<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2000
REGISTRATION NO. 333-91455
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AUDIOVOX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-28839 13-1964841
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM AGGREGATE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE(2) OFFERING PRICE(2) FEE(3)
<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(a) and (c).
(3) Previously paid.
------------------------
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>
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 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
PURCHASES OF THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE OF THESE
SECURITIES IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000
3,100,000 SHARES
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 Nasdaq Stock Market under the
symbol "VOXX." Until January 13, 2000, our Class A common stock was traded on
the American Stock Exchange under the symbol "VOX." On January 31, 2000, the
last reported sale price of our Class A common stock on the Nasdaq Stock Market
was $47.50 per share.
------------------------
OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
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.
[CAPTION]
<TABLE>
PER SHARE TOTAL
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds, before expenses, to Audiovox..................... $ $
Proceeds, before expenses, to the selling
stockholders............................................. $ $
</TABLE>
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
, 2000.
------------------------
SG COWEN
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES
LADENBURG THALMANN & CO. INC.
, 2000
<PAGE>
[INSIDE FRONT COVER PAGE 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements...................... ii
Prospectus Summary.............................. 1
Risk Factors.................................... 5
Use of Proceeds................................. 13
Price Range of Common Stock..................... 14
Dividend Policy................................. 14
Capitalization.................................. 15
Selected Consolidated Financial Data............ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business........................................ 30
<CAPTION>
PAGE
----
<S> <C>
Management...................................... 41
Principal and Selling Stockholders.............. 42
Certain Transactions............................ 43
Description of Capital Stock.................... 45
Material U.S. Tax Considerations................ 48
Underwriting.................................... 51
Legal Matters................................... 52
Experts......................................... 52
Where You Can Find Additional Information....... 52
Information Incorporated by Reference........... 53
Index to Consolidated Financial Statements...... F-1
</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 electronics
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 wireless and 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 6 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
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 1999" refers to the
twelve months ended November 30, 1999. 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 35 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. During the third
quarter of 1999, we became the third largest seller of wireless products and the
second largest seller 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 revenue, sells wireless handsets and accessories
through Bell Operating Companies, domestic and international wireless
carriers and their agents, independent distributors and retailers.
o Mobile and consumer electronics. Our Electronics Group, which accounts
for approximately 20% of our revenue, 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 grew significantly in fiscal 1999, primarily because of
increased sales of our digital handsets. Our net sales have increased as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------- PERCENT
1998 1999 CHANGE
------------------------------ ---------------------------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Wireless...................................... $442 $ 930 110%
Electronics................................... 175 230 32
---- ------ -----
Total......................................... $617 $1,160 88%
---- ------ -----
---- ------ -----
</TABLE>
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
<PAGE>
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
35 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 continue to 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 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.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
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 this
offering................................ 21,499,743 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 $89.6 million in net proceeds in
this offering, assuming an offering price of $47.50 per share. We
intend to use these net proceeds:
o to repay a portion of amounts outstanding under our revolving $250
million credit facility, under which $119.4 million was outstanding
on January 31, 2000, any part of which we may reborrow; and
o for general corporate purposes.
Risk factors.............................. See "Risk Factors" beginning on page 5 and the other information
included in this prospectus for a discussion of factors you should
carefully consider before deciding to invest in shares of our common
stock.
Nasdaq Stock Market symbol................ VOXX
American Stock Exchange symbol ........... VOX
(pre-January 13, 2000 trading)
</TABLE>
On January 31, 2000, we had 17,238,789 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 this 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 3,085,630 shares of our common stock reserved for issuance under
our stock option plans, of which options to purchase 2,857,900 shares
were outstanding as of January 31, 2000 at a weighted average exercise
price of $11.41 per share. See Note 15 to the Consolidated Financial
Statements included in this prospectus.
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."
3
<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. The
consolidated statement of operations data includes:
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.
for 1999:
o a pre-tax charge of $2.0 million due to the other-than-temporary
decline in the market value of its Shintom common stock;
o a pre-tax gain of $3.8 million on the issuance of subsidiary shares to
Toshiba Corporation; and
o a $9.9 million increase in stockholders' equity, net of tax, as a
result of an unrealized gain on marketable securities, which is not
reflected in net income, compared to what stockholders' equity would
have been without the unrealized gain.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................................... $ 639,082 $ 616,695 $ 1,159,537
Gross profit............................................................ 106,762 88,541 134,628
Operating income (loss)................................................. 19,695 4,871 38,237
Other income (expense).................................................. 23,747 (1,070) 4,486
Income (loss) before provision for (recovery of) income taxes........... 43,442 3,801 42,723
Provision for income taxes.............................................. 22,420 829 15,477
----------- ----------- -----------
Net income.............................................................. $ 21,022 $ 2,972 $ 27,246
----------- ----------- -----------
----------- ----------- -----------
Net income--per share diluted........................................... $ 1.09 $ 0.16 $ 1.39
----------- ----------- -----------
----------- ----------- -----------
Diluted number of shares used in per share calculation.................. 19,508,132 19,134,529 19,703,333
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
-----------------------------------
ACTUAL AS ADJUSTED
----------------- -----------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 5,527 $ 5,527
Total current assets............................................................. 404,295 404,295
Total assets..................................................................... 475,083 475,083
Total current liabilities........................................................ 132,214 132,214
Total liabilities................................................................ 255,012 165,462(1)
Total stockholders' equity....................................................... 216,744 306,294
</TABLE>
- ------------------
(1) As of January 31, 2000, our bank obligations increased to $119.4 million
from $102.0 million on November 30, 1999 due to seasonal inventory
requirements.
4
<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 to Kyocera Corporation. Once this sale is completed,
Kyocera will be 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 several 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 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."
5
<PAGE>
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 product distribution
o marketing
o custom packaging
o warranty support
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 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
fiscal 1999, 65.9% of our wireless sales were to five customers. Our ten largest
customers accounted for 70.6% and 76.1% of our wireless sales in fiscal 1998 and
fiscal 1999, respectively. For fiscal 1999, our largest customers were:
o Bell Atlantic, which accounted for 24.4% of our wireless sales
o AirTouch Communications, which merged with Vodafone, accounted for 18.6%
of our wireless sales
o PrimeCo, which accounted for 15.8% of our wireless sales
6
<PAGE>
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 fiscal 1999, 33.9% of our electronics sales were to ten customers. Nissan
accounted for 11.9% of our electronics sales in fiscal 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 during 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 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 fiscal 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
7
<PAGE>
o if obtained, alternatively sourced products of satisfactory quality would
be delivered on a timely basis, 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."
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:
<TABLE>
<CAPTION>
TOTAL FOREIGN PURCHASES FROM
PURCHASES PACIFIC RIM
------------- --------------
<S> <C> <C>
Fiscal year ended November 30, 1997...................................... 92.7% 89.0%
Fiscal year ended November 30, 1998...................................... 93.5% 90.0%
Fiscal year ended November 30, 1999...................................... 91.1% 90.9%
</TABLE>
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.
8
<PAGE>
FLUCTUATIONS IN FOREIGN CURRENCIES COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
BUSINESS.
We cannot predict the effect of exchange rate fluctuations on our 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 approximately $442 million in fiscal 1998 to approximately $930
million for fiscal 1999. Sales of our electronics products also increased
significantly from approximately $175 million for fiscal 1998 to approximately
$230 million for fiscal 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 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
9
<PAGE>
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 three years. 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.
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 income
o limit our ability to incur additional debt
o require us to achieve specific financial ratios
o restrict our ability to make capital expenditures or acquisitions
10
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." 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.
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, which could have a negative
effect on our stock price.
11
<PAGE>
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 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 is traded on the
Nasdaq Stock Market under the symbol VOXX, 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 in certain circumstances, for
the election and removal of directors and as otherwise may be required by
Delaware law. 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
January 31, 2000, there were:
o 13,806,061 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, as of January 31, 2000, there were 3,320,045 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.
12
<PAGE>
USE OF PROCEEDS
Assuming an offering price of $47.50 per share, we will receive
approximately $89.6 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 approximately an additional
$13.5 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, $119.4 million of which was outstanding on
January 31, 2000, 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 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 7.09%
as of January 31, 2000. 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 $250 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
investment-grade, interest-bearing securities.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our Class A common stock is traded on the Nasdaq Stock Market under the
symbol "VOXX". Before January 13, 2000, our Class A common stock was traded on
the American Stock Exchange under the symbol "VOX." The following table shows
for the fiscal periods indicated the high and low sales prices of our Class A
common stock as reported by the American Stock Exchange through January 12, 2000
and by the Nasdaq Stock Market from January 13, 2000 through January 31, 2000.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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........................................................... 30.00 14.50
2000
First Quarter (through January 31, 2000)................................. 50.81 26.00
</TABLE>
On January 31, 2000, the closing sale price of our Class A common stock on
the Nasdaq Stock Market was $47.50 per share.
As of January 31, 2000, there were approximately 345 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."
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization plus cash and cash
equivalents as of November 30, 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 $47.50 per share.
You should read the following table together with "Use of Proceeds,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and our consolidated financial
statements and the accompanying notes.
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
-------- -------------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT
SHARE
AND PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents........................................ $ 5,527 $ 5,527
-------- ---------
-------- ---------
Short-term and current installments of long-term debt............ 18,006 18,006
-------- ---------
Long-term debt, less current maturities:
Bank obligations............................................... 102,007(1) 12,457(1)
Long-term debt................................................. 5,932 5,932
Capital lease obligation....................................... 6,279 6,279
-------- ---------
Total....................................................... 114,218 24,668
-------- ---------
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; 17,206,909
outstanding at November 30, 1999 and 19,206,909 as
adjusted.................................................. 179 199
Class B common stock, 10,000,000 authorized; 2,260,954
outstanding............................................... 22 22
Paid-in capital............................................. 149,278 238,808
Retained earnings........................................... 63,142 63,142
Other....................................................... 1,623 1,623
-------- ---------
Total stockholders' equity.................................. 216,744 306,294
-------- ---------
Total capitalization........................................ $348,968 $ 348,968
-------- ---------
-------- ---------
</TABLE>
- ------------------
(1) As of January 31, 2000, our bank obligations increased to $119.4 million
from $102.0 million on November 30, 1999 due to seasonal inventory
requirements.
15
<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 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, compared to what stockholders' equity would
have been without the unrealized gain.
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, compared to what stockholders' equity would
have been without the unrealized gain; 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, compared to what stockholders' equity would
have been without the unrealized gain;
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, which is not
reflected in net income, compared to what stockholders' equity would
have been without the unrealized gain; and
16
<PAGE>
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.
for 1999:
o a pre-tax charge of $2.0 million due to the other-than-temporary
decline in the market value of its Shintom common stock;
o a pre-tax gain of $3.8 million on the issuance of subsidiary shares
to Toshiba Corporation; and
o a $9.9 million increase in stockholders' equity, net of tax, as a
result of an unrealized gain on marketable securities, which is not
reflected in net income, compared to what stockholders' equity would
have been without the unrealized gain.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................................. $500,740 $597,915 $639,082 $616,695 1,159,537
Gross profit............................................... 70,742 96,388 106,762 88,541 134,628
Operating income (loss).................................... (9,734) 13,075 19,695 4,877 38,237
Other income (expense)..................................... (4,952) (33,710) 23,747 (1,070) 4,486
Income (loss) before provision for (recovery of) income
taxes.................................................... (14,686) (20,635) 43,442 3,801 42,723
Provision for (recovery of) income taxes................... (2,803) 5,834 22,420 829 15,477
-------- -------- -------- -------- ----------
Net income (loss).......................................... $(11,883) $(26,469) $ 21,022 $ 2,972 $ 27,246
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Net income (loss) per common share, basic.................. $ (1.31) $ (2.82) $ 1.11 $ 0.16 $ 1.43
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Net income (loss) per common share, diluted................ $ (1.31) $ (2.82) $ 1.09 $ 0.16 1.39
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Total assets............................................... $308,428 $265,545 $289,827 $279,679 $ 475,083
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Long-term obligations, less current installments........... 142,802 70,413 38,996 33,724 122,798
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Stockholders' equity....................................... $114,595 $131,499 $187,892 $177,720 $ 216,744
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
</TABLE>
17
<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 95% 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 direct sale of handsets, accessories
and wireless telephone service. For fiscal 1999, sales through Quintex were
$53.2 million or 5.7% 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), a division of
Audiovox, 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 and others. In addition, we sell some of our
products directly 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 fiscal 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 6.1 million units for fiscal
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 the large increases in
net sales.
Sales by our Electronics Group were $188.4 million in fiscal 1996 and
$193.9 million in fiscal 1997, but declined in 1998 to $175.1 million, primarily
due to a financial crisis in Asia, particularly Malaysia. Sales for fiscal 1999
have increased 31% over fiscal 1998 to $230.2 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 $38.2 million in fiscal 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 fiscal 1996 to
20.3% for fiscal 1999 due, in part, to higher margins in mobile video products
and other new technologies and products.
18
<PAGE>
Our total operating expenses have not increased materially since fiscal
1996, despite our increase in sales. Total operating expenses were $83.3 million
in fiscal 1996 and $96.4 million in fiscal 1999. We have invested in management
systems and improved our operating facilities to increase our efficiency.
During the period from fiscal 1996 to fiscal 1999, our balance sheet was
strengthened by the conversion of $64 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of income data for the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
YEARS ENDED
NOVEMBER 30,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales:
Wireless
Wireless products......................................................... 62.1% 65.3% 76.5%
Activation commissions.................................................... 4.9 3.7 2.2
Residual fees............................................................. 0.7 0.7 0.3
Other..................................................................... 1.9 1.9 1.1
----- ----- -----
Total Wireless.......................................................... 69.6 71.6 80.1
----- ----- -----
Electronics
Sound........................................................................ 14.4 12.7 6.8
Mobile electronics........................................................... 15.2 13.8 9.8
Consumer electronics......................................................... 0.7 1.9 3.3
----- ----- -----
Total Electronics....................................................... 30.3 28.4 19.9
----- ----- -----
Other........................................................................ 0.1 -- --
Total net sales......................................................... 100.0 100.0 100.0
Cost of sales.................................................................. (83.3) (85.6) (88.4)
----- ----- -----
Gross profit................................................................... 16.7 14.4 11.6
Selling........................................................................ (6.0) (5.7) (3.2)
General and administrative..................................................... (5.8) (5.9) (3.8)
Warehousing, assembly and repair............................................... (1.9) (2.0) (1.3)
----- ----- -----
Total operating expenses................................................ (13.7) (13.6) (8.3)
----- ----- -----
Operating income............................................................... 3.0 0.8 3.3
Interest and bank charges...................................................... (0.4) (0.8) (0.4)
Income in equity investments, management fees and related income, net.......... 0.2 0.2 0.3
Gain on sale of investments.................................................... 5.9 0.1 0.3
Gain on issuance of subsidiary shares.......................................... -- -- 0.3
Debt conversion expense........................................................ (2.0) -- --
Other income (expense)......................................................... -- 0.3 (0.2)
Provision for income taxes..................................................... (3.5) (0.1) (1.3)
----- ----- -----
Net income..................................................................... 3.3% 0.5% 2.3%
----- ----- -----
----- ----- -----
</TABLE>
19
<PAGE>
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1997, 1998 and 1999 are reflected
in the following table. Certain reclassifications and recaptioning have been
made to the data for periods prior to fiscal 1999 in order to conform to fiscal
1999 presentation.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
---------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Wireless
Wireless products......................... $396,510 62.1% $402,606 65.3% $ 886,509 76.5%
Activation commissions.................... 31,061 4.9 22,785 3.7 25,873 2.2
Residual fees............................. 4,688 0.7 4,452 0.7 3,674 0.3
Other..................................... 12,141 1.9 11,747 1.9 13,247 1.1
-------- ----- -------- ----- ---------- -----
Total Wireless.......................... 444,400 69.5 441,590 71.6 929,303 80.1
-------- ----- -------- ----- ---------- -----
Electronics
Sound..................................... 91,763 14.4 78,338 12.7 78,713 6.8
Mobile electronics........................ 97,446 15.2 84,973 13.8 113,371 9.8
Consumer electronics...................... 4,701 0.7 11,794 1.9 38,150 3.3
-------- ----- -------- ----- ---------- -----
Total Electronics....................... 193,910 30.3 175,105 28.4 230,234 19.9
Other........................................ 772 0.1 -- -- -- --
-------- ----- -------- ----- ---------- -----
Total..................................... $639,082 100.0% $616,695 100.0% $1,159,537 100.0%
-------- ----- -------- ----- ---------- -----
-------- ----- -------- ----- ---------- -----
</TABLE>
Net sales for fiscal 1999 were $1,159,537, an 88% increase from net sales
of $616,595 in fiscal 1998. Wireless Group sales were $929,303 in fiscal year
1999, a 110% increase from sales of $441,590 in fiscal 1998. Unit sales of
wireless handsets increased 83.2% to approximately 6,067,000 units in fiscal
1999 from 3,311,000 units in fiscal 1998. The average selling price of our
handsets increased to $140 per unit in fiscal 1999 from $114 per unit in fiscal
1998.
Electronics Group sales were $230,234 in fiscal 1999, a 31% increase from
sales of $175,105 in fiscal 1998. This increase was largely due to increased
sales in our mobile video and consumer electronics product lines. Sales by our
international subsidiaries increased 14.2% in fiscal 1999 to approximately
$25,100 as a result of improvements in both the Malaysian and Venezuelan
subsidiaries.
Gross profit margin for fiscal 1999 was 11.6%, compared to 14.4% in fiscal
1998. This decline in profit margin resulted primarily from margin reductions in
our Wireless Group attributable to increased sales of digital handsets, which
have lower margins than analog handsets, and was also affected by decreases in
Latin American sales and margins. Gross profit increased 52.1% to $134,628 in
fiscal 1999, versus $88,541 in fiscal 1998.
Operating expenses were $96,391 in fiscal 1999, compared to $83,670 in
fiscal 1998. As a percentage of net sales, operating expenses decreased to 8.3%
in fiscal 1999 from 13.6% in fiscal 1998. Operating income for fiscal 1999 was
$38,237, an increase of $33,366 from fiscal 1998.
Net income for fiscal 1999 was $27,246, an increase of 817% from net income
of $2,972 in fiscal 1998. Earnings per share were $1.43, basic, and $1.39,
diluted, fiscal 1999 compared to $0.16, basic and diluted, in fiscal 1998.
20
<PAGE>
WIRELESS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of income (loss) data for the Wireless Group expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales:
Wireless products..................................... $402,606 91.1% $886,509 95.4%
Activation commissions................................ 22,785 5.1 25,873 2.8
Residual fees......................................... 4,452 1.0 3,674 0.4
Other................................................. 11,747 2.7 13,247 1.4
-------- ----- -------- -----
Total net sales..................................... 441,590 100.0 929,303 100.0
Gross profit............................................... 52,270 11.8 87,807 9.5
Total operating expenses................................... 48,257 10.9 49,888 5.4
-------- ----- -------- -----
Operating income........................................... 4,013 0.9 37,919 4.1
Other expense.............................................. (5,799) (1.3) (6,664) (0.7)
-------- ----- -------- -----
Pre-tax income (loss)...................................... $ (1,786) (0.4)% $ 31,255 3.4%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
The Wireless Group is composed of ACC and Quintex, both subsidiaries of
Audiovox Corporation. Since principally all of the net sales of Quintex are
wireless in nature, all operating results of Quintex are being included in the
discussion of the Wireless Group's product line.
Net sales were $929,303 in fiscal 1999, an increase of $487,713, or 110%,
from fiscal 1998. Unit sales of wireless handsets increased by 2,756,000 units
in fiscal 1999, or 83.2%, to approximately 6,067,000 units from 3,311,000 units
in fiscal 1998. The average selling price of our handsets increased to $140 per
unit in fiscal 1999 from $114 per unit in fiscal 1998. The number of new
wireless subscriptions processed by Quintex increased 21.7% in fiscal 1999, with
a corresponding increase in activation commissions of approximately $3,088 in
fiscal 1999. The average commission received by Quintex per activation decreased
by approsimately 6.7% in fiscal 1999 from fiscal 1998. Unit gross profit margins
increased to 7.8% in fiscal 1999 from 7.3% in fiscal 1998, reflecting increased
selling prices, which were partially offset by a corresponding increase of 22.7%
in average unit cost. During fiscal 1998, we recorded a $6,600 charge to adjust
the carrying value of certain cellular inventories, partially offset by a $1,000
credit from a supplier. This charge was the result of a software problem in
certain analog cellular phones, as well as a continuing decrease in the selling
prices of analog telephones due to pressure from the presence of digital
handsets in the market. While the analog handset market is still quite large,
the Wireless Group may experience lower gross profits in the future due to the
price sensitivity of this market.
Operating expenses increased to $49,888 in fiscal 1999 from $48,257 in
fiscal 1998. As a percentage of net sales, however, operating expenses decreased
to 5.4% during fiscal 1999 compared to 10.9% in fiscal 1998. Selling expenses
decreased to $22,784 in fiscal 1999 from $24,201 in fiscal 1998, primarily in
divisional marketing and advertising, partially offset by increases in travel
expenses. General and administrative expenses increased to $18,059 in fiscal
1999 from $15,904 in fiscal 1998, primarily due to temporary personnel,
insurance expense and provisions for doubtful accounts. Warehousing, assembly
and repair expenses increased to $9,045 in fiscal 1999 from $8,150 in fiscal
1998, primarily due to direct labor expenses. Pre-tax income for fiscal 1999 was
$31,255, an increase of $33,041 from fiscal 1998.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future.
21
<PAGE>
ELECTRONICS RESULTS
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales:
Sound.................................................... $ 78,338 44.8% $ 78,713 34.2%
Mobile electronics....................................... 84,973 48.5 113,371 49.2
Consumer electronics..................................... 11,794 6.7 38,150 16.6
-------- ----- -------- -----
Total net sales....................................... 175,105 100.0 230,234 100.0
Gross profit............................................... 36,433 20.8 46,819 20.3
Total operating expenses................................... 27,126 15.5 32,977 14.3
-------- ----- -------- -----
Operating income........................................... 9,307 5.3 13,842 6.0
Other expense.............................................. (3,370) (1.9) (2,546) (1.1)
-------- ----- -------- -----
Pre-tax income............................................. $ 5,937 3.4% $ 11,296 4.9%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
Net sales were $230,234 in fiscal 1999, a 31.5% increase from net sales of
$175,105 in fiscal 1998. All product categories experienced an increase in
sales, particularly in the mobile and consumer electronics product lines. Sales
of mobile video, in the mobile electronics category, increased over 400% in
fiscal 1999 to approximately $52 million from $10 million in fiscal 1998.
Consumer electronics increased over 200% to $38,150 in fiscal 1999 from $11,794
in fiscal 1998. These increases were partially offset by decreases in Prestige
audio and SPS sound lines.
Operating expenses were $32,977 in fiscal 1999, a 21.6% increase from
operating expenses of $27,126 in fiscal 1998. Selling expenses increased during
fiscal 1999, primarily in salaries, commissions and divisional marketing. These
increases were partially offset by decreases in advertising. General and
administrative expenses increased from fiscal 1998, mostly in salaries,
provision for doubtful accounts and temporary personnel. Warehousing and
assembly expenses increased to $5,991 in fiscal 1999 from $4,434 in fiscal 1998,
primarily due to tooling expenses, warehousing and direct labor. Pre-tax income
for fiscal 1999 was $11,296, an increase of $5,359 from fiscal 1998.
We believe that the Electronics Group has an expanding market with a
certain level of volatility related to both domestic and international new car
sales. Also, certain of our products are subject to price fluctuations, which
could affect the carrying value of inventories and gross margins in the future.
OTHER INCOME AND EXPENSE
Interest expense and bank charges decreased $57 during fiscal 1999 from
fiscal 1998.
Management fees and equity in income from joint venture investments
increased by approximately $3,150 for fiscal 1999 compared to fiscal 1998 as
detailed in the following table:
<TABLE>
<CAPTION>
1998 1999
-------------------------------- --------------------------------
EQUITY EQUITY
MANAGEMENT INCOME MANAGEMENT INCOME
FEES (LOSS) TOTAL FEES (LOSS) TOTAL
----------- ------- ------ ----------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bliss-tel.................................. -- $ (13) $ (13) -- $ (55) $ (55)
ASA........................................ -- 1,860 1,860 -- 3,506 3,506
TALK....................................... -- (509) (509) -- 1,121 1,121
G.L.M...................................... $ 7 -- 7 -- -- --
Pacific.................................... -- (337) (337) -- -- --
Posse...................................... 29 70 99 $ 30 30 60
Quintex West............................... -- -- -- -- (375) (375)
------- ------- ------ ------- ------- ------
$ 36 $1,071 $1,107 $ 30 $4,227 $4,257
------- ------- ------ ------- ------- ------
</TABLE>
22
<PAGE>
During 1998, we purchased 400,000 Japanese yen (approximately $3,132) of
Shintom debentures. We exercised our option to convert the Shintom debentures
into shares of Shintom common stock. These shares are included in our
available-for-sale marketable securities at November 30, 1998. During the fourth
quarter of 1999, we recorded an other-than-temporary decline in market value of
our Shintom common stock in the amount of $1,953 and a related deferred tax
benefit of $761. The write-down has been recorded as a component of other
expense in the consolidated statements of income.
During 1998, we purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom debentures and exercised our option to convert
737,212 Japanese yen of Shintom debentures into shares of Shintom common stock.
We then sold the Shintom common stock, yielding net proceeds of $5,830 and a
gain of $787.
During 1999, we purchased an additional 3,100,000 Japanese yen
(approximately $27,467) of Shintom debentures and exercised our option to
convert 2,882,788 Japanese yen of Shintom debentures into shares of Shintom
common stock. We sold the Shintom common stock, yielding net proceeds of $27,916
and a gain of $3,501. As of November 30, 1999, the remaining Shintom debentures
of 1,125,024 Japanese yen are included in our available-for-sale marketable
securities.
As of December 1999, we completed the liquidation of Audiovox Pacific Pty.
Ltd.
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 fiscal 1999, we implemented
various tax strategies which have resulted in lowering the effective tax rate.
23
<PAGE>
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.
WIRELESS GROUP RESULTS
Net sales in 1998 were $441,590, a decrease of $2,810, or 0.6%, from 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 marketplace. Operating
expenses decreased to $48,257 in 1998 from $49,582 in 1997. 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,
salesperson 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 $13,368 compared to 1997.
The net sales and percentage of net sales of the Wireless Group are
reflected in the following table:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------------
1997 1998
--------------------- ---------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
Wireless products........................................... $ 396,510 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)%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
24
<PAGE>
ELECTRONICS GROUP RESULTS
Net sales in 1998 were $175,105, a decrease of approximately $18,805 or
9.7% from 1997. 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, mobile
and consumer electronics products increased by approximately $4.7 million, or
3.7%, from 1997. The main components of this increase were our mobile video and
consumer products categories. Our 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 because of
decreases 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 $2.6 million from foreign operations, partially
offset by an increase in pre-tax income from domestic operations.
The net sales and percentage of net sales of the Electronics Group are
reflected in the following table:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
--------------------------------------------
1997 1998
--------------------- ---------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
Sound....................................................... $ 91,763 47.3% $ 78,338 44.8%
Mobile electronics.......................................... 97,446 50.3 84,973 48.5
Consumer electronics........................................ 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%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
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.
25
<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 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.
During 1998, we purchased 400,000 Japanese yen (approximately $3,132) of
Shintom debentures. We exercised our option to convert the Shintom debentures
into shares of Shintom common stock. These shares are included in our
available-for-sale marketable securities at November 30, 1998. During the fourth
quarter of 1999, we recorded an other-than-temporary decline in market value of
our Shintom common stock in the amount of $1,953. The write-down has been
recorded as a component of other expense in the consolidated statements of
income. In connection with the write-down, we also recorded a deferred tax
recovery in the amount of $761 in the accompanying consolidated statements of
income.
During 1998, we purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom debentures. We exercised our option to convert
737,212 Japanese yen of Shintom debentures into shares of Shintom common stock.
We sold the Shintom common stock yielding net proceeds of $5,830 and a gain of
$787.
26
<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 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.
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 events, which
resulted in an effective tax rate of 51.6% for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position at November 30, 1999 was approximately $3,871 below the
November 30, 1998 level. Operating activities used approximately $95,616,
primarily from increases in accounts receivable and inventory partially offset
by an increase in accounts payable. Even though accounts receivable and
inventory have increased, days on hand have decreased approximately 4% for both
accounts receivable and inventory. Investing activities used approximately
$1,124, primarily from the purchase of investment securities and the purchase of
property, plant and equipment, partially offset by the proceeds from the sale of
investment securities. Financing activities provided approximately $92,884,
primarily from net borrowings under line of credit agreements.
On July 28, 1999, we amended and restated our credit agreement with a group
of lenders led by The Chase Manhattan Bank, as administrative agent. The amended
and restated credit agreement increased our maximum borrowings available from
$112,500 to $200,000. Effective December 20, 1999, we again amended the credit
agreement to increase our maximum borrowings to $250,000. 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 the
amended and 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 consolidated pre-tax loss in any two
consecutive fiscal quarters;
o we may not permit consolidated pre-tax income for the period of two
consecutive fiscal quarters ending on May 31, 2000, May 31, 2001,
May 31, 2002, May 31, 2003 or May 31, 2004 to be less than $1,500; or
ending on November 30, 1999, November 30, 2000, November 30, 2001,
November 30, 2002 or November 30, 2003 to be less than $2,500;
o we may not permit a consolidated pre-tax income for any fiscal year
ending on or after November 30, 1999 to be less than $4,000;
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, among other items, our ability to pay dividends, repurchase
stock and make capital expenditures or acquisitions.
Borrowings under the credit facility bear interest, payable monthly, based
on the annual interest rate publicly announced by The Chase Manhattan Bank as
its prime rate in effect at its principal office in New York plus the applicable
margin which is based on the consolidated pre-tax income for four consecutive
quarters. The applicable margin presently in effect is 0%. This margin will
increase to .25% if consolidated pre-tax income for four consecutive quarters
falls below $4,000. We may also borrow on a LIBOR basis plus
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<PAGE>
the applicable margin. At present, the margin above LIBOR is 1.50%, which will
be reduced to 1.25% on February 28, 2000. This margin will increase to 1.50% if
our consolidated pre-tax income for four consecutive quarters is equal to or
greater than $10,000 but less than $15,000, and to 1.75% if our consolidated
pre-tax income for four consecutive quarters is less than $10,000. The margin
will be 1.25% if consolidated pre-tax income for four consecutive quarters is
equal to or greater than $15,000.
Our ability to borrow under our credit facility is conditioned on a formula
that 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.
We believe that we have sufficient liquidity to satisfy our anticipated
working capital and capital expenditure needs for the reasonable foreseeable
future.
We also have revolving credit facilities in Malaysia to finance additional
working capital needs. As of November 30, 1999, the available line of credit for
direct borrowing, letters of credit, bankers' acceptances and other forms of
credit approximated $8,158. The Malaysian credit facilities are partially
secured by us under one standby letter of credit totaling $1,300 and two standby
letters of credit totaling $5,320 and are payable upon demand or upon expiration
of the standby letters of credit. Our obligations under the Malaysian credit
facilities are secured by the property and building owned in Malaysia by
Audiovox Communications Sdn. Bhd.
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.
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
We are not aware of any year 2000 issues that have affected our business.
In preparation for the year 2000, we incurred internal staff costs as well as
consulting and other expenses. Year 2000 expenses totaled less than $1 million.
These expenses were not significant because, during 1996, we replaced or updated
a significant portion of our computer systems, both hardware and software, with
year 2000 compliant systems.
It is possible that the computerized systems could be affected in the
future by the year 2000 issue. We have numerous computerized interfaces with
third parties that are possibly vulnerable to failure if those third parties
have not adequately addressed their year 2000 issues. System failures resulting
from these issues could cause significant disruption to our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (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
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<PAGE>
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. Our management has not yet determined the impact, if
any, that the implementation of Statement 133 will have on our financial
position, results of operations or liquidity.
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 November 30, 1999, which are recorded at fair
value of $30,401 and include net unrealized gains of $15,981, 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 $3,040 as of November 30, 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.
The change in fair value of our long-term debt resulting from a
hypothetical 10% decrease in interest rates as of November 30, 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 November 30, 1999, is not
material.
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 November 30, 1999, is
approximately $431. Actual results may differ.
We are subject to risk from changes in foreign exchange rates for our
subsidiaries and equity investments 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 other comprehensive
income. On November 30, 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
November 30, 1999, amounts to $816. Actual results may differ.
Certain of the Company's investments in marketable securities are subject
to risk from changes in the Japanese yen rate. A portion of these investments
are hedged with a yen denominated loan. As of November 30, 1999, the amount of
loss in fair value resulting from a hypothetical 10% adverse change in the
Japanese yen rate, for the investments that are not hedged, approximates $118.
Actual results may differ.
29
<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 35 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. During the third
quarter of 1999, we became the third largest seller of wireless products and the
second largest seller 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, sells wireless handsets and
accessories through domestic and international wireless carriers and
their agents, independent distributors and retailers.
o Mobile 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 grew significantly in fiscal 1999 primarily because of
increased sales of our digital handsets. Our net sales have increased as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
1998 1999
---------------------------- ----------------------------
($ IN MILLIONS)
<S> <C> <C>
Wireless..................................................... $442 $ 930
Electronics.................................................. 175 230
---- ------
Total........................................................ $617 $1,160
---- ------
---- ------
<CAPTION>
PERCENT
CHANGE
-------
<S> <C>
Wireless..................................................... 110%
Electronics.................................................. 32
---
Total........................................................ 88%
---
---
</TABLE>
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.
30
<PAGE>
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 mobile 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 35
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 56%
of unit handset sales for fiscal 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 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 8.9% of our total consolidated revenue in fiscal 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.
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<PAGE>
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:
o product design and development
o engineering and testing
o proprietary handsets and software
o customized electronic products
o technical and sales support
o electronic data interchange (EDI)
o inventory warehousing and fulfillment
o management of information systems
o product repair services and warranty
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 (in
thousands):
<TABLE>
<CAPTION>
UNITED STATES
CELLULAR, PCS & HYBRID
------------------------
HANDSET
SUBSCRIBERS SHIPMENTS
----------- ---------
<S> <C> <C>
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%
</TABLE>
32
<PAGE>
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 (in thousands):
<TABLE>
<CAPTION>
WORLDWIDE
CELLULAR/PCS
------------------------
HANDSET
SUBSCRIBERS SHIPMENTS
----------- ---------
<S> <C> <C>
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%
</TABLE>
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.
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<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 digital products
represented 56% 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 1999 were as follows:
<TABLE>
<CAPTION>
TECHNOLOGY FISCAL 1998 FISCAL 1999
- ------------------------------------------------------------------------------ ----------- ------------
<S> <C> <C>
Analog
AMPS........................................................................ 2,092,328 1,784,789
N-AMPS...................................................................... 592,957 915,589
--------- ----------
Analog Total................................................................ 2,685,285 2,700,378
Digital
CDMA........................................................................ 593,104 2,459,609
CDMA/PCS.................................................................... -- 779,762
TDMA/PCS.................................................................... -- 67,233
GSM......................................................................... 27,933 37,597
Cordless 900 MHz............................................................ 4,313 21,945
--------- ----------
Digital Total............................................................ 625,350 3,366,146
--------- ----------
Total.................................................................... 3,310,635 6,066,524
--------- ----------
--------- ----------
</TABLE>
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. During 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 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 wireless sales for fiscal 1998. For fiscal 1999, our
five largest wireless customers were Bell Atlantic, AirTouch Communications,
PrimeCo Personal Communications LP, MCI and US Cellular. Two of these customers,
Bell Atlantic and AirTouch, accounted for 24.4% and 18.6%, respectively, of our
net wireless sales for fiscal 1999. These customers represented 65.9% of our net
wireless sales during that period.
The wireless carrier industry is currently in a period of consolidation,
which may impact our sales. Bell Atlantic, one of our largest customers, expects
to finalize its pending merger with GTE during 2000, and then transfer the new
business to a joint venture with Vodafone. During 1999, Vodafone merged with
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,
34
<PAGE>
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 five 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 fiscal 1999, our revenues
from these operations were 5.7% 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 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 warranties, we utilize 1,178 independent warranty centers
throughout the United States and Canada and have 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
have also purchased a small percentage of our wireless products from a supplier
in Denmark. In selecting our suppliers, 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
35
<PAGE>
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
-------------------------------------
FISCAL YEAR ENDED
NOVEMBER 30,
YEAR FIRST -------------------------------------
SUPPLIER PURCHASED TECHNOLOGY 1996 1997 1998 1999
- ---------------------------- ---------- --------------- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Toshiba Corporation......... 1984 AMPS/CDMA 42% 47% 57% 48%
Talk Corporation/Shintom.... 1988 AMPS/N-AMPS/GSM 19 40 29 13
Hyundai..................... 1998 CMDA/PCS -- -- 6 21
Bosch....................... 1998 GSM -- -- 2 0.2
LGIC........................ 1999 CDMA -- -- -- 12
Mitsubishi.................. 1999 TDMA/PCS -- -- -- 2
Sanyo....................... 1999 CDMA -- -- -- 1
</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 to Kyocera Corporation.
When the sale is completed, Kyocera will 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 competitors have also included some of our own
suppliers and customers. Many of our competitors undertake 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 we and our competitors will be
required to support an infrastructure capable of providing many of 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 several 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 during 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."
36
<PAGE>
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.
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 fiscal 1998 and fiscal 1999,
our sales by product category were as follows:
<TABLE>
<CAPTION>
1998 1999 PERCENT CHANGE
--------- --------- --------------
($ IN MILLIONS)
<S> <C> <C> <C>
Mobile electronics.................................................. $ 163.3 $ 192.0 17.6%
Consumer electronics................................................ 11.8 38.2 224.0
--------- --------- ------
Total.......................................................... $ 175.1 $ 230.2 31.5%
--------- --------- ------
--------- --------- ------
</TABLE>
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 fiscal 1999, they sold $27.7 million in licensed goods for
which we received license fees. License sales promote our Audiovox brand name
without adding any significant costs.
37
<PAGE>
ELECTRONICS DISTRIBUTION AND MARKETING
We sell our electronics products to:
o mass merchants
o power retailers
o chain stores
o specialty retailers
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 Hauppauge facility is QS 9000 and ISO
9001 registered.
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 fiscal 1999, our five largest customers
were Nissan, Best Buy, Sears, Army and Air Force Exchange Services ("AAFES") and
Gulf States Toyota, and they represented 23.9% of our net electronic sales.
Nissan represented approximately 12% of net electronics sales for fiscal 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
38
<PAGE>
o performing software design and validation testing
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 utilize 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 fiscal 1999, the percentage of our electronics purchases from our
largest suppliers were:
o Nutek Corporation--12.7%
o Namsung Corporation--8.8%
o Action Electronics Co.--6.9%
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.
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
39
<PAGE>
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
Applications.......... 50.0% 1997 Distribution of products for van, RV and other
specialized vehicles
Bliss-Tel Company
Ltd................... 20.0% 1997 Distribution of wireless products and
accessories in Thailand
</TABLE>
See also Note 10 to our Consolidated Financial Statements.
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.
PROPERTIES
We lease all of our facilities. These facilities range in size from 100 to
75,000 square feet. Our largest properties are:
<TABLE>
<S> <C>
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
</TABLE>
We lease these three facilities from related parties. See "Certain
Transactions--Leases." In addition, as of November 30, 1999 we leased a total of
thirty-three operating facilities located in eleven states and one Canadian
province. The Wireless Group utilizes twenty-four of these facilities located in
California, Georgia, New Jersey, New York, Pennsylvania, Tennessee, Virginia and
Canada. The Electronics Group utilizes nine of these facilities located in
California, Florida, Massachusetts, New York, Ohio, Texas and Canada. These
facilities serve as offices, warehouses, distribution centers or retail
locations for both the Wireless Group and the Electronics Group. Additionally,
the Company utilizes public warehouse facilities located in Norfolk, Virginia
and Sparks, Nevada for its Electronics Group and in Miami, Florida, Toronto,
Canada and Tilburg, Netherlands for its Wireless Group. The Company also owns
and leases facilities in Venezuela and Malaysia for its Electronics Group. 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."
40
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
John J. Shalam.................................. 66 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.............................. 48 Senior Vice President, Electronics Division and
a Director
Ann M. Boutcher................................. 49 Vice President, Marketing and a Director
Richard Maddia.................................. 41 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 has been a Vice President of the Company since 1982. In
1991, Mr. Lavelle was elected Senior Vice President, with responsibility for the
Company's mobile and consumer electronics division. 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.
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.
41
<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 January 31,
2000 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>
SHARES OWNED CLASS A SHARES OWNED
BEFORE THE AMOUNT OF AFTER THE
OFFERING(2) CLASS A SHARES OFFERING(2)
-------------------- SOLD IN THE --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) CLASS A PERCENT OFFERING AMOUNT PERCENT
- --------------------------------------------------- --------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
John J. Shalam(3).................................. 5,750,771 28.9%(3) 1,000,000 4,750,771 21.7%
Philip Christopher................................. 745,799 4.2 100,000 645,799 3.3
Charles M. Stoehr.................................. 122,500 * -- 122,500 *
Patrick M. Lavelle................................. 94,617 * -- 94,617 *
Richard Maddia..................................... 5,070 * -- 5,070 *
Ann M. Boutcher.................................... 5,338 * -- 5,338 *
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 32.8% 1,100,000 5,636,080 25.0%
<CAPTION>
NAME AND ADDRESS OF OTHER 5% HOLDERS OF COMMON STOCK
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kennedy Capital
Management, Inc.(4)
10829 Olive Blvd.
St. Louis, MO 63141................................ 1,715,250 9.9%
Franklin Resources, Inc.(5)
777 Mariners Island Blvd.
San Mateo, CA 94404................................ 1,198,369 6.9%
Dimensional Fund Advisors Inc.(6)
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401............................. 1,076,900 6.2%
</TABLE>
- ------------------
* 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 17,238,789 shares of
Class A common stock outstanding as of January 31, 2000 and 19,238,789
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 January 31, 2000 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.
(Footnotes continued on next page)
42
<PAGE>
(Footnotes continued from previous page)
(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 13, 2000,
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.
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,
EXPIRATION ----------------------------------------------------
EQUIPMENT/PROPERTY LOCATION DATE 1996 1997 1998 1999
- --------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
150 Marcus Blvd.(1)
Hauppauge, NY...................................... 11/30/2003 $396,000 $396,000 $440,668 $530,000
16820 Marquardt Ave.(2)
Cerritos, CA....................................... 1/31/2000 $119,016 $119,011 $119,001 $119,011
555 Wireless Blvd.(3)
Hauppauge, NY...................................... 12/1/2026 -- -- $337,599 $675,956
555 Wireless Blvd.(3)
Hauppauge, NY...................................... 3/31/2003 -- -- $307,981 $410,641
</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.
For additional description of our related party transactions, see Note 18
to our Consolidated Financial Statements. 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
43
<PAGE>
with the issuance of the warrants, John J. 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 option from Mr. Shalam is only exercisable to the
extent a warrant holder exercises its warrants described above. 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 30, 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:
<TABLE>
<S> <C> <C>
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
</TABLE>
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 1,070,000 options as
follows:
<TABLE>
<CAPTION>
AVERAGE EXERCISE
NAME NUMBER OF OPTIONS PRICE PER SHARE
- ------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
John J. Shalam..................................................... 350,000 $ 7.6875
Philip Christopher................................................. 500,000 $ 6.93
Charles M. Stoehr.................................................. 100,000 $ 5.78
Patrick M. Lavelle................................................. 100,000 $ 5.78
Richard A. Maddia.................................................. 20,000 $ 7.6875
Paul C. Kreuch, Jr................................................. 5,000 $ 4.63
Dennis F. McManus.................................................. 5,000 $ 4.63
Ann M. Boutcher.................................................... 5,000 $ 7.6875
</TABLE>
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 and $188,130 in 1999. 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 exercise price of $13.81.
RELATIONSHIPS WITH SUPPLIER
In 1998, Toshiba, our largest supplier, purchased a 5% equity interest in
Audiovox Communications Corp., our largest subsidiary, for $5,000,000.
44
<PAGE>
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
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
The Board of Directors has proposed an amendment to our Certificate of
Incorporation that would increase the number of our authorized shares of common
stock from 41,550,000 to 71,550,000. The additional 30,000,000 shares would be
Class A common stock. The Board intends to submit the proposed amendment for
approval at the 2000 annual meeting of stockholders. If the stockholders approve
the amendment, we will file an amended and restated certificate of incorporation
with the Secretary of State of the State of Delaware as soon as practicable
after our annual meeting. Because Mr. Shalam controls more than a majority of
our common stock, we expect that the proposed amendment will be approved.
The shares being offered in this offering are shares of Class A common
stock. As of January 31, 2000, there were outstanding 17,238,789 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 in the circumstances described below 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.
Our Certificate of Incorporation provides that the 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.
Our Certificate of Incorporation further provides that the holders of
Class B common stock, voting separately as a class, would be entitled to 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. However, 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.
The number of outstanding shares of Class B common stock is currently less
than 12.5% of the total outstanding shares of both classes of common stock.
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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 if a separate class vote would be
required to elect 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 January 31, 2000, the outstanding shares of Class A common stock
comprised approximately 88% of the shares of both classes outstanding, and the
holders of Class A common stock held approximately 43% of the combined voting
power of both classes of common stock. Accordingly, the holders of the Class B
common stock have the voting power to elect the directors not elected by the
Class A common stock, or 75% of the board.
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.
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
46
<PAGE>
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 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.
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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.
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 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.
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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 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.
<TABLE>
<CAPTION>
NAME AMOUNT
- --------------------------------------------------------------------------------- ---------
<S> <C>
SG Cowen Securities Corporation..................................................
Morgan Keegan & Company, Inc.....................................................
Prudential Securities Incorporated...............................................
Ladenburg Thalmann & Co. Inc.....................................................
---------
Total....................................................................... 3,100,000
---------
---------
</TABLE>
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 in whole or in part and from time to time 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.
Audiovox, our directors and executive officers, have agreed with the
underwriters that for a period of 90 days following the date of this prospectus,
Audiovox and such persons 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
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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
Nasdaq Stock Market or otherwise and, if commenced, may be discontinued at any
time.
One of the underwriters, Prudential Securities, also markets securities
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(sm), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors. Other
than the prospectus in electronic format, the information on this website is not
part of this prospectus or the registration statement of which this prospectus
forms a part and has not been approved and/or endorsed by Audiovox or any
underwriter in such capacity and should not be relied on by prospective
investors.
We estimate that our out-of-pocket expenses for this offering, exclusive of
underwriters' discounts and commissions, will be approximately $700,000.
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, 1999, 1998 and 1997, and for each of the years
in the three-year period ended November 30, 1999, 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,
1999;
o our Report on Form 8-K dated as of January 13, 2000; 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 this document or any other
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.
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AUDIOVOX CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Annual Consolidated Financial Statements:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of November 30, 1998 and 1999............................................. F-3
Consolidated Statements of Income for the fiscal years ended November 30, 1997,
1998 and 1999......................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended November 30, 1997, 1998 and
1999.................................................................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended November 30, 1997,
1998 and 1999......................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<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 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended November 30, 1999. 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 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP__________________________
KPMG LLP
Melville, New York
January 13, 2000
F-2
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $ 9,398 $ 5,527
Accounts receivable, net............................................................ 131,120 237,272
Inventory, net...................................................................... 72,432 136,554
Receivable from vendor.............................................................. 956 9,327
Prepaid expenses and other current assets........................................... 6,502 7,940
Deferred income taxes, net.......................................................... 6,088 7,675
--------- --------
Total current assets............................................................ 226,496 404,295
Investment securities................................................................. 17,089 30,401
Equity investments.................................................................... 10,387 13,517
Property, plant and equipment, net.................................................... 17,828 19,629
Excess cost over fair value of assets acquired and other intangible assets, net....... 6,052 5,661
Other assets.......................................................................... 1,827 1,580
--------- --------
$ 279,679 $475,083
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 34,063 $ 76,382
Accrued expenses and other current liabilities...................................... 15,376 29,068
Income taxes payable................................................................ 5,210 8,777
Bank obligations.................................................................... 7,327 15,993
Documentary acceptances............................................................. 3,911 1,994
--------- --------
Total current liabilities....................................................... 65,887 132,214
Bank obligations...................................................................... 17,500 102,007
Deferred income taxes, net............................................................ 3,595 8,580
Long-term debt........................................................................ 6,331 5,932
Capital lease obligation.............................................................. 6,298 6,279
--------- --------
Total liabilities............................................................... 99,611 255,012
--------- --------
Minority interest..................................................................... 2,348 3,327
--------- --------
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 17,827,946 issued 1998 and 1999,
respectively; 16,760,518 and 17,206,909 outstanding 1998 and 1999, respectively... 173 179
Class B convertible; 10,000,000 authorized; 2,260,954 issued and outstanding........ 22 22
Paid-in capital....................................................................... 143,339 149,278
Retained earnings..................................................................... 35,896 63,142
Accumulated other comprehensive income (loss)......................................... (1,550) 5,165
Gain on hedge of available-for-sale securities, net................................... 929 929
Treasury stock, at cost, 498,055 and 621,037 Class A common stock 1998 and 1999,
respectively........................................................................ (3,589) (4,471)
--------- --------
Total stockholders' equity...................................................... 177,720 216,744
--------- --------
Commitments and contingencies
Total liabilities and stockholders' equity...................................... $ 279,679 $475,083
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED NOVEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Net sales.................................................................. $639,082 $616,695 $1,159,537
Cost of sales (including an inventory write-down to market in 1998 of
$6,600).................................................................. 532,320 528,154 1,024,909
-------- -------- ----------
Gross profit............................................................... 106,762 88,541 134,628
-------- -------- ----------
Operating expenses:
Selling.................................................................. 38,044 35,196 36,606
General and administrative............................................... 37,000 35,890 44,748
Warehousing, assembly and repair......................................... 12,023 12,584 15,037
-------- -------- ----------
Total operating expenses.............................................. 87,067 83,670 96,391
-------- -------- ----------
Operating income........................................................... 19,695 4,871 38,237
-------- -------- ----------
Other income (expense):
Debt conversion expense.................................................. (12,686) -- --
Interest and bank charges................................................ (2,542) (4,769) (4,712)
Equity in income of equity investments, management fees and related
income, net........................................................... 1,468 1,107 4,257
Gain on sale of investments.............................................. 37,471 787 3,501
Gain on issuance of subsidiary shares.................................... -- -- 3,800
Other, net............................................................... 36 1,805 (2,360)
-------- -------- ----------
Total other income (expense).......................................... 23,747 (1,070) 4,486
-------- -------- ----------
Income before provision for income taxes................................... 43,442 3,801 42,723
Provision for income taxes................................................. 22,420 829 15,477
-------- -------- ----------
Net income................................................................. $ 21,022 $ 2,972 $ 27,246
-------- -------- ----------
-------- -------- ----------
Net income per common share (basic)........................................ $ 1.11 $ 0.16 $ 1.43
-------- -------- ----------
-------- -------- ----------
Net income per common share (diluted)...................................... $ 1.09 $ 0.16 $ 1.39
-------- -------- ----------
-------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN UNEARNED RETAINED
STOCK STOCK CAPITAL COMPENSATION EARNINGS
--------- ------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balances at November 30, 1996....................................... 2,500 163 107,958 (125) 11,902
Comprehensive income:
Net income......................................................... -- -- -- -- 21,022
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... -- -- -- -- --
Unrealized gain on marketable securities, net of tax effect of
$1,174......................................................... -- -- -- -- --
Other comprehensive income (loss)................................
Comprehensive income................................................
Compensation expense................................................ -- -- 118 17 --
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. -- -- (23) 23 --
Issuance of 352,194 shares of common stock.......................... -- 3 3,489 -- --
Conversion of debentures into 2,860,925 shares...................... -- 29 33,592 -- --
Issuance of warrants................................................ -- -- 106 -- --
Acquisition of 290,000 common shares................................ -- -- -- -- --
Unrealized gain on equity collar, net of tax effect of $473......... -- -- -- -- --
------- ---- -------- -------- ---------
Balances at November 30, 1997....................................... 2,500 195 145,240 (85) 32,924
Comprehensive income:
Net income......................................................... -- -- -- -- 2,972
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... -- -- -- -- --
Unrealized loss on marketable securities, net of tax effect of
$4,928......................................................... -- -- -- -- --
Other comprehensive income (loss)................................
Comprehensive income (loss).........................................
Compensation expense (income)....................................... -- -- (23) 76 --
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. -- -- (9) 9 --
Purchase of warrants................................................ -- -- (1,869) -- --
Acquisition of 208,055 common shares................................ -- -- -- -- --
Sale of equity collar, net of tax effect of $1,043.................. -- -- -- -- --
------- ---- -------- -------- ---------
Balances at November 30, 1998...................................... 2,500 195 143,339 -- 35,896
Comprehensive income:
Net income......................................................... -- -- -- -- 27,246
Other comprehensive income, net of tax:
Foreign currency translation adjustment.......................... -- -- -- -- --
Unrealized gain on marketable securities, net of tax effect of
$3,540......................................................... -- -- -- -- --
Other comprehensive income.......................................
Comprehensive income................................................
Compensation expense (income)....................................... -- -- 158 -- --
Exercise of stock options into 364,550 shares of common stock and
issuance of 39,305 shares under the Restricted Stock Plan.......... -- 4 2,775 -- --
Tax benefit of stock options exercised.............................. -- -- 1,101 -- --
Conversion of debentures into 70,565 shares......................... -- 1 1,248 -- --
Issuance of warrants................................................ -- 1 662 -- --
Purchase of warrants................................................ -- -- (5) -- --
Acquisition of 122,982 common shares................................ -- -- -- -- --
------- ---- -------- -------- ---------
Balances at November 30, 1999....................................... 2,500 201 149,278 -- 63,142
------- ---- -------- -------- ---------
------- ---- -------- -------- ---------
<CAPTION>
ACCUMULATED GAIN ON
OTHER UNREALIZED HEDGE OF
COMPREHENSIVE GAIN ON AVAILABLE
INCOME EQUITY FOR SALE TREASURY
(LOSS) COLLAR SECURITIES STOCK
------------- ---------- ---------- --------
<S> <C>
Balances at November 30, 1996....................................... 9,101 -- -- --
Comprehensive income:
Net income......................................................... -- -- -- --
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... (2,252) -- -- --
Unrealized gain on marketable securities, net of tax effect of
$1,174......................................................... 1,917 -- -- --
Other comprehensive income (loss)................................
Comprehensive income................................................
Compensation expense................................................ -- -- -- --
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. -- -- -- --
Issuance of 352,194 shares of common stock.......................... -- -- -- --
Conversion of debentures into 2,860,925 shares...................... -- -- -- --
Issuance of warrants................................................ -- -- -- --
Acquisition of 290,000 common shares................................ -- -- -- (2,421)
Unrealized gain on equity collar, net of tax effect of $473......... -- 773 -- --
--------- ------ ---- --------
Balances at November 30, 1997....................................... 8,766 773 -- (2,421)
Comprehensive income:
Net income......................................................... -- -- -- --
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... (2,276) -- -- --
Unrealized loss on marketable securities, net of tax effect of
$4,928......................................................... (8,040) -- -- --
Other comprehensive income (loss)................................
Comprehensive income (loss).........................................
Compensation expense (income)....................................... -- -- -- --
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. -- -- -- --
Purchase of warrants................................................ -- -- -- --
Acquisition of 208,055 common shares................................ -- -- -- (1,168)
Sale of equity collar, net of tax effect of $1,043.................. -- (773) 929 --
--------- ------ ---- --------
Balances at November 30, 1998...................................... (1,550) -- 929 (3,589)
Comprehensive income:
Net income......................................................... -- -- -- --
Other comprehensive income, net of tax:
Foreign currency translation adjustment.......................... 940 -- -- --
Unrealized gain on marketable securities, net of tax effect of
$3,540......................................................... 5,775 -- -- --
Other comprehensive income.......................................
Comprehensive income................................................
Compensation expense (income)....................................... -- -- -- --
Exercise of stock options into 364,550 shares of common stock and
issuance of 39,305 shares under the Restricted Stock Plan.......... -- -- -- --
Tax benefit of stock options exercised.............................. -- -- -- --
Conversion of debentures into 70,565 shares......................... -- -- -- --
Issuance of warrants................................................ -- -- -- --
Purchase of warrants................................................ -- -- -- --
Acquisition of 122,982 common shares................................ -- -- -- (882)
--------- ------ ---- --------
Balances at November 30, 1999....................................... 5,165 -- 929 (4,471)
--------- ------ ---- --------
--------- ------ ---- --------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
Balances at November 30, 1996....................................... 131,499
Comprehensive income:
Net income......................................................... 21,022
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... (2,252)
Unrealized gain on marketable securities, net of tax effect of
$1,174......................................................... 1,917
--------
Other comprehensive income (loss)................................ (335)
--------
Comprehensive income................................................ 20,687
Compensation expense................................................ 135
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. --
Issuance of 352,194 shares of common stock.......................... 3,492
Conversion of debentures into 2,860,925 shares...................... 33,621
Issuance of warrants................................................ 106
Acquisition of 290,000 common shares................................ (2,421)
Unrealized gain on equity collar, net of tax effect of $473......... 773
--------
Balances at November 30, 1997....................................... 187,892
Comprehensive income:
Net income......................................................... 2,972
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.......................... (2,276)
Unrealized loss on marketable securities, net of tax effect of
$4,928......................................................... (8,040)
--------
Other comprehensive income (loss)................................ (10,316)
--------
Comprehensive income (loss)......................................... (7,344)
--------
Compensation expense (income)....................................... 53
Options and non-performance restricted stock forfeitures due to
employee terminations.............................................. --
Purchase of warrants................................................ (1,869)
Acquisition of 208,055 common shares................................ (1,168)
Sale of equity collar, net of tax effect of $1,043.................. 156
--------
Balances at November 30, 1998...................................... 177,720
Comprehensive income:
Net income......................................................... 27,246
Other comprehensive income, net of tax:
Foreign currency translation adjustment.......................... 940
Unrealized gain on marketable securities, net of tax effect of
$3,540......................................................... 5,775
--------
Other comprehensive income....................................... 6,715
--------
Comprehensive income................................................ 33,961
Compensation expense (income)....................................... 158
Exercise of stock options into 364,550 shares of common stock and
issuance of 39,305 shares under the Restricted Stock Plan.......... 2,779
Tax benefit of stock options exercised.............................. 1,101
Conversion of debentures into 70,565 shares......................... 1,249
Issuance of warrants................................................ 663
Purchase of warrants................................................ (5)
Acquisition of 122,982 common shares................................ (882)
--------
Balances at November 30, 1999....................................... 216,744
--------
--------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 21,022 $ 2,972 $ 27,246
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Debt conversion expense................................................. 12,386 -- --
Depreciation and amortization........................................... 1,903 2,471 3,288
Provision for bad debt expense.......................................... 1,300 581 3,255
Equity in income of equity investments.................................. (1,468) (1,107) (4,257)
Minority interest....................................................... 1,623 (320) (220)
Gain on sale of investments............................................. (37,471) (787) (3,501)
Gain on issuance of subsidiary shares................................... -- -- (3,800)
Other-than-temporary decline in market value of investment security..... -- -- 1,953
Deferred income tax benefit, net........................................ (3,123) (902) (565)
Provision for unearned compensation..................................... 135 53 --
Expense relating to issuance of warrants................................ 106 -- --
Gain on disposal of property, plant and equipment, net.................. (9) (151) 36
Changes in:
Accounts receivable..................................................... 6,853 (27,940) (109,889)
Receivable from vendor.................................................. -- 4,266 (8,371)
Inventory............................................................... (36,823) 31,705 (64,533)
Accounts payable, accrued expenses and other current liabilities........ (2,855) 9,385 56,615
Income taxes payable.................................................... 2,181 (4,034) 4,022
Prepaid expenses and other, net......................................... (2,659) 1,186 3,105
-------- -------- ---------
Net cash provided by (used in) operating activities................... (36,899) 17,378 (95,616)
-------- -------- ---------
Cash flows from investing activities:
Purchases of investment securities......................................... (4,706) (12,719) (14,151)
Purchases of property, plant and equipment, net............................ (3,986) (4,932) (4,822)
Net proceeds from sale of investment securities............................ 45,937 5,830 11,201
Proceeds from sale of equity collar........................................ -- 1,499 --
Proceeds from distribution from equity investment.......................... 450 1,125 1,648
Proceeds from issuance of subsidiary shares................................ -- -- 5,000
-------- -------- ---------
Net cash provided by (used in) investing activities................... 37,695 (9,197) (1,124)
-------- -------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements................ (3,765) (5,047) 93,428
Net borrowings (repayments) under documentary acceptances.................. 413 (3) (1,917)
Debt issuance costs........................................................ (13) -- (1,175)
Principal payments on capital lease obligation............................. -- (26) (19)
Proceeds from issuance of Class A common stock............................. 2,328 -- --
Proceeds from exercise of stock options and warrants....................... -- -- 3,449
Repurchase of Class A common stock......................................... (2,421) (1,168) (882)
Purchase of warrants....................................................... -- (1,869) --
-------- -------- ---------
Net cash provided by (used in) financing activities................... (3,458) (8,113) 92,884
-------- -------- ---------
Effect of exchange rate changes on cash...................................... (243) (115) (15)
-------- -------- ---------
Net decrease in cash......................................................... (2,905) (47) (3,871)
Cash at beginning of period.................................................. 12,350 9,445 9,398
-------- -------- ---------
Cash at end of period........................................................ $ 9,445 $ 9,398 $ 5,527
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design and market a
diverse line of products and provide related services throughout the world.
These products and services include handsets and accessories for wireless
communications, fulfillment services for wireless carriers, automotive
entertainment and security products, automotive electronic accessories and
consumer electronics.
The Company operates in two primary markets:
(1) Wireless communications. The Wireless Group markets wireless handsets
and accessories through domestic and international wireless carriers
and their agents, independent distributors and retailers.
(2) Mobile and consumer electronics. The Electronics Group sells autosound,
mobile electronics and consumer electronics primarily to mass
merchants, power retailers, specialty retailers, new car dealers,
original equipment manufactures (OEMs), independent installers of
automotive accessories and the U.S. military.
(b) 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.
(c) Cash Equivalents
Investments with original maturities of three months or less are considered
cash equivalents. There were no cash equivalents at November 30, 1998 or 1999.
(d) Cash Discounts, 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.
(e) 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.
(f) 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.
F-7
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 component of accumulated other
comprehensive income 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.
(g) 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:
(1) 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 19(a)(1)).
(2) Equity Collar
As of November 30, 1997, the Company had an equity collar for 100,000
of its shares in CellStar Corporation (CellStar) (Note 8). 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 19(a)(2)). The equity collar acted as a hedging
item for the CellStar shares. The investment in 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 accumulated other
comprehensive income (loss).
The Financial Accounting Standards Board (FASB) issued Statement
No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133"
(Statement 137). Statement 137 amends Statement 133, "Accounting for
Derivative Instruments and Hedging Activities", which 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. Statement 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments, embedded in other contracts and
for hedging activities. 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.
F-8
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(h) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank obligations
(Note 11(a)) have been capitalized. During 1999, the Company capitalized $1,220
in fees associated with the amendment to the Company's credit agreement. These
charges are amortized over the lives of the respective agreements. Amortization
expense of these costs amounted to $37 and $160 for the years ended
November 30, 1997 and 1999, respectively. During 1997, the Company wrote-off
$245 of debt issuance costs (Note 12). There was no amortization of debt
issuance costs for the year ended November 30, 1998.
(i) 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:
<TABLE>
<S> <C>
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
</TABLE>
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.
(j) Intangible Assets
Intangible assets consist of patents, trademarks, non-competition
agreements and the excess cost over fair value of assets acquired for subsidiary
companies and equity investments. Excess cost over fair value of assets acquired
is being amortized, on a straight-line basis, 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 $2,583 at November 30,
1998 and 1999, respectively. Amortization of the excess cost over fair value of
assets acquired and other intangible assets amounted to $363, $382 and $429 for
the years ended November 30, 1997, 1998 and 1999, respectively.
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 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.
F-9
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) Equity Investments
The Company has common stock investments which are accounted for by the
equity method (Note 10).
(l) Cellular Telephone Commissions
Under various agency agreements, the Company receives an initial activation
commission for obtaining subscribers for cellular telephone services. The
agreements may contain provisions for additional 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 $35,749, $27,237 and $29,547 for the years
ended November 30, 1997, 1998 and 1999, respectively. Related commissions paid
to outside selling representatives for cellular activations are included in cost
of sales in the accompanying consolidated statements of income and amounted to
$19,924, $13,877 and $19,884 for the years ended November 30, 1997, 1998 and
1999, respectively.
(m) Advertising
The Company expenses the costs of advertising as incurred. During the years
ended November 30, 1997, 1998 and 1999, the Company had no direct response
advertising.
(n) 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
1999, the liability for future warranty expense amounted to $1,915 and $5,104,
respectively.
(o) Foreign Currency
With the exception of a subsidiary operation in Venezuela, which has been
deemed a hyper inflationary economy, 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 rates of
exchange at the end of the period or historical exchange rates, as appropriate.
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 accumulated other comprehensive income. 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.
Exchange gains and losses on hedges of foreign net investments and on
intercompany balances of a long-term nature are also recorded in the cumulative
foreign currency translation adjustment account in accumulated other
comprehensive income. Exchange gains and losses on available-for-sale investment
securities and the related hedge of such investment securities is recorded in
the unrealized gain (loss) on marketable securities in accumulated other
comprehensive income. Other foreign currency transaction gains (losses) of $871
and $(1,046) for the years ended November 30, 1998 and 1999, respectively, were
included in other income. Other foreign currency gains and losses were not
material for the year ended November 30, 1997.
F-10
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(p) 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.
(q) Net Income 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.
The Company adopted Statement 128 in fiscal 1998. Earnings per share amounts for
all periods presented have been restated to conform to the new presentation.
(r) Supplementary Financial Statement Information
Advertising expenses approximated $16,981, $15,789 and $15,390 for the
years ended November 30, 1997, 1998 and 1999, respectively.
Interest income of approximately $1,525, $896 and $943 for the years ended
November 30, 1997, 1998 and 1999, respectively, is included in other, net, in
the accompanying consolidated statements of income.
(s) 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.
(t) Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of
The Company accounts for its long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards 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.
(u) Accounting for Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
stock-based compensation plans.
F-11
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(v) Reporting Comprehensive Income
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.
Other comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains and losses on
investment securities classified as available-for-sale. The Company adopted this
accounting standard effective December 1, 1998, as required. Prior year
financial statements have been reclassified to conform to the presentation
required by Statement 130.
(w) Reclassifications
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements in order to conform to the 1999 presentation.
2. BUSINESS ACQUISITIONS
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.
3. 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 in accordance with the
Company's policy on the recognition of such transactions.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NOVEMBER
30,
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash paid during the years for:
Interest, excluding bank charges, net of $801
capitalized in 1998.......................................... $ 1,560 $ 1,587 $ 2,994
Income taxes................................................... $23,530 $ 4,496 $12,039
</TABLE>
Non-cash Transactions:
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 12).
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 five
dollars per share, in exchange for a 20% interest in Bliss-tel Company, Limited
(Bliss-tel) (Note 10).
F-12
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1997, 1998 AND 1999
4. SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
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 10).
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 19).
During 1998, a capital lease obligation of $6,340 was incurred when the
Company entered into a building lease (Note 18).
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 19).
During 1998 and 1999, the Company exercised its option to convert 1,137,212
and 2,882,788 Japanese yen (approximately $8,176 and $24,026) of Shintom Co.
Ltd. (Shintom) convertible debentures (Shintom debentures) into approximately
7,500,000 and 48,100,000 shares of Shintom common stock, respectively (Note 8).
During the years ended November 30, 1997, 1998 and 1999, the Company
recorded an unrealized holding gain relating to available-for-sale marketable
equity securities, net of deferred income taxes, of $1,917, $(8,040) and $5,775,
respectively, as a separate component of accumulated other comprehensive income
(Note 16).
During 1999, $1,249 of its $65,000 6 1/4% subordinated debentures were
converted into 70,565 shares of Class A common stock (Note 12).
5. TRANSACTIONS WITH MAJOR SUPPLIERS
The Company engages in transactions with Shintom and TALK Corporation
(TALK). Shintom is a stockholder who owns all of the outstanding Preferred Stock
of the Company at November 30, 1998 and 1999. The Company has a 30.8% interest
in TALK (Note 10).
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 29%, 19% and 11% for the years ended
November 30, 1997, 1998 and 1999, respectively, of total inventory purchases. At
November 30, 1998 and 1999, the Company had recorded $15 and $20, respectively,
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 1999 (Note 11(b)). At November 30, 1998 and 1999, the
Company had recorded a receivable from TALK in the amount of $734 and $3,741,
respectively, a portion of which is payable with interest (Note 10), which is
reflected as receivable from vendor on the accompanying consolidated financial
statements.
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.
Inventory purchases from another major supplier approximated 32%, 42% and
39% of total inventory purchases for the years ended November 30, 1997, 1998 and
1999, respectively. Although there are a limited number of manufacturers of its
products, management believes that other suppliers could provide similar
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.
F-13
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Trade accounts receivable............................................. $142,211 $254,477
Receivables from equity investments (Note 10)......................... 1,035 1,057
-------- --------
143,246 255,534
Less:
Allowance for doubtful accounts..................................... 2,944 5,645
Allowance for cellular deactivations................................ 875 1,261
Allowance for co-operative advertising, cash
discounts and market development funds........................... 8,307 11,356
-------- --------
$131,120 $237,272
-------- --------
-------- --------
</TABLE>
7. RECEIVABLE FROM VENDOR
The Company recorded receivable from vendor in the amount of $956 and
$9,327 as of November 30, 1998 and 1999, respectively. Receivable from vendor
represents prepayments on product shipments, defective product reimbursements
and interest receivable at a rate of 6.5% on amounts due from TALK (Note 10).
8. INVESTMENT SECURITIES
As of November 30, 1999, 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 1,125,024 Japanese yen of Shintom debentures, which
were classified as available-for-sale marketable 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, which were classified as available-for-sale
marketable securities. The cost, gross unrealized gains and losses and aggregate
fair value of the investment securities available-for-sale as of November 30,
1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------------------------ ----------------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED AGGREGATE UNREALIZED AGGREGATE
HOLDING HOLDING FAIR HOLDING FAIR
COST GAIN LOSS VALUE COST GAIN VALUE
------- ---------- ---------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CellStar Common
Stock............... $ 2,715 $8,422 -- $11,137 $ 2,715 $ 13,936 $16,651
Shintom Common
Stock............... 3,132 -- $1,723 1,409 1,179 -- 1,179
Shintom Debentures.... 4,543 -- -- 4,543 10,526 2,045 12,571
------- ------ ------ ------- ------- -------- -------
$10,390 $8,422 $1,723 $17,089 $14,420 $ 15,981 $30,401
------- ------ ------ ------- ------- -------- -------
------- ------ ------ ------- ------- -------- -------
</TABLE>
The Shintom debentures mature on September 30, 2002.
A related deferred tax liability of $2,546 and $6,053 was recorded at
November 30, 1998 and 1999, respectively, as a reduction to the unrealized
holding gain included in accumulated other comprehensive income.
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.
During 1998, the Company purchased 400,000 Japanese yen (approximately
$3,132) of Shintom debentures and 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
the fourth quarter of 1999, the Company recorded an other-than-temporary decline
in market value of
F-14
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INVESTMENT SECURITIES--(CONTINUED)
its Shintom common stock in the amount of $1,953 and a related deferred tax
benefit of $761. The write-down has been recorded as a component of other
expense in the consolidated statement of income.
During 1998, the Company purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom debentures and exercised its option to convert
737,212 Japanese yen of Shintom debentures into shares of Shintom common stock.
The Company sold the Shintom common stock yielding net proceeds of $5,830 and a
gain of $787.
During 1999, the Company purchased an additional 3,100,000 Japanese yen
(approximately $27,467) of Shintom debentures and exercised its option to
convert 2,882,788 Japanese yen of Shintom debentures into shares of Shintom
common stock. The Company sold the Shintom common stock yielding net proceeds of
$27,916 and a gain of $3,501.
9. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, net, is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Land.............................................................................. $ 363 $ 363
Buildings......................................................................... 1,605 1,605
Property under capital lease...................................................... 7,141 7,141
Furniture, fixtures and displays.................................................. 3,184 1,878
Machinery and equipment........................................................... 5,023 5,363
Computer hardware and software.................................................... 9,767 9,655
Automobiles....................................................................... 633 580
Leasehold improvements............................................................ 3,943 2,968
------- -------
31,659 29,553
Less accumulated depreciation and amortization.................................... (13,831) (9,924)
------- -------
$17,828 $19,629
------- -------
------- -------
</TABLE>
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $3,149 and $2,927 of unamortized
costs as of November 30, 1998 and 1999, respectively, related to the acquisition
and installation of management information systems for internal use.
Depreciation and amortization of plant and equipment amounted to $1,503,
$2,089 and $2,875 for the years ended November 30, 1997, 1998 and 1999,
respectively. Included in accumulated depreciation and amortization is
amortization of computer software costs of $19, $350 and $1,051 for the years
ended November 30, 1997, 1998 and 1999, respectively. Included in accumulated
depreciation and amortization is amortization of property under capital lease of
$160 and $240 for the year ended November 30, 1998 and 1999, respectively.
10. EQUITY INVESTMENTS
As of November 30, 1999, the Company had a 30.8% ownership interest in
TALK, a major supplier of the Company. As of November 30, 1999, the Company's
72% owned subsidiary, Audiovox Communications Sdn. Bhd., 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, 1999,
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,
F-15
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EQUITY INVESTMENTS--(CONTINUED)
security and accessory products; Audiovox Pacific Pty., Limited (Audiovox
Pacific) which was a former distributor of 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.
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 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 excess cost over fair
value of assets acquired. No further adjustments to the selling price can be
made.
The Company's net sales to the equity investments amounted to $6,132,
$4,528 and $4,605 for the years ended November 30, 1997, 1998 and 1999,
respectively. The Company's purchases from the equity investments amounted to
$7,484, $91,095 and $146,803 for the years ended November 30, 1997, 1998 and
1999, respectively. The Company recorded $2,027, $1,752 and $1,735 of outside
representative commission expenses for activations and residuals generated by
G.L.M. on the Company's behalf during fiscal year 1997, 1998 and 1999,
respectively. During the fourth quarter of 1999, the Company recorded $1,121 of
equity income from TALK.
Included in accounts receivable at November 30, 1998 and 1999 are trade
receivables due from its equity investments aggregating $1,035 and $1,057,
respectively. Receivable from vendor includes $833 and $3,741 due from TALK as
of November 30, 1998 and 1999, respectively, which represents prepayments on
product shipments and interest. Interest is payable in monthly installments at
6.5% on amounts due from TALK. Amounts representing prepayments of $3,500 were
repaid via receipt of product shipments in December 1999. At November 30, 1998
and 1999, other long-term assets include management fee receivables of $1,271
and $459, respectively. At November 30, 1998 and 1999, included in accounts
payable and other accrued expenses were obligations to equity investments
aggregating $1,049 and $1,015, respectively. Documentary acceptance obligations
were outstanding from TALK at November 30, 1999 (Note 11(b)).
For the years ended November 30, 1997, 1998 and 1999, interest income
earned on equity investment notes and other receivables approximated $653, $480
and $482, respectively. Interest expense on documentary acceptances payable to
TALK approximated $203, $256 and $228 in 1997, 1998 and 1999, respectively.
F-16
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCING ARRANGEMENTS
(a) Bank Obligations
The Company maintains a revolving credit agreement with various
financial institutions. During the year ended November 30, 1999, the
credit agreement was amended and restated in its entirety, extending the
expiration date to July 27, 2004. As a result, bank obligations under
the credit agreement have been classified as long-term at November 30,
1999. The amended and restated credit agreement provides for $200,000 of
available credit, including $15,000 for foreign currency borrowings. In
December 1999, the credit agreement was further amended, resulting in an
increase in available credit to $250,000.
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, 1999, availability of credit
under the credit agreement is a maximum aggregate amount of $200,000,
subject to certain conditions, based upon a formula taking into account
the amount and quality of its accounts receivable and inventory. At
November 30, 1999, the amount of unused available credit is $46,930. The
credit agreement also allows for commitment up to $50,000 in forward
exchange contracts (Note 19(a)(1)).
Outstanding obligations under the credit agreement at November 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
Revolving Credit Notes................................................. $ 2,500 $ 47,007
Eurodollar Notes....................................................... 15,000 55,000
------- --------
$17,500 $102,007
------- --------
------- --------
</TABLE>
Interest rates are as follows: revolving credit notes at .50% above the
prime rate, which was approximately 8.5%, 7.75% and 8.5% at
November 30, 1997, 1998 and 1999, respectively, and Eurodollar Notes at
1.50% above the Libor rate which was approximately 5.97%, 5.62% and
6.48% at November 30, 1997, 1998 and 1999, respectively. The maximum
commitment fee on the unused portion of the line of credit is .50% as of
November 30, 1999.
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 revolving credit facilities in Malaysia (Malaysian
Credit Agreement) to finance additional working capital needs. As of
November 30, 1998 and 1999, the available line of credit for direct
borrowing, letters of credit, bankers' acceptances and other forms of
credit approximated $8,195 and $8,158, respectively. The credit
facilities are partially secured by one standby letter of credit
totaling $1,300 and two standby letters of credit totaling $5,320, by
the Company and payable upon demand or upon expiration of the standby
letters of credit on January 15, 2000 and August 31, 2000, respectively.
The obligations of the Company under the Malaysian Credit Agreement are
secured by the property and building owned by Audiovox Communications
Sdn. Bhd. Outstanding obligations under the Malaysian Credit Agreement
at November 30, 1998 and 1999 were approximately $4,711 and $5,843,
respectively. At November 30, 1999 interest on the credit facility
ranged from 7.4% to 9.6%. At November 30, 1998, interest on the
F-17
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCING ARRANGEMENTS--(CONTINUED)
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%.
As of November 30, 1998 and 1999, Audiovox Venezuela had notes payable
of 1,500,000 and 1,275,500 Venezuelan Bolivars (approximately $2,617 and
$2,000 at November 30, 1998 and 1999) outstanding to a bank. Interest on
the notes payable is 10.7%. 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 $3,000, by
the Company and is payable upon demand or upon expiration of the standby
letter of credit on June 30, 2000.
The maximum month-end amounts outstanding under the credit agreement and
Malaysian Credit Agreement borrowing facilities during the years ended
November 30, 1997, 1998 and 1999 were $28,420, $42,975 and $110,595,
respectively. Average borrowings during the years ended November 30,
1997, 1998 and 1999 were $18,723, $26,333 and $29,835, respectively, and
the weighted average interest rates were 7.7%, 8.7% and 9.6%,
respectively.
During 1999, the Company entered into a wholesale financing agreement
with a financial institution to finance up to $15,000 of inventory
purchases of a particular supplier. Amounts outstanding under this
agreement were $8,150 at November 30, 1999. Borrowings under the
agreement are secured by the inventory purchased. Payments on the
borrowings are due within 30 days. Interest is payable after stipulated
due dates at a rate of prime plus 1 1/2%, which was 10% at November 30,
1999. The agreement contains several covenants.
(b) Documentary Acceptances
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 and 1999,
$3,911 and $1,994, respectively, 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, 1997, 1998 and 1999 were $4,162, $4,809 and
$5,033, respectively. Average borrowings during the years ended
November 30, 1997, 1998 and 1999 were $3,199, $3,885 and $3,755,
respectively, and the weighted average interest rates, including fees,
were 6.3%, 6.6% and 6.1%, respectively.
12. LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at $17.70 per share.................... $ 2,269 $ 1,020
Subordinated note payable.............................................. 4,062 4,912
------- --------
6,331 5,932
------- --------
Less current installments.............................................. -- --
------- --------
$ 6,331 $ 5,932
------- --------
------- --------
</TABLE>
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
F-18
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LONG-TERM DEBT--(CONTINUED)
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 15(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.
During fiscal 1999, holders of the Company's 65,000 subordinated debentures
exercised their option to convert $1,249 debentures for 70,565 shares of the
Company's Class A common stock. As a result, the remaining subordinated
debentures are $1,020 as of November 30, 1999.
On October 20, 1994, the Company issued a note payable for 500,000 Japanese
yen (approximately $4,062 and $4,912 on November 30, 1998 and 1999,
respectively) to finance its investment in TALK (Note 10). 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 recorded in accumulated other comprehensive income.
Any foreign currency translation adjustment resulting from the note will be
recorded in other comprehensive income 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.
Maturities on long-term debt for the next five fiscal years are as follows:
<TABLE>
<S> <C>
2000............................................................. --
2001............................................................. $ 1,020
2002............................................................. --
2003............................................................. --
2004............................................................. $ 4,912
---------
---------
</TABLE>
F-19
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
The components of income (loss) before the provision for income taxes are
as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Domestic Operations............................................................... $42,613 $ 5,380 $42,668
Foreign Operations................................................................ 829 (1,579) 55
------- ------- -------
$43,442 $ 3,801 $42,723
------- ------- -------
------- ------- -------
</TABLE>
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statement of income............................................................... $22,420 $ 829 $15,477
Stockholders' equity:
Unrealized holding gain (loss) on investment securities recognized for financial
reporting purposes........................................................... 1,174 (4,928) 3,540
Unrealized holding gain on equity collar recognized for financial reporting
purposes..................................................................... 473 (1,043)
Income tax benefit of employee stock option exercises........................... -- -- (1,101)
------- ------- -------
Total income tax expense (benefit)........................................... $24,067 $(5,142) $17,916
------- ------- -------
------- ------- -------
</TABLE>
The provision for (benefit of) income taxes is comprised of:
<TABLE>
<CAPTION>
FEDERAL FOREIGN STATE TOTAL
------- ------- ------ -------
<S> <C> <C> <C> <C>
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
------- ------- ------ -------
------- ------- ------ -------
1999:
Current............................................................... $14,565 $ (116) $1,593 $16,042
Deferred.............................................................. (118) (431) (16) (565)
------- ------- ------ -------
$14,447 $ (547) $1,577 $15,477
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
F-20
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES--(CONTINUED)
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at Federal statutory rates......... $15,205 35.0% $1,292 34.0% $14,953 35.0%
Expense relating to exchange of subordinated
debentures..................................... 4,578 10.5 -- -- -- --
Undistributed income (losses) from equity
investments.................................... 123 0.3 287 7.6 (373) (0.9)
State income taxes, net of Federal benefit....... 1,637 3.8 260 6.8 1,025 2.4
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets.... (180) (0.4) (340) (8.9) (989) (2.3)
Foreign tax rate differential.................... 323 0.7 (82) (2.2) 38 0.1
Benefit of concluded examination................. -- -- (350) (9.2) -- --
Other, net....................................... 734 1.7 (238) (6.3) 823 1.9
------- ----- ------ ---- ------- ----
$22,420 51.6% $ 829 21.8% $15,477 36.2%
------- ----- ------ ---- ------- ----
------- ----- ------ ---- ------- ----
</TABLE>
The significant components of deferred income tax recovery for the years
ended November 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------
1998 1999
----- -----
<S> <C> <C>
Deferred tax (recovery) expense (exclusive of the effect of other components listed
below)............................................................................... $(562) $ 424
Decrease in beginning-of-the-year balance of the valuation allowance for deferred tax
assets............................................................................... (340) (989)
----- -----
$(902) $(565)
----- -----
----- -----
</TABLE>
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 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts and
cellular deactivations.......................................................... $1,210 $1,977
Inventory, principally due to additional costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986.......................................... 325 617
Inventory, principally due to valuation reserve.................................... 1,882 1,702
Accrual for future warranty costs.................................................. 563 615
Plant, equipment and certain intangibles, principally due to depreciation and
amortization.................................................................... 804 957
Net operating loss carryforwards, state and foreign................................ 2,338 1,327
Equity collar...................................................................... 570 570
Accrued liabilities not currently deductible....................................... 346 348
Other.............................................................................. 405 121
------ ------
Total gross deferred tax assets................................................. 8,443 8,234
Less: valuation allowance.......................................................... (2,373) (1,384)
------ ------
Net deferred tax assets............................................................ 6,070 6,850
------ ------
</TABLE>
F-21
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax liabilities:
Investment securities.............................................................. (3,577) (6,323)
Issuance of subsidiary shares...................................................... -- (1,432)
------ ------
Total gross deferred tax liabilities............................................ (3,577) (7,755)
------ ------
Net deferred tax asset (liability).............................................. $2,493 $ (905)
------ ------
------ ------
</TABLE>
The net change in the total valuation allowance for the year ended
November 30, 1999 was a decrease of $989. 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 more likely than not that
the Company will realize the benefit of the net deferred tax assets existing at
November 30, 1999. 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, 1999, the Company had net operating loss carryforwards for
state and foreign income tax purposes of approximately $7,250, which are
available to offset future state and foreign taxable income, if any, which will
expire through the year ended November 30, 2018.
14. CAPITAL STRUCTURE
The Company's capital structure is as follows:
<TABLE>
<CAPTION>
SHARES
SHARES AUTHORIZED OUTSTANDING VOTING
NOVEMBER 30, NOVEMBER 30, RIGHTS
PAR ------------------------------------ -------------------------- PER LIQUIDATION
SECURITY VALUE 1998 1999 1998 1999 SHARE RIGHTS
- ---------------------------------- ------ ----------------- ----------------- ------------ ------------ ------ -------------
<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.............. 0.01 30,000,000 30,000,000 16,760,518 17,206,909 One Ratably with
Class B
Class B Common Stock.............. 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably with
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.
The Company's Board of Directors approved the repurchase of 1,563,000
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 1999, 498,055 and
621,037 shares, respectively, were repurchased under the Program
F-22
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. CAPITAL STRUCTURE--(CONTINUED)
at an average price of $7.21 and $7.20 per share, respectively, for an aggregate
amount of $3,589 and $4,471, respectively.
As of November 30, 1998 and 1999, 1,963,480 and 1,598,930 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 3,946,522 for all
convertible securities and warrants outstanding at November 30, 1998 and 1999
(Notes 12 and 15).
Undistributed earnings from equity investments included in retained
earnings amounted to $2,324 and $4,219 at November 30, 1998 and 1999,
respectively.
15. STOCK-BASED COMPENSATION AND STOCK WARRANTS
(a) 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. The Company recorded $31 in compensation expense for the
year ended November 30, 1999. No compensation expense was recorded for
the years ended November 30, 1997 and 1998.
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, 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
Granted................................................................................. 1,542,500 14.98
Exercised............................................................................... (364,550) 7.64
Canceled................................................................................ (500) 13.00
--------- ------
Outstanding at November 30, 1999.......................................................... 2,871,200 11.41
--------- ------
--------- ------
Options exercisable, November 30, 1999.................................................... 1,181,200 $ 7.51
--------- ------
--------- ------
</TABLE>
F-23
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCK-BASED COMPENSATION AND STOCK WARRANTS--(CONTINUED)
At November 30, 1998 and 1999, 207,302 and 184,775 shares, respectively,
were available for future grants under the terms of these plans.
The per share weighted average fair value of stock options granted during
1999 was $9.83 on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: risk free interest rate of
5.9%, 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
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.
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:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported.................................................................... $21,022 $ 2,972 $27,246
Pro-forma...................................................................... 18,786 1,336 25,494
Net income per common share (basic):
As reported.................................................................... $ 1.11 $ 0.16 $ 1.43
Pro-forma...................................................................... 0.99 0.07 1.33
Net income per common share (diluted):
As reported.................................................................... $ 1.09 $ 0.16 $ 1.39
Pro-forma...................................................................... 0.97 0.07 1.30
</TABLE>
Pro-forma net income 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 income 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 income may not be representative of
the effects on reported net income for future years.
Summarized information about stock options outstanding as of November 30,
1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------- EXERCISABLE
WEIGHTED ---------------------
AVERAGE WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE
EXERCISE PRICE LIFE PRICE
PRICE NUMBER OF REMAINING NUMBER OF
RANGE OF SHARES SHARES IN YEARS OF SHARES SHARES
- ------------------------------------------------------ --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
$4.63--$8.00.......................................... 1,259,700 $ 7.12 7.22 1,059,700 $ 7.02
$8.01--13.00.......................................... 121,500 11.77 5.20 121,500 11.77
$13.01--15.00......................................... 1,490,000 $15.00 9.78 -- $ --
</TABLE>
(b) 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 1999
F-24
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCK-BASED COMPENSATION AND STOCK WARRANTS--(CONTINUED)
was 77,871 and 13,750, respectively. Awards under the restricted stock plan may
be performance accelerated shares or performance-restricted shares. During
fiscal 1999, 32,222 performance-accelerated shares and 12,103 performance
restricted shares were granted. No performance accelerated shares or performance
restricted shares were granted in 1997 or 1998. During fiscal 1999, 19,796
performance restricted shares lapsed. No performance accelerated shares or
performance restricted shares lapsed in fiscal years 1997 or 1998.
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,
1997, 1998 and 1999 were $135, $(23) and $127, respectively.
(c) 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.
(d) Stock Warrants
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. During fiscal 1999, the warrants
were surrendered for cancellation, and the holder agreed to waive registration
rights in exchange for $5.
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. In connection with this purchase, the option to purchase
1,324,075 shares from John J. Shalam's personal holdings was canceled. As of
November 30, 1999, 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. During the year ended November 30, 1999, all
of the warrants were exercised.
(e) 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
F-25
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCK-BASED COMPENSATION AND STOCK WARRANTS--(CONTINUED)
Company. A contribution of $500, $150 and $800 was made by the Company to the
United States plan in fiscal 1997, 1998 and 1999, respectively. Contributions
required by law to be made for eligible employees in Canada were not material.
16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The change in net unrealized gain (loss) on marketable securities of
$1,917, $(8,040) and $5,775 for the years ended November 30, 1997, 1998 and 1999
is net of tax of $1,174, $(4,928) and $3,540, respectively. Reclassification
adjustments of $23,232, $488 and $2,171 are included in the net unrealized gain
(loss) on marketable securities for the years ended November 30, 1997, 1998 and
1999, respectively.
The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries and equity
investments.
17. NET INCOME 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,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net income (numerator for net income per common share,
basic).................................................. $ 21,022 $ 2,972 $ 27,246
Interest on 6 1/4% convertible subordinated debentures,
net of tax.............................................. 185 -- 84
----------- ----------- -----------
Adjusted net income (numerator for net income per common
share, diluted)......................................... $ 21,207 $ 2,972 $ 27,330
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares (denominator for net income
per common share, basic)................................ 18,948,356 19,134,529 19,100,047
Effect of dilutive securities:
Employee stock options and stock warrants............... 237,360 -- 430,560
Employee stock grants................................... 70,845 -- 62,175
Convertible debentures.................................. 251,571 -- 110,551
----------- ----------- -----------
Weighted average common and potential common shares
outstanding (denominator for net income per common
share, diluted)......................................... 19,508,132 19,134,529 19,703,333
----------- ----------- -----------
----------- ----------- -----------
Net income per common share, basic........................ $ 1.11 $ 0.16 $ 1.43
----------- ----------- -----------
----------- ----------- -----------
Net income per common share, diluted...................... $ 1.09 $ 0.16 $ 1.39
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Employee stock options and stock warrants totaling 1,908,438 and 2,779,363
for the years ended November 30, 1997 and 1998, respectively, were not included
in the net income per share calculation because their effect would have been
anti-dilutive. There were no anti-dilutive stock options and stock warrants for
the year ended November 30, 1999.
F-26
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. 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 9). In connection with the capital lease, the Company paid certain
construction costs on behalf of its principal stockholder and chief executive
officer in the amount of $1,301. The amount is payable to the Company with 8%
interest.
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, 1999, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for minimum
annual rental payments as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
------- ---------
<S> <C> <C>
2000.............................................................................. $ 522 $ 1,955
2001.............................................................................. 530 1,473
2002.............................................................................. 553 1,225
2003.............................................................................. 554 820
2004.............................................................................. 553 81
Thereafter........................................................................ 13,099 658
------- -------
Total minimum lease payments...................................................... 15,811 $ 6,212
-------
-------
Less: amount representing interest................................................ 9,513
-------
Present value of net minimum lease payments....................................... 6,298
Less: current installments........................................................ 19
-------
Long-term obligation.............................................................. $ 6,279
-------
-------
</TABLE>
Rental expense for the above-mentioned operating lease agreements and other
leases on a month-to-month basis approximated $2,516, $2,563 and $2,552 for the
years ended November 30, 1997, 1998 and 1999, 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, 1999, 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:
<TABLE>
<S> <C>
2000.............................................................. $ 960
2001.............................................................. 941
2002.............................................................. 941
2003.............................................................. 667
---------
---------
</TABLE>
19. FINANCIAL INSTRUMENTS
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
F-27
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. FINANCIAL INSTRUMENTS--(CONTINUED)
At November 30, 1998, the Company had contracts to exchange
foreign currencies in the form of forward exchange contracts in
the amount of $5,352. These contracts have varying maturities
with none exceeding one year as of November 30, 1998. At
November 30, 1999, the Company had no contracts to exchange
foreign currencies in the form of forward exchange contracts.
For the years ended November 30, 1997, 1998 and 1999, gains and
losses on foreign currency transactions which were not hedged
were not material. For the years ended November 30, 1997, 1998
and 1999, there were no gains or losses as a result of
terminating hedges prior to the transaction date.
(2) Equity Collar
The Company entered into an equity collar on September 26, 1997
to hedge some of the unrealized gains associated with its
investment in CellStar (Note 8). The equity collar provided 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 net gain on the equity collar will be
reflected in the consolidated statements of income upon sale of
the CellStar shares.
The Company is exposed to credit losses in the event of nonperformance by
the counter parties to its forward exchange contracts. 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.
(b) 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 Sdn. Bhd. and Audiovox Venezuela (Note 11(a)). The
Company had open commercial letters of credit of approximately $24,914
and $41,173, of which $20,576 and $28,727 were accrued for purchases
incurred as of November 30, 1998 and 1999, 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
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 joint and several guarantees on behalf of
G.L.M. and Quintex West which aggregate $475. There is no market for
these guarantees and they were issued without explicit cost. Therefore,
it is not practicable to establish its fair value.
(c) 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
F-28
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. FINANCIAL INSTRUMENTS--(CONTINUED)
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, 1999, three customers, which included two
cellular carrier and service providers and a Bell Operating Company
accounted for approximately 15.8%, 15.5% and 11.1%, respectively, of
accounts receivable.
During the year ended November 30, 1997, two customers accounted for
approximately 11.3% and 9.0%, respectively, of the Company's 1997 sales.
During the year ended November 30, 1998, two customers accounted for
approximately 18.3% and 14.9%, respectively, of the Company's 1998
sales. During the year ended November 30, 1999, three customers
accounted for approximately 19.6%, 14.9% and 12.7%, respectively, of the
Company's 1999 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.
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.
(d) Fair Value
The carrying value of all financial instruments classified as a current
asset or liability is deemed to approximate fair value 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, 1999
------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Investment securities.................................... $ 17,089 $17,089 $ 30,401 $ 30,401
Long-term obligations.................................... $ 23,831 $24,202 $107,939 $109,261
Forward exchange contract
obligation (derivative)................................ -- $ 5,352 -- --
</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 and conversion features at the reporting date (Note 8).
Long-Term Obligations
The carrying amount of bank debt under the Company's revolving credit
agreement approximates fair value because the interest rate on the bank debt is
reset every quarter to reflect current market rates. With respect to the
subordinated debentures, fair values are based on quoted market price.
F-29
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. FINANCIAL INSTRUMENTS--(CONTINUED)
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based upon exchange
rates at November 30, 1999 and 1998 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.
20. SEGMENT INFORMATION
The Company has two reportable segments which are organized by products:
Wireless and Electronics. The Wireless segment markets wireless handsets and
accessories through domestic and international wireless carriers and their
agents, independent distributors and retailers. The Electronics segment sells
autosound, mobile electronics and consumer electronics, primarily to mass
merchants, power retailers, specialty retailers, new car dealers, original
equipment manufacturers (OEM), independent installers of automotive accessories
and the U.S. military.
The Company evaluates performance of the segments based upon income before
provision for income taxes. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies (Note 1).
The Company allocates interest and certain shared expenses, including treasury,
legal and human resources, to the segments based upon estimated usage.
Intersegment sales are reflected at cost and have been eliminated in
consolidation. A royalty fee on the intersegment sales, which is eliminated in
consolidation, is recorded by the segments and included in other income
(expense). Certain items are maintained at the Company's corporate headquarters
(Corporate) and are not allocated to the segments. They primarily include costs
associated with accounting and certain executive officer salaries and bonuses
and certain items including investment securities, equity investments, deferred
income taxes, certain portions of excess cost over fair value of assets
acquired, jointly-used fixed assets and debt. The jointly-used fixed assets are
the Company's management information systems, which is jointly used by the
Wireless and Electronics segments and Corporate. A portion of the management
information systems costs, including depreciation and amortization expense, are
allocated to the segments based upon estimates made by management. Segment
identifiable assets are those which are directly used in or identified to
segment operations.
During the year ended November 30, 1997, one customer of the Wireless
segment accounted for approximately 11.3% of the Company's 1997 sales. During
the year ended November 30, 1998, two customers of the Wireless segment
accounting for approximately 19.6% and 14.9% of the Company's 1998 sales. During
the year ended November 30, 1999, three customers of the Wireless segment
accounted for approximately 18.3%, 14.9% and 12.7% of the Company's 1999 sales.
No customers in the Electronics segment exceeded 10% of the consolidated sales
in fiscal 1997, 1998 or 1999.
F-30
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATED
WIRELESS ELECTRONICS CORPORATE TOTALS
-------- ----------- --------- ------------
<S> <C> <C> <C> <C>
1997
Net sales...................................................... $444,400 $ 193,910 $ 772 $ 639,082
Intersegment sales (purchases), net............................ 6 (6) -- --
Interest income................................................ 46 31 1,448 1,525
Interest expense............................................... 4,551 3,169 (5,546) 2,174
Depreciation and amortization.................................. 775 630 498 1,903
Debt conversion expense........................................ -- -- 12,686 12,686
Income (loss) before provision for income tax.................. 11,582 8,002 23,858 43,442
Total assets................................................... 138,136 86,632 65,059 289,827
Non-cash items:
Provision for bad debt expense............................... 354 934 12 1,300
Deferred income tax benefit.................................. -- -- 3,123 3,123
Minority interest............................................ -- -- 1,623 1,623
Capital expenditures......................................... 1,340 744 1,902 3,986
1998
Net sales...................................................... 441,590 175,105 -- 616,695
Intersegment sales (purchases), net............................ (1,125) 1,125 -- --
Interest income................................................ 215 165 517 897
Interest expense............................................... 5,536 4,068 (5,173) 4,431
Depreciation and amortization.................................. 877 570 1,024 2,471
Income (loss) before provision for income tax.................. (1,786) 5,937 (350) 3,801
Total assets................................................... 138,136 79,597 61,946 279,679
Non-cash items:
Provision for bad debt expense............................... 316 533 (268) 581
Deferred income tax benefit.................................. -- -- 902 902
Minority interest............................................ -- -- (320) (320)
Capital expenditures......................................... 1,003 475 3,454 4,932
1999
Net sales...................................................... 929,303 230,234 -- 1,159,537
Intersegment sales (purchases), net............................ (1,149) 1,449 -- --
Interest income................................................ 65 80 793 938
Interest expense............................................... 6,098 3,268 (5,307) 4,059
Depreciation and amortization.................................. 987 748 1,553 3,288
Income (loss) before provision for income tax.................. 31,255 11,296 172 42,723
Total assets................................................... 256,954 122,163 96,229 475,346
Non-cash items:
Provision for bad debt expense............................... 1,914 705 636 3,255
Deferred income tax benefit.................................. -- -- 565 565
Minority interest............................................ -- -- (220) (220)
Capital expenditures......................................... 1,747 1,211 1,864 4,822
</TABLE>
F-31
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SEGMENT INFORMATION--(CONTINUED)
Net sales and long-lived assets by location for the years ended November
30, 1997, 1998 and 1999 were as follows.
<TABLE>
<CAPTION>
NET SALES LONG-LIVED ASSETS
---------------------------------- --------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States......................... $499,417 $531,307 $1,059,536 $ 47,694 $ 50,469 $ 68,126
Canada................................ 18,323 15,789 23,146 -- -- --
Argentina............................. 39,832 27,354 22,831 -- -- --
Peru.................................. 7,426 10,514 9,913 -- -- --
Portugal.............................. 14,028 2,024 -- -- -- --
Malaysia.............................. 31,660 7,592 7,780 1,903 1,348 1,275
Venezuela............................. 10,867 14,358 22,853 696 1,366 1,387
Mexico, Central America and
Caribbean........................... 10,493 7,289 10,568 -- -- --
Other foreign countries............... 7,036 468 2,910 -- -- --
-------- -------- ---------- -------- -------- --------
Total................................. $639,082 $616,695 $1,159,537 $ 50,293 $ 53,183 $ 70,788
-------- -------- ---------- -------- -------- --------
-------- -------- ---------- -------- -------- --------
</TABLE>
(21) 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 Sdn. Bhd. and Audiovox Venezuela (Note 19(b)).
(22) SUBSEQUENT EVENT
The Company is anticipating selling 2,000,000 shares of its Class A Common
Stock to the public during the first quarter of fiscal 2000. In connection with
this offering, the Company has recorded $600 in deferred costs which have been
included in prepaid expenses and other assets on the accompanying consolidated
balance sheet at November 30, 1999.
F-32
<PAGE>
The glossy cover of the prospectus pages for 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>
3,100,000 SHARES
CLASS A COMMON STOCK
[LOGO]
------------------------
PROSPECTUS
------------------------
SG COWEN
MORGAN KEEGAN & COMPANY, INC.
PRUDENTIAL SECURITIES
LADENBURG THALMANN & CO. INC.
, 2000
<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 Nasdaq additional listing fee:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 27,688
Nasdaq Additional Listing Fee................................. 17,500
Printing Expenses............................................. 100,000
Blue Sky Fees and NASD Fees................................... 15,000
Legal Fees and Expenses....................................... 350,000
Accounting Fees and Expenses.................................. 150,000
Transfer Agent Fee............................................ 2,500
Miscellaneous................................................. 37,312
----------
Total.................................................... $ 700,000
----------
----------
</TABLE>
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
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
II-1
<PAGE>
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 bylaws 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.
ITEM 16. EXHIBITS.
The following exhibits are filed herewith or incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------
<S> <C>
*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.
</TABLE>
- ------------------
* Previously filed.
** 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
II-2
<PAGE>
(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.
(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-3
<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 AMENDMENT NO. 2 TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, AT HAUPPAUGE, NEW YORK, ON THIS 1ST DAY OF FEBRUARY,
2000.
AUDIOVOX CORPORATION
(Registrant)
By: _______/s/ CHARLES M. STOEHR______
Charles M. Stoehr,
Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED BELOW ON FEBRUARY 1, 2000.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ ------------------------------------------------------------------
<S> <C>
* President and Chief Executive Officer
- ------------------------------------------ Director
John J. Shalam
* Executive Vice President
- ------------------------------------------ Director
Philip Christopher
/s/ CHARLES M. STOEHR Senior Vice President and Chief
- ------------------------------------------ Financial Officer (Principal Accounting
Charles M. Stoehr Officer), Director
* Senior Vice President
- ------------------------------------------ Director
Patrick M. Lavelle
* Vice President
- ------------------------------------------ Director
Ann Boutcher
* Vice President
- ------------------------------------------ Director
Richard Maddia
* Director
- ------------------------------------------
Paul C. Kreuch, Jr.
* Director
- ------------------------------------------
Dennis F. McManus
* /s/ CHARLES M. STOEHR
- ------------------------------------------
Charles M. Stoehr, Attorney in Fact
Senior Vice President and
Chief Financial Officer
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------
<S> <C>
*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.
</TABLE>
- ------------------
* Previously Filed.
** Incorporated by reference.
<PAGE>
Exhibit 5.1
February 1, 2000
Board of Directors 212-859-8272
Audiovox Corporation (FAX: 212-859-8589)
150 Marcus Blvd.
Hauppauge, New York 11788
RE: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel for Audiovox Corporation, a Delaware
corporation (the "Company"), in connection with the underwritten public offering
of 3,100,000 shares (the "Shares") of the Company's common stock, $0.01 par
value, by the Company and certain of its stockholders, on a Registration
Statement on Form S-3 (the "Registration Statement"). Of the Shares, 2,000,000
are being sold by the Company, 1,100,000 are being sold by the Selling
Stockholders, and a total of 465,000 options to purchase shares are being
granted by the Company and the Selling Stockholders to the Underwriters (the
"Option Shares"). The Shares and Option Shares are to be offered to the public
pursuant to an underwriting agreement to be entered into among the Company and
SG Cowen Securities Corporation, Morgan Keegan & Company, Inc., Prudential
Securities Incorporated, and Ladenburg Thalmann & Company, as representatives of
the underwriters (the "Underwriting Agreement").
With your permission, all assumptions and statements of reliance herein
have been made without any independent investigation or verification on our part
except to the extent otherwise expressly stated, and we express no opinion with
respect to the subject matter or accuracy of such assumptions or items relied
upon.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed, or
reproduction copies of such agreements, instruments, documents, and records of
the Company, such certificates of public officials and such other documents and
(iii) received such
<PAGE>
Audiovox Corporation - 2 - February 1, 2000
information from officers and representatives of the Company and others, in each
case as we have deemed necessary or appropriate for the purposes of this
opinion.
In all such examinations, we have assumed the genuineness of all
signatures, the authenticity of original and certified documents, and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduction copies. As to various questions of fact relevant to
the opinions expressed herein, we have relied upon, and assume the accuracy of,
representations and warranties contained in the Underwriting Agreement, and
certificates and oral or written statements and other information of or from
public officials, officers, or representatives of the Company and others, and
assume compliance on the part of all parties to the Underwriting Agreement with
the covenants and agreements contained therein.
Based upon the foregoing and subject to the limitations,
qualifications, and assumptions set forth herein, we are of the opinion that the
Shares and the Option Shares registered under the Registration Statement, when
issued, delivered, and paid for in accordance with the terms of the Underwriting
Agreement, will be legally issued, fully paid, and non-assessable.
The opinion expressed herein is limited to the General Corporation Law
of the State of Delaware, the Delaware Constitution and reported judicial
decisions interpreting those laws, as currently in effect.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming part of the Registration Statement. In
giving such consent, we do not hereby admit that we are in the category of such
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
By: /s/ Stuart H. Gelfond
_______________________________________
Stuart H. Gelfond
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Audiovox Corporation:
We consent to the use of our reports dated January 13, 2000 included
herein or incorporated herein by reference and to the reference to our firm
under the heading "Experts" in the prospectus.
/s/ KPMG LLP
-----------------------------------
Melville, New York
February 1, 2000
