UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended August 31, 1995
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 October 4, 1995
Class A Common Stock 6,777,788 Shares
Class B Common Stock 2,260,954 Shares
<PAGE>
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
November 30, 1994 and August 31, 1995
(unaudited) 3
Consolidated Statements of Operations
for the Three Months and Nine Months
ended August 31, 1994 and August 31, 1995
(unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months ended August 31, 1994
and August 31, 1995 (unaudited) 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 9-20
SIGNATURES 21
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
November 30, August 31,
1994 1995
(unaudited)
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,495 $ 4,361
Accounts receivable, net 94,242 74,463
Inventory, net 83,430 118,988
Receivable from vendor - 3,954
Prepaid expenses and other current assets 6,065 15,204
Deferred income taxes 2,247 7,412
Restricted cash - 6,109
Total current assets 191,479 230,491
Restricted cash 6,559 -
Property, plant and equipment, net 6,180 5,674
Equity investments 25,902 8,532
Marketable equity securities - 75,703
Debt issuance costs, net 4,840 4,567
Excess cost over fair value of assets
acquired and other intangible assets, net 1,032 977
Other assets 3,106 2,723
$ 239,098 $ 328,667
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,088 $ 11,223
Accrued expenses and other current liabilities 13,063 18,671
Income taxes payable 834 4,128
Bank obligations 1,084 1,262
Documentary acceptances - 5,800
Current installments of long-term debt 159 5,622
Total current liabilities 36,228 46,706
Bank obligations 29,100 58,050
Deferred income taxes 5,945 28,328
Long-term debt, less current installments 75,653 70,175
Total liabilities 146,926 203,259
Minority interest 138 280
Stockholders' equity:
Preferred stock 2,500 2,500
Common Stock:
Class A 68 68
Class B 22 22
Paid-in capital 39,715 42,886
Unrealized holding gains and losses for marketable
equity securities, net - 40,004
Retained earnings 50,254 40,633
92,559 126,113
Cumulative foreign currency translation
and adjustment (525) (985)
Total stockholders' equity 92,034 125,128
Commitments and contingencies
$ 239,098 $ 328,667
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
<TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
1994 1995 1994 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 109,719 $ 112,177 $ 341,328 $ 349,378
Cost of sales (includes an inventory
write-down to market in 1995 of
$9,300) 89,500 104,771 277,253 300,115
Gross profit 20,219 7,406 64,075 49,263
Operating expenses:
Selling 7,645 8,583 22,352 25,723
General and administrative 7,666 11,518 23,958 29,486
Warehousing, assembly
and repair 2,448 2,451 6,849 7,286
17,759 22,552 53,159 62,495
Operating income (loss) 2,460 (15,146) 10,916 (13,232)
Other income (expenses):
Interest and bank charges (1,496) (2,595) (4,502) (7,306)
Equity in income of equity
investments 1,589 210 3,048 2,612
Management fees and related income 118 (354) 550 362
Gain on sale of equity investment - 8,435 27,783 8,435
Gain on public offering of equity
investment - - 10,565 -
Expense related to issuance of
warrants - - - (2,921)
Other, net (138) (279) (748) (836)
73 5,417 36,696 346
Income (loss) before provision for
(recovery of) income taxes and
cumulative effect of a change in an
accounting principle 2,533 (9,729) 47,612 (12,886)
Provision for (recovery of) income
taxes 1,013 (3,344) 20,492 (3,265)
Income (loss) before cumulative effect
of a change in accounting for
income taxes 1,520 (6,385) 27,120 (9,621)
Cumulative effect of change in
accounting for income taxes - - (178) -
Net income (loss) $ 1,520 $ (6,385) $ 26,942 $ (9,621)
Income (loss) per common share
(primary):
Income (loss) before cumulative
effect of change in accounting
for income taxes $ 0.17 $ (0.71) $ 2.98 $ (1.06)
Cumulative effect of change in
accounting for income taxes - - $ 0.02 -
Net income (loss) $ 0.17 $ (0.71) $ 2.96 $ (1.06)
Income (loss) per common share (fully
diluted):
Income (loss) before cumulative
effect of change in accounting for
income taxes $ 0.16 $ (0.71) $ 2.30 $ (1.06)
Cumulative effect of change in
accounting for income taxes - - $ 0.02 -
Net income (loss) $ 0.16 $ (0.71) $ 2.28 $ (1.06)
Weighted average number of common
shares outstanding, primary 9,059,801 9,038,742 9,113,394 9,038,742
Weighted average number of common
shares outstanding, fully diluted 13,791,305 9,038,742 12,426,967 9,038,742
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
Nine Months Ended
August 31, August 31,
1994 1995
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 26,942 $ (9,621)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,110 3,008
Provision for bad debt expense (471) 1,181
Equity in income of equity investments (3,048) (2,612)
Minority interest 79 142
Gain on sale of equity investment (27,783) (8,435)
Gain on public offering of equity investment (10,565) -
Provision for deferred income taxes 5,768 (7,300)
Provision for unearned compensation 258 250
Expense related to issuance of warrants - 2,921
Cumulative effect of change in accounting for
income taxes 178 -
Other non-cash charges to income 55 (8)
Changes in:
Accounts receivable 2,467 18,653
Inventory (25,946) (35,473)
Income taxes receivable 230 -
Receivables from vendor (4,436) (3,954)
Accounts payable, accrued expenses
and other current liabilities (2,262) (4,272)
Income taxes payable (77) 3,294
Prepaid expenses and other assets (4,564) (9,476)
Net cash used in operating activities (40,065) (51,702)
Cash flows from investing activities:
Purchases of property, plant and equipment, net (1,977) (1,402)
Notes receivable from equity investment 7,973 -
Net proceeds from sale of equity investment 29,434 17,250
Note receivable from vendor (3,000) -
Payment for purchase of equity investment (6,016) -
Distribution from equity investment - 198
Payment for purchase of subsidiary (148) -
Net cash provided by investing activities 26,266 16,046
Cash flows from financing activities:
Net (repayments) borrowings under line of
credit agreements (16,797) 29,130
Net (repayments) borrowings under documentary
acceptances (10,833) 5,800
Principal payments on long-term debt (17,412) -
Debt issuance costs (4,745) (675)
Proceeds from exercise of stock options 170 -
Principal payments on capital lease obligation (133) (190)
Proceeds from issuance of long-term debt 65,000 -
Proceeds from release of restricted cash - 450
Note payable to supplier 5,000 -
Restricted cash securing stand-by letter
of credit (6,953) -
Net cash provided by financing activities 13,297 34,515
Effect of exchange rate changes on cash (7) 7
Net decrease in cash and cash equivalents (509) (1,134)
Cash and cash equivalents at beginning of period 1,372 5,495
Cash and cash equivalents at end of period $ 863 $ 4,361
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended August 31, 1994 and August 31, 1995
(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, 1994 and August 31, 1995 and the
results of operations and consolidated statements of cash flows for
the nine month periods ended August 31, 1994 and August 31, 1995.
Accounting policies adopted by the Company are identified in
Note 1 of the Notes to Consolidated Financial Statements included
in the Company's 1994 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) Certain reclassifications have been made to the 1994
Consolidated Financial Statements to conform to the 1995
presentation.
(4) The following is supplemental information relating to the
consolidated statements of cash flows:
Nine Months Ended
August 31,
1994 1995
(In thousands)
Cash paid during the period:
Interest (excluding bank
charges) $ 3,493 $ 5,393
Income taxes $14,544 $ 722
During 1995, the Company entered into a lease agreement to
acquire new computer equipment. As a result, a capital lease
obligation of $86,000 was incurred.
As of August 31, 1995, the Company recorded an unrealized
holding gain for marketable equity securities, net of deferred
income taxes, of $40.0 million as a separate component of
stockholders' equity.
(5) During the third quarter of 1995, the Company sold 1,500,000
shares of CellStar Corporation (CellStar) common stock at a price
of $11.50 per share as a result of the exercise of an option
<PAGE>
granted previously by the Company to the president of CellStar. As
a result, the Company recorded a gain, before provision for income
taxes, of $8.4 million.
The sale also reduced the Company's ownership in CellStar
below 20%, and as such, the Company will no longer account for
CellStar under the equity method of accounting. The remaining
2,375,000 CellStar shares owned by the Company will be accounted
for as an investment in equity securities (Note 6).
(6) The Company has adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115), during the third quarter of 1995. In
accordance with FAS 115, prior years' financial statements have not
been restated to reflect the change in accounting method. There
was no cumulative effect as a result of adopting FAS 115 in 1995
since CellStar was accounted for under the equity method of
accounting.
Management determines the appropriate classification of its
investments in marketable equity securities at the time of purchase
and reevaluates such determination at each balance sheet date. The
Company's investment in marketable equity securities, which are
classified as available-for-sale at August 31, 1995, are carried at
fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. At August
31, 1995, the Company had no investments that qualified as trading
or held to maturity.
At August 31, 1995, the aggregate fair value of available-
for-sale securities was $75.7 million, which is comprised of a cost
basis of $11.2 million and a gross unrealized holding gain of $64.5
million, recorded as a separate component of stockholders' equity.
A related deferred tax liability of $24.5 million was recorded as
a reduction to the unrealized holding gain included as a separate
component of stockholders' equity.
(7) Included in prepaid expenses and other current assets are
approximately $11.2 million of advances to suppliers to acquire
inventory at future scheduled dates. Included in advances to
suppliers is $9.6 million advanced to TALK Corporation, a vendor
who is also a 33%-owned equity investment.
(8) Receivable from vendor represents claims on late deliveries,
product modifications and price protection from TALK Corporation,
a vendor who is also a 33%-owned equity investment. These claims
will be paid in monthly installments, with interest, with the final
payment due November 30, 1996.
(9) On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, each convertible into one share of class A
common stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial holders,
as of June 3, 1994, of $57.6 million of the Company's 6 1/4%
<PAGE>
convertible subordinated debentures due 2001 (the "Debentures"), in
exchange for a release of any claims such holders may have against
the Company, its agents, directors and employees in connection with
their investment in the Debentures. As a result, the Company
incurred a warrant expense of $2.9 million and recorded a
corresponding increase to paid in capital. The warrants are not
exercisable (a) until the later of (x) May 9, 1996 and (y) the date
a registration statement with respect to the class A common stock
issuable upon exercise of the warrants has been filed and declared
effective by the Securities and Exchange Commission or (b) after
March 15, 2001, unless sooner terminated under certain
circumstances. The Company has also agreed to register the
warrants and the underlying common stock within one year of the
date of issuance pursuant to a registration rights agreement dated
as of May 9, 1995, between the Company and the purchasers of the
warrants.
John J. Shalam, Chief Executive Officer of the Company, has
granted the Company an option to purchase 1,668,875 shares of class
A common stock from his personal holdings at the same price, plus
the tax impact, if any, should the exercise of this option be
treated as dividend income rather than capital gains to Mr. Shalam.
(10) On May 5, 1995, the Company entered into the Second Amended
and Restated Credit Agreement ("Credit Agreement"). Under the
Credit Agreement, the Company may obtain credit through direct
borrowings, letters of credit and banker's acceptances. The
obligations of the Company under the Credit Agreement continue to
be guaranteed by certain of the Company's subsidiaries and will be
secured by accounts receivable and inventory of the Company and
those subsidiaries. Availability of credit under the Credit
Agreement is in a maximum aggregate amount of $95 million, is
subject to certain conditions and is based upon a formula taking
into account the amount and quality of its accounts receivable and
inventory.
(11) In August 1995, non-qualified options to purchase 279,000
shares of class A common stock were granted under the 1994 Stock
Option Plan at an exercise price of $5.88 per share, which
represents the estimated fair market value of the shares at the
date of grant. No options can be exercised until February 9, 1997
or August 9, 1998, as the case may be, after which they can be
exercised in whole, or in part, until expiration on August 9, 2005.
Also in August 1995, 21,000 shares of class A common stock
were awarded under the 1987 Restricted Stock Plan, as amended. One
half of such shares are performance accelerated restricted stock
and one half of such shares are performance restricted stock.
(12) During the third quarter of 1995, the Company recorded a
charge of $9.3 million to accurately reflect the Company's
inventory at the lower of cost or market.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
While the Company experienced strong unit sales growth in the
cellular product category during the third quarter, the downward
pressure on cellular telephone pricing, which began last summer,
has continued. In view of this situation, the Company negotiated
reduced pricing on all current and future phone orders from our
vendors. Additionally, the Company took a mark-down on its
existing cellular telephone inventory to accurately reflect the
market value of those telephones.
The outlook for the Company's Quintex retail locations started
to deteriorate earlier this year, caused by greatly increased
competition and the cellular carriers' desire to reduce subscriber
acquisition costs. Accordingly, the Company made the decision to
accelerate the closing of unprofitable Quintex locations.
As a result, for the third quarter ended August 31, 1995, the
Company recorded an $11.8 million charge to income, before recovery
of income tax. This charge was for cellular product, both
wholesale ($7.3 million for inventory write-downs) and retail ($4.0
million for inventory write-downs and other costs associated with
store closings within the Quintex group). In the automotive sound
product category, which is primarily wholesale, there was a
$500,000 charge. The following is a discussion of these charges.
Wholesale
The wholesale operation of the Company's cellular product
class recorded a charge of $7.3 million during the third quarter of
1995. This charge was to reduce inventory carrying value to
current market value. As previously disclosed, the cellular
marketplace is and has been extremely price-sensitive, with the
Company competing with many other companies for market-share.
Average selling prices have continued to decline. In order to
maintain market share, the Company has reduced selling prices to
its customers. Likewise, there was a similar charge to the gross
profit of the automotive sound category of $500,000. In reviewing
the sound category, certain products sold primarily to mass-
merchandisers were reduced to reflect current market prices and
conditions.
Retail
The market for the Company's cellular retail operations has
continued to change over the last fiscal year. Other companies,
who actively compete with Quintex, now include the direct sales
force of carriers, mass merchants, and other independent agents.
Notwithstanding the competition, the carriers moved to reduce
subscriber activation costs which resulted in less activation
revenue per number to the Company. Though the retail operations
have been profitable in prior years, the result of increased
competition and reduced activation revenue resulted in the
<PAGE>
Company's decision to accelerate the closing of a majority of its
remaining retail locations. On August 31, 1995, the Company
operated a total of 77 retail locations, a reduction of 34 from
November 30, 1994. During the fourth quarter of 1995, the Company
plans to close an additional 47 locations. Of the $4.0 million
charge to income, approximately $1.5 million is related to
inventory write-offs, $1.8 million associated with lease buy-outs,
employee severance pay, the write-off of leasehold improvements and
other fixed assets and $700,000 of miscellaneous charges, including
co-op advertising, deactivation allowances and anticipated bad
debts.
The following table sets forth, for the periods indicated,
certain items from the Company's consolidated statements of
operations, expressed as percentages of net sales:
<TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
1994 1995 1994 1995
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 18.4 6.6 18.8 14.1
Operating expenses 16.2 20.1 15.6 17.9
Income (loss) before provision
for (recovery of) income taxes
and cumulative effect of change
in accounting for income taxes 2.3 (8.7) 13.9 (3.7)
Cumulative effect of change in
accounting for income taxes - - 0.1 -
Net income (loss) 1.4 (5.7) 7.9 (2.8)
</TABLE>
Net sales by product line for the three and nine month periods ended
August 31, 1994 and August 31, 1995 are reflected in the following table:
<TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
1994 1995 1994 1995
(In Millions)
<S> <C> <C> <C> <C>
Cellular Product - Wholesale $ 46.6 $ 50.4 $152.8 $168.4
Cellular Product - Retail 4.5 2.6 16.8 13.2
Activation Commissions 11.3 7.7 36.9 29.9
Residual Fees 0.9 1.3 2.7 3.5
Total Cellular 63.3 62.0 209.2 215.0
Automotive Sound Equipment 29.0 28.5 81.0 79.6
Automotive Security and Accessory
Equipment 17.4 21.7 48.7 54.8
Other - - 2.4 -
$109.7 $112.2 $341.3 $349.4
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Net sales increased $2.5 million or 2.2% and $8.1 million or
2.4% for the three and nine month periods ended August 31, 1995
compared to the same periods last year. The increase for the
quarter was attributable to an increase in automotive security and
accessory equipment ($4.3 million or 24.7%). This increase was
partially offset by decreases in cellular of $1.3 million (2.1%)
and automotive sound equipment of $500,000 or 1.7%. The increase
in net sales for the nine month period was in cellular ($5.8
million or 2.8%) and automotive security and accessories ($6.1
million or 12.5%), partially offset by decreases in automotive
sound ($1.4 million or 1.7%) and other ($2.4 million or 100%). The
other category, comprised principally of facsimile machines, has
been discontinued. Wholesale sales were up 10.1% for the quarter
versus last year, and down 30.9% for retail, respectively. Year to
date, wholesale sales were up 8.6% while retail sales dropped
22.3%.
The decrease of $1.3 million in net sales in the cellular
product category for the quarter was due to a 26.6% decrease in
average unit selling prices to approximately $201 despite an
increase of 94,000 (61.3%) in unit sales. On a year-to-date basis,
net sales were up $5.8 million, primarily due to an increase of
45.4% in unit sales to 750,000, partially offset by a 22.7%
decrease in average unit selling prices to approximately $213. The
incremental increase in unit volume was caused by the introduction
of new product which was directed towards that portion of the
market which requires lower unit sales price. The domestic market
for the sales of cellular products continues to be very competitive
and price-sensitive.
<PAGE>
Revenues for cellular activation commissions decreased $3.6
million (31.8%) and $7.0 million (19.0%) for the three and nine
months ended August 31, 1995, respectively, compared to last year.
This decrease is attributable to increased competition, a reduction
in the number of retail locations and a corresponding decrease in
new cellular subscriber activations of 27.2% and 14.2%,
respectively. Also contributing to the decrease was the continuing
decline in average activation fees received by the Company from the
carriers of approximately $23 (7.1%) and $20 (6.2%) for the three
and nine month periods, respectively.
The decrease in net sales in the automotive sound category for
both the three and nine month periods compared to the same periods
last year was primarily in the AV product line. Net sales in the
Prestige Audio product line increased for the nine month period,
but was down for the quarter versus last year. The decreases were
partially offset by increases for the three and nine month periods
in the Heavy Duty Sound, SPS, and Marine product lines.
Automotive accessories experienced increased sales for both
the three and nine months ended August 31, 1995 compared to last
year. The increases were primarily in the Prestige and Hardgoods
product lines. These increases were offset by decreases in AA
security and cruise controls.
Gross margins declined to 6.6% from 18.4% for the third
quarter of 1995 compared to 1994 as a result of lower selling
prices and the write-down of the carrying value of inventory of
<PAGE>
$9.3 million. Gross margins before the inventory write-down were
14.9%. This reflects the overall erosion of gross margins
experienced primarily in the cellular product category which
resulted in the decision to mark down the carrying value of the
Company's cellular inventory. Of the $9.3 million inventory
adjustment, $8.8 million was in the cellular product category of
which $7.3 million was in the wholesale cellular operations and
$1.5 million being in the retail cellular operation. The remaining
$500,000 was in the automotive sound product category in wholesale
operations. Gross margins for the nine months ended August 31,
1995 were 14.1%, 16.8% before the aforementioned inventory
adjustment, compared to 18.8% last year.
Cellular gross margins were negative and 9.2% after the charge
for the write-down of the carrying value of the cellular
inventories for the three and nine months ended August 31, 1995,
respectively. As previously mentioned, the gross margins reflect
a $8.8 million charge for inventory write-downs. In addition, 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 portable cellular
telephone line accounted for the majority of this decrease. The
average unit selling price declined 26.6% and 22.7% for the three
and nine month periods ended August 31, 1995 and 1994,
respectively. Likewise, gross profits on unit sales declined 58.5%
and 46.9% for the same periods. The number of new subscriber
activations declined 27.2% to 25,150 for the third quarter of 1995
and 14.2% to 98,500 for the nine month period compared to last
<PAGE>
year. Average commissions received by the Company from the
cellular carriers per activation also declined 7.1% and 6.2% to
$303 for the three and nine month periods, respectively, versus
last year. These decreases were partially offset by increases in
residual payments received by the Company of 29.7% and 22.6% for
the three and nine months ended August 31, 1995, respectively,
compared to the same periods last year.
Automotive sound margins decreased from 19.8% to 13.1% and
from 20.3% to 17.2% for the three and nine month periods ended
August 31, 1995 compared to 1994. The decrease in automotive sound
margins was primarily in the AV product line, partially offset by
increases in the Heavy Duty Sound product lines. Automotive
accessory margins remained essentially unchanged at 29.9% and 28.9%
compared to 30.1% and 28.6% for the three and nine month periods
ended August 31, 1995 and 1994, respectively. These increases were
primarily in the Prestige and Hardgoods product lines, partially
offset by a decrease in margins in AA security products.
The domestic cellular market continues to be a highly-
competitive, price-sensitive environment. Increased price
competition related to the Company's product could result in
downward pressure on the Company's gross margins if the Company is
unable to obtain competitively-priced product from its suppliers.
As previously stated, the Company's de-emphasis on retail
operations reflects the effect of this competition.
Total operating expenses increased by approximately $4.8
million and $9.3 million for the three and nine months ended August
31, 1995 compared to last year. A major component of these
<PAGE>
increases was the aforementioned charge for the Company's
downsizing of its retail operations. Excluding this charge,
operating overhead increased $2.3 million and $6.9 million for the
three and nine month periods ended August 31, 1995 compared to the
same periods last year. The wholesale operations accounted for
$2.6 million and $5.0 million, respectively, of these increases.
The retail operation, without the charges for streamlining the
field operations previously mentioned, decreased approximately
$288,000 and increased $1.9 million for the three and nine month
periods ended August 31, 1995 and 1994, respectively.
Warehousing, assembly and repair expenses remained essentially
unchanged at $2.4 million and increased $437,000 (6.4%) for the
three and nine month periods ended August 31, 1995, respectively,
versus last year. The increase for the nine months was primarily
in field warehousing expenses.
Selling expenses increased for both the three and nine month
periods ended August 31, 1995 compared to the same periods last
year by $938,000 (12.3%) and $3.4 million (15.1%), respectively.
Advertising and other promotional marketing programs accounted for
the majority of the increases in both periods versus last year.
General and administrative expenses increased $3.9 million
(50.2%) and $5.5 million (23.1%) for the three and nine months
ended August 31, 1995, respectively, compared to the same periods
last year. The increase in both periods was due to a provision for
costs associated with the down-sizing of the retail group of $2.5
million. This provision includes costs for the buy-out of leases,
the write-off of leasehold improvements, severance pay and other
<PAGE>
charges necessary to close and consolidate the retail operations.
On August 31, 1995, the Company had 77 retail locations open, down
34 from November 30, 1994. During the fourth quarter of 1995, the
Company plans to close an additional 47 locations. Other increases
were in professional fees, occupancy costs and expenses associated
with the Company's overseas buying offices.
Interest expense and bank charges increased by $1.1 million or
73.5% and $2.8 million or 62.3% for the three and nine month
periods ended August 31, 1995, compared to the respective periods
of 1994 as a result of an increase in interest costs from increased
borrowing to support higher levels of inventory purchases.
Management fees and related income and equity in income from joint
venture investments decreased by approximately $1.9 million and
$624,000 for the three and nine month periods ended August 31,
1995, as compared to the same periods of 1994, principally due to
CellStar not being accounted for under the equity method in the
third quarter of 1995 due to the Company's sale of 1,500,000
CellStar shares. The gain on the sale of these securities, before
income taxes, was approximately $8.4 million. Similarly, during
the nine months ended August 31, 1994, the Company sold shares of
CellStar, resulting in a pre-tax gain on sale of $27.8 million.
Also in 1994, the Company recorded a $10.6 million gain on the
carrying value of the investment in CellStar after their public
offering. In addition, one of the Company's 50%-owned equity
investments had an adjustment to its cellular inventory to bring
the carrying value into line with market conditions. The Company
recorded its share of this charge, approximately $400,000, as a
reduction to management fees and related income.
<PAGE>
Other expenses increased $141,000 for the three month period
ended August 31, 1995 compared to the same period last year. Year
to date, other expenses increased approximately $3.0 million due to
the cost to the Company associated with the issuance of stock
warrants for no monetary consideration to certain holders of the
Company's convertible subordinated debentures. This one-time, non-
cash charge to earnings is offset by a $2.9 million increase in
paid in capital. Therefore, there is no effect on total
shareholders' equity.
For the three and nine months ended August 31, 1995, the
Company recorded an income tax recovery of $3.3 million compared to
income tax provisions of $1.0 million and $20.5 million in 1994,
respectively. The provision for 1994 was higher primarily due to
the $27.8 million gain on the sale of CellStar common stock and
operating profits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 1995 was
approximately $1.1 million below the November 30, 1994 level.
Operating activities used approximately $51.7 million, primarily
due to increases in inventory and unprofitable operations,
partially offset by decreases in accounts receivable. Investing
activities provided approximately $16.0 million, primarily due to
the sale of 1,500,000 shares of CellStar common stock, partially
offset by the purchase of property, plant and equipment. Financing
activities provided approximately $34.5 million, primarily from an
increase in bank obligations under line of credit agreements and
documentary acceptances.
<PAGE>
On May 5, 1995, the Company entered into the 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, letters of credit, and banker's
acceptances. The obligations of the Company under the Credit
Agreement continue to be guaranteed by certain of the Company's
subsidiaries and will be secured by accounts receivable and
inventory of the Company and those subsidiaries. Availability of
credit under the Credit Agreement is in a maximum aggregate amount
of $95.0 million, is subject to certain conditions and is based
upon a formula taking into account the amount and quality of its
accounts receivable and inventory.
On May 9, 1995, the Company issued 1,668,875 warrants in a
private placement, with the underlying shares to be purchased
pursuant to an option on the Chief Executive Officer's personal
stock holdings. Each warrant is convertible into one share of
class A common stock at $7 1/8, subject to adjustment under certain
circumstances. The warrants were issued to the beneficial holders,
as of June 3, 1994, of $57.6 million of the Company's 6 1/4%
convertible subordinated Debentures due 2001, in exchange for a
release of any claims such holder may have against the Company, its
agents, directors and employees in connection with their investment
in the Debentures. Each holder received 30 Warrants for each
$1,000 of principal amount of debentures, except for Oppenheimer &
Co., Inc. which received 25 warrants for each $1,000 of principal
amount of debentures. The warrants are not exercisable (a) until
<PAGE>
the later of (x) May 9, 1996 and (y) the date a registration
statement with respect to the class A common stock issuable upon
exercise of the warrants has been filed and declared effective by
the Securities and Exchange Commission or (b) after March 15, 2001,
unless sooner terminated under certain circumstances. The Company
has also agreed to register the warrants and the underlying common
stock within one year of the date of issuance pursuant to a
registration rights agreement dated as of May 9, 1995, between the
Company and the purchasers of the warrants.
On May 9, 1995, John J. Shalam, Chief Executive Officer of the
Company, granted the Company an option to purchase 1,668,875 shares
of class A common stock from his personal holdings at the same
price plus the tax impact, if any, should the exercise of this
option be treated as dividend income rather than capital gains to
Mr. Shalam. The independent directors of the Company may elect to
issue shares from the Company instead of exercising the option on
Mr. Shalam's shares if such directors determine it is in the best
interest of the shareholders and the Company.
On June 2, 1995, the Company announced that Alan Goldfield,
Chairman and Chief Executive Officer of CellStar, one of the
Company's equity investments, had exercised his option, pursuant to
a December 3, 1993 agreement with the Company, to purchase
1,500,000 shares of CellStar common stock from the Company at a
price of $11.50 per share. As a result of this transaction, the
Company received $17.25 million in gross proceeds and still owns
2,375,000 shares of CellStar common stock or 12.79% ownership
<PAGE>
interest in CellStar. Since the ownership percentage is below
20%, the Company no longer accounts for CellStar under the equity
method, and the remaining 2,375,000 shares are accounted for as
available-for-sale securities under FAS 115. As discussed in Note
6 to the financial statements, FAS 115 addresses the accounting and
reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt
securities. Based upon the closing market price of CellStar on
August 31, 1995, the increase to equity as required by FASB 115 is
$40.0 million, net of deferred taxes.
The Company believes that it has sufficient liquidity to
satisfy its anticipated working capital and capital expenditure
needs through November 30, 1995 and for the reasonable foreseeable
future.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AUDIOVOX CORPORATION
By:s/John J. Shalam
John J. Shalam
President and Chief
Executive Officer
Dated: October 16, 1995
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
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