UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended August 31, 1998
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-7750
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 requirements for the past 90 days.
Yes X No
Number of shares of each class of the registrant's Common Stock outstanding as
of the latest practicable date.
Class Outstanding at October 9, 1998
Class A Common Stock 17,258,573 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
August 31, 1998 (unaudited) and
November 30, 1997 3
Consolidated Statements of Income (Loss)
for the Three and Nine Months Ended
August 31, 1998 and August 31, 1997
(unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 1998
and August 31, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 11-27
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 28
SIGNATURES 29
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, NOVEMBER 30,
1998 1997
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 10,075 $ 9,445
Accounts receivable, net 87,031 104,698
Inventory, net 99,962 105,242
Receivable from vendor 3,098 5,000
Prepaid expenses and other current assets 5,651 9,230
Deferred income taxes 5,743 4,673
Equity collar -- 1,246
--------- ---------
Total current assets 211,560 239,534
Investment securities 19,969 22,382
Equity investments 10,824 10,693
Property, plant and equipment, net 17,170 8,553
Excess cost over fair value of assets acquired and other intangible assets, net 5,730 5,557
Other assets 3,197 3,108
--------- ---------
$ 268,450 $ 289,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 26,165 $ 24,237
Accrued expenses and other current liabilities 16,266 16,538
Income taxes payable 2,520 9,435
Bank obligations 9,299 6,132
Documentary acceptances 3,767 3,914
Current installments of capital lease obligation 62 --
--------- ---------
Total current liabilities 58,079 60,256
Bank obligations 14,000 24,300
Deferred income taxes 3,628 8,505
Long-term debt 5,790 6,191
Capital lease obligation 6,386 --
--------- ---------
Total liabilities 87,883 99,252
--------- ---------
Minority interest 2,721 2,683
--------- ---------
Stockholders' equity:
Preferred stock 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 and 17,253,533 issued
1998 and 1997, respectively 173 173
Class B; 10,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 145,300 145,155
Retained earnings 32,451 32,924
Cumulative foreign currency translation adjustment (4,659) (3,428)
Unrealized gain on marketable securities, net 4,421 12,194
Unrealized gain on equity collar, net -- 773
Gain on hedge of available-for-sale securities, net 929 --
Treasury stock, 447,000 Class A common stock, at cost (3,291) (2,421)
--------- ---------
Total stockholders' equity 177,846 187,892
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 268,450 $ 289,827
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Net sales $ 154,501 $ 153,124 $ 407,886 $ 467,933
Cost of sales (including an inventory write-down
to market of $6,600 during the second quarter
of 1998) 129,623 127,490 346,705 389,242
------------ ------------ ------------ ------------
Gross profit 24,878 25,634 61,181 78,691
------------ ------------ ------------ ------------
Operating expenses:
Selling 8,490 8,597 26,146 29,146
General and administrative 9,347 9,037 27,162 27,335
Warehousing, assembly and repair 3,113 2,972 9,367 8,854
------------ ------------ ------------ ------------
Total operating expenses 20,950 20,606 62,675 65,335
------------ ------------ ------------ ------------
Operating income (loss) 3,928 5,028 (1,494) 13,356
------------ ------------ ------------ ------------
Other income (expense):
Debt conversion expense -- -- -- (12,686)
Interest and bank charges (1,387) (523) (3,382) (1,872)
Equity in income of equity investments 326 749 1,201 1,062
Management fees and related income 7 18 28 94
Gain on sale of investment 427 303 427 34,270
Other, net 900 (10) 938 702
------------ ------------ ------------ ------------
Total other income (expense) 273 537 (788) 21,570
------------ ------------ ------------ ------------
Income (loss) before provision for (recovery of)
income taxes 4,201 5,565 (2,282) 34,926
Provision for (recovery of) income taxes 1,620 2,467 (1,808) 19,271
------------ ------------ ------------ ------------
Net income (loss) $ 2,581 $ 3,098 $ (474) $ 15,655
============ ============ ============ ============
Net income (loss) per common share (basic) $ 0.14 $ 0.16 $ (0.02) $ 0.83
============ ============ ============ ============
Net income (loss) per common share (diluted) $ 0.14 $ 0.16 $ (0.02) $ 0.82
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 19,118,385 19,407,913 19,161,768 18,829,986
============ ============ ============ ============
Weighted average number of common shares 19,320,075 19,822,432 19,161,768 19,328,733
outstanding (diluted) ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
-------- --------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ (474) $ 15,655
Adjustment to reconcile net income to net cash provided by
operating activities:
Debt conversion expense -- 12,386
Depreciation and amortization 1,790 1,451
Provision for bad debt expense 632 539
Equity in income of equity investment (1,229) (1,156)
Minority interest 141 1,381
Gain on sale of investment (427) (34,270)
Recovery of deferred income taxes, net (1,291) (3,098)
Provision for unearned compensation 144 137
Gain on disposal of property, plant and equipment, net (198) (17)
Warrant expense -- 106
Change in:
Accounts receivable 15,755 22,199
Inventory 3,493 (25,454)
Accounts payable, accrued expenses and other current liabilities 2,702 5,553
Receivable from vendor 1,901 (8,200)
Income taxes payable (6,688) 1,898
Prepaid expenses and other, net 2,735 (2,257)
-------- --------
Net cash provided by (used in) operating activities 18,986 (13,147)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (3,696) (3,053)
Proceeds from sale of investment securities 4,658 42,422
Purchase of investment -- (4,706)
Purchase of convertible debentures (12,719) --
Proceeds from distribution from equity investment 561 50
-------- --------
Net cash provided by (used in) investing activities (11,196) 34,713
-------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements (5,844) (27,543)
Net borrowings (repayments) under documentary acceptances (147) 513
Debt issuance costs -- (13)
Proceeds from issuance of Class A Common Stock -- 2,328
Principal payments on capital lease obligation (35) --
Repurchase of Class A Common Stock (870) (890)
-------- --------
Net cash used in financing activities (6,896) (25,605)
Effect of exchange rate changes on cash (264) (131)
-------- --------
Net increase (decrease) in cash and cash equivalents 630 (4,170)
Cash and cash equivalents at beginning of period 9,445 12,350
-------- --------
Cash and cash equivalents at end of period $ 10,075 $ 8,180
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles and include
all adjustments (which include only normal recurring adjustments)
which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Audiovox Corporation and
subsidiaries (the Company) as of August 31, 1998 and November 30, 1997,
the consolidated statements of income (loss) for the three and nine
month periods ended August 31, 1998 and August 31, 1997, and the
consolidated statements of cash flows for the nine months ended August
31, 1998 and August 31, 1997. The interim figures are not necessarily
indicative of the results for the year.
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.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 1997 Annual Report filed on Form 10-K.
(2) The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
--------------------------
August 31, August 31,
1998 1997
Cash paid during the period:
Interest (excluding bank charges) $ 2,019 $ 1,378
Income taxes $ 4,415 $19,753
As of August 31, 1998, the Company recorded a net unrealized holding
gain relating to available-for-sale marketable securities, net of
deferred taxes, of $4,421 as a separate component of stockholders'
equity.
During the first quarter of 1998, the Company sold its equity collar
for $1,499. The transaction resulted in a net gain on hedge of
available-for-sale securities of $929 which is reflected as a separate
component of stockholders' equity.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 1998, the Company purchased 400
million Japanese Yen (approximately $3,132) of Shintom Co. Ltd
(Shintom) Convertible Debentures. The Company exercised its
option to convert the Shintom Debentures into 1,904,000 shares of
Shintom Common Stock. The Company accounts for its investment in
Shintom as an available-for-sale marketable equity security. The
aggregate fair value of the available-for-sale marketable equity
security was $1,516 at August 31, 1998, which is comprised of a
cost basis of $3,132 and a gross unrealized holding loss of
$1,616 recorded as a separate component of stockholders' equity
at August 31, 1998. A related deferred tax asset of $614 was
recorded at August 31, 1998 as a reduction to the unrealized
holding loss included as a separate component of stockholders'
equity.
During the second quarter of 1998, a capital lease obligation of $6,573
was incurred when the Company entered into a building lease (Note 6).
During the third quarter of 1998, the Company purchased 400 million
Japanese Yen (approximately $2,732) of Shintom Debentures. The Company
exercised its option to convert the Shintom Debentures into shares of
Shintom Common Stock. The Company sold the Shintom Common Stock
yielding net proceeds of $3,159 and a gain of $427.
During the third quarter of 1998, the Company purchased one billion
Japanese Yen (approximately $6,854) of Shintom Debentures. The Company
accounts for its investment in Shintom as an available-for-sale
marketable security. The aggregate fair value and cost of the
available-for-sale marketable security was $6,854 at August 31, 1998.
During the third quarter, the Company purchased approximately 1,324,075
warrants at a price of $1.30 per warrant, tendered pursuant to the
terms of its self-tender offer. After purchasing the tendered warrants,
the Company has 344,800 remaining warrants outstanding.
(3) During the second quarter of 1997, the Company's Board of Directors
approved the repurchase of up to 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 August 31, 1998, 447,000 shares were
repurchased under the Program at an average price of $7.36 per share
for an aggregate amount of $3,291.
(4) In February 1997, the FASB issued Statement No. 128, "Earnings per
Share" (Statement 128). Statement 128 replaces the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any dilution. It
is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Earnings
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per share amounts for all periods presented have been restated to
conform to the new presentation. A reconciliation between the
numerators and denominators of the basic and diluted earnings per
common share is as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net income (loss) (numerator for basic
earnings (loss) per share) $ 2,581 $ 3,098 $ (474) $ 15,655
Interest on 6 1/4% convertible subordinated
debentures, net of tax 21 21 -- 164
------------ ------------ ------------ ------------
Adjusted net income (loss) (numerator for
diluted earnings (loss) per share) $ 2,602 $ 3,119 $ (474) $ 15,819
============ ============ ============ ============
Weighted average common shares
(denominator for basic earnings (loss) per
share) 19,118,385 19,407,913 19,161,768 18,829,986
Effect of dilutive securities:
6 1/4% convertible subordinated debentures 128,192 128,192 -- 335,429
Employee stock options and stock warrants -- 211,390 -- 93,687
Employee stock grants 73,498 74,937 -- 69,631
------------ ------------ ------------ ------------
Weighted average common and potential
common shares outstanding (denominator
for diluted earnings (loss) per share) 19,320,075 19,822,432 19,161,768 19,328,733
============ ============ ============ ============
Basic earnings (loss) per share $ 0.14 $ 0.16 $ (0.02) $ 0.83
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.14 $ 0.16 $ (0.02) $ 0.82
============ ============ ============ ============
Employee stock options and stock warrants totaling 3,642,875 and
1,150,500 for the quarter ended August 31, 1998 and 1997,
respectively, were not included in the net earnings per share
calculation because their effect would have been anti-dilutive.
(5) In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income", effective for fiscal
years beginning after December 15, 1997. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
This Statement further requires that an entity display an amount
representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of
other comprehensive income by their nature in a financial statement. For
example, other comprehensive income may include foreign currency items and
unrealized gains and losses on investments in equity securities.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required. Based on current accounting standards,
this Statement is not expected to have a material impact on the Company's
consolidated financial statements. The Company will adopt this accounting
standard effective December 1, 1998, as required.
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information",
effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for reporting information
about operating segments in annual financial statements and
requires selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are
defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This Statement requires
reporting segment profit or loss, ceratin specific revenue and
expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts reported in the consolidated
financial statements. Restatement of comparative information for
earlier periods presented is required in the initial year of
application. Interim information is not required until the second
year of application, at which time comparative information is
required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its
consolidated financial statements disclosures. The Company will
adopt this accounting standard in fiscal 1999, as required.
The FASB issued Statement No.133,"Accounting for Derivative Instruments
and Hedging Activities" (Statement 133). Statement 133 established
accounting and reporting standards for derivative instruments embedded
in other contracts, and for hedging activities. Statement 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. Early application of all the provisions of this
Statement is encouraged but is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this Statement.
Management of the Company does not believe that the implementation of
Statement 133 will have a significant impact on its financial position
or results of operations.
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) During the second quarter of 1998, the Company entered into a 30-year
lease, for a building, with its principal stockholder and chief executive
officer. A significant portion of the lease payments, as required under the
lease agreement, consist of the debt service payments required to be made
by the principal stockholder in connection with the financing of the
construction of the building. For financial reporting purposes, the lease
has been classified as a capital lease, and, accordingly, a building and
the related obligation of approximately $6,573 has been recorded. Future
minimum lease payments for this capital lease in effect at August 31, 1998
are as follows:
September 1, 1998 - November 30, 1998 $ 147
Fiscal November 30, 1999 579
Fiscal November 30, 2000 579
Fiscal November 30, 2001 579
Fiscal November 30, 2002 579
Fiscal November 30, 2003 579
Thereafter 13,263
-------
Total minimum lease payments 16,305
Less: amount representing interest 9,857
-------
Present value of net minimum lease payments 6,448
Less: current installments 62
-------
Long-term obligation $ 6,386
=======
(7) Receivable from vendor represents claims due from TALK Corporation of
$3,098.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 fees are
based upon a percentage of customers' usage and are calculated based on the
amount of local air time fees collected from the base of customers activated by
the Company on a particular cellular carrier's system. The Automotive group
consists of Audiovox Automotive Electronics (AAE), a division 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.
11
This Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance and business
prospects. When used in this Quarterly 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 inventory 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.
12
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
Three Months Ended Nine Months Ended
August 31, August 31,
1998 1997 1998 1997
------ ------ ------ ------
Net sales:
Product sales:
Cellular wholesale 66.9% 58.6% 60.8% 60.7%
Cellular retail 0.8 0.8 0.8 1.2
Sound 11.5 14.9 14.0 14.2
Security and accessories 12.6 17.5 15.7 15.2
------ ------ ------ ------
91.8 91.8 91.3 91.3
Activation commissions 3.7 4.2 4.3 5.4
Residual fees 0.6 0.8 0.7 0.8
Other 3.9 3.2 3.7 2.6
------ ------ ------ ------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.9 83.3 85.0 83.2
------ ------ ------ ------
Gross profit 16.1 16.7 15.0 16.8
------ ------ ------ ------
Selling 5.5 5.6 6.4 6.2
General and administrative expense 6.0 5.9 6.7 5.9
Warehousing, assembly and repair 2.0 1.9 2.3 1.9
------ ------ ------ ------
Total operating expenses 13.5 13.4 15.4 14.0
------ ------ ------ ------
Operating income (loss) 2.6 3.3 (0.4) 2.8
Debt conversion expense -- -- -- (2.7)
Interest and bank charges (0.9) (0.3) (0.8) (0.4)
Equity in income of equity investments 0.2 0.5 0.3 0.2
Management fees and related income -- -- -- --
Gain on sale of investment 0.3 0.2 0.1 7.3
Other income 0.6 -- 0.2 0.2
Income (loss) before provision for (recovery of)
income taxes 2.7 3.6 (0.6) 7.5
Provision for (recovery of) income taxes 1.0 1.6 (0.4) 4.1
------ ------ ------ ------
Net income (loss) 1.7% 2.0% (0.1)% 3.3%
====== ====== ====== ======
13
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1997
Net sales were $154,501 for 1998, an increase of $1,377, or 0.9%, from
the same period last year. The increase in net sales was in the Communications
group partially offset by declines in the Automotive Group. Sales from our
international operations were also down from last year by approximately 63%.
Sales in Malaysia were down $6,588, or 80%, and sales in Venezuela were down
$1,945, or 43%. Gross margins were 16.1% in 1998 compared to 16.7% in 1997.
Operating expenses increased to $20,950 from $20,606, a 1.7% increase. The
operating income for 1998 was $3,928 compared to last year's $5,028.
The net sales and percentage of net sales by product line and marketing
group for the three months ended August 31, 1998 and August 31, 1997 are
reflected in the following table:
Three Months Ended
August 31,
----------------------------------------------------------------------
1998 1997
------------------- -------------------
Net sales:
Communications
Cellular wholesale $103,435 66.9% $ 89,714 58.6%
Cellular retail 1,194 0.8 1,157 0.8
Activation commissions 5,708 3.7 6,430 4.2
Residual fees 941 0.6 1,248 0.8
Other 3,259 2.1 3,376 2.2
-------- ------ -------- ------
Total Communications 114,537 74.1 101,925 66.6
-------- ------ -------- ------
Automotive
Sound 17,716 11.5 22,890 14.9
Security and accessories 19,542 12.6 26,721 17.5
Consumer electronics 2,706 1.8 1,242 0.8
-------- ------ -------- ------
Total Automotive 39,964 25.9 50,853 33.2
Other -- -- 346 0.2
-------- ------ -------- ------
Total $154,501 100.0% $153,124 100.0%
======== ====== ======== ======
14
NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1997
Net sales were $407,886 for 1998, a decrease of $60,047, or 12.8%, from
the same period last year. The decrease in net sales was in both the
Communications and Automotive groups. Sales from our international operations
decreased 38% from the comparable period last year. Malaysian sales were down
$18,568, or 75%, partially offset by a $6,110 increase (over 100%) in Venezuelan
sales. Gross margins decreased to 15.0% for 1998 from 16.8% in 1997, primarily
due to the second quarter 1998 cellular inventory write-down. Operating expenses
decreased to $62,675 from $65,335 a 4.1% decrease. The operating loss for 1998
was $1,494 compared to last year's operating income of $13,356.
The net sales and percentage of net sales by product line and marketing
group for the nine months ended August 31, 1998 and August 31, 1997 are
reflected in the following table:
Nine Months Ended
August 31,
1998 1997
----------------- -----------------
Net sales:
Communications
Cellular wholesale $247,957 60.8% $284,004 60.7%
Cellular retail 3,185 0.8 5,468 1.2
Activation commissions 17,669 4.3 25,095 5.4
Residual fees 2,856 0.7 3,660 0.8
Other 8,965 2.2 9,148 2.0
-------- ------ -------- ------
Total Communications 280,632 68.8 327,375 70.0
-------- ------ -------- ------
Automotive
Sound 56,932 14.0 66,552 14.2
Security and accessories 64,094 15.7 71,150 15.2
Consumer electronics 6,228 1.5 2,819 0.6
-------- ------ -------- ------
Total Automotive 127,254 31.2 140,521 30.0
Other -- -- 37 --
-------- ------ -------- ------
Total $407,886 100.0% $467,933 100.0%
======== ====== ======== ======
15
COMMUNICATIONS RESULTS
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1997
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 $114,537, an increase of $12,612, or 12.4%, from the same
period last year. Unit sales of cellular telephones increased approximately
167,000 units, or 23.0%, from 1997. Average unit selling prices decreased
approximately 6.1% to $108 during the third quarter of 1998 from $116 for the
same period in 1997, but were partially offset by a corresponding decrease of
2.4% in average unit cost during the same periods. The number of new cellular
subscriptions processed by Quintex decreased 10.1%, with an accompanying
decrease in activation commissions of approximately $722, or 11.2%. The average
commission received by Quintex per activation also decreased approximately 1.2%
from last year. Cellular unit gross profit margins decreased to 8.0% during the
quarter from 11.5% last year. Operating expenses increased to $11,847 from
$11,411. As a percentage of net sales, however, operating expenses decreased to
10.3% during 1998 compared to 11.2% in 1997. Selling expenses increased $131
from last year, primarily in advertising and divisional marketing, partially
offset by decreases in commissions and salaries. General and administrative
expenses increased during 1998 by $473 from 1997, primarily in occupancy costs,
bad debt and temporary personnel. Warehousing and assembly expenses decreased by
$168 during 1998 from last year, primarily in tooling and direct labor.
Operating income for 1998 was $4,594 compared to last year's $3,477.
16
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
Three Months Ended
August 31,
1998 1997
------------------- ---------------------
Net sales:
Cellular product - wholesale $ 103,435 90.3% $ 89,714 88.0%
Cellular product - retail 1,194 1.0 1,157 1.1
Activation commissions 5,708 5.0 6,430 6.3
Residual fees 941 0.8 1,248 1.2
Other 3,259 2.8 3,376 3.3
--------- ----- --------- -----
Total net sales 114,537 100.0 101,925 100.0
--------- ----- --------- -----
Gross profit 16,441 14.4 14,888 14.6
Total operating expenses 11,847 10.3 11,411 11.2
--------- ----- --------- -----
Operating income 4,594 4.0 3,477 3.4
Other expense (1,478) (1.3) (1,242) (1.2)
--------- ----- --------- -----
Pre-tax income $ 3,116 2.7% $ 2,235 2.2%
========= ===== ========= =====
NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1997
Net sales were $280,632, a decrease of $46,743, or 14.3%, from the same
period last year. Unit sales of cellular telephones increased approximately
109,000 units, or 5.3%, from 1997. Average unit selling prices during the nine
months decreased approximately 15.7% to $107 from $128 for the same period last
year, but were partially offset by a corresponding decrease of 10.3% in average
unit cost. The number of new cellular subscriptions processed by Quintex
decreased 27.1%, with an accompanying decrease in activation commissions of
approximately $7,426, or 29.6%. The average commission received by Quintex per
activation also decreased approximately 3.4% from last year. Cellular unit gross
profit margins decreased to 6.9% during 1998 from 12.5%
17
last year. This decrease was primarily due to a $6.6 million charge during the
second quarter of 1998 to adjust the carrying value of certain cellular
inventories, partially offset by a $1.0 million credit from a supplier. This
charge was the result of a software problem in certain analog cellular phones,
as well as a continuing decrease in the selling prices of analog telephones due
to pressure from the growing digital presence in the market. While the analog
market is still quite large, the Communications group may experience lower gross
profits in the future due to the price sensitivity of this market place.
Operating expenses decreased to $36,197 from $38,039. As a percentage of net
sales, operating expenses increased to 12.9% during 1998 compared to 11.6% in
1997. Selling expenses decreased $2,484 from last year, primarily in
commissions, salaries, advertising and divisional marketing. General and
administrative expenses increased during 1998 by $554 from 1997, primarily in
occupancy costs, depreciation and temporary personnel. Warehousing and assembly
expenses increased by $88 during 1998 over last year, primarily in tooling
expenses and field warehouse expenses. The operating loss for 1998 was $2,256
compared to operating income of $12,498 last year.
18
The following table sets forth for the periods indicated certain statements
of income (loss) data for the Communications group expressed as a percentage of
net sales:
COMMUNICATIONS
Nine Months Ended
August 31,
1998 1997
-------------------- ---------------------
Net sales:
Cellular product - wholesale $ 247,957 88.4% $ 284,004 86.8%
Cellular product - retail 3,185 1.1 5,468 1.7
Activation commissions 17,669 6.3 25,095 7.7
Residual fees 2,856 1.0 3,660 1.1
Other 8,965 3.2 9,148 2.8
--------- ----- --------- -----
Total net sales 280,632 100.0 327,375 100.0
--------- ----- --------- -----
Gross profit 33,941 12.1 50,537 15.4
Total operating expenses 36,197 12.9 38,039 11.6
--------- ----- --------- -----
Operating income (loss) (2,256) (0.8) 12,498 3.8
Other expense (4,549) (1.6) (3,474) (1.1)
--------- ----- --------- -----
Pre-tax income (loss) $ (6,805) (2.4)% $ 9,024 2.7%
========= ===== ========= =====
AUTOMOTIVE RESULTS
THREE MONTHS ENDED AUGUST 31, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1997
Net sales decreased approximately $10,889 compared to last year, a decrease
of 21.4%. Decreases were experienced in the sound, security and accessories
product lines, partially offset by an increase in consumer electronics.
Automotive sound decreased 22.6% compared to last year, primarily due to
decreased sales in AV, Prestige Audio and SPS product lines and reduced sales in
our international operations. Automotive security and accessories decreased
26.9% compared to last year, primarily due to decreased sales in our
international operations and AA security, Prestige security and Protector
Hardgoods product lines. These decreases were partially offset by a $2.0
19
million increase (over 100%) in mobile video. Gross margins were relatively
consistent (21.3% in 1998 and 21.4% in 1997). Operating expenses decreased to
$6,764 from $7,078. Selling expenses decreased from last year by $166, primarily
in salesmen salaries in international operations and commissions. General and
administrative expenses decreased from 1997 by $363, primarily in foreign buying
office expenses and bad debt. Warehousing and assembly expenses increased from
1997 by $215, primarily in field warehousing and direct labor. Operating income
for 1998 was $1,738 compared to $3,803 last year.
The following table sets forth for the periods indicated certain statement
of income data for the Automotive group expressed as a percentage of net sales:
AUTOMOTIVE
Three Months Ended
August 31,
1998 1997
-------------------- ---------------------
Net sales:
Sound $ 17,716 44.3% $ 22,890 45.0%
Security and accessories 19,542 48.9 26,721 52.5
Consumer electronics 2,706 6.8 1,242 2.5
-------- ----- -------- -----
Total net sales 39,964 100.0 50,853 100.0
-------- ----- -------- -----
Gross profit 8,502 21.3 10,881 21.4
Total operating expenses 6,764 16.9 7,078 13.9
-------- ----- -------- -----
Operating income 1,738 4.4 3,803 7.5
Other expense (621) (1.6) (1,251) (2.5)
-------- ----- -------- -----
Pre-tax income $ 1,117 2.8% $ 2,552 5.0%
======== ===== ======== =====
NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1997
Net sales decreased approximately $13,267 compared to last year, a
decrease of 9.4%. Decreases were experienced in automotive sound, security and
accessories product lines. Consumer electronics, increased over 100.0% from last
year. Automotive sound decreased 14.5% compared
20
to last year, primarily due to decreased sales in international operations,
Prestige audio and SPS. Also during 1997, the Company contributed the net assets
of the Heavy Duty Sound division to a newly-formed 50%-owned joint venture.
Excluding this event, sound sales decreased 11% during 1998 compared to 1997. It
is anticipated that the sales of the former Heavy Duty Sound division will be
realized through the joint venture. Automotive security and accessories
decreased 9.9% compared to last year, primarily due to decreased sales in AA
security and Protector Hardgoods, partially offset by a $4.0 million increase in
mobile video. Gross margins increased to 21.5% from 20.6% last year. Operating
expenses increased to $20,393 from $20,030. Selling expenses decreased from last
year by $321, primarily in international operations and the result of the
transfer of the Heavy Duty Sound division. General and administrative expenses
decreased from 1997 by $145, primarily in overseas buying offices. Warehousing
and assembly expenses increased from 1997 by $829 primarily in tooling and field
warehousing. Operating income for 1998 was $6,977 compared to $8,904 last year.
21
The following table sets forth for the periods indicated certain statement
of income data for the Automotive group expressed as a percentage of net sales:
AUTOMOTIVE
Nine Months Ended
August 31,
1998 1997
--------------------- --------------------
Net sales:
Sound $ 56,932 44.7% $ 66,552 47.4%
Security and accessories 64,094 50.4 71,150 50.6
Consumer electronics 6,228 4.9 2,819 2.0
--------- ----- --------- -----
Total net sales 127,254 100.0 140,521 100.0
--------- ----- --------- -----
Gross profit 27,370 21.5 28,934 20.6
Total operating expenses 20,393 16.0 20,030 14.3
--------- ----- --------- -----
Operating income 6,977 5.5 8,904 6.3
Other expense (2,529) (2.0) (3,031) (2.2)
--------- ----- --------- -----
Pre-tax income $ 4,448 3.5% $ 5,873 4.1%
========= ===== ========= =====
OTHER INCOME AND EXPENSE
Interest expense and bank charges increased by $864 and $1,510 for the
three and nine months ended August 31, 1998, respectively, compared to the same
periods last year, primarily due to an increase in interest-bearing debt. Equity
in income of equity investments and management fees and related income decreased
$434 and increased $73 for the three and nine months ended August 31, 1998,
respectively, compared to the same periods last year. The Company also sold a
building during the quarter for a gain of $234. The Company purchased 400
million Japanese Yen (approximately $2,732) of Shintom Convertible Debentures
(Shintom Debentures). The Company exercised its option to convert the Shintom
Debentures into shares of Shintom Common Stock. The Company sold the Shintom
Common Stock yielding net proceeds of $3,159 and a gain of $427.
PROVISION FOR INCOME TAXES
Provision for income taxes and income tax recovery are provided for at a
blended federal and state rate of 40% for profits or losses from normal business
operations. During 1998, the Company implemented various tax strategies which
have resulted in lowering the effective tax rate.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 1998 increased approximately $630
from the November 30, 1997 level. Operating activities provided approximately
$18,986, primarily from decreases in accounts receivable and inventory and
increases in accounts payable and accrued expenses, partially offset by a
reduction in income taxes payable. Investing activities used approximately
$11,196, primarily from the purchase of convertible debentures and property,
plant and equipment, offset by the sale of investment securities. Financing
activities used approximately $6,896, primarily from repayments under line of
credit agreements and repurchase of Class A Common Stock.
On May 5, 1995, the Company entered into the Second Amended and Restated
Credit Agreement (the "Credit Agreement"). From May 5, 1995 through October 8,
1998, the Credit Agreement was amended thirteen times providing for various
changes to the terms. The terms as of October 8, 1998 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 are secured by the 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.
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 as follows: pre-tax
23
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; minimum
level of total net worth of $172,500. At May 31, 1998, the Company was not in
compliance with its pre-tax income and pre-tax loss covenants which were
subsequently waived. As of the date of issuance of the second quarter 1998
financial statements, the Company's creditors waived their right to call the
bank obligations. The Credit Agreement provides for adjustments to the covenants
in the event of certain specified non-operating transactions. Additionally, the
agreement includes restrictions and limitations on payments of dividends, stock
repurchases and capital expenditures.
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.
YEAR 2000 DATE CONVERSION
Many of the Company's computerized systems could be affected by the Year
2000 issue, which refers to the inability of such systems to properly process
dates beyond December 31, 1999. The Company also has numerous computerized
interfaces with third parties and is possibly vulnerable to failure by such
third parties if they do not adequately address their Year 2000 issues. System
failures resulting from these issues could cause significant disruption to the
Company's operations and result in a material adverse effect on the Company's
business, results of operations, financial condition or liquidity.
24
Management believes that a significant portion of its "mission critical"
computer systems are Year 2000 compliant and is continuing to assess the balance
of its computer systems as well as equipment and other facilities systems.
Management plans to complete its investigation, remediation and contingency
planning activities for all critical systems by mid 1999, although there can be
no assurance that it will. At this time, management believes that the Company
does not have any internal critical Year 2000 issues that it cannot remedy.
Management is in the process of surveying third parties with whom it has a
material relationship primarily through written correspondence. Despite its
efforts to survey its customers, management is depending on the response of
these third parties in its assessment of Year 2000 readiness. Management cannot
be certain as to the actual Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations, financial condition or liquidity.
The Company expects to incur internal staff costs as well as consulting and
other expenses in preparing for the Year 2000. Because the Company has replaced
or updated a significant portion of its computer systems, both hardware and
software, in recent years, the cost to be incurred in addressing the Year 2000
issue are not expected to have a material impact on the Company's business,
results of operations, financial condition or liquidity. This expectation
assumes that our existing forecast of costs to be incurred contemplates all
significant actions required and that we will not be obligated to incur
significant Year 2000 related costs on behalf of our customers, suppliers and
other third parties.
25
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997. This Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement further
requires that an entity display an amount representing total comprehensive
income for the period in that financial statement. This Statement also requires
that an entity classify items of other comprehensive income by their nature in a
financial statement. For example, other comprehensive income may include foreign
currency items and unrealized gains and losses on investments in equity
securities. Reclassification of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements. The Company will adopt this
accounting standard effective December 1, 1998, as required.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing
26
performance. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the consolidated financial statements. Restatement of
comparative information for earlier periods presented is required in the initial
year of application. Interim information is not required until the second year
of application, at which time comparative information is required. The Company
has not determined the impact that the adoption of this new accounting standard
will have on its consolidated financial statements disclosures. The Company will
adopt this accounting standard in fiscal 1999, as required.
The FASB issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133). Statement 133 established accounting
and reporting standards for derivative instruments embedded in other contracts,
and for hedging activities. Statement 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. Early application of all the
provisions of this Statement is encouraged but is permitted only as of the
beginning of any fiscal quarter that begins after issuance of this Statement.
Management of the Company does not believe that the implementation of Statement
133 will have a significant impact on its financial position or results of
operations.
27
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
During the third quarter, the Registrant filed one report on Form 8-K. The
Form 8-K, dated July 8, 1998 and filed July 21, 1998, reported that the Company
had executed Waiver and Twelfth Amendment to the Company's Second Amended and
Restated Credit Agreement (the Waiver and Amendment).
The Waiver and Amendment, among other things, (i) waives compliance by the
Company with the provisions of subsection 9.1(a) (I) (A) with respect to the two
consecutive fiscal quarters of the Company ending May 31, 1998, provided that
the amount of the Consolidated Pre-Tax Loss for such two consecutive fiscal
quarters shall not exceed $6,485,000; (ii) waives compliance by the Company with
the provisions of subsection 9.1(a) (iii) with respect to the fiscal quarter of
the Company ending May 31, 1998 provided that the amount of the Consolidated
Pre-Tax Loss for such fiscal quarter shall not exceed $8,721,000; and, (iii)
amends subsection 9.9 to allow for the Company's investment in Shintom Co., Ltd.
28
SIGNATURES
Pursuant to the requirements 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
By:s/John J. Shalam
John J. Shalam
President and Chief
Executive Officer
Dated: October 15, 1998
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
29
5
0000807707
Audiovox Corporation
1000
9-MOS
NOV-30-1998
AUG-31-1998
10,075
0
99,441
12,410
99,962
211,560
38,770
21,600
268,450
58,079
5,790
0
2,500
195
175,151
268,450
387,361
407,886
336,160
346,705
0
632
3,382
(2,282)
(1,808)
(474)
0
0
0
(474)
(0.02)
(0.02)
