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 February 29, 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 April 1, 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 February 29, 1996
(unaudited) 3
Consolidated Statements of Income
for the Three Months Ended February 28,
1995 and February 29, 1996 (unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended February 28,
1995 and February 29, 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6-7
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 8-17
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 18-19
ITEM 6 Reports on Form 8-K 19
SIGNATURES 20
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, February 29,
1995 1996
(unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 7,076 $ 4,044
Accounts receivable, net 96,930 75,798
Inventory, net 100,422 97,637
Receivable from vendor 5,097 9,748
Prepaid expenses and other current assets 5,443 5,361
Deferred income taxes 5,287 4,894
Restricted cash 5,959 -
Total current assets 226,214 197,482
Investment securities 62,344 42,156
Equity investments 8,527 8,481
Property, plant and equipment, net 6,055 6,283
Debt issuance costs, net 4,235 3,944
Excess cost over fair value of assets
acquired and other intangible assets, net 943 913
Other assets 2,737 2,824
$ 311,055 $ 262,083
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,844 $ 14,382
Accrued expenses and other current liabilities 16,800 16,553
Income taxes payable 2,455 2,846
Bank obligations 761 28,405
Documentary acceptances 7,120 7,164
Current installments of long-term debt 5,688 145
Total current liabilities 50,668 69,495
Bank obligations 49,000 -
Deferred income taxes 23,268 15,545
Long-term debt, less current installments 70,534 70,345
Total liabilities 193,470 155,385
Minority interest 363 472
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,
February 29, 996, respectively 68 70
Class B; 10,000,000 authorized; 2,260,954
issued 22 22
Paid-in capital 42,876 44,064
Retained earnings 40,998 41,477
Cumulative foreign currency translation
and adjustment (963) (1,112)
Unrealized gain on marketable securities, net 31,721 19,205
Total stockholders' equity 117,222 106,226
Commitments and contingencies
Total liabilities and stockholders' equity $ 311,055 $ 262,083
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
February 28, February 29,
1995 1996
(unaudited) (unaudited)
Net sales $ 131,391 $ 122,493
Cost of sales 108,805 102,616
Gross profit 22,586 19,877
Operating expenses:
Selling 9,057 7,509
General and administrative 9,196 7,605
Warehousing, assembly and repair 2,470 2,405
20,723 17,519
Operating income 1,863 2,358
Other income (expenses):
Interest and bank charges (2,050) (2,204)
Equity in income of equity investments 1,187 110
Management fees and related income 396 50
Gain on sale of investment - 985
Other, net (313) (208)
(780) (1,267)
Income before provision for income taxes 1,083 1,091
Provision for income taxes 547 612
Net income $ 536 $ 479
Net income per common share (primary) $ 0.06 $ 0.05
Net income per common share (fully diluted) $ 0.06 $ 0.05
Weighted average number of common shares
outstanding, primary 9,070,392 9,285,188
Weighted average number of common shares
outstanding, fully diluted 10,125,070 9,325,588
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
February 28, February 29,
1995 1996
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 536 $ 479
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 980 813
Provision for bad debt expense 393 59
Equity in income of equity investments (1,187) (110)
Minority interest 10 109
Gain on sale of investment - (985)
Provision for (recovery of) deferred income taxes,
net (286) 341
Provision for unearned compensation 99 90
Loss on disposal of property, plant and equipment,
net - (9)
Changes in:
Accounts receivable 17,422 21,025
Inventory (23,324) 2,715
Accounts payable, accrued expenses and other
current liabilities 6,594 (3,653)
Receivable from vendor - (4,651)
Income taxes payable 802 394
Prepaid expenses and other assets (796) (104)
Net cash provided by operating activities 1,243 16,513
Cash flows from investing activities:
Purchases of property, plant and equipment, net (886) (768)
Proceeds from sale of investment - 1,000
Proceeds from distribution from equity investment - 79
Net cash (used in) provided by investing
activities (886) 311
Cash flows from financing activities:
Net repayments under line of credit agreements (2,350) (21,351)
Net borrowings under documentary acceptances - 44
Principal payments on long-term debt - (4,371)
Debt issuance costs (32) (50)
Principal payments on capital lease obligation (70) (81)
Proceeds from release of restricted cash 150 5,959
Net cash used in financing activities (2,302) (19,850)
Effect of exchange rate changes on cash (3) (6)
Net decrease in cash and cash equivalents (1,948) (3,032)
Cash and cash equivalents at beginning of period 5,495 7,076
Cash and cash equivalents at end of period $ 3,547 $ 4,044
See accompanying notes to consolidated financial statements.
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 28, 1995 and February 29, 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
February 29, 1996 and the results of operations and
consolidated statements of cash flows for the three month
periods ended February 28, 1995 and February 29, 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:
Three Months Ended
February 28, February 29,
1995 1996
Cash paid during the period:
Interest (excluding bank
charges) $ 859 $ 950
Income taxes $ 95 $ 48
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 February 29, 1996, the Company recorded an unrealized
holding loss relating to available-for-sale marketable
securities, net of deferred taxes, of $12,516 as a separate
component of stockholders' equity.
(4) Receivable from vendor includes $5,000 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 March 1996. In addition, TALK
owes the Company $4,748 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
February 28, February 29,
1995 1996
Net sales 100.0% 100.0%
Gross profit 17.2 16.2
Operating expenses 15.8 14.3
Income before provision for
income taxes 0.8 0.9
Net income 0.4 0.4
Net sales by product line for the three month periods ended
February 28, 1995 and February 29, 1996 are reflected in the
following table:
Three Months Ended
February 28, February 29,
1995 1996
Cellular product - wholesale $ 71,585 $ 70,494
Cellular product - retail 6,040 1,766
Activation commissions 13,436 9,780
Residual fees 1,085 1,234
Total Cellular 92,146 83,274
Automotive sound equipment 24,529 19,297
Automotive security and accessory
equipment 14,705 19,018
Other 11 904
$131,391 $122,493
RESULTS OF OPERATIONS
Net sales decreased by approximately $8,898, or 6.8%, for the
three month period ended February 29, 1996 compared to the same
period last year. This result was attributable to decreases in net
sales from the cellular product line of approximately $8,872, or
9.6%, and automotive sound equipment of approximately $5,232, or
21.3%. These decreases were partially offset by an increase in net
sales of automotive security and accessory equipment of
approximately $4,313, or 29.3%. In addition, during the fourth
quarter of 1995, the Company introduced a line of leisure products,
comprised mostly of home and portable stereo/cassette/CD changers.
Sales for the quarter for this new line were approximately $800.
The decrease in net sales of the cellular product category was
due to many factors. The primary reason for this decrease was a
reduction in average unit selling prices for cellular telephones,
of $52 per unit, 23.3%, from the same period last year. This was
primarily caused by the desire of cellular service providers to
lower their cost of product to the consumer and competition for
market share by cellular product suppliers. In addition,
production efficiencies led to the introduction of new lower-priced
product. All of these factors contributed to the downward pressure
on unit selling prices. The effect of the reduced unit selling
prices was only partially offset by an increase in unit sales of
approximately 69,000 units (23.1%)
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 February 29, 1996,
the Company was operating 30 retail outlets compared to 88 on
February 28, 1995. Consequently, with fewer retail operations to
activate new telephones, the number of subscriber activations
decreased by approximately 15,800 subscribers, or 35.2%.
Activation commissions received by the Company decreased $3,656, or
27.2%, for the first quarter of 1996 compared to the same period
last year. However, the average commission received by the
Company per activation increased approximately $37 per activation
to $337. These decreases were partially offset by an increase in
residual fees received by the Company of approximately $149, or
13.7%. The residual customer base is unaffected by the closing of
retail outlets, as the majority of the residual agreements are with
the Company and not with specific retail locations.
Net sales of automotive sound equipment decreased by
approximately $5,232, or 21.3%, for the three month period ended
February 29, 1996, compared to the same period in 1995. This
decrease was attributable primarily to a decrease in sales of
products sold to mass merchandise chains, as a result of a slower
holiday season from the prior year and a decision made to reduce
sales to selected customers due to low profitability. In addition,
SPS auto sound sales decreased, principally due to lower CD player
sales. This decrease in sales is a result of the appreciation of
the Yen during the latter part of 1995. Subsequently, the dollar
has strengthened and the Company anticipates regaining market-
share. Automotive sound sales also decreased in the truck and
agricultural vehicle markets and the Prestige audio product line.
These decreases were partially offset by an increase in sales to
private label customers. Net sales of automotive security and
accessory products increased approximately $4,313, or 29.3%, for
the three month period ended February 29, 1996, compared to the
same period in 1995, principally due to increases in sales of
Prestige vehicle security products and Protector Hardgoods. This
increase was partially offset by a reduction in net sales of the
Company's security lines sold to mass merchandisers.
Gross margins for the quarter ended February 29, 1996 declined
to 16.2% from 17.2% for the same period in 1995. This reflects the
continuing erosion of gross margins experienced by the Company,
primarily in the cellular and automotive sound product categories.
Cellular gross margins were 13.1% for the three month period
ended February 29, 1996 compared to 14.1% 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. This
increased competition is causing unit selling prices to decline
faster than the Company is able to recover price concessions from
its vendors. The average unit selling price has declined 15.2%
since November 30, 1995 and was 23.3% lower than February 28, 1995.
Likewise, gross profits on unit sales declined 26.3% for the same
period. 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 is currently negotiating 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 decreased to 19.6% from 22.0% for the
quarter ended February 29, 1996 compared to last year. The
decrease in automotive sound margins was primarily in the Audiovox
sound and SPS product lines, partially offset by increases in the
Heavy Duty Sound product lines. Automotive accessory margins
decreased to 26.7% for the three month period ended February 29,
1996 from 28.4% for the same period in 1995. These decreases were
primarily in the Prestige security product line.
Total operating expenses decreased by approximately $3,204, or
15.5%, for the three months ended February 29, 1996 compared to the
respective period in 1995. A major component of this decrease was
the downsizing of the Company's retail operations during the fourth
quarter of 1995. Warehousing, assembly and repair expenses
decreased approximately $65, or 2.6%, for the first quarter of 1996
compared to 1995. The decrease was primarily in field warehousing
expenses. Selling expenses decreased approximately $1,548, or
17.1%, compared to last year. Salesmen salaries and commissions
accounted for the majority of the decrease in the three month
period ended February 29, 1996. This was partially offset by
increases in market development and advertising in the Company's
cellular wholesale operations. General and administrative expenses
decreased $1,591, or 17.3%, for the three month period ended
February 29, 1996 compared to the same period last year. Occupancy
costs, bad debt, salaries and depreciation accounted for the
majority of the decrease. Most of these decreases were due to the
downsizing of the retail operations.
Operating income increased $495, or 26.6% over last year. The
Company's retail operations, with fewer outlets compared to last
year, increased operating income by $687. This increase was
partially offset by a decrease in operating income of $193 in the
wholesale business. Within the wholesale business, both automotive
and cellular experienced a decline in operating income which was
partially offset by an increase in operating income in the
Company's majority-owned subsidiary in Malaysia.
Equity in income of equity investments decreased $1,077 for
the three months ended February 29, 1996 compared to the same
period 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. During the first quarter of
1995, the Company recorded equity income of CellStar of $972. If
the CellStar sale had occurred on November 30, 1994, net income for
the quarter ended February 28, 1995 would have been reduced by
approximately $573. The Company will experience a net loss of
equity income from CellStar of approximately $696 when comparing
the second quarter 1995 to 1996. 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 increased by $154, or 7.5%,
compared to 1995. Also during the first quarter of 1996, the
Company sold an investment it had in a French distribution company
for a pre-tax gain of $985.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at February 29, 1996 was
approximately $3,032 below the November 30, 1995 level. Operating
activities provided approximately $16,513, compared to $1,243 for
the first quarter of 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 March 1996
and reduced accounts payable and accrued expenses. Investing
activities provided approximately $311, primarily from the proceeds
of the sale of an investment, offset by the purchase of property,
plant and equipment. Financing activities used approximately
$19,850, 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 were 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 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.
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 1 - Legal Proceedings
The action entitled Steve Helms and Cellular Warehouse, Inc.
v. Quintex Mobile, Wachovia Bank, GET Mobilnet, Stan Bailey and
Rick Rasmussen which was instituted on August 31, 1994 in the Court
of Common Pleas, Sumter County, South Carolina and in which
plaintiff sought damages of $1,200 plus punitive damages and treble
damages and attorneys' fees under the Unfair Trade Practices Act
was discontinued with prejudice as to Quintex Mobile on February
12, 1996. This matter was settled in consideration of a nominal
payment to the plaintiff.
On March 15, 1996 and April 4, 1996, Audiovox was served with
a complaint and an amended complaint, respectively, in an action
entitled Electronics Communications Corp. ("ECC") v. Toshiba
America Consumer Products, Inc. and Audiovox Corporation in which
plaintiff seeks injunctive relief and damages against Toshiba and
Audiovox of $16,700 arising out of anti-trust violations, tortious
interference with contract and tortious interference with
prospective economic advantage or business relations and monopoly,
all arising out of the termination of ECC's alleged distributorship
arrangements with Toshiba. Audiovox has not yet served its answer
or moved with respect to the complaint. Based on preliminary
investigation of the facts to date, management intends to
vigorously defend this action as it believes that there are no
valid causes of action upon which relief may be granted.
Item 6. Reports on Form 8-K
On March 7, 1996, the Company filed a report on Form 8-K dated
February 9, 1996, which reported that:
(1) the Company had executed, effective February 9, 1996, a
Second Amendment to the Audiovox Corporation Credit Agreement (the
"Amendment") and a Pledge Agreement relating to the Amendment; and
(2) the Company on February 12, 1996, issued a press release
announcing that its Series AA 10.8%, $77, and its Series BB 11.0%,
$5,385, Convertible Debentures matured on February 9, 1996 and that
as of the close of business on February 9, 1996, only the holder of
$1,100 Series BB Convertible Debentures had exercised its right to
convert into 206,046 shares of unregistered Class A Common Stock.
The Series AA, $77 and the remaining Series BB, $4,285, were paid
at maturity, thereby extinguishing the conversion rights of these
two debentures.
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: April 15, 1996
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
5
1,000
3-MOS
NOV-30-1996
FEB-29-1996
4,044
0
78,640
2,842
97,637
197,482
24,325
18,042
262,083
69,495
65,000
0
2,500
92
103,634
262,083
111,479
122,493
97,160
102,616
0
59
2,204
1,091
612
479
0
0
0
479
0.05
0.05
