UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-511
COBRA ELECTRONICS CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 36-2479991
(State of incorporation) (I.R.S. Employer Identification No.)
6500 WEST CORTLAND STREET
CHICAGO, ILLINOIS 60707
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(773) 889-8870
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.33 1/3 Per Share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Common Stock of Registrant outstanding at
August 12, 1998:
5,993,416
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Cobra Electronics Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
For the Three For the Six
Months Ended Months Ended
(Unaudited) (Unaudited)
-------------------- --------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales............$ 26,213 $ 22,440 $ 46,087 $ 43,612
Cost of sales........ 19,700 16,976 34,509 33,897
-------- -------- -------- -------
Gross profit....... 6,513 5,464 11,578 9,715
Selling, general and
administrative
expense............ 5,091 4,096 9,920 7,833
-------- -------- -------- -------
Operating income.... 1,422 1,368 1,658 1,882
Other income(expense):
Interest expense... (242) (281) (500) (519)
Other, net......... 95 178 177 138
-------- -------- -------- -------
Income before
taxes.............. 1,275 1,265 1,335 1,501
Provision
for income taxes... 442 --- 465 ---
-------- --------- --------- --------
Net income...........$ 833 $ 1,265 $ 870 $ 1,501
======== ========= ========= ========
Net income per common share:
-Basic....... 0.14 $ 0.20 $ 0.14 $ 0.24
-Diluted..... 0.14 0.19 0.14 0.23
======== ======== ======== ========
Weighted average
shares outstanding
-Basic....... 6,019 6,235 6,047 6,224
-Diluted..... 6,122 6,539 6,202 6,584
======== ======== ======== ========
Cash dividends....... None None None None
======== ======== ======== ========
See notes to condensed consolidated financial statements.
Cobra Electronics Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)
As of As of
June 30, December 31,
1999 1998
(Unaudited)
------------- ------------
ASSETS:
Current assets:
Cash.......................$ 421 $ 100
Receivables, less allowance
for doubtful accounts of
$777 at June 30, 1999,
and $985 at December 31,
1998...................... 18,791 27,055
Inventories, primarily
finished goods.............. 17,610 14,213
Deferred income taxes....... 6,945 6,945
Other current assets........ 2,016 1,747
------------ ------------
Total current assets........ 45,783 50,060
------------ ------------
Property, plant and equipment,
at cost:
Land........................ 330 330
Building and improvements... 3,617 3,614
Tooling and equipment....... 13,222 12,765
------------ ------------
17,169 16,709
Accumulated depreciation
and amortization.......... (12,561) (11,960)
------------- -------------
Net property, plant and
equipment................. 4,608 4,749
------------ ------------
Other assets:
Deferred income taxes...... 4,089 4,089
Cash surrender value of
officers' life insurance
policies................... 4,779 4,553
Other ..................... 1,060 968
------------ ------------
Total other assets......... 9,928 9,610
------------ ------------
Total assets..................$ 60,319 $ 64,419
============ ============
See notes to condensed consolidated financial statements.
Cobra Electronics Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)
As of As of
June 30, December 31,
1999 1998
(Unaudited)
------------ ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities:
Accounts payable............ $ 4,127 $ 3,145
Accrued salaries and
commissions................. 659 844
Accrued advertising and
sales promotion costs....... 680 1,804
Accrued product warranty
costs....................... 1,770 2,211
Accrued liabilities......... 1,839 2,283
Short-term debt............. 10,830 14,316
------------ ------------
Total current liabilities... 19,905 24,603
------------ ------------
Deferred compensation....... 2,359 2,320
----------- ------------
Total liabilities:............ 22,264 26,923
----------- ------------
Shareholders' equity:
Preferred stock, $1 par
value, shares authorized-
1,000,000; none issued.... --- ---
Common stock, $.33 1/3 par
value,12,000,000 shares
authorized; 7,039,100
issued;5,988,666
outstanding at June
30, 1999 and 6,065,916
outstanding at December 31,
1998...................... 2,346 2,345
Paid-in capital............. 20,716 20,799
Retained earnings........... 21,342 20,472
------------ ------------
44,404 43,616
Treasury stock, at cost..... (6,349) (6,120)
------------ ------------
Total shareholders' equity.. 38,055 37,496
------------ ------------
Total liabilities and share-
holders' equity............. $ 60,319 $ 64,419
============ ============
See notes to condensed consolidated financial statements
Cobra Electronics Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
For the Six Months Ended
(Unaudited)
--------------------------------
June 30, June 30,
1999 1998
-------------- -------------
Cash flows from operating
activities:
Net income from operations $ 870 $ 1,501
Adjustments to reconcile net income
from operations to net
cash used for
operating activities:
Depreciation and amortization 842 866
Changes in assets and
liabilities:
Receivables................ 8,264 355
Inventories................ (3,397) (140)
Other current assets....... (290) (168)
Other assets............... (429) (873)
Accounts payable........... 982 (733)
Deferred compensation...... 39 (59)
Accrued liabilities........ (2,194) (2,539)
-------- ---------
Net cash provided by (used for)
operating activities......... 4,687 (1,790)
--------- ---------
Cash flows from investing activities:
Capital expenditures........... (570) (860)
--------- ---------
Net cash used for investing
activities................... (570) (860)
--------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under
the line-of credit agreement. (3,486) 855
Transactions related to stock
repurchase ................... (396) --
Transactions related to exercise
of options, net.............. 86 51
--------- ---------
Net cash provided by (used for)
financing activities......... (3,796) 906
-------- ---------
Net increase (decrease) in cash.. 321 (1,744)
Cash at beginning of period...... 100 1,815
-------- ---------
Cash at end of period............ 421 $ 71
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 538 $ 520
Taxes 63 0
See notes to condensed consolidated financial statements.
Cobra Electronics Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The condensed consolidated financial statements included herein
have been
prepared by the Company, without audit, pursuant to the rules and
regulations
of the Securities and Exchange Commission. Certain information
and footnote
disclosures normally included in financial statements prepared in
accordance
with generally accepted accounting principles have been condensed
or omitted
pursuant to such rules and regulations, although the Company
believes that the
disclosures are adequate to make the information presented not
misleading. The
Condensed Consolidated Balance Sheet as of December 31, 1998 has
been derived
from the audited consolidated balance sheet as of that date. It
is suggested
that these financial statements be read in conjunction with the
financial
statements and the notes thereto included in the Company's latest
annual
report on Form 10-K. In the opinion of management, the
information contained
herein reflects all adjustments necessary to make the results of
operations
for the interim periods a fair statement of such operations. All
such
adjustments are of a normal recurring nature. The results of
operations of
any interim period are not necessarily indicative of the results
that may be
expected for a fiscal year.
(1) PURCHASE ORDERS AND COMMITMENTS
At June 30, 1999, the Company had outstanding purchase orders
with suppliers
totaling approximately $25.3 million compared to $28 million as
of June 30,
1998.
(2) EARNINGS PER SHARE
For the Three For the
Six
Months Ended Months
Ended
(Unaudited)
(Unaudited)
--------------------
- --------------------
June 30, June 30, June 30,
June 30,
1999 1998 1999
1998
-------- -------- --------
- --------
Income:
Income available to common
shareholders (thousands).... $ 833 $ 1,265 $ 870
$1,501
Basic Earnings Per Share:
Weighted-Average shares
outstanding.............. 6,018,537 6,234,791 6,047,482
6,224,118
Basic Earnings Per Share $0.14 $0.20 $0.14
$0.24
======== ======== =========
========
Diluted Earnings Per Share:
Weighted-Average shares
outstanding 6,018,537 6,234,791 6,047,482
6,224,118
Dilutive Shares issuable
in connection with
Stock option plans 691,250 734,375 691,250
735,750
Less: Shares purchasable
with proceeds (587,417) (430,546) (536,734)
(376,174)
---------- --------- ---------
--------
Total 6,122,370 6,538,620 6,201,998
6,583,694
========== ========= =========
=========
Diluted Earnings Per Share $0.14 $0.19 $0.14
$0.23
========= ========= =========
=========
(3) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and
for hedging activities. It requires that an entity recognize all
derivatives
as either assets or liabilities in the balance sheet and measure
these
instruments at fair value. This statement is effective on the
first day of the
first fiscal year beginning after June 15, 2000, or January 1,
2001 in the
case of the Company. The Company is in the process of assessing
the impact
that adopting SFAS No. 133 will have on its financial position
and results of
operations when such statement is adopted.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ANALYSIS OF RESULTS OF OPERATIONS
Second Quarter 1999 vs. Second Quarter 1998:
- --------------------------------------------
For the second quarter ended June 30, 1999, net income was
$833,000, or $0.14
per diluted share, which includes a provision for income taxes
that the
Company did not have in the prior year's quarter, compared to net
income of
$1.3 million, or $0.19 per diluted share, in the second quarter
of 1998. If
adjusted for the tax rate used in the current quarter, 1998's
second quarter
net income and diluted earnings per share would have been
$826,000 and $0.13,
respectively.
Sales for the second quarter of 1999 increased $3.8 million, or
16.8%, to
$26.2 million from $22.4 million for the same period a year ago.
The increase
was due to strong sales of MicroTalk Family Radio Service (FRS)
two-way
radios, introduced in the third quarter of 1998, and higher sales
of 6 Band
radar detectors as a result of increased distribution. Partially
offsetting
these increases were lower sales of 25-channel cordless phones,
as the Company
exited the 25-channel telephone business during 1998, and a
decrease in sales
of radar detectors to Russia, which had been a significant
contributor to the
Company's overall revenues through the second quarter of 1998.
This decrease
in sales to Russia reflected that country's continuing economic
problems,
which impacted consumer demand for radar detectors. Excluding the
drop in the
international business, domestic sales increased $4.8 million or
23.4% from
the prior year's quarter.
Gross margin for the second quarter of 1999 increased to 24.8%
from 24.3% in
the prior year's quarter, which was the Company's eighth
consecutive quarter
of higher comparable gross margin. The increase was due
primarily to a more
favorable sales mix as higher margin FRS radios have replaced
lower margin
25-channel products.
Selling, general and administrative expenses increased $995,000
in the second
quarter of 1999 from the same period a year ago, and as a
percentage of net
sales was 19.4% compared to 18.3% for the second quarter of 1998.
The increase
was the result of continued investments in new product
development, retail
account expansion and distribution channel gains, and offset much
of the
favorable impact of the second quarter's gross margin
improvement.
Interest expense for the current quarter decreased $39,000
compared to the
prior year's second quarter due to lower average debt levels,
driven by lower
inventory levels.
Other income for the second quarter of 1999 was $95,000 compared
to other
income of $178,000 in the prior year. Lower interest income from
the cash
surrender value of life insurance was the main contributor.
For the second quarter of 1999, the Company had a provision for
income taxes
of $442,000 compared to no tax provision for the prior year's
quarter. This
is because in the fourth quarter of 1998, the Company reversed it
valuation
allowance that had substantially offset all of the Company's net
deferred tax
asset. Accordingly, tax expense can no longer be offset against
the valuation
allowance.
Six Months 1999 vs. Six Months 1998
- -----------------------------------
For the six months ended June 30, 1999, the Company's net income
was $870,000
or $0.14 per diluted share, which includes a provision for income
taxes that
the Company did not have in the prior year's quarter, compared to
net income
of $1.5 million, or $0.23 per diluted share, for the first six
months of 1998.
If adjusted for the tax rate used in the current period, 1998's
first half net
income and diluted earnings per share would have been $979,000
and $0.15,
respectively.
Sales for the six months ended June 30, 1999 increased $2.5
million, or 5.7%,
to $46.1 million from $43.6 million for the six months ended June
30, 1998.
The increase was due to strong sales of MicroTalk Family Radio
Service (FRS)
two-way radios, introduced in the third quarter of 1998, and
higher sales of 6
Band radar detectors, introduced in March 1998. Partially
offsetting these
increases were lower sales of 25-channel cordless phones as the
Company exited
the 25-channel telephone business during 1998, and a decrease in
sales of
radar detectors to Russia, because of that country's continuing
economic
problems. Excluding the drop in the international sales
business, domestic
sales increased $5.6 million or 14.3% from the prior year's
quarter.
Gross margin increased to 25.1% for the six months ended June 30,
1999 from
22.3% in the prior year period. The increase is due primarily to
a more
favorable sales mix as higher margin FRS radios have replaced
lower margin
25-channel products.
Selling, general and administrative expenses increased $2.1
million for the
first half of 1999 from the same period a year ago, and, as a
percentage of
net sales, increased to 21.5% from 17.9% for the first half of
1998. The
expenses increased because the Company has continued to invest
heavily in new
product development, retail account expansion and distribution
channel gains,
offsetting much of the favorable impact of the first half gross
margin
improvement. Also, because selling expenses associated with
international
sales are substantially lower in comparison to domestic selling
expenses,
these expenses did not drop proportionately as international
sales declined.
Also, a one-time charge of $230,000 in the first quarter of 1999
for due
diligence expenses incurred for the terminated Beltronics
acquisition
contributed to the increase.
Interest expense for the period decreased $19,000 compared to the
prior year
due to lower average debt levels, driven by lower inventory
levels.
For the first six months of 1999, the Company had a provision for
income taxes
of $465,000 compared to no tax provision for the prior year's
quarter. This
is because in the fourth quarter of 1998, the Company reversed it
valuation
allowance that had substantially offset all of the Company's net
deferred tax
asset. Accordingly, tax expense can no longer be offset against
the valuation
allowance.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided cash of $4.7 million during the six
months ended
June 30, 1999. The decrease in receivables reflected heavy cash
collections
related in part to the high volume of fourth quarter sales.
Inventories
increased due to purchases in anticipation of higher second half
sales.
Accounts payable increased due to an increase in letters of
credit presented
but not yet paid for inventory placed in transit by the Company's
vendors.
Accrued liabilities decreased because deductions were taken by
customers
against normal year-end advertising accruals during the first
half of 1999.
Additionally, normal accruals made in 1998 for professional fees
and the
Company's profit sharing program were paid in the first half of
1999. Also,
warranty reserves decreased as a result of lower return rates and
the lower
sales volume in the first half of 1999 compared to the last half
of 1998. Debt
decreased $3.5 million during the first six months of 1999 and at
June 30,
1999, the Company had approximately $7.3 million of unused credit
line.
In late August 1998, the Company's board of directors authorized
a program to
repurchase up to $1 million of the Company's common shares. On
May 17, 1999,
the Company announced that a second repurchase program has been
approved to
acquire up to another $1 million of common stock. During the
first half of
1999, the Company spent $397,000 to repurchase 104,000 of its
common shares.
To date, the Company has repurchased 293,500 of its common shares
at a total
cost of approximately $1.1 million.
YEAR 2000
The Company initiated the process of preparing its computer
systems and
applications for the Year 2000 in 1998. This process primarily
involved two
parts: replacing certain Company hardware and modifying software
maintained by
the Company, as well as inquiring into the Year 2000 compliance
of the
Company's major customers and vendors. In February 1999, the
replacement of
hardware and software modifications were completed by an outside
consulting
firm. The Company has tested the hardware and modified software
for Year 2000
compliance. Although the Company believes its hardware and
software are Year
2000 compliant, it intends to continue testing during 1999. The
Company has
also queried all major customers and vendors as to their
preparedness. The
responses received to date indicate that the Company's major
customers and
vendors are or will be Year 2000 compliant by year end.
The failure to correct a Year 2000 problem could interrupt, or
result in a
failure of, normal business operations and consequently
materially affect the
Company's financial position or results of operations. While the
Company
believes its own hardware and software are Year 2000 compliant,
the Year 2000
readiness of the Company's customers and vendors is inherently
uncertain and
beyond the Company's control. Accordingly, the Company cannot
determine at
this time whether the consequences of Year 2000 interruptions or
failures will
materially affect the Company's financial position or results of
operations.
The Company has not developed formal contingency plans to date.
However, the
Company has a network of suppliers and the Company does not enter
into
long-term supply contracts. The Company believes that, if
necessary, other
suppliers could be found. As stated above, customer responses to
Company
inquiries indicate that the Company's major customers are or will
be Year 2000
compliant by year-end. In the event a major customer is not Year
2000
compliant, the Company believes that such non-compliance is
unlikely to
materially affect the Company's financial condition or results of
operations.
Item 3 Qualitative and Quantitative Disclosures About Market Risk
The Company is subject to market risk associated principally with
changes in
interest rates. Interest rate exposure is principally limited to
the Company's
$10.8 million of debt outstanding at June 30, 1999. The debt is
priced at
interest rates that float with the market, which therefore
minimizes interest
rate exposure. A 50 basis point movement in the interest rate on
the floating
rate debt would result in an approximately $54,000 increase or
decrease in
interest expense and cash flows. The Company does not use
derivative financial
or commodity instruments for trading or other purposes.
The Company's suppliers are located in foreign countries,
principally in the
Far East, and the Company made approximately 3.7% of its sales
outside the
United States in the first half of 1999. The Company minimizes
its foreign
currency exchange rate risk by conducting substantially all of
its
transactions in US dollars.
PART II
OTHER INFORMATION
Items 1, 2, 3, and 5 Not Applicable
- -------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
a) The 1998 Annual Meeting of Shareholders was held on
May 11, 1999.
b) The following persons were elected as Class I
Directors of the Company to serve until the 2002 Annual
Meeting of Shareholders:
Name Votes for Votes withheld
------------- --------- --------------
James R. Bazet 5,509,392 53,219
Jerry Kalov 5,501,392 61,219
Harold D. Schwartz 5,502,392 60,219
The Class II directors continuing in office until the
2000 Annual Meeting of Shareholders are Samuel B.
Horberg and Gerald M. Laures.
c) Not Applicable
d) Not Applicable
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits:
Exhibit No. Description
----------- ---------------------------------------
10-16 Employment Agreement between Cobra
Electronics
Corporation and James R. Bazet dated
May 11, 1999.
27 Financial data schedule required under
Article 5 of Regulation S-X
b) During the quarter, the Company filed no Current Reports
on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COBRA ELECTRONICS CORPORATION
By
------------------------
Gerald M. Laures
Vice President - Finance,
and Corporate Secretary
(Authorized Officer and
Principal Financial Officer)
Dated: August 13, 1999
EXHIBIT 10-16
May 11, 1999
Mr. James Bazet
Cobra Electronics Corporation
6500 Cortland Street
Chicago, Illinois 60707
Dear Jim:
This letter is to confirm the terms of your continued
employment with
Cobra Electronics Corporation ("Company").
1. Employment. Commencing August 1, 1999, you shall
continue your
employment as the President and Chief Executive Officer of the
Company and
shall have the normal duties, responsibilities and attendant
authorities of
that position. Unless earlier terminated pursuant to Paragraph
10, the term
of your employment by the Company pursuant to this Agreement
shall end on
December 31, 2004 (the "Employment Period"). In any event, the
Company agrees
to provide to you written notice, on or prior to March 31, 2004,
if the
Company elects to (i) either offer to you or not offer to you a
renewal of
this Agreement or (ii) offer to you a continuation of employment
upon other
terms and conditions than are provided in this Agreement. In the
event the
Company either offers to you a renewal of this Agreement, or,
offers to you a
continuation of employment upon other terms and conditions than
are provided
in this Agreement, the parties agree to proceed promptly with
good faith
negotiations toward the end of fulfilling their mutual intent to
reach
agreement, within 90 days thereafter, as to the terms and
conditions of such
continuation of employment In the event the parties are unable
to reach
agreement as to such terms and conditions within such 90 day
period, it shall
be deemed to be a timely notice that the Company does not intend
to continue
your employment beyond the Employment Period.
2. Salary and Bonus. During the Employment Period, you
shall receive
a regular annual salary at the rates per year hereinafter set
forth, payable
every 2 weeks. Such annual salary shall be as follows: during
the period
August 1, 1999 through and including July 31, 2000, $375,000;
during the
period August 1, 2000 through and including July 31, 2001,
$390,000; during
the period August 1, 2001 through and including July 31, 2002,
$405,000;
during the period August 1, 2002 through and including July 31,
2003,
$420,000; and during the period August 1, 2003
through and including July 31, 2004, $435,000. Your salary will
be subject to
annual review of the Compensation Committee of the Company's
Board of
Directors, but in no event shall your salary be reduced below the
rates per
year for each applicable year as set forth above.
In addition to your regular annual salary, during each year
of the
Employment Period you will also earn a bonus equal to 2.5% of
operating profit
(before taxes) ("Profit") earned during such year, as determined
by the
Auditor's Report of the Company's auditors; provided however that
Profit shall
be subject to adjustment for reduction (addition) for any gain
(or loss)
respecting the sale, transfer, conversion or any other
disposition of the
assets of the Company or any of its subsidiaries other than in
the ordinary
course of its business, as such bonus is being determined.
Notwithstanding the provisions pertaining to your bonus set
forth in
that certain letter agreement between you and the Company dated
April 18, 1997
(the "1997 Agreement"), your bonus for the period commencing
January 1, 1999
and terminating December 31, 1999 shall be calculated in
accordance with the
provisions of this paragraph, and the bonus provisions contained
in the 1997
Agreement shall not apply to such period. Bonuses shall be paid
within 15
days after completion of the Company's audit for each fiscal
year.
3. Perquisites. You also shall receive $15,000 gross each
year to be
used for perquisites of your choice, payable in monthly payments
of $1,250
commencing August 1, 1999, in lieu of any other allowances.
4. Stock Options. The Company will grant to you an
incentive stock
option as of August 2, 1999 to purchase up to an aggregate of
100,000 shares
of the Company's common stock, the exercise price for which will
be 100% of
the fair market value of a share of common stock as determined by
the closing
price of a share of common stock of the Company on the NASDAQ
Stock Market on
August 2, 1999. The stock option to be granted on August 2, 1999
shall become
exercisable (i) on August 2, 2000 as to 25% of the number of
shares of common
stock subject to such option; (ii) on August 2, 2001 as to an
additional 25%
of the number of shares of common stock subject to such option
(50% on a
cumulative basis); (iii) on August 2, 2002 as to an additional
25% of the
number of shares of common stock subject to such option (75% on a
cumulative
basis); and (iv) on August 2, 2003 as to an additional 25% of the
number of
shares of common stock subject to such option (100% on a
cumulative basis).
In addition to the stock option to be granted to you as of
August 2,
1999, if you are a full-time employee of the Company on August 1,
2000, an
incentive stock option will be granted to you as of August 1,
2000 to purchase
up to 100,000 shares of the Company's common stock, the exercise
price for
which will be 100% of the fair market value of a share of common
stock of the
Company on August 1, 2000, as determined by the closing price of
a share of
common stock of the Company on The NASDAQ Stock Market on August
1, 2000. The
stock option to be granted on August 1, 2000 shall become
exercisable (a) on
August 1, 2001 as to the 25% of the shares of common stock
subject to such
option; (b) on August 1, 2002 as to an additional 25% of the
shares of common
stock subject to such option (50% on a cumulative basis); (c) on
August 1,
2003 as to an additional 25% of the shares of common stock
subject to the
option (75% on a cumulative basis); and (d) on August 1, 2004 as
to an
additional 25% of the shares of common stock subject to the
option (100% on a
cumulative basis).
Each stock option referenced in this Paragraph 5 will have
identical
terms and conditions as options granted under the Company's
existing 1998
Stock Option Plan, provided that, on or after August 1, 1999, in
the event a
Change of Control occurs, the stock options shall immediately
become
exercisable in full.
For the purpose of this Agreement, a Change of Control shall
be deemed
to have occurred if: (a) any person, including a group within the
meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, acquires
beneficial ownership of, and the right to vote, shares having at
least 50
percent of the aggregate voting power of the class or classes of
capital stock
of the Company having the ordinary and sufficient voting power
(not depending
upon the happening of a contingency) to elect at least a majority
of the
directors of the Board of Directors of the Company (the
"Outstanding Voting
Securities"), (b) as a result of any tender or exchange offer,
substantial
purchase of equity securities, merger, consolidation, sale of
assets or
contested election, or any combination of the foregoing
transactions, the
persons who were directors of the Company immediately prior to
such
transaction or transactions shall not constitute a majority of
the board of
directors (or the board of directors of any successor to or
assign of the
Company) immediately after the next meeting of stockholders of
the Company (or
such successor or assign) following such transaction or (c) there
is
consummated a reorganization, merger or consolidation of the
Company or sale
or other disposition of all or substantially all of the assets of
the Company
(a "Corporate Transaction"), excluding any Corporate Transaction
pursuant to
which (i) all or substantially all of the individuals or entities
who are the
beneficial owners, respectively, of the Outstanding Voting
Securities
immediately prior to such Corporate Transaction will beneficially
own,
directly or indirectly, more than 50% of the combined voting
power of the
outstanding securities entitled to vote generally in the election
of directors
of the corporation resulting from such Corporate Transaction
(including,
without limitation, a corporation which as a result of such
transaction owns
the Company or all or substantially all of the Company's assets
either
directly or indirectly) in substantially the same proportions
relative to each
other as their ownership, immediately prior to such Corporate
Transaction, of
the Outstanding Voting Securities; (ii) no person (other than:
the Company;
any employee benefit plan (or related trust) sponsored or
maintained by the
Company or any corporation controlled by the Company) will
beneficially own,
directly or indirectly, 50% or more of the combined voting power
of the
outstanding securities of the corporation resulting from such
Corporate
Transaction entitled to vote generally in the election of
directors and (iii)
the persons who were directors of the Company immediately prior
to such
Corporate Transaction will constitute at least a majority of the
board of
directors of the corporation resulting from such Corporate
Transaction.
5. Lodging Allowance. To provide for your lodging while
you are in
the Chicago area attending to Company business, the Company will
continue to
provide you with a furnished, rented apartment, with all
utilities and
associated costs to be paid by the Company; provided that you
will reimburse
the Company for rent (including the rental of furniture),
utilities and other
costs of maintaining such apartment to the extent all such costs
exceed $3,000
per month. The Company will continue to provide you with such
lodging until
the earlier of (a) February 29, 2000, (b) the date upon which you
move into a
residence which you purchase in the Chicagoland area, and (c) the
date which
is 30 days after your termination of employment with the Company
for any
reason.
6. Moving Expense. Company agrees to reimburse you
promptly for the
expense of moving and relocating your residence from South
Carolina to
Chicago, such expense to be in an amount not to exceed $7,000.
Such expense
shall be evidenced by your presentation to the Company of paid
invoices and
other satisfactory expense information.
7. Employee Benefits. During the term of this Agreement,
you shall
be entitled to continue to participate in such employee benefits
including,
but not limited to, life, short- and long-term disability and
health insurance
and other medical benefits (after you have completed the
qualifying period) as
the Company makes available to individuals serving at senior
corporate levels.
8. Retirement Plan. Following the termination of your
employment
with the Company for any reason other than Cause, the Company
agrees to pay to
you during each year for a period of 10 years (to be extended one
year for
each year in excess of 10 years you are employed by the Company,
provided that
such payments shall not continue for more than a total of 15
years) the amount
vested as described in the vesting schedule hereinafter set
forth, based upon
60% of the average of your salary and bonuses paid, pursuant to
paragraph 2,
during the highest three years of your employment with the
Company. The
amounts so vested shall be placed in a "rabbi trust" for your
benefit. For
purposes of this paragraph 8 and the vesting schedule, your
employment by the
Company shall be deemed to have commenced on August 1, 1997. The
amounts to
be paid to you pursuant to this paragraph 8 shall vest in
accordance with the
following vesting schedule:
Years of Service Percentage Vested
Less than 4 full years 0%
4 full years 10%
5 full years 20%
6 full years 30%
7 full years 40%
8 full years 60%
9 full years 80%
10 full years or more 100%
All amounts to be paid to you as provided herein shall
commence on the
first regular Company pay day following the termination of your
employment,
and be paid to you every two weeks in the same manner as you are
paid your
salary as provided in paragraph 2 hereof. For purposes of the
foregoing
vesting schedule, you will be deemed to have completed seven (7)
full years of
service if you are terminated for reasons other than Cause or
your voluntary
change in status as described in paragraph 10D. hereafter.
9. Reimbursement of Expenses. You shall be reimbursed for
all of
your reasonable and necessary business expenses incurred in
performing your
duties for the Company, upon presentation of the Company's
standard forms for
expense reimbursement.
10. Termination of Employment.
A. Termination for Reasons Other Than For Cause. In the
event your
employment with the Company is terminated by the Company for any
reason other
than for Cause, or in the event the Company fails to deliver to
you a timely
written notice of intent to neither offer to renew this Agreement
nor to offer
you employment upon other terms and conditions, as provided in
Paragraph 1,
you shall be entitled, as of the effective date of your
termination of
employment, to: (i) salary through and including the effective
date of your
termination of employment; (ii) any bonus earned but not yet paid
for any
fiscal year of the Company ended on or prior to the effective
date of your
termination of employment; (iii) other employee benefits in
accordance with
applicable plans and programs of the Company for claims incurred,
or benefits
accrued and vested, on or prior to the effective date of your
termination of
employment; and (iv) receive severance payments, payable every
two weeks, in
an amount equal to the greater of (x) your base salary (as
adjusted annually
pursuant to Paragraph 2 hereof) for the remainder of the
Employment Period and
(y) 6 months of the then current base salary, provided that any
period during
which you are receiving severance payments shall be included in
the definition
of Noncompetition Period (as defined in Paragraph 11) and you
shall remain
subject to the provisions of Paragraph 11. In addition, in
accordance with
Paragraph 2, you will be paid any bonuses earned for any fiscal
year of the
Company in which you are employed and ending after the effective
date of your
termination of employment. The Company's obligation to make
severance
payments to you pursuant to this Paragraph 10 shall be reduced by
any salary,
commission or other compensation paid or payable to you and any
entity in
which you or a member of your family holds a majority or
controlling interest
(in respect to any period during which the Company is making
severance
payments to you) from your subsequent employment, contract or
engagement, with
any other employer or principal or similar person. Your
acceptance of
employment or receipt of such salary, commission or other
compensation shall
not terminate the Company's obligation to make the severance
payments
hereunder and in the event any such salary, commission or other
compensation
payments are reduced or cease, the Company's obligation for the
severance
payments shall adjust or resume, as appropriate. In addition,
the Company
shall pay to you group health and dental insurance continuation
payments for
the period required by COBRA and thereafter for the balance of
the severance
period. All such payments shall be in the same amount as the
payments made to
you during the COBRA period. Except as otherwise provided
herein, all of your
remaining benefits, including the continued vesting of Company
stock options
(except in the event of a Change of Control) shall immediately
end upon your
termination of employment, whether by expiration of this
agreement or
otherwise.
B. Termination for Cause. The Company may at any time
terminate you
for Cause. Cause shall mean embezzlement, misappropriation,
theft or other
criminal conduct, of which you are convicted, related to the
property and
assets of the Company and willful refusal to perform or
substantial disregard
of your duties as assigned to you by the Board of Directors,
unless you have
reasonable and just cause for such refusal to perform or
disregard of your
duties or unless you commence immediate corrective actions within
15 days
after notice by the Chairman of the Board of Directors of the
Board's
objection to your refusal to perform or disregard your duties.
If the Company
terminates your employment for Cause, you shall be entitled to
salary through
and including the effective date of your termination of
employment, and all
other benefits provided for hereunder shall immediately cease,
except to the
extent previously vested.
C. Death and Disability. If, at any time during the term
of this
agreement, you die or are deemed to be disabled, the Company may
immediately
terminate this Agreement. For the purpose of this Agreement, you
shall be
deemed to be disabled if you are physically or mentally unable to
perform your
duties for a period of 180 consecutive days. In the event of
your termination
of employment by reason of your death or disability, you(or your
estate) shall
be entitled to: (i) salary through and including the date of
death or the
effective date of your termination of employment, as applicable;
(ii) any
bonus earned (pro-rated to the date of death or disability) but
not yet paid
for any fiscal year of the Company ended on or prior to the date
of death or
the effective date of your termination of employment, as
applicable; (iii)
other employee benefits in accordance with applicable plans and
programs of
the Company for claims incurred, or benefits accrued and vested,
on or prior
to the date of death or effective date of your termination of
employment, as
applicable; and (iv) treatment of all your outstanding stock
options on the
date of termination in accordance with their terms. In addition,
in
accordance with Paragraph 2, you will be paid any bonuses earned
for any
fiscal year of the Company in which you are employed and ending
after the
effective date of your termination of employment.
D. Voluntary Change in Status. In the event (i) you are
removed as a
director of the Company prior to the termination of your
full-time employment
with the Company, or (ii) you are demoted in title or
responsibilities and
duties during the Employment Period, (iii) you are prevented by
the Board of
Directors or employees of the Company from exercising the duties
and
responsibilities of the President or Chief Executive Officer, and
as a result
thereof you voluntarily terminate your employment with the
Company, or (iv)
there is a breach by the Company of a material provision of this
agreement,
which breach remains uncured for at least sixty (60) days
following written
notice from you, then you shall be entitled, as of the effective
date of your
voluntary termination of employment, to (i) salary through and
including the
effective date of your termination of employment; (ii) any bonus
earned but
not yet paid for any fiscal year of the Company ended on or prior
to the
effective date of your termination of employment; (iii) other
employee
benefits in accordance with applicable plans and programs of the
Company for
claims incurred, or benefits accrued and vested, on or prior to
the effective
date of your termination of employment; and (iv) receive
severance payments,
payable every two weeks, in an amount equal to the greater of (x)
your base
salary (as adjusted pursuant to Paragraph 2 hereof) for the
remainder of the
Employment Period and (y) 6 months of the then current base
salary, provided
that any period during which you are receiving severance payments
shall be
included in the definition of Noncompetition Period (as defined
in Paragraph
11) and you shall remain subject to the provisions of Paragraph
11. The
Company's obligation to make severance payments to you pursuant
to this
Paragraph 10.D shall be reduced by any salary, commission or
other
compensation paid or payable to you and any entity in which you
or a member of
your family holds a majority or controlling interest (in respect
of any period
during which the Company is making severance payments to you)
from your
subsequent employment, contract or engagement with any other
employer or
principal or similar person. Your acceptance of employment or
receipt of such
salary, commission or other compensation shall not terminate the
Company's
obligation to make the severance payments hereunder and in the
event any such
salary, commission or other compensation payments are reduced or
cease, the
Company's obligation for the severance payments shall adjust or
resume, as
appropriate. In addition, in accordance with Paragraph 2, you
will be paid
any bonuses earned for any fiscal year of the Company in which
you are
employed and ending after the effective date of your termination
of
employment. In addition, the Company shall pay to you group
health and dental
insurance continuation payments for the period required by COBRA
and
thereafter for the balance of the severance period. All such
payments shall
be in the same amount as the payments made to you during the
COBRA period.
11. Trade Secrets and Non-Compete. You acknowledge that in
the course
of your employment with the Company pursuant to this Agreement
you will become
familiar with trade secrets and customer lists of, and other
confidential
information concerning, the Company and its subsidiaries,
affiliates and
clients and that your services have been and will be of special,
unique and
extraordinary value to the Company.
(a) You agree that during the Employment Period and
for a period
of six months thereafter (the "Noncompetition Period") you shall
not in any
manner, directly or indirectly, through any person, firm,
corporation or
enterprise, alone or as a member of a partnership or as an
officer, director,
stockholder, investor or employee of or advisor or consultant to
any person,
firm, corporation or enterprise or otherwise, engage or be
engaged, or assist
any other person, firm, corporation or enterprise in engaging or
being
engaged, in any business being conducted by the Company or any of
its
subsidiaries or affiliates as of the effective date of your
termination of
employment in any geographic area in which the Company or any of
its
subsidiaries or affiliates is then conducting such business.
(b) You further agree that during the Noncompetition
Period you
shall not (i) in any manner, directly or indirectly, induce or
attempt to
induce any employee of or advisor or consultant to the Company or
any of its
subsidiaries or affiliates to terminate or abandon his or her or
its
employment for any purpose whatsoever, or (ii) call on, service,
solicit or
otherwise do business with any customer of the Company or any of
its
subsidiaries or affiliates.
(c) Nothing in this Paragraph 11 shall prohibit you
from being
(i) a stockholder in a mutual fund or a diversified investment
company or (ii)
a passive owner of not more than two percent of the outstanding
common stock,
capital stock and equity or any firm, corporation or enterprise
so long as you
have no active participation in the business of such firm,
corporation or
enterprise.
12. Confidential Information. You agree that at no time
following the
termination of your employment shall you disclose or in any way
use the
confidential and proprietary information obtained during the
course of your
employment with the Company, including, but not limited to the
Company's or
any subsidiary's financial and product information and
information relating to
the Company's or any subsidiary's customer and supplier
relations.
13. Unreasonable Restraint. If, at any time of enforcement
of
Paragraph 11 or Paragraph 12, a court or an arbitrator holds that
the
restrictions stated therein are unreasonable under circumstances
then
existing, the parties hereto agree that the maximum period, scope
or
geographical area reasonable under such circumstances shall be
substituted for
the stated period, scope or area and that the court shall be
allowed to revise
the restrictions contained therein to cover the maximum period,
scope and area
permitted by law.
14. Unique Services. You acknowledge that the services to
be rendered
by you hereunder are unique and personal. Accordingly, you may
not assign any
of your rights or delegate any of your duties or obligations
under this
Agreement. The Company may assign its rights, duties or
obligations under
this Agreement to a purchaser or transferee of all, or
substantially all, of
the assets of the Company.
15. Waiver. The waiver by either party of a breach by the
other party
of any provision of this Agreement shall not be valid unless in a
writing
signed by the non-breaching party, and any valid waiver shall not
operate or
be construed as a waiver of any subsequent breach.
16. Entire Agreement. This Agreement embodies the entire
agreement
and understanding of the parties hereto with respect to the
matters described
herein and supersedes any and all prior and/or contemporaneous
agreements and
understandings, oral or written, between the parties.
17. Governing Law. This Agreement shall be, in all
respects,
construed in accordance with and governed by the laws of the
State of
Illinois.
18. Arbitration. Any dispute or controversy between the
Company and
you, whether arising out of or relating to this Agreement, the
breach of this
Agreement, or otherwise, shall be settled by arbitration
administered by the
American Arbitration Association ("AAA") in accordance with its
Commercial
Rules then in effect and judgment on the award rendered by the
arbitrator may
be entered in any court having jurisdiction thereof. Any
arbitration shall be
held before a single arbitrator who shall be selected by the
mutual agreement
of the Company and you, unless the parties are unable to agree to
an
arbitrator, in which case, the arbitrator will be selected under
the
procedures of the AAA. The arbitrator shall have the authority
to award any
remedy or relief that a court of competent jurisdiction could
order or grant,
including, without limitation, the issuance of an injunction.
However, either
party may, without inconsistency with this arbitration provision,
apply to any
court having jurisdiction over such dispute or controversy and
seek interim
provisional, injunctive or other equitable relief until the
arbitration award
is rendered or the controversy is otherwise resolved. Except as
necessary in
court proceedings to enforce this arbitration provision or an
award rendered
hereunder, or to obtain interim relief, neither a party nor an
arbitrator may
disclose the existence, content or results of any arbitration
hereunder
without the prior written consent of the Company and you. The
Company and you
acknowledge that this Agreement evidences a transaction involving
interstate
commerce. Notwithstanding any choice of law provision included
in this
Agreement, the United States Federal Arbitration Act shall govern
the
interpretation and enforcement of this arbitration provision.
The arbitration
proceeding shall be conducted in Chicago, Illinois or such other
location to
which the parties may agree in writing.
19. No Duty to Mitigate/Set-Off: The Company agrees that
if your
employment with the Company is terminated during the term of this
Agreement,
you shall not be required to seek other employment or to attempt
in any way to
reduce the amounts payable to you by the Company pursuant to this
Agreement.
Except as otherwise provided herein and apart from any
disagreement between
you and the Company concerning interpretation or operation of
this Agreement
or any term or provision hereof, the Company's obligation to make
payments
provided for in this Agreement and otherwise to perform its
obligations
hereunder, shall not be affected by any circumstances, including
without
limitation, any set-off, counter-claim, recoupment, defense or
other legal
right which the Company may have against you.
20. Successors; Binding Agreement: In addition to any
obligations
imposed by law upon any successor to the Company, the Company
will use its
best efforts to require any successor (whether direct or
indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of
the business and/or assets of the Company to expressly assume and
agree in
writing to perform this Agreement in the same manner and to the
same extent
that the Company would be required to perform it if no such
succession had
taken place and this Agreement shall enure to the benefit of such
successor.
Any such assignment shall not relieve the Company from liability
hereunder.
This Agreement shall enure to the benefit of and be enforceable
by your
personal or legal representatives, executors, administrators,
successors,
heirs, distributees, devisees and legatees. If you die, any
amount would
still be payable to you hereunder if you had continued to live,
all such
amounts, unless otherwise provided herein, shall be paid in
accordance with
the terms of this Agreement to the executors, personal
representatives,
estate, trustees or administrators of your estate.
If you are in agreement with the terms hereof, please sign
in the
appropriate place below and return to me as soon as possible.
Sincerely,
COBRA ELECTRONICS CORPORATION
By:__________________________
Carl Korn, Chairman of the
Board of Directors
Accepted this 11th day
of May, 1999.
_____________________
James Bazet