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, 1996
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 10, 1996
Class A Common Stock 6,983,834 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
November 30, 1995 and May 31, 1996
(unaudited) 3
Consolidated Statements of Income (Loss)
for the Three Months and Six Months Ended
May 31, 1995 and May 31, 1996 (unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended May 31, 1995 and
May 31, 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 8-20
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 20
SIGNATURES 21
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, May 31,
1995 1996
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 7,076 $ 8,326
Accounts receivable, net 96,930 88,476
Inventory, net 100,422 93,331
Receivable from vendor 5,097 10,857
Prepaid expenses and other current assets 5,443 6,875
Deferred income taxes 5,287 4,722
Restricted cash 5,959 -
Total current assets 226,214 212,587
Investment securities 62,344 24,047
Equity investments 8,527 8,524
Property, plant and equipment, net 6,055 6,164
Debt issuance costs, net 4,235 3,757
Excess cost over fair value of assets
acquired and other intangible assets, net 943 883
Other assets 2,737 2,562
$ 311,055 $ 258,524
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,844 $ 19,811
Accrued expenses and other current liabilities 16,800 18,367
Income taxes payable 2,455 2,861
Bank obligations 761 34,140
Documentary acceptances 7,120 8,590
Current installments of long-term debt 5,688 80
Total current liabilities 50,668 83,849
Bank obligations 49,000 -
Deferred income taxes 23,268 8,659
Long-term debt, less current installments 70,534 70,206
Total liabilities 193,470 162,714
Minority interest 363 606
Stockholders' equity:
Preferred stock 2,500 2,500
Common Stock:
Class A; 30,000,000 authorized; 6,777,788 and
6,983,834 issued on November 30, 1995,
May 31, 1996, respectively 68 70
Class B; 10,000,000 authorized; 2,260,954
issued 22 22
Paid-in capital 42,876 44,132
Retained earnings 40,998 41,626
Cumulative foreign currency translation
and adjustment (963) (1,123)
Unrealized gain on marketable securities, net 31,721 7,977
Total stockholders' equity 117,222 95,204
Commitments and contingencies
Total liabilities and stockholders' equity $ 311,055 $ 258,524
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
(In thousands, except share and per share data)
Three Months Ended Six Months Ended
May 31, May 31,
1995 1996 1995 1996
(unaudited) (unaudited)
Net sales $ 105,811 $ 141,194 $ 237,201 $ 263,687
Cost of sales 86,541 119,608 195,344 222,224
Gross profit 19,270 21,586 41,857 41,463
Operating expenses:
Selling 8,084 8,808 17,140 16,317
General and administrative 8,772 7,888 17,969 15,493
Warehousing, assembly and repair 2,365 2,651 4,835 5,056
19,221 19,347 39,944 36,866
Operating income 49 2,239 1,913 4,597
Other income (expenses):
Interest and bank charges (2,661) (2,010) (4,711) (4,214)
Equity in income of equity investments 1,215 305 2,402 415
Management fees and related income 320 100 716 150
Gain on sale of investment - - - 985
Expense related to issuance of
warrants (2,921) - (2,921) -
Other, net (242) (208) (556) (417)
(4,289) (1,813) (5,070) (3,081)
Income (loss) before provision for
(recovery of) income taxes (4,240) 426 (3,157) 1,516
Provision for (recovery of) income
taxes (467) 276 79 888
Net income (loss) $ (3,773)$ 150 $ (3,236) $ 628
Net income (loss) per common share
(primary) $ (0.42)$ 0.02 $ (0.36) $ 0.07
Net income (loss) per common share
(fully diluted) $ (0.42)$ 0.02 $ (0.36) $ 0.07
Weighted average number of common
shares outstanding, primary 9,038,742 9,285,188 9,038,742 9,285,188
Weighted average number of common
shares outstanding, fully diluted 9,038,742 9,339,475 9,038,742 9,332,531
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
May 31,
1995 1996
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (3,236) $ 628
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,988 1,628
Provision for bad debt expense 603 107
Equity in income of equity investments (2,402) (415)
Minority interest 57 243
Gain on sale of investment - (985)
Provision for (recovery of) deferred income
taxes, net (245) 509
Provision for unearned compensation 151 159
Expense related to issuance of warrants 2,921 -
Gain on disposal of property, plant and
equipment, net - (9)
Changes in:
Accounts receivable 18,803 8,380
Inventory (43,849) 7,165
Accounts payable, accrued expenses and other
current liabilities (3,190) 3,403
Receivable from vendor - (5,760)
Income taxes payable (280) 398
Prepaid expenses and other assets (5,312) (1,392)
Net cash (used in) provided by operating
activities (33,991) 14,059
Cash flows from investing activities:
Purchases of property, plant and equipment, net (1,290) (1,132)
Proceeds from sale of investment - 1,000
Proceeds from distribution from equity investment 95 198
Net cash (used in) provided by investing
activities (1,195) 66
Cash flows from financing activities:
Net borrowings (repayments) under line of credit
agreements 24,638 (15,631)
Net borrowings under documentary acceptances 9,836 1,470
Principal payments on long-term debt - (4,380)
Debt issuance costs (642) (141)
Principal payments on capital lease obligation (130) (145)
Proceeds from release of restricted cash 300 5,959
Net provided by (cash used) in financing
activities 34,002 (12,868)
Effect of exchange rate changes on cash (11) (7)
Net decrease in cash and cash equivalents (1,195) 1,250
Cash and cash equivalents at beginning of period 5,495 7,076
Cash and cash equivalents at end of period $ 4,300 $ 8,326
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended May 31, 1995 and May 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, in the opinion
of management, are necessary to present fairly the
consolidated financial position of Audiovox Corporation and
subsidiaries (the "Company") as of November 30, 1995 and
May 31, 1996 and the results of operations and consolidated
statements of cash flows for the six month periods ended May
31, 1995 and May 31, 1996.
Accounting policies adopted by the Company are identified in
Note 1 of the Notes to Consolidated Financial Statements
included in the Company's 1995 Annual Report filed on Form
10-K.
(2) The information furnished in this report reflects all
adjustments (which include only normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
statement of the results for the interim period. The interim
figures are not necessarily indicative of the results for the
year.
(3) The following is supplemental information relating to the
consolidated statements of cash flows:
Six Months Ended
May 31,
1995 1996
Cash paid during the period:
Interest (excluding bank
charges) $3,950 $3,652
Income taxes $ 675 $ 142
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 May 31, 1996, the Company recorded an unrealized holding
loss relating to available-for-sale marketable securities, net
of deferred taxes, of $23,744 as a separate component of
stockholders' equity.
(4) Receivable from vendor includes $7,000 advanced to TALK
Corporation (TALK), a vendor who is also a 33%-owned equity
investment. This advance is for inventory which will be
delivered to the Company during June 1996. In addition, TALK
owes the Company $3,857 for claims on late deliveries, product
modifications and price protection. These claims will be paid
in monthly installments, with interest, with the final payment
due November 1996.
(5) On December 1, 1995, the Company purchased a 50% equity
investment in a newly-formed company, Quintex Communications
West, LLC, for approximately $97 in contributed assets and a
loan of $100, payable at 8.5%, due March 1997.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
certain items from the Company's consolidated statements of
earnings, expressed as percentages of net sales:
Three Months Ended Six Months Ended
May 31, May 31,
1995 1996 1995 1996
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 18.2 15.3 17.6 15.7
Operating expenses 18.2 13.7 16.8 14.0
Income (loss) before provision
for (recovery of) income taxes (4.0) 0.3 (1.3) 0.6
Net income (loss) (3.6) 0.1 (1.4) 0.2
Net sales by product line for the three and six month periods ended
May 31, 1995 and May 31, 1996 are reflected in the following table:
Three Months Ended Six Months Ended
May 31, May 31,
1995 1996 1995 1996
Cellular product - wholesale $ 46,461 $ 77,285 $118,042 $147,779
Cellular product - retail 4,499 1,768 10,539 3,534
Activation commissions 8,796 7,821 22,232 17,601
Residual fees 1,137 1,184 2,223 2,417
Total Cellular 60,893 88,058 153,036 171,331
Automotive sound equipment 26,550 26,862 51,079 46,160
Automotive security and
accessory equipment 18,365 25,465 33,071 44,483
Other 3 809 15 1,713
$105,811 $141,194 $237,201 $263,687
RESULTS OF OPERATIONS
Net sales increased by approximately $35,383, or 33.4%, for
the three month period ended May 31, 1996, compared to the same
period last year. This result was attributable to increases in net
sales from all of the Company's product lines: cellular of
approximately $27,165, or 44.6%, automotive sound equipment of
approximately $312, or 1.2%, and automotive security and accessory
equipment of approximately $7,100, or 38.7%. In addition, the
Company's recently introduced line of leisure products, comprised
mostly of home and portable stereo/cassette/CD changers, had net
sales of approximately $800 for the quarter.
Net sales increased approximately $26,486, or 11.2%, for the
six months ended May 31, 1996 compared to the same period last
year. Both cellular and automotive security and accessory
equipment sales increased over last year by approximately $18,295
(12.0%) and $11,412 (34.5%), respectively. These increases were
partially offset by a decline in sales of automotive sound
equipment of approximately $4,919, or 9.6%. In addition, the
Company's new line of leisure products had sales of approximately
$1,496 for the first six months of 1996.
The increase in cellular sales for the second quarter of 1996
was primarily due to unit sales increasing to approximately 451,500
units, a 121.8% increase over the same period last year. The
favorable increase in unit sales was partially offset by a 25.5%
decrease in average unit selling prices. For the six months ended
May 31, 1996, unit sales increased by approximately 317,000 units,
or 63.1%, over the first six months of 1995. During this same
period of time, average selling prices declined 25.2%.
During the latter part of 1995, the Company decided to close
a substantial number of its retail outlets which were either
marginally profitable or unprofitable. As of May 31, 1996, the
Company was operating 30 retail outlets compared to 71 on May 31,
1995. Consequently, with fewer retail operations to activate new
telephones, the number of subscriber activations decreased by
approximately 19.3% and 29.0% for the three and six months ended
May 31, 1996, respectively, compared to last year. Activation
commissions received by the Company decreased 11.1% and 20.8% for
the three and six month periods ended May 31, 1996, respectively,
compared to the same period last year. However, the average
commission earned per activation increased 10.2% and 11.6% for the
same periods last year, respectively. In addition, residuals
increased 4.1% for the quarter and 8.8% year-to-date compared to
last year. The residual customer base is unaffected by the closing
of retail outlets, as the majority of the residual agreements are
not entered into with specific retail locations.
Net sales of automotive sound equipment increased by
approximately $312, or 1.2%, and decreased by approximately $4,919,
or 9.6%, for the three and six month periods ended May 31, 1996,
compared to the same period in 1995, respectively. The increase
for the three months ended May 31, 1996 was due to an increase in
sales by the Company's international ventures, the majority of
such revenue being attributed to sales by its Malaysian venture.
This increase was offset by lower sales in the AV product line,
which is sold primarily through mass merchandisers and catalog
showrooms, Prestige Audio and SPS product lines. The decrease for
the six months was primarily due to a decrease in sales of products
sold to mass merchandise chains and catalog showrooms. Automotive
sound sales also decreased in the truck and agricultural vehicle
markets, the Prestige and SPS audio product lines. These decreases
were partially offset by an increase in sales to private label
customers and in sales by the Company's international companies.
Net sales of automotive security and accessory products increased
approximately $7,100, or 38.7%, and $11,412, or 34.5%, for the
three and six month periods ended May 31, 1996, compared to the
same period in 1995, respectively. The increases were principally
due to improved sales of Prestige vehicle security products,
Protector Hardgoods, cruise controls and increased sales in the
Company's Malaysian venture, both for the three and six month
periods. These increases were partially offset by reductions in
net sales of the Company's security lines sold to mass
merchandisers and catalog showrooms.
Gross margins for the quarter ended May 31, 1996 declined to
15.3% from 18.2% for the same period in 1995. For the six months
ended May 31, 1996, gross margins declined to 15.7% from 17.6% for
1995. This reflects the continuing decline of gross margins
experienced by the Company, primarily in the cellular and
automotive accessories product categories.
For the three months ended May 31, 1996, cellular gross
margins were 11.4% compared to 15.7% for the same period last year.
The decline in cellular margins is a result of the continuing
decline of unit selling prices due to increased competition and the
introduction of lower-priced units. The average unit selling price
for the three months was 25.5% lower at May 31, 1996 compared to
May 31, 1995. Gross margins declined to 12.2% from 14.7% for the
six month period compared to last year. There was a corresponding
decrease of 25.2% in average unit selling prices. As previously
discussed, the decline in new subscriber activations and activation
commissions also contributed to the decline in cellular gross
profits.
The Company believes that the cellular market will continue to
be a highly-competitive, price-sensitive environment. Cellular
service providers will continue to try to lower their product costs
to the end user which will continue to put pressure on unit selling
prices. The Company has negotiated, and is continuing to
negotiate, lower inventory purchasing costs for both its existing
models and new products. However, increased price competition
related to the Company's product could result in additional
downward pressure on gross margins. In the future, the Company may
have to adjust the carrying value of its inventory if selling
prices continue to decline and it is unable to obtain
competitively-priced product from its suppliers.
Automotive sound margins increased to 20.4% from 17.1% for the
quarter ended May 31, 1996 compared to the same quarter last year.
Year-to-date margins increased to 20.1% from 19.5%. The increase
in automotive sound margins was attributable to the Company's
international operations, primarily Malaysia. This was partially
offset by decreases in AV, SPS and Prestige Audio product lines.
Automotive accessory margins decreased to 23.5% from 28.2% for the
three month period ended May 31, 1996 compared to the same period
in 1995. On a year-to-date basis, automotive accessory margins
decreased to 24.9% from 28.3% for the same period last year. These
decreases were primarily in the Prestige security and cruise
control product lines, partially offset by an increase in the
Company's international operations.
Total operating expenses increased approximately $126, or
0.7%, and decreased approximately $3,078, or 7.7%, for the three
and six month periods ended May 31, 1996 compared to the same
periods last year. For the second quarter, warehousing,
manufacturing and repair expenses increased approximately $286
(12.1%) due to increases in field warehousing expenses, warehouse
production expenses and direct labor. Selling expenses increased
approximately $724 (9.0%) primarily due to increases in divisional
marketing and advertising of approximately $1,577, trade show and
travel expenses. These increases were partially offset by
decreases in salesmen's salaries, commissions and payroll taxes.
General and administrative expenses decreased approximately $884
(10.1%) primarily in occupancy costs, telephone, depreciation and
office expenses. These decreases were partially offset by
increases in travel and professional fees. A large part of the
decrease in occupancy and related expenses is attributable to the
closing of many retail outlets.
For the six months ended May 31, 1996, warehousing,
manufacturing, and repair expenses increased approximately $221
(4.6%) due to increases in field warehousing expenses and direct
labor, partially offset by a decrease in warehouse production
expenses. Selling expenses decreased approximately $823 (4.8%)
primarily in salesmen's salaries, commissions and payroll taxes.
These decreases were partially offset by increases in divisional
marketing and advertising of approximately $1,832, trade show and
travel expenses. General and administrative expenses decreased
approximately $2,476 (13.8%) primarily in occupancy costs,
telephone, depreciation and office expenses. These decreases were
partially offset by increases in travel and professional fees. As
previously stated, a large part of the decrease in occupancy and
related expenses is attributable to the closing of many retail
outlets.
Operating income increased $2,190 and $2,684 over last year
for the three and six month periods, respectively. The Company's
retail operations, with fewer outlets compared to last year,
increased operating income by $1,651 and $965 for the three and six
month periods ended May 31, 1996, respectively. The wholesale
business, both automotive and cellular, experienced an increase in
operating income of $1,032 and $1,226 for the three and six month
periods ended May 31, 1996, respectively.
Equity in income of equity investments decreased $910 and
$1,987 for the three six month periods ended May 31, 1996 compared
to the same periods last year. This decrease was primarily due to
the Company no longer accounting for its investment in CellStar on
the equity method. The change in accounting method was caused by
the sale of CellStar shares during the third quarter of 1995 which
reduced the Company's holdings below 20% and eliminated the
Company's significant influence over CellStar. For the three and
six months ended May 31, 1995, the Company recorded equity income
of CellStar of $1,074 and $2,046, respectively. Management fees
and related income also decreased compared to last year, entirely
due to Audiovox Pacific experiencing a change in its cellular
market. During the first quarter of 1996, the Australian cellular
market demand shifted to a different type of digital technology.
This shift impacted the sales of Audiovox Pacific as it did not
have this type of digital equipment in its inventory. The Company
is currently sourcing additional digital product with this type of
technology which should provide Audiovox Pacific with adequate
digital product in the future.
Interest expense and bank charges decreased by $651 and $497
for the three and six month periods ended May 31, 1996 compared to
1995, respectively, primarily due to reduced interest-bearing
borrowings, partially offset by an increase in interest rates.
Income (loss) before provision for (recovery of) income taxes
was $426 and $1,516 for the three and six month periods ended May
31, 1996, a $4,666 and $4,673 increase over the same periods last
year, respectively. However, during 1996, the Company's Canadian
operations have experienced losses which can no longer be offset
against profits in the United States due to all Canadian tax
carrybacks being fully utilized. As a result, the Company must add
the Canadian losses back when computing its provision for income
taxes. This has resulted in the Company providing approximately
$276 and $888 in income taxes on consolidated taxable income of
$426 and $1,516 for the three and six months ended May 31, 1996,
respectively. The Company is in the process of reorganizing its
Canadian operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at May 31, 1996 was approximately
$1,250 above the November 30, 1995 level. Operating activities
provided approximately $14,059, compared to an operating cash
deficit of $33,991 for the six months ended May 31, 1995, primarily
due to profitable operations and decreases in both accounts
receivable and inventory, offset by an advance to a supplier for
product to be delivered in June 1996 and reduced accounts payable
and accrued expenses. Investing activities provided approximately
$66, primarily from the proceeds of the sale of an investment,
offset by the purchase of property, plant and equipment. Financing
activities used approximately $12,868, primarily from repayments of
bank obligations. In addition, on February 9, 1996, the Company's
10.8% Series AA and 11.0% Series BB Convertible Debentures matured.
The Company paid $4,362 to holders on that date. The remaining
$1,100 was converted into 206,046 shares of Common Stock.
On May 5, 1995, the Company entered into an amended and
restated Credit Agreement ("Credit Agreement") with five banks,
including Chemical Bank which acts as agent for the bank group,
which provides that 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 also secured by a pledge agreement entered into by
the Company for 1,075,000 shares of CellStar Common Stock.
Availability of credit under the Credit Agreement is in a maximum
aggregate amount of $95,000, is subject to certain conditions and
is based upon a formula taking into account the amount and quality
of it accounts receivable and inventory. The Company amended the
Credit Agreement, effective December 22, 1995 and February 9, 1996,
which amendments provided for, among other things, increased
interest rates, which may be reduced under certain circumstances,
and a change in the criteria for and method of calculating certain
financial covenants in the future as follows: net income of $2,500
was changed to pre-tax income of $4,000 per annum; the Company must
have pre-tax income of $1,500 for the first six months of fiscal
1996; the Company cannot have pre-tax losses of more than $500 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 $100,000, of which a minimum
level of $80,000, adjusted for the unrealized holding gain for
CellStar, must be maintained.
Effective May 13, 1996, the Company executed a Third Amendment
to the Credit Agreement and a Pledge Agreement Amendment and
Supplement. The Amendment amends the Credit Agreement to provide
that the Company shall not permit (i) Consolidated Net Worth to be
less than $90,000 at any time or (ii) Consolidated Adjusted Net
Worth to be less than $80,000 at any time. The Pledge Agreement
Amendment and Supplement increases the number of shares of CellStar
stock pledged by Audiovox Holding Corp. by 1,050,000 additional
shares. The total number of shares pledged by Audiovox Holding
Corp., as increased, is 2,125,000.
The Company believes that it has sufficient liquidity to
satisfy its anticipated working capital and capital expenditure
needs through November 30, 1996 and for the reasonable foreseeable
future.
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended May 31,
1996.
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, 1996
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
5
1,000
6-MOS
NOV-30-1996
MAY-31-1996
8,326
0
91,321
2,845
93,331
212,587
24,104
17,940
258,524
83,849
65,000
0
2,500
92
92,612
258,524
243,669
263,687
211,821
222,224
0
107
4,214
1,516
888
628
0
0
0
628
0.07
0.07
