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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended November 30, 1997
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-7750
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of each class: Which Registered
Class A Common Stock $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
X
1
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $83,945,514 (based upon closing price on the American Stock
Exchange, Inc. on February 18, 1998).
The number of shares outstanding of each of the registrant's classes of common
stock, as of February 18, 1998 was:
Class Outstanding
Class A Common Stock $.01 par value 17,253,533
Class B Common Stock $.01 par value 2,260,954
PART I
Item 1 - Business
General
Audiovox Corporation, together with its operating subsidiaries
(collectively, the Company), markets and supplies, under its own name or trade
names, a diverse line of aftermarket products which include wireless products,
both hand held portables and vehicle installed cellular telephones and
accessories, automotive sound equipment and automotive accessories, which
includes vehicle security systems, cruise controls, defoggers, remote start
systems and vehicle tracking systems, all of which are designed primarily for
installation in cars, trucks and vans after they have left the factory, and
consumer electronic products.
The Company's products are sold through a worldwide distribution network.
Sales are made directly and indirectly through independent distributors to
cellular telephone accounts, cellular service providers, regional Bell Operating
Companies (BOCs), new car dealers, mass merchandisers, catalogue showrooms,
original equipment manufacturers (OEMs), military Army and Air Force Exchange
Systems (AAFES), autosound specialists and retailers. The Company sells to
consumers from Company-owned retail sales and service locations which generally
operate under the name "Quintex", and also receives activation commissions and
residuals from certain cellular service providers.
The Company's products may be broadly grouped into three major categories:
wireless, which includes cellular telephone products, activation commissions and
residual fees; automotive sound equipment; and automotive accessories. These
categories represent different product lines rather than separate reporting
segments. The Company's products are distributed by two separate marketing
groups: Communications and Automotive.
The Company was incorporated in Delaware on April 10, 1987, as successor to
the business of Audiovox Corp., a New York corporation founded in 1960 (the
predecessor company) by John J. Shalam, the Company's President, Chief Executive
Officer and controlling stockholder. Unless the context otherwise requires, or
as otherwise indicated, references herein to the "Company" include the Company
and its wholly-owned and majority-owned operating subsidiaries.
2
Trademarks
The Company markets products under several trademarks, including
Audiovox(R), Custom SPS(R), Prestige(R), Pursuit(R), Minivox(TM), Minivox
Lite(R), The Protector(TM) and Rampage(TM). The Company believes that these
trademarks are recognized by customers and are therefore significant in
marketing its products. Trademarks are registered for a period of ten years and
such registration is renewable for subsequent ten-year periods.
Distribution and Marketing
Cellular and Non-Cellular Wholesale
The Company markets products on a wholesale basis to a variety of customers
through its direct sales force and independent sales representatives. During the
fiscal year ended November 30, 1997, the Company sold its products to
approximately 2,500 wholesale customers, including the BOCs, other cellular
carriers and their respective agents, mass merchandise chain stores, specialty
installers, distributors, car dealers, OEMs and AAFES.
The Company's five largest wholesale customers (excluding joint ventures),
who, in the aggregate, accounted for 30.6% of the Company's net sales for the
fiscal year ended November 30, 1997, are AirTouch Cellular, Bell Atlantic Mobile
Systems, US Cellular, C.R.M. Movicom and Vanguard Cellular. In addition, the
Company also sells its non-cellular products to mass merchants such as Walmart
Stores, Inc. and OEMs such as Chrysler of Canada, Proton Corporation Sdn. Bhd.
of Malaysia, General Motors and Chrysler of Venezuela, General Motors
Corporation and BMW of North America.
The Company uses several techniques to promote its products to wholesale
customers, including trade and consumer advertising, attendance at trade shows
and direct personal contact by Company sales representatives. In addition, the
Company typically assists cellular carriers in the conduct of their marketing
campaigns including the scripting of telemarketing presentations, funds
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 to end users.
The Company's wholesale policy is to ship its products within 24 hours of a
requested shipment date from public warehouses in Norfolk, Virginia, Sparks,
Nevada and Canada and from leased facilities located in Hauppauge, New York and
Los Angeles, California.
Retail
As of November 30, 1997, the Company operated approximately 26 retail
outlets and licensed its trade name to 6 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) and Quintex(R). In addition to Audiovox products, these outlets sell
competitive products
3
such as Motorola and Nokia.
The Company's retail outlets typically generate revenue from three sources:
(i) sale of cellular telephones and related products, (ii) activation
commissions paid to the Company by cellular telephone carriers when a customer
initially subscribes for cellular service and (iii) monthly residual fees. The
amount of the activation commissions paid by a cellular telephone carrier is
based upon various service plans and promotional marketing programs offered by
the particular cellular telephone carrier. The monthly residual payment is based
upon a percentage of the customer's usage and is calculated based on the amount
of the cellular phone billings generated by the base of the customers activated
by the Company on a particular cellular carrier's system. Under the Company's
six licensee relationships, the licensee receives the majority of the activation
commissions, and the Company retains the majority of the residual fees. The
Company's agreements with cellular carriers provide for a reduction in, or
elimination of, activation commissions in certain circumstances if a cellular
subscriber activated by the Company deactivates service within a specified
period. The Company records an allowance to provide for the estimated liability
for return of activation commissions associated with such deactivations. As a
practical matter, the profitability of the Company's retail operations is
dependent on the Company maintaining agency agreements with cellular carriers
under which it receives activation commissions and residual fees.
The Company's relationships with the cellular carriers are governed by
contracts that, in the aggregate, are material to the continued generation of
revenue and profit for the Company. Pursuant to applicable contracts with
cellular carriers, each of the Company's retail outlets functions as 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 several cellular carriers.
As of November 30, 1997, the Company was an agent for the following
carriers in selected areas: Bell Atlantic Mobile Systems, Inc., BellSouth
Mobility, Inc. and GTE Mobilnet of the Southeast, 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, either party may terminate the agreement, with
cause, upon prior notice. Typically, the Company's right to be paid residual
fees ceases upon termination of an agency relationship.
Equity Investments
The Company has from time-to-time, at both the wholesale and retail levels,
established joint ventures to market its products to a specific market segment
or geographic area. In entering into a 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.
4
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, 1997, the Company had a 30.8% ownership interest in TALK
Corporation (TALK) which holds world-wide distribution rights for product
manufactured by Shintom Co., Ltd. (Shintom). These products include cellular
telephones, video recorders and players and automotive sound products. TALK has
granted Audiovox exclusive distribution rights on all wireless personal
communication products for all countries except Japan, China, Thailand, and
several mid-eastern countries. The Company's 72%-owned subsidiary, Audiovox
Communications (Malaysia) Sdn. Bhd. (Audiovox Communications), had a 29%
ownership interest in Avx Posse (Malaysia) Sdn. Bhd. (Posse) which monitors car
security commands through a satellite based system in Malaysia. As of November
30, 1997, the Company had a 20% ownership interest in Bliss-Tel Company,
Limited, which distributes cellular telephones and accessories in Thailand.
Additionally, the Company had a 50% non-controlling ownership in five other
companies: Protector Corporation (Protector) which acts as a distributor of
chemical protection treatments, Audiovox Specialized Applications, LLC (ASA),
which acts as a distributor of televisions and other automotive sound, security
and accessory products to specialized markets for recreational vehicles and van
conversions, Audiovox Pacific Pty., Limited (Audiovox Pacific) which distributes
cellular telephones and automotive sound and security products in Australia and
New Zealand, G.L.M. Wireless Communications, Inc. (G.L.M.) which is in the
cellular telephone, pager and communications business and Quintex Communications
West, LLC, which is in the cellular telephone and communications business.
Customers
The Company had one customer, AirTouch Cellular, that accounted for more
than 10% of the Company's net sales for fiscal 1997. AirTouch Cellular accounted
for 11.3% of the Company's net sales for fiscal 1997.
Suppliers
The Company purchases its cellular and non-cellular products from
manufacturers located in several Pacific Rim countries, including Japan, China,
Korea, Taiwan and Singapore, Europe and the United States. In selecting its
vendors, the Company considers quality, price, service, market conditions and
reputation. The Company maintains buying offices or inspection offices in
Taiwan, Korea and China to provide local supervision of supplier performance
with regard to, among other things, price negotiation, delivery and quality
control. The majority of the products sourced through these foreign buying
offices are non-cellular.
Since 1984, the principal supplier of the Company's wholesale cellular
telephones has been Toshiba Corporation (Toshiba), accounting for approximately
32%, 28% and 44% of the total dollar amount of all product purchases by the
Company, during the fiscal years ended November 30, 1997, 1996 and 1995,
respectively. Toshiba continues to sell products to the Company as an original
equipment customer. In order to expand its supply channels and diversify its
cellular product line, the Company sources cellular equipment from other
manufacturers including, but not limited to, TALK. Purchases from TALK accounted
for approximately 29%, 26% and 20% of total inventory purchases for the years
ended November 30, 1997, 1996 and 1995, respectively. Purchases of non-cellular
products
5
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 of its
product lines, each competing with a number of well-established companies that
manufacture and sell products similar to those of the Company. Specifically, the
cellular market place is driven by current selling prices, which also affects
the carrying value of inventory on hand. Additionally, the Custom SPS line
competes against factory-supplied radios. Service and price are the major
competitive factors in all product lines. The Company believes that it is a
leading supplier to the cellular market primarily as a result of the performance
of its products and the service provided by its distribution network. The
Company's retail business is also highly competitive on a product basis. In
addition, since the Company acts as an agent for cellular service providers,
these cellular service providers must also compete in their own highly
competitive markets. The Company's retail performance is, therefore, also based
on the cellular service providers' ability to compete.
Employees
At November 30, 1997, the Company employed approximately 1,018 people.
Executive Officers of the Registrant
The executive officers of the registrant are listed below. All officers of
the Company are elected by the Board of Directors to serve one-year terms. There
are no family relationships among officers, or any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected. Unless otherwise indicated, positions listed in the table have been
held for more than five years.
Name Age Current Position
John J. Shalam 64 President and Chief Executive Officer and
Director
Philip Christopher 49 Executive Vice President and Director
Charles M. Stoehr 51 Senior Vice President and Chief Financial
Office and Director
Patrick M. Lavelle 46 Senior Vice President and Director
Chris L. Johnson 46 Vice President, Secretary
Ann M. Boutcher 47 Vice President and Director
Richard Maddia 39 Vice President and Director
6
John J. Shalam has served as President and Chief Executive Officer and as a
director of the Company since 1960. Mr. Shalam also serves as president and is a
director of most of the Company's operating subsidiaries.
Philip Christopher, Executive Vice President of the Company, has been with
the Company since 1970 and has held his current position since 1983. Prior
thereto, he was Senior Vice President of the Company. Mr. Christopher also has
been a director of the Company since 1973 and, in addition, serves as President
of Audiovox Communications Corp. and is an officer and a director of most of the
Company's operating subsidiaries.
Charles M. Stoehr has been Chief Financial Officer of the Company since
1979 and was elected Senior Vice President in 1990. Mr. Stoehr has been a
director of the Company since 1987. From 1979 through 1990, Mr. Stoehr was a
Vice President of the Company.
Patrick M. Lavelle has been a Vice President of the Company since 1982. In
1991, Mr. Lavelle was elected Senior Vice President, with responsibility for
marketing and selling the Company's automotive accessory and automotive sound
line of products. Mr. Lavelle was elected to the Board of Directors in 1993.
Chris L. Johnson has been a Vice President of the Company since 1986 and
Secretary since 1980. Ms. Johnson has been employed by the Company in various
positions since 1968 and was a director of the Company from 1987 to 1993.
Ann M. Boutcher has been a Vice President of the Company since 1984. Ms.
Boutcher's responsibilities include the development and implementation of the
Company's advertising, sales promotion and public relations programs. Ms.
Boutcher was elected to the Board of Directors in 1995.
Richard Maddia has been a Vice President of the Company since 1991. Mr.
Maddia is responsible for the Company's Management Information Systems for both
the Company's distribution network and financial reporting. Mr. Maddia was
elected to the Board of Directors in 1996.
Item 2 - Properties
As of November 30, 1997, the Company leased a total of thirty-four
operating facilities located in twelve states and two Canadian provinces. These
facilities serve as offices, warehouses, distribution centers or retail
locations. Additionally, the Company utilizes approximately 117,000 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
The Company is currently, and has in the past been, a party to routine
litigation incidental to its business. The Company does not expect any pending
litigation to have a material adverse effect on its consolidated financial
position.
7
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 1997.
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 6,300 beneficial holders of Class A Common Stock and 4 holders
of Class B Common Stock.
Class A Common Stock
Average
Daily
Trading
Fiscal Period High Low Volume
1997
First Quarter $ 8 1/2 $ 4 5/8 368,639
Second Quarter 7 7/8 4 15/16 171,733
Third Quarter 8 13/16 6 5/16 201,653
Fourth Quarter 10 3/4 7 5/16 131,779
1996
First Quarter $ 6 3/8 $ 43/4 15,924
Second Quarter 7 7/16 4 1/16 52,039
Third Quarter 6 5/16 4 16,309
Fourth Quarter 6 3/4 4 5/8 95,817
1995
First Quarter $ 8 1/2 $ 6 3/8 25,300
Second Quarter 7 5 1/16 13,500
Third Quarter 7 3/8 4 7/16 30,100
Fourth Quarter 6 13/16 4 3/8 21,600
8
Item 6 - Selected Financial Data
Years ended November 30, 1997, 1996, 1995, 1994 and 1993
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------- ------------
(Dollars in thousands, except per share data)
Net sales $ 639,082 $597,915 $500,740 $486,448 $389,038
Net income (loss) 21,022 (a ) (26,469) (b) (11,883) (c) 26,028 (e) 12,224 (g)
Net income (loss)
per common
share, primary 1.09 (a ) (2.82) (b) (1.31) (c) 2.86 (e) 1.35 (g)
Net income (loss)
per common
share, fully
diluted 1.05 (a) - - 2.20 (e) 1.25 (g)
Total assets 289,827 265,545 308,428 239,098 169,671
Long-term obli
gations, less
current in
stallments 38,996 70,413 142,802 110,698 (f) 13,610 (h)
Stockholders' 187,892 (d) 131,499 (d) 114,595 (d) 92,034 65,793
equity
(a) Includes a pre-tax charge of $12.7 million for costs associated with
the exchange of $21.5 million of subordinated debentures into 2,860,925
shares of common stock in addition to tax expense on the exchange of
$158,000. Additionally, includes a net gain of $23.2 million on sale of
CellStar shares.
(b) Includes a pre-tax charge of $26.3 million for costs associated with
the exchange of $41.3 million of subordinated debentures into 6,806,580
shares of common stock in addition to tax expense on the exchange of
$2.9 million.
(c) Includes a pre-tax charge of $2.9 million associated with the issuance
of warrants, a pre-tax charge of $11.8 million for inventory
write-downs and the down-sizing of the retail operations and a pre-tax
gain on the sale of an equity investment of $8.4 million.
(d) Includes a $12.2 million unrealized gain on marketable securities, net,
a $773,000 unrealized gain on equity collar, net, and a $20.8 million
increase as a result of the exchange of $21.5 million of subordinated
debentures in 1997 and a $10.3 million unrealized gain on marketable
securities, net, and a $34.4 million increase as a result of the
exchange of $41.3 million of subordinated debentures in 1996 and a
$31.7 million unrealized gain on marketable securities, net, for 1995.
(e) Includes a cumulative effect change of ($178,000) or ($0.02) per share,
primary, and ($0.01) per share, fully diluted. Also includes a pre-tax
gain on sale of an equity investment of $27.8 million and a gain on
public offering of equity investment of $10.6 million.
(f) Long-term debt includes the addition of a $65 million bond offering
in 1994.
(g) Includes an extraordinary item of $2.2 million or $0.24 per share,
primary, and $0.22 per share, fully diluted.
(h) Long-term debt does not include $38.8 million of bank obligations which
were classified as current.
9
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (In thousands, except share and per share data)
The Company markets its products under its own brand as well as private
labels to a large and diverse distribution network both domestically and
internationally. The Company's products are distributed by two separate
marketing groups: Communications and Automotive. The Communications group
consists of Audiovox Communications Corp. (ACC) and the Quintex retail
operations (Quintex), both of which are wholly-owned subsidiaries of the
Company. The Communications group markets cellular telephone products and
receives activation commissions and residual fees from its retail sales. The
price at which the Company's retail outlets sell cellular telephones is often
affected by the activation commission the Company will receive in connection
with such sale. The activation commission paid by a cellular telephone carrier
is based upon various service plans and promotional marketing programs offered
by the particular cellular telephone carrier. The monthly residual payment is
based upon a percentage of the customer's usage and is calculated based on the
amount of the cellular phone billings generated by the base of customers
activated by the Company on a particular cellular carrier's system. The
Automotive group consists of Audiovox Automotive Electronics (AAE) and, through
February 28, 1997, Heavy Duty Sound, which are divisions of the Company,
Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd.
and Audiovox Venezuela, C.A., which are majority-owned subsidiaries. Products in
the Automotive group include automotive sound and security equipment, car
accessories, home and portable sound products and mobile video. The Company
allocates interest and certain shared expenses to the marketing groups based
upon estimated usage. General expenses and other income items which are not
readily allocable are not included in the results of the various marketing
groups.
This Report on Form 10-K contains forward-looking statements relating to
such matters as anticipated financial performance and business prospects. When
used in this Report, the words "anticipates," "expects," "may," "intend" and
similar expressions are intended to be among the statements that identify
forward-looking statements. From time to time, the Company may also publish
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors,
including, but not limited to, foreign currency risks, political instability,
changes in foreign laws, regulations, and tariffs, new technologies,
competition, customer and vendor relationships, seasonality, inventory
obsolescence and availability, could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements.
10
The following table sets forth for the periods indicated certain statements
of income (loss) data for the Company expressed as a percentage of net sales:
Percentage of Net Sales
Years Ended November 30,
--------------------------------
1997 1996 1995
---- ---- ----
Net sales:
Product sales:
Cellular wholesale 61.1% 58.6% 52.3%
Cellular retail 1.0 1.3 2.8
Sound 14.4 16.4 20.3
Security and accessories 15.2 14.6 13.5
-------- ------- ------
91.7 90.9 88.9
Activation commissions 4.9 5.5 7.7
Residual fees 0.7 0.8 1.0
Other 2.7 2.8 2.4
--------- -------- -------
Total net sales 100.0 100.0 100.0
Cost of sales (83.3) (83.9) (85.9)
------- ------ ------
Gross profit 16.7 16.1 14.1
Warehousing and assembly (1.9) (1.8) (2.0)
Selling (6.0) (6.7) (6.9)
General and administrative expense (5.8) (5.4) (7.2)
-------- ------- -------
Total operating expenses (13.7) (13.9) (16.1)
------- ------ ------
Operating income (loss) 3.0 2.2 (2.0)
Interest expense (0.4) (1.4) (1.9)
Income of equity investments 0.2 0.1 -
Management fees - - -
Gain on sale of equity investment 5.9 0.2 1.7
Debt conversion expense (2.0) (4.4) -
Expenses related to issuance of warrants - - (0.6)
Other income (expense) - (0.1) (0.2)
Income tax (expense) recovery (3.5) (1.0) 0.6
-------- ------- -------
Net income (loss) 3.3 % (4.4)% (2.4)%
========= ======= =======
FISCAL 1997 COMPARED TO FISCAL 1996
CONSOLIDATED RESULTS
Net sales were $639,082 for 1997, an increase of $41,167, or 6.9%, over the
same period last year. The increase in net sales was accompanied by a
corresponding increase in gross profit margins to 16.7% from 16.1% last year.
Operating expenses increased to $87,067 from $83,313, a 4.5% increase. Operating
income for 1997 was $19,695, an increase of $6,620, or 50.6%, compared to last
year. During 1997, the Company sold 1,835,000 shares of its holdings of CellStar
for a net gain of $23,232. Also during 1997, the Company exchanged $21,479 of
its subordinated debentures for 2,860,925
11
shares of Class A Common Stock. Costs associated with this exchange were
$12,844, including income taxes.
The net sales and percentage of net sales by product line and marketing
group for the fiscal years ended November 30, 1997, 1996 and 1995 are reflected
in the following table. Certain reclassifications have been made to the data for
periods prior to fiscal 1996 in order to conform to fiscal 1997 presentation.
Years Ended November 30,
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- ----------------------
Net sales:
Communications
Cellular wholesale $390,230 61.1% $350,299 58.6% $261,997 52.3%
Cellular retail 6,280 1.0 7,665 1.3 14,177 2.8
Activation commissions 31,061 4.9 33,102 5.5 38,526 7.7
Residual fees 4,688 0.7 4,828 0.8 4,781 1.0
Other 12,141 1.9 12,785 2.1 11,293 2.3
---------- ---------- ---------- ---------- ---------- -------
Total Communications 444,400 69.5 408,679 68.4 330,774 66.1
--------- --------- --------- --------- --------- ------
Automotive
Sound 91,763 14.4 98,303 16.4 101,757 20.3
Security and accessories 97,446 15.2 87,234 14.6 67,560 13.5
Other 4,701 0.7 2,879 0.5 649 0.1
----------- ---------- ----------- ---------- ------------ -------
Total Automotive 193,910 30.3 188,416 31.5 169,966 33.9
Other 772 0.1 820 0.1 - -
------------ ---------- ------------ ---------- -------------- --------
Total $639,082 100.0% $597,915 100.0% $500,740 100.0%
======== ====== ======== ====== ======== ======
COMMUNICATION RESULTS
The Communications group is composed of ACC and Quintex, both wholly-owned
subsidiaries of Audiovox Corporation. Since principally all of the net sales of
Quintex are cellular in nature, all operating results of Quintex are being
included in the discussion of the Communications group's product line.
Net sales were $444,400, an increase of $35,721, or 8.7%, over the same
period last year. Unit sales of cellular telephones increased 892,000 units, or
43.2%, over 1996. Average unit selling prices decreased approximately 21.2% but
were offset by a corresponding decrease of 22.9% in average unit cost. The
number of new cellular subscriptions processed by Quintex decreased 9.1%, with a
corresponding decrease in activation commissions of approximately $2,041. The
average commission received by Quintex per activation, however, increased
approximately 3.2% from last year. Unit gross profit margins increased to 11.1%
from 9.0% last year, primarily due to increased unit sales and reduced unit
costs. Operating expenses decreased to $49,582 from $50,710. As a percentage of
net sales, operating expenses decreased to 11.2% during 1997 compared to 12.4%
in 1996. Selling expenses decreased $3,203 from last year, primarily in
advertising and divisional marketing, partially offset by increases in
commissions and salesmen salaries. General and administrative expenses increased
over
12
1996 by $572, primarily in office salaries and temporary personnel. Warehousing
and assembly expenses increased over 1996 by $1,503, primarily in tooling and
direct labor. Pre-tax income for 1997 was $11,582, an increase of $8,476
compared to last year.
Though gross margins have improved over last year, management believes that
the cellular industry is extremely competitive and that this competition could
affect gross margins and the carrying value of inventories in the future.
The following table sets forth for the periods indicated certain statements
of income data for the Communications group expressed as a percentage of net
sales:
COMMUNICATIONS
1997 1996
------ -----
Net sales:
Cellular product - wholesale $390,230 87.8% $350,299 85.7%
Cellular product - retail 6,280 1.4 7,665 1.9
Activation commissions 31,061 7.0 33,102 8.1
Residual fees 4,688 1.1 4,828 1.2
Other 12,141 2.7 12,785 3.1
---------- -------- -------- -------
Total net sales 444,400 100.0 408,679 100.0
Gross profit 66,117 14.9 60,245 14.7
Total operating expenses 49,582 11.2 50,710 12.4
---------- -------- -------- ------
Operating income 16,535 3.7 9,535 2.3
Other expense (4,953) (1.1) (6,429) (1.6)
---------- -------- -------- -------
Pre-tax income $ 11,582 2.6% $ 3,106 0.8%
========== ======== ======== ========
AUTOMOTIVE RESULTS
Net sales increased approximately $5,494 compared to last year, an increase
of 2.9%. Increases were experienced in security and accessories and were
partially offset by a decrease in sound products. A majority of the increase was
from the group's international operations, both from an increase in existing
business and the formation of a new subsidiary in Venezuela. Automotive sound
decreased 6.7% compared to last year, due to the transfer of the Heavy Duty
Sound division to a new joint venture. Excluding sound sales from the Heavy Duty
Sound division for fiscal 1997 and 1996, sound sales decreased 0.6%. Automotive
security and accessories increased 11.7% compared to last year, primarily due to
increased sales in Prestige Security, Protector Hardgoods and alarms and video,
partially offset by decreases in net sales of AA security and cruise controls.
Gross margins increased to 20.8% from 18.9% last year. This increase was
experienced in the AV and Private Label sound lines and cruise control,
Protector Hardgoods and AA security accessory lines, partially offset by
decreases in Prestige Security. Operating expenses increased to $27,989 from
$25,559. Selling expenses increased over last year by $1,151, primarily in our
international operations, in commissions and advertising. General and
administrative expenses increased over 1996 by $1,512, primarily from our
international operations, in occupancy,
13
office expenses and bad debt expense. Warehousing and assembly expenses
decreased from 1996 by $233, primarily from the transfer of Heavy Duty Sound
business to the new joint venture. Pre-tax income for 1997 was $8,002, an
increase of $2,303 compared to last year. Without the transfer of the Heavy Duty
Sound business, pre-tax income increased $2,796 compared to 1996.
The Company believes that the Automotive group has an expanding market with
a certain level of volatility related to both domestic and international new car
sales. Also, certain of its products are subject to price fluctuations which
could affect the carrying value of inventories and gross margins in the future.
The following table sets forth for the periods indicated certain statements
of income data for the Automotive group expressed as a percentage of net sales:
AUTOMOTIVE
1997 1996
------ -----
Net sales:
Sound $91,763 47.3% $98,303 52.2%
Security and accessories 97,446 50.3 87,234 46.3
Other 4,701 2.4 2,879 1.5
--------- ------- ---------- -------
Total net sales 193,910 100.0 188,416 100.0
Gross profit 40,326 20.8 35,622 18.9
Total operating expenses 27,989 14.4 25,559 13.6
--------- ------- --------- ------
Operating income 12,337 6.4 10,063 5.3
Other expense (4,335) (2.2) (4,364) (2.3)
--------- ------- --------- -------
Pre-tax income $ 8,002 4.1% $ 5,699 3.0%
========= ======= ========= ========
OTHER INCOME AND EXPENSE
Interest expense and bank charges decreased by $5,938 for 1997 compared to
1996. This was due to reduced interest bearing debt and the decrease in interest
bearing subordinated debentures which were exchanged for shares of common stock.
14
Management fees and equity in income from joint venture investments
increased by approximately $651 for 1997 compared to 1996 as detailed in the
following table:
1997 1996
------------------------------------------------- -----------------------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
ASA - $1,857 $1,857 - - -
ASMC - - - - $ 948 $ 948
G.L.M. $ 12 - 12 $ 100 - 100
Pacific - (685) (685) 22 (334) (312)
Quintex West - - - 18 - 18
Posse 97 187 284 46 17 63
------- --------- ---------- -------- ------- ---------
$ 109 $1,359 $1,468 $ 186 $ 631 $ 817
====== ======= ======= ======== ======= =========
Audiovox Pacific has experienced an overall decline in gross margins, as
the cellular market in Australia has experienced the same competitive factors as
those in the United States.
During January 1997, the Company completed an exchange of $21,479 of its
subordinated debentures for 2,860,925 shares of Class A Common Stock (Exchange).
As a result of the Exchange, a charge of $12,686 was recorded. The charge to
earnings represents (i) the difference in the fair market value of the shares
issued in the Exchange and the fair market value of the shares that would have
been issued under the terms of the original conversion feature plus (ii) a
write-off of the debt issuance costs associated with the subordinated debentures
plus (iii) expenses associated with the Exchange offer. The Exchange resulted in
taxable income due to the difference in the face value of the bonds converted
and the fair market value of the shares issued and, as such, a current tax
expense of $158 was recorded. An increase in paid in capital was reflected for
the face value of the bonds converted, plus the difference in the fair market
value of the shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the original conversion
feature for a total of $33,592.
During 1997, the Company sold a total of 1,835,000 shares of CellStar for
net proceeds of $45,937 and a net gain of $23,232.
PROVISION FOR INCOME TAXES
Income taxes are provided for at a blended federal and state rate of 41%
for profits from normal business operations. During 1997, the Company had
several non-operating events which had tax provisions calculated at specific
rates, determined by the nature of the transaction. The tax treatment for the
debt conversion expense of $12,686, which lowered income before provision for
income taxes, did not reduce taxable income as it is a non-deductible item.
Instead of recording a tax recovery of $5,201, which would lower the provision
for income taxes, the Company actually recorded a tax expense of $158. This and
other various tax treatments resulted in an effective tax rate of 51.6% for
1997.
15
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by approximately $97,175, or 19.4% for fiscal 1996,
compared to fiscal 1995. This result was primarily attributable to increases in
net sales from the cellular division of approximately $76,413, or 23.9%,
automotive security and accessory equipment of approximately $20,418, or 27.9%
and other products, primarily home stereo systems of $3,052. These increases
were partially offset by a decrease in automotive sound equipment of
approximately $2,708, or 2.5%.
The improvement in net sales of cellular telephone products was primarily
attributable to an increase in unit sales. Net sales of cellular products
increased by approximately 857,000 units, or 70.9%, compared to fiscal 1995,
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 23.7% vs. 1995 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.
Activation commissions decreased by approximately $5,424, or 14.1%, for
fiscal 1996 compared to fiscal 1995. This decrease was primarily attributable to
fewer new cellular subscriber activations and partially due to fewer retail
outlets operated by the Company. The number of activation commissions decreased
21.4% compared to fiscal 1995. This decrease in commission revenue was offset by
a 9.3% increase in average activation commissions paid to the Company. Residual
revenues on customer usage increased by approximately $47, or 1.0%, for fiscal
1996, compared to fiscal 1995, due primarily to the addition of new subscribers
to the Company's cumulative subscriber base, despite a decrease in current year
activations. A majority of the residual income resides with the remaining
operating retail locations.
Net sales of automotive sound equipment decreased by approximately $2,708,
or 2.5%, for fiscal 1996, compared to fiscal 1995. This decrease was
attributable primarily to a decrease in sales of products sold to mass
merchandise chains and auto sound sales to new car dealers. This decrease was
partially offset by increases in sales of sound products to private label
customers. Net sales of automotive security and accessory products increased
approximately $20,418, or 27.9%, for fiscal 1996, compared to fiscal 1995,
principally due to increases in sales of vehicle security products, Protector
Hardgoods and cruise controls. This increase was partially offset by a reduction
in net sales of AA security products.
Gross margins increased to 16.1% in fiscal 1996 from 14.1% in fiscal 1995.
The 1995 gross margin included a $9,300 charge for inventory written down to
market at August 31, 1995. Cellular gross margins were 13.2% compared to 9.8% in
1995. Despite a 23.7% decrease in average unit selling prices, the average gross
margin per unit increased 25.3%. The number of new subscriber activations
decreased 21.4% but was partially offset by a 9.3% increase in average
activation commissions earned by the Company. Residuals increased 1.0% compared
to 1995. The Company believes that the cellular market will continue to be a
highly-competitive and price-sensitive environment. Increased price competition
related to the Company's product could result in downward pressure on the
Company's
16
gross margins if the Company is unable to obtain competitively priced product
from its suppliers or result in adjustments to the carrying value of the
Company's inventory.
Automotive sound margins were 19.9%, up from 17.5% in 1995. Most product
lines in the category experienced an increase and there was a marked increase in
the gross margin on international sales. Automotive accessory margins decreased
from 27.9% in 1995 to 24.5% in 1996. This decrease was primarily in the Prestige
and cruise control lines.
Total operating expenses increased approximately $2,837, or 3.5%, compared
to 1995. As a percentage to sales, total operating expenses decreased to 13.9%
during 1996 compared to 16.1% for 1995. Selling expenses increased approximately
$5,544, or 16.1%, compared to 1995. Divisional marketing and advertising
increased approximately $8,256 compared to 1995 in addition to travel and
related expenses. These increases were partially offset by decreases in
salesmen's commissions, salesmen's salaries, payroll taxes and employee
benefits. General and administrative expenses decreased approximately $3,708
during 1996. The decreases were in occupancy costs, telephone and overseas
buying office expenses and were partially offset by increases in office
salaries, travel, payroll taxes, employee benefits and professional fees.
Warehousing, assembly and repair expenses increased approximately $1,001
compared to1995, predominately in warehousing expenses and direct labor.
Management fees and related income and equity in income from joint venture
investments increased by approximately $463 for 1996 compared to 1995 as
detailed in the following table:
1996 1995
-------------------------------------------------- -------------------------------------------------
Equity Equity
Management Income Management Income
Fees (Loss) Total Fees (Loss) Total
CellStar - - - - $ 2,151 $ 2,151
ASMC - $ 948 $ 948 - 819 819
G.L.M. $ 100 - 100 $ 14 - 14
Pacific 22 (334) (312) 186 21 207
TALK - - - - (2,837) (2,837)
Quintex West 18 - 18 - - -
Posse 46 17 63 - - -
-------- ------- -------- ------- --------- ---------
$ 186 $ 631 $ 817 $ 200 $ 154 $ 354
======== ======= ========= ====== ========= =======
This increase was primarily due to non-recurring costs recorded by TALK
during 1995, their first full year of operations. This was offset by the Company
owning less than 20% of CellStar for the entire fiscal year and, therefore, not
accounting for the investment on the equity method. During 1995, the Company
owned more than 20% of CellStar until the third quarter and, therefore,
accounted for CellStar under the equity method until then. Audiovox Pacific has
experienced an overall decline in gross margins, as the cellular market in
Australia has experienced the same competitive factors as those in the United
States.
Interest expense and bank charges decreased by $1,214, or 12.5%, compared
to 1995 as a result of a decrease in interest bearing debt. Other expenses
decreased approximately $412 primarily due to the write-off of fixed assets in
the retail group during 1995 which did not recur in 1996. Costs
17
associated with the issuance of stock warrants for no monetary consideration to
certain holders of the Company's convertible subordinated debentures also did
not recur in 1996.
During the fourth quarter of 1996, the Company exchanged $41,252 of its 6
1/4% subordinated debentures for 6,806,580 shares of Class A Common Stock. This
exchange resulted in a charge to earnings of approximately $26,318 before income
taxes. This charge includes the loss on the exchange and the write-off of the
remaining debt issuance costs associated with the original issue of the
debentures.
Liquidity and Capital Resources
The Company's cash position at November 30, 1997 was approximately $2,905
below the November 30, 1996 level. Operating activities used approximately
$36,899, primarily from increases in inventory and prepaid expenses and other
assets, and a decrease in accounts payable, accrued expenses and other current
liabilities. These events were partially offset by a decrease in accounts
receivable and an increase in income taxes payable. Investing activities
provided approximately $37,695, composed primarily of $45,937 from the sale of
investment securities, partially offset by the purchase of property, plant and
equipment of $3,986 and purchase of equity investments of $4,706. Financing
activities used approximately $3,458, principally from the repayment of
borrowings under line of credit agreements.
On February 9, 1996, the Company's 10.8% Series AA and 11.0% Series BB
Convertible Debentures matured. The Company paid $4,362 to holders on that date.
The remaining $1,100 was converted into 206,046 shares of Common Stock. On
November 25, 1996, the Company concluded an exchange of $41,252 of its 6 1/4%
subordinated debentures for 6,806,580 shares of the Company's Class A Common
Stock. Accounting charges to earnings for this transaction were $29,206,
including income taxes on the gain of the exchange of the bonds. As a result of
the exchange, stockholders' equity was increased by $34,426.
On October 1, 1996, business formally conducted by the Company's cellular
division was continued in a newly-formed, wholly-owned subsidiary called
Audiovox Communications Corp. Capitalization of this company was accomplished by
exchanging the assets of the former division, less their respective liabilities,
for all of the common stock.
On May 5, 1995, the Company entered into the Second Amended and Restated
Credit Agreement (the Credit Agreement) which superseded the first amendment in
its entirety. During 1997 and 1996, the Credit Agreement was amended ten times
providing for various changes to the terms. The terms as of November 30, 1997
are summarized below.
Under the Credit Agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
Credit Agreement continue to be guaranteed by certain of the Company's
subsidiaries and are secured by accounts receivable and inventory of the Company
and those subsidiaries. The obligations were secured at November 30, 1996 by a
pledge agreement entered into by the Company for 2,125,000 shares of CellStar
Common Stock and 100 shares of ACC. Subsequent to November 30, 1996, the shares
of CellStar Common Stock were released from the Pledge Agreement. Availability
of credit under the Credit Agreement is a maximum aggregate amount of $95,000,
subject to certain conditions, and is based upon a formula taking into account
the amount and quality of its accounts receivable and inventory. The Credit
Agreement expires on February 28, 2000.
18
The Credit Agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth as
follows: Pre-tax income of $4,000 per annum; pre-tax income of $1,500 for the
two consecutive fiscal quarters ending May 31, 1997, 1998 and 1999; pre-tax
income of $2,500 for the two consecutive fiscal quarters ending November 30,
1997, 1998 and 1999; the Company cannot have pre-tax losses of more than $1,000
in any quarter; and the Company cannot have pre-tax losses in any two
consecutive quarters. In addition, the Company must maintain a minimum level of
total net worth of $170,000. The Credit Agreement provides for adjustments to
the covenants in the event of certain specified non-operating transaction.
Additionally, the agreement includes restrictions and limitations on payments of
dividends, stock repurchases and capital expenditures. During 1997, the Company
received amendments and waivers to allow the Company to make stock repurchases
and enter into the equity collar. Subsequent to year end, the Company received a
waiver which allowed for the delay in issuance of its financial statements.
The Company granted to an investor in CellStar, in connection with the
CellStar initial public offering, two options to purchase up to an aggregate of
1,750,000 shares of CellStar Common Stock owned by the Company, 1,500,000 of
which was exercised in full on June 1, 1995 at an exercise price of $11.50 per
share. As a result, the Company recorded a gain, before provision for income
taxes, of $8,435. This reduced the Company's ownership in CellStar below 20%
and, as such, the Company will no longer account for CellStar under the equity
method of accounting. Subsequent to November 30, 1996, the remaining 250,000
shares under the remaining option expired. The remaining 2,375,000 CellStar
shares owned by the Company will be accounted for as an investment in marketable
equity securities. During 1997, the Company sold 1,835,000 shares of its
CellStar shares for a gain of $23,232, net of income tax. The Company continues
to hold 865,000 shares of CellStar common stock. Based upon the closing market
price of CellStar on November 30, 1997, the unrealized gain in equity is
$12,194, net of deferred taxes.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
1998 and for the reasonable foreseeable future.
Impact of Inflation and Currency Fluctuation
Inflation has not had and is not expected to have a significant impact on
the Company's financial position or operating results. However, as the Company
expands its operations into Latin America and the Pacific Rim, the effects of
inflation and currency fluctuations in those areas, if any, could have growing
significance to the financial condition and results of the operations of the
Company.
The Company has operations and conducts local business in Asia. The recent
fluctuations in the foreign exchange rates have not materially impacted the
consolidated financial position, results of operations or liquidity. Management
believes that continued fluctuations will not have a material adverse effect on
the Company's consolidated financial position, however the impact on the results
of operations or liquidity, particularly our Malaysian subsidiaries, is unknown.
While the prices that the Company pays for the products purchased from its
suppliers are principally denominated in United States dollars, price
negotiations depend in part on the relationship between the foreign currency of
the foreign manufacturers and the United States dollar. This relationship is
dependent upon, among other things, market, trade and political factors.
19
Seasonality
The Company typically experiences some seasonality. The Company believes
such seasonality could be attributable to increased demand for its products
during the Christmas season, which commences in October, for both wholesale and
retail operations.
Year 2000 Date Conversion
Management believes that a significant portion of its computer systems are
year 2000 compliant and is in the process of assessing the balance of its
systems. The Company intends to communicate with its customers, suppliers,
financial institutions and others with which it does business to ensure that any
year 2000 issue will be resolved timely. This issue affects computer systems
that have time-sensitive programs that may not properly recognize the year 2000.
If necessary modifications and conversions by those with which the Company does
business are not completed timely or if all of the Company's systems are not
year 2000 compliant, the year 2000 issue may have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No.
128, "Earnings per Share" (Statement 128), on December 1, 1997. Under Statement
128, the Company is required to report basic and diluted earnings per share. It
will replace the presentation of both primary and fully diluted earnings per
share. Statement 128 requires restatement of all prior-period earnings per share
data. The provisions of Statement 128 are effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and earlier application is not permitted. The provisions of Statement 128 must
be implemented no later than fiscal 1998. The Company believes that Statement
128 will not have an impact on the Company's financial position, results of
operations, or liquidity, however, the impact on previously reported earnings
per share data is currently unknown.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items and unrealized
gains and losses on investments in equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. Based on current accounting standards, this Statement is not expected
to have a material impact on the Company's consolidated financial statements.
The Company will adopt this accounting standard effective December 1, 1999, as
required.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic
20
areas and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement requires
reporting segment profit or loss, ceratin specific revenue and expense items and
segment assets. It also requires reconciliations of total segment revenues,
total segment profit or loss, total segment assets, and other amounts disclosed
for segments to corresponding amounts reported in the consolidated financial
statements. Restatement of comparative information for earlier periods presented
is required in the initial year of application. Interim information is not
required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statements disclosures. The Company will adopt this accounting standard
effective December 1, 1999, as required.
21
Item 8-Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of the Company as of November 30,
1997 and 1996 and for each of the years in the three-year period ended November
30, 1997, 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, 1997 and 1996 appears below:
QUARTER ENDED
--------------------------------------------------------------------
Feb. 28 May 31 Aug. 31 Nov. 30
------- ------ ------- -------
1997
Net sales $166,614 148,195 153,124 171,149
Gross profit 28,002 25,055 25,634 28,071
Operating expenses 23,486 21,243 20,606 21,732
Income before provision for income taxes 15,328 (a) 14,032 (c) 5,565 (e) 8,517 (g)
Provision for income taxes 11,125 (b) 5,678 (d) 2,467 (f) 3,150 (h)
Net income 4,203 8,354 3,098 5,367
Net income per common share (primary) 0.24 0.43 0.16 0.27
Net income per share (fully diluted) 0.23 0.42 0.16 0.26
1996
Net sales $122,493 141,194 142,828 191,400
Gross profit 19,877 21,586 24,639 30,286
Operating expenses 17,519 19,347 2,091 25,536
Income (loss) before provision for income taxes 1,091 426 1,575 (23,727) (i)
Provision for income taxes 612 276 808 4,138 (j)
Net income (loss) 479 150 767 (27,865)
Net income (loss) per common share (primary) 0.05 0.02 0.08 (2.83)
Net income (loss) per share (fully diluted) - - - -
NOTE: The Company does not compute fully diluted earnings per share when the addition of potentially
dilutive securities would result in anti-dilution.
(a) Includes a pre-tax charge of $12.7 million for costs associated with
the exchange of $21.5 million of subordinated debentures into 2,860,925
shares of Class A Common Stock and a pre-tax gain of $23.8 million on
the sale of CellStar shares.
(b) Includes $158,000 for income taxes associated with the exchange of
$21.5 million of subordinated debentures into 2,860,925 shares of Class
A Common Stock and income taxes of $9.0 million for the gain on sale of
CellStar shares.
(c) Includes $10.2 million of pre-tax gain on the sale of CellStar shares.
(d) Includes $3.9 million of income taxes on the gain on sale of CellStar shares
(e) Includes $303,000 of pre-tax gain on the sale of CellStar shares
(f) Includes $115,000 of income taxes on the gain on the sale of CellStar shares
(g) Includes $3.2 million of pre-tax gain on the sale of CellStar shares
(h) Includes $1.2 million of income taxes on the gain on sale of CellStar shares
(i) Includes a pre-tax charge of $26.3 million for costs associated with the exchange of $41.3 million
of subordinated debentures into 6,806,580 shares of common stock.
(j) Includes tax expense of $2.9 million associated with the exchange of debentures.
22
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, 1997 and 1996, and the related
consolidated statements of income (loss), stockholders' equity and cash flows
for each of the years in the three-year period ended November 30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended November 30, 1997, in conformity with generally accepted accounting
principles.
s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
March 6, 1998
23
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,445 $ 12,350
Accounts receivable, net 104,698 118,408
Inventory, net 105,242 72,785
Receivable from vendor 5,000 4,565
Prepaid expenses and other current assets 9,230 7,324
Deferred income taxes 4,673 5,241
Equity collar 1,246 -
----------- ----------
Total current assets 239,534 220,673
Investment securities 22,382 27,758
Equity investments 10,693 5,836
Property, plant and equipment, net 8,553 6,756
Debt issuance costs, net - 269
Excess cost over fair value of assets
acquired and other intangible assets, net 5,557 804
Other assets 3,108 3,449
----------- ---------
$ 289,827 $ 265,545
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,237 $ 28,192
Accrued expenses and other current liabilities 16,538 18,961
Income taxes payable 9,435 7,818
Bank obligations 6,132 4,024
Documentary acceptances 3,914 3,501
----------- ----------
Total current liabilities 60,256 62,496
Bank obligations 24,300 31,700
Deferred income taxes 8,505 10,548
Long-term debt 6,191 28,165
----------- -----------
Total liabilities 99,252 132,909
----------- ----------
Minority interest 2,683 1,137
----------- ------------
Stockholders' equity:
Preferred stock 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,253,533 issued 173 141
Class B; 10,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 145,155 107,833
Retained earnings 32,924 11,902
Cumulative foreign currency translation and adjustment (3,428) (1,176)
Unrealized gain on marketable securities, net 12,194 10,277
Unrealized gain on equity collar, net 773 -
Treasury stock, 290,000 Class A common stock, at cost (2,421) -
----------- ----------
Total stockholders' equity 187,892 131,499
----------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 289,827 $ 265,545
========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED NOVEMBER 30, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
---- ---- ----
Net sales $639,082 $597,915 $500,740
Cost of sales (including an inventory write-down to
market in 1995 of $9,300) 532,320 501,527 429,998
---------- --------- ---------
Gross profit 106,762 96,388 70,742
---------- --------- ---------
Operating expenses:
Selling 38,044 40,033 34,489
General and administrative 37,000 32,452 36,160
Warehousing, assembly and repair 12,023 10,828 9,827
----------- --------- ---------
Total operating expenses 87,067 83,313 80,476
----------- --------- ---------
Operating income (loss) 19,695 13,075 (9,734)
----------- ---------- ----------
Other income (expense):
Debt conversion expense (12,686) (26,318) -
Interest and bank charges (2,542) (8,480) (9,694)
Equity in income of equity investments 1,359 631 154
Management fees and related income 109 186 200
Gain on sale of equity investment 37,471 985 8,435
Expense related to issuance of warrants - - (2,921)
Other, net 36 (714) (1,126)
--------- --------- ----------
Total other income (expense) 23,747 (33,710) (4,952)
--------- --------- ----------
Income (loss) before provision for (recovery of) income
taxes 43,442 (20,635) (14,686)
Provision for (recovery of) income taxes 22,420 5,834 (2,803)
---------- --------- ----------
Net income (loss) $ 21,022 $(26,469) $ (11,883)
========== ========= ==========
Net income (loss) per common share (primary) $ 1.09 $ (2.82) $ (1.31)
============ ========= ==========
Net income per common share (fully diluted) $ 1.05 - -
============ ========= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1997, 1996, AND 1995
(IN THOUSANDS)
Unreal-
ized
Gain
(Loss)
Cumulative Unreal- On
Foreign ized Market- Total
Unearned Currency Gain on able Stock-
Preferred Common Paid-In Compen- Retained Translation Treasury Equity Secur- holders'
Stock Stock Capital sation Earnings Adjustment Stock Collar ities Equity
Balances at
November 30, 1994 2,500 90 40,338 (623) 50,254 (525) - - - 92,034
Net loss - - - - (11,883) - - - - (11,883)
Equity adjustment from
foreign currency
translation - - - - - (438) - - - (438)
Unearned compensation
relating to grant of
options and non-
performance
restricted stock - - 62 (62) - - - - - -
Compensation expense - - 46 194 - - - - - 240
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations - - (81) 81 - - - - - -
Issuance of warrants - - 2,921 - - - - - - 2,921
Implementation of
change in accounting
for debt and equity
securities, net of tax
effect of $24,517 - - - - - - - - 40,004 40,004
Net unrealized loss on -
marketable
securities, net of tax
effect of $(5,076) - - - - - - - (8,283) (8,283)
------ ------------------ ------------------------ ------------ ------ ------- ----------
Balances at
November 30, 1995 2,500 90 43,286 (410) 38,371 (963) - - 31,721 114,595
Net loss - - - - (26,469) - - - - (26,469)
Equity adjustment from
foreign currency
translation - - - - - (213) - - - (213)
Compensation expense - - 39 258 - - - - - 297
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations - - (27) 27 - - - - - -
Issuance of 250,000
shares of common
stock - 3 - - - - - - - 3
Conversion of
debentures into
7,012,626 shares of
common stock - 70 64,660 - - - - - - 64,730
Net unrealized loss on -
marketable -
securities, net of tax
effect of ($13,143) - - - - - - - - (21,444) (21,444)
------ ------------------ ------------------------ ------------ ------ ------- ---------
Balance at
November 30, 1996 2,500 163 107,958 (125) 11,902 (1,176) - - 10,277 131,499
Net income - - - - 21,022 - - - - 21,022
Equity adjustment from
foreign currency
translation - - - - - (2,252) - - - (2,252)
Compensation expense - - 118 17 - - - - - 135
26
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996, AND 5
(IN THOUSANDS)
Unreal-
ized
Gain
(Loss)
Cumulative Unreal- On
Foreign ized Market- Total
Unearned Currency Gain on able Stock-
Preferred Common Paid-In Compen- Retained Translation Treasury Equity Secur- holders'
Stock Stock Capital sation Earnings Adjustment Stock Collar ities Equity
Options and non-
performance
restricted stock
forfeitures due to
employee
terminations - - (23) 23 - - - - - -
Issuance of 352,194
shares of common
stock - 3 3,489 - - - - - - 3,492
Conversion of
debentures into
2,860,925 shares - 29 33,592 - - - - - - 33,621
Issuance of warrants - - 106 - - - - - - 106
Acquisition of 290,000
common shares - - - - - - (2,421) - - (2,421)
Net unrealized gain on
marketable -
securities, net of ta
effect of $1,174 - - - - - - - - 1,917 1,917
Unrealized gain on -
equity collar, net of
tax effect of $473 - - - - - - - 773 - 773
------ ---- ----------- --------- ---------------------- ------------ --- ----------- -------
Balances at 2,500 195 145,240 (85) 32,924 (3,428) (2,421) 773 12,194 187,892
===== === ======== ====== ======= ======= ======= === ========= =======
November 30, 1997
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 21,022 $ (26,469) $(11,883)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Debt conversion expense 12,386 25,629 -
Depreciation and amortization 1,903 3,298 4,100
Provision for bad debt expense 1,300 429 1,816
Equity in income of equity investments (1,468) (614) (154)
Minority interest 1,623 767 225
Gain on sale of equity investment (37,471) (985) (8,435)
Provision for (recovery of ) deferred income taxes (3,123) 468 (5,158)
Provision for unearned compensation 135 297 240
Expense relating to issuance of warrants 106 - 2,921
(Gain) loss on disposal of property, plant and equipment, net (9) (32) 246
Changes in:
Accounts receivable 6,853 (21,848) (4,468)
Note receivable from equity investment - 532 (5,097)
Inventory (36,823) 27,688 (16,950)
Accounts payable, accrued expenses and other current liabilities (2,855) 12,445 488
Income taxes payable 2,181 5,360 1,623
Prepaid expenses and other, net (2,659) (2,954) 250
----------- ------------ ----------
Net cash provided by (used in) operating activities (36,899) 24,011 (40,236)
---------- ----------- ---------
Cash flows from investing activities:
Purchase of equity investments (4,706) - -
Purchases of property, plant and equipment, net (3,986) (2,805) (2,722)
Net proceeds from sale of investment securities 45,937 1,000 17,250
Proceeds from distribution from equity investment 450 317 267
------------- ------------- ----------
Net cash provided by (used in) investing activities 37,695 (1,488) 14,795
----------- ------------ --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (3,765) (14,040) 19,577
Net borrowings (repayments) under documentary acceptances 413 (3,620) 7,120
Principal payments on long-term debt - (5,029) (11)
Debt issuance costs (13) (392) (714)
Principal payments on capital lease obligation - (158) (233)
Proceeds from issuance of long-term debt - - 675
Proceeds from issuance of Class A Common Stock 2,328 - -
Repurchase of Class A Common Stock (2,421) - -
Proceeds from release of restricted cash - 5,959 600
--------------- ------------ ----------
Net cash provided by (used in) financing activities (3,458) (17,280) 27,014
Effect of exchange rate changes on cash (243) 31 8
------------ -------------- ------------
Net increase in cash and cash equivalents (2,905) 5,274 1,581
Cash and cash equivalents at beginning of period 12,350 7,076 5,495
----------- ------------ ---------
Cash and cash equivalents at end of period $ 9,445 $ 12,350 $ 7,076
=========== =========== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market cellular telephones and accessories, automotive
aftermarket sound and security equipment, other automotive
aftermarket accessories, and certain other products,
principally in the United States, Canada, and overseas. In
addition to generating product revenue from the sale of
cellular telephone products, the Company's retail outlets, as
agents for cellular carriers, are paid activation commissions
and residual fees from such carriers.
The Company's automotive sound, security, and accessory
products include stereo cassette radios, compact disc players
and changers, amplifiers and speakers; key based remote
control security systems; cruise controls and door and trunk
locks. These products are marketed through mass merchandise
chain stores, specialty automotive accessory installers,
distributors, and automobile dealers.
(b) Principles of Consolidation
The consolidated financial statements include the financial
statements of Audiovox Corporation and its wholly-owned and
majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
Cash equivalents of $1,337 at November 30, 1995 consisted of
short-term investments with terms of less than three months.
For purposes of the statements of cash flows, the Company
considers investments with original maturities of three months
or less to be cash equivalents.
(d) Cash Discount 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.
(Continued)
29
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(e) Inventory
Inventory consists principally of finished goods and is stated
at the lower of cost (primarily on a weighted moving average
basis) or market. The markets in which the Company competes
are characterized by declining prices, intense competition,
rapid technological change and frequent new product
introductions. The Company maintains a significant investment
in inventory and, therefore, is subject to the risk of losses
on write-downs to market and inventory obsolescence. During
the third quarter of 1995, the Company recorded a charge of
approximately $9,300 to accurately reflect the Company's
inventory at the lower of cost or market. No estimate can be
made of losses that are reasonably possible should additional
write-downs to market be required in the future.
(f) Derivative Financial Instruments
The Company, as a policy, does not use derivative financial
instruments for trading purposes. A description of the
derivative financial instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign
currencies and, as a result, is subject to foreign
currency exchange rate risk due to the effects that
exchange rate movements of these currencies have on
the Company's costs. To minimize the effect of
exchange rate fluctuations on costs, the Company
enters into forward exchange rate contracts. The
Company, as a policy, does not enter into forward
exchange contracts for trading purposes. The forward
exchange rate contracts are entered into as hedges of
inventory purchase commitments and of trade
receivables due in foreign currencies.
Gains and losses on the forward exchange contracts
that qualify as hedges are reported as a component of
the underlying transaction. Foreign currency
transactions which have not been hedged are
marked-to-market on a current basis with gains and
losses recognized through income and reflected in
other income (expense). In addition, any previously
deferred gains and losses on hedges which are
terminated prior to the transaction date are
recognized in current income when the hedge is
terminated (Note 16(a)(1)).
(2) Equity Collar
The Company has an equity collar for 100,000 of its
shares in CellStar Corporation (CellStar) (Note 6).
The equity collar is recorded on the balance sheet at
fair value with gains and losses on the equity collar
reflected as a separate component
(Continued)
30
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of stockholders' equity (Note 16(a)(2)). The equity
collar acts as a hedging item for the CellStar
shares. Being that the item being hedged, the
CellStar shares, is an available-for-sale security
carried at fair market value with unrealized gains
and losses recorded as a separate component of
stockholders' equity, the unrealized gains and losses
on the equity collar are also recorded as a separate
component of stockholders' equity.
(g) Investment Securities
The Company classifies its debt and equity securities in one
of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair
value. Held-to-maturity securities are recorded at amortized
cost, adjusted for the amortization or accretion of premiums
or discounts. Unrealized holding gains and losses on trading
securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity
until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts
are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned.
(h) Debt Issuance Costs
Costs incurred in connection with the issuance of the
convertible subordinated debentures and restructuring of the
Series A and Series B convertible subordinated notes (Note 10)
and the restructuring of bank obligations (Note 9(a)) have
been capitalized. These charges are amortized over the lives
of the respective agreements. Amortization expense of these
costs amounted to $37, $1,109, and $1,319 for the years ended
November 30, 1997, 1996 and 1995, respectively. During 1997
and 1996, the Company wrote off $245 and $3,249, respectively,
of debt issuance costs (Note 10).
(Continued)
31
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(i) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Equipment
under capital lease is stated at the present value of minimum
lease payments. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets as follows:
Buildings 20 years
Furniture, fixtures and displays 5-10 years
Machinery and equipment 5-10 years
Computer hardware and software 5 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset. Assets
acquired under capital lease are amortized over the term of
the lease.
(j) Intangible Assets
Intangible assets consist of patents, trademarks,
non-competition agreements, and the excess cost over fair
value of assets acquired for certain subsidiary companies and
equity investments. Excess cost over fair value of assets
acquired is being amortized over periods not exceeding twenty
years. The costs of other intangible assets are amortized on a
straight-line basis over their respective lives.
Accumulated amortization approximated $1,759 and $1,413 at
November 30, 1997 and 1996, respectively. Amortization of the
excess cost over fair value of assets acquired and other
intangible assets amounted to $363, $145, and $127 for the
years ended November 30, 1997, 1996, and 1995, respectively.
During 1997, the Company made investments in two companies
that resulted in additional excess cost over fair value of
assets acquired (Note 8).
On an ongoing basis, the Company reviews the valuation and
amortization of its intangible assets. As a part of its
ongoing review, the Company estimates the fair value of
intangible assets taking into consideration any events and
circumstances which may diminish fair value.
The recoverability of the excess cost over fair value of
assets acquired is assessed by determining whether the
amortization over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of the excess cost over
fair value of assets acquired
(Continued)
32
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
will be impacted if estimated future operating cash flows are not
achieved.
(k) Equity Investments
The Company has common stock investments which are accounted
for by the equity method (Note 8).
(l) Cellular Telephone Commissions
Under various 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 $35,749, $37,930, and $43,307 for the
years ended November 30, 1997, 1996, and 1995, respectively.
Related commissions paid to outside selling representatives
for cellular activations are reflected as cost of sales in the
accompanying consolidated statements of income (loss) and
amounted to $19,924, $20,443, and $15,374 for the years ended
November 30, 1997, 1996, and 1995, respectively.
(m) Advertising
The Company expenses the production costs of advertising as
incurred and expenses the costs of communicating advertising
when the service is received. During the years ended November
30, 1997, 1996, and 1995, the Company had no direct response
advertising.
(n) Warranty Expenses
Warranty expenses are accrued at the time of sale based on the
Company's estimated cost to repair expected returns for
products. At November 30, 1997 and 1996, the liability for
future warranty expense amounted to $2,257 and $2,618,
respectively.
(Continued)
33
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(o) Foreign Currency
Assets and liabilities of those subsidiaries and equity
investments located outside the United States whose cash flows
are primarily in local currencies have been translated at
rates of exchange at the end of the period. Revenues and
expenses have been translated at the weighted average rates of
exchange in effect during the period. Gains and losses
resulting from translation are accumulated in the cumulative
foreign currency translation account in stockholders' equity.
Exchange gains and losses on hedges of foreign net investments
and on intercompany balances of a long-term investment nature
are also recorded in the cumulative foreign currency
translation adjustment account. Other foreign currency
transaction gains and losses are included in net income, none
of which were material for the years ended November 30, 1997,
1996, and 1995.
(p) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(q) Net Income (Loss) Per Common Share
Primary earnings per share are computed based on the weighted
average number of common shares outstanding and common stock
equivalents. The Company did not present fully-diluted
earnings per share for the years ended November 30, 1996 and
1995 as 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,
1997 1996 1995
---- ---- ----
Primary 19,295,346 9,398,352 9,038,742
Fully diluted 20,112,523 - -
(Continued)
34
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company will adopt the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", on December 1, 1997. Adoption of SFAS No. 128 will not
have an impact on the Company's financial position, results of
operations or liquidity, however, the impact on previously
reported earnings per share data is currently unknown.
(r) Supplementary Financial Statement Information
Advertising expenses approximated $16,981, $21,794, and
$13,538 for the years ended November 30, 1997, 1996, and 1995,
respectively.
Interest income of approximately $1,525, $1,097, and $1,047
for the years ended November 30, 1997, 1996, and 1995,
respectively, is included in other in the accompanying
consolidated statements of income (loss).
Included in accrued expenses and other current liabilities is
$4,091 and $4,405 of accrued wages and commissions at November
30, 1997 and 1996, respectively.
(s) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(t) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of
On December 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by comparison of the carrying amount of
an asset to the future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value
of assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less cost to sell.
Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position, results of operations or
liquidity.
(Continued)
35
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(u) Accounting for Stock-Based Compensation
Prior to December 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price. On December 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize, as expense
over the vesting period, the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(2) Business Acquisitions/Dispositions
During 1997, the Company formed Audiovox Venezuela C.A. (Audiovox
Venezuela), an 80%- owned subsidiary, for the purpose of expanding its
international business. The Company made an initial investment of $478
which was used by Audiovox Venezuela to obtain certain licenses,
permits and fixed assets.
In April 1996, the Company formed Audiovox Holdings (M) Sdn. Bhd.
(Audiovox Holdings) and Audiovox Communications (Malaysia) Sdn. Bhd.
(Audiovox Communications), which are 80% and 72% -owned subsidiaries
of Audiovox Asia, Inc. (Audiovox Asia), respectively, which, in turn,
is a wholly-owned subsidiary of the Company. In July 1994, the Company
formed Audiovox (Thailand) Co., Ltd., a 100%-owned subsidiary of
Audiovox Asia. In 1996, Audiovox Communications formed Vintage
Electronics Holdings (Malaysia) Sdn. Bhd., a wholly-owned subsidiary.
The Company formed these subsidiaries to assist in its planned
expansion of its international business.
In October 1996, the Company contributed the net assets of its
cellular division into a newly- formed, wholly-owned subsidiary
Audiovox Communications Corp. (ACC).
(Continued)
36
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
For the Years Ended November 30,
1997 1996 1995
Cash paid during the years for:
Interest $ 1,560 $7,666 $9,224
Income taxes $23,530 $ 272 $ 818
During 1997, the Company issued a credit of $1,250 on open accounts
receivable and issued 250,000 shares of its Class A Common Stock,
valued at five dollars per share, in exchange for a 20% interest in
Bliss-Tel Company, Limited (Bliss-Tel) (Note 8).
During 1997, the Company contributed $6,475 in net assets in exchange
for a 50% ownership interest in Audiovox Specialized Applications, LLC
(ASA) which resulted in $5,595 of excess cost over fair value of net
assets (Note 8).
As of November 30, 1997, the Company recorded an unrealized holding
gain relating to the equity collar, net of deferred income taxes, of
$773 as a separate component of stockholders' equity (Note 16).
As of November 30, 1997 and 1996, the Company recorded an unrealized
holding gain relating to available-for-sale marketable equity
securities, net of deferred income taxes, of $12,194 and $10,277,
respectively, as a separate component of stockholders' equity (Note 6).
On February 9, 1996, the Company's 10.8% Series AA and 11.0% Series BB
convertible debentures matured. As of February 9, 1996, $1,100 of the
Series BB convertible debentures converted into 206,046 shares of
Common Stock (Note 10).
On November 25, 1996, the Company completed an exchange of $41,252 of
its $65,000 6 1/4% convertible subordinated debentures into 6,806,580
shares of Common Stock (Note 10).
During 1996, the Company contributed $97 of property, plant and
equipment in exchange for a 50% ownership interest in a newly-formed
joint venture (Note 8).
During 1995, the Company contributed $36 of property, plant, and
equipment in exchange for a 50% ownership interest in a newly-formed
joint venture (Note 8).
(Continued)
37
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) Transactions With Major Suppliers
The Company engaged in transactions with Shintom Co., Ltd. (Shintom), a
stockholder who owned approximately 1.7% at November 30, 1996 of the
outstanding Class A Common Stock and all of the outstanding Preferred
Stock of the Company at November 30, 1997 and 1996. During 1994, the
Company formed TALK Corporation (TALK), a 30.8%-owned joint venture in
Japan (Note 8), with Shintom and other companies.
Transactions with Shintom and TALK included financing arrangements and
inventory purchases which approximated 26% and 20% for the years ended
November 30, 1996 and 1995, respectively, of total inventory purchases.
Transactions with TALK included financing arrangements and inventory
purchases which approximated 29% for the year ended November 30, 1997
of total inventory purchases. At November 30, 1997 and 1996, the
Company had recorded $9,702 and $3,501, respectively, of liabilities
due to TALK for inventory purchases included in accounts payable. The
Company also has documentary acceptance obligations outstanding from
TALK as of November 30, 1997 and 1996 (Note 9(b)). At November 30,
1996, the Company had recorded a receivable from TALK in the amount of
$4,565 payable with interest (Note 8).
Inventory purchases from a major supplier approximated 32%, 28%, and
44% of total inventory purchases for the years ended November 30, 1997,
1996, and 1995, respectively. Although there are a limited number of
manufacturers of its products, management believes that other suppliers
could provide similar products on comparable terms. A change in
suppliers, however, could cause a delay in product availability and a
possible loss of sales, which would affect operating results adversely.
(5) Accounts Receivable
Accounts receivable is comprised of the following:
November 30,
1997 1996
Trade accounts receivable $113,498 $127,854
Receivables from equity investments (Note 8) 1,921 2,626
----------- -----------
115,419 130,480
Less:
Allowance for doubtful accounts 3,497 3,115
Allowance for cellular deactivations 1,363 1,666
Allowance for co-operative advertising and cash
discounts 5,861 7,291
----------- -----------
$104,698 $118,408
======== ========
See Note 16(c) for concentrations of credit risk.
(Continued)
38
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) Investment Securities
The Company's investment securities consist primarily of 865,000 and
2,375,000 shares of CellStar Common Stock, which were classified as
available-for-sale marketable equity securities at November 30, 1997
and 1996, respectively. The aggregate fair value of available-for-sale
marketable equity securities were $22,382 and $27,758 at November 30,
1997 and 1996, respectively, which is comprised of a cost basis of
$2,715 and $11,181 and a gross unrealized holding gain of $19,667 and
$16,577 recorded as a separate component of stockholders' equity at
November 30, 1997 and 1996, respectively. A related deferred tax
liability of $7,473 and $6,300 was recorded at November 30, 1997 and
1996, respectively, as a reduction to the unrealized holding gain
included as a separate component of stockholders' equity.
During 1997, the Company sold 1,835,000 shares of CellStar Common Stock
yielding net proceeds of approximately $45,937 and a gain, net of
taxes, of approximately $23,232.
(7) Property, Plant, and Equipment
A summary of property, plant, and equipment, net, is as follows:
November 30,
1997 1996
Land $ 363 $ 363
Buildings 2,099 1,782
Furniture, fixtures and displays 3,418 3,277
Machinery and equipment 4,341 3,221
Computer hardware and software 14,307 12,658
Automobiles 800 954
Leasehold improvements 3,510 3,454
----------- ----------
28,838 25,709
Less accumulated depreciation and amortization (20,285) (18,953)
--------- ---------
$ 8,553 $ 6,756
========== =========
Computer software includes approximately $1,672 and $690 of unamortized
costs as of November 30, 1997 and 1996, 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
$1,503, $2,044, and $2,654 for the years ended November 30, 1997, 1996,
and 1995, respectively, which includes amortization of computer
software costs of $19, $364, and $922 for the years ended November 30,
1997, 1996, and 1995, respectively.
(Continued)
39
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) Equity Investments
As of November 30, 1997, the Company had a 30.8% ownership interest in
TALK. As of November 30, 1997, the Company's 72% owned subsidiary,
Audiovox Communications, had a 29% ownership interest in Avx Posse
(Malaysia) Sdn. Bhd. (Posse) which monitors car security commands
through a satellite based system in Malaysia. As of November 30, 1997,
the Company had a 20% ownership interest in Bliss-Tel which distributes
cellular telephones and accessories in Thailand. Additionally, the
Company had 50% non-controlling ownership interests in five other
entities: Protector Corporation (Protector) which acts as a distributor
of chemical protection treatments; ASA which acts as a distributor to
specialized markets for RV's and van conversions, of televisions and
other automotive sound, security, and accessory products; Audiovox
Pacific Pty., Limited (Audiovox Pacific) which distributes cellular
telephones and automotive sound and security products in Australia and
New Zealand; G.L.M. Wireless Communications, Inc. (G.L.M.) which is in
the cellular telephone, pager, and communications business in the New
York metropolitan area; and Quintex Communications West, LLC (Quintex
West), which is in the cellular telephone and related communication
products business, as well as the automotive aftermarket products
business on the West Coast of the United States.
On June 1, 1995, at an exercise price of $11.50 per share, an option to
purchase up to an aggregate of 1,500,000 shares of CellStar Common
Stock owned by the Company was exercised. As a result, the Company
recorded a gain, before provision for income taxes, of approximately
$8,400. This reduced the Company's ownership in CellStar below 20% and,
as such, the Company discontinued the equity method of accounting for
CellStar. The remaining CellStar shares owned by the Company are
accounted for as an investment in marketable equity securities (Note
6).
The following table presents financial information relating to CellStar
for the year ended November 30, 1995:
1995
Current assets $271,156
Non-current assets 43,765
Current liabilities 196,746
Non-current liabilities 6,880
Net sales 811,915
Gross profit 109,841
Net income 22,896
In August 1994, the Company invested 600 million Japanese Yen
(approximately $6,000) into a newly-formed company, TALK, in exchange
for 12,000 shares of TALK, representing a 33% ownership interest. Five
million dollars of this investment was financed by a non-recourse note
with a third party lender, which provides for the repayment of the note
either in cash or
(Continued)
40
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
by surrendering 10,000 shares in TALK. During 1997 and 1996, additional
investments were made by outside investors reducing the Company's
ownership to 30.8%. The Company accounts for its investment in TALK
under the equity method of accounting.
TALK, which holds world-wide distribution rights for product
manufactured by Shintom, has given the Company exclusive distribution
rights on all wireless personal communication products for all
countries except Japan, China, Thailand, and several mid-eastern
countries. The Company granted Shintom a license agreement permitting
the use of the Audiovox trademark to be used with TALK video cassette
recorders sold in Japan from August 29, 1994 to August 28, 1997, in
exchange for royalty fees. For the years ended November 30, 1997, 1996
and 1995, no such royalty fees were earned by the Company.
On July 31, 1995, the Company purchased a 50% equity investment in a
newly-formed company, G.L.M., for approximately $36 in contributed
assets. In addition, the Company has guaranteed certain obligations of
G.L.M. (Note 16(b)).
On December 1, 1995, the Company purchased a 50% equity investment in a
newly-formed company, Quintex West, for approximately $97 in
contributed assets.
During 1997, the Company purchased a 20% equity investment in Bliss-Tel
in exchange for 250,000 shares of the Company's Class A Common Stock
and a credit for open accounts receivable of $1,250. The issuance of
the common stock resulted in an increase to additional paid-in capital
of approximately $1,248. The investment in Bliss-Tel will be accounted
for under the equity method of accounting.
During 1997, the Company purchased a 50% equity investment in a
newly-formed company, ASA, for approximately $11,131. The Company
contributed the net assets of its Heavy Duty Sound division, its 50%
interest in Audiovox Specialty Markets Co. (ASMC) and $4,656 in cash.
In connection with this investment, excess cost over fair value of net
assets acquired of $5,595 resulted, which is being amortized on a
straight-line basis over 20 years. The other investor (Investor)
contributed its 50% interest in ASMC and the net assets of ASA
Electronics Corporation. In connection with this investment, the
Company entered into a stock purchase agreement with the Investor in
ASA. The agreement provides for the sale of 352,194 shares of Class A
Common Stock at $6.61 per share (aggregate proceeds of approximately
$2,328) by the Company to the Investor. The transaction resulted in a
net increase to additional paid-in capital of approximately $2,242. The
selling price of the shares are subject to adjustment in the event the
Investor sells shares at a loss during a 90-day period, beginning with
the effective date of the registration statement filed with the
Securities and Exchange Commission to register such shares. The
adjustment to the selling price will equal the loss incurred by the
Investor up to a maximum of 50% of the shares. In the event the Company
does make an adjustment to the shares, additional goodwill will be
recorded as the adjustment represents contingent consideration.
(Continued)
41
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company received the following management fees and related income
from its equity investments:
November 30,
-------------
1997 1996 1995
---- ---- ----
Pacific - $ 22 $ 186
G.L.M. $ 12 100 14
Quintex West - 18 -
Posse 97 46 -
------ ------- --------
$109 $ 186 $ 200
==== ===== =====
The Company's net sales to the equity investments amounted to $6,132,
$6,483, and $17,864 for the years ended November 30, 1997, 1996, and
1995, respectively. The Company's purchases from the equity investments
amounted to $144,488, $115,109, and $83,858 for the years ended
November 30, 1997, 1996, and 1995, respectively. The Company recorded
$2,027 and $2,130 of outside representative commission expenses for
activations and residuals generated by G.L.M. on the Company's behalf
during fiscal year 1997 and 1996, respectively, (Note 1(l)).
Included in accounts receivable at November 30, 1997 and 1996 are trade
receivables due from its equity investments aggregating $1,921 and
$2,576, respectively. At November 30, 1996, a management fee receivable
of $50 was also included in accounts receivable. Receivable from vendor
is interest bearing and represents claims on late deliveries, product
modifications, and price protection from TALK as well as prepayments on
product shipments. Interest is payable in monthly installments at rates
which range from 6.5% to 8%. Amounts representing prepayments of $5,000
were repaid via receipt of product shipments in December 1997. At
November 30, 1997 and 1996, other long-term assets include equity
investment advances outstanding and management fee receivables of
$1,496 and $1,634, respectively. At November 30, 1997 and 1996,
included in accounts payable and other accrued expenses were
obligations to equity investments aggregating $9,783 and $3,773,
respectively. Documentary acceptance obligations were outstanding from
TALK at November 30, 1997 (Note 9(b)).
During 1997, the Company recorded interest income from TALK relating to
the receivable from vendor, reimbursement of interest expense incurred
under the subordinated loan to hedge the TALK investment (Note 10), and
other short-term loans made to TALK during 1997 at market interest
rates. For the years ended November 30, 1997, 1996, and 1995, interest
income earned on equity investment notes and other receivables
approximated $653, $725, and $573, respectively. Interest expense on
equity investment documentary acceptances approximated $203 and $198 in
1997 and 1996, respectively.
(Continued)
42
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) Financing Arrangements
(a) Bank Obligations
During 1993, the Company had established a revolving credit
agreement with several financial institutions which was first
amended on March 15, 1994. On May 5, 1995, the Company entered
into the Second Amended and Restated Credit Agreement (the
Credit Agreement) which superseded the first amendment in its
entirety. During 1997, the Credit Agreement was amended four
times providing for various changes to the terms. The terms as
of November 30, 1997 are summarized below.
Under the Credit Agreement, the Company may obtain credit
through direct borrowings and letters of credit. The
obligations of the Company under the Credit Agreement continue
to be guaranteed by certain of the Company's subsidiaries and
is secured by accounts receivable and inventory of the Company
and those subsidiaries. The obligations were secured at
November 30, 1997 by a pledge agreement entered into by the
Company for 100 shares of ACC. Availability of credit under
the Credit Agreement is a maximum aggregate amount of $95,000,
subject to certain conditions, and is based upon a formula
taking into account the amount and quality of its accounts
receivable and inventory. The Credit Agreement expires on
February 28, 2000. As a result, bank obligations under the
Credit Agreement have been classified as long-term at November
30, 1997.
Outstanding obligations under the Credit Agreement at November
30, 1997 and 1996 were as follows:
November 30,
1997 1996
Revolving Credit Notes $18,300 $11,700
Eurodollar Notes 6,000 20,000
--------- -------
$24,300 $31,700
======= =======
For the year ended November 30, 1995 through and including
February 8, 1996, interest on revolving credit notes were .25%
above the prime rate, which was 8.75% at November 30, 1995.
For the same period, interest on Eurodollar Notes were 2%
above the Libor rate which was approximately 5.1% at November
30, 1995 and interest on bankers' acceptances were 2% above
the bankers' acceptance rate which was approximately 6.25% at
November 30, 1995. Pursuant to an amendment on February 9,
1996, the interest rates were increased to the following:
revolving credit notes at .50% above the prime rate, which was
approximately 8.5% at November 30, 1997 and Eurodollar Notes
at 2.75% above the Libor rate which was approximately 5.97% at
November 30, 1997. Interest on bankers' acceptances remained
at 2% above the bankers' acceptance
(Continued)
43
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
rate which was approximately 5.77% at November 30, 1997. The
maximum commitment fee on the unused portion of the line of
credit is .25% as of November 30, 1997.
The Credit Agreement contains several covenants requiring,
among other things, minimum levels of pre-tax income and
minimum levels of net worth and working capital. Additionally,
the agreement includes restrictions and limitations on
payments of dividends, stock repurchases, and capital
expenditures. During 1997, the Company received amendments and
waivers to allow the Company to make stock repurchases (Note
12) and enter into the equity collar (Note 16(a)(2)).
Subsequent to year end, the Company received a waiver which
allowed for the delay in issuance of its financial statements.
The Company also has a revolving credit facility with a
Malaysian bank (Malaysian Credit Agreement) to finance
additional working capital needs. As of November 30, 1997 and
1996, the available line of credit for direct borrowing,
letters of credit, bankers' acceptances and other forms of
credit approximated $8,017 and $9,320, respectively. The
credit facility is partially secured by two standby letters of
credit totaling $5,320, issued under the Credit Agreement by
the Company and is payable upon demand or upon expiration of
the standby letters of credit on August 31, 1998. The
obligations of the Company under the Malaysian Credit
Agreement are secured by the property and building owned by
Audiovox Communications. Outstanding obligations under the
Malaysian Credit Agreement at November 30, 1997 and 1996 were
approximately $4,146 and $4,024, respectively. At November 30,
1997, interest on the credit facility ranged from 8.25% to
11.10%. At November 30, 1996, interest on the credit facility
ranged from 9.25% to 9.52%.
On October 28, 1997, Audiovox Venezuela issued a note payable
to a Venezuelan bank in the amount of 994,000 Venezuelan
Bolivars (approximately $1,986 at November 30, 1997) to
finance additional working capital needs. The note is
scheduled to be repaid within one year and as such, is
classified as short-term. Interest on the note payable is 20%.
The note payable is secured by a standby letter of credit in
the amount of $2,000, issued under the Credit Agreement by the
Company and is payable upon demand or upon expiration of the
standby letter of credit on August 31, 1998.
The maximum month-end amounts outstanding under the Credit
Agreement and Malaysian Credit Agreement borrowing facilities
during the years ended November 30, 1997, 1996, and 1995 were
$28,420, $44,213, and $59,315, respectively. Average
borrowings during the years ended November 30, 1997, 1996, and
1995 were $11,478, $33,662, and $43,470, respectively, and the
weighted average interest rates were 11.3%, 8.9%, and 8.7%,
respectively.
(Continued)
44
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) Documentary Acceptances
During 1997, the Company had various unsecured documentary
acceptance lines of credit available with suppliers to finance
inventory purchases. The Company does not have written
agreements specifying the terms and amounts available under
the lines of credit. At November 30, 1997, $3,914 of
documentary acceptances were outstanding of which all was due
to TALK.
The maximum month-end documentary acceptances outstanding
during the years ended November 30, 1997, 1996, and 1995 were
$4,162, $9,792, and $9,977, respectively. Average borrowings
during the years ended November 30, 1997, 1996, and 1995 were
$3,199, $5,845, and $5,876, respectively, and the weighted
average interest rates, including fees, were 6.3%, 5.1%, and
4.4%, respectively.
(10) Long-Term Debt
A summary of long-term debt follows:
November 30,
---------------------------
1997 1996
---- ----
Convertible subordinated debentures:
6 1/4%, due 2001, convertible at
$17.70 per share $ 2,269 $23,748
Subordinated note payable 3,922 4,417
-------- ---------
6,191 28,165
Less current installments - -
----------- ------------
$ 6,191 $28,165
======= =======
On March 15, 1994, the Company completed the sale of $65,000, 6 1/4%
convertible subordinated debentures (Subordinated Debentures) due 2001
and entered into an Indenture Agreement. The Subordinated Debentures
are convertible into shares of the Company's Class A Common Stock, par
value $.01 per share at an initial conversion price of $17.70 per
share, subject to adjustment under certain circumstances. The Indenture
Agreement contains various covenants. The bonds are subject to
redemption by the Company in whole, or in part, at any time after March
15, 1997, at certain specified amounts. On May 9, 1995, the Company
issued warrants to certain beneficial holders of these Subordinated
Debentures (Note 13(d)).
On November 25, 1996, the Company completed an exchange of $41,252 of
its $65,000 Subordinated Debentures for 6,806,580 shares of Class A
Common Stock (Exchange). As a result of the Exchange, a charge of
$26,318 was recorded. The charge to earnings represents (i) the
difference in the fair market value of the shares issued in the
Exchange and the fair market value of the shares that would have been
issued under the terms of the original conversion feature
(Continued)
45
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
plus (ii) a write-off of the debt issuance costs associated with the
Subordinated Debentures (Note 1(h)) plus (iii) expenses associated with
the Exchange offer. The Exchange resulted in taxable income due to the
difference in the face value of the bonds converted and the fair market
value of the shares issued and, as such, a current tax expense of
$2,888 was recorded. An increase to paid in capital was reflected for
the face value of the bonds converted, plus the difference in the fair
market value of the shares issued in the Exchange and the fair market
value of the shares that would have been issued under the terms of the
original conversion feature for a total of $63,564.
During January 1997, the Company completed additional exchanges
totaling $21,479 of it $65,000 Subordinated Debentures for 2,860,925
shares of Class A Common Stock (Additional Exchanges). As a result of
the Additional Exchanges, similar to that of the Exchange described
earlier, a charge of $12,686, tax expense of $158 and an increase to
paid in capital of $33,592, was recorded. As a result of the Exchange
and Additional Exchanges, the remaining Subordinated Debentures are
$2,269.
On March 8, 1994, the Company entered into a Debenture Exchange
Agreement and exchanged certain debentures for Series AA and Series BB
Convertible Debentures (Debentures). The Debentures were convertible at
any time at $5.34 per share, which is subject to adjustment in certain
circumstances, and were secured by a standby letter of credit. Although
the Debenture Exchange Agreement provides for optional prepayments
under certain circumstances, such prepayments are restricted by the
Credit Agreement (Note 9(a)). On February 9, 1996, the holders of
$1,100 of the Series BB Convertible Debentures exercised their right to
convert into 206,046 shares of Class A Common Stock. The remaining
balance of the Debentures were repaid during 1996; thereby
extinguishing the remaining conversion features of these Debentures.
On October 20, 1994, the Company issued a note payable for 500,000
Japanese Yen (approximately $3,922 and $4,417 on November 30, 1997 and
1996, respectively) to finance its investment in TALK (Note 8). The
note is scheduled to be repaid on October 20, 2004 and bears interest
at 4.1%. The note can be repaid by cash payment or by giving 10,000
shares of its TALK investment to the lender. The lender has an option
to acquire 2,000 shares of TALK held by the Company in exchange for
releasing the Company from 20% of the face value of the note at any
time after October 20, 1995. This note and the investment in TALK are
both denominated in Japanese Yen, and, as such, the foreign currency
translation adjustments are accounted for as a hedge. Any foreign
currency translation adjustment resulting from the note will be
recorded in stockholders' equity to the extent that the adjustment is
less than or equal to the adjustment from the translation of the
investment in TALK. Any portion of the adjustment from the translation
of the note that exceeds the adjustment from the translation of the
investment in TALK is a transaction gain or loss that will be included
in earnings.
During 1995, Audiovox Malaysia entered into a Secured Term Loan for
1,700 Malaysian Ringgits (approximately $675) to acquire a building.
The loan was secured by the property acquired
(Continued)
46
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
and bore interest at 1.5% above the Malaysian base lending rate which
was 9.2% on November 30, 1996. The loan was payable in 120 monthly
equal installments commencing October 1995, however, was fully repaid
in November 1996.
Maturities on long-term debt for the next five fiscal years are
as follows:
1998 -
1999 -
2000 -
2001 $2,269
2002 -
=========
(11) Income Taxes
The components of income (loss) before the provision for (recovery of)
income taxes are as follows:
November 30,
-------------------------------
1997 1996 1995
---- ---- ----
Domestic Operations $42,613 $(21,899) $(12,424)
Foreign Operations 829 1,264 (2,262)
---------- ----------- ----------
$43,442 $(20,635) $(14,686)
======= ========= =========
Total income tax expense (recovery) was allocated as follows:
November 30,
1997 1996
Income (loss) from continuing operations $22,420 $ 5,834
Stockholders' equity
Unrealized holding gain (loss) on investment
securities recognized for financial reporting
purposes 1,174 (13,143)
Unrealized holding gain on equity collar
recognized for financial reporting purposes 473 -
----------- ---------
Total income tax expense (recovery) $24,067 $ (7,309)
======== =========
(Continued)
47
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision for (recovery of) income taxes attributable to income
from continuing operations is comprised of:
Federal Foreign State Total
1995:
Current $ 1,455 $ 570 $ 330 $ 2,355
Deferred (4,189) - (969) (5,158)
---------- ---------- ---------- ----------
$ (2,734) $ 570 $ (639) $ (2,803)
========= ======= ========= =========
1996:
Current $ 3,711 $ 802 $ 853 $ 5,366
Deferred 330 - 138 468
----------- ---------- ----------- ----------
$ 4,041 $ 802 $ 991 $ 5,834
========== ======= ========== =========
1997:
Current $ 23,316 $1,159 $ 1,068 $ 25,543
Deferred (2,845) - (278) (3,123)
---------- ---------- ---------- ----------
$ 20,471 $1,159 $ 790 $ 22,420
========= ====== ========== ========
A reconciliation of the provision for (recovery of) income taxes
attributable to income (loss) from continuing operations computed at
the Federal statutory rate to the reported provision for income taxes
attributable to income (loss) from continuing operations is as follows:
November 30,
---------------------------------------------------------------------------------------
1997 1996 1995
------ ------ -----
Tax provision (recovery) at
Federal statutory rates $15,205 35.0% $ (7,222) (35.0)% $ (5,140) (35.0)%
Expense relating to exchange
of subordinated debentures 4,578 10.5 11,421 55.3 - -
Undistributed earnings from
equity investments 123 0.3 128 0.6 1,330 9.1
State income taxes, net of
Federal benefit 1,637 3.8 275 1.3 (415) (2.8)
(Decrease) increase in
beginning-of-the-year
balance of the valuation
allowance for deferred tax
assets (180) (0.4) 1,270 6.2 644 4.3
Foreign tax rate differential 323 0.7 30 0.1 (34) (0.2)
Expense relating to the
issuance of warrants - - - - 1,022 6.9
Other, net 734 1.7 (68) (0.2) (210) (1.4)
--------- ------ ---------- -------- ----------- -----
$22,420 51.6% $ 5,834 28.3% $ (2,803) (19.1)%
======== ===== ========== ======= ========= =======
(Continued)
48
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant components of deferred income tax expense (recovery)
for the years ended November 30, 1997 and 1996 are as follows:
November 30,
1997 1996
Deferred tax recovery (exclusive of the effect
of other components listed below) $(2,938) $ (802)
(Decrease) increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets (180) 1,270
---------- --------
$(3,118) $ 468
======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are
presented below:
November 30,
1997 1996
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts and cellular deactivations $ 1,483 $ 1,593
Inventory, principally due to additional costs
capitalized for tax purposes pursuant to the Tax
Reform Act of 1986 439 306
Inventory, principally due to valuation reserve 941 930
Accrual for future warranty costs 830 978
Plant, equipment, and certain intangibles, principally
due to depreciation and amortization 719 714
Net operating loss carryforwards, state and foreign 2,662 2,458
Accrued liabilities not currently deductible 405 491
Other 381 664
----------- --------
Total gross deferred tax assets 7,860 8,134
Less: valuation allowance (2,713) (2,893)
--------- ---------
Net deferred tax assets 5,147 5,241
---------- --------
Deferred tax liabilities:
Equity investments, principally due to undistributed
earnings (8,506) (10,548)
Equity collar (473) -
---------- --------
Total gross deferred tax liabilities (8,979) (10,548)
--------- ---------
Net deferred tax liability $(3,832) $ (5,307)
======== =========
(continued)
49
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net change in the total valuation allowance for the year ended
November 30, 1997 was a decrease of $180. A valuation allowance is
provided when it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. The Company has
established valuation allowances primarily for net operating loss
carryforwards in certain states and foreign countries as well as other
deferred tax assets in foreign countries. Based on the Company's
ability to carry back future reversals of deferred tax assets to taxes
paid in current and prior years and the Company's historical taxable
income record, adjusted for unusual items, management believes it is
likely that the Company will realize the benefit of the net deferred
tax assets existing at November 30, 1997. Further, management believes
the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income. There can be
no assurance, however, that the Company will generate any earnings or
any specific level of continuing earnings in the future. The amount of
the deferred tax asset considered realizable, however, could be reduced
in the near term if estimates of future taxable income during the
carryforward period are reduced.
At November 30, 1997, the Company had net operating loss carryforwards
for state and foreign income tax purposes of approximately $21,851,
which are available to offset future state and foreign taxable income,
if any, which will expire through the year ended November 30, 2011.
(12) Capital Structure
The Company's capital structure is as follows:
Voting
Rights
Par Shares Issued Per Liquidation
Security Value Shares Authorized and Outstanding Share Rights
November 30, November 30,
1997 1996 1997 1996
Preferred Stock $50.00 50,000 50,000 50,000 50,000 - $50 per share
Series Preferred Stock 0.01 1,500,000 1,500,000 - - - -
Ratably with
Class A Common Stock 0.01 30,000,000 30,000,000 16,963,533 14,040,414 One Class B
Class B Common Stock 0.01 10,000,000 10,000,000 2,260,954 2,260,954 Ten Ratably with
Class A
The holders of Class A and Class B Common Stock are entitled to receive cash
or property dividends declared by the Board of Directors. The Board can
declare cash dividends for Class A Common Stock in amounts equal to or
greater than the cash dividends for Class B Common Stock. Dividends other
than cash must be declared equally for both classes. Each share of
(Continued)
50
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Class B Common Stock may, at any time, be converted into one share of Class
A Common Stock.
The 50,000 shares of non-cumulative Preferred Stock outstanding are owned by
Shintom and have preference over both classes of common stock in the event
of liquidation or dissolution.
On May 16, 1997, the Company's Board of Directors approved the repurchase of
1,000,000 shares of the Company's Class A Common Stock in the open market
under a share repurchase program (the Program). As of November 30, 1997,
290,000 shares were repurchased under the Program at an average price of
$8.35 per share for an aggregate amount of $2,421. Subsequent to November
30, 1997, 50,000 shares have been repurchased under the Program at an
average price of $7.37 per share for an aggregate amount of $368.
As of November 30, 1997 and 1996, 969,500 shares of the Company's Class A
Common Stock are reserved for issuance under the Company's Stock Option and
Restricted Stock Plans and 5,491,192 for all convertible securities and
warrants outstanding at November 30, 1997 and 1996 (Notes 10 and 13).
Undistributed earnings from equity investments included in retained earnings
amounted to $1,564 and $3,728 at November 30, 1997 and 1996, respectively.
(13) Common Stock and Compensation Plans
(a) The Company has stock option plans under which employees
and non-employee directors may be granted incentive stock
options (ISO's) and non-qualified stock options (NQSO's) to
purchase shares of Class A Common Stock. Under the plans,
the exercise price of the ISO's will not be less than the
market value of the Company's Class A Common Stock or 110%
of the market value of the Company's Class A Common Stock on
the date of grant. The exercise price of the NQSO's may not
be less than 50% of the market value of the Company's Class
A Common Stock on the date of grant. The options must be
exercisable no later than ten years after the date of grant.
Compensation expense is recorded with respect to the options
based upon the quoted market value of the shares and the
exercise provisions at the date of grant. Compensation
expense for the year ended November 30, 1996 and 1995 was
$97 and $113, respectively. No compensation expense was
recorded for the year ended November 30, 1997.
(Continued)
51
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Information regarding the Company's stock option plans is summarized below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at
November 30, 1994 313,000 11.72
Granted 279,000 5.88
Exercised - -
Canceled (33,750) 11.76
----------- ------
Outstanding at
November 30, 1995 558,250 8.80
Granted - -
Exercised - -
Canceled (9,500) 10.17
------------ -----
Outstanding at
November 30, 1996 548,750 8.78
Granted 1,260,000 7.09
Exercised - -
Canceled (109,000) 10.95
---------- -----
Outstanding at
November 30, 1997 1,699,750 7.38
========== =====
Options exercisable, 166,750 12.10
=========== =====
November 30, 1997
At November 30, 1997 and 1996, 190,250 and 341,250 shares,
respectively, were available for future grants under the terms
of these plans.
The Company adopted SFAS No. 123 in fiscal 1997. The Company
has elected to disclose the pro forma net earnings and
earnings per share as if such method had been used to
account for stock-based compensation costs as described in
SFAS No. 123.
The per share weighted average fair value of stock options
granted during 1997 was $5.73 on the date of the grant using
the Black-Scholes option-pricing model with the following
weighted average assumptions: risk free interest rate of
6.49%, expected dividend yield of 0.0%, expected stock
volatility of 70% and an expected option life of 10 years. No
options were granted in 1996.
(Continued)
52
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company applies APB Opinion No. 25 in accounting for its
stock option grants and, accordingly, no compensation cost has
been recognized in the financial statements for its stock
options which have an exercise price equal to or greater than
the fair value of the stock on the date of the grant. Had the
Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123,
the Company's net income (loss) and net income (loss) per
common share would have been reduced to the proforma amounts
indicated below:
1997 1996
---- ----
Net income (loss):
As reported $21,022 $(26,469)
Pro forma 18,786 (26,469)
Net income (loss) per common share (primary):
As reported $1.09 $(2.82)
Pro forma 0.97 (2.82)
Net income (loss) per common share (fully diluted):
As reported 1.05 -
Pro forma 0.94 -
Proforma net earnings reflect only options granted in 1997 and
1996. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in
the proforma net earnings amounts presented above because
compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to
December 1, 1995 was not considered.
Summarized information about stock options outstanding as of
November 30, 1997 is as follows:
Outstanding Exercisable
Weighted Weighted
Average Average Weighted
Exercise Exercise Life Average
Price Number Price Remaining Number Price
Range of Shares of Shares In Years of Shares of Shares
------- --------- ----------- ---------- --------- ---------
$5.50 - $8.00 1,533,000 6.87 9.22 - -
$8.01 - $13.00 166,750 12.10 6.50 166,750 $ 12.10
---------- -------
1,699,750 166,750
========= =======
(continued)
53
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) Restricted Stock Plan
The Company has restricted stock plans under which key
employees and directors may be awarded restricted stock. Total
restricted stock outstanding, granted under these plans, at
November 30, 1997 and 1996 was 78,500 and 79,500,
respectively.
The per share weighted average fair value of restricted stock
awards granted in 1995 was $5.88 on the date of the grant. The
fair value was determined to be the fair market value of the
Company's Class A Common Stock on the date of the grant. No
restricted stock awards were granted in 1997 or 1996.
Compensation expense for the performance accelerated shares is
recorded based upon the quoted market value of the shares on
the date of grant. Compensation expense for the performance
restricted shares is recorded based upon the quoted market
value of the shares on the balance sheet date. Compensation
expense for these grants for the years ended November 30,
1997, 1996 and 1995 were $135, $200 and $127, respectively.
(c) Employee Stock Purchase Plan
In May 1993, the stockholders approved the 1993 Employee Stock
Purchase Plan. The stock purchase plan provides eligible
employees an opportunity to purchase shares of the Company's
Class A Common Stock through payroll deductions up to 15% of
base salary compensation. Amounts withheld are used to
purchase Class A Common Stock on or about the last business
day of each month at a price equal to 85% of the fair market
value. This Plan provides for purchases of up to 1,000,000
shares.
(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, 1997. The consulting
agreement, valued at $100, was expensed in 1994 when the
services to be provided, pursuant to the consulting agreement,
were completed.
In December 1993, the Company granted warrants to purchase
50,000 shares of Class A Common Stock at a purchase price of
$14.375 per share as part of the acquisition of H & H Eastern
Distributors, Inc. The per share purchase price and number of
shares purchasable are each subject to adjustment upon the
occurrence of certain events described in the warrant
agreement. The warrants are exercisable, in whole or in part,
from time-to-time, until September 22, 2003. If the warrants
are exercised in whole, the holder thereof
(Continued)
54
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
has the right to require the Company to file with the
Securities Exchange Commission a registration statement
relating to the sale by the holder of the Class A Common Stock
purchasable pursuant to the warrant.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of Class A
Common Stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial
holders as of June 3, 1994, of approximately $57,600 of the
Company's Subordinated Debentures in exchange for a release of
any claims such holders may have against the Company, its
agents, directors and employees in connection with their
investment in the Subordinated Debentures. As a result, the
Company incurred a warrant expense of $2,900 and recorded a
corresponding increase to paid in capital. The warrants are
not exercisable after March 15, 2001, unless sooner terminated
under certain circumstances. John J. Shalam, Chief Executive
Officer of the Company, has granted the Company an option to
purchase 1,668,875 shares of Class A Common Stock from his
personal holdings. The exercise price of this option is $7
1/8, plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains
to Mr. Shalam.
During fiscal 1997, the Company granted warrants to purchase
100,000 shares of Class A Common Stock, which have been
reserved, at $6.75 per share. The warrants, which are
exercisable in whole or in part at the discretion of the
holder, expire on January 29, 2002. There were no warrants
exercised as of November 30, 1997.
(e) Profit Sharing Plans
The Company has established two non-contributory employee
profit sharing plans for the benefit of its eligible employees
in the United States and Canada. The plans are administered by
trustees appointed by the Company. A contribution of $500 and
$150 was made by the Company to the United States plan in
fiscal 1997 and 1996, respectively. No contributions were made
to the plan for fiscal year 1995. Contributions required by
law to be made for eligible employees in Canada were not
material.
(14) Export Sales
Export sales of approximately $102,659 and $87,334 for the years ended
November 30, 1997 and 1996, respectively, exceeded 10% of sales. Export
sales for the year ended November 30, 1995 did not exceed 10% of sales.
(Continued)
55
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) Lease Obligations
At November 30, 1997, the Company was obligated under non-cancelable
leases for equipment and warehouse facilities for minimum annual rental
payments as follows:
Operating
Leases
1998 $1,377
1999 904
2000 504
2001 217
2002 25
Thereafter 2
--------
Total $3,029
========
Rental expense for the above-mentioned operating lease agreements and
other leases on a month-to-month basis approximated $2,516, $2,292 and
$4,080 for the years ended November 30, 1997, 1996 and 1995,
respectively.
The Company leases certain facilities from its principal stockholder
and several officers. Rentals for such leases are considered by
management of the Company to approximate prevailing market rates. At
November 30, 1997, minimum annual rental payments on these related
party leases, which are included in the above table, are as follows:
1998 $162
1999 23
(16) Financial Instruments
(a) Derivative Financial Instruments
(1) Forward Exchange Contracts
At November 30, 1997 and 1996, the Company had
contracts to exchange foreign currencies in the form
of forward exchange contracts in the amount of
$26,502 and $5,451, respectively. These contracts
have varying maturities with none exceeding one year
as of November 30, 1997. For the years ended November
30, 1997, 1996 and 1995, gains and losses on foreign
currency transactions which were not hedged were not
material. For the years ended November 30, 1997, 1996
and 1995, there were no gains or losses as a result
of terminating hedges prior to the transaction date.
(Continued)
56
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Equity Collar
The Company entered into an equity collar on
September 26, 1997 to maintain some of the unrealized
gains associated with its investment in CellStar
(Note 6). The equity collar provides that on
September 26, 1998, the Company can put 100,000
shares of CellStar to the counter party to the equity
collar (the bank) at $38 per share in exchange for
the bank being able to call the 100,000 shares of
CellStar at $51 per share. The Company has designated
this equity collar as a hedge of 100,000 of its
shares in CellStar being that it provides the Company
with protection against the market value of CellStar
shares falling below $38. Given the high correlation
of the changes in the market value of the item being
hedged to the item underlying the equity collar, the
Company applied hedge accounting for this equity
collar. The equity collar is recorded on the balance
sheet at fair value with gains and losses on the
equity collar reflected as a separate component of
equity.
Subsequent to year end, the Company sold the equity
collar for $1,499 in cash.
The Company is exposed to credit losses in the event of
nonperformance by the counter parties to its forward exchange
contracts and its equity collar. The Company anticipates,
however, that counter parties will be able to fully satisfy
their obligations under the contracts. The Company does not
obtain collateral to support financial instruments, but
monitors the credit standing of the counter parties.
(b) Off-Balance Sheet Risk
Commercial letters of credit are issued by the Company during
the ordinary course of business through major domestic banks
as requested by certain suppliers. The Company also issues
standby letters of credit principally to secure certain bank
obligations of Audiovox Communications and Audiovox Venezuela
(Note 9(a)). The Company had open commercial letters of credit
of approximately $19,078 and $23,785, of which $10,625 and
$17,400 were accrued for as of November 30, 1997 and 1996,
respectively. The terms of these letters of credit are all
less than one year. No material loss is anticipated due to
nonperformance by the counter parties to these agreements. The
fair value of these open commercial and standby letters of
credit is estimated to be the same as the contract values
based on the nature of the fee arrangements with the issuing
banks.
The Company is a party to a joint and several guarantee on
behalf of G.L.M. up to the amount of $200. There is no market
for this guarantee and it was issued without explicit cost.
Therefore, it is not practicable to establish its fair value.
(Continued)
57
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(c) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of trade
receivables. The Company's customers are located principally
in the United States and Canada and consist of, among others,
cellular carriers and service providers, distributors, agents,
mass merchandisers, warehouse clubs and independent retailers.
At November 30, 1997, two customers, a cellular carrier and
service provider and a Bell Operating Company, accounted for
approximately 8.7% and 5.3%, respectively, of accounts
receivable. At November 30, 1996, two customers, which
included a cellular carrier and service provider and a Bell
Operating Company accounted for approximately 11% and 10%,
respectively, of accounts receivable.
During the year ended November 30, 1997, two customers, a
cellular carrier and service provider and a Bell Operating
Company, accounted for approximately 11.3% and 9.0%,
respectively, of the Company's 1997 sales. During the year
ended November 30, 1996, two customers, a Bell Operating
Company and a cellular carrier and service provider, accounted
for approximately 12% and 9%, respectively, of the Company's
1996 sales. During the year ended November 30, 1995, two Bell
Operating Companies and a cellular carrier and service
provider accounted for approximately 6%, 7% and 7%,
respectively, of the Company's 1995 sales.
The Company generally grants credit based upon analyses of its
customers' financial position and previously established
buying and payment patterns. The Company establishes
collateral rights in accounts receivable and inventory and
obtains personal guarantees from certain customers based upon
management's credit evaluation. At November 30, 1997 and 1996,
43 and 44 customers, respectively, representing approximately
69% and 70%, 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.
(d) Fair Value
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value. The carrying
value of all financial instruments classified as a current
asset or liability is deemed to approximate fair value, with
the exception of current installments of long-term debt,
(Continued)
58
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
because of the short maturity of these instruments.
Investment Securities
The carrying amount represents fair value, which is based upon
quoted market prices at the reporting date (Note 6).
Equity Collar (Derivative)
The carrying amount represents fair value, which is based upon
the Black Scholes option-pricing model.
Long-Term Debt Including Current Installments
The carrying amount of bank debt under the Company's revolving
Credit Agreement and Malaysian Credit Agreement approximates
fair value because of the short maturity of the related
obligations. With respect to the Subordinated Debentures, fair
values are based on published statistical data.
Forward Exchange Contracts (Derivative)
The fair value of the forward exchange contracts are based
upon exchange rates at November 30, 1997 and 1996 as the
contracts are short term.
The estimated fair value of the Company's financial
instruments are as follows:
November 30, 1997 November 30, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Equity collar (derivative) $ 1,246 $ 1,246 - -
Long-term obligations
including current
installments $30,491 $30,910 $ 59,865 $ 56,046
Forward exchange contract - $26,125 - 5,316
obligation (derivative)
(Continued)
59
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
(17) Contingencies
The Company is a defendant in litigation arising from the normal
conduct of its affairs. The impact of the final resolution of these
matters on the Company's results of operations or liquidity in a
particular reporting period is not known. Management is of the opinion,
however, that the litigation in which the Company is a defendant is
either subject to product liability insurance coverage or, to the
extent not covered by such insurance, will not have a material adverse
effect on the Company's consolidated financial position.
The Company has guaranteed certain obligations of its equity
investments and has established standby letters of credit to guarantee
the bank obligations of Audiovox Communications and Audiovox Venezuela
(Note 16(b)).
60
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information regarding this item is set forth under the captions
"Election of Directors" of the Company's Proxy Statement to be dated March 27,
1998, which will be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (the Proxy Statement) and is incorporated herein by
reference. Information with regard to Executive Officers is set forth in Item 1
of this Form 10-K.
Item 11 - Executive Compensation
The information regarding this item is set forth under the caption
"Executive Compensation" of the Proxy Statement and is incorporated herein by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement and is
incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Information regarding this item is set forth under the caption
"Beneficial Ownership of Common Stock", "Election of Directors" and "Executive
Compensation" of the Proxy Statement.
PART IV
Item 14 - Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
(a) (1)
The following financial statements are included in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets of Audiovox Corporation and Subsidiaries as of
November 30, 1997 and 1996.
Consolidated Statements of Income (Loss) of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity of Audiovox Corporation and
Subsidiaries for the Years Ended November 30, 1997, 1996 and 1995.
61
Consolidated Statements of Cash Flows of Audiovox Corporation and Subsidiaries
for the Years Ended November 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(a) (2)
Financial Statement Schedules of the Registrant for the Years Ended November 30,
1997, 1996 and 1995.
Independent Auditors' Report on Financial Statement Schedules
Schedule Page
Number Description Number
II Valuation and Qualifying Accounts 67
All other financial statement schedules not listed are omitted because they are
either not required or the information is otherwise included.
62
Independent Auditors' Report
The Board of Directors and Stockholders
Audiovox Corporation:
Under the date of March 6, 1998 we reported on the consolidated balance sheets
of Audiovox Corporation and subsidiaries as of November 30, 1997 and 1996, and
the related consolidated statements of income (loss), stockholders' equity, and
cash flows for each of the years in the three-year period ended November 30,
1997, which are included in the Company's 1997 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 1997 annual report on Form 10-K. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
March 6, 1998
63
(3) Exhibits See Item 14(c) for Index of Exhibits.
(b) Reports on Form 8-K
During the fourth quarter, the Registrant filed one report on Form 8-K.
The Form 8-K, dated August 19, 1997 and filed September 4, 1997,
reported that the Company had executed a Ninth Amendment to the
Company's Second Amended and Restated Credit Agreement (the Amendment).
The Amendment, among other things, (i) increased the aggregate amount
of the lenders' commitments under the Credit Agreement to $95,000,000;
(ii) extended the term of the Credit Agreement to February 28, 2000;
and (iii) decreased the applicable margin on base rate and Eurodollar
loans.
(c) Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the company
(incorporated by reference to the Company's Registration
Statement on Form S-1; No. 33-107, filed May 4, 1987).
3.1a Amendment to Certificate of Incorporation (incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended November 30, 1993).
3.2 By-laws of the Company (incorporated by reference to the Company's Registration
Statement on Form S-1; No. 33-10726, filed May 4, 1987).
10.1 Eighth Amendment, dated as of March 7, 1997, to the Second Amended and
Restated Credit Agreement among the Registrant and the several banks and financial
institutions (filed via EDGAR herewith).
10.2 Ninth Amendment, dated as of August 19, 1997, to the
Second Amended and Restated Credit Agreement among the
Registrant and the several banks and financial
institutions (incorporated by reference to the Company's
Form 8-K filed via EDGAR on September 4, 1997).
10.3 Tenth Amendment, dated as of October 24, 1997, to the Second Amended and
Restated Credit Agreement among the Registrant and the several banks and financial
institutions (filed via EDGAR herewith)
11 Statement of Computation of Income (Loss) per Common Share (filed via EDGAR
herewith).
21 Subsidiaries of the Registrant (filed via EDGAR herewith).
23 Independent Auditors Consent (filed via EDGAR herewith).
27 Financial Data Schedule (filed via EDGAR herewith).
(d) All other schedules are omitted because the required information is
shown in the financial statements or notes thereto or because they are
not applicable.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AUDIOVOX CORPORATION
March 11, 1998 BY:s/John J. Shalam
John J. Shalam, President
and Chief Executive Officer
65
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
President; March 11, 1998
Chief Executive Officer
s/John J. Shalam (Principal Executive Officer
John J. Shalam and Director
Executive Vice President and March 11, 1998
s/Philip Christopher Director
Philip Christopher
Senior Vice President, March 11, 1998
Chief Financial Officer (Principal
s/Charles M. Stoehr Financial and Accounting
Charles M. Stoehr Officer) and Director
Director March 11, 1998
s/Patrick M. Lavelle
Patrick M. Lavelle
s/Ann Boutcher Director March 11, 1998
- --------------
Ann Boutcher
s/Gordon Tucker Director March 11, 1998
- ---------------
Gordon Tucker
s/Irving Halevy Director March 11, 1998
- ---------------
Irving Halevy
s/Richard Maddia Director March 11, 1998
- ----------------
Richard Maddia
s/Paul C. Kreuch, Jr. Director March 11, 1998
- ---------------------
Paul C. Kreuch, Jr.
66
Schedule II
AUDIOVOX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 30, 1997, 1996 and 1995
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description Of Year Expenses Accounts Deductions Of Year
1997
Allowance for doubtful accounts $ 3,115 $ 1,300 - $ 918 $ 3,497
Cash discount allowances 314 - - 125 189
Co-op advertising and volume
rebate allowances 6,977 12,283 - 13,588 5,672
Allowance for cellular deactivations 1,666 - - 303 1,363
Reserve for warranties and product
repair costs 4,975 2,316 - 3,223 4,068
--------- --------- ------- --------- ---------
$17,047 $15,899 - $18,157 $14,789
======= ======= ======= ======= =======
1996
Allowance for doubtful accounts $ 2,707 $ 430 - $ 22 $ 3,115
Cash discount allowances 165 149 - - 314
Co-op advertising and volume rebate
allowances 3,225 17,629 - 13,877 6,977
Allowance for cellular deactivations 1,725 - - 59 1,666
Reserve for warranties and product repair
costs 3,948 3,784 - 2,757 4,975
--------- --------- ------- --------- ---------
$11,770 $21,992 - $16,715 $17,047
======= ======= ======= ======= =======
1995
Allowance for doubtful accounts $ 1,623 $ 1,816 - $ 732 $ 2,707
Cash discount allowances 237 - - 72 165
Co-op advertising and volume rebate
allowances 2,688 7,621 - 7,084 3,225
Allowance for cellular deactivations 1,234 491 - - 1,725
Reserve for warranties and product repair
costs 3,207 3,834 - 3,093 3,948
--------- --------- ------- --------- ---------
$ 8,989 $13,762 - $10,981 $11,770
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