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 May 31, 1999
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 July 9, 1999
Class A Common Stock 17,357,178 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
May 31, 1999 (unaudited) and
November 30, 1998 3
Consolidated Statements of Income (Loss)
for the Three and Six Months Ended
May 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended May 31, 1999
and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 10-26
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 27
ITEM 6 Reports on Form 8-K 27
SIGNATURES 28
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
May 31, November 30,
1999 1998
--------- ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,059 $ 9,398
Accounts receivable, net 145,223 131,120
Inventory, net 74,621 72,432
Receivable from vendor 7,769 734
Prepaid expenses and other current assets 5,799 6,724
Deferred income taxes, net 6,181 6,088
--------- ---------
Total current assets 251,652 226,496
Investment securities 23,562 17,089
Equity investments 11,011 10,387
Property, plant and equipment, net 19,301 17,828
Excess cost over fair value of assets acquired and other intangible assets, net 5,904 6,052
Other assets 758 1,827
--------- ---------
$ 312,188 $ 279,679
========= =========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 43,569 $ 34,063
Accrued expenses and other current liabilities 19,575 15,359
Income taxes payable 7,643 5,210
Bank obligations 8,034 7,327
Documentary acceptances 2,967 3,911
Capital lease obligation 17 17
--------- ---------
Total current liabilities 81,805 65,887
Bank obligations 19,730 17,500
Deferred income taxes, net 6,483 3,595
Long-term debt 6,409 6,331
Capital lease obligation 6,266 6,298
--------- ---------
Total liabilities 120,693 99,611
--------- ---------
Minority interest 3,181 2,348
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,297,878 issued 173 173
Class B convertible; 10,000,000 authorized; 2,260,954issued 22 22
Paid-in capital 143,327 143,339
Retained earnings 45,333 35,896
Accumulated other comprehensive income (loss) 366 (1,550)
Gain on hedge of available-for-sale securities, net 929 929
Treasury stock, at cost, 606,332 and 498,055 Class A common stock 1999
and 1998, respectively (4,336) (3,589)
--------- ---------
Total stockholders' equity 188,314 177,720
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 312,188 $ 279,679
========= =========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the Three and Six Months Ended May 31, 1999 and 1998
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
May 31, May 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales $ 242,069 $ 132,411 $ 452,335 $ 253,384
Cost of sales (including an inventory write-down
to market in 1998 of $6,600) 213,348 118,367 397,394 217,082
------------ ------------ ------------ ------------
Gross profit 28,721 14,044 54,941 36,302
------------ ------------ ------------ ------------
Operating expenses:
Selling 9,557 9,366 18,242 17,656
General and administrative 10,437 9,393 19,598 17,815
Warehousing, assembly and repair 3,507 3,242 6,679 6,253
------------ ------------ ------------ ------------
Total operating expenses 23,501 22,001 44,519 41,724
------------ ------------ ------------ ------------
Operating income (loss) 5,220 (7,957) 10,422 (5,422)
------------ ------------ ------------ ------------
Other income (expense):
Gain on issuance of subsidiary shares 3,800 -- 3,800 --
Interest and bank charges (863) (1,149) (1,970) (1,995)
Equity in income of equity investments,
management fees and related income, net 673 483 1,301 897
Gain on sale of investment 1,657 -- 1,896 --
Other, net 193 (97) 318 35
------------ ------------ ------------ ------------
Total other income (expense) 5,460 (763) 5,345 (1,063)
------------ ------------ ------------ ------------
Income (loss) before provision for (recovery of)
income taxes 10,680 (8,720) 15,767 (6,485)
Provision for (recovery of) income taxes 4,226 (4,025) 6,331 (3,429)
------------ ------------ ------------ ------------
Net income (loss) $ 6,454 $ (4,695) $ 9,436 $ (3,056)
============ ============ ============ ============
Net income (loss) per common share (basic) $ 0.34 $ (0.24) $ 0.50 $ (0.16)
============ ============ ============ ============
Net income (loss) per common share (diluted) $ 0.34 $ (0.24) $ 0.49 $ (0.16)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 19,023,964 19,174,487 19,022,718 19,183,459
============ ============ ============ ============
Weighted average number of common shares
outstanding (diluted) 19,302,033 19,174,487 19,289,988 19,183,459
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended May 31, 1999 and 1998
(In thousands)
(unaudited)
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ 9,436 $ (3,056)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Gain on issuance of subsidiary shares (3,800) --
Depreciation and amortization 1,450 1,135
Provision for bad debt expense 637 253
Equity in income of equity investments, management fees and
related income, net (1,301) (897)
Minority interest (367) 142
Gain on sale of investment securities (1,896) --
Provision for (recovery of) deferred income taxes, net 1,753 (3,272)
Provision for unearned compensation -- 96
Loss on disposal of property, plant and equipment, net 4 17
Change in:
Accounts receivable (14,835) 22,450
Inventory (2,287) (12,709)
Accounts payable, accrued expenses and other current liabilities 13,887 4,390
Receivable from vendor (7,035) (1,327)
Income taxes payable 2,433 (6,072)
Prepaid expenses and other, net 2,124 1,016
-------- --------
Net cash provided by operating activities 203 2,166
-------- --------
Cash flows from investing activities:
Proceeds from issuance of subsidiary shares 5,000 --
Net proceeds from sale of equity collar -- 1,499
Proceeds from sale of investment securities 6,439 --
Purchases of property, plant and equipment, net (2,782) (2,236)
Purchase of convertible debentures (8,280) (3,132)
Proceeds from distribution from equity investment 782 561
-------- --------
Net cash provided by (used in) investing activities 1,159 (3,308)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements 3,047 (925)
Net borrowings (repayments) under documentary acceptances (944) 338
Principal payments on capital lease obligation (32) --
Repurchase of Class A common stock (747) (369)
-------- --------
Net cash provided by (used in) financing activities 1,324 (956)
-------- --------
Effect of exchange rate changes on cash (25) (100)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,661 (2,198)
Cash and cash equivalents at beginning of period 9,398 9,445
-------- --------
Cash and cash equivalents at end of period $ 12,059 $ 7,247
======== ========
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended May 31, 1999 and 1998
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
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 May 31, 1999 and November 30, 1998,
the consolidated statements of income (loss) for the three and six
month periods ended May 31, 1999 and May 31, 1998, and the consolidated
statements of cash flows for the six months ended May 31, 1999 and May
31, 1998. The interim figures are not necessarily indicative of the
results for the year.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 1998 Annual Report filed on Form 10-K.
(2) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
May 31,
1999 1998
------ -----
Cash paid during the period:
Interest (excluding bank charges) $1,423 $1,827
Income taxes $2,655 $4,637
During the six months ended May 31, 1999 and 1998, the Company recorded
a net unrealized holding gain relating to available-for-sale marketable
securities, net of deferred taxes, of $1,695 and $1,724, respectively,
as a component of accumulated other comprehensive income.
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 component
of accumulated other comprehensive income..
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Investment Securities
During the three and six months ended May 31, 1999, the Company
exercised its option to convert 1,156,320 and 1,380,720 Japanese yen,
respectively, of Shintom debentures into shares of Shintom common
stock. During the three and six months ended May 31, 1999, the Company
sold the Shintom common stock yielding net proceeds of $1,777 and
$9,697, respectively, and a gain of $239 and $1,657, respectively.
(4) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income (loss) per common share is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) (numerator for basic income
(loss) per share) $ 6,454 $ (4,695) $ 9,436 $ (3,056)
Interest on 6 1/4% convertible subordinated
debentures, net of tax 21 -- 42 --
------------ ------------ ------------ ------------
Adjusted net income (loss) (numerator for
diluted income (loss) per share) $ 6,475 $ (4,695) $ 9,478 $ (3,056)
============ ============ ============ ============
Weighted average common shares
(denominator for basic income (loss) per
share) 19,023,964 19,174,487 19,022,718 19,183,459
Effect of dilutive securities:
6 1/4% convertible subordinated debentures 128,192 -- 128,192 --
Employee stock options and stock warrants 69,077 -- 58,278 --
Employee stock grants 80,800 -- 80,800 --
------------ ------------ ------------ ------------
Weighted average common and potential
common shares outstanding (denominator
for diluted income (loss) per share) 19,302,033 19,174,487 19,289,988 19,183,459
============ ============ ============ ============
Basic income (loss) per share $ 0.34 $ (0.24) $ 0.50 $ (0.16)
============ ============ ============ ============
Diluted income (loss) per share $ 0.34 $ (0.24) $ 0.49 $ (0.16)
============ ============ ============ ============
Employee stock options and stock warrants totaling 1,595,300 and
3,723,675 for the quarters ended May 31, 1999 and 1998, respectively,
were not included in the net earnings per share calculation because
their effect would have been anti-dilutive. The 6 1/4% convertible
subordinated debentures totaling $128,192 were also not included in the
net earnings per share calculation for the quarter ended May 31, 1998
because their effect would have been anti-dilutive.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Comprehensive Income (Loss)
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 requires that all items recognized under
accounting standards as components of comprehensive income be reported
in an annual financial statement that is displayed with the same
prominence as other annual financial statements. For example, other
comprehensive income may include foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains
and losses on marketable securities classified as available- for-sale.
The accumulated other comprehensive income (loss) of $366 and $1,550 at
May 31, 1999 and November 30, 1998, respectively, on the accompanying
consolidated balance sheets is the accumulated unrealized gain (loss)
on the Company's available-for-sale investment securities and the
accumulated foreign currency translation adjustment. Annual financial
statements for prior periods will be reclassified as required.
The Company's total comprehensive income was as follows:
Three Months Six Months
Ended Ended
May 31, May 31,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ 6,454 $ (4,695) $ 9,436 $ (3,056)
Other comprehensive income (loss):
Foreign currency translation adjustments 172 (170) 221 (703)
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during period, net of tax (2,303) (1,728) 2,871 1,724
Less: reclassification adjustment for gains
realized in net income (1,027) -- (1,176) --
-------- -------- -------- --------
Net unrealized gains (losses) (3,330) (1,728) 1,695 1,724
-------- -------- -------- --------
Other comprehensive income (loss), net of tax (3,158) (1,898) 1,916 1,021
-------- -------- -------- --------
Total comprehensive income (loss) $ 3,296 $ (6,593) $ 11,352 $ (2,035)
======== ======== ======== ========
The unrealized holding gains (losses) arising during the period
presented above are net of tax of $1,411, $1,059, $1,759 and $1,057 for
the three and six months ended May 31, 1999 and 1998, respectively. The
reclassification adjustment presented above is net of tax of $630 and
$720 for the three and six months ended May 31, 1999, respectively.
(6) Issuance of Subsidiary Shares
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5%
of the Company's subsidiary, Audiovox Communications Corp. (ACC), a
supplier of wireless products for
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
$5,000 in cash. The Company currently owns 95% of ACC; prior to the
transaction ACC was a wholly-owned subsidiary. As a result of the
issuance of ACC's shares, the Company recognized a gain of $3,800
($2,470 after provision for deferred taxes). The gain on the issuance
of the subsidiary's shares have been recognized in the statement of
income (loss) in accordance with the Company's policy on the
recognition of such transactions.
9
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 Electronics. The Communications group
consists of Audiovox Communications Corp. (ACC), a majority-owned subsidiary of
the Company, and the Quintex retail operations (Quintex), a wholly-owned
subsidiary of the Company. The Communications group markets cellular telephone
products and receives activation commissions and residual fees from its retail
sales. ACC markets products on a wholesale basis to a variety of customers,
primarily cellular and wireless service providers and their respective agents.
The activation commission 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. The
Electronics group consists of Audiovox Automotive and Consumer Electronics (AE),
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 Electronics group include 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.
10
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.
11
The following table sets forth for the periods indicated certain
statements of income data for the Company expressed as a percentage of net
sales:
Percentage of Net Sales
Three Months Ended Six Months Ended
May 31, May 31,
1999 1998 1999 1998
------ ------ ------ ------
Net sales:
Product sales:
Cellular wholesale 72.8% 58.5% 72.4% 57.0%
Cellular retail 0.9 0.9 1.0 0.8
Sound 6.9 15.7 7.1 15.5
Security and accessories 11.8 16.5 11.8 17.6
------ ------ ------ ------
92.4 91.5 92.3 90.9
Activation commissions 2.4 4.2 2.9 4.7
Residual fees 0.5 0.7 0.5 0.8
Other 4.7 3.5 4.2 3.6
------ ------ ------ ------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.1 89.4 87.9 85.7
------ ------ ------ ------
Gross profit 11.9 10.6 12.1 14.3
Selling 3.9 7.1 4.0 7.0
General and administrative expense 4.3 7.1 4.3 7.0
Warehousing, assembly and repair 1.5 2.4 1.5 2.5
------ ------ ------ ------
Total operating expenses 9.7 16.6 9.8 16.5
------ ------ ------ ------
Operating income (loss) 2.2 (6.0) 2.3 (2.1)
Gain on issuance of subsidiary shares 1.6 -- 0.8 --
Interest and bank charges (0.4) (0.9) (0.4) (0.8)
Equity in income of equity investments,
management fees and related income, net 0.3 0.4 0.3 0.3
Gain on sale of investment 0.7 -- 0.4 --
Other income (loss) -- (0.1) -- --
Income (loss) before provision for (recovery of)
income taxes 4.4 (6.6) 3.5 (2.6)
Provision for (recovery of) income taxes 1.7 (3.0) 1.4 (1.4)
------ ------- ------ -------
Net income (loss) 2.7% (3.5)% 2.1% (1.2)%
====== ======= ====== =======
12
RESULTS OF OPERATIONS
Consolidated Results
Three months ended May 31, 1999 compared to three months ended May 31, 1998
The net sales and percentage of net sales by product line and marketing
group for the three months ended May 31, 1999 and May 31, 1998 are reflected in
the following table:
Three Months Ended
May 31,
1999 1998
---------------- ----------------
Net sales:
Communications
Cellular wholesale $176,322 72.8% $ 77,412 58.5%
Cellular retail 2,109 0.9 1,139 0.9
Activation commissions 5,973 2.4 5,614 4.2
Residual fees 1,115 0.5 917 0.7
Other 3,580 1.5 2,946 2.2
-------- ----- -------- -----
Total Communications 189,099 78.1 88,028 66.5
-------- ----- -------- -----
Electronics
Sound 16,748 6.9 20,788 15.7
Security and accessories 28,481 11.8 21,875 16.5
Consumer electronics 7,741 3.2 1,720 1.3
-------- ----- -------- -----
Total Automotive 52,970 21.9 44,383 33.5
-------- ----- -------- -----
Total $242,069 100.0% $132,411 100.0%
======== ===== ======== =====
Net sales were $242,069 for 1999, an increase of $109,658, or 82.8%,
from 1998. The increase in net sales was in both the Communications and
Electronics Groups. Sales from our international operations decreased from last
year by approximately 21.0%. Sales in Malaysia increased $2,179, over 100%, and
sales in Venezuela were down $3,374, or 64.3%. Gross margins were 11.9% in 1999
compared to 10.6% in 1998. This improvement in margins was a result of the
Company's recording of a charge of $6,600 to adjust the carrying value of
certain inventories to market during the second quarter of 1998. Operating
expenses increased to $23,501 from $22,001,
13
a 6.8% increase. However, as a percentage of sales, operating expenses decreased
to 9.7% in 1999 from 16.6% in 1998. Operating income for 1999 was $5,220
compared to last year's operating loss of $7,957.
Six months ended May 31, 1999 compared to six months ended May 31, 1998
The net sales and percentage of net sales by product line and marketing
group for the six months ended May 31, 1999 and May 31, 1998 are reflected in
the following table:
Six Months Ended
May 31,
1999 1998
---------------- ----------------
Net sales:
Communications
Cellular wholesale $327,604 72.4% $144,522 57.0%
Cellular retail 4,371 1.0 1,991 0.8
Activation commissions 13,336 2.9 11,961 4.7
Residual fees 2,199 0.5 1,915 0.8
Other 7,006 1.6 5,705 2.3
-------- ----- -------- -----
Total Communications 354,516 78.4 166,094 65.6
-------- ----- -------- -----
Electronics
Sound 32,147 7.1 39,216 15.5
Security and accessories 53,535 11.8 44,552 17.6
Consumer electronics 12,137 2.7 3,522 1.4
-------- ----- -------- -----
Total Automotive 97,819 21.6 87,290 34.4
-------- ----- -------- -----
Total $452,335 100.0% $253,384 100.0%
======== ===== ======== =====
Net sales were $452,335 for 1999, an increase of $198,951 or 78.5%,
from 1998. The increase in net sales was in both the Communications and
Electronics Groups. Sales from our international operations decreased from last
year by approximately 34.5%. Sales in Malaysia increased $2,512, or 53.2%, and
sales in Venezuela were down $5,689, or 60.3%. Gross margins were 12.1% in 1999
compared to 14.3% in 1998. Gross margins in 1998 reflect the previously
14
mentioned inventory adjustment. Operating expenses increased to $44,519 from
$41,724, a 6.7% increase. However, as a percentage of sales, operating expenses
decreased to 9.8% in 1999 from 16.5% in 1998. Operating income for 1999 was
$10,422 compared to last year's operating loss of $5,422.
Communications Results
Three months ended May 31, 1999 compared to three months ended May 31, 1998
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
Three Months Ended
May 31,
1999 1998
------------------ ------------------
Net sales:
Cellular product - wholesale $ 176,322 93.2% $ 77,412 87.9%
Cellular product - retail 2,109 1.1 1,139 1.3
Activation commissions 5,973 3.2 5,614 6.4
Residual fees 1,115 0.6 917 1.0
Other 3,580 1.9 2,946 3.3
--------- ----- --------- -----
Total net sales 189,099 100.0 88,028 100.0
--------- ----- --------- -----
Gross profit 18,320 9.7 4,301 4.9
Total operating expenses 12,423 6.6 12,911 14.7
--------- ----- --------- -----
Operating income (loss) 5,897 3.0 (8,610) (9.8)
Other expense (1,361) (0.7) (1,770) (2.0)
--------- ----- --------- -----
Pre-tax income (loss) $ 4,536 2.4% $ (10,380) (11.8)%
========= ===== ========= =====
The Communications group is composed of ACC, a majority-owned
subsidiary, and Quintex, a wholly-owned subsidiary, of Audiovox Corporation.
Since principally all of the net sales of Quintex
15
are cellular in nature, all operating results of Quintex are being included in
the discussion of the Communications group's product line.
During the second quarter of 1999, sales increased $101,071, or
114.8%, to $189,099. Unit sales of cellular telephones increased approximately
90.3% (or 583,000 units) during the second quarter of 1999. This increase is
attributable to sales of portable digital product. The digital phones have a
higher average unit selling price as well as a higher unit cost to the Company.
Average unit selling prices increased approximately 26.1% to $140 from $111.
Gross profit increased to 9.7% from last year's 4.9%. The increase in gross
profit margins is due to a charge recorded during the second quarter of 1998 of
$6,600 reducing the carrying value of certain cellular inventory to market.
After adjusting for this charge, gross profit margins would have reflected a
decrease. However, gross profit dollars on the increased sales volume is higher.
The number of new cellular subscriptions processed by Quintex increased 20.4%,
with an accompanying increase in activation commissions of approximately $359,
or 6.4%. The average commission received by Quintex per activation decreased
approximately 11.6% from last year. During the quarter, the Company became a
direct agent for MCI, who is also a reseller of cellular service for cellular
carriers. This new agency agreement, which is non-exclusive, allows the Company
to expand additional cellular and wireless services within the territory
outlined in the agreement. This new agency agreement replaces the current
agreement with Bell Atlantic. Management does not anticipate any material impact
from this change. Operating expenses decreased to $12,423 from $12,911. As a
percentage of net sales, however, operating expenses decreased to 6.6% during
1999 compared to 14.7% in 1998. Selling expenses decreased $340 from last year,
primarily in salaries, advertising and divisional marketing, partially offset by
increases in commissions and travel expenses. General and administrative
expenses decreased during
16
1999 by $204 from 1998, primarily in salaries, travel, depreciation and
amortization. Warehousing and assembly expenses increased by $56 during 1999
from last year, primarily due to an increase in direct labor, partially offset
by decreases in tooling and field warehouse expenses. Operating income for 1999
was $5,897 compared to last year's operating loss of $8,610. Six months ended
May 31, 1999 compared to six months ended May 31, 1998
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
Six Months Ended
May 31,
1999 1998
------------------ ------------------
Net sales:
Cellular product - wholesale $ 327,604 92.4% $ 144,522 87.0%
Cellular product - retail 4,371 1.2 1,991 1.2
Activation commissions 13,336 3.8 11,961 7.2
Residual fees 2,199 0.6 1,915 1.2
Other 7,006 2.0 5,705 3.4
--------- ----- --------- -----
Total net sales 354,516 100.0 166,094 100.0
--------- ----- --------- -----
Gross profit 35,194 9.9 17,500 10.5
Total operating expenses 24,318 6.9 24,350 14.7
--------- ----- --------- -----
Operating income (loss) 10,876 3.1 (6,850) (4.1)
Other expense (2,911) (0.8) (3,071) (1.8)
--------- ----- --------- -----
Pre-tax income (loss) $ 7,965 2.2% $ (9,921) (6.0)%
========= ===== ========= =====
Through the second quarter of 1999, sales increased $188,422, or
113.4%, to $354,516. Unit sales of cellular telephones increased approximately
81.7% (or 1,039,223 units) through the second quarter of 1999. This increase is
attributable to sales of portable digital product. The addition of new suppliers
has also provided a variety of new digital, wireless products which have
contributed
17
to the sales increase. As a result of increased digital sales, average unit
selling prices increased approximately 28.4% to $137 from $107. Gross profit
margins decreased to 9.9% from 10.5% during the six months ended May 31, 1999
compared to the same period last year. After adjusting for a charge recorded
during the second quarter of 1998 of $6,600, reducing the carrying value of
certain cellular inventory to market, gross profit margins would have reflected
a decrease. Gross profit margins were affected by higher air freight costs in
response to increased customer demand, a shift in the activation mix toward
indirect channels and an increase in the number of orders committed in advance
which lowers margins, and minimizes inventory risk. The number of new cellular
subscriptions processed by Quintex increased 21.2%, with an accompanying
increase in activation commissions of approximately $1,375, or 11.5%. The
average commission received by Quintex per activation decreased approximately
8.0% from last year. The Communications Group operates in a very competitive
market and may experience lower gross profit and inventory adjustments due to
market competition. Operating expenses decreased to $24,318 from $24,350. As a
percentage of net sales operating expenses decreased to 6.9% during 1999
compared to 14.7% in 1998. Selling expenses increased $54 from last year,
primarily in commissions and divisional marketing, partially offset by decreases
in salaries, advertising and trade shows. General and administrative expenses
increased during 1999 by $54 from 1998, primarily in occupancy costs, insurance
and temporary personnel, partially offset by decreases in salaries. Warehousing
and assembly expenses decreased by $140 during 1999 from last year, primarily in
tooling and field warehousing expenses. Operating income for 1999 was $10,876
compared to last year's operating loss of $6,850
18
Electronics Results
Three months ended May 31, 1999 compared to three months ended May 31, 1998
The following table sets forth for the periods indicated certain
statement of income data for the Electronics group expressed as a percentage of
net sales:
Electronics
Three Months Ended
May 31,
1999 1998
----------------- -----------------
Net sales:
Sound $ 16,748 31.6% $ 20,788 46.8%
Security and accessories 28,481 53.8 21,875 49.3
Consumer electronics 7,741 14.6 1,720 3.9
-------- ----- -------- -----
Total net sales 52,970 100.0 44,383 100.0
-------- ----- -------- -----
Gross profit 10,402 19.6 9,769 22.0
Total operating expenses 7,649 14.4 6,873 15.5
-------- ----- -------- -----
Operating income 2,753 5.2 2,896 6.5
Other expense (104) (0.2) (944) (2.1)
-------- ----- -------- -----
Pre-tax income $ 2,649 5.0% $ 1,952 4.4%
======== ===== ======== =====
Net sales increased approximately $8,587 compared to last year, an
increase of 19.3%. Automotive security and accessories sales increased 30.2%
compared to last year, primarily due to a $10.0 million increase in mobile video
sales. Consumer electronics sales also more than tripled from last year to
$7,741. These increases were partially offset by a decrease of 19.4% in auto
sound. Net sales in our Malaysian subsidiary increased 139.1% from last year,
but were offset by a 64.3% decline in sales in our Venezuelan subsidiary. Gross
margins decreased to 19.6% in 1999 from 22.0% in 1998, primarily in our
international operations. Operating expenses increased $776 from last year.
Selling expenses increased from last year by $537, primarily in commissions and
divisional marketing, partially offset by a decrease in advertising. General and
administrative expenses increased from 1998
19
by $60, primarily in office salaries and temporary personnel, partially offset
by decreases in international operations. Warehousing and assembly expenses
increased from 1998 by $179, primarily in field warehousing and direct labor,
partially offset by a decline in tooling. Operating income was $2,753 compared
to last year's $2,896.
Six months ended May 31, 1999 compared to six months ended May 31, 1998
The following table sets forth for the periods indicated certain
statement of income data for the Electronics group expressed as a percentage of
net sales:
Electronics
Six Months Ended
May 31,
1999 1998
----------------- -----------------
Net sales:
Sound $ 32,147 32.9% $ 39,216 44.9%
Security and accessories 53,535 54.7 44,552 51.0
Consumer electronics 12,137 12.4 3,522 4.0
-------- ----- -------- -----
Total net sales 97,819 100.0 87,290 100.0
-------- ----- -------- -----
Gross profit 19,607 20.0 18,868 21.6
Total operating expenses 14,382 14.7 13,629 15.6
-------- ----- -------- -----
Operating income 5,225 5.3 5,239 6.0
Other expense (754) (0.7) (1,908) (2.2)
-------- ----- -------- -----
Pre-tax income $ 4,471 4.6% $ 3,331 3.8%
======== ===== ======== =====
Net sales increased approximately $10,529 compared to last year, an
increase of 12.1%. Automotive security and accessories sales increased 20.2%
compared to last year, primarily due to a $17.1 million increase in mobile video
sales. Consumer electronics sales also more than tripled from last year to
$12,137. These increases were partially offset by a decrease of 18.0% in auto
sound. Net sales in our Malaysian subsidiary increased 53.2% from last year, but
were offset by a 60.3% decline
20
in sales in our Venezuelan subsidiary. Gross margins decreased to 20.0% in 1999
from 21.6% in 1998, primarily in our international operations. Operating
expenses increased $753 over last year. Selling expenses increased from last
year by $566, primarily in commissions and divisional marketing, partially
offset by a decrease in advertising. General and administrative expenses
decreased from 1998 by $330, primarily in bad debt and international operations,
partially offset by increases in professional fees and temporary personnel.
Warehousing and assembly expenses increased from 1998 by $517, primarily in
field warehousing and direct labor. Operating income for 1999 was $5,225
compared to $5,239 last year.
Other Income and Expense
Interest expense and bank charges decreased by $286 and $25 for the
three and six months ended May 31, 1999, respectively, compared to the same
periods last year. Equity in income of equity investments increased $190 and
$404 for the three and six months ended May 31, 1999, respectively, compared to
the same periods last year. The Company is in the process of liquidating its 50%
investment in Audiovox Pacific Pty. Ltd. This business will be liquidated by the
end of this fiscal year. The Company does not anticipate any charges to
operations as a result of this liquidation during this fiscal year. During the
second quarter of 1999, the Company exercised its option to convert
approximately 1,156,320 Japanese yen of Shintom debentures into shares of
Shintom common stock. The Company then sold the Shintom common stock yielding
net proceeds of $10,417 and a gain of $1,657. The remaining debentures of
1,000,000 Japanese yen are included in the Company's available-for-sale
investment securities at May 31, 1999. During the second quarter of 1999, the
Company's subsidiary, ACC, sold a 5% interest to Toshiba Corporation for $5,000.
This
21
transaction resulted in a $3,800 increase in the carrying value of the remaining
95% interest in ACC for the Company, which is reflected as a gain ($2,470 net of
tax) on the accompanying consolidated statement of income (loss).
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at May 31, 1999 increased $2,660 from the
November 30, 1998 level. Operating activities provided $203, primarily from
increases in accounts payable and accrued expenses, income taxes payable and a
decrease in prepaid expenses, partially offset by an increase in accounts
receivable and receivable from vendor. Investing activities provided $1,159,
primarily from the sale of investment securities and proceeds from the issuance
of subsidiary shares, partially offset by the purchase of property, plant and
equipment and the purchase of convertible debentures. Financing activities
provided $1,324, primarily from borrowings under line of credit agreements.
On December 23, 1998, the Company entered into the Third Amended and
Restated Credit Agreement (the Revised Credit Agreement) with its financial
institutions which superseded the Second Amended and Restated Credit Agreement
in its entirety. The major changes in the Revised Credit Agreement include an
increase in the maximum aggregate amount of borrowings to $112,500 and allow for
a sub-limit for foreign currency borrowing of $15,000. The Revised Credit
Agreement
22
contains covenants requiring, among other things, minimum levels of pre-tax
income and minimum levels of net worth as follows: Pre-tax income of not less
than $1,500 for the two consecutive fiscal quarters ending May 31, 1999, 2000
and 2001 and; not less than $2,500 for two consecutive fiscal quarters ending
November 30, 1999, 2000 and 2001; and not less than $4,000 for any fiscal year
ending on or after November 30, 1999. Further, the Company may not incur a
pre-tax loss in excess of $1,000 for any fiscal quarter and may not incur a
pre-tax loss for two consecutive fiscal quarters. In addition, the Company must
maintain a net worth base amount of $172,500 at any time prior to February 28,
1999; $175,000 at any time on or after February 28, 1999, but prior to February
28, 2000; $177,500 at any time on or after February 2000 but prior to February
28, 2001; and $180,000 at any time thereafter. Further, the Company must at all
times maintain a debt to worth ratio of not more than 1.75 to 1. The Revised
Credit Agreement includes restrictions and limitations on payments of dividends,
stock repurchases and capital expenditures. The Revised Credit Agreement expires
on December 31, 2001.
On March 10, 1999, the December 23, 1998 Credit Agreement was amended
(First Amendment) to allow for the Company to finance up to $15 million of
inventory of a particular supplier through Deutsche Financial Services (DFS).
This facility with DFS is separate from the Credit Agreement and provides the
Company with additional borrowing capacity. The DFS facility is secured by a
first lien on the inventory of the supplier.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
1999 and for the reasonable foreseeable future.
23
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.
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 is in the process of completing its investigation,
remediation and contingency planning activities for all critical systems,
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
24
of its computer systems, both hardware and software, in recent years, the cost
to be incurred in addressing the Year 2000 issue is not expected to have a
material impact on the Company's business, results of operations, financial
condition or liquidity. This expectation assumes that our existing forecast of
costs to be incurred contemplates all significant actions required and that we
will not be obligated to incur significant Year 2000 related costs on behalf of
our customers, suppliers and other third parties.
Recent Accounting Pronouncements
In June 1997, the 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,
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
25
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statement disclosures. The Company will adopt this accounting standard in the
November 30, 1999 financial statements, 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, 2000. Early application of
all the provisions of this Statement is encouraged but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. Management of the Company has not yet determined the impact that the
implementation of Statement 133 will have on its financial position and results
of operations.
26
PART II - OTHER INFORMATION
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Stockholders of Audiovox Corporation ("the
Company") was held on May 6, 1999 at the Smithtown Sheraton, Seminar Room, 110
Vanderbilt Motor Parkway, Smithtown, New York.
Proxies for the meeting were solicited pursuant to Regulation 14 of the
Act on behalf of the Board of Directors to elect a Board of eight Directors.
There was no solicitation in opposition to the Board of Directors'
nominees for election as directors as listed in the Proxy Statement and all of
such nominees were elected. Class A nominee Paul C. Kreuch, Jr. received
15,877,238 votes and 215,541 votes were withheld. Class A nominee Dennis F.
McManus received 15,875,538 votes and 215,241 votes were withheld.
Each Class B nominee received 22,609,540 votes. No votes were withheld
from Class B nominees.
Item 6 REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the second quarter ended May
31, 1999.
27
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: July 15, 1999
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
28
5
0000807707
Audiovox Corporation
1000
6-Mos
Nov-30-1999
May-31-1999
12,059
0
148,288
3,065
74,621
251,652
34,211
14,910
312,188
81,805
6,409
0
2,500
195
185,619
312,188
436,800
452,335
387,120
397,394
0
637
1,970
15,767
6,331
9,436
0
0
0
9,436
0.50
0.49
