UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment #2
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 [fee required]
For the fiscal year ended November 30, 1995
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-7750
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
Class A Common Stock $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
(X)
1
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $18,763,355 (based upon closing price on the American Stock
Exchange, Inc. on February 20, 1996).
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 20, 1996 was
Class Outstanding
Class A Common Stock $.01 par value 6,777,788
Class B Common Stock $.01 par value 2,260,954
PART I
Item 1 - Business
General
Audiovox Corporation, together with its operating subsidiaries
(collectively, the "Company"), markets and supplies, under its own name or trade
names, a diverse line of aftermarket products which include cellular telephones,
both hand held portables and vehicle installed, in addition to automotive sound
equipment and automotive accessories, both of which are designed primarily for
installation in cars, trucks and vans after they have left the factory and
consumer electronic products.
The Company's products are sold through a worldwide distribution
network covering the United States, Canada and overseas. Sales are made directly
and through independent distributors to new car dealers, cellular telephone
accounts, cellular service providers, regional Bell Operating Companies
("BOCs"), mass merchandisers, catalogue showrooms, original equipment
manufacturers ("OEMs"), military Army and Air Force Exchange Systems ("AAFES"),
autosound specialists and retailers. The Company sells to consumers from
Company-owned retail sales and service locations which generally operate under
the name "Quintex", which also receives activation commissions and residuals
from certain cellular service providers.
The Company's products may be broadly grouped into four major
categories: cellular telephones, automotive sound equipment, automotive
accessories and consumer electronic products. These categories represent
different product lines rather than separate reporting segments.
The Company was incorporated in Delaware on April 10, 1987, as
successor to the business of Audiovox Corp., a New York corporation founded in
1960 (the "predecessor company") by John J. Shalam, the Company's President,
Chief Executive Officer and controlling stockholder. Unless the context
otherwise requires, or as otherwise indicated, references herein to the
"Company" include the Company, its wholly-owned and majority-owned operating
subsidiaries.
2
Trademarks
The Company markets products under several trademarks, including
Audiovox(R), Custom SPS(R), Prestige(R), Pursuit(R), Minivox(TM), Minivox
Lite(R) and The Protector(R). The Company believes that these trademarks are
recognized by customers and are therefore significant in marketing its products.
Trademarks are registered for a period of ten years and such registration is
renewable for subsequent ten-year periods.
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
fiscal year ended November 30, 1995, the Company sold its products to
approximately 2,500 wholesale accounts, including the BOCs, 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 25.5% of the Company's net sales for the
fiscal year ended November 30, 1995, are Nynex Mobile Communications Company,
Cellular Communications, Inc. ("Cellular One"), Bell Atlantic Mobile Systems,
Vanguard Cellular Systems and US Cellular, all of whom are cellular carriers.
None of these customers individually accounted for more than 7.3% of the
Company's net sales for such period. In addition, the Company also sells its
non-cellular products to mass merchants such as K-Mart, Walmart Stores, Inc.,
warehouse clubs including Price/Costco, Inc. and OEMs such as Chrysler of
Canada, Navistar International Corporation and General Motors 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.
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
3
users.
The Company's wholesale policy is to ship its products within 24 hours of a
requested shipment date from public warehouses in Norfolk, Virginia, Sparks,
Nevada and Canada and from leased facilities located in Hauppauge, New York and
Los Angeles, California.
Retail
As of November 30, 1995, the Company operated approximately 30 retail
outlets and licensed its trade name to 5 additional retail outlets in selected
markets in the United States 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 ("H&H"). In addition to
Audiovox products, these outlets sell competitive products such as Motorola and
Nokia.
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 5
licensee relationships, the licensee receives the majority of the activation
commissions, and the Company retains the majority of 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 an allowance to provide for the estimated liability
for return of activation commissions associated with such deactivations. See
Note 1(l) of Notes to Consolidated Financial Statements. 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 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
4
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 November 30, 1995, the Company had agency contracts with the
following carriers: Bell Atlantic Mobile Systems, Inc., BellSouth Mobility,
Inc., 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. Dependant 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. Dependent 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. The Company does not participate in the day-to-day
management of these joint ventures.
As of November 30, 1995, the Company had a 33.33% ownership interest in
TALK Corporation (TALK) which holds world-wide distribution rights for product
manufactured by Shintom Co., Ltd. (Shintom). These products include cellular
telephones, video recorders and players and automotive sound products. TALK has
granted Audiovox exclusive distribution rights on all wireless personal
communication products for all countries except Japan, China, Thailand, and
several mid-eastern countries. Additionally, the Company had 50% non-controlling
ownership in four other companies: Protector Corporation (Protector) which acts
as a distributor of chemical protection treatments, Audiovox Specialty Markets
Co., L.P. (ASMC), which acts as a distributor
5
to specialized markets for RV's and van conversions, of televisions and other
automotive sound, security and accessory products, Audiovox Pacific Pty.,
Limited (Audiovox Pacific) which distributes cellular telephones and automotive
sound and security products in Australia and New Zealand, and G.L.M. Wireless
Communications, Inc. (G.L.M.) which is in the cellular telephone, pager and
communications business.
Effective December 1, 1993, the Company acquired the remaining 50%
interest in H&H for a warrant to purchase 50,000 shares of the Company's Class A
Common Stock. See Note 2 of Notes to Consolidated Financial Statements.
Customers
No customer of the Company accounted for more than 10% of the Company's
net sales for fiscal 1995.
Suppliers
The Company purchases its cellular and non-cellular products from
manufacturers located in several Pacific Rim countries, including Japan, China,
Korea, Taiwan and Singapore, 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 or inspection offices in
Taiwan, Korea 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.
Since 1984, the principal supplier of the Company's wholesale cellular
telephones has been Toshiba Corporation ("Toshiba"), accounting for
approximately 47%, 45% and 44% of the total dollar amount of all product
purchases by the Company, during the fiscal years ended November 30, 1993, 1994
and 1995, respectively. In 1994, Toshiba competed directly with the Company in
the United States by marketing cellular telephone products through Toshiba's
United States distribution subsidiary. As of November 30, 1995, Toshiba
announced it will no longer distribute cellular telephone products through its
subsidiary in the United States. Toshiba continues to sell products to the
Company as an original equipment customer. 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, Alcatel
Radiotelephone ("Alcatel"), Dancall Telecom A/S ("Dancall") and TALK. 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. In addition, the Company believes that
6
alternative sources of supply are currently available.
Competition
The Company's wholesale business is highly competitive in all its
product lines, each competing with a number of well-established companies that
manufacture and sell products similar to those of the Company. Specifically, the
cellular market place is driven by current selling prices, which also affects
the carrying value of inventory on hand. Additionally, the Custom SPS line
competes against factory-supplied radios. Service and price are the major
competitive factors in all product lines. The Company believes that it is a
leading supplier to the cellular market primarily as a result of the performance
of its products and the service provided by its distribution network. The
Company's retail business is also highly competitive on a product basis. In
addition, since the Company acts as an agent for cellular service providers,
these cellular service providers must also compete in their own markets which
are also highly competitive. The Company's retail performance is, therefore,
also based on the carriers' ability to compete.
Employees
At November 30, 1995, the Company employed approximately 872 people.
Executive Officers of the Registrant
The executive officers of the registrant are listed below. All officers
of the Company are elected by the Board of Directors to serve one-year terms.
There are no family relationships among officers, or any arrangement or
understanding between any officer and any other person pursuant to which the
officer was selected. Unless otherwise indicated, positions listed in the table
have been held for more than five years.
Name Age Current Position
John J. Shalam 62 President and Chief Executive
Officer and Director
Philip Christopher 47 Executive Vice President and
Director
Charles M. Stoehr 49 Senior Vice President, Chief
Financial Officer and Director
Patrick M. Lavelle 44 Vice President and Director
Martin Novick 60 Vice President and Director
Chris L. Johnson 44 Vice President, Secretary
Ann M. Boutcher 45 Vice President and Director
John J. Shalam has served as President and Chief Executive Officer and a
director of the Company since 1960. Mr. Shalam also serves as president and a
director of most of the Company's operating subsidiaries.
7
Philip Christopher, Executive Vice President of the Company, has been with
the Company since 1970 and has held his current position since 1983. Prior
thereto, he was Senior Vice President of the Company. Mr. Christopher also has
been a director of the Company since 1973 and, in addition, serves as an officer
and a director of most of the Company's operating subsidiaries.
Charles M. Stoehr has been Chief Financial Officer of the Company 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.
Patrick M. Lavelle has been a Vice President of the Company since 1982. In
1991, Mr. Lavelle was elected Vice President, with responsibility for marketing
and selling the Company's automotive accessory and automotive sound line of
products. Mr. Lavelle was elected to the Board of Directors in 1993.
Martin Novick has been a Vice President of the Company since 1971 and
has been a director since 1987. In 1991, Mr. Novick was elected Vice President,
with responsibility for the sale of auto sound products to mass merchandisers.
Chris L. Johnson has been a Vice President of the Company since 1986
and Secretary since 1980. Ms. Johnson has been employed by the Company in
various positions since 1968 and was a director of the Company from 1987 to
1993.
Ann M. Boutcher has been a Vice President of the Company since 1984. Ms.
Boutcher's responsibilities include the development and implementation of the
Company's advertising, sales promotion and public relations programs. Ms.
Boutcher was elected to the Board of Directors in 1995.
Item 2 - Properties
As of November 30, 1995, the Company leased a total of fifty-five
operating facilities located in fourteen states and two Canadian provinces.
These facilities serve as offices, warehouses, distribution centers or retail
locations. Additionally, the Company utilizes approximately 115,000 square feet
of public warehouse facilities. Management believes that it has sufficient,
suitable operating facilities to meet the Company's requirements.
Item 3 - 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
8
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.
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. In February 1996, the Company has settled this
action with the plaintiffs.
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 consolidated
financial position.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1995.
9
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters
Summary of Stock Prices and Dividend Data
Class A Common Shares of Audiovox are traded on the American Stock Exchange
under the symbol VOX. No dividends have been paid on the Company's common stock.
The Company is restricted by agreements with its financial institutions from the
payment of common stock dividends while certain loans are outstanding (see
Liquidity and Capital Resources of Management's Discussion and Analysis). There
are approximately 2,000 holders of Class A Common Stock and 5 holders of Class B
Common Stock.
Class A Common Stock
Average Daily
Fiscal Period High Low Trading Volume
1994
First Quarter...........................$18 3/8 $14 1/4 26,400
Second Quarter......................... 16 11 7/8 32,600
Third Quarter............................12 3/4 6 1/4 39,600
Fourth Quarter............................9 3/8 6 3/4 19,600
1995
First Quarter.............................8 1/2 6 3/8 25,300
Second Quarter............................7 5 1/16 13,500
Third Quarter.............................7 3/8 4 7/16 30,100
Fourth Quarter............................6 13/16 4 3/8 21,600
10
Item 6 - Selected Financial Data
Years ended November 30, 1991, 1992, 1993, 1994 and 1995
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Net sales $327,966 $343,905 $389,038 $486,448 $500,740
Net income (loss) (14,658)(a) 7,670(b) 12,224(c) 26,028(e) (11,883)(g)
Net income (loss)
per common share,
primary (1.63) 0.85(b) 1.35(c) 2.86(e) (1.31)
Net income per
common share, fully
diluted - - 1.25(c) 2.20(e) -
Total assets 137,082 145,917 169,671 239,098 308,428
Long-term obligations,
less current
installments 59,912 55,335 13,610(d) 110,698(f) 142,802
Stockholders' equity 46,696 53,457 65,793 92,034 114,595(h)
NOTE: Certain amounts have been restated as discussed in Note 8 to
the consolidated financial statements.
(a) Includes a pre-tax restructuring charge of $5.0 million.
(b) Includes an extraordinary item of $1.9 million or $0.21 per
share.
(c) Includes an extraordinary item of $2.2 million or $0.24 per share,
primary, and $0.22 per share, fully diluted.
(d) Long-term debt does not include $38.8 million of bank obligations
which were classified as current.
(e) Includes a cumulative effect change of ($178,000) or ($0.02) per
share, primary, and ($0.01) per share, fully diluted. Also includes
a pre-tax gain on sale of an equity investment of $27.8 million and
a gain on public offering of equity investment of $10.6 million.
(f) Long-term debt includes the addition of a $65 million bond
offering in 1994.
(g) Includes a pre-tax charge of $2.9 million associated with the
issuance of warrants, a pre-tax charge of $11.8 million for
inventory write-downs and the down-sizing of the retail operations
and a pre-tax gain on the sale of an equity investment of $8.4
million.
(h) Includes a $31.7 million unrealized gain on marketable securities,
net.
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
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
11
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 door locks.
Certain reclassifications have been made to the data for periods prior to
fiscal 1995 in order to conform to fiscal 1995 presentation. The net sales and
percentage of net sales by product line for the fiscal years ended November 30,
1993, 1994 and 1995 are reflected in the following table:
Years Ended November 30,
1993 1994 1995
----------------- ------------------- ----------------
(Dollars in thousands)
Cellular product-
wholesale $189,636 49% $237,566 49% $260,704 52%
Cellular product-
retail 12,281 3 18,198 3 15,470 3
Activation
commissions 27,504 7 47,788 10 38,526 8
Residual fees 2,646 1 4,005 1 4,781 1
-------- ---- -------- ----- -------- ---
Total Cellular 232,067 60 307,557 63 319,481 64
Automotive sound
equipment 94,674 24 112,512 23 107,404 21
Automotive security
and accessory
equipment 57,025 15 64,040 13 73,207 15
Other 5,272 1 2,339 1 648 -
-------- ---- -------- ---- -------- ---
Total $389,038 100% $486,448 100% $500,740 100%
======== ==== ======== ==== ======== ====
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The following table sets forth for the periods indicated certain statement
of income (loss) data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Year Ended November 30,
1993 1994 1995
------ ------ -----
Net sales:
Net product sales 92.3% 89.4% 91.4%
Cellular telephone activation
commissions 7.0 9.8 7.7
Cellular telephone residual fees 0.7 0.8 0.9
------ ------ -----
Net sales 100.0 100.0 100.0
Cost of sales 80.7 82.5 85.9
Gross profit 19.3 17.5 14.1
Selling expense 6.0 6.7 6.9
General and administrative expense 7.2 6.7 7.2
Warehousing, assembly and repair
expense 2.2 1.9 1.9
Operating income (loss) 3.9 2.2 (1.9)
Interest expense 1.7 1.3 1.9
Income of equity investments 1.3 0.8 -
Management fees 0.5 0.3 -
Gain on sale of equity investment - 5.7 1.7
Gain on public offering equity
investment - 2.2 -
Expenses related to issuance of
warrants - - 0.6
Other expenses, net 0.1 0.2 0.2
Income tax (recovery) 0.8 4.2 (0.6)
Net income (loss) 3.2 5.4 (2.4)
NOTE: Certain amounts have been restated as discussed in Note 8 to
the consolidated financial statements.
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
Net sales increased by approximately $14.3 million, or 2.9%, for fiscal
1995 compared to fiscal 1994. This result was primarily attributable to
increases in net sales from cellular telephone products of approximately $11.9
million, or 3.9%, and automotive security and accessory equipment of
approximately $9.2 million, or 14.3%. These increases were partially offset by a
decline in net sales attributable to automotive sound equipment of approximately
$5.1 million or 4.5%.
The improvement in net sales of cellular telephone products was primarily
attributable to increased unit sales, partially offset by a decrease in
activation commissions. Net sales of cellular telephones increased by
approximately 382,000 units, or 46.3%, compared to fiscal 1994, primarily
resulting from an
13
increase in sales of hand-held portable cellular telephones, partially offset by
a decline in sales of installed mobile and transportable cellular telephones.
The average unit selling price declined approximately 23.4% vs. 1994 as
production efficiencies and market competition continues to reduce unit selling
prices.
Activation commissions decreased by approximately $9.3 million, or 19.4%,
for fiscal 1995 compared to fiscal 1994. This decrease was primarily
attributable to fewer new cellular subscriber activations and partially due to
the net reduction of 61 retail outlets operated by the Company. The number of
activation commissions decreased 15.5% over fiscal 1994. This decrease in
commission revenue was further affected by a 4.7% decrease in average activation
commissions paid to the Company. Residual revenues on customer usage increased
by approximately $776,000, or 19.4%, for fiscal 1995, compared to fiscal 1994,
due primarily to the addition of new subscribers to the Company's cumulative
subscriber base, despite a decrease in current year activations. A majority of
the residual income resides with the remaining 30 operating retail locations.
During fiscal 1994, the Company experienced dramatic growth in its Quintex
type retail operations. This growth reflected the large increases in cellular
telephone sales experienced in the domestic U.S.
During this period, the Company had favorable contracts with several of the
major cellular carriers. To capitalize on the growth in the market during 1994,
the Company embarked on an expansion program to increase its retail presence in
its designated cellular markets. During fiscal 1995, beginning with the first
quarter, the market place in which the Quintex retail operations conducted their
business was adversely affected by several trends These trends include a slow
down in the growth of the cellular market, a desire by the cellular carriers to
lower their acquisition costs with lower payments to its individual agents,
increased competition by mass merchandisers and the cellular carriers direct
sales force, and the overall economic conditions in the U.S. domestic market. As
a result of these trends, the Company decided to reduce its retail presence by
closing or disposing of all unprofitable Quintex locations throughout the U.S.
The result of this plan was a reduction of outlets from 91 to 30. The cost of
this closing was approximately $4.0 million during fiscal 1995. Of the $4.0
million charge to income, approximately $1.5 million is related to inventory
write-offs, $1.8 million is associated with the lease buy-outs, employee
severance pay, the write-off of leasehold improvements and other fixed assets
and $700,000 of miscellaneous charges including co-op advertising, deactivation
allowances, and anticipated bad debts. The impact of this Quintex reduction
program and the overall erosion of the retail market was a decrease in revenue
of approximately $21.0 million for fiscal 1995.
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This decrease was due to a decrease in revenues of cellular and
non-cellular products of approximately $12.5 million and a decrease in
activation commission revenues of approximately $9.3 million, which was
partially offset by an increase in residuals of $776,000. During the earlier
part of the 1995 fiscal year, prior to the retail program, the Company continued
to open and close various retail outlets. During the third quarter of 1995, the
Company felt that the erosion of the retail business in certain carrier regions
would not allow a return to profitability. It was then decided to close all
those locations which had not attained profitability. This further accelerated
the reduction of operating revenues and income in the fourth quarter of fiscal
1995. The performance of the retail locations closed during fiscal 1995, which
were a part of the retail reduction program and included in the total $21.0
million decrease in revenues for the entire retail group, is as follows:
1993 1994 1995
---- ---- ----
Net sales $14,496 $25,663 $18,077
Operating income (loss) $ 1,944 $ 1,159 $(1,438)
The Company believes that these closures will reduce revenue, as well as
operating expenses, primarily in occupancy costs, salaries and commissions,
during fiscal 1996. The Company will continue to review its remaining locations
and will close them if they do not remain profitable.
Net sales of automotive sound equipment decreased by approximately $5.1
million, or 4.5%, for fiscal 1995, compared to fiscal 1994. This decrease was
attributable primarily to a decrease in sales of products sold to mass
merchandise chains, coupled with decreases in auto sound sales to private label
customers, new car dealers, products used in the truck and agricultural vehicle
markets and several OEM accounts. Net sales of automotive security and accessory
products increased approximately $9.2 million, or 14.3%, for fiscal 1995,
compared to fiscal 1994, principally due to increases in sales of vehicle
security products and Protector Hardgoods. This increase was partially offset by
a reduction in net sales by the Company of recreational vehicle equipment and
accessories.
Gross margins declined to 14.1% in fiscal 1995 from 17.5% for fiscal 1994
as a result of lower selling prices and the write-down of the carrying value of
inventory of $9.3 million during the third quarter of 1995. This reflects the
overall erosion of gross margins experienced primarily in the cellular product
category which resulted in the decision to mark down the carrying value of the
Company's cellular inventory. Of the $9.3 million inventory adjustment, $8.8
million was in the cellular product category and $500,000 was in the automotive
sound product category in wholesale operations.
15
Cellular gross margins were 9.8% for fiscal 1995 compared to 14.8% for
fiscal 1994. As previously mentioned, the gross margins reflect an $8.8 million
charge for inventory write-downs. In addition, the decline in cellular margins
is a result of the continuing decline of unit selling prices due to increased
competition and the introduction of lower-priced units. The portable cellular
telephone line accounted for the majority of this decrease. The average unit
selling price declined 23.4% during the 1995 fiscal year. Likewise, gross
profits on unit sales declined 26.7% for the same period. The number of new
subscriber activations declined 15.5% to 126,000 for 1995 compared to last year.
Average commissions received by the Company from the cellular carriers per
activation also declined 4.7% to $305 for the twelve months ended November 30,
1995 versus last year. These decreases were partially offset by an increase of
19.4% in residual payments received by the Company compared to the same period
last year. The Company believes that the cellular market will continue to be a
highly-competitive, price-sensitive environment. Increased price competition
related to the Company's product could result in downward pressure to the
Company's gross margins if the Company is unable to obtain competitively-priced
product from its suppliers or result in additional adjustments to the carrying
value of the Company's inventory.
Automotive sound margins decreased to 17.5% from 18.7% for the fiscal year
ended November 30, 1995 compared to last year. The decrease in automotive sound
margins was primarily in the AV product line, partially offset by increases in
the Heavy Duty Sound product lines. Automotive accessory margins decreased to
27.9% for 1995 from 29.1% in 1994. These decreases were primarily in the AA
security product line, partially offset by an increase in margins in Prestige
security products and Protector Hardgoods.
Total operating expenses increased by approximately $6.1 million or 8.1%
for the twelve months ended November 30, 1995 compared to last year. A major
component of this increase was the third quarter 1995 charge for the downsizing
of the Company's retail operations. Excluding this charge, operating overhead
increased $3.6 million for fiscal 1995 compared to the same period last year.
Warehousing, assembly and repair expenses increased approximately $441,000,
or 4.7 %, for 1995 compared to 1994. The increase for the twelve months was
primarily in field warehousing expenses and travel. Selling expenses increased
approximately $2.2 million, or 6.8%, compared to last year. Advertising and
other promotional marketing programs accounted for the majority of the increase
in fiscal 1995. General and administrative expenses increased $3.4 million, or
10.5%, for 1995 compared to last year. A provision for costs associated with the
down-sizing of the retail group was the primary component of this increase. This
provision included costs for the buy-out of leases, the write-off of leasehold
improvements, severance pay and other charges necessary to close and consolidate
the retail operations. Other increases
16
were in professional fees, bad debt and expenses associated with the Company's
overseas buying offices.
Management fees and related income and equity in income from joint venture
investments decreased by approximately $15.5 million for 1995, as compared to
1994, principally due to CellStar Corporation ("CellStar") as detailed in the
following table:
1994 1995
-------------------------------------------- -----------------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
CellStar - $13,958 $13,958 - $ 2,151 $ 2,151
ASMC - 932 932 - 819 819
G.L.M. - - - $ 14 - 14
Pacific $ 435 242 677 186 21 207
Protector 1,108 - 1,108 - - -
TALK - (819) (819) - (2,837) (2,837)
------- -------- -------- ------- -------- --------
$1,543 $14,313 $15,856 $ 200 $ 154 $ 354
======= ======== ======== ======= ======== =======
NOTE: Certain amounts have been restated as discussed in Note 8
to the consolidated financial statements.
During 1994, the Company sold shares of CellStar, resulting in a pre-tax
gain on sale of $27.8 million. Also in 1994, the Company recorded a $10.6
million gain on the carrying value of the investment in CellStar after their
public offering. This event did not repeat in 1995. In addition, in 1995, the
Company sold 1,500,000 shares of CellStar Common Stock. The gain on the sale of
these securities, before income taxes, was approximately $8.4 million. Since the
Company's ownership in CellStar is less than 20%, the Company can no longer
account for CellStar under the equity method of accounting. The decrease in
Audiovox Pacific is due to an overall decline in gross profits, as the cellular
market in Australia experienced the same competitive factors which exist in the
United States. As a result, Audiovox Pacific recorded an inventory write-down of
$800,000 during 1995, 50% of which resulted in the Company recording lower
income from equity investments. TALK, which commenced operations during the
latter part of 1994, continued to experience losses, primarily due to ongoing
start-up costs.
Interest expense and bank charges increased by $3.2 million, or 48.3%,
compared to 1994 as a result of an increase in interest costs from increased
borrowing to support higher levels of inventory purchases and asset financing.
Other expenses increased approximately $3.0 million primarily due to $2.9
million in costs associated with the issuance of stock warrants for no monetary
consideration to certain holders of the Company's convertible subordinated
debentures. This one-time, non-cash charge to earnings is offset by a $2.9
million increase in paid in capital. Therefore, there is no effect on total
shareholders' equity.
For fiscal 1995, the Company recorded an income tax recovery
17
of approximately $2.8 million, compared to a provision of approximately $20.3
million for fiscal 1994. The effective income tax recovery rate for 1995 was
negatively impacted primarily due to the non-deductibility of losses in the
Company's Canadian operations which can no longer be carried-back, the
non-deductibility of costs associated with the issuance of the stock warrants
and undistributed earnings from equity investments.
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 Minivox(TM) 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.
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.
18
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.
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 $9.1 million, or 39.3%, 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 stra tegy for
the wholesale business of increasing marketing support expenditures in order to
accelerate sales growth. The retail
19
division accounted for $6.2 million (68.1%) of the increase over fiscal 1994.
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 $4.6
million, or 16.5%, 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 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
$4.0 million (87.0%) 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 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
ASMC - 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 is 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 ASMC is due to an increase in sales and
profitability by the venture. The decrease in H&H is 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 is due to an overall decline in gross profits as the market in Australia
became more competitive.
20
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 product 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 commenced operations in October 1994. From October 1994 through
November 1994, all activity recorded by TALK was related to start-up operations.
The Company believes that, as a new operation, there will be additional start-up
costs 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.
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 11 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's cash position at November 30, 1995 was $1.6 million above the
November 30, 1994 level. Operating activities used approximately $40.2 million,
primarily due to increases in accounts receivable, inventory, the gain on the
sale of 1,500,000 shares of CellStar and provision for deferred income taxes.
This was partially offset by increases in income taxes payable, depreciation and
amortization and expenses associated with the issuance of warrants. Investing
activities provided approximately $14.8 million, primarily from the net proceeds
of the partial sale of CellStar. This source of cash was partially offset by the
purchase of property, plant and equipment. Financing activities provided
approximately $27.0 million, primarily from increased borrowings under line of
credit agreements and documentary acceptances.
In December 1993, CellStar, the successor to National Auto Center, Inc.
(National) and Audiomex Export Corp., completed an initial public offering (the
CellStar Offering ) of 7,935,000
21
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 approximately $10.69 per share and
received aggregate net proceeds of $29.4 million (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 $17.8 million. In
addition, the Company recorded a gain, before provision for income taxes, of
$10.6 million on the increase in the carrying value of its remaining shares of
CellStar Common Stock due to the CellStar Offering in 1994.
Of the proceeds received by CellStar from its initial public offering,
$13.7 million was paid to the Company in satisfaction of amounts owed to the
Company by CellStar 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 granted to the other
50% investor in CellStar two options to purchase up to an aggregate of 1,750,000
shares of CellStar Common Stock owned by the Company, 1,500,000 of which was
exercised in full on June 1, 1995 at an exercise price of $11.50 per share. As a
result, the Company recorded a gain, before provision for income taxes, of $8.4
million. This reduced the Company's ownership in CellStar below 20% and, as
such, the Company will no longer account for CellStar under the equity method of
accounting. The remaining 2,375,000 CellStar shares owned by the Company will be
accounted for as an investment in marketable equity securities. As discussed in
Note 6 to the consolidated financial statements, Financial Accounting Standards
Board (FASB) Statement No. 115 (Statement 115) addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Based upon the closing
market price of CellStar on November 30, 1995, the increase to equity as
required by FASB 115 is $31.7 million, net of deferred taxes.
On March 15, 1994, the Company completed the sale of $65 million 6 1/4%
Convertible Subordinated Debentures due 2001. 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.
A portion of the net proceeds of the offering was used to repay existing
indebtedness and a prepayment premium. 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. The Series AA and Series BB Convertible Debentures have
the same maturity, interest rate, and conversion provision as
22
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.
On May 5, 1995, the Company entered into an amended and restated Credit
Agreement ("Credit Agreement") with five banks, including Chemical Bank which
acts as agent for the bank group, which provides that the Company may obtain
credit through direct borrowings and letters of credit. The obligations of the
Company under the Credit Agreement continue to be guaranteed by certain of the
Company's subsidiaries and are secured by accounts receivable and inventory of
the Company and those subsidiaries. The obligations are also secured by a pledge
agreement entered into by the Company for 1,075,000 shares of CellStar Common
Stock. Availability of credit under the Credit Agreement is in a maximum
aggregate amount of $95.0 million, is subject to certain conditions and is based
upon a formula taking into account the amount and quality of its accounts
receivable and inventory. The Credit Agreement contains several covenants
requiring, among other things, a minimum level of net worth and working capital
required to be maintained at November 30, 1995 of $92.5 million and $125.0
million, respectively. As of November 30, 1995, the Company's financial
condition satisfied these requirements, however, did not satisfy the covenant
requiring net income of $2.5 million for the year ended November 30, 1995.
Non-compliance with this covenant was waived. Subsequent to November 30, 1995,
the Company amended the Credit Agreement, effective December 22, 1995 and
February 9, 1996, which provided for, among other things, increased interest
rates, which may be reduced under certain circumstances, and a change in the
criteria for and method of calculating certain financial covenants in the
future.
On May 9, 1995, the Company issued 1,668,875 warrants in a private
placement, with underlying shares which may be purchased pursuant to an option
on the Chief Executive Officer's personal stock holdings. Each warrant is
convertible into one share of class A common stock at $7 1/8, subject to
adjustment under certain circumstances. The warrants were issued to the
beneficial holders, as of June 3, 1994, of $57.6 million of the Company's 6 1/4%
convertible subordinated Debentures due 2001, in exchange for a release of any
claims such holder may have against the Company, its agents, directors and
employees in connection with their investment in the Debentures. Each holder
received 30 Warrants for each $1,000 of principal amount of debentures, except
for Oppenheimer & Co., Inc. which received 25 warrants for each $1,000 of
principal amount of debentures. The warrants are not exercisable (a) until the
later of (x) May 9, 1996 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 or (b)
after March 15, 2001, unless sooner terminated under certain circumstances.
Subsequent to November 30, 1995, the Company filed a registration statement for
the warrants and the underlying common stock pursuant to a
23
registration rights agreement dated as of May 9, 1995, between the Company and
the purchasers of the warrants.
On May 9, 1995, John J. Shalam, Chief Executive Officer of the Company,
granted the Company an option to purchase 1,668,875 shares of class A common
stock from his personal holdings. The exercise price of this option is $7 1/8
plus the tax impact, if any, should the exercise of this option be treated as
dividend income rather than capital gains to Mr. Shalam. The independent
directors of the Company may elect to issue shares from the Company instead of
exercising the option on Mr. Shalam's shares if such directors determine it is
in the best interest of the shareholders and the Company.
On February 9, 1996, the Company's 10.8% Series AA $76,923, and 11.0%
Series BB $5.4 million, Convertible Debentures matured. As of February 9, 1996,
the holders of only $1.1 million of the Series BB Convertible Debentures
exercised their right to convert into 206,046 shares of common stock. The
remaining balance of Series AA and Series BB were paid, thereby extinguishing
the remaining conversion features of these two debentures.
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 foreseeable future.
Impact of Inflation and Currency Fluctuation
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 the 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.
Seasonality
The Company typically experiences some seasonality. The Company believes
such seasonality could be attributable to increased demand for its products
during the Christmas season, commencing October, for both wholesale and retail
operations.
24
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" (Statement 121), in March 1995. Under Statement 121,
the Company is required to assess the recoverability and carrying amount of
long-lived assets, certain identifiable intangible assets and goodwill related
to those assets, whenever events or changes in circumstances indicate
impairment. Statement 121 provides the methodology for the measurement of such
impairment to be recognized in the financial statements. The provisions of
Statement 121 are effective for financial statements for fiscal years beginning
after December 15, 1995 and earlier adoption is permitted. The provisions of
Statement 121 must be implemented no later than fiscal year 1997. The effect of
initially applying these provisions shall be reported in the period in which the
recognition criteria are first applied and met or, in the case of long-lived
assets held for disposal, as the cumulative effect of a change in accounting
principle at the date of adoption. The Company believes that the implementation
will not have a material impact on the Company's consolidated financial
position.
The FASB has issued Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), in October 1995. Under Statement 123, the Company
is required to choose either the new fair value method or the current intrinsic
value method of accounting for its stock-based compensation arrangements. Using
the fair value method, the Company would measure the compensation cost
recognized in the financial statements based upon the estimated fair value of
the stock-based compensation arrangements as of the date they are granted. The
intrinsic value method, under APB Opinion No. 25, "Accounting for Stock issued
to Employees", requires the recognition of compensation cost only if such value
does not exceed the market value of the underlying stock on the measurement
date. The Company will continue to account for all employee stock-based
compensation plans under APB Opinion No. 25 and adopt the provisions of
Statement 123, as required, for all stock-based arrangements issued to
non-employees. The accounting requirements of Statement 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995 and
the disclosure, including pro forma, requirements are effective for financial
statements for fiscal years beginning after December 15, 1995. Even though the
Company has opted not to change its method of accounting, Statement 123 requires
pro forma disclosures of net income and earnings per share computed as if the
fair value method has been applied. Statement 123 must be implemented no later
than fiscal year 1997. As of November 30, 1995, the Company does not have any
such stock compensation plans which would require the preparation of the pro
forma disclosure provisions of Statement 123.
The FASB has issued Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" (Statement 114), in May 1993.
25
An amendment of Statement 114 was issued in October 1994 as Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (Statement 118). Under Statement 114, as amended by Statement 118,
the Company is required to measure impaired loans based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Statement 114
amends FASB Statement No. 5, "Accounting for Contingencies", and FASB Statement
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring".
The provisions of Statement 114 as amended by Statement 118 must be implemented
no later than fiscal year 1996. Previously issued annual financial statements
shall not be restated upon adoption of these provisions. The Company believes
that the implementation will not have a material impact on the Company's
consolidated financial position.
Item 8-Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
1994 and 1995 and for each of the years in the three-year period ended November
30, 1995, together with the independent auditors' report thereon of KPMG Peat
Marwick LLP, independent auditors, are filed under this Item 8.
26
Selected unaudited, quarterly financial data of the Registrant for the
years ended November 30, 1995 and 1994 appears below:
QUARTER ENDED
Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
1995
Net sales $131,391 105,811 112,177 151,361
Gross profit 22,586 19,270 7,406 (b) 21,480
Operating expenses 20,723 19,221 22,552 (c) 17,980
Income (loss) before provision for
(recovery of) income taxes 1,083 (4,240) (9,729)(d) (1,800)
Provision for (recovery of) income
taxes 547 (467) (3,344) 461
Net income (loss) 536 (3,773) (6,385) (2,261)
Net income (loss) per share (primary) 0.06 (0.42) (0.71) (0.25)
Net income per common share (fully
diluted) 0.06 (0.42) (0.71) -
1994
Net sales $115,337 116,272 109,719 145,120
Gross profit 22,178 21,678 20,219 20,836
Operating expenses 16,923 18,421 17,797 21,284
Income (loss) before provision for
income taxes and extra ordinary
item 42,640 (a) 2,439 2,533 (1,078)
Provision for (recovery of) for
income taxes 18,477 1,002 1,013 (164)
Income (loss) before cumulative effect
of change in accounting principle 24,163 1,437 1,520 (914)
Cumulative effect of change in
accounting principle (178) - - -
Net income (loss) 23,985 1,437 1,520 (914)
Net income (loss) per share (primary):
Income (loss) before cumulative
effect 2.63 0.16 0.17 (0.10)
Cumulative effect (0.02) - - -
Net income (loss) 2.61 0.16 0.17 (0.10)
Net income (loss) per common share
(fully diluted):
Income (loss) before cumulative
effect 2.38 0.15 0.16 (0.10)
Cumulative effect (0.02) - - -
Net income (loss) 2.36 0.15 0.16 (0.10)
NOTE: The Company does not compute fully diluted earnings per
share when the addition of potentially dilutive
securities would result in anti-dilution.
NOTE: Certain amounts have been restated as discussed in Note
8 to the consolidated financial statements.
(a) Includes a gain on the sale of an equity investment of $27.8 million
and a gain on public offering of an equity investment of $10.6 million.
(b) Includes a $9.3 million inventory write-down to market.
(c) Includes a $2.5 million expense due to the down-sizing of the
retail operations.
(d) Includes a $2.9 million charge associated with the issuance of warrants
and a $8.4 million gain on the sale of an equity investment.
27
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, 1994 and 1995, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
for each of the years in the three-year period ended November 30, 1995. 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, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1(g) to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", in 1995. As also discussed
in Note 1(p), the Company adopted the provisions of the FASB's SFAS No.
109, "Accounting for Income Taxes", in 1994.
s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
February 12, 1996, except for Paragraph 7 on Note 8 which is as of March 6, 1998
28
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
1994 1995
---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,495 $ 7,076
Accounts receivable, net 94,242 96,930
Inventory, net 83,430 100,422
Receivable from vendor - 5,097
Prepaid expenses and other current assets 6,065 5,443
Deferred income taxes 2,247 5,287
Restricted cash - 5,959
---------- ---------
Total current assets 191,479 226,214
Restricted cash 6,559 -
Investment securities - 62,344
Equity investments 25,902 5,900
Property, plant and equipment, net 6,180 6,055
Debt issuance costs, net 4,840 4,235
Excess cost over fair value of assets
acquired and other intangible assets, net 1,032 943
Other assets 3,106 2,737
---------- ---------
$ 239,098 $ 308,428
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,088 $ 17,844
Accrued expenses and other current liabilities 13,063 16,800
Income taxes payable 834 2,455
Bank obligations 1,084 761
Documentary acceptances - 7,120
Current installments of long-term debt 159 5,688
---------- ---------
Total current liabilities 36,228 50,668
Bank obligations 29,100 49,000
Deferred income taxes 5,945 23,268
Long-term debt, less current installments 75,653 70,534
---------- ---------
Total liabilities 146,926 193,470
---------- ---------
Minority interest 138 363
---------- ---------
Stockholders' equity:
Preferred stock 2,500 2,500
Common Stock:
Class A; 30,000,000 authorized; 6,777,788
issued 68 68
Class B; 10,000,000 authorized; 2,260,954
issued 22 22
Paid-in capital 39,715 42,876
Retained earnings 50,254 38,371
Cumulative foreign currency translation
and adjustment (525) (963)
Unrealized gain on marketable securities, net - 31,721
---------- ---------
Total stockholders' equity 92,034 114,595
---------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 239,098 $ 308,428
========== =========
Certain amounts have been restated as discussed in Note 8 to the
consolidated financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED NOVEMBER 30, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1994 1995
--------- --------- --------
Net sales $389,038 $486,448 $500,740
Cost of sales (including an inventory
write-down to market in 1995 of $9,300) 314,118 401,537 429,998
--------- --------- --------
Gross profit 74,920 84,911 70,742
--------- --------- --------
Operating expenses:
Selling 23,191 32,299 34,489
General and administrative 28,096 32,740 36,160
Warehousing, assembly and repair 8,479 9,386 9,827
--------- --------- --------
59,766 74,425 80,476
--------- --------- --------
Operating income (loss) 15,154 10,486 (9,734)
--------- --------- ---------
Other income (expenses):
Interest and bank charges (6,504) (6,535) (9,694)
Equity in income of equity investments 4,948 3,748 154
Management fees and related income 1,903 1,543 200
Gain on sale of equity investment - 27,783 8,435
Gain on public offering of equity
investment - 10,565 -
Expense related to issuance of warrants - - (2,921)
Other, net (259) (1,056) (1,126)
--------- --------- ---------
88 36,048 (4,952)
--------- --------- ---------
Income (loss) before provision for (recovery
of) income taxes, extra-ordinary
item and cumulative effect
of a change in an accounting principle 15,242 46,534 (14,686)
Provision for (recovery of) income taxes 5,191 20,328 (2,803)
--------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting for income taxes 10,051 26,206 (11,883)
Extraordinary item - tax benefits from
utilization of net operating loss
carryforwards 2,173 - -
Cumulative effect of change in accounting
for income taxes - (178) -
--------- --------- --------
Net income (loss) $ 12,224 $ 26,028 $(11,883)
========= ========= =========
Net income (loss)per common share
(primary):
Income (loss) before extraordinary
item $ 1.11 $ 2.88 $ (1.31)
========= ========= =========
Extraordinary item $ 0.24 - -
========= ========= ========
Cumulative effect of change in
accounting for income taxes - $ (.02) -
========= ========= ========
Net income (loss) $ 1.35 $ 2.86 $ (1.31)
========= ========= =========
Net income (loss) 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 - $ (.01) -
========= ========= ========
Net income (loss) $ 1.25 $ 2.20 -
========= ========= ========
Certain amounts have been restated as discussed in Note 8 to the consolidated
financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1993, 1994 AND 1995
(IN THOUSANDS)
Cumulative
foreign Unrealized
currency Gain (Loss) Total
Preferred Common Paid-In Unearned Retained translation on Marketable Stockholders'
stock stock capital compensation earnings adjustment Securities equity
--------- ------- ------- ------------ -------- ------------ ------------- ---------
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)
Issuance 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
Net loss - - - - (11,883) - - (11,883)
Equity adjustment
from foreign
currency
translation - - - - - (438) - (438)
Unearned compensation
relating to grant
of options and non-
performance restricted
stock - - 62 (62) - - - -
Compensation
expense - - 46 194 - - - 240
Options and non-perform-
ance restricted stock
forfeitures due to
employee terminations - - (81) 81 - - - -
Issuance of warrants - - 2,921 - - - - 2,921
Implementation of
change in accounting
for debt and equity
securities, net of
tax effect of
$24,517 - - - - - - 40,004 40,004
Unrealized loss on
marketable
securities, net of
tax effect of
$(5,076) - - - - - - (8,283) (8,283)
------ --- -------- ------ -------- ------ -------- ---------
Balances at
November 30,
1995 $2,500 $90 $43,286 $(410) $38,371 $(963) $31,721 $114,595
====== === ======== ====== ======== ====== ======== ========
Certain amounts have been restated as discussed in Note 8 to the consolidated
financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
--------- --------- --------
Cash flows from operating activities:
Net income (loss) $ 12,224 $ 26,028 $(11,883)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 3,863 4,299 4,100
Provision for bad debt expense 230 (21) 1,816
Equity in income of equity investments (4,948) (3,748) (154)
Minority interest (22) 96 225
Gain on sale of equity investment - (27,783) (8,435)
Gain on public offering of equity investment - (10,565) -
Provision for (recovery of) deferred income taxes, net of
extraordinary item (2,311) 6,140 (5,158)
Provision for unearned compensation - 268 240
Expense relating to issuance of warrants - - 2,921
Loss on disposal of property, plant and equipment, net - - 246
Cumulative effect of change in accounting for income taxes - 178 -
Changes in:
Accounts receivable (6,266) (20,337) (4,468)
Note receivable from equity investment - - (5,097)
Inventory (13,849) (18,701) (16,950)
Income taxes receivable 451 229 -
Accounts payable, accrued expenses and other current
liabilities 8,076 3,675 488
Income taxes payable 1,632 (1,395) 1,623
Prepaid expenses and other, net (193) (4,171) 250
--------- --------- --------
Net cash used in operating activities (1,113) (45,808) (40,236)
--------- --------- ---------
Cash flows from investing activities:
Purchase of equity investments - (6,016) -
Purchases of property, plant and equipment, net (1,346) (2,611) (2,722)
Notes receivable from equity investment - 7,973 -
Net proceeds from sale of equity investment - 29,433 17,250
Purchase of business - (148) -
Proceeds from distribution from equity investment - - 267
--------- --------- -------
Net cash (used in) provided by investing activities (1,346) 28,631 14,795
--------- --------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements 4,616 (8,613) 19,577
Net borrowings (repayments) under documentary acceptances 2,832 (10,833) 7,120
Principal payments on long-term debt (6,127) (17,411) (11)
Debt issuance costs (177) (5,315) (714)
Proceeds from exercise of stock options 176 170 -
Principal payments on capital lease obligation (165) (175) (233)
Proceeds from issuance of long-term debt - 65,000 675
Proceeds from issuance of notes payable - 10,045 -
Payment of note payable - (5,000) -
Restricted cash - (6,559) -
Proceeds from release of restricted cash - - 600
--------- --------- --------
Net cash provided by financing activities 1,155 21,309 27,014
Effect of exchange rate changes on cash (10) (9) 8
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (1,314) 4,123 1,581
Cash and cash equivalents at beginning of period 2,686 1,372 5,495
--------- --------- --------
Cash and cash equivalents at end of period $ 1,372 $ 5,495 $ 7,076
========= ========= ========
Certain amounts have been restated as discussed in Note 8 to the consolidated
financial statements.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1993, 1994 AND 1995
(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'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; cruise controls and 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 $448 and $1,337 at November 30, 1994 and
1995 consisted of short-term investments, with terms of less
than three months. For purposes of the statements of cash
flows, the Company considers investments with original
maturities of three months or less to be cash equivalents.
(d) Cash Discount and Co-operative Advertising Allowances
The Company accrues for estimated cash discounts and
trade and promotional co-operative advertising allowances
(Continued)
33
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
at the time of sale. These discounts and allowances are
reflected in the accompanying consolidated financial
statements as a reduction of accounts receivable as they are
utilized by customers to reduce their trade indebtedness to
the Company.
(e) Inventory
Inventory consists principally of finished goods and is stated
at the lower of cost (primarily on a weighted moving average
basis) or market. During the third quarter of 1995, the
Company recorded a charge of approximately $9,300 to
accurately reflect the Company's inventory at the lower of
cost or market.
(f) Restricted Cash
Restricted cash represents collateral for an irrevocable
standby letter of credit in favor of the Series AA and Series
BB Convertible Debentures (Note 10). Currently, the cash is
invested in short-term investments.
(g) Investment Securities
The Company adopted the provisions of the FASB's SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" (Statement 115) at December 1, 1994. Under
Statement 115, the Company classifies its debt and equity
securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to
hold the security until maturity. All other securities not
included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity
until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
(Continued)
34
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts
are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income
recognized when earned.
(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 10)
and the restructuring of bank obligations (Note 9(a)) have
been capitalized. These charges are amortized over the lives
of the respective agreements. Amortization expense of these
costs amounted to $856, $1,225 and $1,319 for the years ended
November 30, 1993, 1994 and 1995, respectively.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment
under capital lease is stated at the present value of minimum
lease payments. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
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.
The Company will adopt the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", on December 1,
(Continued)
35
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1996.
(j) 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 $1,283 and $1,280 at
November 30, 1994 and 1995, respectively. Amortization of the
excess cost over fair value of assets acquired and other
intangible assets amounted to $164, $271 and $127 for the
years ended November 30, 1993, 1994 and 1995, respectively.
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its
ongoing review, the Company estimates the fair value of
intangible assets, taking into consideration any events and
circumstances which may diminish fair value. The Company will
adopt the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", on December 1, 1996.
(k) Equity Investments
The Company has common stock investments in five companies
which are accounted for by the equity method (Note 8).
(l) 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
(Continued)
36
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $30,150, $51,793 and $43,307 for the
years ended November 30, 1993, 1994 and 1995, respectively.
Related commissions paid to outside selling representatives
for cellular activations are reflected as cost of sales in the
accompanying consolidated statements of income (loss) and
amounted to $10,969, $17,848 and $15,374 for the years ended
November 30, 1993, 1994 and 1995, respectively.
(m) Advertising
The Company expenses the production costs of advertising as
incurred and expenses the costs of communicating advertising
when the service is received. During the years ended November
30, 1993, 1994 and 1995, the Company had no direct response
advertising.
(n) Warranty Expenses
Warranty expenses are accrued at the time of sale based on the
Company's estimated cost to repair expected returns for
products. At November 30, 1994 and 1995, the reserve for
future warranty expense amounted to $1,665 and $2,030,
respectively.
(o) 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 intercompany 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
(Continued)
37
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
30, 1993, 1994 and 1995.
During 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. There were no open foreign
exchange contracts at November 30, 1994 and 1995.
(p) Income Taxes
Effective December 1, 1993, the Company adopted the provisions
of SFAS No. 109, "Accounting for Income Taxes", (Statement
109) and has reported the cumulative effect of that change in
the method of accounting for income taxes in the 1994
consolidated statement of income (loss). 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.
(q) Net Income (Loss) Per Common Share
Primary earnings per share are computed based on the
weighted average number of common shares outstanding and
(Continued)
38
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 for the years ended November
30, 1993 and 1994 assumes conversion of all outstanding
debentures (Note 10) 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,
1993 1994 1995
Primary 9,046,698 9,105,952 9,038,742
Fully diluted 10,077,685 12,769,221 -
(r) Supplementary Financial Statement Information
Advertising expenses approximated $8,740, $11,610 and $13,538
for the years ended November 30, 1993, 1994 and 1995,
respectively.
Interest income of approximately $837, $540 and $1,047 for the
years ended November 30, 1993, 1994 and 1995, respectively, is
included in other in the accompanying consolidated statements
of income (loss).
Included in accrued expenses and other current liabilities is
$3,696 and $4,601 of accrued wages and commissions at November
30, 1994 and 1995, respectively.
(s) Reclassifications
Certain reclassifications have been made to the 1993 and 1994
consolidated financial statements in order to conform to the
1995 presentation.
(Continued)
39
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Business Acquisitions/Dispositions
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. Bnd.(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,
1993 1994 1995
Cash paid during the years for:
Interest $5,985 $ 5,291 $9,224
Income taxes $3,667 $15,409 $ 818
During 1993 and 1995, the Company entered into lease agreements to
acquire new computer equipment. As a result, capital lease obligations
of $646 and $86, respectively were incurred (Note 14).
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.
(Continued)
40
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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).
During 1995, the Company contributed $36 of property, plant and
equipment in exchange for a 50% ownership interest in a newly-formed
joint venture (Note 8).
As of November 30, 1995, the Company recorded an unrealized holding
gain relating to available-for-sale marketable equity securities, net
of deferred income taxes, of $31.7 million as a separate component of
stockholders' equity (Note 6).
(4) Transactions With Major Suppliers
The Company engages in transactions with Shintom Co., Ltd. (Shintom), a
stockholder who owns approximately 3.5% at November 30, 1994 and 1995
of the outstanding Class A Common Stock and all of the outstanding
Preferred Stock of the Company. During 1994, the Company formed TALK
Corporation (TALK), a 33%-owned joint venture in Japan (Note 8), with
Shintom and other companies.
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 4%, 7% and 20% for the years
ended November 30, 1993, 1994 and 1995, respectively, of total
inventory purchases. At November 30, 1994 and 1995, the Company had
recorded $43 and $25, respectively, of liabilities due to Shintom and
TALK for inventory purchases included in accounts payable. The Company
also has documentary acceptance obligations outstanding from TALK as of
November 30, 1995 (Note 9(b)).
The Company currently buys a majority of its products from one
supplier. Inventory purchases from this supplier approximated 47%, 45%
and 44% of total inventory purchases for the years ended November 30,
1993, 1994 and 1995, respectively.
(Continued)
41
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
1994 1995
-------- --------
Trade accounts receivable $ 90,225 $100,556
Receivables from equity investments
(Note 8) 9,799 4,196
-------- --------
100,024 104,752
Less:
Allowance for doubtful accounts 1,623 2,707
Allowance for cellular deactivations 1,234 1,725
Allowance for co-operative
advertising and cash discounts 2,925 3,390
-------- --------
$ 94,242 $ 96,930
======== ========
The provision for (recovery of) bad debt expense amounted to $230,
($21) and $1,816 for the years ended November 30, 1993, 1994 and 1995,
respectively. See Note 15(b) for
concentrations of credit risk.
(6) Investment Securities
The Company's investment securities consist primarily of 2,375,000
shares of CellStar Corporation (CellStar) Common Stock, which were
classified as available-for-sale marketable equity securities at
November 30, 1995. The aggregate fair value of available-for-sale
marketable equity securities was $62.3 million at November 30, 1995,
which is comprised of a cost basis of $11.2 million and a gross
unrealized holding gain of $51.1 million recorded as a separate
component of stockholders' equity. A related deferred tax liability of
$19.4 million was recorded at November 30, 1995 as a reduction to the
unrealized holding gain included as a separate component of
stockholders' equity.
During 1994, the Company granted the majority owner of CellStar (the
Investor) an option (the Option) to purchase 250,000 shares of CellStar
Common Stock which is exercisable through December 3, 1996, in whole
and not in part, at an exercise price of $13.80 per share. As of
November 30, 1995, the Investor has the right to vote up to 1,300,000
shares of CellStar Common Stock owned by the Company pursuant to a
voting rights agreement entered into during 1994. The number of shares
of CellStar Common Stock the Investor is entitled to vote is subject to
reduction to the extent the Investor sells
(Continued)
42
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
his shares of CellStar Common Stock (with certain exceptions) or
exercises the Option. Subsequent to November 30, 1995, the voting
rights granted to the Investor by the Company expired. During the term
of the Option and the voting rights agreement, the Company cannot
transfer its shares of CellStar Common Stock which are held subject to
those agreements.
On November 29, 1995, the Company entered into a pledge agreement with
its financial institutions, which provided that 1,075,000 shares of
CellStar Common Stock be secured as collateral for the bank obligations
incurred by the Company (Note 9).
(7) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
1994 1995
------- -------
Land $ 53 $ 363
Buildings 446 1,491
Furniture, fixtures and displays 3,467 3,581
Machinery and equipment 2,458 2,783
Computer hardware and software 10,981 11,422
Automobiles 649 723
Leasehold improvements 4,003 3,671
------- -------
22,057 24,034
Less accumulated depreciation
and amortization 15,877 17,979
------- -------
$ 6,180 $ 6,055
======= =======
At November 30, 1994 and 1995, included in computer hardware and
software, is $846 and $937, respectively, pertaining to capital leases.
Amortization of such equipment is included in depreciation and
amortization of plant and equipment, and accumulated amortization was
$463 and $729 at November 30, 1994 and 1995, respectively.
Computer software includes approximately $1,305 and $383 of unamortized
costs as of November 30, 1994 and 1995, 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
$2,843, $2,803 and $2,654 for the years ended November 30,
(Continued)
43
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1993, 1994 and 1995, respectively, which includes amortization of
computer software costs of $1,439, $1,259 and $922 for the years ended
November 30, 1993, 1994 and 1995, respectively.
(8) Equity Investments
As of November 30, 1995, the Company had a 33.33% ownership interest in
TALK. Additionally, the Company had 50% non-controlling ownership in
four other entities: Protector Corporation (Protector) which acts as a
distributor of chemical protection treatments; Audiovox Specialty
Markets Co., L.P. (ASMC) which acts as a distributor to specialized
markets for RV's and van conversions, of televisions and other
automotive sound, security and accessory products; Audiovox Pacific
Pty., Limited (Audiovox Pacific) which distributes cellular telephones
and automotive sound and security products in Australia and New
Zealand; and G.L.M. Wireless Communications, Inc. (G.L.M.) which is in
the cellular telephone, pager and communications business in the New
York metropolitan area.
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 1993, 1994 and 1995, the Company waived its right to
receive its monthly payments pursuant to the agreement and 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 to National Auto Center, Inc.
(National) and Audiomex Export Corp. (both 50 % owned equity
investments of the Company in 1993), 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 shares of CellStar Common Stock due to the CellStar Offering
in 1994.
(Continued)
43
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 granted the
Investor an option to purchase up to an aggregate of 1,500,000 shares
of CellStar Common Stock owned by the Company, which was exercised in
full on June 1, 1995, at an exercise price of $11.50 per share. As a
result, the Company recorded a gain, before provision for income taxes,
of $8.4 million. This reduced the Company's ownership in CellStar below
20% and, as such, the Company will no longer account for CellStar under
the equity method of accounting. The remaining 2,375,000 CellStar
shares owned by the Company will be accounted for as an investment in
marketable equity securities (Note 6).
The following table presents financial information relating to CellStar
for the years ended November 30, 1993, 1994 and 1995:
1993 1994 1995
(In Thousands)
Current assets $ 81,983 $170,285 $271,156
Non-current assets 7,911 16,069 43,765
Current liabilities 74,931 106,617 196,746
Non-current liabilities 7,214 3,095 6,880
Net sales 275,376 518,422 811,915
Gross profit 45,580 69,642 109,841
Net income 7,853 16,248 22,896
In August 1994, the Company invested 600 million Japanese Yen
(approximately $6,000) into a newly-formed company, TALK in exchange
for 12,000 shares of TALK, representing a 33% ownership interest. Five
million dollars of this investment was financed by a non-recourse note
with a third party lender, which provides for the repayment of the note
either in cash or by surrendering 10,000 shares in TALK (Note 10). The
Company accounts for its investment in TALK under the equity method of
accounting. The Company discontinued recording its share of
(Continued)
45
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
TALK's losses beyond $1,000, which amount represented the Company's net
investment in TALK. Following discussions with the Securities and
Exchange Commission, the Company determined to change the manner in
which it applied the equity method of accounting for the fiscal year
ended November 30, 1995. As a result, the net loss for 1995 has
increased from $9,256 to $11,883 or from $1.02 to $1.31 primary net
loss per common share. There was no impact of this restatement on the
1994 consolidated statement of income (loss) as the Company's share of
TALK's 1994 losses were previously recorded.
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive distribution
rights on all wireless personal communication products for all
countries except Japan, China, Thailand and several mid-eastern
countries. The Company granted Shintom a license agreement permitting
the use of the Audiovox trademark to be used with TALK video cassette
recorders sold in Japan from August 29, 1994 to August 28, 1997, in
exchange for royalty fees. For the years ended November 30, 1994 and
1995, no such royalty fees were earned by the Company.
On July 31, 1995, the Company purchased a 50% equity investment in a
newly-formed company, G.L.M., for approximately $36 in contributed
assets in addition to a $100 loan payable at 1% above prime which was
8.75% at November 30, 1995, due in fiscal 1996.
The Company received the following management fees and related income
from its equity investments:
November 30,
1993 1994 1995
------ ------ -----
CellStar $1,220 - -
Pacific 613 $ 435 $ 186
H & H 70 - -
Protector - 1,108 -
G.L.M. - - 14
------ ------ -----
$1,903 $1,543 $ 200
====== ====== =====
The Company's net sales to the equity investments amounted to $21,368,
$32,630 and $17,864 for the years ended November 30, 1993, 1994 and
1995, respectively. The Company's purchases from the equity investments
amounted to $2,585, $5,715 and $83,858 for the years ended November 30,
1993, 1994 and 1995, respectively. The Company recorded $668 of outside
representative commission expenses for activations and
(Continued)
46
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
residuals generated by G.L.M. on the Company's behalf during
fiscal year 1995 (Note 1(l)).
Included in accounts receivable at November 30, 1994 and November 30,
1995 are trade receivables due from its equity investments aggregating
$8,691 and $4,182 and management fee receivables of $1,108 and $14,
respectively. Receivable from vendor represents claims on late
deliveries, product modifications and price protection from TALK.
Amounts are payable in monthly installments through November 30, 1996
and bear interest at rates which range from 6% to 8%. At November 30,
1994 and 1995, other long-term assets include equity investment
advances outstanding and management fee receivables of $1,138 and
$1,289, respectively. At November 30, 1994 and 1995, included in
accounts payable and other accrued expenses were obligations to equity
investments aggregating $207 and $240, respectively. Documentary
acceptance obligations were outstanding from TALK at November 30, 1995
(Note 9(b)).
During 1995, the Company recorded interest income from TALK relating to
the receivable from vendor, reimbursement of interest expense incurred
under the subordinated loan (Note 10) and other short-term loans made
to TALK during 1995 at market interest rates. For the years ended
November 30, 1993, 1994 and 1995, interest income earned on equity
investment notes and other receivables approximated $666, $25 and $573,
respectively. Interest expense on equity investment documentary
acceptances approximated $158 in 1995.
(9) Financing Arrangements
(a) Bank Obligations
During 1993, the Company had established a revolving credit
agreement with several financial institutions which was first
amended on March 15, 1994. On May 5, 1995, the Company entered
into the Second Amended and Restated Credit Agreement (the
"Credit Agreement") which superseded the first amendment in
its entirety. Under the Credit Agreement, the Company may
obtain credit through direct borrowings and letters of credit.
The obligations of the Company under the Credit Agreement
continue to be guaranteed by certain of the Company's
subsidiaries and is secured by accounts receivable and
inventory of the Company and those subsidiaries. The
obligations are also secured by a pledge agreement entered
into by the Company for 1,075,000 shares of
(Continued)
47
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CellStar Common Stock (Note 6). Availability of credit under
the Credit Agreement is a maximum aggregate amount of $95
million, subject to certain conditions, and is based upon a
formula taking into account the amount and quality of its
accounts receivable and inventory. The term of the Credit
Agreement is for approximately two years, expiring on February
28, 1997. As a result, bank obligations under the Credit
Agreement have been classified as long-term at November 30,
1995.
Outstanding obligations under the Credit Agreement at November
30, 1994 and 1995 were as follows:
November 30,
1994 1995
------- -------
Bankers' Acceptances $ 7,000 $16,000
Revolving Credit Notes 400 3,000
Eurodollar Notes 21,700 30,000
------- -------
$29,100 $49,000
======= =======
Interest on revolving credit notes was .25% above the prime
rate which was 8.5% and 8.75% at November 30, 1994 and 1995,
respectively. Interest on Eurodollar Notes was 2% above the
Libor rate which was approximately 6.2% and 5.1% at November
30, 1994 and 1995, respectively. Interest on bankers'
acceptances was 2% above the bankers' acceptance rate which
was approximately 6.75% and 6.25% at November 30, 1994 and
1995, respectively. Under the Credit Agreement, the Company is
also 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, 1995, the Company was
not in compliance with a financial covenant which was waived.
As of the date of the issuance of the financial statements,
the Company's creditors lost their right to call the bank
obligations as of November 30, 1995. Subsequent to November
30, 1995, the Company amended the Credit Agreement, effective
December 22, 1995 and February 9, 1996, which provided for,
among other things, increased interest rates, which may be
reduced under certain circumstances, and a change
(Continued)
48
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
in the criteria for and method of calculating certain
financial covenants in the future. At November 30, 1995, the
Company was in compliance with the new covenants.
During 1994, Audiovox Malaysia entered into a revolving credit
facility with a local Malaysian bank (Malaysian Credit
Agreement) to finance additional working capital needs. As of
November 30, 1994 and 1995, the available line of credit for
direct borrowing, letters of credit, bankers' acceptances and
other forms of credit approximated $1,200 and $2,200,
respectively. The facilities are secured by two standby
letters of credit issued under the Credit Agreement by the
Company and is payable upon demand or upon expiration of the
standby letters of credit on August 31, 1996. Subsequent to
November 30, 1995, the available line of credit under the
Malaysian Credit Agreement was increased to $5,320, and the
standby letter of credit issued by the Company was amended to
reflect the increase in the line. Outstanding obligations
under the Malaysian Credit Agreement at November 30, 1994 and
1995 were approximately $1,084 and $761, respectively.
Interest on direct borrowings was 1.5% above the Malaysian
base lending rate which was 6.6% and 7.8% at November 30, 1994
and 1995, respectively.
The maximum month-end amounts outstanding under the Credit
Agreement and the Malaysian Credit Agreement borrowing
facilities during the years ended November 30, 1993, 1994 and
1995 were $42,659, $30,184 and $59,315, respectively. Average
borrowings during the years ended November 30, 1993, 1994 and
1995 were $28,895, $16,929 and $43,470, respectively, and the
weighted average interest rates were 7.8%, 7.9% and 8.7%,
respectively.
(b) Documentary Acceptances
During 1995, the Company had various unsecured documentary
acceptance lines of credit available with suppliers to finance
inventory purchases. The Company does not have written
agreements which established the terms and amounts available
under the lines of credit. At November 30, 1995, $7,120 of
documentary acceptances were outstanding of which $6,801 was
due to TALK.
The maximum month-end documentary acceptances outstanding
during the years ended November 30, 1993, 1994 and 1995 were
$9,638, $9,078 and $9,977, respectively. Average borrowings
during the years ended November 30, 1993, 1994
(Continued)
49
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and 1995 were $6,883, $3,787 and $5,876, respectively, and the
weighted average interest rates, including fees, were 11.2%,
11.0% and 4.4%, respectively.
(10) Long-Term Debt
A summary of long-term debt follows:
November 30,
1994 1995
-------- -------
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at
$17.70 per share $ 65,000 $ 65,000
Convertible debentures:
Series AA, 10.8%, due 1996,
convertible at $5.34 per share 77 77
Series BB, 11.0%, due 1996,
convertible at $5.34 per share 5,385 5,385
Subordinated note payable 5,045 4,938
Secured term loan - 664
Capital lease obligations (Note 14) 305 158
-------- -------
75,812 76,222
Less current installments 159 5,688
-------- -------
$ 75,653 $70,534
======== =======
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
convertible subordinated debentures ("Subordinated Debentures") due
2001 and entered into an Indenture Agreement. The Subordinated
Debentures are convertible into shares of the Company's Class A Common
Stock, par value $.01 per share at an initial conversion price of
$17.70 per share, subject to adjustment under certain circumstances.
The Indenture Agreement contains various covenants. The bonds are
subject to redemption by the Company in whole, or in part, at any time
after March 15, 1997, at certain specified amounts. On May 9, 1995, the
Company issued warrants to certain beneficial holders of these
Subordinated Debentures (Note 13(d)).
On March 8, 1994, the Company entered into a Debenture Exchange
Agreement and exchanged certain debentures for Series AA and Series BB
Convertible Debentures (Debentures). The Debentures are convertible at
any time at $5.34 per share, which is subject to adjustment in certain
circumstances, and are secured by a standby letter of credit (Note
1(f)). Although the Debenture Exchange Agreement provides for optional
prepayments under certain circumstances, such prepayments are
restricted by the Credit Agreement (Note 9(a)). On February 9, 1996,
the holders of $1,100 of the
(Continued)
50
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Series BB Convertible Debentures exercised their right to convert into
206,046 shares of Class A Common Stock. The remaining balance of the
Debentures were repaid, thereby extinguishing the remaining conversion
features of these Debentures.
On October 20, 1994, the Company issued a note payable for five hundred
million Japanese Yen (approximately $5,045 and $4,938 on November 30,
1994 and 1995, respectively) to finance its investment in TALK (Note
8). The note is scheduled to be repaid on October 20, 2004 and bears
interest at 4.1%. The note can be repaid by cash payment or by giving
10,000 shares of its TALK investment to the lender. The lender has an
option to acquire 2,000 shares of TALK held by the Company in exchange
for releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. This note and the investment in TALK are
both denominated in Japanese Yen, and, as such, the foreign currency
translation adjustments are accounted for as a hedge. Any foreign
currency translation adjustment resulting from the note will be
recorded in stockholders' equity to the extent that the adjustment is
less than or equal to the adjustment from the translation of the
investment in TALK. Any portion of the adjustment from the translation
of the note that exceeds the adjustment from the translation of the
investment in TALK is a transaction gain or loss that will be included
in earnings.
During 1995, Audiovox Malaysia entered into a Secured Term Loan for 1.7
million Malaysian Ringgits (approximately $675) to acquire a building.
The loan is secured by the property acquired and bears interest at 1.5%
above the Malaysian base lending rate which was 7.8% on November 30,
1995. The loan is payable in 120 monthly equal installments commencing
October 1995.
Maturities on long-term debt for the next five fiscal years are as
follows:
1996 $5,688
1997 68
1998 68
1999 68
2000 68
======
(Continued)
51
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) Income Taxes
As discussed in Note 1(p), 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 income (loss) for the year ended November 30,
1994. Prior years' financial statements have not been restated to apply
the provisions of Statement 109.
The components of income (loss) before the provision for (recovery of)
income taxes and extraordinary item are as follows:
November 30,
1993 1994 1995
-------- -------- ---------
Domestic Operations $15,983 $47,032 $(12,424)
Foreign Operations (741) (498) (2,262)
-------- -------- ---------
$15,242 $46,534 $(14,686)
======== ======== =========
Total income tax expense (recovery) was allocated as follows:
November 30,
1994 1995
-------- -------
Income (loss) from continuing
operations $20,328 $(2,803)
Stockholders' equity
Additional paid in capital for
compensation expense for tax
purposes in excess of amounts
recognized for financial
reporting purposes (37) -
Unrealized holding gain on
investment securities recognized
for financial reporting purposes - 19,441
-------- -------
Total income tax expense $20,291 $16,638
======== =======
(Continued)
52
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision for (recovery of) income taxes attributable to income
from continuing operations is comprised of:
Federal Foreign State Total
-------- ------- ------- --------
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
======== ====== ======= =======
1995:
Current $ 1,455 $ 570 $ 330 $ 2,355
Deferred (4,189) - (969) (5,158)
-------- ----- ------- --------
$(2,734) $ 570 $ (639) $(2,803)
======== ====== ======= ========
A reconciliation of the provision for (recovery of) income taxes
attributable to income (loss) from continuing operations computed at
the Federal statutory rate to the reported provision for income taxes
attributable to income (loss) from continuing operations is as follows:
November 30,
1993 1994 1995
-------------------- ------------------- --------------------
Tax provision (recovery) at
Federal statutory rates $5,335 35.0% $16,287 35.0% $(5,140) (35.0)%
Undistributed earnings (loss)
from equity investments (1,437) (9.4) 1,558 3.4 1,330 9.1
State income taxes, net of
Federal benefit 645 4.2 1,854 4.0 (415) (2.8)
Increase in beginning-of-the-
year balance of the valuation
allowance for deferred tax
assets - - 306 .7 644 4.3
Foreign tax rate differential 238 1.6 (7) (.1) (34) (0.2)
Expense relating to the
issuance of warrants - - - - 1,022 6.9
Other, net 410 2.7 330 .7 (210) (1.4)
------- ------ -------- ------ -------- ------
5,191 34.1 20,328 43.7 (2,803) (19.1)
Utilization of net operating
loss carryforwards (2,173) (14.3) - - - -
------- ------ -------- ------ -------- -----
$3,018 19.8% $20,328 43.7% $(2,803) (19.1)%
======= ====== ======== ====== ======== =======
(Continued)
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the year ended November 30, 1993, deferred income tax expense of
$433 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, 1993
Uniform capitalization of inventory
costs $ (93)
Accounts receivable reserves 193
Warranty and inventory reserves 484
Depreciation and amortization (646)
Insurance reserves 23
Cellular deactivation reserves (439)
Other, net 45
-------
$ (433)
========
The significant components of deferred income tax expense (recovery)
for the years ended November 30, 1994 and 1995 are as follows:
November 30,
1994 1995
Deferred tax expense (recovery)
(exclusive of the effect of other
components listed below) $5,834 $(5,802)
Increase in beginning-of-the-year
balance of the valuation
allowance for deferred tax assets 306 644
------ -------
$6,140 $(5,158)
====== ========
(Continued)
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are
presented below:
November 30,
1994 1995
-------- --------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts
and cellular deactivations $ 968 $ 1,601
Inventory, principally due to
additional costs capitalized for tax
purposes pursuant to the Tax Reform
Act of 1986 387 455
Inventory, principally due to valuation
reserve 436 1,373
Accrual for future warranty costs 658 790
Plant, equipment and certain
intangibles, principally due to
depreciation and amortization - 588
Net operating loss carryforwards, state
and foreign 859 1,689
Accrued liabilities not currently
deductible - 359
Other 193 477
-------- --------
Total gross deferred tax assets 3,501 7,332
Less: valuation allowance (979) (1,623)
-------- ---------
Net deferred tax assets 2,522 5,709
-------- --------
Deferred tax liabilities:
Plant, equipment and certain
intangibles, principally due to
depreciation and amortization (71) -
Equity investments, principally due to
undistributed earnings (6,149) (23,690)
-------- ---------
Total gross deferred tax
liabilities (6,220) (23,690)
-------- ---------
Net deferred tax liability $(3,698) $(17,981)
======== =========
The net change in the total valuation allowance for the year ended
November 30, 1995 was an increase of $644. A valuation allowance is
provided when it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. The Company has
established valuation allowances primarily for net operating loss
carryforwards in certain states and foreign countries as well as other
deferred tax assets in foreign countries. Based on the Company's
ability to carry back future reversals of deferred tax assets to taxes
paid in current and prior years and the Company's historical taxable
income
(Continued)
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1995. 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, 1995, the Company has net operating loss carryforwards
for state and foreign income tax purposes of approximately $13,912,
which are available to offset future state and foreign taxable income,
if any, which will expire through the year ended November 30, 2010.
The Company has not recognized a deferred tax liability of
approximately $260 and $268 at November 30, 1994 and 1995,
respectively, for the undistributed earnings of a foreign corporate
joint venture that arose in 1995 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.
(12) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Issued Per Liquidation
Security Value Shares Authorized and Outstanding Share Rights
November 30, November 30,
1994 1995 1994 1995
----------- ---------- ----------- ----------
Class A $ 0.01 30,000,000 30,000,000 6,777,788 6,777,788 One Ratably with
Common Class B
Stock
Class B 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably with
Common Class A
Stock
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 - - - -
====== ========== ========== ========= ========= === ==========
(Continued)
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 fiscal 1994, 15,500 shares 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.
As of November 30, 1994 and 1995, 969,500 shares of the Company's Class
A Common Stock are reserved for issuance under the Company's Stock
Option and Restricted Stock Plans and 4,845,345 for all convertible
securities and warrants outstanding at November 30, 1994 and 1995
(Notes 10 and 13).
Undistributed earnings from equity investments included in retained
earnings amounted to $20,526 and $3,431 at November 30, 1994 and 1995,
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
(Continued)
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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. Certain of the options became exercisable on
June 14, 1995, and the remainder will become exercisable on
December 14, 1996 after which they can be exercised in whole
or in part until expiration on December 14, 2003.
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.
In August 1995, non-qualified options to purchase 279,000
shares of Class A Common Stock were granted under the 1994
Stock Option Plan at an exercise price of $5.88 per share,
which represents the estimated fair market value of the shares
at the date of grant. No options can be exercised until
February 9, 1997 or August 9, 1998, as the case may be, after
which they can be exercised in whole or in part, until
expiration on August 9, 2005.
Compensation expense is recorded with respect to the options
based upon the quoted market value of the shares and the
exercise provisions at the date of grant. Compensation expense
for the years ended November 30, 1994 and 1995 was $175 and
$113, respectively.
(Continued)
58
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company will adopt the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", on December 1,
1996.
Information regarding the Company's stock option plans is
summarized below:
1987 1993 1994
Stock Stock Stock
Option Option Option
Plan 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 -
Granted - - 279,000
Exercised - - -
Canceled 21,000 12,750 -
--------- --------- -------
Outstanding at
November 30, 1995 104,000 175,250 279,000
========= ========= =======
Options exercisable,
November 30, 1995 104,000 15,750 -
========= ========= =======
(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, the stockholders approved an amendment to the 1987
Restricted Stock Plan which provides that restrictions on
stock 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.
(Continued)
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 to the extent the Company
achieves certain earnings per share goals. To the extent the
earnings per share goals have not been achieved during the
five years after the date of grant, the award will lapse.
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 August 1995, 21,000 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
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, 1995.
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.
Total restricted stock outstanding at November 30, 1994 and
1995 were 63,300 and 80,800, respectively. Compensation
expense for these grants for the years ended November 30, 1994
and 1995 were $93 and $127, respectively.
(c) Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee Stock
Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the
(Continued)
60
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 total number of shares available for purchase under
this plan is 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, 1995. The consulting
agreement, valued at $100, was expensed in 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 occurrence of certain
events described in the warrant agreement. The warrants are
exercisable, in whole or in part, from time-to-time, until
September 22, 2003. If the warrants are exercised in whole,
the holder thereof has the right to require the Company to
file with the Securities Exchange Commission a registration
statement relating to the sale by the holder of the Class A
Common Stock purchasable pursuant to the warrant.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of Class A
Common Stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial
holders as of June 3, 1994, of $57.6 million of the Company's
Subordinated Debentures in exchange for a release of any
claims such holders may have against the Company, its agents,
directors and employees in connection with their investment in
the Subordinated Debentures. As a result, the Company incurred
a warrant expense of $2.9 million and recorded a corresponding
increase to paid in capital. The warrants are not exercisable
(a) until the later of (x) May 9, 1996 and (y) the date a
registration statement with respect to the Class A Common
Stock issuable
(Continued)
61
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
upon exercise of the warrants has been filed and declared
effective by the Securities and Exchange Commission or (b)
after March 15, 2001, unless sooner terminated under certain
circumstances. Subsequent to November 30, 1995, the Company
has filed a registration statement for the warrants and the
underlying common stock pursuant to a registration rights
agreement dated as of May 9, 1995, between the Company and the
holders of the warrants. John J. Shalam, Chief Executive
Officer of the Company, has granted the Company an option to
purchase 1,668,875 shares of Class A Common Stock from his
personal holdings. The exercise price of this option is $7
1/8, plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains
to Mr.
Shalam.
(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,
contributions of $200 and $225, respectively, were made by the
Company to the United States plan. No contributions were made
in fiscal 1995. Contributions required by law to be made for
eligible employees in Canada were not material.
(14) Lease Obligations
At November 30, 1995, the Company was obligated under non-cancelable
leases for equipment and warehouse facilities for minimum annual rental
payments as follows:
Capital Operating
Lease Leases
1996 $170 $1,970
1997 - 1,018
1998 - 600
1999 - 258
2000 and thereafter - 71
---- ------
Total minimum lease payments 170 $3,917
======
Amounts representing interest 12
----
Present value of future
minimum lease payments 158
Less current portion 158
----
Obligations under leases
excluding current
installments -
====
(Continued)
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Rental expense for the above-mentioned operating lease agreements and
other leases on a month-to-month basis approximated $2,390, $3,107 and
$4,080 for the years ended November 30, 1993, 1994 and 1995,
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, 1995, minimum annual rental payments on these related
party leases, which are included in the above table, are as follows:
1996 $458
1997 66
1998 68
1999 11
(15) Financial Instruments
(a) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Malaysia (Note 9) and its Debentures
(Note 10). The Company had open commercial letters of credit
of $16,000 and $22,000, of which $13,100 and $10,800 were
accrued for as of November 30, 1994 and 1995, respectively.
The terms of these letters of credit are all less than one
year. No material loss is anticipated due to nonperformance by
the counterparties to these agreements. The fair value of
these open commercial and standby letters of credit is
estimated to be the same as the contract values based on the
nature of the fee arrangements with the issuing banks.
(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.
(Continued)
63
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. At November 30, 1995, three customers,
which included two cellular carriers and service providers and
a Bell Operating Company accounted for approximately 6%, 7%
and 5%, respectively, of accounts receivable.
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. During the year
ended November 30, 1995, two Bell Operating Companies and a
cellular carrier and service provider accounted for
approximately 6%, 7% and 7%, respectively, of the Company's
1995 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, 1994 and 1995,
25 and 36 customers, respectively, representing approximately
60% and 63%, 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. The carrying
value of all financial instruments classified as a current
asset or liability is deemed to approximate fair value, with
the exception of current installments of long-term debt,
because of the short maturity of these
(Continued)
64
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
instruments.
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 6).
Long-term debt Including Current Installments
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
Subordinated Debentures, fair values are based on published
statistical data. The 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 and 1995.
Management believes that the carrying value of the secured
term loan approximates fair value because it bears interest at
rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers.
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 are as follows:
November 30, 1994 November 30, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Long-term
obligations
including
current
installments $104,912 $86,662 $125,221 $103,699
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.
(Continued)
65
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) Commitments and Contingencies
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 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.
The impact of the final resolution of this matter on the Company's
results of operations or liquidity in a particular reporting period is
not known. Management is of the opinion, however, 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 effect
on the Company's consolidated financial position.
The Company is a defendant in an action alleging, among other things,
breach of contract and the plaintiff is seeking damages in excess of
$500. The litigation is currently in the early discovery phase. The
impact of the final resolution of this matter on the Company's results
of operations or liquidity in a particular reporting period is not
known. Management is of the opinion, however, 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 effect
on the Company's consolidated financial position.
The Company is also a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion,
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not
(Continued)
66
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
covered by such insurance, will not have a material adverse effect on
the Company's consolidated financial position.
67
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information regarding this item is set forth under the captions "Election of
Directors" of the Company's Proxy Statement to be dated March 24, 1996, which
will be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 (the "Proxy Statement") and is incorporated herein by reference.
Information with regard to Executive Officers is set forth in Item 1 of this
Form 10-K.
Item 11 - Executive Compensation
The information regarding this item is set forth under the caption "Executive
Compensation" of the proxy statement and is incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
The information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement and is
incorporated herein by reference. The Company knows of no arrangements which may
result at a subsequent date in a change of control of the Company.
Item 13 - Certain Relationships and Related Transactions
Information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock", "Election of Directors" and
"Executive Compensation" of the proxy statement.
68
PART IV
Item 14 - Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K
(a) (1)
The following financial statements are included in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets of Audiovox Corporation and Subsidiaries as of
November 30, 1994 and 1995.
Consolidated Statements of Income (Loss) of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1993, 1994 and 1995.
Consolidated Statements of Stockholders' Equity of Audiovox
Corporation and Subsidiaries for the Years Ended November 30, 1993,
1994 and 1995.
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1993, 1994 and 1995.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the
Years Ended November 30, 1993, 1994 and 1995.
Independent Auditors' Report on Financial Statement Schedules
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
II Valuation and Qualifying 75
Accounts
All other financial statement schedules not listed are omitted
because they are either not required or the information is otherwise
included.
69
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of February 12, 1996, except for Paragraph 7 of Note 8 which is
as of March 6, 1998, we reported on the consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1994 and 1995, and the related
consolidated statements of income (loss), stockholders' equity, and cash flows
for each of the years in the three-year period ended November 30, 1995, which
are included in the Company's 1995 annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules in the 1995
annual report on Form 10-K. These consolidated financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Our report refers to changes in the methods of accounting for certain
investments in equity securities and income taxes.
s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
February 12, 1996, except for Paragraph 7 of Note 8 which is as of March 6, 1998
70
(3) Exhibits See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
No reports were filed on Form 8-K for the fourth quarter ended November
30, 1995.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Company
(incorporated by reference to the Company's
Registration Statement on Form S-1; No. 33-107, filed
May 4, 1987).
3.1a Amendment to Certificate of Incorporation
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
1993).
3.2 By-laws of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1; No.
33-10726, filed May 4, 1987).
10.1 Renewal, dated October 30, 1993, of Lease by and
between Registrant and John J. Shalam dated October
22, 1986 (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
November 30, 1993).
10.2 Lease by and between Audiovox West Corporation and
Marquardt Associates dated February 1, 1991
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
1990).
10.3 Debenture Exchange Agreement among the Registrant and
the several note holders dated as of March 15, 1994
(incorporated by reference to the Company's Current
Report on Form 8-K dated March 15, 1994).
10.4 Amended and Restated Credit Agreement by and between
the Registrant and the several banks and financial
institutions (incorporated by reference to the
Company's Current Report on Form 8-K dated March 15,
1994).
10.4a Fifth Amendment, dated as of February 24, 1995, to
amended and restated credit agreement by and between
the Registrant and the several banks and financial
institutions (incorporated by reference to the
Company's Annual Report on Form 10-K for the year
ended November 30, 1994).
71
EXHIBIT
NUMBER DESCRIPTION
10.4b Second Amended and Restated Credit Agreement among
Audiovox Corporation and its lenders dated May 5,
1995 (incorporated by reference to the Company's
Current Report on Form 8-K dated May 5, 1995).
10.5 Purchase Agreement dated March 8, 1994 and
Registration Rights Agreement dated as of March 15,
1994, by and between the Registrant and Oppenheimer
& Co., Inc., Furman Selz Incorporated and Chemical
Securities, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K dated March 15,
1994).
10.6 Initial Option, Second Option and Voting Rights
Agreement by and between Registrant and Alan Gold
field (incorporated by reference to the Company's
Current Report on Form 8-K dated December 23, 1993).
10.7 Offering Memorandum in Connection with Audiovox
Corporation Warrants for the Purchase of One Share of
Class A Common Stock, dated as of April 12, 1995, as
supplemented in Supplement No. 1, dated May 1, 1995
(incorporated by reference to the Company's Current
Report on Form 8-K dated December 23, 1993).
10.8 Warrant Agreement, dated as of May 9, 1995, between
Audiovox Corporation and Continental Stock Transfer
& Trust Company, as Warrant Agent (incorporated by
reference to the Company's Current Report on Form 8-K
dated December 23, 1993).
10.9 Registration Rights Agreement, dated as of May 9,
1995, between Audiovox Corporation and certain
purchasers of Audiovox Corporation warrants
(incorporated by reference to the Company's Current
Report on Form 8-K dated December 23, 1993).
11 Statement of Computation of Income (Loss) Per Common
Share (Filed via EDGAR herewith).
21 Subsidiaries of the Registrant (Filed via EDGAR
herewith).
23 Independent Auditors' Consent (Filed via EDGAR
herewith).
27 Financial Data Schedule (filed via EDGAR herewith)
(d) All other schedules are omitted because the required information is
shown in the financial statements or notes thereto or because they are
not applicable.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUDIOVOX CORPORATION
March 9, 1998 BY: s/John J. Shalam
----------------------------
John J. Shalam, President
and Chief Executive Officer
73
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
s/John J. Shalam President; March 9, 1998
- ------------------------
John J. Shalam Chief Executive Officer
(Principal Executive
Officer) and Director
s/Philip Christopher Executive Vice President March 9, 1998
- ------------------------
Philip Christopher and Director
s/Charles M. Stoehr Senior Vice President, March 9, 1998
- ------------------------
Charles M. Stoehr Chief Financial Officer
(Principal Financial and
Accounting Officer) and
Director
s/Patrick M. Lavelle Director March 9, 1998
- -----------------------
Patrick M. Lavelle
s/Ann Boutcher Director March 9, 1998
- ------------------------
Ann Boutcher
s/Gordon Tucker Director March 9, 1998
- ------------------------
Gordon Tucker
s/Irving Halevy Director March 9, 1998
- ------------------------
Irving Halevy
s/Richard Maddia Director March 9, 1998
- ------------------------
Richard Maddia
s/Paul C. Kreuch, Jr. Director March 9, 1998
- ------------------------
Paul C. Kreuch, Jr.
74
Schedule II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1993, 1994 and 1995
(In thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance at Charged to Charged Balance
Beginning Costs and To Other At End
Description Of Year Expenses Accounts Deductions Of Year
1993
Allowance for doubtful
accounts $ 2,669 $ 230 - $ 836 $ 2,063
Cash discount allowances 171 131 - - 302
Co-op advertising and
volume rebate allow-
ances 832 4,651 - 4,054 1,429
Allowance for cellular
deactivations 688 1,051 - - 1,739
Reserve for warranties
and product repair costs 4,983 2,512 - 3,690 3,805
------- -------- ----- ------ -------
$ 9,343 $ 8,575 - $8,580 $ 9,338
======= ======== ===== ====== =======
1994
Allowance for doubtful
accounts $ 2,063 $ (21) $ 419 $ 1,623
Cash discount allowances 302 - - 65 237
Co-op advertising and
volume rebate allow-
ances 1,429 5,898 - 4,639 2,688
Allowance for cellular
deactivations 1,739 - - 505 1,234
Reserve for warranties
and product repair costs 3,805 2,970 - 3,568 3,207
------- -------- ----- ------- -------
$ 9,338 $ 8,847 - $ 9,196 $ 8,989
======= ======== ===== ======= =======
1995
Allowance for doubtful
accounts $ 1,623 $ 1,816 - $ 732 $ 2,707
Cash discount allowances 237 - - 72 165
Co-op advertising and
volume rebate allow-
ances 2,688 7,621 - 7,084 3,225
Allowance for cellular
deactivations 1,234 491 - - 1,725
Reserve for warranties
and product repair costs 3,207 3,834 - 3,093 3,948
------- -------- ----- ------- -------
$ 8,989 $13,762 - $10,981 $11,770
======= ======== ===== ======= =======
75
AUDIOVOX CORPORATION
Computation of Income (Loss) Per Common Share
Years Ended November 30, 1993, 1994 and 1995
(In thousands, except per share data)
1993 1994 1995
------- -------- --------
Primary earnings:
Income (loss) before extraordinary item and cumulative
effect of a change in an accounting principle $10,051 $26,206 $(11,883)
Extraordinary item 2,173 - -
Cumulative effect of change in accounting principle - (178) -
------- -------- --------
Net income (loss) $12,224 $26,028 $(11,883)
======= ======== =========
Shares
Weighted average number of common shares
outstanding 9,009 9,037 9,039
Additional shares assuming conversion of:
Stock options, performance share awards, and
warrants 38 69 -
------- -------- --------
Weighted average common shares outstanding, as
adjusted 9,047 9,106 9,039
======= ======== ========
Primary earnings per common share:
Before extraordinary item and cumulative effect $ 1.11 $ 2.88 $ (1.31)
Extraordinary item $ 0.24 - -
Cumulative effect - $ (0.02) -
------- -------- --------
Net income (loss) $ 1.35 $ 2.86 $ (1.31)
======= ======== =========
Fully diluted earnings:
Income (loss) before extraordinary item and cumulative
effect of a change in an accounting principle $10,051 $26,206 $(11,883)
Net interest expense related to convertible debt 354 2,074 -
------- -------- --------
Income before extraordinary item and cumulative
effect of a change in an accounting principle 10,405 28,280 -
Extraordinary item 2,173 - -
Cumulative effect of change in accounting principle - (178) -
------- -------- --------
Net income (loss) applicable to common stock $12,578 $28,102 $(11,883)
======= ======== =========
Shares
Weighted average number of common shares
outstanding 9,009 9,037 -
Additional shares assuming conversion of:
Stock options, performance share awards, and
warrants 46 88 -
Convertible debentures 1,023 3,644 -
------- -------- --------
Weighted average common shares outstanding, as
adjusted 10,078 12,769 -
======= ======== ========
Fully diluted earnings per common share:
Before extraordinary item and cumulative effect $ 1.03 $ 2.21 -
Extraordinary item $ 0.22 - -
Cumulative effect - (0.01) -
------- -------- --------
Net income (loss) $ 1.25 $ 2.20 -
======= ======== ========
NOTE: Certain amounts have been restated as discussed in Note 8 to the
consolidated financial statements.
Exhibit 11
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Subsidiaries Incorporation
Quintex Communications Corp. New York
Quintex Mobile Communications Corp. Delaware
Hermes Telecommunications Inc. Delaware
Lenex Corporation Delaware
American Radio Corp. Georgia
Audiovox International Corp. Delaware
Cell Holding Corporation Delaware
H & H Eastern Distributors Inc. Pennsylvania
Audiovox Holding Corp. New York
Audiovox Asia Inc. Delaware
Audiovox Latin America Ltd. Delaware
Audiovox Canada Limited Ontario
Western Audiovox Corp. British Columbia
Audiovox Communications (Malaysia) Sdn. Bhd. Malaysia
Audiovox Singapore PTE. LTD. Singapore
Audiovox (Thailand) Co., Ltd. Thailand
Exhibit 21
Independent Auditor's Consent
The Board of Directors and Stockholders
Audiovox Corporation:
We consent to incorporation by reference in the registration statements (No.
33-18119 and 33-65580) on Form S-8 of Audiovox Corporation and subsidiaries of
our report dated February 12, 1996, except for Paragraph 7 of Note 8 which is as
of March 6, 1998, relating to the consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1994 and 1995, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
and all related schedules for each of the years in the three-year period ended
November 30, 1995, which reports appear in the November 30, 1995 annual report
on Form 10-K of Audiovox Corporation and subsidiaries.
Our report refers to changes in the methods of accounting for certain
investments in equity securities and income taxes.
s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Jericho, New York
March 9, 1998
Exhibit 23
5
0000807707
Audiovox Corp.
1000
12-MOS
Nov-30-1995
Nov-30-1995
7076
0
99677
2707
100422
226214
24034
17979
308428
50668
70462
0
2500
90
112005
308428
457433
500740
414624
429998
0
1816
9694
(14686)
(2803)
(11883)
0
0
0
(11883)
(1.31)
(1.31)
