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, 2001
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Commission file number 0-28839
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AUDIOVOX CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-1964841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Marcus Blvd., Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 231-7750
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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 10, 2001
-------------------------------------------------------------------
Class A Common Stock 20,306,538 Shares
Class B Common Stock 2,260,954 Shares
1
AUDIOVOX CORPORATION
I N D E X
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements:
Consolidated Balance Sheets at November 30,
2000 and February 28, 2001 (unaudited) 3
Consolidated Statements of Income for the
Three Months Ended February 29, 2000
and February 28, 2001 (unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended February 29, 2000
and February 28, 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 Management's Discussion and Analysis of
Financial Operations and Results of
Operations 12-23
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
November 30, February 28,
2000 2001
--------- ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,431 $ 12,359
Accounts receivable, net 279,402 195,838
Inventory, net 140,065 187,020
Receivable from vendor 5,566 3,100
Prepaid expenses and other current assets 6,830 9,276
Deferred income taxes, net 12,244 13,536
--------- ---------
Total current assets 450,538 421,129
Investment securities 5,484 6,574
Equity investments 11,418 12,767
Property, plant and equipment, net 27,996 27,298
Excess cost over fair value of assets acquired and other intangible assets, net 5,098 5,009
Other assets 2,325 1,573
--------- ---------
$ 502,859 $ 474,350
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 61,060 $ 54,368
Accrued expenses and other current liabilities 62,569 52,667
Income taxes payable 6,274 7,053
Bank obligations 8,104 8,535
Notes payable 5,868 5,448
Current installment of long-term debt 486 486
--------- ---------
Total current liabilities 144,361 128,557
Bank obligations 15,000 --
Deferred income taxes, net 972 1,427
Capital lease obligation 6,260 6,254
Deferred compensation 2,208 3,933
--------- ---------
Total liabilities 168,801 140,171
--------- ---------
Minority interest 3,555 2,851
--------- ---------
Stockholders' equity:
Preferred stock, liquidation preference of $2,500 2,500 2,500
Common stock:
Class A; 60,000,000 authorized; 20,291,046 issued at November 30, 2000
and February 28, 2001, 19,528,554 and 19,380,664 outstanding
at November 30, 2000 and February 28, 2001, respectively 204 204
Class B convertible; 10,000,000 authorized; 2,260,954 issued 22 22
Paid-in capital 248,468 248,468
Retained earnings 90,371 92,937
Accumulated other comprehensive loss (5,058) (5,416)
Treasury stock, at cost, 762,492 and 910,382 Class A common stock at
November 30, 2000 and February 28, 2001, respectively (6,004) (7,387)
--------- ---------
Total stockholders' equity 330,503 331,328
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity $ 502,859 $ 474,350
========= =========
See accompanying notes to consolidated financial statements.
3
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended February 29, 2000 and February 28, 2001
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
February 29, February 28,
2000 2001
------------ ------------
Net sales $ 340,156 $ 330,748
Cost of sales 305,288 300,908
------------ ------------
Gross profit 34,868 29,840
------------ ------------
Operating expenses:
Selling 10,359 9,771
General and administrative 10,635 11,156
Warehousing and assembly 4,793 5,323
------------ ------------
Total operating expenses 25,787 26,250
------------ ------------
Operating income 9,081 3,590
------------ ------------
Other income (expense):
Interest and bank charges (2,639) (1,007)
Equity in income of equity investments, net 990 1,370
Gain on sale of investments 328 --
Other, net 1,013 71
------------ ------------
Total other income (expense), net (308) 434
------------ ------------
Income before provision for income taxes 8,773 4,024
Provision for income taxes 3,473 1,458
------------ ------------
Net income $ 5,300 $ 2,566
============ ============
Net income per common share (basic) $ 0.27 $ 0.12
============ ============
Net income per common share (diluted) $ 0.25 $ 0.12
============ ============
Weighted average number of common shares outstanding (basic) 19,951,186 21,654,486
============ ============
Weighted average number of common shares outstanding (diluted) 21,575,569 22,034,838
============ ============
See accompanying notes to consolidated financial statements.
4
AUDIOVOX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended February 29, 2000 and February 28, 2001
(In thousands)
(unaudited)
February 29, February 28,
2000 2001
------------- ------------
Cash flows from operating activities:
Net income $ 5,300 $ 2,566
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 860 1,054
Provision for (recovery of) bad debt expense (74) 176
Equity in income of equity investments, net (990) (1,370)
Minority interest 135 330
Gain on sale of investments (328) --
Deferred income tax expense (1,289) (603)
Changes in:
Accounts receivable 68,627 83,481
Receivable from vendor (2,792) 2,466
Inventory (56,731) (46,987)
Accounts payable, accrued expenses and other current liabilities (25,517) (15,112)
Income taxes payable (2,025) 780
Investment securities - trading -- (1,721)
Prepaid expenses and other, net (835) (1,476)
-------- --------
Net cash provided by (used in) operating activities (15,659) 23,584
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (903) (698)
Net proceeds from sale of investment securities 3,103 --
Proceeds from distribution from equity investment 338 --
-------- --------
Net cash provided by (used in) investing activities 2,538 (698)
-------- --------
Cash flows from financing activities:
Net repayments of bank obligations (76,024) (14,535)
Payment of dividend to minority shareholder of subsidiary -- (1,034)
Net repayments under documentary acceptances (1,994) --
Principal payments on capital lease obligation (5) (6)
Proceeds from exercise of stock options and warrants 166 --
Repurchase of Class A common stock -- (1,382)
Net proceeds from follow-on offering 97,677 --
-------- --------
Net cash provided by (used in) financing activities 19,820 (16,957)
-------- --------
Effect of exchange rate changes on cash 5 (1)
-------- --------
Net increase in cash 6,704 5,928
Cash at beginning of period 5,527 6,431
-------- --------
Cash and cash equivalents at end of period $ 12,231 $ 12,359
======== ========
See accompanying notes to consolidated financial statements.
5
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended February 29, 2000 and February 28, 2001
(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 November 30, 2000 and February 28,
2001, the consolidated statements of income for the three month
periods ended February 29, 2000 and February 28, 2001, and the
consolidated statements of cash flows for the three month periods
ended February 29, 2000 and February 28, 2001. 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 2000 Annual Report filed on Form 10-K. Certain
reclassifications have been made to the 2000 consolidated financial
statements in order to conform to the 2001 presentation.
(2) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Three Months Ended
February 29, February 28,
2000 2001
------------ -----------
Cash paid during the period:
Interest (excluding bank charges) $445 $ 774
Income taxes $178 $1,280
During the three months ended February 29, 2000 and February 28, 2001,
the Company recorded a net unrealized holding loss relating to
available-for-sale marketable securities, net of deferred taxes, of
$1,082 and $391, respectively, as a component of accumulated other
comprehensive loss.
6
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Net Income Per Common Share
A reconciliation between the numerators and denominators of the basic
and diluted income per common share is as follows:
Three Months Ended
February 29, February 28,
2000 2001
----------- -----------
Net income (numerator for basic income per share) $ 5,300 $ 2,566
Interest on 6 1/4% convertible subordinated debentures, net of tax 10 4
----------- -----------
Adjusted net income (numerator for diluted income per share) $ 5,310 $ 2,570
=========== ===========
Weighted average common shares (denominator for basic
income per share) 19,951,186 21,654,486
Effect of dilutive securities:
6 1/4% convertible subordinated debentures 57,627 27,458
Employee stock options and stock warrants 1,553,106 352,894
Employee stock grants 13,650 --
----------- -----------
Weighted average common and potential common shares
outstanding (denominator for diluted income per share) 21,575,569 22,034,838
=========== ===========
Basic income per share $ 0.27 $ 0.12
=========== ===========
Diluted income per share $ 0.25 $ 0.12
=========== ===========
There were no anti-dilutive employee stock options or stock warrants
for the three months ended February 29, 2000. Employee stock options
and warrants totaling 1,565,000 for the three months ended February 28,
2001 were not included in the net income per common share calculation
because their effect would have been anti-dilutive.
(4) Comprehensive Income
The accumulated other comprehensive loss of $5,058 and $5,416 at
November 30, 2000 and February 28, 2001, respectively, on the
accompanying consolidated balance sheets is the net accumulated
unrealized loss on the Company's available-for-sale investment
securities of $190 and $581 at November 30, 2000 and February 28, 2001,
respectively, and the accumulated foreign currency translation
adjustment of $4,868 and $4,835 at November 30, 2000 and February 28,
2001, respectively.
7
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's total comprehensive income was as follows:
Three Months Ended
February 29, February 28,
2000 2001
----------- ------------
Net income $ 5,300 $ 2,566
------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments 846 33
------- -------
Unrealized losses on securities:
Unrealized holding losses arising during period,
net of tax (879) (391)
Less: reclassification adjustment for losses
realized in net income, net of tax (203) --
------- -------
Net unrealized losses (1,082) (391)
------- -------
Other comprehensive loss, net of tax (236) (358)
------- -------
Total comprehensive income $ 5,064 $ 2,208
======= =======
The change in the net unrealized losses arising during the period
presented above are net of tax benefit of $1,082 and $240 for the three
months ended February 29, 2000 and February 28, 2001, respectively. The
reclassification adjustment presented above is net of tax expense of
$125 for the three months ended February 29, 2000. There was no
reclassification adjustment for the three months ended February 28,
2001.
(5) Segment Information
The Company has two reportable segments which are organized by
products: Wireless and Electronics. The Wireless segment markets
wireless handsets and accessories through domestic and international
wireless carriers and their agents, independent distributors and
retailers. The Electronics segment sells autosound, mobile electronics
and consumer electronics, primarily to mass merchants, power retailers,
specialty retailers, new car dealers, original equipment manufacturers
(OEM), independent installers of automotive accessories and the U.S.
military.
The Company evaluates performance of the segments based upon income
before provision for income taxes. The accounting policies of the
segments are the same as those for the
8
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Company as a whole. The Company allocates interest and certain shared
expenses, including treasury, legal and human resources, to the
segments based upon estimated usage. Intersegment sales are reflected
at cost and have been eliminated in consolidation. A royalty fee on the
intersegment sales, which is eliminated in consolidation, is recorded
by the segments and included in other income (expense). Certain items
are maintained at the Company's corporate headquarters (Corporate) and
are not allocated to the segments. They primarily include costs
associated with accounting and certain executive officer salaries and
bonuses and certain items including investment securities, equity
investments, deferred income taxes, certain portions of excess cost
over fair value of assets acquired, jointly-used fixed assets and debt.
The jointly-used fixed assets are the Company's management information
systems, which are used by the Wireless and Electronics segments and
Corporate. A portion of the management information systems costs,
including depreciation and amortization expense, are allocated to the
segments based upon estimates made by management. During the three
months ended February 29, 2000 and February 28, 2001, certain
advertising costs were not allocated to the segments. These costs
pertained to an advertising campaign that was intended to promote
overall Company awareness, rather than individual segment products.
Segment identifiable assets are those which are directly used in or
identified to segment operations.
Consolidated
Wireless Electronics Corporate Eliminations Totals
Three Months Ended
February 29, 2000
Net sales $ 276,624 $ 63,532 -- -- $340,156
Intersegment sales (purchases) (1,036) 1,036 -- -- --
Pre-tax income (loss) 5,639 3,230 $ (96) -- 8,773
Total assets 269,356 108,238 92,948 -- 470,542
Three Months Ended
February 28, 2001
Net sales $ 265,142 $ 65,606 -- -- $330,748
Intersegment sales (purchases) (129) 129 -- -- --
Pre-tax income (loss) 3,325 2,310 $ (1,611) -- 4,024
Total assets 282,351 116,947 111,009 $(35,957) 474,350
(6) Audiovox Communications Corp. Dividend
In February 2001, the Board of Directors of Audiovox Communications Corp.
(ACC), declared a dividend payable to its shareholders, Audiovox Corporation, a
95% shareholder,
9
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
and Toshiba Corporation (Toshiba), a 5% shareholder. ACC paid Toshiba
its share of the dividend, which approximated $1,034, in February 2001.
(7) Accounting for Derivative Instruments and Hedging Activities
On December 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which, as amended, is
effective for fiscal years beginning after June 15, 2000. This
statement establishes accounting and reporting standards for derivative
instruments and requires the recognition of all derivative instruments
as either assets or liabilities in the statement of financial position
based on their fair values. Changes in the fair values are required to
be reported in earnings or other comprehensive income depending on the
use of the derivative and whether it qualifies for hedge accounting.
Derivatives designated as effective cash flow hedges qualify for hedge
accounting and, therefore, changes in fair values are recognized in
other comprehensive income. Changes in fair values related to the
ineffective portion of cash flow hedges, as well as fair value hedges,
must be recognized immediately in earnings.
The Company uses derivative instruments primarily to manage exposures
related to foreign currency denominated receivables and payables. To
accomplish this, the Company uses certain contracts, primarily foreign
currency forward contracts, which minimize cash flow risks from changes
in foreign currency exchange rates. Implementation of SFAS No. 133 did
not have an impact on the Company's financial positions, results of
operations or liquidity. As of February 28, 2001, the Company did not
have any derivative instruments.
(8) Product Return
During the quarter ended February 28, 2001, Wireless refunded
approximately $21,000 to a customer, who is a wireless carrier, for the
return of approximately 97,000 tri-mode phones. The returned phones are
expected to be resold to another carrier customer or returned to the
manufacturer for a full refund or some combination thereof during the
second quarter. Since the time of the original sale, the selling price
of the phones has been reduced below the original cost by approximately
$90 per phone, or $8.6 million in the aggregate, as a result of changes
in the marketplace for wireless products. Further reductions to the
selling price may occur. Management believes the Company will receive
credit for any loss incurred on the resale of the phones from its
vendor or the phones will be returned to the vendor for a full refund
of the original purchase price. Accordingly, the Company has not
recorded a charge for any potential loss on the disposition of the
phones.
10
AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During January 2001, Wireless also purchased 93,600 of the same model
of tri-mode phone from the same manufacturer for a total cost of $12.4
million. A provision of the purchase agreement is that the manufacturer
will provide a credit to the extent the selling price of the phone is
less than the cost of the phone. Accordingly, the Company has not
recognized any provision for any potential impairment in the value of
the phones.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company markets its products under the Audiovox brand as well as
private labels through a large and diverse distribution network both
domestically and internationally. The Company operates through two marketing
groups: Wireless and Electronics. Wireless consists of Audiovox Communications
Corp. (ACC), a 95%-owned subsidiary of Audiovox, and Quintex, which is a
wholly-owned subsidiary of ACC. ACC markets wireless handsets and accessories
primarily on a wholesale basis to wireless carriers in the United States and, to
a lesser extent, carriers overseas. Quintex is a small operation for the direct
sale of handsets, accessories and wireless telephone service. For the first
three months of 2001, sales through Quintex were $11,633 or 4.4% of Wireless'
sales. Quintex receives activation commissions and residual fees from retail
sales, in addition to a monthly residual payment which is based upon a
percentage of a customer's usage.
The Electronics Group consists of two wholly-owned subsidiaries, Audiovox
Electronics Corp. (AEC) and American Radio Corp., and three majority-owned
subsidiaries, Audiovox Communications (Malaysia) Sdn. Bhd., Audiovox Holdings
(M) Sdn. Bhd. and Audiovox Venezuela, C.A. The Electronics Group markets
automotive sound and security systems, electronic car accessories, home and
portable sound products, FRS radios, in-vehicle video systems, flat-screen
televisions, DVD's and navigation systems. Sales are made through an extensive
distribution network of mass merchandisers, power retailers and others. In
addition, the Company sells some of its products directly to automobile
manufacturers on an OEM basis.
The Company allocates interest and certain shared expenses to the marketing
groups based upon estimated usage. General expenses and other income items that
are not readily allocable are not
12
included in the results of the two marketing groups.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of income data for the Company expressed as a percentage of net sales:
Three Months Ended
February 29, February 28,
2000 2001
--------- ------------
Net sales:
Wireless
Wireless products 78.8% 77.9%
Activation commissions 2.0 2.2
Residual fees 0.1 0.1
Other 0.4 --
------- -------
Total Wireless 81.3 80.2
------- -------
Electronics
Mobile electronics 9.3 10.2
Consumer electronics 2.3 4.6
Sound 6.7 4.8
Other 0.3 0.2
------- -------
Total Electronics 18.7 19.8
------- -------
Total net sales 100.0% 100.0%
Cost of sales 89.7 91.0
------- -------
Gross profit 10.3 9.0
Selling 3.0 3.0
General and administrative 3.2 3.4
Warehousing and assembly 1.3 1.6
------- -------
Total operating expenses 7.6 8.0
------- -------
Operating income 2.7 1.1
Interest and bank charges (0.8) (0.3)
Income in equity investments, net 0.3 0.4
Gain on sale of investments 0.1 --
Other 0.3 --
------- -------
Income before provision for income taxes 2.6 1.2
Provision for income taxes 1.0 0.4
------- -------
Net income 1.6% 0.8%
======= =======
13
Consolidated Results
Three months ended February 29, 2000 compared to three months ended February 28,
2001
The net sales and percentage of net sales by marketing group and product
line for the three months ended February 29, 2000 and February 28, 2001 are
reflected in the following table:
Three Months Ended
February 29, February 28,
2000 2001
------------------ ------------------
Net sales:
Wireless
Wireless products $267,968 78.8% $257,232 77.9%
Activation commissions 6,736 2.0 7,286 2.2
Residual fees 484 0.1 462 0.1
Other 1,436 0.4 162 --
-------- ------ -------- ------
Total Wireless 276,624 81.3 265,142 80.2
-------- ------ -------- ------
Electronics
Mobile electronics 31,764 9.3 33,819 10.2
Consumer electronics 7,715 2.3 15,239 4.6
Sound 23,011 6.7 15,847 4.8
Other 1,042 0.3 701 0.2
-------- ------ -------- ------
Total Electronics 63,532 18.7 65,606 19.8
-------- ------ -------- ------
Total $340,156 100.0% $330,748 100.0%
======== ====== ======== ======
Net sales for the first quarter of 2001 were $330,748, a decrease of
$9,408, or 2.8%, from 2000. The decrease in net sales was in the Wireless Group
which was partially offset by an increase in the Electronics Group. During the
quarter, a carrier customer returned 97,000 tri-mode phones for $21,000 (See
Note 8 for additional information). Sales from our international subsidiaries
increased slightly from 2000 by approximately $20 or 0.3%. Gross margins were
9.0% in 2001 compared to 10.3% in 2000. Operating expenses increased to $26,250
from $25,787, a 1.8% increase. As a percentage of sales, operating expenses
increased slightly to 8.0% in 2001 from 7.6%
14
in 2000. Operating income for 2001 was $3,590 compared to $9,081 in 2000, a
decrease of $5,491 or 60.0%.
Wireless Results
Three months ended February 29, 2000 compared to three months ended February
28, 2001
The Wireless Group is composed of ACC and Quintex, both subsidiaries of the
Company.
The following table sets forth for the periods indicated certain income
statement data for the Wireless Group as expressed as a percentage of net sales:
Three Months Ended
February 29, February 28,
2000 2001
------------------ --------------------
Net sales:
Wireless products $ 267,968 96.9% $ 257,232 97.0%
Activation commissions 6,736 2.4 7,286 2.7
Residual fees 484 0.2 462 0.2
Other 1,436 0.5 162 0.1
--------- ------ --------- ------
276,624 100.0% 265,142 100.0%
Gross profit 20,960 7.6 15,968 6.0
Total operating expenses 12,411 4.5 11,848 4.5
--------- ------ --------- ------
Operating income 8,549 3.1 4,120 1.5
Other expense (2,910) (1.1) (795) (0.2)
--------- ------ --------- ------
Pre-tax income $ 5,639 2.0% $ 3,325 1.3%
========= ====== ========= ======
Net sales were $265,142 in the first quarter of 2001, a decrease of
$11,482, or 4.2%, from last year. Unit sales of wireless handsets decreased by
112,000 units in 2001, or 6.1%, to approximately 1,744,000 units from 1,856,000
units in 2000. This decrease was attributable to decreased sales of digital
handsets which was due to delivery delays of product from vendors and
15
delayed new product introductions. Additionally, a carrier customer
returned 97,000 tri-mode phones for approximately $21,000. The returned product
is expected to be resold to another carrier customer during the second quarter.
(See Note 8 for additional information.) The average selling price of handsets
increased to $141 per unit in 2001 from $140 per unit in 2000. The number of new
wireless subscriptions processed by Quintex increased 12.3% in 2001, with a
corresponding increase in activation commissions of approximately $2.3 in 2001.
The average commission received by Quintex per activation decreased 8.9% from
2000. Unit gross profit margins decreased to 4.9% in 2001 from 6.3% in 2000. The
newer digital phones have a lower margin as the higher average unit cost is only
partially offset by an increased selling price. This also reflects the
competitive nature of the wireless marketplace and pricing pressures associated
with supporting various wireless carrier programs. Operating expenses decreased
to $11,848 from $12,411. Selling expenses decreased from last year, primarily in
divisional marketing, advertising and commissions. General and administrative
expenses decreased from 2000, primarily in office salaries and office expenses.
Warehousing and assembly expenses increased during 2001 from last year,
primarily due to an increase in direct labor and temporary personnel. Operating
income for 2001 was $4,120 compared to last year's $8,549, a decrease of $4,429
or 51.8%.
Management believes that the wireless industry is extremely competitive in
both price and technology. As the growth in the wireless marketplace slows,
carrier customer purchasing practices have changed and pricing pressures have
intensified. This could affect gross margins and the carrying value of
inventories in the future. As the market for digital products becomes more
competitive and if the market for analog phones continues to decline, the
Company may be required to adjust the carrying value of its inventory and
inventory returned in the future. Industry and financial market
16
forecasts call for slower growth in the global handset market. In addition, the
industry-wide shortage of certain wireless components and parts may affect our
vendors' ability to provide handsets to us on a timely basis, which may result
in delayed shipments to our customers and decreased sales.
Electronics Results
Three months ended February 29, 2000 compared to three months ended February 28,
2001
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:
Three Months Ended
February 29, February 28,
2000 2001
------------------- ------------------
Net sales:
Mobile electronics $ 31,764 50.0% $ 33,819 51.5%
Consumer electronics 7,715 12.1 15,239 23.2
Sound 23,011 36.2 15,847 24.2
Other 1,042 1.6 701 0.1
--------- ------ --------- -------
Total net sales 63,532 100.0 65,606 100.0
Gross profit 13,909 21.9 13,870 21.1
Total operating expenses 10,281 16.2 11,133 17.0
--------- ------ --------- -------
Operating income 3,628 5.7 2,737 4.2
Other expense (398) (0.6) (427) (0.7)
--------- ------ --------- -------
Pre-tax income $ 3,230 5.1% $ 2,310 3.5%
========= ======= ========= =======
Net sales increased $65,606 compared to last year, an increase of 3.3%.
Mobile electronics sales increased 6.5% compared to last year to $33,819,
primarily due to increases in mobile video and security sales, partially offset
by declines in sales of Protector Hardgoods and cruise controls. Consumer
electronics sales also increased 97.5% from last year due to increased sales of
FRS radios and home stereo products. Automotive sound sales decreased 31.1% from
last year to $15,847,
17
primarily in the AV product line. Net sales in the Company's Malaysian
subsidiary decreased from last year by approximately 6.3%. The Company's
Venezuelan subsidiary experienced an increase of 10.2% in sales from last year.
Gross margins of the Electronics Group were 21.1% in 2001 and 21.9% in 2000.
Operating expenses increased $852 from last year to 17.0% of sales up from last
year's 16.2% of sales. Selling expenses increased from last year, primarily in
commissions. General and administrative expenses increased from 2000, primarily
in office salaries, payroll taxes and employee benefits. Warehousing and
assembly expenses decreased from 2000, primarily in tooling expense offset by an
increase in direct labor. Operating income was $2,737 compared to last year's
$3,628, a decrease of $891 or 24.6%.
The Company believes that the Electronics Group has an expanding market
with a certain level of volatility related to both domestic and international
new car sales. Also, certain of its products are subject to price fluctuations
which could affect the carrying value of inventories and gross margins in the
future. The Electronics Group may also experience additional competition in the
mobile video category as more competitors enter the market.
Other Income and Expense
Interest expense and bank charges decreased by $1,632 for the three months
ended February 28, 2001 compared to the same period last year. The decrease in
interest expense and bank charges is due to lower average borrowings for the
three month period ended February 28, 2001. Equity in income of equity
investments increased $380 for the three months ended February 28, 2001, as
compared to the same period last year. For the three months ended February 28,
2000 and 2001, Audiovox Specialty Applications, LLC represented the majority of
equity in income of equity
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investments.
Provision for Income Taxes
The effective tax rate for the three months ended February 28, 2001 was
36.2% compared to last year's 39.6%. The decrease in the effective tax rate was
principally due to changes in the proportion of domestic and foreign earnings,
utilization of a Canadian tax loss carryforward and benefits from reduced state
taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at February 28, 2001 increased $5,928 from the
November 30, 2000 level. Operating activities provided $23,584, primarily from a
decrease of $83,481 in accounts receivable, partially offset by increases in
inventory of $46,987 and decreases in accounts payable and accrued expenses of
$15,112. Accounts receivable days on hand increased to 61 days at February 28,
2001 from 53 days at February 29, 2000. Inventory days on hand decreased from 69
days last year to 65 days this year. The increase in inventory value and days on
hand was primarily in the Wireless Group. Investing activities used $698, solely
from the purchase of property, plant and equipment. Financing activities used
$16,957, primarily from repayments on the line of credit agreement.
The Company maintains a revolving credit agreement with various financial
institutions. The credit agreement provides for $250,000 of available credit,
including $15,000 for foreign currency borrowings and expires July 27, 2004.
Under the credit agreement, the Company may obtain credit through direct
borrowings and letters of credit. The obligations of the Company under the
credit agreement are guaranteed by
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certain of the Company's subsidiaries and is secured by accounts
receivable, inventory and the Company's shares of ACC. The Company's ability to
borrow under its credit facility is a maximum aggregate amount of $250,000,
subject to certain conditions, based upon a formula taking into account the
amount and quality of its accounts receivable and inventory. The credit
agreement also allows for commitments up to $50,000 in forward exchange
contracts.
The credit agreement contains several covenants requiring, among other
things, minimum levels of pre-tax income and minimum levels of net worth and
working capital. Additionally, the agreement includes restrictions and
limitations on payments of dividends, stock repurchases and capital
expenditures.
The Company also has revolving credit facilities in Malaysia and Venezuela
to finance additional working capital needs. The Malaysian credit facilities are
partially secured by the Company under standby letters of credit and are payable
upon demand or upon expiration of the standby letters of credit. The obligations
of the Company under the Malaysian credit facilities are secured by the property
and building in Malaysia owned by Audiovox Communications Sdn. Bhd. The
Venezuelan credit facility is secured by the Company under a standby letter of
credit and is payable upon demand or upon expiration of the standby letter of
credit.
In February 2000, the Company completed a follow on offering of 3,565,000
Class A common shares at a price to the public of $45.00 per share. Of the
3,565,000 shares sold, the Company offered 2,300,000 shares and 1,265,000 shares
were offered by selling shareholders. Audiovox received approximately $96,573
after deducting expenses. The Company used these net proceeds to repay a portion
of amounts outstanding under their revolving credit facility, any portion of
which can be reborrowed at any time. The Company did not receive any of the net
proceeds from
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the sale of shares by the selling shareholders.
The Company believes that it has sufficient liquidity to satisfy its
anticipated working capital and capital expenditure needs through November 30,
2001 and for the reasonable foreseeable future.
Recent Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 - "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. SAB No. 101 delayed the implementation date for
registrants to adopt the accounting guidance contained in SAB No. 101 by no
later than the fourth fiscal quarter of the fiscal year beginning after December
15, 1999. Management of the Company does not believe that applying the
accounting guidance of SAB No. 101 will have a material effect on its financial
position or results of operations.
In September 2000, the Emerging Issues Task Force issued EITF 00-22,
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future" (EITF 00-22) . EITF 00-22 addresses, among other issues, how a
vendor should account for an offer to a customer to rebate or refund a specified
amount of cash that is redeemable only if a customer completes a specified
cumulative level of revenue transactions or remains a customer for a specified
time period. At the January 2001 meeting, the Task Force affirmed its
conclusions reached at the November 2000 meeting, at which time they concluded
that a vendor should recognize a cash rebate or refund obligation as a reduction
of revenue based upon a systematic and rational allocation of the cost of
honoring rebates or refunds earned and
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claimed to each of the underlying revenue transactions. The consensus is
effective for interim or annual periods ending after February 15, 2001. The
Company adopted EITF 00-22 during the quarter ended February 28, 2001.
Implementation of EITF 00-22 did not have an impact on the Company's
consolidated financial statements.
In March 2000, the Emerging Issues Task Force issued EITF 99-19, "Reporting
Revenue Gross as a Principal verses Net as an Agent" (EITF 99-19). EITF 99-19
addresses whether a company should report revenue based on (a) the gross amount
billed to the customer because it has earned revenue from the sale of the goods
or services or (b) the net amount retained (that is, the amount billed to a
customer less the amount paid to a supplier) because it has earned a commission
or fee. The Task reached a consensus that whether a company should recognize
revenue at the gross amount billed or the net amount retained, as defined above,
because it has earned a commission or fee is a matter of judgment that depends
on the relevant facts and circumstances. The Task Force also gave examples which
should be considered in that evaluation. The consensus is effective for the
fourth quarter of the Company's fiscal year beginning after December 15, 1999.
Upon application of the consensus, comparative financial statements should be
reclassified. The Company will adopt EITF 99-19 during the quarter ended
November 30, 2001. Management does not believe that implementation of EITF 99-19
will have a material impact on the Company's consolidated financial statements.
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 Exchange Act of
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1934. Words such as "may," "believe," "estimate," "expect," "plan,"
"intend," "project," "anticipate," "continues," "could," "potential," "predict"
and similar expressions may identify forward-looking statements. The Company has
based these forward-looking statements on its current expectations and
projections about future events, activities or developments. The Company's
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 in the wireless, automotive and consumer electronic
businesses
o technological and market developments in the wireless, automotive and
consumer electronics businesses
o liquidity
o availability of key employees
o expansion into international markets
o the availability of new consumer electronic products
These forward-looking statements are subject to numerous risks,
uncertainties and assumptions about the Company including, among other things:
o the ability to keep pace with technological advances
o significant competition in the wireless, automotive and consumer
electronics businesses
o quality and consumer acceptance of newly introduced products
o the relationships with key suppliers
o the relationships with key customers
o possible increases in warranty expense
o the loss of key employees
o foreign currency risks
o political instability
o changes in U.S. federal, state and local and foreign laws
o changes in regulations and tariffs
o seasonality and cyclicality
o inventory obsolescence and availability
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
No reports were filed on Form 8-K for the quarter ended February 28, 2001.
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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 16, 2001
By:s/Charles M. Stoehr
------------------------------
Charles M. Stoehr
Senior Vice President and
Chief Financial Officer
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