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, 1997
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 September 24, 1997
Class A Common Stock 17,253,533 Shares
Class B Common Stock 2,260,954 Shares
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
August 31, 1997 (unaudited) and
November 30, 1996 3
Consolidated Statements of Income
for the Three and Nine Months Ended
August 31, 1997 and August 31, 1996
(unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 1997
and August 31, 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 10-30
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 31
SIGNATURES 32
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
August 31, November 30,
1997 1996
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 8,180 $ 12,350
Accounts receivable, net 91,579 118,408
Inventory, net 95,313 72,785
Receivable from vendor 12,765 4,565
Prepaid expenses and other current assets 9,245 7,324
Deferred income taxes 5,241 5,241
Total current assets 222,323 220,673
Investment securities 32,147 27,758
Equity investments 13,809 8,463
Property, plant and equipment, net 8,323 6,756
Debt issuance costs, net - 269
Excess cost over fair value of assets
acquired and other intangible assets, net 6,185 804
Other assets 3,001 3,449
$ 285,788 $ 268,172
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 33,279 $ 28,192
Accrued expenses and other current liabilities 17,633 18,961
Income taxes payable 9,439 7,818
Bank obligations 7,212 4,024
Documentary acceptances 4,014 3,501
Total current liabilities 71,577 62,496
Bank obligations - 31,700
Deferred income taxes 12,216 10,548
Long-term debt 6,453 28,165
Total liabilities 90,246 132,909
Minority interest 2,478 1,137
Stockholders' equity:
Preferred stock 2,500 2,500
Common Stock:
Class A; 30,000,000 authorized; 17,253,533 and
14,040,414 issued on August 31, 1997 and
November 30, 1996, respectively 173 141
Class B; 10,000,000 authorized; 2,260,954
issued 22 22
Paid-in capital 145,240 107,833
Retained earnings 30,185 14,529
Cumulative foreign currency translation
and adjustment (2,219) (1,176)
Unrealized gain on marketable securities, net 18,053 10,277
Treasury stock, 125,000 Class A common shares,
at cost (890) -
Total stockholders' equity 193,064 134,126
Commitments and contingencies
$ 285,788 $ 268,172
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except share and per share data)
Three Months Ended Nine Months Ended
August 31, August 31,
1997 1996 1997 1996
(unaudited) (unaudited)
Net sales $ 153,124 $ 142,828 $ 467,933 $ 406,515
Cost of sales 127,490 118,189 389,242 340,413
Gross profit 25,634 24,639 78,691 66,102
Operating expenses:
Selling 8,597 9,820 29,146 26,137
General and administrative 9,037 8,274 27,335 23,767
Warehousing, assembly and repair 2,972 2,817 8,854 7,874
20,606 20,911 65,335 57,778
Operating income 5,028 3,728 13,356 8,324
Other income (expenses):
Interest and bank charges (523) (2,193) (1,872) (6,407)
Equity in income of equity
investments 749 135 1,062 550
Management fees and related income 18 7 94 157
Gain on sale of investment 303 - 34,270 985
Debt conversion expense - - (12,686) -
Other, net (10) (102) 702 (519)
537 (2,153) 21,570 (5,234)
Income before provision for income
taxes 5,565 1,575 34,926 3,090
Provision for income taxes 2,467 808 19,271 1,696
Net income $ 3,098 $ 767 $ 15,655 $ 1,394
Net income per common share
(primary) $ 0.16 $ 0.08 $ 0.82 $ 0.15
Net income per common share
(fully diluted) $ 0.16 $ 0.08 $ 0.81 $ 0.15
Weighted average number of common
shares outstanding, primary 19,724,791 9,285,188 19,001,908 9,285,188
Weighted average number of common
shares outstanding, fully diluted 19,839,117 9,325,588 19,596,619 9,330,217
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
August 31, August 31,
1997 1996
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 15,655 $ 1,394
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Debt conversion expense 12,386 -
Depreciation and amortization 1,451 2,433
Provision for bad debt expense 539 249
Equity in income of equity investments (1,156) (550)
Minority interest 1,381 473
Gain on sale of investment (34,270) (985)
Provision for (recovery of) deferred income
taxes, net (3,098) 670
Provision for unearned compensation 137 228
Gain on disposal of property, plant and
equipment, net (17) (13)
Warrant expense 106 -
Changes in:
Accounts receivable 22,199 10,251
Inventory (25,454) 5,785
Accounts payable, accrued expenses and
other current liabilities 5,553 4,985
Receivable from vendor (8,200) (7,022)
Income taxes payable 1,898 1,087
Prepaid expenses and other assets (2,257) (1,580)
Net cash (used in) provided by
operating activities (13,147) 17,405
Cash flows from investing activities:
Purchases of property, plant and equipment, net (3,053) (2,240)
Proceeds from sale of investment 42,422 1,000
Purchase of equity investments (4,706) -
Proceeds from distribution from equity investment 50 317
Net cash provided by (used in) investing
activities 34,713 (923)
Cash flows from financing activities:
Net repayments under line of credit agreements (27,543) (13,676)
Net borrowings (repayments) under documentary
acceptances 513 (4,458)
Principal payments on long-term debt - (4,389)
Debt issuance costs (13) (323)
Proceeds from issuance of Class A Common Stock 2,328 -
Repurchase of Class A Common Stock (890) -
Principal payments on capital lease obligation - (158)
Proceeds from release of restricted cash - 5,959
Net cash used in financing activities (25,605) (17,045)
Effect of exchange rate changes on cash (131) (4)
Net decrease in cash and cash equivalents (4,170) (567)
Cash and cash equivalents at beginning of period 12,350 7,076
Cash and cash equivalents at end of period $ 8,180 $ 6,509
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended August 31, 1997 and August 31, 1996
(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, 1997 and November 30, 1996
and the results of operations and consolidated statements of
cash flows for the nine-month periods ended August 31, 1997
and August 31, 1996. 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 1996 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,
1997 1996
Cash paid during the period:
Interest (excluding bank
charges) $ 1,378 $4,219
Income taxes $19,753 $ 193
On February 9, 1996, the Company's 10.8% Series AA and 11.0%
Series BB Convertible Debentures matured. As of February 9,
1996, $1,100 of the Series BB Convertible Debentures converted
into 206,046 shares of Common Stock.
As of August 31, 1997, the Company recorded an unrealized
holding gain relating to available-for-sale marketable
securities, net of deferred taxes, of $18,053 as a separate
component of stockholders' equity.
The Company issued a credit of $1,250 on open accounts
receivable and issued 250,000 shares of its Class A Common
Stock, valued at five dollars per share, in anticipation of an
exchange for a 20% interest in Bliss-Tel Company, Limited
(Bliss-Tel).
During the second quarter of 1997, the Company contributed
$6,463 in net assets in exchange for a 50% ownership interest
in Audiovox Specialized Applications, LLC (ASA) which resulted
in $5,595 of excess cost over fair value of net assets.
(3) The Financial Accounting Standards Board has issued Statement
128, "Earnings per Share" (Statement 128). Statement 128
establishes standards for computing and presenting earnings
per share (EPS). The Statement simplifies the standards for
computing EPS and makes them comparable to international EPS
standards. The provisions of Statement 128 are effective for
financial statements issued for periods ending after December
1, 1997, including interim periods. The Statement does not
permit early application and requires restatement of all
prior-period EPS data presented. Adoption of Statement 128
will not effect the Company's consolidated financial position
or results of operations, however the impact on previously
report EPS data is currently unknown.
(4) The Company formed Audiovox Venezuela C.A. (Audiovox
Venezuela), an 80%-owned subsidiary, for the purpose of
expanding its international business. The Company made an
initial investment of $478 which was used by Audiovox
Venezuela to obtain certain licenses, permits and fixed
assets.
(5) The Company purchased a 20% equity investment in Bliss-Tel in
exchange for 250,000 shares of the Company's Class A Common
Stock and a credit for open accounts receivable of $1,250.
The issuance of the common stock resulted in an increase to
additional paid-in capital of approximately $1,248. The
investment in Bliss-Tel will be accounted for under the equity
method of accounting.
(6) During the first quarter of 1997, the Company completed an
exchange of $21,479 of its subordinated debentures for
2,860,925 shares of Class A Common Stock ("Exchange"). As a
result of the Exchange, a charge of $12,686 was recorded. The
charge to earnings represents (i) the difference in the fair
market value of the shares issued in the Exchange and the fair
market value of the shares that would have been issued under
the terms of the original conversion feature plus (ii) a
write-off of the debt issuance costs associated with the
subordinated debentures plus (iii) expenses associated with
the Exchange offer. The Exchange resulted in taxable income
due to the difference in the face value of the bonds converted
and the fair market value of the shares issued and, as such,
a current tax expense of $158 was recorded. An increase in
paid-in capital was reflected for the face value of the bonds
converted, plus the difference in the fair market value of the
shares issued in the Exchange and the fair market value of the
shares that would have been issued under the terms of the
original conversion feature for a total of $33,592.
(7) During the second quarter of 1997, the Company purchased a 50%
equity investment in a newly-formed company, ASA, for
approximately $11,119. The Company contributed the net assets
of its Heavy Duty Sound division, its 50% interest in Audiovox
Specialty Markets Co. (ASMC) and $4,656 in cash. In
connection with this investment, excess cost over fair value
of net assets acquired of $5,595 resulted, which is being
amortized on a straight-line basis over 20 years. The other
investor (Investor) contributed its 50% interest in ASMC and
the net assets of ASA Electronics Corporation. In connection
with this investment, the Company entered into a stock
purchase agreement with the Investor in ASA. The agreement
provides for the sale of 352,194 shares of Class A Common
Stock at $6.61 per share (aggregate proceeds of approximately
$2,328) by the Company to the Investor. The transaction
resulted in an increase to additional paid-in capital of
approximately $2,324. The selling price of the shares are
subject to adjustment in the event the Investor sells shares
at a loss during a 90-day period, beginning with the effective
date of the registration statement filed with the Securities
and Exchange Commission to register such shares. The
adjustment to the selling price will equal the loss incurred
by the Investor up to a maximum of 50% of the shares. In the
event the Company does make an adjustment to the shares,
additional goodwill will be recorded as the adjustment
represents contingent consideration.
(8) Receivable from vendor is a prepayment to TALK for merchandise
to be shipped during the fourth quarter of 1997.
(9) During the second quarter, the Company's Board of Directors
approved the repurchase of 1,000,000 shares of the Company's
Class A Common Stock in the open market under a share
repurchase program (the Program). As of August 31, 1997,
125,000 shares were repurchased under the Program at an
average price of $7.12 per share for an aggregate amount of
$890. Subsequent to August 31, 1997, 77,000 shares have been
repurchased under the Program at an average price of $9.47 per
share for an aggregate amount of $729.
(10) For the nine months ended August 31, 1997, the Company sold
1,735,000 shares of CellStar common stock yielding net
proceeds of approximately $42,422 and a gain, net of taxes, of
approximately $21,247.
(11) 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.
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 Automotive group consists of Audiovox
Automotive Electronics (AAE) and, through February 28, 1997, Heavy
Duty Sound, which are divisions of the Company, and Audiovox
Communications Sdn. Bhd., Audiovox Holdings 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. The
following tables reflect the way the Company manages its business.
The column headed "Other" includes general expenses and other
income items which are not readily allocable.
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 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.
The following tables are summaries of pre-tax results by
product group for the three and nine months ended August 31, 1997
and August 31, 1996:
Consolidated Pre-Tax Operating Results
Three Months Ended August 31, 1997
(In thousands)
(Unaudited)
Total
Company Communications Automotive Other
Net sales:
Product sales:
Cellular wholesale $ 89,714 $ 89,714 - -
Cellular retail 1,157 1,157 - -
Sound 22,890 - $ 22,890 -
Security and
accessories 26,721 - 26,721 -
Activation commissions 6,430 6,430 - -
Residual fees 1,248 1,248 - -
Other 4,964 3,376 1,242 $ 346
Total net sales 153,124 101,925 50,853 346
Gross profit (loss) 25,634 14,888 10,881 (135)
Gross profit % 16.7% 14.6% 21.4% -
Selling 8,597 5,638 2,858 101
General and
administrative 9,037 3,631 3,269 2,137
Warehousing and
assembly 2,972 2,142 951 (121)
Total operating
expenses 20,606 11,411 7,078 2,117
Operating income (loss) 5,028 3,477 3,803 (2,252)
Other income (expense) 537 (1,242) (1,251) 3,030
Pre-tax income $ 5,565 $ 2,235 $ 2,552 $ 778
Consolidated Pre-Tax Operating Results
Three Months Ended August 31, 1996
(In thousands)
(Unaudited)
Total
Company Communications Automotive Other
Net sales:
Product sales:
Cellular wholesale $ 76,486 $ 76,486 - -
Cellular retail 2,148 2,148 - -
Sound 27,441 - $ 27,441 -
Security and
accessories 22,935 - 22,935 -
Activation commissions 7,914 7,914 - -
Residual fees 1,236 1,236 - -
Other 4,668 3,709 846 $ 113
Total net sales 142,828 91,493 51,222 113
Gross profit (loss) 24,639 15,015 9,764 (140)
Gross profit % 17.3% 16.4% 19.1% -
Selling 9,820 6,955 2,756 109
General and
administrative 8,274 3,699 2,745 1,830
Warehousing and
assembly 2,817 1,808 1,052 (43)
Total operating
expenses 20,911 12,462 6,553 1,896
Operating income (loss) 3,728 2,553 3,211 (2,036)
Other income (expense) (2,153) (1,708) (1,209) 764
Pre-tax income (loss) $ 1,575 $ 845 $ 2,002 $(1,272)
Consolidated Pre-Tax Operating Results
Nine Months Ended August 31, 1997
(In thousands)
(Unaudited)
Total
Company Communications Automotive Other
Net sales:
Product sales:
Cellular wholesale $284,004 $284,004 - -
Cellular retail 5,468 5,468 - -
Sound 66,552 - $ 66,552 -
Security and
accessories 71,150 - 71,150 -
Activation commissions 25,095 25,095 - -
Residual fees 3,660 3,660 - -
Other 12,004 9,148 2,819 $ 37
Total net sales 467,933 327,375 140,521 37
Gross profit (loss) 78,691 50,537 28,934 (780)
Gross profit % 16.8% 15.4% 20.6% -
Selling 29,146 20,540 8,320 286
General and
administrative 27,335 11,238 9,136 6,961
Warehousing and
assembly 8,854 6,261 2,574 19
Total operating
expenses 65,335 38,039 20,030 7,266
Operating income (loss) 13,356 12,498 8,904 (8,046)
Other income (expense) 21,570 (3,474) (3,031) 28,075
Pre-tax income $ 34,926 $ 9,024 $ 5,873 $20,029
Consolidated Pre-Tax Operating Results
Nine Months Ended August 31, 1996
(In thousands)
(Unaudited)
Total
Company Communications Automotive Other
Net sales:
Product sales:
Cellular wholesale $224,356 $224,356 - -
Cellular retail 6,020 6,020 - -
Sound 70,489 - $ 70,489 -
Security and
accessories 63,797 - 63,797 -
Activation commissions 25,085 25,085 - -
Residual fees 3,654 3,654 - -
Other 13,114 9,934 2,558 $ 622
Total net sales 406,515 269,049 136,844 622
Gross profit 66,102 39,792 25,613 697
Gross profit % 16.3% 14.8% 18.7% -
Selling 26,137 18,252 7,616 269
General and
administrative 23,767 10,787 8,030 4,950
Warehousing and
assembly 7,874 5,098 2,872 (96)
Total operating
expenses 57,778 34,137 18,518 5,123
Operating income (loss) 8,324 5,655 7,095 (4,426)
Other income (expense) (5,234) (4,858) (3,265) 2,889
Pre-tax income (loss) $ 3,090 $ 797 $ 3,830 $(1,537)
RESULTS OF OPERATIONS
Consolidated Results
Three months ended August 31, 1997 compared to three months ended
August 31, 1996
Net sales were $153,124 for 1997, an increase of $10,296, or
7.2%, over the same period last year. The increase in net sales was
accompanied by a corresponding decrease in gross profit margins to
16.7% from 17.3% last year. Operating expenses decreased to
$20,606 from $20,911, a 1.5% decrease. Operating income for 1997
was $5,028, an increase of $1,300 compared to last year. During
the third quarter of 1997, the Company sold 10,000 shares of its
holdings of CellStar for a net gain of $188. This non-operating
transaction is reported under the "Other" caption in the preceding
tables.
Net sales by product group for the three months ended August
31, 1997 and August 31, 1996 and percentage of sales are reflected
in the following table:
Three Months Ended
August 31, August 31,
1997 1996
Communications
Cellular product - wholesale $ 89,714 58.6% $ 76,486 53.6%
Cellular product - retail 1,157 0.8 2,148 1.5
Activation commissions 6,430 4.2 7,914 5.5
Residual fees 1,248 0.8 1,236 0.9
Other 3,376 2.2 3,709 2.6
Total Communications 101,925 66.6 91,493 64.1
Automotive
Sound 22,890 14.9 27,441 19.2
Security and accessories 26,721 17.5 22,935 16.1
Other 1,242 0.8 846 0.6
Total Automotive 50,853 33.2 51,222 35.9
Other 346 0.2 113 0.1
Total Company $153,124 100.0% $142,828 100.0%
Nine months ended August 31, 1997 compared to nine months ended
August 31, 1996
Net sales for the nine months were $467,933, an increase of
$61,416, or 15.1%, over the same period last year. The increase in
net sales was accompanied by a corresponding increase in gross
profit margins to 16.8% from 16.3% last year. Operating expenses
increased to $65,336 from $57,778 in all expense categories:
selling expenses, general and administrative expenses and
warehousing and assembly expenses. Operating income for 1997 was
$13,356, an increase of $5,032 compared to last year. During the
first nine months of 1997, the Company sold 1,735,000 shares of its
holdings of CellStar for a net gain of $21,247. The Company also
exchanged $21,479 of its 6 1/4% subordinated debentures for
2,860,925 shares of Class A Common Stock. The costs associated
with this exchange were approximately $12,844, including income
taxes. Both of these non-operating transactions are reported under
the "Other" caption in the preceding tables.
Net sales by product group for the nine months ended August
31, 1997 and August 31, 1996 and percentage of sales are reflected
in the following table:
Nine Months Ended
August 31, August 31,
1997 1996
Communications
Cellular product -
wholesale $284,004 60.7% $224,356 55.2%
Cellular product - retail 5,468 1.2 6,020 1.5
Activation commissions 25,095 5.4 25,085 6.2
Residual fees 3,660 0.8 3,654 0.9
Other 9,148 2.0 9,934 2.4
Total Communications 327,375 70.0 269,049 66.2
Automotive
Sound 66,552 14.2 70,489 17.3
Security and accessories 71,150 15.2 63,797 15.7
Other 2,819 0.6 2,558 0.6
Total Automotive 140,521 30.0 136,844 33.7
Other 37 - 622 0.2
Total Company $467,933 100.0% $406,515 100.0%
The following table sets forth for the periods indicated
certain statement of income data for the Company expressed as a
percentage of net sales:
Consolidated
Percentage of Sales
Three Months Nine Months
Ended August 31, Ended August 31,
1997 1996 1997 1996
Net sales:
Cellular product - wholesale 58.6% 53.6% 60.7% 55.2%
Cellular product - retail 0.8 1.5 1.2 1.5
Sound 14.9 19.2 14.2 17.3
Security and accessories 17.5 16.1 15.2 15.7
Activation commissions 4.2 5.5 5.4 6.2
Residual fees 0.8 0.9 0.8 0.9
Other 3.2 3.3 2.6 3.2
Total net sales 100.0 100.0 100.0 100.0
Gross profit 16.7 17.3 16.8 16.3
Total operating expenses 13.5 14.6 14.0 14.2
Operating income 3.3 2.6 2.9 2.0
Other income (expense) 0.4 (1.5) 4.6 (1.3)
Pre-tax income 3.6% 1.1% 7.5% 0.8%
Communication Results
The Communications group is composed of ACC and Quintex, both
wholly-owned subsidiaries of Audiovox Corporation. Since
principally all of the net sales of Quintex are cellular in nature,
all operating results of Quintex are being included in the
discussion of the Communications group's product line.
Three months ended August 31, 1997 compared to three months ended
August 31, 1996
Net sales were $101,925, an increase of $10,432, or 11.4%,
over the same period last year. Unit sales of cellular telephones
increased 260,000 units, or 55.9%, over 1996. Average unit selling
prices decreased approximately 23.6% but were offset by a
corresponding decrease of 23.4% in average unit cost. The number
of new cellular subscriptions processed by Quintex decreased 16.3%,
with an accompanying decrease in activation commissions of
approximately $1,484, or 18.8%. The average commission received by
Quintex per activation also decreased approximately 2.9% from last
year. Unit gross profit margins decreased to 11.5% from 11.8% last
year. Operating expenses decreased to $11,411 from $12,462. As a
percentage of net sales, operating expenses decreased to 11.2%
during 1997 compared to 13.6% in 1996. Selling expenses decreased
$1,317 from last year, primarily in commissions, advertising and
divisional marketing, partially offset by increases in trade show
expense, travel and entertainment. General and administrative
expenses decreased during 1997 by $68 from 1996, primarily in
professional fees. Warehousing and assembly expenses increased by
$334 during 1997 over last year, primarily in direct labor and
field warehouse expenses. Pre-tax income for 1997 was $2,235, an
increase of $1,390 compared to last year.
Nine months ended August 31, 1997 compared to nine months ended
August 31, 1996
Net sales were $327,375, an increase of $58,326, or 21.7%,
over the same period last year. Unit sales of cellular telephones
increased 771,000 units, or 60.0%, over 1996. Average unit selling
prices decreased approximately 20.0% but were offset by a
corresponding decrease of 24.1% in average unit cost. The number
of new cellular subscriptions processed by Quintex decreased 2.9%,
with an accompanying increase in activation commissions of
approximately $10,288. The average commission received by Quintex
per activation increased approximately 3.0% from last year. Unit
gross profit margins increased to 12.5% from 7.8% last year,
primarily due to increased unit sales and reduced unit costs.
Operating expenses increased to $38,039 from $34,137. As a
percentage of net sales, however, operating expenses decreased to
11.6% during 1997 compared to 12.7% in 1996. Selling expenses
increased over last year, primarily in commissions, advertising and
divisional marketing. General and administrative expenses
increased over 1996 by $451, primarily in office salaries and
temporary personnel. Warehousing and assembly expenses increased
over 1996 by $1,163, primarily in tooling, direct labor and field
warehouse expenses. Pre-tax income for 1997 was $9,024, an
increase of $8,227 compared to last year.
Though gross margins have improved over last year, management
believes that the cellular industry is extremely competitive and
that this competition could affect gross margins and the carrying
value of inventories in the future.
The following table sets forth for the periods indicated
certain statement of income data for the Communications group
expressed as a percentage of net sales:
Communications
Percentage of Sales
Three Months Nine Months
Ended August 31, Ended August 31,
1997 1996 1997 1996
Net sales:
Cellular product - wholesale 88.0% 83.6% 86.8% 83.4%
Cellular product - retail 1.1 2.3 1.7 2.2
Activation commissions 6.3 8.6 7.7 9.3
Residual fees 1.2 1.4 1.1 1.4
Other 3.3 4.1 2.8 3.7
Total net sales 100.0 100.0 100.0 100.0
Gross profit 14.6 16.4 15.4 14.8
Total operating expenses 11.2 13.6 11.6 12.7
Operating income 3.4 2.8 3.8 2.1
Other income (expense) (1.2) (1.9) (1.1) (1.8)
Pre-tax income 2.2% 0.9% 2.8% 0.3%
Automotive Results
Three months ended August 31, 1997 compared to three months ended
August 31, 1996
Net sales decreased approximately $369 compared to last year,
a decrease of 0.7%. Decreases were experienced in the automotive
sound product lines and were offset by increases in security and
accessories product lines. Automotive sound decreased 16.6%
compared to last year, primarily due to decreased sales in Heavy
Duty Sound, AV and Private Label product lines, partially offset by
an increase in SPS. As explained in footnote number 7, the Company
has contributed the net assets of the Heavy Duty Sound division to
a new 50%-owned venture. The loss of revenues from the Heavy Duty
Sound line was $1,675 for the three months ended August 31, 1996.
It is anticipated that the loss of this revenue will be realized
from the joint venture. Automotive security and accessories
increased 16.5% compared to last year, primarily due to increased
sales in Prestige security, Protector Hardgoods and mobile video,
partially offset by decreases in net sales of cruise controls.
Gross margins increased to 21.4% from 19.1% last year. This
increase was experienced in SPS and AV sound products and Protector
Hardgoods. Operating expenses increased to $7,078 from $6,553.
Selling expenses increased over last year by $102, primarily in
commissions, travel and entertainment. General and administrative
expenses increased over 1996 by $524, primarily in bad debt
expenses and occupational costs in the international operations.
Warehousing and assembly expenses decreased from 1996 by $101.
Pre-tax income for 1997 was $2,552, an increase of $550 compared to
last year.
Nine months ended August 31, 1997 compared to nine months ended
August 31, 1996
Net sales increased approximately $3,677 compared to last
year, an increase of 2.7%. Increases were experienced in security
and accessories and was partially offset by a decrease in sound
products. A majority of the increase was from the group's
international operations. Automotive sound decreased 5.6% compared
to last year. Automotive security and accessories increased 11.5%
compared to last year, primarily due to increased sales in Prestige
security, Protector Hardgoods and video, partially offset by a
decrease in net sales of AA security. Gross margins increased to
20.6% from 18.7% last year. This increase was experienced in SPS
and AV sound lines and Protector Hardgoods, partially offset by
decreases in Prestige security. Operating expenses increased to
$20,030 from $18,518. Selling expenses increased over last year by
$704, primarily in our international operations, in commissions and
salaries. General and administrative expenses increased over 1996
by $1,106, primarily in our international operations, in occupancy
and office expenses and professional fees. Warehousing and
assembly expenses decreased from 1996 by $298, primarily from the
transfer of Heavy Duty Sound business to the new joint venture.
Pre-tax income for 1997 was $5,873, an increase of $2,043 compared
to last year.
The Company believes that the Automotive group has an
expanding market with a certain level of volatility related to both
domestic and international new car sales. Also, certain of its
products are subject to price fluctuations which could affect the
carrying value of inventories and gross margins in the future.
The following table sets forth for the periods indicated
certain statement of income data for the Automotive group expressed
as a percentage of net sales:
Automotive
Percentage of Sales
Three Months Nine Months
Ended August 31, Ended August 31,
1997 1996 1997 1996
Net sales:
Sound 45.0% 53.6% 47.4% 51.5%
Security and accessories 52.5 44.8 50.6 46.6
Other 2.4 1.7 2.0 1.9
Total net sales 100.0 100.0 100.0 100.0
Gross profit 21.4 19.1 20.6 18.7
Total operating expenses 13.9 12.8 14.3 13.5
Operating income 7.5 6.3 6.3 5.2
Other income (expense) (2.5) (2.4) (2.2) (2.4)
Pre-tax income 5.0% 3.9% 4.2% 2.8%
Other Income and Expense
Interest expense and bank charges decreased by $1,670 and
$4,535 for the three and nine months ended August 31, 1997 compared
to the same periods last year, respectively. This is due to
reduced interest bearing debt and the decrease in interest bearing
subordinated debentures which were exchanged for shares of common
stock. Equity in income of equity investments and management fees
and related income increased $625 and $449 for the three and nine
months ended August 31, 1997 compared to the same periods last
year. The equity investment primarily responsible for the increase
was ASA, accounting for $640 and $885 of the increase compared to
last year for the three and nine months ended, respectively,
partially offset by declines in Audiovox Pacific.
During January 1997, the Company completed an exchange of
$21,479 of its subordinated debentures for 2,860,925 shares of
Class A Common Stock ("Exchange"). As a result of the Exchange, a
charge of $12,686 was recorded. The charge to earnings represents
(i) the difference in the fair market value of the shares issued in
the Exchange and the fair market value of the shares that would
have been issued under the terms of the original conversion feature
plus (ii) a write-off of the debt issuance costs associated with
the subordinated debentures plus (iii) expenses associated with the
Exchange offer. The Exchange resulted in taxable income due to the
difference in the face value of the bonds converted and the fair
market value of the shares issued and, as such, a current tax
expense of $158 was recorded. An increase in paid in capital was
reflected for the face value of the bonds converted, plus the
difference in the fair market value of the shares issued in the
Exchange and the fair market value of the shares that would have
been issued under the terms of the original conversion feature for
a total of $33,592.
During the third quarter, the Company sold 10,000 shares of
CellStar Common Stock yielding net proceeds of approximately $334
and a gain, net of taxes, of approximately $188. For 1997, the
Company has sold a total of 1,735,000 shares of CellStar for net
proceeds of $42,422 and a net gain of $21,247.
Provision for Income Taxes
Income taxes are provided for at a blended federal and state
rate of 41% for profits from normal business operations. During
1997, the Company had several non-operating events which had tax
provisions calculated at specific rates, determined by the nature
of the transaction. The tax treatment for the debt conversion
expense of $12,686, which lowered income before provision for
income taxes, did not reduce taxable income as it is a non-deductible item.
Instead of recording a tax recovery of $5,201,
which would lower the provision for income taxes, the Company
actually recorded a tax expense of $158. This and other various
tax treatments resulted in effective tax rates of 44.3% and 55.2%
for the three and nine months ended August 31, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 1997 decreased
approximately $4,170 from the November 30, 1996 level. Operating
activities used approximately $13,147, primarily from increases in
inventory and an advance to a supplier for product to be delivered
during the fourth quarter of 1997, partially offset by profitable
operations, a decrease in accounts receivable and an increase in
accounts payable, accrued expenses and income taxes payable.
Investing activities provided approximately $34,713, primarily from
the sale of an equity investment. Financing activities used
approximately $25,605, primarily from the repayment of bank
obligations.
On May 5, 1995, the Company entered into the Second Amended
and Restated Credit Agreement (the "Credit Agreement") which
superseded the first amendment in its entirety. During 1996 and
1997, the Credit Agreement was amended nine times providing for
various changes to the terms. The terms as of August 31, 1997 are
summarized below.
Under the Credit Agreement, the Company may obtain credit
through direct borrowings and letters of credit. The obligations
of the Company under the Credit Agreement continue to be guaranteed
by certain of the Company's subsidiaries and are secured by
accounts receivable and inventory of the Company and those
subsidiaries. The obligations were secured at November 30, 1996 by
a pledge agreement entered into by the Company for 2,125,000 shares
of CellStar Common Stock and ten shares of ACC. Subsequent to year
end, the shares of CellStar Common Stock were released from the
Pledge Agreement. Availability of credit under the Credit Agreement
is a maximum aggregate amount of $95,000, subject to certain
conditions, and is based upon a formula taking into account the
amount and quality of its accounts receivable and inventory. The
Credit Agreement expires on February 28, 2000.
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 income
of $4,000 per annum; pre-tax income of $1,500 for the two
consecutive fiscal quarters ending May 31, 1997, 1998 and 1999;
pre-tax income of $2,500 for the two consecutive fiscal quarters
ending November 30, 1997, 1998 and 1999; the Company cannot have
pre-tax losses of more than $1,000 in any quarter; and the Company
cannot have pre-tax losses in any two consecutive quarters. In
addition, the Company must maintain a minimum level of total net
worth of $170,000. The Company must maintain a minimum working
capital of $125,000. 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, 1997 and for the reasonable foreseeable
future.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement
128, "Earnings per Share" (Statement 128). Statement 128
establishes standards for computing and presenting earnings per
share (EPS). The Statement simplifies the standards for computing
EPS and makes them comparable to international EPS standards. The
provisions of Statement 128 are effective for financial statements
issued for periods ending after December 1, 1997, including interim
periods. The Statement does not permit early application and
requires restatement of all prior-period EPS data presented.
Adoption of Statement 128 will not effect the Company's
consolidated financial position or results of operations, however
the impact on previously reported EPS data is currently unknown.
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 August 19, 1997 and filed September
4, 1997, reported that the Company had executed a Ninth Amendment
to the Company's Second Amended and Restated Credit Agreement (the
"Amendment"). The Amendment, among other things, (i) increased the
aggregate amount of the lenders' commitments under the Credit
Agreement to $95,000,000; (ii) extended the term of the Credit
Agreement to February 28, 2000; and (iii) decreased the applicable
margin on base rate and Eurodollar loans.
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, 1997
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
5
9-MOS
NOV-30-1997
AUG-31-1997
8,180
0
94,656
3,077
95,313
222,323
28,198
19,875
285,788
71,577
6,453
0
2,500
195
190,369
285,788
430,834
467,933
372,443
389,242
0
539
1,872
34,926
19,271
15,655
0
0
0
15,655
0.82
0.81
