UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended November 30, 1998
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 $88,788,210 (based upon closing price on the American Stock
Exchange, Inc. on February 25, 1999).
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 22, 1999 was:
Class Outstanding
Class A Common Stock $.01 par value 16,760,518
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 wireless products,
both hand held portables and vehicle installed cellular telephones and
accessories, automotive sound equipment and automotive accessories, which
includes vehicle security systems, cruise controls, defoggers, remote start
systems, vehicle tracking systems and mobile video, all 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. Sales are made directly and indirectly through independent distributors
to cellular telephone accounts, cellular service providers, regional Bell
Operating Companies (BOCs), new car dealers, 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", and also receives activation
commissions and residuals from certain cellular service providers.
The Company's products may be broadly grouped into three major
categories: wireless, which includes cellular telephone products, activation
commissions and residual fees; automotive sound equipment; and automotive
accessories. These categories represent different product lines rather than
separate reporting segments. The Company's products are distributed by two
separate marketing groups:
Communications and Automotive.
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 and 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), The Protector(TM) and Rampage(TM). 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, 1998, the Company sold its products to
approximately 2,500 wholesale customers, including the BOCs, other cellular and
wireless carriers and their respective agents, mass merchandise chain stores,
specialty installers, distributors, car dealers, OEMs and AAFES.
The Company's five largest wholesale customers (excluding joint
ventures), who, in the aggregate, accounted for 42.7% of the Company's net sales
for the fiscal year ended November 30, 1998, are Bell Atlantic Mobile, AirTouch
Cellular, US Cellular, PrimeCo Personal Communications LP and Auto Club Cellular
Corporation. In addition, the Company also sells its products, cellular,
wireless and automotive, to mass merchants such as Walmart Stores, Inc. and OEMs
such as Chrysler of Canada, Proton Corporation Sdn. Bhd. of Malaysia, General
Motors and Chrysler of Venezuela, General Motors Corporation and BMW of North
America.
The Company uses several techniques to promote its products to
wholesale customers, including trade and consumer 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, funds co-operative advertising campaigns, develops and prints
custom sales literature, provides product fulfillment and logistic services and
conducts in-house training programs for wireless 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 to end users.
The Company's wholesale policy is to ship its products within 24 hours
of a requested shipment date from public warehouses in Norfolk, Virginia,
Sparks, Nevada, Miami, Florida and Canada and from leased facilities located in
Hauppauge, New York and Los Angeles, California.
Retail
As of November 30, 1998, the Company operated approximately 20 retail
outlets and licensed its trade name to 6 additional retail outlets in selected
markets in the United States through which it markets wireless telephones and
related products to retail customers under the names Audiovox(R),
3
American Radio(R) and Quintex(R). In addition to Audiovox products, both
wireless and automotive, these outlets sell competitive products such as
Motorola, Nokia and other manufacturers.
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
six 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. 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 either as
exclusive or non-exclusive agent engaged to solicit and sell cellular telephone
service in certain geographic areas and, while such contract is in effect and
for a specified period thereafter (which typically ranges from three months to
one year), may not act as a representative or agent for any other carrier or
reseller in those areas or solicit cellular or wireless communication network
services of the kind provided by the cellular carrier in the areas where the
Company acts as an agent. The Company's retail operation is free, at any time
after the restricted period, to pursue an agreement with another carrier who
services a particular geographic area. At present, each geographic area is
serviced by several cellular carriers.
As of November 30, 1998, the Company was an agent for the following
carriers in selected areas: Bell Atlantic Mobile Systems, Inc., BellSouth
Mobility, Inc., GTE Mobilnet of the Southeast, Inc. and United States Cellular.
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, either party may terminate the
agreement, with cause, upon prior notice. Typically, the Company's right to be
paid residual fees ceases upon termination of an agency relationship.
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
4
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, 1998, the Company had a 30.8% 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.
The Company's 72%-owned subsidiary, Audiovox Communications (Malaysia) Sdn.
Bhd. (Audiovox Communications), had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands through a
satellite based system in Malaysia. As of November 30, 1998, the Company had a
20% ownership interest in Bliss-tel Company, Limited, which distributes cellular
telephones and accessories in Thailand. Additionally, the Company had a 50%
non-controlling ownership in five other companies: Protector Corporation
(Protector) which acts as a distributor of chemical protection treatments,
Audiovox Specialized Applications, LLC (ASA), which acts as a distributor of
televisions and other automotive sound, security and accessory products to
specialized markets for recreational vehicles and van conversions, Audiovox
Pacific Pty., Limited (Audiovox Pacific) which distributes cellular telephones
and automotive sound and security products in Australia and New Zealand, G.L.M.
Wireless Communications, Inc. (G.L.M.) which is in the cellular telephone, pager
and communications business and Quintex Communications West, LLC, which is in
the wireless telephone business.
Customers
The Company had two customers, Bell Atlantic Mobile and AirTouch
Cellular, that accounted for more than 10% of the Company's net sales for fiscal
1998. Bell Atlantic Mobile and AirTouch Cellular accounted for 18.3 and 14.9%,
respectively, of the Company's net sales for fiscal 1998.
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 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 sound, security and automotive accessories.
Since 1984, the principal supplier of the Company's wholesale cellular
telephones has been Toshiba Corporation (Toshiba), accounting for approximately
42%, 32% and 28% of the total dollar amount of all product purchases by the
Company, during the fiscal years ended November 30, 1998, 1997 and 1996,
respectively. 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
5
sources cellular equipment from other manufacturers including, but not limited
to, TALK. Purchases from TALK accounted for approximately 19%, 29% and 26% of
total inventory purchases for the years ended November 30, 1998, 1997 and 1996,
respectively. Purchases of non-cellular products are made primarily from other
overseas suppliers including Hyundai Electronics Inc. (Hyundai), Namsung
Corporation (Namsung) and Nutek Corporation (Nutek). Some manufacturers have
agreements in effect that require them to supply product to the Company. The
Company considers its relations with its suppliers to be good. In addition, the
Company believes that alternative sources of supply are currently available.
Competition
The Company's wholesale business is highly competitive in all of 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 highly
competitive markets. The Company's retail performance is, therefore, also based
on the cellular service providers' ability to compete.
Employees
At November 30, 1998, the Company employed approximately 900 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 65 President and Chief Executive
Officer and Director
Philip Christopher 50 Executive Vice President and Director
Charles M. Stoehr 52 Senior Vice President and Chief Financial
Office and Director
Patrick M. Lavelle 47 Senior Vice President and Director
6
Name Age Current Position
Chris L. Johnson 47 Vice President, Secretary
Ann M. Boutcher 48 Vice President and Director
Richard Maddia 40 Vice President and Director
John J. Shalam has served as President and Chief Executive Officer and as a
director of the Company since 1960. Mr. Shalam also serves as president and is a
director of most of the Company's operating subsidiaries.
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 President
of Audiovox Communications Corp. and is 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 Senior 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.
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.
Richard Maddia has been a Vice President of the Company since 1991. Mr.
Maddia is responsible for the Company's Management Information Systems for both
the Company's distribution network and financial reporting. Mr. Maddia was
elected to the Board of Directors in 1996.
Item 2 - Properties
As of November 30, 1998, the Company leased a total of thirty-eight
operating facilities located in eleven states and two Canadian provinces. These
facilities serve as offices, warehouses, distribution centers or retail
locations. Additionally, the Company utilizes approximately 100,000 square feet
of public warehouse facilities. Management believes that it has sufficient,
suitable operating facilities to meet the Company's requirements.
7
Item 3 - Legal Proceedings
The Company is currently, and has in the past been, a party to 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 1998.
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 4,800 beneficial holders of Class A Common
Stock and 4 holders of Class B Common Stock.
Class A Common Stock
Average
Daily
Trading
Fiscal Period High Low Volume
1998
First Quarter $ 9 $ 5 3/4 103,038
Second Quarter 7 7/16 4 3/4 77,516
Third Quarter 7 7/16 3 5/8 82,948
Fourth Quarter 6 3/4 3 11/16 42,024
1997
First Quarter $ 8 1/2 $ 4 5/8 368,639
Second Quarter 7 7/8 4 15/16 171,733
Third Quarter 8 13/16 6 5/16 201,653
Fourth Quarter 10 3/4 7 5/16 131,779
1996
First Quarter $ 6 3/8 $ 4 3/4 15,924
Second Quarter 7 7/16 4 1/16 52,039
Third Quarter 6 5/16 4 16,309
Fourth Quarter 6 3/4 4 5/8 95,817
8
Item 6 - Selected Financial Data
Years ended November 30, 1998, 1997, 1996, 1995 and 1994
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Net sales $616,695 $ 639,082 $597,915 $500,740 $486,448
Net income (loss) 2,972 (a) 21,022 (b) (26,469) (c) (11,883) (d) 26,028 (f)
Net income (loss)
per common
share, basic 0.16 (a) 1.11 (b) (2.82) (c) (1.31) (d) 2.88 (f)
Net income (loss)
per common
share, diluted 0.16 (a) 1.09 (b) (2.82) (c) (1.31) (d) 2.22 (f)
Total assets 279,679 289,827 265,545 308,428 239,098
Long-term obli
gations, less
current in
stallments 33,724 38,996 70,413 142,802 110,698
Stockholders' 177,720 (e) 187,892 (e) 131,499 (e) 114,595 (e) 92,034
equity
(a) Includes a pre-tax charge of $6.6 million for inventory write-downs.
(b) Includes a pre-tax charge of $12.7 million for costs associated with
the exchange of $21.5 million of subordinated debentures into 2,860,925
shares of common stock in addition to tax expense on the exchange of
$158,000. Additionally, includes a net gain of $23.2 million on sale of
CellStar shares.
(c) Includes a pre-tax charge of $26.3 million for costs associated with
the exchange of $41.3 million of subordinated debentures into 6,806,580
shares of common stock in addition to tax expense on the exchange of
$2.9 million.
(d) 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.
(e) Includes a $4.2 million unrealized gain on marketable securities, net,
and a $929,000 gain on hedge of available-for-sale securities in 1998
and a $12.2 million unrealized gain on marketable securities, net, a
$773,000 unrealized gain on equity collar, net, and a $20.8 million
increase as a result of the exchange of $21.5 million of subordinated
debentures in 1997 and a $10.3 million unrealized gain on marketable
securities, net, and a $34.4 million increase as a result of the
exchange of $41.3 million of subordinated debentures in 1996 and a
$31.7 million unrealized gain on marketable securities, net, for 1995.
(f) Includes a cumulative effect change of ($178,000) or ($0.02) per share,
basic, and ($0.01) per share, 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.
9
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (In thousands, except share and per share data)
The Company markets its products under its own brand as well as private
labels to a large and diverse distribution network both domestically and
internationally. The Company's products are distributed by two separate
marketing groups: Communications and Automotive. The Communications group
consists of Audiovox Communications Corp. (ACC) and the Quintex retail
operations (Quintex), both of which are wholly-owned subsidiaries of the
Company. The Communications group markets cellular telephone products and
receives activation commissions and residual fees from its retail sales. The
price at which the Company's retail outlets sell cellular telephones is often
affected by the activation commission the Company will receive in connection
with such sale. 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
Automotive group consists of Audiovox Automotive Electronics (AAE) and, through
February 28, 1997, Heavy Duty Sound, which are divisions of the Company,
Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd.
and Audiovox Venezuela, C.A., which are majority-owned subsidiaries. Products in
the Automotive group include automotive sound and security equipment, car
accessories, home and portable sound products and mobile video. The Company
allocates interest and certain shared expenses to the marketing groups based
upon estimated usage. General expenses and other income items which are not
readily allocable are not included in the results of the various marketing
groups.
This Report on Form 10-K contains forward-looking statements relating
to such matters as anticipated financial performance and business prospects.
When used in this Report, the words "anticipates," "expects," "may," "intend"
and similar expressions are intended to be among the statements that identify
forward-looking statements. From time to time, the Company may also publish
forward- looking statements. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors,
including, but not limited to, foreign currency risks, political instability,
changes in foreign laws, regulations and tariffs, new technologies, competition,
customer and vendor relationships, seasonality, inventory obsolescence and
availability, could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements.
10
The following table sets forth for the periods indicated certain
statements of income (loss) data for the Company expressed as a percentage of
net sales:
Percentage of Net Sales
Years Ended November 30,
--------------------------------------------------------
1998 1997 1996
---- ---- ----
Net sales:
Product sales:
Cellular wholesale 64.6% 61.1% 58.6%
Cellular retail 0.7 1.0 1.3
Sound 12.7 14.4 16.4
Security and accessories 13.8 15.2 14.6
Consumer goods and all other 3.8 2.7 2.8
-------- -------- -------
95.6 94.4 93.7
Activation commissions 3.7 4.9 5.5
Residual fees 0.7 0.7 0.8
Total net sales 100.0 100.0 100.0
Cost of sales (85.6) (83.3) (83.9)
-------- -------- -------
Gross profit 14.4 16.7 16.1
Warehousing and assembly (2.0) (1.9) (1.8)
Selling (5.7) (6.0) (6.7)
General and administrative (5.9) (5.8) (5.4)
-------- -------- -------
Total operating expenses (13.6) (13.7) (13.9)
-------- -------- -------
Operating income 0.8 3.0 2.2
Interest expense (0.8) (0.4) (1.4)
Income of equity investments 0.2 0.2 0.1
Gain on sale of equity investment - 5.9 0.2
Debt conversion expense - (2.0) (4.4)
Other income (expense) 0.4 - (0.1)
Income tax expense (0.1) (3.5) (1.0)
-------- -------- -------
Net income 0.5 % 3.3 % (4.4)%
========= ======== =======
Fiscal 1998 Compared to Fiscal 1997
Consolidated Results
Net sales were $616,695 for 1998, a decrease of $22,387, or 3.5%, over
the same period in 1997. The decrease in net sales was accompanied by a
corresponding decrease in gross profit margins to 14.4% from 16.7% in 1997.
Operating expenses decreased to $83,670 from $87,067, a 3.9% decrease. Operating
income for 1998 was $4,871, a decrease of $14,824, or 75.3%, compared to 1997.
During 1997, the Company sold 1,835,000 shares of its holdings of CellStar for a
net gain of $23,232. Also during 1997, the Company exchanged $21,479 of its
subordinated debentures for 2,860,925 shares of Class A Common Stock. Costs
associated with this exchange were $12,844, including income taxes.
11
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1998, 1997 and 1996 are reflected
in the following table. Certain reclassifications have been made to the data for
periods prior to fiscal 1997 in order to conform to fiscal 1998 presentation.
Years Ended November 30,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------- ----------------- ---------------------
Net sales:
Communications
Cellular wholesale $398,113 64.6% $390,230 61.1% $350,299 58.6%
Cellular retail 4,493 0.7 6,280 1.0 7,665 1.3
Activation commissions 22,785 3.7 31,061 4.9 33,102 5.5
Residual fees 4,452 0.7 4,688 0.7 4,828 0.8
Other 11,747 1.9 12,141 1.9 12,785 2.1
--------- ------ -------- ------ -------- ------
Total Communications 441,590 71.6 444,400 69.5 408,679 68.4
--------- ------ -------- ------ -------- ------
Automotive
Sound 78,338 12.7 91,763 14.4 98,303 16.4
Security and accessories 84,973 13.8 97,446 15.2 87,234 14.6
Consumer goods 11,794 1.9 4,701 0.7 2,879 0.5
--------- ------ -------- ------ -------- ------
Total Automotive 175,105 28.4 193,910 30.3 188,416 31.5
Other - - 772 0.1 820 0.1
--------- ------ -------- ------ -------- ------
Total $616,695 100.0% $639,082 100.0% $597,095 100.0%
======== ====== ======== ====== ======== ======
Communication Results
The Communications group is composed of ACC and Quintex, both
wholly-owned subsidiaries of Audiovox Corporation. Since principally all of the
net sales of Quintex are cellular in nature, all operating results of Quintex
are being included in the discussion of the Communications group's product line.
Net sales were $441,590, a decrease of $2,810, or 0.6%, from the same
period in 1997. Unit sales of cellular telephones increased 354,000 units, or
12.0%, over 1997. Average unit selling prices decreased approximately 6.9%. The
number of new cellular subscriptions processed by Quintex decreased 22.8%, with
a corresponding decrease in activation commissions of approximately $8,276. Part
of the decrease was due to the closing of some retail locations. The average
commission received by Quintex per activation also decreased by approximately
4.9% from 1997. Unit gross profit margins decreased to 7.3% from 11.1% in 1997,
primarily due to reduced selling prices, however, were partially offset by a
corresponding decrease of 3.0% in average unit cost. In addition, the Company
recorded a $6.6 million charge to adjust the carrying value of certain cellular
inventories, partially offset by a $1.0 credit from a supplier. This charge was
the result of a software problem in certain analog cellular phones, as well as a
continuing decrease in the selling prices of analog telephones due to pressure
from the growing digital presence in the market. While the analog market is
still quite large, the Communications group may experience lower gross profits
in the future due to the price sensitivity of this market place. Operating
expenses decreased to $48,257 from $49,582. As a percentage of net sales,
operating expenses
12
decreased to 10.9% during 1998 compared to 11.2% in 1997. Selling expenses
decreased $1,763 from 1997, primarily in commissions, salesmen salaries, payroll
taxes and benefits, partially offset by increases in market development funds
and co-operative advertising. General and administrative expenses increased over
1997 by $632, primarily in occupancy costs and temporary personnel. Warehousing
and assembly expenses decreased over 1997 by $194, primarily in tooling and
direct labor. Pre-tax loss for 1998 was $1,786, a decrease of $13,368 compared
to 1997.
Management believes that the cellular industry is extremely competitive
and that this competition could affect gross margins and the carrying value of
inventories in the future.
The following table sets forth for the periods indicated certain
statements of income data for the Communications group expressed as a percentage
of net sales:
Communications
1998 1997
--------------------- ------------------
Net sales:
Cellular product - wholesale $398,113 90.1% $390,230 87.8%
Cellular product - retail 4,493 1.0 6,280 1.4
Activation commissions 22,785 5.1 31,061 7.0
Residual fees 4,452 1.0 4,688 1.1
Other 11,747 2.7 12,141 2.7
----------- -------- ----------- -------
Total net sales 441,590 100.0 444,400 100.0
Gross profit 52,270 11.8 66,117 14.9
Total operating expenses 48,257 10.9 49,582 11.2
----------- -------- ----------- -------
Operating income 4,013 0.9 16,535 3.7
Other expense (5,799) (1.3) (4,953) (1.1)
----------- -------- ----------- -------
Pre-tax income (loss) $ (1,786) (0.4)% $ 11,582 2.6%
========== ======== ========== =======
Automotive Results
Net sales decreased approximately $18,805 from 1997, a decrease of
9.7%. This decrease was primarily from a $21.3 million decrease in net sales in
the Company's foreign subsidiaries, primarily Malaysia, composed chiefly of
security and accessory products. Domestic operation sales of Automotive sound,
security, accessories and consumer goods products increased approximately $4.7
million, or 3.7%, from 1997. The main components of this increase being the
mobile video and leisure products categories. The domestic operations sales grew
by $7.3 million, or 5.9%, before the Heavy Duty Sound division was transferred
to one of the Company's equity investments during 1997.
Operating expenses decreased 3.1% from 1997 to $27,126, primarily in
our international operations. This was partially offset by an increase in
domestic operating expenses. Selling expenses decreased during 1998, primarily
in commissions and salaries in our foreign companies and market development
funds and co-operative advertising in our domestic operations. This was
partially offset by increases
13
in domestic commissions and trade show expenses. General and administrative
expenses decreased from 1997, mostly in foreign office expenses, bad debt
expense and executive salaries, both domestic and foreign. These decreases were
partially offset by increases in office salaries, domestically, and professional
fees, both domestic and foreign. Warehousing and assembly expenses increased
from 1997, primarily in field warehousing and direct labor. Pre-tax income
decreased $2,065 from last year, primarily due to a decrease of $2.6 million
from foreign operations, partially offset by an increase in pre-tax income from
domestic operations.
The Company believes that the Automotive group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales. Also, certain of its products are subject to price fluctuations
which could affect the carrying value of inventories and gross margins in the
future.
The following table sets forth for the periods indicated certain
statements of income data for the Automotive group expressed as a percentage of
net sales:
Automotive
1998 1997
------ -----
Net sales:
Sound $ 78,338 44.8% $ 91,763 47.3%
Security and accessories 84,973 48.5 97,446 50.3
Consumer goods 11,794 6.7 4,701 2.4
--------- ----- --------- -----
Total net sales 175,105 100.0 193,910 100.0
Gross profit 36,433 20.8 40,326 20.8
Total operating expenses 27,126 15.5 27,989 14.4
--------- ----- --------- -----
Operating income 9,307 5.3 12,337 6.4
Other expense (3,370) (1.9) (4,335) (2.2)
--------- ----- --------- -----
Pre-tax income $ 5,937 3.4% $ 8,002 4.1%
========= ===== ========= =====
Other Income and Expense
Interest expense and bank charges increased $2,227 during 1998 from
1997. This increase was primarily due to an increase in average outstanding
interest bearing debt. Another major factor was the increase in interest rates
experienced by the Company's subsidiary in Venezuela. The increase in the rate,
coupled with the additional outstanding debt as a result of the growth of that
operation, resulted in an increase in Venezuelan interest expense of $975.
14
Management fees and equity in income from joint venture investments
decreased by approximately $361 for 1998 compared to 1997 as detailed in the
following table:
1998 1997
---------------------------- ----------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
Bliss-tel -- $ (13) $ (13) -- -- --
ASA -- 1,860 1,860 -- $ 1,857 $ 1,857
TALK -- (509) (509) -- -- --
G.L.M $ 7 -- 7 $ 12 -- 12
Pacific -- (337) (337) -- (685) (685)
Posse 29 70 99 97 187 284
------- ------- ------- ------- ------- -------
$ 36 $ 1,071 $ 1,107 $ 109 $ 1,359 $ 1,468
======= ======= ======= ======= ======= =======
During 1998, the Company purchased 400,000 Japanese Yen (approximately
$3,132) of Shintom Convertible Debentures (Shintom Debentures). The Company
exercised its option to convert the Shintom Debentures into shares of Shintom
Common Stock.
Also during 1998, the Company purchased an additional 400,000 Japanese
Yen (approximately $2,732) of Shintom Debentures. The Company exercised its
option to convert the Shintom Debentures into shares of Shintom Common Stock.
The Company sold the Shintom Common Stock yielding net proceeds of $3,159 and a
gain of $427.
In addition, the Company purchased 1,000,000 Japanese Yen
(approximately $6,854) of Shintom Debentures. The Company exercised its option
to convert 337,212 Japanese Yen of Shintom Debentures into shares of Shintom
Common Stock. The Company sold the Shintom Common Stock yielding net proceeds of
$2,671 and a gain of $360.
During January 1997, the Company completed an exchange of $21,479 of
its subordinated debentures for 2,860,925 shares of Class A Common Stock
(Exchange). As a result of the Exchange, a charge of $12,686 was recorded. The
charge to earnings represents (i) the difference in the fair market value of the
shares issued in the Exchange and the fair market value of the shares that would
have been issued under the terms of the original conversion feature plus (ii) a
write-off of the debt issuance costs associated with the subordinated debentures
plus (iii) expenses associated with the Exchange offer. The Exchange resulted in
taxable income due to the difference in the face value of the bonds converted
and the fair market value of the shares issued and, as such, a current tax
expense of $158 was recorded. An increase in paid in capital was reflected for
the face value of the bonds converted, plus the difference in the fair market
value of the shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the original conversion
feature for a total of $33,592.
During 1997 the Company sold a total of 1,835,000 shares of CellStar
for net proceeds of $45,937 and a net gain of $23,232.
15
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of
40% for profits from normal business operations. During 1998, the Company
recorded $350 of tax benefit as a result of certain tax examinations. In
addition, the Company implemented various tax strategies which have resulted in
lowering the effective tax rate. During 1997, the Company had several
non-operating events which had tax provisions calculated at specific rates,
determined by the nature of the transaction.
Fiscal 1997 Compared to Fiscal 1996
Consolidated Results
Net sales were $639,082 for 1997, an increase of $41,167, or 6.9%, from
1996. The increase in net sales was accompanied by a corresponding increase in
gross profit margins to 16.7% from 16.1% in 1996. Operating expenses increased
to $87,067 from $83,313, a 4.5% increase. Operating income for 1997 was $19,695,
an increase of $6,620, or 50.6%, compared to 1996. During 1997, the Company sold
1,835,000 shares of its holdings of CellStar for a net gain of $23,232. Also
during 1997, the Company exchanged $21,479 of its subordinated debentures for
2,860,925 shares of Class A Common Stock. Costs associated with this exchange
were $12,844, including income taxes.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1997, 1996 and 1995 are reflected
in the following table. Certain reclassifications have been made to the data for
periods prior to fiscal 1996 in order to conform to fiscal 1997 presentation.
Years Ended November 30,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Net sales:
Communications
Cellular wholesale $390,230 61.1% $350,299 58.6% $261,997 52.3%
Cellular retail 6,280 1.0 7,665 1.3 14,177 2.8
Activation commissions 31,061 4.9 33,102 5.5 38,526 7.7
Residual fees 4,688 0.7 4,828 0.8 4,781 1.0
Other 12,141 1.9 12,785 2.1 11,293 2.3
-------- ----- -------- ----- -------- -----
Total Communications 444,400 69.5 408,679 68.4 330,774 66.1
-------- ----- -------- ----- -------- -----
Automotive
Sound 91,763 14.4 98,303 16.4 101,757 20.3
Security and accessories 97,446 15.2 87,234 14.6 67,560 13.5
Other 4,701 0.7 2,879 0.5 649 0.1
-------- ----- -------- ----- -------- -----
Total Automotive 193,910 30.3 188,416 31.5 169,966 33.9
Other 772 0.1 820 0.1 -- --
-------- ----- -------- ----- -------- -----
Total $639,082 100.0% $597,915 100.0% $500,740 100.0%
======== ===== ======= ===== ======== =====
16
Communication Results
The Communications group is composed of ACC and Quintex, both
wholly-owned subsidiaries of Audiovox Corporation. Since principally all of the
net sales of Quintex are cellular in nature, all operating results of Quintex
are being included in the discussion of the Communications group's product line.
Net sales were $444,400, an increase of $35,721, or 8.7%, from 1996.
Unit sales of cellular telephones increased 892,000 units, or 43.2%, over 1996.
Average unit selling prices decreased approximately 21.2% but were offset by a
corresponding decrease of 22.9% in average unit cost. The number of new cellular
subscriptions processed by Quintex decreased 9.1%, with a corresponding decrease
in activation commissions of approximately $2,041. The average commission
received by Quintex per activation, however, increased approximately 3.2% from
1996. Unit gross profit margins increased to 11.1% from 9.0% in 1996, primarily
due to increased unit sales and reduced unit costs. Operating expenses decreased
to $49,582 from $50,710. As a percentage of net sales, operating expenses
decreased to 11.2% during 1997 compared to 12.4% in 1996. Selling expenses
decreased $3,203 from 1996, primarily in advertising and divisional marketing,
partially offset by increases in commissions and salesmen salaries. General and
administrative expenses increased over 1996 by $572, primarily in office
salaries and temporary personnel. Warehousing and assembly expenses increased
over 1996 by $1,503, primarily in tooling and direct labor. Pre-tax income for
1997 was $11,582, an increase of $8,476 compared to 1996.
Though gross margins have improved over 1996, management believes that
the cellular industry is extremely competitive and that this competition could
affect gross margins and the carrying value of inventories in the future.
The following table sets forth for the periods indicated certain
statements of income data for the Communications group expressed as a percentage
of net sales:
Communications
1997 1996
------------------ ------------------
Net sales:
Cellular product - wholesale $ 390,230 87.8% $ 350,299 85.7%
Cellular product - retail 6,280 1.4 7,665 1.9
Activation commissions 31,061 7.0 33,102 8.1
Residual fees 4,688 1.1 4,828 1.2
Other 12,141 2.7 12,785 3.1
--------- ----- --------- -----
Total net sales 444,400 100.0 408,679 100.0
Gross profit 66,117 14.9 60,245 14.7
Total operating expenses 49,582 11.2 50,710 12.4
--------- ----- --------- -----
Operating income 16,535 3.7 9,535 2.3
Other expense (4,953) (1.1) (6,429) (1.6)
--------- ----- --------- -----
Pre-tax income $ 11,582 2.6% $ 3,106 0.8%
========= ===== ========= =====
17
Automotive Results
Net sales increased approximately $5,494 compared to 1996, an increase
of 2.9%. Increases were experienced in security and accessories and were
partially offset by a decrease in sound products. A majority of the increase was
from the group's international operations, both from an increase in existing
business and the formation of a new subsidiary in Venezuela. Automotive sound
decreased 6.7% compared to 1996, due to the transfer of the Heavy Duty Sound
division to a new joint venture. Excluding sound sales from the Heavy Duty Sound
division for fiscal 1997 and 1996, sound sales decreased 0.6%. Automotive
security and accessories increased 11.7% compared to 1996, primarily due to
increased sales in Prestige Security, Protector Hardgoods and alarms and video,
partially offset by decreases in net sales of AA security and cruise controls.
Gross margins increased to 20.8% from 18.9% in 1996. This increase was
experienced in the AV and Private Label sound lines and cruise control,
Protector Hardgoods and AA security accessory lines, partially offset by
decreases in Prestige Security. Operating expenses increased to $27,989 from
$25,559. Selling expenses increased over 1996 by $1,151, primarily in our
international operations, in commissions and advertising. General and
administrative expenses increased over 1996 by $1,512, primarily from our
international operations, in occupancy, office expenses and bad debt expense.
Warehousing and assembly expenses decreased from 1996 by $233, primarily from
the transfer of Heavy Duty Sound business to the new joint venture. Pre-tax
income for 1997 was $8,002, an increase of $2,303 compared to 1996. Without the
transfer of the Heavy Duty Sound business, pre-tax income increased $2,796
compared to 1996.
The Company believes that the Automotive group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales. Also, certain of its products are subject to price fluctuations
which could affect the carrying value of inventories and gross margins in the
future.
The following table sets forth for the periods indicated certain
statements of income data for the Automotive group expressed as a percentage of
net sales:
Automotive
1997 1996
------------------ ------------------
Net sales:
Sound $ 91,763 47.3% $ 98,303 52.2%
Security and accessories 97,446 50.3 87,234 46.3
Other 4,701 2.4 2,879 1.5
--------- ----- --------- -----
Total net sales 193,910 100.0 188,416 100.0
Gross profit 40,326 20.8 35,622 18.9
Total operating expenses 27,989 14.4 25,559 13.6
--------- ----- --------- -----
Operating income 12,337 6.4 10,063 5.3
Other expense (4,335) (2.2) (4,364) (2.3)
--------- ----- --------- -----
Pre-tax income $ 8,002 4.1% $ 5,699 3.0%
========= ===== ========= =====
18
Other Income and Expense
Interest expense and bank charges decreased by $5,938 for 1997 compared
to 1996. This was due to reduced interest bearing debt and the decrease in
interest bearing subordinated debentures which were exchanged for shares of
common stock.
Management fees and equity in income from joint venture investments
increased by approximately $651 for 1997 compared to 1996 as detailed in the
following table:
1997 1996
---------------------------- ------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
ASA -- $ 1,857 $ 1,857 -- -- --
ASMC -- -- -- -- $ 948 $ 948
G.L.M $ 12 -- 12 $ 100 -- 100
Pacific -- (685) (685) 22 (334) (312)
Quintex West -- -- -- 18 -- 18
Posse 97 187 284 46 17 63
------- ------- ------- ------- ------- -------
$ 109 $ 1,359 $ 1,468 $ 186 $ 631 $ 817
======= ======== ======= ======= ======= ======= ======= =======
Audiovox Pacific has experienced an overall decline in gross margins,
as the cellular market in Australia has experienced the same competitive factors
as those in the United States.
During January 1997, the Company completed an exchange of $21,479 of
its subordinated debentures for 2,860,925 shares of Class A Common Stock
(Exchange). As a result of the Exchange, a charge of $12,686 was recorded. The
charge to earnings represents (i) the difference in the fair market value of the
shares issued in the Exchange and the fair market value of the shares that would
have been issued under the terms of the original conversion feature plus (ii) a
write-off of the debt issuance costs associated with the subordinated debentures
plus (iii) expenses associated with the Exchange offer. The Exchange resulted in
taxable income due to the difference in the face value of the bonds converted
and the fair market value of the shares issued and, as such, a current tax
expense of $158 was recorded. An increase in paid in capital was reflected for
the face value of the bonds converted, plus the difference in the fair market
value of the shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the original conversion
feature for a total of $33,592.
During 1997, the Company sold a total of 1,835,000 shares of CellStar
for net proceeds of $45,937 and a net gain of $23,232.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of
41% for profits from normal business operations. During 1997, the Company had
several non-operating events which had tax provisions calculated at specific
rates, determined by the nature of the transaction. The tax treatment for the
debt
19
conversion expense of $12,686, which lowered income before provision for income
taxes, did not reduce taxable income as it is a non-deductible item. Instead of
recording a tax recovery of $5,201, which would have lowered the provision for
income taxes, the Company actually recorded a tax expense of $158. This and
other various tax treatments resulted in an effective tax rate of 51.6% for
1997.
Liquidity and Capital Resources
The Company's cash position at November 30, 1998 was approximately $47
below the November 30, 1997 level. Operating activities provided approximately
$17,378, primarily from decreases in inventory and increases in accounts
payable, accrued expenses and other current liabilities. These events were
partially offset by an increase in accounts receivable and a decrease in income
taxes payable. Investing activities used approximately $9,197, primarily from
the purchases of investment securities and property, plant and equipment,
partially offset by the net proceeds from the sale of investment securities.
Financing activities used approximately $8,113, primarily from net repayments
under line of credit agreements and repurchase of Class A Common Stock and
warrants.
On February 9, 1996, the Company's 10.8% Series AA and 11.0% Series BB
Convertible Debentures matured. The Company paid $4,362 to holders on that date.
The remaining $1,100 was converted into 206,046 shares of Common Stock. On
November 25, 1996, the Company concluded an exchange of $41,252 of its 6 1/4%
subordinated debentures for 6,806,580 shares of the Company's Class A Common
Stock. Accounting charges to earnings for this transaction were $29,206,
including income taxes on the gain of the exchange of the bonds. As a result of
the exchange, stockholders' equity was increased by $34,426.
On October 1, 1996, business formally conducted by the Company's
cellular division was continued in a newly-formed, wholly-owned subsidiary
called Audiovox Communications Corp. Capitalization of this company was
accomplished by exchanging the assets of the former division, less their
respective liabilities, for all of the common stock.
On May 5, 1995, the Company entered into the Second Amended and
Restated Credit Agreement (the Credit Agreement) which superseded the prior
agreement in its entirety. From its inception on May 5, 1995 through November
30, 1998, the Credit Agreement was amended a total of 13 times providing for
various changes to the terms. The terms as of November 30, 1998 are summarized
below.
Under the Credit Agreement, the Company may obtain credit through
direct borrowings and/or letters of credit to a maximum aggregate amount of
$95,000. These borrowings are subject to certain conditions with borrowings
based on a formula which takes into account the amount and quality of the
Company's accounts receivable and inventory. The obligations of the Company
under the Credit Agreement are guaranteed by certain of the Company's
subsidiaries and are secured by accounts receivable of the Company and those
subsidiaries.
On December 23, 1998, the Company entered into the Third Amended and
Restated Credit Agreement (the Revised Credit Agreement) which superseded the
Second Amended and Restated Credit Agreement in its entirety. The major changes
in the Revised Credit Agreement included an increase in the maximum aggregate
amount of borrowings to $112,500 and allowed for a sub-limit for foreign
currency borrowing of $15,000. The Revised Credit Agreement contains covenants
requiring, among other things, minimum levels of pre-tax income and minimum
levels of net worth as follows:
20
pre-tax income of not less than $1,500 for the two consecutive fiscal quarters
ending May 31, 1999, 2000 and 2001; not less than $2,500 for two consecutive
fiscal quarters ending November 30, 1999, 2000 and 2001; and not less than
$4,000 for any fiscal year ending on or after November 30, 1999. Further, the
Company may not incur a pre-tax loss in excess of $1,000 for any fiscal quarter
and may not incur a pre-tax loss for two consecutive fiscal quarters. In
addition, the Company must maintain a net worth base amount of $172,500 at any
time prior to February 28, 1999; $175,000 at any time on or after February 28,
1999 but prior to February 28, 2000; $177,500 at any time on or after February
28, 2000, but prior to February 28, 2001; and $180,000 at any time thereafter.
Further, the Company must at all times maintain a debt to worth ratio of not
more than 1.75 to 1. The Revised Credit Agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures.
The Revised Credit Agreement expires on December 31, 2001.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
1999 and for the reasonable 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 and currency fluctuations in those areas, if any, could
have growing significance to the financial condition and results of the
operations of the Company.
The Company has operations and conducts local business in Asia. The
recent fluctuations in the foreign exchange rates have not materially impacted
the consolidated financial position, results of operations or liquidity.
Management believes that continued fluctuations will not have a material adverse
effect on the Company's consolidated financial position, however the impact on
the results of operations or liquidity, particularly our Malaysian subsidiaries,
is unknown.
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, which commences in October, for both
wholesale and retail operations.
Year 2000 Date Conversion
Many of the Company's computerized systems could be affected by the
Year 2000 issue, which refers to the inability of such systems to properly
process dates beyond December 31, 1999. The Company also has numerous
computerized interfaces with third parties and is possibly vulnerable to failure
by such third parties if they do not adequately address their Year 2000 issues.
System failures resulting from these issues could cause significant disruption
to the Company's operations and result in a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
21
Management believes that a significant portion of its "mission
critical" computer systems are Year 2000 compliant and is continuing to assess
the balance of its computer systems as well as equipment and other facilities
systems. Management plans to complete its investigation, remediation and
contingency planning activities for all critical systems by mid 1999, although
there can be no assurance that it will. At this time, management believes that
the Company does not have any internal critical Year 2000 issues that it cannot
remedy.
Management is in the process of surveying third parties with whom it
has a material relationship primarily through written correspondence. Despite
its efforts to survey its customers, management is depending on the response of
these third parties in its assessment of Year 2000 readiness. Management cannot
be certain as to the actual Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations, financial condition or liquidity.
The Company expects to incur internal staff costs as well as consulting
and other expenses in preparing for the Year 2000. Because the Company has
replaced or updated a significant portion of its computer systems, both hardware
and software, in recent years, the cost to be incurred in addressing the Year
2000 issue are not expected to have a material impact on the Company's business,
results of operations, financial condition or liquidity. This expectation
assumes that our existing forecast of costs to be incurred contemplates all
significant actions required and that we will not be obligated to incur
significant Year 2000 related costs on behalf of our customers, suppliers and
other third parties.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997.
This Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items and unrealized
gains and losses on investments in equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. Based on current accounting standards, this Statement is not expected
to have a material impact on the Company's consolidated financial statements.
The Company will adopt this accounting standard effective December 1, 1999, as
required.
In June 1997, the FASB issued Statement 131, "Disclosures about
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement requires reporting segment profit or loss,
ceratin specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets
22
and other amounts disclosed for segments to corresponding amounts reported in
the consolidated financial statements. Restatement of comparative information
for earlier periods presented is required in the initial year of application.
Interim information is not required until the second year of application, at
which time comparative information is required. The Company has not determined
the impact that the adoption of this new accounting standard will have on its
consolidated financial statements disclosures. The Company will adopt this
accounting standard effective December 1, 1999, as required.
The FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 133 established
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. Statement 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Early application of
all the provisions of this Statement is encouraged but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. Management of the Company has not yet determined the impact that the
implementation of Statement 133 will have on its financial position, results of
operations or liquidity.
Item 7a - Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive
instruments and positions is the potential loss arising from adverse changes in
marketable equity security prices, foreign currency exchange rates and interest
rates.
Marketable Securities
Marketable securities at November 30, 1998, which are recorded at fair
value of $17,089 and include net unrealized gains of $4,154, have exposure to
price risk. This risk is estimated as the potential loss in fair value resulting
from a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $1,231. Actual results may differ.
Interest Rate Risk
The Company's bank loans expose earnings to changes in short-term
interest rates since interest rates on the underlying obligations are either
variable or fixed for such a short period of time as to effectively become
variable. The fair values of the Company's bank loans are not significantly
affected by changes in market interest rates.
The change in fair value of the Company's long-term debt resulting from
a hypothetical 10% decrease in interest rates is not material.
Foreign Exchange Risk
In order to reduce the risk of foreign currency exchange rate
fluctuations, the Company hedges transactions denominated in a currency other
than the functional currencies applicable to each of its various entities. The
instruments used for hedging are forward contracts with banks. The changes in
market value of such contracts have a high correlation to price changes in the
currency of the related hedged transactions. Intercompany transactions between
the U.S. company and its foreign subsidiaries
23
and equity investees are typically not hedged. The potential loss in fair value
for such net currency position resulting from a 10% adverse change in quoted
foreign currency exchange rates is approximately $265.
In addition, the Company holds debt denominated in Japanese Yen and
recognizes foreign currency translation adjustments in net income to the extent
the adjustment is greater than the adjustment from the translation of the
Company's investment in TALK. The potential loss resulting from a hypothetical
10% adverse change in the quoted Japanese Yen rate is approximately $141. Actual
results may differ.
The Company is subject to risk from changes in foreign exchange rates
for our subsidiaries and equity investees which use a foreign currency as their
functional currency and are translated into U.S. dollars. Such changes result in
cumulative translation adjustments which are included in stockholders' equity.
At November 30, 1998, the Company had translation exposure to various foreign
currencies with the most significant being the Malaysian Ringgit, Thailand Baht,
Canadian Dollar and Australian Dollar. The Company also has a Venezuelan
subsidiary in which translation adjustments are included in net income. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates amounts to $369. Actual results may differ.
24
Item 8-Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
1998 and 1997 and for each of the years in the three-year period ended November
30, 1998, together with the independent auditors' report thereon of KPMG LLP,
independent auditors, are filed under this Item 8.
Selected unaudited, quarterly financial data of the Registrant for the
years ended November 30, 1998 and 1997 appears below:
QUARTER ENDED
--------------------------------------------------------------------
Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
1998
Net sales $120,974 132,411 154,501 208,809
Gross profit 22,259 14,044(a) 24,878 27,360
Operating expenses 19,724 22,001 20,950 20,995
Income (loss) before provision for (recovery of)
income taxes 2,236 (8,720)(a) 4,201 6,084
Provision for (recovery of) income taxes 597 (4,025) 1,620 2,637
Net income 1,639 (4,695)(a) 2,581 3,447
Net income (loss) per common share (basic) 0.09 (0.24) 0.14 0.18
Net income (loss) per share (diluted) 0.09 (0.24) 0.14 0.18
1997
Net sales $166,614 148,195 153,124 171,149
Gross profit 28,002 25,055 25,634 28,071
Operating expenses 23,486 21,243 20,606 21,732
Income before provision for income taxes 15,328 (b) 14,032 (d) 5,565 (f) 8,517(h)
Provision for income taxes 11,125 (c) 5,678 (e) 2,467(g) 3,150(i)
Net income 4,203 8,354 3,098 5,367
Net income per common share (basic) 0.24 0.43 0.16 0.28
Net income per share (diluted) 0.23 0.43 0.16 0.27
(a) Includes a pre-tax charge of $6.6 million for inventory write-
downs.
(b) Includes a pre-tax charge of $12.7 million for costs
associated with the exchange of
$21.5 million of subordinated debentures into 2,860,925 shares
of Class A Common Stock and a pre-tax gain of $23.8 million on
the sale of CellStar shares.
(c) Includes $158,000 for income taxes associated with the
exchange of $21.5 million of subordinated debentures into
2,860,925 shares of Class A Common Stock and income taxes of
$9.0 million for the gain on sale of CellStar shares.
(d) Includes $10.2 million of pre-tax gain on the sale of CellStar
shares.
(e) Includes $3.9 million of income taxes on the gain on sale of
CellStar shares
(f) Includes $303,000 of pre-tax gain on the sale of Cell
Star shares
(g) Includes $115,000 of income taxes on the gain on the sale of
CellStar shares
(h) Includes $3.2 million of pre-tax gain on the sale of CellStar
shares
(i) Includes $1.2 million of income taxes on the gain on sale of
CellStar shares
25
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1998 and 1997, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
for each of the years in the three-year period ended November 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1998, in conformity with generally accepted accounting
principles.
s/KPMG LLP
KPMG LLP
Melville, New York
January 25, 1999
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 1998 and 1997
(In thousands, except share data)
1998 1997
--------- ---------
Assets
Current assets:
Cash $ 9,398 $ 9,445
Accounts receivable, net 131,120 104,698
Inventory, net 72,432 105,242
Receivable from vendor 734 5,000
Prepaid expenses and other current assets 6,724 9,230
Deferred income taxes 6,088 4,673
Equity collar -- 1,246
--------- ---------
Total current assets 226,496 239,534
Investment securities 17,089 22,382
Equity investments 10,387 10,693
Property, plant and equipment, net 17,828 8,553
Excess cost over fair value of assets acquired and other intangible assets, net 6,052 5,557
Other assets 1,827 3,108
--------- ---------
$ 279,679 $ 289,827
========= =========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 34,063 $ 24,237
Accrued expenses and other current liabilities 15,359 16,538
Income taxes payable 5,210 9,435
Bank obligations 7,327 6,132
Documentary acceptances 3,911 3,914
Capital lease obligation 17 --
--------- ---------
Total current liabilities 65,887 60,256
Bank obligations 17,500 24,300
Deferred income taxes 3,595 8,505
Long-term debt 6,331 6,191
Capital lease obligation 6,298 --
--------- ---------
Total liabilities 99,611 99,252
--------- ---------
Minority interest 2,348 2,683
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 and 17,253,533 issued 1998
and 1997, respectively; 16,760,518 and 16,963,533 outstanding 1998
and 1997, respectively 173 173
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding 22 22
Paid-in capital 143,339 145,155
Retained earnings 35,896 32,924
Cumulative foreign currency translation and adjustment (5,704) (3,428)
Unrealized gain on marketable securities, net 4,154 12,194
Unrealized gain on equity collar, net -- 773
Gain on hedge of available-for-sale securities, net 929 --
Treasury stock, at cost, 498,055 and 290,000 Class A common stock 1998
and 1997, respectively (3,589) (2,421)
--------- ---------
Total stockholders' equity 177,720 187,892
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 279,679 $ 289,827
========= =========
See accompanying notes to consolidated financial statements.
27
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Years Ended November 30, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
--------- --------- ---------
Net sales $ 616,695 $ 639,082 $ 597,915
Cost of sales (including an inventory write-down to
market in 1998 of $6,600) 528,154 532,320 501,527
--------- --------- ---------
Gross profit 88,541 106,762 96,388
--------- --------- ---------
Operating expenses:
Selling 35,196 38,044 40,033
General and administrative 35,890 37,000 32,452
Warehousing, assembly and repair 12,584 12,023 10,828
--------- --------- ---------
Total operating expenses 83,670 87,067 83,313
--------- --------- ---------
Operating income 4,871 19,695 13,075
--------- --------- ---------
Other income (expense):
Debt conversion expense -- (12,686) (26,318)
Interest and bank charges (4,769) (2,542) (8,480)
Equity in income of equity investments 1,071 1,359 631
Management fees and related income 36 109 186
Gain on sale of investments 787 37,471 985
Other, net 1,805 36 (714)
--------- --------- ---------
Total other income (expense) (1,070) 23,747 (33,710)
--------- --------- ---------
Income (loss) before provision for income taxes 3,801 43,442 (20,635)
Provision for income taxes 829 22,420 5,834
--------- --------- ---------
Net income (loss) $ 2,972 $ 21,022 $ (26,469)
========= ========= =========
Net income (loss) per common share (basic) $ 0.16 $ 1.11 $ (2.82)
========= ========= =========
Net income (loss) per common share (diluted) $ 0.16 $ 1.09 $ (2.82)
========= ========= =========
See accompanying notes to consolidated financial statements.
28
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 1998, 1997 and 1996
(In thousands, except share data)
Gain
Unreal- On
ized Hedge
Gain of
(Loss) Avail-
Cumulative On Unreal-able-
Foreign Market- ized for- Total
Unearned Currency able Gain onSale- Stock-
Preferred Common Paid-In Compen Retained Translation Secur- Equity Securi-Treasuryholders'
Stock Stock Capital -sation Earnings Adjustment ities Collar ties Stock Equity
Balances at
November 30,
1995 2,500 90 43,286 (410) 38,371 (963) 31,721 - - -- 114,595
Net loss -- -- -- -- (26,469) -- -- - - -- (26,469)
Equity adjustment
from foreign
currency
translation -- -- -- -- -- (213) -- - - -- (213)
Compensation
expense -- -- 39 258 -- -- -- - - -- 297
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations -- -- (27) 27 -- -- -- - - -- --
Issuance of 250,000
shares of
common stock -- 3 -- -- -- -- -- - - -- 3
Conversion of
debentures into
7,012,626 shares
of common stock -- 70 64,660 -- -- -- -- - - -- 64,730
Net unrealized loss
on marketable
securities, net of
tax effect of
($13,143) -- -- -- -- -- -- (21,444) - - -- (21,444)
------- ------- -------- -------- -------- - - -------- --------
Balance at
November 30,
1996 2,500 163 107,958 (125) 11,902 (1,176) 10,277 - - -- 131,499
Net income -- -- -- -- 21,022 -- -- - - -- 21,022
Equity adjustment
from foreign
currency
translation -- -- -- -- -- (2,252) -- - - -- (2,252)
Compensation
expense -- -- 118 17 -- -- -- - - -- 135
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations -- -- (23) 23 -- -- -- - - -- --
Issuance of 352,194
shares of
common stock -- 3 3,489 -- -- -- -- - - -- 3,492
Conversion of
debentures into
2,860,925 shares -- 29 33,592 -- -- -- -- - - -- 33,621
Issuance of warrants -- -- 106 -- -- -- -- - - -- 106
Acquisition of
290,000 common
shares -- -- -- -- -- -- -- - - (2,421) (2,421)
See accompanying notes to consolidated financial statements.
29
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
Years Ended November 30, 1998, 1997 and 1996
(In thousands., except share data)
Gain
Unreal- On
ized Hedge
Gain of
(Loss) Avail-
Cumulative On Unreal- able-
Foreign Market- ized for- Total
Unearned Currency able Gain on Sale- Stock-
Preferred Common Paid-In Compen Retained Translation Secur- Equity Securi-Treasury holders'
Stock Stock Capital -sation Earnings Adjustment ities Collar ties Stock Equity
Net unrealized gain
on marketable
securities, net of
tax effect of $1,174 -- -- -- -- -- -- 1,917 -- -- -- 1,917
Unrealized gain on
equity collar, net
of tax effect of
$473 -- -- -- -- -- -- -- 773 -- -- 773
-------- -------- ------- -------- -------- -------- ------- -------- --------
Balance at
November 30,
1997 2,500 195 145,240 (85) 32,924 (3,428) 12,194 773 -- (2,421) 187,892
Net income -- -- -- -- 2,972 -- -- -- -- -- 2,972
Equity adjustment
from foreign
currency
translation -- -- -- -- -- (2,276) -- -- -- -- (2,276)
Compensation
expense (income) -- -- (23) 76 -- -- -- -- -- -- 53
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations -- -- (9) 9 -- -- -- -- -- -- --
Purchase of warrants -- -- (1,869) -- -- -- -- -- -- -- (1,869)
Acquisition of
208,055 common
shares -- -- -- -- -- -- -- -- -- (1,168) (1,168)
Net unrealized loss
on marketable
securities, net of
tax effect of
$4,928 -- -- -- -- -- -- (8,040) -- -- -- (8,040)
Sale of equity collar
net of tax effect
of $1,043 -- -- -- -- -- -- -- (773) 929 -- 156
----- ----- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balances at
November 30,
1998 2,500 195 143,339 -- 35,896 (5,704) 4,154 -- 929 (3,589) 177,720
===== ===== ======== ======== ======== ======== ======== ======== ======== ======== =======
See accompanying notes to consolidated financial statements.
30
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 2,972 $ 21,022 $(26,469)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Debt conversion expense -- 12,386 25,629
Depreciation and amortization 2,471 1,903 3,298
Provision for bad debt expense 581 1,300 429
Equity in income of equity investments (1,107) (1,468) (614)
Minority interest (320) 1,623 767
Gain on sale of investments (787) (37,471) (985)
Provision for (recovery of ) deferred income taxes, net (902) (3,123) 468
Provision for unearned compensation 53 135 297
Expense relating to issuance of warrants -- 106 --
Gain on disposal of property, plant and equipment, net (151) (9) (32)
Changes in:
Accounts receivable (27,940) 6,853 (21,848)
Receivable from vendor 4,266 -- 532
Inventory 31,705 (36,823) 27,688
Accounts payable, accrued expenses and other current liabilities 9,385 (2,855) 12,445
Income taxes payable (4,034) 2,181 5,360
Prepaid expenses and other, net 1,186 (2,659) (2,954)
-------- -------- --------
Net cash provided by (used in) operating activities 17,378 (36,899) 24,011
-------- -------- --------
Cash flows from investing activities:
Purchases of investment securities (12,719) (4,706) --
Purchases of property, plant and equipment, net (4,932) (3,986) (2,805)
Net proceeds from sale of investment securities 5,830 45,937 1,000
Proceeds from sale of equity collar 1,499 -- --
Proceeds from distribution from equity investment 1,125 450 317
-------- -------- --------
Net cash provided by (used in) investing activities (9,197) 37,695 (1,488)
-------- -------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements (5,047) (3,765) (14,040)
Net borrowings (repayments) under documentary acceptances (3) 413 (3,620)
Principal payments on long-term debt -- -- (5,029)
Debt issuance costs -- (13) (392)
Principal payments on capital lease obligation (26) -- (158)
Proceeds from issuance of Class A Common Stock -- 2,328 --
Repurchase of Class A Common Stock (1,168) (2,421) --
Purchase of warrants (1,869) -- --
Proceeds from release of restricted cash -- -- 5,959
-------- -------- --------
Net cash used in financing activities (8,113) (3,458) (17,280)
Effect of exchange rate changes on cash (115) (243) 31
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (47) (2,905) 5,274
Cash and cash equivalents at beginning of period 9,445 12,350 7,076
-------- -------- --------
Cash at end of period $ 9,398 $ 9,445 $ 12,350
======== ======== ========
See accompanying notes to consolidated financial statements.
31
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1998, 1997 and 1996
(Dollars in thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market cellular telephones and accessories, automotive
aftermarket sound and security equipment, other automotive
aftermarket accessories and certain other products,
principally in the United States, Canada and overseas. In
addition to generating product revenue from the sale of
cellular telephone products, the Company's retail outlets, as
agents for cellular carriers, are paid activation commissions
and residual fees from such carriers.
The Company's automotive sound, security and accessory
products include stereo cassette radios, compact disc players
and changers, amplifiers, speakers and mobile LCD TV and video
cassette playback units; key based remote control security
systems; cruise controls and door and trunk locks. These
products are marketed through mass merchandise chain stores,
specialty automotive accessory installers, distributors and
automobile dealers.
(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 $1,337 at November 30, 1995 consisted of
short-term investments with terms of less than three months.
For purposes of the statements of cash flows, the Company
considers investments with original maturities of three months
or less to be cash equivalents.
(d) Cash Discount, Co-operative Advertising Allowances and
Market Development Funds
The Company accrues for estimated cash discounts, trade and
promotional co-operative advertising allowances and market
development funds at the time of sale. These discounts and
allowances are reflected in the accompanying consolidated
financial statements as a reduction of accounts receivable as
they are utilized by customers to reduce their trade
indebtedness to the Company.
(Continued)
32
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Inventory
Inventory consists principally of finished goods and is stated
at the lower of cost (primarily on a weighted moving average
basis) or market. The markets in which the Company competes
are characterized by declining prices, intense competition,
rapid technological change and frequent new product
introductions. The Company maintains a significant investment
in inventory and, therefore, is subject to the risk of losses
on write-downs to market and inventory obsolescence. During
the second quarter of 1998, the Company recorded a charge of
approximately $6,600 to accurately reflect the Company's
inventory at the lower of cost or market. No estimate can be
made of losses that are reasonably possible should additional
write-downs to market be required in the future.
(f) Derivative Financial Instruments
The Company, as a policy, does not use derivative financial
instruments for trading purposes. A description of the
derivative financial instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign
currencies and, as a result, is subject to foreign
currency exchange rate risk due to the effects that
exchange rate movements of these currencies have on
the Company's costs. To minimize the effect of
exchange rate fluctuations on costs, the Company
enters into forward exchange rate contracts. The
Company, as a policy, does not enter into forward
exchange contracts for trading purposes. The forward
exchange rate contracts are entered into as hedges of
inventory purchase commitments and of trade
receivables due in foreign currencies.
Gains and losses on the forward exchange contracts
that qualify as hedges are reported as a component of
the underlying transaction. Foreign currency
transactions which have not been hedged are
marked-to-market on a current basis with gains and
losses recognized through income and reflected in
other income (expense). In addition, any previously
deferred gains and losses on hedges which are
terminated prior to the transaction date are
recognized in current income when the hedge is
terminated (Note 17(a)(1)).
(2) Equity Collar
As of November 30, 1997, the Company had an equity
collar for 100,000 of its shares in CellStar
Corporation (CellStar) (Note 6). The equity collar
was recorded on the balance sheet at fair value with
gains and losses on the equity
(Continued)
33
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
collar reflected as a separate component of
stockholders' equity (Note 17(a)(2)). The equity
collar acts as a hedging item for the CellStar
shares. Being that the item being hedged, the
CellStar shares, is an available-for-sale security
carried at fair market value with unrealized gains
and losses recorded as a separate component of
stockholders' equity, the unrealized gains and losses
on the equity collar are also recorded as a separate
component of stockholders' equity.
During 1998, the Company sold the equity collar for
$1,499 in cash. As of November 30, 1998, the net gain
on the equity collar of $929 is recorded as a
separate component of stockholders' equity.
The Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (Statement 133). Statement 133 established
accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities.
Statement 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Early application
of all the provisions of this Statement is encouraged but is
permitted only as of the beginning of any fiscal quarter that
begins after issuance of this Statement. Management of the
Company has not yet determined the impact, if any, that the
implementation of Statement 133 will have on its financial
position, results of operations or liquidity.
(g) Investment Securities
The Company classifies its debt and equity securities in one
of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity
until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost
basis for the security
(Continued)
34
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity
security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized
when earned.
(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 $37 and $1,109 for the years ended November
30, 1997 and 1996, respectively. During 1997 and 1996, the
Company wrote-off $245 and $3,249, respectively, of debt
issuance costs (Note 10). There were no debt issuance costs
recorded as of November 30, 1998.
(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 20-30 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Assets
acquired under capital lease are amortized over the term of
the lease.
(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 $2,148 and $1,759 at
November 30, 1998 and 1997, respectively. Amortization of the
excess cost over fair value of assets acquired and other
intangible assets amounted to $382, $363 and $145 for the
years ended
(Continued)
35
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 1998, 1997 and 1996, respectively. During 1997,
the Company made investments in two companies that resulted in
additional excess cost over fair value of assets acquired
(Note 8).
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its
ongoing review, the Company estimates the fair value of
intangible assets taking into consideration any events and
circumstances which may diminish fair value.
The recoverability of the excess cost over fair value of
assets acquired is assessed by determining whether the
amortization over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of the excess cost over
fair value of assets acquired will be impacted if estimated
future operating cash flows are not achieved.
(k) Equity Investments
The Company has common stock investments which are accounted
for by the equity method (Note 8).
(l) Cellular Telephone Commissions
Under various agency agreements, the Company receives an
initial activation commission for obtaining subscribers for
cellular telephone services. Additionally, the agreements may
contain provisions for commissions based upon usage and length
of continued subscription. The agreements also provide for the
reduction or elimination of initial activation commissions if
subscribers deactivate service within stipulated periods. The
Company has provided a liability for estimated cellular
deactivations which is reflected in the accompanying
consolidated financial statements as a reduction of accounts
receivable.
The Company recognizes sales revenue for the initial
activation, length of service commissions and residual
commissions based upon usage on the accrual basis. Such
commissions approximated $27,237, $35,749 and $37,930 for the
years ended November 30, 1998, 1997 and 1996, respectively.
Related commissions paid to outside selling representatives
for cellular activations are reflected as a reduction of sales
in the accompanying consolidated statements of income (loss)
and amounted to $13,877, $19,924 and $20,443 for the years
ended November 30, 1998, 1997 and 1996, respectively.
(Continued)
36
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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, 1998, 1997 and 1996, the Company had no direct response
advertising.
(n) Warranty Expenses
Warranty expenses are accrued at the time of sale based on the
Company's estimated cost to repair expected returns for
products. At November 30, 1998 and 1997, the liability for
future warranty expense amounted to $1,915 and $2,257,
respectively.
(o) Foreign Currency
With the exception of an operation in Venezuela, assets and
liabilities of those subsidiaries and equity investments
located outside the United States whose cash flows are
primarily in local currencies have been translated at rates of
exchange at the end of the period. Revenues and expenses have
been translated at the weighted average rates of exchange in
effect during the period. Gains and losses resulting from
translation are accumulated in the cumulative foreign currency
translation account in stockholders' equity. For the operation
in Venezuela, financial statements are translated at either
current or historical exchange rates, as appropriate. These
adjustments, along with gains and losses on currency
transactions, are reflected in the consolidated statements of
income (loss). Exchange gains and losses on hedges of foreign
net investments and on intercompany balances of a long-term
investment nature are also recorded in the cumulative foreign
currency translation adjustment account. Other foreign
currency transaction gains of $924 for the year ended November
30, 1998 were included in other income. Other foreign currency
gains and losses were not material for the years ended
November 30, 1997 and 1996.
(p) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(Continued)
37
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(q) Net Income (Loss) Per Common Share
In February 1997, the FASB issued Statement No. 128,
"Earnings per Share" (Statement 128). Statement 128 replaces the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilution. It is based upon the weighted average
number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Earnings per share
amounts for all periods presented have been restated to conform
to the new presentation.
(r) Supplementary Financial Statement Information
Advertising expenses approximated $15,789, $16,981 and $21,794
for the years ended November 30, 1998, 1997 and 1996,
respectively.
Interest income of approximately $896, $1,525 and $1,097 for
the years ended November 30, 1998, 1997 and 1996,
respectively, is included in other in the accompanying
consolidated statements of income (loss).
Included in accrued expenses and other current liabilities is
$3,511 and $4,091 of accrued wages and commissions at November
30, 1998 and 1997, respectively.
(s) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(t) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
On December 1, 1996, the Company adopted Statement No.121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of " (Statement 121).
Statement 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the
carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount
(Continued)
38
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
by which the carrying amount of the assets exceed the fair
value of assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell.
Adoption of Statement 121 did not have a material impact on
the Company's financial position, results of operations or
liquidity.
(u) Accounting for Stock-Based Compensation
Prior to December 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (Opinion 25), and related interpretations. As
such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price. On December 1, 1996, the Company
adopted Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement 123), which permits entities to
recognize, as expense over the vesting period, the fair value
of all stock-based awards on the date of grant. Alternatively,
Statement 123 also allows entities to continue to apply the
provisions of Opinion 25 and provide pro-forma net income and
pro-forma earnings per share disclosures for employee stock
option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in Statement 123 had been
applied. The Company has elected to continue to apply the
provisions of Opinion 25 and provide the pro-forma disclosure
provisions of Statement 123.
(v) Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements. Statement 130
further requires that an entity display an amount representing
total comprehensive income for the period in that financial
statement. Statement 130 also requires that an entity classify
items of other comprehensive income by their nature in a
financial statement. For example, other comprehensive income
may include foreign currency items and unrealized gains and
losses on investments in equity securities. Reclassification
of financial statements for earlier periods, provided for
comparative purposes, is required. Based on current accounting
standards, Statement 130 is not expected to have a material
impact on the Company's financial position, results of
operation or liquidity. The Company will adopt this accounting
standard effective December 1, 1998, as required.
(Continued)
39
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(w) Disclosure About Segments of an Enterprise and
Related Information
In June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
(Statement 131). Statement 131 establishes standards for
reporting information about operating segments in annual
financial statements and requires selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. Operating segments are defined as components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing performance. Statement 131 requires reporting
segment profit or loss, certain specific revenue and expense
items and segment assets. It also requires reconciliations of
total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to
corresponding amounts reported in the consolidated financial
statements. Restatement of comparative information for earlier
periods presented is required in the initial year of
application. Interim information is not required until the
second year of application, at which time comparative
information is required. The Company has not determined the
impact that the adoption of this new accounting standard will
have on its consolidated financial statements disclosures. The
Company will adopt this accounting standard in fiscal 1999, as
required, however, Statement 131 will not have any impact on
the Company's financial position, results of operations or
liquidity.
(2) Business Acquisitions/Dispositions
During 1997, the Company formed Audiovox Venezuela C.A. (Audiovox
Venezuela), an 80%- owned subsidiary, for the purpose of expanding its
international business. The Company made an initial investment of $478
which was used by Audiovox Venezuela to obtain certain licenses,
permits and fixed assets.
In April 1996, the Company formed Audiovox Holdings (M) Sdn. Bhd.
(Audiovox Holdings) and Audiovox Communications (Malaysia) Sdn. Bhd.
(Audiovox Communications), which are 80% and 72% -owned subsidiaries
of Audiovox Asia, Inc. (Audiovox Asia), respectively, which, in turn,
is a wholly-owned subsidiary of the Company. In 1996, Audiovox
Communications formed Vintage Electronics Holdings (Malaysia) Sdn.
Bhd., a wholly-owned subsidiary. The Company formed these subsidiaries
to assist in its planned expansion of its international business.
In October 1996, the Company contributed the net assets of its
cellular division into a newly- formed, wholly-owned subsidiary
Audiovox Communications Corp. (ACC).
(Continued)
40
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
For the Years Ended November 30,
1998 1997 1996
Cash paid during the years for:
Interest, net of $801 capitalized in 1998 $ 1,587 $ 1,560 $7,666
Income taxes $ 4,496 $23,530 $ 272
During 1998, the Company exercised its option to convert 1,137,212
Japanese Yen (approximately $8,176) of Shintom Co. Ltd. (Shintom)
Convertible Debentures (Shintom Debentures) into approximately
7,500,000 shares of Shintom Common Stock (Note 6).
During 1998, a capital lease obligation of $6,340 was incurred when the
Company entered into a building lease (Note 16).
During 1998, the Company sold its equity collar for $1,499. The
transaction resulted in a net gain on hedge of available-for-sale
securities of $929 which is reflected as a separate component of
stockholders' equity (Note 17).
As of November 30, 1998 and 1997, the Company recorded an unrealized
holding gain relating to available-for-sale marketable equity
securities, net of deferred income taxes, of $4,154 and $12,194,
respectively, as a separate component of stockholders' equity (Note 6).
During January 1997, the Company completed an exchange of $21,479 of
its $65,000 6 1/4 % convertible subordinated debentures (Subordinated
Debentures) into 2,860,925 shares of Class A Common Stock (Note 10).
During 1997, the Company issued a credit of $1,250 on open accounts
receivable and issued 250,000 shares of its Class A Common Stock,
valued at five dollars per share, in exchange for a 20% interest in
Bliss-tel Company, Limited (Bliss-tel) (Note 8).
During 1997, the Company contributed $6,475 in net assets in exchange
for a 50% ownership interest in Audiovox Specialized Applications, LLC
(ASA) which resulted in $5,595 of excess cost over fair value of net
assets (Note 8).
As of November 30, 1997, the Company recorded an unrealized holding
gain relating to the equity collar, net of deferred income taxes, of
$773 as a separate component of stockholders' equity (Note 17).
(Continued)
41
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On February 9, 1996, the Company's 10.8% Series AA and 11.0% Series BB
convertible debentures matured. As of February 9, 1996, $1,100 of the
Series BB convertible debentures converted into 206,046 shares of
Common Stock (Note 10).
On November 25, 1996, the Company completed an exchange of $41,252 of
its Subordinated Debentures into 6,806,580 shares of Common Stock (Note
10).
During 1996, the Company contributed $97 of property, plant and
equipment in exchange for a 50% ownership interest in a newly-formed
joint venture, Quintex Communications West, LLC (Quintex West), (Note
8).
(4) Transactions With Major Suppliers
The Company engaged in transactions with Shintom, a stockholder who
owned approximately 1.7% at November 30, 1996 of the outstanding Class
A Common Stock and all of the outstanding Preferred Stock of the
Company at November 30, 1998 and 1997. The Company has a 30.8% interest
in a Japanese company, TALK Corporation (TALK) (Note 8).
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 19%, 29% and 26% for the years
ended November 30, 1998, 1997 and 1996, respectively, of total
inventory purchases. At November 30, 1998, the Company had recorded $15
of liability due to TALK for inventory purchases included in accounts
payable. The Company also has documentary acceptance obligations
payable to TALK as of November 30, 1998 and 1997 (Note 9(b)). At
November 30, 1998 and 1997, the Company had recorded a receivable from
TALK in the amount of $734 and $5,000, respectively, payable with
interest (Note 8).
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive distribution
rights on all wireless personal communication products for all
countries except Japan, China, Thailand and several mid-eastern
countries. The Company granted Shintom a license agreement permitting
the use of the Audiovox trademark to be used with TALK video cassette
recorders sold in Japan from August 29, 1994 to August 28, 1997, in
exchange for royalty fees. For the years ended November 30, 1997 and
1996, no such royalty fees were earned by the Company.
Inventory purchases from a major supplier approximated 42%, 32% and 28%
of total inventory purchases for the years ended November 30, 1998,
1997 and 1996, respectively. Although there are a limited number of
manufacturers of its products, management believes that other suppliers
could provide similar products on comparable terms. A change in
suppliers, however, could cause a delay in product availability and a
possible loss of sales, which would affect operating results adversely.
(Continued)
42
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
1998 1997
-------- --------
Trade accounts receivable $142,211 $113,498
Receivables from equity investments (Note 8) 1,035 1,921
-------- --------
143,246 115,419
Less:
Allowance for doubtful accounts 2,944 3,497
Allowance for cellular deactivations 875 1,363
Allowance for co-operative advertising, cash
discounts and market development funds 8,307 5,861
-------- --------
$131,120 $104,698
======== ========
See Note 17(c) for concentrations of credit risk.
(6) Investment Securities
As of November 30, 1998, the Company's investment securities consist
primarily of 1,730,000 shares of CellStar Common Stock, 1,904,000
shares of Shintom Common Stock and 662,788 Japanese Yen of Shintom
Debentures, respectively, which were classified as available-for-sale
marketable securities. As of November 30, 1997, the Company's
investment securities consist primarily of 1,730,000 shares of CellStar
Common Stock (adjusted for the CellStar 2 for 1 stock split that
occurred during 1998). The cost, gross unrealized gains and losses and
fair value of the investment securities available-for-sale as of
November 30, 1998 were as follows:
Gross Gross
UnrealizedUnrealized
Holding Holding Fair
Cost Gain Loss Value
------- ------- ------- -------
CellStar Common Stock $ 2,715 $ 8,422 -- $11,137
Shintom Common Stock 3,132 -- $ 1,723 1,409
Shintom Debentures 4,543 -- -- 4,543
------- ------- ------- -------
$10,390 $ 8,422 $ 1,723 $17,089
======= ======= ======= =======
The Shintom Debentures mature on September 30, 2002.
(Continued)
43
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A related deferred tax liability of $2,546 and $7,473 was recorded at
November 30, 1998 and 1997, respectively, as a reduction to the
unrealized holding gain included as a separate component of
stockholders' equity.
During 1998, the Company purchased 400,000 Japanese Yen (approximately
$3,132) of Shintom Debentures. The Company exercised its option to
convert the Shintom Debentures into shares of Shintom Common Stock.
These shares are included in the Company's available-for-sale
marketable securities at November 30, 1998.
During 1998, the Company purchased an additional 400,000 Japanese Yen
(approximately $2,732) of Shintom Debentures. The Company exercised its
option to convert the Shintom Debentures into shares of Shintom Common
Stock. The Company sold the Shintom Common Stock yielding net proceeds
of $3,159 and a gain of $427.
During 1998, the Company purchased 1,000,000 Japanese Yen
(approximately $6,854) of Shintom Debentures. The Company exercised its
option to convert 337,212 Japanese Yen of Shintom Debentures into
shares of Shintom Common Stock. The Company sold the Shintom Common
Stock yielding net proceeds of $2,671 and a gain of $360. The remaining
debentures of 662,788 Japanese Yen are included in the Company's
available-for-sale marketable securities at November 30, 1998.
During 1997, the Company sold 1,835,000 shares of CellStar Common Stock
yielding net proceeds of approximately $45,937 and a gain, net of
taxes, of approximately $23,232.
(7) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
1998 1997
-------- --------
Land $ 363 $ 363
Buildings 1,605 2,099
Property under capital lease 7,141 --
Furniture, fixtures and displays 3,184 3,418
Machinery and equipment 5,023 4,341
Computer hardware and software 9,767 14,307
Automobiles 633 800
Leasehold improvements 3,943 3,510
-------- --------
31,659 28,838
Less accumulated depreciation and amortization (13,831) (20,285)
-------- --------
$ 17,828 $ 8,553
======== ========
(Continued)
44
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $3,149 and $1,672 of
unamortized costs as of November 30, 1998 and 1997, respectively,
related to the acquisition and installation of management information
systems for internal use.
Depreciation and amortization of plant and equipment amounted to
$2,089, $1,503 and $2,044 for the years ended November 30, 1998, 1997
and 1996, respectively. Included in accumulated depreciation and
amortization is amortization of computer software costs of $350, $19
and $364 for the years ended November 30, 1998, 1997 and 1996,
respectively. Included in accumulated depreciation and amortization is
amortization of property under capital lease of $160 for the year ended
November 30, 1998.
(8) Equity Investments
As of November 30, 1998, the Company had a 30.8% ownership interest in
TALK. As of November 30, 1998, the Company's 72% owned subsidiary,
Audiovox Communications, had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands
through a satellite based system in Malaysia. As of November 30, 1998,
the Company had a 20% ownership interest in Bliss-tel which distributes
cellular telephones and accessories in Thailand. Additionally, the
Company had 50% non-controlling ownership interests in five other
entities: Protector Corporation (Protector) which acts as a distributor
of chemical protection treatments; ASA which acts as a distributor to
specialized markets for RV's and van conversions, of televisions and
other automotive sound, security and accessory products; Audiovox
Pacific Pty., Limited (Audiovox Pacific) which distributes cellular
telephones and automotive sound and security products in Australia and
New Zealand; G.L.M. Wireless Communications, Inc. (G.L.M.) which is in
the cellular telephone, pager and communications business in the New
York metropolitan area; and Quintex West, which is in the cellular
telephone and related communication products business, as well as the
automotive aftermarket products business on the West Coast of the
United States.
During 1997, the Company purchased a 20% equity investment in Bliss-tel
in exchange for 250,000 shares of the Company's Class A Common Stock
and a credit for open accounts receivable of $1,250. The issuance of
the common stock resulted in an increase to additional paid-in capital
of approximately $1,248. The Company accounts for its investment in
Bliss-tel under the equity method of accounting. In connection with the
purchase, excess of the fair value of net assets acquired over cost
amounting to $320 was recorded and is being amortized on a
straight-line basis over 10 years.
During 1997, the Company purchased a 50% equity investment in a
newly-formed company, ASA, for approximately $11,131. The Company
contributed the net assets of its Heavy Duty
(Continued)
45
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Sound division, its 50% interest in Audiovox Specialty Markets Co.
(ASMC) and $4,656 in cash. In connection with this investment, excess
cost over fair value of net assets acquired of $5,595 resulted, which
is being amortized on a straight-line basis over 20 years. The other
investor (Investor) contributed its 50% interest in ASMC and the net
assets of ASA Electronics Corporation. In connection with this
investment, the Company entered into a stock purchase agreement with
the Investor in ASA. The agreement provides for the sale of 352,194
shares of Class A Common Stock at $6.61 per share (aggregate proceeds
of approximately $2,328) by the Company to the Investor. The
transaction resulted in a net increase to additional paid-in capital of
approximately $2,242. The selling price of the shares are subject to
adjustment in the event the Investor sells shares at a loss during a
90-day period, beginning with the later of the effective date of the
registration statement filed with the Securities and Exchange
Commission to register such shares or May 13, 1998. The adjustment to
the selling price will equal the loss incurred by the Investor up to a
maximum of 50% of the shares. During 1998, the Investor sold its shares
at a loss which resulted in the Company recording an adjustment to the
selling price of $410 as additional goodwill. No further adjustments to
the selling price can be made.
The Company's net sales to the equity investments amounted to $4,528,
$6,132 and $6,483 for the years ended November 30, 1998, 1997 and 1996,
respectively. The Company's purchases from the equity investments
amounted to $15,383, $7,484 and $115,109 for the years ended November
30, 1998, 1997 and 1996, respectively. The Company recorded $1,752,
$2,027 and $2,130 of outside representative commission expenses for
activations and residuals generated by G.L.M. on the Company's behalf
during fiscal year 1998, 1997 and 1996, respectively, (Note 1(l)).
Included in accounts receivable at November 30, 1998 and 1997 are trade
receivables due from its equity investments aggregating $1,035 and
$1,921, respectively. Receivable from vendor is interest bearing and
represents claims on late deliveries, product modifications and price
protection from TALK as well as prepayments on product shipments.
Interest is payable in monthly installments at 6.5%. Amounts
representing prepayments of $734 were repaid via receipt of product
shipments in December 1998. At November 30, 1998 and 1997, other
long-term assets include management fee receivables of $1,271 and
$1,496, respectively. At November 30, 1998 and 1997, included in
accounts payable and other accrued expenses were obligations to equity
investments aggregating $1,049 and $9,783, respectively. Documentary
acceptance obligations were outstanding from TALK at November 30, 1998
(Note 9(b)).
During 1997, the Company recorded interest income from TALK relating to
the receivable from vendor, reimbursement of interest expense incurred
under the subordinated loan to finance the TALK investment (Note 10)
and other short-term loans made to TALK during 1997 at market interest
rates. For the years ended November 30, 1998, 1997 and 1996, interest
income earned on equity investment notes and other receivables
approximated $480, $653 and $725, respectively. Interest expense on
equity investment documentary acceptances approximated
(Continued)
46
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
$256, $203 and $198 in 1998, 1997 and 1996, respectively.
(9) Financing Arrangements
(a) Bank Obligations
The Company maintains a revolving credit agreement with
various financial institutions. Subsequent to year end, the
credit agreement has been amended and restated in its
entirety, extending the expiration date to December 31, 2001.
As a result, bank obligations under the credit agreement have
been classified as long-term at November 30, 1998. The amended
and restated credit agreement provides for $112,500 of
available credit.
Under the credit agreement, the Company may obtain credit
through direct borrowings and letters of credit. The
obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's
shares of ACC. As of November 30, 1998, availability of credit
under the credit agreement is a maximum aggregate amount of
$95,000, subject to certain conditions, and is based upon a
formula taking into account the amount and quality of its
accounts receivable and inventory. At November 30, 1998, the
amount of unused available credit is $43,085.
Outstanding obligations under the credit agreement at November
30, 1998 and 1997 were as follows:
November 30,
1998 1997
-------- -------
Revolving Credit Notes $ 2,500 $18,300
Eurodollar Notes 15,000 6,000
-------- -------
$17,500 $24,300
======= =======
Through February 8, 1996, interest on revolving credit notes
were .25% above the prime rate, which was 8.75% at November
30, 1995. For the same period, interest on Eurodollar Notes
were 2% above the Libor rate which was approximately 5.1% at
November 30, 1995 and interest on bankers' acceptances were 2%
above the bankers' acceptance rate which was approximately
6.25% at November 30, 1995. Pursuant to an amendment on
February 9, 1996, the interest rates were increased to the
following: revolving credit notes at .50% above the prime
rate, which was approximately 7.75%, 8.5% and 8.25% at
November 30, 1998, 1997 and 1996, respectively, and Eurodollar
Notes at 2.75% above the Libor rate which was approximately
5.62%, 5.97% and 5.5% at November 30, 1998, 1997 and 1996,
respectively. Interest on bankers' acceptances remained at 2%
above the bankers' acceptance rate which was approximately
5.5%,
(Continued)
47
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
5.77% and 5.75% at November 30, 1998, 1997 and 1996,
respectively. The maximum commitment fee on the unused portion
of the line of credit is .25% as of November 30, 1998.
The credit agreement contains several covenants requiring,
among other things, minimum levels of pre-tax income and
minimum levels of net worth and working capital. Additionally,
the agreement includes restrictions and limitations on
payments of dividends, stock repurchases and capital
expenditures. During 1998, the Company violated its covenant
regarding maintenance of pre-tax income for the fiscal quarter
and six months ended May 31, 1998 which was waived.
The Company also has a revolving credit facility with a
Malaysian bank (Malaysian Credit Agreement) to finance
additional working capital needs. As of November 30, 1998 and
1997, the available line of credit for direct borrowing,
letters of credit, bankers' acceptances and other forms of
credit approximated $8,195 and $8,017, respectively. The
credit facility is partially secured by two standby letters of
credit totaling $5,320, by the Company and is payable upon
demand or upon expiration of the standby letters of credit on
August 31, 1999. The obligations of the Company under the
Malaysian Credit Agreement are secured by the property and
building owned by Audiovox Communications. Outstanding
obligations under the Malaysian Credit Agreement at November
30, 1998 and 1997 were approximately $4,711 and $4,146,
respectively. At November 30, 1998, interest on the credit
facility ranged from 9.5% to 12.0%. At November 30, 1997,
interest on the credit facility ranged from 8.25% to 11.10%.
On October 28, 1997, Audiovox Venezuela issued a note payable
to a Venezuelan bank in the amount of 994,000 Venezuelan
Bolivars (approximately $1,986 at November 30, 1997) to
finance additional working capital needs. Interest on the note
payable is 20%. The note was repaid in 1998. As of November
30, 1998, Audiovox Venezuela has notes payable of 1,500,000
Venezuelan Bolivars (approximately $2,617 at November 30,
1998) outstanding. Interest on the notes payable is 50%. The
notes are scheduled to be repaid within one year and, as such,
are classified as short term. The notes payable are secured by
a standby letter of credit in the amount of $4,000, by the
Company and is payable upon demand or upon expiration of the
standby letter of credit on June 30, 1999.
The maximum month-end amounts outstanding under the credit
agreement and Malaysian Credit Agreement borrowing facilities
during the years ended November 30, 1998, 1997 and 1996 were
$42,975, $28,420 and $44,213, respectively. Average borrowings
during the years ended November 30, 1998, 1997 and 1996 were
$26,333, $18,723 and $33,662, respectively, and the weighted
average interest rates were 8.7%, 7.7% and 8.9%, respectively.
(Continued)
48
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Documentary Acceptances
During 1998, the Company had various unsecured documentary
acceptance lines of credit available with suppliers to finance
inventory purchases. The Company does not have written
agreements specifying the terms and amounts available under
the lines of credit. At November 30, 1998, $3,911 of
documentary acceptances were outstanding of which all was due
to TALK.
The maximum month-end documentary acceptances outstanding
during the years ended November 30, 1998, 1997 and 1996 were
$4,809, $4,162 and $9,792, respectively. Average borrowings
during the years ended November 30, 1998, 1997 and 1996 were
$3,885, $3,199 and $5,845, respectively, and the weighted
average interest rates, including fees, were 6.6%, 6.3% and
5.1%, respectively.
(10) Long-Term Debt
A summary of long-term debt follows:
November 30,
1998 1997
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at $17.70 per share $ 2,269 $ 2,269
Subordinated note payable 4,062 3,922
------- -------
6,331 6,191
Less current installments - -
------- -------
$ 6,331 $ 6,191
======= =======
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
Subordinated Debentures due 2001 and entered into an Indenture
Agreement. The Subordinated Debentures are convertible into shares of
the Company's Class A Common Stock, par value $.01 per share at an
initial conversion price of $17.70 per share, subject to adjustment
under certain circumstances. The Indenture Agreement contains various
covenants. The bonds are subject to redemption by the Company in whole,
or in part, at any time after March 15, 1997, at certain specified
amounts. On May 9, 1995, the Company issued warrants to certain
beneficial holders of these Subordinated Debentures (Note 13(d)).
On November 25, 1996, the Company completed an exchange of $41,252 of
its $65,000 Subordinated Debentures for 6,806,580 shares of Class A
Common Stock (Exchange). As a result of the Exchange, a charge of
$26,318 was recorded. The charge to earnings represents (i) the
difference in the fair market value of the shares issued in the
Exchange and the fair market
(Continued)
49
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
value of the shares that would have been issued under the terms of the
original conversion feature plus (ii) a write-off of the debt issuance
costs associated with the Subordinated Debentures (Note 1(h)) plus
(iii) expenses associated with the Exchange offer. The Exchange
resulted in taxable income due to the difference in the face value of
the bonds converted and the fair market value of the shares issued and,
as such, a current tax expense of $2,888 was recorded. An increase to
paid in capital was reflected for the face value of the bonds
converted, plus the difference in the fair market value of the shares
issued in the Exchange and the fair market value of the shares that
would have been issued under the terms of the original conversion
feature for a total of $63,564.
During January 1997, the Company completed additional exchanges
totaling $21,479 of its $65,000 Subordinated Debentures for 2,860,925
shares of Class A Common Stock (Additional Exchanges). As a result of
the Additional Exchanges, similar to that of the Exchange described
earlier, a charge of $12,686, tax expense of $158 and an increase to
paid in capital of $33,592, was recorded. As a result of the Exchange
and Additional Exchanges, the remaining Subordinated Debentures are
$2,269.
On March 8, 1994, the Company entered into a Debenture Exchange
Agreement and exchanged certain debentures for Series AA and Series BB
Convertible Debentures (Debentures). The Debentures were convertible at
any time at $5.34 per share, which is subject to adjustment in certain
circumstances, and were secured by a standby letter of credit. Although
the Debenture Exchange Agreement provides for optional prepayments
under certain circumstances, such prepayments are restricted by the
credit agreement (Note 9(a)). On February 9, 1996, the holders of
$1,100 of the Series BB Convertible Debentures exercised their right to
convert into 206,046 shares of Class A Common Stock. The remaining
balance of the Debentures were repaid during 1996; thereby
extinguishing the remaining conversion features of these Debentures.
On October 20, 1994, the Company issued a note payable for 500,000
Japanese Yen (approximately $4,062 and $3,922 on November 30, 1998 and
1997, respectively) to finance its investment in TALK (Note 8). The
note is scheduled to be repaid on October 20, 2004 and bears interest
at 4.1%. The note can be repaid by cash payment or by giving 10,000
shares of its TALK investment to the lender. The lender has an option
to acquire 2,000 shares of TALK held by the Company in exchange for
releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. This note and the investment in TALK are
both denominated in Japanese Yen, and, as such, the foreign currency
translation adjustments are accounted for as a hedge. Any foreign
currency translation adjustment resulting from the note will be
recorded in stockholders' equity to the extent that the adjustment is
less than or equal to the adjustment from the translation of the
investment in TALK. Any portion of the adjustment from the translation
of the note that exceeds the adjustment from the translation of the
investment in TALK is a transaction gain or loss that will be included
in earnings.
(Continued)
50
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1995, Audiovox Malaysia entered into a Secured Term Loan for
1,700 Malaysian Ringgits (approximately $675) to acquire a building.
The loan was secured by the property acquired and bore interest at 1.5%
above the Malaysian base lending rate which was 9.2% on November 30,
1996. The loan was payable in 120 monthly equal installments commencing
October 1995, however, was fully repaid in November 1996.
Maturities on long-term debt for the next five fiscal years are as
follows:
1999 -
2000 -
2001 $2,269
2002 -
2003 -
======
(11) Income Taxes
The components of income (loss) before the provision for income taxes
are as follows:
November 30,
-------------
1998 1997 1996
-------- -------- --------
Domestic Operations $ 5,380 $ 42,613 $(21,899)
Foreign Operations (1,579) 829 1,264
-------- -------- --------
$ 3,801 $ 43,442 $(20,635)
======== ======== ========
Total income tax expense (recovery) was allocated as follows:
November 30,
1998 1997
------- -------
Income from continuing operations $ 829 $22,420
Stockholders' equity
Unrealized holding gain (loss) on investment
securities recognized for financial reporting
purposes (4,928) 1,174
Unrealized holding gain on equity collar
recognized for financial reporting purposes (1,043) 473
------- -------
Total income tax expense (recovery) $(5,142) $24,067
======= =======
(Continued)
51
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
1996:
Current $ 3,711 $ 802 $ 853 $ 5,366
Deferred 330 -- 138 468
-------- -------- -------- --------
$ 4,041 $ 802 $ 991 $ 5,834
======== ======== ======== ========
1997:
Current $ 23,316 $ 1,159 $ 1,068 $ 25,543
Deferred (2,845) -- (278) (3,123)
-------- -------- -------- --------
$ 20,471 $ 1,159 $ 790 $ 22,420
======== ======== ======== ========
1998:
Current $ 1,499 $ (119) $ 351 $ 1,731
Deferred (819) -- (83) (902)
-------- -------- -------- --------
$ 680 $ (119) $ 268 $ 829
======== ======== ======== ========
A reconciliation of the provision for (recovery of) income taxes
attributable to income (loss) from continuing operations computed at
the Federal statutory rate to the reported provision for income taxes
attributable to income (loss) from continuing operations is as follows:
November 30,
-------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Tax provision (recovery) at
Federal statutory rates $ 1,292 34.0% $ 15,205 35.0% $ (7,222) (35.0)%
Expense relating to exchange
of subordinated debentures -- -- 4,578 10.5 11,421 55.3
Undistributed losses from
equity investments 287 7.6 123 0.3 128 0.6
State income taxes, net of
Federal benefit 260 6.8 1,637 3.8 275 1.3
(Decrease) increase in
beginning-of-the-year
balance of the valuation
allowance for deferred tax
assets (340) (8.9) (180) (0.4) 1,270 6.2
Foreign tax rate differential (82) (2.2) 323 0.7 30 0.1
Benefit of concluded
examination (350) (9.2) -- -- -- --
Other, net (238) (6.3) 734 1.7 (68) (0.2)
-------- ---- -------- ---- -------- ----
$ 829 21.8% $ 22,420 51.6% $ 5,834 28.3%
======== ==== ======== ==== ======== ====
(Continued)
52
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The significant components of deferred income tax recovery for the
years ended November 30, 1998 and 1997 are as follows:
November 30,
1998 1997
------- -------
Deferred tax recovery (exclusive of the effect
of other components listed below) $ (562) $(2,943)
(Decrease) increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets (340) (180)
------- -------
$ (902) $(3,123)
======= =======
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,
1998 1997
------- -------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and cellular deactivations $ 1,210 $ 1,483
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 325 439
Inventory, principally due to valuation reserve 1,882 941
Accrual for future warranty costs 563 830
Plant, equipment and certain intangibles, principally
due to depreciation and amortization 804 719
Net operating loss carryforwards, state and foreign 2,338 2,662
Equity collar 570 --
Accrued liabilities not currently deductible 346 405
Other 405 381
------- -------
Total gross deferred tax assets 8,443 7,860
Less: valuation allowance (2,373) (2,713)
------- -------
Net deferred tax assets 6,070 5,147
------- -------
Deferred tax liabilities:
Investment securities (3,577) (8,506)
Equity collar -- (473)
------- -------
Total gross deferred tax liabilities (3,577) (8,979)
------- -------
Net deferred tax asset (liability) $ 2,493 $(3,832)
======= =======
(Continued)
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The net change in the total valuation allowance for the year ended
November 30, 1998 was a decrease of $340. A valuation allowance is
provided when it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. The Company has
established valuation allowances primarily for net operating loss
carryforwards in certain states and foreign countries as well as other
deferred tax assets in foreign countries. Based on the Company's
ability to carry back future reversals of deferred tax assets to taxes
paid in current and prior years and the Company's historical taxable
income record, adjusted for unusual items, management believes it is
likely that the Company will realize the benefit of the net deferred
tax assets existing at November 30, 1998. Further, management believes
the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income. There can be
no assurance, however, that the Company will generate any earnings or
any specific level of continuing earnings in the future. The amount of
the deferred tax asset considered realizable, however, could be reduced
in the near term if estimates of future taxable income during the
carryforward period are reduced.
At November 30, 1998, the Company had net operating loss carryforwards
for state and foreign income tax purposes of approximately $11,239,
which are available to offset future state and foreign taxable income,
if any, which will expire through the year ended November 30, 2018.
(12) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
November 30, November 30,
1998 1997 1998 1997
$50 per
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - share
Series Preferred Stock 0.01 1,500,000 1,500,000 - - -
Ratably with
Class A Common Stock 0.01 30,000,000 30,000,000 16,760,518 16,963,533 One Class B
Class B Common Stock 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably with
Class A
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
(Continued)
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Class B Common Stock may, at any time, be converted into one share of Class
A Common Stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned by
Shintom and have preference over both classes of common stock in the event
of liquidation or dissolution.
On May 16, 1997, the Company's Board of Directors approved the repurchase of
1,000,000 shares of the Company's Class A Common Stock in the open market
under a share repurchase program (the Program). As of November 30, 1998 and
1997, 498,055 and 290,000 shares, respectively, were repurchased under the
Program at an average price of $7.21 and $8.35 per share, respectively, for
an aggregate amount of $3,589 and $2,421, respectively.
As of November 30, 1998 and 1997, 1,963,480 and 969,500 shares of the
Company's Class A Common Stock are reserved for issuance under the Company's
Stock Option and Restricted Stock Plans and 4,167,117 and 5,491,192 for all
convertible securities and warrants outstanding at November 30, 1998 and
1997 (Notes 10 and 13).
Undistributed earnings from equity investments included in retained earnings
amounted to $2,324 and $1,564 at November 30, 1998 and 1997, respectively.
(13) Stock-Based Compensation and Stock Warrants
(a) Stock Options
The Company has stock option plans under which employees and
non-employee directors may be granted incentive stock options
(ISO's) and non-qualified stock options (NQSO's) to purchase shares
of Class A Common Stock. Under the plans, the exercise price of the
ISO's will not be less than the market value of the Company's Class
A Common Stock or 110% of the market value of the Company's Class A
Common Stock on the date of grant. The exercise price of the NQSO's
may not be less than 50% of the market value of the Company's Class
A Common Stock on the date of grant. The options must be
exercisable no later than ten years after the date of grant. The
vesting requirements are determined by the Board of Directors at
the time of grant.
Compensation expense is recorded with respect to the options based
upon the quoted market value of the shares and the exercise
provisions at the date of grant. Compensation expense for the year
ended November 30, 1996 was $97. No compensation expense was
recorded for the years ended November 30, 1998 and 1997.
(Continued)
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Information regarding the Company's stock options is summarized below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at
November 30, 1995 558,250 8.80
Granted - -
Exercised - -
Canceled (9,500) 10.17
------------ -----
Outstanding at
November 30, 1996 548,750 8.78
Granted 1,260,000 7.09
Exercised - -
Canceled (109,000) 10.95
---------- -----
Outstanding at
November 30, 1997 1,699,750 7.38
Granted 10,000 4.63
Exercised - -
Canceled (16,000) 8.79
----------- ------
Outstanding at
November 30, 1998 1,693,750 7.33
========== ======
Options exercisable, 1,117,750 7.18
========== ======
November 30, 1998
At November 30, 1998 and 1997, 207,302 and 190,250 shares,
respectively, were available for future grants under the terms
of these plans.
The Company adopted Statement 123 in fiscal 1997. The Company
has elected to disclose the pro-forma net earnings and
earnings per share as if such method had been used to account
for stock-based compensation costs as described in Statement
123.
The per share weighted average fair value of stock options
granted during 1998 was $3.45 on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions: risk free interest rate of 5.7%, expected
dividend yield of 0.0%, expected stock volatility of 60% and
an expected option life of 10 years.
The per share weighted average fair value of stock options
granted during 1997 was $5.73 on the date of the grant using
the Black-Scholes option-pricing model with the following
weighted average assumptions: risk free interest rate of
6.49%, expected
(Continued)
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
dividend yield of 0.0%, expected stock volatility of 70% and
an expected option life of 10 years. No options were granted
in 1996.
The Company applies Opinion 25 in accounting for its stock
option grants and, accordingly, no compensation cost has been
recognized in the financial statements for its stock options
which have an exercise price equal to or greater than the fair
value of the stock on the date of the grant. Had the Company
determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the
Company's net income and net income per common share would
have been reduced to the pro-forma amounts indicated below:
1998 1997
---- ----
Net income:
As reported $ 2,972 $ 21,022
Pro-forma 1,336 18,786
Net income per common share (basic):
As reported $ 0.16 $ 1.11
Pro-forma 0.07 0.99
Net income per common share
(diluted):
As reported 0.16 1.09
Pro-forma 0.07 0.97
Pro-forma net earnings reflect only options granted after
November 30, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement 123 is not
reflected in the pro-forma net earnings amounts presented
above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior
to December 1, 1995 was not considered. Therefore, the
pro-forma net earnings may not be representative of the
effects on reported net income for future years.
(Continued)
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Summarized information about stock options outstanding as of
November 30, 1998 is as follows:
Outstanding Exercisable
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Average
Price Number Price Remaining Number Price
Range of Shares of Shares In Years of Shares of Shares
------- --------- ----------- --------- --------- ----------
$4.63 - $ 8.00 1,531,000 $ 6.85 8.15 955,000 $ 6.30
$8.01 - $13.00 162,750 $12.08 5.43 162,750 $12.08
(b) Restricted Stock Plan
The Company has restricted stock plans under which key
employees and directors may be awarded restricted stock. Total
restricted stock outstanding, granted under these plans, at
November 30, 1998 and 1997 was 72,428 and 78,500,
respectively. Awards under the restricted stock plan may be
performance accelerated shares or performance restricted
shares No performance accelerated shares or performance
restricted shares were granted in 1998, 1997 or 1996.
Compensation expense for the performance accelerated shares is
recorded based upon the quoted market value of the shares on
the date of grant. Compensation expense for the performance
restricted shares is recorded based upon the quoted market
value of the shares on the balance sheet date. Compensation
expense (income) for these grants for the years ended November
30, 1998, 1997 and 1996 were $(23), $135 and $200,
respectively.
(c) Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee Stock
Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the Company's
Class A Common Stock through payroll deductions up to 15% of
base salary compensation. Amounts withheld are used to
purchase Class A Common Stock on the open market. The cost to
the employee for the shares is equal to 85% of the fair market
value of the shares on or about the last business day of each
month. The Company bears the cost of the remaining 15 % of the
fair market value of the shares as well as any broker fees.
This Plan provides for purchases of up to 1,000,000 shares.
(Continued)
58
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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, expired on December 31, 1998. There were no
warrants exercised as of November 30, 1998. The consulting
agreement, valued at $100, was expensed in 1994 when the
services to be provided, pursuant to the consulting agreement,
were completed.
In December 1993, the Company granted warrants to purchase
50,000 shares of Class A Common Stock at a purchase price of
$14.375 per share as part of the acquisition of H & H Eastern
Distributors, Inc. The per share purchase price and number of
shares purchasable are each subject to adjustment upon the
occurrence of certain events described in the warrant
agreement. The warrants are exercisable, in whole or in part,
from time-to-time, until September 22, 2003. If the warrants
are exercised in whole, the holder thereof has the right to
require the Company to file with the Securities Exchange
Commission a registration statement relating to the sale by
the holder of the Class A Common Stock purchasable pursuant to
the warrant.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of Class A
Common Stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial
holders as of June 3, 1994, of approximately $57,600 of the
Company's Subordinated Debentures in exchange for a release of
any claims such holders may have against the Company, its
agents, directors and employees in connection with their
investment in the Subordinated Debentures. As a result, the
Company incurred a warrant expense of $2,900 and recorded a
corresponding increase to paid-in capital. The warrants are
not exercisable after March 15, 2001, unless sooner terminated
under certain circumstances. John J. Shalam, Chief Executive
Officer of the Company, has granted the Company an option to
purchase 1,668,875 shares of Class A Common Stock from his
personal holdings. The exercise price of this option is $7
1/8, plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains
to Mr. Shalam. During 1998, the Company purchased
approximately 1,324,075 of these warrants at a price of $1.30
per warrant, pursuant to the terms of a self-tender offer. As
of November 30, 1998, 344,800 remaining warrants are
outstanding.
During fiscal 1997, the Company granted warrants to purchase
100,000 shares of Class A Common Stock, which have been
reserved, at $6.75 per share. The warrants, which are
exercisable in whole or in part at the discretion of the
holder, expire on January 29, 2002. There were no warrants
exercised as of November 30, 1998.
(Continued)
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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. A contribution of $150,
$500 and $150 was made by the Company to the United States
plan in fiscal 1998, 1997 and 1996, respectively.
Contributions required by law to be made for eligible
employees in Canada were not material.
(14) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted earnings per common share is as follows:
For the Years Ended
November 30,
1998 1997 1996
---- ---- ----
Net income (loss) (numerator for net income
(loss) per common share, basic $ 2,972 $ 21,022 $ (26,469)
Interest on 6 1/4% convertible subordinated
debentures, net of tax -- 185 --
------------ ------------ ------------
Adjusted net income (numerator for net income
(loss) per common share, diluted $ 2,972 $ 21,207 $ (26,469)
============ ============ ============
Weighted average common shares (denominator
for net income(loss) per common share, basic) 19,134,529 18,948,356 9,398,352
Effect of dilutive securities:
Employee stock options and stock warrants -- 237,360 --
Employee stock grants -- 70,845 --
Convertible debentures -- 251,571 --
------------ ------------ ------------
Weighted average common and potential common
shares outstanding (denominator for net
income (loss) per common share, diluted) 19,134,529 19,508,132 9,398,352
============ ============ ============
Net income (loss) per common share, basic $ 0.16 $ 1.11 $ (2.82)
$ 0.16 $ 1.09 $ (2.82)
Net income (loss) per common share, diluted
Employee stock options and stock warrants totaling 2,779,363, 1,908,438
and 2,385,875 for the years ended November 30, 1998, 1997 and 1996,
respectively, were not included in the
(Continued)
60
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
net earnings per share calculation because their effect would have been
anti-dilutive.
(15) Export Sales
Export sales of approximately$102,659 for the year ended November 30,
1997, exceeded 10% of sales. Export sales did not exceed 10% of sales
for the years ended November 30, 1998 and 1996.
(16) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building
with its principal stockholder and chief executive officer. A
significant portion of the lease payments, as required under the lease
agreement, consists of the debt service payments required to be made by
the principal stockholder in connection with the financing of the
construction of the building. For financial reporting purposes, the
lease has been classified as a capital lease, and, accordingly, a
building and the related obligation of approximately $6,340 was
recorded (Note 7). In connection with the capital lease, the Company
paid certain construction costs on behalf of it principal stockholder
and Chief Executive Officer in the amount of $1,210. The amount is
payable to the Company with 8% interest.
During 1998, the Company entered into a sale/lease back transaction
with its principal stockholder and Chief Executive Officer for $2,100
of equipment. No gain or loss on the transaction was recorded as the
book value of the equipment equaled the fair market value. The lease is
for five years with monthly rental payments of $34. The lease has been
classified as an operating lease.
(Continued)
61
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At November 30, 1998, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for
minimum annual rental payments as follows:
Capital Operating
Lease Leases
1999 $ 521 $ 2,115
2000 522 1,712
2001 530 1,325
2002 553 1,113
2003 554 610
Thereafter 13,652 724
-------- ----------
Total minimum lease payments 16,332 $ 7,599
========
Less: amount representing interest 10,017
--------
Present value of net minimum lease payments 6,315
Less: current installments 17
-----------
Long-term obligation $ 6,298
========
Rental expense for the above-mentioned operating lease agreements and
other leases on a month-to-month basis approximated $2,563, $2,516 and
$2,292 for the years ended November 30, 1998, 1997 and 1996,
respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are
considered by management of the Company to approximate prevailing
market rates. At November 30, 1998, minimum annual rental payments on
these related party leases, in addition to the capital lease payments,
which are included in the above table, are as follows:
1999 $434
2000 411
2001 411
2002 411
2003 -
(Continued)
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17) Financial Instruments
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
At November 30, 1998 and 1997, the Company had
contracts to exchange foreign currencies in the form
of forward exchange contracts in the amount of $5,352
and $26,502, respectively. These contracts have
varying maturities with none exceeding one year as of
November 30, 1998. For the years ended November 30,
1998, 1997 and 1996, gains and losses on foreign
currency transactions which were not hedged were not
material. For the years ended November 30, 1998, 1997
and 1996, there were no gains or losses as a result
of terminating hedges prior to the transaction date.
(2) Equity Collar
The Company entered into an equity collar on
September 26, 1997 to maintain some of the unrealized
gains associated with its investment in CellStar
(Note 6). The equity collar provides that on
September 26, 1998, the Company can put 100,000
shares of CellStar to the counter party to the equity
collar (the bank) at $38 per share in exchange for
the bank being able to call the 100,000 shares of
CellStar at $51 per share. The Company has designated
this equity collar as a hedge of 100,000 of its
shares in CellStar being that it provides the Company
with protection against the market value of CellStar
shares falling below $38. Given the high correlation
of the changes in the market value of the item being
hedged to the item underlying the equity collar, the
Company applied hedge accounting for this equity
collar. The equity collar is recorded on the balance
sheet at fair value with gains and losses on the
equity collar reflected as a separate component of
equity.
During 1998, the Company sold its equity collar for
$1,499. The transaction resulted in a net gain on
hedge of available-for-sale securities of $929 which
is reflected as a separate component of stockholders'
equity.
The Company is exposed to credit losses in the event of
nonperformance by the counter parties to its forward exchange
contracts and its equity collar. The Company anticipates,
however, that counter parties will be able to fully satisfy
their obligations under the contracts. The Company does not
obtain collateral to support financial instruments, but
monitors the credit standing of the counter parties.
(Continued)
63
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Communications and Audiovox Venezuela
(Note 9(a)). The Company had open commercial letters of credit
of approximately $24,914 and $19,078, of which $20,576 and
$10,625 were accrued for as of November 30, 1998 and 1997,
respectively. The terms of these letters of credit are all
less than one year. No material loss is anticipated due to
nonperformance by the counter parties to these agreements. The
fair value of these open commercial and standby letters of
credit is estimated to be the same as the contract values
based on the nature of the fee arrangements with the issuing
banks.
The Company is a party to a joint and several guarantee on
behalf of G.L.M. up to the amount of $200. There is no market
for this guarantee and it was issued without explicit cost.
Therefore, it is not practicable to establish its fair value.
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally
in the United States and Canada and consist of, among others,
cellular carriers and service providers, distributors, agents,
mass merchandisers, warehouse clubs and independent retailers.
At November 30, 1998, three customers, which included two
cellular carrier and service providers and a Bell Operating
Company accounted for approximately 18.0%, 13.8% and 13.5%,
respectively, of accounts receivable. At November 30, 1997,
two customers, a cellular carrier and service provider and a
Bell Operating Company, accounted for approximately 8.7% and
5.3%, respectively, of accounts receivable.
During the year ended November 30, 1998, two customers, a Bell
Operating Company and a cellular carrier and service provider,
accounted for approximately 18.3% and 14.9%, respectively, of
the Company's 1998 sales. During the year ended November 30,
1997, two customers, a cellular carrier and service provider
and a Bell Operating Company, accounted for approximately
11.3% and 9.0%, respectively, of the Company's 1997 sales.
During the year ended November 30, 1996, two customers, a Bell
Operating Company and a cellular carrier and service provider
accounted for approximately 12% and 9%, respectively, of the
Company's 1996 sales.
The Company generally grants credit based upon analyses of
its customers' financial position and previously established
buying and payment patterns. The Company establishes
(Continued)
64
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon
management's credit evaluation. At November 30, 1998 and 1997,
34 and 43 customers, representing approximately 74% and 69%,
respectively, of outstanding accounts receivable, had balances
owed greater than $500.
A portion of the Company's customer base may be susceptible to
downturns in the retail economy, particularly in the consumer
electronics industry. Additionally, customers specializing in
certain automotive sound, security and accessory products may
be impacted by fluctuations in automotive sales. A relatively
small number of the Company's significant customers are deemed
to be highly leveraged.
(d) Fair Value
The carrying value of all financial instruments classified as
a current asset or liability is deemed to approximate fair
value, with the exception of current installments of long-term
debt, because of the short maturity of these instruments. The
estimated fair value of the Company's financial instruments
are as follows:
November 30, 1998 November 30, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Investment securities $17,854 $17,854 $22,382 $22,382
Equity collar (derivative) - - $ 1,246 $ 1,246
Long-term obligations
including current
installments $23,831 $24,202 $30,491 $30,910
Forward exchange contract - $ 5,352 - $26,125
obligation (derivative)
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 6).
(Continued)
65
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Equity Collar (Derivative)
The carrying amount represents fair value, which is based upon
the Black Scholes option- pricing model.
Long-Term Debt Including Current Installments
The carrying amount of bank debt under the Company's revolving
credit agreement and Malaysian Credit Agreement approximates
fair value because of the short maturity of the underlying
obligations. With respect to the Subordinated Debentures, fair
values are based on published statistical data.
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based
upon exchange rates at November 30, 1998 and 1997 as the
contracts are short term.
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(18) Contingencies
The Company is a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion,
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not covered by such insurance, will not have a material adverse
effect on the Company's consolidated financial position.
The Company has guaranteed certain obligations of its equity
investments and has established standby letters of credit to guarantee
the bank obligations of Audiovox Communications and Audiovox Venezuela
(Note 17(b)).
66
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 26,
1999, 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.
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.
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, 1998 and 1997.
Consolidated Statements of Income (Loss) of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1998, 1997 and 1996.
67
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
1998, 1997 and 1996.
Independent Auditors' Report on Financial Statement Schedules
Schedule Page
Number Description Number
II Valuation and Qualifying Accounts 74
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
68
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of January 25, 1999 we reported on the consolidated balance
sheets of Audiovox Corporation and subsidiaries as of November 30, 1998 and
1997, and the related consolidated statements of income (loss), stockholders'
equity, and cash flows for each of the years in the three-year period ended
November 30, 1998, which are included in the Company's 1998 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 1998 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.
s/KPMG LLP
KPMG LLP
Melville, New York
January 25, 1999
69
(3) Exhibits
See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the fourth quarter of fiscal
1998.
(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 Eighth Amendment, dated as of March 7, 1997, to the
Second Amended and
Restated Credit Agreement among 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, 1997).
10.2 Ninth Amendment, dated as of August 19, 1997, to the
Second Amended and
Restated Credit Agreement among the Registrant and the
several banks and financial
institutions (incorporated by reference to the Company's
Form 8-K filed via EDGAR
on September 4, 1997).
10.3 Tenth Amendment, dated as of October 24, 1997, to
the Second Amended and
Restated Credit Agreement among 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, 1997)
10.4 Eleventh Amendment, dated as of March 20, 1998, to the Second Amended and
Restated Credit Agreement among the Registrant and the several banks and financial
institutions (incorporated by reference to the Company's Form 8-K filed via EDGAR
on March 31, 1998).
10.5 Twelfth Amendment, dated as of July 8, 1998, to the Second Amended and Restated
Credit Agreement among the Registrant and the several banks and financial
institutions (incorporated by reference to the Company's Form 8-K filed via EDGAR
on July 21, 1998).
70
Exhibit
10.6 Thirteenth Amendment, dated as of October 8, 1998, to the Second Amended
and Restated Credit Agreement among the Registrant and
the several banks and financial institutions (filed
herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Independent Auditors Consent (filed herewith).
27 Financial Data Schedule (filed 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.
71
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 1, 1999 BY:s/John J. Shalam
John J. Shalam, President
and Chief Executive Officer
72
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
President;
Chief Executive Officer
s/John J. Shalam (Principal Executive Officer March 1, 1999
John J. Shalam and Director
Executive Vice President and
s/Philip Christopher Director March 1, 1999
Philip Christopher
Senior Vice President,
Chief Financial Officer (Principal
s/Charles M. Stoehr Financial and Accounting March 1, 1999
Charles M. Stoehr Officer) and Director
s/Patrick M. Lavelle Director March 1, 1999
Patrick M. Lavelle
s/Ann Boutcher Director March 1, 1999
Ann Boutcher
s/Richard Maddia Director March 1, 1999
Richard Maddia
s/Paul C. Kreuch, Jr. Director March 1, 1999
Paul C. Kreuch, Jr.
s/Dennis McManus Director March 1, 1999
Dennis McManus
67
Schedule II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1998, 1997 and 1996
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description Of Year Expenses Accounts Deductions Of Year
1998
Allowance for doubtful accounts $ 3,497 $ 581 -- $ 1,134 $ 2,944
Cash discount allowances 189 -- -- 19 170
Co-op advertising and volume
rebate allowances 5,672 12,129 -- 9,664 8,137
Allowance for cellular deactivations 1,363 -- -- 488 875
Reserve for warranties and product
repair costs 4,068 2,306 -- 2,289 4,085
------- ------- ------- ------- -------
$14,789 $15,016 -- $13,594 $16,211
======= ======= ======= ======= =======
1997
Allowance for doubtful accounts $ 3,115 $ 1,300 -- $ 918 $ 3,497
Cash discount allowances 314 -- -- 125 189
Co-op advertising and volume
rebate allowances 6,977 12,283 -- 13,588 5,672
Allowance for cellular deactivations 1,666 -- -- 303 1,363
Reserve for warranties and product
repair costs 4,975 2,316 -- 3,223 4,068
------- ------- ------- ------- -------
$17,047 $15,899 -- $18,157 $14,789
======= ======= ======= ======= =======
1996
Allowance for doubtful accounts $ 2,707 $ 430 -- $ 22 $ 3,115
Cash discount allowances 165 149 -- -- 314
Co-op advertising and volume rebate
allowances 3,225 17,629 -- 13,877 6,977
Allowance for cellular deactivations 1,725 -- -- 59 1,666
Reserve for warranties and product repair
costs 3,948 3,784 -- 2,757 4,975
------- ------- ------- ------- -------
$11,770 $21,992 -- $16,715 $17,047
======= ======= ======= ======= =======
74
1
THIRTEENTH AMENDMENT, dated as of October 8, 1998 (this
"Amendment"), to the Second Amended and Restated Credit Agreement, dated as of
May 5, 1995 (as amended pursuant to the First Amendment thereto dated as of
December 22, 1995, the Second Amendment thereto dated as of February 9, 1996,
the Third Amendment thereto dated as of May 13, 1996, the Fourth Amendment and
Consent thereto, dated as of July 29, 1996, the Fifth Amendment thereto dated as
of September 10, 1996, the Sixth Amendment thereto dated as of November 27,
1996, the Seventh Amendment and Waiver thereto dated as of February 5, 1997, the
Eighth Amendment thereto dated as of March 7, 1997, the Ninth Amendment thereto
dated as of August 19, 1997, the Tenth Amendment thereto dated as of October 24,
1997, the Eleventh Amendment thereto dated as of March 20, 1998, the Waiver and
Twelfth Amendment thereto, dated as of July 8, 1998 and this Amendment, and as
the same may be further amended, supplemented or otherwise modified from time to
time (the "Credit Agreement"), among AUDIOVOX CORPORATION, a Delaware
corporation (the "Borrower"), the several banks and other financial institutions
from time to time parties thereto (collectively, the "Lenders"; individually, a
"Lender") and THE CHASE MANHATTAN BANK, a New York banking corporation, as
administrative and collateral agent for the Lenders (in such capacity, the
"Agent").
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit
Agreement; and
WHEREAS, the Borrower has requested that the Lenders amend certain terms in
the Credit Agreement in the manner provided for herein; and
WHEREAS, the Agent and the Lenders are willing to agree to therequested
amendment;
NOW, THEREFORE, in consideration of the premises contained
herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms which
are defined in the Credit Agreement and used herein (and in the recitals hereto)
as defined terms are so used as so defined.
2. Amendment of Subsection 9.8. Subsection 9.8 of the Credit
Agreement is hereby amended by amending and restating the parenthetical at the
end of such subsection to read in its entirety as follows:
"(excluding obligations of the Borrower in respect of the new Wireless
facility which shall not exceed, in the aggregate, $7,200,000, it being
understood that to the extent the Borrower's obligations in respect of
the new Wireless facility exceed $7,200,000, such excess amount shall
be included for determining compliance with this covenant)".
Exhibit 10.6
2
3. Representations and Warranties. On and as of the date
hereof, the Borrower hereby confirms, reaffirms and restates the representations
and warranties set forth in Section 6 of the Credit Agreement mutatis mutandis,
except to the extent that such representations and warranties expressly relate
to a specific earlier date in which case the Borrower hereby confirms, reaffirms
and restates such representations and warranties as of such earlier date.
4. Effectiveness. This Amendment shall become effective as of
the date first written above upon receipt by the Agent of counterparts of this
Amendment duly executed by the Borrower and the Required Lenders.
5. Continuing Effect; No Other Waivers. Except as expressly
provided herein, all of the terms and provisions of the Credit Agreement are and
shall remain in full force and effect. The amendment provided for herein is
limited to the specific subsection of the Credit Agreement specified herein and
shall not constitute a consent, waiver or amendment of, or an indication of the
Agent's or the Lenders' willingness to consent to any action requiring consent
under or to waive or amend, any other provisions of the Credit Agreement or the
same subsection for any other date or time period (whether or not such other
provisions or compliance with such subsections for another date or time period
are affected by the circumstances addressed in this Amendment).
6. Expenses. The Borrower agrees to pay and reimburse the
Agent for all its reasonable costs and out-of-pocket expenses incurred in
connection with the preparation and delivery of this Amendment, including,
without limitation, the reasonable fees and disbursements of counsel to the
Agent.
7. Counterparts. This Amendment may be executed in any number
of counterparts by the parties hereto (including by facsimile transmission),
each of which counterparts when so executed shall be an original, but all the
counterparts shall together constitute one and the same instrument.
8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
AUDIOVOX CORPORATION
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Senior Vice President/
Chief Financial Officer
THE CHASE MANHATTAN BANK,
as Agent and as a Lender
By: s/John Budzynski
Name: John Budzynski
Title: Assistant Vice President
FLEET BANK, N.A., as a Lender
By: s/Steven J. Melicharek
Name: Steven J. Melicharek
Title: Senior Vice President
BANKBOSTON, as a Lender
By: s/Neal Hesler
Name: Neal Hesler
Title: Vice President
4
EUROPEAN AMERICAN BANK,
as a Lender
By: s/Stuart N. Berman
Name: Stuart N. Berman
Title: Assistant Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
as a Lender
By: s/Karen Hoffman
Name: Karen Hoffman
Title: Assistant Vice President
MELLON BANK, N.A.,
as a Lender
By: s/Christine G. Dekajlo
Name: Christine G. Dekajlo
Title: First Vice President
ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned corporations (i) as a guarantor under
that certain Amended and Restated Subsidiaries Guarantee, dated as of March 15,
1994 (the "Guarantee"), made by each of such corporations in favor of the
Collateral Agent and (ii) as a grantor under that certain Amended and Restated
Security Agreement, dated as of March 15, 1994 (the "Security Agreement"), made
by each of such corporations in favor of the Collateral Agent, confirms and
agrees that the Guarantee and the Security Agreement are, and shall continue to
be, in full force and effect and are hereby ratified and confirmed in all
respects and the Guarantee and the Security Agreement and all of the
Subsidiaries Collateral (as defined in the Security Agreement) do, and shall
continue to, secure the payment of all of the Obligations (as defined in the
Guarantee) and the Secured Obligations (as defined in the Security Agreement),
as the case may be, pursuant to the terms of the Guarantee or the Security
Agreement, as the case may be. Capitalized terms not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement referred to in
the Amendment to which this Acknowledgement and Consent is attached.
QUINTEX COMMUNICATIONS CORP.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
QUINTEX MOBILE COMMUNICATIONS
CORP.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
HERMES TELECOMMUNICATIONS INC.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Secretary/Treasurer
LENEX CORPORATION
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Secretary/Treasurer
AMERICAN RADIO CORP.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
AUDIOVOX INTERNATIONAL CORP.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Senior Vice President
AUDIOVOX HOLDING CORP.
By: s/Chris Lazarides
Name: Chris Lazarides
Title: President
AUDIOVOX CANADA LIMITED
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
2
AUDIOVOX ASIA INC.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
AUDIOVOX LATIN AMERICA LTD.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Vice President
AUDIOVOX COMMUNICATIONS CORP.
By: s/Charles M. Stoehr
Name: Charles M. Stoehr
Title: Secretary
Dated as of October 8, 1998
SUBSIDIARIES OF REGISTRANT
Jurisdiction of
Subsidiaries Incorporation
- ------------ -------------
Audiovox Communications Corp. Delaware
Quintex Communications Corp. New York
Quintex Mobile Communications Corp. Delaware
American Radio Corp. Georgia
Audiovox Holding Corp. New York
Audiovox Canada Limited Ontario
Audiovox Communications (Malaysia) Sdn. Bhd. Malaysia
Audiovox Holdings (M) Sdn. Bhd. Malaysia
Exhibit 21
Independent Auditors' 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 and (No. 333-00811) on Form S-3 of Audiovox
Corporation and subsidiaries of our report dated January 25, 1999, relating to
the consolidated balance sheets of Audiovox Corporation and subsidiaries as of
November 30, 1998 and 1997, and the related consolidated statements of income
(loss), stockholders' equity and cash flows for each of the years in the
three-year period ended November 30, 1998, and all related schedules, which
report appears in the November 30, 1998 annual report on Form 10-K of Audiovox
Corporation and subsidiaries.
s/KPMG LLP
KPMG LLP
Melville, New York
February 26, 1999
Exhibit 23
5
0000807707
Audiovox Corp.
1000
12-MOS
Nov-30-1998
Nov-30-1998
9398
0
144166
2944
72432
226496
31659
13831
279679
65887
6331
0
2500
195
175025
279679
589458
616695
514277
528154
0
581
4769
3801
829
2972
0
0
0
2972
(0.16)
(0.16)
