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, 1999
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 5, 1999
Class A Common Stock 17,626,678 Shares
Class B Common Stock 2,260,954 Shares
1
<PAGE>
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
August 31, 1999 (unaudited) and
November 30, 1998 3
Consolidated Statements of Income (Loss)
for the Three and Nine Months Ended
August 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended August 31, 1999
and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6-8
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 9-24
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 25
SIGNATURES 26
2
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
August 31, November 30,
1999 1998
--------- -----------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,873 $ 9,398
Accounts receivable, net 163,427 131,120
Inventory, net 85,130 72,432
Receivable from vendor 6,479 734
Prepaid expenses and other current assets 9,068 6,724
Deferred income taxes, net 7,346 6,088
--------- ---------
Total current assets 277,323 226,496
Investment securities 11,287 17,089
Equity investments 10,964 10,387
Property, plant and equipment, net 20,189 17,828
Excess cost over fair value of assets acquired and other intangible assets, net 5,850 6,052
Other assets 1,280 1,827
--------- ---------
$ 326,893 $ 279,679
========= =========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 55,598 $ 34,063
Accrued expenses and other current liabilities 24,455 15,359
Income taxes payable 7,239 5,210
Bank obligations 7,800 7,327
Documentary acceptances 5,003 3,911
Capital lease obligation 33 17
--------- ---------
Total current liabilities 100,128 65,887
Bank obligations 12,646 17,500
Deferred income taxes, net 4,844 3,595
Long-term debt 6,773 6,331
Capital lease obligation 6,233 6,298
--------- ---------
Total liabilities 130,624 99,611
--------- ---------
Minority interest 3,736 2,348
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 16,845,846 issued 173 173
Class B convertible; 30,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 144,271 143,339
Retained earnings 51,762 35,896
Accumulated other comprehensive loss (2,653) (1,550)
Gain on hedge of available-for-sale securities, net 929 929
Treasury stock, at cost, 618,832 and 498,055 Class A common stock 1999
and 1998, respectively (4,471) (3,589)
--------- ---------
Total stockholders' equity 192,533 177,720
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 326,893 $ 279,679
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the Three and Nine Months Ended August 31, 1999 and 1998
(In thousands, except share and per share data)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 296,732 $ 154,501 $ 749,068 $ 407,886
Cost of sales (including an inventory write-down
to market during the second quarter of 1998
of $6,600) 261,453 129,623 658,848 346,705
------------ ------------ ------------ ------------
Gross profit 35,279 24,878 90,220 61,181
------------ ------------ ------------ ------------
Operating expenses:
Selling 8,371 8,490 26,613 26,146
General and administrative 11,431 9,347 31,029 27,162
Warehousing, assembly and repair 3,962 3,113 10,641 9,367
------------ ------------ ------------ ------------
Total operating expenses 23,764 20,950 68,283 62,675
------------ ------------ ------------ ------------
Operating income (loss) 11,515 3,928 21,937 (1,494)
------------ ------------ ------------ ------------
Other income (expense):
Gain on issuance of subsidiary shares -- -- 3,800 --
Interest and bank charges (894) (1,387) (2,865) (3,382)
Equity in income of equity investments,
management fees and related income, net 342 333 1,644 1,229
Gain on sale of investment -- 427 1,896 427
Other, net (548) 900 (230) 938
------------ ------------ ------------ ------------
Total other income (expense) (1,100) 273 4,245 (788)
------------ ------------ ------------ ------------
Income (loss) before provision for (recovery of)
income taxes 10,415 4,201 26,182 (2,282)
Provision for (recovery of) income taxes 3,986 1,620 10,317 (1,808)
------------ ------------ ------------ ------------
Net income (loss) $ 6,429 $ 2,581 $ 15,865 $ (474)
============ ============ ============ ============
Net income (loss) per common share (basic) $ 0.34 $ 0.14 $ 0.83 $ (0.02)
============ ============ ============ ============
Net income (loss) per common share (diluted) $ 0.32 $ 0.14 $ 0.82 $ (0.02)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic) 19,029,335 19,118,385 19,024,598 19,161,768
============ ============ ============ ============
19,876,435 19,320,075 19,485,145 19,161,768
============ ============ ============ ============
Weighted average number of common shares
outstanding (diluted)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended August 31, 1999 and 1998
(In thousands)
(unaudited)
<TABLE>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 15,865 $ (474)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Gain on issuance of subsidiary shares (3,800) --
Depreciation and amortization 2,288 1,790
Provision for bad debt expense 1,641 632
Equity in income of equity investments, management fees and
related income, net (1,644) (1,229)
Minority interest 188 141
Gain on sale of investment securities (1,896) (427)
Provision for (recovery of) deferred income taxes, net 731 (1,291)
Provision for unearned compensation -- 144
(Gain) loss on disposal of property, plant and equipment, net 3 (198)
Change in:
Accounts receivable (34,291) 15,755
Inventory (12,974) 3,493
Accounts payable, accrued expenses and other current liabilities 31,056 2,702
Receivable from vendor (5,745) 1,901
Income taxes payable 2,029 (6,688)
Prepaid expenses and other, net (354) 2,735
-------- --------
Net cash provided by (used in) operating activities (6,903) 18,986
-------- --------
Cash flows from investing activities:
Proceeds from issuance of subsidiary shares 5,000 --
Proceeds from sale of investment securities 14,016 4,658
Purchases of property, plant and equipment, net (4,454) (3,696)
Purchase of convertible debentures (8,280) (12,719)
Proceeds from distribution from equity investment 1,143 561
-------- --------
Net cash provided by (used in) investing activities 7,425 (11,196)
-------- --------
Cash flows from financing activities:
Net repayments under line of credit agreements (4,194) (5,844)
Net borrowings (repayments) under documentary acceptances 1,092 (147)
Principal payments on capital lease obligation (49) (35)
Repurchase of Class A common stock (882) (870)
-------- --------
Net cash used in financing activities (4,033) (6,896)
-------- --------
Effect of exchange rate changes on cash (14) (264)
-------- --------
Net increase (decrease) in cash and cash equivalents (3,525) 630
Cash and cash equivalents at beginning of period 9,398 9,445
-------- --------
Cash and cash equivalents at end of period $ 5,873 $ 10,075
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Nine Months Ended August 31, 1999 and 1998
(Dollars in thousands, except share and per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles and include
all adjustments (which include only normal recurring adjustments)
which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Audiovox Corporation and
subsidiaries (the Company) as of August 31, 1999 and November 30, 1998,
the consolidated statements of income (loss) for the three and nine
month periods ended August 31, 1999 and August 31, 1998, and the
consolidated statements of cash flows for the nine months ended August
31, 1999 and August 31, 1998. The interim figures are not necessarily
indicative of the results for the year.
Accounting policies adopted by the Company are identified in Note 1 of
the Notes to Consolidated Financial Statements included in the
Company's 1998 Annual Report filed on Form 10-K.
(2) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
August 31,
1999 1998
------ -----
Cash paid during the period:
Interest (excluding bank charges) $1,680 $2,019
Income taxes $8,254 $4,415
During the nine months ended August 31, 1999 and 1998, the Company
recorded a net unrealized holding loss relating to available-for-sale
marketable securities, net of deferred taxes, of $1,216 and $7,773,
respectively, as a component of accumulated other comprehensive loss.
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.
6
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Net Income (Loss) Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income (loss) per common share is as follows:
<TABLE>
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) (numerator for basic income
(loss) per share) $ 6,429 $ 2,581 $ 15,865 $ (474)
Interest on 6 1/4% convertible subordinated
debentures, net of tax 21 21 63 --
------------ ------------ ------------ ------------
Adjusted net income (loss) (numerator for
diluted income (loss) per share) $ 6,450 $ 2,602 $ 15,928 $ (474)
============ ============ ============ ============
Weighted average common shares
(denominator for basic income (loss) per
share) 19,029,335 19,118,385 19,024,598 19,161,768
Effect of dilutive securities:
6 1/4% convertible subordinated debentures 128,192 128,192 128,192 --
Employee stock options and stock warrants 645,458 -- 254,005 --
Employee stock grants 73,450 73,498 78,350 --
------------ ------------ ------------ ------------
Weighted average common and potential
common shares outstanding (denominator
for diluted income (loss) per share) 19,876,435 19,320,075 19,485,145 19,161,768
============ ============ ============ ============
Basic income (loss) per share $ 0.34 $ 0.14 $ 0.83 $ (0.02)
============ ============ ============ ============
Diluted income (loss) per share $ 0.32 $ 0.14 $ 0.82 $ (0.02)
============ ============ ============ ============
</TABLE>
Employee stock options and stock warrants totaling 210,250 and
3,642,875 for the quarters ended August 31, 1999 and 1998,
respectively, were not included in the net earnings per share
calculation because their effect would have been anti-dilutive.
(4) Comprehensive Income (Loss)
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 requires that all items recognized under
accounting standards as components of comprehensive income be reported
in an annual financial statement that is displayed with the same
prominence as other annual financial statements. For example, other
comprehensive income may include foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains
and losses on marketable securities classified as available- for-sale.
The accumulated other comprehensive loss of $2,653 and $1,550 at August
31,
7
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1999 and November 30, 1998, respectively, on the accompanying
consolidated balance sheets is the net accumulated unrealized loss on
the Company's available-for-sale investment securities and the
accumulated foreign currency translation adjustment. Annual financial
statements for prior periods will be reclassified as required.
The Company's total comprehensive income (loss) was as follows:
<TABLE>
Three Months Nine Months
Ended Ended
August 31, August 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,429 $ 2,581 $ 15,865 $ (474)
Other comprehensive income (loss):
Foreign currency translation adjustments (108) (528) 113 (1,231)
Unrealized losses on securities:
Unrealized holding losses arising
during period, net of tax (2,911) (9,232) (40) (7,508)
Less: reclassification adjustment for
gains realized in net income, net of
tax -- (265) (1,176) (265)
-------- -------- -------- --------
Net unrealized losses (2,911) (9,497) (1,216) (7,773)
-------- -------- -------- --------
Other comprehensive loss, net of tax (3,019) (10,025) (1,103) (9,004)
-------- -------- -------- --------
Total comprehensive income (loss) $ 3,410 $ (7,444) $ 14,762 $ (9,478)
======== ======== ======== ========
</TABLE>
The unrealized holding losses arising during the period presented above
are net of tax benefit of $1,784 and $5,658 for the three months ended
August 31, 1999 and 1998, respectively, and $25 and $4,602 for the nine
months ended August 31, 1999 and 1998, respectively. The
reclassification adjustment presented above is net of tax expense of
$162 for the three and nine months ended August 31, 1998 and $720 for
the nine months ended August 31, 1999.
(5) Issuance of Subsidiary Shares
On March 31, 1999, Toshiba Corporation, a major supplier, purchased 5%
of the Company's subsidiary, Audiovox Communications Corp. (ACC), a
supplier of wireless products for $5,000 in cash. The Company currently
owns 95% of ACC; prior to the transaction ACC was a wholly-owned
subsidiary. As a result of the issuance of ACC's shares, the Company
recognized a gain of $3,800 ($2,204 after provision for deferred
taxes). The gain on the issuance of the subsidiary's shares have been
recognized in the statements of income (loss) in accordance with the
Company's policy on the recognition of such transactions.
8
<PAGE>
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 Electronics. The Communications group
consists of Audiovox Communications Corp. (ACC), a majority-owned subsidiary of
the Company, and the Quintex Mobile Communications Corp. (Quintex), a
wholly-owned subsidiary of ACC, engaged in both wholesale and retail operations.
The Communications group markets cellular and wireless telephone products and
receives activation commissions and residual fees from its retail sales. ACC
markets products on a wholesale basis to a variety of customers, primarily
cellular and wireless service providers and their respective agents. The
activation commission 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. The
Electronics group consists of Audiovox Mobile and Consumer Electronics (AE), 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 Electronics group include 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.
9
<PAGE>
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:
<TABLE>
Percentage of Net Sales
Three Months Ended Nine Months Ended
August 31, August 31,
1999 1998 1999 1998
------ ----- ----- -----
<S> <C> <C> <C> <C>
Net sales:
Product sales:
Cellular wholesale 75.6% 66.9% 73.7% 60.8%
Cellular retail 1.0 0.8 1.0 0.8
Sound 7.7 11.5 7.3 14.0
Security and accessories 9.3 12.6 10.8 15.7
Consumer electronics 3.2 1.8 2.9 1.5
Other 1.0 2.1 1.4 2.2
------ ----- ----- -----
97.8 95.7 97.1 95.0
Activation commissions 1.8 3.7 2.5 4.3
Residual fees 0.4 0.6 0.4 0.7
------ ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.1 83.9 88.0 85.0
------ ----- ----- -----
Gross profit 11.9 16.1 12.0 15.0
Selling 2.8 5.5 3.6 6.4
General and administrative 3.9 6.0 4.1 6.7
Warehousing, assembly and repair 1.3 2.0 1.4 2.3
------ ----- ----- -----
Total operating expenses 8.0 13.5 9.1 15.4
------ ----- ----- -----
Operating income (loss) 3.9 2.6 2.9 (0.4)
Gain on issuance of subsidiary shares -- -- 0.5 --
Interest and bank charges (0.3) (0.9) (0.4) (0.8)
Equity in income of equity investments,
management fees and related income, net 0.1 0.2 0.2 0.3
Gain on sale of investment -- 0.3 0.3 0.1
Other, net (0.2) 0.6 -- 0.2
Income (loss) before provision for (recovery of)
income taxes 3.5 2.8 3.5 (0.6)
Provision for (recovery of) income taxes 1.3 1.0 1.4 (0.4)
------ ----- ----- -----
Net income (loss) 2.2% 1.8% 2.1% (0.2)%
====== ====== ====== ======
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
Consolidated Results
Three months ended August 31, 1999 compared to three months ended August 31,
1998
The net sales and percentage of net sales by product line and marketing
group for the three months ended August 31, 1999 and August 31, 1998 are
reflected in the following table:
<TABLE>
Three Months Ended
August 31,
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales:
Communications
Cellular wholesale $224,374 75.6% $103,435 66.9%
Cellular retail 2,982 1.0 1,194 0.8
Activation commissions 5,298 1.8 5,708 3.7
Residual fees 1,061 0.4 941 0.6
Other 3,101 1.0 3,259 2.1
-------- ----- -------- -----
Total Communications 236,816 79.8 114,537 74.1
-------- ----- -------- -----
Electronics
Sound 22,905 7.7 17,716 11.5
Security and accessories 27,659 9.3 19,542 12.6
Consumer electronics 9,352 3.2 2,706 1.8
-------- ----- -------- -----
Total Electronics 59,916 20.2 39,964 25.9
-------- ----- -------- -----
Total $296,732 100.0% $154,501 100.0%
======== ===== ======== =====
</TABLE>
Net sales were $296,732 for 1999, an increase of $142,231, or 92.1%,
from 1998. The increase in net sales was in both the Communications and
Electronics Groups. Sales from our international operations increased from last
year by approximately 35.8%. Sales in Malaysia doubled over 1998 to $3,375, and
sales in Venezuela increased 13.5%. Gross margins were 11.9% in 1999 compared to
16.1% in 1998. Operating expenses increased to $23,764 from $20,950, a 13.4%
increase. However, as a percentage of sales, operating expenses decreased to
8.0% in 1999 from 13.5% in 1998. Operating income for 1999 was $11,515 compared
to last year's $3,928.
11
<PAGE>
Nine months ended August 31, 1999 compared to nine months ended August 31, 1998
The net sales and percentage of net sales by product line and marketing
group for the nine months ended August 31, 1999 and August 31, 1998 are
reflected in the following table:
<TABLE>
Nine Months Ended
August 31,
1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales:
Communications
Cellular wholesale $551,978 73.7% $247,957 60.8%
Cellular retail 7,353 1.0 3,185 0.8
Activation commissions 18,634 2.5 17,669 4.3
Residual fees 3,260 0.4 2,856 0.7
Other 10,108 1.4 8,965 2.2
-------- ------ -------- ------
Total Communications 591,333 79.0 280,632 68.8
-------- ------ -------- ------
Electronics
Sound 55,052 7.3 56,932 14.0
Security and accessories 81,194 10.8 64,094 15.7
Consumer electronics 21,489 2.9 6,228 1.5
-------- ------ -------- ------
Total Electronics 157,735 21.0 127,254 31.2
-------- ------ -------- ------
Total $749,068 100.0% $407,886 100.0%
======== ====== ======== ======
</TABLE>
Net sales were $749,068 for 1999, an increase of $341,182 or 83.6%,
from 1998. The increase in net sales was in both the Communications and
Electronics Groups. Sales from our international operations decreased from last
year by approximately 6.0%. Sales in Malaysia increased $4,243, or 66.7%, while
sales in Venezuela were down $5,339, or 44.4%. Gross margins were 12.0% in 1999
compared to 15.0% in 1998. Gross margins in 1998 reflect a $6.6 million charge
to adjust the carrying value of certain inventories during the second quarter of
1998. Operating expenses increased to $68,283 from $62,675, an 8.9% increase.
However, as a percentage of sales, operating expenses decreased to 9.1% in 1999
from 15.4% in 1998. Operating income for 1999 was $21,937 compared to last
year's operating loss of $1,494.
12
<PAGE>
Communications Results
Three months ended August 31, 1999 compared to three months ended August 31,
1998
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the
Communications group:
<TABLE>
Three Months Ended
August 31,
1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales:
Cellular product - wholesale $ 224,374 94.8% $ 103,435 90.4%
Cellular product - retail 2,982 1.3 1,194 1.0
Activation commissions 5,298 2.2 5,708 5.0
Residual fees 1,061 0.4 941 0.8
Other 3,101 1.3 3,259 2.8
--------- ------ --------- ------
Total net sales 236,816 100.0 114,537 100.0
--------- ------ --------- ------
Gross profit 22,717 9.6 16,441 14.4
Total operating expenses 11,667 4.9 11,847 10.3
--------- ------ --------- ------
Operating income 11,050 4.7 4,594 4.1
Other expense (1,577) (0.7) (1,478) (1.3)
--------- ------ --------- ------
Pre-tax income $ 9,473 4.0% $ 3,116 2.8%
========= ====== ========= ======
</TABLE>
The Communications group is composed of ACC, a majority-owned
subsidiary of the Company, and Quintex, a wholly-owned subsidiary of ACC. 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.
During the third quarter of 1999, sales increased $122,279, or 107%,
to $236,816. Unit sales of cellular telephones increased approximately 72.1% (or
644,000 units) during the third quarter of 1999. This increase is attributable
to sales of portable digital product. The digital phones have a higher average
unit selling price as well as a higher unit cost to the Company. Average unit
selling
13
<PAGE>
prices increased approximately 30.4% to $141 from $108. Gross profit decreased
to 9.6% from last year's 14.4%. Gross profit margins were affected by higher air
freight costs in response to increased customer demand, a shift in the
activation mix toward indirect channels and an increase in the number of orders
committed in advance which lowers margins and minimizes inventory risk. The
number of new cellular subscriptions processed by Quintex increased 3.0%, with
an accompanying decrease in revenue from activation commissions of approximately
$410, or 7.2%. The average commission received by Quintex per activation
decreased approximately 9.9% from last year. During the second quarter of 1999,
the Company became a direct agent for MCI, who is also a reseller of cellular
service for cellular carriers. This new non-exclusive agency agreement allows
the Company to expand additional cellular and wireless services within the
territory outlined in the agreement. This new agency agreement replaced the
prior agreement with Bell Atlantic. Management does not anticipate any material
impact from this change. Operating expenses decreased to $11,667 from $11,847.
As a percentage of net sales, operating expenses decreased to 4.9% during 1999
compared to 10.3% in 1998. Selling expenses decreased $1,095 from last year,
primarily in advertising and divisional marketing, partially offset by increases
in commissions and travel expenses. General and administrative expenses
increased during 1999 by $680 from 1998, primarily in salaries, provision for
bad debt expense and depreciation and amortization. Warehousing and assembly
expenses increased by $235 during 1999 from last year, primarily due to an
increase in direct labor, partially offset by decreases in tooling and field
warehouse expenses. Operating income for 1999 was $11,050 compared to last
year's $4,594.
14
<PAGE>
Nine months ended August 31, 1999 compared to nine months ended August 31, 1998
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the
Communications group:
<TABLE>
Nine Months Ended
August 31,
1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales:
Cellular product - wholesale $ 551,978 93.3% $ 247,957 88.4%
Cellular product - retail 7,353 1.2 3,185 1.1
Activation commissions 18,634 3.2 17,669 6.3
Residual fees 3,260 0.6 2,856 1.0
Other 10,108 1.7 8,965 3.2
--------- ------ --------- ------
Total net sales 591,333 100.0 280,632 100.0
--------- ------ --------- ------
Gross profit 57,911 9.8 33,941 12.1
Total operating expenses 35,985 6.1 36,197 12.9
--------- ------ --------- ------
Operating income (loss) 21,926 3.7 (2,256) (0.8)
Other expense (4,488) (0.8) (4,549) (1.6)
--------- ------ --------- ------
Pre-tax income (loss) $ 17,438 2.9% $ (6,805) (2.4)%
========= ====== ========= =======
</TABLE>
Through the third quarter of 1999, sales increased $310,701, or
110.7%, to $591,333. Unit sales of cellular telephones increased approximately
77.8% (or 1,683,000 units) through the third quarter of 1999. This increase is
attributable to sales of portable digital products. The addition of four new
suppliers has also provided a variety of new digital, wireless products which
have contributed to the sales increase. As a result of increased digital sales,
average unit selling prices increased approximately 29.2% to $139 from $107.
Gross profit margins decreased to 9.8% from 12.1% during the nine months ended
August 31, 1999 compared to the same period last year. Gross profit margins were
affected by higher air freight costs in response to increased customer demand, a
shift in the activation mix toward indirect channels and an increase in the
number of orders
15
<PAGE>
committed in advance which lowers margins and minimizes inventory risk. The
number of new cellular subscriptions processed by Quintex increased 15.1%, with
an accompanying increase in revenue from activation commissions of approximately
$965, or 5.5%, even though the average commission received by Quintex per
activation decreased approximately 8.4% from last year. The Communications Group
operates in a very competitive market and may experience lower gross profit and
inventory adjustments due to market competition and other factors as discussed
in our "safe harbor" statement. Operating expenses decreased to $35,985 from
$36,197. As a percentage of net sales operating expenses decreased to 6.1%
during 1999 compared to 12.9% in 1998. Selling expenses decreased $1,041 from
last year, primarily in salaries and benefits, advertising and divisional
marketing partially offset by an increase in commissions. General and
administrative expenses increased during 1999 by $734 from 1998, primarily in
bad debt, partially offset by decreases in salaries. Warehousing and assembly
expenses increased by $95 during 1999 from last year, primarily in direct labor.
Operating income for 1999 was $21,926 compared to last year's operating loss of
$2,256.
16
<PAGE>
Electronics Results
Three months ended August 31, 1999 compared to three months ended August 31,
1998
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the Electronics
group:
<TABLE>
Three Months Ended
August 31,
1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales:
Sound $ 22,905 38.2% $ 17,716 44.3%
Security and accessories 27,659 46.2 19,542 48.9
Consumer electronics 9,352 15.6 2,706 6.8
-------- ------ -------- ------
Total net sales 59,916 100.0 39,964 100.0
-------- ------ -------- ------
Gross profit 12,570 21.0 8,502 21.3
Total operating expenses 8,834 14.7 6,764 16.9
-------- ------ -------- ------
Operating income 3,736 6.3 1,738 4.4
Other expense (489) (0.8) (621) (1.6)
-------- ------ -------- ------
Pre-tax income $ 3,247 5.5% $ 1,117 2.8%
======== ====== ======== ======
</TABLE>
Net sales increased approximately $19,952 compared to last year, an
increase of 49.9%. Automotive sound sales increased 29.3% from last year,
primarily in AV and Private Label categories, partially offset by decreases in
SPS. Automotive security and accessories sales increased 41.5% compared to last
year, primarily due to an increase in mobile video sales of approximately
$11,467, partially offset by declines in Prestige security. Consumer electronics
sales also more than tripled from last year to $9,352. Net sales in our
Malaysian subsidiary doubled from last year to $3,375. Our Venezuelan subsidiary
also experienced increased sales, surpassing last year by 13.4%. Gross margins
decreased to 21.0% in 1999 from 21.3% in 1998, primarily in our international
operations. Operating expenses increased $2,070 from last year. Selling expenses
increased from last year by $917, primarily in commissions and divisional
marketing, partially offset by a decrease
17
<PAGE>
in advertising. General and administrative expenses increased from 1998 by $539,
primarily in office salaries, temporary personnel and provision for bad debt
expense, partially offset by decreases in international operations. Warehousing
and assembly expenses increased from 1998 by $614, primarily in tooling, field
warehousing and direct labor. Operating income was $3,736 compared to last
year's $1,738.
Nine months ended August 31, 1999 compared to nine months ended
August 31, 1998
The following table sets forth for the periods indicated certain income
statement data and percentage of net sales by product line for the Electronics
group:
<TABLE>
Nine Months Ended
August 31,
1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales:
Sound $ 55,052 34.9% $ 56,932 44.7%
Security and accessories 81,194 51.5 64,094 50.4
Consumer electronics 21,489 13.6 6,228 4.9
-------- ------ -------- ------
Total net sales 157,735 100.0 127,254 100.0
-------- ------ -------- ------
Gross profit 32,170 20.4 27,370 21.5
Total operating expenses 23,216 14.7 20,393 16.0
-------- ------ -------- ------
Operating income 8,954 5.7 6,977 5.5
Other expense (1,243) (0.8) (2,529) (2.0)
-------- ------ -------- ------
Pre-tax income $ 7,711 4.9% $ 4,448 3.5%
========= ====== ========= ======
</TABLE>
Net sales increased approximately $30,481 compared to last year, an
increase of 24.0%. Automotive security and accessories sales increased 26.7%
compared to last year, primarily due to an increase in mobile video sales of
approximately $28,600. This increase was partially offset by decreases in
Prestige security. Consumer electronics sales also more than tripled from last
year to $21,489. These increases were partially offset by a decrease of 3.3% in
auto sound. Net sales in our
18
<PAGE>
Malaysian subsidiary increased 66.7% from last year, but were offset by a 44.4%
decline in sales in our Venezuelan subsidiary. Gross margins decreased to 20.4%
in 1999 from 21.5% in 1998, primarily in our international operations. The
Electronics Group operates in a very competitive market and may experience lower
gross profit and inventory adjustments due to market competition and other
factors as discussed in our "safe harbor" statement. Operating expenses
increased $2,823 over last year. Selling expenses increased from last year by
$1,483, primarily in commissions and divisional marketing, partially offset by a
decrease in advertising. General and administrative expenses increased from 1998
by $209, primarily in salaries, office expenses and professional fees.
Warehousing and assembly expenses increased from 1998 by $1,131, primarily in
field warehousing and direct labor. Operating income for 1999 was $8,954
compared to $6,977 last year.
Other Income and Expense
Interest expense and bank charges decreased by $493 and $518 for the
three and nine months ended August 31, 1999, respectively, compared to the same
periods last year. The decrease in interest expense and bank charges is due to
lower average borrowings. Equity in income of equity investments increased $9
and $415 for the three and nine months ended August 31, 1999, respectively,
compared to the same periods last year. The increase in equity in income of
equity investments is primarily due to Audiovox Specialty Applications, LLC. The
Company is in the process of liquidating its 50% investment in Audiovox Pacific
Pty. Ltd., which should be completed by the end of this fiscal year. The Company
does not anticipate any material charges to operations as a result of this
liquidation. During the second quarter of 1999, the Company's subsidiary, ACC,
sold a 5% interest to Toshiba Corporation for $5,000. This transaction resulted
in a $3,800 increase in the carrying value of the remaining 95% interest in ACC
for the Company, which is reflected as
19
<PAGE>
a gain ($2,204 net of tax) on the accompanying consolidated statements of income
(loss).
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,
United States business operations. During 1998, the Company implemented various
tax strategies which resulted in lowering the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 1999 decreased $3,525 from
the November 30, 1998 level. Operating activities used $6,903, primarily from
increases in accounts receivable and inventory, with associated improvements in
days on hand, partially offset by an increase in accounts payable, primarily due
to the increase in sales volume as well as the timing of such sales and
inventory purchases. Accounts receivable days on hand decreased to 47 days from
51 days last year. Inventory days on hand decreased to 28 days from last year's
70 days. This improvement in accounts receivable and inventory turnover allowed
the Company to minimize its reliance on outside financing. Investing activities
provided $7,425, primarily from the sale of investment securities and proceeds
from the issuance of subsidiary shares, partially offset by the purchase of
property, plant and equipment and the purchase of convertible debentures.
Financing activities used $4,033, primarily from repayments under line of credit
agreements.
On July 28, 1999, the Company entered into the Fourth Amended and Restated
Credit Agreement (the Revised Credit Agreement) which superseded the Third
Amended and Restated Credit Agreement in its entirety. The major changes in the
Revised Credit Agreement included an increase in the maximum aggregate amount of
borrowings from $112,500 to $200,000. The Revised
20
<PAGE>
Credit Agreement contains covenants requiring, among other things, minimum
quarterly and annual levels of pre-tax income and net worth. Further, the
Company may not incur a pre-tax loss in excess of $1,000 for any fiscal quarter
and may not incur a pre-tax loss for two consecutive fiscal quarters. In
addition, the Company must maintain a net worth base amount of $175,000, plus
50% of consolidated net income for each fiscal year ending on or after November
30, 1999. Further, the Company must, at all times, maintain a debt to worth
ratio of not more than 1.75 to 1. The Revised Credit Agreement includes
restrictions and limitations on payments of dividends, stock repurchases and
capital expenditures. The Revised Credit Agreement expires on July 28, 2004.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
1999 and for the reasonable foreseeable future.
Year 2000 Date Conversion
Many of the Company's computerized systems could be affected by the
Year 2000 issue, which refers to the inability of such systems to properly
process dates beyond December 31, 1999. The Company also has numerous
computerized interfaces with third parties and is possibly vulnerable to failure
by such third parties if they do not adequately address their Year 2000 issues.
System failures resulting from these issues could cause significant disruption
to the Company's operations and result in a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
Management believes that a significant portion of its "mission
critical" computer systems are Year 2000 compliant and is continuing to assess
the balance of its computer systems as well as equipment and other facilities
systems. Management is in the process of completing its investigation,
remediation and contingency planning activities for all critical systems,
although there can be no
21
<PAGE>
assurance that it will. At this time, management believes that the Company does
not have any internal critical Year 2000 issues that it cannot remedy.
Management is in the process of surveying third parties with whom it
has a material relationship, including customers, vendors and manufacturers of
the Company's products, primarily through written correspondence. Management is
depending on the response of these third parties in its assessment of Year 2000
readiness. Management cannot be certain as to the actual Year 2000 readiness of
these third parties or the impact that any non-compliance on their part may have
on the Company's business, results of operations, financial condition or
liquidity.
The Company expects to incur internal staff costs as well as consulting
and other expenses in preparing for the Year 2000. Because the Company has
replaced or updated a significant portion of its computer systems, both hardware
and software, in recent years, the cost to be incurred in addressing the Year
2000 issue is not expected to have a material impact on the Company's business,
results of operations, financial condition or liquidity. This expectation
assumes that our existing forecast of costs to be incurred contemplates all
significant actions required and that we will not be obligated to incur
significant Year 2000 related costs on behalf of our customers, suppliers and
other third parties.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 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.
22
<PAGE>
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 required until the second year
of application, at which time comparative information is required. The Company
is in the process of determining the impact that the adoption of this new
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this accounting standard in the November 30,
1999 financial statements, as required.
The FASB issued Statement 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." Statement 137 amends Statement 133, "Accounting for Derivative Instruments
and Hedging Activities," which was issued in June 1998 and was to be effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Statement
137 defers the effective date of Statement 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier application is permitted. Statement
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. While management has not determined the impact
of the new standard, it is not expected to be material.
23
<PAGE>
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934. We use words such as "may", "believe",
"estimate", "expect", "plan", "intend", "project", "anticipate", and similar
expressions to identify forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, activities or developments. Our actual results could differ
materially from those discussed in or implied by these forward-looking
statements. Forward-looking statements include statements relating to, among
other things:
o growth trends and projected sales in the wireless, automotive
aftermarket and consumer electronic businesses;
o technological and market developments in the wireless, automotive
aftermarket and consumer electronic businesses;
o our relationship with key suppliers;
o foreign currency risks;
o political instability;
o changes in foreign laws;
o regulations and tariffs;
o competition in the wireless, automotive aftermarket and consumer
electronics businesses;
o seasonality and cyclicality;
o inventory obsolence and availability;
o the anticipated consequences of the Year 2000 issue; and
o quality and consumer acceptance of newly-introduced product.
24
<PAGE>
PART II - OTHER INFORMATION
Item 6 REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the third quarter ended August
31, 1999.
25
<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 15, 1999
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000807707
<NAME> Audiovox Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Nov-30-1999
<PERIOD-END> Aug-31-1999
<CASH> 5,873
<SECURITIES> 0
<RECEIVABLES> 168,136
<ALLOWANCES> 4,709
<INVENTORY> 85,130
<CURRENT-ASSETS> 277,323
<PP&E> 31,171
<DEPRECIATION> 10,982
<TOTAL-ASSETS> 326,893
<CURRENT-LIABILITIES> 100,128
<BONDS> 6,773
0
2,500
<COMMON> 195
<OTHER-SE> 189,838
<TOTAL-LIABILITY-AND-EQUITY> 326,893
<SALES> 727,174
<TOTAL-REVENUES> 749,068
<CGS> 644,599
<TOTAL-COSTS> 658,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,641
<INTEREST-EXPENSE> 2,865
<INCOME-PRETAX> 26,182
<INCOME-TAX> 10,317
<INCOME-CONTINUING> 15,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,865
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.82
</TABLE>
