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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, 1999
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Commission file number 0-28839
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AUDIOVOX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-1964841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Marcus Blvd., Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
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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 Nasdaq Stock Market
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.
1
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $655,787,898 (based upon closing price on the Nasdaq Stock Market
on January 31, 2000).
The number of shares outstanding of each of the registrant's classes of common
stock, as of January 31, 2000 was:
Class Outstanding
Class A common stock $.01 par value 17,859,826
Class B common stock $.01 par value 2,260,954
PART I
Item 1 - Business
(a) General Development of Business
The Company designs and markets a diverse line of products and provide
related services throughout the world. These products and services include:
o handsets and accessories for wireless communications
o fulfillment services for wireless carriers
o automotive entertainment and security products
o automotive electronic accessories
o consumer electronics
The Company generally markets its products under the well-recognized
Audiovox brand name, which it has used for over 35 years. The Company was a
pioneer in the wireless industry, selling its first vehicle-installed wireless
telephone in 1984 as a natural expansion of its automotive aftermarket products
business. The Company's extensive distribution network and its long-standing
industry relationships have allowed the Company to benefit from growing market
opportunities in the wireless industry and to exploit emerging niches in the
consumer electronics business. During the third quarter of 1999, the Company
became the third largest seller of wireless products and the second largest
seller of CDMA handsets in the United States. CDMA is currently the fastest
growing technology in the wireless industry.
The Company operates in two primary markets:
o Wireless communications. The Wireless Group, which accounts for
approximately 80% of revenues, sells wireless handsets and
accessories through Bell Operating Companies, domestic and
international wireless carriers and their agents, independent
distributors and retailers.
o Mobile and consumer electronics. The Electronics Group, which
accounts for approximately 20% of revenues, sells autosound,
mobile video, mobile electronics and consumer electronics
primarily to mass merchants, power retailers, specialty retailers,
new car dealers, original equipment manufacturers (OEMs),
independent installers of automotive accessories and the U.S.
military.
2
The business grew significantly in fiscal 1999 primarily because of
increased sales of digital handsets. Net sales have increased as follows:
Percent
1998 1999 Change
---- ---- ------
($ in millions)
Wireless $442 $ 930 110%
Electronics 175 230 32
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Total $617 $1,160 88%
==== ====== ======
To remain flexible and limit our research and fixed costs, the Company does
not manufacture its products. Instead, the Company has relationships with a
broad group of suppliers who manufacture its products. The Company works
directly with its suppliers in the design, development and testing of all of its
products and perform some assembly functions for its electronics products.
The Company's product development efforts focus on meeting changing
consumer demand for technologically-advanced, high-quality products, and the
Company consults with customers throughout the design and development process.
In the wireless business, the Company was among the first to introduce wireless
handsets and mobile phones with one-touch dialing, analog caller ID and
voice-activated dialing as standard features. In its electronics business, the
Company was among the first to introduce mobile video entertainment products and
the MP-3 Internet music player/recorders. The Company stands behind all of its
products by providing warranties and customer and end user service support.
Strategy
The Company's objective is to leverage the well-recognized Audiovox brand
name and its extensive distribution network to capitalize on the growing
worldwide demand for wireless products and continue to provide innovative
mobile and consumer electronics products in response to consumer demand. The
key elements of the Company's strategy are:
Enhance and capitalize on the Audiovox brand name. The Company believes
that the "Audiovox" brand name is one of its greatest strengths. During
the past 35 years, the Company has invested heavily to establish the
Audiovox name as a well-known consumer brand for communications and
electronics products. The Company's wireless handsets generally bear
the Audiovox brand name or are co-branded with a wireless carrier. To
further benefit from the Audiovox name, the Company continues to
introduce new products using its brand name and recently began
licensing its name for selected consumer products.
Expand wireless technology offerings to increase market opportunities.
The Company intends to continue to offer an array of
technologically-advanced wireless products using all digital standards.
The Company's wide selection of wireless products will allow it to
satisfy different carrier demands, both domestic and international.
3
Capitalize on niche market opportunities in the consumer electronics
industry. The Company intends to continue to use its extensive
distribution and supply networks to capitalize on niche market
opportunities in the consumer electronics industry. The Company
believes that focusing on high-demand, high-growth niche products
results in better profit margins and growth potential for its
electronics business.
Expand international presence. During fiscal 2000, the Company intends
to expand its international wireless business as it continues to
introduce products compatible with international wireless technologies,
such as GSM, TDMA and CDMA.
Continue to outsource manufacturing to increase operating leverage. One
of the key components of the Company's business strategy is outsourcing
the manufacturing of its products. This allows the Company to deliver
the latest technological advances without the fixed costs associated
with manufacturing.
Continue to provide added value to customers and suppliers. The Company
believes that it provides key services, such as product design,
development and testing, sales support, product repair and warranty,
and carrier fulfillment services more efficiently than its customers
and suppliers could provide for themselves. The Company intends to
continue to develop its value- added services as the market evolves and
customer needs change.
Audiovox was incorporated in Delaware on April 10, 1987, as successor to a
business founded in 1960 by John J. Shalam, our President, Chief Executive
Officer and controlling stockholder. Its principal executive offices are located
at 150 Marcus Boulevard, Hauppauge, New York 11788, and the telephone number is
631-231-7750.
(b) Financial Information About Industry Segments
The Company's industry segments are the Wireless Group and the Electronics
Group. Net sales, income before provision for income taxes and total assets
attributable to each segment for each of the last three years are set forth in
Note 20 of the Company's consolidated financial statements included herein.
(c) Narrative Description of Business
Wireless Group
The Wireless Group, which accounts for approximately 80% of the Company's
revenues, markets wireless handsets and accessories through domestic and
international wireless carriers and their agents, independent distributors and
retailers. The Wireless Group operates in the wireless communications industry.
Wireless products and technology
The Wireless Group sells an array of analog and digital handsets and
accessories in a variety of technologies. In fiscal 1998, sales of analog
handsets represented 81% of total unit sales. In fiscal 1999, the Wireless Group
expanded its line of digital handsets and increased its digital sales efforts
4
and, for fiscal 1999, digital products represented 56% of the Wireless Group's
total unit sales. The Wireless Group generally markets its wireless products
under the Audiovox brand name or co-brands its products with its carrier
customers, such as Bell Atlantic, GTE Mobilnet, AirTouch and PrimeCo Personal
Communications L.P.
In addition to handsets, the Wireless Group sells a complete line of
accessories that includes batteries, hands-free kits, battery eliminators, cases
and hands-free earphones. During 2000, the Wireless Group intends to broaden its
digital product offerings and introduce handsets with new features, such as
Internet access and other interactive technologies, as well as tri-mode products
that combine digital and analog technologies.
Wireless marketing and distribution
The Wireless Group sells wireless products to the wireless carriers and
their respective agents, distributors and retailers. In addition, a majority of
its handsets are designed to carrier specifications. In fiscal 1998, the five
largest wireless customers, Bell Atlantic, AirTouch Communications, United
States Cellular, PrimeCo Personal Communications LP and Auto Club Cellular
Corporation, accounted for 59.6% of its net wireless sales. Two of these
customers, Bell Atlantic and AirTouch, accounted for 25.6% and 20.8%,
respectively, of the Wireless Group's net sales for fiscal 1998. For fiscal
1999, the five largest wireless customers were Bell Atlantic, AirTouch
Communications, PrimeCo Personal Communications LP, MCI Worldcom and United
States Cellular. Two of these customers, Bell Atlantic and AirTouch
Communications, accounted for 24.4% and 18.6%, respectively, of the Wireless
Group's net sales for fiscal 1999. These customers represented 65.9% of net
sales during fiscal 1999.
In addition, the Wireless Group promotes its products through trade and
consumer advertising, participation at trade shows and direct personal contact
by its sales representatives. The Wireless Group also assists wireless carriers
with their marketing campaigns by scripting telemarketing presentations, funding
co-operative advertising campaigns, developing and printing custom sales
literature, providing product fulfillment and logistic services and conducting
in-house training programs for wireless carriers and their agents.
The Wireless Group operates approximately 20 subscriber facilities under
the names Quintex or American Radio. In addition, the Wireless Group licenses
the trade names Audiovox(R), American Radio(R) and Quintex(R) to five retail
outlets in selected markets in the United States. The Wireless Group also serves
as an agent for the following carriers in selected areas: MCI Worldcom, Sprint,
BellSouth Mobility, Inc., GTE Mobilnet of the Southeast, Inc. and United States
Cellular. For fiscal 1999, revenues from these operations were 5.7% of total
wireless revenues.
The Wireless Group's policy is to ship its products within 24 hours of a
requested shipment date from public warehouses in Miami, Florida and Toronto,
Canada and from leased facilities located in Hauppauge, New York and Los
Angeles, California.
5
Wireless product development, warranty and customer service
Although the Wireless Group does not have its own manufacturing facilities,
it works closely with both customers and suppliers in the design, development
and testing of its products. In particular, the Wireless Group:
o determines future market feature requirements with its wireless
customers
o work with its suppliers to develop products containing those
features
o participates in the design of the features and cosmetics of
its wireless products
o tests products in its own facilities to ensure compliance with
Audiovox standards
o supervises testing of the products in its carrier markets to ensure
compliance with carrier specifications
The Wireless Group's Hauppauge facility is ISO-9001 registered, which
requires it to carefully monitor quality standards in all facets of its
business.
The Wireless Group believes customer service is an important tool for
enhancing its brand name and its relationship with carriers. In order to provide
full service to its customers, the Wireless Group warranties its wireless
products to the end user for periods ranging from up to one year for portable
handsets to up to three years for mobile car phones. To support its warranty,
the Wireless Group has 1,178 independent warranty centers throughout the United
States and Canada and has warranty repair stations in its headquarters facility.
The Wireless Group has experienced customer service representatives who interact
directly with both end users and its customers. These representatives are
trained to respond to questions on handset operation and warranty and repair
issues.
Wireless suppliers
The Wireless Group purchases its wireless products from several
manufacturers located in Pacific Rim countries, including Japan, China, Korea,
Taiwan and Malaysia. In selecting its suppliers, the Wireless Group considers
quality, price, service, market conditions and reputation. The Wireless Group
generally purchases its products under short-term purchase orders and does not
have long-term contracts with its suppliers. The Wireless Group considers its
relations with its suppliers to be good. The Wireless Group believes that
alternative sources of supply are currently available, although there could be a
time lag and increased costs if it were to have an unplanned shift to a new
supplier.
Wireless competition
The market for wireless handsets and accessories is highly competitive and
is characterized by intense price competition, significant price erosion over
the life of a product, demand for value-added services, rapid technological
development and industry consolidation. Currently, the Wireless Group's primary
competitors for wireless handsets include Ericsson, Motorola, Nokia and
Qualcomm. Qualcomm has announced plans to sell its wireless handset business to
Kyocera Corporation. When the sale is completed, Kyocer will become the
Company's direct competitor.
The Wireless Group also competes with numerous established and new
manufacturers and distributors, some of whom sell the same or similar products
directly to its customers. Historically, the Wireless Group's competitors have
also included some of its own suppliers and customers. Many
6
of the Wireless Group's competitors offer more extensive advertising and
promotional programs than it does.
The Wireless Group competes for sales to carriers, agents and distributors
on the basis of its products and services and price. As its customers are
requiring greater value added logistic services, the Wireless Group believes
that competition will continually be required to support an infrastructure
capable of providing these services. The Wireless Group's ability to continue to
compete successfully will largely depend on its ability to perform these
value-added services at a reasonable cost.
The Wireless Group's wireless products compete primarily on the basis of
value in terms of price, features and reliability. There have been several
periods of extreme price competition in the wireless industry, particularly when
one or more or its competitors has sought to sell off excess inventory by
lowering its prices significantly.
As a result of global competitive pressures, there has been significant
consolidation among the Wireless Group's customers, including:
o Vodafone and AirTouch Communications, which merged in 1999
o Bell Atlantic and GTE, which expect to finalize their merger by
early 2000, and then fold the new wireless business into a joint
venture with Vodafone
o SBC Communications, which acquired Ameritech in 1999
o MCI Worldcom and Sprint, which recently announced plans to merge
These consolidations may result in greater competition for a smaller number
of large customers and may favor one or more of its competitors over the
Wireless Group.
Electronics Group
Electronics Industry
The electronics industry is large and diverse and encompasses a broad range
of products. There are many large manufacturers in the industry, such as Sony,
RCA, Panasonic and JVC, as well as large companies that specialize in niche
products. The Electronics Group participates in selected niche markets such as
autosound, mobile video, vehicle security and selected consumer electronics.
The introduction of new products and technological advancements drives
growth in the electronics industry. For example, the transition from analog to
digital technology is leading to the development of a new generation of consumer
electronic products. Some of these products include MP-3 players for playing
audio downloaded from the Internet, digital radio and DVD mobile video systems.
7
Electronics products
The Company's electronics products consist of two major categories, mobile
electronics and consumer electronics.
Mobile electronics products include:
o autosound products, such as radios, speakers, amplifiers and CD
changers
o mobile video products, including overhead and center console mobile
entertainment systems, video cassette players and game options o
automotive security and remote start systems o automotive power
accessories
Consumer electronics include:
o home and portable stereos
o FRS two-way radios
o LCD televisions
o MP-3 Internet music player/recorders
The Electronics Group markets its products under the Audiovox(R) brand
name, as well as several other Audiovox-owned trade names that include
Prestige(R), Pursuit(R) and Rampage(TM). Sales by both the Company's Malaysian
and Venezuelan subsidiaries fall under the Electronics Group. For the fiscal
years ended November 30, 1998 and November 30, 1999, the Electronics Group's
sales by product category were as follows:
Percent
1998 1999 Change
---- ---- ------
($ in millions)
Mobile electronics $163.3 $192.0 17.6%
Consumer electronics 11.8 38.2 223.7
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Total $175.1 $230.2 31.5%
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In the coming years, the Electronics Group intends to focus its efforts on
new technologies to take advantage of market opportunities created by the
digital convergence of data, communications, navigation and entertainment
products.
Licensing
In the late 1990's, the Company began to license its brand name for use on
selected products, such as home and portable stereo systems. Actual sales of
licensed products are not included in the Company's sales figures. However, the
Company licensed customers have told it that, for fiscal 1999, they sold $27.7
million in licensed goods for which the Company received license fees. License
sales promote the Audiovox brand name without adding any significant costs.
8
Electronics distribution and marketing
The Electronics Group sells its electronics products to:
o mass merchants
o power retailers
o chain stores
o specialty retailers
o distributors
o new car dealers
o the U.S. military
The Electronics Group also sells its products under OEM arrangements with
domestic and/or international subsidiaries of automobile manufacturers such as
Daimler Chrysler, General Motors Corporation and Nissan. OEM projects are a
significant portion of the Electronics Group sales. These projects require a
close partnership with the customer as the Electronics Group develops products
to their specific requirements. Three of the largest auto makers, General
Motors, Daimler Chrysler and Ford require QS registration for all of their
vendors. The Electronics Group's Hauppauge facility is both QS 9000 and ISO 9001
registered.
The Electronics Group's five largest customers in fiscal 1998, Gulf States
Toyota, Kmart, Southeast Toyota, Alkon International and Costco, accounted for
16.4% of its net electronics sales. No single customer accounted for more than
10% of the Electronics Group's net sales in fiscal 1998. For fiscal 1999, the
Electronics Group's five largest customers were Nissan, Best Buy, Sears, AAFES
and Gulf States Toyota, and they represented 23.9% of net sales. Nissan
represented approximately 12% of net sales for fiscal 1999.
As part of the Electronics Group's sales process, the Electronics Group
provides value-added management services including:
o product design and development
o engineering and testing
o technical and sales support
o electronic data interchange (EDI)
o product repair services and warranty
o nationwide installation network
The Electronics Group has flexible shipping policies designed to meet
customer needs. In the absence of specific customer instructions, the
Electronics Group ships its products within 24 to 48 hours from the receipt of
an order. The Electronics Group makes shipments from public warehouses in
Norfolk, Virginia; Sparks, Nevada; Miami, Florida and Toronto, Canada and from
leased facilities located in Hauppauge, New York.
Electronics product development, warranty and customer service
Although the Electronics Group does not have its own manufacturing
facilities, it works closely with its customers and suppliers
in the design, development and testing of its
9
products. For the Electronics Group's OEM automobile customers, the Electronics
Group performs extensive validation testing to ensure that its products meet the
special environmental and electronic standards of the manufacturer. The
Electronics Group also performs final assembly of products in its Hauppauge
location. The Electronics Group's product development cycle includes:
o working with key customers and suppliers to identify consumer trends
and potential demand
o working with the suppliers to design and develop products to meet
those demands o evaluating and testing the products in our own
facilities to ensure compliance with our standards
o performing software design and validation testing
The Electronics Group provides a warranty to the end users of its
electronics products, generally ranging from 90 days up to the life of the
vehicle for the original owner on some of its automobile-installed products. To
support its warranties, the Electronics Group has 19 independent warranty
centers throughout the United States and Canada. At its Hauppauge facility, the
Electronics Group has a customer service group that provides product
information, answers questions and serves as a technical hotline for
installation help for both end users and its customers.
Electronics suppliers
The Electronics Group purchases its electronics products from manufacturers
located in several Pacific Rim countries, including Japan, China, Korea, Taiwan,
Singapore and Malaysia. The Electronics Group also uses several manufacturers in
the United States for cruise controls, mobile video and power amplifiers. In
selecting its manufacturers, the Electronics Group considers quality, price,
service, market conditions and reputation. The Electronics Group maintains
buying offices or inspection offices in Taiwan, Korea, China and Hong Kong to
provide local supervision of supplier performance with regard to, among other
things, price negotiations, delivery and quality control. The Electronics Group
generally purchases its product under short-term purchase orders and does not
have long-term contracts with its suppliers.
For fiscal 1999, the percentage of the Electronics Group's electronics
purchases from its largest suppliers were:
o Nutek Corporation --12.7%
o Namsung Corporation -- 8.8%
o Action Electronics -- 6.9%
The Electronics Group considers relations with its suppliers to be good. In
addition, the Electronics Group believes that alternative sources of supply are
generally available within 120 days.
Electronics competition
The Electronics Group's electronics business is highly competitive across
all of its product lines, and the Electronics Group competes with a number of
well-established companies that manufacture and sell similar products. The
Electronics Group's mobile electronics products compete against factory-
10
supplied radios, security and mobile video systems from subsidiaries of
automobile manufacturers, including General Motors, Ford and Daimler Chrysler.
The Electronics Group's mobile electronics products also compete in the
automotive aftermarket against major companies such as Sony, Panasonic, Kenwood
and Pioneer. The Electronics Group's consumer electronics product lines compete
against major consumer electronic companies, such as JVC, Panasonic, Motorola,
RCA and AIWA. Brand name, design, features and price are the major competitive
factors across all of its product lines.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
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The amounts of net sales and long-lived assets, attributable to each of the
Company's geographic segments for each of the last three fiscal years are set
forth in Note 20 to the Company's consolidated financial statements included
herein. During fiscal 1999, the Company exported approximately $100 million in
product sales.
Trademarks
The Company markets products under several trademarks, including
Audiovox(R), Prestige(R), Pursuit(R) and Rampage(TM) . The trademark Audiovox(R)
is registered in approximately 63 countries. The Company believes that these
trademarks are recognized by customers and are therefore significant in
marketing its products.
Other Matters
Equity Investments
The Company has several investments in unconsolidated joint ventures which
were formed to market its products in specific market segments or geographic
areas. The Company seeks to blend its financial and product resources with local
operations to expand its distribution and marketing capabilities. The Company
believes its 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. The Company's significant joint ventures
are:
Percentage Formation
Venture Ownership Date Function
------- --------- ----- --------
TALK Corporation 30.8% 1994 Distribution rights for wireless
products and autosound products
from Shintom Ltd.
Audiovox Specialized 1997 Distribution of products for van, RV
Applications 50.0% and other specialized vehicles.
20.0% 1997 Distribution of wireless products and
Bliss-Tel Company, accessories in Thailand.
Ltd.
11
Employees
The Company employs approximately 950 people, which number has been
relatively stable for the past several years. The Company considers its
relations with its employees to be good. No employees are covered by collective
bargaining agreements.
Directors and Executive Officers of the Registrant
The executive officers of the Company 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 66 President, Chief Executive Officer and
Chairman of the Board of Directors
Philip Christopher 51 Executive Vice President and a Director
Charles M. Stoehr 53 Senior Vice President, Chief Financial
Officer and a Director
Patrick M. Lavelle 48 Senior Vice President, Electronics Division
and a Director
Ann M. Boutcher 49 Vice President, Marketing and a Director
Richard A. Maddia 41 Vice President, MIS and a Director
Paul C. Kreuch, Jr.* 61 Director
Dennis F. McManus* 49 Director
*Member of the Audit and Compensation Committees
John J. Shalam has served as President, Chief Executive Officer and as
Director of Audiovox or its predecessor since 1960. Mr. Shalam also serves as
President and a Director of most of Audiovox's operating subsidiaries. Mr.
Shalam is on the Board of Directors of the Electronics Industry Association and
is on the Executive Committee of the Consumer Electronics Association.
Philip Christopher, our Executive Vice President, has been with Audiovox
since 1970 and has held his current position since 1983. Before 1983, he served
as Senior Vice President of Audiovox. Mr. Christopher is Chief Executive Officer
of Audiovox's wireless subsidiary, Audiovox Communications Corp. From 1973
through 1987, he was a Director of our predecessor, Audiovox Corp. Mr.
Christopher serves on the Executive Committee of the Cellular Telephone Industry
Association.
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Charles M. Stoehr has been our Chief Financial Officer since 1979 and was
elected Senior Vice President in 1990. Mr. Stoehr has been a Director of
Audiovox since 1987. From 1979 through 1990, he was a Vice President of
Audiovox.
Patrick M. Lavelle has been a Vice President of the Company since 1982. In
1991, Mr. Lavelle was elected Senior Vice President, with responsibility for the
Company's mobile and consumer electronics division. Mr. Lavelle was elected to
the Board of Directors in 1993. Mr. Lavelle also serves as a board member of the
Mobile Electronics Division of the Consumer Electronics Association and is a
co-chair of the Mobile Information Technology Subdivision.
Ann M. Boutcher has been our Vice President of Marketing since 1984. Ms.
Boutcher's responsibilities include the development and implementation of our
advertising, sales promotion and public relations programs. Ms. Boutcher was
elected to the Board of Directors in 1995.
Richard A. Maddia has been our Vice President of Information Systems since
1992. Prior thereto, Mr. Maddia was Assistant Vice President, MIS. Mr. Maddia's
responsibilities include development and maintenance of information systems. Mr.
Maddia was elected to the Board of Directors in 1996.
Paul C. Kreuch, Jr. was elected to the Board of Directors in February 1997.
Mr. Kreuch has been a Principal of Secura Burnett Co., LLC since October 1998.
From December 1997 through September 1998, he was the President and Chief
Executive Officer of Lafayette American Bank. From June 1996 through November
1997, he was a Senior Vice President at Handy HRM Corp., an executive search
firm. From 1993 through 1996, Mr. Kreuch was an Executive Vice President of
NatWest Bank N.A. and, before that, was President of National Westminster Bank
USA.
Dennis F. McManus was elected to the Board of Directors in March 1998. Mr.
McManus has been self-employed as a telecommunications consultant since January
1, 1998. Before that, he was employed by NYNEX Corp. for over 27 years, most
recently as a Senior Vice President and Managing Director. Mr. McManus held this
position from 1991 through December 31, 1997.
All of our executive officers hold office at the discretion of the Board of
Directors.
Item 2 - Properties
As of November 30, 1999, the Company leased a total of thirty-three
operating facilities located in eleven states and one Canadian province. The
Wireless Group utilizes twenty-four of these facilities located in California,
Georgia, New Jersey, New York, Pennsylvania, Tennessee, Virginia and Canada. The
Electronics Group utilizes nine of these facilities located in California,
Florida, Massachusetts, New York, Ohio, Texas and Canada. These facilities serve
as offices, warehouses, distribution centers or retail locations for both the
Wireless Group and the Electronics Group. Additionally, the Company utilizes
public warehouse facilities located in Norfolk, Virginia and Sparks, Nevada for
its Electronics Group and in Miami, Florida, Toronto, Canada and Tilburg,
Netherlands for its Wireless Group. The Company also owns and leases facilities
in Venezuela and Malaysia for its Electronics Group.
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.
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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 1999.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
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Summary of Stock Prices and Dividend Data
The Class A Common Stock of Audiovox are traded on the Nasdaq Stock Market
under the symbol VOXX. Prior to January 13, 2000, the Class A Common Stock was
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 345 holders of
record of our Class A Common Stock and 4 holders of Class B Convertible Common
Stock.
Class A Common Stock
Average
Daily
Trading
Fiscal Period High Low Volume
- ------------- ---- --- ------
1998
First Quarter 9.00 5.75 103,038
Second Quarter 7.44 4.75 77,516
Third Quarter 7.44 3.63 82,948
Fourth Quarter 6.75 42,024
1999
First Quarter 43,260
Second Quarter 8.94 5.94 48,416
Third Quarter 16.00 8.44 151,232
Fourth Quarter 30.00 14.50 222,102
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Item 6 - Selected Financial Data
Years ended November 30, 1995, 1996, 1997, 1998 and 1999:
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Net sales $ 500,740 $ 597,915 $ 639,082 $ 616,695 $1,159,537
Net income (loss) (11,883) (26,469) 21,022 2,972 27,246
Net income (loss) per common share, basic (1.31) (2.82) 1.11 0.16 1.43
Net income (loss) per common share, diluted (1.31) (2.82) 1.09 0.16 1.39
Total assets 308,428 265,545 289,827 279,679 475,083
Long-term obligations, less current
installments 142,802 70,413 38,996 33,724 122,798
Stockholders' equity 114,595 131,499 187,892 177,720 216,744
This selected financial data includes:
for 1995:
o a pre-tax charge of $2.9 million associated with the issuance of warrants;
o a pre-tax charge of $11.8 million of inventory write-downs and the
downsizing of the Company's retail operations;
o a pre-tax gain on the sale of an equity investment of $8.4 million; and
o a $31.7 million increase in stockholders' equity, net of tax, as a result
of an unrealized gain on marketable securities which is not reflected in
net income compared to what sockholders' equity would have been without the
unrealized gain.
for 1996:
o a pre-tax charge of $26.3 million related to the exchange of $41.3 million
of subordinated convertible debentures into 6,806,580 shares of common
stock and a related tax expense of $2.9 million;
o a $10.3 million increase in stockholders' equity, net of tax, as a result
of an unrealized gain on marketable securities which is not reflected in
net income compared to what sockholders' equity would have been without the
unrealized gain; and
o a $64.7 million increase in stockholders' equity as a result of the
exchange of $41.3 million of subordinated convertible debentures which is
not reflected in net income.
for 1997:
o a pre-tax charge of $12.7 million related to the exchange of $21.5 million
of subordinated convertible debentures into 2,860,925 shares of common
stock and a related tax expense of $158,000;
o a pre-tax gain of $37.5 million on sale of shares of CellStar Corporation
held by the Company and a related tax expense of $14.2 million;
o a $12.2 million increase in stockholders' equity, net of tax, as a result
of an unrealized gain on marketable securities which is not reflected in
net income compared to what sockholders' equity would have been without the
unrealized gain;
o a $773,000 increase in stockholders' equity, net of tax, as a result of an
unrealized gain on equity collar which is not reflected in net income; and
o a $33.6 million increase in stockholders' equity as a result of the
exchange of $21.5 million of subordinated convertible debentures which is
not reflected in net income.
15
for 1998:
o a pre-tax charge of $6.6 million for inventory write-downs;
o a $4.2 million increase in stockholders' equity, net of tax, as a result of
an unrealized gain on marketable securities which is not reflected in net
income compared to what sockholders' equity would have been without the
unrealized gain; and
o a $929,000 increase in stockholders' equity, net of tax, as a result of an
unrealized gain on a hedge of available-for-sale securities.
for 1999:
o a pre-tax charge of $2.0 million due to the other-than-temporary decline in
the market value of its Shintom common stock;
o a pre-tax gain of $3.8 million on the issuance of subsidiary shares to
Toshiba Corporation; and
o a $9.9 million increase in stockholders' equity, net of tax, as a result of
an unrealized gain on marketable securities which is not reflected in net
income compared to what sockholders' equity would have been without the
unrealized gain.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except share and per share data)
Forward-looking Statements
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Words such as "may," "believe," "estimate,"
"expect," "plan," "intend," "project," "anticipate," "continues," "could,"
"potential," "predict" and similar expressions may identify forward-looking
statements. The Company has based these forward-looking statements on its
current expectations and projections about future events, activities or
developments. The Company's actual results could differ materially from those
discussed in
16
or implied by these forward-looking statements. Forward-looking statements
include statements relating to, among other things:
o growth trends in the wireless, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive
and consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
The Company markets its products under the Audiovox brand as well as
private labels to a large and diverse distribution network both domestically and
internationally. The Company operates through two marketing groups: Wireless and
Electronics. The Wireless Group consists of Audiovox Communications Corp. (ACC),
a 95%-owned subsidiary of Audiovox, and Quintex, which is a wholly- owned
subsidiary of ACC. ACC markets wireless handsets and accessories primarily on a
wholesale basis to wireless carriers in the United States and, to a lesser
extent, carriers overseas. Quintex is for the direct sale of handsets,
accessories and wireless telephone service.
The Electronics Group consists of Audiovox Electronics (AE), a division of
Audiovox, and Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A., which are wholly-owned subsidiaries.
The Electronics Group markets automotive sound and security systems, electronic
car accessories, home and portable sound products, FRS radios and in-vehicle
video systems. Sales are made through an extensive distribution network of mass
merchandisers, power retailers and others. In addition, the Company sells some
of its products directly to automobile manufacturers on an OEM basis.
The Company allocates interest and certain shared expenses to the marketing
groups based upon estimated usage. General expenses and other income items that
are not readily allocable are not included in the results of the two marketing
groups.
From fiscal 1996 through 1999, several major events and trends have
affected the Company's results and financial conditions.
The Wireless Group increased its handset sales from 2.1 million units in
fiscal 1996 to 3.3 million units in fiscal 1998 to 6.1 million units in fiscal
1999. This increase in sales was primarily due to:
o the introduction of digital technology, which has allowed carriers to
significantly increase subscriber capacity
o increased number of carriers competing in each market
o reduced cost of service and expanded feature options
During this period, the Company's unit gross profit margin declined due to
continued strong competition and increased sales of digital handsets, which have
a lower gross profit margin percentage than analog handsets. Despite the margin
decline, the Company's gross margin dollars increased significantly due to the
large increases in net sales.
Sales by the Electronics Group were $188.4 million in 1996 and $193.9
million in 1997, but declined in 1998 to $175.1 million, primarily due to a
financial crisis in Asia, particularly Malaysia. Sales for fiscal 1999 have
increased 31% to $230.6 million over fiscal 1998 . During this period, the
Company's sales were impacted by the following items:
o the growth of our consumer electronic products business from $2.9
million in fiscal 1996 to $38.2 million in fiscal 1999
o the introduction of mobile video entertainment systems and other new
technologies
o the Asian financial crisis in 1998
Gross margins in the Company's electronics business increased from 18.9% in
1996 to 20.3% for fiscal 1999 due, in part, to higher margins in mobile video
products and other new technologies and products.
The Company's total operating expenses have not increased materially since
1996, despite its increase in sales. Total operating expenses were $83.3 million
in 1996 and $96.4 million in 1999. The Company has invested in management
systems and improved its operating facilities to increase its efficiency.
During the period 1996 to 1999, the Company's balance sheet was
strengthened by the conversion of $63 million of it $65 million 6 1/4%
subordinated convertible debentures due 2001 into approximately 9.7 million
shares of Class A common stock and the net gain of $23.2 million from the sale
of CellStar stock held by the Company.
All financial information, except share data, is presented in thousands.
17
Results of Operations
The following table sets forth for the periods indicated certain statements
of income data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Years Ended November 30,
----------------------------------------
1997 1998 1999
---- ---- ----
Net sales:
Wireless
Wireless products 62.1% 65.3% 76.5%
Activation commissions 4.9 3.7 2.2
Residual fees 0.7 0.7 0.3
Other 1.9 1.9 1.1
----- ----- -----
Total Wireless 69.5 71.6 80.1
----- ----- -----
Electronics
Sound 14.4 12.7 6.8
Mobile electronics 15.2 13.8 9.8
Consumer electronics 0.7 1.9 3.3
----- ----- -----
Total Electronics 30.3 28.4 19.9
Other 0.1 -- --
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales (83.3) (85.6) (88.4)
----- ----- -----
Gross profit 16.7 14.4 11.6
Selling (6.0) (5.7) (3.2)
General and administrative (5.8) (5.9) (3.8)
Warehousing, assembly and repair (1.9) (2.0) (1.3)
----- ----- -----
Total operating expenses (13.7) (13.6) (8.3)
----- ----- -----
Operating income 3.0 0.8 3.3
Interest and bank charges (0.4) (0.8) (0.4)
Income in equity investments, management fees
and related income, net 0.2 0.2 0.3
Gain on sale of investments 5.9 0.1 0.3
Gain on issuance of subsidiary shares -- -- 0.3
Debt conversion expense (2.0) -- --
Other income (expense) -- 0.3 (0.2)
Provision for income taxes (3.5) (0.1) (1.3)
----- ----- -----
3.3 % 0.5 % 2.3 %
===== ===== =====
Net income
18
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1997, 1998 and 1999 are reflected
in the following table. Certain reclassifications and recaptionings have been
made to the data for periods prior to fiscal 1999 in order to conform to fiscal
1999 presentation.
Fiscal Year Ended November 30,
----------------------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
Net sales:
Wireless
Wireless products $ 396,510 62.1% $ 402,606 65.3% $ 886,509 76.5%
Activation commissions 31,061 4.9 22,785 3.7 25,873 2.2
Residual fees 4,688 0.7 4,452 0.7 3,674 0.3
Other 12,141 1.9 11,747 1.9 13,247 1.1
---------- ----- ---------- ----- ---------- -----
Total Wireless 444,400 69.5 441,590 71.6 929,303 80.1
---------- ----- ---------- ----- ---------- -----
Electronics
Sound 91,763 14.4 78,338 12.7 78,713 6.8
Mobile electronics 97,446 15.2 84,973 13.8 113,371 9.8
Consumer electronics 4,701 0.7 11,794 1.9 38,150 3.3
---------- ----- ---------- ----- ---------- -----
Total Electronics 193,910 30.3 175,105 28.4 230,234 19.9
Other 772 0.1 -- -- -- --
---------- ----- ---------- ----- ---------- -----
Total $ 639,082 100.0% $ 616,695 100.0% $1,159,537 100.0%
========== ===== ========== ===== ========== =====
Fiscal 1998 Compared to Fiscal 1999
Consolidated Results
Net sales for fiscal 1999 were $1,159,537, an 88% increase from net sales
of $616,595 in fiscal 1998. Wireless Group sales were $929,303 in fiscal year
1999, a 110% increase from sales of $441,590 in fiscal 1998. Unit sales of
wireless handsets increased 83.2% to approximately 6,067,000 units in fiscal
1999 from 3,311,000 units in fiscal 1998. The average selling price of the
Company's handsets increased to $140 per unit in fiscal 1999 from $114 per unit
in fiscal 1998.
Electronics Group sales were $230,234 in fiscal 1999, a 31% increase from
sales of $175,105 in fiscal 1998. This increase was largely due to increased
sales in the mobile video and consumer electronics product lines. Sales by the
Company's international subsidiaries increased 14.2% in fiscal 1999 to
approximately $25,100 as a result of improvements in both the Malaysian and
Venezuelan subsidiaries.
Gross profit margin for fiscal 1999 was 11.6%, compared to 14.4% in fiscal
1998. This decline in profit margin resulted primarily from margin reductions in
the Wireless Group attributable to increased sales of digital handsets, which
have lower margins than analog handsets, and was also affected by
19
decreases in Latin American sales and margins. Gross profit increased 52.1% to
$134,628 in fiscal 1999, versus $88,541 in fiscal 1998.
Operating expenses were $96,391 in fiscal 1999, compared to $83,670 in
fiscal 1998. As a percentage of net sales, operating expenses decreased to 8.3%
in fiscal 1999 from 13.6% in fiscal 1998. Operating income for fiscal 1999 was
$38,237, an increase of $33,366 from fiscal 1998.
Net income for fiscal 1999 was $27,246, an increase of 817% from net income
of $2,972 in fiscal 1998. Earnings per share were $1.43, basic, and $1.39,
diluted, in fiscal 1999 compared to $0.16, basic and diluted, in fiscal 1998.
Wireless Results
The following table sets forth for the fiscal years indicated certain
statements of income (loss) data for the Wireless Group expressed as a
percentage of net sales:
1998 1999
------ -----
Net sales:
Wireless products $ 402,606 91.1% $ 886,509 95.4%
Activation commissions 22,785 5.1 25,873 2.8
Residual fees 4,452 1.0 3,674 0.4
Other 11,747 2.7 13,247 1.4
--------- ----- --------- -----
Total net sales 441,590 100.0 929,303 100.0
Gross profit 52,270 11.8 87,807 9.5
Total operating expenses 48,257 10.9 49,888 5.4
--------- ----- --------- -----
Operating income 4,013 0.9 37,919 4.1
Other expense (5,799) (1.3) (6,664) (0.7)
--------- ----- --------- -----
Pre-tax income (loss) $ (1,786) (0.4)% $ 31,255 3.4%
========= ===== ========= =====
The Wireless Group is composed of ACC and Quintex, both subsidiaries of the
Company. Since principally all of the net sales of Quintex are wireless in
nature, all operating results of Quintex are being included in the discussion of
the Wireless Group's product line.
Net sales were $929,303 in fiscal 1999, an increase of $487,713, or 110%,
from fiscal 1998. Unit sales of wireless handsets increased by 2,756,000 units
in fiscal 1999, or 83.2%, to approximately 6,067,000 from 3,311,000 in fiscal
1998. This increase was attributable to sales of portable, digital products. The
addition of four new suppliers also provided a variety of new digital, wireless
producst that contribute to the sales increase. The average selling price of
handsets increased to $140 per unit in fiscal 1999 from $114 per unit in fiscal
1998. The number of new wireless subscriptions processed by Quintex increased
21.7% in fiscal 1999, with a corresponding increase in activation commissions of
approximately $3,088 in fiscal 1999. The average commission received by Quintex
per activation decreased by approximately 6.7% in fiscal 1999 from fiscal 1998.
Unit gross profit margins increased to 7.8% in fiscal 1999 from 7.3% in fiscal
1998, reflecting increased selling prices, which were partially offset by a
corresponding increase of 22.7% in average unit cost. During fiscal 1998, the
Company recorded a $6,600 charge to adjust the carrying value of certain
cellular inventories, partially offset by a $1,000 credit from a supplier.
20
This charge was the result of a software problem in certain analog cellular
phones, as well as a continuing decrease in the selling prices of analog
telephones due to pressure from the presence of digital handsets in the market.
While the analog handset market is still quite large, the Wireless Group may
experience lower gross profits in the future due to the price sensitivity of
this market.
Operating expenses increased to $49,888 in fiscal 1999 from $48,257 in
fiscal 1998. As a percentage of net sales, however, operating expenses decreased
to 5.4% during fiscal 1999 compared to 10.9% in fiscal 1998. Selling expenses
decreased to $22,784 in fiscal 1999 from $24,201 in fiscal 1998, primarily in
divisional marketing and advertising, partially offset by increases in travel
expenses. General and administrative expenses increased to $18,059 in fiscal
1999 from $15,904 in fiscal 1998, primarily due to temporary personnel,
insurance expense and provisions for doubtful accounts. Warehousing, assembly
and repair expenses increased to $9,045 in fiscal 1999 from $8,150 in fiscal
1998, primarily due to direct labor expenses. Pre-tax income for fiscal 1999 was
$31,255, an increase of $33,041 from fiscal 1998.
Management believes that the wireless industry is extremely competitive and
that this competition could affect gross margins and the carrying value of
inventories in the future.
Electronics Results
The following table sets forth for the fiscal years indicated certain
statements of income data for the Electronics Group expressed as a percentage of
net sales:
1998 1999
---- ------
Net sales:
Sound $ 78,338 44.8% $ 78,713 34.2%
Mobile electronics 84,973 48.5 113,371 49.2
Consumer electronics 11,794 6.7 38,150 16.6
--------- ------ --------- ------
Total net sales 175,105 100.0 230,234 100.0
Gross profit 36,433 20.8 46,819 20.3
Total operating expenses 27,126 15.5 32,977 14.3
--------- ------ --------- ------
Operating income 9,307 5.3 13,842 6.0
Other expense (3,370) (1.9) (2,546) (1.1)
--------- ------ --------- ------
Pre-tax income $ 5,937 3.4% $ 11,296 4.9%
========= ====== ========= ======
Net sales were $230,234 in fiscal 1999, a 31.5% increase from net sales of
$175,105 in fiscal 1998. All product categories experienced an increase in
sales, particularly in the mobile and consumer electronics product lines. Sales
of mobile video, in the mobile electronics category, increased over 400% in
fiscal 1999 to approximately $52 million from $10 million in fiscal 1998.
Consumer electronics increased over 200% to $38,150 in fiscal 1999 from $11,794
in fiscal 1998. These increases were partially offset by decreases in Prestige
audio and SPS sound lines.
21
Operating expenses were $32,977 in fiscal 1999, a 21.6% increase from
operating expenses of $27,126 in fiscal 1998. Selling expenses increased during
fiscal 1999, primarily in salaries, commissions and divisional marketing. These
increases were partially offset by decreases in advertising. General and
administrative expenses increased from fiscal 1998, mostly in salaries,
provision for doubtful accounts and temporary personnel. Warehousing and
assembly expenses increased to $5,991 in fiscal 1999 from $4,434 in fiscal 1998,
primarily due to tooling expenses, warehousing and direct labor. Pre-tax income
for fiscal 1999 was $11,296, an increase of $5,359 from fiscal 1998.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales. Also, certain of its products are subject to price fluctuations
which could affect the carrying value of inventories and gross margins in the
future.
Other Income and Expense
Interest expense and bank charges decreased $57 during fiscal 1999 from
fiscal 1998.
Management fees and equity in income from joint venture investments
increased by approximately $3,150 for fiscal 1999 compared to fiscal 1998 as
detailed in the following table:
1998 1999
----------------------------------- -----------------------------------------------
(Dollars in thousands)
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
-------- ------- ------- ------- ------- -------
Bliss-tel -- $ (13) $ (13) -- $ (55) $ (55)
ASA -- 1,860 1,860 -- 3,506 3,506
TALK -- (509) (509) -- 1,121 1,121
G.L.M $ 7 -- 7 -- -- --
Pacific -- (337) (337) -- -- --
Posse 29 70 99 $ 30 30 60
Quintex West -- -- -- -- (375) (375)
-------- ------- ------- ------- ------- -------
$ 36 $ 1,071 $ 1,107 $ 30 $ 4,227 $ 4,257
======== ======= ======= ======= ======= =======
During 1998, the Company purchased 400,000 Japanese yen (approximately
$3,132) of Shintom debentures and exercised its option to convert the Shintom
debentures into shares of Shintom common stock. These shares are included in the
Company's available-for-sale marketable securities at November 30, 1998. During
the fourth quarter of 1999, the Company recorded an other-than-temporary decline
in market value of its Shintom common stock in the amount of $1,953 and a
related deferred tax recovery of $761. The write-down has been recorded as a
component of other expense in the consolidated statements of income.
22
During 1998, the Company purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom Debentures and exercised its option to convert
737,212 Japanese yen of Shintom debentures into shares of Shintom common stock.
The Company sold the Shintom common stock yielding net proceeds of $5,830 and a
gain of $787.
During 1999, the Company purchased an additional 3,100,000 Japanese yen
(approximately $27,467) of Shintom Debentures and exercised its option to
convert 2,882,788 Japanese yen of Shintom debentures into shares of Shintom
common stock. The Company sold the Shintom common stock yielding net proceeds of
$27,916 and a gain of $3,501. As of November 30, 1999, the remaining debentures
of 1,125,024 Japanese yen are included in the Company's available-for-sale
marketable securities.
As of December 1999, the Company completed the liquidation of Audiovox
Pacific Pty. Ltd.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of 40%
for profits from normal business operations. During fiscal 1999, the Company
implemented various tax strategies which have resulted in lowering the effective
tax rate.
Fiscal 1997 Compared to Fiscal 1998
Consolidated Results
Net sales were $616,695 for 1998, a decrease of $22,387, or 3.5%, over
1997. The decrease in net sales was accompanied by a corresponding decrease in
gross profit margins to 14.4% from 16.7% in 1997. Operating expenses decreased
to $83,670 from $87,067, a 3.9% decrease. Operating income for 1998 was $4,871,
a decrease of $14,824, or 75.3%, compared to 1997. During 1997, 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 convertible
debentures for 2,860,925 shares of Class A common stock. Costs associated with
this exchange were $12,844, including income taxes.
23
Wireless Group Results
Net sales in 1998 were $441,590, a decrease of $2,810, or 0.6%, from 1997.
Unit sales of wireless handsets increased 354,000 units, or 12.0%, over 1997.
Average unit selling prices decreased approximately 6.9%. The number of new
wireless subscriptions processed by Quintex decreased 22.8%, with a
corresponding decrease in activation commissions of approximately $8,276. Part
of the decrease was due to the closing of some retail locations. The average
commission received by Quintex per activation also decreased by approximately
4.9% from 1997. Unit gross profit margins decreased to 7.3% from 11.1% in 1997,
primarily due to reduced selling prices, which were partially offset by a
corresponding decrease of 3.0% in average unit cost. In addition, the Company
recorded a $6.6 million charge to adjust the carrying value of certain wireless
inventories, partially offset by a $1.0 million credit from a supplier. This
charge was the result of a software problem in a line of analog handsets, as
well as a continuing decrease in the selling prices of analog handsets due to
pressure from the growing presence of digital handsets in the market. While the
analog market is still sizable, the Wireless Group may experience lower gross
profits in the future due to the price sensitivity of this market place.
Operating expenses decreased to $48,257 from $49,582. As a percentage of net
sales, operating expenses decreased to 10.9% during 1998 compared to 11.2% in
1997. Selling expenses decreased $1,763 from 1997, primarily in commissions,
salesmen salaries, payroll taxes and benefits, partially offset by increases in
market development funds and co-operative advertising. General and
administrative expenses increased over 1997 by $632, primarily in occupancy
costs and temporary personnel. Warehousing and assembly expenses decreased over
1997 by $194, primarily in tooling and direct labor. Pre-tax loss for 1998 was
$1,786, a decrease of $13,368 compared to 1997.
24
The net sales and percentage of net sales of the Wireless Group are
reflected in the following table:
1997 1998
------------------ ------------------
(Dollars in thousands)
Net sales:
Wireless product $ 396,510 89.2% $ 402,606 91.1%
Activation commissions 31,061 7.0 22,785 5.1
Residual fees 4,688 1.1 4,452 1.0
Other 12,141 2.7 11,747 2.7
--------- ----- --------- -----
Total net sales 444,400 100.0 441,590 100.0
Gross profit 66,117 14.9 52,270 11.8
Total operating expenses 49,582 11.2 48,257 10.9
--------- ----- --------- -----
Operating income 16,535 3.7 4,013 0.9
Other expense (4,953) (1.1) (5,799) (1.3)
--------- ----- --------- -----
Pre-tax income (loss) $ 11,582 2.6% $ (1,786) (0.4)%
========= ===== ========= =====
Electronics Group Results
Net sales in 1998 were $175,105, a decrease of approximately $18,805, or
9.7% from 1997. This decrease was primarily from a $21.3 million decrease in net
sales in our foreign subsidiaries, primarily Malaysia, composed chiefly of
security and accessory products. Domestic operation sales of autosound, mobile
and consumer electronics products increased approximately $4.7 million, or 3.7%,
from 1997. The main components of this increase were our mobile video and
consumer products categories. The domestic operations sales grew by $7.3
million, or 5.9%, before the Heavy Duty Sound division was transferred to one of
our equity investments during 1997.
Operating expenses decreased 3.1% from 1997 to $27,126, primarily in our
international operations. This was partially offset by an increase in domestic
operating expenses. Selling expenses decreased during 1998, primarily in
commissions and salaries in our foreign companies and market development funds
and co-operative advertising in our domestic operations. This was partially
offset by increases in domestic commissions and trade show expenses. General and
administrative expenses decreased from 1997, mostly in foreign office expenses,
bad debt expense and executive salaries, both domestic and foreign. These
decreases were partially offset by increases in office salaries, domestically,
and professional fees, both domestic and foreign. Warehousing and assembly
expenses increased from 1997, primarily in field warehousing and direct labor.
Pre-tax income decreased $2,065 from in 1997, primarily due to a decrease of
$2.6 million from foreign operations, partially offset by an increase in pre-tax
income from domestic operations.
25
The net sales and percentage of net sales of the Electronics Group are
reflected in the following table:
1997 1998
------------------ ------------------
(Dollars in thousands)
Net sales:
Sound $ 91,763 47.3% $ 78,338 44.8%
Mobile electronics 97,446 50.3 84,973 48.5
Consumer electronics 4,701 2.4 11,794 6.7
--------- ----- --------- -----
Total net sales 193,910 100.0 175,105 100.0
Gross profit 40,326 20.8 36,433 20.8
Total operating expenses 27,989 14.4 27,126 15.5
--------- ----- --------- -----
Operating income 12,337 6.4 9,307 5.3
Other expense (4,335) (2.2) (3,370) (1.9)
--------- ----- --------- -----
Pre-tax income $ 8,002 4.1% $ 5,937 3.4%
========= ===== ========= =====
Other Income and Expense
Interest expense and bank charges increased $2,227 during 1998 from 1997.
This increase was primarily due to an increase in average outstanding interest
bearing debt. Another major factor was the increase in interest rates
experienced by our subsidiary in Venezuela. The increase in the rates, coupled
with the additional outstanding debt as a result of the growth of that
operation, resulted in an increase in Venezuelan interest expense of $975.
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:
1997 1998
------------------------------- ----------------------------
(Dollars in thousands)
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
------- ------- ------- ------- ------- -------
Bliss-tel -- -- -- -- $ (13) $ (13)
ASA -- $ 1,857 $ 1,857 -- 1,860 1,860
TALK -- -- -- -- (509) (509)
G.L.M $ 12 -- 12 $ 7 -- 7
Pacific -- (685) (685) -- (337) (337)
Posse 97 187 284 29 70 99
------- ------- ------- ------- ------- -------
$ 109 $ 1,359 $ 1,468 $ 36 $ 1,071 $ 1,107
======= ======= ======= ======= ======= =======
26
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.
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 the fourth quarter of 1999, the Company recorded an
other-than-temporary decline in market value of its Shintom common stock in the
amount of $1,953. The write-down has been recorded as a component of other
expense in the consolidated statements of income. In connection with the
write-down, the Company also recorded a deferred tax recovery in the amount of
$761 in the accompanying consolidated statements of income.
During 1998, the Company purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom Debentures. The Company exercised its option
to convert 737,212 Japanese yen of Shintom Debentures into shares of Shintom
common stock. The Company sold the Shintom common stock yielding net proceeds of
$5,830 and a gain of $787.
During January 1997, the Company completed an exchange of $21,479 of its
subordinated debentures for 2,860,925 shares of Class A common stock. As a
result of this exchange, the Company recorded a charge of $12,686. The charge to
earnings represents (1) the difference in the fair market value of the shares
issued in the exchange and the fair market value of the shares that would have
been issued under the terms of the original conversion feature plus (2) a
write-off of the debt issuance costs associated with the subordinated debentures
plus (3) expenses associated with the exchange offer. The exchange resulted in
taxable income due to the difference in the face value of the bonds converted
and the fair market value of the shares issued and, as such, a current tax
expense of $158 was recorded. An increase in paid in capital was reflected for
the face value of the bonds converted, plus the difference in the fair market
value of the shares issued in the exchange and the fair market value of the
shares that would have been issued under the terms of the original conversion
feature for a total of $33,592.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state rate of 40%
for profits from normal business operations. During 1998, 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.
Liquidity and Capital Resources
The Company's cash position at November 30, 1999 was approximately
$3,871 below the November 30, 1998 level. Operating activities used
approximately $95,616, primarily from increases in accounts receivable and
inventory partially offset by an increase in accounts payable. Even though
accounts receivable and inventory have increased, days on hand have decreased
approximately 4% for both accounts receivable and inventory. Investing
activities used approximately $1,124, primarily from the purchase of investment
securities and the purchase of property, plant and equipment, partially
27
offset by the proceeds from the sale of investment securities. Financing
activities provided approximately $92,884, primarily from net borrowings under
line of credit agreements.
On July 28, 1999, the Company amended and restated its credit agreement
with a group of lenders led by The Chase Manhattan Bank, as administrative
agent. The amended and restated credit agreement increased the Company's maximum
borrowings available from $112,500 to $200,000. Effective December 20, 1999, the
Company amended the credit agreement to increase its maximum borrowings to
$250,000. The amended and restated credit agreement contains covenants
requiring, among other things, minimum quarterly and annual levels of pre-tax
income and net worth. Under the amended and restated credit agreement:
o the Company may not incur a pre-tax loss in excess of $1,000
for any fiscal quarter and may not incur a consolidated
pre-tax loss in any two consecutive fiscal quarters;
o the Company may not permit consolidated pre-tax income for
the period of two consecutive fiscal quarters ending on May
31, 2000, May 31, 2001, May 31, 2002, May 31, 2003 or May
31, 2004 to be less than $1,5000; or ending on November 30,
1999, November 30, 2000, November 30, 2001, November 30,
2002 or November 30, 2003 to be less than $2,500;
o the Company may not permit a consolidated pre-tax income for
any fiscal year ending on or after November 30, 1999 to be
less than $4,000;
o the Company must maintain a net worth base amount of
$175,000, plus 50% of consolidated net income for each
fiscal year ending on or after November 30, 1999; and
o the Company must, at all times, maintain a debt to net worth
ratio of not more than 1.75 to 1.
The amended and restated credit agreement also contains restrictions and
limitations on, among other items, the Company's ability to pay dividends,
repurchase stock and make capital expenditures or acquisitions.
Borrowings under the credit facility bear interest, payable monthly, based
on the annual interest rate publicly announced by The Chase Manhattan Bank as
its prime rate in effect at its principal office in New York plus the applicable
margin, which is based on the consolidated pre-tax income for four consecutive
quarters. The applicable margin presently in effect is 0%. This margin will
increase to .25% if consolidated pre-tax income for four consecutive quarters
falls below $4,000. The Company may also borrow on a LIBOR basis plus the
applicable margin. At present, the margin above LIBOR is 1.50%, which will be
reduced to 1.25% on February 28, 2000. This margin will increase to 1.50% if the
Company's consolidated pre-tax income for four consecutive quarters is equal to
or greater than $10,000 but less than $15,000, and to 1.75% if its consolidated
pre-tax income for four consecutive quarters is less than $10,000. The margin
will be 1.25% if consolidated pre-tax income for four consecutive quarters is
equal to or greater than $15,000.
The Company's ability to borrow under its credit facility is conditioned on
a formula that takes into account the amount and quality of its accounts
receivable and inventory. The Company's obligations under the credit agreement
are guaranteed by its subsidiaries and are secured by its accounts receivable.
The amended and restated credit agreement expires on July 28, 2004.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs for the reasonable
foreseeable future.
The Company also has revolving credit facilities in Malaysia to finance
additional working capital needs. As of November 30, 1999, the available line of
credit for direct borrowing, letters of credit, bankers' acceptances and other
forms of credit approximated $8,158. The Malaysian credit facilities are
partially secured by the Company under one standby letter of credit totaling
$1,300 and two standby letters of credit totaling $5,320 and are payable upon
demand or upon expiration of the standby letters of credit on January 15, 2000
and August 31, 2000, respectively. The obligations of the Company under the
Malaysian credit facilities are secured by the property and building in Malaysia
owned by Audiovox Communications Sdn. Bhd.
Impact of Inflation and Currency Fluctuation
Inflation has not had a significant impact on the Company's financial
position or operating results. To the extent that the Company expands its
operations into Latin America and the Pacific Rim, the effects of inflation and
currency fluctuations in those areas could have growing significance to its
financial condition and results of operations. Fluctuations in the foreign
exchange rates in Pacific Rim countries have not had a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
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
28
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 in its operations. The
Company generally experiences a substantial amount of its sales during
September, October and November. December is also a key month for the Company
due to increased demand for its products during the holiday season. This
increase results from increased promotional and advertising activities from the
Company's customers to end-users.
Year 2000 Date Compliance
The Company is not aware of any year 2000 issues that have affected its
business. In preparation for the year 2000, the Company incurred internal staff
costs as well as consulting and other expenses. Year 2000 expenses totaled less
than $1 million. These expenses were not significant because, during 1996, the
Company replaced or updated a significant portion of its computer systems, both
hardware and software, with year 2000 compliant systems.
It is possible that the Company's computerized systems could be affected in
the future by the year 2000 issue. The Company has numerous computerized
interfaces with third parties that are possibly vulnerable to failure if those
third parties have not adequately addressed their year 2000 issues. System
failures resulting from these issues could cause significant disruption to the
Company's operations.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." Statement 137 amends Statement 133,
"Accounting for Derivative Instruments and Hedging Activities," which was issued
in June 1998 and was to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Statement 137 defers the effective date of
Statement 133 to all fiscal quarters of fiscal years beginning after June 15,
2000. Earlier application is permitted. Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
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.
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.
29
Marketable Securities
Marketable securities at November 30, 1999, which are recorded at fair
value of $30,401 and include net unrealized gains of $15,981, have exposure to
price risk. This risk is estimated as the potential loss in fair value resulting
from a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $3,040 as of November 30, 1999. Actual results may differ.
Interest Rate Risk
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 as of November 30, 1999 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 with
foreign subsidiaries and equity investments are typically not hedged. The
potential loss in fair value for such net currency position resulting from a 10%
adverse change in quoted foreign currency exchange rates as of November 30, 1999
is not material.
In addition, 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 its TALK joint venture. The potential loss resulting
from a hypothetical 10% adverse change in the quoted Japanese yen rate as of
November 30, 1999 is approximately $431. Actual results may differ.
The Company is subject to risk from changes in foreign exchange rates for
its subsidiaries and equity investments that use a foreign currency as their
functional currency and are translated into U.S. dollars. These changes result
in cumulative translation adjustments which are included in accumulated other
comprehensive income. On November 30, 1999, the Company had translation exposure
to various foreign currencies with the most significant being the Malaysian
ringgit, Thailand baht and Canadian 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, as of November 30, 1999, amounts to $816.
Actual results may differ.
Certain of the Company's investments in marketable securities are subject
to risk from changes in the Japanese yen rate. A portion of these investments
are hedged with a yen denominated loan. As of November 30, 1999, the amount of
loss in fair value resulting from a hypothetical 10% adverse change in the
Japanese yen rate, for the investments that are not hedged, approximates $118.
Actual results may differ.
30
Item 8 - Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
1998 and 1999 and for each of the years in the three-year period ended November
30, 1999, 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 Company for the
years ended November 30, 1998 and 1999 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 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) 4,201 6,084
Provision for (recovery of) income taxes 597 (4,025) 1,620 2,637
Net income (loss) 1,639 (4,695) 2,581 3,447
Net income (loss) per common share (basic) 0.09 (0.24) 0.14 0.18
Net income (loss) per common share (diluted) 0.09 (0.24) 0.14 0.18
1999
Net sales 210,266 242,069 296,732 410,470
Gross profit 26,220 28,721 35,279 44,408
Operating expenses 21,018 23,501 23,764 28,108
Income before provision for income taxes 5,087 10,680 10,415 16,541
Provision for income taxes 2,105 4,226 3,986 5,160
Net income 2,982 6,454 6,429 11,381
Net income per common share (basic) 0.16 0.34 0.34 0.59
Net income per common share (diluted) 0.16 0.34 0.32 0.56
31
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended November 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Audiovox Corporation
and subsidiaries as of November 30, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1999, in conformity with generally accepted accounting
principles.
s/KPMG LLP
----------
KPMG LLP
Melville, New York
January 13, 2000
32
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 1998 and 1999
(In thousands, except share data)
1998 1999
--------- ---------
Assets
Current assets:
Cash $ 9,398 $ 5,527
Accounts receivable, net 131,120 237,272
Inventory, net 72,432 136,554
Receivable from vendor 956 9,327
Prepaid expenses and other current assets 6,502 7,940
Deferred income taxes, net 6,088 7,675
--------- ---------
Total current assets 226,496 404,295
Investment securities 17,089 30,401
Equity investments 10,387 13,517
Property, plant and equipment, net 17,828 19,629
Excess cost over fair value of assets acquired and other intangible assets, net 6,052 5,661
Other assets 1,827 1,580
--------- ---------
$ 279,679 $ 475,083
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 34,063 $ 76,382
Accrued expenses and other current liabilities 15,376 29,068
Income taxes payable 5,210 8,777
Bank obligations 7,327 15,993
Documentary acceptances 3,911 1,994
--------- ---------
Total current liabilities 65,887 132,214
Bank obligations 17,500 102,007
Deferred income taxes, net 3,595 8,580
Long-term debt 6,331 5,932
Capital lease obligation 6,298 6,279
--------- ---------
Total liabilities 99,611 255,012
--------- ---------
Minority interest 2,348 3,327
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 and 17,827,946 issued 1998 and
1999, respectively; 16,760,518 and 17,206,909 outstanding 1998
and 1999, respectively 173 179
Class B convertible; 10,000,000 authorized; 2,260,954 issued and
outstanding 22 22
Paid-in capital 143,339 149,278
Retained earnings 35,896 63,142
Accumulated other comprehensive income (loss) (1,550) 5,165
Gain on hedge of available-for-sale securities, net 929 929
Treasury stock, at cost, 498,055 and 621,037 Class A common stock 1998
and 1999, respectively (3,589) (4,471)
--------- ---------
Total stockholders' equity 177,720 216,744
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 279,679 $ 475,083
========= =========
See accompanying notes to consolidated financial statements.
33
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended November 30, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
----------- ----------- -----------
Net sales $ 639,082 $ 616,695 $ 1,159,537
Cost of sales (including an inventory write-down to
market in 1998 of $6,600) 532,320 528,154 1,024,909
----------- ----------- -----------
Gross profit 106,762 88,541 134,628
----------- ----------- -----------
Operating expenses:
Selling 38,044 35,196 36,606
General and administrative 37,000 35,890 44,748
Warehousing, assembly and repair 12,023 12,584 15,037
----------- ----------- -----------
Total operating expenses 87,067 83,670 96,391
----------- ----------- -----------
Operating income 19,695 4,871 38,237
----------- ----------- -----------
Other income (expense):
Debt conversion expense (12,686) -- --
Interest and bank charges (2,542) (4,769) (4,712)
Equity in income of equity investments, management
fees and related income, net 1,468 1,107 4,257
Gain on sale of investments 37,471 787 3,501
Gain on issuance of subsidiary shares -- -- 3,800
Other, net 36 1,805 (2,360)
----------- ----------- -----------
Total other income (expense) 23,747 (1,070) 4,486
----------- ----------- -----------
Income before provision for income taxes 43,442 3,801 42,723
Provision for income taxes 22,420 829 15,477
----------- ----------- -----------
Net income $ 21,022 $ 2,972 $ 27,246
=========== =========== ===========
Net income per common share (basic) $ 1.11 $ 0.16 $ 1.43
=========== =========== ===========
Net income per common share (diluted) $ 1.09 $ 0.16 $ 1.39
=========== =========== ===========
See accompanying notes to consolidated financial statements.
34
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 1997, 1998 and 1999
(In thousands, except share data)
Accum-
ulated
Other Gain on
Compre- Unrealized Hedge of Total
Unearned hensive Gain on Available Stock-
Preferred Common Paid-In Compen Retained Income Equity for Sale Treasuryholders'
Stock Stock Capital -sation Earnings (Loss) Collar Securities Stock Equity
-------- ------- ---------------- -------- -------- -------- -------- -------- --------
Balances at
November 30, 1996 2,500 163 107,958 (125) 11,902 9,101 -- -- -- 131,499
Comprehensive income:
Net income -- -- -- -- 21,022 -- -- -- -- 21,022
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation
adjustment -- -- -- -- -- (2,252) -- -- -- (2,252)
Unrealized gain on
marketable
securities, net of tax
effect of --
$ 1,174 -- -- -- -- -- 1,917 -- -- -- 1,917
--------
Other comprehensive
income (loss) (335)
--------
Comprehensive income 20,687
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 int
2,860,925
shares -- 29 33,592 -- -- -- -- -- -- 33,621
Issuance of warrants -- -- 106 -- -- -- -- -- -- 106
Acquisition of 290,000 commo
shares -- -- -- -- -- -- -- -- (2,421) (2,421)
Unrealized gain on equity
collar, net
of tax effect of $473 -- -- -- -- -- -- 773 -- -- 773
-------- ------- ---------------- -------- -------- -------- -------- -------- --------
Balances at
November 30, 1997 2,500 195 145,240 (85) 32,924 8,766 773 -- (2,421) 187,892
Comprehensive income:
Net income -- -- -- -- 2,972 -- -- -- -- 2,972
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation
adjustment -- -- -- -- -- (2,276) -- -- -- (2,276)
Unrealized loss on
marketable
securities, net of
tax effect of
$ 4,928 -- -- -- -- -- (8,040) -- -- -- (8,040)
--------
Other comprehensive
income (loss) (10,316)
--------
Comprehensive
income (loss) (7,344)
--------
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)
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 (1,550) -- 929 (3,589) 177,720
See accompanying notes to consolidated financial statements.
35
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
Years Ended November 30, 1997, 1998 and 1999
(In thousands, except share data)
Accum-
ulated
Other Gain on
Compre- Unrealized Hedge of Total
Unearned hensive Gain on Available Stock-
Preferred Common Paid-In Compen Retained Income Equity for Sale Treasury holders'
Stock Stock Capital -sation Earnings (Loss) Collar Securities Stock Equity
---------------- -------- -------- -------- -------- -------- -------- -------- --------
Comprehensive income:
Net income - - - - 27,246 - - - - 27,246
Other comprehensive
income, net of
tax:
Foreign currency
translation
adjustment - - - - - 940 - - - 940
Unrealized gain on
marketable
securities, net of
tax effect
of $3,540 - - - - - 5,775 - - - 5,775
---------
Other comprehensive
income 6,715
---------
Comprehensive income 33,961
Compensation expense (income) - - 158 - - - - - - 158
Exercise of stock options
into 364,550
shares of common stock
and issuance -
of 39,305 shares under the
Restriceted
Stock Plan 4 2,775 - - - - - - 2,779
Tax benefit of stock options
exercised - 1,101 - - - - - - 1,101
Conversion of debentures into
70,565
shares - 1 1,248 - - - - - - 1,249
Issuance of warrants - 1 662 - - - - - - 663
Purchase of warrants - - (5) - - - - - - (5)
Acquisition of 122,982
common shares - - - - - - - - (882) (882)
----- ---- ------- ------ ------ ------ -------- ---- ------ -------
Balances at 2,500 201 149,278 - 63,142 5,165 - 929 (4,471) 216,744
===== === ======== ====== ======= ====== ======== ==== ====== =======
November 30, 1999
See accompanying notes to consolidated financial statements.
36
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 21,022 $ 2,972 $ 27,246
Adjustment to reconcile net income to net cash provided by (used
in) operating activities:
Debt conversion expense 12,386 -- --
Depreciation and amortization 1,903 2,471 3,288
Provision for bad debt expense 1,300 581 3,255
Equity in income of equity investments (1,468) (1,107) (4,257)
Minority interest 1,623 (320) (220)
Gain on sale of investments (37,471) (787) (3,501)
Gain on issuance of subsidiary shares -- -- (3,800)
Other-than-temporary decline in market value of investment
security -- -- 1,953
Deferred income tax benefit, net (3,123) (902) (565)
Provision for unearned compensation 135 53 --
Expense relating to issuance of warrants 106 -- --
Gain on disposal of property, plant and equipment, net (9) (151) 36
Changes in:
Accounts receivable 6,853 (27,940) (109,889)
Receivable from vendor -- 4,266 (8,371)
Inventory (36,823) 31,705 (64,533)
Accounts payable, accrued expenses and other current liabilities (2,855) 9,385 56,615
Income taxes payable 2,181 (4,034) 4,022
Prepaid expenses and other, net (2,659) 1,186 3,105
--------- --------- ---------
Net cash provided by (used in) operating activities (36,899) 17,378 (95,616)
--------- --------- ---------
Cash flows from investing activities:
Purchases of investment securities (4,706) (12,719) (14,151)
Purchases of property, plant and equipment, net (3,986) (4,932) (4,822)
Net proceeds from sale of investment securities 45,937 5,830 11,201
Proceeds from sale of equity collar -- 1,499 --
Proceeds from distribution from equity investment 450 1,125 1,648
Proceeds from issuance of subsidiary shares -- -- 5,000
--------- --------- ---------
Net cash provided by (used in) investing activities 37,695 (9,197) (1,124)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (3,765) (5,047) 93,428
Net borrowings (repayments) under documentary acceptances 413 (3) (1,917)
Debt issuance costs (13) -- (1,175)
Principal payments on capital lease obligation -- (26) (19)
Proceeds from issuance of Class A common stock 2,328 -- --
Proceeds from exercise of stock options and warrants -- -- 3,449
Repurchase of Class A common stock (2,421) (1,168) (882)
Purchase of warrants -- (1,869) --
--------- --------- ---------
Net cash provided by (used in) financing activities (3,458) (8,113) 92,884
--------- --------- ---------
Effect of exchange rate changes on cash (243) (115) (15)
--------- --------- ---------
Net decrease in cash (2,905) (47) (3,871)
Cash at beginning of period 12,350 9,445 9,398
--------- --------- ---------
Cash at end of period $ 9,445 $ 9,398 $ 5,527
========= ========= =========
See accompanying notes to consolidated financial statements.
37
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1997, 1998 and 1999
(Dollars in thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market a diverse line of products and provide related
services throughout the world. These products and services
include handsets and accessories for wireless communications,
fulfillment services for wireless carriers, automotive
entertainment and security products, automotive electronic
accessories and consumer electronics.
The Company operates in two primary markets:
(1) Wireless communications. The Wireless Group markets
wireless handsets and accessories through domestic
and international wireless carriers and their agents,
independent distributors and retailers.
(2) Mobile and consumer electronics. The Electronics
Group sells autosound, mobile electronics and
consumer electronics primarily to mass merchants,
power retailers, specialty retailers, new car
dealers, original equipment manufactures (OEMs),
independent installers of automotive accessories and
the U.S. military.
(b) Principles of Consolidation
The consolidated financial statements include the financial
statements of Audiovox Corporation and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
Investments with original maturities of three months or less
are considered cash equivalents. There were no cash
equivalents at November 30, 1998 or 1999.
(d) Cash Discounts, Co-operative Advertising Allowances and
Market DevelopmentFunds
----------------------------------------------------------
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
(Continued)
38
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
as a reduction of accounts receivable as they are utilized by
customers to reduce their trade indebtedness to the Company.
(e) Inventory
Inventory consists principally of finished goods and is stated
at the lower of cost (primarily on a weighted moving average
basis) or market. The markets in which the Company competes
are characterized by declining prices, intense competition,
rapid technological change and frequent new product
introductions. The Company maintains a significant investment
in inventory and, therefore, is subject to the risk of losses
on write-downs to market and inventory obsolescence. During
the second quarter of 1998, the Company recorded a charge of
approximately $6,600 to accurately reflect the Company's
inventory at the lower of cost or market. No estimate can be
made of losses that are reasonably possible should additional
write-downs to market be required in the future.
(f) Investment Securities
The Company classifies its debt and equity securities in one
of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a component of accumulated other comprehensive
income until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed
other-than-temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield
using the effective interest method. Dividend and interest
income are recognized when earned.
(Continued)
39
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(g) Derivative Financial Instruments
The Company, as a policy, does not use derivative financial
instruments for trading purposes. A description of the
derivative financial instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign
currencies and, as a result, is subject to foreign
currency exchange rate risk due to the effects that
exchange rate movements of these currencies have on
the Company's costs. To minimize the effect of
exchange rate fluctuations on costs, the Company
enters into forward exchange rate contracts. The
Company, as a policy, does not enter into forward
exchange contracts for trading purposes. The forward
exchange rate contracts are entered into as hedges of
inventory purchase commitments and of trade
receivables due in foreign currencies.
Gains and losses on the forward exchange contracts
that qualify as hedges are reported as a component of
the underlying transaction. Foreign currency
transactions which have not been hedged are
marked-to-market on a current basis with gains and
losses recognized through income and reflected in
other income (expense). In addition, any previously
deferred gains and losses on hedges which are
terminated prior to the transaction date are
recognized in current income when the hedge is
terminated (Note 19(a)(1)).
(2) Equity Collar
As of November 30, 1997, the Company had an equity
collar for 100,000 of its shares in CellStar
Corporation (CellStar) (Note 8). The equity collar
was recorded on the balance sheet at fair value with
gains and losses on the equity collar reflected as a
separate component of stockholders' equity (Note
19(a)(2)). The equity collar acted as a hedging item
for the CellStar shares. The investment in the
CellStar shares is an available-for-sale security
carried at fair market value with unrealized gains
and losses recorded as a separate component of
accumulated other comprehensive income (loss).
The Financial Accounting Standards Board (FASB) issued
Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (Statement 137). Statement 137 amends
Statement 133, "Accounting for Derivative Instruments and
Hedging Activities", which was to be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Statement 137 defers the effective date of Statement 133 to
all fiscal quarters of fiscal years beginning
(Continued)
40
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
after June 15, 2000. Statement 133 established accounting and
reporting standards for derivative instruments, including
certain derivative instruments, embedded in other contracts
and for hedging activities. Management of the Company has not
yet determined the impact, if any, that the implementation of
Statement 133 will have on its financial position, results of
operations or liquidity.
(h) Debt Issuance Costs
Costs incurred in connection with the restructuring of bank
obligations (Note 11(a)) have been capitalized. During 1999,
the Company capitalized $1,220 in fees associated with the
amendment to the Company's credit agreement. These charges are
amortized over the lives of the respective agreements.
Amortization expense of these costs amounted to $37 and $160
for the years ended November 30, 1997 and 1999, respectively.
During 1997, the Company wrote-off $245 of debt issuance costs
(Note 12). There was no amortization of debt issuance costs
for the year ended November 30, 1998.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment
under capital lease is stated at the present value of minimum
lease payments. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
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 subsidiary companies and equity
investments. Excess cost over fair value of assets acquired is
being amortized, on a straight-line basis, over periods not
exceeding twenty years. The costs of other intangible assets
are amortized on a straight-line basis over their respective
lives.
Accumulated amortization approximated $2,148 and $2,583 at
November 30, 1998 and 1999, respectively. Amortization of the
excess cost over fair value of assets acquired
(Continued)
41
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
and other intangible assets amounted to $363, $382 and $429
for the years ended November 30, 1997, 1998 and 1999,
respectively.
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its
ongoing review, the Company estimates the fair value of
intangible assets taking into consideration any events and
circumstances which may diminish fair value.
The recoverability of the excess cost over fair value of
assets acquired is assessed by determining whether the
amortization over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of the excess cost over
fair value of assets acquired will be impacted if estimated
future operating cash flows are not achieved.
(k) Equity Investments
The Company has common stock investments which are accounted
for by the equity method (Note 10).
(l) Cellular Telephone Commissions
Under various agency agreements, the Company receives an
initial activation commission for obtaining subscribers for
cellular telephone services. The agreements may contain
provisions for additional commissions based upon usage and
length of continued subscription. The agreements also provide
for the reduction or elimination of initial activation
commissions if subscribers deactivate service within
stipulated periods. The Company has provided a liability for
estimated cellular deactivations which is reflected in the
accompanying consolidated financial statements as a reduction
of accounts receivable.
The Company recognizes sales revenue for the initial
activation, length of service commissions and residual
commissions based upon usage on the accrual basis. Such
commissions approximated $35,749, $27,237 and $29,547 for the
years ended November 30, 1997, 1998 and 1999, respectively.
Related commissions paid to outside selling representatives
for cellular activations are included in cost of sales in the
accompanying consolidated statements of income and amounted to
$19,924, $13,877 and $19,884 for the years ended November 30,
1997, 1998 and 1999, respectively.
(Continued)
42
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(m) Advertising
The Company expenses the costs of advertising as incurred.
During the years ended November 30, 1997, 1998 and 1999, the
Company had no direct response advertising.
(n) Warranty Expenses
Warranty expenses are accrued at the time of sale based on the
Company's estimated cost to repair expected returns for
products. At November 30, 1998 and 1999, the liability for
future warranty expense amounted to $1,915 and $5,104,
respectively.
(o) Foreign Currency
With the exception of a subsidiary operation in Venezuela,
which has been deemed a hyper inflationary economy,, assets
and liabilities of those subsidiaries and equity investments
located outside the United States whose cash flows are
primarily in local currencies have been translated at rates of
exchange at the end of the period or historical exchange
rates, as appropriate. Revenues and expenses have been
translated at the weighted average rates of exchange in effect
during the period. Gains and losses resulting from translation
are accumulated in the cumulative foreign currency translation
account in accumulated other comprehensive income. For the
operation in Venezuela, financial statements are translated at
either current or historical exchange rates, as appropriate.
These adjustments, along with gains and losses on currency
transactions, are reflected in the consolidated statements of
income.
Exchange gains and losses on hedges of foreign net investments
and on intercompany balances of a long-term nature are also
recorded in the cumulative foreign currency translation
adjustment account in accumulated other comprehensive income.
Exchange gains and losses on available-for-sale investment
securities and the related hedge of such investment securities
is recorded in the unrealized gain (loss) on marketable
securities in accumulated other comprehensive income. Other
foreign currency transaction gains (losses) of $871 and
$(1,046) for the years ended November 30, 1998 and 1999,
respectively, were included in other income. Other foreign
currency gains and losses were not material for the year ended
November 30, 1997.
(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
(Continued)
43
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(q) Net Income Per Common Share
In February 1997, the FASB issued Statement No. 128, "Earnings
per Share" (Statement 128). Statement 128 replaces the
calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per
share excludes any dilution. It is based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution
that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
The Company adopted Statement 128 in fiscal 1998. Earnings per
share amounts for all periods presented have been restated to
conform to the new presentation.
(r) Supplementary Financial Statement Information
Advertising expenses approximated $16,981, $15,789 and $15,390
for the years ended November 30, 1997, 1998 and 1999,
respectively.
Interest income of approximately $1,525, $896 and $943 for the
years ended November 30, 1997, 1998 and 1999, respectively, is
included in other, net, in the accompanying consolidated
statements of income.
(s) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(t) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
The Company accounts for its long-lived assets in accordance
with the provisions of Statement of Financial Accounting
Standards No.121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of "
(Statement 121). Statement 121 requires that long-lived assets
and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to
(Continued)
44
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
be held and used is measured by comparison of the carrying
amount of an asset to the future net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the
fair value of assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less cost to
sell.
(u) Accounting for Stock-Based Compensation
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations, in accounting for its stock-based
compensation plans.
(v) Reporting Comprehensive Income
Effective December 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 requires
that all items recognized under accounting standards as
components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence
as other annual financial statements. Other comprehensive
income may include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains and
losses on investment securities classified as available-
for-sale. The Company adopted this accounting standard
effective December 1, 1998, as required. Prior year financial
statements have been reclassified to conform to the
presentation required by Statement 130.
(w) Reclassifications
Certain reclassifications have been made to the 1997 and 1998
consolidated financial statements in order to conform to the
1999 presentation.
(2) Business Acquisitions
During 1997, the Company formed Audiovox Venezuela C.A. (Audiovox
Venezuela), an 80%- owned subsidiary, for the purpose of expanding its
international business. The Company made an initial investment of $478
which was used by Audiovox Venezuela to obtain certain licenses,
permits and fixed assets.
(3) Issuance of Subsidiary Shares
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5%
of the Company's subsidiary, Audiovox Communications Corp. (ACC), a
supplier of wireless products for $5,000
(Continued)
45
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
in cash. The Company currently owns 95% of ACC; prior to the
transaction ACC was a wholly- owned subsidiary. As a result of the
issuance of ACC's shares, the Company recognized a gain of $3,800
($2,204 after provision for deferred taxes). The gain on the issuance
of the subsidiary's shares have been recognized in the statements of
income in accordance with the Company's policy on the recognition of
such transactions.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
For the Years Ended November 30,
--------------------------------
1997 1998 1999
---- ---- ----
Cash paid during the years for:
Interest, excluding bank charges, net of $801
capitalized in 1998 $ 1,560 $ 1,587 $ 2,994
Income taxes $23,530 $ 4,496 $12,039
Non-cash Transactions:
During January 1997, the Company completed an exchange of $21,479 of
its $65,000 6 1/4 % convertible subordinated debentures (Subordinated
Debentures) into 2,860,925 shares of Class A common stock (Note 12).
During 1997, the Company issued a credit of $1,250 on open accounts
receivable and issued 250,000 shares of its Class A common stock,
valued at five dollars per share, in exchange for a 20% interest in
Bliss-tel Company, Limited (Bliss-tel) (Note 10).
During 1997, the Company contributed $6,475 in net assets in exchange
for a 50% ownership interest in Audiovox Specialized Applications, LLC
(ASA) which resulted in $5,595 of excess cost over fair value of net
assets (Note 10).
As of November 30, 1997, the Company recorded an unrealized holding
gain relating to the equity collar, net of deferred income taxes, of
$773 as a separate component of stockholders' equity (Note 19).
During 1998, a capital lease obligation of $6,340 was incurred when the
Company entered into a building lease (Note 18).
(Continued)
46
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1998, the Company sold its equity collar for $1,499. The
transaction resulted in a net gain on hedge of available-for-sale
securities of $929 which is reflected as a separate component of
stockholders' equity (Note 19).
During 1998 and 1999, the Company exercised its option to convert
1,137,212 and 2,882,788 Japanese yen (approximately $8,176 and $24,026)
of Shintom Co. Ltd. (Shintom) convertible debentures (Shintom
debentures) into approximately 7,500,000 and 48,100,000 shares of
Shintom common stock, respectively (Note 8).
During the years ended November 30, 1997, 1998 and 1999, the Company
recorded an unrealized holding gain relating to available-for-sale
marketable equity securities, net of deferred income taxes, of $1,917,
$(8,040) and $5,775, respectively, as a separate component of
accumulated other comprehensive income (Note 16).
During 1999, $1,249 of its $65,000 6 1/4% subordinated debentures were
converted into 70,565 shares of Class A common stock (Note 12).
(5) Transactions With Major Suppliers
The Company engages in transactions with Shintom and TALK Corporation
(TALK). Shintom is a stockholder who owns all of the outstanding
Preferred Stock of the Company at November 30, 1998 and 1999. The
Company has a 30.8% interest in TALK (Note 10).
Transactions with Shintom and TALK include financing arrangements and
inventory purchases which approximated 29%, 19% and 11% for the years
ended November 30, 1997, 1998 and 1999, respectively, of total
inventory purchases. At November 30, 1998 and 1999, the Company had
recorded $15 and $20, respectively, of liability due to TALK for
inventory purchases included in accounts payable. The Company also has
documentary acceptance obligations payable to TALK as of November 30,
1998 and 1999 (Note 11(b)). At November 30, 1998 and 1999, the Company
had recorded a receivable from TALK in the amount of $734 and $3,741,
respectively, a portion of which is payable with interest (Note 10),
which is reflected as receivable from vendor on the accompanying
consolidated financial statements.
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive distribution
rights on all wireless personal communication products for all
countries except Japan, China, Thailand and several mid-eastern
countries.
Inventory purchases from another major supplier approximated 32%, 42%
and 39% of total inventory purchases for the years ended November 30,
1997, 1998 and 1999, respectively. Although there are a limited number
of manufacturers of its products, management believes that other
suppliers could provide similar products on comparable terms. A change
in suppliers,
(Continued)
47
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
however, could cause a delay in product availability and a possible
loss of sales, which would affect operating results adversely.
(6) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
1998 1999
-------- -----------
Trade accounts receivable $142,211 $254,477
Receivables from equity investments (Note 10) 1,035 1,057
-------- --------
143,246 255,534
Less:
Allowance for doubtful accounts 2,944 5,645
Allowance for cellular deactivations 875 1,261
Allowance for co-operative advertising, cash
discounts and market development funds 8,307 11,356
-------- --------
$131,120 $237,272
======== ========
(7) Receivable from Vendor
The Company recorded receivable from vendor in the amount of $956 and
$9,327 as of November 30, 1998 and 1999, respectively. Receivable from
vendor represents prepayments on product shipments, defective product
reimbursements and interest receivable at a rate of 6.5% on amounts due
from TALK (Note 10).
(Continued)
48
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Investment Securities
As of November 30, 1999, the Company's investment securities consist
primarily of 1,730,000 shares of CellStar Common Stock, 1,904,000
shares of Shintom common stock and 1,125,024 Japanese yen of Shintom
debentures, which were classified as available-for-sale marketable
securities. As of November 30, 1998, the Company's investment
securities consist primarily of 1,730,000 shares of CellStar Common
Stock, 1,904,000 shares of Shintom common stock and 662,788 Japanese
yen of Shintom debentures, which were classified as available-for-sale
marketable securities. The cost, gross unrealized gains and losses and
aggregate fair value of the investment securities available-for-sale as
of November 30, 1999 were as follows:
1998 1999
------------------------------------ ---------------------------
Gross Gross Gross
Unrealized Unrealized Aggregate Unrealized Aggregate
Holding Holding Fair Holding Fair
Cost Gain Loss Value Cost Gain Value
------- ------ ------- ------- ------- ------- -------
CellStar
Common
Stock $ 2,715 $8,422 -- $11,137 $ 2,715 $13,936 $16,651
Shintom
Common
Stock 3,132 -- $ 1,723 1,409 1,179 -- 1,179
Shintom
Debentures 4,543 -- -- 4,543 10,526 2,045 12,571
------- ------ ------- ------- ------- ------- -------
$10,390 $8,422 $ 1,723 $17,089 $14,420 $15,981 $30,401
======= ====== ======= ======= ======= ======= =======
The Shintom debentures mature on September 30, 2002.
A related deferred tax liability of $2,546 and $6,053 was recorded at
November 30, 1998 and 1999, respectively, as a reduction to the
unrealized holding gain included in accumulated other comprehensive
income.
During 1997, the Company sold 1,835,000 shares of CellStar Common Stock
yielding net proceeds of approximately $45,937 and a gain, net of
taxes, of approximately $23,232.
During 1998, the Company purchased 400,000 Japanese yen (approximately
$3,132) of Shintom debentures and exercised its option to convert the
Shintom debentures into shares of Shintom common stock. These shares
are included in the Company's available-for-sale marketable securities
at November 30, 1998. During the fourth quarter of 1999, the Company
recorded an other-than- temporary decline in market value of its
Shintom common stock in the amount of $1,953 and a related deferred tax
benefit of $761. The write-down has been recorded as a component of
other expense in the consolidated statement of income.
(Continued)
49
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1998, the Company purchased an additional 1,400,000 Japanese yen
(approximately $9,586) of Shintom debentures and exercised its option
to convert 737,212 Japanese yen of Shintom debentures into shares of
Shintom common stock. The Company sold the Shintom common stock
yielding net proceeds of $5,830 and a gain of $787.
During 1999, the Company purchased an additional 3,100,000 Japanese yen
(approximately $27,467) of Shintom debentures and exercised its option
to convert 2,882,788 Japanese yen of Shintom debentures into shares of
Shintom common stock. The Company sold the Shintom common stock
yielding net proceeds of $27,916 and a gain of $3,501.
(9) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
1998 1999
---------- -----------
Land $ 363 $ 363
Buildings 1,605 1,605
Property under capital lease 7,141 7,141
Furniture, fixtures and displays 3,184 1,878
Machinery and equipment 5,023 5,363
Computer hardware and software 9,767 9,655
Automobiles 633 580
Leasehold improvements 3,943 2,968
--------- -------
31,659 29,553
Less accumulated depreciation and amortization (13,831) (9,924)
--------- --------
$ 17,828 $ 19,629
========= ========
The amortization of the property under capital lease is included in
depreciation and amortization expense.
Computer software includes approximately $3,149 and $2,927 of
unamortized costs as of November 30, 1998 and 1999, respectively,
related to the acquisition and installation of management information
systems for internal use.
Depreciation and amortization of plant and equipment amounted to
$1,503, $2,089 and $2,875 for the years ended November 30, 1997, 1998
and 1999, respectively. Included in accumulated depreciation and
amortization is amortization of computer software costs of $19, $350
and $1,051 for the years ended November 30, 1997, 1998 and 1999,
respectively. Included in
(Continued)
50
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
accumulated depreciation and amortization is amortization of property
under capital lease of $160 and $240 for the year ended November 30,
1998 and 1999, respectively.
(10) Equity Investments
As of November 30, 1999, the Company had a 30.8% ownership interest in
TALK, a major supplier of the Company. As of November 30, 1999, the
Company's 72% owned subsidiary, Audiovox Communications Sdn. Bhd., had
a 29% ownership interest in Avx Posse (Malaysia) Sdn. Bhd. (Posse)
which monitors car security commands through a satellite based system
in Malaysia. As of November 30, 1999, the Company had a 20% ownership
interest in Bliss-tel which distributes cellular telephones and
accessories in Thailand. Additionally, the Company had 50%
non-controlling ownership interests in five other entities: Protector
Corporation (Protector) which acts as a distributor of chemical
protection treatments; ASA which acts as a distributor to specialized
markets for RV's and van conversions, of televisions and other
automotive sound, security and accessory products; Audiovox Pacific
Pty., Limited (Audiovox Pacific) which was a former distributor of
cellular telephones and automotive sound and security products in
Australia and New Zealand; G.L.M. Wireless Communications, Inc.
(G.L.M.) which is in the cellular telephone, pager and communications
business in the New York metropolitan area; and Quintex West, which is
in the cellular telephone and related communication products business,
as well as the automotive aftermarket products business on the west
coast of the United States.
During 1997, the Company purchased a 20% equity investment in Bliss-tel
in exchange for 250,000 shares of the Company's Class A common stock
and a credit for open accounts receivable of $1,250. The issuance of
the common stock resulted in an increase to additional paid-in capital
of approximately $1,248. In connection with the purchase, excess of the
fair value of net assets acquired over cost amounting to $320 was
recorded and is being amortized on a straight-line basis over 10 years.
During 1997, the Company purchased a 50% equity investment in a
newly-formed company, ASA, for approximately $11,131. The Company
contributed the net assets of its Heavy Duty Sound division, its 50%
interest in Audiovox Specialty Markets Co. (ASMC) and $4,656 in cash.
In connection with this investment, excess cost over fair value of net
assets acquired of $5,595 resulted, which is being amortized on a
straight-line basis over 20 years. The other investor (Investor)
contributed its 50% interest in ASMC and the net assets of ASA
Electronics Corporation. In connection with this investment, the
Company entered into a stock purchase agreement with the Investor in
ASA. The agreement provides for the sale of 352,194 shares of Class A
Common Stock at $6.61 per share (aggregate proceeds of approximately
$2,328) by the Company to the Investor. The transaction resulted in a
net increase to additional paid-in capital of approximately $2,242. The
selling price of the shares are subject to adjustment in the event the
Investor sells shares at a loss during a 90-day period, beginning with
the later of the effective date of the registration statement filed
with the Securities and Exchange
(Continued)
51
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Commission to register such shares or May 13, 1998. The adjustment to
the selling price will equal the loss incurred by the Investor up to a
maximum of 50% of the shares. During 1998, the Investor sold its shares
at a loss which resulted in the Company recording an adjustment to the
selling price of $410 as additional excess cost over fair value of
assets acquired. No further adjustments to the selling price can be
made.
The Company's net sales to the equity investments amounted to $6,132,
$4,528 and $4,605 for the years ended November 30, 1997, 1998 and 1999,
respectively. The Company's purchases from the equity investments
amounted to $7,484, $91,095 and $146,803 for the years ended November
30, 1997, 1998 and 1999, respectively. The Company recorded $2,027,
$1,752 and $1,735 of outside representative commission expenses for
activations and residuals generated by G.L.M. on the Company's behalf
during fiscal year 1997, 1998 and 1999, respectively.
Included in accounts receivable at November 30, 1998 and 1999 are trade
receivables due from its equity investments aggregating $1,035 and
$1,057, respectively. Receivable from vendor includes $833 and $3,741
due from TALK as of November 30, 1998 and 1999, respectively, which
represents prepayments on product shipments and interest. Interest is
payable in monthly installments at 6.5% on amounts due from TALK.
Amounts representing prepayments of $3,500 were repaid via receipt of
product shipments in December 1999. At November 30, 1998 and 1999,
other long-term assets include management fee receivables of $1,271 and
$459, respectively. At November 30, 1998 and 1999, included in accounts
payable and other accrued expenses were obligations to equity
investments aggregating $1,049 and $1,015, respectively. Documentary
acceptance obligations were outstanding from TALK at November 30, 1999
(Note 11(b)).
For the years ended November 30, 1997, 1998 and 1999, interest income
earned on equity investment notes and other receivables approximated
$653, $480 and $482, respectively. Interest expense on documentary
acceptances payable to TALK approximated $203, $256 and $228 in 1997,
1998 and 1999, respectively.
(11) Financing Arrangements
(a) Bank Obligations
The Company maintains a revolving credit agreement with
various financial institutions. During the year ended November
30, 1999, the credit agreement was amended and restated in its
entirety, extending the expiration date to July 27, 2004. As a
result, bank obligations under the credit agreement have been
classified as long-term at November 30, 1999. The amended and
restated credit agreement provides for $200,000 of available
credit, including $15,000 for foreign currency borrowings. In
December 1999, the credit agreement was further amended,
resulting in an increase in available credit to $250,000.
(Continued)
52
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Under the credit agreement, the Company may obtain credit
through direct borrowings and letters of credit. The
obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is
secured by accounts receivable, inventory and the Company's
shares of ACC. As of November 30, 1999, availability of credit
under the credit agreement is a maximum aggregate amount of
$200,000, subject to certain conditions, based upon a formula
taking into account the amount and quality of its accounts
receivable and inventory. At November 30, 1999, the amount of
unused available credit is $46,930. The credit agreement also
allows for commitment up to $50,000 in forward exchange
contracts (Note 19(a)(1)).
Outstanding obligations under the credit agreement at November
30, 1999 and 1998 were as follows:
November 30,
1998 1999
-------- ---------
Revolving Credit Notes $ 2,500 $ 47,007
Eurodollar Notes 15,000 55,000
------- --------
$17,500 $102,007
======= ========
Interest rates are as follows: revolving credit notes at .50%
above the prime rate, which was approximately 8.5%, 7.75% and
8.5% at November 30, 1997, 1998 and 1999, respectively, and
Eurodollar Notes at 1.50% above the Libor rate which was
approximately 5.97%, 5.62% and 6.48% at November 30, 1997,
1998 and 1999, respectively. The maximum commitment fee on the
unused portion of the line of credit is .50% as of November
30, 1999.
The credit agreement contains several covenants requiring,
among other things, minimum levels of pre-tax income and
minimum levels of net worth and working capital. Additionally,
the agreement includes restrictions and limitations on
payments of dividends, stock repurchases and capital
expenditures. During 1998, the Company violated its covenant
regarding maintenance of pre-tax income for the fiscal quarter
and six months ended May 31, 1998 which was waived.
The Company also has revolving credit facilities in Malaysia
(Malaysian Credit Agreement) to finance additional working
capital needs. As of November 30, 1998 and 1999, the available
line of credit for direct borrowing, letters of credit,
bankers' acceptances and other forms of credit approximated
$8,195 and $8,158, respectively. The credit facilities are
partially secured by one standby letter of credit totaling
$1,300 and two standby letters of credit totaling $5,320, by
the Company and payable upon demand or upon expiration of the
standby letters of credit on January 15, 2000 and August 31,
2000,
(Continued)
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
respectively. The obligations of the Company under the
Malaysian Credit Agreement are secured by the property and
building owned by Audiovox Communications Sdn. Bhd.
Outstanding obligations under the Malaysian Credit Agreement
at November 30, 1998 and 1999 were approximately $4,711 and
$5,843, respectively. At November 30, 1999 interest on the
credit facility ranged from 7.4% to 9.6%. At November 30,
1998, interest on the credit facility ranged from 9.5% to
12.0%. At November 30, 1997, interest on the credit facility
ranged from 8.25% to 11.10%.
As of November 30, 1998 and 1999, Audiovox Venezuela had notes
payable of 1,500,000 and 1,275,500 Venezuelan Bolivars
(approximately $2,617 and $2,000 at November 30, 1998 and
1999) outstanding to a bank. Interest on the notes payable is
10.7%. The notes are scheduled to be repaid within one year
and, as such, are classified as short term. The notes payable
are secured by a standby letter of credit in the amount of
$3,000, by the Company and is payable upon demand or upon
expiration of the standby letter of credit on June 30, 2000.
The maximum month-end amounts outstanding under the credit
agreement and Malaysian Credit Agreement borrowing facilities
during the years ended November 30, 1997, 1998 and 1999 were
$28,420, $42,975 and $110,595, respectively. Average
borrowings during the years ended November 30, 1997, 1998 and
1999 were $18,723, $26,333 and $29,835, respectively, and the
weighted average interest rates were 7.7%, 8.7% and 9.6%,
respectively.
During 1999, the Company entered into a wholesale financing
agreement with a financial institution to finance up to
$15,000 of inventory purchases of a particular supplier.
Amounts outstanding under this agreement were $8,150 at
November 30, 1999. Borrowings under the agreement are secured
by the inventory purchased. Payments on the borrowings are due
within 30 days. Interest is payable after stipulated due dates
at a rate of prime plus 1 1/2%, which was 10% at November 30,
1999. The agreement contains several covenants.
(b) Documentary Acceptances
The Company had various unsecured documentary acceptance lines
of credit available with suppliers to finance inventory
purchases. The Company does not have written agreements
specifying the terms and amounts available under the lines of
credit. At November 30, 1998 and 1999, $3,911 and $1,994,
respectively, of documentary acceptances were outstanding of
which all was due to TALK.
The maximum month-end documentary acceptances outstanding
during the years ended November 30, 1997, 1998 and 1999 were
$4,162, $4,809 and $5,033, respectively. Average borrowings
during the years ended November 30, 1997, 1998 and 1999 were
(Continued)
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
$3,199, $3,885 and $3,755, respectively, and the weighted
average interest rates, including fees, were 6.3%, 6.6% and
6.1%, respectively.
(12) Long-Term Debt
A summary of long-term debt follows:
November 30,
1998 1999
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at $17.70 per share $2,269 $1,020
Subordinated note payable 4,062 4,912
------ ------
6,331 5,932
Less current installments -- --
------ ------
$6,331 $5,932
====== ======
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 15(d)).
On November 25, 1996, the Company completed an exchange of $41,252 of
its $65,000 Subordinated Debentures for 6,806,580 shares of Class A
Common Stock (Exchange). As a result of the Exchange, a charge of
$26,318 was recorded. The charge to earnings represents (i) the
difference in the fair market value of the shares issued in the
Exchange and the fair market value of the shares that would have been
issued under the terms of the original conversion feature plus (ii) a
write-off of the debt issuance costs associated with the Subordinated
Debentures (Note 1(h)) plus (iii) expenses associated with the Exchange
offer. The Exchange resulted in taxable income due to the difference in
the face value of the bonds converted and the fair market value of the
shares issued and, as such, a current tax expense of $2,888 was
recorded. An increase to paid in capital was reflected for the face
value of the bonds converted, plus the difference in the fair market
value of the shares issued in the Exchange and the fair market value of
the shares that would have been issued under the terms of the original
conversion feature for a total of $63,564.
(Continued)
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During January 1997, the Company completed additional exchanges
totaling $21,479 of its $65,000 subordinated debentures for 2,860,925
shares of Class A common stock (Additional Exchanges). As a result of
the Additional Exchanges, similar to that of the Exchange described
earlier, a charge of $12,686, tax expense of $158 and an increase to
paid in capital of $33,592, was recorded.
During fiscal 1999, holders of the Company's 65,000 subordinated
debentures exercised their option to convert $1,249 debentures for
70,565 shares of the Company's Class A common stock. As a result, the
remaining subordinated debentures are $1,020 as of November 30, 1999.
On October 20, 1994, the Company issued a note payable for 500,000
Japanese yen (approximately $4,062 and $4,912 on November 30, 1998 and
1999, respectively) to finance its investment in TALK (Note 10). The
note is scheduled to be repaid on October 20, 2004 and bears interest
at 4.1%. The note can be repaid by cash payment or by giving 10,000
shares of its TALK investment to the lender. The lender has an option
to acquire 2,000 shares of TALK held by the Company in exchange for
releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. This note and the investment in TALK are
both denominated in Japanese yen, and, as such, the foreign currency
translation adjustments are recorded in accumulated other comprehensive
income. Any foreign currency translation adjustment resulting from the
note will be recorded in other comprehensive income to the extent that
the adjustment is less than or equal to the adjustment from the
translation of the investment in TALK. Any portion of the adjustment
from the translation of the note that exceeds the adjustment from the
translation of the investment in TALK is a transaction gain or loss
that will be included in earnings.
Maturities on long-term debt for the next five fiscal years are as
follows:
2000 -
2001 $1,020
2002 -
2003 -
2004 $4,912
======
(Continued)
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes
The components of income (loss) before the provision for income taxes
are as follows:
November 30,
-------------
1997 1998 1999
------- -------- -------
Domestic Operations $42,613 $ 5,380 $42,668
Foreign Operations 829 (1,579) 55
------- -------- -------
$43,442 $ 3,801 $42,723
======= ======== =======
Total income tax expense (benefit) was allocated as follows:
November 30,
------------
1997 1998 1999
------- ------- ------
Statement of income $22,420 $ 829 $ 15,477
Stockholders' equity:
Unrealized holding gain (loss) on investment
securities recognized for financial
reporting purposes 1,174 (4,928) 3,540
Unrealized holding gain on equity collar
recognized for financial reporting
purposes 473 (1,043) -
Income tax benefit of employee stock option
exercises -- -- (1,101)
------- ------- --------
Total income tax expense benefit $24 067 $(5,142) $ 17,916
======= ======= ========
(Continued)
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The provision for (benefit of) income taxes is comprised of:
Federal Foreign State Total
1997:
Current $ 23,316 $ 1,159 $ 1,068 $ 25,543
Deferred (2,845) -- (278) (3,123)
-------- ------- -------- --------
$ 20,471 $ 1,159 $ 790 $ 22,420
======== ======= ======== ========
1998:
Current $ 1,499 $ (119) $ 351 $ 1,731
Deferred (819) -- (83) (902)
-------- ------- -------- --------
$ 680 $ (119) $ 268 $ 829
======== ======= ======== ========
1999:
Current $ 14,565 $ (116) $ 1,593 $ 16,042
Deferred (118) (431) (16) (565)
-------- ------- -------- --------
$ 14,447 $ (547) $ 1,577 $ 15,477
======== ======= ======== ========
A reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes is as follows:
November 30,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- --------------------
Tax provision at Federal
statutory rates $ 15,205 35.0% $ 1,292 34.0% $ 14,953 35.0%
Expense relating to exchange
of subordinated debentures 4,578 10.5 -- -- -- --
Undistributed income (losses)
from equity investments 123 0.3 287 7.6 (373) (0.9)
State income taxes, net of
Federal benefit 1,637 3.8 260 6.8 1,025 2.4
Decrease in beginning-of-the-
year balance of the
valuation allowance for
deferred tax assets (180) (0.4) (340) (8.9) (989) (2.3)
Foreign tax rate differential 323 0.7 (82) (2.2) 38 0.1
Benefit of concluded
examination -- -- (350) (9.2) -- --
Other, net 734 1.7 (238) (6.3) 823 1.9
-------- ----- ------- ------- -------- ------
$ 22,420 51.6% $ 829 21.8% $ 15,477 36.2%
======== ===== ======= ======= ======== =====
(Continued)
58
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The significant components of deferred income tax recovery for the
years ended November 30, 1999 and 1998 are as follows:
November 30,
1998 1999
----- -----
Deferred tax (recovery) expense (exclusive of the effect
of other components listed below) $(562) $ 424
Decrease in beginning-of-the-year balance of the valuation
allowance for deferred tax assets (340) (989)
----- -----
$(902) $(565)
===== =====
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 1999
---- ----
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and cellular deactivations $ 1,210 $ 1,977
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 325 617
Inventory, principally due to valuation reserve 1,882 1,702
Accrual for future warranty costs 563 615
Plant, equipment and certain intangibles, principally
due to depreciation and amortization 804 957
Net operating loss carryforwards, state and foreign 2,338 1,327
Equity collar 570 570
Accrued liabilities not currently deductible 346 348
Other 405 121
------- -------
Total gross deferred tax assets 8,443 8,234
Less: valuation allowance (2,373) (1,384)
------- -------
Net deferred tax assets 6,070 6,850
------- -------
Deferred tax liabilities:
Investment securities (3,577) (6,323)
Issuance of subsidiary shares -- (1,432)
------- -------
Total gross deferred tax liabilities (3,577) (7,755)
------- -------
Net deferred tax asset (liability) $ 2,493 $ (905)
======= =======
(Continued)
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The net change in the total valuation allowance for the year
ended November 30, 1999 was a decrease of $989. A valuation allowance
is provided when it is more likely than not that some portion, or all,
of the deferred tax assets will not be realized. The Company has
established valuation allowances primarily for net operating loss
carryforwards in certain states and foreign countries as well as other
deferred tax assets in foreign countries. Based on the Company's
ability to carry back future reversals of deferred tax assets to taxes
paid in current and prior years and the Company's historical taxable
income record, adjusted for unusual items, management believes it is
more likely than not that the Company will realize the benefit of the
net deferred tax assets existing at November 30, 1999. Further,
management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will
generate any earnings or any specific level of continuing earnings in
the future. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
At November 30, 1999, the Company had net operating loss carryforwards
for state and foreign income tax purposes of approximately $7,250,
which are available to offset future state and foreign taxable income,
if any, which will expire through the year ended November 30, 2018.
(14) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Per Liquidation
Security Value Shares Authorized Outstanding Share Rights
-------- ----- ----------------------- ------------------------- ------ -----------
November 30, November 30,
------------------------ -------------------------
1998 1999 1998 1999
--------- ---------- --------- ----------
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - $50 per share
Series Preferred Stock 0.01 1,500,000 1,500,000 - - - -
Ratably with
Class A Common Stock 0.01 30,000,000 30,000,000 16,760,518 17,206,909 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 Class B
common stock may, at any time, be converted into one share of Class A common
stock.
(Continued)
60
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned by
Shintom and have preference over both classes of common stock in the event
of liquidation or dissolution.
The Company's Board of Directors approved the repurchase of 1,563,000
shares of the Company's Class A common stock in the open market under a
share repurchase program (the Program). As of November 30, 1998 and 1999,
498,055 and 621,037 shares, respectively, were repurchased under the
Program at an average price of $7.21 and $7.20 per share, respectively, for
an aggregate amount of $3,589 and $4,471, respectively.
As of November 30, 1998 and 1999, 1,963,480 and 1,598,930 shares of the
Company's Class A common stock are reserved for issuance under the Company's
Stock Option and Restricted Stock Plans and 4,167,117 and 3,946,522 for all
convertible securities and warrants outstanding at November 30, 1998 and
1999 (Notes 12 and 15).
Undistributed earnings from equity investments included in retained earnings
amounted to $2,324 and $4,219 at November 30, 1998 and 1999, respectively.
(15) Stock-Based Compensation and Stock Warrants
(a) Stock Options
The Company has stock option plans under which employees and
non-employee directors may be granted incentive stock options
(ISO's) and non-qualified stock options (NQSO's) to purchase shares
of Class A common stock. Under the plans, the exercise price of the
ISO's will not be less than the market value of the Company's Class
A common stock or 110% of the market value of the Company's Class A
common stock on the date of grant. The exercise price of the NQSO's
may not be less than 50% of the market value of the Company's Class
A common stock on the date of grant. The options must be
exercisable no later than ten years after the date of grant. The
vesting requirements are determined by the Board of Directors at
the time of grant.
Compensation expense is recorded with respect to the options based
upon the quoted market value of the shares and the exercise
provisions at the date of grant. The Company recorded $31 in
compensation expense for the year ended November 30, 1999. No
compensation expense was recorded for the years ended November 30,
1997 and 1998.
(Continued)
61
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, 1996 548,750 8.78
Granted 1,260,000 7.09
Exercised - -
Canceled (109,000) 10.95
---------- -----
Outstanding at
November 30, 1997 1,699,750 7.38
Granted 10,000 4.63
Exercised - -
Canceled (16,000) 8.79
---------- ------
Outstanding at
November 30, 1998 1,693,750 7.33
Granted 1,542,500 14.98
Exercised (364,550) 7.64
Canceled (500) 13.00
---------- -----
Outstanding at
November 30, 1999 2,871,200 11.41
========== =====
Options exercisable, 1,181,200 7.51
========== ======
November 30, 1999
At November 30, 1998 and 1999, 207,302 and 184,775 shares,
respectively, were available for future grants under the terms
of these plans.
The per share weighted average fair value of stock options
granted during 1997 was $5.73 on the date of the grant using
the Black-Scholes option-pricing model with the following
weighted average assumptions: risk free interest rate of
6.49%, expected dividend yield of 0.0%, expected stock
volatility of 70% and an expected option life of 10 years.
The 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.
(Continued)
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The per share weighted average fair value of stock options
granted during 1999 was $9.83 on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions: risk free interest rate of 5.9%, expected
dividend yield of 0.0%, expected stock volatility of 60% and
an expected option life of 10 years.
The 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:
1997 1998 1999
---- ---- ----
Net income:
As reported $ 21,022 $ 2,972 $ 27,246
Pro-forma 18,786 1,336 25,494
Net income per common share (basic):
As reported $ 1.11$ 0.16$ 1.43
Pro-forma 0.99 0.07 1.33
Net income per common share (diluted):
As reported $ 1.09$ 0.16$ 1.39
Pro-forma 0.97 0.07 1.30
Pro-forma net income reflect only options granted after
November 30, 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement 123 is not
reflected in the pro-forma net income amounts presented above
because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior
to December 1, 1995 was not considered. Therefore, the
pro-forma net income may not be representative of the effects
on reported net income for future years.
(Continued)
61
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Summarized information about stock options outstanding as of
November 30, 1999 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 1,259,700 7.12 7.22 1,059,700 7.02
$8.01 - 13.00 121,500 11.77 5.20 121,500 11.77
$13.01 - 15.00 1,490,000 15.00 9.78 -- --
(b) Restricted Stock Plan
The Company has restricted stock plans under which key
employees and directors may be awarded restricted stock. Total
restricted stock outstanding, granted under these plans, at
November 30, 1998 and 1999 was 77,871 and 13,750,
respectively. Awards under the restricted stock plan may be
performance accelerated shares or performance- restricted
shares. During fiscal 1999, 32,222 performance-accelerated
shares and 12,103 performance restricted shares were granted.
No performance accelerated shares or performance restricted
shares were granted in 1997 or 1998. During fiscal 1999,
19,796 performance restricted shares lapsed. No performance
accelerated shares or performance restricted shares lapsed in
fiscal years 1997 or 1998.
Compensation expense for the performance accelerated shares is
recorded based upon the quoted market value of the shares on
the date of grant. Compensation expense for the performance
restricted shares is recorded based upon the quoted market
value of the shares on the balance sheet date. Compensation
expense (income) for these grants for the years ended November
30, 1997, 1998 and 1999 were $135, $(23) and $127,
respectively.
(c) Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee Stock
Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the Company's
Class A common stock through payroll deductions up to 15% of
base salary compensation. Amounts withheld are used to
purchase Class A common stock on the open market. The cost to
the employee for the shares is equal to 85% of the fair market
value of the shares on or about the last business day of each
month.
(Continued)
62
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company bears the cost of the remaining 15 % of the fair
market value of the shares as well as any broker fees. This
Plan provides for purchases of up to 1,000,000 shares.
(d) Stock Warrants
In December 1993, the Company granted warrants to purchase
50,000 shares of Class A Common Stock at a purchase price of
$14.375 per share as part of the acquisition of H & H Eastern
Distributors, Inc. During fiscal 1999, the warrants were
surrendered for cancellation, and the holder agreed to waive
registration rights in exchange for $5.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of Class A
common stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial
holders as of June 3, 1994, of approximately $57,600 of the
Company's subordinated debentures in exchange for a release of
any claims such holders may have against the Company, its
agents, directors and employees in connection with their
investment in the subordinated debentures. As a result, the
Company incurred a warrant expense of $2,900 and recorded a
corresponding increase to paid-in capital. The warrants are
not exercisable after March 15, 2001, unless sooner terminated
under certain circumstances. John J. Shalam, Chief Executive
Officer of the Company, has granted the Company an option to
purchase 1,668,875 shares of Class A common stock from his
personal holdings. The exercise price of this option is $7
1/8, plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains
to Mr. Shalam. During 1998, the Company purchased
approximately 1,324,075 of these warrants at a price of $1.30
per warrant, pursuant to the terms of a self-tender offer. In
connection with this purchase, the option to purchase
1,324,075 shares from John J. Shalam's personal holdings was
canceled. As of November 30, 1999, 344,800 remaining warrants
are outstanding.
During fiscal 1997, the Company granted warrants to purchase
100,000 shares of Class A Common Stock, which have been
reserved, at $6.75 per share. The warrants, which are
exercisable in whole or in part at the discretion of the
holder, expire on January 29, 2002. During the year ended
November 30, 1999, all of the warrants were exercised.
(e) Profit Sharing Plans
The Company has established two non-contributory employee
profit sharing plans for the benefit of its eligible employees
in the United States and Canada. The plans are administered by
trustees appointed by the Company. A contribution of $500,
$150 and $800 was made by the Company to the United States
plan in fiscal 1997, 1998 and 1999, respectively.
Contributions required by law to be made for eligible
employees in Canada were not material.
(Continued)
63
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Accumulated Other Comprehensive Income
The change in net unrealized gain (loss) on marketable securities of
$1,917, $(8,040) and $5,775 for the years ended November 30, 1997, 1998
and 1999 is net of tax of $1,174, $(4,928) and $3,540, respectively.
Reclassification adjustments of $23,232, $488 and $2,171 are included
in the net unrealized gain (loss) on marketable securities for the
years ended November 30, 1997, 1998 and 1999, respectively.
The currency translation adjustments are not adjusted for income taxes
as they relate to indefinite investments in non-U.S. subsidiaries and
equity investments.
(17) Net Income Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted earnings per common share is as follows:
For the Years Ended
November 30,
1997 1998 1999
---- ---- ----
Net income (numerator for net income per
common share, basic) $ 21,022 $ 2,972 $ 27,246
Interest on 6 1/4% convertible subordinated
debentures, net of tax 185 -- 84
----------- ----------- -----------
Adjusted net income (numerator for net income
per common share, diluted) $ 21,207 $ 2,972 $ 27,330
=========== =========== ===========
Weighted average common shares (denominator
for net income per common share, basic) 18,948,356 19,134,529 19,100,047
Effect of dilutive securities:
Employee stock options and stock warrants 237,360 -- 430,560
Employee stock grants 70,845 -- 62,175
Convertible debentures 251,571 -- 110,551
----------- ----------- -----------
Weighted average common and potential common
shares outstanding (denominator for net income
per common share, diluted) 19,508,132 19,134,529 19,703,333
=========== =========== ===========
Net income per common share, basic $ 1.11 $ 0.16 $ 1.43
=========== =========== ===========
Net income per common share, diluted $ 1.09 $ 0.16 $ 1.39
=========== =========== ===========
(Continued)
64
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Employee stock options and stock warrants totaling 1,908,438 and
2,779,363 for the years ended November 30, 1997 and 1998, respectively,
were not included in the net income per share calculation because their
effect would have been anti-dilutive. There were no anti-dilutive stock
options and stock warrants for the year ended November 30, 1999.
(18) Lease Obligations
During 1998, the Company entered into a 30-year lease for a building
with its principal stockholder and chief executive officer. A
significant portion of the lease payments, as required under the lease
agreement, consists of the debt service payments required to be made by
the principal stockholder in connection with the financing of the
construction of the building. For financial reporting purposes, the
lease has been classified as a capital lease, and, accordingly, a
building and the related obligation of approximately $6,340 was
recorded (Note 9). In connection with the capital lease, the Company
paid certain construction costs on behalf of its principal stockholder
and chief executive officer in the amount of $1,301. The amount is
payable to the Company with 8% interest.
During 1998, the Company entered into a sale/lease back transaction
with its principal stockholder and chief executive officer for $2,100
of equipment. No gain or loss on the transaction was recorded as the
book value of the equipment equaled the fair market value. The lease is
for five years with monthly rental payments of $34. The lease has been
classified as an operating lease.
At November 30, 1999, the Company was obligated under non-cancelable
capital and operating leases for equipment and warehouse facilities for
minimum annual rental payments as follows:
Capital Operating
Lease Leases
2000 $ 522 $ 1,955
2001 530 1,473
2002 553 1,225
2003 554 820
2004 553 81
Thereafter 13,099 658
------- ----------
Total minimum lease payments 15,811 $ 6,212
========
Less: amount representing interest 9,513
--------
Present value of net minimum lease payments 6,298
Less: current installments 19
----------
Long-term obligation $ 6,279
=======
Rental expense for the above-mentioned operating lease agreements and
other leases on a month- to-month basis approximated $2,516, $2,563 and
$2,552 for the years ended November 30, 1997, 1998 and 1999,
respectively.
The Company leases certain facilities and equipment from its principal
stockholder and several officers. Rentals for such leases are
considered by management of the Company to approximate prevailing
market rates. At November 30, 1999, minimum annual rental payments on
these related party leases, in addition to the capital lease payments,
which are included in the above table, are as follows:
2000 $960
2001 941
2002 941
2003 667
====
(19) Financial Instruments
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
At November 30, 1998, the Company had contracts to
exchange foreign currencies in the form of forward
exchange contracts in the amount of $5,352. These
contracts have varying maturities with none exceeding
one year as of November 30, 1998. At November 30,
1999, the Company had no contracts to exchange
foreign currencies in the form of forward exchange
contracts. For the years ended November 30, 1997,
1998 and 1999, gains and losses on foreign currency
transactions which were not hedged were not material.
For the years ended November 30, 1997, 1998 and 1999,
there were no gains or losses as a result of
terminating hedges prior to the transaction date.
(2) Equity Collar
The Company entered into an equity collar on
September 26, 1997 to hedge some of the unrealized
gains associated with its investment in CellStar
(Note 8). The equity collar provided that on
September 26, 1998, the Company can put 100,000
shares of CellStar to the counter party to the equity
collar (the bank) at $38 per share in exchange for
the bank being able to call the 100,000 shares of
CellStar at $51 per share. The Company has designated
this equity collar as a hedge of 100,000 of its
shares in CellStar being that it provides the Company
with protection against the market value of CellStar
shares falling
(Continued)
65
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
below $38. Given the high correlation of the changes
in the market value of the item being hedged to the
item underlying the equity collar, the Company
applied hedge accounting for this equity collar. The
equity collar is recorded on the balance sheet at
fair value with gains and losses on the equity collar
reflected as a separate component of equity. During
1998, the Company sold its equity collar for $1,499.
The transaction resulted in a net gain on hedge of
available-for-sale securities of $929 which is
reflected as a separate component of stockholders'
equity. The net gain on the equity collar will be
reflected in the consolidated statements of income
upon sale of the CellStar shares.
The Company is exposed to credit losses in the event of
nonperformance by the counter parties to its forward exchange
contracts. The Company anticipates, however, that counter
parties will be able to fully satisfy their obligations under
the contracts. The Company does not obtain collateral to
support financial instruments, but monitors the credit
standing of the counter parties.
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Communications Sdn. Bhd. and Audiovox
Venezuela (Note 11(a)). The Company had open commercial
letters of credit of approximately $24,914 and $41,173, of
which $20,576 and $28,727 were accrued for purchases incurred
as of November 30, 1998 and 1999, respectively. The terms of
these letters of credit are all less than one year. No
material loss is anticipated due to nonperformance by the
counter parties to these agreements. The fair value of these
open commercial and standby letters of credit is estimated to
be the same as the contract values based on the nature of the
fee arrangements with the issuing banks.
The Company is a party to joint and several guarantees on
behalf of G.L.M. and Quintex West which aggregate $475. There
is no market for these guarantees and they were issued without
explicit cost. Therefore, it is not practicable to establish
its fair value.
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally
in the United States and Canada and consist of, among others,
cellular carriers and service providers, distributors, agents,
mass merchandisers, warehouse clubs and independent retailers.
(Continued)
66
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At November 30, 1998, three customers, which included two
cellular carrier and service providers and a Bell Operating
Company accounted for approximately 18.0%, 13.8% and 13.5%,
respectively, of accounts receivable. At November 30, 1999,
three customers, which included two cellular carrier and
service providers and a Bell Operating Company accounted for
approximately 15.8%, 15.5% and 11.1%, respectively, of
accounts receivable.
During the year ended November 30, 1997, two customers
accounted for approximately 11.3% and 9.0%, respectively, of
the Company's 1997 sales. During the year ended November 30,
1998, two customers accounted for approximately 18.3% and
14.9%, respectively, of the Company's 1998 sales. During the
year ended November 30, 1999, three customers accounted for
approximately 19.6%, 14.9% and 12.7%, respectively, of the
Company's 1999 sales.
The Company generally grants credit based upon analyses of its
customers' financial position and previously established
buying and payment patterns. The Company establishes
collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon
management's credit evaluation.
A portion of the Company's customer base may be susceptible to
downturns in the retail economy, particularly in the consumer
electronics industry. Additionally, customers specializing in
certain automotive sound, security and accessory products may
be impacted by fluctuations in automotive sales. A relatively
small number of the Company's significant customers are deemed
to be highly leveraged.
(d) Fair Value
The carrying value of all financial instruments classified as
a current asset or liability is deemed to approximate fair
value because of the short maturity of these instruments. The
estimated fair value of the Company's financial instruments
are as follows:
November 30, 1998 November 30, 1999
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Investment securities $17,089 $17,089 $ 30,401 $ 30,401
Long-term obligations $23,831 $24,202 $107,939 $109,261
Forward exchange contract -- $ 5,352 -- --
obligation (derivative)
(Continued)
67
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices and conversion features at the reporting
date (Note 8).
Long-Term Obligations
The carrying amount of bank debt under the Company's revolving
credit agreement approximates fair value because the interest
rate on the bank debt is reset every quarter to reflect
current market rates.. With respect to the subordinated
debentures, fair values are based on quoted market price.
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based
upon exchange rates at November 30, 1999 and 1998 as the
contracts are short term.
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(20) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment markets
wireless handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers. The Electronics segment sells autosound, mobile electronics
and consumer electronics, primarily to mass merchants, power retailers,
specialty retailers, new car dealers, original equipment manufacturers
(OEM), independent installers of automotive accessories and the U.S.
military.
The Company evaluates performance of the segments based upon income
before provision for income taxes. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 1). The Company allocates interest and
certain shared expenses, including treasury, legal and human resources,
to the segments based upon estimated usage. Intersegment sales are
reflected at cost and have been eliminated
(Continued)
68
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
in consolidation. A royalty fee on the intersegment sales, which is
eliminated in consolidation, is recorded by the segments and included
in other income (expense). Certain items are maintained at the
Company's corporate headquarters (Corporate) and are not allocated to
the segments. They primarily include costs associated with accounting
and certain executive officer salaries and bonuses and certain items
including investment securities, equity investments, deferred income
taxes, certain portions of excess cost over fair value of assets
acquired, jointly-used fixed assets and debt. The jointly-used fixed
assets are the Company's management information systems, which is
jointly used by the Wireless and Electronics segments and Corporate. A
portion of the management information systems costs, including
depreciation and amortization expense, are allocated to the segments
based upon estimates made by management. Segment identifiable assets
are those which are directly used in or identified to segment
operations.
During the year ended November 30, 1997, one customer of the Wireless
segment accounted for approximately 11.3% of the Company's 1997 sales.
During the year ended November 30, 1998, two customers of the Wireless
segment accounting for approximately 18.3% and 14.9% of the Company's
1998 sales. During the year ended November 30, 1999, three customers of
the Wireless segment accounted for approximately 19.6%, 14.9% and 12.7%
of the Company's 1999 sales. No customers in the Electronics segment
exceeded 10% of the consolidated sales in fiscal 1997, 1998 or 1999.
Consolidated
Wireless Electronics Corporate Totals
1997
Net sales $444,400 $ 193,910 $ 772 $639,082
Intersegment sales
(purchases), net 6 (6) -- --
Interest income 46 31 1,448 1,525
Interest expense 4,551 3,169 (5,546) 2,174
Depreciation and amortization 775 630 498 1,903
Debt conversion expense -- -- 12,686 12,686
Income (loss) before provision
for income tax 11,582 8,002 23,858 43,442
Total assets 138,136 86,632 65,059 289,827
Non-cash items:
Provision for bad debt
expense 354 934 12 1,300
Deferred income tax benefit -- -- 3,123 3,123
Minority interest -- -- 1,623 1,623
Capital expenditures 1,340 744 1,902 3,986
(Continued)
69
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Consolidated
Wireless Electronics Corporate Totals
1998
Net sales 441,590 175,105 -- 616,695
Intersegment sales
(purchases), net (1,125) 1,125 -- --
Interest income 215 165 517 897
Interest expense 5,536 4,068 (5,173) 4,431
Depreciation and amortization 877 570 1,024 2,471
Income (loss) before provision
for income tax (1,786) 5,937 (350) 3,801
Total assets 138,136 79,597 61,946 279,679
Non-cash items:
Provision for bad debt
expense 316 533 (268) 581
Deferred income tax benefit -- -- 902 902
Minority interest -- -- (320) (320)
Capital expenditures 1,003 475 3,454 4,932
1999
Net sales 929,303 230,234 -- 1,159,537
Intersegment sales
(purchases), net (1,149) 1,449 -- --
Interest income 65 80 793 938
Interest expense 6,098 3,268 (5,307) 4,059
Depreciation and amortization 987 748 1,553 3,288
Income (loss) before provision
for income tax 31,255 11,296 172 42,723
Total assets 256,954 122,163 96,229 475,346
Non-cash items:
Provision for bad debt
expense 1,914 705 636 3,255
Deferred income tax benefit -- -- 565 565
Minority interest -- -- (220) (220)
Capital expenditures 1,747 1,211 1,864 4,822
(Continued)
70
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net sales and long-lived assets by location for the years ended November
30, 1997, 1998 and 1999 were as follows.
Net Sales Long-Lived Assets
----------------------------- -------------------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
United States $499,417 $ 531,307 $1,059,536 $47,694 $50,469 $68,126
Canada 18,323 15,789 23,146 -- -- --
Argentina 39,832 27,354 22,831 -- -- --
Peru 7,426 10,514 9,913 -- -- --
Portugal 14,028 2,024 -- -- -- --
Malaysia 31,660 7,592 7,780 1,903 1,348 1,275
Venezuela 10,867 14,358 22,853 696 1,366 1,387
Mexico, Central
America and
Caribbean 10,493 7,289 10,568 -- -- --
Other foreign
countries 7,036 468 2,910 -- -- --
-------- --------- ---------- ------- ------- -------
Total $639,082 $ 616,695 $1,159,537 $50,293 $53,183 $70,788
======== ========= ========== ======= ======= =======
(21) Contingencies
The Company is a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion,
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not covered by such insurance, will not have a material adverse
effect on the Company's consolidated financial position.
The Company has guaranteed certain obligations of its equity
investments and has established standby letters of credit to guarantee
the bank obligations of Audiovox Communications Sdn. Bhd. and Audiovox
Venezuela (Note 19(b)).
(22) Subsequent Event
The Company is anticipating selling 2,000,000 shares of its Class A
Common Stock to the public during the first quarter of fiscal 2000. In
connection with this offering, the Company has recorded $600 in
deferred costs which have been included in prepaid expenses and other
assets on the accompanying consolidated balance sheet at November 30,
1999.
71
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" and Compliance with Section 16(a) of the Exchange Act"
of the Company's Proxy Statement to be dated February 28, 2000, 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 "Certain
Relationships and Related Party Transactions" of the Proxy Statement.
PART IV
Item 14 - Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
(a) (1)
The following 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 1999.
Consolidated Statements of Income of Audiovox Corporation and Subsidiaries for
the Years Ended November 30, 1997, 1998 and 1999.
Consolidated Statements of Stockholders' Equity of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1997, 1998 and 1999.
72
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1997, 1998 and 1999.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
1997, 1998 and 1999.
Independent Auditors' Report on Financial Statement Schedules
Schedule Page
Number Description Number
------ ----------- ------
II Valuation and Qualifying Accounts 81
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
73
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of January 13, 2000 we reported on the consolidated balance
sheets of Audiovox Corporation and subsidiaries as of November 30, 1998 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended November 30,
1999, which are included in the Company's 1999 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
schedule in the 1999 annual report on Form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
s/KPMG LLP
-----------
KPMG LLP
Melville, New York
January 13, 2000
74
(3) Exhibits
See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
During the fourth quarter, the Registrant filed one report on Form 8-K.
The Form 8-K, dated July 28, 1999 and filed October 27, 1999, reported
that the Company had entered into the Fourth Amended and Restated
Credit Agreement (the Amendment).
(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 The Fourth Amended and Restated Credit Agreement among
the Registrant and the several banks and financial
institutions dated as of July 28, 1999 (incorporated by
reference to the Company's Form 8-K filed via EDGAR on
October 27, 1999).
10.2 First Amendment, dated as of October 13, 1999, to the Fourth 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 October 27, 1999).
10.3 Second Amendment, dated as of December 20, 1999, to the
Fourth 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 January 13, 2000).
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.
75
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
February 1, 2000 BY:s/John J. Shalam
----------------
John J. Shalam, President
and Chief Executive Officer
76
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 February 1, 2000
- ------------------------------
John J. Shalam and Director
Executive Vice President and
s/Philip Christopher Director February 1, 2000
- ------------------------------
Philip Christopher
Senior Vice President,
Chief Financial Officer (Principal
s/Charles M. Stoehr Financial and Accounting February 1, 2000
- ------------------------------
Charles M. Stoehr Officer) and Director
s/Patrick M. Lavelle Director February 1, 2000
- ------------------------------
Patrick M. Lavelle
s/Ann Boutcher Director February 1, 2000
- ------------------------------
Ann Boutcher
s/Richard A. Maddia Director February 1, 2000
- ------------------------------
Richard A. Maddia
s/Paul C. Kreuch, Jr. Director February 1, 2000
- ------------------------------
Paul C. Kreuch, Jr.
s/Dennis McManus Director February 1, 2000
- ------------------------------
Dennis McManus
77
Schedule II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1997, 1998 and 1999
(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
----------- --------- ---------- --------- ---------- --------
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
======= ======= ======== ======== =======
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
======= ======= ======== ======== =======
1999
Allowance for doubtful accounts $ 2,944 $ 3,342 -- $ (641) $ 5,645
Cash discount allowances 170 49 -- -- 219
Co-op advertising and volume
rebate allowances 8,137 12,122 -- (9,122) 11,137
Allowance for cellular deactivations 875 386 -- -- 1,261
Reserve for warranties and product
repair costs 4,085 4,486 -- (800) 7,771
------- ------- -------- -------- -------
$16,211 $20,385 -- $(10,563) $26,033
======= ======= ======= ========= =======
78