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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 [fee required]
For the fiscal year ended November 30, 1994
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-7750
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
Class A Common Stock $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Sec 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
(X)
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $23,418,491 (based upon closing
price on the American Stock Exchange, Inc. on February 22, 1995).
The number of shares outstanding of each of the registrant's
classes of common stock, as of February 22, 1995 was
Class Outstanding
Class A Common Stock $.01 par value 6,777,788
Class B Common Stock $.01 par value 2,260,954
PART I
Item 1 - Business
General
Audiovox Corporation, together with its operating
subsidiaries (collectively, the "Company"), markets and supplies,
under its own name or trade names, a diverse line of aftermarket
products which include automotive sound equipment, cellular
telephones, automotive accessories and consumer electronic
products. Such products are designed primarily for installation
in cars, trucks and vans after they have left the factory.
The Company's products are sold through a national
distribution network covering the United States, Canada and
overseas. Sales are made directly and through approximately 900
independent distributors to new car dealers, cellular telephone
accounts, cellular service providers, regional Bell Operating
Companies ("BOCs"), mass merchandisers, catalogue showrooms,
original equipment manufacturers ("OEMs"), military Army and Air
Force Exchange Systems ("AAFES"), autosound specialists and
retailers. The Company also sells to, and installs cellular
mobile telephones for, consumers from Company-owned retail sales
and service locations which generally operate under the name
"Quintex."
The Company's products may be broadly grouped into four
major categories: automotive sound equipment, cellular
telephones, automotive accessories and consumer electronic
products. These categories represent different product lines
rather than separate reporting segments.
The Company was incorporated in Delaware on April 10, 1987,
as successor to the business of Audiovox Corp., a New York
corporation founded in 1960 (the "predecessor company") by John
J. Shalam, the Company's President, Chief Executive Officer and
controlling stockholder. Unless the context otherwise requires,
or as otherwise indicated, references herein to the "Company"
include the Company, its wholly-owned and majority-owned
operating subsidiaries.
On February 28, 1992, the Company filed merger documents
with the Secretary of State of Delaware and the Secretary of
State of the state of incorporation of each of the effected
subsidiaries which provided that these subsidiaries would be
merged with the Company. The merger documents provided that the
merger was deemed effective February 28, 1992. The following
subsidiaries were merged with the Company: Audiovox Dealer
Services, Inc., Audiovox Florida Corp., Audiovox Midwest Corp.,
Audiovox Southeast Corp., Audiovox South Corp., Audiovox West
Corporation, Audiovox Kentucky Corp., Audiovox Carolina Inc.,
Audiovox Mid-Atlantic Inc., Marymol Investment Company, Inc.,
Audiovox Security Corp., Audiovox Northeast Corp. and Audiovox
OEM Corp. The Company also merged certain of its subsidiaries
into other wholly-owned subsidiaries (to wit, Audiovox Suffolk
Corp. and National Clearing Services Corp. were merged with
Quintex Communications Corp. and Audiovox Tidewater Corp. was
merged with Quintex Mobile Communications Corp.).
Trademarks
The Company markets products under several trademarks,
including Audiovox(R), Custom SPS(R), Prestige(R), Pursuit(R),
Minivox(TM), Minivox Lite(R) and The Protector(R). The Company
believes that these trademarks are recognized by customers and
are therefore significant in marketing its products. Trademarks
are registered for a period of ten years and such registration is
renewable for subsequent ten-year periods.
Distribution and Marketing
Cellular and Non-Cellular Wholesale
The Company markets products on a wholesale basis to a
variety of customers through its direct sales force and
independent sales representatives. During the fiscal year ended
November 30, 1994, the Company sold its products to approximately
3,300 wholesale accounts, including the BOCs, other cellular
carriers and their respective agents, mass merchandise chain
stores, specialty installers, distributors and car dealers, OEMs
and AAFES.
The Company's five largest wholesale customers (excluding
joint ventures), who, in the aggregate, accounted for 12.4% of
the Company's net sales for the fiscal year ended November 30,
1994, are Cellular Communications, Inc. ("Cellular One"), Bell
Atlantic Mobile Systems, Nynex Mobile Communications Company, and
Vanguard Cellular Systems, all of whom are cellular carriers, and
K-Mart, a non-cellular mass merchant. None of these customers
individually accounted for more than 3.6% of the Company's net
sales for such period. In addition, the Company also sells its
non-cellular products to mass merchants such as Walmart Stores,
Inc., warehouse clubs including Price/Costco, Inc. and OEMs such
as Chrysler of Canada and Navistar International Corporation.
The Company uses several techniques to promote its products
to wholesale customers, including trade and customer advertising,
attendance at trade shows and direct personal contact by Company
sales representatives. In addition, the Company typically
assists cellular carriers in the conduct of their marketing
campaigns (including the scripting of telemarketing
presentations), conducts cooperative advertising campaigns,
develops and prints custom sales literature and conducts in-house
training programs for cellular carriers and their agents.
The Company believes that the use of such techniques, along
with the provision of warranty services and other support
programs, enhances its strategy of providing value-added
marketing and, thus, permits the Company to increase Audiovox(R)
brand awareness among wholesale customers while, at the same
time, promoting sales of the Company's products through to end
users.
The Company's wholesale policy is to ship its products
within 24 hours of a requested shipment date from public
warehouses in Norfolk, VA and Sparks, NV and from leased
facilities located in Hauppauge, NY, Toronto, Canada and Los
Angeles, CA.
Retail
As of November 30, 1994, the Company operated 91 retail
outlets and licensed its trade name to 20 additional retail
outlets in selected markets in the United States through which it
markets cellular telephones and related products to retail
customers under the names Audiovox(R), American Radio(R),
Quintex(R) and H & H Eastern Distributors ("H&H"). The Company
intends to gradually phase out the use of such multiple names and
rename all of its retail outlets with one uniform trade name. In
addition to Audiovox products, these outlets sell competitive
products such as Motorola, Nokia and Uniden.
The Company's retail outlets typically generate revenue from
three sources: (i) sale of cellular telephones and related
products, (ii) activation commissions paid to the Company by
cellular telephone carriers when a customer initially subscribes
for cellular service and (iii) monthly residual fees. The amount
of the activation commissions paid by a cellular telephone
carrier is based upon various service plans and promotional
marketing programs offered by the particular cellular telephone
carrier. The monthly residual payment is based upon a percentage
of the customer's usage and is calculated based on the amount of
the cellular phone billings generated by the base of the
customers activated by the Company on a particular cellular
carrier's system. Under the Company's 20 licensee relationships,
the licensee receives the majority of the activation commissions,
and the Company retains the majority of the residual fees. The
Company's agreements with cellular carriers provide for a
reduction in, or elimination of, activation commissions in
certain circumstances if a cellular subscriber activated by the
Company deactivates service within a specified period. The
Company records a reserve to provide for the estimated liability
for return of activation commissions associated with such
deactivations. See Note 1(n) of Notes to Consolidated Financial
Statements. As a practical matter, the profitability of the
Company's retail operations is dependent on the Company
maintaining agency agreements with cellular carriers under which
it receives activation commissions and residual fees.
The Company's relationships with the cellular carriers are
governed by contracts that, in the aggregate, are material to the
continued generation of revenue and profit for the Company.
Pursuant to applicable contracts with cellular carriers, each of
the Company's retail outlets functions as a non-exclusive agent
engaged to solicit and sell cellular telephone service in certain
geographic areas and, while such contract is in effect and for a
specified period thereafter (which typically ranges from three
months to one year), may not act as a representative or agent for
any other carrier or reseller in those areas or solicit cellular
or wireless communication network services of the kind provided
by the cellular carrier in the areas where the Company acts as an
agent. The Company's retail operation is free, at any time after
the restricted period, to pursue an agreement with another
carrier who services a particular geographic area. At present,
each geographic area is serviced by two cellular carriers.
The Company currently has agency contracts with the
following carriers: Bell Atlantic Mobile Systems, Inc.,
BellSouth Mobility, Inc., Metro Mobile CTS of Columbia, Inc.
("Bell Atlantic"), GTE Mobilnet of the Southeast, Inc., Richmond
Cellular Telephone Company d/b/a Cellular One, New York Cellular
Geographic Service Area, Inc. ("NYNEX"), United States Cellular,
Air Touch and Contel Cellular, Inc. Dependant upon the terms of
the specific carrier contracts, which typically range in duration
from one year to five years, the Company's retail operation may
receive a one-time activation commission and periodic residual
fees. These carrier contracts provide the carrier with the right
to unilaterally restructure or revise activation commissions and
residual fees payable to the Company, and certain carriers have
exercised such right from time-to-time. Dependent upon the terms
of the specific carrier contract, the carrier may terminate the
agreement, with cause, upon prior notice to the Company.
Typically, the Company's right to be paid residual fees ceases
upon termination of an agency contract.
Equity Investments
The Company has from time-to-time, at both the wholesale and
retail levels, established joint ventures to market its products
to a specific market segment or geographic area. In entering
into a joint venture, the Company seeks to join forces with an
established distributor with an existing customer base and
knowledge of the Company's products. The Company seeks to blend
its financial and product resources with these local operations
to expand their collective distribution and marketing
capabilities. The Company believes that such joint ventures
provide a more cost effective method of focusing on specialized
markets. The Company does not participate in the day-to-day
management of these joint ventures.
As of November 30, 1994, the Company had a 20.88% ownership
interest in CellStar Corporation (CellStar)and a 33.33% ownership
interest in TALK Corporation (TALK) which holds world-wide
distribution rights for product manufactured by Shintom Co., Ltd.
(Shintom). These products include cellular telephones, video
recorders and players and automotive sound products. TALK has
granted Audiovox exclusive distribution rights on all wireless
personal communication products for all countries except Japan,
China, Thailand, and several small mid-eastern countries.
Additionally, the Company had 50% non-controlling ownership in
three other companies: Protector Corporation (Protector) which
acts as a distributor of chemical protection treatments and
Audiovox Specialty Markets Co., L.P. (ASM), which acts as a
distributor to specialized markets for RV's, van conversions,
televisions and other automotive sound, security and accessory
products, and Audiovox Pacific Pty., Limited (Audiovox Pacific)
which distributes cellular telephones and automotive sound and
security products in Australia and New Zealand.
Effective December 1, 1993, the Company acquired the
remaining 50% interest in H&H for a warrant to purchase 50,000
shares of Class A Common Stock. See Note 2 of Notes to
Consolidated Financial Statements.
Customers
No customer of the Company accounted for more than 10% of
the Company's net sales for fiscal 1994.
Suppliers
The Company purchases its cellular and non-cellular products
from manufacturers located in several Pacific Rim countries,
including Japan, China, Korea, Taiwan and Singapore, Europe and
in the United States. In selecting its vendors, the Company
considers quality, price, service, market conditions and
reputation. The Company maintains buying offices in Taiwan and
Korea to provide local supervision of supplier performance with
regard to, among other things, price negotiation, delivery and
quality control. The majority of the products sourced through
these foreign buying offices are non-cellular.
Since 1984, the principal supplier of the Company's
wholesale cellular telephones has been Toshiba Corporation
("Toshiba"), accounting for approximately 48%, 47% and 45% of the
total dollar amount of all product purchases by the Company,
during the fiscal years ended November 30, 1992, 1993 and 1994,
respectively. Beginning in 1994, Toshiba has competed directly
with the Company in the United States by marketing cellular
telephone products through Toshiba's United States distribution
subsidiary. Toshiba continues to sell products to the Company as
an original equipment customer. In order to expand its supply
channels and diversify its cellular product line, the Company has
begun to source cellular equipment from other manufacturers
including, Sanyo Electric Trading Co., Ltd ("Sanyo"), Samsung
Electronics Co., Ltd. ("Samsung"), Alcatel Radiotelephone
("Alcatel") and Shintom. Purchases of non-cellular products are
made primarily from other overseas suppliers including Hyundai
Electronics Inc. ("Hyundai"), Namsung Corporation ("Namsung") and
Nutek Corporation ("Nutek"). There are no agreements in effect
that require manufacturers to supply product to the Company. The
Company considers its relations with its suppliers to be good.
In addition, the Company believes that alternative sources of
supply are currently available.
Competition
The Company's wholesale business is highly competitive in
all its product lines, each competing with a number of well-
established companies that manufacture and sell products similar
to those of the Company. Additionally, the Custom SPS line
competes against factory-supplied radios. Service and price are
the major competitive factors in all product lines. The Company
believes that it is a leading supplier to the cellular market
primarily as a result of the performance of its products and the
service provided by its distribution network. The Company's
retail business is also highly competitive on a product basis.
In addition, since the Company acts as an agent for cellular
service providers, these cellular service providers must also
compete in their own markets which are also highly competitive.
The Company's retail performance is, therefore, also based on the
carriers' ability to compete.
Employees
At November 30, 1994, the Company employed approximately
1107 persons.
Executive Officers of the Registrant
The executive officers of the registrant are listed
below. All officers of the Company are elected by the Board of
Directors to serve one-year terms. There are no family
relationships among officers, or any arrangement or understanding
between any officer and any other person pursuant to which the
officer was selected. Unless otherwise indicated, positions
listed in the table have been held for more than five years.
Name Age Current Position
John J. Shalam . . . . 61 President and Chief
Executive Officer and
Director
Philip Christopher. . . 46 Executive Vice President
and Director
Charles M. Stoehr . . . 48 Senior Vice President,
Chief Financial Officer
and Director
Patrick Lavelle . . . . 43 Vice President and
Director
Martin Novick. . . . . 59 Vice President and
Director
Chris L. Johnson. . . . 43 Vice President, Secretary
Harold Bagwell . . . . 54 Vice President and
Director
Gordon Tucker. . . . . 43 Director
Irving Halevy. . . . . 78 Director
John J. Shalam has served as President and Chief Executive
Officer and a director of the Company since 1960. Mr. Shalam
also serves as president and a director of most of the Company's
operating subsidiaries.
Philip Christopher, Executive Vice President of the Company,
has been with the Company since 1970 and has held his current
position since 1983. Prior thereto, he was Senior Vice President
of the Company. Mr. Christopher also has been a director of the
Company since 1973 and, in addition, serves as an officer and a
director of most of the Company's operating subsidiaries.
Charles M. Stoehr has been Chief Financial Officer of the
Company since 1979 and was elected Senior Vice President in 1990.
Mr. Stoehr has been a director of the Company since 1987. From
1979 through 1990, Mr. Stoehr was a Vice President of the
Company.
Patrick M. Lavelle has been a Vice President of the Company
since 1982. In 1991, Mr. Lavelle was elected Vice President,
with responsibility for marketing and selling the Company's
automotive accessory and automotive sound line of products. Mr.
Lavelle was elected to the Board of Directors in 1993.
Martin Novick has been a Vice President of the Company since
1971 and has been a director since 1987. In 1991, Mr. Novick was
elected Vice President, with responsibility for the sale of
autosound products to mass merchandisers.
Chris L. Johnson has been Vice President of the Company
since 1986 and Secretary since 1980. Ms. Johnson has been
employed by the Company in various positions since 1968 and was a
director of the Company from 1987 to 1993.
Harold Bagwell has been a Vice President of the Company
since 1992 and an officer of certain subsidiaries of the Company
since 1978. Mr. Bagwell has responsibility for the Company's
retail operations in the southern United States. Mr. Bagwell was
elected to the Board of Directors in 1994.
Gordon Tucker has served as a director of the Company since
1987. Since August 1994, Dr. Tucker has been the Rabbi of Temple
Israel Center of White Plains, New York, and since 1979 has also
been an Assistant Professor of Philosophy at the Jewish
Theological Seminary of America. From 1984 through 1992, he was
also Dean of the Rabbinical School at the Jewish Theological
Seminary of America.
Irving Halevy has served as a director of the Company since
1987. Mr. Halevy is a retired professor of Industrial Relations
and Management at Fairleigh Dickinson University where he taught
from 1952 to 1986. He also is a panel member of the Federal
Mediation and Conciliation Service.
Item 2 - Properties
The Company leases all of its facilities. As of
November 30, 1994, excluding its joint venture premises, the
Company leased a total of ninety-nine operating facilities
located in sixteen states, two Canadian provinces and Malaysia.
These facilities serve as offices, warehouses, distribution
centers or retail locations. Additionally, the Company utilizes
approximately 100,000 square feet of public warehouse facilities.
Management believes that it has sufficient, suitable operating
facilities to meet the Company's requirements.
Item 3 - Legal Proceedings
In February 1993, an action was instituted in the Circuit
Court of Cooke County, Illinois, (Robert Verb, et al. v.
Motorola, Inc., et al., File No.: 93 Ch. 00969), against the
Company and other defendants. The complaint in such action seeks
damages on several product liability related theories, alleging
that there is a link between the non-thermal electromagnetic
field emitted by portable cellular telephones and the development
of cancer, including brain cancer. On August 20, 1993, an order
was entered dismissing the complaint which included the Company
as a defendant and permitting plaintiffs to file an amended
complaint which does not include the Company as a defendant.
Such order, effectively dismissing the Company as a defendant, is
being appealed by the plaintiffs. The Company believes that its
insurance coverage and rights of recovery against manufacturers
of its portable hand-held cellular telephones relating to this
case are sufficient to cover any reasonably anticipated damages.
In addition, the Company believes that there are meritorious
defenses to the claims made in this case.
In November 1991, a class action was commenced by Jeffrey R.
Cramm on behalf of himself and other similarly situated against
the Protector Corporation, Audiovox Corporation and unnamed "John
Does" in the Circuit Court of Cook County, Chancery Division,
State of Illinois. The complaint alleges unfair and deceptive
trade practices and sought, inter alia, judgment that the
Protector reprocess all affected warranty denials submitted by
class members or, alternatively, at the class members option
refund all monies paid with interest together with punitive
damages and reasonable attorney's' fees. The parties have
entered into a settlement which was approved by the Court on June
29, 1994 and which does not require any payment by the Company.
On August 31, 1994, an action was instituted entitled Steve
Helms and Cellular Warehouse, Inc. v. Quintex Mobile, Wachovia
Bank, GTE Mobilnet, Stan Bailey and Rick Rasmussen in the Court
of Common Pleas, Sumter County, South Carolina. Plaintiffs
allege ten causes of action against Quintex, including fraud,
breach of contract, conspiracy, conversion, interference with
prospective contract, restraint of trade, violation of Unfair
Trade Practices Act, false arrest and malicious prosecution.
Damages sought are $1.2 million plus punitive damages. Also
plaintiffs are seeking treble damages and attorneys' fees under
the Unfair Trade Practices Act. The case is presently in the
early discovery stage. Management intends to vigorously defend
the action and is of the opinion that there are meritorious
defenses to the claims made in this case and that the ultimate
outcome of this matter will not have a material adverse impact on
the financial position of the Company.
In February 1995, an action was commenced by Thunderball
Marketing, Inc. against Quintex Communications Corp., Nynex
Mobile Communications Company, and others in the United States
District Court for the Southern District of New York. The
complaint alleges that defendants have violated federal anti-
trust laws by engaging in conduct which is purported to be a
restraint of trade and competition and have tortiously interfered
with Plaintiff's contract with Nynex and have intentionally
interfered with Plaintiff's prospective economic or business
advantage. The Complaint seeks, from all defendants, injunctive
relief, treble damages for alleged anti-trust violations of
approximately $3 million, damages of $1 million for tortious
interference with contract and damages of $1 million for
intentional interference with prospective or actual economic
advantage or business relation. Management intends to vigorously
defend the action and is of the opinion that there are
meritorious defenses to the claims made in this case and that the
ultimate outcome of this matter will not have a material adverse
impact on the financial position of the Company.
In addition, the Company is currently, and has in the past
been, a party to other routine litigation incidental to its
business. The Company does not expect any pending litigation to
have a material adverse effect on its financial condition or
results of operations.
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 1994.
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters
Summary of Stock Prices and Dividend Data
Class A Common Shares of Audiovox are traded on the American
Stock Exchange under the symbol VOX. No dividends have been paid
on the Company's common stock. The Company is restricted by
agreements with its financial institutions from the payment of
common stock dividends while certain loans are outstanding (see
Liquidity and Capital Resources of Management's Discussion and
Analysis). There are approximately 2,025 holders of Class A
Common Stock and 5 holders of Class B Common Stock.
Class A Common Stock
Average Daily
Fiscal Period High Low Trading Volume
1993
First Quarter. . . . . . . . . . . . . . $ 9 5/8 $ 5 5/8 19,000
Second Quarter . . . . . . . . . . . . . 12 5/8 7 1/8 20,000
Third Quarter. . . . . . . . . . . . . . 14 5/8 10 1/4 22,000
Fourth Quarter . . . . . . . . . . . . . 18 3/8 12 32,000
1994
First Quarter. . . . . . . . . . . . . . 18 3/8 14 1/4 26,400
Second Quarter . . . . . . . . . . . . . 16 11 7/8 32,600
Third Quarter. . . . . . . . . . . . . . .12 3/4 6 1/4 39,600
Fourth Quarter . . . . . . . . . . . . . . 9 3/8 6 3/4 19,600
Item 6 - Selected Financial Data
Years ended November 30, 1994, 1993, 1992, 1991 and 1990
(Dollars in thousands, except per share data)
1994 1993 1992 1991 1990
Net Sales $486,448 $389,038 343,905 327,966 308,147
Net income (loss) 26,028(e) 12,224(d) 7,670(c) (14,658)(a) (3,192)
Net income (loss)
per common share,
primary 2.86(e) 1.35(d) .85(c) (1.63) (.35)
Net income per common
share, fully diluted 2.20(e) 1.25(d) - - -
Total assets 239,098 169,671 145,917 137,082 142,834
Long-term obligations,
less current
installments 110,698 13,610 55,335 59,912(b) 29,075
Stockholders' equity 92,034 65,793 53,457 46,696 61,462
(a) Includes a restructuring charge of $5,048.
(b) Long-term debt includes the effect of a May 1992
renegotiation of subordinated notes and bank obligations,
which were $29,000 Series A and Series B subordinated notes
and $30,912 of bank obligations.
(c) Includes an extraordinary item of $1,851 or $.21 per share.
(d) Includes an extraordinary item of $2,173 or $.24 per share.
(e) Includes a cumulative effect change of ($178) or (0.02) per
share.
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's operations are conducted in a single business
segment encompassing three principal product lines: cellular,
automotive sound equipment and automotive security and accessory
equipment.
The Company's wholesale cellular operations generate revenue
from the sale of cellular telephones and accessories. The
Company's retail outlets typically generate revenue from three
sources: (i) the sale of cellular telephones and related
products, (ii) activation commissions paid to the Company by
cellular telephone carriers when a customer initially subscribes
for cellular service and (iii) monthly residual fees. The price
at which the Company's retail outlets sell cellular telephones is
often affected by the amount of the activation commission the
Company will receive in connection with such sale. The amount of
the activation commission paid by a cellular telephone carrier is
based upon various service plans and promotional marketing
programs offered by the particular cellular telephone carrier.
The monthly residual payment is based upon a percentage of the
customer's usage and is calculated based on the amount of the
cellular phone billings generated by the base of customers
activated by the Company on a particular cellular carrier's
system.
The Company's automotive sound product line includes stereo
cassette radios, compact disc players and changers, speakers and
amplifiers. The automotive security and accessory line consists
of automotive security products, such as alarm systems, and power
accessories, including cruise controls and power door locks.
Certain reclassifications have been made to the data for
periods prior to fiscal 1994 in order to conform to fiscal 1994
presentation. The net sales and percentage of net sales by
product line for the fiscal years ended November 30, 1992, 1993
and 1994 are reflected in the following table:
Year Ended November 30,
1992 1993 1994
(Dollars in thousands)
Cellular Product-Wholesale $165,479 48% $189,636 49% $237,566 49%
Cellular Product-Retail 8,027 2 12,281 3 18,198 3
Activation Commissions 19,209 6 27,504 7 47,788 10
Residual Fees 2,260 1 2,646 1 4,005 1
Total Cellular 194,975 57 232,067 60 307,557 63
Automotive Sound Equipment 89,680 26 94,674 24 112,512 23
Automotive Security and
Accessory Equipment 53,057 15 57,025 15 64,040 13
Other 6,193 2 5,272 1 2,339 1
Total $343,905 100% $389,038 100% $486,448 100%
The following table sets forth for the periods indicated
certain statement of operations data for the Company expressed as
a percentage of net sales:
Percentage of Net Sales
Year Ended November 30,
1992 1993 1994
Net Sales:
Net Product Sales 93.7% 92.3% 89.4%
Cellular Telephone Activation Commissions 5.6 7.0 9.8
Cellular Telephone Residual Fees 0.7 0.7 0.8
Net Sales 100.0 100.0 100.0
Cost of Sales 82.8 80.7 82.5
Gross Profit 17.2 19.3 17.5
Selling Expense 4.9 6.0 6.6
General and Administrative Expense 7.3 7.2 6.8
Warehousing, Assembly and Repair Expense 2.4 2.2 1.9
Operating Income 2.6 3.9 2.2
Interest Expense 1.9 1.7 1.3
Income of Equity Investments 0.3 1.3 0.8
Management Fees 1.4 0.5 0.3
Gain on sale of equity investment - - 5.7
Gain on public offering equity investment - - 2.2
Other Expenses, Net - 0.1 0.2
Income Taxes 0.2 0.8 4.2
Net Income 2.2 3.2 5.4
Results of Operations
Fiscal 1994 Compared to Fiscal 1993
Net sales increased by approximately $97.4 million, or 25.0%
for fiscal 1994, compared to fiscal 1993. This result was
primarily attributable to increases in net sales from cellular
telephone products of approximately $75.5 million, or 32.5%,
automotive sound equipment of approximately $17.8 million, or
18.8%, and automotive security and accessory equipment of
approximately $7.0 million, or 12.3%. These increases were
partially offset by a decline in net sales attributable to
facsimile machines of approximately $2.9 million, or 55.6%.
The improvement in net sales of cellular telephone products
was primarily attributable to a combination of increased unit
sales and activation commissions. Net sales of cellular products
increased by approximately 325,450 units, or 65.0%, compared to
fiscal 1993, primarily resulting from an increase in sales of
hand-held portable cellular telephones and transportable cellular
telephones, partially offset by a decline in sales of installed
mobile cellular telephones. The average unit selling price
declined approximately 18.2% vs. 1993 as production efficiencies
and market competition continues to reduce unit selling prices.
The Company believes that the shift from installed mobile
cellular telephones to hand-held and transportable cellular
telephones is reflective of a desire by consumers for increased
flexibility in their use of cellular telephones. Toward that
end, the Company markets an accessory package that permits its
Minivox(TM) and Minivox Lite(R) hand-held cellular telephones to
be used in an automobile on a hands-free basis and to draw power
from the automobile's electrical system like an installed mobile
cellular telephone.
The number of activation commissions increased 84.2% over
fiscal 1993. Activation commissions increased by approximately
$20.3 million, or 73.8%, for fiscal 1994, compared to fiscal
1993. This growth was primarily attributable to the increase in
new cellular subscriber activations, partially due to the net
addition of 30 retail outlets operated by the Company, the
acquisition of H&H and one new retail outlet operated by
licensees of the Company during the twelve-month period ended
November 30, 1994. This increase in commission revenue was
partially offset by a 5.7% decrease in average activation
commissions paid to the Company. Residual revenues on customer
usage increased by approximately $1.4 million, or 51.4%, for
fiscal 1994, compared to fiscal 1993, due primarily to the
addition of new subscribers to the Company's subscriber base.
Net sales of automotive sound equipment increased by
approximately $17.8 million, or 18.8%, for fiscal 1994, compared
to fiscal 1993. This increase was attributable primarily to an
increase in sales of high-end sound products, products sold to
mass merchandise chains and new car dealers, and products used in
the truck and agricultural vehicle markets, which was partially
offset by decreases in auto sound sales to private label
customers and several OEM accounts. Net sales of automotive
security and accessory products increased approximately $7.0
million, or 12.3%, for fiscal 1994, compared to fiscal 1993,
principally due to increases in sales of vehicle security
products. This increase was partially offset by a reduction in
net sales by the Company of cruise controls and recreational
vehicle equipment and accessories.
Gross margins decreased to 17.5% in fiscal 1994 from 19.3%
for fiscal 1993. This decrease was primarily due to the shift in
the Company's product mix to a greater percentage of low-cost,
high-volume portable cellular telephones. Additionally, cellular
gross margins were adversely affected by price competition with
Motorola and Nokia which developed during the latter part of the
second quarter of 1994 and intensified during the remainder of
the year. Cellular gross margins were further affected by costs
incurred in connection with the return to the vendor of product
that did not perform satisfactorily. Retail gross margins
declined from 37.2% to 35.5% as a result of reduced average
activation commissions during fiscal 1994. This was partially
offset by an increase in residual payments. Automotive sound
equipment margins decreased across all product lines and
automotive security and accessory product margins showed a
moderate increase for fiscal 1994 compared to fiscal 1993. The
Company operates in a highly-competitive environment and believes
that such competition will intensify in the future. Increased
price competition relating to products and services provided to
the Company's retail customers on behalf of cellular carriers,
may result in downward pressure on the Company's gross margins.
Total operating expenses increased by approximately $14.7
million, or 24.5%, for fiscal 1994, compared to fiscal 1993. Of
the $14.7 million increase in total operating expenses, $10.8
million (73.5%) was from retail operations. This increase was
due to the expansion of the retail division and the acquisition
of the remaining 50% interest in H&H. Total operating expenses as
a percentage of sales remained essentially unchanged at 15.3% for
fiscal 1994 compared to fiscal 1993.
Selling expenses increased by approximately $8.7 million, or
37.7%, for fiscal 1994 compared to fiscal 1993, primarily due to
increases in marketing support costs (which include expenditures
for sales literature, promotion of products in key market areas,
and divisional marketing expenses), salespersons' compensation
and commissions paid to outside sales representatives primarily
due to increases in commissionable sales. The Company has
adopted a strategy for the wholesale business of increasing
marketing support expenditures in order to accelerate sales
growth. The retail division accounted for $5.8 million ($66.0%)
of the increase over fiscal 1994. Selling expense as a percentage
of net sales increased from 6.0% for fiscal 1993 to 6.6% for
fiscal 1994.
General and administrative expenses increased by
approximately $5.0 million, or 17.9%, for fiscal 1994 compared to
fiscal 1993, largely as the result of increases in the number of
personnel required for the opening and operation of additional
retail outlets, partially offset by a decrease in the provision
for bad debt expense, which was primarily attributable to
increased collection efforts and an improvement in the credit
quality of the Company's customer base. Employee benefit costs
also increased, reflecting the continuing rise in health benefit
costs. Other increases in general and administrative expenses
occurred in travel, occupancy and insurance expenses. These
increases were partially offset by decreases in professional fees
and costs associated with the Company's overseas buying offices.
The retail division accounted for $4.4 million (88.4%) of the
increase over fiscal 1994.
Warehousing, assembly and repair expenses increased by
approximately $907,000, or 10.7%, for fiscal 1994 compared to
fiscal 1993, largely due to increases in costs attributable to
direct labor, principally due to the retail and cellular
divisions. The retail division accounted for $628,000 (69.2%) of
the increase over fiscal 1994.
Management fees and related income and equity in income
(loss) of equity investments for 1994 increased by approximately
$9.0 million (131%) over fiscal 1993 as outlined in the following
table:
1993 1994
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
CellStar $1,220 $3,927 $5,147 $ - $13,958 $13,958
ASM - 841 841 932 932
H & H 70 (6) 64 - - -
Pacific 613 186 799 435 242 677
Protector - - - 1,108 - 1,108
TALK - - - - (819) (819)
$1,903 $4,948 $6,851 $1,543 $14,313 $15,856
The increase in CellStar is due to the increase in carrying
value of the Company's remaining investment in CellStar, partially
offset by the suspension of management fees. The increase in ASM
is due to an increase in sales and profitability by the venture.
The decrease in H&H is due to this entity now being a wholly-owned
subsidiary of the Company and, therefore, being included in the
consolidated reporting of the Company for 1994. The decrease in
Audiovox Pacific is due to an overall decline in gross profits as
the market in Australia became more competitive.
Previously, Protector has been unprofitable and the
investment on the Company's books was written off prior to 1987.
The Company continued to support Protector through various
marketing programs, but was unable to be reimbursed by the Company
for these services through a management fee. Protector had funded
its product chemical treatment product warranty programs through
insurance policies (cash collateralized) for each of the warranty
periods. During 1994, the warranty obligations for certain
warranty periods had been fulfilled and excess funds became
available. Protector approved a partial payment to the Company
for its prior support, which was recorded by the Company in
November 1994.
TALK commenced operations in October 1994. From October 1994
through November 1994, all activity recorded by TALK was related
to start-up operations. The Company believes that, as a new
operation, there will be additional start-up costs during 1995.
Other expenses increased by approximately $797,000 for
fiscal 1994 compared to fiscal 1993, primarily due to an
increase in debt amortization costs and a reduction in interest
income.
Net interest and bank charges increased by approximately
$31,000, or 0.5%, for fiscal 1994, compared to fiscal 1993.
Even though interest rates have increased, the Company's
interest expense was favorably impacted by the newly issued $65
million, 6 1/4% debenture.
For fiscal 1994, the Company's provision for income tax was
approximately $20.3 million, compared to a provision of
approximately $5.2 million for fiscal 1993. The increase in the
effective tax rate was primarily due to the undistributed
earnings from equity investments. See Note 10 of Notes to
Consolidated Financial Statements.
Fiscal 1993 Compared to Fiscal 1992
Net sales increased by approximately $45.1 million, or
13.1% for fiscal 1993, compared to fiscal 1992. This result was
primarily attributable to increases in net sales from cellular
telephones of approximately $37.1 million, or 19.0%, automotive
sound equipment of approximately $5.0 million, or 5.6%, and
automotive security and accessory equipment of approximately
$4.0 million, or 7.5%. These increases were partially offset by
a decline in net sales attributable to facsimile machines of
approximately $921,000, or 14.9%.
The improvement in net sales of cellular telephone products
was primarily attributable to a combination of increased unit
sales and activation commissions. Net sales of cellular
products increased by approximately 102,700 units, or 21.5%,
compared to fiscal 1992, primarily resulting from the
introduction of the Minivox Lite(R) series of hand-held portable
cellular telephones and increased sales of transportable "bag"
cellular telephones, partially offset by a decline in sales of
installed mobile cellular telephones. The average unit selling
price was relatively consistent, as the continued shift toward
sales of higher-priced hand-held portable cellular telephone
products substantially offset a continued decline in cellular
telephone prices throughout the period. The Company believes
that the shift from installed mobile cellular telephones to
hand-held and transportable cellular telephones is reflective of
a desire by consumers for increased flexibility in their use of
cellular telephones. Toward that end, the Company markets an
accessory package that permits its Minivox(TM) and Minivox
Lite(R) hand-held cellular telephones to be used in an
automobile on a hands-free basis and to draw power from the
automobile's electrical system like an installed mobile cellular
telephone. Unit sales in the fourth quarter reflect a slower
rate of growth as the introduction of the new Minivox(TM) MVX
525, slated for introduction in September, 1993, was delayed
until November, 1993.
Activation commissions and residual fees increased by
approximately $8.7 million, or 40.4%, for fiscal 1993, compared
to fiscal 1992. This growth was primarily attributable to the
increase in new cellular subscriber activations, partially due
to the addition of 26 new retail outlets operated by the Company
and 19 new retail outlets operated by licensees of the Company
during the twelve-month period ended November 30, 1993.
Residual revenues on customer usage increased by approximately
$386,000, or 17.1%, for fiscal 1993, compared to fiscal 1992,
due primarily to the addition of new subscribers to the
Company's subscriber base.
Net sales of automotive sound equipment increased by
approximately $5.0 million, or 5.6%, for fiscal 1993, compared
to fiscal 1992. This increase was attributable primarily to an
increase in sales of high-end sound products and products used
in the truck and agricultural vehicle markets, which was
partially offset by decreases in auto sound sales to new car
dealers and the discontinuance of two of the Company's
automotive sound product lines. Net sales of automotive
security and accessory products increased approximately $4.0
million, or 7.5%, for fiscal 1993, compared to fiscal 1992,
principally due to increases in sales of vehicle security
products. This increase was partially offset by a reduction in
net sales by the Company of video cassette players and
television and related accessories which occurred in connection
with the establishment by the Company and Automotive Sound &
Accessories Company in January 1992 of a joint venture to sell
these products to the recreational vehicle, van and marine
markets. Net sales attributable to sales by the Company's joint
ventures are not reflected in net sales but rather, the
Company's pro rata share of equity in a joint venture's income
is included in equity in income of equity investments, which is
discussed below. Accordingly, upon formation of such joint
venture, the Company no longer reported sales of video cassette
players and related accessories.
Gross margins increased to 19.3% in fiscal 1993 from 17.2%
for fiscal 1992. This increase was primarily due to the shift
in the Company's product mix to a greater percentage of portable
cellular telephones (primarily the Minivox Lite(R) series) which
typically carry higher margins, higher activation commissions
and increased income from residual payments. Cellular margin
increases were partially offset by the delayed introduction of
the Company's new Minivox(TM) MVX 525 which was introduced in
November 1993, rather than September 1993, as planned.
Imposition of threatened trade sanctions would have a material
adverse effect on the Company's cellular product margins.
Automotive sound equipment margins were relatively consistent
and automotive security and accessory product margins showed a
moderate increase for fiscal 1993 compared to fiscal 1992. The
Company operates in a highly-competitive environment and
believes that such competition will intensify in the future.
Increased price competition relating to products and services
provided to the Company's retail customers on behalf of cellular
carriers, may result in downward pressure on the Company's gross
margins.
Total operating expenses increased by approximately $9.5
million, or 18.9%, for fiscal 1993, compared to fiscal 1992.
Total operating expenses as a percentage of sales increased from
14.6% for fiscal 1992 to 15.4% for fiscal 1993. These increases
were principally attributable to increased selling expenses.
Selling expenses increased by approximately $6.5 million,
or 38.9%, for fiscal 1993 compared to fiscal 1992, primarily due
to increases in marketing support costs (which include
expenditures for sales literature and promotion of products in
key market areas), salespersons' compensation and commissions
paid to outside sales representatives primarily due to increases
in commissionable sales. After the Company's return to
profitability in fiscal 1992, it adopted a strategy of
increasing marketing support expenditures in order to attempt to
accelerate sales growth. This strategy was implemented in
fiscal 1993 and, consequently, selling expense as a percentage
of net sales increased from 4.9% for fiscal 1992 to 6.0% for
fiscal 1993.
General and administrative expenses increased by
approximately $2.9 million, or 11.5%, for fiscal 1993 compared
to fiscal 1992, largely as the result of increases in the number
of personnel required for the opening and operation of
additional retail outlets, partially offset by a decrease in the
provision for bad debt expense, which was primarily attributable
to increased collection efforts and an improvement in the credit
quality of the Company's customer base. Employee benefit costs
also increased, reflecting the continuing rise in health benefit
costs. In addition, professional fees and amortization of such
fees increased, due to the retention of consultants and
attorneys in connection with an amendment to the Company's bank
credit facility. Since a majority of the Company's general and
administrative expenses are fixed and such expenses grew, in the
aggregate, at a rate slower than the growth in net sales, such
expenses declined as a percentage of net sales from 7.3% for
fiscal 1992 to 7.2% for fiscal 1993.
Warehousing, assembly and repair expenses increased by
approximately $132,000, or 1.6%, for fiscal 1993 compared to
fiscal 1992, largely due to increases in costs attributable to
increased use of public warehousing as a result of increases in
sales volume. Warehousemen receive an "in/out charge" when
goods are received at the warehouse, plus a monthly charge based
upon space occupied during the month. Because these expenses
grew at a rate slower than net sales, such expenses declined as
a percentage of net sales from 2.4% for fiscal 1992 to 2.2% for
fiscal 1993.
Management fees and related income and equity in income of
equity investments increased by approximately $741,000, or
12.1%, for fiscal 1993 compared to fiscal 1992, primarily as a
result of increased earnings in the Company's equity
investments, partially offset by a reduction in management fees,
which the Company stopped accruing from CellStar in July 1993 in
contemplation of the CellStar Offering. Other expenses
increased by approximately $372,000, or 51.4%, for fiscal 1993
compared to fiscal 1992, primarily due to amortization of the
costs associated with the restructuring of the Company's
indebtedness completed in May 1992.
Net interest and bank charges decreased by approximately
$182,000, or 2.7%, for fiscal 1993, compared to fiscal 1992.
This decrease was primarily attributable to an increase in
interest income and a decrease of approximately $6,800,000 in
average outstanding debt.
For fiscal 1993, the Company's provision for income tax
(before utilization of a net operating loss carryforward credit
of approximately $2,173,000) was approximately $5,191,000,
compared to a provision of approximately $2,500,000 (before
utilization of a net operating loss carryforward credit of
approximately $1,900,000) for fiscal 1992. The effective tax
rate for fiscal 1993 was 34.1%, compared to 30.0% for fiscal
1992. As of November 30, 1993, the Company had utilized all of
its net operating loss carryforwards.
Liquidity and Capital Resources
The Company's cash position at November 30, 1994 was $4.1
million above the November 30, 1993 level. Operating activities
used approximately $45.8 million, primarily due to increases in
accounts receivable, inventory, and equity in income (loss) of
equity investments. This was partially offset by increases in
accounts payable and accrued expenses, deferred income taxes
payable and profitable operations. Investing activities
provided approximately $28.6 million, primarily from the net
proceeds of the partial sale of one of the Company's equity
investments, CellStar, and the collection of notes receivable
from the same equity investment. This source of cash was
partially offset by the purchase of property, plant and
equipment, and the purchase of two new equity investments (Note
12). Financing activities provided approximately $21.3 million,
primarily from the proceeds from issuance of long-term debt,
offset by a reduction of bank obligations under line of credit
agreements and documentary acceptances. The Company also paid
approximately $17.4 million in principal payments on long-term
debt.
In December 1993, CellStar, the successor in interest to
the Company's National Auto Center and Audiomex Export Corp.
joint ventures, completed the CellStar Offering for 7,935,000
shares of CellStar Common Stock. Of such shares, the Company
sold 2,875,000 of its shares to CellStar Common Stock for
approximately $29.4 million in net proceeds to the Company. The
proceeds from the sale of the Company's shares of CellStar
Common Stock were used to reduce bank debt. In addition,
CellStar utilized approximately $13.7 million of the net
proceeds it received in the CellStar Offering to pay certain
accounts receivable and all management fees owed by CellStar to
the Company. The Company utilized such proceeds to further
reduce bank debt and to make a partial payment of the Restated
Series A Notes and Restated Series B Notes. Approximately $12.2
million of federal income tax primarily due to the capital gain
on sale of the Company's CellStar Common Stock was paid on May
15, 1994. After the CellStar Offering, the Company continues to
own 3,875,000 shares of CellStar Common Stock. As a result of
the CellStar Offering, the Company will no longer receive
management fees from CellStar. The Company believes that the
loss of such fees will not have a material adverse effect on its
liquidity.
On March 15, 1994, the Company completed the sale of $65
million 6 1/4% Convertible Subordinated Debentures due 2001.
The Debentures are convertible into shares of the Company's
Class A Common Stock, par value $.01 per share at an initial
conversion price of $17.70 per share, subject to adjustment
under certain circumstances. The Company has been requested to
consider and is considering modifications of the terms of its
$65 million 6 1/4% Convertible Subordinated Debentures due 2001,
issued in a March private placement. The Company has had
discussions with several of its bond holders concerning these
modifications. However, there can be no assurance that any such
modifications will be made.
A portion of the net proceeds of the offering was used to
repay existing indebtedness and a prepayment premium. In
connection with the Company's repayment of indebtedness, the
Company exchanged its existing Series A and Series B Convertible
Subordinated Debentures for Series AA and Series BB Convertible
Debentures. The Series AA and Series BB Convertible Debentures
have the same maturity, interest rate, and conversion provision
as the existing Series A and Series B Convertible Subordinated
Debentures, but are not subordinated to other indebtedness of
the Company. Future payments of principal and interest on the
Series AA and Series BB Debentures are secured by a letter of
credit.
Concurrently with the completion of the sale of the
Debentures, the Company entered into an amended and restated
credit agreement with its financial institutions. Under the
credit agreement, the Company may obtain credit through direct
borrowings, letters of credit, and banker's acceptances. The
obligations of the Company under the credit agreement have been
guaranteed by certain of the Company's subsidiaries and have
been secured by accounts receivable and inventory of the Company
and those subsidiaries. Availability of credit under the Credit
Agreement is in a maximum aggregate amount of $50 million and is
subject to certain conditions and based upon a formula taking
into account the amount and quality of its accounts receivable
and inventory.
On August 29, 1994, the Company entered into the Third
Amendment to the Credit Agreement, as extended on February 24,
1995, which provided for an increase in the Company's direct
borrowings and bank lines from $20 million to $40 million and
$50 million to $75 million, respectively. On June 1, 1995,
direct borrowings and bank lines will be stepped down to $20
million and $50 million, respectively.
Following the sale of such CellStar Common Stock in the
CellStar Offering, consummation of the 1994 credit facility and
sale of Debentures, the Company believes that it has sufficient
liquidity to satisfy its anticipated working capital and capital
expenditures needs through November 30, 1995 and for the
reasonably foreseeable future.
Impact of Inflation and Currency Fluctuation
Inflation has not had and is not expected to have a
significant impact on the Company's financial position or
operating results. However, as the Company expands its
operations into Latin America and the Pacific Rim, the effects
of inflation in those areas, if any, could have growing
significance to the financial condition and results of the
operations of the Company.
Currency Fluctuations
While the prices that the Company pays for the products
purchased from its suppliers are principally denominated in
United States dollars, price negotiations depend in part on the
relationship between the foreign currency of the foreign
manufacturers and the United States dollar. This relationship
is dependent upon, among other things, market, trade and
political factors.
Seasonality
The Company typically experiences some seasonality. The
Company believes such seasonality could be attributable to
increased demand for its products during the Christmas season,
commencing October, for both wholesale and retail operations.
Recent Accounting Pronouncements
Effective December 1, 1993, the Company adopted SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires an
asset and liability approach for financial accounting and
reporting of income taxes. The cumulative effect of this
accounting change is a one-time charge of approximately $178,000
or $.02 per share. The adoption of these statements has no
effect on cash flow.
Item 8 - Consolidated Financial Statements and Supplementary
Data
The consolidated financial statements of the Company as of
November 30, 1993 and 1994 and for each of the years in the
three-year period ended November 30, 1994, together with the
independent auditors' report thereon of KPMG Peat Marwick LLP,
independent auditors, are filed under this Item 8.
Selected unaudited, quarterly financial data of the
Registrant for the years ended November 30, 1994 and 1993
appears below:
QUARTER ENDED
Feb. 28 May 31 Aug. 31 Nov. 30*
1994
Net sales $115,337 116,272 109,719 145,120
Gross profit 22,178 21,678 20,219 20,836
Operating expenses 16,923 18,421 17,797 21,284
Income (loss) before provision for
income taxes and extraordinary
item 42,640 2,439 2,533 (1,078)
Provision (recovery) for income taxes 18,477 1,002 1,013 (164)
Income (loss) before cumulative effect of
change in accounting principle 24,163 1,437 1,520 (914)
Cumulative effect of change in
accounting principle (178) - - -
Net income (loss) 23,985 1,437 1,520 (914)
Income (loss) per share (primary):
Income (loss) before cumulative effect 2.63 0.16 0.17 (0.10)
Cumulative effect (0.02) - - -
Net income (loss) 2.61 0.16 0.17 (0.10)
Income (loss) per common share
(fully diluted):
Income (loss) before cumulative effect 2.38 0.15 0.16 (0.10)
Cumulative effect (0.02) - - -
Net income (loss) 2.36 0.15 0.16 (0.10)
1993
Net sales $91,820 95,510 94,479 107,229
Gross profit 17,356 19,272 18,793 19,499
Operating expenses 13,619 14,853 15,366 15,928
Income before provision for
income taxes and extraordinary
item 3,562 4,143 4,150 3,387
Provision for income taxes 1,110 1,386 1,730 965
Income before extraordinary item 2,452 2,757 2,420 2,422
Extraordinary item-tax benefits
from utilization of net operating
loss carryforwards 885 1,066 222 -
Net income 3,337 3,823 2,642 2,422
Income per share (primary):
Income before extraordinary item 0.27 0.31 0.27 0.27
Extraordinary item 0.10 0.11 0.02 -
Net income 0.37 0.42 0.29 0.27
Income per common share (fully diluted):
Income before extraordinary item - 0.28 0.25 0.25
Extraordinary item - 0.11 0.02 -
Net income - 0.39 0.27 0.25
*The Company does not compute fully diluted earnings per share when the
addition of potentially dilutive securities would result in anti-
dilution.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AUDIOVOX CORPORATION:
We have audited the accompanying consolidated balance sheets of Audiovox
Corporation and subsidiaries as of November 30, 1993 and 1994, and the
related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended November
30, 1994. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Audiovox Corporation and subsidiaries as of November 30, 1993 and 1994,
and the results of their operations and their cash flows for each of the
years in the three-year period ended November 30, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 1(f) to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" in 1994.
s/KPMG Peat Marwick, LLP
KPMG PEAT MARWICK, LLP
Jericho, New York
February 13, 1995
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 1993 and 1994
(In thousands)
1993 1994
Assets
Current Assets:
Cash and cash equivalents $ 1,372 $ 5,495
Accounts receivable, net 73,208 94,242
Inventory, net 64,308 83,430
Income taxes receivable 228 -
Notes receivable from equity investment 7,973 -
Prepaid expenses and other current assets 3,668 6,065
Deferred income taxes 2,620 2,247
Total current assets 153,377 191,479
Restricted cash - 6,559
Property, plant and equipment, net 6,083 6,180
Equity investments 7,240 25,902
Debt issuance costs, net 750 4,840
Excess cost over fair value of assets
acquired and other intangible assets, net 1,031 1,032
Other assets 1,190 3,106
$ 169,671 $ 239,098
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,762 $ 21,088
Accrued expenses and other current liabilities 10,841 13,063
Income taxes payable 2,250 834
Bank obligations 38,797 1,084
Documentary acceptances 10,833 -
Current installments of long-term debt 9,743 159
Total current liabilities 90,226 36,228
Bank obligations - 29,100
Deferred income taxes - 5,945
Long-term debt, less current installments 13,610 75,653
Total liabilities 103,836 146,926
Minority interest 42 138
Stockholders' equity:
Preferred stock 2,500 2,500
Common Stock:
Class A 68 68
Class B 22 22
Paid-in capital 39,171 39,715
Retained earnings 24,226 50,254
65,987 92,559
Cumulative foreign currency translation
and adjustment (194) (525)
Total stockholders' equity 65,793 92,034
Commitments and contingencies
Total liabilities and stockholders' equity $ 169,671 $ 239,098
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended November 30, 1992, 1993 and 1994
(In thousands, except per share data)
1992 1993 1994
Net sales $343,905 $389,038 $486,448
Cost of sales 284,904 314,118 401,537
Gross profit 59,001 74,920 84,911
Operating expenses:
Selling 16,699 23,191 31,925
General and administrative 25,202 28,096 33,114
Warehousing, assembly and repair 8,347 8,479 9,386
50,248 59,766 74,425
Operating income 8,753 15,154 10,486
Other income (expenses):
Interest and bank charges (6,686) (6,504) (6,535)
Equity in income of equity investments 1,177 4,948 3,748
Management fees and related income 4,933 1,903 1,543
Gain on sale of equity investment - - 27,783
Gain on public offering of equity
investment - - 10,565
Other, net 137 (259) (1,056)
(439) 88 36,048
Income before provision for
income taxes, extraordinary item
and cumulative effect of a change
in an accounting principle 8,314 15,242 46,534
Provision for income taxes 2,495 5,191 20,328
Income before extraordinary item and
cumulative effect of a change in
accounting for income taxes 5,819 10,051 26,206
Extraordinary item - Tax benefits from
utilization of net operating loss
carryforwards 1,851 2,173 -
Cumulative effect of change in accounting
for income taxes - - (178)
Net income $ 7,670 $ 12,224 $ 26,028
Income per common share (primary):
Income before extraordinary item $ 0.64 $ 1.11 $ 2.88
Extraordinary item $ 0.21 $ 0.24 -
Cumulative effect of change in
accounting for income taxes - - $ (.02)
Net income $ 0.85 $ 1.35 $ 2.86
Net income per common share (fully
diluted):
Income before extraordinary item - $ 1.03 $ 2.21
Extraordinary item - $ 0.22 -
Cumulative effect of change in
accounting for income taxes - - $ (.01)
Net income - $ 1.25 $ 2.20
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended November 30, 1992, 1993 and 1994
(In thousands)
Cumulative
foreign
currency Total
Preferred Common Paid-In Unearned Retained translation Stockholders'
stock stock capital compensation earnings adjustment equity
Balances at
November 30,
1991 $2,500 $90 $38,854 - $ 4,332 $ 920 $ 46,696
Net income - - - - 7,670 - 7,670
Equity adjustment
from foreign
currency
translation - - - - - (909) (909)
Balances at
November 30,
1992 2,500 90 38,854 - 12,002 11 53,457
Net income - - - - 12,224 - 12,224
Equity adjustment
from foreign
currency
translation - - - - - (205) (205)
Grant of warrants - - 100 - - - 100
Stock issuance
upon exercise
of options - - 217 - - - 217
Balances at
November 30,
1993 2,500 90 39,171 - 24,226 (194) 65,793
Net income - - - - 26,028 - 26,028
Equity adjustment
from foreign
currency
translation - - - - - (331) (331)
Unearned compensation
relating to grant
of options and non-
performance restricted
stock - - 864 (864) - - -
Compensation
expense - - 27 241 - - 268
Stock issuance
upon exercise
of options - - 207 - - - 207
Issuance of warrants - - 69 - - - 69
Balances at
November 30,
1994 $2,500 $90 $40,338 $(623) $50,254 $(525) $92,034
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended November 30, 1992, 1993 and 1994
(In thousands)
1992 1993 1994
Cash flows from operating activities:
Net income $ 7,670 $ 12,224 $ 26,028
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 3,067 3,863 4,299
Provision for bad debt expense 1,921 230 (21)
Equity in income of equity investments (1,177) (4,948) (3,748)
Minority interest (19) (22) 96
Gain on sale of business (263) - -
Gain on sale of equity investment - - (27,783)
Gain on public offering of equity investment - - (10,565)
Provision for deferred income taxes, net of
extraordinary item 309 (2,311) 6,140
Provision for unearned compensation - - 268
Cumulative effect of change in accounting for
income taxes - - 178
Changes in:
Accounts receivable (5,656) (6,266) (20,337)
Inventory (4,533) (13,849) (18,701)
Income taxes receivable 2,064 451 229
Accounts payable, accrued expenses
and other current liabilities (5,407) 8,076 3,675
Income taxes payable - 1,632 (1,395)
Prepaid expenses and other assets (1,121) (193) (4,171)
Net cash used in operating activities (3,145) (1,113) (45,808)
Cash flows from investing activities:
Purchase of equity investments (51) - (6,016)
Purchases of property, plant and equipment, net (1,235) (1,346) (2,611)
Notes receivable from equity investment (4,125) - 7,973
Proceeds from sale of business 88 - -
Net proceeds from sale of equity investment - - 29,433
Purchase of acquired business - - (148)
Net cash (used in) provided by investing
activities (5,323) (1,346) 28,631
Cash flows from financing activities:
Net (repayments) borrowings under line of
credit agreements 3,194 4,616 (8,613)
Net (repayments) borrowings under documentary
acceptances 3,942 2,832 (10,833)
Principal payments on long-term debt - (6,127) (17,411)
Debt issuance costs (1,562) (177) (5,315)
Proceeds from exercise of stock options - 176 170
Principal payments on capital lease obligation - (165) (175)
Proceeds from issuance of long-term debt - - 65,000
Proceeds from issuance of notes payable - - 10,045
Payment of note payable - - (5,000)
Restricted cash - - (6,559)
Net cash provided by financing activities 5,574 1,155 21,309
Effect of exchange rate changes on cash (73) (10) (9)
Net increase (decrease) in cash and cash
equivalents (2,967) (1,314) 4,123
Cash and cash equivalents at beginning of period 5,653 2,686 1,372
Cash and cash equivalents at end of period $ 2,686 $ 1,372 $ 5,495
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1992, 1993 and 1994
(Dollars in thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company)
designs and markets cellular telephones and accessories,
automotive aftermarket sound and security equipment, other
automotive aftermarket accessories and certain other
products, principally in the United States, Canada, and
overseas. In addition to generating product revenue from the
sale of cellular telephone products, the Company's retail
outlets, as agents for cellular carriers, are paid activation
commissions and residual fees from such carriers. The
Company also sells cellular telephones in Europe, Latin
America, Asia, the Middle East and Australia.
The Company's automotive sound, security and accessory
products include stereo cassette radios, compact disc players
and changers, amplifiers and speakers; key based remote
control security systems; and cruise controls, door and trunk
locks. These products are marketed through mass merchandise
chain stores, specialty automotive accessory installers,
distributors and automobile dealers.
(b) Principles of Consolidation
The consolidated financial statements include the financial
statements of Audiovox Corporation and its wholly owned and
majority owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
Cash equivalents of $100 at November 30, 1993 consisted of a
certificate of deposit with an initial term of less than
three months. For purposes of the statements of cash flows,
the Company considers investments with original maturities of
three months or less to be cash equivalents.
(d) Inventory
Inventory consists principally of finished goods and is
stated at the lower of cost (primarily on a weighted moving
average basis) or market.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Equipment
under capital lease is stated at the present value of minimum
lease payments. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
Buildings 20 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Assets
acquired under capital lease are amortized over the term of
the lease.
(f) Income Taxes
Effective December 1, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards
Board No. 109, "Accounting for Income Taxes", and has
reported the cumulative effect of that change in the method
of accounting for income taxes in the 1994 consolidated
statement of earnings. Under the asset and liability method
of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Pursuant to the deferred method under APB Opinion 11, which
was applied in 1993 and prior years, deferred income taxes
are recognized for income and expense items that are reported
in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the
year of the calculation. Under the deferred method, deferred
taxes are not adjusted for subsequent changes in tax rates.
(g) Net Income Per Common Share
Primary earnings per share are computed based on the weighted
average number of common shares outstanding and common stock
equivalents. For the years ended November 30, 1993 and 1994,
stock options, stock grants and stock warrants (Note 13) are
common stock equivalents. The computation of fully diluted
earnings per share assumes conversion of all outstanding
debentures (Note 8) and exercise of common stock equivalents,
stock options, performance accelerated grants and warrants.
For purposes of this computation, net income was adjusted for
the after-tax interest expense applicable to the convertible
debentures.
The Company does not compute fully diluted earnings per share
when the addition of potentially dilutive securities would
result in anti-dilution.
The following weighted average shares were used for the
computation of primary and fully diluted earnings per share:
For the Years Ended November 30,
1992 1993 1994
Primary 9,007,242 9,046,698 9,105,952
Fully diluted 9,007,242 10,077,685 12,769,221
(h) Debt Issuance Costs
Costs incurred in connection with the issuance of the
Convertible Subordinated Debentures and restructuring of the
Series A and Series B Convertible Subordinated Notes (Note 8)
and the restructuring of bank obligations (Note 7) have been
capitalized. These charges are amortized over the lives of
the respective agreements. Amortization expense of these
costs amounted to $501, $856 and $1,225 for the years ended
November 30, 1992, 1993 and 1994, respectively.
(i) Intangible Assets
Intangible assets consist of patents, trademarks,
non-competition agreements and the excess cost over fair
value of assets acquired for certain subsidiary companies and
equity investments. Excess cost over fair value of assets
acquired is being amortized over periods not exceeding twenty
years. The costs of other intangible assets are amortized on
a straight-line basis over their respective lives.
Accumulated amortization approximated $1,012 and $1,283 at
November 30, 1993 and 1994, respectively. Amortization of
the excess cost over fair value of assets acquired and other
intangible assets amounted to $133, $164 and $271 for the
years ended November 30, 1992, 1993 and 1994, respectively.
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its
ongoing review, the Company estimates the fair value of
intangible assets, taking into consideration any events and
circumstances which may diminish fair value.
(j) Warranty Expenses
Warranty expenses are accrued at the time of sale based on
the Company's estimated cost to repair expected returns for
products. At November 30, 1993 and 1994, the reserve for
future warranty expense amounted to $2,170 and $1,665,
respectively.
(k) Cash Discount and Co-operative Advertising Allowances
The Company accrues for estimated cash discounts and trade
and promotional co-operative advertising allowances at the
time of sale. These discounts and allowances are reflected
in the accompanying consolidated financial statements as a
reduction of accounts receivable as they are utilized by
customers to reduce their trade indebtedness to the Company.
(l) Foreign Currency
Assets and liabilities of those subsidiaries and equity
investments located outside the United States whose cash
flows are primarily in local currencies have been translated
at rates of exchange at the end of the period. Revenues and
expenses have been translated at the weighted average rates
of exchange in effect during the period. Gains and losses
resulting from translation are accumulated in the cumulative
foreign currency translation account in stockholders' equity.
Exchange gains and losses on hedges of foreign net
investments and on inter-company balances of a long-term
investment nature are also recorded in the cumulative foreign
currency translation adjustment account. Other foreign
currency transaction gains and losses are included in net
income, none of which were material for the years ended
November 30, 1992, 1993 and 1994.
During 1993 and 1994, the Company entered into foreign
exchange contracts denominated in the currency of its major
suppliers. These contracts were purchased to hedge
identifiable foreign currency commitments, principally
purchases of inventory that are not denominated in U.S.
Dollars. Accordingly, any gain or loss associated with the
contracts was included as a component of inventory cost.
Cash flows resulting from these contracts are included in the
net change in inventory for purposes of the statements of
cash flows. No foreign exchange contracts were purchased in
1992. There were no open foreign exchange contracts at
November 30, 1993 and 1994.
(m) Equity Investments
The Company has common stock investments in five companies,
which are accounted for by the equity method (Note 12).
(n) Cellular Telephone Commissions
Under various agreements, the Company typically receives an
initial activation commission for obtaining subscribers for
cellular telephone services. Additionally, the agreements
typically contain provisions for commissions based upon usage
and length of continued subscription. The agreements also
typically provide for the reduction or elimination of initial
activation commissions if subscribers deactivate service
within stipulated periods. The Company has provided a
liability for estimated cellular deactivations which is
reflected in the accompanying consolidated financial
statements as a reduction of accounts receivable.
The Company recognizes sales revenue for the initial
activation, length of service commissions and residual
commissions based upon usage on the accrual basis. Such
commissions approximated $21,469, $30,150 and $51,793 for the
years ended November 30, 1992, 1993 and 1994, respectively.
Related commissions paid to outside selling representatives
for cellular activations are reflected as cost of sales in
the accompanying consolidated statements of earnings and
amounted to $8,923, $10,969 and $17,848 for the years ended
November 30, 1992, 1993 and 1994, respectively.
(o) Restricted Cash
At November 30, 1994, the Company has approximately $6,559 of
restricted cash, classified as a non-current asset, which
represents collateral for an irrevocable standby letter of
credit in favor of the Series AA and Series BB Convertible
Debentures. Currently, the cash is invested in short-term
certificates of deposit.
(p) Supplementary Financial Statement Information
Advertising expenses approximated $4,467, $8,740 and $11,610
for the years ended November 30, 1992, 1993 and 1994,
respectively.
Interest income of approximately $861, $837 and $540 for the
years ended November 30, 1992, 1993 and 1994, respectively,
is included in other in the accompanying consolidated
financial statements.
Included in accrued expenses and other current liabilities is
$3,696 of accrued wages and commissions.
(q) Reclassifications
Certain reclassifications have been made to the 1992 and 1993
consolidated financial statements in order to conform to the
1994 presentation.
(2) Business Acquisitions/Dispositions
In May 1992, the Company sold its interest in a 50% investment in
Park Plus Corporation (Park Plus), which marketed and distributed
mechanical parking equipment, for cash, accounts receivable and
notes receivable aggregating $451. This transaction resulted in
a gain of $263 which has been recognized as other income in the
accompanying consolidated financial statements as of November 30,
1992.
On December 1, 1993, the Company acquired all of the assets and
liabilities of H & H Eastern Distributors, Inc. (H&H) for $148 in
cash and a warrant to purchase 50,000 shares of the Company's
Class A Common Stock valued at approximately $69. The Company
acquired assets of approximately $1,854, liabilities of
approximately $1,922 and excess cost over fair value of net assets
acquired of $285 which is being amortized on a straight-line basis
over 20 years. Proforma financial information has not been
reflected for this acquisition as the impact on the results of
operations of the Company would not have been material.
In December, 1993, the Company formed Audiovox Singapore Pte.
Ltd., a wholly-owned subsidiary of Audiovox Asia, Inc. (Audiovox
Asia), which, in turn, is a wholly-owned subsidiary of the
Company, as well as Audiovox Communications (Malaysia) Sdn.
Bnd.(Audiovox Malaysia), which is an 80% owned subsidiary of
Audiovox Asia. In July 1994, the Company formed Audiovox
(Thailand) Co., Ltd., a 100% owned subsidiary of Audiovox Asia.
The Company formed these subsidiaries to assist in its planned
expansion of its international customer base.
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the
consolidated statements of cash flows:
For the Years Ended November 30,
1992 1993 1994
Cash paid during the years
for:
Interest $7,152 $5,985 $ 5,291
Income taxes $ 650 $3,667 $15,409
During 1992, $3,848 of outstanding accounts receivable from
CellStar Corporation (CellStar, the successor to National Auto
Center, Inc. (National) and Audiomex Export Corp. (Audiomex)), one
of the Company's equity investments, was converted to a note
receivable (Note 12).
During 1993, the Company entered into a lease agreement to acquire
new computer equipment. As a result, a capital lease obligation
of $646 was incurred (Note 11).
Stock warrants were issued pursuant to a consulting agreement
entered into during 1993 (Note 13).
During 1993 and 1994, a reduction of $40 and $37 to income taxes
payable was made due to the exercise of stock options.
During 1994, the Company acquired the assets and liabilities of
H&H in exchange for cash and warrants to purchase the Company's
common stock (Note 2).
(4) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
1993 1994
Trade accounts receivable $68,570 $ 90,225
Receivables from equity investments
(Note 12) 10,171 9,799
78,741 100,024
Less:
Allowance for doubtful accounts 2,063 1,623
Allowance for cellular deactivations 1,739 1,234
Allowance for co-operative
advertising and cash discounts 1,731 2,925
$73,208 $ 94,242
The provision for bad debt expense amounted to $1,921, $230 and a
recovery of $21 for the years ended November 30, 1992, 1993 and
1994, respectively. See Note 14(b) for concentrations of credit
risk.
(5) Transactions With Major Suppliers
The Company engages in transactions with Shintom Co., Ltd
(Shintom), a stockholder who owns approximately 3.5% at November
30, 1993 and 1994 of the outstanding Class A Common Stock and all
of the outstanding Preferred Stock of the Company. These
transactions include financing arrangements and inventory
purchases which approximated 6%, 4% and 7% for the years ended
November 30, 1992, 1993 and 1994, respectively, of total inventory
purchases. During 1993, the Company terminated its $14,500 line
of credit with Shintom. Included in accounts payable as of
November 30, 1993 is $43 due to Shintom for trade purchases.
During 1993, defective product was returned to Shintom in exchange
for tooling valued at $185. At November 30, 1993, tooling valued
at $92 is outstanding and included in prepaid and other current
assets.
During 1994, the Company formed a joint venture in Japan (Note 12)
with Shintom and other companies and issued a note payable to a
wholly-owned subsidiary of Shintom, in connection with the
purchase, which was repaid during 1994.
The Company purchased a majority of its cellular products from
another supplier. Inventory purchases from this supplier
approximated 48%, 47% and 45% of total inventory purchases for the
years ended November 30, 1992, 1993 and 1994, respectively.
Prior to fiscal 1993, the Company had an unwritten arrangement
with its principal supplier of cellular telephone products
pursuant to which the Company generally absorbed all repair costs
to a maximum of 50% of the original value of the defective unit.
The Company no longer utilizes its principal supplier of cellular
telephone products for repairs as of November 30, 1993. During
the fiscal year ended November 30, 1993, the Company began
repairing cellular telephone products.
(6) Property, Plant and Equipment
A summary of property, plant and equipment, net, is as follows:
November 30,
1993 1994
Land $ 53 $ 53
Buildings 446 446
Furniture, fixtures and displays 2,930 3,467
Machinery and equipment 2,077 2,458
Computer hardware and software 10,105 10,981
Automobiles 394 649
Leasehold improvements 3,207 4,003
19,212 22,057
Less accumulated depreciation
and amortization 13,129 15,877
$ 6,083 $ 6,180
At November 30, 1993 and 1994, included in computer hardware and
software, is $846 pertaining to a capital lease. Amortization of
such equipment is included in depreciation and amortization of
plant and equipment, and accumulated amortization was $226 and
$463 at November 30, 1993 and 1994, respectively.
Computer software includes approximately $2,564 and $1,305 of
unamortized costs as of November 30, 1993 and 1994, respectively,
related to the acquisition and installation of management
information systems for internal use which are being amortized
over a five-year period.
Depreciation and amortization of plant and equipment amounted to
$2,433, $2,843 and $2,803 for the years ended November 30, 1992,
1993 and 1994, respectively, which includes amortization of
computer software costs of $1,420, $1,439 and $1,259 for the years
ended November 30, 1992, 1993 and 1994, respectively.
(7) Financing Arrangements
(a) Bank Obligations
In connection with the completion of the sale of the
Debentures (Note 8), the Company entered into an amended and
restated revolving credit agreement (the Credit Agreement)
with its financial institutions on March 15, 1994. Under the
credit agreement, the Company may obtain credit through
direct borrowings, Eurodollars, banker's acceptances and
letters of credit. The obligations of the Company under the
credit agreement have been guaranteed by certain of the
Company's subsidiaries and have been secured by accounts
receivable and inventory of the Company and those
subsidiaries. The term of the Credit Agreement is for
approximately two years, expiring on February 28, 1996. As
a result of the new revolving credit agreement, bank
obligations have been classified as long-term at November 30,
1994.
The original amount of the aggregate direct borrowing and
line of credit availability under the Credit Agreement was
$20,000 and $50,000, respectively, which is subject to
certain conditions and based upon a formula taking into
account the amount and quality of its accounts receivable and
inventory. On August 26, 1994, the Company executed an
amendment to the Credit Agreement to increase amounts
eligible for direct borrowing and lines of credit to $40,000
and $75,000, respectively. This amendment was extended on
February 24, 1995, whereby direct borrowings and bank lines
will be reduced to $20,000 and $50,000, respectively, on June
1, 1995.
Outstanding obligations under the Credit Agreement at
November 30, 1993 and 1994 were as follows:
November 30,
1993 1994
Bankers Acceptances $20,000 $ 7,000
Revolving Credit Notes 18,797 400
Eurodollar Notes - 21,700
$38,797 $29,100
During 1993, interest on revolving credit notes was 1.625%
above the prime rate, which was 6% at November 30, 1993, and
interest on bankers acceptances was 3.25% above the discount
rate, which was 3% at November 30, 1993. During 1994,
interest on revolving credit notes was .25% above the prime
rate which was 8.5% at November 30, 1994, interest on
Eurodollar Notes was 2% above the three month Libor rate
which was 6.2% at November 30, 1994, and interest on bankers
acceptances was 2% above the discount rate which was 4.75% at
November 30, 1994.
Prior to May 6, 1992, compensating balances were required by
some financial institutions. The Company elected to pay a
fee in lieu of these balances and such fees approximated $69
for the year ended November 30, 1992. Under the new Credit
Agreement, the Company is required to pay quarterly
commitment fees, as well as an annual administrative fee.
The Credit Agreement contains several covenants requiring,
among other things, minimum annual levels of net income, and
minimum quarterly levels of net worth and working capital.
Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and
capital expenditures. At November 30, 1994, the Company was
not in compliance with a covenant. The Credit Agreement was
subsequently amended to eliminate the non-compliance.
During 1994, Audiovox Malaysia (Note 2) entered into a
revolving credit facility for approximately $1,200 with a
local Malaysian bank for additional working capital needs.
The facility is secured by a Standby Letter of Credit issued
under the Credit Agreement by the Company and is payable upon
demand or upon expiration of the Standby Letter of Credit
which has a term of one year. Outstanding obligations under
this agreement at November 30, 1994 were $1,084 and annual
interest was 1.5% above the Malaysian Base Lending Rate which
was 6.6% at November 30, 1994.
The maximum month-end amounts outstanding under the above-
mentioned borrowing facilities during the years ended
November 30, 1992, 1993 and 1994 were $41,047, $42,659 and
$30,184, respectively. Average borrowings during the years
ended November 30, 1992, 1993 and 1994 were $32,960, $28,895
and $16,929, respectively and the weighted average interest
rates were 7.7%, 7.8% and 7.9%, respectively.
(b) Documentary Acceptances
Prior to August 1994, the Company had various unsecured
documentary acceptance lines of credit with major suppliers.
These lines of credit amounted to approximately $11,670 at
November 30, 1993 to finance inventory purchases. Interest
for certain documentary lines was at a fixed rate of 9% at
November 30, 1993. In addition, during 1993, the Company
entered into an agreement with a supplier to fund all
merchandise from the supplier on a 60-day documentary
acceptance line of credit at terms equal to the supplier's
interest rate, which was 6.9% at November 30, 1993, plus a
1.1% fee. At November 30, 1993, $10,833 of documentary
acceptances were outstanding.
The maximum month-end documentary acceptances outstanding
during the years ended November 30, 1992, 1993 and 1994 were
$9,099, $9,638 and $9,078, respectively. Average borrowings
during the years ended November 30, 1992, 1993 and 1994 were
$6,733, $6,883 and $3,787, respectively and the weighted
average interest rates, including fees, were 8.5%, 11.2% and
11.0%, respectively.
(8) Long-Term Debt
A summary of long-term debt follows:
November 30,
1993 1994
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at
$17.70 per share $ - $ 65,000
Series A 10.8%, due 1996, convertible
at $5.34 per share 77 -
Series B 11.0%, due 1996, convertible
at $5.34 per share 5,385 -
Convertible debentures:
Series AA, 10.8%, due 1996, convertible
at $5.34 per share - 77
Series BB, 11.0%, due 1996, convertible
at $5.34 per share - 5,385
Subordinated Notes:
Series A, 10.8%, due 1995 2,902 -
Series B, 11.0%, due 1995 14,509 -
Subordinated note payable - 5,045
Capital lease obligations (Note 11) 480 305
23,353 75,812
Less current installments 9,743 159
$13,610 $ 75,653
On March 15, 1994, the Company completed the sale of $65,000,
6 1/4% convertible subordinated debentures (Debentures) due
2001 (the Offering), and entered into an Indenture Agreement.
The Debentures are convertible into shares of the Company's
Class A Common Stock, par value $.01 per share at an initial
conversion price of $17.70 per share, subject to adjustment
under certain circumstances. The Indenture Agreement contains
various covenants. The bonds are subject to redemption by the
Company in whole or in part, at any time after March 15, 1997,
at certain specified amounts. Audiovox has been requested to
consider, and is considering, certain modifications with
respect to its Debentures. However, there can be no assurance
that any such modification will be made.
A portion of the net proceeds of the Offering was used to
repay existing subordinated notes. In connection with the
Company's repayment of indebtedness, the Company exchanged its
existing Series A and Series B Convertible Subordinated
Debentures for Series AA and Series BB Convertible Debentures
and entered into a Debenture Exchange Agreement dated March 8,
1994 (the Debenture Exchange Agreement). The Series AA and
Series BB Convertible Debentures have the same maturity,
interest rate, and conversion provision as the existing Series
A and Series B Convertible Subordinated Debentures, but are
not subordinated to other indebtedness of the Company. Future
payments of principal and interest on the Series AA and Series
BB Debentures are secured by a letter of credit (Note 1 (o)).
The Series AA and Series BB Convertible Debentures are
convertible at any time at $5.34 per share which is subject to
adjustment in certain circumstances. Although the Debentures
Exchange Agreement provides for optional prepayments, under
certain circumstances, such payments are restricted by the
Credit Agreement (Note 7).
On October 20, 1994, the Company issued a note payable for
five hundred million Japanese Yen (approximately $5,045) to
finance a foreign currency investment in TALK Corporation
(TALK) (Note 12). The note is scheduled to be repaid on
October 20, 2004 and bears interest at 4.1%. The note can be
repaid by cash payment or by giving 10,000 shares of its TALK
investment to the lender. The lender has an option to acquire
2,000 shares of TALK held by the Company in exchange for
releasing the Company from 20% of the face value of the note
at any time after October 20, 1995. This note and the
investment in TALK are both denominated in Japanese Yen, and
as such, the foreign currency translation adjustments are
accounted for as a hedge. Any foreign currency translation
adjustment resulting from the note will be recorded in
stockholders' equity to the extent that the adjustment is less
than or equal to the adjustment from the translation of the
investment in TALK. Any portion of the adjustment from the
translation of the not that exceeds the adjustment from the
translation of the investment in TALK is a transaction gain or
loss that will be included in earnings.
At November 30, 1993 and 1994, current installments of long-
term debt include current installments of $159 under capital
lease obligations.
Maturities on long-term debt for the next five fiscal years
are as follows:
1995 $ 159
1996 5,608
1997 -
1998 -
1999 -
(9) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Issued Per Liquidation
Security Value Shares Authorized and Outstanding Share Rights
November 30, November 30,
1993 1994 1993 1994
Class A$ 0.01 30,000,000 30,000,0006,762,288 6,777,788 One Ratably with
Common Class B
Stock
Class B 0.01 10,000,000 10,000,0002,260,954 2,260,954 Ten Ratably with
Common Class A
Stock
Preferred
Stock 50.00 50,000 50,000 50,000 50,000 - $50 per share
Series
Preferred
Stock 0.01 1,500,000 1,500,000 - - - -
The holders of Class A and Class B Common Stock are entitled
to receive cash or property dividends declared by the Board
of Directors. The Board can declare cash dividends for Class
A Common Stock in amounts equal to or greater than the cash
dividends for Class B Common Stock. Dividends other than
cash must be declared equally for both classes. Each share
of Class B Common Stock may, at any time, be converted into
one share of Class A Common Stock. During 1993, 3,839,500
shares of Class B Common Stock were converted to shares of
Class A Common Stock. During fiscal 1993 and 1994, 16,000
and 15,500 shares, respectively, of Class A Common Stock were
issued due to the exercise of stock options, (Note 13).
The 50,000 shares of non-cumulative Preferred Stock
outstanding are owned by Shintom and have preference over
both classes of common stock in the event of liquidation or
dissolution. The Company had the right, until January 1,
1993, which was not exercised, to redeem all or part of the
Preferred Stock at its par value.
As of November 30, 1994, 969,500 shares of the Company's
Class A Common Stock are reserved for issuance under the
Company's Stock Option and Restricted Stock Plans (Note 13)
and 4,845,345 for all convertible securities and warrants
outstanding at November 30, 1994.
Undistributed earnings from equity investments included in
retained earnings amounted to $7,149 and $20,526 at November
30, 1993 and 1994, respectively.
(10) Income Taxes
As discussed in Note 1, the Company adopted Statement 109 as
of December 1, 1993. The cumulative effect of this change
in accounting for income taxes of $178, or $.02 per share,
is determined as of December 1, 1993 and is reported
separately as a reduction to the consolidated statement of
earnings for the year ended November 30, 1994. Prior years'
financial statements have not been restated to apply the
provisions of Statement 109.
The components of income before the provision for income
taxes and extraordinary item are as follows:
November 30,
1992 1993 1994
Domestic Operations $ 8,655 $ 15,983 $47,032
Foreign Operations (341) (741) (498)
$ 8,314 $ 15,242 $46,534
Total income tax expense for the year ended November 30, 1994
was allocated as follows:
Income from continuing operations $20,328
Stockholders' equity
Additional paid in capital for
compensation expense for tax
purposes in excess of amounts
recognized for financial reporting
purposes (37)
Total income tax expense $20,291
The provision for (recovery of) income taxes attributable to
income from continuing operations is comprised of:
Federal Foreign State Total
1992:
Current $ 2,953 $ 25 $ 905 $ 3,883
Deferred (1,022) - (366) (1,388)
$ 1,931 $ 25 $ 539 $ 2,495
1993:
Current $ 4,535 $ 21 $1,068 $ 5,624
Deferred (358) - (75) (433)
$ 4,177 $ 21 $ 993 $ 5,191
1994:
Current $12,042 $ 68 $2,078 $14,188
Deferred 5,365 - 775 6,140
$17,407 $ 68 $2,853 $20,328
A reconciliation of the provision for income taxes attributable
to income from continuing operations computed at the Federal
statutory rate to the reported provision for income taxes
attributable to income from continuing operations is as follows:
November 30,
1992 1993 1994
Tax provision at Federal
statutory rates $2,827 34.0% $5,335 35.0% $16,287 35.0%
Undistributed earnings from
equity investments (263) (3.2) (1,437) (9.4) 1,558 3.4
Benefit for utilization of
loses previously not
consolidated for tax purposes (666) (8.0) - - - -
State income taxes, net of
Federal benefit 372 4.5 645 4.2 1,854 4.0
Increase in beginning-of-the-
year balance of the valuation
allowance for deferred tax
assets - - - - 306 .7
Foreign tax rate differential 91 1.1 238 1.6 (7) (.1)
Other, net 134 1.6 410 2.7 330 .7
2,495 30.0 5,191 34.1 20,328 43.7
Utilization of net operating
loss carryforwards (1,851) (22.3) (2,173)(14.3) - -
$ 644 7.7% $3,018 19.8% $20,328 43.7%
For the years ended November 30, 1992 and 1993, deferred income
tax expense of $1,388 and $433, respectively, results from
timing differences in the recognition of income and expense for
income tax and financial reporting purposes. The sources and
tax effects of those timing differences are presented below:
November 30,
1992 1993
Uniform capitalization of inventory costs $ (27) $ (93)
Accounts receivable reserves (632) 193
Warranty and inventory reserves (623) 484
Depreciation and amortization (190) (646)
Insurance reserves 96 23
Cellular deactivation reserves (237) (439)
Other, net 225 45
$(1,388) $ (433)
The significant components of deferred income tax expense for
the year ended November 30, 1994 are as follows:
Deferred tax expense (exclusive of
the effect of other component
listed below) $ 5,834
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 306
$ 6,140
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
liabilities at November 30, 1994 are presented below:
November 30
1994
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts
and cellular deactivations $ 968
Inventory, principally due to
additional costs capitalized for tax
purposes pursuant to the Tax Reform
Act of 1986 387
Inventory, principally due to valuation
reserve 436
Accrual for future warranty costs 658
Net operating loss carryforwards, state
and foreign 859
Capital loss carryforward -
Foreign tax credits -
Other 193
Total gross deferred tax assets 3,501
Less: valuation allowance (979)
Net deferred tax assets 2,522
Deferred tax liabilities:
Plant, equipment and certain
intangibles, principally due to
depreciation and amortization (71)
Equity investments, principally due to
undistributed earnings (6,149)
Total gross deferred tax liabilities (6,220)
Net deferred tax liability $(3,698)
The valuation allowance for deferred assets as of December 1,
1993 was $673. The net change in the total valuation allowance
for the year ended November 30, 1994 was an increase of $306.
A valuation allowance is provided when it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. The Company has established valuation allowances
primarily for net operating loss carryforwards in certain states
and foreign countries, as well as other deferred tax assets in
foreign countries. Based on the Company's ability to carryback
future reversals of deferred tax assets to taxes paid in current
and prior years and the Company's historical taxable income
record, adjusted for extraordinary items, management believes
it is likely that the Company will realize the benefit of the
net deferred tax assets existing at November 30, 1994. Further,
management believes the existing net deductible temporary
differences will reverse during periods in which the Company
generates net taxable income. There can be no assurance,
however, that the Company will generate any earnings or any
specific level of continuing earnings in the future.
At November 30, 1994, the Company has net operating loss
carryforwards for state and foreign income tax purposes of
approximately $7,504, which are available to offset future state
and foreign taxable income, if any, which will expire through
the year ended November 30, 2009.
The Company has not recognized a deferred tax liability of
approximately $168 for the undistributed earnings of a foreign
corporate joint venture that arose in 1994 and prior years
because the Company currently does not expect those unremitted
earnings to reverse and become taxable to the Company in the
foreseeable future. A deferred tax liability will be recognized
when the Company expects that it will recover those
undistributed earnings in a taxable manner, such as through
receipt of dividends or sale of the investments.
(11) Lease Obligations
At November 30, 1994, the Company was obligated under
non-cancelable leases, for equipment and warehouse facilities
for minimum annual rental payments as follows:
Capital Operating
Lease Leases
1995 $217 $2,557
1996 111 1,791
1997 - 898
1998 - 424
1999 and thereafter - 165
Total minimum lease payments $328 $5,835
Amounts representing interest 23
Present value of future
minimum lease payments 305
Less current portion 159
Obligations under leases
excluding current
installments $146
Rental expense for the above-mentioned operating lease
agreements and other leases on a month-to-month basis
approximated $2,594, $2,390 and $3,107 for the years ended
November 30, 1992, 1993 and 1994, respectively.
The Company leases certain facilities from its principal
stockholder and several officers. Rentals for such leases are
considered by management of the Company to approximate
prevailing market rates. At November 30, 1994, minimum annual
rental payments on these related party leases, which are
included in the above table, are as follows:
1995 $646
1996 469
1997 82
1999 14
(12) Equity Investments
As of November 30, 1994, the Company had 20.88% ownership
interest in CellStar and a 33.33% ownership interest in TALK.
Additionally, the Company had 50% non-controlling ownership in
three other companies: Protector Corporation (Protector) which
acts as a distributor of chemical protection treatments and
Audiovox Specialty Markets Co., L.P. (ASM), which acts a
distributor to specialized markets for RV's, van conversions,
televisions and other automotive sound, security and accessory
products, and Audiovox Pacific Pty., Limited (Audiovox Pacific)
which distributes cellular telephones and automotive sound and
security products in Australia and New Zealand.
In January, 1992, the Company purchased a 50% equity investment
in a newly formed company, ASM, for $51. Effective December 1,
1993, the Company acquired the remaining 50% interest in H&H
which was a 50% owned joint venture in 1993 (Note 2).
The Company has an agreement for product marketing with
Protector. Under the terms of this agreement, the Company was
to receive monthly payments, as well as a fee based on a
percentage of the sales of certain products. In 1992, 1993 and
1994, the Company waived its right to receive its monthly
payments pursuant to the agreement. In 1992, 1993 and 1994, the
Company also waived its right to principally all of the fees
based on the percentage of the sales of certain products.
However, in 1994, the Company recorded management fees of $1,108
for the Company's support to Protector through various marketing
programs.
In December 1993, CellStar, the successor in interest to the
Company's National and Audiomex joint ventures, completed an
initial public offering (the CellStar Offering) of 7,935,000
shares of CellStar Common Stock. Of the total shares sold, the
Company sold 2,875,000 shares of CellStar Common Stock at the
initial public offering price (net of applicable underwriting
discount) of $10.695 per share and received aggregate net
proceeds of $29,433 (after giving effect to expenses paid by the
Company in connection with the offering). As a result, the
Company recorded a gain, before provision for income taxes, of
$27,783. In addition, the Company recorded a gain, before
provision for income taxes, of $10,565 on the increase in the
carrying value of its remaining 3,785,000 shares of CellStar
Common Stock due to the CellStar Offering. The closing price
of CellStar stock on November 30, 1994 was $18.50.
Of the proceeds received by CellStar from its initial public
offering, $13,656 was paid to the Company in satisfaction of
amounts owed to the Company by CellStar (as successor to
National) under certain promissory notes which evidenced
National's liability to the Company for the payment of
management fees and in satisfaction of past due trade
receivables from National to the Company. As a result of the
CellStar Offering, the Company will no longer receive management
fees from CellStar.
In connection with the CellStar Offering, the Company also
granted to the other 50% investor in CellStar (the Investor) an
option (Initial Option), exercisable in whole or in part, on or
before December 3, 1995, to purchase up to an aggregate of
1,500,000 shares of CellStar Common Stock owned by the Company.
The Initial Option is exercisable during the first eighteen
months at an exercise price of $11.50 per share and, thereafter,
at an exercise price of $14.38. In addition, Audiovox granted
the Investor a second option (Second Option), exercisable on or
before December 3, 1996, to purchase 250,000 shares of CellStar
Common Stock owned by the Company. The Second Option is
exercisable, in whole and not in part, at an exercise price of
$13.80 per share, and may only be exercised after the Initial
Option has been exercised in full.
In connection with the CellStar Offering, the Company also
granted the Investor the right to vote up to 2,800,000 shares
of CellStar Common Stock owned by the Company. The number of
shares of CellStar Common Stock the Investor is entitled to vote
is subject to reduction to the extent the Investor sells his
shares of CellStar Common Stock (with certain exceptions) or
exercises either the Initial Option or Second Option. The
voting rights granted to the Investor by the Company expire on
December 3, 1995. During the term of the Initial Option, the
Second Option and the voting rights agreement, the Company
cannot transfer its shares of CellStar Common Stock which are
the subject of those Agreements.
On August 29, 1994, the Company and Shintom each invested six
hundred million Japanese Yen (approximately $6,016) into a
newly-formed company, TALK. In exchange for their investments,
the Company and Shintom each received a 33% ownership in TALK,
with the remaining 33% to be owned by others.
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive
distribution rights on all wireless personal communication
products for all countries except Japan, China, Thailand and
several small mid-eastern countries. The Company granted
Shintom a license agreement permitting the use of the Audiovox
trademark to be used with TALK video cassette recorders sold in
Japan from August 29, 1994 to August 28, 1997, in exchange for
royalty fees.
The following table presents financial information relating to these
equity investments:
CellStar Protector
Year Ended Year Ended
November 30, 1994 August 31, 1994
(Unaudited)
Assets $192,418 $1,063
Liabilities 115,776 1,436
Equity (deficit) 76,642 (373)
Revenue 518,422 25
Gross Profit 69,642 -
Net income (loss) 16,248 5
Audiovox TALK ASM
Pacific Four Months Twelve Months
Year Ended Ended Ended
November 30, 1994 November 30, 1994 November 30, 1994
(Unaudited) (Unaudited)
Assets $ 9,868 $25,613 $ 4,661
Liabilities 8,312 10,185 209
Equity (deficit) 1,556 15,428 4,452
Revenue 19,831 11,637 15,619
Gross profit 6,035 468 2688
Net income (loss) 484 (2,456) 1,864
The Company's share of the change in the equity of these
investments was $18,662 for the year ended November 30, 1994,
which consists of $3,748 of earnings, $6,016 of an initial
investment in TALK, gain on the CellStar public offering of
$10,565, less the sale of CellStar stock of $1,650 and $17 of
cumulative losses on foreign currency translations.
The Company received the following management fees and related
income from its equity investments:
November 30,
1992 1993 1994
CellStar $4,334 $1,220 -
Pacific 514 613 435
H & H 85 70 -
Protector - - 1,108
$4,933 $1,903 $1,543
The Company's sales to the equity investments amounted to
$31,997, $21,368 and $32,630 for the years ended November 30,
1992, 1993 and 1994, respectively.
The Company's purchases from the equity investments amounted to
$436, $2,585 and $5,715 for the years ended November 30, 1992,
1993 and 1994, respectively.
Included in accounts receivable at November 30, 1993 and
November 30, 1994 are trade receivables due from its equity
investments aggregating $8,217 and $8,691, respectively. In
addition, included in accounts receivable at November 30, 1993
and November 30, 1994 are management fee receivables of $1,954
and $1,108, respectively. At November 30, 1993 and 1994,
included in accounts payable and other accrued expenses were
obligations to equity investments aggregating $891 and $207,
respectively. At November 30, 1993 and November 30, 1994, other
long-term assets include equity investment advances outstanding
and management fee receivables of $185 and $1,138. For the
years ended November 30, 1993 and November 30, 1994, interest
income earned on equity investment notes and other receivables
approximated $666 and $25, respectively.
(13) Common Stock and Compensation Plans
(a) Stock Option Plans
In April 1987, the Board of Directors approved the adoption
of the 1987 Stock Option Plan for the granting of options
to directors and key employees of the Company. Under the
1987 Stock Option Plan, the options can be either incentive
or non-qualified.
In April 1987, non-qualified options to purchase 200,000
shares of Class A Common Stock were granted at $11 per
share which represents the estimated fair market value at
the date of grant. Such options became exercisable in full
in October 1988 and expire in April 1997.
In May 1993, the stockholders approved the 1993 Stock
Option Plan which authorizes the granting of incentive
stock options to key employees and non-qualified stock
options to employees and/or directors of the Company. The
incentive stock options may be granted at a price not less
than the market value of the Company's common stock on the
date of grant and must be exercisable no later than ten
years after the date of grant. The exercise price of non-
qualified stock options may not be less than 50% of the
market value of the Company's Class A Common Stock on the
date of grant.
In December 1993, non-qualified options to purchase 113,500
shares of Class A Common Stock were granted at $13 per
share which was less than the market value of $17 per share
on the date of grant. No options can be exercised until
June 14, 1995 or December 14, 1996 (as the case may be)
after which they can be exercised in whole or in part until
expiration on December 14, 2003. Compensation expense is
recorded with respect to the options based upon the quoted
market value of the shares and the exercise provisions at
the date of grant. Compensation expense, under these
options, for the year ended November 30, 1994 was $175.
In November 1994, non-qualified options to purchase 75,000
shares of Class A Common Stock were granted at $11 per
share, which exceeded fair market value at the date of
grant, to a director and officer of the Company. Such
options will become exercisable in full on May 22, 1996 and
expire on November 22, 2004.
In May 1994, the stockholders approved the 1994 Stock
Option Plan which authorizes the granting of incentive
stock options to key employees and non-qualified stock
options to employees and/or directors of the Company. The
incentive stock options may be granted at a price not less
than 110% of the market value of the Company's common stock
on the date of grant and must be exercisable no later than
ten years after the date of grant. The exercise price of
non-qualified stock options may not be less than 50% of
market value of the Company's Class A Common Stock on the
date of grant. No options were granted under this plan as
of November 30, 1994.
Information regarding the Company's stock option plan is summarized
below:
1987 1993
Stock Stock
Option Option
Plan Plan
Shares under option:
Outstanding at
December 1, 1992 157,500 -
Granted - -
Exercised (16,000) -
Canceled - -
Outstanding at
November 30, 1993 141,500 -
Granted - 188,500
Exercised (15,500) -
Canceled (1,000) (500)
Outstanding at
November 30, 1994 125,000 188,000
Options exercisable,
November 30, 1994 125,000 -
(b) Restricted Stock Plan
In April 1987, the Board of Directors approved the adoption
of the 1987 Restricted Stock Plan for the granting of
restricted stock awards to directors and key employees of
the Company. In May 1993, the stockholders approved an
amendment to the 1987 Restricted Stock Plan which provides
that restrictions on stocks awarded pursuant to the Plan
will lapse at the discretion of the Compensation Committee
of the Company. In addition, the Plan's original
expiration date of April 27, 1997 was extended through
April 27, 2007.
In December 1993, 38,300 shares of Class A Common Stock
were awarded under the 1987 Restricted Stock Plan, one half
of such shares to be performance accelerated restricted
stock and one half of such shares to be performance
restricted stock. The performance accelerated shares will
vest in five years or earlier depending upon whether the
Company meets certain earnings per share goals. The
performance restricted shares will only vest in five years
or earlier if the Company meets certain earnings per share
ratios.
In November 1994, 25,000 shares of Class A Common Stock
were awarded under the 1987 Restricted Stock Plan to a
director and officer of the Company. One half of such
shares are to be performance accelerated restricted stock
and one half of such shares are to be performance
restricted stock. The terms of the grant are identical to
the December 1993 grant as previously discussed.
In May 1994, the Board of Directors approved the adoption
of the 1994 Restricted Stock Plan for the granting of
restricted stock awards to directors and key employees of
the Company. No awards were granted under this plan as of
November 30, 1994.
Compensation expense is recorded with respect to the grants
based upon the quoted market value of the shares on the
date of grant for the performance accelerated shares and
on the balance sheet date for the performance restricted
shares. Compensation expense, for these grants, for the
year ended November 30, 1994 was $93.
(c) Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee
Stock Purchase Plan. The stock purchase plan provides
eligible employees an opportunity to purchase shares of the
Company's Class A Common Stock through payroll deductions
up to 15% of base salary compensation. Amounts withheld
are used to purchase Class A Common Stock on or about the
last business day of each month at a price equal to 85% of
the fair market value. The aggregate number of shares
available for purchase under this plan shall not exceed
1,000,000.
(d) Stock Warrants
During the third quarter of fiscal 1993, pursuant to a
consulting agreement effective April 1993, the Company
granted warrants to purchase 100,000 shares of Class A
Common Stock, which have been reserved, at $7.50 per share.
The warrants, which are exercisable in whole or in part at
the discretion of the holder, expire on December 31, 1998.
There were no warrants exercised as of November 30, 1994.
The consulting agreement, valued at $100, was being
amortized over the two-year term thereof until 1994 when
the services to be provided pursuant to the consulting
agreement were completed.
In December 1993, the Company granted warrants to purchase
50,000 shares of Class A Common Stock, at a purchase price
of $14.375 per share as part of the acquisition of H&H
(Note 2). The per share purchase price and number of
shares purchasable are each subject to adjustment upon the
occurrence of certain events described in the warrant
agreement. The warrants are exercisable, in whole or in
part, from time-to-time, until September 22, 2003. If the
warrants are exercised in whole, the holder thereof has the
right to require the Company to file with the Securities
Exchange Commission, on or after September 22, 1995, a
registration statement relating to the sale by the holder
of the Class A Common Stock purchasable pursuant to the
warrant.
(e) Profit Sharing Plans
The Company has established two non-contributory employee
profit sharing plans for the benefit of its eligible
employees in the United States and Canada. The plans are
administered by trustees appointed by the Company. In
fiscal 1993 and 1994, a contribution of $200 and $225,
respectively, was made by the Company to the United States
plan. Contributions, required by law, to be made for
eligible employees in Canada were not material.
(14) Financial Instruments
(a) Off-Balance Sheet Risk
Letters of credit are issued by the Company during the
ordinary course of business through major domestic banks
as requested by certain suppliers. As of November 30, 1993
and 1994, the Company had open letters of credit of $15,000
and $17,000, respectively, of which $12,600 and $13,100,
respectively, were recorded in accounts payable. No
material loss is anticipated due to nonperformance by the
counterparties to these agreements.
(b) Concentrations of Credit Risk
Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist
principally of trade receivables. The Company's customers
are located principally in the United States and Canada and
consist of, among others, cellular carriers and service
providers, distributors, agents, mass merchandisers,
warehouse clubs and independent retailers.
At November 30, 1993, two customers, which included
CellStar and a Bell Operating Company, accounted for
approximately 9% and 8%, respectively, of accounts
receivable. At November 30, 1994, three customers, which
included CellStar, a Bell Operating Company and a mass
merchandiser, each accounted for approximately 5% of
accounts receivable, and one Bell Operating Company
accounted for approximately 6% of accounts receivable.
Four customers, CellStar, two Bell Operating Companies and
one other telephone company accounted for approximately 6%,
6%, 7% and 5%, respectively, of the Company's 1992 sales.
During the year ended November 30, 1993, two Bell Operating
Companies accounted for approximately 6% and 5% of the
Company's sales. A Bell Operating Company accounted for
approximately 7% of the Company's 1994 sales.
The Company generally grants credit based upon analyses of
its customers' financial position and previously
established buying and payment patterns. The Company
establishes collateral rights in accounts receivable and
inventory and obtains personal guarantees from certain
customers based upon management's credit evaluation. At
November 30, 1993 and 1994, 27 and 25 customers,
respectively, representing approximately 52% and 60%, of
outstanding accounts receivable, had balances owed greater
than $500.
A significant portion of the Company's customer base may
be susceptible to downturns in the retail economy,
particularly in the consumer electronics industry.
Additionally, customers specializing in certain automotive
sound, security and accessory products may be impacted by
fluctuations in automotive sales. A relatively small
number of the Company's significant customers are deemed
to be highly leveraged.
(c) Fair Value
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value.
Cash and cash equivalents, accounts receivable, restricted
cash, and accounts payable
The carrying amount approximates fair value because of the
short maturity of these instruments.
Long-term debt
The carrying amount of bank debt under the Company's
revolving Credit Agreement approximates fair value because
of the short maturity of the related obligations. With
respect to the 6 1/4% convertible subordinated debentures,
fair values are based on published statistical data. The
Series AA and BB Convertible Debentures were valued at the
closing market price of the Company's Class A Common Stock
for the number of shares convertible at November 30, 1994.
Other long-term borrowings are valued by the present value
of future cash flows at current market interest rates.
The estimated fair value of the Company's financial
instruments at November 30, 1994 is as follows:
Carrying Fair
Amount Value
Long-term obligations 104,912 86,662
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instrument. These estimates are subjective
in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly
affect the estimates.
(15) Commitments and Contingent Liabilities
On February 5, 1993, Motorola, Inc., Mitsubishi Electronic
Corp., Nokia Mobile Phones Company, Toshiba Corporation,
Panasonic Communications and Systems Company, OKI Electric
Industry Company, Ltd. and the Company, all suppliers or
manufacturers of cellular telephones, were named as defendants
in a class action complaint. The complaint contains several
allegations, including negligence and breach of both implied and
express warranties under the Uniform Commercial Code, arising
from the sale of portable hand-held cellular telephones. The
complaint seeks unspecified damages and attorney's fees.
Discovery has not yet commenced. On August 12, 1993, a
dismissal of the class allegation was granted. On August 20,
1993, an order was entered dismissing the complaint which
included the Company as a defendant and permitting plaintiffs
to file an amended complaint which does not include the Company
as a defendant. Such order, effectively dismissing the Company
as a defendant, is being appealed by the plaintiffs. The
Company believes that its insurance coverage and rights of
recovery against manufacturers of its portable hand-held
cellular telephones relating to this case are sufficient to
cover any reasonably anticipated damages. Management is of the
opinion that there are meritorious defenses to the claims made
in this case and that the ultimate outcome of this matter will
not have a material adverse impact on the financial position of
the Company. However, an estimate of the possible loss or range
of loss cannot be made at this time.
In November 1991, the Company was named as a co-defendant in a
class action suit against Protector, a 50% owned equity
investment. The class action alleges unfair and deceptive
practices and seeks, among other things, a refund of all
warranty fees paid, interest, litigation costs and unspecified
punitive damages. The action was settled and approved by the
Court on June 29, 1994 without any payment by the Company.
The Company is a co-defendant in an action alleging, among other
things, breach of contract and the plaintiff is seeking damages
of approximately $1,200. The litigation is currently in the
early discovery phase. Management is of the opinion that there
are meritorious defenses to the claim made in this case and that
the ultimate outcome of this matter will not have a material
adverse impact on the financial position of the Company.
However, an estimate of the possible loss or range of loss
cannot be made at this time.
In February 1995, an action was commenced against the Company
and others which alleges that the defendants have, among other
things, violated federal anti-trust laws. The Complaint seeks,
from all defendants, injunctive relief and damages of
approximately $5,000. The litigation is currently in the early
discovery phase. Management intends to vigorously defend the
action and is of the opinion that there are meritorious defenses
to the claims made in this case and that the ultimate outcome
of this matter will not have a material adverse impact on the
financial position of the Company. However, an estimate of the
possible loss or range of loss cannot be made at this time.
The Company is also a defendant in litigation arising from the
normal conduct of its affairs. Management is of the opinion
that any litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to
the extent not covered by such insurance, will not have a
material adverse impact on the financial position of the
Company. However, an estimate of the possible loss or range of
loss cannot be made at this time.
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information regarding this item is set forth under the captions
"Election of Directors" of the Company's Proxy Statement dated
March 24, 1995, which will be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 (the "Proxy Statement") and is
incorporated herein by reference. Information with regard to
Executive Officers is set forth in Item 1 of this Form 10-K.
Item 11 - Executive Compensation
The information regarding this item is set forth under the caption
"Executive Compensation" of the proxy statement and is incorporated
herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
The information regarding this item is set forth under the
caption "Beneficial Ownership of Common Stock" of the Proxy Statement
and is incorporated herein by reference. The Company knows of no
arrangements which may result at a subsequent date in a change of
control of the Company.
Item 13 - Certain Relationships and Related Transactions
Information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock", "Election of Directors" and
"Executive Compensation" of the proxy statement.
PART IV
Item 14 - Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K
(a) (1)
The following financial statements are included in Item 8 of this
Report:
Independent Auditors' Report
Consolidated Balance Sheets of Audiovox Corporation and
Subsidiaries as of November 30, 1993 and 1994.
Consolidated Statements of Earnings of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1992, 1993 and 1994.
Consolidated Statements of Stockholders' Equity of Audiovox
Corporation and Subsidiaries for the Years Ended November 30,
1992, 1993 and 1994.
Consolidated Statements of Cash Flows of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1992, 1993 and 1994.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the
Years Ended November 30, 1992, 1993 and 1994.
Independent Auditors' Report on Financial Statement Schedules
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
VIII Valuation and Qualifying 68
Accounts
All other financial statement schedules not listed are
omitted because they are either not required or the
information is otherwise included.
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of February 13, 1995 we reported on the
consolidated balance sheets of Audiovox Corporation and
subsidiaries as of November 30, 1993 and 1994, and the related
consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended
November 30, 1994, which are included in the Company's 1994 annual
report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedules in the 1994
annual report on Form 10-K. These consolidated financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Our report refers to a change in the method of accounting for
income taxes.
s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
February 13, 1995
(3) Exhibits See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
The Registrant filed one report on Form 8-K during the fourth
quarter ended November 30, 1994.
On September 15, 1994, the Company filed a report on Form 8-K
which reported that the Company, on August 29, 1994, had
entered into the Third Amendment to the Credit Agreement
dated as of March 15, 1994, whereby the Company's direct
borrowing was increased from $20 million to $40 million, and
its bank lines were increased from $50 million to $75 million
until March 1, 1995 when direct borrowing and bank lines will
be stepped down to $20 million and $50 million, respectively.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Company
(incorporated by reference to the Company's
Registration Statement on Form S-1; No. 33-107,
filed May 4, 1987).
3.1a Amendment to Certificate of Incorporation
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
1993).
3.2 By-laws of the Company (incorporated by reference
to the Company's Registration Statement on Form S-
1; No. 33-10726, filed May 4, 1987).
10.1 Renewal, dated October 30, 1993, of Lease by and
between Registrant and John J. Shalam dated October
22, 1986 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year
ended November 30, 1993).
10.2 Lease by and between Audiovox West Corporation and
Marquardt Associates dated February 1, 1991
(incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended November 30,
1990).
10.3 Debenture Exchange Agreement among the Registrant
and the several noteholders dated as of March 15,
1994 (incorporated by reference to the Company's
Current Report on Form 8-K dated March 15, 1994).
EXHIBIT
NUMBER DESCRIPTION
10.4 Amended and Restated Credit Agreement by and
between the Registrant and the several banks and
financial institutions (incorporated by reference
to the Company's Current Report on Form 8-K dated
March 15, 1994).
10.4a Fifth Amendment, dated as of February 24, 1995, to
amended and restated credit agreement by and
between the Registrant and the several banks and
financial institutions (Pages 69-72 herein).
10.5 Purchase Agreement dated March 8, 1994 and
Registration Rights Agreement dated as of March 15,
1994, by and between the Registrant and Oppenheimer
& Co., Inc., Furman Selz Incorporated and Chemical
Securities, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K dated March
15, 1994).
10.6 Initial Option, Second Option and Voting Rights
Agreement by and between Registrant and Alan
Goldfield (incorporated by reference to the
Company's Current Report on Form 8-K dated December
23, 1993).
11 Statement of Computation of per share earnings
(Page 73 herein).
21 Subsidiaries of the Registrant (Page 74 herein).
23 Independent Auditors' Consent (Page 75 herein).
27 Financial Data Schedule (filed via EDGAR herewith)
(d) All other schedules are omitted because the required
information is shown in the financial statements or notes
thereto or because they are not applicable.
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 28, 1995 BY:s/John J. Shalam
John J. Shalam, President and
Chief Executive Officer
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 dated indicated.
Signature Title Date
s/John J. Shalam President; February 28, 1995
John J. Shalam Chief Executive Officer
(Principal Executive
Officer) and Director
s/Philip Christopher Executive Vice President February 28, 1995
Philip Christopher and Director
s/Charles M. Stoehr Senior Vice President, February 28, 1995
Charles M. Stoehr Chief Financial Officer
(Principal Financial and
Accounting Officer) and
Director
s/Patrick M. Lavelle Director February 28, 1995
Patrick M. Lavelle
s/Martin Novick Director February 28, 1995
Martin Novick
s/Harold Bagwell Director February 28, 1995
Harold Bagwell
s/Gordon Tucker Director February 28, 1995
Gordon Tucker
s/Irving Halevy Director February 28, 1995
Irving Halevy
Schedule VIII
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1992, 1993 and 1994
(In thousands)
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged Balance
Beginning Costs and To Other At End
Description Of Year Expenses Accounts Deductions Of Year
1992
Allowance for doubtful
accounts $ 4,779 $ 1,921 - $4,031 $ 2,669
Cash discount allowances 391 - - 220 171
Co-op advertising and
volume rebate allow-
ances 1,208 1,830 - 2,206 832
Allowance for cellular
deactivations 748 - - 60 688
Reserve for warranties
and product repair costs 4,271 3,322 - 2,610 4,983
$11,397 $ 7,073 - $9,127 $ 9,343
1993
Allowance for doubtful
accounts $ 2,669 $ 230 - $ 836 $ 2,063
Cash discount allowances 171 131 - - 302
Co-op advertising and
volume rebate allow-
ances 832 4,651 - 4,054 1,429
Allowance for cellular
deactivations 688 1,051 - - 1,739
Reserve for warranties
and product repair costs 4,983 2,512 - 3,690 3,805
$ 9,343 $ 8,575 - $8,580 $ 9,338
1994
Allowance for doubtful
accounts $ 2,063 $ (21) $ 419 $ 1,623
Cash discount allowances 302 - - 65 237
Co-op advertising and
volume rebate allow-
ances 1,429 5,898 - 4,639 2,688
Allowance for cellular
deactivations 1,739 - - 505 1,234
Reserve for warranties
and product repair costs 3,805 2,970 - 3,568 3,207
$ 9,338 $ 8,847 - $ 9,196 $ 8,989