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, 1998
Commission file number 1-9532
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1964841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 231-7750
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of shares of each class of the registrant's Common Stock outstanding as
of the latest practicable date.
Class Outstanding at July 7, 1998
Class A Common Stock 17,258,573 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
May 31, 1998 (unaudited) and
November 30, 1997 3
Consolidated Statements of Income (Loss)
for the Three and Six Months Ended
May 31, 1998 and May 31, 1997
(unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended May 31, 1998
and May 31, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-9
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 10-25
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 26
SIGNATURES 27
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MAY 31, NOVEMBER 30,
1998 1997
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,247 $ 9,445
Accounts receivable, net 81,159 104,698
Inventory, net 117,085 105,242
Receivable from vendor 6,327 5,000
Prepaid expenses and other current assets 8,497 9,230
Deferred income taxes 7,721 4,673
Equity collar -- 1,246
--------- ---------
Total current assets 228,036 239,534
Investment securities 28,296 22,382
Equity investments 10,473 10,693
Property, plant and equipment, net 16,228 8,553
Excess cost over fair value of assets acquired and other intangible assets, net 5,426 5,557
Other assets 2,695 3,108
--------- ---------
$ 291,154 $ 289,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 30,105 $ 24,237
Accrued expenses and other current liabilities 14,279 16,538
Income taxes payable 3,197 9,435
Bank obligations 4,393 6,132
Documentary acceptances 4,252 3,914
Current installments of capital lease obligation 62 --
--------- ---------
Total current liabilities 56,288 60,256
Bank obligations 24,600 24,300
Deferred income taxes 9,439 8,505
Long-term debt 5,851 6,191
Capital lease obligation 6,422 --
--------- ---------
Total liabilities 102,600 99,252
--------- ---------
Minority interest 2,811 2,683
--------- ---------
Stockholders' equity:
Preferred stock 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 and 17,253,533 issued
1998 and 1997, respectively 173 173
Class B; 10,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 145,252 145,155
Retained earnings 29,869 32,924
Cumulative foreign currency translation adjustment (4,131) (3,428)
Unrealized gain on marketable securities, net 13,918 12,194
Unrealized gain on equity collar, net -- 773
Gain on hedge of available-for-sale securities 929 --
Treasury stock, 340,000 Class A common stock, at cost (2,789) (2,421)
--------- ---------
Total stockholders' equity 185,743 187,892
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 291,154 $ 289,827
========= =========
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, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 132,411 $ 148,195 $ 253,384 $ 314,809
Cost of sales (including an inventory write-down
to market in 1998 of $6,600) 118,367 123,140 217,082 261,752
--------- --------- --------- ---------
Gross profit 14,044 25,055 36,302 53,057
--------- --------- --------- ---------
Operating expenses:
Selling 9,366 8,848 17,656 20,549
General and administrative 9,393 9,379 17,815 18,298
Warehousing, assembly and repair 3,242 3,016 6,253 5,882
--------- --------- --------- ---------
Total operating expenses 22,001 21,243 41,724 44,729
--------- --------- --------- ---------
Operating income (loss) (7,957) 3,812 (5,422) 8,328
--------- --------- --------- ---------
Other income (expense):
Debt conversion expense -- -- -- (12,686)
Interest and bank charges (1,149) (433) (1,995) (1,349)
Equity in income of equity investments 469 167 876 313
Management fees and related income 14 28 21 75
Gain on sale of equity investment -- 10,187 -- 33,966
Other, net (97) 271 35 713
--------- --------- --------- ---------
Total other income (expense) (763) 10,220 (1,063) 21,032
--------- --------- --------- ---------
Income (loss) before provision for (recovery of)
income taxes (8,720) 14,032 (6,485) 29,360
Provision for (recovery of) income taxes (4,025) 5,678 (3,429) 16,803
--------- --------- --------- ---------
Net income (loss) $ (4,695) $ 8,354 $ (3,056) $ 12,557
========= ========= ========= =========
Net income (loss) per common share (basic) $ ( 0.24) $ 0.43 $ ( 0.16) $ 0.68
========== ========= ========= =========
Net income (loss) per common share (diluted) $ ( 0.24) $ 0.43 $ ( 0.16) $ 0.67
========== ========= ========= =========
Weighted average number of common shares
outstanding (basic) 19,174,487 19,415,100 19,183,459 18,541,023
=========== =========== =========== ==========
Weighted average number of common shares 19,174,487 19,645,777 19,183,459 19,081,884
outstanding (diluted) =========== =========== =========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
-------- --------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ (3,056) $ 12,557
Adjustment to reconcile net income to net cash provided by
operating activities:
Debt conversion expense -- 12,386
Depreciation and amortization 1,135 924
Provision for bad debt expense 253 172
Equity in income of equity investment (897) (388)
Minority interest 142 779
Gain on sale of equity investment -- (33,966)
Recovery of deferred income taxes, net (3,272) (3,086)
Provision for unearned compensation 96 111
Loss (gain) on disposal of property, plant and equipment, net 17 (7)
Warrant expense -- 106
Change in:
Accounts receivable 22,450 33,492
Inventory (12,709) (11,587)
Accounts payable, accrued expenses and other current liabilities 4,390 (8,779)
Receivable from vendor (1,327) (3,475)
Income taxes payable (6,072) 4,532
Prepaid expenses and other, net 1,016 223
-------- --------
Net cash provided by operating activities 2,166 3,994
-------- --------
Cash flows from investing activities:
Net proceeds from sale of equity collar 1,499 --
Purchases of property, plant and equipment, net (2,236) (2,087)
Proceeds from sale of investment security -- 42,088
Purchase of equity investments -- (4,706)
Purchase of convertible debentures (3,132) --
Proceeds from distribution from equity investment 561 --
-------- --------
Net cash provided by (used in) investing activities (3,308) 35,295
-------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements (925) (27,654)
Net borrowings (repayments) under documentary acceptances 338 (973)
Debt issuance costs -- (13)
Proceeds from issuance of Class A Common Stock -- 2,328
Repurchase of Class A Common Stock (369) (328)
-------- --------
Net cash used in financing activities (956) (26,640)
-------- --------
Effect of exchange rate changes on cash (100) (53)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,198) 12,596
Cash and cash equivalents at beginning of period 9,445 12,350
-------- --------
Cash and cash equivalents at end of period $ 7,247 $ 24,946
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles and include
all adjustments (which include only normal recurring adjustments)
which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Audiovox Corporation and
subsidiaries (the Company) as of May 31, 1998 and November 30, 1997 and
the results of operations and consolidated statements of cash flows for
the three and six month periods ended May 31, 1998 and May 31, 1997.
The interim figures are not necessarily indicative of the results for
the year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 1997 Annual Report filed on Form 10-K.
(2) The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
-----------------------
May 31, May 31,
1998 1997
Cash paid during the period:
Interest (excluding bank charges) $1,364 $ 1,210
Income taxes $4,364 $15,161
As of May 31, 1998, the Company recorded a net unrealized holding gain
relating to available-for-sale marketable securities, net of deferred
taxes, of $13,918 as a separate component of stockholders' equity.
6
During the first quarter of 1998, the Company sold its equity collar
for $1,499. The transaction resulted in a net gain on hedge of
available-for-sale securities of $929 which is reflected as a separate
component of stockholders' equity.
During the second quarter of 1998, the Company converted 400 million
Japanese Yen of its Shintom Co. Ltd (Shintom) Convertible
Debentures (Shintom Debentures) to 1,904,000 shares of Shintom Common
Stock.
During the second quarter of 1998, a capital lease obligation of $6,573
was incurred when the Company entered into a building lease (Note 7).
(3) In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income", effective for
fiscal years beginning after December 15, 1997. This Statement requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity
display an amount representing total comprehensive income for the
period in that financial statement. This Statement also requires that
an entity classify items of other comprehensive income by their nature
in a financial statement. For example, other comprehensive income may
include foreign currency items and unrealized gains and losses on
investments in equity securities. Reclassification of financial
statements for earlier periods, provided for comparative purposes, is
required. Based on current accounting standards, this Statement is not
expected to have a material impact on the Company's consolidated
financial statements. The Company will adopt this accounting standard
effective December 1, 1998, as required.
In June 1997, the FASB issued Statement 131, "Disclosures about
Segments of an Enterprise and Related Information", effective for
fiscal years beginning after December 15, 1997. This Statement
establishes standards for reporting information about operating
segments in annual financial statements and requires selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This
Statement requires reporting segment profit or loss, ceratin specific
revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or
loss, total segment assets, and other amounts disclosed for segments to
corresponding amounts reported in the consolidated financial
statements. Restatement of comparative information for earlier periods
presented is required in the initial year of application. Interim
information is not required until the second year of application, at
which time comparative information is required. The Company has not
determined the impact that the adoption of this new accounting standard
will have on its consolidated financial statements disclosures. The
7
Company will adopt this accounting standard in fiscal 1999, as
required.
(4) During the second quarter of 1997, the Company's Board of Directors
approved the repurchase of 1,000,000 shares of the Company's Class A
Common Stock in the open market under a share repurchase program (the
Program). As of May 31, 1998, 340,000 shares were repurchased under the
Program at an average price of $8.20 per share for an aggregate amount
of $2,789.
(5) In February 1997, the FASB issued Statement No. 128, "Earnings per
Share" (Statement 128). Statement 128 replaces the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any dilution. It
is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Earnings
per share amounts for all periods presented have been restated to
conform to the new presentation. A reconciliation between the
numerators and denominators of the basic and diluted earnings per
common share is as follows:
Three Months Ended Six Months Ended
May 31, May 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income (loss) (numerator for basic
earnings (loss) per share) $ (4,695) $ 8,354 $ (3,056) $ 12,557
Interest on 6 1/4% convertible subordinated -
debentures, net of tax - 21 - 143
---------- ---------- ---------- ----------
Adjusted net income (loss) (numerator for
diluted earnings (loss) per share) $ (4,695) $ 8,375 $ (3,056) $ 12,700
========== ========== ========== ==========
Weighted average common shares
(denominator for basic earnings (loss) per
share) 19,174,487 19,415,100 19,183,459 18,541,023
Effect of dilutive securities:
6 1/4% convertible subordinated debentures - 128,192 - 439,048
Employee stock options and stock warrants - 32,868 - 34,836
Employee stock grants - 69,617 - 66,977
----------- ---------- ----------- ----------
Weighted average common and potential
common shares outstanding (denominator
for diluted earnings (loss) per share) 19,174,487 19,645,777 19,183,459 19,081,884
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.24) $ 0.43 $ (0.16) $ 0.68
============== ============== ============== ==============
Diluted earnings (loss) per share $ (0.24) $ 0.43 $ (0.16) $ 0.67
============== ============== ============== ==============
Employee stock options and stock warrants totaling 3,723,675 and
3,122,375 for the quarter ended May 31, 1998 and 1997, respectively,
were not included in the net earnings per share calculation because
their effect would have been anti-dilutive.
8
(6) During the second quarter of 1998, the Company purchased 400 million
Japanese Yen (approximately $3,132) of Shintom Debentures. The Company
exercised its option to convert the Shintom Debentures into 1,904,000
shares of Shintom Common Stock. The Company accounts for its investment
in Shintom as an available-for-sale marketable equity security. The
aggregate fair value of the available-for-sale marketable equity
security was $2,265 at May 31, 1998, which is comprised of a cost basis
of $3,132 and a gross unrealized holding loss of $867 recorded as a
separate component of stockholders' equity at May 31, 1998. A related
deferred tax asset of $330 was recorded at May 31, 1998 as a reduction
to the unrealized holding loss included as a separate component of
stockholders' equity.
(7) During the second quarter of 1998, the Company entered into a 30-year
lease, for a building, with its principal stockholder and chief
executive officer. A significant portion of the lease payments, as
required under the lease agreement, consist of the debt service
payments required to be made by the principal stockholder in connection
with the financing of the construction of the building. For financial
reporting purposes, the lease has been classified as a capital lease,
and accordingly, a building and the related obligation of
approximately $6,573 has been recorded. Future minimum lease
payments for this capital lease in effect at May 31, 1998 are as
follows:
June 1, 1998 - November 30, 1998 $ 289
Fiscal November 30, 1999 579
Fiscal November 30, 2000 579
Fiscal November 30, 2001 579
Fiscal November 30, 2002 579
Fiscal November 30, 2003 579
Thereafter 13,263
-------
Total minimum lease payments 16,447
Less: amount representing interest 9,963
-------
Present value of net minimum lease payments 6,484
Less: current installments 62
-------
Long-term obligation $ 6,422
=======
(8) Receivable from vendor represents claims due from and payments to TALK
Corporation.
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 Automotive. The Communications group
consists of Audiovox Communications Corp. (ACC) and the Quintex retail
operations (Quintex), both of which are wholly-owned subsidiaries of the
Company. The Communications group markets cellular telephone products and
receives activation commissions and residual fees from its retail sales. The
price at which the Company's retail outlets sell cellular telephones is often
affected by the activation commission the Company will receive in connection
with such sale. The activation commission paid by a cellular telephone carrier
is based upon various service plans and promotional marketing programs offered
by the particular cellular telephone carrier. The monthly residual fees are
based upon a percentage of customers' usage and are calculated based on the
amount of local air time fees collected from the base of customers activated by
the Company on a particular cellular carrier's system. The Automotive group
consists of Audiovox Automotive Electronics (AAE), a division of the Company,
Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings (M) Sdn. Bhd.
and Audiovox Venezuela, C.A., which are majority-owned subsidiaries. Products in
the Automotive group include automotive sound and security equipment, car
accessories, home and portable sound products and mobile video. The Company
allocates interest and certain shared expenses to the marketing groups based
upon estimated usage. General expenses and other income items which are not
readily allocable are not included in the results of the various marketing
groups.
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 (loss) 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,
1998 1997 1998 1997
---- ---- ---- ----
Net sales:
Product sales:
Cellular wholesale 58.5% 58.6% 57.0% 61.7%
Cellular retail 0.9 1.2 0.8 1.4
Sound 15.7 16.2 15.5 13.9
Security and accessories 16.5 15.5 17.6 14.1
----- ----- ----- -----
91.5 91.5 90.9 91.1
Activation commissions 4.2 5.6 4.7 5.9
Residual fees 0.7 0.7 0.8 0.8
Other 3.5 2.1 3.6 2.2
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.4 83.1 85.7 83.1
----- ----- ----- -----
Gross profit 10.6 16.9 14.3 16.9
Selling 7.1 6.0 7.0 6.5
General and administrative expense 7.1 6.3 7.0 5.8
Warehousing, assembly and repair 2.4 2.0 2.5 1.9
----- ----- ----- -----
Total operating expenses 16.6 14.3 16.5 14.2
----- ----- ----- -----
Operating income (loss) (6.0) 2.6 (2.1) 2.6
Debt conversion expense -- -- -- 4.0
Interest and bank charges 0.9 0.3 0.8 0.4
Equity in income of equity investments 0.4 0.1 0.3 0.1
Management fees and related income -- -- -- --
Gain on sale of equity investment -- 6.9 -- 10.8
Other income (expense) (0.1) 0.2 -- 0.2
Income (loss) before provision for (recovery of)
income taxes (6.6) 9.5 (2.6) 9.3
Provision for (recovery of) income taxes (3.0) 3.8 (1.4) 5.3
----- ----- ----- -----
Net income (loss) (3.5)% 5.6% (1.2)% 4.0%
===== ===== ===== =====
12
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
Net sales were $132,411 for 1998, a decrease of $15,784, or 10.7%, from the
same period last year. The decrease in net sales was primarily in the
Communications group. During the quarter, the Communications group recorded a
charge of $6.6 million to adjust the carrying value of certain inventories to
market. This charge was for analog cellular telephones from a specific supplier.
This supplier has issued a credit to the Company of $1.0 million to partially
offset this write-down. The charge reduced gross profit margins to 10.6%.
Operating expenses increased to $22,001 from $21,243, a 3.6% increase. The
operating loss for 1998 was $7,957 compared to last year's operating income of
$3,812.
The net sales and percentage of net sales by product line and marketing
group for the three months ended May 31, 1998 and May 31, 1997 are reflected in
the following table:
Three Months Ended
May 31,
--------------------------------------
1998 1997
------ -----
Net sales:
Communications
Cellular wholesale $ 77,412 58.5% $ 86,871 58.6%
Cellular retail 1,139 0.9 1,793 1.2
Activation commissions 5,614 4.2 8,288 5.6
Residual fees 917 0.7 1,097 0.7
Other 2,946 2.2 3,129 2.1
--------- ----- -------- -----
Total Communications 88,028 66.5 101,178 68.3
--------- ----- -------- -----
Automotive
Sound 20,788 15.7 24,034 16.2
Security and accessories 21,875 16.5 22,937 15.5
Other 1,720 1.3 615 0.4
--------- ----- --------- -----
Total Automotive 44,383 33.5 47,586 32.1
Other -- -- (569) (0.4)
--------- ----- --------- -----
Total $ 132,411 100.0% $ 148,195 100.0%
========= ====== ========= ======
13
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
Net sales were $253,384 for 1998, a decrease of $61,425, or 19.5%, from the
same period last year. The decrease in net sales was primarily in the
Communications group. Gross margins decreased to 14.3% for 1998 from 16.9% in
1997, primarily due to the aforementioned charge for inventory. Operating
expenses decreased to $41,724 from $44,729, a 6.7% decrease. The operating loss
for 1998 was $5,422 compared to last year's operating income of $8,328.
The net sales and percentage of net sales by product line and marketing
group for the six months ended May 31, 1998 and May 31, 1997 are reflected in
the following table:
Six Months Ended
May 31,
--------------------------------------
1998 1997
------ -----
Net sales:
Communications
Cellular wholesale $144,522 57.0% $ 194,290 61.7%
Cellular retail 1,991 0.8 4,311 1.4
Activation commissions 11,961 4.7 18,665 5.9
Residual fees 1,915 0.8 2,412 0.8
Other 5,705 2.3 5,772 1.8
-------- ----- --------- -----
Total Communications 166,094 65.6 225,450 71.6
-------- ----- --------- -----
Automotive
Sound 39,216 15.5 43,662 13.9
Security and accessories 44,552 17.6 44,430 14.1
Other 3,522 1.4 1,577 0.5
-------- ----- --------- -----
Total Automotive 87,290 34.4 89,669 28.5
Other -- -- (310) (0.1)
-------- ----- --------- -----
Total $253,384 100.0% $ 314,809 100.0%
======== ===== ========= =====
14
COMMUNICATION RESULTS
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
The Communications group is composed of ACC and Quintex, both wholly-owned
subsidiaries of Audiovox Corporation. Since principally all of the net sales of
Quintex are cellular in nature, all operating results of Quintex are being
included in the discussion of the Communications group's product line. Net sales
were $88,028, a decrease of $13,150, or 13.0%, from the same period last year.
Unit sales of cellular telephones increased approximately 28,000 units, or 4.6%,
from 1997. Average unit selling prices decreased approximately 11.9% to $111
from $126 but were partially offset by a corresponding decrease of 3.5% in
average unit cost. The number of new cellular subscriptions processed by Quintex
decreased 28.9%, with an accompanying decrease in activation commissions of
approximately $2,674, or 32.3%. The average commission received by Quintex per
activation also decreased approximately 4.8% from last year. Unit gross profit
margins decreased to 3.3% from 11.7% last year. This decrease was primarily due
to a $6.6 million charge to adjust the carrying value of certain cellular
inventories, partially offset by a $1.0 credit from a supplier. This charge was
the result of a software problem in certain analog cellular phones, as well as a
continuing decrease in the selling prices of analog telephones due to pressure
from the growing digital presence in the market. While the analog market is
still quite large, the Communications group may experience lower gross profits
in the future due to the price sensitivity of this market place. Operating
expenses increased to $12,911 from $11,776. As a percentage of net sales,
operating expenses increased to 14.7% during 1998 compared to 11.6% in 1997.
Selling expenses increased $730 from last year, primarily in advertising and
divisional marketing, partially offset by decreases in commissions and salaries.
15
General and administrative expenses increased during 1998 by $390 from
1997, primarily in occupancy costs, salaries and temporary personnel.
Warehousing and tooling increased by $15 during 1998 over last year, primarily
in direct labor. The operating loss for 1998 was $8,610 compared to operating
income of $4,172 last year.
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,
--------------------------------------
1998 1997
------ -----
Net sales:
Cellular product - wholesale $ 77,412 87.9% $ 86,871 85.9%
Cellular product - retail 1,139 1.3 1,793 1.8
Activation commissions 5,614 6.4 8,288 8.2
Residual fees 917 1.0 1,097 1.1
Other 2,946 3.3 3,129 3.1
-------- ----- --------- -----
Total net sales 88,028 100.0 101,178 100.0
-------- ----- --------- -----
Gross profit 4,301 4.9 15,948 15.8
Total operating expenses 12,911 14.7 11,776 11.6
-------- ----- --------- -----
Operating income (loss) (8,610) (9.8) 4,172 4.1
Other expense (1,770) (2.0) (1,143) (1.1)
-------- ----- --------- -----
Pre-tax income (loss) $(10,380) (11.8)% $ 3,029 3.0%
======== ===== ========= =====
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
Net sales were $166,094, a decrease of $59,356, or 26.3%, from the same
period last year. Unit sales of cellular telephones decreased approximately
58,000 units, or 4.4%, from 1997. Average unit selling prices decreased
approximately 20.3% to $107 from $134 but were partially offset by a
corresponding decrease of 14.0% in average unit cost. The number of new cellular
subscriptions
16
processed by Quintex decreased 33.4%, with an accompanying decrease in
activation commissions of approximately $6,704, or 35.9%. The average commission
received by Quintex per activation also decreased approximately 3.8% from last
year. Unit gross profit margins decreased to 6.1% from 13.4% last year. This
decrease was primarily due to a $6.6 million charge to adjust the carrying value
of certain cellular inventories, partially offset by a $1.0 credit from a
supplier. This charge was the result of a software problem in certain analog
cellular phones, as well as a continuing decrease in the selling prices of
analog telephones due to pressure from the growing digital presence in the
market. While the analog market is still quite large, the Communications group
may experience lower gross profits in the future due to the price sensitivity of
this market place. Operating expenses decreased to $24,350 from $26,628. As a
percentage of net sales, operating expenses increased to 14.7% during 1998
compared to 11.8% in 1997. Selling expenses decreased $2,615 from last year,
primarily in commissions, salaries, advertising and divisional marketing.
General and administrative expenses increased during 1998 by $81 from 1997,
primarily in occupancy costs, depreciation and temporary personnel. Warehousing
and assembly expenses increased by $256 during 1998 over last year, primarily in
tooling expenses and field warehouse expenses. The operating loss for 1998 was
$6,850 compared to operating income of $9,021 last year.
17
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,
1998 1997
------ -----
Net sales:
Cellular product - wholesale $ 144,522 87.0% $ 194,290 86.2%
Cellular product - retail 1,991 1.2 4,311 1.9
Activation commissions 11,961 7.2 18,665 8.3
Residual fees 1,915 1.2 2,412 1.1
Other 5,705 3.4 5,772 2.6
--------- ----- --------- -----
Total net sales 166,094 100.0 225,450 100.0
--------- ----- --------- -----
Gross profit 17,500 10.5 35,649 15.8
Total operating expenses 24,350 14.7 26,628 11.8
--------- ----- --------- -----
Operating income (loss) (6,850) (4.1) 9,021 4.0
Other expense (3,071) (1.8) (2,232) (1.0)
--------- ----- --------- -----
Pre-tax income (loss) $ (9,921) (6.0)% $ 6,789 3.0%
========= ===== ========= =====
AUTOMOTIVE RESULTS
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
Net sales decreased approximately $3,203 compared to last year, a decrease
of 6.7%. Decreases were experienced in the sound, security and accessories
product lines, partially offset by an increase in other, primarily consumer
goods. Automotive sound decreased 13.5% compared to last year, primarily due to
decreased sales in Prestige Audio, SPS and AV product lines and reduced sales in
our international operations. Automotive security and accessories decreased 4.6%
compared to last year, primarily due to decreased sales in our international
operations and Protector Hardgoods, partially offset by increased sales in
Prestige security, cruise controls and Mobile Video. Gross
18
margins increased to 22.0% from 19.9% last year. This increase was experienced
in SPS, AV and Prestige Audio sound products, Protector Hardgoods and Prestige
security. Operating expenses increased to $6,873 from $6,571. Selling expenses
decreased from last year by $116, primarily in salesmen salaries in
international operations, divisional marketing and advertising, partially offset
by increases in commissions. General and administrative expenses decreased from
1997 by $211, primarily in foreign buying office expenses. Warehousing and
assembly expenses increased from 1997 by $629, primarily in direct labor and
tooling. Operating income for 1998 was $2,896 compared to $2,911 last year.
The following table sets forth for the periods indicated certain statement
of income data for the Automotive group expressed as a percentage of net sales:
AUTOMOTIVE
Three Months Ended
May 31,
1998 1997
------ -----
Net sales:
Sound $ 20,788 46.8% $ 24,034 50.5%
Security and accessories 21,875 49.3 22,937 48.2
Other 1,720 3.9 615 1.3
-------- ----- -------- -----
Total net sales 44,383 100.0 47,586 100.0
Gross profit 9,769 22.0 9,482 19.9
Total operating expenses 6,873 15.5 6,571 13.8
-------- ----- -------- -----
Operating income 2,896 6.5 2,911 6.1
Other expense (944) (2.1) (905) (1.9)
-------- ----- -------- -----
Pre-tax income $ 1,952 4.4% $ 2,006 4.2%
======== ===== ======== =====
SIX MONTHS ENDED MAY 31, 1998 COMPARED TO SIX MONTHS ENDED MAY 31, 1997
Net sales decreased approximately $2,379 compared to last year, a
decrease of 2.7%. Decreases were experienced in automotive sound, while security
and accessories product lines
19
remained relatively the same as last year. Other sales, primarily consumer
goods, increased over 100%. Automotive sound decreased 10.2% compared to last
year, primarily due to decreased sales in international operations, Prestige
Audio and SPS product lines, partially offset by an increase in AV. Also during
1997, the Company contributed the net assets of the Heavy Duty Sound division to
a newly-formed 50%-owned joint venture. Excluding this event, sound sales
decreased 4.5% during 1998 compared to 1997. It is anticipated that the loss of
this revenue will be realized through the joint venture. Automotive security and
accessories increased 0.3% compared to last year, primarily due to increased
sales in Prestige security and Mobile Video, offset by decreases in net sales of
Protector Hardgoods, AA Security and international operations. Gross margins
increased to 21.6% from 20.1% last year. This increase was experienced primarily
in Prestige security and Protector Hardgoods. Operating expenses increased to
$13,629 from $12,952. Selling expenses decreased from last year by $155,
primarily in international operations and the result of the transfer of the
Heavy Duty Sound division, offset by increases in commissions and trade shows.
General and administrative expenses increased over 1997 by $218, primarily in
bad debt expenses and office salaries in both international and domestic
operations. Warehousing and assembly expenses increased from 1997 by $614
primarily in tooling and field warehousing. Operating income for 1998 was $5,239
compared to $5,101 last year.
20
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
Six Months Ended
May 31,
1998 1997
------ -----
Net sales:
Sound $ 39,216 44.9% $ 43,662 48.7%
Security and accessories 44,552 51.0 44,430 49.5
Other 3,522 4.0 1,577 1.8
-------- ----- -------- -----
Total net sales 87,290 100.0 89,669 100.0
Gross profit 18,868 21.6 18,053 20.1
Total operating expenses 13,629 15.6 12,952 14.4
-------- ----- -------- -----
Operating income 5,239 6.0 5,101 5.7
Other expense (1,908) (2.2) (1,780) (2.0)
-------- ----- -------- -----
Pre-tax income $ 3,331 3.8% $ 3,321 3.7%
======== ===== ======== =====
OTHER INCOME AND EXPENSE
Interest expense and bank charges increased by $716 and $646 for the
three and six months ended May 31, 1998, respectively, compared to the same
periods last year, primarily due to an increase in interest-bearing debt. Equity
in income of equity investments and management fees and related income increased
$288 and $509 for the three and six months ended May 31, 1998, respectively,
compared to the same periods last year. The increases are attributable to
Audiovox Specialized Applications, LLC (ASA) and Audiovox Pacific. ASA had 1998
earnings in excess of 1997 both for the quarter and year to date. In 1997, the
Company had written down its investment in Audiovox Pacific to zero and,
accordingly, has not recorded its share of additional losses incurred by
Audiovox Pacific in 1998. During 1997, the Company's share of Audiovox Pacific
losses were $310 and $355 for the three and six months ended, respectively.
21
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. Over the last several months, the Company has 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, 1998 decreased
approximately $2,198 from the November 30, 1997 level. Operating activities
provided approximately $2,166, primarily from decreases in accounts receivable
and increases in accounts payable and accrued expenses, partially offset by an
operating loss and an increase in inventories and reduction in income taxes
payable.. Investing activities used approximately $3,308, primarily from the
purchase of convertible debentures and property, plant and equipment, offset by
the sale of an equity collar. Financing activities used approximately $956,
primarily from repayments under line of credit agreements and repurchase of
Class A Common Stock. On May 5, 1995, the Company entered into the Second
Amended and Restated Credit Agreement (the "Credit Agreement"). From May 5, 1995
through May 31, 1998, the Credit Agreement was amended eleven times providing
for various changes to the terms. The terms as of May 31, 1998 are summarized
below. Under the Credit Agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
Credit Agreement continue to be guaranteed by certain of the Company's
subsidiaries and are secured by accounts receivable and inventory of the Company
and those subsidiaries. The obligations are secured by the shares of ACC.
22
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; minimum level of total net worth of $172,500. At May
31, 1998, the Company was not in compliance with its pre-tax income and pre-tax
loss covenants which were subsequently waived. As of the date of issuance of the
financial statements, the Company's creditors waived their right to call the
bank obligations. The Credit Agreement provides for adjustments to the covenants
in the event of certain specified non-operating transactions. Additionally, the
agreement includes restrictions and limitations on payments of dividends, stock
repurchases and capital expenditures. The Company believes that it has
sufficient liquidity to satisfy its anticipated working capital and capital
expenditure needs through November 30, 1998 and for the reasonable foreseeable
future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement
No. 130, "Reporting Comprehensive Income", effective for fiscal years beginning
after December 15, 1997. This Statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other
23
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items and unrealized
gains and losses on investments in equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. Based on current accounting standards, this Statement is not expected
to have a material impact on the Company's consolidated financial statements.
The Company will adopt this accounting standard effective December 1, 1998, as
required.
In June 1997, the FASB issued Statement 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
24
required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statements disclosures. The Company will adopt this accounting standard in
fiscal 1999, as required.
25
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
During the second quarter, the Registrant filed one report on Form 8-K. The
Form 8-K, dated March 20, 1998 and filed March 31, 1998, reported that the
Company had executed an Eleventh Amendment to the Company's Second Amended and
Restated Credit Agreement (the Amendment). The Amendment, among other things,
changed the definition of "Borrowing Base" thereby increasing the amount of
credit available to the Company.
26
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, 1998
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
27
5
0000807707
Audiovox Corp.
1000
6-MOS
Nov-30-1998
May-31-1998
8247
0
93452
12293
117085
228036
37331
21103
291154
56288
5851
0
2500
195
183048
291154
239508
253384
210195
217082
0
253
1995
(6485)
(3429)
(3056)
0
0
0
(3056)
(0.16)
(0.16)
