 10.31 November 20, 1995 Congress Financial Corporation (Northwest) 101 S.W. Main Street, Suite 725 Portland, OR 97204 Re: Tenth Amendment to Accounts Financing Agreement and Third Amendment to Letter re: Inventory Loans ------------------------------------------------- Ladies and Gentlemen: This Tenth Amendment to Accounts Financing Agreement and Third Amendment to Letter re: Inventory Loans (this "Amendment"), dated as of the 20th day of November, 1995, is 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") and the Letter Re: Inventory Loans dated contemporaneously with the Accounts Financing Agreement, as it has been amended (the "Inventory Loans Supplement"). For valuable consideration, receipt and sufficiency of which are acknowledged, we agree as follows: A. MODIFICATIONS TO THE ACCOUNTS FINANCING AGREEMENT ------------------------------------------------- 1. Section 2. 1 of the Accounts Financing Agreement is amended in its entirety to provide as follows: "1.2 You shall, in your discretion, make loans to us from time to time, at our request, of up to seventy percent (70%) of the Net Amount of Eligible Accounts (or such greater or lesser percentage thereof as you shall in your sole discretion determine from time to time), less the Availability Block described in Section 2.6 below." 2. A new Section 2.6 is hereby added to the Accounts Financing Agreement as follows: "2.6 The amount of loans which you shall, in your discretion, make to us from time to time under Section 2.1 above or under any supplement to this Agreement shall be subject at all times to Congress Financial Corporation (Northwest) November 20, 1995 Page 2 a reduction in the amount of $250,000 plus twenty percent (20%) of the gross proceeds from the sale of raw materials and work-in- process inventories of our Professional Division to Phoenix Gold International, Inc. pursuant to the Asset Purchase Agreement dated November 13, 1995. Such reduction shall be referred to as the "Availability Block." B. MODIFICATIONS TO INVENTORY LOANS SUPPLEMENT ------------------------------------------- Paragraph 2 of the Inventory Loans Supplement is amended in its entirety to provide as follows: "2. In addition to loans which may be made by you to us pursuant to Section 2 of the Accounts Agreement, you shall, in your sole discretion, make loans to us from time to time, at our request, of up to fifty percent (50%) of the Value of Eligible Inventory consisting of finished goods (or such greater or lesser percentages thereof as you shall, in your sole discretion, determine from time to time) less the Availability Block described in Section 2.6 of the Accounts Agreement. Finished goods of our Professional Division shall not be Eligible Inventory." C. GENERAL PROVISIONS ------------------ 1. 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 Inventory Loans Supplement is correct as of the date of this Amendment. (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. 2. 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. 3. Except as specifically provided above, the Accounts Financing Agreement and Inventory Loans Supplement remain fully valid, binding, and enforceable according to their terms. Congress Financial Corporation (Northwest) November 20, 1995 Page 3 4. 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/ John P. World -------------------------- Its Vice President -------------------------- 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 -------------------------- Congress Financial Corporation (Northwest) November 20, 1995 Page 4 ACCEPTED AND AGREED: CONGRESS FINANCIAL CORPORATION (NORTHWEST) By /s/ Drew Stawin ---------------------------- Its Vice President ---------------------------- 7267\00026\0103781.Wp EX-10.32 4 ELEVENTH AMENDMENT TO ACCOUNTS FINANCING AGREEMENT Exhibit 10.32 January 15, 1996 Congress Financial Corporation (Northwest) 101 S.W. Main Street, Suite 725 Portland, OR 97204 Re: Eleventh Amendment to Accounts Financing Agreement -------------------------------------------------- Ladies and Gentlemen: This Eleventh Amendment to Accounts Financing Agreement, dated as of the 15th day of January, 1996 (this "Amendment") is 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. A new Section 2.7 is hereby added to the Accounts Financing Agreement as follows: "2.7 In addition to amounts otherwise available under the formulas described above, and notwithstanding the Maximum Credit limit, you will temporarily allow us an overadvance of up to the lesser of (i) fifty percent of the market value of that certain real property in Lynnwood, Washington, more fully described in Exhibit C hereto (the "Lynnwood Property") as established by an MAI appraisal satisfactory to you; or (ii) $1,000,000 (the lesser of (i) or (ii) being referred to hereinafter as the "Overadvance Limit"). All overadvance amounts shall bear interest at the rate prescribed in Section 3 hereof. The Overadvance Limit will be reduced by the following amounts, and any overadvance amounts in excess of such reduced Overadvance Limit must be repaid, on the dates listed below: Congress Financial Corporation (Northwest) January 15, 1996 Page 2
Date Reduction Amount ---- ---------------- 2/29/96 $575,000 3/31/96 $ 75,000 4/30/96 $100,000 5/31/96 $250,000
provided, however, that notwithstanding the provision for elimination of the overadvance on May 31, 1996, all Obligations, including the overadvance, will be due and payable on April 30, 1996 in the event the Accounts Financing Agreement is not extended beyond that date. 2. A new section 4.3 is hereby added to the Accounts Financing Agreement as follows: "4.3 In addition to the security interest granted in Section 4.1 hereof, we shall execute and deliver to you a first Deed of Trust on the Lynnwood Property (the "Deed of Trust") in form satisfactory to you to secure the prompt performance, observance and payment in full of all Obligations. Upon payment in full of the overadvance provided in Section 2.7 hereof, including all accrued interest thereon, and provided that there then exists no Event of Default, you will reconvey the Lynnwood Property to us. 3. A new Section 6.11 is hereby added to the Accounts Financing Agreement as follows: "6.11 We own the Lynnwood Property free and clear of any mortgages, liens, encumbrances, reservations, restrictions, easements or adverse claims of any kind, except as disclosed in Schedule 6.11 hereto. Without your prior written consent, we shall not sell, lease, transfer or convey all or any portion of the Lynnwood Property, or create, assume, incur or permit to exist any mortgage, trust deed, lien, security interest or encumbrance of any nature in or against the Lynnwood Property other than those specifically set forth in Schedule 6.11 attached hereto." Congress Financial Corporation (Northwest) January 15, 1996 Page 3 4. Section 8.1 of the Accounts Financing Agreement is hereby amended by changing the period at the end of the section to a semicolon and by adding the following: "or (h) if there shall be any breach of any covenant, representation or warranty contained in the Deed of Trust, or any other instrument delivered to you by us in connection with any loans hereunder." 5. For the accommodation described in this Amendment, we agree to pay you a fee in the sum of $5,000. 6. 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. (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. 7. 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. 8. Except as specifically provided above, the Accounts Financing Agreement remains fully valid, binding, and enforceable according to its terms. 9. 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: Congress Financial Corporation (Northwest) January 15, 1996 Page 4 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/ Sandra L. Jenkins ------------------------------ Its Vice President Finance ------------------------------ 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 Stawin -------------------------- Its Vice President -------------------------- c:\dms\007267\00026\0108341.Wp EX-10.33 5 TWELFTH AMENDMENT TO ACCOUNTS FINANCING AGREEMENT Exhibit 10.33 February 26, 1996 Congress Financial Corporation (Northwest) 101 S.W. Main Street, Suite 725 Portland, OR 97204 Re: Twelfth Amendment to Accounts Financing Agreement ------------------------------------------------- Ladies and Gentlemen: This Twelfth Amendment to Accounts Financing Agreement, dated as of the 26th day of February, 1996 (this "Amendment") is 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. The first sentence of Paragraph 9.1 of the Accounts Financing Agreement is amended to provide as follows: "9.1 This Agreement shall remain effective and shall continue in force and effect for a term ending May 31, 1996 (the "Renewal Date") and from year to year thereafter, unless sooner terminated pursuant to the terms hereof." 2. 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. (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. 3. 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. 4. Except as specifically provided above, the Accounts Financing Agreement remains fully valid, binding, and enforceable according to its terms. Congress Financial Corporation (Northwest) February 26, 1996 Page 2 5. 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/ John P. World -------------------------- Its Executive Vice President -------------------------- 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 -------------------------- Congress Financial Corporation (Northwest) February 26, 1996 Page 3 ACCEPTED AND AGREED: CONGRESS FINANCIAL CORPORATION (NORTHWEST) By /s/ Drew Stawin -------------------------- Its Vice President -------------------------- 7267\00026\0118490 EX-10.34 6 EMPLOYMENT AGREEMENT EXHIBIT 10.34 EMPLOYMENT AGREEMENT -------------------- This Agreement is entered into as of January 2, 1996 by Stephen M. Williams ("Employee") and Carver Corporation, a Washington corporation (the "Company"). 1. Duration of Employment. Subject to paragraph 8, Employee's ---------------------- employment in the capacity set forth in paragraph 2, below, shall begin on January 3, 1996 and shall continue through December 31, 1996. Notwithstanding that period, this Agreement shall remain in effect until all the parties' rights and obligations have been satisfied, terminated, or have expired, as provided herein. 2. Title and Duties. Employee is hereby employed full-time as ---------------- President and Chief Executive Officer of the Company. In such capacity, Employee shall perform such duties as the Company's Board of Directors shall, from time to time, reasonably direct, provided that the parties intend that the Employee's duties and responsibilities shall include responsibility for the preparation and achievement of the Company's annual operating plan and principal responsibility for the Company's operations, employee staffing and budgets. Employee agrees to use his skills and render services to the best of his ability on a full-time basis during the term of this Agreement. 3. Compensation. For all services Employee performs during his ------------ employment, the Company shall pay Employee as follows: 3.1 Salary. Employee shall be paid a salary at an annual rate of ------- $172,800 (gross), payable biweekly in accordance with the Company's usual payroll policies and procedures. 3.2 Participation in Bonus Plans. In addition to the salary set ---------------------------- forth in paragraph 3.1, above, and beginning with calendar year 1996, Employee shall be eligible to receive an annual bonus pursuant to the Company's Management Bonus Plan (the "Bonus Plan"), of any amount not to exceed twenty percent (20%) of the Employee's salary set forth in paragraph 3.1, above. The payment of any bonus under the Bonus Plan shall be subject to the degree that the Company and Employee achieve or exceed profit and cash flow targets established by the Company's Annual Plan for the 1996 calendar year. 3.3 Offset. The Company may deduct from Employee's compensation any ------ amounts due the company for any advance on salary, mistaken overpayment, products purchased from the Company, or for similar reasons, substantiated by the Company's business 1 records and specifically identified in a written notice to Employee five (5) days in advance of any such deduction. 4. Business Expenses. The Company will reimburse Employee's ----------------- reasonable business expenses incurred in the course of his work for the Company, in accordance with its then current policies, and on Employee's presentation of proper receipts and other supporting information as the Company may from time to time reasonably require. 5. Benefits. On satisfaction of any applicable eligibility and -------- contribution requirements, Employee will be covered by such fringe benefit plan(s), as the Company may offer from time to time to its personnel generally. 6. Vacation and Holidays. Employee will receive paid holidays in --------------------- accordance with the Company policy in effect from time to time. Employee will receive four weeks (20 days) paid vacation per year. 7. Termination. ----------- 7.1 Termination for Cause. The Company has the right to terminate this --------------------- Agreement and the employment of Employee hereunder at any time for "Cause" upon thirty (30) days written notice. In lieu of providing such thirty (30) days prior notice, the Company may tender notice of immediate termination for Cause, together with thirty (30) days salary. In the event of termination for Cause, all obligations of the Company under this Agreement will immediately cease, and no payments of any kind, including but not limited to the payment of salary pursuant to Section 3 hereof (except for the payment of salary and fringe benefits up through the date of termination) will thereafter be made in respect of the remaining term of this Agreement. For purposes of this Agreement, "Cause" is defined to mean any act or course of conduct of Employee which constitutes: dishonesty; repeated intoxication on duty; fraud; deceit; gross negligence; commission of a civil or criminal offense which adversely affects the Company's reputation or interest as determined by the Company's Board of Directors, regardless of any legal proceeding; material misrepresentation to shareholders, directors, or officers of the Company; willful failure or refusal to comply with reasonably instructions of the Board of Directors; a material breach of this Agreement; or other similar conduct or omission that would constitute "cause" under Washington law. If the sole basis for the notice of termination for Cause is a material breach of this Agreement by Employee and Employee shall cure such breach to the reasonable satisfaction of the Board of Directors within thirty (30) days of the giving of such notice, 2 then Employee's employment hereunder shall not terminate, but shall continue in accordance with the terms hereof. 8.2 Termination Without Cause. The Company shall have the absolute ------------------------- right to terminate Employee's employment without Cause at any time following six (6) months' written notice. In lieu of providing such six (6) months' prior notice, the Company may tender notice of immediate termination without Cause, together with six (6) months' salary. In the event of termination of Employee by the Company without Cause, the Company shall pay to Employee, as its sole and complete severance obligation for the remaining term of this Employment Agreement, or six months, whichever is longer, (the "Severance Period") an amount equal to Employee's base salary and medical insurance premium for such period, which amount shall be payable in equal monthly installments commencing on the date of any such termination (herein the "Severance Obligation"). The 8.3 Voluntary Resignation. Should Employee wish to resign from his --------------------- position with the Company during the term of this Agreement, Employee shall give six (6) months written notice to the Company specifying the date on which such resignation is to become effective. In the event of voluntary resignation, the Company shall have no further obligations to Employee under this Agreement other than to pay Employee salary and fringe benefits through the date of resignation. 8.4 Death or Disability. This Agreement, and the Company's ------------------- obligations hereunder shall terminate (i) immediately upon the death of Employee, or (ii) upon thirty (340 days written notice to Employee upon the Disability of Employee. As used herein "Disability" shall mean (i) permanent disability as defined and determined under any policy of disability insurance covering him, or (ii) if no such policy is then in force, if Employee has any physical, mental or other health condition which substantially impairs his ability to perform his assigned duties for a period of 120 days or more within any 240-day period, PROVIDED, however, the Company may, in its sole discretion, grant Employee a leave of absence, or make other reasonable accommodation for Employee's Disability. The terms of such a leave shall be confirmed by the Company in writing, and shall determine the Employee's right, if any, to continued compensation, his obligation to continue his job duties, the terms under which he may return to work, and all other conditions of the leave. 8.5 Except as expressly stated in this Paragraph 8, all obligations of the Company to pay salary and bonus or to provide benefits shall terminate on the effective date of termination of employment. 3 9. Intellectual Properties. ----------------------- 9.1 Company Ownership. All ownership, copyright, patent, trade ----------------- secrecy and other rights in all works, programs, manuals, ideas, inventions, improvements, discoveries, processes, or other properties ("Intellectual Properties") made or conceived by Employee during the term of his employment, shall be the sole property of the Company, whether developed independently by Employee or jointly with others, whether developed or conceived during regular work hour or at the Company's facilities, and whether the Company uses, registers, or markets such properties. In accordance with the Company's policy and Washington law, this Agreement does not apply to, and Employee has no obligation to assign to the Company, any invention for which no Company trade secrets, and no equipment, supplies, or facilities of the Company were used, and which was developed entirely on Employee's own time, unless: (i) the invention relates directly to the Company's business; (ii) the invention relates to the Company's existing or demonstrably anticipated research or development work; or (iii) the invention results from Employee's work for the Company. 9.2 Disclosure Duty. To determine whether Employee has an obligation ---------------- to assign particular Intellectual Properties to the Company, Employee shall promptly make full written disclosure to an officer of the Company of all Intellectual Properties that he developed, or on which he is working during the term of his employment and during the six-month period thereafter. Employee will assist the Company as it may request during and after the term of his employment to further evidence, perfect, and/or enforce the Company's rights in, and ownership of, the covered Intellectual Properties. Employee's obligation in this respect includes, without limitation, execution of additional instruments of conveyance and assistance to the Company with applications for patents, copyright, or other registrations. 9.3 Infringement Warranty. Employee warrants to the best of his --------------------- knowledge, any and all items, technology, and Intellectual Properties of any nature developed or provided by Employee, or which in any way benefit the Company, will be original to Employee, and will not infringe in any respect on the rights or property of others. Employee will not, without prior written approval of the Company, use any equipment, supplies, facilities, or proprietary information of any other party. Employee warrants that he is entirely free to contract for employment with the Company, and to perform his duties under this Agreement, without any conflict with other commitments, agreements, understandings or duties, whether to prior employers, or others. Employee will indemnify the Company for all losses, claims, attorneys fees, and other expenses which may arise from any breach of this warranty. 4 10. Confidentiality. --------------- 10.1 Employee acknowledges that the Company's business and future success depends on preservation of trade secrets and other confidential, proprietary information concerning the Company, its affiliates, suppliers, and customers ("Secrets"). These Secrets include, without limitation: product designs, computer software, product configuration knowledge, market surveys, financial statements and forecasts, customer lists and needs, product and marketing plans, procedural and technical manuals and practices, pricing methods, proposal terms, contract renewal dates, information about the qualification of other employees, and other such business information. Employee agrees to protect and preserve these Secrets as confidential both during and indefinitely after the term of his employment, whether the Secrets are contained in a tangible medium, or merely remembered. 10.2 Employee shall mark all items containing any Secret with prominent confidentiality notices acceptable to the Company. Employee shall neither use nor allow any person to use any of the Secrets in any way, except for the benefit of the Company. All tangible material containing or in any way disclosing any Secret is the Company's exclusive property, shall not be removed from the Company's premises without specific consent from an officer of the Company and shall be returned to the Company on the termination or expiration of Employee's employment, or at any earlier request of the Company. At such time, Employee shall also assembly all tangible items of work-in-progress, notes, plans, and other materials related in any way to his employment, and shall promptly deliver such material to the Company. 10.3 Employee's covenants in this confidentiality provision shall supplement, rather than replace, any other rights or remedies the Company may have under applicable law for the protection of its properties and trade secrets. 11. Non-Competition. --------------- 11.1 Employee hereby agrees that he will not, during the period of his employment with the Company, and for the period set forth in paragraph 11.2, below, either directly or indirectly, enter into the employment of, render services to, or acquire any interest whatsoever in any business which competes with the Company, or which is planning to so compete. Employee acknowledges that the Company's business includes, without limitation, the consumer, professional and mobile high fidelity stereo audio business as well as other types of business the Company may choose to undertake during or shortly after the term of Employee's employment. Employee further acknowledges that the 5 Company's business is conducted in the United States, Canada, Mexico and Europe, and in such other areas to which the Company may expand during the course of Employee's employment or shortly thereafter. Accordingly, Employee agrees that he will not compete with the Company in any of these areas. Nothing in this paragraph shall prevent Employee from owning as a passive investor up to five percent (5%) of the outstanding stock of any publicly-traded corporation or the employment of or the rendering of services by Employee where he does not directly or indirectly contribute to the design, development, manufacture or sale of any product or service which competes with those offered by the Company, or from acting as an independent sales representative for manufacturers of audio electronic equipment. 11.2 The non-competition obligations of the Employee under paragraph 11.1 hereof shall continue during the Company's payment to the Employee of the Severance Obligation. In the event the Employee competes with Company in violation of paragraph 11.1, above, the Severance Obligation of the Company to the Employee shall end. 11.3 Employee further agrees that during the period stated in paragraphs 11.1 and 11.2, above, he will not directly or indirectly call on, or otherwise solicit, or accept business from any actual or identified potential customer of the Company, nor will he assist others in doing so. Employee further agrees that he will not, during the period stated above, encourage or solicit any other employee of the Company to leave such employment for any reason, nor will he assist others to do so. 11.4 Employee agrees that he will during the term of his employment with the Company promptly and fully disclose to the Company any business opportunity coming to Employee's attention, or conceived or developed in whole or in part by Employee, which relates to the Company's business, or anticipated business. Employee will not at any time exploit such business opportunities for his own gain or that of any person or entity other than the Company. 11.5 Employee acknowledges that the covenants in this paragraph are reasonable in relation to his position and the nature of the Company's business, and that compliance with such covenants after his employment ends will not prevent him from pursuing his livelihood. Employee also acknowledges that the restraints imposed by this paragraph 11 are necessary for the protection of the business and good will of the Company and are not greater than are necessary to protect said businesses and good will. Nonetheless, should any court find that any provision of these covenants is unreasonable in any respect, the parties agree 6 that the covenants shall be interpreted, limited, and enforced to the maximum extent which the court deems reasonable. 12. Certain Remedies. The harm to the Company from any breach of ---------------- Employee's obligations under or related to paragraphs 9, 10 and 11 of this Agreement may be difficult to determine and may be wholly or partially irreparable. Thus, the Company may enforce such obligations by seeking an injunction as well as damages and other appropriate relief. If any bond from the Company is required in connection with such enforcement, the parties agree that a reasonable value of such bond shall be $5,000. Employee further agrees that any profits made in violation of paragraphs 9, 10 and 11 shall be held in constructive trust for the Company. 13. Waiver. No waiver of any provision of this Agreement shall be ------ valid unless in writing signed by the waiving party, nor shall any failure to enforce any right hereunder or a waiver in one instance constitute a waiver of that right or of any other right under this Agreement. 14. Assignment Prohibited. Employee may not assign any of his rights --------------------- nor delegate any of his duties hereunder. The Company may assign this Agreement and delegate its duties hereunder in connection with any merger, consolidation, or sale of assets, or to any of its affiliates at any time owned by, or under common ownership with the Company. 15. Governing Law; Venue. This Agreement, including all matters of -------------------- construction, validity and performance, shall be governed by and construed and enforced in accordance with the laws of the State of Washington, as applied to contracts made, executed and to be fully performed in such state by citizens of such state, without regard to its conflict of law rules. The parties hereto agree that the exclusive jurisdiction and venue for any action brought between the parties under this Agreement shall be the state courts sitting in King County, Washington, and each of the parties hereby agrees and submits itself to the exclusive jurisdiction and venue of such courts for such purpose. 16. Savings Clause. If any provision of this Agreement is held to be -------------- invalid or unenforceable to any extent in any context, it shall nevertheless be enforced to the fullest extent allowed by law in that and other contexts, and the validity and force of the remainder of this Agreement shall not be affected thereby. 17. Notices. All notices and other communications called for or ------- required by this Agreement shall be in writing to the parties at their respective addresses stated below, or to such other address as a party may subsequently specify and shall be deemed to have been received (i) upon delivery in person, (ii) 7 upon the passage of seventy two hours following post by first class registered or certified mail, return receipt requested, with postage prepaid, (iii) upon the passage of twenty four hours following post by overnight receipted courier service, or (iv) sent by confirmed telex or facsimile provided that is sent by facsimile a copy of such notice shall be concurrently sent by U.S. certified mail, return receipt requested and postage prepaid, with an indication that the original was sent by facsimile and the date of its transmittal. 18. Complete Agreement. This Agreement comprises the entire agreement ------------------ of Employee and the Company. It may be changed only by further written agreement signed by all parties . It supersedes and merges within it all prior agreements and understandings between these parties, whether written or oral, express or implied. In interpreting and construing this Agreement, the fact that either the Company or Employee may have drafted this Agreement or any provision hereof shall not be given any weight or relevance. 19. Option to Renew. Employee and the Company agree that this --------------- Agreement may be extended for an additional one year period ending on December 31, 1997 by delivery of written notice of such intent to Employee on or before October 31, 1997, together with the Company's undertaking to increase the annual base salary of Employee by a minimum of five percent (5%) effective January 1. 1997. By his signature below, Employee acknowledges that he has read and understood this Agreement, that its terms have been fully and fairly negotiated by himself and the Company, and that he signs it voluntarily. CARVER CORPORATION EMPLOYEE a Washington corporation By: /s/ Robert A. Fulton By: /s/ Stephen M. Williams -------------------------- --------------------------- Its: President Stephen M. Williams ------------------------- Address: 20121 48th Avenue West Address: 414 - 39th Avenue E. Lynnwood, WA 98036 Seattle, WA 98112 8 C:\msoffice\winword\williams\steve.agr 9 EX-10.35 7 STEPHEN M. WILLIAMS 1996 BONUS PLAN Exhibit 10.35 THE STEPHEN M. WILLIAMS 1996 BONUS PLAN --------------------------------------- 1. PURPOSES. The purposes of the Stephen M. Williams 1996 Bonus Plan -------- (the "Plan") is to provide Stephen M. Williams ("Williams") with incentives to maximize shareholder value, improve gross margins on product manufactured and/or sourced by Carver Corporation (the "Company"), and obtain loudspeaker and twelve volt product lines to be marketed and sold under the Company's brand. 2. ADMINISTRATION OF PLAN. This Plan shall be administered by the ---------------------- Compensation Committee of the Board of Directors of the Company (the "Administrator"). 3. INCENTIVES. The incentives payable to Williams shall range from ---------- $5,000 to $20,000 depending upon the value of the goal to the Company as determined in the sole discretion of the Administrator. The amount of an incentive shall be set forth in writing at the time the goal is set and shall be agreed to by Williams. Incentives shall be payable upon the closing of any transaction which is the object of the goal or upon the execution of an agreement which is the object of the goal. 4. GOALS. Each goals will be set forth in writing at the time the ----- goal is set and agreed to by Williams. Goals shall be determined by the Administrator and shall relate to strategic relationships with third parties and may include, for example, agreements to source a loudspeaker mobile audio product lines on terms and conditions acceptable to the Company and the Administrator; agreements with strategic suppliers of finished goods and/or raw materials upon such prices and/or margins as shall be acceptable to the Company; agreements to purchase shares of authorized but unissued Common Stock or other securities of the Company in amounts equal or greater than fifteen percent (15%) of the Company's current outstanding shares of Common Stock upon such terms and conditions as are acceptable to the Company. 5. PAYMENT OF INCENTIVES. Contemporaneously with the execution of --------------------- this Plan, the Company has loaned to Williams the sum of $45,000 according to the terms and conditions of a Promissory Note dated January 3, 1996. The parties understand and agree that so long as any portion of the principal due under the Promissory Note remains unpaid by Williams that any Incentives payable to Williams pursuant to this Plan shall be offset against the unpaid principal. In such event, the Company shall advise Williams in writing of the amount of the Incentive applied to the principal and the amount of unpaid principal remaining under the Promissory Note after the offset. 6. WITHHOLDING. All incentives payable under this Plan shall be ----------- subject to reduction for any applicable withholding taxes. 7. AMENDMENTS. This Plan may be amended at any time and from time to ---------- time by the Administrator, provided, however, that no such amendment shall act ------------------ to reduce an incentive once the corresponding goal has been attained. 8. EFFECTIVE DATE. This Plan shall become -------------- effective on January 3, 1996. CARVER CORPORATION STEPHEN M. WILLIAMS By /s/ Robert A. Fulton /s/ Stephen M. Williams ----------------------- ------------------------- Its President EX-10.36 8 INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.36 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and Stephen 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 15,000 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 3,750 March 11, 1997 3,750 March 11, 1998 3,750 March 11, 1999 3,750
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 11th day of March, 1995. EMPLOYEE CARVER CORPORATION /s/ Stephen M. Williams By: /s/ Robert A. Fulton - ------------------------- --------------------------- Stephen Williams Robert A. Fulton President and CEO 3 EX-10.37 9 INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.37 CARVER CORPORATION INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is entered into between CARVER CORPORATION, a Washington corporation (the "Corporation"), and Stephen 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 10,000 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 24, 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 24, 1996 2,500 March 24, 1997 2,500 March 24, 1998 2,500 March 24, 1999 2,500
4. This Option shall expire, to the extent not previously exercised, on the earlier of March 23, 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 24th day of March, 1995. EMPLOYEE CARVER CORPORATION /s/ Stephen Williams By: /s/ John P. World - ------------------------- -------------------------------- Stephen Williams John P. World Vice President & General Counsel 3 EX-10.38 10 INCENTIVE STOCK OPTION AGREEMENT Exhibit 10.38 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 62,000 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 20,667 July 15, 1997 20,667 July 15, 1998 20,666
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; 1 (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 2 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: (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 15th day of January, 1996. EMPLOYEE CARVER CORPORATION /s/ Stephen M. Williams By: /s/ John P. World - ----------------------------- ---------------------- Stephen M. Williams John P. World General Manager & EVP 3 EX-11 11 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE YEAR ENDED DECEMBER 31, ------------------------
1995 1994 1993 --------------- ---------------- --------------- Primary Net loss $(3,157,000) ($2,873,000) $(5,408,000) --------------- ---------------- --------------- Shares Weighted average common shares outstanding 3,680,000 3,678,000 3,676,000 Net common shares issuable on exercise of certain stock options - - - --------------- ---------------- --------------- Average common and common share equivalents outstanding, as adjusted 3,680,000 3,678,000 3,676,000 --------------- ---------------- --------------- Primary loss per common share $( .86) $( .78) ( 1.47) --------------- ---------------- --------------- Assuming full dilution Average common and common share equivalents as adjusted 3,680,000 3,678,000 3,676,000 Net additional common shares issuable on exercise of certain stock options - - - --------------- ---------------- --------------- Average common and common share equivalents outstanding, as adjusted 3,680,000 3,678,000 3,676,000 --------------- ---------------- --------------- Loss per common share assuming full dilution $( .86) $( .78) $( 1.47) --------------- ---------------- ---------------
EX-21 12 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation Carver International Ltd. Guam EX-23.1 13 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT [LETTERHEAD OF MOSS-ADAMS LLP APPEARS HERE] EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 February 15, 1996, which appear in the December 31, 1995 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 February 15, 1996 EX-27 14 ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 261,000 5,000 2,570,000 266,000 3,927,000 8,216,000 4,911,000 2,620,000 10,674,000 3,285,000 0 0 0 37,000 7,352,000 10,674,000 18,428,000 18,428,000 15,038,000 15,038,000 6,247,000 447,000 335,000 (3,157,000) 0 (3,157,000) 0 0 0 (3,157,000) (.86) (.86)
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