<PAGE>
================================================================================
As filed with the Securities and Exchange Commission on November 22, 1999
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------------------
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 506 13-1964841
- ----------------- ------------------------- ----------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or Code Number) Number)
organization)
----------------------------
150 Marcus Blvd.
Hauppauge, New York 11788
(631) 231-7750
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------------------
C. Michael Stoehr
Audiovox Corporation
150 Marcus Blvd.
Hauppauge, New York 11788
(631) 231-7750
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------------------
Copies to:
<TABLE>
<S> <C> <C>
Robert S. Levy, Esq. Stuart H. Gelfond, Esq. Stuart Bressman, Esq.
Levy & Stopol, LLP Fried, Frank, Harris, Shriver & Brown Raysman Millstein Felder &
1 Penn Plaza Jacobson Steiner LLP
New York, NY 10119 One New York Plaza 120 W. 45th Street
(212) 279-7007 New York, New York 10004 New York, New York 10036
(212) 859-8000 (212) 944-1515
</TABLE>
-----------------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================
Proposed
Maximum
Amount Aggregate Aggregate Amount of
Title of Each Class of Securities To Be Offering Offering Registration
to be Registered Registered(1) Price(2) Price Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A common stock, $0.01 par value 3,565,000 $27.9375 $99,597,187.50 $27,688
======================================================================================================
</TABLE>
(1) Includes 465,000 shares subject to underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
-----------------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Subject to Completion, dated November 22, 1999
3,100,000 Shares
AUDIOVOX CORPORATION
Class A Common Stock
This is a public offering of shares of Class A common stock of Audiovox
Corporation. We are offering 2,000,000 shares and our selling stockholders are
offering 1,100,000 shares. We will not receive any of the proceeds of shares
sold by the selling stockholders.
Our Class A common stock is traded on the American Stock Exchange under the
symbol "VOX." On November 19, 1999, the last reported sale price of our Class A
common stock on the American Stock Exchange was $27.5625 per share.
Our business involves significant risks. These risks are described under
the caption "Risk Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
Per Share Total
--------- -----
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Audiovox...................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
The underwriters may also purchase from us and the selling stockholders up
to an additional 465,000 shares of common stock at the public offering price,
less the underwriting discounts and commissions, to cover over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering.
The underwriters expect to deliver the shares in New York, New York on
_____________________, 1999.
------------------
SG COWEN
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES
LADENBURG THALMANN & CO. INC.
, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. AUDIOVOX AND THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT IS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES, AND AUDIOVOX AND THE SELLING STOCKHOLDERS ARE NOT SOLICITING TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT
PERMITTED.
<PAGE>
The glossy cover of the prospectus is a gatefold that allows for two 8 1/2" x
11" pages for graphics.
[INSIDE LEFT PAGE COVER GRAPHICS]
This page depicts the Electronics Division logo and 5 product photos with
captions.
Photo 1 is a simple head-on view product photo of the MP 1000, Internet Music
Player/Recorder. Below the photo is the caption "MP Internet Music
Player/Recorder" and the following sentence: The Audiovox MP 1000 is our first
Internet related product. It allows consumers to download music from a variety
of MP 3 format Internet sites or create custom music files in MP 3 format from
their existing compact disc collection. Those files are then transferred to the
palm-sized MP 1000 Portable Player/Recorder so that the consumer can play them
anywhere.
Photo 2 is a simple head-on view product photo of the P-99, Prestige Car Stereo.
Below the photo is the caption "The P-99" and the following sentence: The P-99
is an electronically-tuned AM/FM/MPX radio with a fold-down detachable face. It
contains a CD player, CD changer controller, DSP, wireless remote and a high
power 4x40 watt amplifier.
Photo 3 depicts a photo of the Lincoln Navigator overhead console installed in a
Navigator. The photo is taken from the interior rear of the vehicle and shows
the TV screen in the on position. Below the photo is the caption "Vehicle
Specific Overhead Video Entertainment System for Lincoln Navigator" and the
following sentence: Audiovox mobile video systems include a variety of vehicle
specific overhead consoles designed specifically for SUV's as well as center
console systems that fit most minivans. Systems typically include a TV screen
for TV and Video as well as a video cassette player and video game capability.
To date Audiovox has introduced 26 vehicle specific overheads and has a full
line of LCD screens for custom applications.
Photo 4 depicts a photo of the under counter TV in the on position. Photo is a
close up of the system mounted under a kitchen counter. Below the photo is the
caption "Consumer products include home and portable stereo systems and the new
under counter TV system" and the following sentences: The Audiovox under counter
TV system is a LCD TV that folds flat under the counter when not in use. The
system is cable ready and has an optional wireless camera that allows a consumer
to monitor a baby's room or use it as a security system to monitor a doorway.
Photo 5 depicts the FR 500 head on view, simple product shot. Below the photo is
the caption "FRS radios for short range two-way radio communications" and the
following sentences: Audiovox FRS radios are designed to allow two-way
communication for up to two miles. Great for camping trips, on the ski slopes,
in the mall or an amusement park.
<PAGE>
[INSIDE RIGHT PAGE COVER GRAPHICS]
This page depicts the Audiovox Communications Corp. logo and 5 photos with
captions.
Photo 1 is a 3/4 view photo of the new wireless headquarters building. Below the
photo is the caption "ACC Headquarters Building" and the following sentences: In
late 1998, ACC moved into a state-of-the-art 70,000 square foot building in
Hauppauge, NY. This location is the headquarters for our wireless business and
the east coast shipping point for our wireless products. All sales and
engineering functions as well as customer service, repair and fulfillment are
housed here.
Photo 2 is a simple product shot of the CDM 4000XL. Below the photo is the
caption "CDM 4000XL-Dual Mode" and the following sentences: The CDM 4000XL is
the second generation CDMA phone from ACC. It is a dual mode, CDMA/AMPS and
features a lithium ion battery, the latest MSM3000 chipset, enhanced phone book
with 99 Alpha and 198 Numeric Memory, Caller ID with name, and text and voice
mail notification.
Photo 3 is a simple product shot of the CDM 4500. Below the photo is the caption
"CDM 4500-Dual Mode" and the following sentences: The CDM 4500 is a dual mode
phone, CDMA/AMPS and features voice recognition, vibrating alert option, data
capabilities and our first web browser.
Photo 4 is a 3/4 product shot of the CDM 3300 "clamshell" in the open position.
Below the photo is the caption "CDM 3300-Clamshell Platform" and the following
sentences: The CDM-3300 is part of our "wearable" line of products, which
includes the PCX-3500 and PCX-3500XL. Weighing only 4.4 ounces and fitting
comfortably in the palm of your hand, CDM-3300 has a large, 4-line display, full
size keypad, vibrating alert option and long-lasting lithium ion battery.
Photo 5 is a product shot of the CDM 9000 Tri-Mode. Below the photo is the
caption "CDM 9000-Tri-Mode" and the following sentences: The CDM 9000 is a
tri-mode handset operating on 800 AMPS/800 CDMA/1900CDMA to allow for seamless
nationwide coverage. The handset features voice recognition, vibrating alert
option, data capabilities, a web browser and the state-of-the-art MSM3100
chipset.
<PAGE>
TABLE OF CONTENTS
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Page Page
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Forward-Looking Statements.................. ii Principal and Selling Stockholders........ 57
Prospectus Summary.......................... 1 Certain Transactions...................... 59
Risk Factors................................ 7 Description of Capital Stock.............. 62
Use of Proceeds............................. 18 Material U.S. Tax Considerations.......... 66
Price Range of Common Stock................. 19 Underwriting.............................. 70
Dividend Policy............................. 19 Legal Matters............................. 72
Capitalization.............................. 20 Experts................................... 72
Selected Consolidated Financial Data........ 21 Where You Can Find Additional
Management's Discussion and Analysis Information............................ 72
of Financial Condition and Results of Information Incorporated by Reference..... 73
Operations................................ 23 Index to Consolidated Financial
Business.................................... 41 Statements.............................. F-1
Management.................................. 55
</TABLE>
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with information different from that contained
in this prospectus. If anyone provides you with different or inconsistent
information, you should not rely on it. We are offering to sell, and seeking
offers to buy shares of Class A common stock only in jurisdictions where offers
and sales are permitted. You should assume that the information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of common stock. Our
business, financial condition, results of operations and prospects may have
changed since that date. Information on our web site or in our promotional
literature is not incorporated into this document.
------------------------
Technical Terms
The following is a summary description of some of the technologies in the
wireless industry that we refer to in this prospectus:
o AMPS - Advanced Mobile Phone Service. The analog wireless standard.
o CDMA - Code Division Multiple Access. A spread spectrum digital technology
that allows a large number of users to share a radio frequency by
identifying each transmission with a unique code.
o GSM - Global System for Mobile Communications. A digital wireless or
personal communications services (PCS) network standard used around the
world.
o N-AMPS - Narrow band Advanced Mobile Phone Service. N-Amps combines
wireless voice processing with digital signaling, increasing the capacity
of AMPS systems and improving the ability to include additional functions
such as voice mail and caller ID.
o PCS - Personal Communications Services. A two-way, 1900 MHz digital voice,
messaging and data service designed as the second generation of wireless.
o TDMA - Time Division Multiple Access. A digital technology that allows a
large number of users to share a radio frequency by allocating unique time
slots.
o Tri-mode - Combines analog and digital technologies at different
frequencies.
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into the
prospectus include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Words such as "may," "believe," "estimate," "expect," "plan," "intend,"
"project," "anticipate," "continues," "could," "potential," "predict" and
similar expressions may identify forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, activities or developments. Our actual results could differ
materially from those discussed in or implied by these forward-looking
statements. Forward-looking statements include statements relating to, among
other things:
o growth trends in the wireless, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o our liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about our company, including the risks described
under "Risk Factors," beginning on page 7 and including, among other things:
o our ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o our relationships with key suppliers
o our relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
o the consequences of the year 2000 issue
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before deciding to invest in our common stock. We urge you to read this
entire prospectus carefully, including the "Risk Factors" section and our
consolidated financial statements and the notes to those statements. References
to "Audiovox," "we" and "our" refer to Audiovox Corporation and its consolidated
subsidiaries. Reference to fiscal years in this prospectus refer to the twelve
months ended November 30 of that year. For example, "fiscal 1998" refers to the
twelve months ended November 30, 1998. Unless otherwise stated, all information
contained in this prospectus assumes no exercise of the over-allotment option
granted to the underwriters.
Audiovox Corporation
We design and market a diverse line of products and provide related
services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o fulfillment services for wireless carriers
o automotive entertainment and security products
o automotive electronic accessories
o consumer electronics
We generally market our products under the well-recognized Audiovox brand
name, which we have used for over 34 years. We were a pioneer in the wireless
industry, selling our first vehicle-installed wireless telephone in 1984 as a
natural expansion of our automotive aftermarket products business. Our extensive
distribution network and our long-standing industry relationships have allowed
us to benefit from growing market opportunities in the wireless industry and to
exploit emerging niches in the consumer electronics business. For the first six
months of 1999, we were the fourth largest seller of wireless products and the
second largest supplier of CDMA handsets in the United States. CDMA is currently
the fastest growing technology in the wireless industry.
We operate in two primary markets:
o Wireless communications. Our Wireless Group, which accounts for
approximately 80% of our revenues, markets wireless handsets and
accessories through Bell Operating Companies, domestic and
international wireless carriers and their agents, independent
distributors and retailers.
o Automotive and consumer electronics. Our Electronics Group, which
accounts for approximately 20% of our revenues, sells autosound,
mobile video, mobile electronics and consumer electronics primarily to
mass merchants, power retailers, specialty retailers, new car dealers,
original equipment manufacturers (OEMs), independent installers of
automotive accessories and the U.S. military.
<PAGE>
Our business has grown significantly in the last nine months primarily
because of increased sales of our digital handsets. Our net sales have increased
as follows:
Nine Months Ended August 31,
---------------------------- Percent
1998 1999 Change
---- ---- ------
($ in millions)
Wireless $281 $591 110%
Electronics 127 158 24
---- ---- ---
Total $408 $749 84%
To remain flexible and limit our research and fixed costs, we do not
manufacture our products ourselves. Instead, we have relationships with a broad
group of suppliers who manufacture our products. We work directly with our
suppliers in the design, development and testing of all of our products and
perform some assembly functions for our electronics products. Our product
development efforts focus on meeting changing consumer demand for
technologically-advanced, high-quality products, and we consult with our
customers throughout the design and development process. In our wireless
business, we were among the first to introduce wireless handsets and mobile
phones with one-touch dialing, analog caller ID and voice-activated dialing as
standard features. In our electronics business, we were among the first to
introduce mobile video entertainment products and MP-3 Internet music
player/recorders. We stand behind all of our products by providing warranties
and customer and end user service support.
Strategy
Our objective is to leverage the well-recognized Audiovox brand name and
our extensive distribution network to capitalize on the growing worldwide demand
for wireless products and continue to provide innovative automotive and consumer
electronics products in response to consumer demand. The key elements of our
strategy are:
o Enhance and capitalize on the Audiovox brand name. We believe that the
"Audiovox" brand name is one of our greatest strengths. During the
past 34 years, we have invested heavily to establish the Audiovox name
as a well-known consumer brand for communications and electronics
products. Our wireless handsets generally bear the Audiovox brand name
or are co-branded with a wireless carrier. To further benefit from the
Audiovox name, we continually introduce new products using our brand
name and recently began licensing our name for selected consumer
products.
o Expand wireless technology offerings to increase market opportunities.
We intend to continue to offer an array of technologically-advanced
wireless products using all digital standards. Our wide selection of
wireless products will allow us to satisfy different carrier demands,
both domestic and international.
o Capitalize on niche market opportunities in the consumer electronics
industry. We intend to continue to use our extensive distribution and
supply networks to capitalize on niche market opportunities in the
consumer electronics industry. We believe that
2
<PAGE>
focusing on high-demand, high-growth niche products results in better
profit margins and growth potential for our electronics business.
o Expand our international presence. During fiscal 2000, we intend to
expand our international wireless business as we continue to introduce
products compatible with international wireless technologies, such as
GSM, TDMA and CDMA.
o Continue to outsource manufacturing to increase operating leverage.
One of the key components of our business strategy is outsourcing the
manufacturing of our products. This allows us to deliver the latest
technological advances without the fixed costs associated with
manufacturing.
o Continue to provide added value to customers and suppliers. We believe
that we provide key services, such as product design, development and
testing, sales support, product repair and warranty, and carrier
fulfillment services more efficiently and cost-effectively than our
customers and suppliers could provide for themselves. We intend to
continue to develop our value-added services as the market evolves and
customer needs change.
Audiovox was incorporated in Delaware on April 10, 1987, as successor to a
business founded in 1960 by John J. Shalam, our President, Chief Executive
Officer and controlling stockholder. Our principal executive offices are located
at 150 Marcus Boulevard, Hauppauge, New York 11788, and our telephone number is
631-231-7750.
3
<PAGE>
The Offering
Common stock offered by Audiovox.... 2,000,000 shares
Common stock offered by the
selling stockholders............. 1,100,000 shares
Total shares offered................ 3,100,000 shares
Common stock to be outstanding
after the offering............... 21,991,866 shares
Voting rights....................... Each share of our Class A common stock
has one vote and each share of our Class
B common stock has ten votes. See
"Description of Capital Stock."
Use of proceeds..................... We expect to receive approximately $51.8
million in net proceeds in this
offering, assuming an offering price of
$27.5625 per share. We intend to use
these net proceeds:
o to repay a portion of amounts
outstanding under our revolving $200
million credit facility, under which
$101.8 million was outstanding on
November 12, 1999, any part of which
we may reborrow; and
o for general corporate purposes.
Risk factors........................ See "Risk Factors" beginning on page 7
and the other information included in
this prospectus for a discussion of
factors you should carefully consider
before deciding to invest in shares of
the common stock.
American Stock Exchange symbol...... VOX
On November 1, 1999, we had 17,730,912 shares of Class A common stock and
2,260,954 shares of Class B common stock outstanding. The number of shares of
common stock that will be outstanding after the offering is based on these
numbers and assumes that the underwriters do not exercise their over-allotment
option. The number of shares that will be outstanding after this offering:
o excludes 3,072,125 shares of our common stock reserved for issuance
under our stock option plans, of which options to purchase 2,848,700
shares were outstanding as of November 1, 1999 at a weighted average
exercise price of $11.52 per share
o excludes 344,800 shares of our common stock reserved for issuance
under warrants with an exercise price of $7.125 per share
o excludes 127,345 shares reserved for issuance upon conversion of our
6-1/4% convertible debentures due 2001
o includes 344,800 shares of common stock underlying our option to
purchase common stock from John J. Shalam, which option is exercisable
upon exercise of the warrants described above. See "Description of
Capital Stock."
4
<PAGE>
Summary Consolidated Financial Data
The following table summarizes our consolidated financial data. Interim
period information is derived from our unaudited financial statements which
include, in management's view, all adjustments necessary for a fair
presentation. For a more detailed explanation of our financial condition and
operating results, you should read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes to those statements included in this prospectus. Operating
results for the nine months ended August 31, 1999 are not necessarily indicative
of the results that may be expected for our full fiscal year or any future
period. The consolidated statement of operations data includes:
for 1996:
o a pre-tax charge of $26.3 million related to the exchange of
$41.3 million of subordinated convertible debentures into
6,806,580 shares of common stock and a related tax expense of
$2.9 million.
for 1997:
o a pre-tax charge of $12.7 million related to the exchange of
$21.5 million of subordinated convertible debentures into
2,860,925 shares of common stock and a related tax expense of
$158,000; and
o a pre-tax gain of $37.5 million on the sale of shares of CellStar
Corporation held by us and a related tax expense of $14.2
million.
for 1998:
o a pre-tax charge of $6.6 million for inventory write-downs.
<TABLE>
<CAPTION>
Fiscal Year Ended November 30, Nine Months Ended August 31,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ---------- -----------
(unaudited)
($ in thousands, except share and per share data)
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Consolidated Statement of Operations Data:
Net sales ................................ $ 597,915 $ 639,082 $ 616,695 $ 407,886 $ 749,068
Gross profit ............................. 96,388 106,762 88,541 61,181 90,220
Operating income (loss) .................. 13,075 19,695 4,871 (1,494) 21,937
Other income (expense) ................... (33,710) 23,747 (1,070) (788) 4,245
Income (loss) before provision for
(recovery of) income taxes ............. (20,635) 43,442 3,801 (2,282) 26,182
Provision for (recovery of) income taxes . 5,834 22,420 829 (1,808) 10,317
--------- ----------- ----------- ---------- -----------
Net income (loss) ........................ $ (26,469) $ 21,022 $ 2,972 $ (474) $ 15,865
========= =========== =========== ========== ===========
Net income (loss) - per share diluted .... $ (2.82) $ 1.09 $ 0.16 $ (0.02) $ 0.82
========= =========== =========== ========== ===========
Diluted number of shares used in per share
calculation ........................... 9,398,352 19,508,132 19,134,529 19,161,768 19,485,145
</TABLE>
<TABLE>
<CAPTION>
August 31, 1999
-------------------------
(unaudited)
Actual As Adjusted
------- -----------
($ in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................................... 5,873 44,991(1)
Total current assets........................................................ 277,323 316,441
Total assets................................................................ 326,893 366,011
Total current liabilities................................................... 100,128 100,128
Total liabilities........................................................... 130,624 17,978(1)
Total stockholders' equity.................................................. 192,533 244,297
</TABLE>
- ----------
(1) As of November 19, 1999, our bank obligations increased to $100.4 million
from $12.6 million on August 31, 1999 due to seasonal inventory
requirements.
5
<PAGE>
RISK FACTORS
Investment in our common stock involves a high degree of risk. We have
identified certain risk factors that apply to either Audiovox as a whole or one
of our specific business units. You should carefully consider each of the
following risk factors and all of the other information included or incorporated
by reference in this prospectus before deciding to invest in shares of our
common stock. If any of these risks, or other risks not presently known to us or
that we currently believe not to be significant, develop into actual events,
then our business, financial condition or results of operations could be
materially adversely affected. If that happens, the market price of our common
stock would likely decline, and you may lose all or part of your investment.
We may not be able to compete successfully in the highly competitive wireless
industry.
The market for wireless handsets and accessories is highly competitive and
is characterized by:
o intense price competition
o significant price erosion over the life of a product
o the demand by wireless carriers for value-added services provided by
their suppliers
o rapid technological development
o industry consolidation
Our primary competitors for wireless handsets currently are Nokia,
Motorola, Ericsson and Qualcomm. Qualcomm has announced plans to sell its
wireless handset business, and its business may be acquired by another large
company or telecommunications carrier that would become our direct competitor.
In addition, we compete with numerous other established and new manufacturers
and distributors, some of whom sell the same or similar products directly to our
customers. Historically, our competitors have also included some of our own
suppliers and customers. Many of our competitors offer more extensive
advertising and promotional programs than we do.
During the last decade, there have been significant periods of extreme
price competition, particularly when one or more or our competitors has sought
to sell off excess inventory by lowering its prices significantly. In
particular, in 1995 several of our larger competitors lowered their prices
significantly to reduce their inventories, which required us to similarly reduce
our prices. These price reductions had a material adverse effect on our
profitability. There can be no assurance that our competitors will not do this
again, because, among other reasons, many of them have significantly greater
financial resources than we do and can withstand substantial price competition.
Since we sell products that tend to have low gross profit-margins, price
competition has had, and may in the future have, a material adverse effect on
our financial performance.
The electronics business is highly competitive; our electronics business also
faces significant competition from original equipment manufacturers (OEMs).
The market for consumer electronics is highly competitive across all four
of our product lines. We compete against many established companies who have
substantially greater resources
6
<PAGE>
than us. In addition, we compete directly with OEMs, including divisions of
well-known automobile manufacturers, in the autosound, auto security, mobile
video and accessories industry. Most of these companies have substantially
greater financial and other resources than we do. We believe that OEMs have
increased sales pressure on new car dealers with whom they have close business
relationships to purchase OEM-supplied equipment and accessories. OEMs have also
diversified and improved their product lines and accessories in an effort to
increase sales of their products. To the extent that OEMs succeed in their
efforts, this success would have a material adverse effect on our sales of
automotive entertainment and security products to new car dealers. See
"Business--Electronics Group--Electronics products" and "Electronics
Group--Electronics competition."
Wireless carriers and suppliers may not continue to outsource value-added
services; we may not be able to continue to provide competitive value-added
services.
Wireless carriers purchase from us, rather than directly from our
suppliers, because, among other reasons, we provide added services valued by our
customers. In order to maintain our sales levels, we must continue to provide
these value-added services at reasonable costs to our carrier-customers and
suppliers, including:
o product sourcing o custom packaging
o product distribution o warranty support
o marketing o programming wireless handsets
Our success depends on the wireless equipment manufacturers, wireless
carriers, network operators and resellers continuing to outsource these
functions rather than performing them in-house. To encourage the use of our
services, we must keep our prices reasonable. If our internal costs of supplying
these services increase, we may not be able to raise our prices to pass these
costs along to our customers and suppliers. As a result of the recent wave of
consolidations in the telecommunications industry, wireless carriers, which are
the largest customers of our wireless business, may attempt to perform these
services themselves. Alternatively, our customers and suppliers may transact
business directly with each other rather than through us. If our customers or
suppliers begin to perform these services internally or do business directly
with each other, it could have a material adverse effect on our sales and our
profits.
Our success depends on our ability to keep pace with technological advances in
the wireless industry.
Rapid technological change and frequent new product introductions
characterize the wireless product market. Our success depends upon our ability
to:
o identify the new products necessary to meet the demands of the
wireless marketplace, and
o locate suppliers who are able to manufacture those products on a
timely and cost-effective basis.
Since we do not make any of our own products and do not conduct our own
research, we cannot assure you that we will be able to source the products that
advances in technology require
7
<PAGE>
to remain competitive. Furthermore, the introduction or expected introduction of
new products or technologies may depress sales of existing products and
technologies. This may result in declining prices and inventory obsolescence.
Since we maintain a substantial investment in product inventory, declining
prices and inventory obsolescence could have a material adverse effect on our
business and financial results.
We depend on a small number of key customers for a large percentage of our
sales.
The wireless industry is characterized by a small number of key customers.
In fiscal 1998, 59.6% of our wireless sales were to five customers, and for the
nine months ended August 31, 1999, 65.4% of our wireless sales were to five
customers. Our ten largest customers accounted for 70.6% and 74.6% of our
wireless sales in fiscal 1998 and the nine months ended August 31, 1999,
respectively. For the nine months ended August 31, 1999, our largest customers
were:
o Bell Atlantic, which accounted for 26.5% of our wireless sales
o AirTouch Communications, which Vodafone recently acquired, accounted
for 17.1% of our wireless sales
o PrimeCo, which accounted for 17% of our wireless sales
We do not have long-term sales contracts with any of our customers. Sales of our
wireless products are made by oral or written purchase orders and are terminable
at will by either party. The unexpected loss of all or a significant portion of
sales to any one of our large customers could have a material adverse effect on
our performance.
In fiscal 1998, 26.9% of our electronics sales were to ten customers, and
in the nine months ended August 31, 1999, 33.5% of our electronics sales were to
ten customers. Nissan accounted for 10.0% of our electronics sales in the nine
months ended August 31, 1999. We do not have long-term sales contracts with any
of these customers. Sales of our electronics products are made by purchase order
and are terminated at will at the option of either party. The unexpected loss of
all or a significant portion of sales to any one of these customers could result
in a material adverse effect on our performance.
We could lose customers or orders as a result of consolidation in the wireless
telecommunications carrier industry.
As a result of global competitive pressures, there has been significant
recent consolidation among our carrier-customers. For example:
o Bell Atlantic and GTE expect to finalize their merger by early 2000,
and then fold the new wireless business into a joint venture with
Vodafone
o Vodafone and AirTouch Communications merged in 1999
o SBC Communications acquired Ameritech in 1999
o MCI Worldcom and Sprint recently announced plans to merge
Any of these consolidations, as well as any future consolidations, could cause
us to lose business if any of the new consolidated entities do not perform as
they expect to because of integration or
8
<PAGE>
other problems. In addition, these consolidations will result in a smaller
number of wireless carriers, leading to greater competition in the wireless
handset market, and may favor one or more of our competitors over us. This could
also lead to fluctuations in our quarterly results. If any of these new entities
orders less product from us or elects not to do business with us, it would have
a material adverse effect on our business. For the nine months ended August 31,
1999, Bell Atlantic, AirTouch Communications and PrimeCo were our three largest
customers.
Sales in our electronics business are dependent on new products and consumer
acceptance.
Our electronics business depends, to a large extent, on the introduction
and availability of innovative products and technologies. Significant sales of
new products in niche markets, such as Family Radio Service two-way radios,
known as FRS radios, and mobile video systems have fueled the recent growth of
our electronics business. If we are not able to continually introduce new
products that achieve consumer acceptance, our sales and profit margins will
decline.
Since we do not manufacture our products, we depend on our suppliers to provide
us with adequate quantities of high quality, competitive products on a timely
basis.
We do not manufacture our products. We do not have long-term contracts with
any of the suppliers who produce our final products and most of our products are
imported from suppliers under short-term, non-exclusive purchase orders. In
addition, we have had a relationship with several of our wireless suppliers for
only a short period of time.
Accordingly, we can give no assurance that:
o our supplier relationships will continue as presently in effect
o our suppliers will be able to obtain the components necessary to
produce high-quality, technologically advanced products for us
o we will be able to obtain adequate alternatives to our supply sources
should they be interrupted
o if obtained, alternatively sourced products would be delivered on a
timely basis of satisfactory quality, competitively priced, comparably
featured or acceptable to our customers
Because of the recent increased demand for wireless and consumer
electronics products, there have been industry-wide shortages of components. As
a result, our suppliers have not been able to produce the quantities of these
products that we desire. For example, LCD screens for mobile video products and
saw filters and audio processors for wireless products are currently in short
supply. Our inability to supply sufficient quantities of products that are in
demand could reduce our profitability and have a material adverse effect on our
relationships with our customers. If any of our supplier relationships were
terminated or interrupted, we could experience an immediate or long-term supply
shortage, which could have a material adverse effect on us. It is likely that
our supply of wireless products would be interrupted before we could obtain
alternative products. See "Business--Wireless suppliers."
9
<PAGE>
Because we purchase a significant amount of our products from suppliers in
Pacific Rim countries, we are subject to the economic risks associated with
changes in the social, political, regulatory and economic conditions inherent in
these countries.
We import most of our products from suppliers in the Pacific Rim. As a
percentage of our total purchases, purchases from foreign suppliers and
suppliers in the Pacific Rim represented:
Total Foreign Purchases from
Purchases Pacific Rim
------------- --------------
Fiscal year ended November 30, 1997 92.7% 89.0%
Fiscal year ended November 30, 1998 93.5% 90.0%
Nine months ended August 31, 1999 90.0% 89.0%
We expect that these percentages will continue to remain high in the future.
Countries in the Pacific Rim have recently experienced significant social,
political and economic upheaval. Because of the large concentrations of our
purchases in Pacific Rim countries, particularly Japan, China, Korea, Taiwan and
Malaysia, any adverse changes in the social, political, regulatory and economic
conditions in these countries may materially increase the cost of the products
that we buy from our foreign suppliers or delay shipments of products, which
could have a material adverse effect on our business. In addition, our
dependence on foreign suppliers forces us to order products further in advance
than we would if our products were manufactured domestically. This increases the
risk that our products will become obsolete before we can sell our inventory.
We plan to expand the international marketing and distribution of our products,
which will subject us to additional business risks.
As part of our business strategy, we intend to increase our international
sales, although we cannot assure you that we will be able to do so. Conducting
business outside of the United States subjects us to significant additional
risks, including:
o export and import restrictions, tax consequences and other trade
barriers
o currency fluctuations
o greater difficulty in accounts receivable collections
o economic and political instability
o foreign exchange controls that prohibit payment in U.S. dollars
o increased complexity and costs of managing and staffing international
operations
For instance, our international sales declined by 50% from 1997 to 1998, in
significant part due to financial crises in the Asian markets, particularly
Malaysia. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
10
<PAGE>
Fluctuations in foreign currencies could have a material adverse impact on our
business.
We cannot predict the effect of exchange rate fluctuations on future
operating results. Also, due to the short-term nature of our supply
arrangements, the relationship of the U.S. dollar to foreign currencies will
impact price quotes when negotiating new supply arrangements denominated in U.S.
dollars. As a result, we could experience declining selling prices in our market
without the benefit of cost decreases on purchases from suppliers or we could
experience increasing costs without an ability to pass the costs to the
customers. We cannot assure you that we will be able to effectively limit our
exposure to foreign currencies. Foreign currency fluctuations could cause our
operating results to decline and have a material adverse effect on our ability
to compete. Many of our competitors manufacture products in the United States or
outside the Pacific Rim, which could place us at a competitive disadvantage if
the value of the Pacific Rim currencies increased relative to the currency in
the countries where our competitors obtain their products. We engage in hedging
transactions in connection with our business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Qualitative and
Quantitative Disclosure About Market Risk."
Trade sanctions against foreign countries or foreign companies could have a
material adverse impact on our business.
As a result of trade disputes, the United States and foreign countries have
occasionally imposed tariffs, regulatory procedures and importation bans on
certain products, including wireless handsets that have been produced in foreign
countries. Trade sanctions or regulatory procedures involving a country in which
we conduct a substantial amount of business could have a material adverse effect
on our operations. Some of the countries we purchase products from are: China,
Japan, Korea, Taiwan and Malaysia. China and Japan have been affected by such
sanctions in the past. In addition, the United States has imposed, and may in
the future impose, sanctions on foreign companies for anti-dumping and other
violations of U.S. law. If sanctions were imposed on any of our suppliers or
customers, it could have a material adverse effect on our operations.
We may not be able to sustain our recent growth rates or maintain profit
margins.
Sales of our wireless products, a large portion of our business that
operates on a high-volume, low-margin basis, have increased significantly in the
past year, from $281 million in the nine months ended August 31, 1998 to $591
million for the nine months ended August 31, 1999. Sales of our electronics
products also increased significantly from $127 million for the nine months
ended August 31, 1998 to $158 million for the nine months ended August 31, 1999.
We may not be able to continue to achieve these increasing revenue growth rates
or maintain profit margins because, among other reasons, of increased
competition and technological changes. In addition, we expect that our operating
expenses will continue to increase as we seek to expand our business, which
could also result in a reduction in profit margins if we do not concurrently
increase our sales proportionately.
If our sales during the holiday season fall below our expectations, our annual
results could also fall below expectations.
Seasonal consumer shopping patterns significantly affect our business. We
generally make a substantial amount of our sales and net income during
September, October and November, our fourth fiscal quarter. We expect this trend
to continue. December is also a key
11
<PAGE>
month for us, due largely to the increase in promotional activities by our
customers during the holiday season. If the economy faltered in these periods,
if our customers altered the timing or frequency of their promotional activities
or if the effectiveness of these promotional activities declined, particularly
around the holiday season, it could have a material adverse effect on our annual
financial results.
A decline in general economic conditions could lead to reduced consumer demand
for the discretionary products we sell.
Consumer spending patterns, especially discretionary spending for products
such as consumer electronics and wireless handsets, are affected by, among other
things, prevailing economic conditions, wage rates, inflation, consumer
confidence and consumer perception of economic conditions. A general slowdown in
the U.S. economy or an uncertain economic outlook could have a material adverse
effect on our sales. In addition, our mobile electronics business is dependent
on the level of car sales in our markets.
We depend heavily on existing management and key personnel and our ability to
recruit and retain qualified personnel.
Our success depends on the continued efforts of John Shalam, Philip
Christopher, C. Michael Stoehr and Patrick Lavelle, each of whom has worked with
Audiovox for over two decades, as well as our other executive officers and key
employees. We do not have employment contracts with any of our executive
officers or key employees, nor do we maintain key person life insurance for any
of our officers or employees. The loss or interruption of the continued
full-time service of certain of our executive officers and key employees could
have a material adverse effect on our business.
In addition, to support our continued growth, we must effectively recruit,
develop and retain additional qualified personnel both domestically and
internationally. Our inability to attract and retain necessary qualified
personnel could have a material adverse effect on our business.
We are responsible for product warranties and defects.
Even though we outsource manufacturing, we provide warranties for all of
our products. Therefore, we are highly dependent on the quality of our
suppliers. The warranties for our electronics products range from 90 days to the
lifetime of a vehicle for the original owner. The warranties for our wireless
products generally range from 90 days to one year. In addition, if we are
required to repair a significant amount of product, the value of the product
could decline while we are repairing the product. In particular, in 1998, a
software problem caused us to recall a specific line of analog handsets. After a
$1 million reimbursement from the manufacturer for warranty costs, this recall
resulted in a net pre-tax charge of $6.6 million to cover the decline in the
selling price of the product during the period we were repairing the handsets.
We cannot assure you that we will not have a similar problem in the future or
that our suppliers will reimburse us for any warranty problems.
12
<PAGE>
Our capital resources may not be sufficient to meet our future capital and
liquidity requirements.
We believe that we currently have sufficient resources to fund our existing
operations for the foreseeable future through our cash flows, the proceeds of
this offering and borrowings under our credit facility. However, we may need
additional capital to operate our business if:
o market conditions change
o our business plans or assumptions change
o we make significant acquisitions
o we need to make significant increases in capital expenditures or
working capital
We cannot assure you that we would be able to raise additional capital on
favorable terms, if at all. If we could not obtain sufficient funds to meet our
capital requirements, we would have to curtail our business plans. We may also
raise funds to meet our capital requirements by issuing additional equity, which
could be dilutive to our stockholders.
Restrictive covenants in our credit facility may restrict our ability to
implement our growth strategy, respond to changes in industry conditions, secure
additional financing and make acquisitions.
Our credit facility contains restrictive covenants that
o require us to attain specified pre-tax profits
o limit our ability to incur additional debt
o require us to achieve specific financial ratios
o restrict our ability to make capital expenditures
If our business needs require us to take on additional debt, secure financing or
make significant capital expenditures or acquisitions, and we are unable to
comply with these restrictions, we would be forced to negotiate with our lenders
to waive these covenants or amend the terms of our credit facility. We cannot
assure you that any such negotiations would be successful.
There are claims of possible health risks from wireless handsets.
Claims have been made alleging a link between the non-thermal
electromagnetic field emitted by wireless handsets and the development of
cancer, including brain cancer. Recently, the television show 20/20 on ABC
reported that several of the handsets available on the market, when used in
certain positions, emit radiation to the user's brain in amounts higher than
permitted by the Food and Drug Administration. The scientific community is
divided on whether there is any risk associated with the use of wireless
handsets and, if so, the magnitude of the risk. Unfavorable publicity, whether
or not warranted, medical studies or findings or litigation could have a
material adverse effect on our growth and financial results.
In the past, several plaintiffs' groups have brought class actions against
wireless handset manufacturers and distributors, including us, alleging that
wireless handsets have caused cancer.
13
<PAGE>
To date, none of these actions has been successful. However, actions based on
these or other claims may succeed in the future and have a material adverse
effect on us.
Several domestic and foreign governments are considering, or have recently
adopted, legislation that restricts the use of wireless handsets while driving.
Several foreign governments have adopted, and a number of U.S. state and
local governments are considering or have recently enacted, legislation that
would restrict or prohibit the use of a wireless handset while driving a vehicle
or, alternatively, require the use of a hands-free telephone. For example,
Brooklyn, Ohio has adopted a statute that restricts the use of wireless handsets
while driving. Widespread legislation that restricts or prohibits the use of
wireless handsets while operating a vehicle could have a material adverse effect
on our future growth.
Our stock price could fluctuate significantly, and you may not be able to resell
your shares at or above the price that you will pay for them in this offering.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
o operating results being below market expectations
o announcements of technological innovations or new products by us or
our competitors
o loss of a major customer or supplier
o changes in, or our failure to meet, financial estimates by securities
analysts
o industry developments
o economic and other external factors
o period-to-period fluctuations in our financial results
o financial crises in Asia
In addition, the securities markets have experienced significant price and
volume fluctuations over the past several years that have often been unrelated
to the operating performance of particular companies. These market fluctuations
may also have a material adverse effect on the market price of our common stock.
The trading prices of many companies' stocks, including ours, are at or near
historical highs. Our earnings per share may decline as a result of the
increased number of shares issued in this offering.
We may be adversely affected if year 2000 remediation efforts are not
successful.
Our computers, our customers' computers and our suppliers' computer systems
could be affected by the year 2000 issue, which refers to the inability to
properly process dates beyond December 31, 1999. We also have numerous
computerized interfaces with third parties that are possibly vulnerable to
failure if those third parties do not adequately address their year 2000 issues.
System failures resulting from these issues could cause significant disruption
to our operations and result in a material adverse effect on our business,
results of operations, financial condition or liquidity.
14
<PAGE>
Our most reasonably likely worst case scenario would occur if the wireless
carriers' systems shut down for a prolonged period of time, thereby adversely
affecting sales of our wireless handsets and/or if our electronics products do
not function after December 31, 1999. See "Management's Discussion and Analysis
of Operations and Financial Conditions."
John J. Shalam, our President and Chief Executive Officer, owns a significant
portion of our common stock and can exercise control over our affairs.
Upon completion of this offering, Mr. Shalam will beneficially own
approximately 59% of the combined voting power of both classes of common stock,
assuming no exercise of the underwriters' over-allotment option. This will allow
him to elect at least 75% of our Board of Directors and, in general, to
determine the outcome of any other matter submitted to the stockholders for
approval. Mr. Shalam's voting power may have the effect of delaying or
preventing a change in control of Audiovox. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
We have two classes of common stock: Class A common stock, which is listed
on the American Stock Exchange and will be sold in this offering, and Class B
common stock, which is not publicly traded and substantially all of which is
beneficially owned by Mr. Shalam. Each share of Class A common stock is entitled
to one vote per share and each share of Class B common stock is entitled to ten
votes per share. Both classes vote together as a single class, except for the
election and removal of directors and as otherwise may be required by Delaware
law. For the election or removal of directors:
o the holders of shares of Class A common stock, voting as a separate
class, are entitled to elect approximately 25% of our directors
o the holders of Class B common stock, voting as a separate class, are
entitled to elect the remaining directors.
Since our charter permits shareholder action by written consent, Mr. Shalam may
be able to take significant corporate actions without prior notice and a
shareholder meeting. See "Description of Capital Stock--Class A Common Stock and
Class B Common Stock."
Future sales of shares could have a material adverse effect on our stock price.
Sales of a substantial number of shares of common stock after this
offering, or the perception that these sales could occur, could have a material
adverse effect on the market price of our common stock and could impair our
ability to raise capital through the sale of additional equity securities. As of
November 1, 1999, there were:
o 13,679,352 shares of common stock outstanding that are freely
tradeable, and
o 5,693,682 shares of common stock , including shares of Class B common
stock convertible into Class A common stock, that are not currently
publicly tradeable but are eligible for public sale under Rule 144
under the Securities Act which contains volume limitations.
In addition, there are 3,845,845 shares of common stock, underlying stock
options, convertible debentures and warrants. The common stock to be issued upon
the exercise or conversion of these stock options, warrants and debentures, will
be freely tradable, unless it is held by our affiliates.
15
<PAGE>
USE OF PROCEEDS
Assuming an offering price of $27.5625 per share, we will receive
approximately $51.8 million from our sale of 2,000,000 shares of Class A common
stock in this offering, after deducting the estimated underwriting discounts and
commissions and offering expenses that we will pay. If the underwriters exercise
their over-allotment option in full, we will receive an additional $8.5 million
in net proceeds. We will not receive any of the proceeds received by the selling
stockholders from the sale of their 1,100,000 shares of common stock in this
offering or their sale of a portion of the shares allocated to the underwriters'
over-allotment option.
We expect to use the net proceeds:
o to repay all or a portion of our existing indebtedness under our
revolving credit facility, $100.4 million of which was outstanding on
November 19, 1999, all of which will be available to be reborrowed
o for general corporate purposes if any amounts remain after payment of
our indebtedness
To finance our growth, we intend to reborrow the amounts under our credit
facility that we are paying down with the net proceeds of this offering, as well
as additional amounts available under our credit facility. Indebtedness under
our revolving credit facility accrues interest at a floating rate, which was
6.98% as of November 1, 1999. Our revolving credit facility matures on July 28,
2004. We borrow under the revolving credit facility to fund our general
liquidity needs. We may borrow up to $200 million under our credit facility.
In addition, we may pursue acquisitions of businesses that are
complementary to ours, some of which may be material. Although we are not
currently negotiating any acquisitions, if in the future we identify an
acquisition that we decide to pursue, we could reborrow funds under our credit
facility for that acquisition.
Pending our use of these net proceeds, we may invest them in short-term,
investment-grade, interest-bearing securities.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Our Class A common stock is traded on the American Stock Exchange under the
symbol VOX. The following table shows for the periods indicated the high and low
sales prices of our Class A common stock as reported by the American Stock
Exchange.
High Low
------ ------
1997
First Quarter............................................. $ 8.50 $ 4.63
Second Quarter............................................ 7.88 4.94
Third Quarter............................................. 8.81 6.31
Fourth Quarter............................................ 10.75 7.31
1998
First Quarter............................................. 9.00 5.75
Second Quarter............................................ 7.44 4.75
Third Quarter............................................. 7.44 3.63
Fourth Quarter............................................ 6.75 3.69
1999
First Quarter............................................. 7.38 5.50
Second Quarter............................................ 8.94 5.94
Third Quarter............................................. 16.00 8.44
Fourth Quarter (through November 19, 1999)................ 30.25 14.19
As of November 19, 1999, the closing sale price of our Class A common stock
on the American Stock Exchange was $27.5625 per share.
As of November 1, 1999, there were approximately 286 holders of record of
our Class A common stock and four holders of our Class B common stock. Our Class
B common stock is not publicly traded.
DIVIDEND POLICY
Since our initial public offering in 1987, we have not declared or paid any
cash or stock dividends on our common stock. We do not expect to pay any
dividends on our common stock for the foreseeable future. We intend to retain
earnings to support operations, reduce indebtedness and to finance expansion.
The payment of dividends in the future will depend upon our earnings,
operations, capital requirements, financial condition and other factors deemed
relevant by the board of directors. The payment of any dividends is restricted
by our current bank credit facility. See "Management's Discussion and Analysis
of Financial Condition and Operation--Liquidity and Capital Resources."
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization plus cash and cash
equivalents as of August 31, 1999:
o on an actual basis, and
o as adjusted to reflect the application of the estimated net proceeds
from the sale of 2,000,000 shares of our Class A common stock offered
at an assumed price of $27.5625 per share.
You should read the following table together with "Use of Proceeds,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and our consolidated financial
statements and the accompanying notes.
<TABLE>
<CAPTION>
August 31, 1999
-----------------------------
Actual As Adjusted
--------- -----------
($ in thousands, except share
and per share data)
<S> <C> <C>
Cash and cash equivalents
................................................................................. $ 5,873 $ 44,991(1)
========= =========
Short-term and current installments of long-term debt ........................... 12,836 12,836
Long-term debt, less current maturities:
Bank obligations .......................................................... 12,646(1) --
Long-term debt ............................................................ 6,773 6,773
Capital lease obligation .................................................. 6,233 6,233
--------- ---------
Total ............................................................... 25,652 13,006
Stockholders' equity
Preferred stock, 50,000 shares authorized,
issued and outstanding, liquidation preference of $2,500 ............... 2,500 2,500
Common stock:
Class A common stock, 30,000,000 authorized; 16,227,014 outstanding..
at August 31, 1999 and 18,227,014 as adjusted .................... 173 193
Class B common stock, 30,000,000 authorized; 2,260,954 outstanding... 22 22
Paid-in capital ..................................................... 144,271 196,015
Retained earnings ................................................... 51,762 51,762
Other ............................................................... (6,195) (6,195)
--------- ---------
Total stockholders' equity .......................................... 192,533 244,297
Total capitalization ................................................ $ 231,021 $ 270,139
========= =========
</TABLE>
- ----------
(1) As of November 19, 1999, our bank obligations increased to $100.4 million
from $12.6 million on August 31, 1999 due to seasonal inventory
requirements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains our selected consolidated financial data.
Interim period information is derived from our unaudited financial statements
which include, in management's view, all adjustments necessary for a fair
presentation. For a more detailed explanation of our financial condition and
operating results, you should read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and our consolidated financial
statements and notes to those statements included in this prospectus. Operating
results for the nine months ended August 31, 1999 are not necessarily indicative
of the results that may be expected for our full fiscal year or any future
period.
This selected consolidated financial data includes:
for 1994:
o the cumulative effect of a change in accounting principle as a
result of the adoption of FAS 109 "Accounting for Income Taxes"
of $(178,000) or $(0.02) per share basic, and $(0.01) per share
diluted;
o a pre-tax gain on the sale by us of an equity investment of $27.8
million; and
o a pre-tax gain on the public offering of our shares in an equity
investment of $10.6 million.
for 1995:
o a pre-tax charge of $2.9 million associated with the issuance of
warrants;
o a pre-tax charge of $11.8 million for inventory write-downs and
the downsizing of our retail operations;
o a pre-tax gain on the sale of an equity investment of $8.4
million; and
o a $31.7 million increase in stockholders' equity, net of tax, as
a result of an unrealized gain on marketable securities which is
not reflected in net income.
for 1996:
o a pre-tax charge of $26.3 million related to the exchange of
$41.3 million of subordinated convertible debentures into
6,806,580 shares of common stock and a related tax expense of
$2.9 million;
o a $10.3 million increase in stockholders' equity, net of tax, as
a result of an unrealized gain on marketable securities which is
not reflected in net income; and
o a $64.7 million increase in stockholders' equity as a result of
the exchange of $41.3 million of subordinated convertible
debentures which is not reflected in net income.
for 1997:
o a pre-tax charge of $12.7 million related to the exchange of
$21.5 million of subordinated convertible debentures into
2,860,925 shares of common stock and a related tax expense
of $158,000;
o a pre-tax gain of $37.5 million on sale of shares of
CellStar Corporation held by us and a related tax expense of
$14.2 million;
o a $12.2 million increase in stockholders' equity, net of
tax, as a result of an unrealized gain on marketable
securities which is not reflected in net income;
19
<PAGE>
o a $773,000 increase in stockholders' equity, net of tax, as
a result of an unrealized gain on equity collar which is not
reflected in net income; and
o a $33.6 million increase in stockholders' equity as a result
of the exchange of $21.5 million of subordinated convertible
debentures which is not reflected in net income.
for 1998:
o a pre-tax charge of $6.6 million for inventory write-downs;
o a $4.2 million increase in stockholders' equity, net of tax,
as a result of an unrealized gain on marketable securities;
and
o a $929,000 increase in stockholders' equity, net of tax, as
a result of a gain on a hedge of available-for-sale
securities.
<TABLE>
<CAPTION>
Nine Months Ended
Fiscal Year Ended November 30, August 31,
----------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- --------- -------- --------- --------- --------
(unaudited)
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales ................. $486,448 $ 500,740 $ 597,915 $639,082 $ 616,695 $ 407,886 $749,068
Gross profit .............. 84,911 70,742 96,388 106,762 88,541 61,181 90,220
Operating income (loss) ... 10,486 (9,734) 13,075 19,695 4,871 (1,494) 21,937
Other income (expense) .... 36,048 (4,952) (33,710) 23,747 (1,070) (788) 4,245
Income (loss) before
provision for (recovery
of) income taxes ........ 46,534 (14,686) (20,635) 43,442 3,801 (2,282) 26,182
Provision for (recovery
of) income taxes ........ 20,328 (2,803) 5,834 22,420 829 (1,808) 10,317
Net income (loss) ......... $ 26,028 $ (11,883) $ (26,469) $ 21,022 $ 2,972 $ (474) $ 15,865
======== ========= ========= ======== ========= ========= ========
Net income (loss) per
common share, basic ..... $ 2.88 $ (1.31) $ (2.82) $ 1.11 $ 0.16 $ (0.02) $ 0.83
======== ========= ========= ======== ========= ========= ========
Net income (loss) per
common share, diluted ... $ 2.22 $ (1.31) $ (2.82) $ 1.09 $ 0.16 $ (0.02) $ 0.82
======== ========= ========= ======== ========= ========= ========
Consolidated Balance
Sheet Data:
Total assets .............. $239,098 $ 308,428 $ 265,545 $289,827 $ 279,679 $ 268,450 $326,893
======== ========= ========= ======== ========= ========= ========
Long-term obligations,
less current installments 110,698 142,802 70,413 38,996 33,724 29,804 30,496
======== ========= ========= ======== ========= ========= ========
Stockholders' equity ...... $ 92,034 $ 114,595 $ 131,499 $187,892 $ 177,720 $ 177,846 $192,533
======== ========= ========= ======== ========= ========= ========
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We market our products under the Audiovox brand as well as private labels
to a large and diverse distribution network both domestically and
internationally. We operate through two marketing groups: Wireless and
Electronics. The Wireless Group consists of Audiovox Communications Corp. (ACC),
a majority owned subsidiary of Audiovox, and Quintex, which is a wholly owned
subsidiary of ACC. ACC markets wireless handsets and accessories primarily on a
wholesale basis to wireless carriers in the United States and, to a lesser
extent, carriers overseas.
Quintex is a small operation for the sale of handsets, accessories and
wireless telephone service. For the nine months ended August 31, 1999, sales
through Quintex were $39.4 million or 6.7% of the Wireless Group sales. Quintex
receives activation commissions and residual fees from retail sales. We also
receive a monthly residual payment which is based upon a percentage of the
customer's usage.
The Electronics Group consists of Audiovox Electronics (AE) and Audiovox
Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd. and
Audiovox Venezuela, C.A., which are wholly-owned subsidiaries. The Electronics
Group markets automotive sound and security systems, electronic car accessories,
home and portable sound products, FRS radios and in-vehicle video systems. Sales
are made through an extensive distribution network of mass merchandisers, power
retailers, etc. In addition, we sell some of our products to automobile
manufacturers on an OEM basis.
We allocate interest and certain shared expenses to the marketing groups
based upon estimated usage. General expenses and other income items that are not
readily allocable are not included in the results of our two marketing groups.
From fiscal 1996 through the nine months ended August 31, 1999, several
major events and trends have affected our results and financial condition.
Our Wireless Group increased its handset sales from 2.1 million units in
fiscal 1996 to 3.3 million units in fiscal 1998 to 3.9 million units for the
nine months ended August 31, 1999. This increase in sales was primarily due to:
o the introduction of digital technology, which has allowed carriers to
significantly increase subscriber capacity
o increased number of carriers competing in each market
o reduced cost of service and expanded feature options
During this period, our unit gross profit margin declined due to continued
strong competition and increased sales of digital handsets, which have a lower
gross profit margin percentage than analog handsets. Despite the margin decline,
our gross margin dollars increased significantly due to large increases in net
sales.
21
<PAGE>
Sales by our Electronics Group were $188.4 million in 1996 and $193.9
million in 1997, but declined in 1998 to $175.1 million, primarily due to a
financial crisis in Asia, particularly Malaysia. Sales for the nine months ended
August 31, 1999 have increased 24% over the nine month period ended August 31,
1998 to $157.7 million. During this period our sales were impacted by the
following items:
o the growth of our consumer electronic products business from $2.9
million in fiscal 1996 to $21.5 million for the nine months ended
August 31, 1999
o the introduction of mobile video entertainment systems and other new
technologies
o the Asian financial crisis in 1998
Gross margins in our electronics business increased from 18.9% in 1996 to 20.4%
for the nine months ended August 31, 1999 due, in part, to higher margins in
mobile video products and other new technologies and products.
Our total operating expenses have not increased materially since 1996,
despite our increase in sales. Total operating expenses were $83.3 million in
1996 and $83.7 million in 1998. We have invested in management systems and
improved our operating facilities to increase our efficiency.
During the period 1996 to 1998, our balance sheet was strengthened by the
conversion of $63 million of our $65 million 6 1/4% subordinated convertible
debentures due 2001 into approximately 9.7 million shares of Class A common
stock and the net gain of $23.2 million from the sale of CellStar stock held by
us.
All financial information, except share data, is presented in thousands.
22
<PAGE>
Results of Operations
The following table sets forth the percentage of revenue represented by
selected items in our consolidated statements of operations for the periods
indicated:
Fiscal Year Ended November 30,
-------------------------------
1996 1997 1998
---- ---- ----
Net sales:
Product sales
Wireless........................... 59.9% 62.1% 64.6%
Sound.............................. 16.4 14.4 12.7
Security and accessories........... 14.6 15.2 13.8
Consumer goods and all other....... 2.8 2.7 3.8
----- ------ -----
93.7 94.4 95.6
Activation commissions...................... 5.5 4.9 3.7
Residual fees............................... 0.8 0.7 0.7
Total net sales................ 100.0 100.0 100.0
Cost of sales............................... (83.9) (83.3) (85.6)
------ ------ ------
Gross profit................................ 16.1 16.7 14.4
Operations Expenses:
Warehousing and assembly.................... (1.8) (1.9) (2.0)
Selling..................................... (6.7) (6.0) (5.7)
General and administrative ................. (5.4) (5.8) (5.9)
----- ----- -----
Total operating expenses....... (13.9) (13.7) (13.6)
------ ------ ------
Operating income............................ 2.2 3.0 0.8
Interest expense............................ (1.4) (0.4) (0.8)
Income of equity investments................ 0.1 0.2 0.2
Gain on sale of equity investment........... 0.2 5.9 -
Debt conversion expense..................... (4.4) (2.0) -
Other income (expense)...................... (0.1) - 0.4
Income tax expense.......................... (1.0) (3.5) (0.1)
----- ----- -----
Net income (loss)........................... (4.4)% 3.3% 0.5%
===== ===== ====
23
<PAGE>
Consolidated Results
Nine months ended August 31, 1998 compared to nine months ended August 31, 1999
The net sales and percentage of net sales by product line and marketing
group for the nine months ended August 31, 1998 and August 31, 1999 are
reflected in the following table:
Nine Months Ended August 31,
--------------------------------------------
1998 1999
-------------------- --------------------
($ in thousands)
Net sales:
Wireless
Wireless ............... $251,142 61.6% $559,331 74.7%
Activation ............. 17,669 4.3 18,634 2.5
Residual ............... 2,856 0.7 3,260 0.4
Other .................. 8,965 2.2 10,108 1.4
-------- ----- -------- -----
Total ............... 280,632 68.8 591,333 79.0
-------- ----- -------- -----
Electronics
Sound .................. 56,932 14.0 55,052 7.3
Security and accessories 64,094 15.7 81,194 10.8
Consumer ............... 6,228 1.5 21,489 2.9
-------- ----- -------- -----
Total Electronics ... 127,254 31.2 157,735 21.0
-------- ----- -------- -----
Total ............... $407,886 100.0% $749,068 100.0%
======== ===== ======== =====
Net sales were $749,068 for 1999, an increase of $341,182 or 83.6%, from
1998. The increase in net sales was in both the Wireless and Electronics Groups.
Sales from our international operations decreased from last year by
approximately 6.0%. Sales in Malaysia increased $4,243, or 66.7%, while sales in
Venezuela were down $5,339, or 44.4%. Gross margins were 12.0% in 1999 compared
to 15.0% in 1998. Gross margins in 1998 reflect a $6.6 million charge to adjust
the carrying value of certain inventories during the second quarter of 1998.
Operating expenses increased to $68,283 from $62,675, an 8.9% increase. However,
as a percentage of sales, operating expenses decreased to 9.1% in 1999 from
15.4% in 1998. Operating income for 1999 was $21,937 compared to last year's
operating loss of $1,494.
24
<PAGE>
Wireless Group Results
Nine months ended August 31, 1998 compared to nine months ended August 31, 1999
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the Wireless
Group:
Nine Months Ended August 31,
---------------------- ----------------------
1998 1999
---------------------- ----------------------
($ in thousands)
Net sales:
Wireless product ..... $251,142 89.5% $559,331 94.5%
Activation commissions 17,669 6.3 18,634 3.2
Residual fees ........ 2,856 1.0 3,260 0.6
Other ................ 8,965 3.2 10,108 1.7
-------- ----- -------- -----
Total net sales ... 280,632 100.0 591,333 100.0
-------- ----- -------- -----
Gross profit ............ 33,941 12.1 57,911 9.8
Total operating expenses 36,197 12.9 35,985 6.1
-------- ----- -------- -----
Operating income (loss) . (2,256) (0.8) 21,926 3.7
Other expense ........... (4,549) (1.6) (4,488) (0.8)
-------- ----- -------- -----
Pre-tax income (loss) $ (6,805) (2.4) $ 17,438 2.9%
======== ===== ======== =====
Through the third quarter of 1999, sales increased $310,701, or 110.7%, to
$591,333. Unit sales of wireless handsets increased approximately 77.8% (or
1,683,000 units) through the third quarter of 1999. This increase is
attributable to sales of portable digital products. The addition of four new
suppliers has also provided a variety of new digital, wireless products that
have contributed to the sales increase. As a result of increased digital sales,
average unit selling prices increased approximately 29.2% to $139 from $107.
Gross profit margins decreased to 9.8% from 12.1% during the nine months ended
August 31, 1999 compared to the same period last year. Gross profit margins were
affected by higher air freight costs in response to increased customer demand, a
shift in the activation mix toward indirect channels and an increase in the
number of orders committed in advance which lowers margins and minimizes
inventory risk. The number of new wireless subscriptions processed by Quintex
increased 15.1%, with an accompanying increase in revenue from activation
commissions of approximately $965, or 5.5%, even though the average commission
received by Quintex per activation decreased approximately 8.4% from last year.
The Wireless Group operates in a very competitive market and may experience
lower gross profit and inventory adjustments due to market competition and other
factors as discussed in our Risk Factors. Operating expenses decreased to
$35,985 from $36,197. As a percentage of net sales operating expenses decreased
to 6.1% during 1999 compared to 12.9% in 1998. Selling expenses decreased $1,041
from last year, primarily in salaries and benefits, advertising and divisional
marketing partially offset by an increase in commissions. General and
administrative expenses increased during 1999 by $734 from 1998, primarily in
bad debt, partially offset by decreases in salaries. Warehousing and assembly
expenses increased by $95 during 1999 from last year, primarily in direct labor.
Operating income for 1999 was $21,926 compared to last year's operating loss of
$2,256.
25
<PAGE>
Electronics Group Results
Nine months ended August 31, 1998 compared to nine months ended August 31, 1999
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the Electronics
Group:
Nine Months Ended August 31,
--------------------------------------------
1998 1999
------------------ --------------------
($ in thousands)
Net sales:
Sound .................. $56,932 44.7% $ 55,052 34.9%
Security and accessories 64,094 50.4 81,194 51.5
Consumer electronics ... 6,228 4.9 21,489 13.6
------- ----- ------- -----
Total net sales ..... 127,254 100.0 157,735 100.0
------- ----- ------- -----
Gross profit ................ 27,370 21.5 32,170 20.4
Total operating expenses .... 20,393 16.0 23,216 14.7
------- ----- ------- -----
Operating income ............ 6,977 5.5 8,954 5.7
Other expense ............... (2,529) (2.0) (1,243) (0.8)
------- ----- ------- -----
Pre-tax income ......... $ 4,448 3.5% $ 7,711 4.9%
======= ===== ======= =====
Net sales increased approximately $30,481 in the nine months ended August
31, 1999 compared to the nine months ended August 31, 1998, an increase of
24.0%. Automotive security and accessories sales increased 26.7% compared to
last year, primarily due to an increase in mobile video sales of approximately
$28,600. This increase was partially offset by decreases in Prestige security
sales. Consumer electronics sales also more than tripled from last year to
$21,489. These increases were partially offset by a decrease of 3.3% in
autosound sales. Net sales in our Malaysian subsidiary increased 66.7% from last
year, but were offset by a 44.4% decline in sales in our Venezuelan subsidiary.
Gross margins decreased to 20.4% in 1999 from 21.5% in 1998, primarily in our
international operations. The Electronics Group operates in a very competitive
market and may experience lower gross profit and inventory adjustments due to
market competition and other factors as discussed in our Risk Factors. Operating
expenses increased $2,823 over last year. Selling expenses increased from last
year by $1,483, primarily in commissions and divisional marketing, partially
offset by a decrease in advertising. General and administrative expenses
increased from 1998 by $209, primarily in salaries, office expenses and
professional fees. Warehousing and assembly expenses increased from 1998 by
$1,131, primarily in field warehousing and direct labor. Operating income for
1999 was $8,954 compared to $6,977 last year.
Other Income and Expense
Interest expense and bank charges decreased by $493 and $518 for the three
and nine months ended August 31, 1999, respectively, compared to the same
periods last year. The decrease in interest expense and bank charges is due to
lower average borrowings. Equity in income of equity investments increased $9
and $415 for the three and nine months ended August 31, 1999, respectively,
compared to the same periods last year. The increase in equity in income of
equity investments is primarily due to Audiovox Specialty Applications, LLC.
Audiovox is in the process of liquidating its 50% investment in Audiovox Pacific
Pty. Ltd., which should be
26
<PAGE>
completed by the end of this fiscal year. Audiovox does not anticipate any
material charges to operations as a result of this liquidation. During the
second quarter of 1999, Audiovox's subsidiary, ACC, sold a 5% interest to
Toshiba Corporation for $5,000. This transaction resulted in a $3,800 increase
in the carrying value of the remaining 95% interest in ACC for Audiovox, which
is reflected as a gain ($2,204 net of tax) on the accompanying consolidated
statements of income (loss).
Provision for Income Taxes
Provision for income taxes and income tax recovery are provided for at a
blended federal and state rate of 40% for profits or losses from normal, United
States business operations. During fiscal 1998, we implemented various tax
strategies that resulted in lowering the effective tax rate.
Fiscal 1997 Compared to Fiscal 1998
Consolidated Results
Net sales were $616,695 for 1998, a decrease of $22,387, or 3.5%, over
1997. The decrease in net sales was accompanied by a corresponding decrease in
gross profit margins to 14.4% from 16.7% in 1997. Operating expenses decreased
to $83,670 from $87,067, a 3.9% decrease. Operating income for 1998 was $4,871,
a decrease of $14,824, or 75.3%, compared to 1997. During 1997, we sold
1,835,000 shares of our holdings of CellStar for a net gain of $23,232. Also
during 1997, we exchanged $21,479 of our subordinated convertible debentures for
2,860,925 shares of Class A common stock. Costs associated with this exchange
were $12,844, including income taxes.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1998, 1997 and 1996 are reflected
in the following table. We have reclassified some of the data for periods prior
to fiscal 1997 to conform to fiscal 1998 presentation.
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
---------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Wireless
Wireless products ...... $357,964 59.9% $396,510 62.1% $402,606 65.3%
Activation commissions . 33,102 5.5 31,061 4.9 22,785 3.7
Residual fees .......... 4,828 0.8 4,688 0.7 4,452 0.7
Other .................. 12,785 2.1 12,141 1.9 11,747 1.9
-------- ----- -------- ----- -------- -----
Total Wireless ..... 408,679 68.4 444,400 69.5 441,590 71.6
-------- ----- -------- ----- -------- -----
Electronics
Sound .................. 98,303 16.4 91,763 14.4 78,338 12.7
Security and accessories 87,234 14.6 97,446 15.2 84,973 13.8
Consumer goods ......... 2,879 0.5 4,701 0.7 11,794 1.9
-------- ----- -------- ----- -------- -----
Total Electronics .. 188,416 31.5 193,910 30.3 175,105 28.4
Other ................. 820 0.1 772 0.1 -- --
-------- ----- -------- ----- -------- -----
Total .............. $597,915 100.0% $639,082 100.0% $616,695 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
27
<PAGE>
Wireless Group Results
Net sales were $441,590, a decrease of $2,810, or 0.6%, from the same
period in 1997. Unit sales of wireless handsets increased 354,000 units, or
12.0%, over 1997. Average unit selling prices decreased approximately 6.9%. The
number of new wireless subscriptions processed by Quintex decreased 22.8%, with
a corresponding decrease in activation commissions of approximately $8,276. Part
of the decrease was due to the closing of some retail locations. The average
commission received by Quintex per activation also decreased by approximately
4.9% from 1997. Unit gross profit margins decreased to 7.3% from 11.1% in 1997,
primarily due to reduced selling prices, which were partially offset by a
corresponding decrease of 3.0% in average unit cost. In addition, we recorded a
$6.6 million charge to adjust the carrying value of certain wireless
inventories, partially offset by a $1.0 million credit from a supplier. This
charge was the result of a software problem in a line of analog handsets, as
well as a continuing decrease in the selling prices of analog handsets due to
pressure from the growing digital presence in the market. While the analog
market is still sizable, the Wireless Group may experience lower gross profits
in the future due to the price sensitivity of this market place. Operating
expenses decreased to $48,257 from $49,582. As a percentage of net sales,
operating expenses decreased to 10.9% during 1998 compared to 11.2% in 1997.
Selling expenses decreased $1,763 from 1997, primarily in commissions, salesmen
salaries, payroll taxes and benefits, partially offset by increases in market
development funds and co-operative advertising. General and administrative
expenses increased over 1997 by $632, primarily in occupancy costs and temporary
personnel. Warehousing and assembly expenses decreased over 1997 by $194,
primarily in tooling and direct labor. Pre-tax loss for 1998 was $1,786, a
decrease of $13,368 compared to 1997.
The net sales and percentage of net sales of the Wireless Group are
reflected in the following table:
Fiscal Year Ended November 30,
-----------------------------------------------
1997 1998
--------------------- -------------------
($ in thousands)
Net sales:
Wireless products .... $ 396,570 89.2% $ 402,606 91.1%
Activation commissions 31,061 7.0 22,785 5.1
Residual fees ........ 4,688 1.1 4,452 1.0
Other ................ 12,141 2.7 11,747 2.7
--------- ----- --------- -----
Total net sales .. 444,400 100.0 441,590 100.0
Gross profit .............. 66,117 14.9 52,270 11.8
Total operating expenses .. 49,582 11.2 48,257 10.9
--------- ----- --------- -----
Operating income .......... 16,535 3.7 4,013 0.9
Other expense ............. (4,953) (1.1) (5,799) (1.3)
--------- ----- --------- -----
Pre-tax income (loss) $ 11,582 2.6% $ (1,786) (0.4)%
========= ===== ========= =====
Electronics Group Results
Net sales decreased approximately $18,805 from 1997, a decrease of 9.7%.
This decrease was primarily from a $21.3 million decrease in net sales in our
foreign subsidiaries, primarily Malaysia, composed chiefly of security and
accessory products. Domestic operation sales of autosound, security, accessories
and consumer goods products increased approximately $4.7 million, or 3.7%, from
1997. The main components of this increase were our mobile video and
28
<PAGE>
consumer products categories. The domestic operations sales grew by $7.3
million, or 5.9%, before the Heavy Duty Sound division was transferred to one of
our equity investments during 1997.
Operating expenses decreased 3.1% from 1997 to $27,126, primarily in our
international operations. This was partially offset by an increase in domestic
operating expenses. Selling expenses decreased during 1998, primarily in
commissions and salaries in our foreign companies and market development funds
and co-operative advertising in our domestic operations. This was partially
offset by increases in domestic commissions and trade show expenses. General and
administrative expenses decreased from 1997, mostly in foreign office expenses,
bad debt expense and executive salaries, both domestic and foreign. These
decreases were partially offset by increases in office salaries, domestically,
and professional fees, both domestic and foreign. Warehousing and assembly
expenses increased from 1997, primarily in field warehousing and direct labor.
Pre-tax income decreased $2,065 from in 1997, primarily due to a decrease of
$2.6 million from foreign operations, partially offset by an increase in pre-tax
income from domestic operations.
The net sales and percentage of net sales of the Electronics Group are
reflected in the following table:
Fiscal Year Ended November 30,
----------------------------------------------
1997 1998
--------------------- ---------------------
($ in thousands)
Net sales:
Sound .................. $ 91,763 47.3% $ 78,338 44.8%
Security and accessories 97,446 50.3 84,973 48.5
Consumer goods ......... 4,701 2.4 11,794 6.7
--------- ----- -------- -----
Total net sales .... 193,910 100.0 175,105 100.0
Gross profit ................ 40,326 20.8 36,433 20.8
Total operating expenses .... 27,989 14.4 27,126 15.5
--------- ----- -------- -----
Operating income ............ 12,337 6.4 9,307 5.3
Other expense ............... (4,335) (2.2) (3,370) (1.9)
--------- ----- -------- -----
Pre-tax income ..... $ 8,002 4.1% $ 5,937 3.4%
========= ===== ======== =====
Other Income and Expense
Interest expense and bank charges increased $2,227 during 1998 from 1997.
This increase was primarily due to an increase in average outstanding interest
bearing debt. Another major factor was the increase in interest rates
experienced by our subsidiary in Venezuela. The increase in the rates, coupled
with the additional outstanding debt as a result of the growth of that
operation, resulted in an increase in Venezuelan interest expense of $975.
29
<PAGE>
Management fees and equity in income from joint venture investments
decreased by approximately $361 for 1998 compared to 1997 as detailed in the
following table:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
-------------------------------------------------------------------------
1997 1998
---------------------------------- ----------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
---------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Bliss-tel.. -- -- -- -- $ (13) $ (13)
ASA ....... -- $1,857 $1,857 -- 1,860 $1,860
TALK ...... -- -- -- -- (509) (509)
G.L.M ..... $ 12 -- 12 $ 7 -- 7
Pacific ... -- (685) (685) -- (337) (337)
Posse ..... 97 187 284 29 70 99
---- ------ ------ --- ------ ------
$109 $1,359 $1,468 $36 $1,071 $1,107
==== ====== ====== === ====== ======
</TABLE>
During 1998, we purchased 400,000 Japanese Yen (approximately $3,132) of
Shintom Convertible Debentures (Shintom Debentures). We exercised our option to
convert the Shintom Debentures into shares of Shintom common stock.
During 1998, we also purchased an additional 400,000 Japanese Yen
(approximately $2,732) of Shintom Debentures. We exercised our option to convert
the Shintom Debentures into shares of Shintom common stock. We sold the Shintom
common stock yielding net proceeds of $3,159 and a gain of $427.
In addition, we purchased 1,000,000 Japanese Yen (approximately $6,854) of
Shintom Debentures. We exercised our option to convert 337,212 Japanese Yen of
Shintom Debentures into shares of Shintom common stock. We sold the Shintom
common stock yielding net proceeds of $2,671 and a gain of $360.
During January 1997, we completed an exchange of $21,479 of our
subordinated debentures for 2,860,925 shares of Class A common stock. As a
result of this exchange, we recorded a charge of $12,686. The charge to earnings
represents (1) the difference in the fair market value of the shares issued in
the exchange and the fair market value of the shares that would have been issued
under the terms of the original conversion feature plus (2) a write-off of the
debt issuance costs associated with the subordinated debentures plus (3)
expenses associated with the exchange offer. The exchange resulted in taxable
income due to the difference in the face value of the bonds converted and the
fair market value of the shares issued and, as such, a current tax expense of
$158 was recorded. An increase in paid in capital was reflected for the face
value of the bonds converted, plus the difference in the fair market value of
the shares issued in the exchange and the fair market value of the shares that
would have been issued under the terms of the original conversion feature for a
total of $33,592.
During 1997, we sold a total of 1,835,000 shares of CellStar for net
proceeds of $45,937 and a net gain of $23,232.
30
<PAGE>
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of 40%
for profits from normal business operations. During 1998, we recorded $350 of
tax benefit as a result of certain tax examinations. In addition, we implemented
various tax strategies, which have resulted in lowering the effective tax rate.
During 1997, we had several non-operating events which had tax provisions
calculated at specific rates, determined by the nature of the transaction.
Fiscal 1996 Compared to Fiscal 1997
Consolidated Results
Net sales were $639,082 for 1997, an increase of $41,167, or 6.9%, from
1996. The increase in net sales was accompanied by a corresponding increase in
gross profit margins to 16.7% from 16.1% in 1996. Operating expenses increased
to $87,067 from $83,313, a 4.5% increase. Operating income for 1997 was $19,695,
an increase of $6,620, or 50.6%, compared to 1996. During 1997, we sold
1,835,000 shares of CellStar for a net gain of $23,232. Also during 1997, we
exchanged $21,479 of our subordinated debentures for 2,860,925 shares of Class A
common stock. Costs associated with this exchange were $12,844, including income
taxes.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1997 and 1996 are reflected in the
following table. We have reclassified some of the data for periods prior to
fiscal 1996 in order to conform to fiscal 1997 presentation.
Fiscal Year Ended November 30,
----------------------------------------------
1996 1997
-------------------- --------------------
($ in thousands)
Net sales:
Wireless
Wireless products ......... $357,964 59.9% $396,510 62.1%
Activation commissions .... 33,102 5.5 31,061 4.9
Residual fees ............. 4,828 0.8 4,688 0.7
Other ..................... 12,785 2.1 12,141 1.9
-------- ----- -------- -----
Total Wireless ......... 408,679 68.4 444,400 69.5
-------- ----- -------- -----
Electronics
Sound .................. 98,303 16.4 91,763 14.4
Security and accessories 87,234 14.6 97,446 15.2
Other .................. 2,879 0.5 4,701 0.7
-------- ----- -------- -----
Total Electronics ... 188,416 31.5 193,910 30.3
Other ..................... 820 0.1 772 0.1
-------- ----- -------- -----
Total ............... $597,915 100.0% $639,082 100.0%
======== ===== ======== =====
Wireless Group Results
Net sales were $444,400, an increase of $35,721, or 8.7%, from 1996. Unit
sales of wireless handsets increased 892,000 units, or 43.2%, over 1996. Average
unit selling prices decreased approximately 21.2% but were offset by a
corresponding decrease of 22.9% in average unit cost. The number of new wireless
subscriptions processed by Quintex decreased 9.1%, with
31
<PAGE>
a corresponding decrease in activation commissions of approximately $2,041. The
average commission received by Quintex per activation, however, increased
approximately 3.2% from 1996. Unit gross profit margins increased to 11.1% in
1997 from 9.0% in 1996, primarily due to increased unit sales and reduced unit
costs. Operating expenses decreased to $49,582 in 1997 from $50,710 in 1996. As
a percentage of net sales, operating expenses decreased to 11.2% during 1997
compared to 12.4% in 1996. Selling expenses decreased $3,203 from 1996,
primarily in advertising and divisional marketing, partially offset by increases
in commissions and salesmen salaries. General and administrative expenses
increased over 1996 by $572, primarily in office salaries and temporary
personnel. Warehousing and assembly expenses increased over 1996 by $1,503,
primarily in tooling and direct labor. Pre-tax income for 1997 was $11,582, an
increase of $8,476 compared to 1996.
The following table sets forth for the periods indicated certain statements
of income data for the Wireless Group expressed in dollars, in thousands, as a
percentage of net sales:
Fiscal Year Ended November 30,
----------------------------------------------------
1996 1997
-------------------- ------------------------
($ in thousands)
Net sales:
Wireless products ...... $ 357,964 87.6% $ 396,510 89.2%
Activation commissions . 33,102 8.1 31,061 7.0
Residual fees .......... 4,828 1.2 4,688 1.1
Other .................. 12,785 3.1 12,141 2.7
--------- ----- --------- -----
Total net sales 408,679 100.0 444,400 100.0
Gross profit ........... 60,245 14.7 66,117 14.9
Total operating expenses 50,710 12.4 49,582 11.2
--------- ----- --------- -----
Operating income ....... 9,535 2.3 16,535 3.7
Other expense .......... (6,429) (1.6) (4,953) (1.1)
- ------------------------ --------- ----- --------- -----
Pre-tax income $ 3,106 0.8% $ 11,582 2.6%
========= ===== ========= =====
Electronics Group Results
Net sales increased approximately $5,494 in 1997 compared to 1996, an
increase of 2.9%. Increases were experienced in security and accessories and
were partially offset by a decrease in sound products. A majority of the
increase was from the Group's international operations, both from an increase in
existing business and the formation of a new subsidiary in Venezuela. Autosound
sales decreased 6.7% in 1997 compared to 1996, due to the transfer of the Heavy
Duty Sound division to a new unconsolidated joint venture. Excluding sound sales
from the Heavy Duty Sound division for fiscal 1997 and 1996, autosound sales
decreased 0.6% in 1997. Automotive security and accessories increased 11.7% in
1997 compared to 1996, primarily due to increased sales in Prestige Security,
Protector Hardgoods and alarms and video, partially offset by decreases in net
sales of AA security and cruise controls. Gross margins increased to 20.8% in
1997 from 18.9% in 1996. This increase was experienced in the AV and Private
Label sound lines and cruise control, Protector Hardgoods and AA security
accessory lines, partially offset by decreases in Prestige Security. Operating
expenses increased to $27,989 from $25,559. Selling expenses increased over 1996
by $1,151, primarily in our international operations, in commissions and
advertising. General and administrative expenses increased over 1996 by $1,512,
primarily from our international operations, resulting from increases in
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<PAGE>
occupancy, office expenses and bad debt expense. Warehousing and assembly
expenses decreased from 1996 by $233, primarily from the transfer of Heavy Duty
Sound business to the new joint venture. Pre-tax income for 1997 was $8,002, an
increase of $2,303 compared to 1996. Without the transfer of the Heavy Duty
Sound business, pre-tax income increased $2,796 compared to 1996.
The following table sets forth for the periods indicated certain statements
of income data for the Electronics Group expressed as a percentage of net sales:
Fiscal Year Ended November 30,
---------------------------------------------
1996 1997
-------------------- --------------------
($ in thousands)
Net sales:
Sound .................. $ 98,303 52.2% $ 91,763 47.3%
Security and accessories 87,234 46.3 97,446 50.3
Other .................. 2,879 1.5 4,701 2.4
-------- ----- -------- -----
Total net sales .... 188,416 100.0 193,910 100.0
Gross profit ................ 35,622 18.9 40,326 20.8
Total operating expenses .... 25,559 13.6 27,989 14.4
-------- ----- -------- -----
Operating income ............ 10,063 5.3 12,337 6.4
Other expense ............... (4,364) (2.3) (4,335) (2.2)
-------- ----- -------- -----
Pre-tax income ..... $ 5,699 3.0% $ 8,002 4.1%
======== ===== ======== =====
Other Income and Expense
Interest expense and bank charges decreased by $5,938 for 1997 compared
to 1996. This was due to reduced interest bearing debt and the decrease in
interest bearing subordinated debentures, which were exchanged for shares of
common stock.
Management fees and equity in income from joint venture investments
increased by approximately $651 for 1997 compared to 1996 as detailed in the
following table:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
---------------------------------------------------------------------
1996 1997
-------------------------------- --------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
---------- ------ ----- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
ASA .............. -- -- -- -- $1,857 $1,857
ASMC ............. -- $ 948 $ 948 -- -- --
G.L.M ............ $100 -- 100 $ 12 -- 12
Pacific .......... 22 (334) (312) -- (685) (685)
Quintex West ..... 18 -- 18 -- -- --
Posse ............ 46 17 63 97 187 284
---- ----- ----- ---- ------ -------
$186 $ 631 $ 817 $109 $1,359 $1,468
==== ===== ===== ==== ====== ======
</TABLE>
Audiovox Pacific experienced an overall decline in gross margins, as
the wireless market in Australia experienced the same competitive factors as
those in the United States during these periods.
33
<PAGE>
During January 1997, we completed an exchange of $21,479 of our
subordinated debentures for 2,860,925 shares of Class A common stock. As a
result of the exchange, a charge of $12,686 was recorded. The charge to earnings
represents (i) the difference in the fair market value of the shares issued in
the exchange and the fair market value of the shares that would have been issued
under the terms of the original conversion feature, plus (ii) a write-off of the
debt issuance costs associated with the subordinated debentures, plus (iii)
expenses associated with the exchange offer. The exchange resulted in taxable
income due to the difference in the face value of the bonds converted and the
fair market value of the shares issued and, as such, a current tax expense of
$158 was recorded. An increase in paid in capital was reflected for the face
value of the bonds converted, plus the difference in the fair market value of
the shares issued in the exchange and the fair market value of the shares that
would have been issued under the terms of the original conversion feature for a
total of $33,592.
During 1997, we sold a total of 1,835,000 shares of CellStar for net
proceeds of $45,937 and a net gain of $23,232.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of 41%
for profits from normal business operations. During 1997, we had several
non-operating events which had tax provisions calculated at specific rates,
determined by the nature of the transaction. The tax treatment for the debt
conversion expense of $12,686, which lowered income before provision for income
taxes, did not reduce taxable income as it is a non-deductible item. Instead of
recording a tax recovery of $5,201, which would have lowered the provision for
income taxes, we actually recorded a tax expense of $158. This and other various
tax treatments resulted in an effective tax rate of 51.6% for 1997.
Liquidity and Capital Resources
Our cash position at August 31, 1999 was $5,873, which decreased by $3,525
from $9,398 at November 30, 1998. Operating activities used $6,903, primarily
from increases in accounts receivable and inventory, with associated
improvements in inventory turnover, partially offset by an increase in accounts
payable, primarily due to the increase in sales volume as well as the timing of
such sales and inventory purchases. Accounts receivable days on hand decreased
to 47 days from 51 days last year. Inventory days on hand decreased to 28 days
from last year's 70 days. This improvement in accounts receivable and inventory
turnover allowed us to minimize our reliance on outside financing. Investing
activities provided $7,425, primarily from the sale of investment securities and
proceeds from the issuance of subsidiary shares, partially offset by the
purchase of property, plant and equipment and the purchase of convertible
debentures. Financing activities used $4,033, primarily from repayments under
our line of credit.
On July 28, 1999, we amended and restated our credit agreement with a group
of lenders led by Chase Manhattan Bank, as administrative agent. The amended and
restated credit agreement increases our maximum borrowings available from
$112,500 to $200,000. The amended and restated credit agreement contains
covenants requiring, among other things, minimum quarterly and annual levels of
pre-tax income and net worth. Under our amended and
34
<PAGE>
restated credit agreement:
o we may not incur a pre-tax loss in excess of $1,000 for any fiscal
quarter and may not incur a pre-tax loss for two consecutive fiscal
quarters;
o we must maintain a net worth base amount of $175,000, plus 50% of
consolidated net income for each fiscal year ending on or after
November 30, 1999; and
o we must, at all times, maintain a debt to net worth ratio of not more
than 1.75 to 1.
The amended and restated credit agreement also contains restrictions and
limitations on our ability to pay dividends, repurchase stock and make capital
expenditures.
Our ability to borrow under this credit facility is conditioned on a
formula which takes into account the amount and quality of our accounts
receivable and inventory. Our obligations under the credit agreement are
guaranteed by our subsidiaries and are secured by our accounts receivable. The
amended and restated credit agreement expires on July 28, 2004.
Our cash position at November 30, 1998 was approximately $47 below the
November 30, 1997 level. Operating activities provided approximately $17,378,
primarily from decreases in inventory and increases in accounts payable, accrued
expenses and other current liabilities. These events were partially offset by an
increase in accounts receivable and a decrease in income taxes payable.
Investing activities used approximately $9,197, primarily from the purchases of
investment securities and property, plant and equipment, partially offset by the
net proceeds from the sale of investment securities. Financing activities used
approximately $8,113, primarily from net repayments under line of credit
agreements and repurchase of Class A common stock and warrants.
We believe that we have sufficient liquidity to satisfy our anticipated
working capital and capital expenditure needs for our existing business for the
reasonably foreseeable future.
Impact of Inflation and Currency Fluctuation
Inflation has not had a significant impact on our financial position or
operating results. To the extent that we expand our operations into Latin
America and the Pacific Rim, the effects of inflation and currency fluctuations
in those areas could have growing significance to our financial condition and
results of operations. Fluctuations in the foreign exchange rates in Pacific Rim
countries have not had a material adverse effect on our consolidated financial
position, results of operations or liquidity.
While the prices that we pay for the products purchased from our suppliers
are principally denominated in United States dollars, price negotiations depend
in part on the relationship between the foreign currency of the foreign
manufacturers and the United States dollar. This relationship is dependent upon,
among other things, market, trade and political factors. See "Risk
Factors--Fluctuation in foreign currencies could have a material adverse impact
on our business."
35
<PAGE>
Seasonality
We typically experience some seasonality in our operations. We generally
make a substantial amount of our sales during September, October and November.
December is also a key month for us due to increased demand for our products
during the holiday season. This increase results from increased promotional and
advertising activities from our customers to end-users.
Year 2000 Compliance
Many of our computerized systems could be affected by the year 2000 issue,
which refers to the inability to properly process dates beyond December 31,
1999. We also have numerous computerized interfaces with third parties that are
possibly vulnerable to failure if those third parties do not adequately address
their year 2000 issues. System failures resulting from these issues could cause
significant disruption to our operations and result in a material adverse effect
on our business, results of operations, financial condition or liquidity.
We believe that our "mission critical" computer systems are year 2000
compliant and we are continuing to assess the balance of our computer systems as
well as other equipment and facilities systems. We are in the process of
finalizing our remediation and contingency planning activities for all systems.
However, we cannot assure you that our systems will operate properly after
December 31, 1999.
We have surveyed third parties with whom we have material relationships,
including customers, vendors and manufacturers of our products, primarily
through written correspondence. Our material third parties have informed us that
they are year 2000 compliant. We cannot be certain as to the actual year 2000
readiness of these third parties or the impact that any non-compliance on their
part may have on our business, results of operations, financial condition or
liquidity. Our most reasonably likely worst case scenarios would occur if the
wireless carriers' systems shut down for a prolonged period of time, thereby
adversely affecting our sales of wireless handsets and/or if our electronics
products do not function after December 31, 1999.
We have incurred internal staff costs as well as consulting and other
expenses in preparing for the year 2000. Since 1996, we have replaced or updated
a significant portion of our computer systems, both hardware and software.
Because these new systems that we installed are year 2000 compliant, we estimate
that the total amount that we will spend will be less than $1 million, most of
which we have already spent. This expectation assumes that our existing forecast
of those costs is accurate and that our customers, suppliers and other third
parties are year 2000 compliant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
36
<PAGE>
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This Statement
requires reporting segment profit or loss, certain specific revenue and expense
items and segment assets. It also requires reconciliation of total segment
revenues, total segment profit or loss, total segment assets, and other amounts
disclosed for segments to corresponding amounts reported in the consolidated
financial statements. Restatement of comparative information for earlier periods
presented is required in the initial year of application. Interim information is
not required until the second year of application, at which time comparative
information is required. We are in the process of determining the impact that
the adoption of this new accounting standard will have on our consolidated
financial statement disclosures. We will adopt this accounting standard in the
November 30, 1999 financial statements, as required.
The FASB issued Statement 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
Statement 137 amends Statement 133, "Accounting for Derivative Instruments and
Hedging Activities," which was issued in June 1998 and was to be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Statement 137
defers the effective date of Statement 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier application is permitted. Statement
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. While we have not determined the impact of the
new standard, it is not expected to be material.
Qualitative and Quantitative Disclosure About Market Risk
Market Risk Sensitive Instruments
The market risk inherent in our market risk sensitive instruments and
positions is the potential loss arising from adverse changes in marketable
equity security prices, foreign currency exchange rates, and interest rates.
Marketable Securities
Marketable securities on August 31, 1999, which are recorded at fair value
of $11,287 and include net unrealized gains of $2,938, have exposure to price
risk. This risk is estimated as the potential loss in fair value resulting from
a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $1,058 as of August 31, 1999. Actual results may differ.
Interest Rate Risk
Our bank loans expose earnings to changes in short-term interest rates
since interest rates on the underlying obligations are either variable or fixed
for such a short period of time as to effectively become variable. The fair
values of our bank loans are not significantly affected by changes in market
interest rates.
37
<PAGE>
The change in fair value of our long-term debt resulting from a
hypothetical 10% decrease in interest rates as of August 31, 1999 is not
material.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations,
we hedge transactions denominated in a currency other than the functional
currencies applicable to each of our various entities. The instruments used for
hedging are forward contracts with banks. The changes in market value of such
contracts have a high correlation to price changes in the currency of the
related hedged transactions. Intercompany transactions with our foreign
subsidiaries and equity investors are typically not hedged. The potential loss
in fair value for such net currency position resulting from a 10% adverse change
in quoted foreign currency exchange rates, as of August 31, 1999, is
approximately $201.
In addition, we hold debt denominated in Japanese Yen and recognize foreign
currency translation adjustments in net income to the extent the adjustment is
greater than the adjustment from the translation of our investment in our TALK
joint venture. The potential loss resulting from a hypothetical 10% adverse
change in the quoted Japanese Yen rate, as of August 31, 1999, is approximately
$257. Actual results may differ.
We are subject to risk from changes in foreign exchange rates for our
subsidiaries and equity investors that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in stockholders'
equity. On August 31, 1999, we had translation exposure to various foreign
currencies with the most significant being the Malaysian Ringgit, Thailand Baht
and Canadian Dollar. We also have a Venezuelan subsidiary in which translation
adjustments are included in net income. The potential loss resulting from a
hypothetical 10% adverse change in quoted foreign currency exchange rates, as of
August 31, 1999, amounts to $276. Actual results may differ.
38
<PAGE>
BUSINESS
We design and market a diverse line of products and provide related
services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o fulfillment services for wireless carriers
o automotive entertainment and security products
o automotive electronic accessories
o consumer electronics
We generally market our products under the well-recognized Audiovox brand
name, which we have used for over 34 years. We were a pioneer in the wireless
industry, selling our first vehicle-installed wireless telephone in 1984 as a
natural expansion of our automotive aftermarket products business. Our extensive
distribution network and our long-standing industry relationships have allowed
us to benefit from growing market opportunities in the wireless industry and to
exploit emerging niches in the consumer electronics business. For the first six
months of 1999, we were the fourth largest seller of wireless products and the
second largest supplier of CDMA handsets in the United States. CDMA is currently
the fastest growing technology in the wireless industry.
We operate in two primary markets:
o Wireless communications. Our Wireless Group, which accounts for
approximately 80% of our revenues, markets wireless handsets and
accessories through Bell Operating Companies, domestic and
international wireless carriers and their agents, independent
distributors and retailers.
o Automotive and consumer electronics. Our Electronics Group, which
accounts for approximately 20% of our revenues, sells autosound,
mobile video, mobile electronics and consumer electronics primarily to
mass merchants, power retailers, specialty retailers, new car dealers,
original equipment manufacturers (OEMs), independent installers of
automotive accessories and the U.S. military.
Our business has grown significantly in the last nine months primarily
because of increased sales of our digital handsets. Our net sales have increased
as follows:
Nine Months Ended August 31,
----------------------------- Percent
1998 1999 Change
---- ---- -------
($ in millions)
Wireless ....................... $281 $591 110%
Electronics .................... 127 158 24
---- ---- ---
Total .................... $408 $749 84%
To remain flexible and limit our research and fixed costs, we do not
manufacture our products ourselves. Instead, we have relationships with a broad
group of suppliers who manufacture our products. We work directly with our
suppliers in the design, development and testing of all of our products and
perform some assembly functions for our electronics products.
39
<PAGE>
Our product development efforts focus on meeting changing consumer demand for
technologically-advanced, high-quality products, and we consult with our
customers throughout the design and development process. In our wireless
business, we were among the first to introduce wireless handsets and mobile
phones with one-touch dialing, analog caller ID and voice-activated dialing as
standard features. In our electronics business, we were among the first to
introduce mobile video entertainment products and MP-3 Internet music
player/recorders. We stand behind all of our products by providing warranties
and customer and end user service support.
Strategy
Our objective is to leverage the well-recognized Audiovox brand name and
extensive distribution network to capitalize on the growing worldwide demand for
wireless products and continue to provide innovative products in response to
consumer demand in the automotive and consumer electronics industries. The key
elements of our strategy are:
Enhance and capitalize on the Audiovox brand name. We believe that the Audiovox
brand name is one of our greatest strengths. During the past 34 years, we have
invested heavily in the Audiovox name and established it as a well-known
consumer brand for autosound and communications products. Our wireless phones
and accessories generally bear the Audiovox name or are co-branded with the
wireless carriers. Our brand name recognition has helped us to obtain rapid
market acceptance for new products such as FRS two-way radios and mobile video
entertainment systems, both of which we introduced recently. To further enhance
the value received from our brand name, we began licensing the Audiovox brand in
1996 for consumer electronics products sold by selected mass merchants. We
intend to continue promoting our brand name through advertising, public
relations, market development activities and licensing arrangements.
Expand wireless technology offerings to increase market opportunities. We intend
to continue to offer a breadth of wireless products in advanced wireless
technologies. We have expanded our wireless product offerings to include digital
handsets to capitalize on the transition from analog to digital technology.
Digital technology has reduced the per minute and service fees, expanded feature
options and resulted in increased growth in the wireless industry. Unit sales of
digital handsets grew from less than 1% in 1997 to approximately 19% in 1998 and
represented approximately 52% of unit handset sales for the nine months ended
August 31, 1999. During fiscal 2000, we plan to introduce wireless handsets
using advanced technologies, including Tri-Mode CDMA, expanded CDMA product
offerings, TDMA/TDMA-PCS, GSM, as well as additional analog products. We expect
our wide selection of technologies to enable us to satisfy different carrier
demands, both domestic and international. We also are working closely with our
suppliers to develop a variety of new handset features for 2000, including
Internet access and other interactive technologies. We work closely with our
suppliers to design our products specifically to meet the unique requirements of
each carrier customer. Our goal is to provide a distinctive and competitive
product for each carrier.
Capitalize on niche market opportunities in the consumer electronics industry.
We intend to continue to use our extensive distribution and supply networks to
capitalize on niche market opportunities in the consumer electronics industry.
We regularly review recommendations by our suppliers and customers regarding
development of new products. We believe that focusing
40
<PAGE>
on high-demand, high-growth niche products results in better profit margins and
growth potential for our electronics business. Our long-standing relationships
with mass merchants have allowed us to quickly become one of the top suppliers
of FRS radios in the United States. Similarly, we expect our relationships with
consumer electronics retailers will provide us with a distribution channel for
our new MP-3 music player/recorder, which we began to sell in November 1999.
Digital technologies are driving demand in consumer electronics, and we expect
to continue to work with our suppliers to develop new digital products to meet
that demand.
Expand our international presence. International sales represented approximately
8.5% of our total consolidated revenue in the nine months ended August 31, 1999.
During fiscal 2000, we intend to seek to expand our international wireless
business as we begin to introduce products compatible with international
wireless technologies, such as GSM, TDMA and CDMA. We also intend to capitalize
on our existing relationships in our Wireless Group with international wireless
carriers in Europe and North and South America. In our Electronics Group, we
intend to expand our OEM business with international automobile manufacturers.
We plan to devote substantial resources for international expansion, and to
capitalize on our relationships with U.S. companies who are also expanding
internationally to benefit from growing global markets, particularly in the
wireless business. We may enter into strategic alliances or acquire other
companies that round out our distribution network in a particular geographic
region. Our Electronics Group currently has operating subsidiaries in Malaysia
and Venezuela. In 1998, our domestic and Venezuelan electronics facilities were
QS-9000/ISO-9001 registered, and in January 1999, our wireless facility was
ISO-9001 registered. These quality standard registrations are key selling points
for us internationally as well as domestically.
Continue to outsource manufacturing to increase operating leverage. One of the
key components of our business strategy is outsourcing the manufacturing of our
products. As a "manufacturer without a factory," we are poised to deliver the
latest technological advances without the fixed costs associated with
manufacturing. For example, if there were a rapid change in customer demand,
such as the recent shift from analog to digital, we could respond quickly
without investing in new factory equipment and raw materials. In addition,
outsourcing manufacturing reduces our risk of obsolete manufacturing equipment
and supplies. We work continually with our suppliers and customers to identify
and design technologically-advanced products that respond to consumer demand and
preferences. We actively seek new, high-quality manufacturers and have added
five new manufacturers of wireless handsets in the last two years.
Continue to provide added value to customers and suppliers. Our customers and
suppliers rely on us, rather than dealing directly with each other, because we
provide value-added services to them. Because of our efficient internal systems,
we believe that we can provide key services more cost-effectively than our
customers and suppliers can provide themselves. We intend to continue adding
value to our customers' and suppliers' businesses by providing key services,
such as:
<TABLE>
<S> <C> <C> <C>
o product design and development o electronic data interchange (EDI)
o engineering and testing o inventory warehousing and fulfillment
o proprietary handsets and software o management of information systems
o customized electronic products o product repair services and warranty
o technical and sales support
</TABLE>
41
<PAGE>
Our internal systems are designed to interact efficiently with both
customers and suppliers, which facilitates business to business communication.
We plan to continue to invest in our infrastructure to ensure that our internal
systems can provide increasingly valuable intermediary services to our customers
and suppliers.
Wireless Group
Wireless Industry
The wireless communications industry has grown rapidly in recent years,
especially in the United States. Despite high growth, at the end of 1998, the
wireless penetration rate was only 23.8% of the United States population, but is
expected to reach 38.9% by the year 2002 according to industry sources. In 1998,
over one-quarter of the worldwide subscriber base was in the United States,
second only to Europe. The growing size of the wireless subscriber base has had
a direct impact on the demand and market size for wireless handsets. The chart
below depicts the growth projected by an industry source as of April 1999 in the
number of United States subscribers and handset shipments from 1998-2002:
United States
Cellular, PCS & Hybrid
-----------------------------
Handset
Subscribers Shipments
----------- ---------
1998 64,436 28,650
1999E 76,084 35,495
2000E 87,676 40,925
2001E 97,551 46,769
2002E 108,019 57,490
1998-2002E
Compound annual
growth rate (%) 13.8% 19.0%
The chart below depicts the growth projected by an industry source as of June
1998 in the number of worldwide (including United States) subscribers and
handset shipments for 1998-2002:
42
<PAGE>
Worldwide
Cellular/PCS
-----------------------------
Handset
Subscribers Shipments
----------- ---------
1998 257,142 118,516
1999E 325,272 146,284
2000E 396,335 176,173
2001E 472,102 203,370
2002E 550,334 231,019
1998-2002E
Compound annual
growth rate (%) 21.0% 18.2%
The major trends that are currently driving this growth in the wireless industry
include:
Shift from analog to digital transmission technologies. Analog networks are
increasingly being upgraded to digital wireless systems. At year-end 1998,
according to industry sources, 68% of the world's wireless subscribers used
digital technologies. The conversion of subscribers from analog to digital
technologies has had a positive impact on the growth of handset demand. Advances
in digital technologies, which have significantly reduced service costs,
continue to stimulate demand for new handsets. An outgrowth of the shift from
analog to digital technologies is a new kind of wireless/PCS subscriber, who
requires a handset that can roam among digital wireless, digital PCS, and analog
markets.
New technologies. Many new wireless communications technologies,
enhancements and applications are being introduced into the wireless
communications market. These developments, which are expected to contribute to
future subscriber and handset sales growth, include, wireless local loop and
satellite-based communications, handset feature and network enhancements such as
e-mail, internet access, fax capabilities, increased talk and standby times,
smaller and lighter weight handsets and multiple-band reception. CDMA technology
is projected to be the fastest growing segment for wireless products. According
to industry sources, sales of total wireless handsets are forecasted to grow 12%
in the U.S. over the next five years. CDMA is also forecasted to grow at a
compounded annual growth rate of 32% over this time period. TDMA is forecasted
to grow 17%.
Increased competition. New carriers and consolidation in the wireless
industry resulting from the grant of additional licenses in each market by the
FCC has increased competition. This increased competition has resulted in
greater selection and contributed to the affordability of wireless services for
consumers. The recent wave of mergers and acquisitions among carriers is
resulting in a market place dominated by fewer carriers. As a result of this
consolidation, carriers will have larger subscriber bases and networks, which
may lead to decreased roaming and other wireless related charges. As the costs
for wireless services continue to decline and become more affordable, we believe
that there will be continued growth in the wireless communications market.
43
<PAGE>
Wireless products and technology. We sell an array of analog and digital
handsets and accessories in a variety of technologies. In fiscal 1998, sales of
analog handsets represented 81% of our total unit sales. In fiscal 1999, we
expanded our line of digital handsets and increased our digital sales efforts
and, for the nine months ended August 31, 1999, digital products represented 52%
of our total unit sales. We generally market our wireless products under the
Audiovox brand name or co-brand our products with our carrier customers, such as
Bell Atlantic, GTE, AirTouch and PrimeCo. Our unit sales by technology for 1998
and the nine months ended August 31, 1998 and 1999 were as follows:
Nine Months Ended August 31,
--------------------------------------------
Technology Fiscal 1998 1998 1999
- ---------- ----------- --------- ---------
Analog
AMPS .................... 2,092,328 1,549,179 1,144,735
N-AMPS .................. 592,957 381,705 702,523
--------- --------- ---------
Analog Total ........ 2,685,285 1,930,884 1,847,258
Digital
CDMA ................... 593,104 208,483 1,421,167
CDMA/PCS ............... -- -- 530,862
TDMA/PCS ............... -- -- 10,234
GSM .................... 27,933 24,773 2,836
Cordless 900 MHz ....... 4,313 -- 15,067
--------- --------- ---------
Digital Total ....... 625,350 233,256 1,980,166
Total ............... 3,310,635 2,164,140 3,847,424
========= ========= =========
These technologies are described on page ii.
In addition to handsets, we sell a complete line of accessories that
include batteries, hands-free kits, battery eliminators, cases and hands-free
earphones. In 2000, we intend to broaden our digital product offerings and
introduce handsets with new features, such as Internet access and other
interactive technologies, as well as tri-mode products that combine digital and
analog technologies.
Wireless marketing and distribution
We sell wireless products to the Bell Operating Companies, wireless
carriers and their respective agents, distributors and retailers. In addition, a
majority of our handsets are designed to carrier specifications which reduces
our inventory risks. In fiscal 1998, our five largest wireless customers, Bell
Atlantic, AirTouch Communications, US Cellular, PrimeCo Personal Communications
LP and Auto Club Cellular Corporation, accounted for 59.6% of our net wireless
sales. Two of these customers, Bell Atlantic and AirTouch, accounted for 25.6%
and 20.8%, respectively, of our net consolidated sales for fiscal 1998. For the
nine months ended August 31, 1999, our five largest wireless customers were Bell
Atlantic, AirTouch Communications, US Cellular, PrimeCo Personal Communications
LP and GTE Mobile. These customers represented 65.4% of our net wireless sales
during that period.
44
<PAGE>
The wireless carrier industry is currently in a period of consolidation,
which may impact our sales. In early 2000, Bell Atlantic, one of our largest
customers, expects to finalize its pending merger with GTE, and then transfer
the new business to a joint venture with Vodafone. During 1999, Vodafone
acquired AirTouch Communications, which is also one of our largest customers,
and MCI Worldcom announced its intention to acquire Sprint. See "Risk
Factors--We could lose customers or orders as a result of consolidation in the
wireless telecommunications carrier industry."
As part of our sales and marketing process, we provide the value-added
management services described under "--Strategy--Continue to Provide Added Value
to Customers and Suppliers."
In addition, we promote our products through trade and consumer
advertising, participation at trade shows and direct personal contact by our
sales representatives. We also assist wireless carriers with their marketing
campaigns by scripting telemarketing presentations, funding co-operative
advertising campaigns, developing and printing custom sales literature,
providing product fulfillment and logistic services and conducting in-house
training programs for wireless carriers and their agents.
We operate approximately 20 wireless subscriber facilities under the names
Quintex or American Radio. In addition, we license the trade names Audiovox(R),
American Radio(R) and Quintex(R) to four retail outlets in selected markets in
the United States. We also serve as an agent for the following carriers in
selected areas: MCI WorldCom, Sprint, BellSouth Mobility, Inc., GTE Mobilnet of
the Southeast, Inc. and United States Cellular. For the nine months ended August
31, 1999, our revenues from these operations were 6.6% of our total wireless
revenues.
Our policy is to ship our products within 24 hours of a requested shipment
date from public warehouses in Miami, Florida and Toronto, Canada and from
leased facilities located in Hauppauge, New York and Los Angeles, California.
Wireless product development, warranty and customer service
Although we do not have our own manufacturing facilities, we work closely
with both customers and suppliers in the design, development and testing of our
products. In particular, we
o determine future market feature requirements with our wireless
customers
o work with our suppliers to develop products containing those features
o participate in the design of the features and cosmetics of our
wireless products
o test products in our own facilities to ensure compliance with Audiovox
standards
o supervise testing of the products in our carrier markets to ensure
compliance with carrier specifications
Our Hauppauge facility is ISO-9001 registered, which requires us to
carefully monitor quality standards in all facets of our business.
We believe customer service is an important tool for enhancing our brand
name and our relationship with carriers. In order to provide full service to our
customers, we warranty our
45
<PAGE>
wireless products to the end user for periods ranging from up to one year for
portable handsets to up to three years for mobile car phones. To support our
warranty, we have 1,178 independent warranty centers throughout the United
States and Canada and 43 warranty repair stations in our wireless headquarters
facility. We have experienced customer service representatives who interact
directly with both end users and our customers. These representatives are
trained to respond to questions on handset operation and warranty and repair
issues.
Wireless suppliers
We purchase our wireless products from several manufacturers located in
Pacific Rim countries, including Japan, China, Korea, Taiwan and Malaysia. We
also purchase a small percentage of our wireless products from a supplier in
Denmark. In selecting our vendors, we consider quality, price, service, market
conditions and reputation. We generally purchase our products under short-term
purchase orders and do not have long-term contracts with our suppliers. We
consider our relations with our suppliers to be good. We believe that
alternative sources of supply are currently available, although there could be a
time lag and increased costs if we were to have an unplanned shift to a new
supplier. The following chart represents purchases from each of our major
suppliers as a percentage of our total wireless purchases:
<TABLE>
<CAPTION>
Percent of Wireless Purchases
------------------------------------------
Nine Months
Fiscal Year Ended Ended
November 30, August 31,
Year First --------------------------- -----------
Supplier Purchased Technology 1996 1997 1998 1999
-------- --------- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Toshiba Corporation 1984 AMPS/CDMA 42% 47% 57% 51%
Talk Corporation/Shintom 1988 AMPS/N-AMPS/GSM 19 40 29 17
Hyundai 1998 CMDA/PCS -- -- 6 26
Bosch 1998 GSM -- -- 2 2
LGIC 1999 CDMA -- -- -- 0.1
Mitsubishi 1999 TDMA/PCS -- -- -- 0.7
Sanyo 1999 CDMA -- -- -- 3
</TABLE>
Wireless Competition
The market for wireless handsets and accessories is highly competitive and
is characterized by intense price competition, significant price erosion over
the life of a product, demand for value-added services, rapid technological
development and industry consolidation. Currently, our primary competitors for
wireless handsets include Ericsson, Motorola, Nokia and Qualcomm. Qualcomm has
announced plans to sell its wireless handset business, and that business could
be acquired by another large wireless equipment company or telecommunications
carrier that would become our direct competitor.
We also compete with numerous established and new manufacturers and
distributors, some of whom sell the same or similar products directly to our
customers. Historically, our
46
<PAGE>
competitors have also included some of our own suppliers and customers. Many of
our competitors offer more extensive advertising and promotional programs than
we do.
We compete for sales to carriers, agents and distributors on the basis of
our products and services and price. As our customers are requiring greater
value added logistic services, we believe that competition will continually be
required to support an infrastructure capable of providing these services. Our
ability to continue to compete successfully will largely depend on our ability
to perform these value-added services at a reasonable cost.
Our wireless products compete primarily on the basis of value in terms of
price, features and reliability. There have been significant periods of extreme
price competition in the wireless industry, particularly when one or more or our
competitors has sought to sell off excess inventory by lowering its prices
significantly.
As a result of global competitive pressures, there has been significant
consolidation among our customers, including:
o Vodafone and AirTouch Communications, which merged in 1999
o Bell Atlantic and GTE, which expect to finalize their merger by early
2000, and then fold the new wireless business into a joint venture
with Vodafone
o SBC Communications, which acquired Ameritech in 1999
o MCI Worldcom and Sprint, which recently announced plans to merge
These consolidations may result in greater competition for a smaller number
of large customers, and may favor one or more of our competitors over us. See
"Risk Factors - We could lose customers or orders as a result of consolidation
in the wireless telecommunications carrier industry."
Electronics Group
Electronics Industry
The electronics industry is large and diverse and encompasses a broad range
of products. There are many large manufacturers in the industry, such as Sony,
RCA, Panasonic and JVC, as well as large companies that specialize in niche
products. We participate in selected niche markets such as autosound, mobile
video, vehicle security and selected consumer electronics.
The introduction of new products and technological advancements drives
growth in the electronics industry. For example, the transition from analog to
digital technology is leading to the development of a new generation of consumer
electronic products. Some of these products include MP-3 players for playing
audio downloaded from the Internet, digital radio and DVD mobile video systems.
Electronics products
Our electronics products consist of two major categories, mobile
electronics and consumer electronics.
47
<PAGE>
Mobile electronics products include:
o autosound products, such as radios, speakers, amplifiers and CD
changers
o mobile video products, including overhead and center console
mobile entertainment systems, video cassette players and game
options
o automotive security and remote start systems
o automotive power accessories
Consumer electronics include:
o home and portable stereos
o FRS two-way radios
o LCD televisions
o MP-3 Internet music player/recorders
We market our electronics products under the Audiovox(R) brand name, as
well as several other Audiovox-owned trade names that include Prestige(R),
Pursuit(R) and Rampage(TM). Sales by both our Malaysian and Venezuelan
subsidiaries fall under the Electronics Group. For the nine months ended August
31, 1998 and August 31, 1999, our sales by product category were as follows:
1998 1999 Percent Change
---- ---- --------------
($ in millions)
Mobile electronics $121.0 $136.2 12.6%
Consumer electronics 6.2 21.5 245.0
------ ------ -----
Total $127.2 $157.7 24.0%
In the coming years, we intend to focus our efforts on new technologies to
take advantage of market opportunities created by the digital convergence of
data, communications, navigation and entertainment products.
Licensing
In the late 1990s, we began to license our brand name for use on selected
products, such as home and portable stereo systems. Actual sales of licensed
products are not included in our sales figures. However, our license customers
have told us that for the nine months ended August 31, 1999, they sold $19.2
million in licensed goods for which we received license fees. License sales
promote our Audiovox brand name without adding any significant costs.
Electronics distribution and marketing
We sell our electronics products to:
o mass merchants
o power retailers
o chain stores
o specialty retailers
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<PAGE>
o distributors
o new car dealers
o the U.S. military
We also sell our products under OEM arrangements with domestic and/or
international subsidiaries of automobile manufacturers such as DaimlerChrysler,
General Motors Corporation and Nissan. OEM projects are a significant portion of
the Electronics Group sales. These projects require a close partnership with the
customer as we develop products to their specific requirements. Three of the
largest auto makers, General Motors, DaimlerChrysler and Ford require QS
registration for all of their vendors.
Our five largest customers in fiscal 1998, Gulf States Toyota, Kmart,
Southeast Toyota, Alkon International and Costco, accounted for 16.4% of our net
electronics sales. No single customer accounted for more than 10% of our net
electronic sales in fiscal 1998. For the nine months ended August 1999, our five
largest customers were Nissan, Best Buy, Gulf States Toyota, Southeast Toyota
and Autozone, and they represented 22.2% of our net electronic sales. Nissan
represented approximately 10% of net electronics sales for the nine months ended
August 31, 1999.
As part of our sales process, we provide value-added management services
including:
o product design and development
o engineering and testing
o technical and sales support
o electronic data interchange (EDI)
o product repair services and warranty
o nationwide installation network
We have flexible shipping policies designed to meet customer needs. In the
absence of specific customer instructions, we ship our products within 24 to 48
hours from the receipt of an order. We make shipments from public warehouses in
Norfolk, Virginia, Sparks, Nevada, Miami, Florida and Toronto, Canada and from
leased facilities located in Hauppauge, New York.
Electronics product development, warranty and customer service
Although we do not have our own manufacturing facilities, we work closely
with our customers and suppliers in the design, development and testing of our
products. For our OEM automobile customers, we perform extensive validation
testing to ensure that their products meet the special environmental and
electronic standards of the manufacturer. We also perform final assembly of
products in our Hauppauge location. Our product development cycle includes:
o working with key customers and suppliers to identify consumer
trends and potential demand
o working with the suppliers to design and develop products to meet
those demands
o evaluating and testing the products in our own facilities to
ensure compliance with our standards
o performing software design and validation testing
49
<PAGE>
Our Hauppauge facility is both QS 9000 and ISO 9001 registered. Both
registrations underscore our commitment to provide the highest quality of
products and services to our customers around the world.
We provide a warranty to the end users of our electronics products,
generally ranging from 90 days up to the life of the vehicle for the original
owner on some of our automobile-installed products. To support our warranties,
we have 19 independent warranty centers throughout the United States and Canada.
At our Hauppauge facility, we have a customer service group that provides
product information, answers questions and serves as a technical hotline for
installation help for both end users and our customers.
Electronics suppliers
We purchase our electronics products from manufacturers located in several
Pacific Rim countries, including Japan, China, Korea, Taiwan, Singapore and
Malaysia. We also use several manufacturers in the United States for cruise
controls, mobile video and power amplifiers. In selecting our manufacturers, we
consider quality, price, service, market conditions and reputation. We maintain
buying offices or inspection offices in Taiwan, Korea, China and Hong Kong to
provide local supervision of supplier performance with regard to, among other
things, price negotiations, delivery and quality control. We generally purchase
our product under short-term purchase orders and do not have long-term contracts
with our suppliers.
For the nine months ended August 31, 1999, the percentage of our
electronics purchases from our largest suppliers were:
o Nutek Corporation--14.0%
o Namsung Corporation --7.2%
o Orient Power-- 5.3%
We consider relations with our suppliers to be good. In addition, we believe
that alternative sources of supply are generally available within 120 days.
Electronics competition
Our electronics business is highly competitive across all of our product
lines, and we compete with a number of well-established companies that
manufacture and sell products similar to ours. Our mobile electronics products
compete against factory-supplied radios, security and mobile video systems from
subsidiaries of automobile manufacturers, including General Motors, Ford and
DaimlerChrysler. Our mobile electronics products also compete in the automotive
aftermarket against major companies such as Sony, Panasonic, Kenwood and
Pioneer. Our consumer electronics product lines compete against major consumer
electronic companies, such as JVC, Panasonic, Motorola, RCA and AIWA. Brand
name, design, features and price are the major competitive factors across all of
our product lines.
50
<PAGE>
Internet
We currently maintain an Internet website to provide product information to
consumers. During the next two years, we expect to expand our Internet
capabilities to:
o include on-line customer service, frequently asked questions and
owners manuals
o facilitate business to business e-commerce for our customers and
suppliers
o allow customers and consumers to order parts and accessories
o manage our business more efficiently
Equity Investments
We have several investments in unconsolidated joint ventures which we
formed to market our products in specific market segments or geographic areas.
We seek to blend our financial and product resources with local operations to
expand our distribution and marketing capabilities. We believe our joint
ventures provide a more cost-effective method of focusing on specialized
markets. We do not participate in the day-to-day management of these joint
ventures. Our significant joint ventures are:
<TABLE>
<CAPTION>
Percentage
Venture Ownership Formation Date Function
- ------- --------- -------------- --------
<S> <C> <C> <C>
Talk Corporation 30.8% 1994 Distribution rights for wireless products and
autosound products from Shintom Ltd.
Audiovox Specialized 50.0% 1997 Distribution of products for van, RV and other
Applications specialized vehicles
</TABLE>
Trademarks
We market products under several trademarks, including Audiovox(R),
Prestige(R), Pursuit(R) and Rampage(TM). The trademark Audiovox is registered in
approximately 63 countries. We believe that these trademarks are recognized by
customers and are therefore significant in marketing our products.
Employees
We employ approximately 950 people, which number has been relatively stable
for the past several years. We consider our relations with our employees to be
good. None of our employees are covered by collective bargaining agreements.
51
<PAGE>
Properties
We lease all of our facilities. These facilities range in size from 100 to
75,000 square feet. Our largest properties are:
150 Marcus Boulevard
Hauppauge, NY 11788
Corporate headquarters: 75,000 sq. ft
Offices and Warehouse
555 Wireless Blvd.
Hauppauge, NY 11788
Wireless headquarters: 70,000 sq. ft.
Offices and Warehouse
16820 Marquardt Avenue
Cerritos, CA
Office warehouse: 28,000 sq. ft.
Offices and Warehouse
We lease these three facilities from related parties. See "Certain
Transactions--Leases." In addition, we lease approximately 30 other operating
facilities located in 11 states and one Canadian province, primarily related to
our Quintex business. If any of these leases terminates, we believe that, if we
desire to, we will be able to renew the lease or replace it with another leased
space on reasonable terms.
We use public warehouses in Sparks, Nevada, Miami, Florida, Norfolk,
Virginia, Toronto, Canada and Brussels, Belgium. See "Certain
Transactions--Leases."
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John J. Shalam 65 President, Chief Executive Officer and Chairman of the Board of Directors
Philip Christopher 51 Executive Vice President and a Director
Charles M. Stoehr 53 Senior Vice President, Chief Financial Officer and a Director
Patrick M. Lavelle 47 Senior Vice President, Electronics Division and a Director
Ann M. Boutcher 49 Vice President, Marketing and a Director
Richard Maddia 40 Vice President, MIS, and a Director
Paul C. Kreuch, Jr.* 61 Director
Dennis F. McManus* 49 Director
</TABLE>
- -------------
*Member of the Audit and Compensation Committees
John J. Shalam has served as President, Chief Executive Officer and
Director of Audiovox or its predecessor since 1960. Mr. Shalam also serves as
President and a Director of most of Audiovox's operating subsidiaries. Mr.
Shalam is on the Board of Directors of the Electronics Industry Association and
is on the Executive Committee of the Consumer Electronics Association.
Philip Christopher, our Executive Vice President, has been with Audiovox
since 1970 and has held his current position since 1983. Before 1983 he served
as Senior Vice President of Audiovox. Mr. Christopher is also Chief Executive
Officer and President of Audiovox's wireless subsidiary, Audiovox Communications
Corp. From 1973 through 1987, he was a Director of our predecessor, Audiovox
Corp. Mr. Christopher serves on the Executive Committee of the Cellular
Telephone Industry Association.
Charles M. Stoehr has been our Chief Financial Officer since 1979 and was
elected Senior Vice President in 1990. Mr. Stoehr has been a Director of
Audiovox since 1987. From 1979 through 1990 he was a Vice President of Audiovox.
Patrick M. Lavelle was elected Senior Vice President of the Electronics
Group in 1996 and has been a Vice President of Audiovox since 1982. He has
responsibility for marketing and selling our automotive entertainment and
security products and consumer electronics products. Mr. Lavelle was elected to
the Board of Directors in 1993. Mr. Lavelle also serves as a board member of the
Mobile Electronics Division of the Consumer Electronics Association and is
co-chair of the Mobile Information Technology Subdivision.
Ann M. Boutcher has been our Vice President of Marketing since 1984. Ms.
Boutcher's responsibilities include the development and implementation of our
advertising, sales promotion and public relations programs. Ms. Boutcher was
elected to the Board of Directors in 1995.
Richard A. Maddia has been our Vice President of Information Systems since
1992. Prior thereto, Mr. Maddia was Assistant Vice President, MIS. Mr. Maddia's
responsibilities include development and maintenance of information systems. Mr.
Maddia was elected to the Board of Directors in 1996.
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<PAGE>
Paul C. Kreuch, Jr. was elected to the Board of Directors in February 1997.
Mr. Kreuch has been a Principal of Secura Burnett Co., LLC since October 1998.
From December 1997 through September 1998, he was the President and Chief
Executive Officer of Lafayette American Bank. From June 1996 through November
1997, he was a Senior Vice President at Handy HRM Corp., an executive search
firm. From 1993 through 1996, Mr. Kreuch was an Executive Vice President of
NatWest Bank N.A. and before that was President of National Westminster Bank
USA.
Dennis F. McManus was elected to the Board of Directors in March 1998. Mr.
McManus has been self-employed as a telecommunications consultant since January
1, 1998. Before that, he was employed by NYNEX Corp. for over 27 years, most
recently as a Senior Vice President and Managing Director. Mr. McManus held this
position from 1991 through December 31, 1997.
All of our executive officers hold office at the discretion of the board of
directors.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock and stock options exercisable within 60 days of November 1,
1999 held by (1) each person or group of persons known by us to own beneficially
five percent (5%) or more of the outstanding shares of common stock, (2) each
director and nominee for director, (3) our chief executive officer and each of
the next four most highly compensated executive officers, and (4) all executive
officers and directors as a group. All information is taken from or based upon
ownership filings made by such persons with the Securities and Exchange
Commission or upon information provided by such persons to us. Unless otherwise
indicated, the stockholders listed below have sole voting and investment power
with respect to the shares reported as owned.
<TABLE>
<CAPTION>
Class A Shares Owned After
Shares Owned Before the Offering(2) the Offering(2)
----------------------------------- ---------------
Name and Address of Class A Percent Amount of Class A
Beneficial Owner(1) ------- ------- Shares Sold in the Amount Percent
- ------------------- Offering ------ -------
--------
<S> <C> <C> <C> <C> <C>
John J. Shalam(3)............. 5,750,771 27.4%(3) 1,000,000 4,750,771 21.2%
Philip Christopher............ 745,799 4.1 100,000 645,799 3.2
Charles M. Stoehr............. 122,500 * - 122,500 *
Patrick M. Lavelle............ 94,617 * - 94,617 *
Richard Maddia................ 5,070 * - 5,070 *
Ann M. Boutcher............... 5,323 * - 5,323 *
Paul C. Kreuch, Jr............ 7,000 * - 7,000 *
Dennis F. McManus............. 5,000 * - 5,000 *
All directors and executive
officers as a group (8
persons)...................... 6,736,080 32.0% 1,100,000 5,636,080 24.5%
<CAPTION>
Name and Address of Other 5% Holders of Common Stock
- ----------------------------------------------------
<S> <C> <C>
Kennedy Capital
Management, Inc. (4)
10829 Olive Blvd.
St. Louis, MO 63141.......... 1,715,250 9.7%
Franklin Resources, Inc. (5)
777 Mariners Island Blvd.
San Mateo, CA 94404.......... 1,720,000 9.7%
Dimensional Fund Advisors
Inc. (6)
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401........ 1,076,900 6.1%
</TABLE>
55
<PAGE>
- ---------------
*Represents less than 1%.
(1) The address of each person, unless otherwise noted, is c/o Audiovox
Corporation, 150 Marcus Boulevard, Hauppauge, New York 11788. The
percentage of shares owned before the offering is based on 17,730,912
shares of Class A common stock outstanding as of November 1, 1999 and
19,730,912 outstanding after the offering. In presenting shares
beneficially owned and in calculating each holder's percentage ownership,
only options exercisable by that person within 60 days of November 1, 1999
and no options exercisable by any other person are deemed to be
outstanding.
(2) The Class A shares owned include stock options exercisable within 60 days
as follows: Mr. Shalam--525,000, Mr. Christopher--431,000, Mr.
Lavelle--80,700, Mr. Stoehr--112,500, Mr. Kreuch--5,000 and Mr.
McManus--5,000.
(3) Includes 2,144,152 shares of Class B common stock held by Mr. Shalam that
he may convert into Class A common stock at any time. Excludes 116,802
shares of Class B common stock and 2,202 shares of Class A common stock
that are held in irrevocable trusts for the benefit of Mr. Shalam's three
sons.
(4) Information reported is derived from a Schedule 13G dated February 5, 1999,
of Kennedy Capital Management, Inc. and filed with the Securities and
Exchange Commission.
(5) Information reported is derived from a Schedule 13G dated January 22, 1999,
of Franklin Resources, Inc. and filed with the Securities and Exchange
Commission.
(6) Information reported is derived from a Schedule 13G dated February 12,
1999, of Dimensional Fund Advisors Inc. and filed with the Securities and
Exchange Commission.
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<PAGE>
CERTAIN TRANSACTIONS
Leases
We lease some of our equipment, office, warehouse and distribution
facilities from entities in which our executive officers own controlling
interests. The following table identifies leases that result in payments in
excess of $60,000 to any of the related entities.
<TABLE>
<CAPTION>
Rent Paid During Fiscal Year
Ended November 30,
------------------------------------------------- Nine Months
Equipment/ Ended
Property Expiration August 31,
Location Date 1996 1997 1998 1999
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
150 Marcus Blvd.(1) 11/30/2003 $396,000 $396,000 $440,668 $397,500
Hauppauge, NY
16820 Marquardt Ave.(2)
Cerritos, CA 1/31/2000 $119,016 $119,011 $119,001 $ 89,258
555 Wireless Blvd.(3)
Hauppauge, NY 12/1/2026 --- --- $337,599 $376,410
555 Wireless Blvd. (3)
Hauppauge, NY 3/31/2003 --- --- $307,981 $273,761
</TABLE>
- ---------------------
(1) Property owned by 150 Marcus Blvd. Realty, LLC, a New York limited
liability company, of which John J. Shalam owns 99% and Mr. Shalam's three
sons own the remaining 1%.
(2) Property owned by Marquardt Associates, a California partnership consisting
of four individuals, of which John J. Shalam owns 60%, Philip Christopher
owns 10%. John J. Shalam's brother-in-law owns 25%. An unaffiliated party
owns the remaining 5%.
(3) Property owned or leased by Wireless Blvd. Realty, LLC, a New York limited
liability company, owned 98% by the Shalam Long Term Trust, 1% by John J.
Shalam and 1% by Mr. Shalam's three sons. The Shalam Long Term Trust is a
grantor trust of which Mr. Shalam is the grantor and his three sons are the
beneficiaries.
We believe that the terms of each of these leases are no less favorable to
us than those that could have been obtained from unaffiliated third parties. To
the extent that conflicts of interest arise between us and such persons in the
future, these conflicts will be resolved on behalf of us by a committee of
disinterested directors.
Warrants
On May 9, 1995, we issued warrants to purchase 1,668,875 shares of Class A
common stock at $7.125 per share. The warrants were issued to the beneficial
holders of approximately $57,600,000 of our debentures. The warrants expire on
March 15, 2001, unless sooner terminated under certain circumstances. In
connection with the issuance of the warrants, John J.
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Shalam, our Chief Executive Officer, granted us an option to purchase 1,668,875
shares of Class A common stock from his personal holdings. The exercise price of
this option is $7.125, plus an amount intended to reimburse Mr. Shalam for the
tax impact, if any, should the exercise of this option be treated as dividend
income rather than capital gains to Mr. Shalam. During 1998, we purchased
approximately 1,324,075 of these warrants at a price of $1.30 per warrant. In
connection with this purchase, we cancelled our option to purchase 1,324,075 of
Mr. Shalam's shares. As of November 1, 1999, 344,800 warrants remain outstanding
and we have a corresponding option to purchase 344,800 of Mr. Shalam's shares.
Options
On September 9, 1999, we granted options to purchase an aggregate of
1,490,000 shares of Class A common stock to our directors and executive officers
at an exercise price of $15.00 per share, the fair market value of the Class A
common stock on the date of grant, as follows:
o Philip Christopher 580,000
o Patrick M. Lavelle 200,000
o Charles M. Stoehr 100,000
o Paul C. Kreuch 10,000
o Dennis F. McManus, Jr. 10,000
o Ann M. Boutcher 10,000
o Richard A. Maddia 20,000
The options vest over a period of three years: 25% on September 9, 2000, 35% on
September 9, 2001 and the remaining 40% on September 9, 2002.
For the fiscal years ended November 30, 1996, 1997 and 1998,we granted to
the following officers and directors an aggregate of 1,317,500 options as
follows:
Average Exercise
Name Number of Options Price
---- ----------------- -----
John J. Shalam 525,000 $7.09
Philip Christopher 500,000 $6.93
Charles M. Stoehr 85,000 $5.87
Patrick M. Lavelle 200,000 $5.66
Paul C. Kreuch, Jr. 5,000 $4.63
Dennis F. McManus 5,000 $4.63
Other relationships
Ari Shalam, the son of John Shalam, our President and Chief Executive
Officer, serves as our Vice President of Strategic Planning. His current annual
salary is $90,000, plus a bonus of 0.3% of our pre-tax profits. He received
total compensation of $61,465 in 1998. During 1997 and 1999, we granted Ari
Shalam options to purchase a total of 11,500 shares of Class A common stock at
an average price of $13.81.
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Relationships with supplier
Toshiba, our largest supplier, purchased a 5% equity interest during 1998
in Audiovox Communications Corp., our largest subsidiary.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
o Class A common stock, $.01 par value - 30,000,000 shares
o Class B common stock, $.01 par value - 10,000,000 shares
o Preferred stock, $50 par value - 50,000 shares
o Series preferred stock, $.01 par value - 1,500,000 shares
The shares being offered in this offering are shares of Class A common
stock. As of November 1, 1999, there were outstanding 17,730,912 shares of Class
A common stock, 2,260,954 shares of Class B common stock, 50,000 shares of
preferred stock, $50 par value and no shares of series preferred stock, $.01 par
value.
The following summary description relating to the Class A common stock, the
Class B common stock and the preferred stock, is not complete. The terms of the
Class A common stock, Class B common stock and preferred stock are contained in
our Certificate of Incorporation.
Class A common stock and Class B common stock
Voting Rights
Holders of both classes of common stock vote as a single class on all
matters except the election or removal without cause of Class A or Class B
directors and any class votes required by Delaware law. In all cases, each share
of Class A common stock is entitled to cast one vote per share and each share of
Class B common stock is entitled to cast ten votes per share.
Holders of Class A common stock, voting separately as a class, are entitled
to elect 25% of the Board of Directors, rounded up to the nearest whole number,
so long as the number of outstanding shares of Class A common stock is at least
10% of the total number of outstanding shares of both classes of common stock.
If the number of outstanding shares of Class A common stock should become less
than 10% of the total number of outstanding shares of both classes of common
stock, directors would then be elected by all stockholders voting as one class,
except holders of Class A common stock would have one vote per share and holders
of Class B common stock would have ten votes per share.
The holders of a majority of the Class B common stock, voting separately as
a class, elect the directors not elected by holders of the Class A common stock,
so long as the number of outstanding shares of Class B common stock is at least
12.5% of the number of outstanding shares of both classes of common stock. If
the number of outstanding shares of Class B common stock falls below that
percentage, directors not elected by the holders of Class A common stock will be
elected by the holders of both classes of common stock, with holders of Class A
common stock having one vote per share and holders of Class B common stock
having ten votes per share.
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Directors may be removed, with or without cause, provided that any removal
of directors without cause may be made only by the holders of the class or
classes of common stock that elected them. Vacancies in a directorship may be
filled by the vote of the class of shares that had previously filled that
vacancy, or by the vote of the remaining directors elected by that class. If
there are no such directors, the vacancy may be filled by the vote of the
remaining directors.
As of November 1, 1999, the outstanding shares of Class A common stock
equal approximately 89% of the shares of both classes outstanding, and the
holders of Class A common stock have approximately 44% of the combined voting
power of both classes of common stock.
Dividends
The holders of Class A common stock and Class B common stock are entitled
to receive dividends or distributions in equal amounts, except cash dividends.
With respect to a cash dividend, the board may pay an equal or greater amount
per share on the Class A common stock than on the Class B common stock or
declare and pay a cash dividend on the Class A common stock without any dividend
being declared and paid on the Class B common stock. Stock dividends are paid on
a same class basis. Since our initial public offering in 1987, we have never
declared or paid cash dividends on our common stock.
Conversion of Class B Common Stock
At the option of the holder, each share of Class B common stock is
convertible at any time into one share of Class A common stock.
Restrictions on Transfer of Class B Common Stock
Without the written consent of holders of two-thirds of the outstanding
shares of Class B common stock, shares of Class B common stock may not be
transferred except to another holder of Class B common stock, family members of
the holder and other permitted transferees. Upon any nonpermitted sale or
transfer, shares of Class B common stock will automatically convert into an
equal number of shares of Class A common stock.
Other Rights
Our stockholders do not have preemptive or other rights to subscribe for
additional shares. Subject to any rights of holders of preferred stock, all
holders of common stock, regardless of class, are entitled to share ratably in
any assets available for distribution upon our liquidation, dissolution or
winding up. No shares of common stock are subject to redemption.
Preferred stock
We are authorized to issue up to 50,000 shares of preferred stock, all of
which have been issued and are outstanding. These shares are nonvoting and have
preference of $50 per share over the common stock in the event of our
liquidation, winding up or dissolution.
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Series preferred stock
We are authorized to issue up to 1,500,000 shares of series preferred
stock, none of which has been issued. The Board of Directors may issue by
resolution shares of series preferred stock from time to time in one or more
series and fix, as to each such series, the designations, preferences and
rights, and limitations pertaining thereto. We may not issue shares of series
preferred stock carrying in excess of one vote per share or convertible into
Class B common stock without prior approval of a majority in interest of the
holders of Class B common stock. Issuance of series preferred stock, while
providing desirable flexibility in connection with possible acquisition and
other corporate purposes, could make it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the issuance of
series preferred stock may be used as an anti-takeover device without further
action on the part of our stockholders.
Charter and bylaw provisions
Special meetings
Our Certificate of Incorporation provides that special meetings of
stockholders for any purpose or purposes can be called only upon the request of
our President, our board of directors or the holders of shares entitled to at
least 25% of all of the shares entitled to vote at the meeting.
Amendment of our bylaws
In order to adopt, repeal, alter or amend the provisions set forth therein,
our Bylaws require either the affirmative vote of the holders of at least a
majority of the voting power of all of the issued and outstanding shares of our
capital stock entitled to vote thereon or by our board of directors.
Advance notice provisions for stockholder nominations and proposals
Our Certificate of Incorporation establishes advance notice procedures for
stockholders to make nominations of candidates for election as directors, or
bring other business before an annual meeting of our stockholders.
These procedures provide that only persons who are nominated by or at the
direction of our board of directors, or by a stockholder who has given timely
written notice to our Secretary prior to the meeting at which directors are to
be elected, will be eligible for election as one of our directors. Further,
these procedures provide that at an annual meeting, only such business may be
conducted as has been specified in the notice of the meeting given by, or at the
direction of, our board or by a stockholder who has given timely written notice
to our secretary of that stockholder's intention to bring such business before
such meeting.
Under these procedures, notice of stockholder nominations to be made or
business to be conducted at an annual meeting must be received by us not less
than ten days before the first anniversary of the date that notice of the annual
meeting was mailed out or public disclosure of that meeting was made; however,
the notice need not be given more than 75 days before the annual meeting of the
stockholders. Under these procedures, notice of a stockholder nomination
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to be made at a special meeting at which directors are to be elected must be
received by us not later than the close of business on the tenth day following
the day on which such notice of the date of the special meeting was mailed or
public disclosure of the date of the special meeting was made, whichever occurs
first.
Under our Certificate of Incorporation, a stockholder's notice nominating a
person for election as a director must contain certain information about the
proposed nominee and the nominating stockholder. If our chairman determines that
a nomination was not made in accordance with our Certificate of Incorporation,
we will disregard the nomination. Similarly, a stockholder's notice proposing
the conduct of business must contain certain information about the business and
the proposing stockholder. If our chairman determines that business was not
properly brought before the meeting in accordance with our Certificate of
Incorporation, we will not conduct the proposed business at the meeting.
Although our Certificate of Incorporation does not give our board the power
to approve or disapprove stockholder nominations of the election of directors or
proposals for action, these notice provisions may have the effect of precluding
a proxy contest for the election of directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from soliciting proxies to elect its own
slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to us
and our stockholders.
Written consent provisions
Our Bylaws provide that any action required or permitted to be taken by the
holders of capital stock at any meeting of our stockholders may be taken without
a meeting by the holders of outstanding capital stock having not less than the
minimum number of votes that would be necessary to authorize or take that action
at a meeting at which all shares entitled to vote on the proposed action were
present and voted. See "Risk Factors--John J. Shalam our President and Chief
Executive Officer owns a significant portion of our common stock and can
exercise control over our affairs."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, Two Broadway, New York, New York 10004; telephone:
(212) 509-4000.
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MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF THE COMMON STOCK
The following discussion is a general summary of the material U.S. federal
income and estate tax consequences of the acquisition, ownership and disposition
of the common stock held by non-U.S. holders. A "non-U.S. holder" means a
beneficial owner of common stock who is not a U.S. holder. A U.S. holder means a
beneficial owner of common stock who, for U.S. federal income tax purposes, is:
o A citizen or individual resident of the United States;
o A corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof (other than a partnership treated as foreign under
U.S. Treasury regulations);
o An estate whose income is includable in gross income for United States
federal income tax purposes regardless of its source; or
o A trust, if, in general, a United States court is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust.
An individual may, among other ways, be deemed to be a resident of the
United States with respect to any calendar year by virtue of being present in
the United States on at least 31 days in such calendar year and for an aggregate
of at least 183 days during the current calendar year and the two preceding
calendar years (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year
and one-sixth of the days present in the second preceding year).
This summary is included for general information and is based upon the U.S.
federal tax laws (including U.S. Treasury regulations and administrative and
judicial interpretations) now in effect, which are subject to change, possibly
retroactively, which could affect the continued validity of this summary. The
tax treatment of the holders of common stock may vary depending on their
particular situation and this summary does not address specific facts and
circumstances that may be relevant to a particular holder's tax position. U.S.
holders acquiring common stock are subject to different rules than those
discussed below. In addition, certain holders (including insurance companies,
tax-exempt organizations, financial institutions, traders in securities,
subsequent purchasers of our common stock, U.S. expatriates and broker-dealers)
may be subject to special rules not discussed below. The discussion also does
not consider the tax consequences for any person who is a shareholder, partner
or beneficiary of a holder of the common stock. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed. In general, this
discussion assumes that a non-U.S. holder holds our common stock as a capital
asset and not as part of a "hedge," "straddle," "conversion transaction,"
"synthetic security" or other integrated investment. Prospective investors are
urged to consult their tax advisors regarding the U.S. federal tax consequences
of acquiring, holding and disposing of our common stock, as well as any tax
consequences that may arise under the laws of any foreign, state, local or other
taxing jurisdiction.
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Dividends
As described above, we do not expect to pay any dividends on our common
stock for the foreseeable future. In the event we pay dividends, we will have to
withhold from dividends paid to a non-U.S. holder a U.S. withholding tax at a
rate of 30% (or a lower rate under a relevant income tax treaty) of the gross
amount of the dividends. Non-U.S. holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
Prior to January 1, 2001, for purposes of determining whether tax is to be
withheld at the 30% rate or at a reduced treaty rate, we will ordinarily presume
that dividends paid to an address in a foreign country are paid to a resident of
such country, absent knowledge to the contrary. Under U.S. Treasury regulations
effective for payments after December 31, 2000, non-U.S. holders will be
required to satisfy applicable certification requirements in order for us to
withhold tax at a reduced treaty rate. These regulations also contain special
rules regarding treaty benefits available for payments made to some intermediary
or disregarded entities.
Except to the extent otherwise provided under an applicable income tax
treaty, dividends that are effectively connected with a non-U.S. holder's
conduct of a trade or business in the United States are subject to U.S. federal
income tax on a net income basis at applicable graduated individual or corporate
rates, and are not generally subject to withholding, if the holder complies with
applicable certification and disclosure requirements. Any such effectively
connected dividends received by a foreign corporation may also, under some
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
o The gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, or, alternatively, if an income
tax treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States (in which cases
such gain will be subject to tax at the rates and in the manner
applicable to United States persons and, if the holder is a foreign
corporation, the branch profits tax described above may also apply);
o The non-U.S. holder is an individual who holds the common stock as a
capital asset, is present in the United States for 183 or more days in
the taxable year of the disposition and meets some other requirements;
or
o We are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time during the shorter of
the five-year period ending on the date of the disposition and the
period that the common stock was held by the non-U.S. holder.
The tax with respect to stock in a United States real property holding
corporation does not apply to a non-U.S. holder whose holdings, direct and
indirect, at all times during the applicable period, constitute 5% or less of
the common stock, provided that the common stock is regularly
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traded on an established securities market. In general, we will be treated as a
United States real property holding corporation if the fair market value of our
U.S. real property interests equals or exceeds 50% of the total fair market
value of our U.S. and non-U.S. real property interests and our other assets used
or held for use in a trade or business. We believe that we currently are not,
and we do not anticipate becoming, a United States real property holding
corporation.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time of
death, or common stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
United States Information Reporting Requirements and Backup Withholding Tax
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether any tax was actually
withheld. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on some payments to persons that fail to furnish
information under the United States information reporting requirements) and
additional information reporting generally will not apply to dividends paid on
common stock before January 1, 2001, that are either:
o Subject to withholding at the 30% rate (or at a reduced rate under an
applicable income tax treaty); or
o Paid to an address outside the United States.
Dividends paid after December 31, 2000 generally will be subject to backup
withholding at a 31% rate unless the non-U.S. holder certifies its status as a
non-U.S. holder in accordance with applicable Treasury regulations or is a
corporation or other exempt recipient.
Payment to or through a United States office of a broker of the proceeds of
a disposition of common stock is generally subject to both backup withholding
and information reporting unless either:
o The non-U.S. holder is a corporation or other exempt recipient; or
o The non-U.S. holder certifies its status as a non-U.S. holder in
accordance with applicable Treasury regulations;
provided, however, the broker does not have actual knowledge that the holder is
a U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied.
Payment of the proceeds of a disposition of common stock to or through a
foreign office of a foreign broker will not be subject to backup withholding or
information reporting unless the
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foreign broker is a "U.S.-related person." After December 31, 2000, backup
withholding will apply if information reporting is required. Payments of
proceeds from the disposition of common stock to or through a foreign office of
a broker that is a U.S. person or a "U.S.-related person" will be subject to
information reporting unless the holder certifies its status as a non-U.S.
holder in accordance with applicable Treasury regulations or the broker has
documentary evidence in its files that the holder is an non-U.S. holder and the
broker has no actual knowledge to the contrary. For this purpose, a
"U.S.-related person" is:
o A controlled foreign corporation for U.S. federal income tax purposes;
o A foreign person 50% or more of whose gross income from certain periods
is effectively connected with a United States trade or business; or
o After December 31, 2000, a foreign partnership if, at any time during
the taxable year, (A) at least 50% of the capital or profits interest of
the foreign partnership is owned by U.S. persons, or (B) the foreign
partnership is engaged in a U.S. trade or business.
After December 31, 2000, payments made to or through a foreign intermediary
satisfying applicable requirements will not be subject to either backup
withholding or information reporting.
Prospective investors should consult with their own tax advisors regarding
these rules, and in particular with respect to whether the use of a particular
broker would subject the investor to information reporting and backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit a non-U.S.
holder's U.S. federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
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UNDERWRITING
Audiovox, the selling stockholders and the underwriters named below have
entered into an underwriting agreement with respect to the shares being offered.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus. SG Cowen
Securities Corporation, Morgan Keegan & Company, Inc., Prudential Securities
Incorporated and Ladenburg Thalmann & Co. Inc. are the representatives of the
underwriters.
Name Amount
---- ------
SG Cowen Securities Corporation........................
Morgan Keegan & Company, Inc...........................
Prudential Securities Incorporated.....................
Ladenburg Thalmann & Co. Inc...........................
Total......................................... 3,100,000
=========
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common stock being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.
The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $ per share. Securities dealers may reallow a
concession not in excess of $ per share to other dealers. After the shares of
the common stock are released for sale to the public, the underwriters may vary
the offering price and other selling terms from time to time.
Audiovox and the selling stockholders have granted to the underwriters an
option to purchase up to an aggregate of 300,000 and 165,000 additional shares
of common stock, respectively, at the public offering price set forth on the
cover of this prospectus to cover over-allotments, if any. The option is
exercisable for a period of 30 days. In the event the underwriters exercise only
a portion of the over-allotment option, such shares will be allocated on a pro
rata basis. If the underwriters exercise their over-allotment option, the
underwriters have severally agreed, subject to limited conditions, to purchase
approximately the same percentage thereof that the number of shares of common
stock to be purchased by each of them, as shown in the table above, bears to the
common stock offered hereby.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments that the underwriters may be required to
make in respect of such liabilities.
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Audiovox, our directors and executive officers, have agreed with the
underwriters that for a period of 90 days following the date of this prospectus,
they will not dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock. SG Cowen Securities
Corporation may, in its sole discretion, at any time without prior notice,
release all or any portion of the shares from these restrictions.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when the common stock
originally sold by such syndicate member is purchased in a syndicate covering
transaction to cover syndicate short positions. In passive market making, market
makers in the common stock who are underwriters or prospective underwriters may,
subject to certain limitations, make bids for or purchases of the common stock
until the time, if any, at which a stabilizing bid is made. These stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the common stock to be higher than it would otherwise be in the absence
of these transactions. These transactions may be effected on the American Stock
Exchange or otherwise and, if commenced, may be discontinued at any time.
We estimate that our out-of-pocket expenses for this offering, exclusive of
underwriters' discounts and commissions, will be approximately $600,000.
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LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for us by Fried, Frank, Harris Shriver & Jacobson (a
partnership including professional corporations), New York, New York and certain
legal matters will be passed upon for the underwriters by Brown Raysman
Millstein Felder & Steiner LLP, New York, New York.
EXPERTS
The consolidated financial statements of Audiovox Corporation and
subsidiaries as of November 30, 1998 and 1997, and for each of the years in the
three-year period ended November 30, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-3
under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which are omitted as permitted
by the rules and regulations of the Commission. For further information
pertaining to us and the common stock, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information, as well as the
Registration Statement and its exhibits and schedules, may be inspected, without
charge, or copied, at prescribed rates, at the public reference facility
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In
addition, the Commission maintains an Internet site that contains reports, proxy
and information statements, and other information, regarding issuers that file
electronically with the Commission. The address of the Commission's site is
http:\\www.sec.gov.
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INFORMATION INCORPORATED BY REFERENCE
We incorporate by reference the following documents, which we have filed
with the Securities and Exchange Commission under the Exchange Act:
o our Annual Report on Form 10-K for the fiscal year ended November 30,
1998;
o our Quarterly Report on Form 10-Q for the period ended February 28,
1999;
o our Quarterly Report on Form 10-Q for the period ended May 31, 1999;
o our Quarterly Report on Form 10-Q for the period ended August 31, 1999;
o our Report on Form 8-K dated as of July 28, 1999; and
o the description of our common stock on our registration statement on
Form 8-A filed on May 21, 1987.
You should consider all documents we file pursuant to sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this document and
before the termination of this offering of our common stock to be incorporated
by reference in this document. In addition, all reports that we file under the
Exchange Act after the date of the initial registration statement and before
effectiveness of the registration statement will be deemed to be incorporated by
reference into this prospectus. You should consider any statement contained in
this document or in a document incorporated or considered to be incorporated by
reference in this document to be modified or superseded for purposes of this
document to the extent that a statement contained in any subsequently filed
document that also is or is considered to be incorporated by reference in this
document modifies or supersedes this statement. You should not consider any
statement modified or superseded in this manner except as so modified or
superseded, to constitute a part of this document.
We will provide without charge to each person whom this document is
delivered, upon written or oral request of that person, a copy of any and all of
the information that has been incorporated by reference in this document
(excluding exhibits unless exhibits are specifically incorporated by reference
in the requested documents). Please direct such requests to John T. Fusto,
Audiovox Corporation, 150 Marcus Boulevard, Hauppauge, New York 11788. Our
telephone number is (631) 231-7750.
71
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of August 31, 1999 (unaudited)
and November 30, 1998.............................................................. F-1
Consolidated Statements of Income (Loss) for the three and nine months
ended August 31, 1999 and 1998 (unaudited)........................................ F-2
Consolidated Statements of Cash Flows for the nine months ended
August 31, 1999 and 1998 (unaudited).............................................. F-3
Notes to Consolidated Financial Statements (unaudited).............................. F-4
Audited Annual Consolidated Financial Statements:
Independent Auditors' Report........................................................ F-7
Consolidated Balance Sheets as of November 30, 1998 and 1997....................... F-8
Consolidated Statements of Income (Loss) for the fiscal years ended
November 30, 1998, 1997 and 1996.................................................. F-9
Consolidated Statements of Stockholders' Equity for the fiscal years ended
November 30, 1998, 1997 and 1996.................................................. F-10
Consolidated Statements of Cash Flows for the fiscal years ended
November 30, 1998, 1997 and 1996.................................................. F-12
Notes to Consolidated Financial Statements.......................................... F-13
</TABLE>
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................... $ 5,873 $ 9,398
Accounts receivable, net................................................ 163,427 131,120
Inventory, net.......................................................... 85,130 72,432
Receivable from vendor.................................................. 6,479 734
Prepaid expenses and other current assets............................... 9,068 6,724
Deferred income taxes, net.............................................. 7,346 6,088
-------- --------
Total current assets................................................ 277,323 226,496
Investment securities..................................................... 11,287 17,089
Equity investments........................................................ 10,964 10,387
Property, plant and equipment, net........................................ 20,189 17,828
Excess cost over fair value of assets acquired and other intangible
assets, net............................................................... 5,850 6,052
Other assets.............................................................. 1,280 1,827
-------- --------
Total assets........................................................ $326,893 $279,679
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................................................... $55,598 $34,063
Accrued expenses and other current liabilities......................... 24,455 15,359
Income taxes payable................................................... 7,239 5,210
Bank obligations....................................................... 7,800 7,327
Documentary acceptances................................................ 5,003 3,911
Capital lease obligation............................................... 33 17
-------- --------
Total current liabilities........................................... 100,128 65,887
Bank obligations.......................................................... 12,646 17,500
Deferred income taxes, net................................................ 4,844 3,595
Long-term debt............................................................ 6,773 6,331
Capital lease obligation.................................................. 6,233 6,298
-------- --------
Total liabilities................................................... 130,624 99,611
-------- --------
Minority interest......................................................... 3,736 2,348
-------- --------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500.......................... 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 16,845,846 issued .................. 173 173
Class B convertible; 30,000,000 authorized; 2,260,954 issued........ 22 22
Paid-in capital............................................................ 144,271 143,339
Retained earnings.......................................................... 51,762 35,896
Accumulated other comprehensive loss....................................... (2,653) (1,550)
Gain on hedge of available-for-sale securities, net........................ 929 929
Treasury stock, at cost, 618,832 and 498,055 Class A common stock 1999
and 1998, respectively.................................................. (4,471) (3,589)
-------- --------
Total stockholders' equity.......................................... 192,533 177,720
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity.......................... $326,893 $279,679
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales...................................... $ 296,732 $ 154,501 $ 749,068 $ 407,886
Cost of sales (including an inventory
write-down to market during the second
quarter of 1998 of $6,600).................. 261,453 129,623 658,848 346,705
--------- --------- --------- ---------
Gross profit................................... 35,279 24,878 90,220 61,181
--------- --------- --------- ---------
Operating expenses:
Selling..................................... 8,371 8,490 26,613 26,146
General and administrative.................. 11,431 9,347 31,029 27,162
Warehousing, assembly and repair............ 3,962 3,113 10,641 9,367
--------- --------- --------- ---------
Total operating expenses................. 23,764 20,950 68,283 62,675
--------- --------- --------- ---------
Operating income (loss)....................... 11,515 3,928 21,937 (1,494)
--------- --------- --------- ---------
Other income (expense):
Gain on issuance of subsidiary shares......... -- -- 3,800 --
Interest and bank charges..................... (894) (1,387) (2,865) (3,382)
Equity in income of equity investments,
management fees and related income, net..... 342 333 1,644 1,229
Gain on sale of investment..................... -- 427 1,896 427
Other, net..................................... (548) 900 (230) 938
--------- --------- --------- ---------
Total other income (expense)............ (1,100) 273 4,245 (788)
--------- --------- --------- ---------
Income (loss) before provision for (recovery
of) income taxes............................ 10,415 4,201 26,182 (2,282)
Provision for (recovery of) income taxes....... 3,986 1,620 10,317 (1,808)
--------- --------- --------- ---------
Net income (loss)............................. $ 6,429 $ 2,581 $ 15,865 $ (474)
========= ========= ========= =========
Net income (loss) per common share (basic).... $ 0.34 $ 0.14 $ 0.83 $ (0.02)
========= ========= ========= =========
Net income (loss) per common share (diluted)... $ 0.32 $ 0.14 $ 0.82 $ (0.02)
========= ========= ========= =========
Weighted average number of common shares
outstanding (basic)......................... 19,029,335 19,118,385 19,024,598 19,161,768
========== ========== ========== ==========
Weighted average number of common shares
outstanding (diluted)....................... 19,876,435 19,320,075 19,485,145 19,161,768
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ 15,865 $ (474)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on issuance of subsidiary shares....................... (3,800) --
Depreciation and amortization............................... 2,288 1,790
Provision for bad debt expense.............................. 1,641 632
Equity in income of equity investments, management fees and
related income, net...................................... (1,644) (1,229)
Minority interest........................................... 188 141
Gain on sale of investment securities....................... (1,896) (427)
Provision for (recovery of) deferred income taxes, net...... 731 (1,291)
Provision for unearned compensation......................... -- 144
(Gain) loss on disposal of property, plant and equipment,
net..................................................... 3 (198)
Change in:
Accounts receivable......................................... (34,291) 15,755
Inventory................................................... (12,974) 3,493
Accounts payable, accrued expenses and other current
liabilities .............................................. 31,056 2,702
Receivable from vendor...................................... (5,745) 1,901
Income taxes payable........................................ 2,029 (6,688)
Prepaid expenses and other, net............................. (354) 2,735
-------- --------
Net cash provided by (used in) operating activities...... (6,903) 18,986
-------- --------
Cash flows from investing activities:
Proceeds from issuance of subsidiary shares..................... 5,000 --
Proceeds from sale of investment securities..................... 14,016 4,658
Purchases of property, plant and equipment, net................. (4,454) (3,696)
Purchase of convertible debentures.............................. (8,280) (12,719)
Proceeds from distribution from equity investment............... 1,143 561
-------- --------
Net cash provided by (used in) investing activities...... 7,425 (11,196)
-------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements.................. (4,194) (5,844)
Net borrowings (repayments) under documentary acceptances....... 1,092 (147)
Principal payments on capital lease obligation.................. (49) (35)
Repurchase of Class A common stock.............................. (882) (870)
-------- --------
Net cash used in financing activities.................... (4,033) (6,896)
-------- --------
Effect of exchange rate changes on cash............................ (14) (264)
-------- --------
Net increase (decrease) in cash and cash equivalents............... (3,525) 630
Cash and cash equivalents at beginning of period................... 9,398 9,445
-------- --------
Cash and cash equivalents at end of period......................... $ 5,873 $ 10,075
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 1999 and 1998
(Dollars in thousands, except share and per share data)
1. Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles and include all
adjustments (which include only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of Audiovox Corporation and subsidiaries (the Company) as
of August 31, 1999 and November 30, 1998, the consolidated statements of
income (loss) for the three and nine month periods ended August 31, 1999 and
August 31, 1998, and the consolidated statements of cash flows for the nine
months ended August 31, 1999 and August 31, 1998. The interim figures are
not necessarily indicative of the results for the year.
Accounting policies adopted by the Company are identified in Note 1 of the
Notes to Consolidated Financial Statements included in the Company's 1998
Annual Report filed on Form 10-K.
2. Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
August 31,
-------------------------
1999 1998
------ ------
Cash paid during the period:
Interest (excluding bank charges) $1,680 $2,019
Income taxes 8,254 4,415
During the nine months ended August 31, 1999 and 1998, the Company recorded
a net unrealized holding loss relating to available-for-sale marketable
securities, net of deferred taxes, of $1,216 and $7,773, respectively, as a
component of accumulated other comprehensive loss.
During the first quarter of 1998, the Company sold its equity collar for
$1,499. The transaction resulted in a net gain on hedge of
available-for-sale securities of $929.
F-4
<PAGE>
3. Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic and
diluted income (loss) per common share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) (numerator for basic income
(loss) per share).......................... $ 6,429 $ 2,581 $ 15,865 $ (474)
Interest on 6 1/4% convertible subordinated
debentures, net of tax..................... 21 21 63 --
---------- ---------- ---------- ----------
Adjusted net income (loss) (numerator for
diluted (loss) per share) ................. $ 6,450 $ 2,602 $ 15,928 $ (474)
========== ========== ========== ==========
Weighted average common shares (denominator for
basic income (loss) per share)............. 19,029,335 19,118,385 19,024,598 19,161,768
Effect of dilutive securities:
6 1/4% convertible subordinated debentures.... 128,192 128,192 128,192 --
Employee stock options and stock warrants.. 645,458 - 254,005 --
Employee stock grants...................... 73,450 73,498 78,350 --
---------- ---------- ---------- ----------
Weighted average common and potential common
shares outstanding (denominator for diluted 19,876,435 19,320,075 19,485,145 19,161,768
========== ========== ========== ==========
income (loss) per share)...................
Basic income (loss) per share................. $ 0.34 $ 0.14 $ 0.83 $ (0.02)
========== ========== ========== ==========
Diluted income (loss) per share............... $ 0.32 $ 0.14 $ 0.82 $ (0.02)
========== ========== ========== ==========
</TABLE>
Employee stock options and stock warrants totaling 210,250 and 3,642,875 for
the quarters ended August 31, 1999 and 1998, respectively, were not included
in the net earnings per share calculation because their effect would have
been anti-dilutive.
4. Comprehensive Income (Loss)
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement
130). Statement 130 requires that all items recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
annual financial statements. For example, other comprehensive income may
include foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on marketable securities
classified as available-for-sale. The accumulated other comprehensive loss
of $2,653 and $1,550 at August 31, 1999 and November 30, 1998, respectively,
on the accompanying consolidated balance sheets is the net accumulated
unrealized loss on the Company's available-for-sale investment securities
and the accumulated foreign currency translation adjustment. Annual
financial statements for prior periods will be reclassified as required.
F-5
<PAGE>
The Company's total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
August 31, August 31,
--------------------- ---------------------
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss).................................... $ 6,429 $ 2,581 $15,865 $ (474)
Other comprehensive income (loss):
Foreign currency translation adjustments.......... (108) (528) 113 (1,231)
Unrealized losses on securities:
Unrealized holding losses arising during
period, net of tax.......................... (2,911) (9,232) (40) (7,508)
Less: reclassification adjustment for gains
realized in net income, net of tax.......... -- (265) (1,176) (265)
------- -------- ------- -------
Net unrealized losses......................... (2,911) (9,497) (1,216) (7,773)
------- -------- ------- -------
Other comprehensive loss, net of tax................. (3,019) (10,025) (1,103) (9,004)
------- -------- ------- -------
Total comprehensive income (loss).................... $ 3,410 $ (7,444) $14,762 $(9,478)
======= ======== ======= =======
</TABLE>
The unrealized holding losses arising during the period presented above are
net of tax benefit of $1,784 and $5,658 for the three months ended August
31, 1999 and 1998, respectively, and $25 and $4,602 for the nine months
ended August 31, 1999 and 1998, respectively. The reclassification
adjustment presented above is net of tax expense of $162 for the three and
nine months ended August 31, 1998 and $720 for the nine months ended August
31, 1999.
5. Issuance of Subsidiary Shares
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5% of
the Company's subsidiary, Audiovox Communications Corp. (ACC), a supplier of
wireless products for $5,000 in cash. The Company currently owns 95% of ACC;
prior to the transaction ACC was a wholly-owned subsidiary. As a result of
the issuance of ACC's shares, the Company recognized a gain of $3,800
($2,204 after provision for deferred taxes). The gain on the issuance of the
subsidiary's shares have been recognized in the statements of income (loss)
in accordance with the Company's policy on the recognition of such
transactions.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1998 and 1997, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
for each of the years in the three-year period ended November 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Audiovox Corporation
and subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1998, in conformity with generally accepted accounting
principles.
s/ KPMG LLP
---------------------------------------
KPMG LLP
Melville, New York
January 25, 1999
F-7
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................................... $ 9,398 $ 9,445
Accounts receivable, net...................................................... 131,120 104,698
Inventory, net................................................................ 72,432 105,242
Receivable from vendor........................................................ 734 5,000
Prepaid expenses and other current assets..................................... 6,724 9,230
Deferred income taxes......................................................... 6,088 4,673
Equity collar................................................................. -- 1,246
-------- --------
Total current assets.......................................... 226,496 239,534
Investment securities........................................................... 17,089 22,382
Equity investments.............................................................. 10,387 10,693
Property, plant and equipment, net.............................................. 17,828 8,553
Excess cost over fair value of assets acquired and other intangible
assets, net................................................................... 6,052 5,557
Other assets.................................................................... 1,827 3,108
-------- --------
Total assets.................................................. $279,679 $289,827
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................................... $ 34,063 $ 24,237
Accrued expenses and other current liabilities............................. 15,359 16,538
Income taxes payable....................................................... 5,210 9,435
Bank obligations........................................................... 7,327 6,132
Documentary acceptances.................................................... 3,911 3,914
Capital lease obligation................................................... 17 --
-------- --------
Total current liabilities..................................... 65,887 60,256
Bank obligations................................................................ 17,500 24,300
Deferred income taxes........................................................... 3,595 8,505
Long-term debt.................................................................. 6,331 6,191
Capital lease obligation........................................................ 6,298 --
-------- --------
Total liabilities............................................. 99,611 99,252
-------- --------
Minority interest............................................................... 2,348 2,683
-------- --------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500............................... 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 and 17,253,533 issued 1998 and
1997, respectively; 16,760,518 and 16,963,533 outstanding 1998 and 1997,
respectively............................................................... 173 173
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding.............................................................. 22 22
Paid-in capital................................................................. 143,339 145,155
Retained earnings............................................................... 35,896 32,924
Cumulative foreign currency translation and adjustment.......................... (5,704) (3,428)
Unrealized gain on marketable securities, net................................... 4,154 12,194
Unrealized gain on equity collar, net........................................... -- 773
Gain on hedge of available-for-sale securities, net............................. 929 --
Treasury stock, at cost, 498,055 and 290,000 Class A common stock 1998 and
1997, respectively........................................................... (3,589) (2,421)
-------- --------
Total stockholders' equity.................................... 177,720 187,892
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity.................... $279,679 $289,827
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Years Ended November 30, 1998, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales............................................... $616,695 $639,082 $597,915
Cost of sales (including an inventory write-down to
market in 1998 of $6,600).......................... 528,154 532,320 501,527
-------- -------- --------
Gross profit.......................................... 88,541 106,762 96,388
-------- -------- --------
Operating expenses:
Selling............................................... 35,196 38,044 40,033
General and administrative............................ 35,890 37,000 32,452
Warehousing, assembly and repair...................... 12,584 12,023 10,828
-------- -------- --------
Total operating expenses....................... 83,670 87,067 83,313
-------- -------- --------
Operating income ....................................... 4,871 19,695 13,075
-------- -------- --------
Other income (expense)..................................
Debt conversion expense............................... -- (12,686) (26,318)
Interest and bank charges............................. (4,769) (2,542) (8,480)
Equity in income of equity investments................ 1,071 1,359 631
Management fees and related income.................... 36 109 186
Gain on sale of investments........................... 787 37,471 985
Other, net............................................ 1,805 36 (714)
-------- -------- --------
Total other income (expense)................... (1,070) 23,747 (33,710)
-------- -------- --------
Income (loss) before provision for income
taxes............................................... 3,801 43,442 (20,635)
Provision for income taxes.............................. 829 22,420 5,834
-------- -------- --------
Net income (loss)....................................... $ 2,972 $ 21,022 $(26,469)
======== ======== =========
Net income (loss) per common share (basic).............. $ 0.16 $ 1.11 $ (2.82)
======== ======== ========
Net income (loss) per common share (diluted)............ $ 0.16 $ 1.09 $ (2.82)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Unreal- Gain
ized On
Gain Hedge of
(Loss) Avail-
Cumulative On Unreal- able
Foreign Market- ized for- Total
Unearned Currency able Gain on Sale Trea- Stock-
Preferred Common Paid-In Compen- Retained Translation Securi- Equity Securi- sury holders'
Stock Stock Capital sation Earnings Adjustment ties Collar ties Stock Equity
--------- ------ -------- ------- -------- ------------ ------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
November 30, 1995 $2,500 $ 90 $43,286 $(410) $ 38,371 $(963) $31,721 -- -- -- $114,595
Net loss -- -- -- -- (26,469) -- -- -- -- -- (26,469)
Equity adjustment
from foreign
currency
translation -- -- -- -- -- (213) -- -- -- -- (213)
Compensation
expense -- -- 39 258 -- -- -- -- -- -- 297
Options and
non-performance
restricted
stock
forfeitures
due to
employee
terminations -- -- (27) 27 -- -- -- -- -- -- --
Issuance of
250,000 shares
of common stock -- 3 -- -- -- -- -- -- -- -- 3
Conversion of
debentures
into 7,012,626
shares of
common stock -- 70 64,660 -- -- -- -- -- -- -- 64,730
Net unrealized
loss on
marketable
securities,
net of tax
effect of
($13,143) -- -- -- -- -- -- (21,444) -- -- -- (21,444)
------ ---- -------- ---- ------ ------ ------- ---- ---- ------ -------
Balance at November
30, 1996 2,500 163 107,958 (125) 11,902 (1,176) 10,277 -- -- -- 131,499
Net income -- -- -- -- 21,022 -- -- -- -- -- 21,022
Equity adjustment
from foreign
currency -- -- -- -- -- (2,252) -- -- -- -- (2,252)
translation
Compensation
expense -- -- 118 17 -- -- -- -- -- -- 135
Options and
non-performance
restricted
stock
forfeitures
due to
employee
terminations -- -- (23) 23 -- -- -- -- -- -- --
Issuance of
352,194 shares
of common stock -- 3 3,489 -- -- -- -- -- -- -- 3,492
Conversion of
debentures
into 2,860,925
shares -- 29 33,592 -- -- -- -- -- -- -- 33,621
Issuance of
warrants -- -- 106 -- -- -- -- -- -- -- 106
Acquisition of
290,000 common
shares -- -- -- -- -- -- -- -- -- (2,421) (2,421)
Net unrealized
gain on
marketable
securities,
net of tax
effect of
$1,174 -- -- -- -- -- -- 1,917 -- -- -- 1,917
Unrealized gain
on equity
collar, net of
tax effect of
$473 -- -- -- -- -- -- -- 773 -- -- 773
------ ---- -------- ---- ------ ------ ------- ---- ---- ------ -------
Balance at November
30, 1997 2,500 195 145,240 (85) 32,924 (3,428) 12,194 773 -- (2,421) 187,892
Net income -- -- -- -- 2,972 -- -- -- -- -- 2,972
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Unreal- Gain
ized On
Gain Hedge of
(Loss) Avail-
Cumulative On Unreal- able
Foreign Market- ized for- Total
Unearned Currency able Gain on Sale Trea- Stock-
Preferred Common Paid-In Compen- Retained Translation Securi- Equity Securi- sury holders'
Stock Stock Capital sation Earnings Adjustment ties Collar ties Stock Equity
--------- ------ -------- ------- -------- ------------ ------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity
adjustment
from foreign
currency
translation -- -- -- -- -- (2,276) -- -- -- -- (2,276)
Compensation
expense
(income) -- -- (23) 76 -- -- -- -- -- -- 53
Options and
non-performance
restricted
stock
forfeitures
due to
employee
terminations -- -- (9) 9 -- -- -- -- -- -- --
Purchase of
warrants -- -- (1,869) -- -- -- -- -- -- -- (1,869)
Acquisition of
208,055 common
shares -- -- -- -- -- -- -- -- -- (1,168) (1,168)
Net unrealized
loss on
marketable
securities,
net of tax
effect of
$4,928 -- -- -- -- -- -- (8,040) -- -- -- (8,040)
Sale of equity
collar, net of
tax effect of
$1,043 -- -- -- -- -- -- -- (773) 929 -- 156
------ ---- -------- ---- ------ ------ ------- ---- ---- ------ -------
Balances at
November 30, 1998 $2,500 $195 $143,339 -- $ 35,896 $(5,704) $ 4,154 -- $929 $(3,589) $177,720
====== ==== ======== ==== ======== ======= ======= ==== ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 2,972 $ 1,022 $(26,469)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Debt conversion expense......................................... -- 12,386 25,629
Depreciation and amortization................................... 2,471 1,903 3,298
Provision for bad debt expense.................................. 581 1,300 429
Equity in income of equity investments.......................... (1,107) (1,468) (614)
Minority interest............................................... (320) 1,623 767
Gain on sale of investments..................................... (787) (37,471) (985)
Provision for (recovery of) deferred income taxes, net.......... (902) (3,123) 468
Provision for unearned compensation............................. 53 135 297
Expense relating to issuance of warrants........................ -- 106 --
Gain on disposal of property, plant and equipment, net.......... (151) (9) (32)
Changes in:
Accounts receivable....................................... (27,940) 6,853 (21,848)
Receivable from vendor.................................... 4,266 -- 532
Inventory................................................. 31,705 (36,823) 27,688
Accounts payable, accrued expenses and other current
liabilities............................................... 9,385 (2,855) 12,445
Income taxes payable...................................... (4,034) 2,181 5,360
Prepaid expenses and other, net........................... 1,186 (2,659) (2,954)
-------- --------- --------
Net cash provided by (used in) operating activities.. 17,378 (36,899) 24,011
-------- --------- --------
Cash flows from investing activities:
Purchases of investment securities.............................. (12,719) (4,706) --
Purchases of property, plant and equipment, net................. (4,932) (3,986) (2,805)
Net proceeds from sale of investment securities................. 5,830 45,937 1,000
Proceeds from sale of equity collar............................. 1,499 -- --
Proceeds from distribution from equity investment............... 1,125 450 317
-------- --------- --------
Net cash provided by (used in) investing activities.. (9,197) 37,695 (1,488)
-------- --------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements.................. (5,047) (3,765) (14,040)
Net borrowings (repayments) under documentary acceptances....... (3) 413 (3,620)
Principal payments on long-term debt............................ -- -- (5,029)
Debt issuance costs............................................. -- (13) (392)
Principal payments on capital lease obligation.................. (26) -- (158)
Proceeds from issuance of Class A Common Stock.................. -- 2,328 --
Repurchase of Class A Common Stock.............................. (1,168) (2,421) --
Purchase of warrants............................................ (1,869) -- --
Proceeds from release of restricted cash........................ -- -- 5,959
-------- --------- --------
Net cash provided by (used in) financing activities.. (8,113) (3,458) (17,280)
-------- --------- --------
Effect of exchange rate changes on cash................................ (115) (243) 31
Net increase (decrease) in cash and cash equivalents................... (47) (2,905) 5,274
Cash and cash equivalents at beginning of period....................... 9,445 12,350 7,076
-------- --------- --------
Cash and cash equivalents at end of period............................. $ 9,398 $ 9,445 $ 12,350
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Description of Business
Audiovox Corporation and its subsidiaries (the Company) design and market
cellular telephones and accessories, automotive aftermarket sound and
security equipment, other automotive aftermarket accessories and certain
other products, principally in the United States, Canada and overseas. In
addition to generating product revenue from the sale of cellular telephone
products, the Company's retail outlets, as agents for cellular carriers, are
paid activation commissions and residual fees from such carriers.
The Company's automotive sound, security and accessory products include
stereo cassette radios, compact disc players and changers, amplifiers,
speakers and mobile LCD TV and video cassette playback units; key based
remote control security systems; cruise controls and door and trunk locks.
These products are marketed through mass merchandise chain stores, specialty
automotive accessory installers, distributors and automobile dealers.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Audiovox Corporation and its wholly-owned and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Cash Equivalents
Cash equivalents of $1,337 at November 30, 1995 consisted of short-term
investments with terms of less than three months. For purposes of the
statements of cash flows, the Company considers investments with original
maturities of three months or less to be cash equivalents.
Cash Discount, Co-operative Advertising Allowances and Market Development
Funds
The Company accrues for estimated cash discounts, trade and promotional
co-operative advertising allowances and market development funds at the time
of sale. These discounts and allowances are reflected in the accompanying
consolidated financial statements as a reduction of accounts receivable as
they are utilized by customers to reduce their trade indebtedness to the
Company.
F-13
<PAGE>
Inventory
Inventory consists principally of finished goods and is stated at the lower
of cost (primarily on a weighted moving average basis) or market. The
markets in which the Company competes are characterized by declining prices,
intense competition, rapid technological change and frequent new product
introductions. The Company maintains a significant investment in inventory
and, therefore, is subject to the risk of losses on write-downs to market
and inventory obsolescence. During the second quarter of 1998, the Company
recorded a charge of approximately $6,600 to accurately reflect the
Company's inventory at the lower of cost or market. No estimate can be made
of losses that are reasonably possible should additional write-downs to
market be required in the future.
Derivative Financial Instruments
The Company, as a policy, does not use derivative financial instruments for
trading purposes. A description of the derivative financial instruments used
by the Company follows:
Forward Exchange Contracts
The Company conducts business in several foreign currencies and, as
a result, is subject to foreign currency exchange rate risk due to the
effects that exchange rate movements of these currencies have on the
Company's costs. To minimize the effect of exchange rate fluctuations on
costs, the Company enters into forward exchange rate contracts. The
Company, as a policy, does not enter into forward exchange contracts for
trading purposes. The forward exchange rate contracts are entered into
as hedges of inventory purchase commitments and of trade receivables due
in foreign currencies.
Gains and losses on the forward exchange contracts that qualify as
hedges are reported as a component of the underlying transaction.
Foreign currency transactions which have not been hedged are
marked-to-market on a current basis with gains and losses recognized
through income and reflected in other income (expense). In addition, any
previously deferred gains and losses on hedges which are terminated
prior to the transaction date are recognized in current income when the
hedge is terminated (Note 17(a)(1)).
Equity Collar
As of November 30, 1997, the Company had an equity collar for
100,000 of its shares in CellStar Corporation (CellStar) (Note 6). The
equity collar was recorded on the balance sheet at fair value with gains
and losses on the equity collar reflected as a separate component of
stockholders' equity (Note 17(a)(2)). The equity collar acts as a
hedging item for the CellStar shares. Being that the item being hedged,
the CellStar shares, is an available-for-sale security carried at fair
market value with unrealized gains and losses recorded as a separate
component of stockholders' equity, the unrealized gains and losses on
F-14
<PAGE>
the equity collar are also recorded as a separate component of
stockholders' equity.
During 1998, the Company sold the equity collar for $1,499 in cash.
As of November 30, 1998, the net gain on the equity collar of $929 is
recorded as a separate component of stockholders' equity.
The Financial Accounting Standards Board (FASB) issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(Statement 133). Statement 133 established accounting and reporting
standards for derivative instruments embedded in other contracts and for
hedging activities. Statement 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. Early application of
all the provisions of this Statement is encouraged but is permitted only
as of the beginning of any fiscal quarter that begins after issuance of
this Statement. Management of the Company has not yet determined the
impact, if any, that the implementation of Statement 133 will have on
its financial position, results of operations or liquidity.
Investment Securities
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them
in the near term. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity.
All other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as
a separate component of stockholders' equity until realized. Realized gains
and losses from the sale of available-for-sale securities are determined on
a specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Debt Issuance Costs
Costs incurred in connection with the issuance of the convertible
subordinated debentures and restructuring of the Series A and Series B
F-15
<PAGE>
convertible subordinated notes (Note 10) and the restructuring of bank
obligations (Note 9(a)) have been capitalized. These charges are amortized
over the lives of the respective agreements. Amortization expense of these
costs amounted to $37 and $1,109 for the years ended November 30, 1997 and
1996, respectively. During 1997 and 1996, the Company wrote-off $245 and
$3,249, respectively, of debt issuance costs (Note 10). There were no debt
issuance costs recorded as of November 30, 1998.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment under capital
lease is stated at the present value of minimum lease payments. Depreciation
is calculated on the straight-line method over the estimated useful lives of
the assets as follows:
Buildings 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset. Assets acquired under capital lease are
amortized over the term of the lease.
Intangible Assets
Intangible assets consist of patents, trademarks, non-competition agreements
and the excess cost over fair value of assets acquired for certain
subsidiary companies and equity investments. Excess cost over fair value of
assets acquired is being amortized over periods not exceeding twenty years.
The costs of other intangible assets are amortized on a straight-line basis
over their respective lives.
Accumulated amortization approximated $2,148 and $1,759 at November 30, 1998
and 1997, respectively. Amortization of the excess cost over fair value of
assets acquired and other intangible assets amounted to $382, $363 and $145
for the years ended November 30, 1998, 1997 and 1996, respectively. During
1997, the Company made investments in two companies that resulted in
additional excess cost over fair value of assets acquired (Note 8).
On an ongoing basis, the Company reviews the valuation and amortization of
its intangible assets. As a part of its ongoing review, the Company
estimates the fair value of intangible assets taking into consideration any
events and circumstances which may diminish fair value.
The recoverability of the excess cost over fair value of assets acquired is
assessed by determining whether the amortization over its remaining life can
be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
F-16
<PAGE>
reflecting the Company's average cost of funds. The assessment of the
recoverability of the excess cost over fair value of assets acquired will be
impacted if estimated future operating cash flows are not achieved.
Equity Investments
The Company has common stock investments which are accounted for by the
equity method (Note 8).
Cellular Telephone Commissions
Under various agency agreements, the Company receives an initial activation
commission for obtaining subscribers for cellular telephone services.
Additionally, the agreements may contain provisions for commissions based
upon usage and length of continued subscription. The agreements also provide
for the reduction or elimination of initial activation commissions if
subscribers deactivate service within stipulated periods. The Company has
provided a liability for estimated cellular deactivations which is reflected
in the accompanying consolidated financial statements as a reduction of
accounts receivable.
The Company recognizes sales revenue for the initial activation, length of
service commissions and residual commissions based upon usage on the accrual
basis. Such commissions approximated $27,237, $35,749 and $37,930 for the
years ended November 30, 1998, 1997 and 1996, respectively. Related
commissions paid to outside selling representatives for cellular activations
are reflected as a reduction of sales in the accompanying consolidated
statements of income (loss) and amounted to $13,877, $19,924 and $20,443 for
the years ended November 30, 1998, 1997 and 1996, respectively.
Advertising
The Company expenses the production costs of advertising as incurred and
expenses the costs of communicating advertising when the service is
received. During the years ended November 30, 1998, 1997 and 1996, the
Company had no direct response advertising.
Warranty Expenses
Warranty expenses are accrued at the time of sale based on the Company's
estimated cost to repair expected returns for products. At November 30, 1998
and 1997, the liability for future warranty expense amounted to $1,915 and
$2,257, respectively.
Foreign Currency
With the exception of an operation in Venezuela, assets and liabilities of
those subsidiaries and equity investments located outside the United States
whose cash flows are primarily in local currencies have been translated at
F-17
<PAGE>
rates of exchange at the end of the period. Revenues and expenses have been
translated at the weighted average rates of exchange in effect during the
period. Gains and losses resulting from translation are accumulated in the
cumulative foreign currency translation account in stockholders' equity. For
the operation in Venezuela, financial statements are translated at either
current or historical exchange rates, as appropriate. These adjustments,
along with gains and losses on currency transactions, are reflected in the
consolidated statements of income (loss). Exchange gains and losses on
hedges of foreign net investments and on intercompany balances of a
long-term investment nature are also recorded in the cumulative foreign
currency translation adjustment account. Other foreign currency transaction
gains of $924 for the year ended November 30, 1998 were included in other
income. Other foreign currency gains and losses were not material for the
years ended November 30, 1997 and 1996.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Net Income (Loss) Per Common Share
In February 1997, the FASB issued Statement No. 128, "Earnings per Share"
(Statement 128). Statement 128 replaces the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilution. It is based upon the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Earnings per share amounts for all periods
presented have been restated to conform to the new presentation.
Supplementary Financial Statement Information
Advertising expenses approximated $15,789, $16,981 and $21,794 for the years
ended November 30, 1998, 1997 and 1996, respectively.
Interest income of approximately $896, $1,525 and $1,097 for the years ended
November 30, 1998, 1997 and 1996, respectively, is included in other in the
accompanying consolidated statements of income (loss).
Included in accrued expenses and other current liabilities is $3,511 and
$4,091 of accrued wages and commissions at November 30, 1998 and 1997,
respectively.
F-18
<PAGE>
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 reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of
On December 1, 1996, the Company adopted Statement No.121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (Statement 121). Statement 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of an asset to the future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell. Adoption of Statement 121
did not have a material impact on the Company's financial position, results
of operations or liquidity.
Accounting for Stock-Based Compensation
Prior to December 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (Opinion 25), and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On December 1, 1996, the Company adopted Statement No.
123, "Accounting for Stock-Based Compensation" (Statement 123), which
permits entities to recognize, as expense over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively,
Statement 123 also allows entities to continue to apply the provisions of
Opinion 25 and provide pro-forma net income and pro-forma earnings per share
disclosures for employee stock option grants made in fiscal 1996 and future
years as if the fair-value-based method defined in Statement 123 had been
applied. The Company has elected to continue to apply the provisions of
Opinion 25 and provide the pro-forma disclosure provisions of Statement 123.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 requires that all items that are
F-19
<PAGE>
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Statement 130
further requires that an entity display an amount representing total
comprehensive income for the period in that financial statement. Statement
130 also requires that an entity classify items of other comprehensive
income by their nature in a financial statement. For example, other
comprehensive income may include foreign currency items and unrealized gains
and losses on investments in equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes,
is required. Based on current accounting standards, Statement 130 is not
expected to have a material impact on the Company's financial position,
results of operation or liquidity. The Company will adopt this accounting
standard effective December 1, 1998, as required.
Disclosure About Segments of an Enterprise and Related Information
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (Statement 131). Statement 131
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Statement 131 requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets. It also
requires reconciliations of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for segments to
corresponding amounts reported in the consolidated financial statements.
Restatement of comparative information for earlier periods presented is
required in the initial year of application. Interim information is not
required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated
financial statements disclosures. The Company will adopt this accounting
standard in fiscal 1999, as required, however, Statement 131 will not have
any impact on the Company's financial position, results of operations or
liquidity.
2. Business Acquisitions/Dispositions
During 1997, the Company formed Audiovox Venezuela C.A. (Audiovox
Venezuela), an 80%-owned subsidiary, for the purpose of expanding its
international business. The Company made an initial investment of $478 which
was used by Audiovox Venezuela to obtain certain licenses, permits and fixed
assets.
In April 1996, the Company formed Audiovox Holdings (M) Sdn. Bhd. (Audiovox
Holdings) and Audiovox Communications (Malaysia) Sdn. Bhd. (Audiovox
Communications), which are 80% and 72% -owned subsidiaries of Audiovox Asia,
F-20
<PAGE>
Inc. (Audiovox Asia), respectively, which, in turn, is a wholly-owned
subsidiary of the Company. In 1996, Audiovox Communications formed Vintage
Electronics Holdings (Malaysia) Sdn. Bhd., a wholly-owned subsidiary. The
Company formed these subsidiaries to assist in its planned expansion of its
international business.
In October 1996, the Company contributed the net assets of its cellular
division into a newly-formed, wholly-owned subsidiary Audiovox
Communications Corp. (ACC).
3. Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Cash paid during the years for:
Interest, net of $801 capitalized in 1998 $1,587 $ 1,560 $7,666
Income taxes $4,496 $23,530 $ 272
</TABLE>
During 1998, the Company exercised its option to convert 1,137,212 Japanese
Yen (approximately $8,176) of Shintom Co. Ltd. (Shintom) Convertible
Debentures (Shintom Debentures) into approximately 7,500,000 shares of
Shintom Common Stock (Note 6).
During 1998, a capital lease obligation of $6,340 was incurred when the
Company entered into a building lease (Note 16).
During 1998, the Company sold its equity collar for $1,499. The transaction
resulted in a net gain on hedge of available-for-sale securities of $929
which is reflected as a separate component of stockholders' equity (Note
17).
As of November 30, 1998 and 1997, the Company recorded an unrealized holding
gain relating to available-for-sale marketable equity securities, net of
deferred income taxes, of $4,154 and $12,194, respectively, as a separate
component of stockholders' equity (Note 6).
During January 1997, the Company completed an exchange of $21,479 of its
$65,000 6 1/4% convertible subordinated debentures (Subordinated
Debentures) into 2,860,925 shares of Class A Common Stock (Note 10).
During 1997, the Company issued a credit of $1,250 on open accounts
receivable and issued 250,000 shares of its Class A Common Stock, valued at
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<PAGE>
five dollars per share, in exchange for a 20% interest in Bliss-tel Company,
Limited (Bliss-tel) (Note 8).
During 1997, the Company contributed $6,475 in net assets in exchange for a
50% ownership interest in Audiovox Specialized Applications, LLC (ASA) which
resulted in $5,595 of excess cost over fair value of net assets (Note 8).
As of November 30, 1997, the Company recorded an unrealized holding gain
relating to the equity collar, net of deferred income taxes, of $773 as a
separate component of stockholders' equity (Note 17).
On February 9, 1996, the Company's 10.8% Series AA and 11.0% Series BB
convertible debentures matured. As of February 9, 1996, $1,100 of the Series
BB convertible debentures converted into 206,046 shares of Common Stock
(Note 10).
On November 25, 1996, the Company completed an exchange of $41,252 of its
Subordinated Debentures into 6,806,580 shares of Common Stock (Note 10).
During 1996, the Company contributed $97 of property, plant and equipment in
exchange for a 50% ownership interest in a newly-formed joint venture,
Quintex Communications West, LLC (Quintex West), (Note 8).
4. Transactions With Major Suppliers
The Company engaged in transactions with Shintom, a stockholder who owned
approximately 1.7% at November 30, 1996 of the outstanding Class A Common
Stock and all of the outstanding Preferred Stock of the Company at November
30, 1998 and 1997. The Company has a 30.8% interest in a Japanese company,
TALK Corporation (TALK) (Note 8).
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 19%, 29% and 26% for the years ended
November 30, 1998, 1997 and 1996, respectively, of total inventory
purchases. At November 30, 1998, the Company had recorded $15 of liability
due to TALK for inventory purchases included in accounts payable. The
Company also has documentary acceptance obligations payable to TALK as of
November 30, 1998 and 1997 (Note 9(b)). At November 30, 1998 and 1997, the
Company had recorded a receivable from TALK in the amount of $734 and
$5,000, respectively, payable with interest (Note 8).
TALK, which holds world-wide distribution rights for product manufactured by
Shintom, has given the Company exclusive distribution rights on all wireless
personal communication products for all countries except Japan, China,
Thailand and several mid-eastern countries. The Company granted Shintom a
license agreement permitting the use of the Audiovox trademark to be used
with TALK video cassette recorders sold in Japan from August 29, 1994 to
August 28, 1997, in exchange for royalty fees. For the years ended November
30, 1997 and 1996, no such royalty fees were earned by the Company.
Inventory purchases from a major supplier approximated 42%, 32% and 28% of
total inventory purchases for the years ended November 30, 1998, 1997 and
1996, respectively. Although there are a limited number of manufacturers of
its products, management believes that other suppliers could provide similar
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<PAGE>
products on comparable terms. A change in suppliers, however, could cause a
delay in product availability and a possible loss of sales, which would
affect operating results adversely.
5. Accounts Receivable
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Trade accounts receivable $142,211 $113,498
Receivables from equity investments (Note 8) 1,035 1,921
-------- --------
143,246 115,419
Less:
Allowance for doubtful accounts 2,944 3,497
Allowance for cellular deactivations 875 1,363
Allowance for co-operative advertising, cash discounts
and market development funds 8,307 5,861
-------- --------
$131,120 $104,698
======== ========
</TABLE>
See Note 17(c) for concentrations of credit risk.
6. Investment Securities
As of November 30, 1998, the Company's investment securities consist
primarily of 1,730,000 shares of CellStar Common Stock, 1,904,000 shares of
Shintom Common Stock and 662,788 Japanese Yen of Shintom Debentures,
respectively, which were classified as available-for-sale marketable
securities. As of November 30, 1997, the Company's investment securities
consist primarily of 1,730,000 shares of CellStar Common Stock (adjusted for
the CellStar 2 for 1 stock split that occurred during 1998). The cost, gross
unrealized gains and losses and fair value of the investment securities
available-for-sale as of November 30, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gain Loss Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
CellStar Common Stock $ 2,715 $ 8,422 -- $11,137
Shintom Common Stock 3,132 -- $1,723 1,409
Shintom Debentures 4,543 -- -- 4,543
------ ------- ------- -------
$10,390 $ 8,422 $ 1,723 $17,089
======= ======= ======= =======
</TABLE>
The Shintom Debentures mature on September 30, 2002.
A related deferred tax liability of $2,546 and $7,473 was recorded at
November 30, 1998 and 1997, respectively, as a reduction to the unrealized
holding gain included as a separate component of stockholders' equity.
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<PAGE>
During 1998, the Company purchased 400,000 Japanese Yen (approximately
$3,132) of Shintom Debentures. The Company exercised its option to convert
the Shintom Debentures into shares of Shintom Common Stock. These shares are
included in the Company's available-for-sale marketable securities at
November 30, 1998.
During 1998, the Company purchased an additional 400,000 Japanese Yen
(approximately $2,732) of Shintom Debentures. The Company exercised its
option to convert the Shintom Debentures into shares of Shintom Common
Stock. The Company sold the Shintom Common Stock yielding net proceeds of
$3,159 and a gain of $427.
During 1998, the Company purchased 1,000,000 Japanese Yen (approximately
$6,854) of Shintom Debentures. The Company exercised its option to convert
337,212 Japanese Yen of Shintom Debentures into shares of Shintom Common
Stock. The Company sold the Shintom Common Stock yielding net proceeds of
$2,671 and a gain of $360. The remaining debentures of 662,788 Japanese Yen
are included in the Company's available-for-sale marketable securities at
November 30, 1998.
During 1997, the Company sold 1,835,000 shares of CellStar Common Stock
yielding net proceeds of approximately $45,937 and a gain, net of taxes, of
approximately $23,232.
Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
<TABLE>
<CAPTION>
November 30,
--------------------------
1998 1997
--------- -------
<S> <C> <C>
Land $ 363 $ 363
Buildings 1,605 2,099
Property under capital lease 7,141 --
Furniture, fixtures and displays 3,184 3,418
Machinery and equipment 5,023 4,341
Computer hardware and software 9,767 14,307
Automobiles 633 800
Leasehold improvements 3,943 3,510
--------- -------
Total property, plant and equipment 31,659 28,838
Less accumulated depreciation and amortization (13,831) (20,285)
--------- -------
Total property, plant and equipment, net $ 17,828 $ 8,553
========= =======
</TABLE>
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $3,149 and $1,672 of unamortized
costs as of November 30, 1998 and 1997, respectively, related to the
F-24
<PAGE>
acquisition and installation of management information systems for internal
use.
Depreciation and amortization of plant and equipment amounted to $2,089,
$1,503 and $2,044 for the years ended November 30, 1998, 1997 and 1996,
respectively. Included in accumulated depreciation and amortization is
amortization of computer software costs of $350, $19 and $364 for the years
ended November 30, 1998, 1997 and 1996, respectively. Included in
accumulated depreciation and amortization is amortization of property under
capital lease of $160 for the year ended November 30, 1998.
8. Equity Investments
As of November 30, 1998, the Company had a 30.8% ownership interest in TALK.
As of November 30, 1998, the Company's 72% owned subsidiary, Audiovox
Communications, had a 29% ownership interest in Avx Posse (Malaysia) Sdn.
Bhd. (Posse) which monitors car security commands through a satellite based
system in Malaysia. As of November 30, 1998, the Company had a 20% ownership
interest in Bliss-tel which distributes cellular telephones and accessories
in Thailand. Additionally, the Company had 50% non-controlling ownership
interests in five other entities: Protector Corporation (Protector) which
acts as a distributor of chemical protection treatments; ASA which acts as a
distributor to specialized markets for RV's and van conversions, of
televisions and other automotive sound, security and accessory products;
Audiovox Pacific Pty., Limited (Audiovox Pacific) which distributes cellular
telephones and automotive sound and security products in Australia and New
Zealand; G.L.M. Wireless Communications, Inc. (G.L.M.) which is in the
cellular telephone, pager and communications business in the New York
metropolitan area; and Quintex West, which is in the cellular telephone and
related communication products business, as well as the automotive
aftermarket products business on the West Coast of the United States.
During 1997, the Company purchased a 20% equity investment in Bliss-tel in
exchange for 250,000 shares of the Company's Class A Common Stock and a
credit for open accounts receivable of $1,250. The issuance of the common
stock resulted in an increase to additional paid-in capital of approximately
$1,248. The Company accounts for its investment in Bliss-tel under the
equity method of accounting. In connection with the purchase, excess of the
fair value of net assets acquired over cost amounting to $320 was recorded
and is being amortized on a straight-line basis over 10 years.
During 1997, the Company purchased a 50% equity investment in a newly-formed
company, ASA, for approximately $11,131. The Company contributed the net
assets of its Heavy Duty Sound division, its 50% interest in Audiovox
Specialty Markets Co. (ASMC) and $4,656 in cash. In connection with this
investment, excess cost over fair value of net assets acquired of $5,595
resulted, which is being amortized on a straight-line basis over 20 years.
The other investor (Investor) contributed its 50% interest in ASMC and the
net assets of ASA Electronics Corporation. In connection with this
investment, the Company entered into a stock purchase agreement with the
Investor in ASA. The agreement provides for the sale of 352,194 shares of
F-25
<PAGE>
Class A Common Stock at $6.61 per share (aggregate proceeds of approximately
$2,328) by the Company to the Investor. The transaction resulted in a net
increase to additional paid-in capital of approximately $2,242. The selling
price of the shares are subject to adjustment in the event the Investor
sells shares at a loss during a 90-day period, beginning with the later of
the effective date of the registration statement filed with the Securities
and Exchange Commission to register such shares or May 13, 1998. The
adjustment to the selling price will equal the loss incurred by the Investor
up to a maximum of 50% of the shares. During 1998, the Investor sold its
shares at a loss which resulted in the Company recording an adjustment to
the selling price of $410 as additional goodwill. No further adjustments to
the selling price can be made.
The Company's net sales to the equity investments amounted to $4,528, $6,132
and $6,483 for the years ended November 30, 1998, 1997 and 1996,
respectively. The Company's purchases from the equity investments amounted
to $15,383, $7,484 and $115,109 for the years ended November 30, 1998, 1997
and 1996, respectively. The Company recorded $1,752, $2,027 and $2,130 of
outside representative commission expenses for activations and residuals
generated by G.L.M. on the Company's behalf during fiscal year 1998, 1997
and 1996, respectively, (Note 1(l)).
Included in accounts receivable at November 30, 1998 and 1997 are trade
receivables due from its equity investments aggregating $1,035 and $1,921,
respectively. Receivable from vendor is interest bearing and represents
claims on late deliveries, product modifications and price protection from
TALK as well as prepayments on product shipments. Interest is payable in
monthly installments at 6.5%. Amounts representing prepayments of $734 were
repaid via receipt of product shipments in December 1998. At November 30,
1998 and 1997, other long-term assets include management fee receivables of
$1,271 and $1,496, respectively. At November 30, 1998 and 1997, included in
accounts payable and other accrued expenses were obligations to equity
investments aggregating $1,049 and $9,783, respectively. Documentary
acceptance obligations were outstanding from TALK at November 30, 1998
(Note 9(b)).
During 1997, the Company recorded interest income from TALK relating to the
receivable from vendor, reimbursement of interest expense incurred under the
subordinated loan to finance the TALK investment (Note 10) and other
short-term loans made to TALK during 1997 at market interest rates. For the
years ended November 30, 1998, 1997 and 1996, interest income earned on
equity investment notes and other receivables approximated $480, $653 and
$725, respectively. Interest expense on equity investment documentary
acceptances approximated $256, $203 and $198 in 1998, 1997 and 1996,
respectively.
9. Financing Arrangements
Bank Obligations
The Company maintains a revolving credit agreement with various financial
institutions. Subsequent to year end, the credit agreement has been amended
and restated in its entirety, extending the expiration date to December 31,
F-26
<PAGE>
2001. As a result, bank obligations under the credit agreement have been
classified as long-term at November 30, 1998. The amended and restated
credit agreement provides for $112,500 of available credit.
Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by certain of the Company's subsidiaries and
is secured by accounts receivable, inventory and the Company's shares of
ACC. As of November 30, 1998, availability of credit under the credit
agreement is a maximum aggregate amount of $95,000, subject to certain
conditions, and is based upon a formula taking into account the amount and
quality of its accounts receivable and inventory. At November 30, 1998, the
amount of unused available credit is $43,085.
Outstanding obligations under the credit agreement at November 30, 1998 and
1997 were as follows:
November 30,
------------------------
1998 1997
------- -------
Revolving Credit Notes $ 2,500 $18,300
Eurodollar Notes 15,000 6,000
------- -------
$17,500 $24,300
======= =======
Through February 8, 1996, interest on revolving credit notes were .25% above
the prime rate, which was 8.75% at November 30, 1995. For the same period,
interest on Eurodollar Notes were 2% above the Libor rate which was
approximately 5.1% at November 30, 1995 and interest on bankers' acceptances
were 2% above the bankers' acceptance rate which was approximately 6.25% at
November 30, 1995. Pursuant to an amendment on February 9, 1996, the
interest rates were increased to the following: revolving credit notes at
.50% above the prime rate, which was approximately 7.75%, 8.5% and 8.25% at
November 30, 1998, 1997 and 1996, respectively, and Eurodollar Notes at
2.75% above the Libor rate which was approximately 5.62%, 5.97% and 5.5% at
November 30, 1998, 1997 and 1996, respectively. Interest on bankers'
acceptances remained at 2% above the bankers' acceptance rate which was
approximately 5.5%, 5.77% and 5.75% at November 30, 1998, 1997 and 1996,
respectively. The maximum commitment fee on the unused portion of the line
of credit is .25% as of November 30, 1998.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth and
working capital. Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures. During 1998, the Company violated its covenant regarding
maintenance of pre-tax income for the fiscal quarter and six months ended
May 31, 1998 which was waived.
The Company also has a revolving credit facility with a Malaysian bank
(Malaysian Credit Agreement) to finance additional working capital needs. As
of November 30, 1998 and 1997, the available line of credit for direct
F-27
<PAGE>
borrowing, letters of credit, bankers' acceptances and other forms of credit
approximated $8,195 and $8,017, respectively. The credit facility is
partially secured by two standby letters of credit totaling $5,320, by the
Company and is payable upon demand or upon expiration of the standby letters
of credit on August 31, 1999. The obligations of the Company under the
Malaysian Credit Agreement are secured by the property and building owned by
Audiovox Communications. Outstanding obligations under the Malaysian Credit
Agreement at November 30, 1998 and 1997 were approximately $4,711 and
$4,146, respectively. At November 30, 1998, interest on the credit facility
ranged from 9.5% to 12.0%. At November 30, 1997, interest on the credit
facility ranged from 8.25% to 11.10%.
On October 28, 1997, Audiovox Venezuela issued a note payable to a
Venezuelan bank in the amount of 994,000 Venezuelan Bolivars (approximately
$1,986 at November 30, 1997) to finance additional working capital needs.
Interest on the note payable is 20%. The note was repaid in 1998. As of
November 30, 1998, Audiovox Venezuela has notes payable of 1,500,000
Venezuelan Bolivars (approximately $2,617 at November 30, 1998) outstanding.
Interest on the notes payable is 50%. The notes are scheduled to be repaid
within one year and, as such, are classified as short term. The notes
payable are secured by a standby letter of credit in the amount of $4,000,
by the Company and is payable upon demand or upon expiration of the standby
letter of credit on June 30, 1999.
The maximum month-end amounts outstanding under the credit agreement and
Malaysian Credit Agreement borrowing facilities during the years ended
November 30, 1998, 1997 and 1996 were $42,975, $28,420 and $44,213,
respectively. Average borrowings during the years ended November 30, 1998,
1997 and 1996 were $26,333, $18,723 and $33,662, respectively, and the
weighted average interest rates were 8.7%, 7.7% and 8.9%, respectively.
Documentary Acceptances
During 1998, the Company had various unsecured documentary acceptance lines
of credit available with suppliers to finance inventory purchases. The
Company does not have written agreements specifying the terms and amounts
available under the lines of credit. At November 30, 1998, $3,911 of
documentary acceptances were outstanding of which all was due to TALK.
The maximum month-end documentary acceptances outstanding during the years
ended November 30, 1998, 1997 and 1996 were $4,809, $4,162 and $9,792,
respectively. Average borrowings during the years ended November 30, 1998,
1997 and 1996 were $3,885, $3,199 and $5,845, respectively, and the weighted
average interest rates, including fees, were 6.6%, 6.3% and 5.1%,
respectively.
10. Long-Term Debt
A summary of long-term debt follows:
November 30,
-------------------
1998 1997
------- -------
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at $17.70 per share $ 2,269 $ 2,269
Subordinated note payable 4,062 3,922
------- -------
6,331 6,191
Less current installments
-- --
------- -------
$ 6,331 $ 6,191
======= =======
F-28
<PAGE>
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
Subordinated Debentures due 2001 and entered into an Indenture Agreement.
The Subordinated Debentures are convertible into shares of the Company's
Class A Common Stock, par value $.01 per share at an initial conversion
price of $17.70 per share, subject to adjustment under certain
circumstances. The Indenture Agreement contains various covenants. The bonds
are subject to redemption by the Company in whole, or in part, at any time
after March 15, 1997, at certain specified amounts. On May 9, 1995, the
Company issued warrants to certain beneficial holders of these Subordinated
Debentures (Note 13(d)).
On November 25, 1996, the Company completed an exchange of $41,252 of its
$65,000 Subordinated Debentures for 6,806,580 shares of Class A Common Stock
(Exchange). As a result of the Exchange, a charge of $26,318 was recorded.
The charge to earnings represents (i) the difference in the fair market
value of the shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the original
conversion feature plus (ii) a write-off of the debt issuance costs
associated with the Subordinated Debentures (Note 1(h)) plus (iii) expenses
associated with the Exchange offer. The Exchange resulted in taxable income
due to the difference in the face value of the bonds converted and the fair
market value of the shares issued and, as such, a current tax expense of
$2,888 was recorded. An increase to paid in capital was reflected for the
face value of the bonds converted, plus the difference in the fair market
value of the shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the original
conversion feature for a total of $63,564.
During January 1997, the Company completed additional exchanges totaling
$21,479 of its $65,000 Subordinated Debentures for 2,860,925 shares of Class
A Common Stock (Additional Exchanges). As a result of the Additional
Exchanges, similar to that of the Exchange described earlier, a charge of
$12,686, tax expense of $158 and an increase to paid in capital of $33,592,
was recorded. As a result of the Exchange and Additional Exchanges, the
remaining Subordinated Debentures are $2,269.
On March 8, 1994, the Company entered into a Debenture Exchange Agreement
and exchanged certain debentures for Series AA and Series BB Convertible
Debentures (Debentures). The Debentures were convertible at any time at
$5.34 per share, which is subject to adjustment in certain circumstances,
and were secured by a standby letter of credit. Although the Debenture
Exchange Agreement provides for optional prepayments under certain
circumstances, such prepayments are restricted by the credit agreement (Note
9(a)). On February 9, 1996, the holders of $1,100 of the Series BB
Convertible Debentures exercised their right to convert into 206,046 shares
of Class A Common Stock. The remaining balance of the Debentures were repaid
during 1996; thereby extinguishing the remaining conversion features of
these Debentures.
F-29
<PAGE>
On October 20, 1994, the Company issued a note payable for 500,000 Japanese
Yen (approximately $4,062 and $3,922 on November 30, 1998 and 1997,
respectively) to finance its investment in TALK (Note 8). The note is
scheduled to be repaid on October 20, 2004 and bears interest at 4.1%. The
note can be repaid by cash payment or by giving 10,000 shares of its TALK
investment to the lender. The lender has an option to acquire 2,000 shares
of TALK held by the Company in exchange for releasing the Company from 20%
of the face value of the note at any time after October 20, 1995. This note
and the investment in TALK are both denominated in Japanese Yen, and, as
such, the foreign currency translation adjustments are accounted for as a
hedge. Any foreign currency translation adjustment resulting from the note
will be recorded in stockholders' equity to the extent that the adjustment
is less than or equal to the adjustment from the translation of the
investment in TALK. Any portion of the adjustment from the translation of
the note that exceeds the adjustment from the translation of the investment
in TALK is a transaction gain or loss that will be included in earnings.
During 1995, Audiovox Malaysia entered into a Secured Term Loan for 1,700
Malaysian Ringgits (approximately $675) to acquire a building. The loan was
secured by the property acquired and bore interest at 1.5% above the
Malaysian base lending rate which was 9.2% on November 30, 1996. The loan
was payable in 120 monthly equal installments commencing October 1995,
however, was fully repaid in November 1996.
Maturities on long-term debt for the next five fiscal years are as follows:
Long-Term
Debt Maturing
-------------
1999 --
2000 --
2001 $2,269
2002 --
2003 --
======
11. Income Taxes
The components of income (loss) before the provision for income taxes are as
follows:
Year Ended November 30,
---------------------------------------
1998 1997 1996
------- ------- --------
Domestic Operations $ 5,380 $42,613 $(21,899)
Foreign Operations (1,579) 829 1,264
------- ------- --------
$ 3,801 $43,442 $(20,635)
======== ======= =========
F-30
<PAGE>
Total income tax expense (recovery) was allocated as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Income from continuing operations $ 829 $22,420
Stockholders' equity
Unrealized holding gain (loss) on investment securities
recognized for financial reporting purposes (4,928) 1,174
Unrealized holding gain on equity collar recognized for
financial reporting purposes (1,043) 473
-------- -------
Total income tax expense (recovery) $(5,142) $24,067
======== =======
</TABLE>
The provision for (recovery of) income taxes attributable to income from
continuing operations is comprised of:
Federal Foreign State Total
------- ------- ------ -------
1996:
Current $ 3,711 $ 802 $ 853 $ 5,366
Deferred 330 -- 138 468
------- ------ ------ ------
$ 4,041 $ 802 $ 991 $ 5,834
======= ====== ====== =======
1997:
Current $ 23,316 $1,159 $1,068 $25,543
Deferred (2,845) - (278) (3,123)
------- ------ ------ ------
$ 20,471 $1,159 $ 790 $22,420
======= ====== ====== =======
1998:
Current $ 1,499 $ (119) $ 351 $ 1,731
Deferred (819) -- (83) (902)
------- ------ ------ ------
$ 680 $ (119) $ 268 $ 829
======= ====== ====== =======
A reconciliation of the provision for (recovery of) income taxes
attributable to income (loss) from continuing operations computed at the
Federal statutory rate to the reported provision for income taxes
attributable to income (loss) from continuing operations is as follows:
F-31
<PAGE>
<TABLE>
<CAPTION>
November 30,
-------------------------------------------------------------------------
1998 1997 1996
---------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision (recovery) at
Federal statutory rates $1,292 34.0% $15,205 35.0% $ (7,222) (35.0)%
Expense relating to exchange of
subordinated debentures -- -- 4,578 10.5 11,421 55.3
Undistributed losses from equity
investments 287 7.6 123 0.3 128 0.6
State income taxes, net of
Federal benefit 260 6.8 1,637 3.8 275 1.3
(Decrease) increase in
beginning-of-the-year balance
of the valuation allowance for
deferred tax assets (340) (8.9) (180) (0.4) 1,270 6.2
Foreign tax rate differential (82) (2.2) 323 0.7 30 0.1
Benefit of concluded examination (350) (9.2) -- -- -- --
Other, net (238) (6.3) 734 1.7 (68) (0.2)
------ ---- ------- ---- ------- ----
$ 829 21.8% $22,420 51.6% $ 5,834 28.3%
====== ==== ======= ==== ======= ====
</TABLE>
The significant components of deferred income tax recovery for the years
ended November 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
November 30,
--------------------
1998 1997
------ -------
<S> <C> <C>
Deferred tax recovery (exclusive of the effect
of other components listed below) $(562) $(2,943)
(Decrease) increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets (340) (180)
----- -------
$(902) $(3,123)
===== =======
</TABLE>
F-32
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are presented
below:
<TABLE>
<CAPTION>
November 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts and cellular deactivations $ 1,210 $ 1,483
Inventory, principally due to additional costs capitalized for tax
purposes pursuant to the Tax Reform Act of 1986 325 439
Inventory, principally due to valuation reserve 1,882 941
Accrual for future warranty costs 563 830
Plant, equipment and certain intangibles, principally due to
depreciation and amortization 804 719
Net operating loss carryforwards, state and foreign 2,338 2,662
Equity collar 570 --
Accrued liabilities not currently deductible 346 405
Other 405 381
------- -------
Total gross deferred tax assets 8,443 7,860
Less: valuation allowance (2,373) (2,713)
------- -------
Net deferred tax assets 6,070 5,147
------- -------
Deferred tax liabilities:
Investment securities (3,577) (8,506)
Equity collar -- (473)
------- -------
Total gross deferred tax liabilities (3,577) (8,979)
------- -------
Net deferred tax asset (liability) $ 2,493 $(3,832)
======= =======
</TABLE>
The net change in the total valuation allowance for the year ended November
30, 1998 was a decrease of $340. A valuation allowance is provided when it
is more likely than not that some portion, or all, of the deferred tax
assets will not be realized. The Company has established valuation
allowances primarily for net operating loss carryforwards in certain states
and foreign countries as well as other deferred tax assets in foreign
countries. Based on the Company's ability to carry back future reversals of
deferred tax assets to taxes paid in current and prior years and the
Company's historical taxable income record, adjusted for unusual items,
management believes it is likely that the Company will realize the benefit
of the net deferred tax assets existing at November 30, 1998. Further,
management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
There can be no assurance, however, that the Company will generate any
earnings or any specific level of continuing earnings in the future. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
At November 30, 1998, the Company had net operating loss carryforwards for
state and foreign income tax purposes of approximately $11,239, which are
available to offset future state and foreign taxable income, if any, which
will expire through the year ended November 30, 2018.
F-33
<PAGE>
12. Capital Structure
The Company's capital structure is as follows:
<TABLE>
<CAPTION>
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
------- ----- ------------------------ ------------------------ ------ ------------
November 30, November 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock $50.00 50,000 50,000 50,000 50,000 -- $50 per share
Series Preferred Stock 0.01 1,500,000 1,500,000 -- -- -- --
Class A Common Stock Ratably with
0.01 30,000,000 30,000,000 16,760,518 16,963,533 One Class B
Class B Common Stock Ratably with
0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Class A
</TABLE>
The holders of Class A and Class B Common Stock are entitled to receive cash
or property dividends declared by the Board of Directors. The Board can
declare cash dividends for Class A Common Stock in amounts equal to or
greater than the cash dividends for Class B Common Stock. Dividends other
than cash must be declared equally for both classes. Each share of Class B
Common Stock may, at any time, be converted into one share of Class A Common
Stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned by
Shintom and have preference over both classes of common stock in the event
of liquidation or dissolution.
On May 16, 1997, the Company's Board of Directors approved the repurchase of
1,000,000 shares of the Company's Class A Common Stock in the open market
under a share repurchase program (the Program). As of November 30, 1998 and
1997, 498,055 and 290,000 shares, respectively, were repurchased under the
Program at an average price of $7.21 and $8.35 per share, respectively, for
an aggregate amount of $3,589 and $2,421, respectively.
As of November 30, 1998 and 1997, 1,963,480 and 969,500 shares of the
Company's Class A Common Stock are reserved for issuance under the Company's
Stock Option and Restricted Stock Plans and 4,167,117 and 5,491,192 for all
convertible securities and warrants outstanding at November 30, 1998 and
1997 (Notes 10 and 13).
Undistributed earnings from equity investments included in retained earnings
amounted to $2,324 and $1,564 at November 30, 1998 and 1997, respectively.
F-34
<PAGE>
13. Stock-Based Compensation and Stock Warrants
Stock Options
The Company has stock option plans under which employees and non-employee
directors may be granted incentive stock options (ISO's) and non-qualified
stock options (NQSO's) to purchase shares of Class A Common Stock. Under the
plans, the exercise price of the ISO's will not be less than the market
value of the Company's Class A Common Stock or 110% of the market value of
the Company's Class A Common Stock on the date of grant. The exercise price
of the NQSO's may not be less than 50% of the market value of the Company's
Class A Common Stock on the date of grant. The options must be exercisable
no later than ten years after the date of grant. The vesting requirements
are determined by the Board of Directors at the time of grant.
Compensation expense is recorded with respect to the options based upon the
quoted market value of the shares and the exercise provisions at the date of
grant. Compensation expense for the year ended November 30, 1996 was $97. No
compensation expense was recorded for the years ended November 30, 1998 and
1997.
Information regarding the Company's stock options is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
---------- ---------
<S> <C> <C>
Outstanding at
November 30, 1995 558,250 8.80
Granted -- --
Exercised -- --
Canceled (9,500) 10.17
--------- -----
Outstanding at
November 30, 1996 548,750 8.78
Granted 1,260,000 7.09
Exercised -- --
Canceled (109,000) 10.95
--------- -----
Outstanding at
November 30, 1997 1,699,750 7.38
Granted 10,000 4.63
Exercised -- --
Canceled (16,000) 8.79
--------- ----
Outstanding at November 30, 1998 1,693,750 7.33
========= ====
Options exercisable November 30, 1998 1,117,750 7.18
========= ====
</TABLE>
At November 30, 1998 and 1997, 207,302 and 190,250 shares, respectively,
were available for future grants under the terms of these plans.
The Company adopted Statement 123 in fiscal 1997. The Company has elected to
disclose the pro-forma net earnings and earnings per share as if such method
had been used to account for stock-based compensation costs as described in
Statement 123.
F-35
<PAGE>
The per share weighted average fair value of stock options granted during
1998 was $3.45 on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: risk free interest
rate of 5.7%, expected dividend yield of 0.0%, expected stock volatility of
60% and an expected option life of 10 years.
The per share weighted average fair value of stock options granted during
1997 was $5.73 on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk
free interest rate of 6.49%, expected dividend yield of 0.0%, expected stock
volatility of 70% and an expected option life of 10 years. No options were
granted in 1996.
The Company applies Opinion 25 in accounting for its stock option grants
and, accordingly, no compensation cost has been recognized in the financial
statements for its stock options which have an exercise price equal to or
greater than the fair value of the stock on the date of the grant. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options under Statement 123, the Company's net income and
net income per common share would have been reduced to the pro-forma amounts
indicated below:
1998 1997
------- ------
Net income:
As reported $ 2,972 $21,022
Pro-forma 1,336 18,786
Net income per common share (basic):
As reported $0.16 $1.11
Pro-forma 0.07 0.99
Net income per common share (diluted):
As reported 0.16 1.09
Pro-forma 0.07 0.97
Pro-forma net earnings reflect only options granted after November 30, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro-forma net earnings
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
December 1, 1995 was not considered. Therefore, the pro-forma net earnings
may not be representative of the effects on reported net income for future
years.
F-36
<PAGE>
Summarized information about stock options outstanding as of November 30,
1998 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------ -------------------------
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Averag
Price Number Price Remaining Number Price
Range of Shares of Shares In Years of Shares of Shares
--------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
$4.63 - $ 8.00 1,531,000 $ 6.85 8.15 955,000 $ 6.30
$8.01 - $13.00 162,750 $12.08 5.43 162,750 $12.08
</TABLE>
Restricted Stock Plan
The Company has restricted stock plans under which key employees and
directors may be awarded restricted stock. Total restricted stock
outstanding, granted under these plans, at November 30, 1998 and 1997 was
72,428 and 78,500, respectively. Awards under the restricted stock plan may
be performance accelerated shares or performance restricted shares No
performance accelerated shares or performance restricted shares were granted
in 1998, 1997 or 1996.
Compensation expense for the performance accelerated shares is recorded
based upon the quoted market value of the shares on the date of grant.
Compensation expense for the performance restricted shares is recorded based
upon the quoted market value of the shares on the balance sheet date.
Compensation expense (income) for these grants for the years ended November
30, 1998, 1997 and 1996 were $(23), $135 and $200, respectively.
Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee Stock Purchase
Plan. The stock purchase plan provides eligible employees an opportunity to
purchase shares of the Company's Class A Common Stock through payroll
deductions up to 15% of base salary compensation. Amounts withheld are used
to purchase Class A Common Stock on the open market. The cost to the
employee for the shares is equal to 85% of the fair market value of the
shares on or about the last business day of each month. The Company bears
the cost of the remaining 15 % of the fair market value of the shares as
well as any broker fees. This Plan provides for purchases of up to 1,000,000
shares.
Stock Warrants
During the third quarter of fiscal 1993, pursuant to a consulting agreement
effective April 1993, the Company granted warrants to purchase 100,000
shares of Class A Common Stock, which have been reserved, at $7.50 per
share. The warrants, which are exercisable in whole or in part at the
discretion of the holder, expired on December 31, 1998. There were no
warrants exercised as of November 30, 1998. The consulting agreement, valued
at $100, was expensed in 1994 when the services to be provided, pursuant to
the consulting agreement, were completed.
F-37
<PAGE>
In December 1993, the Company granted warrants to purchase 50,000 shares of
Class A Common Stock at a purchase price of $14.375 per share as part of the
acquisition of H & H Eastern Distributors, Inc. The per share purchase price
and number of shares purchasable are each subject to adjustment upon the
occurrence of certain events described in the warrant agreement. The
warrants are exercisable, in whole or in part, from time-to-time, until
September 22, 2003. If the warrants are exercised in whole, the holder
thereof has the right to require the Company to file with the Securities
Exchange Commission a registration statement relating to the sale by the
holder of the Class A Common Stock purchasable pursuant to the warrant.
On May 9, 1995, the Company issued 1,668,875 warrants in a private
placement, each convertible into one share of Class A Common Stock at
$7 1/8, subject to adjustment under certain circumstances. The warrants were
issued to the beneficial holders as of June 3, 1994, of approximately
$57,600 of the Company's Subordinated Debentures in exchange for a release
of any claims such holders may have against the Company, its agents,
directors and employees in connection with their investment in the
Subordinated Debentures. As a result, the Company incurred a warrant expense
of $2,900 and recorded a corresponding increase to paid-in capital. The
warrants are not exercisable after March 15, 2001, unless sooner terminated
under certain circumstances. John J. Shalam, Chief Executive Officer of the
Company, has granted the Company an option to purchase 1,668,875 shares of
Class A Common Stock from his personal holdings. The exercise price of this
option is $7 1/8, plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains to
Mr. Shalam. During 1998, the Company purchased approximately 1,324,075 of
these warrants at a price of $1.30 per warrant, pursuant to the terms of a
self-tender offer. As of November 30, 1998, 344,800 remaining warrants are
outstanding.
During fiscal 1997, the Company granted warrants to purchase 100,000 shares
of Class A Common Stock, which have been reserved, at $6.75 per share. The
warrants, which are exercisable in whole or in part at the discretion of the
holder, expire on January 29, 2002. There were no warrants exercised as of
November 30, 1998.
Profit Sharing Plans
The Company has established two non-contributory employee profit sharing
plans for the benefit of its eligible employees in the United States and
Canada. The plans are administered by trustees appointed by the Company. A
contribution of $150, $500 and $150 was made by the Company to the United
States plan in fiscal 1998, 1997 and 1996, respectively. Contributions
required by law to be made for eligible employees in Canada were not
material.
F-38
<PAGE>
14. Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic and
diluted earnings per common share is as follows:
<TABLE>
<CAPTION>
For the Years Ended
November 30,
--------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) (numerator for net income (loss) per common
share, basic $ 2,972 $ 1,022 $(26,469)
Interest on 6 1/4% convertible subordinated debentures, net
of tax -- 185 --
---------- --------- ---------
Adjusted net income (numerator for net income (loss) per
common share, diluted) $ 2,972 $ 1,207 $ (26,469)
========== ========= =========
Weighted average common shares (denominator for net
income(loss) per common share, basic) 19,134,529 18,948,356 9,398,352
Effect of dilutive securities:
Employee stock options and stock warrants -- 237,360 --
Employee stock grants -- 70,845 --
Convertible debentures -- 251,571 --
---------- ---------- ---------
Weighted average common and potential common shares
outstanding (denominator for net income (loss) per common
share, diluted) 19,134,529 19,508,132 9,398,352
========== ========== =========
Net income (loss) per common share, basic $ .16 $ .11 $ (2.82)
Net income (loss) per common share, diluted $ .16 $ .09 $ (2.82)
</TABLE>
Employee stock options and stock warrants totaling 2,779,363, 1,908,438 and
2,385,875 for the years ended November 30, 1998, 1997 and 1996,
respectively, were not included in the net earnings per share calculation
because their effect would have been anti-dilutive.
15. Export Sales
Export sales of approximately $102,659 for the year ended November 30, 1997,
exceeded 10% of sales. Export sales did not exceed 10% of sales for the
years ended November 30, 1998 and 1996.
16. Lease Obligations
During 1998, the Company entered into a 30-year lease for a building with
its principal stockholder and chief executive officer. A significant portion
of the lease payments, as required under the lease agreement, consists of
the debt service payments required to be made by the principal stockholder
in connection with the financing of the construction of the building. For
financial reporting purposes, the lease has been classified as a capital
lease, and, accordingly, a building and the related obligation of
approximately $6,340 was recorded (Note 7). In connection with the capital
lease, the Company paid certain construction costs on behalf of it principal
stockholder and Chief Executive Officer in the amount of $1,210. The amount
is payable to the Company with 8% interest.
F-39
<PAGE>
During 1998, the Company entered into a sale/lease back transaction with its
principal stockholder and Chief Executive Officer for $2,100 of equipment.
No gain or loss on the transaction was recorded as the book value of the
equipment equaled the fair market value. The lease is for five years with
monthly rental payments of $34. The lease has been classified as an
operating lease.
At November 30, 1998, the Company was obligated under non-cancelable capital
and operating leases for equipment and warehouse facilities for minimum
annual rental payments as follows:
Capital Operating
Lease Leases
------- ---------
1999 $ 521 $2,115
2000 522 1,712
2001 530 1,325
2002 553 1,113
2003 554 610
Thereafter 13,652 724
------- ------
Total minimum lease payments 16,332 $7,599
======
Less: amount representing interest 10,017
-------
Present value of net minimum lease payments 6,315
Less: current installments 17
-------
Long-term obligation $ 6,298
=======
Rental expense for the above-mentioned operating lease agreements and other
leases on a month-to-month basis approximated $2,563, $2,516 and $2,292 for
the years ended November 30, 1998, 1997 and 1996, respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are considered by
management of the Company to approximate prevailing market rates. At
November 30, 1998, minimum annual rental payments on these related party
leases, in addition to the capital lease payments, which are included in the
above table, are as follows:
1999 $434
2000 411
2001 411
2002 411
2003 --
17. Financial Instruments
Derivative Financial Instruments
Forward Exchange Contracts
F-40
<PAGE>
At November 30, 1998 and 1997, the Company had contracts to exchange
foreign currencies in the form of forward exchange contracts in the
amount of $5,352 and $26,502, respectively. These contracts have varying
maturities with none exceeding one year as of November 30, 1998. For the
years ended November 30, 1998, 1997 and 1996, gains and losses on
foreign currency transactions which were not hedged were not material.
For the years ended November 30, 1998, 1997 and 1996, there were no
gains or losses as a result of terminating hedges prior to the
transaction date.
Equity Collar
The Company entered into an equity collar on September 26, 1997 to
maintain some of the unrealized gains associated with its investment in
CellStar (Note 6). The equity collar provides that on September 26,
1998, the Company can put 100,000 shares of CellStar to the counter
party to the equity collar (the bank) at $38 per share in exchange for
the bank being able to call the 100,000 shares of CellStar at $51 per
share. The Company has designated this equity collar as a hedge of
100,000 of its shares in CellStar being that it provides the Company
with protection against the market value of CellStar shares falling
below $38. Given the high correlation of the changes in the market value
of the item being hedged to the item underlying the equity collar, the
Company applied hedge accounting for this equity collar. The equity
collar is recorded on the balance sheet at fair value with gains and
losses on the equity collar reflected as a separate component of equity.
During 1998, the Company sold its equity collar for $1,499. The
transaction resulted in a net gain on hedge of available-for-sale
securities of $929 which is reflected as a separate component of
stockholders' equity.
The Company is exposed to credit losses in the event of
nonperformance by the counter parties to its forward exchange contracts
and its equity collar. The Company anticipates, however, that counter
parties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral to support financial
instruments, but monitors the credit standing of the counter parties.
Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during the ordinary
course of business through major domestic banks as requested by certain
suppliers. The Company also issues standby letters of credit principally to
secure certain bank obligations of Audiovox Communications and Audiovox
Venezuela (Note 9(a)). The Company had open commercial letters of credit of
approximately $24,914 and $19,078, of which $20,576 and $10,625 were accrued
for as of November 30, 1998 and 1997, respectively. The terms of these
letters of credit are all less than one year. No material loss is
anticipated due to nonperformance by the counter parties to these
F-41
<PAGE>
agreements. The fair value of these open commercial and standby letters of
credit is estimated to be the same as the contract values based on the
nature of the fee arrangements with the issuing banks.
The Company is a party to a joint and several guarantee on behalf of G.L.M.
up to the amount of $200. There is no market for this guarantee and it was
issued without explicit cost. Therefore, it is not practicable to establish
its fair value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables. The
Company's customers are located principally in the United States and Canada
and consist of, among others, cellular carriers and service providers,
distributors, agents, mass merchandisers, warehouse clubs and independent
retailers.
At November 30, 1998, three customers, which included two cellular carrier
and service providers and a Bell Operating Company accounted for
approximately 18.0%, 13.8% and 13.5%, respectively, of accounts receivable.
At November 30, 1997, two customers, a cellular carrier and service provider
and a Bell Operating Company, accounted for approximately 8.7% and 5.3%,
respectively, of accounts receivable.
During the year ended November 30, 1998, two customers, a Bell Operating
Company and a cellular carrier and service provider, accounted for
approximately 18.3% and 14.9%, respectively, of the Company's 1998 sales.
During the year ended November 30, 1997, two customers, a cellular carrier
and service provider and a Bell Operating Company, accounted for
approximately 11.3% and 9.0%, respectively, of the Company's 1997 sales.
During the year ended November 30, 1996, two customers, a Bell Operating
Company and a cellular carrier and service provider accounted for
approximately 12% and 9%, respectively, of the Company's 1996 sales.
The Company generally grants credit based upon analyses of its customers'
financial position and previously established buying and payment patterns.
The Company establishes collateral rights in accounts receivable and
inventory and obtains personal guarantees from certain customers based upon
management's credit evaluation. At November 30, 1998 and 1997, 34 and 43
customers, representing approximately 74% and 69%, respectively, of
outstanding accounts receivable, had balances owed greater than $500.
A portion of the Company's customer base may be susceptible to downturns in
the retail economy, particularly in the consumer electronics industry.
Additionally, customers specializing in certain automotive sound, security
and accessory products may be impacted by fluctuations in automotive sales.
A relatively small number of the Company's significant customers are deemed
to be highly leveraged.
F-42
<PAGE>
Fair Value
The carrying value of all financial instruments classified as a current
asset or liability is deemed to approximate fair value, with the exception
of current installments of long-term debt, because of the short maturity of
these instruments. The estimated fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Investment securities $17,854 $17,854 $22,382 $22,382
Equity collar (derivative) -- -- $1,246 $1,246
Long-term obligations including current
installments $23,831 $24,202 $30,491 $30,910
Forward exchange contract obligation
(derivative) -- $5,352 -- $26,125
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 6).
Equity Collar (Derivative)
The carrying amount represents fair value, which is based upon the
Black Scholes option-pricing model.
Long-Term Debt Including Current Installments
The carrying amount of bank debt under the Company's revolving
credit agreement and Malaysian Credit Agreement approximates fair value
because of the short maturity of the underlying obligations. With
respect to the Subordinated Debentures, fair values are based on
published statistical data.
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based upon
exchange rates at November 30, 1998 and 1997 as the contracts are short
term.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
F-43
<PAGE>
18. Contingencies
The Company is a defendant in litigation arising from the normal conduct of
its affairs. The impact of the final resolution of these matters on the
Company's results of operations or liquidity in a particular reporting
period is not known. Management is of the opinion, however, that the
litigation in which the Company is a defendant is either subject to product
liability insurance coverage or, to the extent not covered by such
insurance, will not have a material adverse effect on the Company's
consolidated financial position.
The Company has guaranteed certain obligations of its equity investments and
has established standby letters of credit to guarantee the bank obligations
of Audiovox Communications and Audiovox Venezuela (Note 17(b)).
F-44
<PAGE>
3,100,000 Shares
Class A Common Stock
PROSPECTUS
SG COWEN
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES
LADENBURG THALMANN & CO. INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of the
shares being registered. All amounts are estimates except the registration fee
and the Amex additional listing fee:
SEC Registration Fee................................................. $ 25,210
Amex Additional Listing Fee.......................................... 100,000
Printing Expenses................................................... 100,000
Blue Sky Fees and NASD Fees.......................................... 15,000
Legal Fees and Expenses.............................................. *
Accounting Fees and Expenses......................................... *
Transfer Agent Fee................................................... *
Miscellaneous........................................................
--------
Total............................................................ $600,000
========
- -----------
* To be inserted by amendment
Item 15. Indemnification of Directors and Officers.
Subsection (a) of Section 145 of the Delaware General Corporation Law (the
"DGCL") empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceedings, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of the Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
II-1
<PAGE>
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; that indemnification provided for by Section
145 shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such persons' heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under Section 145.
Article Eighth of Audiovox's Certificate of Incorporation and Article VIII
of Audiovox's By-laws provide that it shall indemnify its directors and officers
to the fullest extent authorized by the DGCL.
Section 102(b)(7) of DGCL provides that a certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director provided that such provision shall not eliminate or
limit the liability of a director (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 174 of the DGCL, or (4) for any transaction from which
the director derived an improper personal benefit. Article Fifth of Audiovox's
Certificate of Incorporation limits the liability of directors to the fullest
extent permitted by Section 102(b)(7).
The underwriting agreement, which is Exhibit 1.1 to this registration
statement, provides for indemnification by the underwriters, severally and not
jointly, of Audiovox, its directors and officers and the selling stockholders,
and by Audiovox and the selling stockholders, severally and not jointly, of the
underwriters, for liabilities arising under the Securities Act of 1933, and
afford rights of contribution with respect thereto.
II-2
<PAGE>
Item 16. Exhibits.
The following exhibits are filed herewith or incorporated by reference.
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement.
**4.1 Certificate of Incorporation of Audiovox Corporation
(incorporated by reference to Exhibit 3.1 to
Company's Registration Statement on Form S-1
(Registration No. 33-10726)).
**4.2 Amendment to the Certificate of Incorporation
(incorporated by reference to Exhibit 3.1a to
Audiovox Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1993, File No. 1-9532).
*5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
23.1 Consent of KPMG LLP.
23.2 The consent of Fried, Frank, Harris, Shriver & Jacobson is
contained in their opinion filed as Exhibit (5.1) to this
Registration Statement.
24.1 Power of Attorney is included on the signature pages.
- ---------
* To be filed by amendment.
** Incorporated by reference.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities, other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any act, suit
or proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements of filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, at Hauppauge, New York, on this 22nd day of November, 1999.
AUDIOVOX CORPORATION
(Registrant)
By: /s/ John J. Shalam
------------------------------------
John J. Shalam, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of John J. Shalam and Charles M.
Stoehr, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution and to act without the other, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement
on Form S-3 and any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of their, his or her substitute or substitutes may lawfully do or
cause to be done by virtue hereof and Audiovox Corporation hereby confers like
authority on its behalf.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ John J. Shalam
- -------------------------------------- President and Chief Executive Officer November 22, 1999
John J. Shalam Director
/s/ Philip Christopher
- -------------------------------------- Executive Vice President November 22, 1999
Philip Christopher Director
/s/ Charles M. Stoehr
- -------------------------------------- Senior Vice President and Chief November 22, 1999
Charles M. Stoehr Financial Officer (Principal Accounting
Officer), Director
/s/ Patrick M. Lavelle
- -------------------------------------- Senior Vice President November 22, 1999
Patrick M. Lavelle Director
/s/ Ann Boutcher
- -------------------------------------- Vice President November 22, 1999
Ann Boutcher Director
/s/ Richard Maddia
- -------------------------------------- Vice President November 22, 1999
Richard Maddia Director
/s/ Paul C. Kreuch, Jr.
- -------------------------------------- Director November 22, 1999
Paul C. Kreuch, Jr.
/s/ Dennis F. McManus
- -------------------------------------- Director November 22, 1999
Dennis F. McManus
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement.
**4.1 Certificate of Incorporation of Audiovox Corporation
(incorporated by reference to Exhibit 3.1 to
Company's Registration Statement on Form S-1
(Registration No. 33-10726)).
**4.2 Amendment to the Certificate of Incorporation
(incorporated by reference to Exhibit 3.1a to
Audiovox Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1993, File No.
1-9532).
*5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
23.1 Consent of KPMG LLP.
23.2 The consent of Fried, Frank, Harris, Shriver & Jacobson is
contained in their opinion filed as Exhibit (5.1) to this
Registration Statement.
24.1 Power of Attorney is included on the signature pages.
- ---------
* To be filed by amendment.
** Incorporated by reference.
<PAGE>
3,100,000 Shares
AUDIOVOX CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____________, 1999
SG COWEN SECURITIES CORPORATION
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
LADENBURG & THALMANN & CO. INC.
As Representatives of the several Underwriters
c/o SG Cowen Securities Corporation
Financial Square
New York, New York 10005
Dear Sirs:
1. INTRODUCTORY. Audiovox Corporation, a Delaware corporation (the "Company"),
and the selling shareholders named in Schedule B hereto (the "Selling
Shareholders") propose to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), an aggregate of 3,100,000 shares of Common Stock, $.01 par
value (the "Common Stock"), of the Company. The aggregate of 3,100,000 shares so
proposed to be sold is hereinafter referred to as the "Firm Stock". The Company
and the Selling Shareholders listed in Schedule B hereto also propose to sell to
the Underwriters, upon the terms and conditions set forth in Section 3 hereof,
up to an additional 465,000 shares of Common Stock (the "Optional Stock"). The
Firm Stock and the Optional Stock are hereinafter collectively referred to as
the "Stock". SG Cowen Securities Corporation ("SG Cowen"), Morgan Keegan &
Company, Inc. ("Morgan Keegan"), Prudential Securities Incorporated and
Ladenburg Thalmann & Co. Inc. are acting as representatives of the several
Underwriters and in such capacity are hereinafter referred to as the
"Representatives."
2. (I) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS. The Company and, with respect to Sections 2(I)(b)(ii), (c)(ii),
(l), (m), (n), (r), (z) and (gg) to their knowledge, the Selling Shareholders
represent and warrant to, and agree with, the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-__) (the
"Initial Registration Statement") in respect of the Stock has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto but including all documents incorporated by reference
in the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective
<PAGE>
2
by the Commission in such form; other than a registration statement, if
any, increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
(the "Rules and Regulations") of the Commission thereunder, which
became effective upon filing, no other document with respect to the
Initial Registration Statement or document incorporated by reference
therein has heretofore been filed with the Commission; and no stop
order suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for
that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement
or filed with the Commission pursuant to Rule 424(a) of the Rules and
Regulations, is hereinafter called a "Preliminary Prospectus"); the
various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including (i) the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities
Act and deemed by virtue of Rule 430A under the Securities Act to be
part of the Initial Registration Statement at the time it was declared
effective and (ii) the documents incorporated by reference in the
prospectus contained in the Initial Registration Statement at the time
such part of the Initial Registration Statement became effective, each
as amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statements"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Securities Act, is hereinafter called the "Prospectus" and any
reference herein to any Preliminary Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Securities
Act, as of the date of such Preliminary Prospectus or Prospectus, as
the case may be; any reference to any amendment or supplement to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to
and include any documents filed after the date of such Preliminary
Prospectus or Prospectus, as the case may be, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated
by reference in such Preliminary Prospectus or Prospectus, as the case
may be; and any reference to any amendment to the Registration
Statements shall be deemed to refer to and include any annual report of
the Company filed pursuant to Section 13(a) or 15(d) of the Exchange
Act after the effective date of the Initial Registration Statement that
is incorporated by reference in the Registration Statements. No
document has been or will be prepared or distributed in reliance on
Rule 434 under the Securities Act. No order preventing or suspending
the use of any Preliminary Prospectus has been issued by the
Commission.
(b) The Registration Statement (i) conforms (and the Rule 462(b)
Registration Statement, if any, the Prospectus and any amendments or
supplements to either of the Registration Statements or the Prospectus,
when they become effective or are filed with the Commission, as the
case may be, will conform) in all material respects to the requirements
of the Securities Act and the Rules and Regulations and (ii) do not and
will not, as of the applicable effective date (as to the Registration
Statements and any
<PAGE>
3
amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the foregoing
representations and warranties shall not apply to information contained
in or omitted from the Registration Statements or the Prospectus or any
such amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
(c) The documents incorporated by reference in the Prospectus, when
they were filed with the Commission (i) conformed in all material
respects to the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, and (ii) none of such
documents contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; and any further
documents so filed and incorporated by reference in the Prospectus,
when such documents are filed with Commission will conform in all
material respects to the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(d) The Company and each of its subsidiaries (as defined in Section 14)
have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, and have all power
and authority necessary to own or hold their respective properties and
to conduct the businesses in which they are engaged, except where the
failure to so qualify or have such power or authority would not have,
singularly or in the aggregate, a material adverse effect on the
condition (financial or otherwise), results of operations, business or
prospects of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect"). The Company owns or controls, directly or
indirectly, only the following corporations, associations or other
entities: [___].
(e) This Agreement has been duly authorized executed and delivered by
the Company.
(f) The Stock to be issued and sold by the Company to the Underwriters
hereunder has been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and free of any preemptive
or similar rights and will conform to the description thereof contained
in the Prospectus.
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company (including, without limitation, the shares of Stock to be sold
by the Selling Shareholders), have been duly and validly
<PAGE>
4
authorized and issued, are fully paid and non-assessable and conform to
the description thereof contained in the Prospectus.
(h) All the outstanding shares of capital stock of each subsidiary of
the Company have been duly authorized and validly issued, are fully
paid and nonassessable and, except to the extent set forth in the
Prospectus, are owned by the Company directly or indirectly through one
or more wholly-owned subsidiaries, free and clear of any claim, lien,
encumbrance, security interest, restriction upon voting or transfer or
any other claim of any third party.
(i) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such actions result in any violation
of the provisions of the charter or by-laws of the Company or any of
its subsidiaries or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or
assets.
(j) Except for the registration of the Stock under the Securities Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution
of the Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of
the transactions contemplated hereby.
(k) KPMG LLP, who have expressed their opinions on the audited
financial statements and related schedules included or incorporated by
reference in the Registration Statements and the Prospectus are
independent public accountants as required by the Securities Act and
the Rules and Regulations.
(l) The financial statements, together with the related notes and
schedules, included or incorporated by reference in the Prospectus and
in each Registration Statement fairly present the financial position
and the results of operations and changes in financial position of the
Company and its consolidated subsidiaries at the respective dates or
for the respective periods therein specified. Such statements and
related notes and schedules have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
except as may be set forth in the Prospectus.
(m) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus, any material loss or
interference with its business from fire, explosion, flood
<PAGE>
5
or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the business, general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries taken as a whole,
otherwise than as set forth or contemplated in the Prospectus.
(n) Except as set forth in the Prospectus, there is no legal or
governmental proceeding pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of the
Company or any of its subsidiaries is the subject which, singularly or
in the aggregate, if determined adversely to the Company or any of its
subsidiaries, might have a Material Adverse Effect or would prevent or
adversely affect the ability of the Company to perform its obligations
under this Agreement; and to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(o) Neither the Company nor any of its subsidiaries (i) is in violation
of its charter or by-laws, (ii) is in default in any respect, and no
event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which it
is a party or by which it is bound or to which any of its property or
assets is subject or (iii) is in violation in any respect of any law,
ordinance, governmental rule, regulation or court decree to which it or
its property or assets may be subject except any violations or defaults
which, singularly or in the aggregate, would not have a Material
Adverse Effect.
(p) The Company and each of its subsidiaries possess all licenses,
certificates, authorizations and permits issued by, and have made all
declarations and filings with, the appropriate state, federal or
foreign regulatory agencies or bodies which are necessary or desirable
for the ownership of their respective properties or the conduct of
their respective businesses as described in the Prospectus, except
where any failures to possess or make the same, singularly or in the
aggregate, would not have a Material Adverse Effect, and the Company
has not received notification of any revocation or modification of any
such license, authorization or permit and has no reason to believe that
any such license, certificate, authorization or permit will not be
renewed.
(q) Neither the Company nor any of its subsidiaries is or, after giving
effect to the offering of the Stock and the application of the proceeds
thereof as described in the Prospectus, will become an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended and the rules and regulations of the Commission thereunder.
(r) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate
<PAGE>
6
the price of any security of the Company, or which caused or resulted
in, or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security
of the Company.
(s) The Company and its subsidiaries own or possess the right to use
all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the Prospectus as
being owned by them for the conduct of their respective businesses, and
the Company is not aware of any claim to the contrary or any challenge
by any other person to the rights of the Company and its subsidiaries
with respect to the foregoing. The Company's business as now conducted
and as proposed to be conducted does not and will not infringe or
conflict with any patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses or other intellectual property or
franchise right of any person. Except as described in the Prospectus,
no claim has been made against the Company alleging the infringement by
the Company of any patent, trademark, service mark, trade name,
copyright, trade secret, license in or other intellectual property
right or franchise right of any person.
(t) The Company and each of its subsidiaries have good and marketable
title in fee simple to, or have valid rights to lease or otherwise use,
all items of real or personal property which are material to the
business of the Company and its subsidiaries taken as a whole, in each
case free and clear of all liens, encumbrances, claims and defects that
may result in a Material Adverse Effect.
(u) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or, to the best of the Company's knowledge, is
imminent which might be expected to have a Material Adverse Effect. The
Company is not aware that any key employee or significant group of
employees of the Company or any subsidiary plans to terminate
employment with the Company or any such subsidiary.
(v) No "prohibited transaction" (as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended from time
to time (the "Code")) or "accumulated funding deficiency" (as defined
in Section 302 of ERISA) or any of the events set forth in Section
4043(b) of ERISA (other than events with respect to which the 30-day
notice requirement under Section 4043 of ERISA has been waived) has
occurred with respect to any employee benefit plan which could have a
Material Adverse Effect; each employee benefit plan is in compliance in
all material respects with applicable law, including ERISA and the
Code; the Company has not incurred and does not expect to incur
liability under Title IV of ERISA with respect to the termination of,
or withdrawal from, any "pension plan"; and each "pension plan" (as
defined in ERISA) for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which could cause the loss of such
qualification.
<PAGE>
7
(w) There has been no storage, generation, transportation, handling,
treatment, disposal, discharge, emission, or other release of any kind
of toxic or other wastes or other hazardous substances by, due to, or
caused by the Company or any of its subsidiaries (or, to the best of
the Company's knowledge, any other entity for whose acts or omissions
the Company or any of its subsidiaries is or may be liable) upon any of
the property now or previously owned or leased by the Company or any of
its subsidiaries, or upon any other property, in violation of any
statute or any ordinance, rule, regulation, order, judgment, decree or
permit or which would, under any statute or any ordinance, rule
(including rule of common law), regulation, order, judgment, decree or
permit, give rise to any liability, except for any violation or
liability which would not have, singularly or in the aggregate with all
such violations and liabilities, a Material Adverse Effect; there has
been no disposal, discharge, emission or other release of any kind onto
such property or into the environment surrounding such property of any
toxic or other wastes or other hazardous substances with respect to
which the Company or any of its subsidiaries have knowledge, except for
any such disposal, discharge, emission, or other release of any kind
which would not have, singularly or in the aggregate with all such
discharges and other releases, a Material Adverse Effect.
(x) The Company and its subsidiaries each (i) have filed with the
appropriate authorities all necessary federal, state and foreign income
and franchise tax returns, (ii) have paid all federal sate, local and
foreign taxes due and payable for which it is liable, and (iii) do not
have any tax deficiency or claims outstanding or assessed or, to the
best of the Company's knowledge, proposed against it which could
reasonably be expected to have a Material Adverse Effect.
(y) The Company and each of its subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in
similar businesses in similar industries.
(z) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(aa) The minute books of the Company and each of its subsidiaries have
been made available to the Underwriters and counsel for the
Underwriters, and such books (i) contain a complete summary of all
meetings and actions of the directors and shareholders of the Company
and each of its subsidiaries since the time of its respective
incorporation through the date of the latest meeting and action, and
(ii) accurately in all material respects reflect all transactions
referred to in such minutes.
<PAGE>
8
(bb) There is no franchise, lease, contract, agreement or document
required by the Securities Act or by the Rules and Regulations to be
described in the Prospectus or to be filed as an exhibit to the
Registration Statements which is not described or filed therein as
required; and all descriptions of any such franchises, leases,
contracts, agreements or documents contained in the Registration
Statements are accurate and complete descriptions of such documents in
all material respects.
(cc) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is
required to be described in the Prospectus and which is not so
described.
(dd) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of
the filing or effectiveness of the Registration Statements or
otherwise, except for persons and entities who have expressly waived
such right or who have been given proper notice and have failed to
exercise such right within the time or times required under the terms
and conditions of such right.
(ee) Neither the Company nor any of its subsidiaries own any "margin
securities" as that term is defined in Regulations G and U of the Board
of Governors of the Federal Reserve System (the "Federal Reserve
Board"), and none of the proceeds of the sale of the Stock will be
used, directly or indirectly, for the purpose of purchasing or carrying
any margin security, for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of the
Securities to be considered a "purpose credit" within the meanings of
Regulation G, T, U or X of the Federal Reserve Board.
(ff) Neither the Company nor any of its subsidiaries is a party to any
contract, agreement or understanding with any person that would give
rise to a valid claim against the Company or the Underwriters for a
brokerage commission, finder's fee or like payment in connection with
the offering and sale of the Stock.
(gg) No forward-looking statement (within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act) contained in
the Prospectus has been made or reaffirmed without a reasonable basis
or has been disclosed other than in good faith.
(hh) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to
which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a Material Adverse
Effect. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
<PAGE>
9
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(ii) The Stock is listed on the American Stock Exchange.
(II) REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder severally represents and warrants to, and agrees with,
the several Underwriters that such Selling Shareholder:
(a) Has, and immediately prior to the Closing Date (as defined in
Section 3 hereof) the Selling Shareholder will have good and valid
title to the shares of Stock to be sold by such Selling Shareholder
hereunder on such date, free and clear of all liens, encumbrances,
equities or claims; and upon delivery of such shares and payment
therefor pursuant hereto, good and valid title to such shares, free and
clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters.
(b) Has duly and irrevocably executed and delivered a power of
attorney, in substantially the form heretofore delivered by the
Representatives (the "Power of Attorney"), appointing, [insert names of
attorneys-in-fact] and each of them, as attorney-in-fact (the
"Attorneys-in-fact") with authority to execute and deliver this
Agreement on behalf of such Selling Shareholder, to authorize the
delivery of the shares of Stock to be sold by such Selling Shareholder
hereunder and otherwise to act on behalf of such Selling Shareholder in
connection with the transactions contemplated by this Agreement.
(c) Has duly and irrevocably executed and delivered a custody
agreement, in substantially the form heretofore delivered by the
Representatives (the "Custody Agreement"), with [insert name of
custodian] as custodian (the "Custodian"), pursuant to which
certificates in negotiable form for the shares of Stock to be sold by
such Selling Shareholder hereunder have been placed in custody for
delivery under this Agreement.
(d) Has full right, power and authority to enter into this Agreement,
the Power of Attorney and the Custody Agreement; the execution,
delivery and performance of this Agreement, the Power of Attorney and
the Custody Agreement by such Selling Shareholders and the consummation
by such Selling Shareholders of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Shareholder is a party or
by which the Selling Shareholder is bound or to which any of the
property or assets of the Selling Shareholder is subject, nor will such
actions result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Selling Shareholder or the property or assets of
the Selling Shareholder; and, except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters,
<PAGE>
10
no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement,
the Power of Attorney or the Custody Agreement by such Selling
Shareholder and the consummation by the Selling Shareholder of the
transactions contemplated hereby and thereby.
(e) The Registration Statements do not, and the Prospectus and any
further amendments or supplements to the Registration Statements or the
Prospectus will not, as of the applicable effective date (as to the
Registration Statements and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The preceding
sentence does not apply to information contained in or omitted from the
Registration Statements or the Prospectus in reliance upon and in
conformity with written information furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Shareholders
agree, severally and not jointly, to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholders, that number of shares of Firm Stock (rounded up or
down, as determined by SG Cowen in its discretion, in order to avoid fractions)
obtained by multiplying _____ shares of Firm Stock in the case of the Company
and the number of shares of Firm Stock set forth opposite the name of such
Selling Shareholder in Schedule B hereto, in the case of a Selling Shareholder,
in each case by a fraction the numerator of which is the number of shares of
Firm Stock set forth opposite the name of such Underwriter in Schedule A hereto
and the denominator of which is the total number of shares of Firm Stock.
The purchase price per share to be paid by the Underwriters to the Company and
the Selling Shareholders for the Stock will be $_____ per share (the "Purchase
Price").
The Company and the Selling Shareholders will deliver the Firm Stock to the
Representatives for the respective accounts of the several Underwriters (in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Company given at
or prior to 12:00 Noon, New York time, on the second full business day preceding
the Closing Date (as defined below) against payment of the aggregate Purchase
Price therefor by wire transfer to an account at a bank acceptable to SG Cowen,
payable to the order of the Company and [insert name of custodian], as Custodian
for the Selling Shareholders, all at the offices of __________. Time shall be of
the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligations of each Underwriter
hereunder. The time and date of the delivery and closing shall be at 10:00 A.M.,
New York time, on _______________, _____, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery are herein referred
to as the "Closing Date". The Closing Date and the location of delivery of, and
the form of payment for, the Firm Stock may be varied by agreement among the
Company, the Selling Shareholders and SG Cowen.
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11
The Company and the Selling Shareholders shall make the certificates for the
Stock available to the Representatives for examination on behalf of the
Underwriters in New York, New York at least twenty-four hours prior to the
Closing Date.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Underwriters may purchase all or less than all of the Optional Stock. The
Company and the Selling Shareholders agree, severally and not jointly, to sell
to the Underwriters the respective numbers of shares of Optional Stock obtained
by multiplying the number of shares of Optional Stock specified in such notice
by a fraction, the numerator of which is 2,000,000 in the case of the Company
and the number of shares set forth opposite the names of such Selling
Shareholders in Schedule B hereto under the caption "Number of Optional Shares
to be Sold" in the case of the Selling Shareholders and the denominator of which
is the total number of shares of Optional Stock (subject to adjustment by SG
Cowen to eliminate fractions). Such shares of Optional Stock shall be purchased
from the Company and each Selling Shareholder for the account of each
Underwriter in the same proportion as the number of shares of Firm Stock set
forth opposite such Underwriter's name bears to the total number of shares of
Firm Stock (subject to adjustment by SG Cowen to eliminate fractions). The price
per share to be paid for the Optional Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any part of the Optional
Stock at any time, and from time to time, not more than thirty (30) days
subsequent to the date of this Agreement. No Optional Stock shall be sold and
delivered unless the Firm Stock previously has been, or simultaneously is, sold
and delivered. The right to purchase the Optional Stock or any portion thereof
may be surrendered and terminated at any time upon notice by SG Cowen to the
Company.
The option granted hereby may be exercised by written notice being given to the
Company by SG Cowen, setting forth the number of shares of the Optional Stock to
be purchased by the Underwriters and the date and time for delivery of and
payment for the Optional Stock. Each date and time for delivery of and payment
for the Optional Stock (which may be the Closing Date, but not earlier) is
herein called the "Option Closing Date" and shall in no event be earlier than
two (2) business days nor later than five (5) business days after written notice
is given. (The Option Closing Date and the Closing Date are herein called the
"Closing Dates".)
The Company will deliver the Optional Stock to the Underwriters (in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York time, on the second full business day preceding the
Option Closing Date against payment of the aggregate Purchase Price therefor in
federal (same day) funds by certified or official bank check or checks or wire
transfer to an account at a bank acceptable to SG Cowen payable to the order of
[the Company] [and] [[insert name of custodian], as Custodian for the Selling
Shareholder(s)] all at the offices of _________. Time shall be of the essence,
and delivery at the time and place specified pursuant to this Agreement is a
further condition of the obligations of each Underwriter hereunder. The Company
shall make the certificates for the Optional Stock available to the
Representatives for examination on behalf of the Underwriters in New York, New
York not later than 10:00 A.M., New York Time, on the business day preceding the
Option Closing Date. The
<PAGE>
12
Option Closing Date and the location of delivery of, and the form of payment
for, the Optional Stock may be varied by agreement between the Company and SG
Cowen.
The several Underwriters propose to offer the Stock for sale upon the terms and
conditions set forth in the Prospectus.
4. (I) FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters that:
(a) The Company will prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Representatives and file such Rule
462(b) Registration Statement with the Commission on the date hereof;
prepare the Prospectus in a form approved by the Representatives and
file such Prospectus pursuant to Rule 424(b) under the Securities Act
not later than the second business day following the execution and
delivery of this Agreement; make no further amendment or any supplement
to the Registration Statements or to the Prospectus prior to the Option
Closing Date to which the Representatives shall reasonably object by
notice to the Company after a reasonable period to review; advise the
Representatives, promptly after it receives notice thereof, of the time
when any amendment to either Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with
copies thereof; file promptly all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long
as the delivery of a prospectus is required in connection with the
offering or sale of the Stock; advise the Representatives, promptly
after it receives notice thereof, of the issuance by the Commission of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose,
or of any request by the Commission for the amending or supplementing
of the Registration Statements or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, use
promptly its best efforts to obtain its withdrawal.
(b) If at any time prior to the expiration of nine months after the
effective date of the Initial Registration Statement when a prospectus
relating to the Stock is required to be delivered any event occurs as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus or to file under the
Exchange Act any document incorporated by reference in the Prospectus
to comply with the Securities Act or the Exchange Act, the Company will
promptly notify the Representatives thereof and upon their request will
prepare an amended or supplemented Prospectus or make an appropriate
filing pursuant to Section 13 or 14 of the Exchange Act which will
correct such statement or omission or effect
<PAGE>
13
such compliance. The Company will furnish without charge to each
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of such
amended or supplemented Prospectus; and in case any Underwriter is
required to deliver a prospectus relating to the Stock nine months or
more after the effective date of the Initial Registration Statement,
the Company upon the request of the Representatives and at the expense
of such Underwriter will prepare promptly an amended or supplemented
Prospectus as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Securities Act.
(c) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of each of the Registration
Statements as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith.
(d) To deliver promptly to the Representatives in New York City such
number of the following documents as the Representatives shall
reasonably request: (i) conformed copies of the Registration Statements
as originally filed with the Commission and each amendment thereto (in
each case excluding exhibits), (ii) each Preliminary Prospectus, (iii)
the Prospectus (not later than 10:00 A.M., New York time, of the
business day following the execution and delivery of this Agreement)
and any amended or supplemented Prospectus (not later than 10:00 A.M.,
New York City time, on the business day following the date of such
amendment or supplement) and (iv) any document incorporated by
reference in the Prospectus (excluding exhibits thereto).
(e) To make generally available to its shareholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Securities Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158).
(f) The Company will promptly take from time to time such actions as
the Representatives may reasonably request to qualify the Stock for
offering and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may designate and to continue such
qualifications in effect for so long as required for the distribution
of the Stock; provided that the Company and its subsidiaries shall not
be obligated to qualify as foreign corporations in any jurisdiction in
which they are not so qualified or to file a general consent to service
of process in any jurisdiction;
(g) During the period of five years from the date hereof, the Company
will deliver to the Representatives and, upon request, to each of the
other Underwriters, (i) as soon as they are available, copies of all
reports or other communications furnished to shareholders and (i) as
soon as they are available, copies of any reports and financial
statements furnished or filed with the Commission pursuant to the
Exchange Act or any national securities exchange or automatic quotation
system on which the Stock is listed or quoted.
<PAGE>
14
(h) The Company will not directly or indirectly offer, sell, assign,
transfer, pledge, contract to sell, or otherwise dispose of any shares
of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock for a period of 90 days from the date of
the Prospectus without the prior written consent of SG Cowen other than
the Company's sale of the Stock hereunder and the issuance of shares
pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans existing on the date hereof or
pursuant to currently outstanding options, warrants or rights.
(i) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Stock under the
Securities Act.
(j) Prior to the Closing Date, the Company will furnish to the
Representatives, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company for
any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(k) Prior to the Closing Date, the Company will not issue any press
release or other communication directly or indirectly or hold any press
conference with respect to the Company, its condition, financial or
otherwise, or earnings, business affairs or business prospects (except
for routine oral marketing communications in the ordinary course of
business and consistent with the past practices of the Company and of
which the Representatives are notified), without the prior written
consent of the Representatives, unless in the judgment of the Company
and its counsel, and after notification to the Representatives, such
press release or communication is required by law.
(l) In connection with the offering of the Stock, until SG Cowen shall
have notified the Company of the completion of the resale of the Stock,
the Company will not, and will cause its affiliated purchasers (as
defined in Regulation M under the Exchange Act) not to, either alone or
with one or more other persons, bid for or purchase, for any account in
which it or any of its affiliated purchasers has a beneficial interest,
any Stock, or attempt to induce any person to purchase any Stock; and
not to, and to cause its affiliated purchasers not to, make bids or
purchase for the purpose of creating actual, or apparent, active
trading in or of raising the price of the Stock.
(m) The Company will not take any action prior to the Option Closing
Date which would require the Prospectus to be amended or supplemented
pursuant to Section 4(b);
(n) The Company will apply the net proceeds from the sale of the Stock
as set forth in the Prospectus under the heading "Use of Proceeds".
(II) FURTHER AGREEMENTS OF THE SELLING SHAREHOLDERS. The Selling Shareholders
agree with the several Underwriters that:
<PAGE>
15
(a) They will not directly or indirectly offer, sell, assign, transfer,
pledge, contract to sell, or otherwise dispose of any shares of Common
Stock or securities convertible into or exercisable or exchangeable for
Common Stock other than the sale of the Stock hereunder for a period of
90 days from the date of the Prospectus, without the prior written
consent of SG Cowen.
(b) The shares of Stock represented by the certificates held in custody
under the Custody Agreement are for the benefit of and coupled with and
subject to the interests of the Underwriters and the Selling
Shareholders, and the arrangement for such custody and the appointment
of the Attorneys-in-fact are irrevocable; the obligations of such
Selling Shareholders hereunder shall not be terminated by operation of
law, whether by the death or incapacity, liquidation or distribution of
such Selling Shareholders, or any other event, that if such Selling
Shareholders should die or become incapacitated or is liquidated or
dissolved or any other event occurs, before the delivery of the Stock
hereunder, certificates for the Stock to be sold by such Selling
Shareholders shall be delivered on behalf of such Selling Shareholders
in accordance with the terms and conditions of this Agreement and the
Custody Agreement, and action taken by the Attorneys-in-fact or any of
them under the Power of Attorney shall be as valid as if such death,
incapacity, liquidation or dissolution or other event had not occurred,
whether or not the Custodian, the Attorneys-in-fact or any of them
shall have notice of such death, incapacity, liquidation or dissolution
or other event.
(c) They will deliver to SG Cowen on or prior to the Closing Date a
properly completed and executed United States Treasury Department Form
W-8 (if the Selling Shareholder is a non-United States person) or Form
W-9 (if the Selling Shareholder is a United States person) or such
other applicable form or statement, if any, specified by Treasury
Department regulations in lieu thereof.
5. PAYMENT OF EXPENSES. The Company agrees with the Underwriter to pay (a) the
costs incident to the authorization, issuance, sale, preparation and delivery of
the Stock and any taxes payable in that connection; (b) the costs incident to
the Registration of the Stock under the Securities Act; (c) the costs incident
to the preparation, printing and distribution of the Registration Statement,
Preliminary Prospectus, Prospectus, any amendments and exhibits thereto or any
document incorporated by reference therein the costs of printing, reproducing
and distributing the Power of Attorney, the Custody Agreement, the "Agreement
Among Underwriters" between the Representatives and the Underwriters, the Master
Selected Dealers' Agreement, the Underwriters' Questionnaire and this Agreement
by mail, telex or other means of communications; (d) the fees and expenses
(including related fees and expenses of counsel for the Underwriters) incurred
in connection with filings made with the National Association of Securities
Dealers; (e) any applicable listing or other fees; (f) the fees and expenses of
qualifying the Stock under the securities laws of the several jurisdictions as
provided in Section 4(I)(f) and of preparing, printing and distributing Blue Sky
Memoranda and Legal Investment Surveys (including related fees and expenses of
counsel to the Underwriters); (g) all fees and expenses of the registrar and
transfer agent of the Stock; and (h) all other costs and expenses incident to
the performance of the obligations of the Company and of the Selling
Shareholders under this Agreement (including, without limitation, the fees and
expenses of the Company's counsel and
<PAGE>
16
the Company's independent accountants); provided that, except as otherwise
provided in this Section 5 and in Section 10, the Underwriters shall pay their
own costs and expenses, including the fees and expenses of their counsel, any
transfer taxes on the Stock which they may sell and the expenses of advertising
any offering of the Stock made by the Underwriters.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the
several Underwriters hereunder are subject to the accuracy, when made and on the
Closing Date, of the representations and warranties of the Company and the
Selling Shareholders contained herein, to the accuracy of the statements of the
Company and the Selling Shareholders made in any certificates pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their obligations hereunder, and to each of the following
additional terms and conditions:
(a) No stop order suspending the effectiveness of either of the
Registration Statements shall have been issued and no proceedings for
that purpose shall have been initiated or threatened by the Commission,
and any request for additional information on the part of the
Commission (to be included in the Registration Statements or the
Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Representatives. The Rule 462(b)
Registration Statement, if any, and the Prospectus shall have been
timely filed with the Commission in accordance with Section 4(I)(a).
(b) None of the Underwriters shall have discovered and disclosed to the
Company on or prior to the Closing Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains an
untrue statement of a fact which, in the opinion of counsel for the
Underwriters, is material or omits to state any fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of each of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration
Statement and the Prospectus and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for the
Underwriters, and the Company and the Selling Shareholders shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Fried, Frank, Harris, Shriver & Jacobson and Levy & Stopol, LLP
shall have furnished to the Representatives such counsels' written
opinions, as counsel to the Company, addressed to the Underwriters and
dated the Closing Date, in form and substance reasonably satisfactory
to the Representatives, to the effect that:
(i) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective
<PAGE>
17
ownership or lease of property or the conduct of their respective
businesses requires such qualification, and have all power and
authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged, except where the
failure to so qualify or have such power or authority would not have,
singularly or in the aggregate, a Material Adverse Effect.
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company, including the Stock being delivered on the Closing Date, have
been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus.
(iii) All the outstanding shares of capital stock of each
material subsidiary of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and, except to the
extent set forth in the Prospectus, are owned by the Company directly
or indirectly through one or more wholly-owned subsidiaries, free and
clear of any claim, lien, encumbrance, security interest, restriction
upon voting or transfer or any other claim of any third party.
(iv) There are no preemptive or other rights to subscribe for
or to purchase, nor any restriction upon the voting or transfer of, any
shares of the Stock pursuant to the Company's charter or by-laws or any
agreement or other instrument known to such counsel.
(v) This Agreement has been duly authorized, executed and
delivered by the Company.
(vi) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel after reasonable investigation to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of the
properties or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the Charter
or by-laws of the Company or of any of its subsidiaries or any statute
or any order, rule or regulation of any court or governmental agency or
body or court having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets.
(vii) Except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement by the Company
and the consummation of the transactions contemplated hereby.
<PAGE>
18
(viii) The statements in the Prospectus under the heading
"Certain Federal Income Tax Considerations", to the extent that they
constitute summaries of matters of law or regulation or legal
conclusions, have been reviewed by such counsel and fairly summarize
the matters described therein in all material respects.
(ix) The description in the Registration Statement and
Prospectus of statutes, legal or governmental proceedings and contracts
and other documents are accurate in all material respects; and to the
best of such counsel's knowledge, there are no statutes, legal or
governmental proceedings, contracts or other documents of a character
required to be described in the Registration Statement or Prospectus or
to be filed as exhibits to the Registration Statement which are not
described or filed as required.
(x) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries (i) is in violation of its charter
or by-laws, (ii) is in default, and no event has occurred, which, with
notice or lapse of time or both, would constitute a default, in the due
performance or observance of any term, covenant or condition contained
in any agreement or instrument to which it is a party or by which it is
bound or to which any of its properties or assets is subject or (iii)
is in violation of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject or
has failed to obtain any license, permit, certificate, franchise or
other governmental authorization or permit necessary to the ownership
of its property or to the conduct of its business except, in the case
of clauses (ii) and (iii), for those defaults, violations or failures
which, either individually or in the aggregate, would not have a
Material Adverse Effect.
(xi) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property or asset of the Company or any of its
subsidiaries is the subject which, singularly or in the aggregate, if
determined adversely to the Company or any of its subsidiaries, might
have a Material Adverse Effect or would prevent or adversely affect the
ability of the Company to perform its obligations under this Agreement;
and, to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others.
(xii) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion,
the Rule 462(b) Registration Statement, if any, was filed with the
Commission on the date specified therein, the Prospectus was filed with
the Commission pursuant to the subparagraph of Rule 424(b) of the Rules
and Regulations specified in such opinion on the date specified therein
and no stop order suspending the effectiveness of the Registration
Statement has been issued and, to the knowledge of such counsel, no
proceeding for that purpose is pending or threatened by the Commission.
(xiii) The Registration Statements, as of the respective
effective dates and the Prospectus, as of its date, and any further
amendments or supplements thereto, as
<PAGE>
19
of their respective dates, made by the Company prior to the Closing
Date (other than the financial statements and other financial data
contained therein, as to which such counsel need express no opinion)
complied as to form in all material respects with the requirements of
the Securities Act and the Rules and Regulations; and the documents
incorporated by reference in the Prospectus (other than the financial
statements and related schedules therein, as to which such counsel need
express no opinion), when they were filed with the Commission complied
as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder.
(xiv) To the best of such counsel's knowledge, no person or
entity has the right to require registration of shares of Common Stock
or other securities of the Company because of the filing or
effectiveness of the Registration Statements or otherwise, except for
persons and entities who have expressly waived such right or who have
been given proper notice and have failed to exercise such right within
the time or times required under the terms and conditions of such
right.
(xv) Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of the Investment Company Act
and the rules and regulations of the Commission thereunder.
Each of such counsel shall also have furnished to the Representatives a written
statement, addressed to the Underwriters and dated the Closing Date, in form and
substance satisfactory to the Representatives, to the effect that (x) such
counsel has acted as counsel to the Company in connection with the preparation
of the Registration Statements, (y) based on such counsel's examination of the
Registration Statements and such counsel's investigations made in connection
with the preparation of the Registration Statements and "conferences with
certain officers and employees of and with auditors for and counsel to the
Company", such counsel has no reason to believe that (I) the Registration
Statements, as of the respective effective dates, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or
that the Prospectus contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading or (II) any document incorporated by reference in the
Prospectus, when they were filed with the Commission contained any untrue
statement of a material fact or omitted to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; it being understood that such counsel need
express no opinion as to the financial statements or other financial data
contained in the Registration Statement or the Prospectus.
The foregoing opinion and statement may be qualified by a statement to the
effect that such counsel has not independently verified the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus and takes no responsibility therefor except to the
extent set forth in the opinion described in clauses (viii) and (ix) above.
<PAGE>
20
(e) Fried, Frank, Harris, Shriver & Jacobson and Levy & Stopol, LLP
shall have furnished to the Representatives such counsel's written
opinion, as counsel to the Selling Shareholders, addressed to the
Underwriters and dated the Closing Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) Each Selling Shareholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by each
Selling Shareholder and the consummation by each Selling Shareholder of
the transactions contemplated hereby and thereby will not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any statute, any indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument known to such counsel to which any Selling Shareholder is a
party or by which any Selling Shareholder is bound or to which any of
the property or assets of any Selling Shareholder is subject, nor will
such actions result in any violation of any statute or any order, rule
or regulation known to such counsel of any court or governmental agency
or body having jurisdiction over any Selling Shareholder or the
property or assets of any Selling Shareholder; and, except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by any
Selling Shareholder and the consummation by any Selling Shareholder of
the transactions contemplated hereby and thereby.
(ii) This Agreement has been duly executed and delivered by or
on behalf of each Selling Shareholder.
(iii) A Power-of-Attorney and a Custody Agreement have been
duly executed and delivered by each Selling Shareholder and constitute
valid and binding agreements of each Selling Shareholder.
(iv) Upon payment for, and delivery of, the shares of Stock to
be sold by each Selling Shareholder under this Agreement in accordance
with the terms hereof, the Underwriters will acquire good and valid
title to such shares, free and clear of all liens, encumbrances,
equities or claims.
(f) The Representatives shall have received from Brown Raysman
Millstein Felder & Steiner LLP, counsel for the Underwriters, such
opinion or opinions, dated the Closing Date, with respect to such
matters as the Underwriters may reasonably require, and the Company and
the Selling Shareholders shall have furnished to such counsel such
documents as they request for enabling them to pass upon such matters.
<PAGE>
21
(g) At the time of the execution of this Agreement, the Representatives
shall have received from KPMG LLP a letter, addressed to the
Underwriters and dated such date, in form and substance satisfactory to
the Representatives, (i) confirming that they are independent certified
public accountants with respect to the Company and its subsidiaries
within the meaning of the Securities Act and the Rules and Regulations
and (ii) stating the conclusions and findings of such firm with respect
to the financial statements and certain financial information contained
or incorporated by reference in the Prospectus.
(h) On the Closing Date, the Representatives shall have received a
letter (the "bring-down letter") from KPMG LLP addressed to the
Underwriters and dated the Closing Date confirming, as of the date of
the bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus as of a date not more than three
business days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the financial
information and other matters covered by its letter delivered to the
Representatives concurrently with the execution of this Agreement
pursuant to Section 6(g).
(i) The Company shall have furnished to the Representatives a
certificate, dated the Closing Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating
that (i) such officers have carefully examined the Registration
Statements and the Prospectus and, in their opinion, the Registration
Statements as of their respective effective dates and the Prospectus,
as of each such effective date, did not include any untrue statement of
a material fact and did not omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (ii) since the effective date of the Initial Registration
Statement no event has occurred which should have been set forth in a
supplement or amendment to the Registration Statements or the
Prospectus, (iii) to the best of their knowledge after reasonable
investigation, as of the Closing Date, the representations and
warranties of the Company in this Agreement are true and correct and
the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or
prior to the Closing Date, and (iv) subsequent to the date of the most
recent financial statements included or incorporated by reference in
the Prospectus, there has been no material adverse change in the
financial position or results of operation of the Company and its
subsidiaries, or any change, or any development including a prospective
change, in or affecting the condition (financial or otherwise), results
of operations, business or prospects of the Company and its
subsidiaries taken as a whole, except as set forth in the Prospectus.
(j) Each Selling Shareholder or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Shareholders) shall have
furnished to the Representatives on the Closing Date a certificate,
dated such date, signed by, or on behalf of, the Selling Shareholder
stating that the representations, warranties and agreements of the
Selling Shareholder contained herein are true and correct as of the
Closing Date and that the Selling Shareholder has complied with all
agreements contained herein to be performed by the Selling Shareholder
at or prior to the Closing Date.
<PAGE>
22
(k) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change,
or any development involving a prospective change, in or affecting the
business, general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with
the sale or delivery of the Stock on the terms and in the manner
contemplated in the Prospectus.
(l) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental
agency or body which would, as of the Closing Date, prevent the
issuance or sale of the Stock; and no injunction, restraining order or
order of any other nature by any federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance or sale of the Stock.
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange
or in the over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market, shall have
been suspended or minimum prices shall have been established on any
such exchange or such market by the Commission, by such exchange or by
any other regulatory body or governmental authority having
jurisdiction, (ii) a banking moratorium shall have been declared by
Federal or state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a
declaration of a national emergency or war by the United States or (iv)
there shall have occurred such a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) as to make it, in the judgment of the Representatives,
impracticable or inadvisable to proceed with the sale or delivery of
the Stock on the terms and in the manner contemplated in the
Prospectus.
(n) The American Stock Exchange, Inc. shall have approved the Stock for
inclusion, subject only to official notice of issuance.
(o) SG Cowen shall have received the written agreements, substantially
in the form of Exhibit I hereto, of the officers, directors and
shareholders of the Company listed in Schedule C to this Agreement.
<PAGE>
23
All opinions, letters, evidence and certificates mentioned above or elsewhere in
this Agreement shall be deemed to be in compliance with the provisions hereof
only if they are in form and substance reasonably satisfactory to counsel for
the Underwriters.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification by the Company. The Company shall indemnify and
hold harmless each Underwriter, its officers, employees,
representatives and agents and each person, if any, who controls any
Underwriter within the meaning of the Securities Act (collectively the
"Underwriter Indemnified Parties" and, each an "Underwriter Indemnified
Party") against any loss, claim, damage or liability, joint or several,
or any action in respect thereof, to which that Underwriter Indemnified
Party may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of
or is based upon (i) any untrue statement or alleged untrue statement
of a material fact contained in the Preliminary Prospectus, either of
the Registration Statements or the Prospectus or in any amendment or
supplement thereto, (ii) the omission or alleged omission to state in
any Preliminary Prospectus, either of the Registration Statement or the
Prospectus or in any amendment or supplement thereto a material fact
required to be stated therein or necessary to make the statements
therein not misleading or (iii) any act or failure to act, or any
alleged act or failure to act, by any Underwriter in connection with,
or relating in any manner to, the Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss,
claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall
not be liable in the case of any matter covered by this clause (iii) to
the extent that it is determined in a final judgement by a court of
competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such act or failure to act undertaken
or omitted to be taken by such Underwriter through its gross negligence
or willful misconduct), and shall reimburse each Underwriter
Indemnified Party promptly upon demand for any legal or other expenses
reasonably incurred by that Underwriter Indemnified Party in connection
with investigating or preparing to defend or defending against or
appearing as a third party witness in connection with any such loss,
claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged
untrue statement in or omission or alleged omission from the
Preliminary Prospectus, either of the Registration Statements or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
use therein, which information the parties hereto agree is limited to
the Underwriters' Information (as defined in Section 17); provided
further, however, that the foregoing indemnification agreement with
respect to the Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such loss, claim,
damage or liability purchased Securities, or any officers, employees,
representatives, agents or controlling persons of such Underwriter, if
(i) a copy of the Prospectus (as then amended or supplemented) was
required by law to be delivered to such person at or prior to the
written confirmation of the sale of Securities to
<PAGE>
24
such person, (ii) a copy of the Prospectus (as then amended or
supplemented) excluding documents incorporated by reference therein was
not sent or given to such person by or on behalf of such Underwriter
and such failure was not due to non-compliance by the Company with
Section 4(I)(d), and (iii) the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability. This indemnity agreement is not exclusive
and will be in addition to any liability which the Company might
otherwise have and shall not limit any rights or remedies which may
otherwise be available at law or in equity to each Underwriter
Indemnified Party.
(b) Indemnification by the Selling Shareholders. The Selling
Shareholders, jointly and severally, shall indemnify and hold harmless
each Underwriter Indemnified Party, against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which
that Underwriter Indemnified Party may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
the Preliminary Prospectus, either of the Registration Statements or
the Prospectus or in any amendment or supplement thereto or (ii) the
omission or alleged omission to state in any Preliminary Prospectus,
either of the Registration Statements or the Prospectus or in any
amendment or supplement thereto a material fact required to be stated
therein or necessary to make the statements therein not misleading and
shall reimburse each Underwriter Indemnified Party promptly upon demand
for any legal or other expenses reasonably incurred by that Underwriter
Indemnified Party in connection with investigating or preparing to
defend or defending against or appearing as a third party witness in
connection with any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Selling
Shareholders shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from the Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of
any Underwriter specifically for use therein, which information the
parties hereto agree is limited to the Underwriters' Information;
provided further, however, that the foregoing indemnification agreement
with respect to the Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such
loss, claim, damage or liability purchased Securities, or any officers,
employees, representatives, agents or controlling persons of such
Underwriter, if (i) a copy of the Prospectus (as then amended or
supplemented) was required by law to be delivered to such person at or
prior to the written confirmation of the sale of Securities to such
person, (ii) a copy of the Prospectus (as then amended or supplemented)
excluding documents incorporated by reference therein was not sent or
given to such person by or on behalf of such Underwriter and such
failure was not due to non-compliance by the Company with Section
4(I)(d), and (iii) the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss, claim, damage or
liability. This indemnity agreement is not exclusive and will be in
addition to any liability which the Selling Shareholders might
otherwise have and shall not limit any rights or remedies which may
<PAGE>
25
otherwise be available at law or in equity to each Underwriter
Indemnified Party. Notwithstanding anything in this Section 7(b) to the
contrary, the liability of any Selling Shareholder under this Section
7(b) shall not exceed the amount of the net proceeds received by such
Selling Shareholder from the sale of shares of Stock pursuant to this
Agreement.
(c) Indemnification by Each Underwriter. Each Underwriter, severally
and not jointly, shall indemnify and hold harmless the Company its
officers, employees, representatives and agents, each of its directors
and each person, if any, who controls the Company within the meaning of
the Securities Act (collectively the "Company Indemnified Parties" and
each a "Company Indemnified Party") and the Selling Shareholders, their
respective officers, employees, representatives and agents and each
person, if any, who controls the Selling Shareholders within the
meaning of the Securities Act (collectively, the "Shareholder
Indemnified Parties" and each a "Shareholder Indemnified Party"),
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company Indemnified Parties or
the Selling Shareholder Indemnified Parties may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
the Preliminary Prospectus, either of the Registration Statements or
the Prospectus or in any amendment or supplement thereto or (ii) the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of
that Underwriter specifically for use therein, and shall reimburse the
Company Indemnified Parties and the Selling Shareholder Indemnified
Parties for any legal or other expenses reasonably incurred by such
parties in connection with investigating or preparing to defend or
defending against or appearing as third party witness in connection
with any such loss, claim, damage, liability or action as such expenses
are incurred; provided that the parties hereto hereby agree that such
written information provided by the Underwriters consists solely of the
Underwriters' Information. This indemnity agreement is not exclusive
and will be in addition to any liability which the Underwriters might
otherwise have and shall not limit any rights or remedies which may
otherwise be available at law or in equity to the Company Indemnified
Parties and Selling Shareholder Indemnified Parties.
(d) Notification and Defense. Promptly after receipt by an indemnified
party under this Section 8 of notice of any claim or the commencement
of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under this Section
8, notify the indemnifying party in writing of the claim or the
commencement of that action; provided, however, that the failure to
notify the indemnifying party shall not relieve it from any liability
which it may have under this Section 8 except to the extent it has been
materially prejudiced by such failure; and, provided, further, that the
failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than
under this Section
<PAGE>
26
8. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not
be liable to the indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that any indemnified party shall have
the right to employ separate counsel in any such action and to
participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i)
the employment thereof has been specifically authorized by the
indemnifying party in writing, (ii) such indemnified party shall have
been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to
those available to the indemnifying party and in the reasonable
judgment of such counsel it is advisable for such indemnified party to
employ separate counsel or (iii) the indemnifying party has failed to
assume the defense of such action and employ counsel reasonably
satisfactory to the indemnified party, in which case, if such
indemnified party notifies the indemnifying party in writing that it
elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any
time for all such indemnified parties, which firm shall be designated
in writing by SG Cowen, if the indemnified parties under this Section 8
consist of any Underwriter Indemnified Party, or by the Company if the
indemnified parties under this Section 8 consist of any Company
Indemnified Parties. Each indemnified party, as a condition of the
indemnity agreements contained in Sections 8(a), 8(b) and 8(c), shall
use all reasonable efforts to cooperate with the indemnifying party in
the defense of any such action or claim. Subject to the provisions of
Section 8(e) below, no indemnifying party shall be liable for any
settlement of any such action effected without its written consent
(which consent shall not be unreasonably withheld, provided that in any
event consent may be withheld, without limitation, with respect to a
settlement which (i) does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect of such action or (ii) contains
an admission of guilt on behalf of such indemnified party), but if
settled with its written consent or if there be a final judgment for
the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(e) Settlement if no Reimbursement. If at any time an indemnified party
shall have requested that an indemnifying party reimburse the
indemnified party for fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any
<PAGE>
27
settlement of the nature contemplated by this Section 8 effected
without its written consent if (i) such settlement is entered into more
than 45 days after receipt by such indemnifying party of the request
for reimbursement, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least 30 days prior to such
settlement being entered into and (iii) such indemnifying party shall
not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(f) Contribution. If the indemnification provided for in this Section 8
is unavailable or insufficient to hold harmless an indemnified party
under Section 8(a), 8(b) or 8(c), then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such
loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Selling Shareholder on the one
hand and the Underwriters on the other from the offering of the Stock
or if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Selling Shareholder on the one
hand and the Underwriters on the other with respect to the statements
or omissions which resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other
with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Stock
purchased under this Agreement (before deducting expenses) received by
the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriters with respect to
the Stock purchased under this Agreement, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders on the one hand or
the Underwriters on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission; provided that the parties
hereto agree that the written information furnished to the Company
through the Representatives by or on behalf of the Underwriters for use
in any Preliminary Prospectus, either of the Registration Statements or
the Prospectus consists solely of the Underwriter's Information. The
Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this
Section 8(f) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the
equitable considerations referred to herein. The amount paid or payable
by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this
Section 8(f) shall be deemed to include, for purposes of this Section
8(f), any legal or other expenses reasonably incurred by such
indemnified party in connection with
<PAGE>
28
investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 8(f), no Underwriter shall be required
to contribute any amount in excess of the amount by which the total
price at which the Stock underwritten by it and distributed to the
public were offered to the public less the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The Underwriters' obligations to contribute as provided in this Section
8(f) are several in proportion to their respective underwriting
obligations and not joint.
8. TERMINATION. The obligations of the Underwriters hereunder may be terminated
by SG Cowen, in its absolute discretion by notice given to and received by the
Company and the Selling Shareholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 6(k),
or 6(m) have occurred or if the Underwriters shall decline to purchase the Stock
for any reason permitted under this Agreement.
9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) this Agreement shall have
been terminated pursuant to Section 9 or 11, (b) the Company or any Selling
Stockholder shall fail to tender the Stock for delivery to the Underwriters for
any reason permitted under this Agreement, or (c) the Underwriters shall decline
to purchase the Stock for any reason permitted under this Agreement, the Company
and the Selling Shareholders shall reimburse the Underwriters for the fees and
expenses of their counsel and for such other out-of-pocket expenses as shall
have been reasonably incurred by them in connection with this Agreement and the
proposed purchase of the Stock, and, upon demand, the Company and the Selling
Shareholders shall pay the full amount thereof to the SG Cowen. If this
Agreement is terminated pursuant to Section 11 by reason of the default of one
or more Underwriters, neither the Company nor any Selling Shareholders shall be
obligated to reimburse any defaulting Underwriter on account of those expenses.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required hereby or
agree to take up all or part of the shares of Stock of a defaulting Underwriter
or Underwriters as provided in this Section 11, (i) the Company and the Selling
Shareholders shall have the right to postpone the
<PAGE>
29
Closing Dates for a period of not more than five (5) full business days in order
that the Company and the Selling Shareholders may effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of shares to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company, the Selling Shareholders or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 11 shall be without liability on the part of
any non-defaulting Underwriter, the Selling Shareholders or the Company, except
expenses to be paid or reimbursed pursuant to Sections 5 and 10 and except the
provisions of Section 8 shall not terminate and shall remain in effect.
11. SUCCESSORS; PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the several Underwriters, the
Company and the Selling Shareholders and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person other than the persons mentioned in the preceding sentence any
legal or equitable right, remedy or claim under or in respect of this Agreement,
or any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person; except that the
representations, warranties, covenants, agreements and indemnities of the
Company and the Selling Shareholders contained in this Agreement shall also be
for the benefit of the Underwriter Indemnified Parties, and the indemnities of
the several Underwriters shall also be for the benefit of the Company
Indemnified Parties and the Selling Shareholder Indemnified Parties.
12. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES, ETC. The respective
indemnities, covenants, agreements, representations, warranties and other
statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, the Selling
Shareholders, the Company or any person controlling any of them and shall
survive delivery of and payment for the Stock.
13. NOTICES. All statements, requests, notices and agreements hereunder shall be
in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to SG Securities Corporation, Financial
Square, 27th Floor, New York, NY 10005-3597, Attention: Syndicate
Department (Fax: 212-425-5801), with a copy to: Brown Raysman Millstein
Felder & Steiner LLP, 120 West 45th Street, New York, NY 10036,
Attention: Stuart Bressman, Esq. (Fax: 212-840-2429);
(b) if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to Audiovox Corporation, 150 Marcus Blvd.,
Hauppauge, NY 11788,
<PAGE>
30
Attention: C. Michael Stoehr (Fax: 516-231-1370), with a copy to:
_________________________________;
(c) if to any Selling Shareholders, shall be delivered or sent by mail,
telex or facsimile transmission to such Selling Shareholder at the
address set forth on Schedule B hereto; provided, however, that any
notice to an Underwriter pursuant to Section 8 shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at
its address set forth in its acceptance telex to the Representatives,
which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof.
14. DEFINITION OF CERTAIN TERMS. For purposes of this Agreement, (a) "business
day" means any day on which the New York Stock Exchange, Inc. and the American
Stock Exchange, Inc. are open for trading and (b) "subsidiary" has the meaning
set forth in Rule 405 of the Rules and Regulations.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
16. UNDERWRITERS' INFORMATION. The parties hereto acknowledge and agree that,
for all purposes of this Agreement, the "Underwriters' Information" consists
solely of the following information in the Prospectus: (i) the last paragraph on
the front cover page concerning the terms of the offering by the Underwriters;
and (ii) the statements concerning the Underwriters contained in the
________________ and ____________ paragraphs in the Prospectus under the heading
"Underwriting."
17. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, you
will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by the Representatives, will be binding on all the
Underwriters; and any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all the Selling Shareholders.
18. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section,
paragraph or provision of this Agreement shall not affect the validity or
enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
19. GENERAL. This Agreement constitutes the entire agreement of the parties to
this Agreement and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings and negotiations with respect to the subject
matter hereof. In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Shareholders and the
Representatives.
<PAGE>
31
20. COUNTERPARTS. This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
Any person executing and delivering this Agreement as Attorney-in-fact for the a
Selling Shareholders represents by so doing that he has been duly appointed as
Attorney-in-fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-fact to take such
action.
<PAGE>
32
If the foregoing is in accordance with your understanding of the agreement
between the Company, the Selling Shareholders and the several Underwriters,
kindly indicate your acceptance in the space provided for that purpose below.
Very truly yours,
AUDIOVOX CORPORATION
By:
--------------------------------------
Name:
Title:
SELLING SHAREHOLDERS
By: [Attorney-in-fact]
By:
--------------------------------------
[Attorney-in-fact]
Acting on his own behalf and on
behalf of the Selling Shareholders listed
in Schedule B.
Accepted as of
the date first above written:
SG COWEN SECURITIES CORPORATION
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES INCORPORATED
LADENBURG THALMANN & CO. INC.
Acting on their own behalf and as
Representatives of the several Underwriters
referred to in the
foregoing Agreement
By: SG COWEN SECURITIES
CORPORATION
By:
--------------------------------------
Name:
Title:
<PAGE>
33
SCHEDULE A
Number of Firm Number of
Shares to be Optional Shares
Name Purchased to be Purchased
- ---- -------------- ---------------
SG Cowen Securities Corporation
Morgan Keegan & Company, Inc.
Prudential Securities Incorporated
Ladenburg Thalmann & Co. Inc.
========== =======
Total 3,100,000 465,000
========== =======
<PAGE>
34
SCHEDULE B
Number of
Number of Firm Optional Shares
Selling Shareholders Shares to be Sold to be Sold
- -------------------- ----------------- ----------------
[Name and address]
--------- -------
Total 1,100,000 165,000
========= =======
<PAGE>
35
SCHEDULE C
[List of shareholders subject to Section 4(h)]
<PAGE>
36
Exhibit I
[Form of Lock-Up Agreement]
[Date]
SG Cowen Securities Corporation
Morgan Keegan & Company, Inc.
Ladenburg Thalmann & Co. Inc.
Prudential Securities Incorporated
As representatives of the several Underwriters
c/o SG Cowen Securities Corporation
Financial Square
New York, New York 10005
Re: Audiovox Corporation - Shares of Common Stock
---------------------------------------------
Dear Sirs:
In order to induce SG Cowen Securities Corporation ("SG Cowen"), Morgan Keegan &
Company, Inc., Prudential Securities Incorporated and Ladenburg Thalmann & Co.
Inc. (the "Representatives"), to enter in to a certain underwriting agreement
with Audiovox corporation, a Delaware corporation (the "Company"), with respect
to the public offering of shares of the Company's Common Stock, par value $.01
per share ("Common Stock"), the undersigned hereby agrees that for a period of
90 days following the date of the final prospectus filed by the Company with the
Securities and Exchange Commission in connection with such public offering, the
undersigned will not, without the prior written consent of SG Cowen, directly or
indirectly, offer, sell, assign, transfer, pledge, contract to sell, or
otherwise dispose of, any shares of Common Stock (including, without limitation,
Common Stock which may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations promulgated under the Securities Act
of 1933, as the same may be amended or supplemented from time to time (such
shares, the "Beneficially Owned Shares")) or securities convertible into or
exercisable or exchangeable in Common Stock.
Anything contained herein to the contrary notwithstanding, any person to whom
shares of Common Stock or Beneficially Owned Shares are transferred from the
undersigned shall be bound by the terms of this Agreement.
In order to enable the aforesaid covenants to be enforced, the undersigned
hereby consents to the placing of legends and/or stop-transfer orders with the
transfer agent of the Common Stock with respect to any shares of Common Stock or
Beneficially Owned Shares.
[Signatory]
By:
-----------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Audiovox Corporation:
We consent to the use of our report dated January 25, 1999 included
herein, with respect to the consolidated balance sheets of Audiovox Corporation
and subsidiaries as of November 30, 1998 and 1997, and the related consolidated
statements of income (loss), stockholders' equity and cash flows for each of the
years in the three-year period ended November 30, 1998.
/s/ KPMG LLP
-----------------------------------
Melville, New York
November 22, 1999
