Polk Audio, Inc.

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Polk Audio, Inc.

5601 Metro Drive
Baltimore, Maryland 21215
U.S.A.
Telephone: (410) 358-3600
Toll Free: (800) 377-7655
Fax: (410) 764-5266
Web site: http://www.polkaudio.com

Private Company
Incorporated: 1972
Employees: 124
Sales: $71.81 million (1999)
NAIC: 33431 Audio and Video Equipment Manufacturing

Polk Audio, Inc. is one of the largest manufacturers of home and automotive loudspeakers in the United States. Polk products have traditionally been sold through specialized stereo shops, but in recent years the company has sought distribution through large electronics chains such as Best Buy and Circuit City, as well as overseas. Publicly traded since 1986, the company’s founders led Polk’s return to private status in 1999.

Beginnings

Polk Audio was founded in 1972 by two young graduates of Johns Hopkins University in Baltimore, Maryland. Matthew Polk, a physics major, and George Klopfer, a student of history, had built public address systems for fiddlers’ conventions, and the pair decided they would start a business making audio speakers. The new company, which was formed with only $200 in capital, was named after Polk because his name was easier to pronounce. Initially working out of an unheated garage, the two founders set as their goal speakers which would combine the airy, crisp sound of European designs with the bassier, more powerful style of American ones.

The company’s initial contract was to build private-label speakers for a Washington, D.C. stereo shop, but when that order was canceled, Polk and Klopfer were left with unsold inventory which they were forced to market themselves. Assisted by new partner Sanford Gross, they redesigned the cabinets and managed to successfully find buyers for their wares. The new company’s speakers received a positive response from both consumers and critics, and within a short period of time the partners were able to move the company’s operations to a large Victorian house in Govans, Maryland.

In 1976 Polk Audio, now with 12 employees, secured a $75,000 loan from the U.S. Small Business Administration to help increase production, and revenues grew fourfold the next year, to over $1 million. Two additional SBA loans followed. Annual revenues hit $3.6 million in 1980, with the company now boasting over 100 employees and production of more than 1,000 speakers a week. As a measure of its success, Polk was named to Inc. magazine’s list of the 100 fastest growing private companies in the United States.

Going Public

Polk’s growth continued at a fast pace during the early 1980s. Improved speaker designs were continually being introduced, and the company’s annual sales reached $14 million in 1986. At that time Polk had over 200 employees and was manufacturing its speakers at a 68,000-square-foot factory in Baltimore. Sales of compact disc players were contributing to a robust home audio equipment marketplace, and Polk, seeking an influx of capital, made an initial public offering of 700,000 shares of stock on the NASDAQ exchange in the summer of 1986. The following year Polk shareholders voted to reincorporate the company in Delaware, and an agreement was also made for distribution of Polk products in Japan.

A top-of-the-line Polk speaker from this era utilized what was called Stereo Dimension Array. This was a sophisticated system of sending copies of the left and right audio signals to their opposite speakers at lower volume levels, slightly delayed in time, so that they effectively “canceled out” the sound each speaker produced that reached the opposing ear, thus creating a more expansive stereophonic effect. A Polk model using this design, the SDA-SRS-2, was priced at $1,990 per pair and measured 50 inches high by 20 inches wide.

The late 1980s saw Polk fend off several attempts to unionize its workforce, as well as the departure from the company of Sanford Gross, who sold his 15 percent ownership stake. In 1988 some manufacturing operations were also shifted to a plant in Tijuana, Mexico, through a subcontracting agreement with Cal-Pacifico, Inc. By the end of fiscal 1990 the company’s sales had grown to $27.5 million, with profits of $1.9 million. Polk’s various lines of speakers were priced at between $200 and $3,500 per pair.

At this time Polk began negotiations to purchase a British concern, AGI Ltd. AGI was a holding company which owned speaker manufacturer KEF Electronics and audio component maker Boothroyd-Stuart, Ltd. Both had similar reputations to Polk for quality. The deal was expected to greatly open up Polk’s marketing possibilities in Europe, and would also double the company’s size. The negotiations went slowly, however, and after Polk had invested $3.4 million in an initial phase of the deal, things began to go sour for AGI. By the spring of 1992 the merger was off after AGI was placed into receivership by its principal lender. Polk lost only some $800,000 on the deal, however, being spared further damage by the tough British bankruptcy laws. Subsequently, former AGI head Peter Gaskarth was hired to serve as Polk’s managing director for Europe.

Polk’s sales growth slowed in the early 1990s, with earnings for 1992 dipping to $321,000. The market for speakers had become much more competitive, and the resulting lowering of prices and profit margins was putting a squeeze on revenues. Nevertheless, the company’s products continued to be well received with the public, with several successful new models introduced, including a line of inexpensive bookshelf speakers.

In late 1993 Polk sued New York-based mail-order company 6th Avenue Electronics for allegedly obtaining its speakers fraudulently from authorized dealers. Polk had first sent a cease and desist letter to the retailer in January 1992, but initiated a lawsuit when the practice continued. The company asserted that 6th Avenue was removing original serial numbers and substituting false ones to cover up the source of the merchandise. The suit was later settled out of court. Polk speakers were sold through a network of 350 authorized resellers, which were typically service-oriented, high-end stereo shops that charged premium prices, and the company feared that their availability from a mail-order discounter would damage its relationship with these loyal dealers.

Moving Manufacturing to Mexico

In 1995 Polk announced that it would be moving most of its manufacturing operations to Tijuana, leaving only the assembly of its high-end speakers in Baltimore. Until this time, the company’s products had been assembled there from components largely made in Mexico. A distribution center was also located in San Diego, California. The move eliminated 34 jobs in Baltimore, though over 100 remained there in administration and engineering. The company cited the savings it would realize by paying wages seven to eight times lower than those of the United States, as well as through reduced shipping costs due to the proximity of the assembly and component manufacturing facilities.

By this time a promising new market was developing for Polk in the realm of home theater equipment. With the U.S. economy again booming, and with the growing popularity of lavish television and video playback systems, the market for audio speakers which could replicate the sound of a Dolby Stereo movie soundtrack at home was creating a new opportunity for the company. The spring of 1995 saw the debut of Polk’s Signature Reference Theater (SRT) system, which was expected to come to market later in the year with a retail price of $6,500 or more. The company had also been making speakers for use in cars since the early 1990s. These were sold as aftermarket equipment to customers who wished to supplement or replace factory-installed systems.

In June 1995 Polk announced the formation of a wholly owned subsidiary, Eosone, Inc. Eosone would manufacture home theater speakers for sale exclusively in the 213-store Best Buy discount electronics chain. The speakers would be designed by a company based in Vail, Colorado, named Genesis Technologies, Inc. Polk also announced the expansion of manufacturing in Tijuana, with the opening of a new $2 million speaker cabinet plant. Half the company’s cabinets were to be made there, with the rest produced by outside contractors. In the fall of 1995 further lawsuits were started against unauthorized dealers. 6th Avenue Electronics was again named, as were two other companies which were owned by a New York businessman.

Winter 1995: Restructuring

Things had been changing rapidly for Polk in many areas, and the company, after undergoing a review by an outside consultant, took steps to more formally structure its operations. A senior executive of four years, James Herd (formerly with competitor Bose) was appointed president, while Matthew Polk continued in his role as chairman and George Klopfer remained Chief Executive. The two founders had shared the president’s duties until this time. The company was also divided into four operating units which consisted of Polk Home Entertainment Products, Polk Automotive Products, Eosone International, and Polk Manufacturing. The latter included both production and design activities.

Polk’s stock had never attracted much attention among investors, and in June 1996 the company moved its listing from the NASDAQ to the American Stock Exchange (AMEX) in an attempt to increase its appeal. Polk also hired The Levin Group to help promote the stock. Early in 1997 additional restructuring activities took place, and 16 Baltimore area workers were laid off when warehousing and service operations there were relocated to San Diego. The last manufacturing jobs, those related to the top-of-the-line SRT series speakers, were also moved to Tijuana.

Company Perspectives:

Things sure have changed since 1972. Our little company has grown to be one of the world’s largest manufacturers of home and car speakers. Polk speakers are distributed in over 50 countries and in the best audio retailers in the U.S. But some things never change. Designing great sounding speakers is still more than just a business for the people of Polk Audio-it’s our passion.

Although the company had signed new deals to license its designs for use in Hewlett-Packard computers and Samsung televisions, its profits again began to slide during 1997. This was partly due to a delayed rollout of new models and the “destocking” of Polk products by Best Buy and other retailers. In December a major new deal was announced with electronics giant Circuit City to sell Polk home and automotive speakers in its chain of nearly 550 stores. Polk products were also being more widely distributed overseas, with the brand now available in 50 countries. At the same time Polk announced a deal to acquire Genesis Technologies of Colorado. An initial investment of $500,000 was made, with the option to purchase the rest of the company over three years. Genesis was a maker of even higher-end speakers than Polk, with some of its models costing as much as $90,000 per system.

Faltering sales continued to be a problem, however, and in March 1998 Polk announced a “unilateral minimum resale price policy.” This meant that Polk would refuse to sell stock to dealers who undercut its minimum prices, and represented a further attempt to eliminate the problem of “free riders,” or sales by companies who undercut the full-service, high-end stores Polk relied upon. Later in the year, the company announced it was selling its Eosone brand name and its interest in Genesis Technologies to The Providers, Inc. of Vail, Colorado. The barter agreement gave Polk a package of promotional services in lieu of cash.

Going Private

In the spring of 1999 Polk management took another major step to right the company’s ship. Their repeated attempts to boost interest in the stock among investors had not borne fruit, and the company’s board approved a full stock buyout, with AMEX trading halted in May. An effort to find an outside buyer for the company prior to this had not been successful. Polk expected to realize savings of several hundred thousand dollars per year in costs related to operating as a public company, and also gained greater privacy for strategic decision-making. Additionally, management would not have to worry about the impact every decision would have on share price, a factor which was cited as one of the main reasons for pulling out of the market.

The now private Polk, still guided by its founders, appeared to have resolved many of the problems that had given it difficulties in the 1990s. As it approached the end of its third decade in business, the company was still following its original goal of producing high quality speakers at a reasonable price.

Principal Subsidiaries

Brittania Investment Corp.; Polk Audio Europe, Inc.; Eosone International, Inc.

Principal Divisions

Polk Home Entertainment Products; Polk Automotive Products; Polk Manufacturing.

Principal Competitors

Bang & Olufsen Holding a/s; Bose Corporation; Boston Acoustics, Inc.; Cambridge SoundWorks, Inc; Carver Corporation; Denon Electronics; Harman International Industries, Inc.; Koss Corporation; Matsushita Electric Industrial Co. Ltd.; Pioneer Electronic Corporation; Recoton Corporation; SANYO North America Corporation; Yamaha Corporation.

Key Dates:

1972:: Company is founded by Matthew Polk and George Klopfer.
1976:: Polk receives first Small Business Administration loan for expansion.
1986:: Initial public offering is completed on the NASDAQ.
1995:: Eosone subsidiary is formed; restructuring occurs and most production is moved to Mexico.
1998:: Eosone interests are sold.
1999:: Company goes private.