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 28, 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 April 12, 1999
Class A Common Stock 17,297,878 Shares
Class B Common Stock 2,260,954 Shares
1
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AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at
February 28, 1999 (unaudited) and
November 30, 1998 3
Consolidated Statements of Income
for the Three Months Ended February 28, 1999
and 1998 (unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended February 28, 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 9-20
PART II OTHER INFORMATION
ITEM 6 Reports on Form 8-K 21
SIGNATURES 22
2
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AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
February 28, November 30,
1999 1998
--------- ---------
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,433 $ 9,398
Accounts receivable, net 133,693 131,120
Inventory, net 66,104 72,432
Receivable from vendor 5,325 734
Prepaid expenses and other current assets 5,915 6,724
Deferred income taxes, net 6,088 6,088
--------- ---------
Total current assets 221,558 226,496
Investment securities 24,252 17,089
Equity investments 10,815 10,387
Property, plant and equipment, net 18,502 17,828
Excess cost over fair value of assets acquired
and other intangible assets, net 5,956 6,052
Other assets 1,650 1,827
--------- ---------
$ 282,733 $ 279,679
========= =========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 30,528 $ 34,063
Accrued expenses and other current liabilities 17,437 15,359
Income taxes payable 7,293 5,210
Bank obligations 6,030 7,327
Documentary acceptances 3,910 3,911
Capital lease obligation 17 17
--------- ---------
Total current liabilities 65,215 65,887
Bank obligations 10,086 17,500
Deferred income taxes, net 6,676 3,595
Long-term debt 6,453 6,331
Capital lease obligation 6,282 6,298
--------- ---------
Total liabilities 94,712 99,611
--------- ---------
Minority interest 2,208 2,348
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 30,000,000 authorized; 17,258,573 issued 173 173
Class B convertible; 10,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 143,375 143,339
Retained earnings 38,879 35,896
Accumulated other comprehensive income (loss) 3,524 (1,550)
Gain on hedge of available-for-sale securities, net 929 929
Treasury stock, 498,055 Class A common stock, at cost (3,589) (3,589)
--------- ---------
Total stockholders' equity 185,813 177,720
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 282,733 $ 279,679
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended February 28, 1999 and 1998
(In thousands, except share and per share data)
<TABLE>
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 210,266 $ 120,974
Cost of sales 184,046 98,715
------------ ------------
Gross profit 26,220 22,259
------------ ------------
Operating expenses:
Selling 8,685 8,290
General and administrative 9,161 8,422
Warehousing, assembly and repair 3,172 3,012
------------ ------------
Total operating expenses 21,018 19,724
------------ ------------
Operating income 5,202 2,535
------------ ------------
Other income (expense):
Interest and bank charges (1,107) (846)
Equity in income of equity investments, net 621 406
Gain on sale of investment 239 --
Other, net 132 141
------------ ------------
Total other income (expense) (115) (299)
------------ ------------
Income before provision for income taxes 5,087 2,236
Provision for income taxes 2,105 597
------------ ------------
Net income $ 2,982 $ 1,639
============ ============
Net income per common share (basic) $ 0.16 $ 0.09
============ ============
Net income per common share (diluted) $ 0.16 $ 0.09
============ ============
Weighted average number of common shares outstanding (basic) 19,021,472 19,192,431
============ ============
Weighted average number of common shares outstanding (diluted) 19,277,942 19,494,126
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended February 28, 1999 and 1998
(In thousands)
<TABLE>
1999 1998
-------- --------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,982 $ 1,639
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 718 455
Provision for (recovery of) bad debt expense 109 (73)
Equity in income of equity investments, net (628) (329)
Minority interest (140) (111)
Gain on sale of investment (239) --
Provision for (recovery of) deferred income taxes, net -- (132)
Provision for unearned compensation 48 48
(Gain) loss on disposal of property, plant and equipment, net 4 (7)
Change in:
Accounts receivable (2,675) 25,504
Inventory 6,344 (20,930)
Accounts payable, accrued expenses and other current liabilities (1,451) (9,308)
Receivable from vendor (4,591) (4,000)
Income taxes payable 2,083 (4,124)
Prepaid expenses and other, net 524 (2,079)
-------- --------
Net cash provided by (used in) operating activities 3,088 (13,447)
-------- --------
Cash flows from investing activities:
Net proceeds from sale of equity collar -- 1,499
Net proceeds from sale of investment securities 1,777 --
Purchases of property, plant and equipment, net (1,304) (691)
Proceeds from distribution from equity investment 202 350
-------- --------
Net cash provided by investing activities 675 1,158
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (8,706) 7,743
Net borrowings (repayments) under documentary acceptances (1) 895
Principal payments on capital lease obligation (16) --
Repurchase of Class A Common Stock -- (369)
-------- --------
Net cash provided by (used in) financing activities (8,723) 8,269
-------- --------
Effect of exchange rate changes on cash (5) 2
-------- --------
Net decrease in cash and cash equivalents (4,965) (4,018)
Cash and cash equivalents at beginning of period 9,398 9,445
-------- --------
Cash and cash equivalents at end of period $ 4,433 $ 5,427
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended February 28, 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 February 28, 1999 and November 30,
1998, the consolidated statements of income for the three month periods
ended February 28, 1999 and February 28, 1998, and the consolidated
statements of cash flows for the three months ended February 28, 1999
and February 28, 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:
<TABLE>
Three Months Ended
February 28,
--------------------------
1999 1998
----- -----
Cash paid during the period:
<S> <C> <C>
Interest (excluding bank charges) $ 455 $ 496
Income taxes $ 178 $ 3,973
</TABLE>
During the first quarters of 1999 and 1998, the Company recorded a net
unrealized holding gain relating to available-for-sale marketable
securities, net of deferred taxes, of $5,025 and $2,679, respectively,
as a component of accumulated other comprehensive income (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 which is reflected as a separate
component of stockholders' equity.
6
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AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Investment Securities
During the first quarter of 1999, the Company exercised its option to
convert approximately 224,400 Japanese yen of Shintom debentures into
shares of Shintom common stock. The Company sold the Shintom common
stock yielding net proceeds of $1,777 and a gain of $239.
(4) Net Income Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income per common share is as follows:
<TABLE>
Three Months Ended
February 28,
1999 1998
----------- -----------
<S> <C> <C>
Net income (numerator for basic income per share) $ 2,982 $ 1,639
Interest on 6 1/4% convertible subordinated debentures, net of tax 21 21
----------- -----------
Adjusted net income (numerator for diluted income per
share) $ 3,003 $ 1,660
=========== ===========
Weighted average common shares (denominator for basic
income per share) 19,021,472 19,192,431
Effect of dilutive securities:
6 1/4% convertible subordinated debentures 128,192 128,192
Employee stock options and stock warrants 47,478 106,706
Employee stock grants 80,800 66,797
----------- -----------
Weighted average common and potential common shares
outstanding (denominator for diluted income per share) 19,277,942 19,494,126
=========== ===========
Basic income per share $ 0.16 $ 0.09
=========== ===========
Diluted income per share $ 0.16 $ 0.09
=========== ===========
</TABLE>
Employee stock options and stock warrants totaling 1,695,300 and
1,250,000 for the quarters ended February 28, 1999 and 1998,
respectively, were not included in the net earnings per share
calculation because their effect would have been anti-dilutive.
(5) 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
7
<PAGE>
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
adjustments and unrealized gains and losses on marketable securities
classified as available- for-sale. The accumulated other comprehensive
income (loss) of $3,524 and ($1,550) at February 28, 1999 and 1998,
respectively, on the accompanying consolidated balance sheets is the
accumulated unrealized gain on the Company's 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 was as follows:
<TABLE>
Three Months Ended
February 28,
1999 1998
------- -------
<S> <C> <C>
Net income $ 2,982 $ 1,639
------- -------
Other comprehensive income:
Foreign currency translation adjustments 49 (533)
Unrealized gains on securities:
Unrealized holding gains arising during period, 5,264 2,679
net of tax
Less: reclassification adjustment for gains
realized in net income (239) --
------- -------
Net unrealized gains 5,025 2,679
------- -------
Other comprehensive income, net of tax 5,074 2,146
------- -------
Total comprehensive income $ 8,056 $ 3,785
======= =======
</TABLE>
(6) Subsequent Events
On March 30, 1999, Toshiba Corporation, a major supplier, purchased
newly-issued shares of Audiovox Communications Corp., a wholly-owned
subsidiary of the Company, for $5,000. This investment gives Toshiba
Corporation 5% ownership in Audiovox Communications Corp.
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 Automotive Electronics. The Communications
group consists of Audiovox Communications Corp. (ACC) and the Quintex retail
operations (Quintex), both of which are wholly-owned subsidiaries of the
Company. The Communications group markets cellular telephone products and
receives activation commissions and residual fees from its retail sales. The
price at which the Company's retail outlets sell cellular telephones is often
affected by the activation commission the Company will receive in connection
with such sale. The activation commission paid by a cellular telephone carrier
is based upon various service plans and promotional marketing programs offered
by the particular cellular telephone carrier. The monthly residual fees are
based upon a percentage of customers' usage and are calculated based on the
amount of local air time fees collected from the base of customers activated by
the Company on a particular cellular carrier's system. The Automotive
Electronics group consists of Audiovox Automotive Electronics (AAE), a division
of the Company, Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela C.A., which are majority-owned
subsidiaries. Products in the Automotive 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
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This Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance and business
prospects. When used in this Quarterly Report, the words "anticipates,"
"expects," "may," "intend" and similar expressions are intended to be among the
statements that identify forward-looking statements. From time to time, the
Company may also publish forward-looking statements. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors, including, but not limited to, foreign currency
risks, political instability, changes in foreign laws, regulations and tariffs,
new technologies, competition, customer and vendor relationships, seasonality,
inventory obsolescence and inventory availability, could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
10
<PAGE>
The following table sets forth for the periods indicated certain
statements of income data for the Company expressed as a percentage of net
sales:
<TABLE>
Percentage of Net Sales
Three Months Ended
February 28,
1999 1998
----- -----
Net sales:
Product sales:
<S> <C> <C>
Cellular wholesale 71.9% 55.5%
Cellular retail 1.1 0.7
Sound 7.3 15.2
Security and accessories 11.9 18.7
----- -----
92.2 90.1
Activation commissions 3.5 5.2
Residual fees 0.5 0.8
Other 3.8 3.8
----- -----
Total net sales 100.0% 100.0%
Cost of sales 87.5 81.6
----- -----
Gross profit 12.5 18.4
----- -----
Selling 4.1 6.9
General and administrative expense 4.4 7.0
Warehousing, assembly and repair 1.5 2.5
----- -----
Total operating expenses 10.0 16.3
----- -----
Operating income 2.5 2.1
Interest and bank charges 0.5 0.7
Equity in income of equity investments 0.3 0.3
Gain on sale of investment 0.1 --
Other income 0.1 0.1
Income before provision for income taxes 2.4 1.8
Provision for income taxes 1.0 0.5
----- -----
Net income 1.4% 1.4%
===== =====
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
Consolidated Results
Three months ended February 28, 1999 compared to three months ended February 28,
1998
The net sales and percentage of net sales by product line and marketing
group for the three months ended February 28, 1999 and February 28, 1998 are
reflected in the following table:
<TABLE>
Three Months Ended
February 28,
--------------------------------------
1999 1998
------------------ -------------------
Net sales:
Communications
<S> <C> <C> <C> <C>
Cellular wholesale $151,282 71.9% $ 67,110 55.5%
Cellular retail 2,262 1.1 852 0.7
Activation commissions 7,363 3.5 6,347 5.2
Residual fees 1,084 0.5 998 0.8
Other 3,427 1.6 2,760 2.3
-------- ----- -------- -----
Total Communications 165,418 78.7 78,067 64.5
-------- ----- -------- -----
Automotive Electronics
Sound 15,399 7.3 18,428 15.2
Security and accessories 25,054 11.9 22,677 18.7
Consumer electronics 4,389 2.1 1,802 1.5
-------- ----- -------- -----
Total Automotive 44,842 21.3 42,907 35.5
Other 6 -- -- --
-------- ----- -------- -----
Total $210,266 100.0% $120,974 100.0%
======== ===== ======== =====
</TABLE>
Net sales were $210,266 for 1999, an increase of $89,292, or 73.8%,
from 1998. The increase in net sales was in both the Communications Group and
the Automotive Electronics Group. Sales from our international operations were
down from last year by approximately 11.1%. Sales in Malaysia increased $1,090,
or 34.6%, and sales in Venezuela were down $1,908, or 45.5%. Gross margins were
12.5% in 1999 compared to 18.4% in 1998. Operating expenses increased to $21,018
from $19,724, a 6.6% increase. However, as a percentage of sales, operating
expenses decreased to 10.0% in 1999 from 16.3% in 1998. Operating income for
1999 was $5,202 compared to last year's
12
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$2,535.
Communications Results
Three months ended February 28, 1999 compared to three months ended February 28,
1998
The following table sets forth for the periods indicated certain
statements of income data for the Communications group expressed as a percentage
of net sales:
<TABLE>
Communications
Three Months Ended
February 28,
1999 1998
--------------------- ---------------------
Net sales:
<S> <C> <C> <C> <C>
Cellular product - wholesale $ 151,282 91.4% $ 67,110 86.0%
Cellular product - retail 2,262 1.4 852 1.1
Activation commissions 7,363 4.4 6,347 8.1
Residual fees 1,084 0.7 998 1.3
Other 3,427 2.1 2,760 3.5
--------- ----- --------- -----
Total net sales 165,418 100.0 78,067 100.0
--------- ----- --------- -----
Gross profit 16,876 10.2 13,199 16.9
Total operating expenses 11,895 7.2 11,439 14.7
--------- ----- --------- -----
Operating income 4,981 3.0 1,760 2.3
Other expense (1,550) (0.9) (1,301) (1.7)
--------- ----- --------- -----
Pre-tax income $ 3,431 2.1% $ 459 0.6%
========= ===== ========= =====
</TABLE>
The Communications group is composed of ACC and Quintex, both
wholly-owned subsidiaries of Audiovox Corporation. Since principally all of the
net sales of Quintex are cellular in nature, all operating results of Quintex
are being included in the discussion of the Communications group's product line.
During the first quarter of 1999, sales increased $87,351, or 112%, to
$165,418. Unit sales of cellular telephones increased approximately 72.9%
(or 456,000 units) during the first
13
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quarter of 1999. This increase is attributable to sales of digital product. The
digital phones have a higher average unit selling price as well as a higher unit
cost to the Company. As a result, average unit selling prices increased
approximately 31.2% to $134 from $102, and gross profit margins decreased to
10.2% from 16.9% during the first quarter of 1999 compared to the first quarter
of 1998. The number of new cellular subscriptions processed by Quintex increased
21.9%, with an accompanying increase in activation commissions of approximately
$1,016, or 16.0%. The average commission received by Quintex per activation
decreased approximately 4.8% from last year. Operating expenses increased to
$11,895 from $11,439. As a percentage of net sales, however, operating expenses
decreased to 7.2% during 1999 compared to 14.7% in 1998. Selling expenses
increased $394 from last year, primarily in commissions, advertising and
divisional marketing, partially offset by decreases in salaries. General and
administrative expenses increased during 1999 by $258 from 1998, primarily in
occupancy costs, insurance and temporary personnel. Warehousing and assembly
expenses decreased by $196 during 1999 from last year, primarily in tooling and
field warehousing expenses. Operating income for 1999 was $4,981 compared to
last year's $1,760.
14
<PAGE>
Automotive Electronics Results
Three months ended February 28, 1999 compared to three months ended February 28,
1998
The following table sets forth for the periods indicated certain
statement of income data for the Automotive group expressed as a percentage of
net sales:
<TABLE>
Automotive Electronics
Three Months Ended
February 28,
1999 1998
------------------- --------------------
Net sales:
<S> <C> <C> <C> <C>
Sound $ 15,399 34.3% $ 18,428 42.9%
Security and accessories 25,054 55.9 22,677 52.9
Consumer electronics 4,389 9.8 1,802 4.2
-------- ----- -------- -----
Total net sales 44,842 100.0 42,907 100.0
-------- ----- -------- -----
Gross profit 9,198 20.5 9,099 21.2
Total operating expenses 6,733 15.0 6,756 15.7
-------- ----- -------- -----
Operating income 2,465 5.5 2,343 5.5
Other expense (650) (1.4) (964) (2.2)
-------- ----- -------- -----
Pre-tax income $ 1,815 4.0% $ 1,379 3.2%
======== ===== ======== =====
</TABLE>
Net sales increased approximately $1,935 compared to last year, an
increase of 4.5%. Automotive security and accessories sales increased 10.5%
compared to last year, primarily due to a $7.1 million increase in mobile
video sales from last year's $1.1 million. Consumer electronics sales also
more than doubled from last year to $4,389. These increases were partially
offset by a decrease of 16.4% in auto sound. Net sales in our Malaysian
subsidiary increased 24.6% from last year, but were offset by a 45.5% decline in
sales in our Venezuelan subsidiary. Gross margins decreased to 20.5% in 1999
from 21.2% in 1998. Operating expenses remained relatively flat. Selling
expenses increased from last year by $29, primarily in commissions. General and
administrative expenses decreased from 1998 by $391, primarily in bad debt and
office salaries
15
<PAGE>
in international operations. Warehousing and assembly expenses increased
from 1998 by $339, primarily in field warehousing and direct labor. Operating
income for 1999 was $2,465 compared to $2,343 last year.
Other Income and Expense
Interest expense and bank charges increased by $261 for the three
months ended February 28, 1999 compared to the same period last year. Equity in
income of equity investments increased $215 for the three months ended
February 28, 1999, compared to the same period last year. During the first
quarter of 1999, the Company exercised its option to convert approximately
224,400 Japanese yen of Shintom debentures into shares of Shintom common stock.
The Company then sold the Shintom common stock yielding net proceeds of $1,777
and a gain of $239. The remaining debentures of 438,388 Japanese yen are
included in the Company's available-for-sale investment securities at February
28, 1999.
Provision for Income Taxes
Provision for income taxes and income tax recovery are provided for at
a blended federal and state rate of 40% for profits or losses from normal
business operations. During 1998, the Company implemented various tax strategies
which have resulted in lowering the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at February 28, 1999 decreased $4,965 from
the November 30, 1998 level. Operating activities provided $3,088, primarily
from decreases in inventory and increases in income taxes payable, partially
offset by increases in accounts receivable and receivable from vendor. Investing
activities provided $675, primarily from the sale of investment securities,
offset by the purchase of property, plant and equipment. Financing activities
used $8,723, primarily for
16
<PAGE>
repayments under line of credit agreements.
On December 23, 1998, the Company entered into the Third Amended and
Restated Credit Agreement (the Revised Credit Agreement) with its financial
institutions which superseded the Second Amended and Restated Credit Agreement
in its entirety. The major changes in the Revised Credit Agreement include an
increase in the maximum aggregate amount of borrowings to $112,500 and allow for
a sub-limit for foreign currency borrowing of $15,000. The Revised Credit
Agreement contains covenants requiring, among other things, minimum levels of
pre-tax income and minimum levels of net worth as follows: Pre-tax income of not
less than $1,500 for the two consecutive fiscal quarters ending May 31, 1999,
2000 and 2001 and; not less than $2,500 for two consecutive fiscal quarters
ending November 30, 1999, 2000 and 2001; and not less than $4,000 for any fiscal
year ending on or after November 30, 1999. 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 $172,500 at any time prior to February 28,
1999; $175,000 at any time on or after February 28, 1999, but prior to February
28, 2000; $177,500 at any time on or after February 2000 but prior to February
28, 2001; and $180,000 at any time thereafter. 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 December 31, 2001.
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.
17
<PAGE>
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 plans to complete its investigation, remediation and
contingency planning activities for all critical systems by mid 1999, although
there can be no 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 primarily through written correspondence. Despite
its efforts to survey its customers, 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
18
<PAGE>
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 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.
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
has not determined the impact that the adoption of this new
19
<PAGE>
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this accounting standard in fiscal 1999, as
required.
The FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133). Statement 133 established
accounting and reporting standards for derivative instruments embedded in other
contracts, and for hedging activities. Statement 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Early application of
all the provisions of this Statement is encouraged but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. Management of the Company has not yet determined the impact that the
implementation of Statement 133 will have on its financial position, results of
operations or liquidity.
20
<PAGE>
PART II - OTHER INFORMATION
Item 6 REPORTS ON FORM 8-K
No reports were filed on Form 8-K for the quarter ended February 28,
1999.
21
<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: April 14, 1999
By:s/Charles M. Stoehr
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
22
<PAGE>
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