Exhibit 2
OFFERING MEMORANDUM
CONFIDENTIAL
NO. ______
[LOGO]
AUDIOVOX CORPORATION
1,365,000 WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
Each Warrant entitles the holder thereof to purchase one share of Class A
Common Stock, par value $.01 per share (the "Class A Common Stock"), of Audiovox
Corporation (the "Company"). The exercise price of each Warrant will be $7 7/8
per share unless the closing price of the Class A Common Stock on the AMEX (as
defined) is greater than $7 1/8 per share of Class A Common Stock as of 5:00
p.m. (New York City time) on the date of the closing of the offering, in which
case the exercise price of the Warrant will be 110% of the closing price of the
Class A Common Stock on the AMEX as of such time. The Warrant exercise price
must be at least 110% of the current market price of the Class A Common Stock on
the date of the closing in order for the Warrant to be eligible to be traded
under Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"). The Warrants will not be exercisable until one year after the closing of
this Offering and unless a registration statement with respect to the issuance
of Class A Common Stock upon exercise of the Warrants has been filed and
declared effective by the Securities and Exchange Commission under the
Securities Act. Unless exercised, the Warrants will automatically expire at 5:00
p.m. (New York City time) on March 15, 2001. If less than 5% of the Warrants
initially issued remain outstanding, the Company may elect, by written notice to
each holder of Warrants, that the Warrants will expire on the 30th day after
delivery of such notice. See "Description of the Warrants."
Each beneficial holder of the Company's 6 1/4% Convertible Subordinated
Debentures due 2001 (the "Debentures") as of June 3, 1994 is being offered the
opportunity to acquire 21 Warrants per $1,000 principal amount of Debentures
beneficially held as of such date in consideration for the delivery by such
person of a Release (as defined herein) which releases the Company, the Initial
Purchasers (as defined herein), and their respective directors, officers,
partners, employees and agents, from liability for any and all potential claims,
if any, such beneficial holder may have against such persons in connection with
such purchaser's investment in the Debentures and the offering of the
Debentures. See "The Offering-- Release of Potential Claims."
THE OFFERING EXPIRES 5:00 P.M. NEW YORK CITY TIME ON MAY 1, 1995, UNLESS
EXTENDED.
The Warrants are expected to be eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market.
Pursuant to a registration rights agreement, the Company will agree to file with
the Securities and Exchange Commission (the "SEC") a registration statement with
respect to the Class A Common Stock underlying the Warrants and use its
reasonable best efforts to have such registration statement declared effective
within one year after the consummation of the offering contemplated hereby. If
the Warrants are approved for listing on a national securities exchange or
approved for quotation on the automated quotation system of a national
securities association, the Company will also be required to file, and use its
reasonable best efforts to have declared effective, a registration statement
with respect to the Warrants. The Company anticipates applying to have those
Warrants purchased by certain non-U.S. persons accepted for clearance through
CEDEL, S.A. For a description of certain income tax consequences to persons who
acquire Warrants, see "Certain Federal Income Tax Considerations."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CAREFULLY CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE WARRANTS.
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THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR STATE SECURITIES LAWS, AND MAY NOT BE OFFERED
OR SOLD WITHIN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH TERMS ARE DEFINED
UNDER THE SECURITIES ACT OR THE RULES PROMULGATED PURSUANT THERETO) EXCEPT
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. ACCORDINGLY, THE WARRANTS ARE BEING OFFERED HEREBY IN THE UNITED STATES
ONLY TO PERSONS WHO ARE ACCREDITED INVESTORS (AS SUCH TERM IS DEFINED IN RULE
501(A)(1), (2), (3) OR (7) PROMULGATED UNDER THE SECURITIES ACT) AND WHO EXECUTE
AND DELIVER A SUBSCRIPTION AGREEMENT CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS REGARDING SUCH OFFEREE, AND OUTSIDE THE UNITED STATES IN OFFSHORE
TRANSACTIONS IN RELIANCE ON AND IN COMPLIANCE WITH REGULATION S PROMULGATED
UNDER THE SECURITIES ACT. SUBJECT TO LIMITED EXCEPTIONS, WARRANTS SOLD IN
RELIANCE ON REGULATION S MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO U.S. PERSONS. FOR CERTAIN RESTRICTIONS ON RESALE, SEE "NOTICE TO INVESTORS."
The date of this Offering Memorandum is April 12, 1995.
THE OFFERING IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF SECURITIES WHICH DOES NOT
INVOLVE A PUBLIC OFFERING. EACH PURCHASER OF WARRANTS OFFERED HEREBY IN MAKING
ITS INVESTMENT WILL BE DEEMED TO HAVE MADE CERTAIN ACKNOWLEDGMENTS,
REPRESENTATIONS AND AGREEMENTS AS SET FORTH IN A SUBSCRIPTION AGREEMENT AND
UNDER "NOTICE TO INVESTORS." THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OR ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS. CERTIFICATES FOR THE WARRANTS WILL BEAR A LEGEND TO THAT
EFFECT. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THE OFFERING MEMORANDUM IS SUBMITTED TO YOU AND A LIMITED NUMBER OF OTHER
INVESTORS ON A CONFIDENTIAL BASIS FOR USE SOLELY IN CONNECTION WITH YOUR AND
THEIR CONSIDERATION OF AN INVESTMENT IN THE WARRANTS. THE RECEIPT OF THIS
OFFERING MEMORANDUM CONSTITUTES THE AGREEMENT ON THE PART OF THE RECIPIENT
HEREOF AND OF ITS REPRESENTATIVES TO MAINTAIN THE CONFIDENTIALITY OF THE
INFORMATION CONTAINED HEREIN AND NOT TO RELEASE THIS DOCUMENT OR DISCUSS THE
INFORMATION CONTAINED HEREIN OR MAKE REPRODUCTIONS OF OR USE THIS MEMORANDUM FOR
ANY PURPOSE OTHER THAN EVALUATING A POTENTIAL INVESTMENT IN THE WARRANTS.
DELIVERY OF THIS OFFERING MEMORANDUM TO ANYONE OTHER THAN SUCH OFFEREE IS
UNAUTHORIZED, AND ANY REPRODUCTION OF THIS OFFERING MEMORANDUM, IN WHOLE OR IN
PART, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY IS PROHIBITED. BY
ACCEPTING DELIVERY OF THIS OFFERING MEMORANDUM, THE OFFEREE AGREES TO RETURN IT
AND ANY OTHER DOCUMENTS FURNISHED TO IT TO THE COMPANY IF NO INVESTMENT IN THE
WARRANTS IS MADE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED AND THE TERMS OF THE RELEASE. THE CONTENTS OF THIS OFFERING
MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX
ADVISOR AS TO LEGAL, BUSINESS OR TAX ADVICE.
ALL INQUIRIES RELATING TO THE OFFERING MEMORANDUM AND THE OFFERING SHOULD BE
DIRECTED TO THE COMPANY. PROSPECTIVE INVESTORS MAY CONTACT C. MICHAEL STOEHR,
CHIEF FINANCIAL OFFICER OF THE COMPANY, TO OBTAIN ANY ADDITIONAL INFORMATION
WHICH THEY MAY REASONABLY REQUIRE IN CONNECTION WITH THE DECISION TO INVEST IN
THE WARRANTS. IN ADDITION, ANY PROSPECTIVE INVESTOR SHALL HAVE ACCESS TO ANY
INFORMATION WHICH WOULD BE INCLUDED IF THE COMPANY HAD FILED AN ISSUER STATEMENT
WITH THE NEW YORK DEPARTMENT OF LAW UPON REQUEST TO THE COMPANY.
THE WARRANTS HAVE NOT BEEN RECOMMENDED, APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE
NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ii
ANY RESALE OF THE SECURITIES OFFERED HEREBY WILL BE SUBJECT TO CERTAIN
RESTRICTIONS UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT, OR
AN EXEMPTION FROM REGISTRATION IS AVAILABLE. ALL INVESTORS WILL BE REQUIRED TO
UNDERTAKE THAT THEY WILL NOT TRANSFER SUCH SECURITIES EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION. CERTIFICATES
FOR THE SECURITIES OFFERED HEREBY WILL BEAR A LEGEND TO THAT EFFECT. ANY SUCH
SALES MUST ALSO COMPLY WITH ANY APPLICABLE STATE SECURITIES REQUIREMENTS.
THIS MEMORANDUM DOES NOT PURPORT TO BE ALL INCLUSIVE OR TO CONTAIN ALL THE
INFORMATION THAT A PROSPECTIVE INVESTOR MAY DESIRE IN INVESTIGATING THE COMPANY.
EACH INVESTOR MUST CONDUCT AND RELY ON ITS OWN EVALUATION OF THE COMPANY AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED IN MAKING AN
INVESTMENT DECISION WITH RESPECT TO THE WARRANTS AND IN DELIVERING THE RELEASE
TO THE COMPANY.
THE SECURITIES OFFERED HEREBY WILL BE SOLD ONLY TO CERTAIN PERSONS WHO
QUALIFY AS ACCREDITED INVESTORS UNDER REGULATION D PROMULGATED UNDER THE
SECURITIES ACT AND WHO ARE SOPHISTICATED IN BUSINESS AND FINANCIAL MATTERS, HAVE
THE KNOWLEDGE AND EXPERIENCE TO EVALUATE THE MERITS AND RISKS OF THE INVESTMENT,
HAVE SUFFICIENT FINANCIAL RESOURCES, AND HAVE NO NEED FOR LIQUIDITY WITH RESPECT
TO THEIR INVESTMENT AND, OUTSIDE THE UNITED STATES, TO CERTAIN PERSONS IN
OFFSHORE TRANSACTIONS IN RELIANCE ON AND IN COMPLIANCE WITH REGULATION S
PROMULGATED UNDER THE SECURITIES ACT. PRIOR TO THEIR PURCHASE OF WARRANTS, SUCH
ACCREDITED INVESTORS WILL DELIVER TO THE COMPANY A SUBSCRIPTION AGREEMENT
CONTAINING CERTAIN ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS AS DISCUSSED
UNDER "NOTICE TO INVESTORS." ANY SALES OR OTHER TRANSFERS OF THE SECURITIES
OFFERED HEREBY BY ANY SUBSEQUENT PURCHASER THEREOF MAY BE MADE, SUBJECT TO
CERTAIN RESTRICTIONS DESCRIBED HEREIN, ONLY TO ACCREDITED INVESTORS, TO
QUALIFIED INSTITUTIONAL BUYERS AS DEFINED IN RULE 144A PROMULGATED UNDER THE
SECURITIES ACT OR AS MAY OTHERWISE BE PERMITTED UNDER THE SECURITIES ACT AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
EXCEPT AS PROVIDED BELOW, THE WARRANTS WILL BE AVAILABLE INITIALLY ONLY IN
BOOK-ENTRY FORM. THE COMPANY EXPECTS THAT THE WARRANTS SOLD PURSUANT HERETO WILL
BE ISSUED IN THE FORM OF ONE OR MORE FULLY REGISTERED GLOBAL SECURITY OR
SECURITIES. THE GLOBAL SECURITY OR SECURITIES WILL BE DEPOSITED WITH, OR ON
BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME, OR
IN THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL
SECURITY OR SECURITIES REPRESENTING THE WARRANTS UNDERLYING THE GLOBAL SECURITY
WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS
MAINTAINED BY DTC AND ITS PARTICIPANTS. NOTWITHSTANDING THE FOREGOING, ANY U.S.
HOLDER THAT IS NOT A "QUALIFIED INSTITUTIONAL BUYER," AS SUCH TERM IS DEFINED IN
RULE 144A PROMULGATED UNDER THE SECURITIES ACT, WILL RECEIVE THE SECURITIES IN
CERTIFICATED FORM AND WILL NOT BE ABLE TO TRADE SUCH WARRANTS THROUGH DTC UNTIL
THE WARRANTS ARE RESOLD TO A "QUALIFIED INSTITUTIONAL BUYER" OR PURSUANT TO
REGULATION S PROMULGATED UNDER THE SECURITIES ACT. AFTER THE INITIAL ISSUANCE OF
THE GLOBAL SECURITY OR SECURITIES TO DTC AT THE CLOSING, WARRANTS IN
CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE FOR A BENEFICIAL INTEREST IN THE
GLOBAL SECURITY OR SECURITIES ONLY AS SET
iii
FORTH IN THE WARRANT AGREEMENT UNDER WHICH THE WARRANTS WILL BE ISSUED. SEE
"DESCRIPTION OF WARRANTS--BOOK ENTRY; DELIVERY AND FORM."
NOTWITHSTANDING THE FOREGOING, SECURITIES SOLD OUTSIDE THE UNITED STATES
PURSUANT TO REGULATION S WILL BE DEPOSITED WITH CEDEL IN THE FORM OF AN OFFSHORE
GLOBAL SECURITY. BENEFICIAL INTERESTS IN THE OFFSHORE GLOBAL SECURITY OR
SECURITIES REPRESENTING THE WARRANTS UNDERLYING THE OFFSHORE GLOBAL SECURITY
WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS
MAINTAINED BY CEDEL AND ITS PARTICIPANTS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF.
NEITHER THE DELIVERY OF THIS OFFERING MEMORANDUM AT ANY TIME NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. THE COMPANY SPECIFICALLY DISCLAIMS ANY
RESPONSIBILITY TO UPDATE ANY OF THE INFORMATION CONTAINED HEREIN AFTER THE DATE
HEREOF.
THIS OFFERING MEMORANDUM CONTAINS SUMMARIES, BELIEVED TO BE ACCURATE, OF
CERTAIN TERMS OF CERTAIN DOCUMENTS, BUT REFERENCE IS MADE TO THE ACTUAL
DOCUMENTS, COPIES OF WHICH WILL BE MADE AVAILABLE UPON REQUEST, FOR THE COMPLETE
INFORMATION CONTAINED THEREIN. ALL SUCH SUMMARIES ARE QUALIFIED IN THEIR
ENTIRETY BY THIS REFERENCE.
THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WAS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION.
FOR FLORIDA RESIDENTS ONLY:
IN THE EVENT THAT SALES ARE MADE TO FIVE (5) OR MORE PERSONS IN THE STATE OF
FLORIDA PURSUANT TO THE EXEMPTION FOR LIMITED OFFERS OR SALES OF SECURITIES SET
FORTH IN SECTION 517.061(11)(A) OF THE FLORIDA SECURITIES AND INVESTOR
PROTECTION ACT, ANY SALE IN FLORIDA MADE PURSUANT TO SUCH SECTION IS VOIDABLE BY
THE PURCHASER IN SUCH SALE EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER
OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE
ISSUER, OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF
THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER.
FOR NEW HAMPSHIRE RESIDENTS ONLY:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE
iv
THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY
OR TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
FOR NEW JERSEY RESIDENTS ONLY:
THE ATTORNEY GENERAL OF THE STATE OF NEW JERSEY HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY FILING OF THE WITHIN OFFERING WITH THE
BUREAU OF SECURITIES OF THE STATE OF NEW JERSEY DOES NOT CONSTITUTE APPROVAL OF
THE ISSUE OR THE SALE THEREOF BY THE BUREAU OF SECURITIES OR THE DEPARTMENT OF
LAW AND PUBLIC SAFETY OF THE STATE OF NEW JERSEY. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
FOR NEW MEXICO RESIDENTS ONLY:
OFFERS OF THE SECURITIES DESCRIBED HEREIN ARE MADE IN NEW MEXICO ONLY TO,
AND MAY ONLY BE ACCEPTED BY, DEPOSITORY INSTITUTIONS, INSURANCE COMPANIES OR
SEPARATE ACCOUNTS OF AN INSURANCE COMPANY, INVESTMENT COMPANIES AS DEFINED IN
THE INVESTMENT COMPANY ACT OF 1940, EMPLOYEE PENSION, PROFIT-SHARING OR BENEFIT
PLANS HAVING TOTAL ASSETS IN EXCESS OF $5,000,000, BUSINESS DEVELOPMENT
COMPANIES, SMALL BUSINESS INVESTMENT COMPANIES, OR OTHER FINANCIAL OR
INSTITUTIONAL INVESTORS DESIGNATED BY RULE OR ORDER OF THE DIRECTOR OF THE NEW
MEXICO SECURITIES DIVISION. IF THE RECIPIENT OF THIS CONFIDENTIAL OFFERING
MEMORANDUM IS NOT SUCH AN INSTITUTION, AND SUCH RECIPIENT WISHES TO SUBSCRIBE
FOR THESE SECURITIES, PLEASE CALL C. MICHAEL STOEHR, AT THE COMPANY.
FOR NEW YORK RESIDENTS ONLY:
THIS PRIVATE PLACEMENT MEMORANDUM HAS NOT BEEN REVIEWED BY THE ATTORNEY
GENERAL OF THE STATE OF NEW YORK PRIOR TO ITS ISSUANCE AND USE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE NEW YORK FRAUDULENT PRACTICES ("MARTIN") ACT, BY REASON OF
SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THIS
OFFERING. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE NEW YORK FRAUDULENT PRACTICES ("MARTIN") ACT, IF
SUCH REGISTRATION IS REQUIRED.
v
FOR VERMONT RESIDENTS ONLY:
OFFERS OF THE SECURITIES DESCRIBED HEREIN ARE MADE IN VERMONT ONLY TO, AND
MAY ONLY BE ACCEPTED BY, DEPOSITORY INSTITUTIONS, INSURANCE COMPANIES OR
SEPARATE ACCOUNTS OF AN INSURANCE COMPANY, INVESTMENT COMPANIES AS DEFINED IN
THE INVESTMENT COMPANY ACT OF 1940, EMPLOYEE PENSION, PROFIT SHARING OR BENEFIT
PLANS IF EITHER (I) THE PLAN HAS TOTAL ASSETS IN EXCESS OF $5,000,000, OR (II)
INVESTMENT DECISIONS ARE MADE BY A NAMED FIDUCIARY, AS DEFINED IN THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, THAT IS EITHER A BROKER-DEALER
REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AN INVESTMENT ADVISOR
REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE INVESTMENT ADVISORS ACT OF
1940, A DEPOSITORY INSTITUTION OR AN INSURANCE COMPANY, ANY OTHER FINANCIAL OR
INSTITUTIONAL BUYERS WHICH QUALIFY AS ACCREDITED INVESTORS UNDER THE PROVISIONS
OF REGULATION D AS PROMULGATED UNDER THE SECURITIES ACT OF 1933, OR ANY
INSTITUTIONAL BUYERS DESIGNATED BY THE COMMISSIONER OF BANKING, INSURANCE AND
SECURITIES OF VERMONT. IF THE RECIPIENT OF THIS CONFIDENTIAL OFFERING MEMORANDUM
IS NOT SUCH AN INSTITUTION, PLEASE BE INFORMED THAT YOU MAY NOT PURCHASE THESE
SECURITIES.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS OFFERING MEMORANDUM. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE RESPECTIVE DATES AS OF WHICH INFORMATION IS
GIVEN HEREIN.
* * *
Questions and requests for assistance or for additional copies of this
Offering Memorandum and copies of other documents referred to herein may be
directed to the Company, at the address and telephone number set forth below.
AUDIOVOX CORPORATION
150 Marcus Boulevard
Hauppauge, New York 11788
Attention: C. Michael Stoehr
Telephone (516) 231-7750
* * *
THE WARRANT AGENT IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Two Broadway
New York, New York 10004
Attention: William Seegraber
Telephone (212) 509-4000
vi
OFFERING MEMORANDUM SUMMARY
The following is a summary of certain information included in this Offering
Memorandum or in documents referred to herein. It is not intended to be complete
and is qualified in its entirety by the more detailed information found
elsewhere in this Offering Memorandum or in such documents, which should be read
with care. As used herein, the term "Offering Memorandum" shall mean this
Offering Memorandum and all Appendices and Exhibits hereto, as the same may be
amended, supplemented, restated or otherwise modified from time to time. The
term "Offering" shall mean the offering contemplated hereby. References to the
Company's fiscal year shall refer to the calendar year in which the Company's
fiscal year ends (e.g., fiscal year 1994 refers to the Company's fiscal year
ended November 30, 1994).
THE COMPANY
Audiovox Corporation (together with its subsidiaries, the "Company" or
"Audiovox") designs and markets cellular telephones and accessories, automotive
aftermarket sound and security equipment, other automotive aftermarket
accessories, and certain other products. Over the past thirty years, the Company
has grown from a supplier of automotive sound equipment to a leading supplier of
cellular telephones to the Regional Bell Operating Companies ("RBOCs"), other
cellular carriers and their respective agents in the United States. The Company
has ranked among the top four in terms of cellular telephone market share in the
United States for each of the six calendar quarters ending December 31, 1993. As
of February 28, 1995, the Company also operated 91 administrative and retail
outlets, licensed its tradename to, or entered into concessionaire arrangements
with, 21 additional retail outlets in selected markets in the United States, and
had two mobile vans. These outlets focus on the sale and servicing of cellular
telephones. Each of the Company's retail outlets acts as a licensed agent for
one of the two cellular carriers operating in its geographic area. In addition
to generating product revenue from the sale of cellular telephone products, the
Company's retail outlets, as agents for cellular carriers, are typically paid
activation commissions and residual fees from such carriers. Through its
international distribution network, the Company also sells cellular telephones
in Canada, Europe, Latin America, Asia, the Middle East and Australia. In fiscal
1992, fiscal 1993, fiscal 1994 and the first quarter of fiscal 1995, net sales
of cellular telephone products and related fees and commissions represented 57%,
60%, 63% and 70%, respectively, of the Company's total net sales.
The Company's automotive aftermarket sound, security and accessory products
include stereo cassette radios, compact disc players and changers, amplifiers
and speakers; key based and remote control security systems; and cruise
controls, door and trunk locks and rear window defoggers. In fiscal 1994, the
Company introduced a satellite based security system to its product line. These
products are marketed through mass merchandise chain stores, specialty
automotive accessory installers, distributors and automobile dealers.
Cellular phone service was developed as a mobile alternative to conventional
landline systems. Since its inception over ten years ago, the industry has grown
rapidly. From approximately one million subscribers in the United States in
1987, the industry has grown to more than 25 million subscribers as of year end
1994. In 1994, the number of cellular subscribers in the United States grew by
approximately nine million, representing a 56% increase in the number of
cellular subscribers from the end of 1993. Cellular phone service is now
available in geographic areas that include a substantial majority of the United
States population. In recent years, as retail prices for cellular telephones
have declined, sales of cellular telephones for personal use have grown more
rapidly than sales for business use. The United States Department of Commerce
estimates that as of mid-1994, approximately 7.4% of the U.S. population owned a
cellular telephone. According to statistics published by the U.S. Department of
Commerce, the number of worldwide cellular subscribers grew by approximately
eight million in the
first six months of 1994 to a total of approximately 41 million at June 30,
1994, representing a 24% increase in the number of cellular subscribers from the
end of 1993.
The Company believes that its greatest opportunity for business expansion is
in its cellular product line. Thus, the Company plans to seek to capitalize on
the increased demand for cellular telephone products, on both the wholesale and
retail levels. In addition, the Company intends to continue to respond to
consumer demand for sophisticated automotive sound and security products.
A key component of the Company's operating strategy has been to bring to
market quality products under its own brand names, in response to established
consumer demand, while limiting its investment in fixed plant and, accordingly,
its capital risk exposure. The Company seeks to accomplish this by controlling
the design of its products through its in-house engineering and design staff,
while having such products produced by contract manufacturers.
The Company sells its products under several brand names it owns or
licenses, including Audiovox(R), SPS(R), Prestige(R), Pursuit(R), MinivoxTM,
Minivox Lite(R), The Protector(R), American Radio(R) and Quintex(R). The Company
uses several techniques to promote Company brand awareness, including trade and
customer advertising, attendance at trade shows, and use of a variety of sales
promotional material including brochures and other literature and point-of-sale
displays.
The Company employs a value added marketing approach in connection with its
wholesale sales. In this regard, the Company typically participates with its
wholesale customers in joint marketing and promotional programs such as sales
contests and cooperative advertising campaigns. The Company also typically
offers its customers customized sales and product training, inventory management
assistance, telemarketing assistance (including the scripting of telemarketing
presentations) and Company-created advertising materials. In addition, the
Company maintains several Company-operated warranty repair centers to assist its
network of authorized warranty service stations in technical training and parts
procurement. The Company intends to expand the breadth of its product line (for
example, by introducing a line of moderately priced cellular telephone products)
in order to enable its customers to conveniently obtain a broad line of products
from only one supplier.
The Company has formed a majority-owned subsidiary with its local
distributor in Malaysia as a minority owner and is considering forming ventures
with its distributors in Greece and Thailand. By joining with an established
local business with an existing customer base, the Company believes that it can
enter a new market more quickly and with minimum capital expenditures. The
Company also believes that its relationships with North American cellular
carriers may aid the Company's expansion into international markets as such
markets are developed by those carriers.
In August 1994, the Company formed a new joint venture (known as "Talk
Corporation") with Shintom Co., Ltd. ("Shintom") and others for the purpose of
developing, manufacturing and distributing cellular telephone and other consumer
electronic products. In connection with the formation of the joint venture, the
Company was granted certain exclusive distribution rights with respect to
cellular products manufactured by Shintom. Talk Corporation commenced operations
in October 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Results of Operations."
The Company intends to open additional retail outlets in North America, both
in metropolitan areas with perceived retail potential and in areas where it
seeks to increase sales on a wholesale level to cellular carriers. The Company
believes that the ability of its retail outlets to deliver a significant number
of activations to cellular carriers provides the Company with a competitive
advantage in its wholesale marketing of cellular telephones to cellular
carriers.
Historically, the Company has been dependent on foreign suppliers,
particularly Japan and China, for a majority of its products. In 1994 and 1995,
the United States government announced proposed
2
trade sanctions on cellular products imported from foreign countries,
particularly Japan and China. Although the United States government has not
implemented such proposed trade sanctions, as the Company sources a majority of
its cellular products from Japan and China, if such trade sanctions (or trade
sanctions on other of the Company's products) were to be imposed, there is no
assurance that the Company would be able to obtain alternatives to its supply
sources. The Company is considering sourcing products from several other
countries. Such purchases would be subject to the risks of purchasing products
from foreign suppliers. See "Risk Factors--United States Trade Sanctions Could
Limit the Company's Sources of Supply," "--No Assurance of Alternative Supply
Sources," "--Dependence on Foreign Suppliers," and "--Dependence on Toshiba."
The Company was incorporated in Delaware on April 10, 1987 as a successor to
the business of Audiovox Corp., a New York corporation founded in 1960 by John
J. Shalam, the Company's President, Chief Executive Officer and controlling
stockholder. The Company's corporate headquarters is located at 150 Marcus
Boulevard, Hauppauge, New York 11788, and its telephone number at that address
is 516-231-7750.
3
THE OFFERING
The following is a summary of certain information contained in this Offering
Memorandum and is qualified in its entirety by reference to the detailed
information and financial statements appearing elsewhere in this Offering
Memorandum. See "The Offering" for a more detailed description of the
background, the terms and other aspects of this Offering.
Securities Offered 1,365,000 warrants (the "Warrants"), each Warrant entitling
the holder thereof to purchase one share of Class A
Common Stock, par value $.01 per share (the "Class A
Common Stock), of the Company at any time on or prior to
March 15, 2001 except in certain circumstances described
under "--Warrant Exercise Period" below (the "Expiration
Date"). The exercise price of each Warrant (the "Warrant
Exercise Price") will be $7 7/8 per share unless the
closing price of the Class A Common Stock on the American
Stock Exchange Inc. (the "AMEX") is greater than $7 1/8
per share of Class A Common Stock as of 5:00 p.m. (New
York City time) on the date of the closing of the
offering, in which case the exercise price of the Warrant
will be 110% of the closing price of the Class A Common
Stock on the AMEX as of such time. The Warrant Exercise
Price must be at least 110% of the current market price
of the Class A Common Stock on the date of the closing in
order for the Warrant to be eligible to be traded under
Rule 144A under the Securities Act. The Warrant Exercise
Price and the number of shares of Class A Common Stock
acquirable upon exercise of a Warrant is subject to
adjustment in certain limited circumstances.
Offer to Beneficial Holders of Each beneficial holder of the Company's 6 1/4% Convertible
Debentures Subordinated Debentures due 2001 (the "Debentures") as of
June 3, 1994 will be entitled to acquire 21 Warrants per
$1,000 principal amount of Debentures beneficially owned
as of such date in consideration for the delivery by such
person of a Release (as defined below).
Termination or Amendment of The Company reserves the right (a) to terminate the
Offering Offering at any time before consummation of the Offering
and (b) at any time or from time to time, to amend the
Offering in any respect; provided that the Company does
not intend to close the Offering unless it receives
subscriptions and Releases from at least the beneficial
holders of a majority of the principal amount of the
Debentures outstanding as of June 3, 1994.
Expiration of Offering The Offering expires 5:00 p.m. New York City time on May 1,
1995, unless extended.
Warrant Exercise Period The Warrants may not be exercised (a) until the later of
(x) one year after issuance and (y) the date a
registration statement with respect to the Class A Common
Stock issuable upon exercise of the Warrants has been
filed and declared effective by the Securities and
Exchange Commission (the "SEC") or (b) after the
Expiration Date. The Warrants will expire on the
Expiration Date; provided that if less than 5% of the
Warrants initially issued remain outstanding, the Company
may elect, by
4
written notice to each holder of Warrants, that the
Warrants will expire on the 30th day after delivery of
such notice.
Registration Rights for Class The Company has agreed to file with the SEC within 300 days
A Common Stock; Reduction in of the closing of the offering (the "Closing Date") and
Exercise Price for Failure use its reasonable best efforts to cause to become
to Register Class A Common effective within 365 days of the Closing Date, a shelf
Stock registration statement or statements with respect to the
issuance of the Class A Common Stock underlying the
Warrants upon exercise thereof. If the registration
statement with respect to the Common Stock is not filed
within such 300-day period or declared effective within
such 365-day period, the exercise price of the Warrants
will decrease by $ 1/8 per share of Class A Common Stock;
subject to additional decreases of $ 1/8 per share for
each additional six-month period for which such
registration statement is not filed or declared
effective, as the case may be. In addition, if such
registration is declared effective, the Warrant Exercise
Price will also decrease by $ 1/8 per share of Class A
Common Stock if such registration statement ceases to be
effective for more than 90 days (180 days in certain
circumstances) in any 365-day period, subject to
additional decreases of $ 1/8 per share of Class A Common
Stock for each additional six-month period for which such
registration statement ceases to be effective.
Notwithstanding the foregoing, the maximum number of $
1/8 per share decreases shall be 10 and there shall be no
more than one such decrease in any six-month period.
(Each of such events which results in a decrease in the
Warrant Exercise Price being referred to herein as a
"Registration Default"). The reduction in the Warrant
Exercise Price upon a Registration Default is subject to
adjustment in certain limited circumstances. The Company
will be obligated to use its reasonable best efforts to
cause the registration statement relating to the Class A
Common Stock to remain effective until the Expiration
Date. The Company will not be obligated to register Class
A Common Stock underlying any Warrants (a) which the
holder does not seek to register or (b) as to which the
Company determines that it is not advisable or
appropriate to register (based on discussions with the
SEC, advice of counsel or otherwise) such shares of Class
A Common Stock underlying such Warrants. In any such
event (a) or (b), the Warrant Exercise Price underlying
such Warrants will not decrease upon the failure to
register with the SEC such underlying shares of Class A
Common Stock if the SEC has declared effective a
registration statement with respect to other shares of
Class A Common Stock. See "Description of the
Warrants--Registration Rights."
Mandatory Redemption If a registration statement relating to the Class A Common
Stock underlying the Warrants has not been effective at
any time on or prior to the Expiration Date of the
Warrants, the Company will be required to redeem all of
the outstanding Warrants for $2.20 per Warrant (the
"Redemption Price"). The Redemption Price is subject to
adjustment in certain limited circumstances.
Listing of Warrants; The Company intends to seek to list the Warrants on a
Registration of Warrants national securities exchange or to seek quotation of the
Warrants on the
5
automated quotation system of a national securities
association (as such terms are defined in the Securities
Act) within 365 days of the Closing Date and to
simultaneously register the Warrants under the Securities
Act. The Company intends to seek to obtain such listing
on the the AMEX (the exchange on which the Class A Common
Stock is listed) or to obtain quotation of the Warrants
on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") Small
Capitalization Market ("NASDAQ Small Cap"). However, AMEX
and NASDAQ Small Cap require a minimum number of holders
of Warrants prior to listing or quotation, as the case
may be, without a waiver. Since the Offering is being
made to a limited number of persons in a private
placement transaction, the AMEX or NASDAQ Small Cap may
not agree to list or quote the Warrants, as the case may
be. In such case, the Company intends to seek to list the
Warrants on one of the Boston Stock Exchange, Midwest
Stock Exchange, Pacific Stock Exchange or Philadelphia
Stock Exchange. However, there can be no assurance that
any of such stock exchanges will agree to list the
Warrants since such exchanges also have minimum holder
requirements for listing. If any of the above exchanges
agree to list the Warrants or the Warrants have been
approved for quotation on NASDAQ Small Cap (a "Listing
Approval"), the Company will file a shelf registration
statement relating to the Warrants upon the later of (a)
300 days after the Closing Date and (b) the date approval
of such listing or quotation is obtained (the "Approval
Date") and will use its reasonable best efforts to cause
such registration statement to become effective upon the
later of (a) 365 days after the Closing Date and (b) 60
days after the Listing Approval Date. Once effective, the
Company will be obligated to use reasonable best efforts
to cause the registration statement relating to the
Warrants to remain effective until the date three years
following the Closing Date.
Shalam Option John J. Shalam, Chief Executive Officer of the Company, has
agreed to grant the Company an option (the "Shalam
Option") to purchase a number of shares of Class A Common
Stock equal to the number of shares purchasable under the
Warrants on the Closing Date. The purchase price per
share of Class A Common Stock (the "Shalam Option Price")
will be equal to the sum of (a) the Warrant Exercise
Price (without giving effect to any decreases of such
price as a result of a Registration Default) plus (b) an
additional amount (the "Tax Amount") intended to
reimburse Mr. Shalam for any additional taxes per share
required to be paid by Mr. Shalam as a result of the
payment of the Shalam Option Price being treated for
federal, state and local income tax purposes as the
distribution to Mr. Shalam of a dividend (taxed at
ordinary income rates without consideration of Mr.
Shalam's basis), rather than as a payment to Mr. Shalam
for the sale of his Class A Common Stock to the Company
(taxed at the capital gains rate with consideration of
Mr. Shalam's basis and considering any stepped up basis
to Mr. Shalam's heirs, successors or assigns (a
"Successor")) pursuant to the Shalam Option. The shares
of Class A Common Stock
6
underlying the Shalam Option will be legended with a
description of the Shalam Option. Any Successor acquiring
the shares of Class A Common Stock underlying the Shalam
Option (whether by sale, transfer or upon Mr. Shalam's
death) will acquire such shares subject to the terms of
the Shalam Option. Mr. Shalam and any Successor will be
entitled to the Tax Amount upon delivery of a
satisfactory notice to the Company that the payment of a
Tax Amount is required to reimburse such person for such
additional taxes. The operative terms of the Shalam
Option (other than the exercise price) are similar to
those of the Warrants, however, the Shalam Option Price
per share for the Shalam Option will not decrease in the
event of a Registration Default. The Shalam Option will
be exercisable in the sole discretion of the
then-independent members of the Board of Directors (which
shall in no event include Mr. Shalam). The Company will
be able to exercise the Shalam Option in whole or in part
only if the Warrants are exercised and then only for the
same number of shares of Class A Common Stock as are
purchased under the Warrants. The Shalam Option may limit
the dilutive effect of the Warrants on the earnings per
share or the book value per share of the Company, if the
Company elects to exercise the Shalam Option. The Company
has also agreed to indemnify Mr. Shalam from any
liabilities arising from the Offering, including
liabilities under any federal or state securities laws.
See "The Offering--Shalam Option."
Offerees' Waiver of Any The Warrants are being offered to the beneficial holders of
Potential Cause of Action the Debentures as of June 3, 1994. Each purchaser of
Against the Company and Warrants will be required as consideration therefor to
Certain other Persons execute a release (a "Release") which releases the
Company and Oppenheimer & Co., Inc., Chemical Securities
Inc., and Furman Selz Incorporated (the "Initial
Purchasers") and their respective directors, officers,
partners, employees and agents, from liability for any
and all potential claims, if any, such beneficial holder
may have against such persons in connection with such
purchaser's investment in the Debentures through the date
of the Release and the offering of the Debentures which
was completed on March 15, 1994. See "The
Offering--Release of Potential Claims."
Use of Proceeds The Company will not receive any cash proceeds from the
sale of the Warrants. The proceeds received by the
Company upon exercise of the Warrants will be used toward
the purchase of shares of Class A Common Stock upon
exercise of the Shalam Option or, if the Board of
Directors determines not to exercise the Shalam Option,
as, when and if received by the Company, to purchase
inventory and for other working capital or general
corporate needs.
Warrant Agent Continental Stock Transfer & Trust Company
Two Broadway
New York, New York 10004
Attention: William Seegraber
Telephone (212) 509-4000.
7
Tax Consequences to Subscribers who hold Debentures should not, in the taxable
Subscribers period in which the Warrants are received, recognize gain
or loss or be required to include any amount in income as
the result of the receipt of the Warrants in exchange for
providing the Release. Generally, subscribers who no
longer hold the Debentures with respect to which the
Warrants are acquired should recognize gain equal to the
fair market value of the Warrants acquired. For a more
detailed discussion of the U.S. federal income tax
consequences of receipt, exercise and disposition of the
Warrants, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
below.
Notice to Investors The Warrants and the underlying Class A Common Stock may be
sold or transferred to employee benefit plans only under
certain circumstances. In addition, transfers of Warrants
will be subject to certain restrictions. See "Notice to
Investors" and "ERISA Considerations."
RISK FACTORS
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS IN THE WARRANTS.
8
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below for the fiscal years
ended November 30, 1991, 1992, 1993 and 1994 have been derived from the audited
financial statements of the Company for such periods. The data for the first
quarter ended February 28, 1994 and February 28, 1995 is unaudited. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements, and related notes thereto, and other financial information
included elsewhere in this Offering Memorandum. Certain reclassifications have
been made to the data for periods prior to fiscal 1994 in order to conform to
the fiscal 1994 presentation.
In December, 1993, CellStar Corporation ("CellStar") completed the initial
public offering (the "CellStar Offering") of 7,935,000 shares of CellStar common
stock, par value $.01 per share ("CellStar Common Stock"). CellStar (the
successor to National Auto Center, Inc. and Audiomex Export Corp.) was formed by
the Company, as a 50% owned joint venture. CellStar markets and distributes
cellular telephones and related products. Prior to the CellStar Offering, the
Company recorded income from CellStar from two sources: (i) management fees
accrued by the Company in exchange for certain management services and (ii) the
Company's share of CellStar's net income as a 50% owner of CellStar. In
connection with the CellStar Offering, the Company sold 2,875,000 of its
6,750,000 shares of CellStar Common Stock at the initial public offering price
(net of applicable underwriting discount) of $10.695 per share, and received
aggregate net proceeds of approximately $29,433,000. As a result of the CellStar
Offering, the Company owns 20.88% of the issued and outstanding CellStar Common
Stock. The Company recorded a pre-tax gain of approximately $27,783,000 on the
sale of its shares of CellStar Common Stock. Taxes on such gain amounted to
approximately $12,231,000, which amount was paid on May 15, 1994. The Company
also recorded a pre-tax gain of approximately $10,565,000 on the increase in the
carrying value of its remaining shares of CellStar Common Stock due to the
CellStar Offering. In addition, CellStar utilized approximately $13,656,000 of
the net proceeds it received in the CellStar Offering to pay certain accounts
receivable and all management fees owed by CellStar to the Company. The Company
has also entered into certain agreements in connection with the CellStar
Offering regarding purchase and voting rights relating to certain of its
remaining shares of CellStar Common Stock. See "Risk Factors--Impact of
Elimination of Management Fees from and Reduction in Equity in CellStar; Sale of
CellStar Common Stock" and "Certain Transactions-- CellStar."
(UNAUDITED)
THREE MONTHS
------------------
FISCAL YEARS ENDED NOVEMBER 30, ENDED FEBRUARY 28,
-------------------------------------- ------------------
1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $327,966 $343,905 $389,038 $486,448 $115,337 $131,391
Gross profit.............................. 48,232 59,001 74,920 84,911 22,178 22,586
Operating income (loss)................... (12,229)(1) 8,753 15,154 10,486 5,228 1,863
Interest and bank charges................. (7,406) (6,686) (6,504) (6,535) (1,523) (2,050)
Other, net (2)............................ 4,537 6,247 6,592 4,235 587 1,270
Gain on sale of equity investment......... -- -- -- 27,783 27,783 --
Gain on public offering of equity
investment................................ -- -- -- 10,565 10,565 --
Income (loss) before provision for
(recovery of) income taxes, extraordinary
item and cumulative effect of change in
accounting principle...................... (15,098) 8,314 15,242 46,534 42,640 1,083
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle...................... (14,658) 5,819 10,051 26,206 24,163 536
Extraordinary item........................ -- 1,851(3) 2,173(3) -- -- --
Cumulative effect of change in accounting
for income taxes......................... -- -- -- (178)(5) (178)(5) --
Net income (loss)......................... $(14,658)(1)$7,670 $ 12,224 $ 26,028 $ 23,985 $ 536
PER SHARE OF COMMON STOCK (4):
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle-primary............. $ (1.63) $ 0.64 $ 1.11 $ 2.88 $ 2.63 $ 0.06
Income before extraordinary item and
cumulative effect of change in accounting
principle-fully diluted.................. -- -- $ 1.03 $ 2.21 $ 2.38 $ 0.06
9
NOVEMBER 30, FEBRUARY 28,
1994 1995
------------ ------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 5,495 $ 3,547
Total current assets............................................................. 191,479 196,430
Total assets..................................................................... 239,098 245,098
Short term debt and current maturities of long term debt......................... 1,243 33,455
Total current liabilities........................................................ 36,228 75,832
Long term debt................................................................... 75,653 70,327
Other liabilities and minority interests......................................... 35,183 6,279
Stockholders' equity:
Preferred Stock................................................................. 2,500 2,500
Class A Common Stock............................................................ 68 68
Class B Common Stock............................................................ 22 22
Total stockholders' equity...................................................... 92,034 92,660
- ------------
(1) The Company reported an operating loss of approximately $12,229,000 and a
net loss of approximately $14,658,000 for the fiscal year ended November 30,
1991. Substantially all of these losses were attributable to (i) charges
incurred in connection with the restructuring of the Company's operations,
(ii) the cessation of operations and operating losses attributable to two
unsuccessful ventures, Hermes Telecommunications, Inc. ("Hermes") (a
subsidiary corporation formed to market and distribute moderately priced
cellular telephone equipment) and Park Plus Corp. ("Park Plus") (a 50% owned
joint venture formed to market and distribute mechanical automobile parking
equipment) and (iii) the Company's operating losses. Such charges under
clause (i) included costs incurred in the closing of certain sales and
distribution facilities, write-downs of assets associated with the Hermes
and Park Plus product lines, employee termination expenses and certain other
charges.
(2) Other income consists principally of management fees and equity in income of
equity investments.
(3) Relates to tax benefits of $1,851,000 and $2,173,000, for the fiscal years
ended November 30, 1992 and 1993, respectively, resulting from the
utilization of net operating loss carryforwards which were fully utilized as
of November 30, 1993.
(4) See "Selected Consolidated Financial Data" and Note 1(g) of Notes to
Consolidated Financial Statements.
(5) Relates to adoption of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes."
10
RISK FACTORS
The following factors should be carefully considered, together with the
other information in this Offering Memorandum, in evaluating an investment in
the Warrants.
HISTORY OF LOSSES. The Company reported net losses of approximately
$1,554,000, $3,192,000, and $14,658,000 for the fiscal years ended November 30,
1989, 1990 and 1991, respectively. These losses were primarily attributable to
both operating losses and to charges incurred in connection with the
restructuring of the Company's operations and the cessation of operations of two
unsuccessful ventures, Hermes Telecommunications, Inc. ("Hermes") (a
wholly-owned subsidiary) and Park Plus Corp. ("Park Plus") (a 50% owned joint
venture). Such charges included costs incurred in the closing of certain sales
and distribution facilities, write-downs of assets associated with the Hermes
and Park Plus product lines, employee termination expenses and certain other
charges. During the fiscal years ended November 30, 1989, 1990 and 1991,
earnings were insufficient to cover fixed charges by approximately $2,642,000,
$4,792,000 and $15,098,000 respectively. Although the Company was profitable for
the fiscal years ended November 30, 1992, 1993 and 1994 and the fiscal quarter
ended February 28, 1995, there can be no assurance that it will continue to
operate profitably, or have earnings or cash flow sufficient to cover its fixed
charges. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
UNITED STATES TRADE SANCTIONS COULD LIMIT THE COMPANY'S SOURCES OF
SUPPLY. The Company has historically been dependent on foreign sources,
particularly Japan and China, for a majority of its products. The U.S.
government historically has sought and is continuing to seek greater access to
Japanese markets for U.S. goods. As a result, the U.S. government has threatened
to impose trade sanctions on products imported from Japan if it does not succeed
in obtaining greater access for U.S. goods. The United States government on
February 15, 1994 announced its intention to publish by March 17, 1994 a list of
products imported from Japan on which it might impose trade sanctions, in
connection with Motorola, Inc.'s inability to obtain "comparable" access in
Japan for its cellular products. Motorola, Inc. announced on March 12, 1994 an
agreement with the Japanese government, and the list was not published as
announced. However, no assurance can be given that the United States government
will not, in the future, publish a list of products imported from Japan upon
which it may impose trade sanctions, which could include cellular products. Such
products could also include products produced outside of Japan made from
Japanese components. More recently, the U.S. government has held discussions
with China concerning violations of certain U.S. copyrights and trademarks. The
U.S. government proposed sanctions on Chinese products if a satisfactory
solution was not reached. Included within the proposed sanctions were cellular
products. Subsequently, China and the United States reached an agreement and
those sanctions were not imposed. There can be no assurance that the U.S.
government will not, in the future, propose a list of products imported from
Japan or China (or other countries) on which it may impose trade sanctions that
include cellular products. Such products could also include products produced
outside of the sanctioned country with components made in the sanctioned
country. In fiscal 1992, 1993 and 1994 and the first quarter of fiscal 1995, the
Company purchased 94.6%, 89.7%, 91.8% and 81.7%, respectively, of its total
dollar amount of cellular product purchases from Japanese suppliers, and
revenues from cellular products from Japanese suppliers comprised 46.6%, 46.3%,
47.8% and 55.7%, respectively, of the total revenues of the Company during those
periods.
If imposed, such sanctions may include, among other things, tariffs, duties,
import restrictions or other measures. The imposition of such sanctions would
have a material adverse effect on the Company's financial condition and results
of operations, which would include reduced margins due to the Company's
inability to access alternative cellular products at a competitive cost, and
could also include loss of market share to competitors that are less dependent
on Japanese and Chinese suppliers and/or loss of revenue due to unavailability
of product. See "Management's Discussion and Analysis
11
of Financial Condition and Results of Operations--Overview,"
"Business--Suppliers" and "--Competition."
NO ASSURANCE OF ALTERNATIVE SUPPLY SOURCES. If trade sanctions similar to
those referenced above are imposed, there is no assurance that the Company will
be able to obtain adequate alternatives to its Japanese and Chinese supply
sources. There is no assurance that, if obtained, alternatively sourced products
or components would be delivered on a timely basis, of satisfactory quality,
competitively priced, comparably featured or acceptable to the Company's
customers. The Company believes that it could experience supply shortages as
early as 60 days after such trade sanctions are introduced. Additionally, it is
likely that the Company would experience interruptions in its supply of mobile
and transportable cellular products and significant interruptions in its higher
margin portable cellular products before any alternative products could be
obtained. Any such supply interruptions would have a material adverse effect on
the Company's operating and earnings per share performance. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Suppliers."
In addition, as a result of conditions in China, there has been, and may be
in the future, opposition to the extension of "most favored nation" trade status
for China. Loss of China's "most favored nation" trade status would materially
increase the cost of the products purchased from Chinese manufacturers, as such
products would then become subject to substantially higher rates of duty.
RISKS OF CURRENCY FLUCTUATIONS. The prices that the Company pays for the
products purchased from its 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 determined by, among other things, market, trade and
political factors. Because the Company historically has been dependent on
Japanese suppliers for its cellular products, the yen to dollar relationship has
been the most significant to the Company. The value of the United States dollar
as of April 11, 1995 was 83.65 yen; over the five years preceding that date the
value of the United States dollar ranged from 159.85 yen to 80.15 yen.
A decrease in the value of the United States dollar relative to a foreign
currency increases the cost in United States dollars of products which the
Company purchases from foreign manufacturers. This increase could reduce the
Company's margins or make the Company's products less price competitive. No
assurance is given that, if the value of the United States dollar continues to
decrease relative to the yen, because of potential trade sanctions or otherwise,
the Company will be able to competitively obtain or market the products it
purchases from Japanese sources. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Currency Fluctuations."
DEPENDENCE ON FOREIGN SUPPLIERS. The Company's business is dependent upon
its suppliers' continuing to provide it with adequate quantities of salable
product on a timely basis and on competitive pricing terms. Substantially all of
the Company's products are imported from suppliers in the Pacific Rim. There are
no agreements in effect that require any manufacturer to supply the Company with
product. Accordingly, there can be no assurance that the Company's relationships
with its suppliers will continue as presently in effect. The loss of any
significant supplier, substantial price increases imposed by any such supplier
or the inability to obtain sufficient quantities of product on a timely basis,
could have a material adverse effect on the Company's financial condition and
results of operations. During the fiscal quarter ended May 31, 1994, the Company
experienced supply shortages as a result of the shifting by one of its major
suppliers of manufacturing operations from Japan to China. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Fiscal 1994 Compared to Fiscal 1993."
The Company's arrangements with its suppliers are subject to the risks of
purchasing products from foreign suppliers, including risks associated with
economic and/or political instability in countries in which such suppliers are
located, and risks associated with potential import restrictions, currency
fluctuations, foreign tax laws, import/export regulations, tariff, duty and
freight rates and work
12
stoppages. These risks may be increased in the Company's case by the
concentration of its purchases of cellular products from suppliers in Japan. In
addition, the Company may be subject to risks associated with the availability
of and time required for the transportation of products from foreign countries.
Because of the Company's dependence on such foreign suppliers, the Company is
required to order products further in advance of customers' orders than would be
the case if its products were manufactured domestically. See
"Business--Suppliers," and Note 5 of Notes to Consolidated Financial Statements.
DEPENDENCE ON TOSHIBA. Since 1984, Toshiba has been the principal supplier
of cellular telephone products to the Company, accounting for approximately
86.4%, 83.7%, 83.7% and 78.0% of the total dollar amount of the Company's
cellular product purchases and approximately 48.0%, 46.9%, 45.5% and 56.2% of
the total dollar amount of all product purchases by the Company in fiscal 1992,
fiscal 1993, fiscal 1994 and the first quarter of fiscal 1995, respectively.
During fiscal 1992 and 1993, the Company was the sole distributor of Toshiba
cellular telephone products in the United States. In 1994, Toshiba began to
compete directly with the Company in the United States by marketing cellular
telephone products through Toshiba's United States distribution subsidiary. The
Company anticipates that Toshiba will continue to sell products to the Company
as an original equipment customer; moreover, there is no agreement in effect
that requires Toshiba to supply the Company with products, and there can be no
assurance that Toshiba will continue to supply products to the Company or that
any products supplied will be competitive with others in the market. In that
regard, products that Toshiba develops for its distribution subsidiary may be
similar or superior to those which it sells to the Company. Such direct
competition from Toshiba could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Suppliers" and
Note 5 of Notes to Consolidated Financial Statements.
DEPENDENCE ON CELLULAR CARRIERS. The success of the Company's retail
cellular telephone business is dependent upon the Company's relationship with
certain cellular carriers. As a practical matter, the Company does not believe
that it can operate at the retail level on a profitable basis without agency
agreements with cellular carriers. The Company's agency agreements with cellular
carriers are subject to cancellation by the carriers and give the carriers the
right to unilaterally restructure or revise activation commissions and residual
fees, which they have done from time-to-time. The agreements also provide that,
for specified periods of time following the expiration or termination of a
specific agreement, generally ranging from three months to one year, the Company
cannot sell, solicit or refer cellular or wireless communication network
services of the kind provided by the cellular carriers to other competing
carriers in particular geographic areas. The cancellation or loss of one or more
of these agreements could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Distribution and
Marketing."
IMPACT OF ELIMINATION OF MANAGEMENT FEES FROM AND REDUCTION IN EQUITY IN
CELLSTAR; SALE OF CELLSTAR COMMON STOCK. For the fiscal years ended November 30,
1989, 1990, 1991, 1992 and 1993, approximately $1,237,000, $3,354,000,
$4,825,000, $5,124,000 and $5,147,000, respectively, of the Company's income was
generated by management fees and equity in undistributed earnings from the
operations of CellStar. In contemplation of the CellStar Offering, the Company
stopped accruing such management fees in July, 1993; however, the Company will
be entitled to its portion of the income from the equity in undistributed
earnings of CellStar, if any, for such time as the Company continues to own at
least 20% of CellStar's outstanding common stock. As of March 31, 1995, the
Company owned approximately 20.88% of CellStar Common Stock. If the CellStar
Offering had occurred on November 30, 1992, this accounting treatment would have
resulted in net earnings being reduced by approximately $1,692,000 for the
fiscal year ended November 30, 1993. There can be no assurance that income from
other sources will offset the loss of this income from CellStar. See "Summary
Consolidated Financial Data," "Certain Transactions--CellStar" and Note 12 of
Notes to Consolidated Financial Statements.
13
On March 23, 1995, CellStar filed a registration statement relating to a
public offering for approximately 3.5 to 4 million shares of common stock to be
issued by CellStar and for 1,075,000 shares of its common stock which may be
sold by the Company pursuant to its piggyback registration rights contained in
its registration rights agreement with CellStar. No assurance can be given that
such public offering will be consummated or at what price such public offering
will be consummated and that, if consummated, Audiovox will elect to sell its
shares in such public offering. See "Certain Transactions-- CellStar."
If the Company's ownership percentage in CellStar is reduced below 20% as a
result of such public offering or otherwise, the Company would be required to
account for CellStar using the cost method instead of the equity method.
Accordingly, on a pro forma basis, this change would have decreased pre-tax
earnings for fiscal 1994 and the three months ended February 28, 1995 by
approximately $3,393,000 and $972,000, respectively.
COMPETITION. The Company operates in a highly competitive environment and
believes that such competition will intensify in the future. Many of the
Company's competitors are larger and have greater capital and management
resources than the Company. Competition often is based on price, and therefore
wholesale distributors and retailers, including the Company, generally operate
with low gross margins. The Company also is affected by competition between
cellular carriers. Increased price competition relating not only to cellular
telephone products, but also to services provided by the Company to retail
customers on behalf of cellular carriers, may result in downward pressure on the
Company's gross margins (including that resulting from the loss of residual fees
attributable to customers who change cellular carriers) and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's cellular products compete principally with
cellular telephones supplied by Motorola, Inc., Nokia Mobile Phones, Inc.,
Technophone Corp., Fujitsu Network Transmission Systems, Inc., Oki Electric
Industry Co., Nippon Electric Corp. and Toshiba. The Company's non-cellular
products compete with other suppliers including Matsushita Electric Corp., Sony
Corp. of America, Directed Electronics, Inc. and Code Alarm, Inc., as well as
divisions of well-known automobile manufacturers. In February 1995, Motorola
Inc. announced its cellular inventory build-up was "several weeks above normal
levels." See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Results of Operations--First Quarter Fiscal 1995 vs. First
Quarter Fiscal 1994" and "Business--Competition."
RISK OF INVENTORY OBSOLESCENCE AND TECHNOLOGICAL CHANGE. The markets in
which the Company competes are characterized by rapid technological change,
frequent new product introductions, declining prices and intense competition.
The Company's success depends in large part upon its ability to identify and
obtain products necessary to meet the demands of the marketplace. There can be
no assurance that the Company will be able to identify and offer products
necessary to remain competitive. The Company maintains a significant investment
in its product inventory and, therefore, is subject to the risk of inventory
obsolescence. If a significant amount of inventory is rendered obsolete, the
Company's business and operating results would be materially and adversely
affected. Alternative technologies to cellular, including enhanced specialized
mobile radio ("ESMR") and personal communications service ("PCS"), may reduce
the demand for cellular telephone products. The implementation of communications
systems based upon any of these or other technologies could materially change
the types of products sold by the Company and the service providers with whom
the Company presently does business. Competing communications technologies also
may result in price competition which could result in lower activation
commission or residual fee rates payable to the Company and could have a
material adverse effect on the financial condition and results of operations of
the Company. From time to time, cellular carriers' technological limitations may
result in a shortage of available cellular phone numbers, which could have the
effect of inhibiting sales of the Company's cellular products.
POSSIBLE HEALTH RISKS FROM CELLULAR TELEPHONES. There have been lawsuits
filed (including one such lawsuit against the Company and others) in which
claims have been made alleging a link between the non-thermal electromagnetic
field emitted by portable cellular telephones and the development of
14
cancer, including brain cancer. To date, there have been relatively few medical
studies relating to cellular telephones and the effects of non-thermal
electromagnetic fields on health, nor are there any widely accepted theories
regarding how exposure to a non-thermal electromagnetic field, such as the type
emitted by a portable cellular telephone, could affect living cells or threaten
health. The scientific community is divided on whether there is any risk
associated with the use of portable cellular telephones and the magnitude of any
such risk. There can be no assurance that medical studies or other findings, or
continued litigation in this area, will not have a material adverse impact upon
the financial condition and results of operations of the cellular telephone
industry and the Company.
RISKS ATTRIBUTABLE TO FOREIGN SALES. For the fiscal years ended November 30,
1992, 1993 and 1994 and the fiscal quarter ended February 28, 1995 approximately
12.4%, 12.6%, 13.8% and 17.8%, respectively, of the Company's net sales were
generated from sales in Canada, Europe, Latin America, Asia, the Middle East and
Australia. Foreign sales are subject to political and economic risks, including
political instability, currency controls, exchange rate fluctuations, increased
credit risks, foreign tax laws, changes in import/export regulations and tariff
and freight rates. Political and other factors beyond the control of the
Company, including trade disputes among nations or internal instability in any
nation where the Company sells products, could have a material adverse effect on
the financial condition and results of operations of the Company.
RISK ATTRIBUTABLE TO RETAIL SALES. A significant 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
negatively impacted by fluctuations in automotive sales. Certain of the
Company's significant customers are also believed by the Company to be highly
leveraged. Accordingly, a downturn in the retail economy could have a material
adverse effect on the financial condition and results of operations of the
Company.
LEVERAGE AND DEBT SERVICE. As of February 28, 1995, the Company had
outstanding total interest bearing indebtedness of approximately $104 million
and a total debt-to-total capital ratio of .53 to 1. Although a portion of the
net proceeds from the sale of the Debentures and the CellStar Offering was used
to retire a significant portion of the Company's existing indebtedness, the
Company continues to have substantial annual fixed debt service requirements
including those attributable to the Company's Series AA 10.80% Convertible
Debentures due February 9, 1996 (the "Series AA Convertible Debentures") and
Series BB 11.00% Convertible Debentures due February 9, 1996 (the "Series BB
Convertible Debentures"), the Debentures and the Amended and Restated Credit
Agreement (as herein defined). See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources."
The ability of the Company to make principal and interest payments under the
Company's long-term indebtedness and bank loans will be dependent upon the
Company's future performance, which is subject to financial, economic and other
factors affecting the Company, some of which are beyond its control. There can
be no assurance that the Company will be able to meet its fixed charges as such
charges become due. See "Summary Consolidated Financial Data" and "--History of
Losses."
RESTRICTIVE COVENANTS. The Amended and Restated Credit Agreement (as defined
herein) contains certain restrictive covenants which impose prohibitions or
limitations on the Company with respect to, among other things, (i) the ability
to make payments of principal, interest or premium on, subordinated indebtedness
of the Company, (ii) the incurrence of indebtedness, (iii) capital expenditures,
(iv) the creation or incurrence of liens, (v) the declaration or payment of
dividends or other distributions on, or the acquisition, redemption or
retirement of, any shares of capital stock of the Company and (vi) mergers,
consolidations and sales or purchases of substantial assets, and require that
the Company satisfy certain financial tests and maintain certain financial
ratios. Failure to comply with such covenants could result in a default under
the Amended and Restated Credit Agreement which could have a material adverse
effect on the financial condition and results of operations of the Company. See
15
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ABSENCE OF EXISTING MARKET FOR THE WARRANTS; RESTRICTIONS ON RESALE; NO
ASSURANCE OF LISTING AND REGISTRATION OF WARRANTS. There is no existing market
for the Warrants. The Warrants have not been registered under the Securities Act
or any state securities laws and, unless so registered, may not be offered or
sold except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. Although the Warrants are expected to be eligible for trading
through PORTAL upon issuance, there can be no assurance that the Warrants will
become and remain eligible for trading on PORTAL, that an active trading market
for the Warrants will develop or, if such market develops, as to the liquidity
or sustainability of such a market. Accordingly, no assurance can be given that
a holder of the Warrants will be able to sell such Warrants in the future or as
to the price at which any sale may occur.
The Company intends to seek to list the Warrants on the AMEX or another
national securities exchange or to seek quotation of the Warrants on NASDAQ
Small Cap. However, the listing or quotation requirements for such organizations
require a certain minimum number of holders of Warrants prior to approval for
listing or quotation. Since the Offering is being made to a limited number of
persons in a private placement transaction, there can be no assurance that the
Company will obtain such listing or quotation for the Warrants, or if obtained,
that the Warrants will not become delisted. If the Warrants have not been
approved for listing or quotation, the Company is not required to register the
Warrants under the Securities Act pursuant to the Registration Rights Agreement
and does not intend to register the Warrants. As described above, if the
Warrants are not registered under the Securities Act, they may not be offered or
be sold except pursuant to an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. See "Description of the Warrants--Registration Rights."
In addition, while the Company has agreed to use its reasonable best efforts
to file and have declared effective under the Securities Act a registration
statement covering resales of all of the Warrants if the Warrants have been
approved for listing on a national securities exchange or for quotation on
NASDAQ Small Cap, the SEC has previously taken the position that persons who
purchase securities in a private placement, and who are engaged in the business
of underwriting securities, may not be able to participate as a selling
securityholder in any resale registration statement filed with respect to such
securities. Accordingly, purchasers of Warrants who are engaged in the business
of underwriting securities may not be able to have their resales of the Warrants
or the underlying Class A Common Stock registered under the Securities Act.
NO ASSURANCE OF REGISTRATION OF CLASS A COMMON STOCK UNDERLYING THE
WARRANTS. The Warrants may not be exercised unless, at the time of such
exercise, a registration statement covering the issuance of shares of Class A
Common Stock by the Company upon exercise of the Warrants shall be effective
under the Securities Act. Although the Company has agreed to use its reasonable
best efforts to have such registration statement declared effective by the SEC,
there can be no assurance that the Company will be able to do so. If such a
registration statement has not been declared effective at any time on or prior
to the Expiration Date, the Company will be required to redeem the Warrants for
$2.20 per Warrant. In addition, the Warrant Exercise Price will be subject to
certain decreases in certain circumstances if the registration statement
covering the issuance of shares of Class A Common Stock upon exercise of the
Warrants has not been filed or declared effective within prescribed periods. See
"Description of the Warrants-- Mandatory Redemption."
POSSIBLE VOLATILITY OF STOCK PRICE. Since 1991, the market price of the
Class A Common Stock has experienced a high degree of volatility. There can be
no assurance that such volatility will not continue or become more pronounced.
In addition, recently the stock market has experienced, and is likely to
experience in the future, significant price and volume fluctuations which could
adversely affect the market price of the Class A Common Stock without regard to
the operating performance of the
16
Company. The Company believes that factors such as quarterly fluctuations in the
financial results of the Company or its competitors and general conditions in
the industry, the overall economy and the financial markets could cause the
price of the Class A Common Stock to fluctuate substantially. See "Price Range
of Class A Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION. The Company has approximately
3,406,326 shares of Class A Common Stock held by members of the public that are
able to trade without restriction. Sales of a substantial number of additional
shares of Class A Common Stock in the public market could adversely affect the
market price of the Class A Common Stock. As of March 31, 1995, 3,672,316 shares
of Class A Common Stock were issuable upon conversion of the Debentures,
1,023,028 shares of Class A Common Stock were issuable upon conversion of the
Series AA Convertible Debentures and Series BB Convertible Debentures, and
150,000 shares of Class A Common Stock were issuable pursuant to presently
exercisable warrants. Conversion of a substantial amount of the Warrants or
other outstanding warrants, the Debentures, the Series AA Convertible Debentures
or the Series BB Convertible Debentures or sale of the Class A Common Stock
underlying such debentures also could adversely affect the market price of the
Class A Common Stock, due to the large number of shares issuable upon conversion
of such instruments in comparison to the relatively small number of shares held
by members of the public that are able to trade without restriction. The Company
has granted the holders of the Series AA Convertible Debentures and Series BB
Convertible Debentures certain registration rights relating to the Class A
Common Stock issuable upon conversion of such debentures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In addition, as of March 31, 1995, (i) John J.
Shalam, President and Chief Executive Officer of the Company, owned 3,366,762
shares of Class A Common Stock (excluding for this purpose all of the shares
subject to the Shalam Option (as herein defined)) and 1,883,198 shares of Class
B Common Stock of the Company, par value $.01 per share ("Class B Common
Stock"), which are convertible into an equal number of shares of Class A Common
Stock and (ii) other affiliates (as such term is defined the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of the Company owned 4,700 shares
of Class A Common Stock and 377,756 shares of Class B Common Stock, which are
convertible into an equal number of shares of Class A Common Stock. Sales by
such persons of a substantial number of shares of Class A Common Stock or Class
B Common Stock (collectively, "Common Stock") could adversely affect the market
price of the Class A Common Stock.
The independent members of the Board of Directors may elect not to exercise
the Shalam Option in whole or in part in connection with the exercise of
Warrants if such board members believe it is in the best interests of the
Company not to exercise all or part of the Shalam Option. The decision by the
independent members of the Board of Directors not to exercise the Shalam Option,
in whole or in part, would result in an increase in the number of shares of
Class A Common Stock outstanding and available for future sale and could result
in significant dilution to the holders of Common Stock.
DEPENDENCE ON EXISTING MANAGEMENT. The continued success of the Company is
substantially dependent on the efforts of John J. Shalam, President and Chief
Executive Officer, Philip Christopher, Executive Vice President, and C. Michael
Stoehr, Senior Vice President and Chief Financial Officer. The loss or
interruption of the continued full time services of any of such individuals
could have a material adverse impact on the Company's business operations,
prospects and relations with its suppliers. The Company does not have employment
contracts with any of these persons, nor have any of these persons signed
agreements binding them not to compete with the Company following the
termination of their employment with the Company. The Company maintains a "key
man" life insurance policy only on John J. Shalam.
RISK OF AMENDMENT TO WARRANTS. Under the terms of the Warrant Agreement, the
Warrants may be amended or modified by holders of a majority of the Warrants in
a manner which materially adversely affects holders of the Warrants unless such
amendment or modification would change the Expiration Date (except to a later
date), increase the Warrant Exercise Price, reduce the Redemption Price, reduce
the reduction in the Warrant Exercise Price upon a Registration Default or
reduce the
17
shares of Class A Common Stock purchasable upon exercise of the Warrants (other
than pursuant to adjustments provided in the Warrant Agreement), which
amendments require the approval of each holder of Warrants. Accordingly, the
Warrants could be amended in a manner materially adverse to the holder of a
Warrant without such holder's consent. See "Description of the
Warrants--Amendments."
VOTING RIGHTS OF CLASS A COMMON STOCK AND VOTING CONTROL BY PRINCIPAL
STOCKHOLDER. The holders of Warrants do not have any voting rights as
stockholders of the Company. The voting rights of holders of Class A Common
Stock for which the Warrants are exercisable are limited by the Company's
Certificate of Incorporation. 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 with
respect to the election and removal without cause of directors and as otherwise
may be required by Delaware law. With respect to the election of directors, the
holders of shares of Class A Common Stock, voting as a separate class, are
entitled to elect 25% (rounded up to the nearest whole number) of the authorized
number of directors of the Company and the holders of the Class B Common Stock,
voting as a separate class, are entitled to elect the remaining directors. The
rights of holders of Class A Common Stock and Class B Common Stock with respect
to the election of directors will be subject to certain adjustments under
specified circumstances. See "Description of Capital Stock--Class A Common Stock
and Class B Common Stock." John J. Shalam has effective voting control of the
Company and can elect a majority of the directors through his ownership of
3,369,135 shares of Class A Common Stock (including the shares of Class A Common
Stock subject to the Shalam Option) and 1,883,198 shares of Class B Common
Stock, which gives him approximately 85.5% of the aggregate voting power of the
issued and outstanding Common Stock. Pending exercise of the Shalam Option, Mr.
Shalam will have voting control of the shares of Class A Common Stock subject to
the Shalam Option. The disproportionate voting rights of the Class A Common
Stock and the Class B Common Stock may effectively preclude the Company from
being taken over in a transaction not supported by John J. Shalam, may render
more difficult or discourage a merger proposal or a tender offer, may preclude a
successful proxy contest or may otherwise have an adverse effect on the market
price of the Class A Common Stock. See "Management--Beneficial Ownership of
Common Stock" and "Description of Capital Stock--Effects of Disproportionate
Voting Rights."
18
THE OFFERING
INTRODUCTION
The Company is hereby offering to issue up to 1,365,000 Warrants upon the
terms and conditions set forth herein. The Offering is being extended to the
beneficial holders (the "Investors") of Debentures as of June 3, 1994. Each
Investor will be entitled to acquire 21 Warrants for each $1,000 principal
amount of Debentures then beneficially held by such Investor in consideration
for a Release by such Investor of the Company and the Initial Purchasers (as
defined) and their respective directors, officers, partners, employees and
agents from any liability for any and all potential claims such Investor may
have in connection with the Debentures up through the date of the Release. See
"Terms of the Warrants."
The Release must be executed by the beneficial holders of Debentures as of
June 3, 1994. The Company will not issue Warrants to the record holder of the
Debentures unless such record holder was also the beneficial holder as of such
date. To subscribe for the Warrants, the beneficial holder of Debentures as of
June 3, 1994 will be required to represent in the Subscription Agreement for the
Offering that it was the beneficial holder of a specified amount of Debentures
as of such date.
The Warrants are offered subject to prior withdrawal, cancellation or
modification of the Offering by the Company. The Company reserves the right, in
its sole discretion, to terminate this Offering at any time, and without regard
to the amount of subscriptions received; provided that the Company does not
intend to close the Offering unless it receives subscriptions from at least the
beneficial holders of a majority of the principal amount of the Debentures as of
June 3, 1994.
BACKGROUND OF THE OFFERING
On March 15, 1994, the Company completed its private offering to Oppenheimer
& Co., Inc., Chemical Securities, Inc. and Furman Selz Incorporated (the
"Initial Purchasers") of $65,000,000 in principal amount of Debentures,
realizing net proceeds, before deduction of expenses, of approximately
$63,050,000. The Debentures were purchased by the Initial Purchasers who
intended to resell the Debentures to a limited number of qualified institutional
buyers (as such term is defined in Rule 144A promulgated under the Securities
Act) and institutional accredited investors, and outside the United States in
offshore transactions in reliance on and in compliance with Regulation S
promulgated under the Securities Act.
The Debentures are convertible at any time prior to maturity, unless
previously redeemed, into shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), at a conversion price of $17.70 per share. On
March 15, 1994, the closing sales price of the Company's Class A Common Stock as
reported on the American Stock Exchange was $14 5/8 per share.
On June 3, 1994, the Company announced its preliminary earnings and sales
for its second quarter of fiscal 1994. The text of the press release announcing
these preliminary results is reproduced in part below:
Hauppauge, New York, (June 3, 1994)--Audiovox Corporation (AMEX: VOX)
today announced preliminary earnings and record preliminary sales for its
quarter ended May 31, 1994.
Estimated net sales rose 21.4% to $115.9 million from $95.5 million for
the comparative 1993 quarter. Estimated net earnings were $1.4 million in
the second quarter 1994 compared to $2.7 million, before the extraordinary
item, for the second quarter 1993. On a proforma basis, estimated primary
earnings per share for the second quarter of 1994 were $0.16 versus $0.26
for the second quarter of 1993. On a proforma basis, estimated fully diluted
earnings per share were $0.15 for the second quarter of 1994 versus $0.25
for the second quarter 1993. Audiovox believes the proforma results are a
better measure of its performance, as they reflect the Company's earnings
adjusted for
19
the change in the Company's ownership percentage of CellStar (NASDAQ: CLST)
stock from 50% to 20.88%, the elimination of the after tax management fees
and the 1993 tax benefit of a net operating loss carryforward.
John J. Shalam, Chief Executive Officer, stated, "It must be understood
that this is a preliminary indication of our results for the second quarter.
Upon completion of the final review and report due in early July, the actual
results will be announced."
Mr. Shalam further stated, "As noted in our first quarter report, our
company operates in a highly competitive environment. The second quarter
margins were adversely affected by severe competitive price pressure in the
cellular industry which developed during this period, and by product
shortages. In addition, the Company incurred increased expenses in the
expansion of its Quintex retail operation."
The Company has been requested to consider modifications of the $65
million 6 1/4% convertible subordinated debentures due 2001, issued in its
recent private placement, and is willing to consider making modifications.
However, there can be no assurance that any such modifications will be made.
. . .
The closing sale price of the Class A Common Stock on June 2, 1994 was $12
3/8 per share and the closing sale price of the Class A Common Stock on June 3,
1994 was $9 per share. In June 1994, officers and other representatives of the
Company met with certain holders of Debentures to discuss the Company's second
quarter results. The Company has been advised that the latest traded sale price
of the Debentures prior to the announcement of the Company's second quarter
results was approximately $920 per $1,000 principal amount of Debentures and the
closing sale price of the Debentures on June 3, 1994 was approximately $780 per
$1,000 principal amount of Debentures.
On July 12, 1994, the Company formally announced its earnings and sales for
the fiscal quarter and six months ended May 31, 1994. The text of the press
release announcing these results is reproduced in part below:
Hauppauge, New York, (July 12, 1994)--Audiovox Corporation (AMEX: VOX)
today announced results for its fiscal 1994 second quarter and six months
ended May 31, 1994.
Net sales for the second quarter rose 21.7% to $116.3 million from $95.5
million during the comparable 1993 period. Net earnings for the second
quarter of fiscal 1994 were $1.4 million compared with proforma net earnings
of $2.4 million for 1993's second quarter. Primary earnings per share were
$0.16 for the second quarter of fiscal 1994 compared with proforma earnings
per share of $0.26 last year. On a fully diluted basis the quarterly
earnings per share were $0.15 for 1994 compared with proforma earnings per
share of $0.25 for 1993.
For the six months ended May 31, 1994, net sales rose 23.6% to $231.6
million from $187.3 million during the comparable 1993 period. Net earnings
for the six months ended May 31, 1994 were $25.4 million compared to $7.2
million in the corresponding period in 1993. Proforma net earnings for the
first six months of fiscal 1994 were $4.4 million compared with proforma net
earnings of $4.1 million for the six months ended May 31, 1993. Primary
earnings per share were $2.77 for the first six months of the current fiscal
year compared with earnings per share of $0.79 last year. On a fully diluted
basis, the earnings per share for the first half of the fiscal year were
$2.22 and $0.74 for the 1994 and 1993 periods, respectively. On a proforma
basis, primary earnings per share for the same periods were $0.48 and $0.45.
On a fully diluted basis, the proforma earnings per share for the same
periods were $0.43.
Audiovox believes the proforma results are a better measure of its
operating results as they reflect the Company's performance before the gain
from the sale of CellStar Corporation (NASDAQ: CLST) shares, adjustment for
the change in ownership percentage of CellStar from 50% to
20
20.88% (due to the December 1993 initial public offering of CellStar) and
the elimination of Audiovox's 1993 tax benefit from a net operating loss
carryforward.
Commenting on the quarterly results, Audiovox President and Chief
Executive Officer, John J. Shalam stated, "Although we achieved sales growth
in our cellular, auto sound and auto security businesses, our earnings in
the second quarter were principally impacted by the cellular group. The
cellular margins were affected by the competitive price pressure in the
cellular industry which developed during this period, and by product
shortages. In addition the Company incurred increased expenses in the
expansion of its Quintex retail operations." Mr. Shalam further stated, "Our
Company expects to continue to operate in a highly competitive environment
which is subject to changes in economic and market conditions.". . .
As previously reported, Audiovox has been requested to consider and is
considering certain modifications of the terms of its $65 million 6 1/4%
convertible subordinated debentures due 2001, issued in a March private
placement. However, there can be no assurance that any such modifications
will be made. . .
On July 15, 1994, the Company filed its Quarterly Report on Form 10-Q with
the SEC for the fiscal quarter ended May 31, 1994 (the "May 31 10-Q"). The
Company stated the following in this filing:
The Company has been requested to consider and is considering
modifications of the terms of its $65 million 6 1/4% Convertible
Subordinated Debentures due 2001, issued in a March private placement. The
Company has had discussions with several of its bond holders concerning
these modifications. However, there can be no assurance that any such
modifications will be made.
After such earnings and sales announcement, the Company had additional
discussions with certain holders of the Debentures, each of whom executed a
confidentiality agreement, regarding their investment in the Debentures.
Subsequent to such discussions with such Debentureholders, the Company's
Board of Directors (other than Mr. Shalam) determined that action should be
taken by the Company with respect to the Debentures. The Board of Directors of
the Company determined that the Company would offer the Warrants to those
current or former holders of Debentures who beneficially held Debentures on June
3, 1994, the date the Company announced its quarterly earnings for the fiscal
quarter and six months ended May 31, 1994. The Board of Directors authorized the
Offering after considering the following factors, among others, (a) the
Company's desire to maintain good relations with its investors, customers,
suppliers, lenders, and the financial community as a whole, (b) the possible
adverse impact which the Company's failure to act might have upon the Company's
ability to raise capital in the future, (c) the offer by John J. Shalam to the
Company of the Shalam Option which enables the Company to offer the Warrants
while limiting the dilutive effect on the earnings per share and the book value
of the Company, (d) the fact that the Offering does not entail any current cash
costs (other than fees) to the Company (although cash costs may be possible in
the future depending on Mr. Shalam's or his Successor's tax liability and the
mandatory redemption requirement), (e) the protection from potential litigation
that would be afforded the Company, (f) although the Company believes there is
no basis for any claims, the current litigious atmosphere in the securities
markets, and the costly diversion of the Company's resources and management's
attention which would be involved in any such litigation, and (g) the fact that
litigation is subject to many uncertainties and it is possible that a finding
could be made against the Company. In addition to the foregoing reasons, the
Board of Directors determined to offer the Warrants to the Debentureholders
rather than amend the terms of the Debentures because (a) of the tax
consequences to the Investors of the receipt of the Warrants and (b) the
Warrants provide an opportunity for an additional upside potential return to the
beneficial holders of Debentures as of June 3, 1994.
21
TERMS OF THE OFFERING
Upon the terms and subject to the conditions of the Offering, the Company
will accept subscriptions for Warrants which are properly made in accordance
with the terms of the Offering and received by the Company on or prior to the
Offer Termination Date (as hereinafter defined). The terms of the Warrants are
described under "Terms of the Warrants." As used herein, the term "Offer
Termination Date" means 5:00 p.m., New York City time, on May 1, 1995; provided,
however, that the Company may, at any time or from time to time, in its sole
discretion, extend the period of time for which the Offering is open, in which
event the term "Offer Termination Date" means the latest time and date to which
the Offering is extended. The Company also expressly reserves the right (a) to
terminate the Offering at any time and (b) at any time or from time to time, to
amend the Offering in any respect. The Company does not intend to consummate the
Offering unless the beneficial holders of at least a majority of the principal
amount of Debentures outstanding as of June 3, 1994 elect to participate in the
Offering and execute a Release. Any extension, termination or amendment will be
followed as promptly as practicable by delivery of a letter to the Investors
announcing such extension, termination or amendment.
BENEFICIAL HOLDERS; PROCEDURES FOR SUBSCRIPTIONS; DELIVERY OF WARRANTS
Upon the terms and subject to the conditions of the Offering, beneficial
holders of the Debentures as of June 3, 1994 may subscribe for Warrants by
completing and signing the Subscription Agreement, the Registration Rights
Agreement, a Suitability Questionnaire and the Release (the "Confidential
Subscription Documents") accompanying this Offering Memorandum and delivering
such documents at any time prior to 5:00 p.m. (New York City time) on the Offer
Termination Date (May 1, 1995) to Fried, Frank, Harris, Shriver & Jacobson
(special securities law counsel to the Company), One New York Plaza, New York,
New York 10004, Attention: Stuart Gelfond, Esq. The method of delivery of all
documents is at the election and risk of the subscriber. If delivery is by mail,
registered mail with return receipt requested, properly insured, is recommended
and enough time should be allowed to assure timely delivery. In all cases,
Warrants will be issued pursuant to the Offering only after timely receipt by
the Company of the Confidential Subscription Documents and any other documents
required to be delivered with the Confidential Subscription Documents.
The Warrants are being offered hereby in the United States only to the
beneficial holders of the Debentures as of June 3, 1994 who are accredited
investors (as such term is defined in Rule 501(a)(1), (2), (3) or (7)
promulgated under the Securities Act), and any potential investor will be
required to certify as to such persons' status as such. The Warrants are also
being offered hereby outside the United States in offshore transactions in
reliance on and in compliance with Regulation S promulgated under the Securities
Act. Subscriptions will be accepted in the sole discretion of the Company and
only if after reasonable inquiry and advice of counsel it determines that the
sale of Warrants to the investor satisfies relevant federal and state securities
laws and that the beneficial holders of the Debentures has properly executed the
Confidential Subscription Documents.
The Company specifically reserves the right to reject, for any reason and in
its sole discretion, any subscription for Warrants. The Company shall notify
each subscriber of such determination as soon as practicable after receipt of
such subscriber's subscription.
For purposes of the Offering, the Company shall be deemed to have accepted a
subscription for Warrants as, if and when the Company gives oral or written
notice to the offeree of the Company's acceptance of such subscription. Subject
to the terms and conditions of the Offering, delivery of Warrants for
subscriptions so accepted pursuant to the Offering will be made by the Warrant
Agent as soon as practicable after the expiration of the Offering. If any
subscriptions are not accepted for any reason, the Confidential Subscription
Documents and any other documents submitted therewith will be
22
returned, without expense to the offeree, as promptly as practicable following
the expiration or termination of the Offering.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any subscription for Warrants pursuant to any of the
procedures described above will be determined in the sole discretion of the
Company, whose determination shall be final and binding. The Company reserves
the absolute right to reject any or all subscriptions not in proper form or if
the acceptance of subscription may, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Offering or any defect or irregularity in any subscription.
The Company will not be under any duty to give notification of any defects or
irregularities in any subscription or incur any liability for failure to give
any such notification.
THE COMPANY WILL ACCEPT SUBSCRIPTIONS ONLY FROM BENEFICIAL HOLDERS OF THE
DEBENTURES AS OF JUNE 3, 1994 WHO PROPERLY EXECUTE THE CONFIDENTIAL SUBSCRIPTION
AGREEMENTS AND ONLY WITH RESPECT TO DEBENTURES BENEFICIALLY HELD AS OF SUCH
DATE.
REGISTRATION RIGHTS FOR CLASS A COMMON STOCK; REDUCTION IN EXERCISE PRICE FOR
WARRANTS FOR FAILURE TO REGISTER
The Company will agree to file with the SEC, within 300 days of the Closing
Date, and use its reasonable best efforts to cause to become effective within
365 days of the closing of the offering (the "Closing Date"), a shelf
registration statement or statements with respect to the issuance of the
underlying Class A Common Stock upon exercise of the Warrants. If the
registration statement with respect to the Common Stock is not filed within such
300-day period or declared effective within such 365-day period, the exercise
price of the Warrants will decrease by $ 1/8 per share of Class A Common Stock;
subject to additional decreases of $ 1/8 per share of Class A Common Stock for
each additional six-month period for which such registration statement has not
been filed or is not declared effective, as the case may be. In addition, if
such registration is declared effective, the Exercise Price will also decrease
by $ 1/8 per share of Common Stock if such registration statement ceases to be
effective for more than 90 days (180 days in certain circumstances) in any
365-day period, subject to additional decreases of $ 1/8 per share of Class A
Common Stock for each additional six-month period for which such registration
statement ceases to be effective. Notwithstanding the foregoing, the maximum
number of $ 1/8 per share decreases shall be 10 and there shall be no more than
one such decrease in any six-month period. (Each of such events which results in
a decrease in the Warrant Exercise Price being referred to herein as a
"Registration Default"). The reduction in the Warrant Exercise Price upon a
Registration Default is subject to adjustment in certain limited circumstances.
See "Description of the Warrants--Adjustments." The Company will be obligated to
use its reasonable best efforts to cause the registration statement relating to
the Class A Common Stock to remain effective until the Expiration Date. The
Company will not be obligated to register Class A Common Stock underlying any
Warrants (a) which the holder does not seek to register or (b) if the Company
determines (based on discussions with the SEC, advice of counsel or otherwise)
that it is not advisable or appropriate to register such shares of Class A
Common Stock underlying such Warrants. In any such event (a) or (b), the Warrant
Exercise Price underlying such Warrants will not decrease upon the failure to
register with the SEC such underlying shares of Class A Common Stock if the SEC
has declared effective a registration statement with respect to other shares of
Class A Common Stock. See "Description of Warrants-- Registration Rights."
MANDATORY REDEMPTION
If a registration statement relating to the Class A Common Stock underlying
the Warrants is not effective at any time on or prior to the Expiration Date,
the Company is required to redeem all of the
23
outstanding Warrants for $2.20 per Warrant. The Redemption Price is subject to
adjustment in certain limited circumstances. See "Description of the
Warrants--Adjustments."
LISTING OF WARRANTS; REGISTRATION OF WARRANTS
The Company intends to seek to list the Warrants on a national securities
exchange or to seek quotation of the Warrants on the automated quotation system
of a national securities association (as such terms are defined in the
Securities Act) and to simultaneously register the Warrants under the Securities
Act. The Company intends to seek to obtain such listing on the AMEX or to obtain
quotation of the Warrants on NASDAQ Small Cap. However, AMEX and NASDAQ Small
Cap require a minimum number of holders of Warrants prior to listing or
quotation, as the case may be, without a waiver. Since the Offering is being
made to a limited number of persons in a private placement transaction, the AMEX
or NASDAQ Small Cap may not agree to list or quote the Warrants, as the case may
be. In such case, the Company intends to seek to list the Warrants on one of the
Boston Stock Exchange, Midwest Stock Exchange, Pacific Stock Exchange or
Philadelphia Stock Exchange. However, there can be no assurance that any of such
stock exchanges will agree to list the Warrants since such exchanges also have
minimum holder requirements for listing. If any of the above-exchanges agree to
list the Warrants or the Warrants have been approved for quotation on NASDAQ
Small Cap (a "Listing Approval"), the Company will file a shelf registration
statement relating to the Warrants upon the later of (a) 300 days after the
Closing Date and (b) the date approval of such listing or quotation is obtained
(the "Approval Date") and will use its reasonable best efforts to cause such
registration statement to become effective upon the later of (a) 365 days after
the Closing Date and (b) 60 days after the Approval Date. Once effective, the
Company will be obligated to use reasonable best efforts to cause the
registration statement relating to the Warrants to remain effective until the
date three years following the Closing Date.
RELEASE OF POTENTIAL CLAIMS
As consideration for the Warrants, each Investor in the Offering will be
required to execute a Release which is included in the Confidential Subscription
Documents. The Release must be executed by the beneficial holder of the
Debentures as of June 3, 1994. The Company will require sufficient proof that
the person executing the Release was the beneficial holder of the Debentures as
of June 3, 1994. By executing a Release, an Investor in the Warrants will
irrevocably and unconditionally release the Company and the Initial Purchasers,
and their respective directors, officers, partners, employees, agents, legal
representatives, heirs, executors, administrators, successors and assigns
(collectively, the "Released Parties"), from liability for any and all potential
claims, suits, actions or damages, if any, such Investor or such Investors,
heirs, successors or assigns ever had, now have or hereafter can, shall or may
have against any Released Party for, upon or by reason of any matter, cause or
thing (whether now known or unknown), including, without limitation, any
liability under federal or state statutory or common law, including without
limitation, the Securities Act, the Exchange Act and state "blue sky" laws,
relating to the Investor's investment in the Debentures through the date of the
Release and the offering of the Debentures. Investors are hereby urged to read
the Release for the exact terms thereof.
The Company makes no representation as to the claims, suits or actions, if
any, that may be available to any offeree against the Released Parties with
respect to its investment in the Debentures or the disclosures made by the
Company in the offering memorandum relating to the Debentures or otherwise in
connection with the Debentures and the Debenture Offering. The Company does not
believe that there is any basis for any such claims and would vigorously defend
any lawsuits arising out of such matters. If a court or jury were to decide that
the Company violated the antifraud or other provisions of federal and state
securities laws based upon disclosures made in connection with the Debenture
Offering, the Company could be liable for monetary damages or equivalent
remedies under federal and state law to persons investing in the Debenture
Offering or persons purchasing Debentures
24
after the completion of the Debenture Offering and prior to the issuance of the
Company's press release on June 3, 1994. By executing and delivering a Release
to the Company, an investor in Warrants will have waived and relinquished all
rights, if any, to bring any such action against any of the Released Parties,
under any theory of liability, including any action for monetary damages or
equivalent remedies.
Whether or not the Company obtains the Releases, the Company will retain its
indemnification obligations to the Initial Purchasers under the underwriting
agreement relating to the offering of the Debentures.
POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR COUNSEL WITH RESPECT TO THE
LEGAL EFFECTS OF AN INVESTMENT IN THE WARRANTS AND THE EXECUTION AND DELIVERY OF
THE RELEASES. EACH INVESTOR IN THE WARRANTS WILL BE REQUIRED TO REPRESENT TO THE
COMPANY THAT IT FULLY UNDERSTANDS AND ACKNOWLEDGES THE LEGAL CONSEQUENCES OF
EXECUTING AND DELIVERING THE RELEASE TO THE COMPANY.
This Offering is not, and shall not be construed as, an admission by the
Company or any of its officers, directors, employees or agents of any liability
or responsibility for any losses any offeree may have incurred in connection
with its investment in the Debentures, or an admission of a violation of any
applicable federal or state law, statute, rule or regulation by the Company or
any of its officers, directors, employees or agents, or as a waiver of any
federal or state statute of limitation.
Offerees are under no obligation to invest in the Warrants. By rejecting the
Offering of Warrants made hereby, an offeree will not prejudice any of its
rights with respect to its investment in the Debentures. The terms of the
Debentures will not change as a result of the Offering.
The Warrants offered hereby are being offered through the officers and
directors of the Company who will not be compensated in connection with the
procurement of subscriptions, but will be reimbursed for their reasonable
out-of-pocket expenses, if any, incurred in connection with the Offering.
SHALAM OPTION
John J. Shalam has agreed to grant the Company an option (the "Shalam
Option") to purchase shares of Class A Common Stock (the "Option Shares") at a
purchase price equal to the sum of (a) the Warrant Exercise Price plus (b) an
additional amount (the "Tax Amount") intended to reimburse Mr. Shalam or his
Successors for any additional taxes per share which may be required to be paid
by Mr. Shalam or his Successors as a result of the payment of the Warrant
Exercise Price being treated for federal income tax purposes as the distribution
to Mr. Shalam or his Successors of a dividend (taxed at ordinary income rates
without consideration of Mr. Shalam's or his Successors', as the case may be,
basis), rather than as a payment to Mr. Shalam or his Successors for the sale of
his Class A Common Stock to the Company (taxed at the capital gains rate with
consideration of Mr. Shalam's basis and considering any stepped up basis to Mr.
Shalam's Successors) pursuant to the Shalam Option. If Mr. Shalam or his
Successors, as a result of the receipt of the payment of the Warrant Exercise
Price, are taxed at a capital gains rate (with consideration given to their
stepped up basis), no Tax Amount will be included in the purchase price to be
paid. Any Successor acquiring the shares of Class A Common Stock underlying the
Shalam Option (whether by sale, transfer or upon Mr. Shalam's death), will
acquire such shares subject to the terms of the Shalam Option. The terms of the
Shalam Option (other than the initial exercise price) will be similar to those
of the Warrants, however, the exercise price per share for the Shalam Option
will not decrease in the event of a Registration Default. Such additional amount
per
25
share shall be calculated in accordance with the tax rates applicable to the
date of exercise in accordance with the following formula:
(A-B) x C + (BxD)
1-A
where A equals Mr. Shalam's combined marginal U.S. federal, state and local
ordinary income tax rates after reduction of the federal rate for the benefit of
the deductions for state and local taxes; B equals Mr. Shalam's combined
marginal U.S. federal, state and local capital gains tax rates after reduction
of the federal rate for the benefit of the deductions for state and local taxes;
C equals the per share Warrant Exercise Price without giving effect to any
adjustment thereof resulting from a Registration Default; and D equals Shalam's
per share adjusted tax basis in the Class A Common Stock purchasable by the
Company pursuant to the Shalam Option and includes any stepped-up basis of Mr.
Shalam's Successors. Any payment owing to Mr. Shalam's Successors will be based
on the same formula as it relates to such Successors.
The Shalam Option will be exercisable, in whole or in part, for a number of
shares equal to the aggregate number of shares purchasable under the Warrants on
the Closing Date. The basic terms of the Shalam Option will be similar to the
basic terms of the Warrants; provided that the exercise price of the Shalam
Option will not be reduced in the event of a Registration Default. The Company
is not required to exercise the Shalam Option upon exercise of the Warrants and
intends to do so only if the Board of Directors of the Company (other than Mr.
Shalam) at the time of exercise of the Warrants, determines that it is in the
best interests of the stockholders of the Company to exercise such Shalam
Option. The Company will be able to exercise the Shalam Option only if the
Warrants are exercised and then only for the same number of shares as are
purchased under the Warrants. The Shalam Option may limit the dilutive effect of
the Warrants on the earnings per share or the book value per share if the
Company elects to execute the Shalam Option. The obligations of the Company
under the Warrants are not subject to compliance by Mr. Shalam with the terms of
the Shalam Option. The Tax Amount will be immediately due and payable upon
receipt of a satisfactory notice from the holder of the Option Shares stating
that a Tax Amount is required to reimburse such person for additional taxes in
accordance with the Shalam Option, setting forth the calculation of the Tax
Amount and confirming that such person will file its tax return with respect to
this period in accordance with the facts underlying this calculation, but such
Tax Amount is subject to readjustment in the event the actual tax paid is
different than the amount set forth in the notice. Upon consummation of the
Offering, a legend will be placed on a number of Option Shares equal to the
number of shares of Class A Common Stock underlying Warrants granted in the
Offering which will provide that such shares are subject to the terms of the
Shalam Option. Such legend on the Option Shares will be removed with respect to
the number of Option Shares equal to the number of shares of Class A Common
Stock underlying the Warrants which have been exercised or with respect to which
the independent members of the Board of Directors of the Company have determined
not to exercise the Shalam Option.
26
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class A Common Stock is traded on the American Stock Exchange
(ticker symbol: VOX). The following table sets forth the high and low sale
prices of the Class A Common Stock, as reported by the American Stock Exchange,
for the periods indicated:
FISCAL PERIOD HIGH LOW
------------------------------------------------- ------ -------
1992
First Quarter.................................. $2 3/8 $ 1 3/8
Second Quarter................................. 4 1 3/4
Third Quarter.................................. 4 1/8 2 5/8
Fourth Quarter................................. 6 1/8 3 1/4
1993
First Quarter.................................. 9 5/8 5 5/8
Second Quarter................................. 12 5/8 7 1/8
Third Quarter.................................. 14 5/8 10 1/4
Fourth Quarter................................. 18 3/8 12
1994
First Quarter.................................. 18 3/8 14 1/4
Second Quarter................................. 16 11 7/8
Third Quarter.................................. 12 3/4 6 1/4
Fourth Quarter................................. 9 3/8 6 3/4
1995
First Quarter.................................. 8 1/2 6 3/8
Second Quarter (through April 11, 1995)........ 7 6 1/4
On April 11, 1995, the closing sale price of the Class A Common Stock, as
reported by the American Stock Exchange, was $6 5/8 per share. As of March 27,
1995, the Company had approximately 2,025 holders of record of its Class A
Common Stock and five holders of record of its Class B Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to follow a policy of retaining earnings, if any, to finance
the growth of its business and does not anticipate paying any cash dividends in
the foreseeable future. The Amended and Restated Credit Agreement contains
covenants prohibiting the payment of dividends. See "Risk Factors--Restrictive
Covenants."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the sale of Warrants.
The proceeds received by the Company upon exercise of the Warrants will be used
toward the purchase of shares of Class A Common Stock upon exercise the Shalam
Option or, if the Board of Directors determines it is in the best interest of
the Company not to exercise the Shalam Option, as and if received by the
Company, to purchase inventory and for other working capital or general
corporate needs. See "The Offering-- Shalam Option."
27
CAPITALIZATION
The following table sets forth the current maturities of long-term debt,
short-term debt and capitalization of the Company as of February 28, 1995. The
information presented below should be read in conjunction with the consolidated
financial statements thereto appearing elsewhere in this Offering Memorandum.
PRO FORMA FOR
ACTUAL WARRANT OFFERING
----------------- -----------------
FEBRUARY 28, 1995 FEBRUARY 28, 1995
----------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
Short-term debt and current maturities of long-term debt:
Bank obligations.......................................... $27,834 $27,834
Convertible debentures due 1996........................... 5,462 5,462
Other..................................................... 159 159
-------- --------
Total................................................. 33,455 33,455
-------- --------
Long-term debt, less current maturities:
Convertible subordinated debentures due 2001.............. 65,000 65,000
Other..................................................... 5,327 5,327
-------- --------
Total................................................. 70,327 70,327
-------- --------
Stockholders' equity:
Preferred stock, 50,000 shares authorized, issued and
outstanding................................................. 2,500 2,500
Common stock:
Class A common stock; 30,000,000 shares authorized,
6,777,788 issued and outstanding (1)........................ 68 68
Class B common stock; 10,000,000 shares authorized,
2,260,954 issued and outstanding............................ 22 22
Paid-in capital (2)..................................... 39,814 42,816
Retained earnings (2)................................... 50,790 47,788
Cumulative equity adjustments from foreign currency
translation................................................. (534) (534)
-------- --------
Total capitalization.................................. $92,660 $92,660
-------- --------
-------- --------
- ------------
(1) Excludes up to:
(i) 970,500 shares of Class A Common Stock issuable upon the exercise of
options granted or eligible to be granted pursuant to the Company's
1994 and 1993 Stock Option Plans, 1987 Restricted Stock Plan, as
amended, and 1987 Stock Option Plan, in connection with which options
and restricted stock grants for 375,800 shares were outstanding
(125,000 of which were presently exercisable and vested) and 594,700
shares were available to be granted as of February 28, 1995.
(ii) 50,000 shares of Class A Common Stock issuable upon exercise of stock
warrants granted in connection with the acquisition of a 100% interest
in a joint venture, of which no shares have been issued as of the date
of this Offering Memorandum. See "Certain Transactions--H & H Eastern
Distributors, Inc."
(iii) 1,023,028 shares of Class A Common Stock issuable upon conversion of
the Series AA Convertible Debentures and Series B Convertible
Debentures, of which no shares have been issued as of the date of this
Offering Memorandum.
(iv) 3,672,316 shares of Class A Common Stock issuable upon conversion of
the Debentures, of which no shares have been issued as of the date of
this Offering Memorandum.
(v) Includes 100,000 shares of Class A Common Stock issuable upon exercise
of presently exercisable stock warrants granted pursuant to a
consulting agreement, of which no shares have been issued as of the
date of this Offering Memorandum. See "Certain Transactions--
Consulting Agreement."
(2) The pro forma as adjusted calculations reflect the issuance of 1,365,000
Warrants as if such transaction had occurred on February 28, 1995.
Accordingly, retained earnings and paid in capital have been adjusted for
the estimated effect of the issuance of the Warrants.
28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the fiscal years ended November
30, 1992, 1993 and 1994 have been derived from the audited financial statements
of the Company for the periods then ended appearing elsewhere in this Offering
Memorandum. The selected consolidated financial data for the fiscal years ended
November 30, 1990 and 1991 have been derived from the audited financial
statements for the periods then ended previously issued by the Company. The data
for the first quarters ended February 28, 1994 and February 28, 1995 is
unaudited. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, and related Notes thereto
and other financial information including elsewhere in this Offering Memorandum.
Certain reclassifications have been made to the data for periods prior to fiscal
1994 in order to conform to the fiscal 1994 presentation.
THREE MONTHS
ENDED
FEBRUARY 28,
FISCAL YEARS ENDED NOVEMBER 30, (UNAUDITED)
--------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales......................... $308,147 $327,966 $343,905 $389,038 $486,448 $115,337 $131,391
Cost of sales..................... 256,228 279,734 284,904 314,118 401,537 93,159 108,805
-------- -------- -------- -------- -------- -------- --------
Gross profit.................... 51,919 48,232 59,001 74,920 84,911 22,178 22,586
Operating expenses:
Selling, general and
administrative,warehousing,
assembly and repair............ 54,570 55,413 50,248 59,766 74,425 16,950 20,723
Restructuring and other
charges............................ -- 5,048(1) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
54,570 60,461 50,248 59,766 74,425 16,950 20,723
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... (2,651) (12,229) 8,753 15,154 10,486 5,228 1,863
Other income (expenses):
Interest and other bank charges... (5,580) (7,406) (6,686) (6,504) (6,535) (1,523) (2,050)
Equity in income of equity
investments........................ 44 461 1,177 4,948 3,748 685 1,187
Management fees and related
income............................. 3,435 4,684 4,933 1,903 1,543 210 396
Gain on sale of equity
investment......................... -- -- -- -- 27,783 27,783 --
Gain on public offering of equity
investment......................... -- -- -- -- 10,565 10,565 --
Other, net........................ (40) (608) 137 (259) (1,056) (308) (313)
-------- -------- -------- -------- -------- -------- --------
(2,141) (2,869) (439) 88 36,048 37,412 (780)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before provision for
(recovery of) income taxes,
extraordinary item, and
cumulative effect of a change in
an accounting principle......... (4,792) (15,098) 8,314 15,242 46,534 42,640 1,083
Provision for (recovery of) income
taxes.............................. (1,600) (440) 2,495 5,191 20,328 18,477 547
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of a
change in an accounting
principle.......................... (3,192) (14,658) 5,819 10,051 26,206 24,163 536
Extraordinary items-tax benefits
from utilization of net
operating loss carryforwards.... -- -- 1,851 2,173 -- -- --
Cumulative effect of change in
accounting for income taxes..... -- -- -- -- (178) (178) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................. $ (3,192) $(14,658) $ 7,670 $ 12,224 $ 26,028 $ 23,985 $ 536
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER SHARE OF COMMON STOCK (2):
Net income (loss) per common share
(primary):
Income (loss) before
extraordinary item................. $ (0.35) $ (1.63) $ 0.64 $ 1.11 $ 2.88 $ 2.63 $ 0.06
Extraordinary item.............. -- -- $ 0.21 $ 0.24 -- -- --
Cumulative effect of change in
accounting for income taxes.... -- -- -- -- $ (0.02) $ (0.02) --
Net income (loss)............... $ (0.35) $ (1.63) $ 0.85 $ 1.35 $ 2.86 $ 2.61 $ 0.06
Net income (loss) per common share
(fully diluted):
Income before extraordinary
item............................... -- -- -- $ 1.03 $ 2.21 $ 2.38 $ 0.06
Extraordinary item.............. -- -- -- $ 0.22 -- --
Cumulative effect of change in
accounting for income taxes.... -- -- -- -- $ (0.01) $ (0.02) --
Net income (loss)............... -- -- -- $ 1.25 $ 2.20 $ 2.36 $ 0.06
FEB 28,
NOVEMBER 30, (UNAUDITED)
--------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 4,747 $ 5,653 $ 2,686 $ 1,372 $ 5,495 $ 1,441 $ 3,547
Total current assets............... 131,551 124,610 124,014 153,377 191,479 153,604 196,430
Total assets....................... 142,834 137,082 145,917 169,671 239,098 179,652 245,098
Total current liabilities.......... 52,219 30,391 37,061 90,226 36,228 79,104 75,832
Long term debt..................... 29,075 59,912 55,335 13,610 75,653 5,735 70,327
Other liabilities and minority
interests.......................... 78 83 64 42 35,183 4,907 6,279
Stockholders' equity............... 61,462 46,696 53,457 65,793 92,034 89,906 92,660
- ------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations Corporate Restructuring."
(2) See Note 1(g) of Notes to Consolidated Financial Statements.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's operations are conducted in a single business segment
encompassing three principal product lines: cellular, automotive sound
equipment, and automotive security and accessory equipment.
The Company's wholesale cellular operations generate revenue from the sale
of cellular telephones and accessories. The Company's retail outlets typically
generate revenue from three sources: (i) the sale of cellular telephones and
related products, (ii) activation commissions paid to the Company by cellular
telephone carriers when a customer initially subscribes for cellular service and
(iii) monthly residual fees. The price at which the Company's retail outlets
sell cellular telephones is often affected by the amount of the activation
commission the Company will receive in connection with such sale. The amount of
the activation commission paid by a cellular telephone carrier is based upon
various service plans and promotional marketing programs offered by the
particular cellular telephone carrier. The monthly residual payment is based
upon a percentage of the customer's usage and is calculated based on the amount
of the cellular phone billings generated by the base of customers activated by
the Company on a particular cellular carrier's system.
The Company's automotive sound product line includes stereo cassette radios,
compact disc players and changers, speakers and amplifiers. The automotive
security and accessory line consists of automotive security products, such as
alarm systems, and power accessories, including cruise controls and power
doorlocks.
Historically, the Company has been dependent on Japanese suppliers,
particularly Toshiba, for its cellular products. In 1994 and 1995, the United
States government announced proposed trade sanctions on cellular products
imported from foreign countries, particularly Japan and China. Although the
United States government has not implemented such proposed trade sanctions, as
the Company sources a majority of its cellular products from Japan and China, if
such trade sanctions (or trade sanctions on other of the Company's products)
were to be imposed, there is no assurance that the Company will be able to
obtain adequate alternatives to its Japanese supply sources. The Company is
considering sourcing products from several countries. Such purchases would be
subject to the risks of purchasing products from foreign suppliers. See "Risk
Factors--United States Trade Sanctions Could Limit the Company's Sources of
Supply," "--No Assurance of Alternative Supply Sources", "--Dependence on
Foreign Suppliers" and "--Dependence on Toshiba."
Certain reclassifications have been made to the data for periods prior to
fiscal 1994 in order to conform to fiscal 1994 presentation. The net sales and
percentage of net sales by product line for the fiscal years ended November 30,
1992, 1993 and 1994 are reflected in the following table:
YEARS ENDED NOVEMBER 30,
--------------------------------------------------------
1992 1993 1994
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------
Cellular Product--Wholesale............. $165,479 48% $189,636 49% $237,566 49%
Cellular Product--Retail................ 8,027 2 12,281 3 18,198 3
Activation Commissions.................. 19,209 6 27,504 7 47,788 10
Residual Fees........................... 2,260 1 2,646 1 4,005 1
-------- ---- -------- ---- -------- ----
Total Cellular.......................... 194,975 57 232,067 60 307,557 63
Automotive Sound Equipment.............. 89,680 26 94,674 24 112,512 23
Automotive Security and Accessory
Equipment............................... 53,057 15 57,025 15 64,040 13
Other................................... 6,193 2 5,272 1 2,339 1
-------- ---- -------- ---- -------- ----
Total........................... $343,905 100% $389,038 100% $486,448 100%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
30
The following table sets forth for the periods indicated certain statement
of operations data for the Company expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
-------------------------------------------
THREE MONTHS
ENDED
YEARS ENDED NOVEMBER 30, FEBRUARY28,
------------------------- --------------
1992 1993 1994 1994 1995
----- ----- ----- ----- -----
Net sales:
Net product sales.................................... 93.7% 92.3% 89.4% 86.1% 89.0%
Cellular telephone activation commissions............ 5.6 7.0 9.8 13.2 10.2
Cellular telephone residual fees..................... 0.7 0.7 0.8 0.7 0.8
----- ----- ----- ----- -----
Net sales............................................ 100.0 100.0 100.0 100.0 100.0
Cost of sales........................................ 82.8 80.7 82.5 80.7 82.8
Gross profit......................................... 17.2 19.3 17.5 19.2 17.2
Selling expense...................................... 4.9 6.0 6.6 6.5 6.9
General and administrative expense................... 7.3 7.2 6.8 6.4 7.0
Warehousing, assembly and repair expense............. 2.4 2.2 1.9 1.8 1.9
Operating income..................................... 2.6 3.9 2.2 4.5 1.4
Interest expense..................................... 1.9 1.7 1.3 1.3 1.6
Income of equity investments......................... 0.3 1.3 0.8 0.6 0.9
Management fees...................................... 1.4 0.5 0.3 0.2 0.3
Gain on sale of equity investment.................... -- -- 5.7 24.1 --
Gain on public offering of equity investment......... -- -- 2.2 9.2 --
Other expenses, net.................................. -- 0.1 0.2 0.3 0.2
Income taxes......................................... 0.2 0.8 4.2 16.0 0.4
Net income........................................... 2.2 3.2 5.4 20.8 0.4
CORPORATE RESTRUCTURING
Prior to December 1, 1991, the Company managed its distribution and
marketing by geographic district. For this purpose, the Company divided the
areas in which it did business into one international and ten United States
districts, and maintained a separate staff for each such district. This system
was implemented in the early 1970's, at a time when a significant portion of the
Company's sales involved products, such as automotive sound equipment, which
required installation by the Company's customers. Because such customers
typically did not keep significant quantities of the Company's products on-site
at their installation facilities, it was necessary for the Company to store
products in diverse locations near the customers' facilities in order to supply
products to these customers on a timely basis. In addition, marketing, inventory
storage and distribution were done regionally because the Company lacked the
management information system capability to perform such tasks on a centralized
basis.
Because each region had its own administrative and operations personnel,
this geographic management system gave rise to duplicative overhead costs and,
as the Company grew, an absence of efficient centralized control. In addition,
the sales compensation system then in place gave regional sales personnel an
incentive to focus on sales of higher priced, but lower margin, products.
In the late 1980's, demand for the Company's products began to shift and its
methods of distribution began to change. Automobile manufacturers increased
competition by making higher quality automobile sound systems available to their
dealers, causing the Company to focus more on sales of both customer-installed
and high-end automotive sound products. In addition, sales of cellular
telephones became more significant. As a result of this shift in the Company's
product mix, sales to lower volume customers such as automotive sound equipment
installers decreased while sales to high volume customers such as the BOCs and
mass merchandisers increased. As this shift in demand for the
31
Company's products continued, it became more efficient for the Company to
consolidate its distribution operations, utilizing a smaller number of larger
volume distribution centers. At this time, however, the Company did not have
sufficient management information system capability to effectively manage its
inventory distribution on a centralized basis. Accordingly, the Company
continued to operate under the existing distribution methods while planning for
a shift to a centralized system.
This planning, which commenced in 1988, resulted in the implementation,
beginning in 1990, of a new management information system which permitted the
Company to manage its inventory on a real-time basis. The full activation of
this system on December 1, 1990 permitted the Company to consolidate its
inventory locations from 16 primary distribution points to four, which in turn
resulted in increased inventory turns, reduced financing requirements and
improved customer order fill rates. The improved management information system
also allowed the Company to shift its focus to a product based, rather than a
geographically based, structure by allowing the Company to divisionalize
reporting and separately measure profitability for its cellular, automotive
sound and security, and retail operational areas. See "Business--Management
Information System." The cellular operation focuses primarily on the wholesale
distribution of cellular telephones and accessories. The automotive sound and
security operation focuses on the marketing of automotive sound and security
products to independent distributors, car dealers, retailers, mass merchandisers
and warehouse club customers. The retail operation focuses on the marketing of
cellular telephone and accessory products to the consumer and the activation of
cellular subscribers.
In connection with the implementation of this product division management
program, in 1991, the Company experienced a net loss of approximately
$14,658,000. This loss was primarily attributable to both the restructuring of
the Company's operations and the termination of the Hermes and Park Plus
ventures and included (i) charges of approximately $5,048,000 incurred in
connection with such restructuring and termination, (ii) final operating losses
for Hermes and Park Plus of approximately $2,712,000 and $759,000, respectively
and (iii) the Company's operating loss of approximately $6,139,000, which was
primarily due to lower gross profit margins and increased provisions for bad
debts, inventory write-downs and warranty repair charges. The Park Plus joint
venture never became profitable, principally due to the relatively high unit
cost of the mechanical parking equipment being sold and the general economic and
real estate market downturns that occurred in the late 1980's, which impeded
demand for such products. The Hermes operation was unsuccessful, due primarily
to technical problems in the performance of the lower priced cellular telephones
that it was distributing. The Company discontinued both of these ventures on
November 30, 1991. Since that time, the Company has enhanced it's quality
control and engineering capabilities. See "Business--Products."
By December 1, 1991, the implementation of the product division management
system was complete and the Company had downsized its distribution network and
reduced its personnel head count by 121 persons to reflect the new operational
structure. As of November 30, 1994, the Company had been profitable during each
fiscal quarter since December 1, 1991. See Note 2 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1995 VS. FIRST QUARTER FISCAL 1994
Net sales increased $16.1 million or 13.9% for the three month period ended
February 28, 1995 compared to the same period last year. This increase was
attributable to increases in cellular ($14.8 million or 19.1%), automotive sound
equipment ($1.8 million or 7.9%) and automotive accessories of $1.2 million
(8.9%). There was a decrease in other sales, primarily consumer electronics, of
$1.7 million or 100.0% for the three month period as the Company has
discontinued the sale of facsimile machines.
32
The wholesale business increased 22.2% or $19.7 million which was partially
offset by a $3.6 million decline (13.7%) in the retail business.
The improvement in cellular revenues was a combination of increased unit
sales and residuals, partially offset by a decrease in activation commissions.
Unit sales of cellular telephones increased by 97,000 (49%) from 201,000 for the
three month period ended February 28, 1995 from the respective period in 1994,
primarily in the portable telephone lines, although there was a slowdown in
sales growth during the latter part of the quarter. This increase was partially
offset by decreases in the sales of installed mobile and transportable
telephones. The average revenue per unit decreased approximately 13% for the
three month period compared to last year. This decrease in unit selling price is
primarily attributable to increased market competition in hand-held portable
cellular telephones and the introduction of lower priced hand-held portables by
competitors. During the first quarter, one of the Company's major competitors
over-produced product in anticipation of strong sales during the Christmas
season. As a result, this competitor reduced their selling prices in order to
relieve its inventory over-supply situation. This put additional pressure on the
market which further affected the Company's unit selling prices of cellular
telephones. The Company believes this over-supply of cellular telephones in the
U.S. will continue to affect its performance in the second quarter. However, the
Company believes this over-supply will begin to dissipate and the market will
regain its balance during the second half of the fiscal year. As a result of
continuing market competition, unit sales prices and average activation
commissions are anticipated to continue to decline in fiscal 1995.
Cellular revenues for activations decreased by $1.8 million (11.7%) for the
three month period ended February 28, 1995 compared to the same period in 1994.
This decrease was primarily attributable to an 8% decrease in the Company's
average payment received from the carriers for activation commissions compared
to 1994. In addition, there was a 4% decrease in new cellular subscriber
activations. The reduction in activation commission revenue was partially offset
by increased residual revenues on customer phone usage of approximately 40.2%.
Sales of automotive sound equipment for the quarter ended February 28, 1995
increased to $24.5 million from $22.7 million for the same period in 1994 or
7.9%. The increase was primarily in the Prestige, Heavy Duty Sound, Private
Label and non-Audiovox categories. Automotive accessories sales increased $1.2
million (8.9%) for the three month period ended February 28, 1995 compared to
1994, principally due to increases in the Prestige and Protector product lines,
partially offset by decreases in AA security products. The Company believes
there will not be any growth in consumer electronics sales in 1995 as the
Company has discontinued its facsimile machine product line.
Gross margins for the quarter ended February 28, 1995 decreased to 17.2%
from 19.2% for the same period in 1994. This decline in margins is principally
due to a decrease in the cellular product line, partially offset by increases in
automotive sound and accessories. The gross margins in the wholesale business
decreased from 14.6% to 13.6%, principally in the cellular wholesale business.
The retail gross margins also declined slightly compared to last year. The
decrease in cellular margins is a result of the decline in the selling price of
portable telephones due to increased competition and introduction of lower
priced products. The decrease in retail gross margins was primarily due to the
aforementioned loss of activation commissions partially offset by residual
revenues of customer usage. During the first quarter of 1995, in an effort to
maintain market share, the Company reduced the selling prices of available
models to meet the competition. Cellular margins were further affected by
additional promotions by the Quintex retail group to increase sales.
Automotive sound margins increased from 20.8% for the first quarter of 1994
to 22.0% in 1995. The AV product line experienced a decrease in margins which
was offset by an increase in Heavy Duty Sound. Automotive accessory margins
increased to 28.4% from 27.9% for the three month period, primarily in the
Prestige and Hardgoods product lines, partially offset by a decrease in margins
in AA security products. The Company operates in a highly-competitive
environment and believes that such
33
competition will intensify in the future. Increased price competition relating
to products and services provided to the Company's retail customers on behalf of
cellular carriers may result in downward pressure on the Company's gross profit
margins. See "Risk Factors--Competition."
Total operating expenses increased by approximately $3.8 million or 22.3%
for the three month period ended February 28, 1995 compared to the respective
period in 1994. Of this increase, $2.1 million (55%) was experienced in the
wholesale business and $1.7 million (45%) was in the retail business.
Warehousing, manufacturing, and repair expenses increased by $402,000 or 19.4%
($289,000 in wholesale, $113,000 in retail) for the three month period ended
February 28, 1995, due to increases in field warehousing costs, principally due
to increased inventory levels and sales volume and payroll taxes and benefits,
partially offset by reductions in warehouse production expenses. Selling
expenses increased by $1.6 million or 21.0% ($173,000 in wholesale, $1.4 million
in retail) for the three month period ended February 28, 1995 over the prior
year comparable period due to increases in advertising, commissions paid to
outside sales representatives, salesmen's salaries, and payroll taxes and
benefits. General and administrative expenses increased by $1.8 million or 24.3%
($1.6 million in wholesale, $149,000 in retail) for the three month period ended
February 28, 1995 over respective period in 1994, resulting from increases in
occupancy costs primarily associated with the retail expansion, professional
fees and provision for bad debt. The Company has increased its provision for bad
debt based upon its evaluation of its accounts receivable considering current
and potential market conditions.
Net interest expense and bank charges increased by $527,000 or 34.6% for the
three month period ended February 28, 1995, compared to the respective period of
1994 as a result of an increase in interest costs from increased borrowing.
Management fees and related income and equity in income from joint venture
investments decreased by approximately $9.9 million for the three-month period
ended February 28, 1995, as compared to the same period of 1994, principally due
to 1994's increase in the carrying value of the investment in CellStar after
their public offering. See "Certain Transactions--CellStar."
For the three months ended February 28, 1995 and 1994, the Company recorded
an income tax provision of $547,000 as compared to a provision of $18.5 million,
respectively. The first quarter of 1994 was higher due to the aforementioned
CellStar transaction and higher operating profits.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased by approximately $97.4 million, or 25.0% for fiscal
1994, compared to fiscal 1993. This result was primarily attributable to
increases in net sales from cellular telephone products of approximately $75.5
million, or 32.5%, automotive sound equipment of approximately $17.8 million, or
18.8%, and automotive security and accessory equipment of approximately $7.0
million, or 12.3%. These increases were partially offset by a decline in net
sales attributable to facsimile machines of approximately $2.9 million, or
55.6%.
The improvement in net sales of cellular telephone products was primarily
attributable to a combination of increased unit sales and activation
commissions. Net sales of cellular products increased by approximately 325,450
units, or 65.0%, compared to fiscal 1993, primarily resulting from an increase
in sales of hand-held portable cellular telephones and transportable cellular
telephones, partially offset by a decline in sales of installed mobile cellular
telephones. The average unit selling price declined approximately 18.2% vs. 1993
as production efficiencies and market competition continues to reduce unit
selling prices. The Company believes that the shift from installed mobile
cellular telephones to hand-held and transportable cellular telephones is
reflective of a desire by consumers for increased flexibility in their use of
cellular telephones. Toward that end, the Company markets an accessory package
that permits its MinivoxTM and Minivox Lite(R) hand-held cellular telephones to
be used in an automobile on a hands-free basis and to draw power from the
automobile's electrical system like an installed mobile cellular telephone.
34
The number of activation commissions increased 84.2% over fiscal 1993.
Activation commissions increased by approximately $20.3 million, or 73.8%, for
fiscal 1994, compared to fiscal 1993. This growth was primarily attributable to
the increase in new cellular subscriber activations, partially due to the net
addition of 30 retail outlets operated by the Company, the acquisition of H&H
and one new retail outlet operated by licensees of the Company during the
twelve-month period ended November 30, 1994. This increase in commission revenue
was partially offset by a 5.7% decrease in average activation commissions paid
to the Company. Residual revenues on customer usage increased by approximately
$1.4 million, or 51.4%, for fiscal 1994, compared to fiscal 1993, due primarily
to the addition of new subscribers to the Company's subscriber base.
Net sales of automotive sound equipment increased by approximately $17.8
million, or 18.8%, for fiscal 1994, compared to fiscal 1993. This increase was
attributable primarily to an increase in sales of high-end sound products,
products sold to mass merchandise chains and new car dealers, and products used
in the truck and agricultural vehicle markets, which was partially offset by
decreases in auto sound sales to private label customers and several OEM
accounts. Net sales of automotive security and accessory products increased
approximately $7.0 million, or 12.3%, for fiscal 1994, compared to fiscal 1993,
principally due to increases in sales of vehicle security products. This
increase was partially offset by a reduction in net sales by the Company of
cruise controls and recreational vehicle equipment and accessories.
Gross margins decreased to 17.5% in fiscal 1994 from 19.3% for fiscal 1993.
This decrease was primarily due to the shift in the Company's product mix to a
greater percentage of low-cost, high-volume portable cellular telephones.
Additionally, cellular gross margins were adversely affected by price
competition with Motorola and Nokia which developed during the latter part of
the second quarter of 1994 and intensified during the remainder of the year.
Cellular gross margins were further affected by costs incurred in connection
with the return to the vendor of product that did not perform satisfactorily.
See "Risk Factors--Competition." Retail gross margins declined from 37.2% to
35.5% as a result of reduced average activation commissions during fiscal 1994.
This was partially offset by an increase in residual payments. Automotive sound
equipment margins decreased across all product lines and automotive security and
accessory product margins showed a moderate increase for fiscal 1994 compared to
fiscal 1993. The Company operates in a highly-competitive environment and
believes that such competition will intensify in the future. Increased price
competition relating to products and services provided to the Company's retail
customers on behalf of cellular carriers, may result in downward pressure on the
Company's gross margins.
Total operating expenses increased by approximately $14.7 million, or 24.5%,
for fiscal 1994, compared to fiscal 1993. Of the $14.7 million increase in total
operating expenses, $10.8 million (73.5%) was from retail operations. This
increase was due to the expansion of the retail division and the acquisition of
the remaining 50% interest in H&H. Total operating expenses as a percentage of
sales remained essentially unchanged at 15.3% for fiscal 1994 compared to fiscal
1993.
Selling expenses increased by approximately $8.7 million, or 37.7%, for
fiscal 1994 compared to fiscal 1993, primarily due to increases in marketing
support costs (which include expenditures for sales literature, promotion of
products in key market areas, and divisional marketing expenses), salespersons'
compensation and commissions paid to outside sales representatives primarily due
to increases in commissionable sales. The Company has adopted a strategy for the
wholesale business of increasing marketing support expenditures in order to
accelerate sales growth. The retail division accounted for $5.8 million (66.0%)
of the increase over fiscal 1993. Selling expense as a percentage of net sales
increased from 6.0% for fiscal 1993 to 6.6% for fiscal 1994.
General and administrative expenses increased by approximately $5.0 million,
or 17.9%, for fiscal 1994 compared to fiscal 1993, largely as the result of
increases in the number of personnel required for the opening and operation of
additional retail outlets, partially offset by a decrease in the provision for
35
bad debt expense, which was primarily attributable to increased collection
efforts and an improvement in the credit quality of the Company's customer base.
Employee benefit costs also increased, reflecting the continuing rise in health
benefit costs. Other increases in general and administrative expenses occurred
in travel, occupancy and insurance expenses. These increases were partially
offset by decreases in professional fees and costs associated with the Company's
overseas buying offices. The retail division accounted for $4.4 million (88.4%)
of the increase over fiscal 1993.
Warehousing, assembly and repair expenses increased by approximately
$907,000, or 10.7%, for fiscal 1994 compared to fiscal 1993, largely due to
increases in costs attributable to direct labor, principally due to the retail
and cellular divisions. The retail division accounted for $628,000 (69.2%) of
the increase over fiscal 1993.
Management fees and related income and equity in income (loss) of equity
investments for 1994 (See "Business-- Equity Investments.") increased by
approximately $9.0 million (131%) over fiscal 1993 as outlined in the following
table:
1993 1994
---------------------------- ------------------------------
EQUITY EQUITY
MANAGEMENT INCOME MANAGEMENT INCOME
FEES (LOSS) TOTAL FEES (LOSS) TOTAL
---------- ------ ------ ---------- ------- -------
CellStar................................ $1,220 $3,927 $5,147 $-- $13,958 $13,958
ASM..................................... -- 841 841 -- 932 932
H & H................................... 70 (6) 64 -- -- --
Pacific................................. 613 186 799 435 242 677
Protector............................... -- -- -- 1,108 -- 1,108
TALK.................................... -- -- -- -- (819) (819)
---------- ------ ------ ---------- ------- -------
$1,903 $4,948 $6,851 $1,543 $14,313 $15,856
---------- ------ ------ ---------- ------- -------
---------- ------ ------ ---------- ------- -------
The increase in CellStar was due to the increase in carrying value of the
Company's remaining investment in CellStar, partially offset by the suspension
of management fees. The increase in ASM was due to an increase in sales and
profitability by the venture. The decrease in H&H was due to this entity now
being a wholly-owned subsidiary of the Company and, therefore, being included in
the consolidated reporting of the Company for 1994. The decrease in Audiovox
Pacific was due to an overall decline in gross profits as the market in
Australia became more competitive.
Previously, Protector has been unprofitable and the investment on the
Company's books was written off prior to 1987. The Company continued to support
Protector through various marketing programs, but was unable to be reimbursed by
the Company for these services through a management fee. Protector had funded
its chemical treatment product warranty programs through insurance policies
(cash collateralized) for each of the warranty periods. During 1994, the
warranty obligations for certain warranty periods had been fulfilled and excess
funds became available. Protector approved a partial payment to the Company for
its prior support, which was recorded by the Company in November 1994.
TALK Corporation commenced operations in October 1994. From October 1994
through November 1994, all activity recorded by TALK Corporation was related to
start-up operations. The Company believes that, as a new operation, there will
be additional start-up costs for TALK Corporation during 1995.
Other expenses increased by approximately $797,000 for fiscal 1994 compared
to fiscal 1993, primarily due to an increase in debt amortization costs and a
reduction in interest income.
Net interest and bank charges increased by approximately $31,000, or 0.5%,
for fiscal 1994, compared to fiscal 1993. Even though interest rates have
increased, the Company's interest expense was favorably impacted by the newly
issued $65 million, 6 1/4% debenture.
36
For fiscal 1994, the Company's provision for income tax was approximately
$20.3 million, compared to a provision of approximately $5.2 million for fiscal
1993. The increase in the effective tax rate was primarily due to the
undistributed earnings from equity investments. See Note 10 of Notes to
Consolidated Financial Statements.
FISCAL 1993 COMPARED TO FISCAL 1992
Net sales increased by approximately $45.1 million, or 13.1% for fiscal
1993, compared to fiscal 1992. This result was primarily attributable to
increases in net sales from cellular telephones of approximately $37.1 million,
or 19.0%, automotive sound equipment of approximately $5.0 million, or 5.6%, and
automotive security and accessory equipment of approximately $4.0 million, or
7.5%. These increases were partially offset by a decline in net sales
attributable to facsimile machines of approximately $921,000, or 14.9%.
The improvement in net sales of cellular telephone products was primarily
attributable to a combination of increased unit sales and activation
commissions. Net sales of cellular products increased by approximately 102,700
units, or 21.5%, compared to fiscal 1992, primarily resulting from the
introduction of the Minivox Lite(R) series of hand-held portable cellular
telephones and increased sales of transportable "bag" cellular telephones,
partially offset by a decline in sales of installed mobile cellular telephones.
The average unit selling price was relatively consistent, as the continued shift
toward sales of higher-priced hand-held portable cellular telephone products
substantially offset a continued decline in cellular telephone prices throughout
the period. The Company believes that the shift from installed mobile cellular
telephones to hand-held and transportable cellular telephones is reflective of a
desire by consumers for increased flexibility in their use of cellular
telephones. Toward that end, the Company markets an accessory package that
permits its Minivox and Minivox Lite(R) hand-held cellular telephones to be used
in an automobile on a hands-free basis and to draw power from the automobile's
electrical system like an installed mobile cellular telephone. Unit sales in the
fourth quarter reflect a slower rate of growth as the introduction of the new
Minivox MVX 525, slated for introduction in September, 1993, was delayed until
November, 1993.
Activation commissions and residual fees increased by approximately $8.7
million, or 40.4%, for fiscal 1993, compared to fiscal 1992. This growth was
primarily attributable to the increase in new cellular subscriber activations,
partially due to the addition of 26 new retail outlets operated by the Company
and 19 new retail outlets operated by licensees of the Company during the
twelve-month period ended November 30, 1993. Residual revenues on customer usage
increased by approximately $386,000, or 17.1%, for fiscal 1993, compared to
fiscal 1992, due primarily to the addition of new subscribers to the Company's
subscriber base.
Net sales of automotive sound equipment increased by approximately $5.0
million, or 5.6%, for fiscal 1993, compared to fiscal 1992. This increase was
attributable primarily to an increase in sales of high-end sound products and
products used in the truck and agricultural vehicle markets, which was partially
offset by decreases in auto sound sales to new car dealers and the
discontinuance of two of the Company's automotive sound product lines. Net sales
of automotive security and accessory products increased approximately $4.0
million, or 7.5%, for fiscal 1993, compared to fiscal 1992, principally due to
increases in sales of vehicle security products. This increase was partially
offset by a reduction in net sales by the Company of video cassette players and
television and related accessories which occurred in connection with the
establishment by the Company and Automotive Sound & Accessories Company in
January 1992 of a joint venture to sell these products to the recreational
vehicle, van and marine markets. Net sales attributable to sales by the
Company's joint ventures are not reflected in net sales but rather, the
Company's pro rata share of equity in a joint venture's income is included in
equity in income of equity investments, which is discussed below. Accordingly,
upon formation of such joint venture, the Company no longer reported sales of
video cassette players and related accessories.
37
Gross margins increased to 19.3% in fiscal 1993 from 17.2% for fiscal 1992.
This increase was primarily due to the shift in the Company's product mix to a
greater percentage of portable cellular telephones (primarily the Minivox
Lite(R) series) which typically carry higher margins, higher activation
commissions and increased income from residual payments. Cellular margin
increases were partially offset by the delayed introduction of the Company's new
Minivox MVX 525 which was introduced in November 1993, rather than September
1993, as planned. Imposition of the trade sanctions first threatened in fiscal
1993 would have a material adverse effect on the Company's cellular product
margins. See "Risk Factors--Threatened United States Trade Sanctions Could Limit
the Company's Sources of Supply," "--No Assurance of Alternative Supply
Sources," "--Risks of Currency Fluctuations" and Dependence of Foreign
Suppliers." Automotive sound equipment margins were relatively consistent and
automotive security and accessory product margins showed a moderate increase for
fiscal 1993 compared to fiscal 1992. The Company operates in a
highly-competitive environment and believes that such competition will intensify
in the future. Increased price competition relating to products and services
provided to the Company's retail customers on behalf of cellular carriers, may
result in downward pressure on the Company's gross margins. See "Risk
Factors--Competition."
Total operating expenses increased by approximately $9.5 million, or 18.9%,
for fiscal 1993, compared to fiscal 1992. Total operating expenses as a
percentage of sales increased from 14.6% for fiscal 1992 to 15.4% for fiscal
1993. These increases were principally attributable to increased selling
expenses.
Selling expenses increased by approximately $6.5 million, or 38.9%, for
fiscal 1993 compared to fiscal 1992, primarily due to increases in marketing
support costs (which include expenditures for sales literature and promotion of
products in key market areas), salespersons' compensation and commissions paid
to outside sales representatives primarily due to increases in commissionable
sales. After the Company's return to profitability in fiscal 1992, it adopted a
strategy of increasing marketing support expenditures in order to attempt to
accelerate sales growth. This strategy was implemented in fiscal 1993 and,
consequently, selling expense as a percentage of net sales increased from 4.9%
for fiscal 1992 to 6.0% for fiscal 1993.
General and administrative expenses increased by approximately $2.9 million,
or 11.5%, for fiscal 1993 compared to fiscal 1992, largely as the result of
increases in the number of personnel required for the opening and operation of
additional retail outlets, partially offset by a decrease in the provision for
bad debt expense, which was primarily attributable to increased collection
efforts and an improvement in the credit quality of the Company's customer base.
Employee benefit costs also increased, reflecting the continuing rise in health
benefit costs. In addition, professional fees and amortization of such fees
increased, due to the retention of consultants and attorneys in connection with
an amendment to the Company's bank credit facility. Since a majority of the
Company's general and administrative expenses are fixed and such expenses grew,
in the aggregate, at a rate slower than the growth in net sales, such expenses
declined as a percentage of net sales from 7.3% for fiscal 1992 to 7.2% for
fiscal 1993.
Warehousing, assembly and repair expenses increased by approximately
$132,000, or 1.6%, for fiscal 1993 compared to fiscal 1992, largely due to
increases in costs attributable to increased use of public warehousing as a
result of increases in sales volume. Warehousemen receive an "in/out charge"
when goods are received at the warehouse, plus a monthly charge based upon space
occupied during the month. Because these expenses grew at a rate slower than net
sales, such expenses declined as a percentage of net sales from 2.4% for fiscal
1992 to 2.2% for fiscal 1993.
Management fees and related income and equity in income of equity
investments increased by approximately $741,000, or 12.1%, for fiscal 1993
compared to fiscal 1992, primarily as a result of increased earnings in the
Company's equity investments, partially offset by a reduction in management
fees, which the Company stopped accruing from CellStar in July 1993 in
contemplation of the CellStar Offering. See "Risk Factors--Elimination of
Management Fees From and Reduction in Equity in
38
CellStar." Other expenses increased by approximately $372,000, or 51.4%, for
fiscal 1993 compared to fiscal 1992, primarily due to amortization of the costs
associated with the restructuring of the Company's indebtedness completed in May
1992.
Net interest and bank charges decreased by approximately $182,000, or 2.7%,
for fiscal 1993, compared to fiscal 1992. This decrease was primarily
attributable to an increase in interest income and a decrease of approximately
$6,800,000 in average outstanding debt.
For fiscal 1993, the Company's provision for income tax (before utilization
of a net operating loss carryforward credit of approximately $2,173,000) was
approximately $5,191,000, compared to a provision of approximately $2,500,000
(before utilization of a net operating loss carryforward credit of approximately
$1,900,000) for fiscal 1992. The effective tax rate for fiscal 1993 was 34.1%,
compared to 30.0% for fiscal 1992. As of November 30, 1993, the Company had
utilized all of its net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at February 28, 1995 was approximately $1.9
million below the November 30, 1994 level. Operating activities provided
approximately $1.2 million, primarily due to decreases in accounts receivable
and profitable operations, partially offset by increases in inventory and
accounts payable and accrued expenses. Investing activities used approximately
$886,000 for the purchase of property, plant and equipment. Financing activities
used approximately $2.3 million, primarily from a reduction of bank obligations
under line of credit agreements.
The Company's cash position at November 30, 1994 was $4.1 million above the
November 30, 1993 level. Operating activities used approximately $45.8 million,
primarily due to increases in accounts receivable, inventory, and equity in
income (loss) of equity investments. This was partially offset by increases in
accounts payable and accrued expenses, deferred income taxes payable and
profitable operations. Investing activities provided approximately $28.6
million, primarily from the net proceeds of the partial sale of one of the
Company's equity investments, CellStar, and the collection of notes receivable
from the same equity investment. This source of cash was partially offset by the
purchase of property, plant and equipment, and the purchase of two new equity
investments. Financing activities provided approximately $21.3 million,
primarily from the proceeds from issuance of long-term debt, offset by a
reduction of bank obligations under line of credit agreements and documentary
acceptances. The Company also paid approximately $17.4 million in principal
payments on long-term debt.
During March, 1995, the Company amended its Credit Agreement with its
lenders. The amendments increase the amount available for direct borrowings of
the Company from $40 million to $65 million until June 1, 1995 when direct
borrowings will be stepped down to $20 million. The amendments also provided for
an increased borrowing availability based on inventory from $20 million to $30
million until June 1, 1995 when it will be stepped down to $15 million. The
Company's wholly owned subsidiary, Audiovox Holding Corp., pledged 1,050,000 of
its shares of CellStar to obtain the amendment. Following such amendments, the
Company believes that it has sufficient liquidity to satisfy its anticipated
working capital and capital expenditure needs in the reasonably foreseeable
future.
On March 23, 1995, CellStar filed a registration statement relating to a
public offering for approximately 3.5 to 4 million shares of common stock to be
issued by CellStar and for 1,075,000 shares of its common stock which may be
sold by the Company pursuant to its piggyback registration rights contained in
its registration rights agreement with CellStar. No assurance can be given that
such public offering will be consummated or at what price such public offering
will be consummated and that, if consummated, Audiovox will elect to sell its
shares in such public offering. If the Company elects to sell its shares in such
public offering, the Company will no longer receive equity income from CellStar.
The Company believes that the loss of such income will not have a material
adverse effect on its liquidity since such equity income was a non-cash accrual.
See "Certain Transactions--CellStar."
39
The closing price of the CellStar common stock as traded on NASDAQ on April
11, 1995 was $20 1/4 per share. See Note 12 of Notes to Consolidated Financial
Statements.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
1995 and for the reasonably forseeable future.
IMPACT OF INFLATION
Inflation has not had and is not expected to have a significant impact on
the Company's financial position or operating results. However, as the Company
expands its operations into Latin America and the Pacific Rim, the effects of
inflation in those areas, if any, could have growing significance to the
financial condition and results of operations of the Company.
CURRENCY FLUCTUATIONS
While the prices that the Company pays for the products purchased from its
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.
Recently, the dollar has undergone significant devaluation versus the Japanese
yen falling to a post-World War II low of 80.15 yen per dollar. Accordingly,
price negotiations for the Company's products imported from Japan could be
adversely effected as a result of such devaluation of the dollar versus the
Japanese Yen.
SEASONALITY
The Company typically experiences some seasonality.The Company believes such
seasonality may be attributable to increased demand for its products during the
Christmas season, commencing October, for both wholesale and retail operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement 115,
"Accounting for Certain Investment in Debt and Equity Securities" ("Statement
115"). This Statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in three
categories and accounted for as follows: 1) debt securities that the enterprise
has the positive intent and ability to hold to maturity are classified as
"held-to-maturity securities"; 2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as "trading securities" and reported at fair value, with realized gains and
losses included in earnings; and 3) debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported in a separate component of
shareholders' equity.
The Company believes that the implementation of Statement 115 will not have
a material adverse effect on the Company's financial position.
40
BUSINESS
GENERAL
The Company designs and markets cellular telephones and accessories,
automotive aftermarket sound and security equipment, other aftermarket
automotive accessories, and certain other products. Over the past thirty years,
the Company has grown from a small supplier of car radios to a leading supplier
of cellular telephones to the RBOCs, other cellular carriers and their
respective agents in the United States. The Company has ranked among the top
four in terms of cellular telephone market share for each of the six calendar
quarters ending December 31, 1993. At February 28, 1995, the Company also
operated 91 administrative and retail outlets, licensed its tradename, or
entered into concessionaire arrangements with, 21 additional retail outlets in
selected markets in the United States, and had two mobile vans. These outlets
focus on the sale and servicing of cellular telephones in the United States.
Each of the Company's retail outlets acts as a licensed agent for one of the two
cellular carriers operating in its geographic area. In addition to generating
product revenue from the sale of cellular telephone products, the Company's
retail outlets, as agents for cellular carriers, are typically paid activation
commissions and residual fees from such carriers. Through its international
distribution network, the Company also sells cellular telephones in Canada,
Europe, Latin America, Asia, the Middle East and Australia. In fiscal 1992,
fiscal 1993, fiscal 1994 and the first quarter of fiscal 1995, net sales of
cellular telephone products and related fees and commissions represented 57%,
60%, 63% and 70%, respectively, of the Company's total net sales.
Historically, the Company has been dependent on foreign suppliers,
particularly Japan and China, for a majority of its products. In 1994 and 1995,
the United States government announced proposed trade sanctions on cellular
products imported from foreign countries, particularly Japan and China. Although
the United States government has not implemented such proposed trade sanctions,
as the Company sources a majority of its cellular products from Japan and China,
if such trade sanctions (or trade sanctions on other of the Company's products)
were to be imposed, there is no assurance that the Company would be able to
obtain alternatives to its supply sources. The Company is considering sourcing
products from several countries. Such purchases would be subject to the risks of
purchasing products from foreign suppliers. See "Risk Factors--United States
Trade Sanctions Could Limit the Company's Sources of Supply," "--No Assurance of
Alternative Supply Sources," "--Dependence on Foreign Suppliers," and
"--Dependence on Toshiba."
The Company's automotive aftermarket sound, security and accessory products
include stereo cassette radios, compact disc players and changers, amplifiers
and speakers; key based and remote control security systems; and cruise
controls, door and trunk locks and rear window defoggers. In fiscal 1994, the
Company introduced a satellite based security system to its product line. These
products are marketed through mass merchandise chain stores, specialty
automotive accessory installers, distributors and automobile dealers.
INDUSTRY BACKGROUND
United States Cellular Services
Cellular phone service was developed as a mobile alternative to conventional
landline systems. Since its inception over ten years ago, the industry has grown
rapidly from approximately one million subscribers in the United States in 1987
to more than 25 million subscribers as of year end 1994. In 1994, the number of
cellular subscribers in the United States grew by approximately nine million,
representing a 56% increase in the number of cellular subscribers from the end
of 1993. The FCC issued the first license to provide cellular telephone service
in the United States in 1983. Cellular phone service is now available in
substantially all of the United States making cellular telephone service
available to a substantial majority of the United States population. In recent
years, as retail prices for cellular telephones have declined, sales of cellular
telephones for personal use have grown more rapidly than
41
sales for business use. The United States Department of Commerce estimates that
as of mid-1994, approximately 7.4% of the U.S. population owned a cellular
telephone. According to statistics published by the U.S. Department of Commerce,
the number of worldwide cellular subscribers grew by approximately eight million
in the first six months of 1994 to a total of approximately 41 million at June
30, 1994.
Under applicable Federal Communications Commission ("FCC") regulations, two
cellular service providers are granted licenses to provide cellular services in
each Metropolitan Statistical Area ("MSA") and each Rural Service Area ("RSA").
Initially, the FCC reserved one license for wireless cellular service providers
(the "A Block licensee") and the other license for landline affiliated cellular
service providers (the "B Block licensee"). Currently, an A or B Block license
may be granted to either a wireless or landline affiliated entity so long as no
entity controls more than one cellular system in any service area.
The Company believes that, as retail prices for cellular telephones have
declined in recent years, the sale of cellular telephones for personal use has
grown more rapidly than the sale for business use. In addition, the Company
believes that the United States domestic market expansion is being stimulated by
many cellular service providers upgrading their existing cellular systems from
analog radio frequency to digital radio frequency technology. Digital technology
offers the potential for considerably greater transmission capacity than analog
technology, a distinct advantage to cellular carriers in terms of volume and the
ability to add customers to their systems. New digital cellular telephones
enhance privacy, improve voice quality and portable equipment talk and standby
times and can offer advanced features such as short messaging, all of which
could make cellular telephones more appealing to consumers. As digital
technology is phased into the marketplace, the Company will seek to benefit from
both the sale of digital cellular telephones to replace existing analog cellular
telephones and from the enhanced total market potential digital technology
offers.
Many cellular telephone carriers attempt to stimulate the activation of
subscribers onto their systems through sales techniques which include free
cellular telephone air time, waiver of activation fees and sales of cellular
telephones at substantially reduced prices. In addition, some retailers sell
cellular telephones below cost or at a substantially reduced price in order to
stimulate activations and increase their activation commission and residual fee
income. The Company believes that the price at which retailers sell cellular
telephones is substantially affected by the amount of the activation commission
and anticipated residual fee income such retailer will receive from a cellular
carrier as a result of such sale.
International Cellular Service
According to published statistics, the number of worldwide cellular
subscribers (including United States subscribers) totaled nearly 41,000,000 as
of mid-1994, an increase of approximately 24% from year-end 1993. Approximately
ninety countries now offer cellular service. Unlike major industrialized
countries, in which the demand for cellular telephone service has primarily been
driven by consumer demand for quality communications during automobile and
business travel, the Company believes that in many emerging economies, including
many Latin American and Pacific Rim countries, demand is being driven by the
inadequacy of landline systems and the high cost of building conventional
telephone networks to serve the population in these areas. Consequently, the
Company believes that cellular systems may offer a lower-cost alternative to the
construction of conventional telephone facilities because they do not require
substantial investment in cable and associated facilities. Thus, the Company
believes that telephone users in Latin America, the Pacific Rim and other areas
are likely to increasingly utilize cellular systems, despite the fact that unit
cost and usage rates for cellular telephone systems may be more expensive than
those of conventional landline communication systems.
42
Alternative Technologies
Alternative technologies to cellular, including enhanced specialized mobile
radio ("ESMR") and personal communications service ("PCS"), are presently being
developed. ESMR combines mobile radio, such as that used by taxi drivers, with
low power, frequency reuse digital technology. The FCC has granted permission to
ESMR system operators to construct digital mobile communications systems on
existing frequencies in the United States; however, as of March 31, 1995, the
Company believes that ESMR service was not commercially available in the markets
in which the Company retails its products. PCS is a new form of cellular
communication using handsets and low-powered microcell transmitters in office
buildings and neighborhoods which is anticipated to be less costly to the
consumer than existing cellular telephone service. Eventually, PCS providers may
be able to bypass local phone companies to connect callers directly with homes,
offices and cars. Certain companies are also investigating the use of satellite
based technologies to replace cellular telephone systems. The Company
anticipates that it will market and distribute products compatible with such
technologies, when and if they are made commercially available.
COMPANY STRATEGY
The Company believes that its greatest opportunity for business expansion is
in its cellular product line. Thus, the Company plans to capitalize on the
increased demand for cellular telephone products, on both the wholesale and
retail levels. In addition, the Company intends to continue to respond to
consumer demand for sophisticated sound and security products. In furtherance of
these goals, the Company engages in the following practices:
Promoting Company Brand Awareness
The Company sells its products under several brand names it owns or
licenses, including Audiovox(R), SPS(R), Prestige(R), Pursuit(R), MinivoxTM,
Minivox Lite(R), The Protector(R), American Radio(R) and Quintex(R). The Company
uses several techniques to promote Company brand awareness, including trade and
customer advertising, attendance at trade shows, and use of a wide variety of
sales promotional material including pamphlets and other literature and
point-of-sale displays.
Expand Product Line to Meet Consumer Demand
The Company believes that its broad distribution network and its
relationships with its customers permit it to monitor closely and react quickly
to both changes in consumer demand and developing new technologies. As demand
for cellular telephones for personal use has expanded, the Company has begun to
source cellular telephones which can be sold at lower price points from several
additional manufacturers. In addition to monitoring feedback from its customers
through its distribution network, the Company monitors the progress of new
technology introductions (such as ESMR and PCS) by attending trade shows,
participating in industry conferences and maintaining personal contact with
industry participants. Toward that end, as of March 31, 1995, the Company was
supplying portable cellular telephones for a program operated jointly with one
of the RBOCs, which is designed to test the market response to a proposed PCS
pricing structure. The Company is able to combine the feedback obtained through
these sources with the experience of its product development group to provide
direction to manufacturers in the development of products to meet changing
consumer demands.
Value Added Marketing
The Company employs a value added marketing approach in connection with its
wholesale sales. In this regard, the Company typically participates with its
wholesale customers in joint marketing and promotional programs such as sales
contests and cooperative advertising campaigns. The Company also typically
offers its customers customized sales and product training, inventory management
assistance, telemarketing assistance (including the scripting of telemarketing
presentations) and Company-created
43
advertising materials. In addition, the Company maintains several
Company-operated warranty repair centers to assist its network of authorized
warranty service stations in technical training and parts procurement. The
Company intends to expand the breadth of its product line (for example, by
introducing a line of moderately priced cellular telephone products) in order to
enable its customers to conveniently obtain a broad line of products from only
one supplier.
Limitation of Fixed Plant and Capital Risk
A key component of the Company's operating strategy has been to bring to
market quality products under its own brand names, in response to established
consumer demand, while limiting its investment in fixed plant and, accordingly,
its capital risk exposure. The Company seeks to accomplish this by controlling
the design of its products through its product development group, while having
such products produced by contract manufacturers. This concept enables the
Company to devote a greater portion of its capital resources to design and
marketing activities and inventory purchases, rather than the investments in
factories and associated overhead that would be required if the Company
manufactured its own products.
International Expansion
The Company has formed a majority-owned subsidiary with its local
distributor in Malaysia as a minority owner and is considering forming ventures
with its distributors in Greece and Thailand. By joining with an established
local business with an existing customer base, the Company believes that it can
enter a new market more quickly and with minimal capital expenditures. The
Company also believes that its relationships with North American cellular
carriers may aid the Company's expansion into international markets as such
markets are developed by those carriers.
In August 1994, the Company formed a new joint venture (known as "Talk
Corporation") with Shintom Co., Ltd. ("Shintom") and others for the purpose of
developing, manufacturing and distributing cellular telephone and other consumer
electronic products. In connection with the formation of the joint venture, the
Company was granted certain exclusive distribution rights with respect to
cellular products manufactured by Shintom. Talk Corporation commenced operations
in October 1994.
Retail Expansion
The Company intends to open additional retail outlets in North America, both
in metropolitan areas with perceived retail potential and in areas where it
seeks to increase sales on a wholesale level to cellular carriers. The Company
believes that the ability of its retail outlets to deliver a significant number
of activations to cellular carriers provides the Company with a competitive
advantage in its wholesale marketing of cellular telephones to cellular
carriers. The size of these newly opened retail outlets is expected to vary from
market to market and may include traditional retail stores as well as small
kiosks (generally approximately 100 square feet) in shopping malls and mobile
showroom vehicles. In addition, the Company intends to increase the number of
licensees who use the Company's tradenames and activate cellular subscribers for
the Company's retail outlets. These licensees, who are independent businesses,
often are too small to be agents of the carriers themselves. These arrangements
allow the Company's retail outlets to increase the number of activations they
provide to the carriers.
PRODUCTS
The Company controls the design of its cellular and non-cellular products.
To do so, the Company maintains an engineering staff for product design,
development and testing in both its cellular and non-cellular groups. The
Company's product development activities focus on meeting changing consumer
demand for quality, multi-featured cellular telephone and automotive sound,
security and accessory products. As a result of these activities, the Company
was among the first to introduce cellular telephones with one-touch dialing,
hands free operation and voice-activated dialing as standard
44
features. The Company's engineering staff typically operates jointly with its
suppliers' research and development departments on initial product design and
assists in the formulation of product specifications and the testing of
pre-production prototypes to assure that products from suppliers meet the
Company's strict quality standards. In addition, the engineering staff is
responsible for the establishment of quality control and assurance procedures
and oversees the implementation of such procedures by the Company's suppliers.
The Company maintains separate in-house warranty and service facilities for
both cellular and non-cellular products. The Company's engineering staff is
responsible for the establishment of warranty quality control procedures to
support all warranty programs. In addition, the Company has a network of
authorized service centers that are contracted to repair Company products, as
well as relationships with several outside service and refurbishing specialists
to support the in-house non-cellular warranty and service facilities. Cellular
telephone warranties range from one to three years. Automotive sound and
accessory warranties range from 90 days to vehicle life with the original owner.
Other non-cellular warranties range from 90 days to vehicle life.
CELLULAR
The Company distributes and markets a diverse line of cellular telephone
products through its domestic and international wholesale and retail operations.
These products are marketed under the Audiovox(R), Prestige(R), MinivoxTM and
Minivox Lite(R) labels and include mini hand-held, hand-held, mini
transportable, transportable and mobile cellular telephones and accessories,
such as batteries, battery packs, battery eliminators and chargers and antennae.
If requested by one of its larger wholesale customers, the Company may also sell
such products bearing the customer's private label brand name. The Company's
emphasis is shifting from installed cellular mobile telephones to transportable
and portable models which do not require complex installation. The Company
introduced its first cellular unit in 1984, just as the technology was
introduced in the United States. In 1992, the Company's MinivoxTM hand-held
portable was rated number one in estimated quality based primarily on
performance and convenience by a national consumer reporting publication. Also
in 1992, the Company introduced the Minivox Lite(R) mini hand-held portable
series which utilizes newly developed nickel metal hydride battery technology to
help achieve its 6.2 ounce weight and to help make it the slimmest cellular
phone on the market in 1994. In addition, the Company markets an accessory
package that permits its MinivoxTM and Minivox Lite(R) hand-held cellular
telephones to be used in an automobile on a hands-free basis and to draw power
from the automobile's electrical system, like an installed mobile cellular
telephone. During 1993, the Company brought its first dual-mode digital cellular
phone to market allowing access on both analog and the new digital networks
being operated by North American carriers. The Company is currently sourcing
Global Systems for Mobile Radio ("GSM") and Extended Total Access Communications
Systems ("ETACS") cellular telephones for sale to the European and Asian
markets, respectively. These cellular telephones use technology similar to, but
in a different radio frequency spectrum from, that used in the United States.
The Company's cellular unit sales for the fiscal years ended November 30, 1992,
1993 and 1994 and the fiscal quarter ended February 28, 1995 were approximately
476,000, 579,000, 826,000 and 298,000 respectively.
AUTOMOTIVE SOUND, SECURITY AND ACCESSORIES
Automotive Sound
Automotive sound products are marketed under the Audiovox(R), Prestige(R)
and SPS(R) brands, as well as under private label agreements with original
equipment manufacturers ("OEMs"). These products include stereo cassette radios,
compact disc players and changers, amplifiers, speakers and accessories. In
1993, in response to consumer demand for easy to transport anti-theft automotive
sound products, the Company introduced, for both the Audiovox(R) and Prestige(R)
labels, a new line of removable front panel radios. The Audiovox(R) line is
designed for do-it-yourself consumer installation and is sold principally to
mass merchandisers, warehouse clubs and catalog showrooms. The Company's
45
high performance line, Prestige(R), was introduced in 1992. These products, with
features including removable chassis and removable front panels, infrared
wireless remote controls and high-power amplifiers, are intended for sale by
specialty installers. The SPS(R) line is designed to produce a look consistent
with the interior of new automobiles and is sold exclusively to new car dealers
for installation in new cars, trucks and vans.
Automotive Security and Accessories
Vehicle security products are marketed under the Audiovox(R), Prestige(R)
and Pursuit(R) brands. These products are designed to address the challenges
posed by the high rate of automobile theft. These three brands feature a variety
of systems and are sold through distinct distribution channels. The products
include key based and remote-controlled systems and, beginning in 1994, the
Company began to market a satellite based security system called the "PosseTM."
The PosseTM utilizes satellite paging technology to activate an automobile's
electro-mechanical systems. Via a toll-free telephone number, the customer is
able to use the PosseTM to, among other things, start the vehicle's engine, open
or close windows or locks, or disable the vehicle's starter in the event of
theft.
The Audiovox(R) line consists of auto security systems which are sold
primarily to mass merchandisers, warehouse clubs and catalog showrooms. This
line is designed for do-it-yourself installation and its products range from
two-wire installations to more complicated remote systems. The Prestige(R) line
is sold only to specialty installers. Prestige(R) security products feature a
number of security and convenience features, including remote starting
capability, two-stage shock sensors and multitone sirens. In 1992, Prestige(R)
received a consumer products design award for the outstanding design of its
transmitter. The Pursuit(R) line of new car security systems includes features
similar to those of the Prestige(R) line and is sold exclusively to new car
dealers. Other automotive accessories include an extensive line of cruise
controls, door and trunk locks and rear window defoggers, sold under The
Protector(R) brand name.
DISTRIBUTION AND MARKETING
Cellular and Non-Cellular Wholesale
The Company markets products on a wholesale basis to a variety of customers
through its direct sales force and independent sales representatives. During the
three-month period ended February 28, 1995, the Company sold its products to
approximately 3,300 wholesale accounts, including the RBOCs, other cellular
carriers and their respective agents, mass merchandise chain stores, specialty
installers, distributors and car dealers, OEMs and AAFES.
The Company's five largest wholesale customers (excluding joint ventures),
who, in the aggregate, accounted for 12.4% of the Company's net sales for the
fiscal year ended November 30, 1994, are Cellular Communications, Inc.
("Cellular One"), Bell Atlantic Mobile Systems, Nynex Mobile Communications
Company, and Vanguard Cellular Systems, all of whom are cellular carriers and
K-Mart, a non-cellular mass merchant. None of these customers individually
accounted for more than 3.6% of the Company's wholesale net sales for such
period. In addition, the Company also sells its non-cellular products to mass
merchants such as Walmart Stores, Inc., warehouse clubs including Price/Costco,
Inc., and OEMs such as Chrysler of Canada and Navistar International
Corporation.
The Company uses several techniques to promote its products to wholesale
customers including trade and customer advertising, attendance at trade shows,
and direct personal contact by Company sales representatives. In addition, the
Company typically assists cellular carriers in the conduct of their marketing
campaigns (including the scripting of telemarketing presentations), conducts
cooperative advertising campaigns, develops and prints custom sales literature
and conducts in-house training programs for cellular carriers and their agents.
46
The Company believes that the use of such techniques, along with the
provision of warranty services and other support programs, enhances its strategy
of providing value-added marketing and thus permits the Company to increase
Audiovox(R) brand awareness among wholesale customers while at the same time
promoting sales of the Company's products through to end users.
The Company's wholesale policy is to ship its products within 24 hours of a
requested shipment date from public warehouses in Norfolk, VA and Sparks, NV and
from leased facilities located in Hauppauge, NY, Toronto, Canada and Los
Angeles, CA.
Retail
As of February 28, 1995, the Company operated 91 administrative and retail
outlets, licensed its tradename, or entered into concessionaire arrangements
with, 21 additional retail outlets in selected markets in the United States, and
had two additional mobile vans, through which it markets cellular telephones and
related products to retail customers under the names Audiovox(R), American
Radio(R), Quintex(R) and H & H Eastern Distributors. The Company intends to
gradually phase out the use of such multiple names and rename all of its retail
outlets with one uniform trade name. In addition to Audiovox products, these
outlets sell competitive products such as Motorola, Nokia and Uniden.
The Company's retail outlets typically generate revenue from three sources:
(i) sale of cellular telephones and related products, (ii) activation
commissions paid to the Company by cellular telephone carriers when a customer
initially subscribes for cellular service and (iii) monthly residual fees. The
amount of the activation commissions paid by a cellular telephone carrier is
based upon various service plans and promotional marketing programs offered by
the particular cellular telephone carrier. The monthly residual payment is based
upon a percentage of the customer's usage and is calculated based on the amount
of the cellular phone billings generated by the base of the customers activated
by the Company on a particular cellular carrier's system. Under the Company's 21
licensee or concessionaire arrangements, the recipient receives the majority of
the activation commissions and the Company retains the residual fees. The
Company's agreements with cellular carriers provide for a reduction in or
elimination of activation commissions in certain circumstances if a cellular
subscriber activated by the Company deactivates service within a specified
period. The Company records a reserve to provide for the estimated liability for
return of activation commissions associated with such deactivations. As a
practical matter, the profitability of the Company's retail operations is
dependent on the Company maintaining agency agreements with cellular carriers
under which it receives activation commissions and residual fees.
The Company's objective is to locate its retail outlets in highly visible
and accessible locations, such as on high traffic streets and in or near
destination shopping centers. As an accommodation to a cellular carrier, the
Company has, from time-to-time, opened retail outlets in locations selected by
the cellular carrier. The Company promotes its retail outlets through print and
radio advertising, direct mailings and billboards. Most of the Company's retail
advertising expenditures take advantage of cooperative advertising allowances
generally provided by the cellular carriers.
The Company believes that the performance of its retail stores is enhanced
by its well-trained sales force. The Company requires its sales force to
successfully complete an initial training program, and then periodically
educates and updates them on new and existing products and services so that they
will be better able to serve the Company's retail customers. The sales
representatives receive a base salary supplemented by sales commissions;
however, no commissions are paid on the amount of residual fees generated by
cellular telephones sold by the sales personnel. In addition to in-store
promotions, the sales force attempts to generate repeat business and referral
business through telephone contact with existing and potential customers.
47
The Company's relationships with the cellular carriers are governed by
contracts that, in the aggregate, are material to the continued generation of
revenue and profit for the Company. Pursuant to applicable contracts with
cellular carriers, each of the Company's retail outlets functions as a non-
exclusive agent engaged to solicit and sell cellular telephone service in
certain geographic areas and, while such contract is in effect and for a
specified period thereafter (which typically ranges from three months to one
year) may not act as a representative or agent for any other carrier or reseller
in those areas or solicit cellular or wireless communication network services of
the kind provided by the cellular carrier in the areas where the Company acts as
an agent. The Company's retail operation is free, at any time after the
restricted period, to pursue an agreement with another carrier who services a
particular geographic area. At present, each geographic area is serviced by two
cellular carriers.
As of March 31, 1995, the Company has agency contracts with the following
carriers: Bell Atlantic Mobile Systems, Inc., BellSouth Mobility, Inc., Metro
Mobile CTS of Columbia, Inc. ("Bell Atlantic"), GTE Mobilnet of the Southeast,
Inc., Richmond Cellular Telephone Company, d/b/a Cellular One, New York Cellular
Geographic Service Area, Inc. ("NYNEX"), United States Cellular, Air Touch and
Contel Cellular, Inc. Depending upon the terms of the specific carrier
contracts, which typically range in duration from one year to five years, the
Company's retail operation may receive a one-time activation commission and
periodic residual fees. These carrier contracts provide the carrier with the
right to unilaterally restructure or revise activation commissions and residual
fees payable to the Company and certain carriers have exercised such right from
time-to-time. Depending upon the terms of the specific carrier contract, the
carrier may terminate the agreement, with cause, upon prior notice to the
Company. Typically, the Company's right to be paid residual fees ceases upon
termination of an agency contract.
Equity Investments
The Company has from time-to-time, at both the wholesale and retail levels,
established joint ventures to market its products to a specific market segment
or geographic area. In entering into a joint venture, the Company seeks to join
forces with an established distributor with an existing customer base and
knowledge of the Company's products. The Company seeks to blend its financial
and product resources with these local operations to expand their collective
distribution and marketing capabilities. The Company believes that such joint
ventures provide a more cost effective method of focusing on specialized
markets.
In that regard, the Company has a 50% equity position in three companies:
Audiovox Pacific Pty., Limited ("Pacific") (a wholesale distributor of cellular
products in Australia and New Zealand), Audiovox Specialty Markets Co., L.P.
("ASM") (a U.S. distributor of cellular and automotive sound security and
accessory products to the van and recreational vehicle market) and The Protector
Corporation ("Protector") (formerly a marketer of automotive chemical
aftermarket applications such as rust proofing and undercoating. Protector no
longer operates in the direct sales of chemical aftermarket applications but
Protector still receives fees and commissions for use of its trademarks.). The
purpose of these joint ventures is to distribute cellular and non-cellular
products either to specific markets (e.g., vans and recreational vehicles) or in
specific geographic locations. The Company does not control or participate in
the day-to-day management of these joint ventures. Additionally, CellStar, which
markets and distributes cellular telephones and related products and in which
the Company continues to hold a 20.88% equity interest, was founded as a 50%
owned joint venture. H & H Eastern Distributors, Inc. ("H&H"), in which the
Company recently acquired the 50% equity interest not previously owned by the
Company, was founded as a joint venture in 1989 to market cellular telephones
and related products in the southeastern United States. See "Certain
Transactions--CellStar" and "-- H & H Eastern Distributors" and Notes 2 and 12
of Notes to Consolidated Financial Statements.
The Company also has a 33.33% equity position in Talk Corporation, which was
formed in 1994 as a joint venture with Shintom, Rainbowstar Co., Ltd. and others
for the purpose of developing, manufacturing and distributing cellular telephone
and other consumer electronic products for Japan
48
and other markets. The joint venture will distribute Shintom's cellular products
in Japan, China, South Korea, Indonesia, Vietnam and certain middle eastern
countries. The Company may also distribute these products in these markets, and
has also been granted the exclusive right to distribute cellular products
manufactured by Shintom in the remaining markets of the world.
SUPPLIERS
The Company purchases its cellular and non-cellular products from
manufacturers located in several Pacific Rim countries, including Japan, China,
Korea, Taiwan, Singapore and Europe and in the United States. In selecting its
vendors, the Company considers quality, price, service, market conditions and
reputation. The Company maintains buying offices in Taiwan, Korea, Hong Kong and
China to provide local supervision of supplier performance with regard to, among
other things, price negotiation, delivery and quality control. The majority of
the products sourced through these foreign buying offices are non-cellular.
Historically, the Company has been dependent on foreign suppliers,
particularly Japan and China, for a majority of its products. In 1994 and 1995,
the United States government announced proposed trade sanctions on cellular
products imported from foreign countries, particularly Japan and China. Although
the United States government has not implemented such proposed trade sanction as
the Company sources a majority of its cellular products from Japan and China, if
such trade sanctions (or trade sanctions on other of the Company's products)
were to be imposed, there is no assurance that the Company would be able to
obtain alternatives to its supply sources. The Company is considering sourcing
products from several other countries. Such purchases would be subject to the
risks of purchasing products from foreign suppliers. See "Risk Factors--United
States Trade Sanctions Could Limit the Company's Sources of Supply," "--No
Assurance of Alternative Supply Sources," "--Dependence on Foreign Suppliers"
and "Dependence on Toshiba."
Since 1984, the principal supplier of the Company's wholesale cellular
telephones has been Toshiba, accounting for approximately 86.4%, 83.7%, 83.7%
and 78.0% of the total dollar amount of the Company's cellular product purchases
and approximately 48.0%, 46.9%, 45.5% and 56.2% of the total dollar amount of
all product purchases by the Company, during the fiscal years ended November 30,
1992, 1993 and 1994, and the first quarter of fiscal 1995, respectively. In
1994, Toshiba began to compete directly with the Company in the United States by
marketing cellular telephone products through Toshiba's United States
distribution subsidiary. The Company anticipates that Toshiba will continue to
sell products to the Company as an original equipment customer; however, there
is no agreement in effect that requires Toshiba to supply the Company with
products, and there can be no assurance that Toshiba will continue to supply
products to the Company or that any products supplied will be competitive with
others in the market. See "Risk Factors-- Dependence on Toshiba." In order to
expand its supply channels and diversify its cellular product line, the Company
has begun to source cellular equipment from other manufacturers including,
Samsung Electronics Co., Ltd. ("Samsung"), Alcatel Radiotelephone ("Alcatel")
and Shintom. Purchases of non-cellular products are made primarily from other
overseas suppliers including Hyundai Electronics Inc. ("Hyundai"), Namsung
Corporation ("Namsung") and Nutek Corporation ("Nutek"). There are no agreements
in effect that require manufacturers to supply product to the Company. The
Company considers its relations with its suppliers to be good. The Company
believes additional sources of supply are currently available, but that such
sources may be negatively impacted if the United States imposes threatened trade
sanctions. See "Risk Factors--United States Trade Sanctions Could Limit the
Company's Sources of Supply," "--No Assurance of Alternative Supply Sources" and
"-- Dependence on Foreign Suppliers."
TRADEMARKS
The Company markets products under several trademarks, including
Audiovox(R), SPS(R), Prestige(R), Pursuit(R), MinivoxTM, Minivox Lite(R), The
Protector(R), American Radio(R) and Quintex(R). The Company believes that these
trademarks are recognized by customers and are therefore significant in
marketing
49
its products. Trademarks are registered for a period of ten years and such
registration is renewable for subsequent ten-year periods.
MANAGEMENT INFORMATION SYSTEM
The Company has invested approximately $8,500,000 since 1991 in the
implementation of a fully-integrated system that provides the Company with
real-time inventory, ordering and financial information. The computer hardware
is an IBM AS-400 E70 model which the Company believes has sufficient excess
processing capacity to handle its needs for the foreseeable future. The Company
has arrangements with certain of its major non-cellular wholesale customers that
permit such customers to electronically enter ordering and delivery information
directly into the Company's management information system. Beginning in
mid-1994, the Company began implementing a point-of-sale system in its retail
operations. The Company believes that the point-of-sale system increases the
range and frequency of data available to management on a store-by-store basis.
The point-of-sale system enables the Company to track inventory levels and
monitor daily revenues by product or service for each location. This system
enables the Company to offer its customers rapid delivery of a wide variety of
products.
COMPETITION
The Company competes primarily on the basis of quality, product design
features, inventory availability, delivery, service and price. The Company
believes that it competes effectively on the basis of each such factor. The
Company operates in a highly competitive environment and believes that such
competition will intensify in the future. Many of the Company's competitors are
larger and have greater capital and management resources than the Company.
Competition often is based on price, and therefore wholesale distributors and
retailers, including the Company, generally operate with low gross margins. The
Company is also affected by competition between cellular carriers. Increased
price competition relating not only to cellular telephone products, but also to
services provided by the Company to retail customers on behalf of cellular
carriers, may result in downward pressure on the Company's gross margins
(including that resulting from the loss of residual fees attributable to
customers who change cellular carriers) and could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's cellular products compete principally with cellular telephones
supplied by Motorola, Inc., Nokia Mobile Phones, Inc., Fujitsu Network
Transmission Systems, Inc., Oki Electric Industry, Co., Nippon Electric Corp.,
Toshiba and others. The Company's non-cellular products compete with other
suppliers including Matsushita Electric Corp., Sony Corp. of America, Directed
Electronics, Inc. and Code Alarm, Inc., as well as divisions of well-known
automobile manufacturers. In February 1995, Motorola Inc. announced its cellular
inventory build-up was "several weeks above normal levels." See "Risk
Factors--Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--First Quarter Fiscal 1995 vs. First Quarter
Fiscal 1994."
In the event that United States trade sanctions on products imported from
Japan and China or containing Japanese components are imposed, the Company may
lose market share to competitors that are less dependent on Japanese and Chinese
suppliers. See "Risk Factors--United States Sanctions Could Limit the Company's
Sources of Supply."
Competitors of the Company in the international markets include North
American cellular carriers that have retail outlets and direct end-user access,
United States and foreign based exporters and distributors and grey-market
importers. In addition, the Company competes for activation commissions and
residual fees with agents and subagents of cellular carriers.
EMPLOYEES
As of February 28, 1995, the Company employed 1,082 persons, of whom 363
were involved in wholesale operations, 629 were involved in retail operations
and 51 were corporate office personnel. Of
50
these employees, 1,043 work in domestic operations and 39 work in international
operations. None of the Company's employees are represented by a labor union,
collective bargaining representative or agreement. The Company believes that its
labor relations are good.
PROPERTIES
The Company leases all of its facilities. As of February 28, 1995, excluding
its joint venture premises, the Company leased a total of 62 operating
facilities located in 16 states, two Canadian provinces, Malaysia, Singapore,
Hong Kong, Korea, China and Taiwan. These facilities range in size from 140 to
70,000 square feet, aggregating approximately 350,000 square feet. They serve as
offices, warehouses, distribution centers or retail locations. The unexpired
terms of these leases varied from less than one year to six years. Additionally,
the Company utilizes approximately 100,000 square feet of public warehouse
facilities. Aggregate annual rentals for all such properties and facilities for
the fiscal years ended November 30, 1992, 1993 and 1994 and the first quarter of
fiscal 1995 were approximately $2,594,000, $2,390,000, $3,107,000 and $898,000,
respectively. The following table describes the Company's principal facilities,
all of which are leased, having an area in excess of 25,000 square feet.
APPROXIMATE LEASE
LOCATION OF PROPERTY PRIMARY USE SQUARE FOOTAGE EXPIRATION DATE
- ------------------------------ ------------------------------ -------------- ---------------
150 Marcus Boulevard.......... Corporate and Non-Cellular 70,000 10/31/96
Hauppauge, NY* Headquarters
16808 Marquardt Avenue........ Office, Warehouse and 50,271 1/31/96
Cerritos, CA* Distribution
185 Oser Avenue............... Cellular Headquarters 30,000 10/31/95
Hauppauge, NY
- ------------
* Property owned by executive officers of the Company and leased to the Company.
These leases are described under "Certain Transactions--Transactions with
Management." See also Note 11 of Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS
In February 1993, an action was instituted in the Circuit Court of Cooke
County, Illinois, (Robert Verb, et al. v. Motorola, Inc., et al., File No.: 93
Ch. 00969), against the Company and other defendants. The complaint in such
action seeks damages on several product liability related theories, alleging
that there is a link between the non-thermal electromagnetic field emitted by
portable cellular telephones and the development of cancer, including brain
cancer. On August 20, 1993, an order was entered dismissing the complaint which
included the Company as a defendant and permitting plaintiffs to file an amended
complaint which does not include the Company as a defendant. Such order,
effectively dismissing the Company as a defendant, is being appealed by the
plaintiffs. The Company believes that its insurance coverage and rights of
recovery against manufacturers of its portable hand-held cellular telephones
relating to this case are sufficient to cover any reasonably anticipated
damages. In addition, the Company believes that there are meritorious defenses
to the claims made in this case.
51
On August 31, 1994, an action was instituted entitled Steve Helms and
Cellular Warehouse, Inc. v. Quintex Mobile, Wachovia Bank, GTE Mobilnet, Stan
Bailey and Rick Rasmussen in the Court of Common Pleas, Sumter County, South
Carolina. Plaintiffs allege ten causes of action against Quintex, including
fraud, breach of contract, conspiracy, conversion, interference with prospective
contract, restraint of trade, violation of Unfair Trade Practices Act, false
arrest and malicious prosecution. Damages sought are $1.2 million plus punitive
damages. Also plaintiffs are seeking treble damages and attorneys' fees under
the Unfair Trade Practices Act. The case is presently in the early discovery
stage. The Company intends to vigorously defend the action and is of the opinion
that there are meritorious defenses to the claims made in this case and that the
ultimate outcome of this matter will not have a material adverse impact on the
financial position of the Company.
In addition, the Company is currently, and has in the past been, a party to
other routine litigation incidental to its business. The Company does not expect
any pending litigation to have a material adverse effect on its financial
condition or results of operations. See Note 15 of Notes to Consolidated
Financial Statements.
52
CERTAIN TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
The Company leases or has leased certain of its office, warehouse and
distribution facilities from certain executive officers of the Company or from
entities in which such individuals own a controlling interest. The following
table identifies leases to which any such executive officer or entity is a party
and which, either alone or when combined with all other leases in which such
executive officer has an interest, involve more than $60,000. The table
identifies the property which is subject to such lease, the owner of such
property, and the amount of rent paid by the Company during each of the fiscal
years ended November 30, 1992, 1993 and 1994, and the fiscal quarter ended
February 28, 1995, respectively.
OWNER OF
PROPERTY EXPIRATION DATE PROPERTY PERIOD RENT PAID
- --------------------------------- -------------------- ------------- ----------- ---------
150 Marcus Blvd.................. October 31, 1996 John J. Fiscal 1994 $ 396,500
Hauppauge, NY Shalam Fiscal 1993 429,000
Fiscal 1992 363,000
60 Arkay Dr...................... January 31, 1993(1) John J. Fiscal 1994 none
Hauppauge, NY Shalam Fiscal 1993 (3)
Fiscal 1992 $ 187,328
16808 Marquardt Ave.............. January 31, 1996 Marquardt Fiscal 1994 $ 175,000
Cerritos, CA Associates(2) Fiscal 1993 189,605
Fiscal 1992 160,435
331-335 Sherwee Dr............... January 31, 1999 Harold Fiscal 1994 $ 61,000
Raleigh, NC Bagwell Fiscal 1993 (3)
Fiscal 1992 (3)
- ------------
(1) The Lease would have expired by its terms on August 1, 1994 but was
terminated by agreement on January 31, 1993.
(2) Marquardt Associates is a California partnership comprised of four
individuals, including John J. Shalam, who owns 60% of the partnership,
Philip Christopher, who owns 10%, James Wohlberg, who owns 5%, and John J.
Shalam's brother-in-law who owns 25%.
(3) The rent paid was less than $60,000.
The Company believes that the terms of each of the foregoing leases are no
less favorable to the Company than those which could have been obtained from
unaffiliated third parties. To the extent that conflicts of interest arise
between the Company and such persons in the future, such conflicts will be
resolved by a committee of independent directors of the Company's Board of
Directors.
CELLSTAR
On December 14, 1993, the Company sold 2,500,000 shares of CellStar Common
Stock in connection with the CellStar Offering, for aggregate net proceeds of
approximately $25,594,000. On December 30, 1993, the Company sold 375,000 shares
of CellStar Common Stock pursuant to an over-allotment option granted to the
underwriters of the CellStar Offering, for aggregate net proceeds of
approximately $3,839,000. The Company continues to own 3,875,000 shares of
CellStar Common Stock, constituting 20.88% of the issued and outstanding
CellStar Common Stock.
In connection with the CellStar Offering, the Company and Alan H. Goldfield,
President and, prior to the CellStar Offering, a 50% stockholder of CellStar,
entered into an Option Agreement under the terms of which the Company granted to
Mr. Goldfield the right, until December 3, 1995, to purchase, in whole or in
part, up to 1,500,000 shares of CellStar Common Stock from the Company. During
the first 18 months of such option, the exercise price shall equal $11.50 per
share (the initial public offering price) and for the remaining six months shall
equal $14.38 per share. The Company has granted to Mr.
53
Goldfield an additional option, exercisable until December 3, 1996, to purchase
an additional 250,000 shares of CellStar Common Stock at an exercise price equal
to $13.80 per share, subject to certain restrictions and adjustment in certain
events.
Pursuant to a Voting Rights Agreement entered into by and between the
Company and Mr. Goldfield, the Company granted to Mr. Goldfield the right for
two years to vote up to 2,800,000 shares of CellStar Common Stock owned by the
Company, subject to reduction in the event Mr. Goldfield sells his shares of
CellStar Common Stock in certain events, and subject to reduction in the event
Mr. Goldfield exercises his right to purchase shares under the foregoing option
agreements.
The Company's distribution agreement with CellStar, dated as of November 22,
1993, was not renewed upon expiration. The Company and CellStar entered into a
Sales Representation Agreement, dated as of January 1, 1995, pursuant to which
CellStar acts as the Company's independent sales representative for certain of
the Company's automotive products for certain customers in the states of Texas,
Oklahoma and New Mexico and in Mexico. The agreement is for a one year term.
On March 23, 1995, CellStar filed a registration statement relating to a
public offering for approximately 3.5 to 4 million shares of common stock to be
issued by CellStar and for 1,075,000 shares of its common stock which may be
sold by the Company pursuant to its piggyback registration rights contained in
its registration rights agreement with CellStar. No assurance can be given that
such public offering will be consummated or at what price such public offering
will be consummated and that, if consummated, Audiovox will elect to sell its
shares in such public offering.
REPAYMENT OF CERTAIN SUBORDINATED INDEBTEDNESS
The Company utilized approximately $13,903,000 of the net proceeds of the
offering of the Debentures to repay and extinguish all of its outstanding Series
A Notes and Series B Notes, including paying a prepayment premium of
approximately $172,000 (before adjustment for taxes). The Company and the
holders of such instruments also entered into a debenture exchange agreement
(the "Debenture Exchange Agreement"). Pursuant to the Debenture Exchange
Agreement, the Company's Series A 10.8% Convertible Subordinated Debentures due
1996 (the "Series A Convertible Debentures") and the Company's Series B 11%
Convertible Subordinated Debentures due 1996 (the "Series B Convertible
Debentures") were exchanged for its Series AA Convertible Debentures and Series
BB Convertible Debentures, instruments of like tenor which, in each such case,
constitute senior indebtedness of the Company and which will remain outstanding
until retired in accordance with their terms, with full rights of conversion
into shares of Class A Common Stock and registration rights with respect to such
shares. At the closing of the Debenture offering, the Company caused to be
issued to such holders irrevocable standby letters of credit in an aggregate
amount equal to all future payments of principal and interest on the Series AA
Convertible Debentures and Series BB Convertible Debentures. The holders would
have the right to draw upon the letters of credit in the event of a default by
the Company. As of February 28, 1995, there was approximately $77,000 of Series
AA Convertible Debentures outstanding and $5.4 million of Series BB Convertible
Debentures outstanding. The Series AA Convertible Debentures and Series BB
Convertible Debentures are convertible at any time, at the option of the holder,
into Class A Common Stock at a price of $5.34 per share (subject to adjustment
in certain circumstances). See Note 8 to Notes to Consolidated Financial
Statements.
CONSULTING AGREEMENT
The Company and Harvey R. Blau ("Blau") have entered into a letter
agreement, dated April 1, 1993 (the "Consulting Agreement"). Pursuant to the
Consulting Agreement, the term of which was from April 1, 1993 to March 31,
1995, Blau was to render up to 20 hours of consulting services to the Company
per year. In connection with the Consulting Agreement, Blau was awarded a
warrant (the "Blau Warrant") to purchase 100,000 shares of Class A Common Stock
at a purchase price of $7.50 per
54
share (subject to adjustment upon certain events described in the Blau Warrant).
The Blau Warrant is exercisable in whole or in part, from time-to-time, until
December 31, 1998. On December 15, 1993, the Company and Blau executed a letter
agreement pursuant to which it was agreed that Blau had performed in excess of
40 aggregate hours of consulting services under the Consulting Agreement, that
no further services were required to be performed by Blau under the Consulting
Agreement and that the consideration for the Blau Warrant was deemed fully paid.
The Company has also entered into a consulting arrangement with Mr. Blau
pursuant to which the Company pays Mr. Blau $7,500 per month for consulting
services. Payments under this arrangement began in November 1994.
H & H EASTERN DISTRIBUTORS, INC.
The Company and James Maxim ("Maxim") have entered into an Agreement, dated
September 23, 1993 and effective December 1, 1993, pursuant to which the Company
acquired all of the issued and outstanding stock of H & H Eastern Distributors,
Inc. owned by Maxim, and as a result, the Company became the sole stockholder of
H & H Eastern Distributors, Inc. In connection with such Agreement, the Company
issued to Maxim a warrant (the "Maxim Warrant") to purchase 50,000 shares of
Class A Common Stock, at a purchase price of $14.375 per share. The per share
purchase price and number of shares purchasable pursuant to the Maxim Warrant
are each subject to adjustment upon the occurrence of certain events described
in the Maxim Warrant. The Maxim Warrant is exercisable, in whole or in part,
from time-to-time, until September 22, 2003. In connection with the Maxim
Warrant, Maxim has the right to require the Company to file with the SEC, on or
after September 22, 1995, a registration statement relating to the sale by Maxim
of the Class A Common Stock purchasable pursuant to the Maxim Warrant.
SHALAM OPTION
John J. Shalam has agreed to grant the Company the Shalam Option to purchase
Option Shares at a purchase price equal to the sum of (a) the Warrant Exercise
Price plus (b) an additional amount (the "Tax Amount") intended to reimburse Mr.
Shalam or his Successors for any additional taxes per share which may be
required to be paid by Mr. Shalam or his Successors as a result of the payment
of the Warrant Exercise Price being treated for federal income tax purposes as
the distribution to Mr. Shalam or his Successors of a dividend (taxed at
ordinary income rates without consideration of Mr. Shalam's or his Successors',
as the case may be, basis), rather than as a payment to Mr. Shalam or his
Successors, for the sale of his Class A Common Stock to the Company (taxed at
the capital gains rate with consideration of Mr. Shalam's basis and considering
any stepped up basis to Mr. Shalam's Successors) pursuant to the Shalam Option.
If Mr. Shalam or his Successors, as a result of the receipt of the payment of
the Warrant Exercise Price, are taxed at a capital gains rate (with
consideration given to their stepped up basis), no Tax Amount will be included
in the purchase price to be paid. Any Successor acquiring the shares of Class A
Common Stock underlying the Shalam Option (whether by sale, transfer or upon Mr.
Shalam's death) will acquire such shares subject to the terms of the Shalam
Option. The terms of the Shalam Option (other than the initial exercise price)
will be similar to those of the Warrants, however, the exercise price per share
for the Shalam Option will not decrease in the event of a Registration Default.
Such additional amount per share shall be calculated in accordance with the tax
rates applicable to the date of exercise in accordance with the following
formula:
(A-B)xC+(BxD)
1-A
where A equals Mr. Shalam's combined marginal U.S. federal, state and local
ordinary income tax rates after reduction of the federal rate for the benefit of
the deductions for state and local taxes; B equals Mr. Shalam's combined
marginal U.S. federal, state and local capital gains tax rates after reduction
of the federal rate for the benefit of the deductions for state and local taxes;
C equals the per share Warrant Exercise Price without giving effect to any
adjustment thereof resulting from a
55
Registration Default; and D equals Shalam's per share adjusted tax basis in the
Class A Common Stock purchasable by the Company pursuant to the Shalam Option
and includes any stepped-up basis of Mr. Shalam's Successors. Any payment owing
to Mr. Shalam's Successors will be based on the same formula as it relates to
such Successors.
The Shalam Option will be exercisable, in whole or in part, for a number of
shares equal to the aggregate number of shares purchasable under the Warrants on
the Closing Date. The basic terms of the Shalam Option will be similar to the
basic terms of the Warrants; provided that the exercise price of the Shalam
Option will not be reduced in the event of a Registration Default. The Company
is not required to exercise the Shalam Option upon exercise of the Warrants and
intends to do so only if the Board of Directors of the Company (other than Mr.
Shalam) at the time of exercise of the Warrants, determines that it is in the
best interests of the stockholders of the Company to exercise such Shalam
Option. The Company will be able to exercise the Shalam Option only if the
Warrants are exercised and then only for the same number of shares as are
purchased under the Warrants. The Shalam Option may limit the dilutive effect of
the Warrants on the earnings per share or the book value per share if the
Company elects to execute the Shalam Option. The obligations of the Company
under the Warrants are not subject to compliance by Mr. Shalam with the terms of
the Shalam Option. The Tax Amount will be immediately due and payable upon
receipt of a satisfactory notice from the holder of the Option Shares stating
that a Tax Amount is required to reimburse such person for additional taxes in
accordance with the Shalam Option, setting forth the calculation of the Tax
Amount and confirming that such person will file its tax return with respect to
this period in accordance with the facts underlying this calculation, but such
Tax Amount is subject to readjustment in the event the actual tax paid is
different than the amount set forth in the notice. Upon consummation of the
Offering, a legend will be placed on a number of Option Shares equal to the
number of shares of Class A Common Stock underlying Warrants granted in the
Offering which will provide that such shares are subject to the terms of the
Shalam Option. Such legend on the Option Shares will be removed with respect to
the number of Option Shares equal to the number of shares of Class A Common
Stock underlying the Warrants which have been exercised or with respect to which
the independent members of the Board of Directors of the Company have determined
not to exercise the Shalam Option.
56
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information pertaining to the
directors (all of whom were elected to terms expiring at the next annual meeting
of stockholders) and executive officers of the Company:
NAME AGE CURRENT POSITION
- ------------------------------------------ --- ------------------------------------------
John J. Shalam............................ 61 President and Chief Executive Officer and
Director
Philip Christopher........................ 46 Executive Vice President and Director
Charles M. Stoehr......................... 48 Senior Vice President, Chief Financial
Officer and Director
Martin Novick............................. 59 Vice President and Director
Patrick M. Lavelle........................ 43 Group Vice President and Director
Harold Bagwell............................ 54 Vice President and Director
Gordon Tucker............................. 43 Director
Irving Halevy............................. 78 Director
John J. Shalam has served as President and Chief Executive Officer and a
Director of the Company since 1987. Mr. Shalam also serves as president and a
director of most of the Company's operating subsidiaries. From 1960 to 1987, Mr.
Shalam was President and Director of the Company's predecessor, Audiovox Corp.
Philip Christopher, Executive Vice President of the Company, has been with
the Company (or its predecessors) since 1970 and has held his current position
since 1983. Prior thereto, he was Senior Vice President of the Company (or its
predecessors). Mr. Christopher has additional responsibility for the Company's
cellular division, Audiovox Cellular Communications Co. He has been a Director
of the Company since 1987 and from 1973 through 1987 was a Director of the
Company's predecessor, Audiovox, Corp.
Charles M. Stoehr has been Chief Financial Officer of the Company (or its
predecessors) since 1979, and was elected Senior Vice President in 1990. Mr.
Stoehr has been a Director of the Company since 1987. From 1979 through 1990,
Mr. Stoehr was a Vice President of the Company (or its predecessors).
Martin Novick has been a Vice President of the Company (or its predecessors)
since 1979 and has been a Director since 1987. As of May, 1994, Mr. Novick was
appointed Vice President of the Consumer Electronics Group which is responsible
for marketing and selling the Company's Automotive Electronic Products to mass
merchants and national chain markets.
Patrick M. Lavelle has been a Vice President of the Company (or its
predecessors) since 1982. In 1994, Mr. Lavelle was appointed Group Vice
President of the Company's Automotive Electronics Division, with responsibility
for marketing and selling the Company's Auto Sound, Auto Security and Accessory
product lines. Mr. Lavelle was elected to the Board of Directors in 1993.
Harold Bagwell has been a Vice President of the Company since 1992 and an
officer of certain subsidiaries of the Company (or its predecessors) since 1978.
Mr. Bagwell has responsibility for the Company's retail operations in the
southern United States.
Gordon Tucker has served as a director of the Company since 1987. Since
August 1994, Dr. Tucker has been the Rabbi of Temple Israel Center of White
Plains, New York, and since 1979 has also been an Assistant Professor of
Philosophy at the Jewish Theological Seminary of America. From 1984 through
1992, he was also Dean of the Rabbinical School at the Jewish Theological
Seminary of America.
57
Irving Halevy has served as a director of the Company since 1987. Mr. Halevy
is a retired professor of Industrial Relations and Management at Fairleigh
Dickinson University where he taught from 1952 to 1986. He also is a panel
member of the Federal Mediation and Conciliation Service.
EXECUTIVE COMPENSATION
The following table sets forth a summary for the 1994, 1993 and 1992 fiscal
years of all compensation paid to the Chief Executive Officer and the four most
highly compensated executive officers whose individual compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- --------------------------------------------------
RESTRICTED
STOCK SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($)(1) UNDERLYING OPTIONS COMPENSATION(2)
- --------------------------- ------- -------- -------- ----------- ------------------ ---------------
John J. Shalam, Chief 1994 $398,077 $645,920 -- -- $ 2,900
Executive Officer.......... 1993 430,385 0 -- -- 4,306
1992 345,769 0 -- -- 2,145
Philip Christopher, 1994 450,000 395,005 $ 171,875(1) 75,000 2,905
Executive Vice 1993 450,000 39,531 -- -- 4,568
President.................. 1992 354,700 0 -- -- 2,441
Charles M. Stoehr, Senior 1994 238,461 288,398 255,000(1) 30,000 3,364
Vice President, Chief 1993 250,000 71,915 -- -- 3,318
Financial Officer.......... 1992 224,147 0 -- -- 1,437
Patrick Lavelle, Group Vice 1994 125,000 218,400 34,000(1) 5,000 3,364
President.................. 1993 125,000 198,731 -- -- 2,825
1992 125,000 155,275 -- -- 1,894
Harold Bagwell, Vice 1994 94,200 359,635 17,000(1) 3,000 3,364
President.................. 1993 90,000 459,665 -- -- 4,711
1992 90,000 184,562 -- -- 1,715
- ------------
(1) These values are based on the closing market price of the Company's Class A
Common Stock on the date of grant. The value of the Restricted Stock grants,
based on the value of the Company's shares at November 30, 1994, were as
follows: Philip Christopher, $178,125; Charles M. Stoehr, $106,875; Patrick
Lavelle, $14,250; and, Harold Bagwell, $7,125. The shares of Restricted
Stock may vest dependent upon the achievement of a rolling three year
earnings per share goal and/or continued employment with the Company. Shares
of Restricted Stock are entitled to receive dividends.
(2) Amounts shown represent actual, and for fiscal 1994, estimated contributions
by the Company to the Audiovox Corporation Profit Sharing and 401(K) Plan
allocated or to be allocated to the accounts of the respective officers for
the fiscal years indiciated.
OPTION GRANTS IN LAST FISCAL YEAR (1994)
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR $/SHARE DATE 0%($) 5%($) 10%($)
- --------------------------------- ---------- ------------ ----------- ---------- -------- ------- --------
John J. Shalam................... -- -- -- -- -- -- --
Philip Christopher............... 75,000 39.78 $11.00 11/22/04 -- $14,899 $512,398
Charles M. Stoehr................ 30,000 15.92 13.00(2) 12/14/03 $120,000 440,736 932,809
Patrick Lavelle.................. 5,000 2.65 13.00(2) 12/14/03 20,000 73,456 155,468
Harold Bagwell................... 3,000 1.59 13.00(2) 12/14/03 12,000 44,074 93,281
- ------------
(1) These values are based on the closing market price of the Company's Class A
Common Stock on the date of grant. All options reported have a ten-year
term. Amounts shown represent hypothetical future values at such term based
upon hypothetical price appreciation of Class A Common Stock and may not
necessarily be realized. Actual values which may be realized, if any, upon
exercise of such options, will be based upon the market price of Class A
Common Stock at the time of any such exercise and thus are dependent upon
the future performance of Class A Common Stock.
(2) The market price of Class A Common Stock on the date of grant was $17.00.
58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
- ----------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NOVEMBER 30, 1994 NOVEMBER 30, 1994
----------------- -----------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------------- -----------------
John J. Shalam............................................. -- --
Philip Christopher......................................... 0/75,000 $ 0/0
Charles M. Stoehr.......................................... 30,000/30,000 0/0
Patrick Lavelle............................................ 5,000/5,000 0/0
Harold Bagwell............................................. 5,000/3,000 0/0
- ------------
(1) No options were exercised by the named individuals in fiscal 1994 and none
were in the money at November 30, 1994
COMPENSATION OF DIRECTORS
For their services, members of the Board of Directors who are not salaried
employees of the Company receive an annual retainer of $10,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee consisted of Messrs. Tucker and
Halevy during fiscal year 1994. The Compensation Committee recommends to the
Board of Directors remuneration arrangements for senior management and the
directors and approves and administers other compensation plans, including the
profit sharing plan of the Company, in which officers, directors and employees
participate.
LIMITATION ON LIABILITY
Article FIFTH of the Company's Certificate of Incorporation provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
the payment of dividends in violation of Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction in which the director derived any
improper personal benefit. It also provides that any repeal or modification of
the foregoing provision by the stockholders of the Company shall be prospective
only and shall not adversely affect any right or protection of a director
existing at the time of such repeal or modification.
59
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of April 1, 1995, certain information
with respect to the beneficial ownership of any class of Common Stock by all
stockholders known by the Company to own beneficially more than five percent
(5%) of the outstanding shares of any class of Common Stock, each director,
nominee for director, each executive officer and all directors and executive
officers of the Company as a group:
TITLE OF CLASS
OF SOLE VOTING OR PERCENT OF
NAME AND ADDRESS(1) COMMON STOCK(2) INVESTMENT POWER(2) CLASS(3)(6)
- ---------------------------------------------- --------------- ------------------- ----------
John J. Shalam................................ Class A 5,249,960(4)(5) 57.6
150 Marcus Blvd. Class B 1,883,198 83.3
Hauppauge, NY
Philip Christopher............................ Class A 265,154 2.9
150 Marcus Blvd. Class B 260,954 11.5
Hauppauge, NY
All directors and officers as a group......... Class A 5,590,614(6) 61.3
(10 persons) Class B 2,144,152 94.8
- ------------
(1) Cede & Co., nominee of Depository Trust Co., 55 Water Street, New York, New
York 10041, was the record owner of 2,731,975 shares of Class A Common Stock
and it is believed that none of such shares was beneficially owned.
(2) Class A Common Stock includes as beneficially owned for each person listed
those shares of Class A Common Stock into which Class B Common Stock
beneficially owned by such person may be converted upon the exercise of the
conversion right of the Class B Common Stock.
(3) Does not give effect to the issuance of 4,695,344 shares of Class A Common
Stock issuable as of April 1, 1995 upon conversion of the Series AA
Convertible Debentures or Series BB Convertible Debentures and the
Debentures. The number of shares issuable upon conversion of such debentures
is subject to adjustment in accordance with the terms of the Note Purchase
Agreement with respect to the Series AA Convertible Debentures and the
Series BB Convertible Debentures and in the Indenture with respect to the
Debentures. See Note 8 of Notes to Consolidated Financial Statements.
(4) The amount shown excludes 116,802 shares of Class B Common Stock held in
three irrevocable trusts for the benefit of Marc, David and Ari Shalam, the
children of John J. Shalam, with respect to which shares Mr. Shalam
disclaims any beneficial ownership.
(5) Includes up to 1,365,000 shares of Class A Common Stock subject to the
Shalam Option. See "Certain Transactions--Shalam Option."
(6) Includes 75,000 shares of Class A Common Stock issuable upon the exercise of
options currently exercisable or exercisable within 60 days of April 1,
1995.
60
DESCRIPTION OF THE WARRANTS
The Warrants are to be issued under a Warrant Agreement (the "Warrant
Agreement") between the Company and Continental Stock Transfer & Trust Company,
as Warrant Agent (the "Warrant Agent"). The following summaries of certain
provisions of the Warrant Agreement do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Warrants and the Warrant Agreement, including the definitions
therein of certain terms. Wherever particular sections or defined terms of the
Warrant Agreement are referred to, such sections or defined terms are
incorporated by reference.
Copies of the proposed form of Warrant and the Warrant Agreement have been
included with the copy of this Offering Memorandum. Additional copies are
available from the Company upon request and should be read carefully by
prospective investors in the Warrants.
GENERAL
Each Warrant will entitle the registered holder thereof (the "holder"),
subject to and upon compliance with the provisions thereof and of the Warrant
Agreement, at such holder's option, to purchase one share of Class A Common
Stock. The Warrant Exercise Price of each Warrant will be $7 7/8 per share
unless the closing price of the Class A Common Stock on the AMEX is greater than
$7 1/8 per share of the Class A Common Stock as of 5:00 p.m. (New York City
time) on the date of the closing of the Offering, in which case the exercise
price of the Warrant will be 110% of the closing price of the Class A Common
Stock on the AMEX as of such time. The Warrant Exercise Price must be at least
110% of the current market price of the Class A Common Stock on the date of the
closing in order for the Warrant to be eligible to be traded under Rule 144A
under the Securities Act. The Warrants will not be exercisable until one year
after the closing of this Offering and unless a registration statement with
respect to the issuance of Class A Common Stock upon exercise of the Warrants
shall be effective under the Securities Act, and will expire, unless exercised,
at 5:00 p.m., New York City time, on March 15, 2001, or such earlier date as set
forth in the next sentence (the "Expiration Date"). If less than 5% of the
Warrants initially issued remain outstanding, the Company may elect, by notice
to each holder of Warrants, that the Warrants will expire on the 30th day after
delivery of such notice. See "Registration Rights" below. The Warrant Exercise
Price and the number of shares of Class A Common Stock for which Warrants may be
exercised is subject to adjustment as set forth below. See "Adjustments" below.
The Offering expires 5:00 p.m. (New York City time) on May 1, 1995, unless
extended.
Warrants may be exercised by surrendering the certificate evidencing such
Warrants (the "Warrant Certificate") with the form of election to purchase
shares set forth on the reverse side thereof duly completed and executed by the
holder thereof and paying in full the Warrant Exercise Price for each such
Warrant at the office or agency designated for such purpose, which will
initially be the corporate trust office of the Warrant Agent in New York, New
York. Warrants evidenced by the Global Warrant Certificate may be exercised by a
holder by either obtaining a definitive Warrant Certificate and following the
procedure set forth above or by following certain procedures set forth in the
Warrant Agreement. Each Warrant may only be exercised in whole, and the Warrant
Exercise Price may be paid only by certified or official bank check payable to
the order of the Warrant Agent.
No fractional shares of Class A Common Stock will be issued upon exercise of
the Warrants. In lieu thereof, the Company will pay a cash adjustment based upon
the market price of the Class A Common Stock.
When issued, the Warrants will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of the
trading market for the Warrants. The Company expects that the Warrants will be
eligible for trading on PORTAL upon consummation of the Offering. The Company
intends to seek to list the Warrants on the AMEX or another national securities
exchange or
61
to seek to obtain quotation of the Warrants on NASDAQ Small Cap. However, the
listing or quotation requirements for such organizations require a certain
minimum number of holders of Warrants prior to approval for listing or
quotation. Since the Offering is being made to a limited number of persons in a
private placement transaction, there can be no assurance that the Company will
obtain such listing or quotation for the Warrants, or if obtained, that the
Warrants will not become delisted. If the Warrants have not been approved for
listing or quotation, the Company is not required to register the Warrants under
the Securities Act pursuant to the Registration Rights Agreement and does not
intend to register the Warrants. As described above, if the Warrants are not
registered under the Securities Act, they may not be offered or be sold except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. See "Risk Factors-- Absence of Existing Market for Warrants; Restrictions
on Resale; No Assurance of Listing and Registration."
MANDATORY REDEMPTION
If a registration statement relating to the Class A Common Stock underlying
the Warrants is not effective at any time on or prior to the Expiration Date,
the Company is required to redeem all of the outstanding Warrants for $2.20 per
Warrant. The Redemption Price is subject to adjustment in certain limited
circumstances. See "Description of the Warrants--Adjustments."
ADJUSTMENTS
The Warrant Exercise Price and the number of shares of Class A Common Stock
issuable upon exercise of the Warrants are subject to adjustment in the
following events under formulas set forth in the Warrant Agreement: (i) the
issuance of any shares of Common Stock to holders of any class of Common Stock
as a dividend or distribution; and (ii) subdivisions, combinations and
reclassifications of any class of Common Stock. The Shalam Option will also
contain the adjustments set forth in (i) and (ii) above. The Redemption Price
and the reduction in the Warrant Exercise Price upon a Registration Default will
also be subject to adjustment upon the occurrence of the events set forth in (i)
and (ii) above.
Except as stated in the preceding provisions, the initial Warrant Exercise
Price and the number of shares issuable upon exercise of the Warrants will not
be adjusted for any other events including issuances of shares of Class A Common
Stock, or options to acquire shares of Class A Common Stock, at less than the
then current market price of the Class A Common Stock or the then current
Warrant Exercise Price of the Warrants. Moreover, no adjustment will be made
unless such adjustment would require a change of at least 1% in the Warrant
Exercise Price then in effect, but any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment. The Company will reserve the right to make such
reductions in the Warrant Exercise Price in addition to those required in the
foregoing provisions as it considers to be advisable in order that any event
treated for Federal tax purposes as a dividend of stock or stock rights shall
not be taxable to the recipients.
In case either of the following occurs: (i) any consolidation or merger
involving the Company other than a consolidation or merger which does not result
in any reclassification, conversion, exchange or cancellation of outstanding
shares of Class A Common Stock; or (ii) any sale or transfer of all or
substantially all of the assets of the Company (each, a "Transaction"), the
Person formed by such Transaction or which acquires such assets, as the case may
be (the "Acquiror"), shall execute and deliver to the Warrant Agent prior to the
consummation of the Transaction a warrant agreement (or supplement to this
Warrant Agreement) providing that the Holder of each Warrant then outstanding
shall have the right thereafter, during the period such Warrant shall be
exercisable in accordance with this Warrant Agreement, to exercise such Warrant
only into the kind and amount of securities, cash or other property
(collectively, the "Consideration") receivable upon such Transaction by a holder
of the number of shares of Class A Common Stock into which such Warrant might
have been converted
62
immediately prior to such transaction (assuming such holder of shares of Class A
Common Stock (i) is not a person with which the Company consolidated or into
which the Company merged or which merged into the Company or to which such sale
or transfer was made, as the case may be (a "constituent person") (or an
affiliate of a constituent person), and (ii) failed to exercise his or her
rights of election, if any, and received per share of Class A Common Stock the
kind and amount of cash or other property received per share of Class A Common
Stock by a plurality of non-electing shares).
MODIFICATION OF THE WARRANT AGREEMENT
The Warrant Agreement permits, with certain exceptions, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of Warrant Certificates under the Warrant Agreement at
any time by the Company and the Warrant Agent with the consent of the holders of
Warrant Certificates representing a majority in number of the then outstanding
Warrants; provided that no such modification or amendment may, without the
consent of the holder of each outstanding Warrant affected thereby: (i) change
the Expiration Date (except to extend the Expiration Date to a later date) or
increase the Warrant Exercise Price; (ii) reduce the reduction in the Warrant
Exercise Price of a Warrant upon a Registration Default; (iii) reduce the
Redemption Price or (iv) reduce the percentage of Holders of Warrants the
consent of who is required for modification or amendment of the Warrant
Agreement. See "Risk Factors--Amendment to the Warrants."
The Warrant Agreement (including the terms and conditions of the Warrants)
may be modified or amended by the Company and the Warrant Agent without the
consent of the holder of any Warrant, for certain specified purposes not
materially adversely affecting the rights of the holders of the Warrants.
NO RIGHTS AS STOCKHOLDER
Holders of Warrants will not be entitled, by virtue of being such holders,
to receive dividends, vote, receive notice of any meetings of stockholders,
share in the assets of the Company in the event of liquidation, dissolution or
the winding up of the Company's affairs, or otherwise have any right of
stockholders of the Company.
RULE 144A INFORMATION REQUIREMENT; FINANCIAL INFORMATION
The Company has agreed to furnish to the holders, the beneficial holders of
the Warrants designated by the Holders of the Warrants, or the prospective
purchasers of any such securities, the information required to be delivered
pursuant to Rule 144A(d)(4) promulgated under the Securities Act, if applicable,
until such time as such securities are no longer "restricted securities" within
the meaning of Rule 144 promulgated under the Securities Act. Upon request, the
Company will also furnish to the holders of the Warrants all quarterly and
annual financial information furnished to the holders of the Class A Common
Stock.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the Warrants in accordance with the
Warrant Agreement. The Warrant Certificates evidencing the Warrants may be
surrendered for exercise or exchange, and the transfer of Warrant Certificates
will be registrable, at the office or agency of the Company maintained for such
purpose, which initially will be the corporate trust office of the Warrant Agent
in New York, New York. The Warrant Certificates will be issued only in fully
registered form in denominations of whole numbers of Warrants. No service charge
will be made for any exercise, exchange or registration of transfer of Warrant
Certificates, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. The
Company may also require a holder, among other things, to furnish appropriate
endorsements and transfer documents.
The registered holder of a Warrant may be treated as the owner of it for all
purposes.
63
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Warrants will be issued in fully
registered form. Except as described below, the Warrants sold to U.S. persons
initially will be represented by a single, permanent global certificate in
definitive, fully registered form (the "Restricted Global Warrant") and will be
deposited with the Warrant Agent as custodian for The Depository Trust Company,
New York, New York ("DTC") and registered in the name of a nominee of DTC, Cede
& Co. Warrants sold in offshore transactions in reliance on Regulation S will be
represented by a single, permanent global certificate, in definitive, fully
registered form (the "Regulation S Global Warrant") and will be deposited with
the Warrant Agent as custodian for DTC and registered in the name of Cede & Co.
as the nominee of DTC, for the account of CEDEL. The Company will also attempt
to have the Regulation S Global Warrant registered for the account of Euroclear,
although the Company has been informed by Euroclear that interests in the
Warrants may not be held through Euroclear unless 25% of the Warrants sold in
the Offering are sold in transactions in reliance on Regulation S. The Company
is offering less than 25% of the Warrants to holders who would acquire the
Warrants in a Regulation S transaction, although depending on the success of the
offering more than 25% of the purchasers of the Warrants may acquire the
Warrants in a Regulation S transaction. Accordingly, no assurance can be given
that the Regulation S Global Warrant will be registered for the account of
Euroclear. If Euroclear has agreed to list the Warrants, the Company may elect
to have the Warrants registered with Euroclear and purchasers of Warrants in the
Offering will be notified of such listing promptly after the Offering has been
consummated. Prior to the 40th day after the closing of this Offering,
beneficial interests in the Regulation S Global Warrant may be only held through
CEDEL, and any resale or other transfer of such interests to U.S. persons shall
not be permitted during such period in reliance on Regulation S. CEDEL will hold
omnibus positions on behalf of their respective participants through customers'
securities accounts in CEDEL's name on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' name on the books of DTC. Citibank will act as
depositary for CEDEL (in such capacities, the "Depositaries"). If Euroclear
agrees to have the Regulation S Global Warrant registered for its account, the
Company may elect to have the Warrants registered with Euroclear and, if so
registered, the provisions described under this caption "Book-Entry, Delivery
and Form" relating to CEDEL will also be applicable to Euroclear.
The Global Warrants (as defined below) will be subject to certain
restrictions on transfer set forth therein and in the Warrant Agreement and will
bear the respective legends regarding such restrictions set forth under "Notice
to Investors." A beneficial interest in the Regulation S Global Warrant may be
transferred to a person who takes delivery in the form of an interest in the
Restricted Global Warrant only upon receipt by the Warrant Agent of a written
certification from the transferor (in the form provided in the Warrant
Agreement) to the effect that such transfer is being made to a person whom the
transferor reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A promulgated under the Securities Act (a "Qualified
Institutional Buyer") in a transaction meeting the requirements of Rule 144A and
in accordance with any applicable securities laws of any state of the United
States or any other jurisdiction. Beneficial interests in the Restricted Global
Warrant may be transferred to a person who takes delivery in the form of an
interest in the Regulation S Global Warrant only upon receipt by the Warrant
Agent of a written certification (in the form provided in the Warrant Agreement)
to the effect that such transfer is being made in accordance with Regulation S
under the Securities Act. After a beneficial interest in a Global Warrant has
been transferred pursuant to an effective registration statement or Rule 144
promulgated under the Securities Act, all certification requirements will cease
with respect to such beneficial interest, and any beneficial interests so
transferred will thereafter be evidenced by a third global certificate. Any
beneficial interest in one of the Global Warrants that is transferred to a
Person who takes delivery in the form of an interest in the other Global Warrant
will, upon transfer, cease to be an interest in such Global Warrant and become
an interest in the other Global Warrant and, accordingly, will thereafter be
subject to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Warrant for as long as it remains such
an interest.
64
Warrants held by U.S. persons or "foreign purchasers" who elect to take
physical delivery of their certificates instead of holding their interest
through a Global Warrant (and which are thus ineligible to trade through DTC or
CEDEL (collectively referred to herein as the "Non-Global Purchasers") will be
issued in registered form (the "Certificated Warrants"). Upon the transfer to a
Qualified Institutional Buyer or in accordance with Regulation S of Certificated
Warrants initially issued to a Non-Global Purchaser, such Certificated Warrants
will, unless the transferee requests otherwise or the Global Warrant previously
has been exchanged in whole for Certificated Warrants, be exchanged for an
interest in a Global Warrant. For a description of the restrictions on the
transfer of Certificated Warrants and any interest in Global Warrants, see
"Notice to Investors."
The Global Warrants. Upon the issuance of the Regulation S Global Warrant
and the Restricted Global Warrant (each a "Global Warrant" and together the
"Global Warrants"), DTC or its custodian will credit, on its internal system,
the respective number of Warrants of the individual beneficial interests
represented by such Global Warrant to the accounts of persons who have accounts
with DTC. Ownership of beneficial interests in a Global Warrant will be limited
to persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Warrant will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants). U.S. persons may hold their interests in the
Restricted Global Warrant directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system. Investors may hold their interests in the Regulation S Global Warrant
directly through CEDEL if they are participants in such system, or indirectly
through organizations that are participants in such systems. Beginning 40 days
after the Closing Date (but not earlier), investors may also hold such interests
through organizations other than CEDEL that are participants in the DTC system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Warrant, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Warrants represented by such Global Warrant for all
purposes under the Warrant Agreement and the Warrants. No beneficial owner of an
interest in the Global Warrants will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Warrant Agreement and, if applicable, CEDEL.
Neither the Company, the Warrant Agent nor any agent of the Warrant Agent or
the Company will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Warrants or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment
upon redemption in respect of the Global Warrants will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the amounts of such Global Warrant as shown on the records of DTC
or its nominee. The Company also expects that payments by participants to owners
of beneficial interests in such Global Warrant held through such participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
participants.
65
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a person
holding a beneficial interest in a Global Warrant requires physical delivery of
a Certificated Warrant for any reason, including to sell Warrants to persons in
states which require physical delivery of a Certificated Warrant or to pledge
such Warrants, such holder must transfer its interest in the Global Warrant in
accordance with the normal procedures of DTC and the procedures set forth in the
Warrant Agreement. Transfers between participants in CEDEL will occur in
accordance with CEDEL's rules and operating procedures. Cross-market transfers
between persons holding directly or indirectly through DTC, on the one hand, and
directly or indirectly through CEDEL on the other, will be effected by DTC in
accordance with DTC rules on behalf of CEDEL by their respective Depositaries;
however, subject to compliance with the transfer restrictions applicable to the
Warrants, such crossmarket transactions will require delivery of instructions to
the relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to its Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Participants in CEDEL may not deliver instructions to the Depositary.
Because of time-zone differences, credits to the securities account of a
CEDEL participant as a result of a transaction with a participant in DTC will be
made during the securities settlement processing day (which must be a business
day for CEDEL) immediately following the DTC settlement date. Such credits of
any transactions in such securities settled during such processing will be
reported to the participants in CEDEL on such business day. Cash received in
CEDEL as a result of sales of securities by or through a participant in CEDEL to
a participant in DTC will be received with value on the DTC settlement date but
will be available in the relevant CEDEL cash account only as of the business day
following settlement in DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Warrants only at the direction of one or more participants
to whose account the DTC interests in Global Warrants is credited and only in
respect of such portion of the aggregate number of Warrants as to which such
participant or participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are
66
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgium cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with Euroclear Operator, not the Cooperative. The Cooperative establishes policy
for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear also
is available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, "the Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to certificates representing Warrants held
through CEDEL will be credited to the cash accounts of CEDEL Participants in
accordance with each such systems' rules and procedures, to the extent received
by its Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Each Depositary
will take any other action permitted to be taken by a holder of Warrants under
the Indenture on behalf of a participant in CEDEL only in accordance with its
relevant rules and procedures and subject to its ability to effect such actions
on its behalf through DTC.
Although DTC and CEDEL have agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Warrants among participants of
DTC and CEDEL they are under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Warrant
Agent will have any responsibility for the performance by DTC or CEDEL or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their respective operations. In
addition, if Euroclear agrees to have Warrants registered in its name it will be
subject to the same limitations and terms described above with respect to CEDEL.
67
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Warrants and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Warrants in exchange for the
Global Warrants.
REGISTRATION RIGHTS
Pursuant to the Warrant Agreement, the Company will agree to file with the
SEC within 300 days after the Closing Date a shelf registration statement or
statements under the Securities Act on Form S-1, Form S-2 or Form S-3, as
determined by the Company, if the use of such form is then available, to cover
the issuance of Class A Common Stock by the Company upon exercise of the
Warrants (the "Shelf Registration Statement").
The Warrant Agreement will provide that: (i) the Company will file the Shelf
Registration Statement with the SEC on or prior to 300 days after the Closing
Date; and (ii) the Company will use reasonable best efforts to cause the Shelf
Registration Statement to be declared effective by the SEC on or prior to one
year after the Closing Date. If: (i) the Shelf Registration Statement is not
filed with the SEC on or prior to 300 days after the Closing Date; (ii) the
Shelf Registration Statement has not been declared effective by the SEC within
one year after the Closing Date; or (iii) the Shelf Registration Statement is
filed and declared effective but shall thereafter cease to be effective (without
being succeeded immediately by an additional Shelf Registration Statement filed
and declared effective) for a period of time which shall exceed 90 days (180
days in the event of a Disadvantageous Condition (as defined below)) in the
aggregate per year (defined as a period of 365 days beginning on the date such
Registration Statement is declared effective) (each such event referred to in
clauses (i) through (iii) above, a "Registration Default"), the Warrant Exercise
Price of the Warrants will be reduced by $ 1/8 per share of Class A Common
Stock. The Warrant Exercise Price of the Warrants will be reduced by an
additional $ 1/8 per share of Class A Common Stock, as applicable, with respect
to each subsequent six-month period until the Shelf Registration Statement is
filed, is declared effective, or again becomes effective, as the case may be.
Notwithstanding the foregoing, the maximum number of $ 1/8 per share decreases
shall be 10 and there shall be no more than one such decrease in any six-month
period. The reduction in the Warrant Exercise Price upon a Registration Default
is subject to adjustment in certain limited circumstances. The Company will not
be obligated to register Class A Common Stock underlying any Warrants (a) which
the holder does not seek to register or (b) if the Company determines (based on
discussions with the SEC, advice of counsel or otherwise) that it is not
advisable or appropriate to register such shares of Class A Common Stock
underlying such Warrants if the SEC has declared effective a registration
statement with respect to other shares of Class A Common Stock underlying the
Warrants. In any such event (a) or (b), the exercise price underlying such
Warrants will not decrease upon the failure to register with the SEC such
underlying shares of Class A Common Stock if the SEC has declared effective a
registration statement with respect to other shares of Class A Common Stock. The
Shalam Option will not contain a similar reduction in the Shalam Option Price
upon a Registration Default.
The Company intends to seek to list the Warrants on a national securities
exchange or to seek quotation of the Warrants on the automated quotation system
of a national securities exchange (as such terms are defined in the Securities
Act) within 365 days of the Closing Date and to simultaneously register the
Warrants under the Securities Act. The Company intends to seek to obtain such
listing on theAMEX (the exchange on which the Class A Common Stock is listed) or
to obtain quotation of the Warrants on NASDAQ Small Cap. However, AMEX and
NASDAQ Small Cap require a minimum number of holders of Warrants, prior to
listing or quotation, as the case may be, without a waiver. Since the Offering
is being made to a limited number of persons in a private placement transaction,
the AMEX or NASDAQ Small Cap may not agree to list or quote the Warrants, as the
case may be. In such case, the Company intends to seek to list the Warrants on
one of the Boston Stock Exchange, Midwest Stock Exchange, Pacific Stock Exchange
or Philadelphia Stock Exchange. However, there can be no assurance that any of
such stock exchanges will agree to list the Warrants since such exchanges also
have minimum holder requirements for listing. If any of the above exchanges
agree to list the
68
Warrants or the Warrants have been approved for quotation on NASDAQ Small Cap (a
"Listing Approval"), the Company will file a shelf registration statement (the
"Resale Registration Statement") relating to the Warrants upon the later of (a)
300 days after the Closing Date and (b) the date approval of such listing or
quotation is obtained (the "Approval Date") and will use its reasonable best
efforts to cause such registration statement to become effective upon the later
of (a) 365 days after the Closing Date and (b) 60 days after the Listing
Approval Date. Once effective, the Company will be obligated to use reasonable
best efforts to cause the Resale Registration Statement to remain effective
until the date three years following the Closing Date.
Notwithstanding the foregoing, to the if the Company shall furnish to the
holders of Warrants notice stating that in the Board of Directors' good faith
judgment it would be disadvantageous (a "Disadvantageous Condition") to the
Company or its stockholders for such a registration statement to be maintained
effective, or to be filed and become effective, the Company shall be entitled to
cause any registration statement to be withdrawn and the effectiveness of such
registration statement terminated, or, in the event no Registration Statement
has yet been filed, shall be entitled not to file any such Registration
Statement, until such Disadvantageous Condition no longer exists (notice of
which the Company shall promptly deliver to the holders of Warrants), such
period not to extend beyond one hundred and eighty (180) days. In the event that
the Company shall give any notice of a Disadvantageous Condition, the Company
shall at such time as it in good faith deems appropriate file a new registration
statement covering the securities that were covered by such withdrawn
registration statement.
Holders of Transfer Restricted Warrants will be required to make certain
representations to the Company (as described in the Warrant Agreement) and will
be required to deliver information to be used in connection with the Resale
Registration Statement in order to have such Warrants included in the Resale
Registration Statement and benefit from the provisions regarding the reduction
in the Warrant Exercise Price upon a Registration Default set forth in the
second preceding paragraph. Once effective, the Company will be obligated to
cause the Resale Registration Statement to remain effective for three years
following the Closing Date, and to cause the Shelf Registration Statement to
remain effective until the Expiration Date. For purposes hereof, "Transfer
Restricted Warrants" means each Warrant until the date on which such Warrant has
been effectively registered under the Securities Act and disposed of in
accordance with the Resale Registration Statement, or the date on which such
Warrant is distributed to the public pursuant to Rule 144 promulgated under the
Securities Act or is salable pursuant to Rule 144(k) promulgated under the
Securities Act (or any similar provisions then in force) or is otherwise freely
tradeable.
Holders of Transfer Restricted Warrants will be required to indemnify the
Company against certain liabilities, including liabilities under the Securities
Act, incurred as a result of information provided by such Holders in connection
with the Resale Registration Statement, and to contribute to payments the
Company may be required to make in respect of such liabilities.
CONCERNING THE WARRANT AGENT
Continental Stock Transfer & Trust Company will act as Warrant Agent under
the Warrant Agreement. The address of the Warrant Agent's corporate trust office
is Two Broadway, New York, New York 10004, Attention: William Seegraber.
Continental Stock Transfer & Trust Company also acts as trustee under the
Indenture governing the Debentures, and as registrar and transfer agent for the
Class A Common Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Class A Common Stock, par value $.01 per share, 10,000,000 shares of Class B
Common Stock, par value $.01 per share, 50,000 shares of Preferred Stock, par
value $50 per share, and 1,500,000 shares of Series Preferred Stock, par value
$.01 per share. As of March 31, 1995, there were 6,777,788 shares of Class A
Common
69
Stock outstanding. As of March 31, 1995, 2,260,954 shares of Class B Common
Stock and 50,000 shares of Preferred Stock were issued and outstanding. There
are no shares of Series Preferred Stock outstanding.
The following summary description relating to the Class A Common Stock, the
Class B Common Stock, the Preferred Stock and Series Preferred Stock does not
purport to be complete and is qualified in its entirety by reference to such
documents. A copy of any of such documents is available upon request to the
Company. A description of the Company's capital stock is contained in the
Certificate of Incorporation of the Company. Reference is made to such
Certificate of Incorporation for a detailed description of the provisions
thereof summarized below.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Voting Rights
Except for the election or removal without cause of directors, as required
by the Certificate of Incorporation, and except for such separate class votes as
may be required by Delaware law and the Certificate of Incorporation, holders of
both classes of Common Stock vote as a single class on all matters, including
amendment of the Certificate of Incorporation to increase or decrease the
aggregate number of authorized shares of any class or classes of stock. In all
cases, each share of Class A Common Stock is entitled to cast one vote per share
and each share of Class B Common Stock is entitled to cast ten votes per share.
Holders of Class A Common Stock, voting separately as a class, are entitled
to elect 25% of the Board of Directors (rounded up to the nearest whole number)
so long as the number of outstanding shares of Class A Common Stock is at least
10% of the total number of outstanding shares of both classes of Common Stock.
If the number of outstanding shares of Class A Common Stock should become less
than 10% of the total number of outstanding shares of both classes of Common
Stock, directors would then be elected by all stockholders voting as one class,
except holders of Class A Common Stock would have one vote per share and holders
of Class B Common Stock would have ten votes per share. In such event, the
American Stock Exchange may consider delisting the Class A Common Stock.
The holders of a majority of the Class B Common Stock, voting separately as
a class, will continue to be able 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. 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.
Directors may be removed, with or without cause, provided that any removal
of directors without cause may be made only by the holders of the class or
classes of Common Stock that elected them. Vacancies in a directorship may be
filled by the vote of the class of shares that had previously filled that
vacancy, or by the remaining directors elected by that class. However, if there
are no such directors, the vacancy may be filled by the remaining directors.
The outstanding shares of Class A Common Stock equal approximately 75.0% of
the shares of both classes outstanding, and the holders of Class A Common Stock
have approximately 23.0% of the combined voting power of both classes of Common
Stock. The holders of Class B Common Stock, therefore, have the power to amend
the Company's Certificate of Incorporation to authorize the issuance of enough
additional Class B Common Stock to decrease the outstanding amount of Class A
Common Stock to less than 10%. Because of limitations on dividends in shares of
Class A Common Stock and Class B Common Stock, stock dividends will have the
effect of strengthening the control position of holders of Class B Common Stock.
70
Dividends
The holders of Class A Common Stock and Class B Common Stock are entitled to
receive dividends or distributions declared by the Board of Directors in equal
amounts, share for share, except as hereafter noted. See "Dividend Policy." 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 such dividend
being declared and paid on the Class B Common Stock.
In addition, dividends paid in shares of Class A Common Stock or Class B
Common Stock may be paid only as follows:
(i) shares of Class A Common Stock may be paid only to holders of shares
of Class A Common Stock and shares of Class B Common Stock may be paid only
to holders of Class B Common Stock; and
(ii) the same number of shares shall be paid in respect of each
outstanding share of Class A Common Stock and Class B Common Stock.
Conversion
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. Conversion of a
significant number of shares of Class B Common Stock into Class A Common Stock
could put control of the entire Board of Directors into the hands of such
holders of the Class B Common Stock who so convert.
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, certain family
members of the holder and certain 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. Accordingly, no
trading market will develop in the Class B Common Stock and the Class B Common
Stock will not be listed or traded on any exchange or in any market.
Other Rights
Stockholders of the Company have no preemptive or other rights to subscribe
for additional shares. Subject to any rights of holders of any Preferred Stock
and Series Preferred Stock, all holders of Common Stock, regardless of class,
are entitled to share ratably in any assets available for distribution on
liquidation, dissolution or winding up of the Company. No shares of either class
of Common Stock are subject to redemption. All outstanding shares are, and all
shares issuable upon exercise of the Warrants offered hereby will be, when
issued upon such exercise in accordance with the terms of the Warrants, legally
issued, fully paid and nonassessable. The Company may not subdivide or combine
shares of either class of Common Stock without at the same time proportionally
subdividing or combining shares of the other class of Common Stock.
Effects of Disproportionate Voting Rights
The disproportionate voting rights of Class A Common Stock and Class B
Common Stock could have an adverse effect on the market price of the Class A
Common Stock. Such disproportionate voting rights may effectively preclude the
Company from being taken over in a transaction not supported by holders of Class
B Common Stock, may render more difficult or discourage a merger proposal or
tender offer or may preclude a successful proxy contest, even if such actions
were favored by stockholders of the Company other than the holders of the Class
B Common Stock. Accordingly, such disproportionate voting rights may deprive
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices, since takeover bids frequently involve purchases of stock
directly from stockholders at such a premium price.
71
Transfer Agent
The transfer agent and registrar for shares of the Class A Common Stock and
Class B Common Stock is Continental Stock Transfer & Trust Company, New York,
New York. Continental Stock Transfer & Trust Company will also be acting as
Warrant Agent for the Warrants
PREFERRED STOCK
Preferred Stock
The 50,000 shares of Preferred Stock are owned by Shintom. Such shares are
nonvoting and have preference over the Common Stock in the event of liquidation,
dissolution or winding up of the Company to the extent of its par value of $50
per share.
SERIES PREFERRED STOCK
The Company is authorized to issue up to 1,500,000 shares of Series
Preferred Stock, par value $.01 per share, none of which has been issued. The
Certificate of Incorporation provides that 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
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions pertaining thereto, including voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation and conversion rights. However, the
Company 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. The Company
has no present plans for the issuance of any shares of Series Preferred Stock.
It is not possible to state the actual effect of the authorization of the
Series Preferred Stock upon the rights of holders of Class A Common Stock, Class
B Common Stock and Preferred Stock until the Board determines the specific
rights thereof. However, such effects might include (a) restrictions on
dividends on either class of Common Stock if dividends on Series Preferred Stock
have not been paid; (b) dilution of the voting power of the Class A Common Stock
to the extent that the Series Preferred Stock has voting rights; (c) dilution of
the equity interest of the Class A Common Stock to the extent that the Series
Preferred Stock is convertible into Class A Common Stock; or (d) either class of
Common Stock and Preferred Stock not being entitled to share in the Company's
assets upon liquidation, dissolution or winding up until satisfaction of any
liquidation preference granted to holders of Series Preferred Stock. The Company
has been advised that under its current listing requirements, the American Stock
Exchange would consider delisting the Class A Common Stock if any Series
Preferred Stock diluted the class voting rights of the Class A Common Stock.
Issuance of Series Preferred Stock, while providing desirable flexibility in
connection with possible acquisition and other corporate purposes, could make it
more difficult for a third party to acquire a majority of the outstanding voting
stock. Accordingly, the issuance of Series Preferred Stock may be used as an
antitakeover device without further action on the part of the stockholders of
the Company.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging, under certain circumstances in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless either: (i) prior to the date at which the stockholder
became an interested stockholder, the Board of Directors approved either the
business combination or the transaction in which the person becomes an
interested stockholder; (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes in interested stockholder; or
(iii) the business combination is approved by the Board of Directors and by at
least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting of stockholders (and not
by written consent) held on or subsequent to the date of the business
72
combination. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time within the prior three years did
own) 15% or more of the corporation's voting stock. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset-based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
Section 203 of the Delaware General Corporation Law contains provisions
normally considered to have the effect of inhibiting a non-negotiated merger or
other business combination. Consequently, the market price of the Class A Common
Stock may be less likely to reflect a "premium for control."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
The Warrants offered hereby will be exercisable for Class A Common Stock
upon the later of (a) one year after the Closing Date and (b) the effectiveness
of the Shelf Registration Statement, until the Expiration Date at the Warrant
Exercise Price, subject to adjustment in the Expiration Date and the Warrant
Exercise Price in certain cases. See "Description of the Warrants." The Company
has agreed to use its reasonable best efforts to cause the Shelf Registration
Statement relating to the Class A Common Stock to be declared effective within
one year of the Closing Date. Sales of a substantial number of shares of Class A
Common Stock in the public market could materially adversely affect the market
price of the Class A Common Stock. Conversion of a substantial amount of the
Series AA Convertible Debentures, Series BB Convertible Debentures, Debentures,
Warrants or other warrants of the Company also could materially adversely affect
the market price of the Class A Common Stock due to the large number of
additional shares of Common Stock issuable upon conversion of such debentures
and Warrants (1,365,000 shares) in comparison to the relatively small number of
shares held by members of the public that are able to trade without restriction.
In addition, the independent members of the Board of Directors may elect not to
exercise the Shalam Option in connection with the exercise of the Warrants if
such board members believe it is in the best interests of the Company not to
exercise the Shalam Option. The decision by the independent directors of the
Board of Directors not to exercise the Shalam Option, in whole or in part, upon
exercise of the Warrants would result in an increase in the number of shares of
Class A Common Stock outstanding and available for future sale and could result
in significant dilution to the holders of Common Stock. See "Risk
Factors--Shares Eligible for Future Sale; Dilution".
Upon completion of this Offering, the Company will have outstanding
6,777,788 shares of Class A Common Stock (assuming no exercise of options or
warrants or conversion of other securities after March 31, 1995). Of these
shares, 3,406,326 shares of Class A Common Stock are freely transferable and
tradable without restriction or further registration under the Securities Act
except for any shares purchased by any affiliates of the Company, which will be
subject to the resale limitations of Rule 144 promulgated under the Securities
Act.
In general, under Rule 144 as currently in effect, affiliates of the Company
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Class A
Common Stock then outstanding or the average weekly trading volume of the Class
A Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company.
The Company is unable to estimate accurately the number of shares that will
be sold under Rule 144 since this will depend in part on the market price for
the Class A Common Stock, the personal circumstances of the sellers and other
factors.
With regard to certain demand and piggyback registration rights, see "Recent
Transactions-- Repayment of Certain Subordinated Indebtedness" and "--H & H
Eastern Distributors, Inc."
The Company has registered Class A Common Stock under the Securities Act for
issuance to certain of its directors, officers and employees pursuant to the
Company's stock option plans. Shares issued pursuant to such stock option plans
after the effective date of any registration statement covering such shares
generally will be available for sale in the open market (except that such shares
held by affiliates will be subject to compliance with the volume restrictions of
Rule 144 under the Securities Act).
73
NOTICE TO INVESTORS
Each purchaser of Warrants, by its acceptance thereof, will be deemed to
have acknowledged, represented to and agreed with the Company as set forth in
the Subscription Agreement and as follows:
1. It understands and acknowledges that the Warrants are being offered in a
transaction not requiring registration under the Securities Act or any other
securities law, that the Warrants and the shares of Class A Common Stock
issuable upon conversion of the Warrants have not been registered under the
Securities Act or any other applicable securities law and, unless so registered,
may not be offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act or any other applicable
securities law, pursuant to an exemption therefrom or in a transaction not
subject thereto, and in each case, in compliance with the conditions for
transfer set forth in paragraph (4) below.
2. In the normal course of its business, it invests in, or purchases
securities similar to, the Warrants and it has such knowledge and experience in
financial and business matters as to render it capable of evaluating the merits
and risks of purchasing the Warrants and the Class A Common Stock for which they
are exercisable. It is aware that it (or any investor account) may be required
to bear the economic risk of an investment in the Warrants for an indefinite
period of time and it (or such account) is able to bear such risk for an
indefinite period. The Subscriber further acknowledges that it is aware that the
Company does not expect to pay dividends in the foreseeable future.
3. It acknowledges that neither the Company nor any person representing the
Company has made any representation to it with respect to the Company, the
Offering or the Warrants, other than the information contained in this Offering
Memorandum which has been delivered to it and upon which it is relying in making
its investment decision with respect to the Warrants. It has had access to such
financial and other information concerning the Company and the Warrants as it
has deemed necessary in connection with its decision to purchase the Warrants,
including an opportunity to ask questions of, and request information from, the
Company.
4. It is purchasing the Warrants for its own account, or for one or more
investor accounts for which it is acting as a fiduciary or agent, in each case
for investment, and not with a view to, or for offer or sale in connection with,
any distribution thereof in violation of the Securities Act, subject to any
requirement of law that the disposition of its property or the property of such
investor account or accounts be at all times within its or their control and
subject to its or their ability to resell the Warrants pursuant to Rule 144A,
Regulation S or any exemption from registration available under the Securities
Act. It agrees on its own behalf and on behalf of any investor account for which
it is purchasing the Warrants, and each subsequent holder of the Warrants by its
acceptance thereof will agree, to offer, sell or otherwise transfer such
Warrants prior to the date which is three years after the later of the date of
original issue and the last date on which the Company or any affiliate of the
Company was the owner of such Warrants (or any predecessor thereto) (the "Resale
Restriction Termination Date") only (a) to the Company, (b) pursuant to a
registration statement which has been declared effective under the Securities
Act, (c) for so long as the Restricted Securities are eligible for resale
pursuant to Rule 144A, to a person it reasonably believes is a qualified
institutional buyer under and in compliance with Rule 144A (a "QIB") that
purchases for its own account or for the account of a QIB to whom notice is
given that the transfer is being made in reliance on Rule 144A, (d) pursuant to
offers and sales that occur outside the United States within the meaning of and
in compliance with Regulation S promulgated under the Securities Act, (e) within
the United States to an institutional "accredited investor" within the meaning
of subparagraph (a)(1), (2), (3) or (7) of Rule 501 promulgated under the
Securities Act that is purchasing for his own account or for the account of such
an institutional "accredited investor" for investment purposes and not with a
view to, or for offer or sale in connection with, any distribution in violation
of the Securities Act or (f) pursuant to any other available exemption from the
registration requirements of the Securities Act, subject in each of the
foregoing cases to any
74
requirement of law that the disposition of its property or the property of such
investor account or accounts be at all times within its or their control. The
foregoing restrictions on resale should not apply subsequent to the Resale
Restriction Termination Date. If any resale or other transfer of the Warrants is
proposed to be made pursuant to clause (e) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the transferee
substantially in the form of Annex A hereto to the Warrant Agent, which shall
provide, among other things, that the transferee is an institutional "accredited
investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
promulgated under the Securities Act and that it is acquiring such Warrants for
investment purposes and not for distribution in violation of the Securities Act.
In connection with the Offering, the Subscriber will execute a Suitability
Questionnaire which evidences that status of, and contains certain
representations and warranties by the Subscriber and the Subscriber will
acknowledge that the Company is relying on the information contained in such
Suitability Questionnaire in connection with the sale of the Warrants to the
Subscriber and the other Subscribers. Each purchaser acknowledges that the
Company and the Warrant Agent reserve the right, prior to any offer, sale or
other transfer prior to the Resale Restriction Termination Date of the Warrants
pursuant to clause (d), (e) or (f) above, to require the delivery of an opinion
of counsel, certifications and other information satisfactory to the Company and
the Warrant Agent. Each purchaser acknowledges that each Warrant Certificate
will contain a legend substantially to the following effect:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY, ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER," AS SUCH TERM IS DEFINED IN, AND IN COMPLIANCE WITH,
RULE 144A PROMULGATED UNDER THE SECURITIES ACT, THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE
IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D)
PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF AND IN COMPLIANCE WITH REGULATION S PROMULGATED UNDER THE
SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 PROMULGATED
UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT,
OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE WARRANT AGENT'S
RIGHT PRIOR TO ANY
75
SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F), TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND SUBJECT TO THE REQUIREMENT THAT IN EACH OF
THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE WARRANT AGENT.
THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE.
5. If it is a purchaser in a sale that occurs outside the United States
within the meaning of Regulation S under the Securities Act, it acknowledges
that until the expiration of the "40-day restricted period" within the meaning
of Rule 903(c) (2) promulgated under the Securities Act, any offer or sale of
the Restricted Securities shall not be made by it in reliance upon Regulation S
to a U.S. person or for the account or benefit of a U.S. person within the
meaning of Rule 902(o) promulgated under the Securities Act.
6. It was the beneficial owner of the principal amount of Debentures as of
June 3, 1994 set forth in the Subscription Agreement executed by such person.
7. It acknowledges that the Company and others will rely upon the truth and
accuracy of the foregoing acknowledgments, representations and agreements and
agrees that, if any of the acknowledgments, representations or warranties deemed
to have been made by it by its purchase of Warrants are no longer accurate, it
shall promptly notify the Company. If it is acquiring any Warrants as a
fiduciary or agent for one or more investor accounts, it represents that it has
sole investment discretion with respect to each such account and that it has
full power to make the foregoing acknowledgments, representations and agreements
on behalf of each such account.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain of the anticipated United
States federal income tax consequences to investors in the Offering with respect
to receipt, exercise and disposition of the Warrants and to the Company upon
issuance and exercise of the Warrants. The summary is for general information
only and is based on the United States Internal Revenue Code of 1986 (the
"Code"), the Treasury Regulations promulgated or proposed thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change. Any such changes could be
applied retroactively in a manner that could adversely affect a holder of the
Debentures or the Warrants. In addition, the tax consequences of the matters
discussed herein are uncertain because of the lack of applicable legal authority
and may be subject to administrative or judicial interpretations that differ
from the discussion below. The Company has not requested a ruling from the
Internal Revenue Service ("IRS") with respect to these matters. The summary is
addressed to holders (but in the case of holders who are Foreign Persons, as
defined below, only to those holders (i) who are not pass-through entities, (ii)
for whom income, gain or loss with respect to the Debentures or the Warrants
would not be effectively connected with the conduct of a trade or business in
the United States and (iii) who are neither United States expatriates nor former
United States residents) who will hold the Warrants, and who hold or held the
Debentures, as "capital assets" within the meaning of section 1221 of the Code.
The tax treatment of a holder of the Debentures or the Warrants may vary
depending upon the particular situation of the holder. Certain holders
(including, but not limited to, insurance companies, tax-exempt organizations
and financial institutions) may be subject to special rules not discussed below.
The discussion below also does not address the effect of any state, local or
foreign tax law on a holder of the Debentures or the Warrants. The discussion
does not constitute, and should not be considered as, legal or tax advice to
holders of the Debentures or the Warrants. Each holder of Debentures and/or
Warrants should consult a tax advisor as to the particular tax consequences to
such holder with respect
76
to receipt, exercise and disposition of the Warrants and the ownership of the
Debentures, including the applicability and effect of any state, local or
foreign tax laws.
As used herein, the term "Foreign Person" means a person other than (i) an
individual who is a citizen or resident of the United States, (ii) a
partnership, corporation or other entity organized in or under the laws of the
United States or any state thereof, or (iii) an estate or trust that is subject
to United States federal income taxation without regard to the source of its
income.
TAX CONSEQUENCES OF RECEIPT, EXERCISE AND DISPOSITION OF WARRANTS
While the law is unclear, persons who acquire Warrants in the Offering and
who hold the Debentures with respect to which such Warrants are acquired should
not recognize gain or loss or be required to include any amount in income as the
result of the receipt of the Warrants in exchange for providing the Release.
While the law is also unclear on this point, persons who acquire Warrants in the
Offering but who no longer hold the Debentures with respect to which such
Warrants are acquired should recognize capital gain equal to the fair market
value of the Warrants acquired. All persons who acquire Warrants in the Offering
should have a tax basis in each Warrant received equal to the fair market value
of the Warrant on the date of issuance.
Upon exercise of a Warrant, holders should have an initial tax basis in each
share of Class A Common Stock purchased equal to the sum of the tax basis of the
Warrant (i.e., the fair market value of the Warrant on the date issued) plus the
amount paid per share upon exercise of the Warrant. Cash received in lieu of a
fractional share of Class A Common Stock should be treated as received in
redemption of such fractional share deemed purchased upon exercise of the
Warrants, and holders generally should recognize gain or loss equal to the
difference between the amount received and their tax basis in such fractional
share.
On the sale or exchange of a Warrant, holders should recognize capital gain
or loss equal to the difference (if any) between the amount realized on the sale
or exchange and the holder's tax basis in the Warrant. If the Warrants expire
unexercised, and a registration statement relating to the Class A Common Stock
underlying the Warrants has been effective prior to the Expiration Date so that
no payment is received by holders on the Expiration Date, the loss realized upon
expiration of the Warrants should be treated as capital loss. If such a
registration statement has not been effective, so that the Company is required
to redeem the Warrants on the Expiration Date for a cash payment equal to the
Redemption Price, any loss realized (if a holder's basis in a Warrant exceeds
the mandatory redemption payment) should also be treated as a capital loss, but
any gain realized (if a holder's basis in a Warrant is less than the mandatory
redemption payment) could be treated as ordinary income if the redemption of the
Warrants does not constitute a sale or exchange of the Warrants. Holders should
consult their tax advisors with respect to the treatment of gain or loss
attributable to failure to exercise the Warrants.
Foreign Persons who receive, exercise or dispose of Warrants generally
should not be subject to U.S. federal income tax on any gain recognized in the
transactions described in this section. See "Tax Consequences to Foreign
Persons" below.
TAX CONSEQUENCES TO HOLDERS OF DEBENTURES
As noted above, while the law is unclear, receipt of the Warrants should not
be a taxable event to holders of the Debentures with respect to which the
Warrants are received. Rather, such holders should reduce the tax basis of their
Debentures by the fair market value, on the date of issuance, of the Warrants
received with respect to such Debentures. Furthermore, while there is no
authority on point, such basis reduction may be treated as "market discount"
with respect to a Debenture for federal income tax purposes, and the Company
intends to treat it as such. However, as noted below other treatments are
possible, and there can be no assurance that the IRS would not take the position
that the
77
basis reduction should be treated in some way other than as market discount.
Holders of Debentures are urged to consult their own tax advisors with respect
to the tax consequences of the receipt of the Warrants.
Under the market discount rules of the Code, a holder of Debentures
generally would be required to treat any principal payment on a Debenture and
any gain recognized on the sale, exchange, retirement or other disposition of a
Debenture as ordinary income to the extent of the lesser of (i) the amount of
such payment or recognized gain and (ii) the accrued market discount which has
not previously been included in income. Also, upon conversion of the Debentures,
any accrued but not previously included market discount would carry over to the
Class A Common Stock received on conversion, and any gain recognized upon
disposition of such Class A Common Stock would be required to be included as
ordinary income to the extent of such accrued market discount. In general, such
ordinary income is treated as interest income for federal income tax purposes.
In addition, a holder might be required to defer, until the maturity of a
Debenture or its earlier disposition in a taxable transaction, the deduction of
a portion of the interest expense on any indebtedness incurred or continued to
purchase or carry the Debenture.
Market discount would accrue ratably during the period from the date of
issuance of the Warrants to the maturity date of the Debentures, unless a holder
made an irrevocable election to accrue market discount under a constant yield
method. A holder of a Debenture could elect to include market discount in income
currently as it accrued (under either a ratable or constant yield method), in
which case the rules described above regarding (i) the treatment as ordinary
income of gain upon the disposition of the Debenture and upon the receipt of
certain payments and (ii) the deferral of interest deductions, would not apply.
The election to include market discount in income currently, once made, would
apply to all market discount obligations acquired in or after the first taxable
year to which the election applies and could not be revoked without the consent
of the Internal Revenue Service. Such currently included market discount would
increase the holder's tax basis in the Debenture and generally would be treated
as ordinary interest income for federal income tax purposes.
Market discount with respect to a Debenture held by a Foreign Person is not
subject to withholding of U.S. federal income tax.
Any gain recognized by a holder of Debentures in excess of the amount
treated as ordinary income under the market discount rules would be taxed as
capital gain, provided the holder held the Debentures as a capital asset. Such
capital gain would be long-term capital gain if the holder held the Debentures
for more than one year as of the date such gain is recognized. Gain recognized
by holders of Debentures who are Foreign Persons will generally not be subject
to U.S. federal income tax. See "Tax Consequences to Foreign Persons" below.
As noted above, because of a lack of authority, it is not certain that any
basis reduction resulting from receipt of the Warrants will be treated as market
discount. If such basis reduction were not treated as market discount, it could
be treated as original issue discount ("OID"). In that case, the market discount
rules described above would not apply, and holders of Debentures could be
required to include the fair market value of the Warrants received in income on
an accrual basis based on a constant yield, presumably over the remaining term
of the Debentures. As noted above, Foreign Persons would generally not be
subject to U.S. federal income tax on any such gain. See "Tax Consequences to
Foreign Persons" below. Also, Foreign Persons would generally not be subject to
withholding with respect to any OID on the Debentures, provided that the OID
qualified as "portfolio interest" under the Code. Foreign Persons should consult
their own tax advisors with respect to the application of the "portfolio
interest" rules of the Code.
78
TAX CONSEQUENCES TO FOREIGN PERSONS
Foreign Persons (other than certain nonresident alien individuals who are
present in the United States for more than 183 days in a taxable year) are
generally not subject to United States federal income tax on capital gains
recognized, unless such gains are effectively connected with the conduct of a
trade or business in the United States. Consequently, such Foreign Persons
should not be subject to tax in the United States upon (i) the receipt of
Warrants, even if such Foreign Person no longer holds Debentures, (ii) the
receipt of cash in lieu of a fractional share of Class A Common Stock upon
exercise of the Warrants, (iii) the sale, exchange or redemption of the
Warrants, or (iv) the sale or exchange of, or the receipt of principal payments
on, the Debentures.
TAX CONSEQUENCES TO THE COMPANY
The Company should not recognize gain or loss or be required to include any
amount in income with respect to the issuance of the Warrants in exchange for
the Release. Also, the Company should not recognize gain or loss or be required
to include any amount in income with respect to the issuance of its Class A
Common Stock upon exercise of the Warrants.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Internal Revenue Code of 1986, as amended (the "Code"), prohibit certain
transactions between persons who are "parties in interest" under ERISA or
"disqualified persons" under the Code, including the extension of credit between
a plan subject to ERISA or the Code (a "Plan") and a party in interest or
disqualified person. Any person proposing to purchase the Warrants for or on
behalf of a Plan should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and whether any exemption
would be applicable, and should determine on its own whether all conditions have
been satisfied.
Accordingly, each purchaser of Warrants from the Company, by its acceptance
thereof, will be deemed to certify to the Company that either (i) no part of the
funds used to purchase the Warrants constitutes assets of an employee benefit
plan or (ii) that the use of such assets would not constitute a non-exempt
prohibited transaction under ERISA or the Code. This representation shall be
deemed to be based upon such purchaser's determination that a statutory or
administrative exemption is applicable or that the issuer and its affiliates are
not parties in interest or disqualified persons with respect to the employee
benefit plan with respect to which the investment is being made.
Moreover, each person investing on behalf of a Plan should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Warrants is appropriate, taking into
account the overall investment policy of the Plan and the composition of the
Plan's portfolio.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company and subsidiaries
appearing elsewhere in this Offering Memorandum have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, to the extent and for the
periods indicated in their report thereon. Such financial statements have been
included in reliance upon the report of KPMG Peat Marwick LLP.
79
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports and other information with the SEC. The reports and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549 and at the SEC's Regional Offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, at prescribed rates. In addition, to the extent
applicable, for so long as any of the Warrants remain outstanding, the Company
will make available to any holder of the Warrants (a) the information required
by Rule 144A(d)(4) under the Securities Act, until such securities are no longer
restricted securities within the meaning of Rule 144 under the Securities Act
and (b) upon request, any reports sent to the Company's holders of Class A
Common Stock generally. The Company will also, upon reasonable request, deliver
to each person to whom a copy of this Offering Memorandum has been delivered any
reports previously filed with the SEC or any other information regarding the
Company, including any agreements and contracts to which the Company is a party.
The Company may require any person making such a request to execute a
confidentiality agreement in favor of the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference all documents and reports
subsequently filed by the Company with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Offering Memorandum and
prior to termination of the offering of the Warrants. Such documents shall be
deemed to be incorporated by reference in this Offering Memorandum and to be a
part hereof from the date of filing of such documents or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Offering Memorandum to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded, except as so modified
or superseded, shall not be deemed to constitute a part of this Offering
Memorandum.
The Company will provide without charge to each person to whom a copy of
this Offering Memorandum has been delivered, on the written or oral request of
such person, a copy of any or all of the documents incorporated herein by
reference, other than exhibits to such documents unless they are specifically
incorporated by reference into such documents. Notwithstanding the foregoing,
the Company incorporates herein by reference the list of exhibits set forth in
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1994, and will provide without charge to each person to whom a copy of this
Offering Memorandum has been delivered, on the written or oral request of such
person, a copy of any or all of such exhibits. Requests for such copies should
be directed to: C. Michael Stoehr, Chief Financial Officer, Audiovox
Corporation, 150 Marcus Boulevard, Hauppauge, New York 11788, telephone
516-231-7750. The Company may require any person making such a request to
execute a confidentiality agreement in favor of the Company.
80
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, 1993 and 1994, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended November 30, 1994. 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, 1993 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended November 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1(f) to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" in 1994.
/S/KPMG PEAT MARWICK LLP
Jericho, New York
February 13, 1995
F-1
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1993 AND 1994
(IN THOUSANDS)
1993 1994
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents............................................ $ 1,372 $ 5,495
Accounts receivable, net............................................. 73,208 94,242
Inventory, net....................................................... 64,308 83,430
Income taxes receivable.............................................. 228 --
Notes receivable from equity investment.............................. 7,973 --
Prepaid expenses and other current assets............................ 3,668 6,065
Deferred income taxes................................................ 2,620 2,247
-------- --------
Total current assets............................................. 153,377 191,479
-------- --------
Restricted cash........................................................ -- 6,559
Property, plant and equipment, net..................................... 6,083 6,180
Equity investments..................................................... 7,240 25,902
Debt issuance costs, net............................................... 750 4,840
Excess cost over fair value of assets acquired and
other intangible assets, net......................................... 1,031 1,032
Other assets........................................................... 1,190 3,106
-------- --------
$169,671 $239,098
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 17,762 $ 21,088
Accrued expenses and other current liabilities....................... 10,841 13,063
Income taxes payable................................................. 2,250 834
Bank obligations..................................................... 38,797 1,084
Documentary acceptances.............................................. 10,833 --
Current installments of long-term debt............................... 9,743 159
-------- --------
Total current liabilities........................................ 90,226 36,228
Bank obligations....................................................... -- 29,100
Deferred income taxes.................................................. -- 5,945
Long-term debt, less current installments.............................. 13,610 75,653
-------- --------
Total liabilities................................................ 103,836 146,926
-------- --------
Minority interest...................................................... 42 138
-------- --------
Stockholders' equity:
Preferred stock...................................................... 2,500 2,500
Common Stock:
Class A.......................................................... 68 68
Class B.......................................................... 22 22
Paid-in capital...................................................... 39,171 39,715
Retained earnings.................................................... 24,226 50,254
-------- --------
65,987 92,559
Cumulative foreign currency translation and adjustment................. (194) (525)
-------- --------
Total stockholders' equity........................................... 65,793 92,034
-------- --------
Commitments and contingencies
$169,671 $239,098
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
F-2
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1992 1993 1994
-------- -------- --------
Net sales........................................................ $343,905 $389,038 $486,448
Cost of sales.................................................... 284,904 314,118 401,537
-------- -------- --------
Gross profit................................................... 59,001 74,920 84,911
-------- -------- --------
Operating expenses:
Selling........................................................ 16,699 23,191 31,925
General and administrative..................................... 25,202 28,096 33,114
Warehousing, assembly and repair............................... 8,347 8,479 9,386
-------- -------- --------
50,248 59,766 74,425
-------- -------- --------
Operating income................................................. 8,753 15,154 10,486
Other income (expenses):
Interest and bank charges...................................... (6,686) (6,504) (6,535)
Equity in income of equity investments......................... 1,177 4,948 3,748
Management fees and related income............................. 4,933 1,903 1,543
Gain on sale of equity investment.............................. -- -- 27,783
Gain on public offering of equity investment................... -- -- 10,565
Other, net..................................................... 137 (259) (1,056)
-------- -------- --------
(439) 88 36,048
-------- -------- --------
Income before provision for income taxes, extraordinary item and
cumulative effect of a change in an accounting principle......... 8,314 15,242 46,534
Provision for income taxes....................................... 2,495 5,191 20,328
-------- -------- --------
Income before extraordinary item and cumulative effect of a
change in accounting for income taxes.......................... 5,819 10,051 26,206
Extraordinary item--Tax benefits from utilization of net
operating loss carryforwards................................... 1,851 2,173 --
Cumulative effect of change in accounting for income taxes....... -- -- (178)
-------- -------- --------
Net income....................................................... $ 7,670 $ 12,224 $ 26,028
-------- -------- --------
-------- -------- --------
Income per common share (primary):
Income before extraordinary item............................... $ 0.64 $ 1.11 $ 2.88
-------- -------- --------
-------- -------- --------
Extraordinary item............................................. $ 0.21 $ 0.24 --
-------- -------- --------
-------- -------- --------
Cumulative effect of change in accounting for income taxes..... -- -- $ (0.02)
-------- -------- --------
-------- -------- --------
Net income..................................................... $ 0.85 $ 1.35 $ 2.86
-------- -------- --------
-------- -------- --------
Income per common share (fully diluted):
Income before extraordinary item............................... -- $ 1.03 $ 2.21
-------- -------- --------
-------- -------- --------
Extraordinary item............................................. -- $ 0.22 --
-------- -------- --------
-------- -------- --------
Cumulative effect of change in accounting for income taxes..... -- -- $ (0.01)
-------- -------- --------
-------- -------- --------
Net income..................................................... -- $ 1.25 $ 2.20
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-3
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS)
CUMULATIVE
FOREIGN
CURRENCY TOTAL
PREFERRED COMMON PAID-IN UNEARNED RETAINED TRANSLATION STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION EARNINGS ADJUSTMENT EQUITY
--------- ------ ------- ------------ -------- ----------- -------------
Balances at November 30, 1991..... $ 2,500 $ 90 $38,854 -- $ 4,332 $ 920 $46,696
Net income........................ -- -- -- -- 7,670 -- 7,670
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- (909) (909)
--------- ------ ------- ----- -------- ----- -------------
Balances at November 30, 1992..... 2,500 90 38,854 -- 12,002 11 53,457
Net income........................ -- -- -- -- 12,224 -- 12,224
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- (205) (205)
Grant of warrants................. -- -- 100 -- -- -- 100
Stock issuance upon exercise of
options........................... -- -- 217 -- -- -- 217
--------- ------ ------- ----- -------- ----- -------------
Balances at November 30, 1993..... 2,500 90 39,171 -- 24,226 (194) 65,793
Net income........................ -- -- -- -- 26,028 -- 26,028
Equity adjustment from foreign
currency translation.............. -- -- -- -- -- (331) (331)
Unearned compensation relating to
grant of options and
non-performance restricted
stock............................. -- -- 864 (864) -- -- --
Compensation expense.............. -- -- 27 241 -- -- 268
Stock issuance upon exercise of
options........................... -- -- 207 -- -- -- 207
Issuance of warrants.............. -- -- 69 -- -- -- 69
--------- ------ ------- ----- -------- ----- -------------
Balances at November 30, 1994..... $ 2,500 $ 90 $40,338 $ (623) $ 50,254 $(525) $92,034
--------- ------ ------- ----- -------- ----- -------------
--------- ------ ------- ----- -------- ----- -------------
See accompanying notes to consolidated financial statements.
F-4
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1992, 1993 AND 1994
(IN THOUSANDS)
1992 1993 1994
-------- --------- ---------
Cash flows from operating activities:
Net income............................................... $ 7,670 $ 12,224 $ 26,028
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 3,067 3,863 4,299
Provision for bad debt expense......................... 1,921 230 (21)
Equity in income of equity investments................. (1,177) (4,948) (3,748)
Minority interest...................................... (19) (22) 96
Gain on sale of business............................... (263) -- --
Gain on sale of equity investment...................... -- -- (27,783)
Gain on public offering of equity investment........... -- -- (10,565)
Provision for deferred income taxes, net of
extraordinary item................................... 309 (2,311) 6,140
Provision for unearned compensation.................... -- -- 268
Cumulative effect of change in accounting for income
taxes...................................................... -- -- 178
Changes in:
Accounts receivable.................................... (5,656) (6,266) (20,337)
Inventory.............................................. (4,533) (13,849) (18,701)
Income taxes receivable................................ 2,064 451 229
Accounts payable, accrued expenses and other current
liabilities................................................ (5,407) 8,076 3,675
Income taxes payable................................... -- 1,632 (1,395)
Prepaid expenses and other assets...................... (1,121) (193) (4,171)
-------- --------- ---------
Net cash used in operating activities.................. (3,145) (1,113) (45,808)
-------- --------- ---------
Cash flows from investing activities:
Purchase of equity investments........................... (51) -- (6,016)
Purchases of property, plant and equipment, net.......... (1,235) (1,346) (2,611)
Notes receivable from equity investment.................. (4,125) -- 7,973
Proceeds from sale of business........................... 88 -- --
Net proceeds from sale of equity investment.............. -- -- 29,433
Purchase of acquired business............................ -- -- (148)
-------- --------- ---------
Net cash (used in) provided by investing activities.... (5,323) (1,346) 28,631
-------- --------- ---------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit
agreements................................................. 3,194 4,616 (8,613)
Net (repayments) borrowings under documentary
acceptances................................................ 3,942 2,832 (10,833)
Principal payments on long-term debt..................... -- (6,127) (17,411)
Debt issuance costs...................................... (1,562) (177) (5,315)
Proceeds from exercise of stock options.................. -- 176 170
Principal payments on capital lease obligation........... -- (165) (175)
Proceeds from issuance of long-term debt................. -- -- 65,000
Proceeds from issuance of notes payable.................. -- -- 10,045
Payment of note payable.................................. -- -- (5,000)
Restricted cash.......................................... -- -- (6,559)
-------- --------- ---------
Net cash provided by financing activities.............. 5,574 1,155 21,309
Effect of exchange rate changes on cash.................. (73) (10) (9)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... (2,967) (1,314) 4,123
Cash and cash equivalents at beginning of period........... 5,653 2,686 1,372
-------- --------- ---------
Cash and cash equivalents at end of period................. $ 2,686 $ 1,372 $ 5,495
-------- --------- ---------
-------- --------- ---------
See accompanying notes to consolidated financial statements.
F-5
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1992, 1993 AND 1994
(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) designs and markets
cellular telephones and accessories, automotive aftermarket sound and security
equipment, other automotive aftermarket accessories and certain other products,
principally in the United States, Canada, and overseas. In addition to
generating product revenue from the sale of cellular telephone products, the
Company's retail outlets, as agents for cellular carriers, are paid activation
commissions and residual fees from such carriers. The Company also sells
cellular telephones in Europe, Latin America, Asia, the Middle East and
Australia.
The Company's automotive sound, security and accessory products include
stereo cassette radios, compact disc players and changers, amplifiers and
speakers; key based remote control security systems; and cruise controls, door
and trunk locks. These products are marketed through mass merchandise chain
stores, specialty automotive accessory installers, distributors and automobile
dealers.
(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
Cash equivalents of $100 at November 30, 1993 consisted of a certificate of
deposit with an initial term of less than three months. For purposes of the
statements of cash flows, the Company considers investments with original
maturities of three months or less to be cash equivalents.
(d) Inventory
Inventory consists principally of finished goods and is stated at the lower
of cost (primarily on a weighted moving average basis) or market.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment under capital
lease is stated at the present value of minimum lease payments. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets as follows:
Buildings.............................................................. 20 years
Furniture, fixtures and displays....................................... 5-10 years
Machinery and equipment................................................ 5-10 years
Computer hardware and software......................................... 5 years
Automobiles............................................................ 3 years
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset. Assets acquired under capital lease are
amortized over the term of the lease.
F-6
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(f) Income Taxes
Effective December 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards Board No. 109, "Accounting for Income Taxes",
and has reported the cumulative effect of that change in the method of
accounting for income taxes in the 1994 consolidated statement of earnings.
Under the asset and liability method of Statement 109, 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. Under Statement
109, 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.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1993 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
(g) Net Income Per Common Share
Primary earnings per share are computed based on the weighted average number
of common shares outstanding and common stock equivalents. For the years ended
November 30, 1993 and 1994, stock options, stock grants and stock warrants (Note
13) are common stock equivalents. The computation of fully diluted earnings per
share assumes conversion of all outstanding debentures (Note 8) and exercise of
common stock equivalents, stock options, performance accelerated grants and
warrants. For purposes of this computation, net income was adjusted for the
after-tax interest expense applicable to the convertible debentures.
The Company does not compute fully diluted earnings per share when the
addition of potentially dilutive securities would result in anti-dilution.
The following weighted average shares were used for the computation of
primary and fully diluted earnings per share:
FOR THE YEARS ENDED NOVEMBER 30,
-------------------------------------
1992 1993 1994
--------- ---------- ----------
Primary......................................... 9,007,242 9,046,698 9,105,952
Fully diluted................................... 9,007,242 10,077,685 12,769,221
(h) Debt Issuance Costs
Costs incurred in connection with the issuance of the Convertible
Subordinated Debentures and restructuring of the Series A and Series B
Convertible Subordinated Notes (Note 8) and the restructuring of bank
obligations (Note 7) have been capitalized. These charges are amortized over the
lives of the respective agreements. Amortization expense of these costs amounted
to $501, $856 and $1,225 for the years ended November 30, 1992, 1993 and 1994,
respectively.
F-7
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(i) Intangible Assets
Intangible assets consist of patents, trademarks, non-competition agreements
and the excess cost over fair value of assets acquired for certain subsidiary
companies and equity investments. Excess cost over fair value of assets acquired
is being amortized over periods not exceeding twenty years. The costs of other
intangible assets are amortized on a straight-line basis over their respective
lives.
Accumulated amortization approximated $1,012 and $1,283 at November 30, 1993
and 1994, respectively. Amortization of the excess cost over fair value of
assets acquired and other intangible assets amounted to $133, $164 and $271 for
the years ended November 30, 1992, 1993 and 1994, 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.
(j) 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, 1993 and
1994, the reserve for future warranty expense amounted to $2,170 and $1,665,
respectively.
(k) Cash Discount and Co-operative Advertising Allowances
The Company accrues for estimated cash discounts and trade and promotional
co-operative advertising allowances 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.
(l) Foreign Currency
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. Revenues and
expenses have been translated at the weighted average rates of exchange in
effect during the period. Gains and losses resulting from translation are
accumulated in the cumulative foreign currency translation account in
stockholders' equity. Exchange gains and losses on hedges of foreign net
investments and on inter-company balances of a long-term investment nature are
also recorded in the cumulative foreign currency translation adjustment account.
Other foreign currency transaction gains and losses are included in net income,
none of which were material for the years ended November 30, 1992, 1993 and
1994.
During 1993 and 1994, the Company entered into foreign exchange contracts
denominated in the currency of its major suppliers. These contracts were
purchased to hedge identifiable foreign currency commitments, principally
purchases of inventory that are not denominated in U.S. Dollars. Accordingly,
any gain or loss associated with the contracts was included as a component of
inventory cost. Cash flows resulting from these contracts are included in the
net change in inventory for purposes of the statements of cash flows. No foreign
exchange contracts were purchased in 1992. There were no open foreign exchange
contracts at November 30, 1993 and 1994.
F-8
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(m) Equity Investments
The Company has common stock investments in five companies, which are
accounted for by the equity method (Note 12).
(n) Cellular Telephone Commissions
Under various agreements, the Company typically receives an initial
activation commission for obtaining subscribers for cellular telephone services.
Additionally, the agreements typically contain provisions for commissions based
upon usage and length of continued subscription. The agreements also typically
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 $21,469, $30,150 and $51,793 for the years
ended November 30, 1992, 1993 and 1994, respectively. Related commissions paid
to outside selling representatives for cellular activations are reflected as
cost of sales in the accompanying consolidated statements of earnings and
amounted to $8,923, $10,969 and $17,848 for the years ended November 30, 1992,
1993 and 1994, respectively.
(o) Restricted Cash
At November 30, 1994, the Company has approximately $6,559 of restricted
cash, classified as a non-current asset, which represents collateral for an
irrevocable standby letter of credit in favor of the Series AA and Series BB
Convertible Debentures. Currently, the cash is invested in short-term
certificates of deposit.
(p) Supplementary Financial Statement Information
Advertising expenses approximated $4,467, $8,740 and $11,610 for the years
ended November 30, 1992, 1993 and 1994, respectively.
Interest income of approximately $861, $837 and $540 for the years ended
November 30, 1992, 1993 and 1994, respectively, is included in other in the
accompanying consolidated financial statements.
Included in accrued expenses and other current liabilities is $3,696 of
accrued wages and commissions at November 30, 1994.
(q) Reclassifications
Certain reclassifications have been made to the 1992 and 1993 consolidated
financial statements in order to conform to the 1994 presentation.
F-9
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) BUSINESS ACQUISITIONS/DISPOSITIONS
In May 1992, the Company sold its interest in a 50% investment in Park Plus
Corporation (Park Plus), which marketed and distributed mechanical parking
equipment, for cash, accounts receivable and notes receivable aggregating $451.
This transaction resulted in a gain of $263 which has been recognized as other
income in the accompanying consolidated financial statements as of November 30,
1992.
On December 1, 1993, the Company acquired all of the assets and liabilities
of H & H Eastern Distributors, Inc. (H&H) for $148 in cash and a warrant to
purchase 50,000 shares of the Company's Class A Common Stock valued at
approximately $69. The Company acquired assets of approximately $1,854,
liabilities of approximately $1,922 and excess cost over fair value of net
assets acquired of $285 which is being amortized on a straight-line basis over
20 years. Proforma financial information has not been reflected for this
acquisition as the impact on the results of operations of the Company would not
have been material.
In December, 1993, the Company formed Audiovox Singapore Pte. Ltd., a
wholly-owned subsidiary of Audiovox Asia, Inc. (Audiovox Asia), which, in turn,
is a wholly-owned subsidiary of the Company, as well as Audiovox Communications
(Malaysia) Sdn. Bhd.(Audiovox Malaysia), which is an 80% owned subsidiary of
Audiovox Asia. In July 1994, the Company formed Audiovox (Thailand) Co., Ltd., a
100% owned subsidiary of Audiovox Asia. The Company formed these subsidiaries to
assist in its planned expansion of its international customer base.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
FOR THE YEARS ENDED NOVEMBER
30,
-----------------------------
1992 1993 1994
------ ------ -------
Cash paid during the years for:
Interest........................................... $7,152 $5,985 $ 5,291
Income taxes....................................... $ 650 $3,667 $15,409
During 1992, $3,848 of outstanding accounts receivable from CellStar
Corporation (CellStar, the successor to National Auto Center, Inc. (National)
and Audiomex Export Corp. (Audiomex)), one of the Company's equity investments,
was converted to a note receivable (Note 12). During 1993, the Company entered
into a lease agreement to acquire new computer equipment. As a result, a capital
lease obligation of $646 was incurred (Note 11).
Stock warrants were issued pursuant to a consulting agreement entered into
during 1993 (Note 13).
During 1993 and 1994, a reduction of $40 and $37 to income taxes payable was
made due to the exercise of stock options.
During 1994, the Company acquired the assets and liabilities of H&H in
exchange for cash and warrants to purchase the Company's common stock (Note 2).
F-10
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
NOVEMBER 30,
-------------------
1993 1994
------- --------
Trade accounts receivable............................................... $68,570 $ 90,225
Receivables from equity investments (Note 12)........................... 10,171 9,799
------- --------
78,741 100,024
Less:
Allowance for doubtful accounts....................................... 2,063 1,623
Allowance for cellular deactivations.................................. 1,739 1,234
Allowance for co-operative advertising and cash discounts............. 1,731 2,925
------- --------
$73,208 $ 94,242
------- --------
------- --------
The provision for bad debt expense amounted to $1,921, $230 and a recovery
of $21 for the years ended November 30, 1992, 1993 and 1994, respectively. See
Note 14(b) for concentrations of credit risk.
(5) TRANSACTIONS WITH MAJOR SUPPLIERS
The Company engages in transactions with Shintom Co., Ltd (Shintom), a
stockholder who owns approximately 3.5% at November 30, 1993 and 1994 of the
outstanding Class A Common Stock and all of the outstanding Preferred Stock of
the Company. These transactions include financing arrangements and inventory
purchases which approximated 6%, 4% and 7% for the years ended November 30,
1992, 1993 and 1994, respectively, of total inventory purchases. During 1993,
the Company terminated its $14,500 line of credit with Shintom. Included in
accounts payable as of November 30, 1993 is $43 due to Shintom for trade
purchases.
During 1993, defective product was returned to Shintom in exchange for
tooling valued at $185. At November 30, 1993, tooling valued at $92 is
outstanding and included in prepaid and other current assets.
During 1994, the Company formed a joint venture in Japan (Note 12) with
Shintom and other companies and issued a note payable to a wholly-owned
subsidiary of Shintom, in connection with the purchase, which was repaid during
1994.
The Company purchased a majority of its cellular products from another
supplier. Inventory purchases from this supplier approximated 48%, 47% and 45%
of total inventory purchases for the years ended November 30, 1992, 1993 and
1994, respectively.
Prior to fiscal 1993, the Company had an unwritten arrangement with its
principal supplier of cellular telephone products pursuant to which the Company
generally absorbed all repair costs to a maximum of 50% of the original value of
the defective unit. The Company no longer utilizes its principal supplier of
cellular telephone products for repairs as of November 30, 1993. During the
fiscal year ended November 30, 1993, the Company began repairing cellular
telephone products.
F-11
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment, net, is as follows:
NOVEMBER 30,
------------------
1993 1994
------- -------
Land..................................................................... $ 53 $ 53
Buildings................................................................ 446 446
Furniture, fixtures and displays......................................... 2,930 3,467
Machinery and equipment.................................................. 2,077 2,458
Computer hardware and software........................................... 10,105 10,981
Automobiles.............................................................. 394 649
Leasehold improvements................................................... 3,207 4,003
------- -------
19,212 22,057
Less accumulated depreciation and amortization........................... 13,129 15,877
------- -------
$ 6,083 $ 6,180
------- -------
------- -------
At November 30, 1993 and 1994, included in computer hardware and software,
is $846 pertaining to a capital lease. Amortization of such equipment is
included in depreciation and amortization of plant and equipment, and
accumulated amortization was $226 and $463 at November 30, 1993 and 1994,
respectively.
Computer software includes approximately $2,564 and $1,305 of unamortized
costs as of November 30, 1993 and 1994, respectively, related to the acquisition
and installation of management information systems for internal use which are
being amortized over a five-year period.
Depreciation and amortization of plant and equipment amounted to $2,433,
$2,843 and $2,803 for the years ended November 30, 1992, 1993 and 1994,
respectively, which includes amortization of computer software costs of $1,420,
$1,439 and $1,259 for the years ended November 30, 1992, 1993 and 1994,
respectively.
(7) FINANCING ARRANGEMENTS
(a) Bank Obligations
In connection with the completion of the sale of the Debentures (Note 8),
the Company entered into an amended and restated revolving credit agreement (the
Credit Agreement) with its financial institutions on March 15, 1994. Under the
credit agreement, the Company may obtain credit through direct borrowings,
Eurodollars, banker's acceptances and letters of credit. The obligations of the
Company under the credit agreement have been guaranteed by certain of the
Company's subsidiaries and have been secured by accounts receivable and
inventory of the Company and those subsidiaries. The term of the Credit
Agreement is for approximately two years, expiring on February 28, 1996. As a
result of the new revolving credit agreement, bank obligations have been
classified as long-term at November 30, 1994.
F-12
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) FINANCING ARRANGEMENTS--(CONTINUED)
The original amount of the aggregate direct borrowing and line of credit
availability under the Credit Agreement was $20,000 and $50,000, respectively,
which is subject to certain conditions and based upon a formula taking into
account the amount and quality of its accounts receivable and inventory. On
August 26, 1994, the Company executed an amendment to the Credit Agreement to
increase amounts eligible for direct borrowing and lines of credit to $40,000
and $75,000, respectively. This amendment was extended on February 24, 1995,
whereby direct borrowings and bank lines will be reduced to $20,000 and $50,000,
respectively, on June 1, 1995.
Outstanding obligations under the Credit Agreement at November 30, 1993 and
1994 were as follows:
NOVEMBER 30,
------------------
1993 1994
------- -------
Bankers Acceptances...................................................... $20,000 $ 7,000
Revolving Credit Notes................................................... 18,797 400
Eurodollar Notes......................................................... -- 21,700
------- -------
$38,797 $29,100
------- -------
------- -------
During 1993, interest on revolving credit notes was 1.625% above the prime
rate, which was 6% at November 30, 1993, and interest on bankers acceptances was
3.25% above the discount rate, which was 3% at November 30, 1993. During 1994,
interest on revolving credit notes was .25% above the prime rate which was 8.5%
at November 30, 1994, interest on Eurodollar Notes was 2% above the three month
Libor rate which was 6.2% at November 30, 1994, and interest on bankers
acceptances was 2% above the discount rate which was 4.75% at November 30, 1994.
Prior to May 6, 1992, compensating balances were required by some financial
institutions. The Company elected to pay a fee in lieu of these balances and
such fees approximated $69 for the year ended November 30, 1992. Under the new
Credit Agreement, the Company is required to pay quarterly commitment fees, as
well as an annual administrative fee.
The Credit Agreement contains several covenants requiring, among other
things, minimum annual levels of net income, and minimum quarterly levels of net
worth and working capital. Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures. At November 30, 1994, the Company was not in compliance with a
covenant. The Credit Agreement was subsequently amended to eliminate the
non-compliance.
During 1994, Audiovox Malaysia (Note 2) entered into a revolving credit
facility for approximately $1,200 with a local Malaysian bank for additional
working capital needs. The facility is secured by a Standby Letter of Credit
issued under the Credit Agreement by the Company and is payable upon demand or
upon expiration of the Standby Letter of Credit which has a term of one year.
Outstanding obligations under this agreement at November 30, 1994 were $1,084
and annual interest was 1.5% above the Malaysian Base Lending Rate which was
6.6% at November 30, 1994.
The maximum month-end amounts outstanding under the above mentioned
borrowing facilities during the years ended November 30, 1992, 1993 and 1994
were $41,047, $42,659 and $30,184, respectively. Average borrowings during the
years ended November 30, 1992, 1993 and 1994 were
F-13
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) FINANCING ARRANGEMENTS--(CONTINUED)
$32,960, $28,895 and $16,929, respectively and the weighted average interest
rates were 7.7%, 7.8% and 7.9%, respectively.
(b) Documentary Acceptances
Prior to August 1994, the Company had various unsecured documentary
acceptance lines of credit with major suppliers. These lines of credit amounted
to approximately $11,670 at November 30, 1993 to finance inventory purchases.
Interest for certain documentary lines was at a fixed rate of 9% at November 30,
1993. In addition, during 1993, the Company entered into an agreement with a
supplier to fund all merchandise from the supplier on a 60-day documentary
acceptance line of credit at terms equal to the supplier's interest rate, which
was 6.9% at November 30, 1993, plus a 1.1% fee. At November 30, 1993, $10,833 of
documentary acceptances were outstanding.
The maximum month-end documentary acceptances outstanding during the years
ended November 30, 1992, 1993 and 1994 were $9,099, $9,638 and $9,078,
respectively. Average borrowings during the years ended November 30, 1992, 1993
and 1994 were $6,733, $6,883 and $3,787, respectively and the weighted average
interest rates, including fees, were 8.5%, 11.2% and 11.0%, respectively.
(8) LONG-TERM DEBT
A summary of long-term debt follows:
NOVEMBER 30,
------------------
1993 1994
------- -------
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at $17.70 per share...................... $ -- $65,000
Series A 10.8%, due 1996, convertible at $5.34 per share............... 77 --
Series B 11.0%, due 1996, convertible at $5.34 per share............... 5,385 --
Convertible debentures:
Series AA, 10.8%, due 1996, convertible at $5.34 per share............. -- 77
Series BB, 11.0%, due 1996, convertible at $5.34 per share............. -- 5,385
Subordinated Notes:
Series A, 10.8%, due 1995.............................................. 2,902 --
Series B, 11.0%, due 1995.............................................. 14,509 --
Subordinated note payable................................................ -- 5,045
Capital lease obligations (Note 11)...................................... 480 305
------- -------
23,353 75,812
Less current installments................................................ 9,743 159
------- -------
$13,610 $75,653
------- -------
------- -------
F-14
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) LONG-TERM DEBT--(CONTINUED)
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
convertible subordinated debentures (Debentures) due 2001 (the Offering), and
entered into an Indenture Agreement. The Debentures are convertible into shares
of the Company's Class A Common Stock, par value $.01 per share at an initial
conversion price of $17.70 per share, subject to adjustment under certain
circumstances. The Indenture Agreement contains various covenants. The bonds are
subject to redemption by the Company in whole or in part, at any time after
March 15, 1997, at certain specified amounts. Audiovox has been requested to
consider, and is considering, certain modifications with respect to its
Debentures. However, there can be no assurance that any such modification will
be made.
A portion of the net proceeds of the Offering was used to repay existing
subordinated notes. In connection with the Company's repayment of indebtedness,
the Company exchanged its existing Series A and Series B Convertible
Subordinated Debentures for Series AA and Series BB Convertible Debentures and
entered into a Debenture Exchange Agreement dated March 8, 1994 (the Debenture
Exchange Agreement). The Series AA and Series BB Convertible Debentures have the
same maturity, interest rate, and conversion provision as the existing Series A
and Series B Convertible Subordinated Debentures, but are not subordinated to
other indebtedness of the Company. Future payments of principal and interest on
the Series AA and Series BB Debentures are secured by a letter of credit (Note 1
(o)). The Series AA and Series BB Convertible Debentures are convertible at any
time at $5.34 per share which is subject to adjustment in certain circumstances.
Although the Debentures Exchange Agreement provides for optional prepayments,
under certain circumstances, such payments are restricted by the Credit
Agreement (Note 7).
On October 20, 1994, the Company issued a note payable for five hundred
million Japanese Yen (approximately $5,045) to finance a foreign currency
investment in TALK Corporation (TALK) (Note 12). The note is scheduled to be
repaid on October 20, 2004 and bears interest at 4.1%. The note can be repaid by
cash payment or by giving 10,000 shares of its TALK investment to the lender.
The lender has an option to acquire 2,000 shares of TALK held by the Company in
exchange for releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. This note and the investment in TALK are both
denominated in Japanese Yen, and as such, the foreign currency translation
adjustments are accounted for as a hedge. Any foreign currency translation
adjustment resulting from the note will be recorded in stockholders' equity to
the extent that the adjustment is less than or equal to the adjustment from the
translation of the investment in TALK. Any portion of the adjustment from the
translation of the note that exceeds the adjustment from the translation of the
investment in TALK is a transaction gain or loss that will be included in
earnings.
At November 30, 1993 and 1994, current installments of long-term debt
include current installments of $159 under capital lease obligations.
Maturities on long-term debt for the next five fiscal years are as follows:
1995....................................................................... $ 159
1996....................................................................... 5,608
1997....................................................................... --
1998....................................................................... --
1999....................................................................... --
------
------
F-15
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) CAPITAL STRUCTURE
The Company's capital structure is as follows:
SHARES ISSUED
SHARES AUTHORIZED AND OUTSTANDING
----------------------- ---------------------
VOTING
NOVEMBER 30, NOVEMBER 30, RIGHTS
PAR ----------------------- --------------------- PER LIQUIDATION
SECURITY VALUE 1993 1994 1993 1994 SHARE RIGHTS
- ------------------------------- ------ ---------- ---------- --------- --------- ------- --------------
Class A Common Stock........... $ 0.01 30,000,000 30,000,000 6,762,288 6,777,788 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
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 -- -- -- --
------ ---------- ---------- --------- --------- -------
------ ---------- ---------- --------- --------- ------- --------------
--------------
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. During 1993,
3,839,500 shares of Class B Common Stock were converted to shares of Class A
Common Stock. During fiscal 1993 and 1994, 16,000 and 15,500 shares,
respectively, of Class A Common Stock were issued due to the exercise of stock
options, (Note 13).
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 had the right, until January 1, 1993,
which was not exercised, to redeem all or part of the Preferred Stock at its par
value.
As of November 30, 1994, 969,500 shares of the Company's Class A Common
Stock are reserved for issuance under the Company's Stock Option and Restricted
Stock Plans (Note 13) and 4,845,345 for all convertible securities and warrants
outstanding at November 30, 1994.
Undistributed earnings from equity investments included in retained earnings
amounted to $7,149 and $20,526 at November 30, 1993 and 1994, respectively.
(10) INCOME TAXES
As discussed in Note 1, the Company adopted Statement 109 as of December 1,
1993. The cumulative effect of this change in accounting for income taxes of
$178, or $.02 per share, is determined as of December 1, 1993 and is reported
separately as a reduction to the consolidated statement of earnings for the year
ended November 30, 1994. Prior years' financial statements have not been
restated to apply the provisions of Statement 109.
F-16
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES--(CONTINUED)
The components of income before the provision for income taxes and
extraordinary item are as follows:
NOVEMBER 30,
----------------------------
1992 1993 1994
------ ------- -------
Domestic Operations............................................. $8,655 $15,983 $47,032
Foreign Operations.............................................. (341) (741) (498)
------ ------- -------
$8,314 $15,242 $46,534
------ ------- -------
------ ------- -------
Total income tax expense for the year ended November 30, 1994 was allocated
as follows:
Income from continuing operations................................................. $20,328
Stockholders' equity
Additional paid in capital for compensation expense for tax purposes in excess
of amounts recognized for financial reporting purposes........................ (37)
-------
Total income tax expense...................................................... $20,291
-------
-------
The provision for (recovery of) income taxes attributable to income from
continuing operations is comprised of:
FEDERAL FOREIGN STATE TOTAL
------- ------- ------ -------
1992:
Current............................................... $ 2,953 $25 $ 905 $ 3,883
Deferred.............................................. (1,022) -- (366) (1,388)
------- ------- ------ -------
$ 1,931 $25 $ 539 $ 2,495
------- ------- ------ -------
------- ------- ------ -------
1993:
Current............................................... $ 4,535 $21 $1,068 $ 5,624
Deferred.............................................. (358) -- (75) (433)
------- ------- ------ -------
$ 4,177 $21 $ 993 $ 5,191
------- ------- ------ -------
------- ------- ------ -------
1994:
Current............................................... $12,042 $68 $2,078 $14,188
Deferred.............................................. 5,365 -- 775 6,140
------- ------- ------ -------
$17,407 $68 $2,853 $20,328
------- ------- ------ -------
------- ------- ------ -------
F-17
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES--(CONTINUED)
A reconciliation of the provision for income taxes attributable to income
from continuing operations computed at the Federal statutory rate to the
reported provision for income taxes attributable to income from continuing
operations is as follows:
NOVEMBER 30,
--------------------------------------------------
1992 1993 1994
--------------- --------------- --------------
Tax provision at Federal statutory rates....... $ 2,827 34.0% $ 5,335 35.0% $16,287 35.0%
Undistributed earnings from equity
investments.................................... (263) (3.2) (1,437) (9.4) 1,558 3.4
Benefit for utilization of loses previously not
consolidated for tax purposes.................. (666) (8.0) -- -- -- --
State income taxes, net of Federal benefit..... 372 4.5 645 4.2 1,854 4.0
Increase in beginning-of-the-year balance of
the valuation allowance for deferred tax
assets......................................... -- -- -- -- 306 .7
Foreign tax rate differential.................. 91 1.1 238 1.6 (7) (.1)
Other, net..................................... 134 1.6 410 2.7 330 .7
------- ----- ------- ----- ------- ----
2,495 30.0 5,191 34.1 20,328 43.7
Utilization of net operating loss
carryforwards.................................. (1,851) (22.3) (2,173) (14.3) -- --
------- ----- ------- ----- ------- ----
$ 644 7.7% $ 3,018 19.8% $20,328 43.7%
------- ----- ------- ----- ------- ----
------- ----- ------- ----- ------- ----
For the years ended November 30, 1992 and 1993, deferred income tax expense
of $1,388 and $433, respectively, results from timing differences in the
recognition of income and expense for income tax and financial reporting
purposes. The sources and tax effects of those timing differences are presented
below:
NOVEMBER 30,
----------------
1992 1993
------- -----
Uniform capitalization of inventory costs.................................. $ (27) $ (93)
Accounts receivable reserves............................................... (632) 193
Warranty and inventory reserves............................................ (623) 484
Depreciation and amortization.............................................. (190) (646)
Insurance reserves......................................................... 96 23
Cellular deactivation reserves............................................. (237) (439)
Other, net................................................................. 225 45
------- -----
$(1,388) $(433)
------- -----
------- -----
The significant components of deferred income tax expense for the year ended
November 30, 1994 are as follows:
Deferred tax expense (exclusive of the effect of other component listed below)..... $5,834
Increase in beginning-of-the-year balance of the valuation allowance for deferred
tax assets....................................................................... 306
------
$6,140
------
------
F-18
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities at November 30,
1994 are presented below:
NOVEMBER 30
1994
-----------
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts and
cellular deactivations...................................................... $ 968
Inventory, principally due to additional costs capitalized for tax purposes
pursuant to the Tax Reform Act of 1986...................................... 387
Inventory, principally due to valuation reserve............................... 436
Accrual for future warranty costs............................................. 658
Net operating loss carryforwards, state and foreign........................... 859
Capital loss carryforward..................................................... --
Foreign tax credits........................................................... --
Other......................................................................... 193
-----------
Total gross deferred tax assets........................................... 3,501
Less: valuation allowance................................................... (979)
-----------
Net deferred tax assets................................................... 2,522
-----------
Deferred tax liabilities:
Plant, equipment and certain intangibles, principally due to depreciation and
amortization.................................................................... (71)
Equity investments, principally due to undistributed earnings................. (6,149)
-----------
Total gross deferred tax liabilities...................................... (6,220)
-----------
Net deferred tax liability................................................ $(3,698)
-----------
-----------
The valuation allowance for deferred assets as of December 1, 1993 was $673.
The net change in the total valuation allowance for the year ended November 30,
1994 was an increase of $306. 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 carryback future reversals of deferred tax assets to taxes paid in current
and prior years and the Company's historical taxable income record, adjusted for
extraordinary items, management believes it is likely that the Company will
realize the benefit of the net deferred tax assets existing at November 30,
1994. 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.
At November 30, 1994, the Company has net operating loss carryforwards for
state and foreign income tax purposes of approximately $7,504, which are
available to offset future state and foreign taxable income, if any, which will
expire through the year ended November 30, 2009.
F-19
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES--(CONTINUED)
The Company has not recognized a deferred tax liability of approximately
$168 for the undistributed earnings of a foreign corporate joint venture that
arose in 1994 and prior years because the Company currently does not expect
those unremitted earnings to reverse and become taxable to the Company in the
foreseeable future. A deferred tax liability will be recognized when the Company
expects that it will recover those undistributed earnings in a taxable manner,
such as through receipt of dividends or sale of the investments.
(11) LEASE OBLIGATIONS
At November 30, 1994, the Company was obligated under non-cancelable leases,
for equipment and warehouse facilities for minimum annual rental payments as
follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
1995...................................................... $ 217 $ 2,557
1996...................................................... 111 1,791
1997...................................................... -- 898
1998...................................................... -- 424
1999 and thereafter....................................... -- 165
------- ---------
Total minimum lease payments.............................. $ 328 $ 5,835
Amounts representing interest............................. 23
-------
Present value of future minimum lease payments............ 305
Less current portion...................................... 159
-------
Obligations under leases excluding current installments... $ 146
-------
-------
Rental expense for the above-mentioned operating lease agreements and other
leases on a month-to-month basis approximated $2,594, $2,390 and $3,107 for the
years ended November 30, 1992, 1993 and 1994, respectively.
The Company leases certain facilities 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, 1994, minimum
annual rental payments on these related party leases, which are included in the
above table, are as follows:
1995................................................................ $646
1996................................................................ 469
1997................................................................ 82
1998................................................................ 14
----
----
(12) EQUITY INVESTMENTS
As of November 30, 1994, the Company had 20.88% ownership interest in
CellStar and a 33.33% ownership interest in TALK. Additionally, the Company had
50% non-controlling ownership in three
F-20
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) EQUITY INVESTMENTS--(CONTINUED)
other companies: Protector Corporation (Protector) which acts as a distributor
of chemical protection treatments and Audiovox Specialty Markets Co., L.P.
(ASM), which acts a distributor to specialized markets for RV's, van
conversions, televisions and other automotive sound, security and accessory
products, and Audiovox Pacific Pty., Limited (Audiovox Pacific) which
distributes cellular telephones and automotive sound and security products in
Australia and New Zealand.
In January, 1992, the Company purchased a 50% equity investment in a newly
formed company, ASM, for $51. Effective December 1, 1993, the Company acquired
the remaining 50% interest in H&H which was a 50% owned joint venture in 1993
(Note 2).
The Company has an agreement for product marketing with Protector. Under the
terms of this agreement, the Company was to receive monthly payments, as well as
a fee based on a percentage of the sales of certain products. In 1992, 1993 and
1994, the Company waived its right to receive its monthly payments pursuant to
the agreement. In 1992, 1993 and 1994, the Company also waived its right to
principally all of the fees based on the percentage of the sales of certain
products. However, in 1994, the Company recorded management fees of $1,108 for
the Company's support to Protector through various marketing programs.
In December 1993, CellStar, the successor in interest to the Company's
National and Audiomex joint ventures, completed an initial public offering (the
CellStar Offering) of 7,935,000 shares of CellStar Common Stock. Of the total
shares sold, the Company sold 2,875,000 shares of CellStar Common Stock at the
initial public offering price (net of applicable underwriting discount) of
$10.695 per share and received aggregate net proceeds of $29,433 (after giving
effect to expenses paid by the Company in connection with the offering). As a
result, the Company recorded a gain, before provision for income taxes, of
$27,783. In addition, the Company recorded a gain, before provision for income
taxes, of $10,565 on the increase in the carrying value of its remaining
3,875,000 shares of CellStar Common Stock due to the CellStar Offering. The
closing price of CellStar stock on November 30, 1994 was $18.50.
Of the proceeds received by CellStar from its initial public offering,
$13,656 was paid to the Company in satisfaction of amounts owed to the Company
by CellStar (as successor to National) under certain promissory notes which
evidenced National's liability to the Company for the payment of management fees
and in satisfaction of past due trade receivables from National to the Company.
As a result of the CellStar Offering, the Company will no longer receive
management fees from CellStar.
In connection with the CellStar Offering, the Company also granted to the
other 50% investor in CellStar (the Investor) an option (Initial Option),
exercisable in whole or in part, on or before December 3, 1995, to purchase up
to an aggregate of 1,500,000 shares of CellStar Common Stock owned by the
Company. The Initial Option is exercisable during the first eighteen months at
an exercise price of $11.50 per share and, thereafter, at an exercise price of
$14.38. In addition, Audiovox granted the Investor a second option (Second
Option), exercisable on or before December 3, 1996, to purchase 250,000 shares
of CellStar Common Stock owned by the Company. The Second Option is exercisable,
in whole and not in part, at an exercise price of $13.80 per share, and may only
be exercised after the Initial Option has been exercised in full.
F-21
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) EQUITY INVESTMENTS--(CONTINUED)
In connection with the CellStar Offering, the Company also granted the
Investor the right to vote up to 2,800,000 shares of CellStar Common Stock owned
by the Company. The number of shares of CellStar Common Stock the Investor is
entitled to vote is subject to reduction to the extent the Investor sells his
shares of CellStar Common Stock (with certain exceptions) or exercises either
the Initial Option or Second Option. The voting rights granted to the Investor
by the Company expire on December 3, 1995. During the term of the Initial
Option, the Second Option and the voting rights agreement, the Company cannot
transfer its shares of CellStar Common Stock which are the subject of those
Agreements.
On August 29, 1994, the Company and Shintom each invested six hundred
million Japanese Yen (approximately $6,016) into a newly-formed company, TALK.
In exchange for their investments, the Company and Shintom each received a 33%
ownership in TALK, with the remaining 33% to be owned by others.
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 small mid-eastern countries. The Company granted Shintom a license
agreement permitting the use of the Audiovox trademark to be used with TALK
video cassette recorders sold in Japan from August 29, 1994 to August 28, 1997,
in exchange for royalty fees.
The following table presents financial information relating to these equity
investments:
CELLSTAR PROTECTOR
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1994 AUGUST 31, 1994
----------------- ---------------
(UNAUDITED)
Assets....................................................... $ 192,418 $ 1,063
Liabilities.................................................. 115,776 1,436
Equity (deficit)............................................. 76,642 (373)
Revenue...................................................... 518,422 25
Gross Profit................................................. 69,642 --
Net income (loss)............................................ 16,248 5
AUDIOVOX TALK ASM
PACIFIC FOUR MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
NOVEMBER 30, 1994 NOVEMBER 30, 1994 NOVEMBER 30, 1994
----------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
Assets.................................... $ 9,868 $25,613 $ 4,661
Liabilities............................... 8,312 10,185 209
Equity (deficit).......................... 1,556 15,428 4,452
Revenue................................... 19,831 11,637 15,619
Gross profit.............................. 6,035 468 2,688
Net income (loss)......................... 484 (2,456) 1,864
The Company's share of the change in the equity of these investments was
$18,662 for the year ended November 30, 1994, which consists of $3,748 of
earnings, $6,016 of an initial investment in
F-22
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) EQUITY INVESTMENTS--(CONTINUED)
TALK, gain on the CellStar public offering of $10,565, less the sale of CellStar
stock of $1,650 and $17 of cumulative losses on foreign currency translations.
The Company received the following management fees and related income from
its equity investments:
NOVEMBER 30,
------------------------
1992 1993 1994
------ ------ ------
CellStar............................................................... $4,334 $1,220 --
Pacific................................................................ 514 613 435
H & H.................................................................. 85 70 --
Protector.............................................................. -- -- 1,108
------ ------ ------
$4,933 $1,903 $1,543
------ ------ ------
------ ------ ------
The Company's sales to the equity investments amounted to $31,997, $21,368
and $32,630 for the years ended November 30, 1992, 1993 and 1994, respectively.
The Company's purchases from the equity investments amounted to $436, $2,585
and $5,715 for the years ended November 30, 1992, 1993 and 1994, respectively.
Included in accounts receivable at November 30, 1993 and November 30, 1994
are trade receivables due from its equity investments aggregating $8,217 and
$8,691, respectively. In addition, included in accounts receivable at November
30, 1993 and November 30, 1994 are management fee receivables of $1,954 and
$1,108, respectively. At November 30, 1993 and 1994, included in accounts
payable and other accrued expenses were obligations to equity investments
aggregating $891 and $207, respectively. At November 30, 1993 and November 30,
1994, other long-term assets include equity investment advances outstanding and
management fee receivables of $185 and $1,138. For the years ended November 30,
1993 and November 30, 1994, interest income earned on equity investment notes
and other receivables approximated $666 and $25, respectively.
(13) COMMON STOCK AND COMPENSATION PLANS
(a) Stock Option Plans
In April 1987, the Board of Directors approved the adoption of the 1987
Stock Option Plan for the granting of options to directors and key employees of
the Company. Under the 1987 Stock Option Plan, the options can be either
incentive or non-qualified.
In April 1987, non-qualified options to purchase 200,000 shares of Class A
Common Stock were granted at $11 per share which represents the estimated fair
market value at the date of grant. Such options became exercisable in full in
October 1988 and expire in April 1997.
In May 1993, the stockholders approved the 1993 Stock Option Plan which
authorizes the granting of incentive stock options to key employees and
non-qualified stock options to employees and/or directors of the Company. The
incentive stock options may be granted at a price not less than the market value
of the Company's common stock on the date of grant and must be exercisable no
later
F-23
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) COMMON STOCK AND COMPENSATION PLANS--(CONTINUED)
than ten years after the date of grant. The exercise price of non-qualified
stock options may not be less than 50% of the market value of the Company's
Class A Common Stock on the date of grant.
In December 1993, non-qualified options to purchase 113,500 shares of Class
A Common Stock were granted at $13 per share which was less than the market
value of $17 per share on the date of grant. No options can be exercised until
June 14, 1995 or December 14, 1996 (as the case may be) after which they can be
exercised in whole or in part until expiration on December 14, 2003.
Compensation expense is recorded with respect to the options based upon the
quoted market value of the shares and the exercise provisions at the date of
grant. Compensation expense, under these options, for the year ended November
30, 1994 was $175.
In November 1994, non-qualified options to purchase 75,000 shares of Class A
Common Stock were granted at $11 per share, which exceeded fair market value at
the date of grant, to a director and officer of the Company. Such options will
become exercisable in full on May 22, 1996 and expire on November 22, 2004.
In May 1994, the stockholders approved the 1994 Stock Option Plan which
authorizes the granting of incentive stock options to key employees and
non-qualified stock options to employees and/or directors of the Company. The
incentive stock options may be granted at a price not less than 110% of the
market value of the Company's common stock on the date of grant and must be
exercisable no later than ten years after the date of grant. The exercise price
of non-qualified stock options may not be less than 50% of market value of the
Company's Class A Common Stock on the date of grant. No options were granted
under this plan as of November 30, 1994.
Information regarding the Company's stock option plan is summarized below:
1987 1993
STOCK STOCK
OPTION OPTION
PLAN PLAN
------- -------
Shares under option:
Outstanding at December 1, 1992........................................ 157,500 --
Granted.............................................................. -- --
Exercised.......................................................... (16,000) --
Canceled........................................................... -- --
------- -------
Outstanding at November 30, 1993......................................... 141,500 --
Granted.............................................................. -- 188,500
Exercised.......................................................... (15,500) --
Canceled........................................................... (1,000) (500)
------- -------
Outstanding at November 30, 1994......................................... 125,000 188,000
------- -------
------- -------
Options exercisable, November 30, 1994................................... 125,000 --
(b) Restricted Stock Plan
In April 1987, the Board of Directors approved the adoption of the 1987
Restricted Stock Plan for the granting of restricted stock awards to directors
and key employees of the Company. In May 1993,
F-24
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) COMMON STOCK AND COMPENSATION PLANS--(CONTINUED)
the stockholders approved an amendment to the 1987 Restricted Stock Plan which
provides that restrictions on stocks awarded pursuant to the Plan will lapse at
the discretion of the Compensation Committee of the Company. In addition, the
Plan's original expiration date of April 27, 1997 was extended through April 27,
2007.
In December 1993, 38,300 shares of Class A Common Stock were awarded under
the 1987 Restricted Stock Plan, one half of such shares to be performance
accelerated restricted stock and one half of such shares to be performance
restricted stock. The performance accelerated shares will vest in five years or
earlier depending upon whether the Company meets certain earnings per share
goals. The performance restricted shares will only vest in five years or earlier
if the Company meets certain earnings per share ratios.
In November 1994, 25,000 shares of Class A Common Stock were awarded under
the 1987 Restricted Stock Plan to a director and officer of the Company. One
half of such shares are to be performance accelerated restricted stock and one
half of such shares are to be performance restricted stock. The terms of the
grant are identical to the December 1993 grant as previously discussed.
In May 1994, the Board of Directors approved the adoption of the 1994
Restricted Stock Plan for the granting of restricted stock awards to directors
and key employees of the Company. No awards were granted under this plan as of
November 30, 1994.
Compensation expense is recorded with respect to the grants based upon the
quoted market value of the shares on the date of grant for the performance
accelerated shares and on the balance sheet date for the performance restricted
shares. Compensation expense, for these grants, for the year ended November 30,
1994 was $93.
(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 or about the last business day of each month at a price
equal to 85% of the fair market value. The aggregate number of shares available
for purchase under this plan shall not exceed 1,000,000.
(d) Stock Warrants
During the third quarter of fiscal 1993, pursuant to a consulting agreement
effective April 1993, the Company granted warrants to purchase 100,000 shares of
Class A Common Stock, which have been reserved, at $7.50 per share. The
warrants, which are exercisable in whole or in part at the discretion of the
holder, expire on December 31, 1998. There were no warrants exercised as of
November 30, 1994. The consulting agreement, valued at $100, was being amortized
over the two-year term thereof until 1994 when the services to be provided
pursuant to the consulting agreement were completed.
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 (Note 2). The per share purchase price and number of shares
purchasable are each subject to adjustment upon the
F-25
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) COMMON STOCK AND COMPENSATION PLANS--(CONTINUED)
occurrence of certain events described in the warrant agreement. The warrants
are exercisable, in whole or in part, from time-to-time, until September 22,
2003. If the warrants are exercised in whole, the holder thereof has the right
to require the Company to file with the Securities Exchange Commission, on or
after September 22, 1995, a registration statement relating to the sale by the
holder of the Class A Common Stock purchasable pursuant to the warrant.
(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 Company. In fiscal 1993
and 1994, a contribution of $200 and $225, respectively, was made by the Company
to the United States plan. Contributions, required by law, to be made for
eligible employees in Canada were not material.
(14) FINANCIAL INSTRUMENTS
(a) Off-Balance Sheet Risk
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as requested by certain suppliers. As of
November 30, 1993 and 1994, the Company had open letters of credit of $15,000
and $17,000, respectively, of which $12,600 and $13,100, respectively, were
recorded in accounts payable. No material loss is anticipated due to
nonperformance by the counterparties to these agreements.
(b) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables. The
Company's customers are located principally in the United States and Canada and
consist of, among others, cellular carriers and service providers, distributors,
agents, mass merchandisers, warehouse clubs and independent retailers.
At November 30, 1993, two customers, which included CellStar and a Bell
Operating Company, accounted for approximately 9% and 8%, respectively, of
accounts receivable. At November 30, 1994, three customers, which included
CellStar, a Bell Operating Company and a mass merchandiser, each accounted for
approximately 5% of accounts receivable, and one Bell Operating Company
accounted for approximately 6% of accounts receivable.
Four customers, CellStar, two Bell Operating Companies and one other
telephone company accounted for approximately 6%, 6%, 7% and 5%, respectively,
of the Company's 1992 sales. During the year ended November 30, 1993, two Bell
Operating Companies accounted for approximately 6% and 5% of the Company's
sales. A Bell Operating Company accounted for approximately 7% of the Company's
1994 sales.
The Company generally grants credit based upon analyses of its customers'
financial position and previously established buying and payment patterns. The
Company establishes collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon management's
credit evaluation. At November 30, 1993 and 1994, 27 and 25 customers,
respectively,
F-26
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(14) FINANCIAL INSTRUMENTS--(CONTINUED)
representing approximately 52% and 60%, of outstanding accounts receivable, had
balances owed greater than $500.
A significant 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.
(c) Fair Value
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.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, RESTRICTED CASH, AND ACCOUNTS
PAYABLE
The carrying amount approximates fair value because of the short maturity of
these instruments.
LONG-TERM DEBT
The carrying amount of bank debt under the Company's revolving Credit
Agreement approximates fair value because of the short maturity of the related
obligations. With respect to the 6 1/4% convertible subordinated debentures,
fair values are based on published statistical data. The Series AA and BB
Convertible Debentures were valued at the closing market price of the Company's
Class A Common Stock for the number of shares convertible at November 30, 1994.
Other long-term borrowings are valued by the present value of future cash flows
at current market interest rates.
The estimated fair value of the Company's financial instruments at November
30, 1994 is as follows:
CARRYING FAIR
AMOUNT VALUE
-------- ------
Long-term obligations..................................................... 104,912 86,662
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.
(15) COMMITMENTS AND CONTINGENT LIABILITIES
On February 5, 1993, Motorola, Inc., Mitsubishi Electronic Corp., Nokia
Mobile Phones Company, Toshiba Corporation, Panasonic Communications and Systems
Company, OKI Electric Industry Company, Ltd. and the Company, all suppliers or
manufacturers of cellular telephones, were named as
F-27
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 30, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(15) COMMITMENTS AND CONTINGENT LIABILITIES--(CONTINUED)
defendants in a class action complaint. The complaint contains several
allegations, including negligence and breach of both implied and express
warranties under the Uniform Commercial Code, arising from the sale of portable
hand-held cellular telephones. The complaint seeks unspecified damages and
attorney's fees. Discovery has not yet commenced. On August 12, 1993, a
dismissal of the class allegation was granted. On August 20, 1993, an order was
entered dismissing the complaint which included the Company as a defendant and
permitting plaintiffs to file an amended complaint which does not include the
Company as a defendant. Such order, effectively dismissing the Company as a
defendant, is being appealed by the plaintiffs. The Company believes that its
insurance coverage and rights of recovery against manufacturers of its portable
hand-held cellular telephones relating to this case are sufficient to cover any
reasonably anticipated damages. Management is of the opinion that there are
meritorious defenses to the claims made in this case and that the ultimate
outcome of this matter will not have a material adverse impact on the financial
position of the Company. However, an estimate of the possible loss or range of
loss cannot be made at this time.
In November 1991, the Company was named as a co-defendant in a class action
suit against Protector, a 50% owned equity investment. The class action alleges
unfair and deceptive practices and seeks, among other things, a refund of all
warranty fees paid, interest, litigation costs and unspecified punitive damages.
The action was settled and approved by the Court on June 29, 1994 without any
payment by the Company.
The Company is a co-defendant in an action alleging, among other things,
breach of contract and the plaintiff is seeking damages of approximately $1.2
million. The litigation is currently in the early discovery phase. Management is
of the opinion that there are meritorious defenses to the claim made in this
case and that the ultimate outcome of this matter will not have a material
adverse impact on the financial position of the Company. However, an estimate of
the possible loss or range of loss cannot be made at this time.
In February 1995, an action was commenced against the Comapny and others
which alleges that the defendants have, among other things, violated federal
anti-trust laws. The Complaint seeks, from all defendants, injunctive relief and
damages of approximately $5 million. The litigation is currently in the early
discover phase. Management intends to vigorously defend the action and is of the
opinion that there are meritorious defenses to the claims made in this case and
that the ultimate outcome of this matter will not have a material adverse impact
on the financial position of the Company. However, an estimate of the possible
loss or range of loss cannot be made at this time.
The Company is also a defendant in litigation arising from the normal
conduct of its affairs. Management is of the opinion that any 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 impact on the financial position of the Company.
However, an estimate of the possible loss or range of loss cannot be made at
this time.
F-28
ANNEX A
TRANSFEREE LETTER OF REPRESENTATION
Audiovox Corporation
150 Marcus Boulevard
Hauppauge, NY 11788
Attention: Chief Financial Officer
Dear Sirs:
In connection with our proposed purchase of [ ] Warrants ("Warrants")
of Audiovox Corporation, a Delaware corporation (the "Company"), we confirm
that:
1. We understand that the Warrants (the "Restricted Securities") have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and, unless so registered, may not be sold except as permitted in the
following sentence. We agree on our own behalf and on behalf of any investor
account for which we are purchasing Restricted Securities to offer, sell or
otherwise transfer such Restricted Securities prior to the date which is three
years after the later of the date of original issue and the last date on which
the Company or any affiliate of the Company was the owner of such Restricted
Securities (or any predecessor thereto) (the "Resale Restriction Termination
Date") only: (a) to the Company, (b) pursuant to a registration statement which
has been declared effective under the Securities Act, (c) so long as the
Restricted Securities are eligible for resale pursuant to Rule 144A promulgated
under the Securities Act ("Rule 144A"), to a person we reasonably believe is a
qualified institutional buyer within the meaning of and in compliance with Rule
144A (a "QIB") that purchases for its own account or for the account of a QIB
and to whom notice is given that the transfer is being made in reliance on Rule
144A, (d) pursuant to offers and sales that occur outside of the United States
within the meaning of and in compliance with Regulation S promulgated under the
Securities Act, (e) inside the United States to an institutional "accredited
investor" within the meaning of subparagraph (a), (1), (2), (3) or (7) of Rule
501 promulgated under the Securities Act ("Rule 501") that is purchasing for its
own account or for the account of such an institutional "accredited investor,"
or (f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases to
any requirement of law that the disposition of our property or the property of
such investor account or accounts be at all times within our or their control
and in compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Restricted Securities
is proposed to be made pursuant to clause (e) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee substantially in the form of this letter to the Warrant Agent, which
shall provide, among other things, that the transferee is an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7)
of Rule 501 and that it is acquiring such Restricted Securities for investment
purposes and not for distribution in violation of the Securities Act. Each
purchaser acknowledges that the Company and the Warrant Agent reserve the right
prior to any offer, sale or other transfer prior to the Resale Restriction
Termination Date of the Restricted Securities pursuant to clause (d), (e) or (f)
above to require the delivery of any opinion of counsel, certifications and/or
other information satisfactory to the Company and the Warrant Agent.
2. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D promulgated under the Securities Act)
purchasing for our own account or for the account of such an institutional
"accredited investor," and we are acquiring the Restricted Securities for
investment purposes and not with a view to, or for offer or sale in connection
with, any distribution in violation of the Securities Act, and we have such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of our investment in the Restricted Securities
A-1
and the Class A Common Stock of the Company for which they are exercisable, and
we and any accounts for which we are acting are each able to bear the economic
risk of our or its investment.
3. We are acquiring the Restricted Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise sole
investment discretion.
4. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceeding or official inquiry with respect to the
matters covered thereby.
Very truly yours,
------------------------------------------
(Name of Purchaser)
By:
---------------------------------------
Date:
-------------------------------------
Upon transfer the Restricted Securities would be registered in the name of
the new beneficial owner as follows:
Name:
------------------------------
Address:
----------------------------
Taxpayer ID Number:
-----------------
A-2
- -----------------------------------------------------
- -----------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
MEMORANDUM, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS OFFERING
MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
TABLE OF CONTENTS
Offering Memorandum Summary.......... 1
Risk Factors......................... 11
The Offering......................... 19
Price Range of Class A Common Stock.. 27
Dividend Policy...................... 27
Use of Proceeds...................... 27
Capitalization....................... 28
Selected Consolidated Financial
Data................................. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
Business............................. 41
Certain Transactions................. 53
Management........................... 57
Description of the Warrants.......... 61
Description of Capital Stock......... 69
Notice to Investors.................. 74
Certain Federal Income Tax
Consequences......................... 76
ERISA Considerations................. 79
Independent Accountants.............. 79
Available Information................ 80
Incorporation of Certain Documents by
Reference.......................... 80
Financial Statements................. F-1
Annex A Transferee Letter of
Representation..................... A-1
[LOGO]
AUDIOVOX CORPORATION
1,365,000 WARRANTS TO PURCHASE
CLASS A COMMON STOCK
OFFERING MEMORANDUM
APRIL 12, 1995
- -----------------------------------------------------
- -----------------------------------------------------
SUPPLEMENT NO. 1
DATED MAY 1, 1995
TO THE OFFERING MEMORANDUM
DATED APRIL 12, 1995
This Supplement No. 1 amends and supplements the Confidential Offering
Memorandum (the "Offering Memorandum"), dated April 12, 1995, of Audiovox
Corporation ("Audiovox" or the "Company"). The Offering Memorandum is in
connection with the offering (the "Offering") by the Company in a private
placement transaction of warrants to purchase one share of the Company's Class A
Common Stock, par value $.01 per share (the "Class A Common Stock").
This Supplement No. 1 should be read in conjunction with the Offering
Memorandum and is subject to the restrictions and limitations set forth on
pages (i)-(vi) thereof as though such restrictions and limitations were set
forth in full herein. Investors should carefully review all of the information
contained in the Offering Memorandum and this Supplement No. 1 prior to making
an investment in the Warrants.
Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to them in the Offering Memorandum.
If you held the Debentures as of June 3, 1994 on behalf of a
beneficial holder as nominee or otherwise, please forward this Supplement No. 1
to such beneficial holder as of such date as soon as possible.
If you have any questions or should you require additional copies of
this Supplement No. 1 or the Offering Memorandum or any of the documents that
need to be executed in connection with the Offering please contact C. Michael
Stoehr, Chief Financial Officer of the Company, at (516) 231-7750.
REVISIONS TO THE TERMS OF THE OFFERING
The terms of the Offerings are as stated in the Offering Memorandum
except for the following revisions:
Securities Offered 1,889,695 warrants (the "Warrants"), each Warrant
entitling the holder thereof to purchase one share of
class A Common Stock at any time (i) on or after the
later of (x) one year after issuance and (y) the date a
registration statement with respect to the Class A
Common Stock issuable upon exercise of the Warrants has
been filed and declared effective by the Securities and
Exchange Commission and (ii) on or prior to March 15,
2001 unless the Warrants are terminated earlier in
certain circumstances. The initial exercise price of
each Warrant (the "Warrant Exercise Price") will be $7-
1/8 (rather than $7-7/8) per share unless the closing
sales price of the Class A Common Stock on the American
Stock Exchange, Inc. (the "AMEX") is greater than $6-
1/2 (rather than 7-1/8) per share of Class A Common
Stock as of 5:00 p.m. on the date of the closing of the
Offering in which case the exercise price of the
Warrant will be 110% of the closing price of the
Class A Common Stock on the AMEX as of such time. The
Warrant Exercise Price must be at least 110% of the
current market price of the Class A Common Stock on the
date of the closing in order for the Warrants to be
eligible to be traded under rule 144A under the
Securities Act of 1933, as amended.
On April 28, 1995, the closing sales price of the
Class A Common Stock, as reported by the AMEX was $6-
3/16 per share.
Offer to Beneficial
Holders of Debentures Except as set forth in the next sentence, each
beneficial holder (a "Beneficial Holder") of the
Company's 6-1/4% Convertible Subordinated Debentures
due 2001 (the "Debentures") as of June 3, 1994 will be
entitled to acquire 30 (rather than 21) Warrants per
$1,000
2
principal amount of Debentures beneficially owned as of
such date in consideration for the delivery by such
person of a Release. Oppenheimer & Co., Inc., the
Beneficial Holder of approximately $12,065,000 of the
Debentures as of June 3, 1994, will be entitled to
acquire 25 Warrants per $1,000 principal amount of
Debentures beneficially owned as of such date in
consideration for the delivery by Oppenheimer & Co.,
Inc. of a Release.
Mandatory Redemption If a registration statement relating to the Class A
Common Stock underlying the Warrants has not been
effective at any time on or prior to the Expiration
Date of the Warrants, the Company will be required to
redeem all of the outstanding Warrants for $1.60
(rather than $2.20) per Warrant (the "Redemption
Price"). The Redemption Price is subject to adjustment
in certain limited circumstances.
Expiration of the The expiration date of the Offering has been
Offering extended from 5:00 p.m. (New York City time) on May 1,
1995 to 5:00 p.m. (New York City time) on May 9, 1995.
The Company does not presently intend to extend further
the expiration date of the Offering.
Persons Who Have Already
Accepted the Offer Any persons who have already accepted the terms of the
Offering described in the Offering Memorandum will be
entitled to receive the benefits of the revised terms
described above. Accordingly, in consideration for a
Release such Beneficial Holders will receive
30 Warrants per $1,000 principal amount of Debentures
beneficially owned as of such date and the Warrant
Exercise Price will be as set forth above under "--
Securities Offered."
All of the other terms of the Offering will be as set forth in the
Offering Memorandum. Revised copies of the Subscription Agreement, the Warrant
Agreement and Registration Rights Agreement marked to show changes from the
previously distributed draft are enclosed herewith. In addition, for your
convenience a copy of the Release and the Investor Suitability Questionnaire is
also enclosed.
3
Instructions for Participation
- ------------------------------
All documents must be executed by the BENEFICIAL HOLDER of Debentures
as of June 3, 1994. The documents must be received by 5:00 p.m. (New York City
time) on or before May 9, 1995. The documents should be delivered to Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004,
Attention: Stuart H. Gelfond, Esq. The Company will not accept subscriptions
from any record holder of the Debentures as of such date unless such person was
also the Beneficial Holder of the Debentures. Please execute the documents as
follows:
A. The Subscription Agreement. Two copies of the signature
--------------------------
page (page 16 of such agreement) must be completed and signed and
returned to the Company. The signature must be notarized. The
Subscription Agreement contains, among other things, certain
representations and warranties by you to the Company, including a
representation that you were the beneficial holder of the Debentures
as of June 3, 1994 and certain agreements regarding each subscriber.
You should carefully consider the accuracy of such representations and
warranties and the other terms of such agreement prior to the
execution of the Subscription Agreement.
B. The Registration Rights Agreement. Two copies of the
---------------------------------
signature page (page 15 of such agreement) must be completed and
signed and returned to the Company. The signature must be notarized.
C. Investor Suitability Questionnaire. One copy must be
----------------------------------
completed and signed and returned to the Company. The signature must
be notarized.
D. The Release. Four copies of the Release must be completed
-----------
and signed and returned to the Company. The signature must be
notarized. You should note that the Release will not be effective
against you until you have received the Warrants to which you are
entitled under the Subscription Agreement.
4
E. The Warrant Agreement. The Warrant Agreement will be
---------------------
executed by the Company and Continental Stock Transfer & Trust
Company, as Warrant Agent. You do not have to execute the Warrant
Agreement, although your Warrants will be subject to the terms
thereof. Interests in the Warrants will be available initially only
in book-entry form and you will receive confirmation from the Company
upon consummation of the Offering of the number of Warrants you
acquired in the Offering. You do not have to return any documents
relating to the Warrant Agreement.
5